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Executives

Rob Clancy - Sr. VP and Treasurer

Jeffery R. Gardner - President and CEO

Brent K. Whittington - EVP and CFO

Analysts

Simon Flannery - Morgan Stanley

Michael Nelson - Stanford Financial Group

David Barden - Banc of America Securities

Christopher King - Stifel Nicolaus & Company

Batya Levi - UBS

Jonathan Levine - Jefferies and Company

Ana Goshko - Banc of America

Windstream Corporation (WIN) Q2 FY08 Earnings Call August 8, 2008 8:30 AM ET

Operator

Welcome to the Second Quarter 2008 Windstream Communications Earnings Call. All lines are placed on mute.

We would now like to introduce our speaker Rob Clancy, Senior Vice President and Treasurer.

Rob Clancy - Senior Vice President and Treasurer

Thank you, Arian and good morning, everyone, and thank you for joining us this morning. Today's conference call was preceded by our second quarter 2008 earnings release which has been distributed on the newswires and is available from the Investor Relations section of our website. Today's conference call should be considered together with our earnings release and related financial information.

Today's discussions will include certain forward-looking statements, particularly as they pertain to guidance and other outlooks on our business. Please review the Safe Harbor language filed 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.

Today's discussion will also include certain non-GAAP financial measures, again we refer you to the IR section of our website, where we have posted our earnings release and supplemental materials which contain information and reconciliations for any non-GAAP financial measures.

As you may have seen in our press release earlier this morning, we announced that we are selling our wireless properties in North Carolina to AT&T for $60 million. When we acquired CT Communications, we valued the wireless business using the discounted cash flow analysis based on the asset being held for use, as a result of the pending sale, we incurred a pre-tax $18 million non-cash impairment charge in the second quarter to reflect the difference between the sales price and our recorded book value. Also we are now classifying that business as held-for-sale and the related operating results which are netted against this impairment charge are presented as discontinued operations in our second quarter financial information.

Accordingly, we have updated our pro forma results from current businesses to remove the wireless business from our other segment, as a reminder, our pro forma results include VALOR and CT Communications and exclude our publishing and wireless businesses for all periods. In addition, our pro forma results exclude merger integration costs which for the second quarter totaled $4.6 million due to a non-cash write-off of software prior to the CT Communications transaction. We will make references to these pro forma results from our current businesses, including the year-over-year comparisons during our call.

Participating in our call this morning, are Jeff Gardner, Windstream President and Chief Executive Officer; and Brent Whittington, Windstream Executive Vice President and Chief Financial Officer. At the end of the call we will take a few questions.

With that, here's Jeff Gardner.

Jeffery R. Gardner - President and Chief Executive Officer

Thank you, Rob. Good morning, everyone. I'm very pleased with our results for the second quarter and the first half of 2008. We continue to deliver industry leading operational metrics and generate strong cash flow. In fact, given our updated view on capital expenditures and share repurchases to-date, our expected dividend payout ratio should be between 56% and 61% this year, which is down from our recent projection of 60% to 65%. This is also a significant improvement compared to our dividend payout ratio in 2007 and a testament to the tremendous efforts of the entire Windstream team.

Let me turn to a few details. During the second quarter, we repurchased about $100 million of common stock, or 7.6 million shares at an average price $13.13 per share. To-date, we have completed $200 million of our $400 million share repurchase authorization that expires at the end of 2009. Importantly, our dividends and share repurchases have returned approximately $425 million to shareholders during the first half of 2008.

Turning to our pro forma operational results, we added approximately 23,000 new high-speed Internet customers this quarter, bringing our total customer base to over 934,000, an increase of almost 20% year-over-year. Our overall broadband penetration is now at 30% of our total access lines and residential broadband penetration is approximately 44% of primary residential line. We believe these tighter [ph] penetration rates rather than the economy are the main cause for the slowdown in customer growth rates.

We continue to believe there is room for additional unit growth as well as revenue growth by selling faster speed and other product and services to leverage the broadband connection. We launched ADSL2-plus at the beginning of the second quarter, allowing us to essentially double the Internet speed available and operate 12 meg products in certain markets.

Our promotions during the quarter focused on familiarizing customers with faster speed and we did experience a shift in mix with more customers subscribing to 3 meg speeds or higher. We are also focusing on selling complimentary Internet products such as security suite, a home networking solution and a tech held package which provides assistance on a variety of computer related issues. These additional services coupled with the revenue opportunities from the faster Internet speeds should increase broadband ARPU in the back half of the year.

We added 21,000 digital TV customers in the quarter, bringing our total customer base to approximately 231,000 or 12% penetration of primary residential lines and continue to have great success selling the DISH product in our bundle.

During the quarter, access lines declined by 37,000 which is a slight improvement in lines lost year-over-year and much improved sequentially. This is quite an accomplishment given the fact that cable VoIP competition continues to increase and businesses continue to migrate to higher capacity units. In terms of residential line, gross ads are down year-over-year, but our disconnects are down even more, yielding the lowest absolute residential line loss experienced in two years.

These results are a function of our team's focus on increasing the effectiveness at the point of sale as well as on customer retention. Non-paid disconnect decreased 1,600 units year-over-year and by 5,700 units sequentially. Further supporting our thesis, that rural telecom appears to be more inflated from the effects of the overall economy than many other businesses. We ended the quarter with just over 2 million long distance customers, representing a 66 penetration rate of total access lines.

During the second quarter, we lost approximately 20,000 long distance customers, primarily due to a price increase in the fourth quarter of 2007, which is driving lower ARPU customers to disconnect their long distance service.

Importantly, long distance revenue increased 6% year-over-year, a result of both the pricing increase as well as strong sales of long distance packages. Our team is doing a great job selling our unlimited in-flex packages, driving penetration of these packages to 20% of total access lines, which is important from a revenue and retention standpoint.

Our business channel continues to grow year-over-year driven by next generation data services. Broadband growth and increasing special access growth, as well as strong equipment sales. We are making improvements within our network to expand the availability of advanced data services such as Virtual Private Network and Virtual LAN Services in order to create more capabilities for our business customers. We manage this business channel by focusing on revenue and profitability. This is important as we continue to see migrations to higher capacity circuits that appear as additional line losses. However, drive higher revenues and greater efficiency.

To-date, we've not experienced meaningful cable competition in our business channel and because the majority of our business customers have queued in five lines, we continue to be well positioned competitively. Nonetheless, we continue to be proactive in selling bundled products and extending term contracts to strengthen our existing business relationships.

In summary, I am very proud of all that our team has accomplished in the two years since Windstream became a public company. During this period we have delivered consistent industry leading operational results and met or exceeded our financial goals. We have increased the free cash flow of this business through the synergies in both the VALOR and CT transactions as well as operational and cost reduction initiatives. We remain confident in our ability to sustain cash flows over a long period of time. As we have stated before, we will stay focused on delivering solid operational metrics, achieving our financial goals, so that we will be well positioned for any strategic opportunities that are in the best interest of our shareholders.

Now, let me turn the call over to Brent to discuss the financial results.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Thanks, Jeff, and good morning everyone. For the second quarter, on a GAAP basis, Windstream achieved consolidated revenue of $800 million. Operating income of $289 million and $0.23 of diluted earnings per share, all of which exclude the wireless business which is reflected as discontinued operations given its pending sale. From a contribution perspective, the wireless business generated roughly $12 million in revenue and $3 million in OIBDA during the quarter. The wireless results for the quarter are netted against the non-cash impairment charge, resulting in a loss of $0.04 per share, that's reported in discontinued operations. Income from continuing operations was $0.27 per share.

Let me turn to our pro forma results from current businesses. For the quarter, Windstream achieved consolidated revenues of $800 million, a decline of 2% year-over-year, consolidated OIBDA of $417 million, which is roughly flat year-over-year and operating income up $294 million, an increase of 5% year-over-year.

Within our wireline segment, revenues were $784 million, a decline of 2% year-over-year, although the vast majority of this year-over-year decline related to a favorable $13 million network access settlement we reported in the second quarter of last year. Data and special access revenues increased $15 million or 9% year-over-year due to continued growth in high-speed Internet customers as well as solid growth in business data services and special access circuits.

Long-distance revenues increased by approximately $4 million year-over-year, a result of both solid sales of long-distance packages and a price increase in the fourth quarter of 2007. Voice revenues declined 8% year-over-year, primarily due to access line decline. And finally, we experienced an 8% year-over-year decline in switched access and USF revenues, largely a result of the $13 million settlement we received in the second quarter of last year that I previously mentioned.

Looking forward, we do expect USF revenues to decline related to the elimination of the broadband surcharge previously assessed on broadband customers. However, the corresponding expense will also decrease, making this OIBDA neutral.

Turning to expenses, this quarter wireline cash expenses declined by $18 million or 5% year-over-year. Specifically, cost of services decreased by approximately $15 million or 5% year-over-year, related to lower property taxes, lower pension and benefits expense and favorable comparisons as the second quarter of 2007 included various non-recurring expenses.

Within SG&A, expenses decreased by $11 million or 11% year-over-year, largely related to the realization of synergies from the CT business and cost efficiencies related to optimization activities within our IT organizations in 2007. Sequentially, total cash expenses were down slightly.

For the second quarter wireline OIBDA was $417 million, a slight increase year-over-year, driven by the expense reductions I just mentioned. Our OIBDA margin increased to 53.2%, up from 51.9% in the second quarter of last year. Given the reclassification of our wireless business to discontinued operations, the only additional segment we now have is our product distribution business. As a reminder, the vast majority of the revenue in this business is internal. Our external business, although relatively small allows us to leverage our spend and gain efficiencies in our procurement activities. This quarter revenues were $86 million, up 1% year-over-year driven by higher internal sales. OBIDA for the quarter reflected a loss of $300,000.

We spent $77 million in capital expenditures during the second quarter which brings our year-to-date spend to $133 million. This is below our original plan due primarily to improved capital management initiatives and slowing real estate subdivision development. As a result, we are now lowering our overall capital expenditure guidance for the full year. Our original guidance for capital expenditures included a range from $340 million to $370 million. Our new capital expenditure range is $300 million to $320 million, a significant reduction that yields greater cash flows to the business without compromising the competitiveness of our network. Our engineering team has really done just an outstanding job managing our overall capital spend and we've benefited to some extent from the slowdown in new housing development.

From a balance sheet perspective, we ended the quarter with $60 million of cash, a revolver balance of $120 million and our leverage ratio was 3.2 times. During the first half of the year, we generated $374 million in free cash flow, defined as net cash from operations, less capital expenditures all of which has been returned to shareholders in a form of both dividend and share repurchases. The business continues to produce strong cash flows and combined with the capital reductions, our expected divided payout ratio should be between 56% and 61%, with expected free cash flow generation of $735 million to $795 million in 2008.

In summary, we're very pleased with our results for the second quarter and first half of 2008. The Windstream team has done just an exceptional job executing on our operational initiatives, while closely managing operating and capital expenses, all of which have allowed us to grow our free cash flow year-over-year.

With that we will now take a few of your questions. Operator, please review the instructions and open the call to questions, and thank you.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Simon Flannery of Morgan Stanley.

Simon Flannery - Morgan Stanley

Okay. Thanks very much. Good news on the capital spending, it looks like you're going to be coming in out or maybe slightly below 10%. Is that something that we think could be sustainable in 09 and beyond or is this really something that really reflects the weakness in the economy that when you'll probably have to take it up a bit next year?

And secondly, not a whole lot of discussion in your comments, so far Jeff, about the M&A environment, perhaps you could just talk about what you are seeing out there? Thanks.

Jeffery R. Gardner - President and Chief Executive Officer

Brent, why don't you take the CapEx then I will follow-up with the M&A question.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Yes. Good question Simon. And we've spend a lot of time really focused on CapEx and making sure, we're making smart decisions in the business. And I'm... really two things going on there, I mean, first we have made improvements in how we manage that and the accountability that folks have in our organization around CapEx spend. And so, I think a lot of that improvement, probably about half is just long-term kind of improvement in the run-rate we'd expect to see. About the other half, really I will choke up as much as anything due some of the slowdown in housing that I talked about before. Those are really probably the two bigger issues.

Simon Flannery - Morgan Stanley

And the housing is probably going to persist through 09 as well, so?

Brent K. Whittington - Executive Vice President and Chief Financial Officer

That's hard to say but that looks like that's the case.

Simon Flannery - Morgan Stanley

Okay. Thanks.

Jeffery R. Gardner - President and Chief Executive Officer

Related to M&A Simon, on July 18th our tax sharing agreement expired with Alltel. It's nice to have that behind us. It provides us additional flexibility if you recall, that limited the number of shares that we could issue in a transaction. So, that's all about increased flexibility. Our view on consolidation hasn't changed, I think it's an important part of our long term model. The industry saw a good bit of consolidation over the last couple of years and we've participated that and we hope that we'll have more opportunities going forward.

Simon Flannery - Morgan Stanley

Okay, all right. And any sort of particular with the political environment changing, anything with the prospective [ph] regulatory terms, certainty, macro uncertainty, does that make things little bit slower, compared to what happened in the last couple of years?

Jeffery R. Gardner - President and Chief Executive Officer

I don't think so Simon, I think there is a lot of kind of noise going on in terms of some of the key issues affecting our industry like USF and inter-carrier compensation. Our views on that haven't changed within our carrier compensation, we were supportive of the Missoula Plan. Doesn't look like that's happening, but if something does happen, we think it will be something like that would tend to be revenue neutral. On the USF side, we are relatively light in terms of the amount of federal USF we've got. So I don't think we have significant risk there either.

Simon Flannery - Morgan Stanley

Great, thank you.

Jeffery R. Gardner - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Patrick Rein [ph] of Lehman Brothers.

Unidentified Analyst

Thanks for taking the question. If possible, can you give an update on where you are at with the buyback since the end of second quarter and then also what your restricted payments basket looks like? And finally, the $60 million you are going to get from the sale, does that need to go to debt pay down or can that be added to the buyback? Thank you.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Patrick, a couple of things. One on restricted payment basket, that's over $400 million. The thing to remember, we did spend through the second quarter year-to-date. We had overall, $400 million share repurchase that we had completed, buying back just around 16 million of our shares. In terms of cash flows, the things to remember about us are two things really as you thinking about the third quarter, in fact part of the year. Number one, you look at our CapEx run-rate, you'd expect that to accelerate in Q3.

And then number two, in the first and third quarters, we've got interest payments on our notes. So those are our weakest quarters from a cash flow perspective, so just something to keep in mind. In terms of the sale of the wireless business; that does not have to go back to debt repayment. There are some provisions in our agreements we have to keep in mind. But it does not have to go back to debt repayment.

Unidentified Analyst

Great. You had given out what you've done by the actions [ph]--

Brent K. Whittington - Executive Vice President and Chief Financial Officer

We are not providing that.

Unidentified Analyst

Okay, thank you.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Your next question comes from the line of Michael Nelson of Stanford Group.

Michael Nelson - Stanford Financial Group

Hi, thanks for taking my question. My questions are regarding your margins and your cost structure. You guys are now generating really impressive EBITDA margin in the 52 plus percent range. And I'm wondering if you think this is a good run-rate, is there a revenue mix shift that may cause that to decline or there are opportunities to reduce costs further and what is some of the areas you could potential target? Thanks.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Michael, good question. I've been really pleased of what we've done for a while now on our margins. And we talked about a number of the big initiatives that I think are helping in the regard, with realization of synergies, if you look on a year-over-year basis, and I talked about improvement in our IT organization. But outside that it's just a consistent focus across our entire business on cash costs. There is a shift in mix of revenues going on and predominantly we talked about the shift from voice to broadband which traditionally is going to result in slightly lower margin.

So as you think about OIBDA margins over time, I'd expect there to be some decline, but if you look even Q1 to Q2 and although there was a decline, we still were able to maintain very healthy margins. And so no major cost initiatives, and I'd tell you we had and continue to have just intense focus on field expenses, whether that's over time, contract labor, things like that that are really high areas of spend for us. And in spite of increased utilities and fuel costs, we've been able to outrun that with significant improvements in the business. So that continued focus is what you would expect from us and no, what I call major special projects.

Jeffery R. Gardner - President and Chief Executive Officer

Right and just from overall perspective, when we look at kind of the business model that we put together two years ago, it was... and we looked at expenses and what kind of the trajectory was on revenue. We knew at that time that we would have to be exceptionally clever and innovative in terms of driving cost synergies in our business. And then, as Brad mentioned in its script, M&A helped us well. And so coupled together, I think the team is doing a wonderful job there, that's really helping to sustain these margins over a long period of time.

Michael Nelson - Stanford Financial Group

Thanks. Good luck guys.

Jeffery R. Gardner - President and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of David Barden of Banc of America.

David Barden - Banc of America Securities

Hi, guys, thanks and good morning. Just two quick questions, one just on a housekeeping question. If you could kind of help... just as I look through these numbers, just trying to understand where I can pull wireless out of from the revenue and cost section. So I can understand the base line. Kind of comparing last year's quarters to this year. And then, just going maybe I apologize, back to the M&A question. The less about the goodness of M&A but more the rational for it, as you look around the universe of opportunities, where are you guys thinking that the real opportunity for M&A to attract value is? Is it on the balance sheet, looking at companies that are under-levered or maybe aren't maximizing returns to stockholders and seeing them as an opportunity to increase value?

Or is it leveraging your very high margins and looking for low margin companies where you can hold them up to curves? Because one of the things I'm concerned about is, you guys are stronger than average because of your more real nature, you maintain very high margins and as you look at the universe of opportunities, there is relatively few sizeable companies that you could acquire that wouldn't dilute that strength and it seems like going out and shutting down headquarters is not really a big enough synergy opportunity to maybe take those risks for the that kind of M&A? Thanks.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

David, I will take your first question on the housekeeping item, we've really made that on ET [ph] because our pro formas exclude the wireless business and because we did report on those operations as discontinued operations, in the future we will continue to share that in that line item for all past periods, so that's the key. So, if you kind of look at our results for Q2 on a normalized basis, excluding the discounts, assuming they were still running the wireless business on held for use basis, our revenues would like about $812 million and our OIBDA would have been 420, so that's like a best--

Jeffery R. Gardner - President and Chief Executive Officer

So, David, great question on M&A. It's not all about expense, but I think scale is critically important in this business in terms of you know that you're going to have some revenue pressures you kind of transform this business model from one that is voice centric to broadband centric where we've got a pipeline of new products that we're developing that will kind of offset some of that revenue pressure. And we've got a great wholesale and enterprise business that we're managing throughout.

So, those are big opportunities. The financial flexibility that's afforded when you do these deals is important as well. So, a larger company is in a better position to look at things on the product development side that may really help expedite the transformation of this business in terms of driving additional products and services and that's really a function of the scale as well. But also as you mentioned, operational improvements are really an important part of that. I think that we have a very good view of how to run this business, we operate in some very real markets and in some mid-sized markets as well and just to point to the access lines, where we're not the most rural carrier out there but we've been 80 to 100 basis points better than the industry on that consistently overtime.

So, we bring some of that kind of aggressive management to these businesses as well. So, it's not just one thing but it's a whole function of things. When we look at the business in the long run, what we've always said is that we've got to do an excellent job on the revenue side, coming up with new products and services to replace voice revenue, that's one part of the story. Operational expense on the expense side and then the combination of M&A, a third component of that really can drive this business to sustain and grow cash flows over very long period of time.

David Barden - Banc of America Securities

So, you guys kind of feel you can bring your business model to another business even though it might be a little bit more competitive in its footprint and make the improvement and that's where the synergy opportunities can develop in addition to the scale itself?

Jeffery R. Gardner - President and Chief Executive Officer

That will be an additional opportunity for us.

David Barden - Banc of America Securities

Got you, all right. Thanks guys.

Jeffery R. Gardner - President and Chief Executive Officer

Thanks David.

Operator

Your next question comes from the line of Chris King of Stifel Nicolaus.

Christopher King - Stifel Nicolaus & Company

Good morning guys. A couple of quick questions. Just to a follow-up from Simon's question regarding some of the regulatory issues out there. I just was wondering if you had seen or could comment on the filing made earlier this week by the Bells and consortium of wireless and VoIP guys, on inter-carrier compensation and whether that will actually move the discussion forward, in anyway share perform over the course of the next several months? And secondly, just wanted to get your take on the phantom traffic issue and how big of an issue you view that for you guys, specifically refer that a couple of your like peers are trying to move the ball forward on that issue once again in front of the SEC? Thanks.

Jeffery R. Gardner - President and Chief Executive Officer

Thanks. No, thanks. Not surprised at the letter that went to the SEC this week, I think this interstate access reform has been on the table for long time. A couple of companies that you mentioned have been pushing it. We were very supportive as I said of the Missoula Plan, I thought it was a nice compromise that had a met, the long term goals with interstate access. And we'll see... I don't think anything is going to happen in the short run. It's relatively late in the year. We have got our election here in front of us.

So we are just continuing to kind of put forth our views on that, working with our industry association and through our Washington office. But I don't expect anything to change in the near term. With regard to phantom traffic, I am sure that's an issue, we haven't quantified it. We are working with some other members in the industry that just kind of clarify the rules around traffic and a lot of it has, is very related to the interstate access reform. As long have we have an environment where minutes get treated differently depending on whether their interstate or interest day, you are going to see some of that.

And so, we've always said that you've got play by the rules that are in front of you today and we always have and when this phantom traffic issue gets worked out. I think we see some upside that we haven't quantified it.

Christopher King - Stifel Nicolaus & Company

Thank you.

Jeffery R. Gardner - President and Chief Executive Officer

Sure.

Operator

Your next question comes from the line Batya Levi of UBS.

Batya Levi - UBS

The question, I just wanted to ask about the drivers of the line losses in the quarter. You mentioned disconnect getting, sequentially getting down, probably had those at lower as well should... given your comments on the... about this, do you expect line losses to stabilize at these levels or expect lower growth has to offset that. And if you could give us an update on what percent of your footprint has cable competition? Thanks.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Right. Sure about 50% to 55% of our footprint has cable competition. We haven't given any forward-looking guidance on access line losses. But if I think, if you look at our history over the two years that we have been a public company, it's been very steady. And we are not at all taking for granted that access line losses are a foregone conclusion.

So every quarter, we are getting more and more aggressive with our retention efforts on the distribution side. We are trying to add distribution to help on the gross gain side. When you look at kind of the drivers that disconnects a voice over IP, it's still our biggest issue customers moving to the cable company. So we are trying to get into that by getting more aggressive with things like selling products to multi growing units, adding local agents, increasing our retail presence in the market and then set behind that obviously would be wireless substitution.

Batya Levi - UBS

Thanks. Just one follow-up on, long-distance, do you expect the losses you've seen in the quarter to continue?

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Well, again, what we're losing is very low ARPU customers, because we've raised the prices so, from perspective we'll probably see some additional low end ARPU customers fall off, but importantly revenue grew at 6% and our team is doing a great job selling bundled long-distance products and that's really where we need to focus our attention.

Batya Levi - UBS

Okay. Thanks.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

You're welcome.

Operator

And your next question comes from the line of Jonathan Levine of Jefferies.

Jonathan Levine - Jefferies and Company

Great. I had a question. I was wondering, I may have missed this. But can you give a detail, detail in terms of the access line loss in terms of the break-up between residential, versus business lines. Then also could you talk a little bit in terms of the high speed data sub in terms of the breakout between the different tier levels, different speed tier levels?

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Sure, I am I am sorry, I cut you off.

Jonathan Levine - Jefferies and Company

No problem.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

With respect to... we don't give the specifics on residential and business. But we haven't seen the change. Obviously, the business is much lower. We are being... we are very competitive there. We don't see a lot of cable competition. So our residential line loss is obviously higher. And then we had our best residential line loss in two years for the company in this quarter. So we are real pleased with that.

The second part of your question was data tier level breakout. I mean we didn't talk about it in the quarter, promotions that we had and we saw a much greater percentage of customers subscribing the 3 meg and higher speed. So we were pleased with that. The first half of the year hasn't what I would call Jonathan materially altered our percentage overall. We still have a relatively small number of customers, that are subscribing to speeds higher than our basic offering but it has been a big part of our focus the first part of the year and we will remain so the back half of the year.

Jeffery R. Gardner - President and Chief Executive Officer

And maybe ADSL2-plus is a big part of that, as a kind of a catalyst to sell these higher speeds, if you looked at early in the year our 3 meg and higher sales were in the low 40s and now we're closer to 50% in terms of 3 meg or higher sales, so good progress there.

Jonathan Levine - Jefferies and Company

Great. Thank you.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Thank you.

Jeffery R. Gardner - President and Chief Executive Officer

Marion, we have time for one more question.

Operator

Okay. Your next question comes from the line of Ana Goshko of Banc of America.

Ana Goshko - Banc of America

Hi, thanks very much for taking the question. I wanted to ask you about your leverage targets in a couple of contexts. First, have you've been very conservative in terms of your leverage target in the low 3 times area, particularly given some of your peers, the same rating category, so wondering if this is where you want to be at and you are staying at it?

Or have you thought about potentially increasing that to take advantage of down drafting your share price I know you've got revolver capacity, have you thought about potentially taking on some more debt to take advantage of your share price and bringing in more shares? And then the second context, is in the potential for an M&A outcome, if the right opportunity presented itself, where would you be comfortable taking leverage?

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Ana, good question. I guess I'll tell you, 3.2 times is really still right in the area we had targeted two years ago and so we've remained true to that for a while now. Even if you look at the free cash flow story, which I think we've got a tremendous free cash flow story for the first part of the year, both the buybacks, the amount of cash we've retuned there as well as dividends and we have done all that without significantly impacting our liquidity and leverage.

So, I'm pleased with what we've accomplished there and I think as we talk about the share buyback, we've always spoken about it in terms of using the cash that the business generates, to fund that share buyback. So, that's my views on the first part of your question. As it pertains to M&A, 3.2 times again, in that area, that double BB area, specifically is what we've targeted as opposed to a specific leverage level.

And so, I think that's what we're trying to solve for in any M&A environment or a target we might look at, we've always... we could perhaps have an appetite for a slight increase in leverage with the path to pay down all in the spirit of trying to again protect that credit rating that is important to us. So that's kind of how we think about it.

Jonathan Levine - Jefferies and Company

Okay. Thanks. That's very helpful.

Brent K. Whittington - Executive Vice President and Chief Financial Officer

Thank you

Rob Clancy - Senior Vice President and Treasurer

We appreciate you folks joining us this morning and also appreciate your interest and support. Mary Michaels and I will be available for additional questions through out the day. Have a good day.

Operator

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Source: Windstream Corp. Q2 2008 Earnings Call Transcript
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