Qwest Communications International Inc. Q2 2009 Earnings Call Transcript

Qwest Communications International Inc. (Q) Q2 2009 Earnings Call July 29, 2009 9:00 AM ET

Executives

Kurt Fawkes - SVP of IR

Ed Mueller - Chairman and CEO

Tom Richards - COO

Joe Euteneuer - CFO

Analysts

Simon Flannery - Morgan Stanley

Tim Horan - Oppenheimer

David Barden - Banc of America

John Hodulik - UBS

Jason Armstrong - Goldman Sachs

Michael Rollins - Citi Investment

Mike McCormack - JPMorgan

Peter Rhamey - BMO Capital Markets

Frank Louthan - Raymond James

Operator

Good morning. My name is, Kevin and I will be your conference operator today. At this time, I would like to welcome everyone to the Qwest conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Mr. Fawkes, you may begin your conference call now.

Kurt Fawkes

Thank you, Kevin. Good morning, everyone. Welcome to the call this morning. The format this morning will be as follows: Ed Mueller, our CEO and Chairman, is going to summarize our key takeaways and our strategic accomplishments in the quarter. He will be followed by Tom Richards, our COO. Tom will provide segment details on our second quarter results. Then Joe Euteneuer, our CFO is going to cover the details of the balance sheet and overall financial results, and give you an update on our guidance.

Following our comments, we will take some questions that you might have. As we begin our call, let me point to slide three and remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and contains significant risk and uncertainties. We discuss our risk and uncertainties in detail in our filings with the SEC, and I strongly encourage you to review them.

Additionally, we do not adopt analyst estimates nor do we necessarily commit to updating forward-looking statements that we are making this morning. So, let me mention also that in order to supplement the reporting of our consolidated financial information, we will discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted free cash flow, and net debt. Full reconciliation of these measures is available on our website.

Moving on to slide four, earnings per share for the quarter was $0.12. That a 20% increase from the prior year. EPS performance in the quarter includes a couple of things of note. First, severance costs of $23 million; that's $0.01 per share dilution. We also had a big tax benefit this quarter, and we reported an effective tax rate of 2.3% in the quarter. Finally, I would note the incremental non-cash pension and OPEB expense affected the comparisons year-over-year. We also had a bit of a lower share count this year versus last year, which played into the EPS comparison.

Before I turn it over to Ed, I would like to point out that we are introducing new segment revenue classifications that will be effective with our third quarter reporting. To assist you with this transition, we have provided historical pro forma reporting on these new classifications in the second quarter.

The move to strategic and legacy revenues will allow investors to more closely follow the progress we are making in delivering products designed to meet evolving customer needs, regardless of the technology platform or service delivery. We, of course, are always looking for your feedback, and we welcome your input on how we can continue to enhance transparency and your understanding of our business.

With that, I will turn it over to Ed.

Ed Mueller

Thanks, Kurt. Good morning, everyone. I appreciate you joining us this morning. I will start out with a few highlights from the quarter, and a brief discussion of the progress we are making on our strategic initiatives. I will then turn it over to Tom and Joe, who will walk you through more details on our results.

In light of market conditions, I believe our results were solid across all segments. We reported adjusted EBITDA of $1.1 billion, which was in line with the year ago period, after factoring in the incremental impact of the non-cash pension and OPEB charges. I think it is noteworthy that we achieved this result even in the face of a 6% decline in revenue, excluding wireless.

We have maintained profitability in the face of challenging top line conditions through diligent cost management, and we will continue to improve productivity and attack the cost drivers of the business. While competitive pressures were a factor in our results, once again, a substantial portion of the revenue decline in the quarter was driven by decisions we have made to improve overall profitability.

Additionally, we continue to see tough macroeconomic conditions impacting our customer base. Regionally, unemployment and personal and business bankruptcies continue to climb at rates in line with national trends, although these varied across our markets. In addition, the housing market is showing very limited signs of recovery, although still well below previous levels.

Adjusted free cash flow for the quarter was $657 million, nearly a $200 million improvement from prior year levels. The biggest contributor to these results were lower capital spending where we remain disciplined, especially in an environment where chasing after the next dollar of revenue can be tempting.

However, that doesn't mean that we are sitting on the sidelines waiting for the tides to change. We continue to invest in strategic initiatives that we believe will open up revenue growth opportunities for us as the economy improves. We have taken a number of key steps to strengthen our competitive position for the long run, and we highlight these actions on slide seven.

These steps include announcement of several developments on the partnership front, including agreements with IBM, DIRECTV, and AT&T. Tom will elaborate on these agreements in his remarks.

We believe that each of these partnerships will attract new subscribers, improve customer retention, and deliver economic benefits. We also believe these partnerships will serve as a cornerstone in creating simplified and integrated solutions that fit our customers' lifestyles. They are a great illustration of our 'Best in Brands' approach, which expands on Qwest's core capabilities with win-win agreements that reflect the realities of our capital resources and market position. They also go hand-in-hand with our investments in broadband capabilities.

We continued our deployment of fiber to the node in the quarter, expanding our coverage by more than 375,000 homes. Lastly, we also announced the launch of our 40 Mbps service that will further differentiate of our offering. Additionally, we continue to make progress on efforts to expand our metro fiber presence. I already have mentioned the results of our efforts to maximize productivity across the company, but I will highlight a few developments.

We continue to find process enhancements that afford us the opportunity to reduce the workforce, which was down more than 1,300 employees in the quarter, and segment income margins improved year-over-year in each of our business units. Finally, we continue to maintain our balance between investments in growth opportunities and returns to shareholders with the Board's declaration of our seventh consecutive common stock dividend earlier this week.

In closing, I want to impress upon you that we recognize the significant challenges we have in front of us. Legacy revenue pressures, the economy, and highly competitive markets are each formidable obstacles on their own. However, I believe we have a number of opportunities ahead of us, as well as including our recent product enhancements, our ability to benefit from being a strong partner, and our progress toward our vision of perfecting the customer experience.

Finally, I believe our execution over the past several quarters demonstrates that the team is very capable of turning this vision into reality.

With that, I will let Tom walk you through the segments.

Tom Richards

Thanks Ed. Good morning everyone. I am pleased to provide details of our operational performance this quarter. As Ed mentioned, we executed well against our plans. I will start my discussion with the results of the Business Markets group on slide 10. Our Business Market segment posted another quarter of revenue gains, maintained solid cost controls, and improved segment margins.

Taking a closer look at revenue, results continued to reflect industry trends with growth in strategic revenue, offsetting erosion of legacy services. In the quarter, segment revenue was $1 billion, up 1% year-over-year, and flat with the first quarter. Strategic revenue of $394 million in the quarter increased 14% annually and 2% sequentially.

Strategic revenue was 39% of segment revenue, compared to 34% a year ago. Legacy revenue was $493 million in the quarter, a decline of 8% from 2008, and a 2% sequential decline. You also will note that we are now reporting our CPE or data integration revenue on a standalone basis. This revenue was $132 million in the quarter, similar to prior period levels.

Business Market segment income improved to $408 million, up 7% annually and 3% sequentially. This was aided by our success in managing the cost structure. Direct expenses declined due to lower employee related costs, assigned costs declined on a lower network expense, and further savings from facility cost optimization. The segment income margin improved to 40% in the quarter.

While our strategic review of the long haul asset presented an opportunity for distraction in the quarter, I believe our results indicate that we kept our focus on executing against our goal of perfecting the customer experience. In addition, we made good progress in adding to our foundation for future growth.

First, we signed a long-term partnership agreement with IBM that gives us access to best-in-class managed service offering aimed principally at the lower end of our Business Market space. While this will take time to grow on the top line, it positions Qwest to excel in meeting emerging demand for these services.

Second, we make progress on expanding our metro fiber presence outside of our region. We are now nearly complete with three of the six new rings we plan to add this year. This should both improve our cost structure and offer additional revenue opportunities. Finally, we continue to pursue opportunities under the Federal government's networks contract.

In the quarter, we were selected to deploy Managed Trusted Internet Protocol Service or MTIPS by the GSA. This award was in recognition of Qwest's abilities to develop and deploy sophisticated data and Internet product solutions nationwide. Speaking more broadly, we remain pleased with our performance in bidding on networks opportunities. However, final implementation of proposals awarded to Qwest has proceeded at a slower pace than we anticipated.

Now, I will move on to Mass Market results, which are detailed on slide 11. Revenue for the quarter was $1.3 billion, down nearly 13% compared to the second quarter of 2008. Once again, this quarter's results reflect the ongoing transition of our wireless subscriber base to a more profitable model.

Excluding the impact of wireless, segment revenue declined 7%. Results continue to reflect an erosion of traditional voice access lines due to wireless substitution, competition and the impact of broader economic conditions on unemployment and consumer spending. These factors are likely to continue to impact our Mass Markets segment for the foreseeable future.

Mass Markets strategic revenue, which is primarily high-speed Internet services, increased 5% year-over-year, but declined modestly on a sequential basis. This was principally due to the near-term impact from pricing promotions, and the loss of revenues as we shutdown our legacy Qwest Choice video product.

The Mass Markets segment income for the quarter was $691 million. This is a 5% decline from the year-ago period, and from the first quarter. The annual decline is mainly due to lower voice contributions, offset by substantial cost reductions. Lower sequential results reflect the wind down of our wireless MVNO platform and lower revenue.

The segment margin was 54.5%, an improvement of 440 basis points from the year-ago period. The improvement is due to the wind down of the low-margin MVNO business, and aggressive cost actions over the past three quarters. These cost actions have been broad-based, including employee related and network operations costs.

We reported steady progress on most of our key subscriber metrics in the quarter. Results are summarized on slide 12. We continue to see steady demand for high-speed Internet products including fiber to the node. HSI additions for the quarter were 34,000. The second quarter was our best ever for fiber to the node with net subscriber additions of 65,000, bringing total fiber subscribers to 269,000.

Wireless subscribers grew for the second consecutive quarter to 763,000 as we continue to execute on our migration strategy for MVNO customers. In the quarter, we continued to see strong demand from existing Verizon Wireless customers who wish to bundle their billing with Qwest. With MVNO subscribers now under 185,000, the end of the migration is in sight, and we continue to plan on discontinuing MVNO services on October 31.

Video subscribers improved to 853,000 for the quarter, reaching a 15% penetration rate of primary consumer access lines. Slower subscriber growth in the quarter was partially a result of Qwest's Choice migration impact that I mentioned earlier, and credit policy changes.

Finally, access line losses were 11.8% year-over-year, and we ended the quarter with just under 7.3 million access lines in Mass Markets. Nominal line loss improved by 10,000 sequentially, in what would typically be a seasonally challenging quarter. Over the past couple of quarters, we have seen relative stability in our gross disconnect numbers, and substantial improvement year-over-year retention as our focus on retention efforts, such as promotional offers and other areas of focus gain traction. However, we continue to see soft inward activity in the quarter.

Looking ahead, we have made substantial progress on cementing our product portfolio on slide 13. We have extended our agreement with DIRECTV for five years. This allows us to continue to feature a robust, competitive broadcast video alternative for our customers. Our partnership with DIRECTV continues to evolve with improved integration that provides Qwest with additional opportunities to perfect the customer experience.

We also launched a Wi-Fi feature for all HSI customers in April through an agreement with AT&T. This is another means of distinguishing the Qwest broadband offering for our customers.

Turning to sales and service operations, our efforts are centered on organizing management around regional geographies. We are beginning to see returns from this initiative with our regional centers achieving improved productivity, higher sales efficiency, and the launch of targeted marketing efforts. During the quarter, we began the process of introducing several of these structures into the small business channel as well.

Finally, Wholesale market results are shown on slide 14. Revenue for the quarter was $712 million, a decrease of 14% from the year-ago period and a decline of 5% sequentially. Strategic revenue was $303 million in the quarter, down $2 million from last year and $6 million from the first quarter. This was due to accelerated peer grooming efforts.

Legacy revenue of $409 million reflects our ongoing efforts to improve profitability, lower demand for long-distance, and one-time settlements and continued pressure on access lines. Wholesale segment income results continue to hold up relative to revenue trends. The segment income of $457 million was down just 2% compared to the prior year, and 4% for the first quarter.

Improved pricing and successful cost controls in both direct and assigned expenses mitigated much of the revenue pressures. Assigned expenses improved on lower facility costs due to lower long-distance volumes, and our own grooming efforts. Network operations were also lower.

Segment income margin percentage climbed to 64.2% in the quarter, up 100 basis points from last quarter, and an increase of 740 basis points compared to the second quarter of last year. I believe this is a pretty good proof that our efforts to improve Wholesale profitability are working.

For the balance of the year our Wholesale segment will remain focused on two primary objectives: Maximizing segment income and driving strategic product growth. While the majority of our efforts to improve revenue mix within long-distance are complete, we will continue to look for other areas to drive profitability in this segment. Our efforts in focusing the channel on data product opportunities are starting to gain traction. This is best demonstrated by our progress among key vertical markets, including wireless carriers.

These markets which can leverage our investment in FTTN, offer some of our best opportunities to stabilize top line trends over the coming quarters. In conclusion, I would echo Ed's remarks regarding our efforts in the second quarter. Under challenging economic conditions, we have met our commitments on profitability and producing strong cash flows, while continuing to make progress on initiatives to cultivate future revenue growth.

I hope you share my view that this disciplined approach to operating and investment decisions is really becoming a hallmark here at Qwest.

Now, I will turn it over to Joe.

Joe Euteneuer

Thanks, Tom. Good morning, everyone. I would like to start by reviewing a few key items on the income statement, and then I will walk through the balance sheet and free cash flow before closing with a discussion of our outlook for the remainder of the year.

Looking at the income statement on slide 16, in the second quarter Qwest experienced a continuation of recent revenue trends. The enterprise space had steady performance, while Wholesale, consumer, and voice legacy services remained under pressure. Tom noted the numerous initiatives we have underway to improve the top line in each of our business segments. While we are in the early stages on many of these efforts, we do believe collectively they will create significant value over time.

As Ed noted, non-cash pension and OPEB charges impacted our reported results this quarter. Full year 2009 incremental expense estimates, increased by $20 million to $220 million. This impacted second quarter year-over-year comparisons by $60 million, and sequential comparisons by $10 million. Adjusted EBITDA was approximately $1.1 billion in the quarter, and was flat to 2008, excluding the incremental non-cash pension and OPEB charges.

In light of revenue pressures, our EBITDA performance is a strong testament to the progress we have made on driving an operating margin focus into the business. Compared to the first quarter, adjusted EBITDA declined by $53 million, which was mainly due to lower contributions from legacy voice revenues, and the wireless MVNO business, partially offset by improved contributions from IP services. The wireless MVNO contributed less than $10 million during the quarter. Again, this business will be closed in the fourth quarter.

Tom walked you through the business units' efforts to manage cost. Excluding severance charges, our total operating expenses improved by 9% compared to the second quarter of 2008, and improved 1% sequentially. Compared to the year-ago period, cost of sales improved by 19%, and selling expenses improved by 7%.

At the administrative level, costs were $593 million for the quarter, up 6% compared to last year, and 3% sequentially. Administrative cost comparisons were impacted by non-cash pension and OPEB expense I previously discussed. Below the line, interest expense increased by $16 million compared to the first quarter as a result of our $811 million debt offering in April.

As Kurt noted, income tax expense in the quarter reflects settlements and a one-time resolution on outstanding items from prior year tax filings, going back to 2003. While the timing of resolving uncertain tax positions is always a moving target, we anticipate recognizing tax expense at an effective rate of approximately 39% for the balance of the year.

Moving on to the balance sheet on slide 17. Second quarter results illustrate our improving financial strength and flexibility. Total cash and investments were $1.8 billion as of June 30, up by more than $1.2 billion from the end of the first quarter. This is due to strong free cash flow performance, and net proceeds of our regulated debt offering in April.

I would also point out that we recently expanded our revolving credit facility by $35 million, bringing the total facility availability to $945 million, all of which is undrawn. Our cash flow results in the quarter also drove improvement in our net debt and leverage ratios. Net debt declined by $474 million to $12.3 billion, and our net debt to adjusted EBITDA ratio improved to 2.7 times. This compares to 2.9 times at the beginning of the year.

As Ed noted, in keeping with our philosophy of providing tangible returns to shareholders, we paid nearly $275 million in dividends in the first half of the year. On slide 18, you can see that adjusted free cash flow for the quarter was $657 million, up from $460 million in the same period last year.

The majority of the improvement was the result of lower capital investment in the current quarter. Under current economic conditions, we are maintaining a cautious approach to capital investments. In addition, capacity requirements are trailing expectations for the year. However, a significant factor of lower capital spending in the first half of the year was timing of our capital plan. We expect capital investments to accelerate beginning in the third quarter.

In addition to maintaining and enhancing network infrastructure, our key strategic investments include continued deployment of fiber to the node, IP backbone capacity and enhancements, enterprise services development, and metro fiber.

We had a solid quarter in terms of managing working capital. Day sales outstanding for the quarter was 38.8, an improvement of more than two days versus the same period in 2008. Similarly, days payable outstanding was 43.8, an improvement of more than three days from the second quarter of last year.

Now, I will turn to slide 19 and update you on guidance. With the first half of the year behind us, we have refined our thinking regarding full year expectations for 2009. For the balance of the year, we continue to expect pressure on the top line from several sources, including soft key macroeconomic factors, such as business bankruptcies and unemployment, continued competition, and wireless substitution.

In the second half of this year, we expect Business Markets to produce revenues around the first half level, and we expect Mass Markets and Wholesale will likely be lower.

While we are pleased with our EBITDA performance in the first half of the year, we continue to be optimistic but somewhat cautious on the second half. However, we have enough data now to revise the low end of our full year adjusted EBITDA range up to $4.25 billion, from the previous guidance of $4.2 billion. The upper end of our EBITDA guidance of $4.4 billion remains unchanged.

We have previously discussed the seasonal pattern of our EBITDA performance. Consistent with that discussion, we expect a significant step-up in network expense in the third quarter due to seasonal increases in repairs and maintenance activity. In addition, we expect to have ongoing pressures on legacy revenue contributions. As a result, we expect third quarter adjusted EBITDA to be below the second quarter levels.

As seasonal pressures on network spending abate in the fourth quarter, and as key productivity and cost savings initiatives gain traction, we currently expect adjusted EBITDA in the fourth quarter to be above the third quarter level. Thus, our expectations are that the second half results will have similar shape to 2008, but with different magnitude.

While CapEx is expected to ramp in the third quarter, we now forecast total capital expenditures for the year to be $1.7 billion or less, which is $100 million improvement from our previous guidance of up to $1.8 billion. As a result, we now anticipate adjusted free cash flow for the year of $1.5 billion to $1.6 billion, up from our previous guidance of $1.4 billion to $1.5 billion.

As you can see by our updated guidance, we are cautiously optimistic about our future. This optimism comes from the consistent execution and teamwork of our workforce and management team. Therefore, the leadership team would like to thank this dedicated group for all that they have done and accomplished in the first half of 2009, and will accomplish in the remainder of 2009 to achieve the goals we have set out for our company.

I will now open up the lines with the operator for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Thank you very much. Good morning. If I could talk about the FTTN deployment, during the quarter you upped the speeds as you mentioned to 40 Mbps in certain markets. It's now almost 10% of your high-speed, so my question is where are you today in terms of covered footprint, and what is your expectation of where you can take that in terms of the economics you are seeing? Is this something you can roll out to a substantial portion of your book over the next couple of years? And is there an argument to actually take the CapEx and accelerate it rather than take it down $100 million as you have done? Then, secondly, I think Ed in the past you've talked about some innovative service offerings around things like video. Over that platform, where do we stand on that? Thanks.

Tom Richards

Good morning, Simon. This is Tom. I will take the first half. If you look at our FTTN deployment, it sits at about 2.6 million. As we have said a number of times publicly, our plan is to get to about 3 million by the end of the year. As you heard Joe articulate that, we are on pace to do that, and we are pleased with our penetration. We have if you've heard about 265,000 customers now, so that's continuing to increase. As I also indicated, we had our highest sales of FTTN in this past quarter. So with the introduction of 40 megabit capability, we are looking at, can we accelerate our FTTN deployment, but still within the broad guidelines that Joe gave for total capital spending? I will let Ed answer your question to him on video.

Ed Mueller

Good Morning, Simon. On the video, we are probably more bullish than less on what is going on here. We still believe there is an over-the-top video strategy on the Internet. However, our research would say that it's getting better, more people are trying to play in it, and it's starting to sort out in kind of three buckets.

One would be the traditional linear programming we do with DIRECTV. There is another group that may be a combination of a smaller linear program with broadband capability, more either AVOD or pay-per-view, but gives your customer much more choice, and not have so many channels coming down. The third would be just a pure over-the-top video play. All those are proceeding, and we think we are going to be in a great position for that.

The 40 megabit service that Tom referenced is just icing on the cake. We still believe 20 does it, and you if have a combination of over-the-top video coming through the regular broadcast channels as well as linked to broadband, which by the way we all believe, at least in Qwest, that broadband is the key in any of those three scenarios. So, if nothing else, I am even more enthused that this is coming, and our looking into the marketplace would also validate that.

Simon Flannery - Morgan Stanley

Is that a 2009 potential deployment?

Ed Mueller

Simon, there are some trials going on right now that may start the AVOD. You can go to Roku boxes or you could go to just Hulu or the stuff that is going over YouTube, but that's not what we are talking about. We are talking maybe HOV lanes that have high-definition, where we would provide everything to our customers, but more and more is coming.

I think the linchpin in the marketplace is what the studios do and the content providers. I think you are starting to see them worry that just one linear programming path isn't the way to go. So, once one decides to go a different direction, I think you will see many more. However, some of the stuff that's out there, just like in Netflix and Amazon, is pretty impressive what you can get and the quality of the picture. I think the consumer will play in all three of these, but more and more will come toward what you want when you want it.

Operator

Our next question comes from Tim Horan with Oppenheimer.

Tim Horan - Oppenheimer

Good morning, guys. Thanks. Two questions. On the video front, just a clarification. Wouldn't the HOV lanes be a lot like a U-verse type strategy, and is there a cost effective way for you to do that now? Then while we are on the topic, maybe, can you talk about your appetite for more broad kind of strategic look at the company? I know you had been looking to do something with the long-distance network. How open are you to continuing down that path in the next couple of years, and maybe doing something with the rural launch from a broad strategic perspective? Thanks.

Ed Mueller

Good morning, Tim. This is Ed; I will handle that. The HOV lane that I am talking about really isn't U-verse. Now, it has the same architecture, but it doesn't have the switches that a U-verse would have, and as per our understanding, U-verse is a linear programming play. Now, it would have broadband capability, of course, but our HOV lane would be content delivery networks that could provide high-def over our facility. So, we see it as a little different term. What we don't want to get into is being the broker of content the way a linear programmer would be. So that's the difference for us, but we think that the architecture certainly sits, just like the fiber to the node; U-verse is the same as opposed to a FiOS.

On the strategic part of our business, as you know, we have already put out that we were approached on the IXC. We are open to anything that improves our shareholder value. The consolidation that is now going on, rural versus metro, we are interested in, but we will only do what we need to do to pursue what helps our shareholders. We still stand with accretive, and we don't want a dilutive transaction as well as, we would always look for a de-levering transaction if it met that need.

Operator

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

David Barden - Banc of America

Hi, guys. I guess two questions if I could. First, just kind of following up on that question guys. I think you guys have said in the past that you would be interested in being a buyer or a seller, depending on what is right for the shareholder. I would maybe argue that irrespective of which of those paths you choose, you would obviously want to be maximizing the value of your currency. You are taking up your free cash flow expectations here. Obviously, we will want to see how the year transpires. So, could you talk about cash deployment and your thoughts on dividends and dividend tax preference sunset in 2011, stock buybacks, and how do you plan to use this cash flow maybe in a direct way to improve your currency to improve your position, be it as a buyer or a seller?

Then, next on the critical path to making that decision, have you guys made headway? Or is there a timetable yet for definitively dealing with the convert on an exchange offer or a good sense solicitation, which would probably be a cheaper way of doing it than trying to hit the high yield markets to refinance it? Thanks.

Joe Euteneuer

Sure, David. This is Joe Euteneuer. In regards to your last question, we are underway with talks with everybody and looking at all of the alternatives of how to adjust the towers that are coming due at the end of 2010, and beginning of 2011. It's our goal to try to resolve any of those things hopefully by year end, so we are actively working on it very, very diligently.

In regards to the use of cash, I think you have seen us with a very balanced approach on our cash as far as maintaining a consistent dividend. You hear our cautious optimism for the year. We do have opportunities that we look at with FTTN, and the increased speeds that we might want to invest there. So, I think we are looking at how to use our cash the most effectively. Right now, to the extent that we had excess cash and would want to buy back debt, I think that would still get us a better return than buying back shares, but obviously, we are open to all possibilities that drive the best use of the excess dollars that we will produce.

Operator

Our next question comes from John Hodulik with UBS.

John Hodulik - UBS

Thanks, good morning. Sorry if you guys have covered this already, but on the Business Market, it looks like you guys are still growing the top line there. Obviously, you are careful about the economy, but your main competitors are seeing fairly dramatic declines on a year-over-year basis. Is there anything significantly different in what makes up their top line versus your top line for the trend that you are seeing to suggest that, you won't sort of head in that direction over the next couple quarters given the weak economy?

Tom Richards

This is Tom Richards. I don't know the real makeup of their top line. I can kind of speak about what is going on inside of BMG. I think the continued good performance of the BMG team is really a function of where they have focused, what market segments they have gone after, and where we think our sweet spot is on one hand. On the other hand, we have been focused on kind of base protection now for two or three years. So, I think what you are seeing is, some of the top line growth that we are getting is a result of those previous years' investments in protecting a base, and making sure we are staying focused on that customer segment.

The other thing is, when you compare us with others on a national basis, we are still a relatively small share player. So, we don't have quite a big as base to protect, and therefore gives us the opportunity to take share, and we've still continued to do that effectively in the marketplace. That's not to say that Teresa Taylor and her team aren't confronted with the same kind of pressures that everybody talks about in this economy, as businesses think about managing their business more prudently going forward.

Operator

Our next question comes from Jason Armstrong with Goldman Sachs.

Jason Armstrong - Goldman Sachs

Thanks, good morning. Maybe first question just on the access line trends, you talked about some optimism, I think more associated with lower disconnects. Just wondering, if we step back here, what kind of trend rate differential are you experiencing in areas where you have gone through the broadband plan upgrades, versus those where you haven't? Can you give us some granularity there just in terms of whether that has been effective really in protecting the base?

Then secondly, just getting back real quickly to that strategic review, you guys obviously had a pole position in many of the industry discussions going on. The determination to keep the business in-house, now that that's behind us, I am just wondering if you can give us a framework for what you learned as part of those discussions. Why wasn't this sold? Is it lack of interest? Was it sort of differing concepts of valuation and what the value of the asset was? Was it debate over ownership structures? Just any sort of concept there. Thanks.

Tom Richards

Hi, Jason. This is Tom. I will take the first one and let Ed take the second one. On the access line trends, I think we've been in past calls purely vocal about the fact that when we see HSI deployment, whether it's FTTN, fiber HSI, or ATM, pretty significant impact positively on access line disconnects or net access line losses. That trend continues to be true, which is why we are so focused on accelerating HSI/Broadband into every part of our footprint. It just has a precipitous impact on access line disconnects. So, we are going to continue to stay focused on that because it's too big to ignore.

Jason Armstrong - Goldman Sachs

Tom, is there any sort of metrics you could put behind that? A basis point spread between the sort of haves and have-nots in terms of FTTN penetration?

Tom Richards

Jason, I will give you a perspective. If you look at where HSI is deployed, depending on the product bundle, which is the reason I am a bit hesitant, because it depends on how complex the product bundle is. However, in general, you can get anywhere from 30% to 40%, up to 50% change in access line net disconnect loss when HSI is deployed. Now, that's not ubiquitous, and it depends on the competitive landscape, but it gives you kind of a range of why we are so maniacal about that.

Ed Mueller

Good morning, Jason. This is Ed. I will do the IXC. As you know, we don't run the IXC as a separate unit. We have it integrated in our business units, whether it's Wholesale or BMG, and frankly some of the IXC carries ILD for our consumers. So, in the valuations, and looking at this, we had to dig deep into the asset base, and those that were interested in the assets weren't necessarily interested, obviously, in the way we run the business. So, the valuations could range anywhere from somebody that approached us, what they want or don't want, and we concluded that, at the end of the day it was better for our shareholders to keep it in-house.

As you know, in that evaluation there is price and there is who gets it, and risk of getting it done, and all those factors play in. However, just the interest in our assets says that asset's valuable. So, as we proceeded, we were very diligent in making sure that if there was a transaction that it was first doable. Frankly, we've got enough money for it, the valuations. Then afterwards, what did that do to the rest of our business, what would be left over. So, we won't go any further than that, because it would reveal some competitive stuff we've learned. So, if you ask, what did we learn? We learned about what the competitive landscape was. We learned, obviously, any time you dig deep into an asset on our future plans, we will probably able to maximize that, both in capital and operations, even better than we have in the past.

Operator

Our next question comes from Michael Rollins with Citi Investment.

Michael Rollins - Citi Investment

Hi, good morning. I was wondering if you could talk a little bit more about the business trends in the quarter, the business revenue trends. If you could talk a little bit about what you are doing with your sales force in terms of maybe the investment that you've made there, and the types of booking activity that you are seeing from your customers? Thanks.

Tom Richards

Hi, Michael. This is Tom. As far as kind of sales performance, it still remains relatively light if you are just talking about funnels, and opportunities in the market place. We are seeing customers being a little bit more prudent and cautious about the size of the deal or the length of the contract. In a little strange twist in this quarter, we saw a little bit of uptick from a sales perspective on the CPE end, which you could probably suggest that maybe businesses have been holding off and holding off and now they feel like they need to make some technical upgrades.

However, I don't know that it's enough yet to call it a trend. We think the investments we've made in our sales organization are in part contributing to the performance that you are seeing. Those investments just aren't in headcount so much as they are in skill set, in the way we go and the way we sell to customers, the process that we have adopted as kind of a sales mentality. So all of those things I think have contributed to us withstanding the economic overhang that all the enterprise sales organizations are meeting.

Then the last thing I would tell you, I am going to reinforce this notion of, we've invested a fair amount of time, training, programs, compensation on retention, believing that, if we could continue to manage churn in the business it takes pressure off the top line, and I think the performance you are seeing is a function of that focus.

Operator

Our next question comes from Mike McCormack with JPMorgan.

Mike McCormack - JPMorgan

Tom, I guess this is for you. Any thoughts on the consumer side with respect to how far cable competition has gone? Are you expecting any incremental launches there? Then, secondly, when you look at your footprint in your households, just give us a sense if you can or your thoughts on, how far wireless substitution has gone, and also, any thoughts on lead Metro and Boost prepaid offerings impacting your landline business? Thanks.

Tom Richards

Okay. Let me take the last one, Mike or the last part of it first. Wireless substitution, when we look at access line loss has remained fairly stable. It bumped up a little bit in this last quarter as a percent of loss. Now, in the three or four quarters that I've been doing this, it does move around. We saw some pretty aggressive competitive offers at the end of the second quarter, and that tends to have an impact and change it. However, for the most part, I think I have said on previous calls that wireless substitution is somewhere between 25% and low 30% as far as a percent. That has maintained and continues to maintain. We haven't seen any specific dramatic changes based on some of the things you mentioned. Does that help, Mike?

Operator

Our next question comes from Peter Rhamey with BMO Capital Markets.

Peter Rhamey - BMO Capital Markets

A follow-on to the last question, one clarification in one other. 25% to 30%, Tom, you mentioned, is that 25% to 30% of your line losses that's attributable to that or is that the wireless substitution percentage?

Tom Richards

That's the percent of line losses tied to wireless substitution.

Peter Rhamey - BMO Capital Markets

Perfect, excellent. A question on the enterprise segment, are we seeing any signs of improvement, stability out there that we could point to that would suggest that looking into 2010, we are in for an improvement? In the networks contracts you have mentioned that performance has been a little bit disappointing. Is there some potential to improve there or is there something more systemic about Qwest and its positioning of those contracts that's leading to the underperformance? Thanks.

Tom Richards

Okay. Let me take the general enterprise marketplace, and then we'll do network second, if I've got all the questions. I don't know that I feel comfortable at this point predicting or suggesting what might happen over the next quarter. If you look at the macroeconomic trends, while they would suggest that we might be at the bottom end of the recession, I think there is a fairly widespread opinion on what happens, and how long, and what the recovery looks like.

I can tell you that we are seeing customers, as I mentioned earlier, begin to do some spending, although I don't know that I feel comfortable saying that it's consistent enough to project a significant change. So, I think as we said in our comments, that we expect enterprise revenue in the second half of the year be similar to the first half. So I think that's probably the best indicator.

In the case of networks, it's kind of a split answer. The first part is, we are pleased with the percent of contracts we've been winning. It's consistent with what we had hoped for when we did the original business case on networks. The part that is trailing is the awarding of some of the business and the actual implementation. That has obviously slowed the revenue stream.

We are hearing rumblings that there is going to be some increasing pressure to get some of the agencies to move from their old contract to the new contract. We obviously would be happy if that would happen. It would get the ball rolling at this point. Again, we only hear that at this point, I don't have anything that I can tell you is official.

Peter Rhamey - BMO Capital Markets

Great. Thank you very much.

Operator

Our next question comes from Frank Louthan with Raymond James.

Frank Louthan - Raymond James

Great. Thank you. As you are doing the fiber to the node build out, are you running fiber to other business opportunities like to towers or other tuck-ins, and to different buildings? Can you also give us an update on sort of the lower end of the enterprise, the SME side of the business? What are the trends there? Are you seeing any lag effect with smaller businesses or are you still seeing some strength there, kind of like you are seeing more broadly? Thanks.

Tom Richards

Hi, Frank. This is Tom. The answer to your first question is, yes. We are taking advantage of the fiber to the node deployment and looking at situations like fiber to the cell as extensions off of that deployment. So, that's one of the reasons in my comments I talked about the wireless segment as being an opportunity for Roland Thornton's Wholesale team.

On the second part, when you look at what I will call the low-end of the Business Market segment, it's a little bit bifurcated at the very low end of that segment, which is small business. They are impacted by the bankruptcies and general trends, and so it's a tough putt for them. They got to continue to fight customers going out of business.

At the next level or the little higher end customer, what we call mid-markets, Teresa Taylor and her BMG team have done a really good job of kind of stemming the loss in that business. We are starting to see signs that the losses we had been experiencing are abating, and feel encouraged that we have that market headed in the right direction.

Kurt Fawkes

Okay. That concludes our call today, folks. I appreciate your interest again. Give us a call to Investor Relations if you have any follow-up questions. Have a good day.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.