CenturyTel, Inc. Q2 2008 Earnings Call

Jul.31.08 | About: CenturyLink, Inc. (CTL)

CenturyTel, Inc. (NYSE:CTL)

Q2 FY08 Earnings Call

July 31, 2008, 11:30 AM ET

Executives

Tony Davis - VP of IR

Glen F. Post, III - Chairman of the Board and CEO

R. Stewart Ewing, Jr. - EVP and CFO

Karen A. Puckett - President and COO

Analysts

Mike McCormack - JP Morgan

David Barden - Banc of America

Simon Flannery - Morgan Stanley

Jason Armstrong - Goldman Sachs.

Michael Rollins - Citigroup

Frank Louthan - Raymond James

Chris King - Stifel Nicolaus

Michael Nelson - Stanford Group

Timothy Horan - Oppenheimer

Patrick Rien - Lehman Brothers

Chris Larsen - Credit Suisse

Operator

Good day, ladies and gentlemen, and welcome to CenturyTel's Second Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Tony Davis, Vice President of Investor Relations. Mr. Davis, you may begin.

Tony Davis - Vice President of Investor Relations

Thank you, Sayed. Good morning everyone and welcome to our call today to discuss CenturyTel's second quarter 2008 earnings results released earlier this morning. During today's call, we will refer to certain non-GAAP financial measures and we have reconciled these measures to GAAP figures in our earnings release, which is available on our website at www.centurytel.com. Your host for today's call is Glen Post, Chairman and Chief Executive Officer of CenturyTel. Joining Glen on the call today is Stewart Ewing, CenturyTel's Executive Vice President and Chief Financial Officer and also available during the call today is Karen Puckett, CenturyTel's President and Chief Operating Officer.

We will be making certain forward-looking statements today, particularly as they pertain to guidance for third quarter and full-year 2008, selected information regarding 2007 and 2008, and other outlooks on our business. Please review our safe harbor language found in our press release and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.

Our call today will be accessible for telephone replay through August 6, 2008, and available for webcast replay through August 20, 2008. For anyone listening to a taped or webcast replay of this call, or for anyone reviewing a written transcript of today's call, please note that all information presented is current only as of July 31, 2008 and should be considered valid only as of this date, regardless of the date listened to or reviewed.

At this time, I'll turn the call over to your host today, Glen Post. Glen?

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

Thank you, Tony. We appreciate you joining us today as we discuss CenturyTel's second quarter 2008 operating results and our guidance for third quarter and the full-year 2008. Second quarter 2008 was a solid quarter for us as our revenues and earnings per share exceeded our expectations for the quarter. Operating revenues for the quarter were $657.1 million, nearly 3% higher than in the second quarter 2007. We continued to see strong demand for broadband services during the second quarter as we achieved 21.1% growth in data revenues over the second quarter 2007. That would be 17.7% growth excluding Madison River. This increase was primarily driven by the addition of more than 105,000 high-speed Internet subscribers over the last12 months for nearly 24% growth excluding Madison River Properties.

The growth in data revenues and the revenue contribution of the Madison River Properties during the quarter more than offset anticipated revenue reductions attributable to access line declines and lower access revenues. Diluted earnings per share excluding non-recurring items was $0.87 for the quarter, or $0.05 ahead of the upper end of our previous guidance and $0.06 ahead of First Call consensus of $0.81. The $0.87 diluted earnings per share represents an increase of more than 24% compared to the second quarter 2007. This increase was driven by growth in data revenues and selected price increases and by continued success in controlling operating cost, including synergies gain for the Madison River acquisition, lower interest expense, a moderately lower effective income tax rate, and an 8% decline in average diluted shares outstanding.

We also generated strong free cash flow of more than $162 million during the quarter, a nearly 5% increase over second quarter 2007, while investing 3% more in capital expenditures this quarter than the second quarter last year.

We added more than 21,000 high-speed Internet customers during the traditionally challenging second quarter, which represents approximately 3.6% sequential growth in broadband customers. We ended the second quarter with more than 607,000 high-speed Internet customers or nearly 34% penetration of VSL-enabled lines and more than 29% penetration of total access lines. We experienced access line losses of approximately 30,600 during the quarter, which equates to a six-month annualized loss of 5.4% and a year-over-year loss of 5.8%.

We continued to see solid growth in satellite television customers as we had more than 16,000 additions during the second quarter, representing over 22% sequential growth and we ended the quarter with nearly 89,000 satellite television subscribers. This represents over 6% penetration of primary residential lines with satellite TV services and we expect the satellite video penetration of our residential customers to continue to grow in the months ahead.

Before turning the call over to Stewart, I want to briefly comment on a few other items. First of all, as of June 30, we had achieved a run rate of more than $16 million in annual synergies for the Madison River acquisition. We have also completed a final billing system conversion for Madison River Properties and by the end of the third quarter we expect to reach our target of approximately $24 million in gross synergies and $17 million in annual net synergies after taking into account the regulated revenue impact.

We continue to position ourselves as a broadband provider of choice in our markets. Our bundle offerings, higher speeds, up to 10 megabit and strong messaging continue to drive demand for our broadband product in the second quarter. Customer interest in our pure DSL offer continues to increase, but it still makes up a small percentage of our total customer base.

Looking forward, we are encouraged with the opportunity to drive additional broadband services. We've experienced strong growth with our IPTV product in Columbia and Lacrosse. We are pleased with the service and progress we are making in these markets. Also, we believe fee-based and managed services are other products that have good growth potential, including PC peripheral network assistance, home network diagnostics and those types... other types of similar services.

We also expect to launch additional products in the months ahead aimed at continuing to expand our revenue per customer and enhance the broadband experience. We are also pleased with improvement in access line losses in our properties excluding Madison River this quarter versus second quarter 2007, as residential primary line losses improved 20% year-over-year. Also residential additional line losses improved 29% year-over-year and while we've experienced increased year-over-year line loss in our business segment, we are seeing good results from our new SOHO bundles and continue to see strong demand for our Ethernet product. Also 13% of the business line loss increase in the second quarter was due to customer migration to other CenturyTel service offerings and approximately 30% was attributable to seasonal university disconnects.

On a per customer level, we continue to grow revenue per customer with our bundles and strong data offerings. We expect these trends to continue through 2008 and into 2009. We also remain very focused on customer acquisition and retention. Our expanded distribution is driving improvement in [inaudible] and additional product sales. We have revamped our door-to-door efforts and we've added a multiple dwelling unit and developed our sales force and also prepaid data program to target lower income customers.

As I mentioned before, we are in the process of upgrading approximately 60 of our local bill payment locations to full scale customer service centers, where customers can come in and experience our full array of products. We believe these local service centers are experienced centers along with other local market focused programs that strengthen our local presence and enhance the quality of our interaction with our customers.

Although access lines continue to decline, our consumer average revenue per customer, ARPU, increased approximately 14% to $49.60 and business ARPU increased approximately 7% to over $165 when compared to the second quarter last year. Regarding 700 megahertz, we're continuing to evaluate our deployment and technology alternatives. At this point, we're leaning toward the same sort of LTE-based deployment that has been discussed by larger carriers such as Verizon and AT&T. Given that the LTE-based network elements and end user devices are not expected to be available until 2009 or early 2010, we currently do not expect any material 700 megahertz-related impacts in our capital and operating budgets in 2008 or 2009, other than, of course, the spectrum carrying costs and the 2008 carrying costs are included in our 2008 guidance provided earlier today.

We continue to believe this is valuable wireless spectrum, the 700-megahertz spectrum. We purchased it at a very good price that provides CenturyTel strategic advantage we believe in bringing wireless broadband services to our markets in the years ahead.

Finally, as you know, in late June, we announced a significant change in our cash return strategy to shareholders, increasing our annual dividend rate more than ten-fold to $2.80 from $0.27 per share. We also announced the acceleration of repurchases under our current $750 million repurchase program targeting to complete the program by year-end or early 2009, as well as an increase in our leverage targets 2.75 times net debt to operating cash flow. We believe this cash return and leverage strategy strikes the right balance between returning cash to shareholders and retaining the financial flexibility to take advantage of opportunities that may arrive in the future.

We continue to return significant cash to shareholders during the second quarter, as we repurchased 3.4 million shares of common stock for approximately $114 million under our $750 million repurchase program. There was approximately $384 million remaining under the $750 million authorization at June 30, 2008 and we remain committed to fully completing this repurchase program by the end of this year, early first quarter 2009.

With that, I'll turn the call over to Stewart who will provide additional detail on results for the second quarter and to update you on our financial guidance for 2008.

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

Thank you, Glen. During the next few minutes, I will cover some highlights of our second quarter 2008 operating results and briefly discuss CenturyTel's capital structure and liquidity. I will then spend a few minutes discussing our third quarter and full-year 2008 guidance provided in our earnings release issued earlier today. As a reminder, all comments regarding actual results for second quarter 2008 exclude the non-recurring items detailed on the financial schedules accompanying the press release.

To give you more color on why our results exceeded the guidance we gave earlier for second quarter, first, we achieved expense reductions due to the Madison River integration and other successful cost containment efforts along with lower depreciation expenses. This accounted for about $0.025 per share. Next, we experienced a stronger than expected contribution from our investment in a sale of partnership equating to about $0.15 per share. Finally, share repurchases after April 30, 2008 positively impacted diluted earnings per share about $0.01 a share during the quarter.

For the second quarter 2008, operating revenues increased 2.8% to $657.1 million from $639.1 million in second quarter 2007. Revenue increases of $41 million were primarily driven by revenues contributed by the Madison River Properties acquired April 30, 2007 and our growth in high-speed Internet customers along with selected price increases and the anticipated favorable network access dispute settlements we discussed on our first quarter earnings call.

These increases more than offset revenue declines of approximately $23 million primarily attributable to lower access revenues, lower universal service fund receipts, and access line losses. Voice revenues for the second quarter 2008 were $219.9 million versus $227.7 million in the second quarter a year ago. This 1.2% decrease was primarily driven by revenue declines associated with lower access lines that more than offset voice revenues from the Madison River Properties and selected price increases.

Network access revenues were $206.9 million versus $217.2 million in second quarter 2007. This 4.8% decline was driven primarily by lower universal service fund revenues, lower intrastate administrative [ph] use, and lower interstate revenue requirements as a result of lower operating expenses and a decline in our net planned investment, which more than offset network access revenues contributed by the Madison River Properties.

Data revenues increased a little over 21% from $108.2 million in second quarter 2007 to $131 million in second quarter 2008, primarily driven by strong high-speed Internet customer growth during the last 12 months and the data revenues contributed by the Madison River Properties. Our operating expenses increased 1.6% from $462.2 million in second quarter 2007 to $469.8 million in the second quarter of 2008. This increase in operating expenses was primarily driven by the acquisition of the Madison River Properties, growth in high-speed Internet customers, and higher marketing expenses, which were partially offset by lower personnel-related costs and lower depreciation expense.

For second quarter 2008, we generated an operating cash flow margin of 48.4% similar to the 48.7% margin generated in the second quarter 2007. Operating income for second quarter 2008 was $187.3 million, a 5.9% improvement over second quarter 2007 operating income of approximately $176.9 million. This increase was primarily due to the synergies related to the Madison River Properties along with lower personnel-related cost and lower depreciation expense.

Net income for the quarter rose more than 16% to $91.2 million compared to $78.4 million in second quarter 2007 as a result of the higher operating income just discussed combined with lower interest expense and a slightly lower effective tax rate for 2008 versus 2007.

The second quarter 2008 was a solid quarter financially for CenturyTel. As Glen mentioned earlier, we generated over $162 million in free cash flow during the second quarter. During the second quarter 2008, we also invested nearly $60 million in capital expenditures, returned approximately $121 million to shareholders through share repurchases and dividends, completed the 700 megahertz spectrum acquisition for $149 million and ended the quarter with net debt to year-to-date 2008 annualized operating cash flow at a solid 2.4 times and debt-to-equity ratio of 0.9:1.

So CenturyTel continues to remain in great shape financially with a solid balance sheet and investment grade credit ratings. We believe our strong cash flows and excellent liquidity position us to take advantage of opportunities and meet challenges as they arise.

Finally, I would like to discuss the third quarter and full-year 2008 guidance provided in our press release this morning. Let me begin by reminding you that our guidance excludes any non-recurring items that may occur in the third quarter and full-year 2008. Also the third quarter and full-year 2008 guidance are based on shares outstanding as of July 31, 2008, which reflects all shares repurchased and settled through that date under our $750 million repurchase program announced in late August last year.

For third quarter 2008, we anticipate total revenues in the range of $640 million to $650 million. We expect diluted earnings per share for third quarter 2008 to be in the range of $0.79 to $0.83. There are several items impacting the third quarter results as compared to second quarter results. First, we expect lower revenue in the third quarter, primarily due to approximately $6 million in one-time favorable revenue adjustments, including the network access dispute settlements and approximately $1.5 million reflected in fiber and CLEC revenues discussed in our first quarter earnings call that are not expected to re-occur in the third quarter and revenue declines associated with continued access line losses and reduced access rates. These declines are expected to more than offset revenue increases associated with growth in our high-speed Internet customer base.

We also expect an increase in interest expense and lower income from our sale of the partnership investment in the third quarter. We also anticipate full-year 2008 diluted earnings per share to be in the range of $3.20 to $3.30, which is an increase over our previous guidance of $3.05 to $3.20 per share. This increase is primarily attributable to the second quarter results exceeding expectations and share repurchases settled through July 31.

This concludes our prepared remarks for today. At this time, I will ask the operator to provide further instructions for the question-and-answer portion of our call.

Question and Answer

Operator

Thank you, sir. [Operator Instructions]. The first question comes from Mike McCormack from JP Morgan.

Mike McCormack - JP Morgan

Thanks. Hi, guys. A couple of things. First, on the competitive side, it looks like the access line losses are trending as you said they might, sort of getting better on a year-over-year basis. Was there anything this quarter that you did special as far as promotions go? And maybe some commentary on what trends are you seeing sort of post-quarter for the continuation of this improvement? And then just a technical issue, on the free cash flow side, working capital seemed to be a bit more of a drag than we anticipated. Was there anything there, whether it's expanding AR, and maybe some prepaid expenses? Thanks.

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

Yeah, Mike, as far as the quarter is concerned, we didn't have any new promotions really for the second quarter of a significant nature. We think that our efforts in our local markets, our bundling efforts, our work with the standalone DSL offer, our pure DSL offer all impacted the access line losses. We have... a sale retention win-back program has been very effective and just a number of things we've done to bring real focus to customer retention that we think had an impact. As far as going to the second... the third quarter, it's really too early to tell, but we're continuing to really focus on this issue.

Mike McCormack - JP Morgan

And on the working capital?

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

Yeah, Mike, basically that was related to tax payments that we made in the second quarter. We had about a $42 million reduction there.

Mike McCormack - JP Morgan

Great, thanks Stewart, thanks guys.

Operator

Our next question comes from David Barden from Banc of America.

David Barden - Banc of America

Hi, guys. Thanks a lot for taking the question. My question was just related to, I guess Stewart, the guidance. If you strip out the $6 million from second quarter, we still had a sequential improvement in seasonally the weakest quarter of the year to 6.51 and yet I guess the revenue guidance for next quarter is seasonally a stronger quarter than average is down as much as between $1 million and $11 million sequentially with data and Internet still going up. So I was wondering if you could kind of be more specific... I'm trying to understand how we get that much of a delta even normalizing out for the $6 million one-timer? And then I guess if I could just follow up with a second, maybe Glen or Karen, on the overall demand picture that you're seeing both geographically and by product set, obviously everyone is continuing to worry about the economy, but are you seeing any kind of differentiation between geographies or between product sets say DSO versus fiber initiatives, if you could kind of make any commentary about not just the overall set, but kind of how you're actually seeing it, product or geography-wise? That'd be helpful. Thank you.

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

David, yeah. On the reduction in revenue, basically besides the $6 million that you identified that were one-time items in the second quarter that will not re-occur in the third quarter, we also had our annual tariff filing with the SEC and we reduced our interstate access rate, so that's contributing somewhat to the decline between second quarter and third quarter.

David Barden - Banc of America

And is that like a two, three, five, $10 million effect?

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

It's probably a couple million-dollar effect. And then we also had some large one-time CPE jobs that closed in the second quarter that we don't really expect to re-occur in the third quarters yes, as well .

David Barden - Banc of America

And that would be in the other line?

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

That's in the other line, that's correct.

David Barden - Banc of America

Okay. Because I mean other was 56 or so, I guess it's not completely off trend from the median of 55 for the last year or so. Were they that big in the second quarter?

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

David, I missed that. I'm sorry.

David Barden - Banc of America

I am sorry. You were saying that there were big CPE contributors in the second quarter. I mean at $56 million in the second quarter really wasn't all that much higher than 55 in the second quarter of last year or 54 in the third quarter and 55 in the fourth quarter. So it wasn't obvious that there was a big CPE contributor component in the quarter?

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

It's 1 to $2 million.

David Barden - Banc of America

Okay.

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

But that gets you to $9 million or so, of the $10 million decline.

David Barden - Banc of America

Okay, thanks.

Karen A. Puckett - President and Chief Operating Officer

On the demand picture geographically I would say in 25 states, we pretty much balance out. There are pockets of challenges. If I take consumer first, we're very pleased with where we ended up on access lines and I believe that that's just a focus that Glen talked about in particular with distribution and our local approach. On the DSL side, we still see strong demand, although we're down about 30%, 31% year-over-year. You know, the larger carriers are down 60% to 80%. So we feel good about that. Inwards are moderately down and outs are up just a bit, but really where we're down on inwards are where we're highly penetrated, so I think it's more of a penetration issue there. On the business side, we saw good growth this quarter in ethernet again, WAN, LAN and CPE. So even though the inwards are down on the access lines for businesses, I would say that there's more migration going on to different product sets.

David Barden - Banc of America

Got you. Okay. Thanks, guys.

Operator

Our next question comes from Simon Flannery from Morgan Stanley.

Simon Flannery - Morgan Stanley

Okay. Thanks very much. Good morning. Glen, could you talk about the M&A environment? You've obviously done a great job with Madison River. It looks like you could have done your billing systems, you can kind of handle another transaction at this point, is there much out there, is there much opportunity for you? And just wanted to clarify on the wireless, it sounds like you're pretty much committed to LTE. In the past, you talked about sort of an announcement at the end of this year, early next year, is that pretty much done now, or have you still got some more work to do on this? Thanks.

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

Okay. Simon, first of all, on the M&A environment, as we've said before, we are very interested in looking at future M&A possibilities and opportunities. There's no reason to say there's more opportunity today than there really was three months ago, but we do believe over time we'll see the opportunity for making acquisitions that will... can be accretive. We'll approach those with our very disciplined approach, but we believe those opportunities will arise over time. We think that, if you look at the structure of this industry, that will happen. As far as the 700 megahertz, we really... what we're announcing today is basically that announcement that with the LTE decision, [inaudible] we're strongly leading right now, it really says there will not be any major capital operating hits in '08 or '09. It will be 2010, and we'll continue to work on our plans and develop the product sets and the technology we will actually use, but right now it looks like it's a 2010 type investment.

Simon Flannery - Morgan Stanley

And is this something where you'll start with a couple of important markets and then see how that goes a little bit like IPTV, or do you think it might be broader than that?

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

I think we'll start similarly as we have with IPTV. We'll check it out and build more on the success based type approach rather than just jumping all in one year.

Simon Flannery - Morgan Stanley

Okay. Thanks. That's all I had.

Operator

Our next question comes from Jason Armstrong from Goldman Sachs.

Jason Armstrong - Goldman Sachs.

Hi thanks. Couple of questions. Number one, on DSL, we've seen sort of a huge share shift to cable this quarter, if you sort of step back and look at the macro picture. Your results obviously seem to indicate that you've actually expended off that share shift pretty well this quarter. Can you help us think through what the difference may have been? Have you seen sort of difference in competitive activity in the quarter, did you guys do any sort of promotional activity on the DSL side that we should be aware of? And then second question, just following up on Simon on M&A, just given sort of the process here, the approval timing, PUC requirements, etcetera, we've heard other comments this quarter from some of the other larger RLECs saying if we were going to something it doesn't make sense to look at something small, instead it has to be larger, just given sort of the restrictions we face. Is that something just kind of the way you guys would think about it as well as you look to the M&A landscape?

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

Jason, on the second question, I'll take it first. We would prefer to do something on a larger scale just because of the resources it requires, the focus it requires. So that is our preference. I'm not saying if a very strategic type smaller acquisition that really fits, we're starting to consider that but our preference will be and our focus will more likely be on a larger type transaction.

Jason Armstrong - Goldman Sachs.

And Glen, just to give us a frame of reference, Madison River, is that from your perspective considered a large or sort of mid size acquisition?

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

That's only a mid-size acquisition. We would certainly be interested in something of that nature if it were available.

Jason Armstrong - Goldman Sachs.

Okay. And then on DSL?

Karen A. Puckett - President and Chief Operating Officer

On DSL, I would say that, you know, in terms of what we sell in the marketplace from cable was pretty consistent from first quarter. They have been very focused on single and double play relative to broadband. We continue with our promotional activities. Our standard rates have not changed, and again, I would say that what we see in the rest of the industry, we were only down 31% on net adds year-over-year. With the larger carriers being 60 to 80% down, I do believe our expanded distribution and our focus, go-to-market focus has paid off there. In addition, our churn was low. We had 1.8% churn, which was a reduction year-over-year of over 10%, so we're feeling good about that. And we believe partly driven by our increase in bundles 56% of our DSL customers are now on a bundle.

Jason Armstrong - Goldman Sachs.

Okay. That's good detail. Thanks, Karen.

Operator

Our next question comes from Michael Rollins from Citi Investment Research.

Michael Rollins - Citigroup

Hi. Just a couple questions. First, and I don't think I heard you cover this earlier. Are you capitalizing the interests for the spectrum that was won at auction ? And then secondly, can you give us a perspective as to where your household market share is, if you were to look at primary lines over your household footprint and if you can maybe give us your sort of medium or long-term perspective based on the competitive environment that you see evolving, where do you think you are going to reach equilibrium? Thanks.

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

First of all Mike, we are not capitalizing interest on the 700 megahertz investment. We're expensing it [inaudible] out the interest cost. And fourth, on market share, primary household market share, that's pretty difficult for us to really say. I would think we're in the 80% range or so, but that's very difficult to determine in at least in our markets.

Michael Rollins - Citigroup

If you just take for a moment that it's at roughly 80% where do you think it goes to over time based on where cable competition is, where wireless substitution... if you give us sort of a ballpark over a five-year period, three-year period, how you guys think about the equilibrium in your planning process that would be great?

Karen A. Puckett - President and Chief Operating Officer

If you just think about where we're at right now with, the reason it's hard is because our overlap with cable and our markets don't overlap exactly. But if you think about just where we're at market share wise on wireless, we believe that our pure broadband product is something that a core cutter would be interested in because of the speed that's required, the fixed speed that's required at the home. So from that standpoint it depends on how you look at household if it's a customer with an RPU we believe we can continue to be very successful and frankly not drop much before because we have a value prop depending on the segment. So if it's a customer interested in video, a customer interested in bundle or if it's a wireless only customer we believe that they still need a fixed broadband product.

Michael Rollins - Citigroup

Thank you.

Operator

Our next question comes from Frank Louthan from Raymond James.

Frank Louthan - Raymond James

Great. Thanks. Just wanted to see on the regulatory side any... anything... any traction you see on phantom traffic or on USF. And then can you give us an idea, any changes with sort of your semi permanent video trial in Lacrosse and any update there, anything that you may be seeing for a little broader in the network? Thanks.

Karen A. Puckett - President and Chief Operating Officer

Well, we would love to make traction on the phantom traffic and we're back in there with our peers making those statements. As you know Chairman Martin came out and said in November... early November he would like to make some traction on USF and access reform. Again, we believe the obvious next step on access reform before we start getting into rate structure as less charge. The minutes of use that are billable across our network and give us some teeth in going after carriers who are not paying the minutes to the use or arbitrating the network. But we're hopeful with this maybe opportunity window in November working now that we could get some traction on phantom [ph] traffic.

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

Regarding the trial, the [inaudible] trial in [inaudible] in Colombia we're... overall we're very pleased with where we are. Today we are seeing very good take rates as a matter of fact that we have been in the market for years or so we're seeing a 40% even over 40% penetration of our market share in those areas, we really cut over in the Colombia in the fourth quarter of '07 and this we've seen a really in the last quarter seen a improvement in service, improvement in our sales success there, this services is very positive from a customer standpoint, we're seeing the demand for our service, the video service continue to increase overall we're very pleased with what we're seeing in the trials in both cities.

Frank Louthan - Raymond James

So how close are you to broader expansion within your territory with that, you are seeing... obviously having success from marketing standpoint, good customer service that's helping, what else does it take to sort of to push that further out in the network?

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

The real issue there is [inaudible] in our overall markets and we are looking at technology such as bonding, cover bonding, other related technologies that provide greater compression... greater. I want you to get more [inaudible] with our customers, we will continue to analyze that we have a couple of markets that we're expecting to expand our relevant product and our video product too, but to be economically feasible we have to have a way to bring it up bandwidth to our customer [inaudible] in this market and it's a challenge. So we will see some expansion, but we don't expect significant expansion in the next six to twelve months.

Frank Louthan - Raymond James

Okay. Great. Thanks.

Operator

Our next question comes from Chris King from Stifel Nicolaus.

Chris King - Stifel Nicolaus

Good morning. Quick question for you with respect to CapEx. You guys have…looks like spent roughly 100…$405 million or so, so far this year. You guys were and have been a really a very…second half kind of back-end loaded on CapEx in recent years. Particularly had a huge fourth quarter in terms of CapEx last year. I was just wondering if we could assume the same type of CapEx pattern going into the second half of this year. Thanks.

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

Yeah, Chris. We still think that we will spend about $300 million this year and we would probably expect for it not to be quite as back-end loaded as it was last year.

Chris King - Stifel Nicolaus

Thank you very much.

Operator

Our next question comes from Michael Nelson from Stanford Group

Michael Nelson - Stanford Group

Yeah, thanks for taking the question. I have a question regarding margins and your cost structure. Do you think you have an opportunity to reduce costs and expand margins over the near-term? I guess, what are some of the areas that you could potentially target? Thanks.

R. Stewart Ewing, Jr. - Executive Vice President and Chief Financial Officer

Michael, basically with...from a margin standpoint, the revenue streams that we are growing, our high-speed Internet revenue, our fiber revenue, or our lower margin revenue than the revenue associated with the access lines that we are losing or the access revenue that we're losing. So it would be very difficult I think for us to really be able to cut enough cost, at this point to really significantly expand margins with the changing mix of our revenue streams.

Karen A. Puckett - President and Chief Operating Officer

What I would say, just in general relative to the metrics of the business, the operation team has been very focused on, if our call volume is down, we don't back sell, we have some technology that helps us understand forward-looking scheduling, our work force management that we deployed almost three years ago and now by the way Madison River didn't have work force management so like there is better visibility into tech productivity and allows us to further consolidate at the dispatch level. So we have all those just kind of business as usual that we continue to realign relative to the volume and the condition of the business.

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

Michael, this is Glen. I will just reassess one fact we've talked about before. When you compare our margins to our peer companies, majority of them are not under FAS71, the regulated accounting standpoint, if we were not at a FAS71, you would see our margins up about three percentage points in the 48.5 range, 51, 52% type range, is where our margins would be, if we were not under FAS71.

Michael Nelson - Stanford Group

Thanks.

Operator

Our next question comes from Tim Horan from Oppenheimer.

Timothy Horan - Oppenheimer

Thanks guys. I just wanted a little clarification on the buybacks. The intention is I guess is to finish off, almost 400 million at the range of 180 million in the next six to nine months and it sounds like you're going to be basically borrowing money to make those buybacks? Just one other topic checking out and secondly, maybe why you're thinking is for buybacks going forward '09, '10 and I guess in that regard, that's going to depend how much you can spend a year or want to spend a year on wireless Capex. So maybe just some rough thinking on how much you can spend a year in '10, beyond on the wireless side, thanks.

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

First of all, we are really borrowing to complete the buyback by year-end or early 2009, so yes, that is correct. As far as buybacks going forward of course, that's a Board decision, I won't really comment on that, but we have stated we are committed to paying out substantially all of our free cash flow returning to the shareholders in the months ahead. So that will be our approach. As far as buybacks beyond '09 and '10 and as it relates to wireless, we are not ready to talk about this today, but we expect to continue to buy back stock even while expanding the 700 megahertz business.

Timothy Horan - Oppenheimer

On the wireless side, can you give us a rough idea how much it might cost a year, is it a $100 million or is it closer to $400 million or is it just too early to tell at this point and maybe also on wireless, if you can elaborate a little bit on how much coverage you would like to see, overlap you would like to see with the wireline and how important that is from both an infrastructure perspective and a services perspective and marketing? Thanks.

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

Well, I'm not going to really talk yet about the amount, but I can tell you it's not going to be $400 million a year for sure. It's going to be something substantially less than that, but we are not ready [inaudible] as I mentioned earlier, on the earlier question, we won't just jump and do this all at once. It will be on a success base type... base... we will trial some markets and move into it as we see it. To the extent we believe we can really drive real value for shareholders, that's how we will approach this investment. As far as wireless coverage, we've got about 53% of our markets with the spectrum [ph] we purchased already, we believe there will be opportunities to trade for a spectrum, non-strategic spectrum that we own... spectrum in some of our markets, we don't have coverage, we think we will have opportunities to buy spectrum in other markets. I'd like to see 75%, 80% coverage eventually with our 700 megahertz offering.

Timothy Horan - Oppenheimer

Thanks so much.

Operator

Our next question comes from Patrick Rien from Lehman Brothers.

Patrick Rien - Lehman Brothers

Good afternoon and thanks for taking the question. Just a follow-up on that buyback question, I think you said you're at $340 million remaining at the end of the second quarter. How much is remaining... how much have you used since then? And second, has the methodology actually changed since you announced the acceleration or you want to complete it by the end of the year anyway? And finally given that the stock is up about 20% since that announcement, does that change the way you think of the methodology, is it based on price or a volume amount? Thanks.

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

Well Patrick, we don't disclose or we haven't disclosed the number of shares or the amount that we spent in... during the month of July subsequent to the end of June but we did accelerate our share buyback when we made the dividend announcement. The share buyback program that we had was approved in August of 2007 for $750 million, it was approved to be purchased over a two-year period. So we accelerated that what would have been on August or July '09 end of the $750 million program back into the end of this year or early first quarter of '09. In terms of the methodology we did step up the pace of buybacks when we made the dividend announcement and we are basically spending a set amount each day pretty much to where we will hit the late year end or early first quarter timeframe.

Patrick Rien - Lehman Brothers

Okay. And then just one additional question if possible. Can you remind us what percent of your lines are price cap versus rate of return and any thoughts about moving to price capital return?

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

And I think it's about 25% or 30% of our access lines are price cap. It's basically the last lines that we acquired from Verizon in Missouri and Alabama. That's in the federal jurisdiction, we have looked at potentially converting to price cap with our other lines and that's something we are discussing now, and we certainly have been watching the following that Windstream made to convert and a couple of the other companies has made to convert so that is something we are currently exploring.

Patrick Rien - Lehman Brothers

Great, thanks a lot.

Operator

Our final question for today comes from Chris Larsen from Credit Suisse.

Chris Larsen - Credit Suisse

Hi and thank you for taking the question. I wondered if you can talk a little bit about the IP video and the thoughts of expansion there? First you talked about success, can you give us some idea of churn reductions or return on capital that you have been seeing anyway you can and then how big is the addressable footprint and do you look at it as loop length or is there some other determinant in terms of cable competition just where could the IP video go and how quickly might we see you roll that out?

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

I don't have the specific impact on churn Chris, but we think it's significant, I know and just with our satellite video we are seeing churn there of only 1.7% for those customers. It's really a… when we get the video in the home, it's certainly positive. So we're confident with that. As far as our rollout... expected rollout, I am not ready to say where we are... do we have some markets we targeted and we will be doing some expansion there, again we are looking at ways to get enough bandwidth to a large enough percentage of customers in a city to just find rollout where we can earn appropriate returns. We have... we would not target anything less than 15% or so return on investment, I think where we drill out video just because of the risk element that's kind of a hurdle right for us. So that gives you an idea of where we... what we look at.

Chris Larsen - Credit Suisse

And I assume that the returns in the IP video when you do it yourself, are they materially higher than just reselling the satellite or is there some other aspect to it that makes it that much more attractive than selling the satellite video?

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

When we make a decision to go into a city, it's absolutely, we expect returns significantly higher than just re-selling the satellite TV segment.

Chris Larsen - Credit Suisse

Great. Thank you very much. One other thing, can you just give us an update on footprint coverage in terms of cable with voice-over-IP roughly?

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

Yes, it's between 40% and 45% in that range, some increase in the second quarter, but not substantial increase. So we are still with that range 40% to 45%.

Chris Larsen - Credit Suisse

Great. Thanks a lot.

Operator

This concludes our question-and-answer session for today. I would now like to hand the conference over to Mr. Glen Post for any closing remarks.

Glen F. Post, III - Chairman of the Board and Chief Executive Officer

In closing, CenturyTel's second quarter financial results and operational performance continue to be solid in an increasingly competitive landscape and a challenging economy with a couple of quarters... while a couple of quarters may not tell the whole story, we believe our sales activity and our customer retention initiatives help to drive improved consumer line losses in the first half of this year. And we also hope to see further ARPU growth during the remainder of the year in both the consumer and business segments. We believe our higher dividend and leverage strategy creates an optimal balance to drive long-term shareholder value and capitalize on opportunities that may arise in the future. We appreciate your participating in our call today and we look forward to speaking with you in the weeks ahead. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a nice day. Thank you.

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