CenturyTel, Inc. Q4 2009 Earnings Call Transcript

| About: CenturyLink, Inc. (CTL)
This article is now exclusive for PRO subscribers.

CenturyTel, Inc. (NYSE:CTL) Q4 2009 Earnings Call Transcript February 25, 2010 11:30 AM ET


Tony Davis – VP, IR

Glen Post – President and CEO

Stewart Ewing – CFO

Karen Puckett – COO


Dave Coleman [ph]

Simon Flannery – Morgan Stanley

Frank Louthan – Raymond James

Chris King – Stifel Nicolaus

Chris Larsen – Piper Jaffray

Tim Horan – Oppenheimer

David Barden – Banc of America


Good day, ladies and gentlemen and welcome to CenturyLink fourth quarter 2009 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

Thank you. Good morning, everyone and welcome to our call today to discuss CenturyLink’s fourth quarter 2009 earnings results released earlier this morning.

Unless otherwise noted in the press release or in our remarks this morning, the fourth quarter 2009 results discussed in the press release and during our call today include the effect of the Embarq acquisition completed July 1, 2009.

Also during today’s call we will refer to certain non-GAAP financial measures. We have reconciled these measures to GAAP figures in our earnings release, which is available on our Web site at www.centurylink.com.

Your host for today’s call is Glen Post, Chief Executive Officer and President of CenturyLink. Joining Glen on our call today is Stewart Ewing, CenturyLink’s Chief Financial Officer. Also available during the call today is Karen Puckett, CenturyLink’s Chief Operating Officer.

We will be making certain forward-looking statements today, particularly, as they pertain to guidance for first quarter and full year 2010, selected information regarding 2010 and other outlooks in 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 March 3rd and accessible for webcast replay through March 17th. 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 that date or to-date and should be considered valid only as of today, regardless of the date listen to or reviewed.

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

Glen Post

Thank you, Tony, and thank you for joining us today as we discuss CenturyLink’s fourth quarter 2009 operating results and our guidance for first quarter and full year of 2010. Even with the continued challenging economic environment, which is solid financial and operating results for the quarter. Diluted earnings per share excluding nonrecurring items of $0.95 for the quarter and $0.07 ahead of the $0.88 per share upper end of our previous guidance in the first call of consensus.

Operating revenues for the quarter were $1.839 billion or slightly above the midpoint of our previous revenue guidance of $1.81 to $1.85 billion.

We experienced strong demand for broadband service during the quarter and we had nearly 47,000 high-speed internet customers, this represents an 8% improvement over third quarter 2009, customer additions of approximately 43,500 and a significant improvement over performance of second quarter of 2009, additions were about 29,000.

This strong HSI growth since the July 1st closing of the Embarq acquisition has been driven primarily by our aggressive broadband strategy and our launch of Pure Broadband across the Embarq markets.

We ended the quarter with more than 2,236 million high speed internet customers or over 37.4% penetration of our broadband enabled access lines and approximately 33.3% of total addressable access lines.

We also experienced significant access lines loss improvement as our fourth quarter line loss of approximately 146,000 access lines, represents a 14% improvement over the 170,000 loss in the third quarter and a significant 24% improvement over the fourth quarter 2008 pro forma line loss of 193,000.

Our annualized access line loss for the fourth quarter was 8.1%, which compares to 9.2% in the third quarter of 2009 and 9.8% in pro forma fourth quarter 2008. We experienced a nice improvement and announced or disconnect orders in both the consumer and business segments which was the primary driver of our access line improvement.

Also, demand for our satellite video bundles remain strong, as we added approximately 32,500 DISH customers during the fourth quarter, ended the quarter with more than 535,000 DISH video subscribers.

At year-end 2009, total video subscribers represented 11.7% penetration on primary residential lines. We continue to develop our IPTV capabilities in Columbia and Jefferson City, Missouri and in LA Crosse, Wisconsin. We’re pleased with the results. And these markets thus far are planning to launch of IPTV service in additional markets in 2010 and 2011.

Now turning our attention to the Embarq transaction, integration and processes on schedule and going very well with the financial and HR systems, conversions and initial billing conversion in Ohio behind us. Our next billing conversion is scheduled for North Carolina and will result in approximately 25% of the total legacy Embarq customers to be converted to our integrated customer care billing and provisioning systems.

The implementation of our regional operating model has gone very well and we are confident it is already making a difference in the legacy Embarq markets through an increased local market focus. This local market approach along with our launch of enhanced product offering such as Pure Broadband and our targeted marketing strategy are proven to be successful and positively impacting operating results, as we saw a significant impact in both line loss and high speed sales.

From a synergy perspective, we continue to anticipate achieving approximately $375 million of cost savings within the first three years after the transaction. We exceeded our synergy estimate for fourth quarter to achieve approximately $40 million in operating expense synergies for the quarter.

We expect to achieve an additional $10 million in incremental operating synergies during the first quarter 2010 and approximately $200 million in incremental synergies for the full year 2010.

So, overall, we are off to a great start with the Embarq integration. We generated strong second half financial and operational results and I am very pleased with the accomplishments of our entire CenturyLink team.

Due to the significant billing and customer care conversions scheduled for 2010, we do not anticipate significant reductions in business as usual operating expenses, during the year. We do expect to be far enough along with conversions by year-end 2010 to resume addressing the business as usual type expenses in 2011 and beyond.

Finally, as outlined in our press release issued earlier this morning, for 2010, we anticipate operating revenues excluding one-time unusual items will be approximately 5.5% to 6.5% lower than 2009, pro forma operating revenues, assuming the Embarq acquisition had closed effective January 1st, 2009.

This anticipated revenue decline is driven by access line declines, lower access revenues, and reduced universal service funding that more than offset revenue growth associated with the anticipated high speed internet customer growth during 2010.

Additionally, there’s approximately $135 million to $145 million of extraordinary items. They’re expected to negatively impact 2010 operating revenues, of which, $75 million to $80 million has direct, offsetting expense reductions, and therefore, is not expected to impact 2010 operating cash flow. We expect additional revenue decline in 2011 associated with these unusual items to be approximately $30 million.

We currently expect to generate 2010 free cash flow of $1.475 billion to $1.525 billion. So even with the top line revenue decline, our expected synergies from the Embarq acquisition, anticipated $825 million to $875 million, 2010 capital expenditure plan position us to continue to generate strong free cash flow during the year.

With that I’ll turn the call over to Stewart to provide additional details on our results for the fourth quarter.

Stewart Ewing

Thank you, Glen. During the next few minutes, I will review some highlights of our fourth quarter 2009 operating results and briefly discuss additional financial matters. I will conclude my comments this morning with a discussion of first quarter and full year 2010 guidance provided in our earnings release issued earlier today.

Since we reported significant nonrecurring or one-time items during the fourth quarter, I want to make a few remarks regarding those items before I discuss the fourth quarter normalized results with you.

First, we recognized approximately 37.8 million in after-tax costs or about $0.13 per share associated with the debt extinguishments completed in October 2009, which allowed us to successfully lower our 2013 debt maturity tower.

Second, we incurred approximately 19.8 million in after-tax costs or about $0.07 per share related to integration expenses and other costs associated with our acquisition of Embarq.

Next, we incurred approximately 9.8 million after-tax or about $0.03 per share related to litigation reserve adjustments, severance related costs and the accelerated recognition of share-based compensation and pension expense.

These items more than offset a $10.7 million net tax benefit or about $0.04 per share related to the recognition of previously unrecognized tax benefits and an adjustment to deferred tax liabilities, related to the Embarq acquisition.

In the aggregate, these items have negatively impacted GAAP earnings per share for the fourth quarter by about $0.19. Additionally, due to the size of the Embarq acquisition, relation to legacy CenturyTel, I will not discuss percentage increases between fourth quarter 2009 and fourth quarter 2008.

However, if you will focus on the table in our press release you will note that we were able to translate the increased revenues from Embarq into larger percentage increases in operating cash flow and net income. In addition, we have provided an updated schedule reflecting pro forma results for fourth quarter 2008 and full year 2009

Now, turning our attention to the results for fourth quarter 2009 compared to fourth quarter 2008 results, excluding nonrecurring items for both periods, as outlined in our financial schedules.

For fourth quarter 2009, operating revenues increased $1.197 billion to $1.839 billion from $642.6 million in fourth quarter, a year ago. The Embarq acquisition contributed operating revenues of $1.266 billion during the quarter.

Additionally, it is important to remember that effective July 1, 2009, CenturyLink began eliminated revenues and corresponding expenses each quarter, associated with the discontinuance of regulatory accounting for certain regulated operating entities, as we got off of FAS 71.

The amount of revenues and corresponding expenses eliminated in the fourth quarter of 2009 was $54.5 million. Operating expenses increased 792.7 million from 459.5 million in fourth quarter 2008 to 1.252 billion in fourth quarter 2009, primarily due to operating expenses, associated with the Embarq properties, which more than offset lower operating costs of $54.5 million due to the discontinuance of regulatory accounting for certain regulatory operating entities, I mentioned earlier.

For fourth quarter 2009, we generated an operating cash flow margin of 51.3%. Depreciation and amortization expense increased 356.4 million in fourth quarter 2009 from 128.8 million in fourth quarter 2008, primarily due to increased depreciation and amortization associated with the Embarq acquisition, which more than offset depreciation expense declines associated with assets becoming fully depreciated and the discontinuance of regulatory accounting for certain regulated operating entities and adjustments to reflect the assignment of fair value and appreciable life to Embarq’s property and intangible assets.

Operating income for the fourth quarter was 587.2 million compared to 183.1 million in fourth quarter 2008. Net income attributable to CenturyLink for the quarter was 286.7 million, compared to 87 million in the fourth quarter, a year ago.

We also generated solid free cash flow of 305.7 million during the fourth quarter. If you exclude the $28.1 million of integration related capital expenditures oru free cash flow was nearly $334 million.

From a capital structure standpoint, Century is very well positioned, as of the end of the year, CenturyLink’s debt to equity ratio was 0.82 to 1 and net debt to full year 2009 pro forma operating cash flow was 2.1 times. Our debt maturities are very manageable with maturities of approximately 500 million, 20 million and 330 million in 2010, '11 and '12 respectively.

Our next significant debt maturity tower approximately $2 billion occurs in 2016. So CenturyLink continues to generate strong cash flows, maintains a solid balance sheet and is in great shape financially to take advantage of opportunities and meet challenges as they arise.

Finally, I’d like to discuss the first quarter and full year 2010 guidance provided in our press release this morning. First, cost incurred by CenturyLink during 2010 related to the Embarq integration will be treated as nonrecurring items. These costs along with any other nonrecurring items that may occur during 2010 are excluded from the diluted earnings per share guidance provided in our press release and in my comments regarding the first quarter and full year 2010 diluted earnings per share guidance.

With those points in mind, for first quarter 2010, we anticipate total revenues to be in the range of 1.77 billion to 1.8 billion and we expect diluted earnings per share for first quarter 2010 to be in the range of $0.84 to $0.88.

As Glen mentioned in his opening remarks, based on current economic and business conditions, we expect full year 2010 operating revenues to be 5.5% to 6.5% lower than 2009 pro forma operating revenues, excluding the unusual items that Glen discussed.

Additionally, for full year 2010, we expect diluted earnings per share to be in the range of $3.10 to $3.20. The following items are expected to negatively impact 2010 diluted earnings per share.

(inaudible) related revenues decline driven primarily by anticipated 7.5% to 8.5% access line losses, $0.54 to $0.58, lower access revenues driven primarily by access line losses and continued pressure on access minutes of use $0.37 to $0.41, reduced universal service funding $0.08 to $0.10 per share and expected migration of network traffic from the wireless carrier $0.06 to $0.08 per share. These items more than offset the following items that are expected to positively impact 2010 diluted earnings per share.

First, expected synergies associated with the Embarq acquisition of $0.39 to $0.43, increased revenues associated with expected growth in high-speed internet customers, $0.09 to $0.11 and anticipated lower depreciation and interest expense $0.10 to $0.12 per share.

We expect capital expenditures for full year 2010 to be in the range of $825 million to $875 million or approximately 15% lower than 2009 pro forma capital expenditures of a billion dollars. We expect free cash flow for 2010 to be in the range of $1.475 billion to $1.525 billion.

Finally, we elected to make a $300 million contribution to one of our pension plans during first quarter of 2010. The contribution is tax deductible and therefore will utilize approximately $185 million of cash. We expect to fund this as well as repayment of our 2010 debt maturities from cash flow, cash on hand, and a minimal amount from our credit facility.

That 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 Session


Thank you, sir. (Operator instructions). Our first question comes from Dave Coleman.

Dave Coleman

Hi, great, thanks a lot. Last quarter, you identified several factors that would negatively impact 2010 revenues when you mentioned them on the call today, the declining USF receipts and network grooming by a wireless carrier, I guess, my question is does 2010 guidance reflect those factors fully or is there additional items in the 2010 guidance or one previously anticipated?

My second question is that the gross margins for the fourth quarter were a bit higher than we had modeled. I’m just trying to figure out how much of the quarter-to-quarter improvement was attributable to the synergies from the Embarq merger? And then how much of the 200 million of expected cost synergies in 2010 would be allocated between cost of service in SG&A? Thanks.

Stewart Ewing

I think the margin was a little higher in the fourth quarter because our synergies exceeded the expectations when we gave guidance. We would expect margins to trend somewhat down and to slightly down in the first quarter due to some of the revenue declines that we mentioned earlier. The last quarter, the items that we identified, impacting 2010 revenues, specifically, universal service and network grooming by the wireless carrier that does fully bake into 2010, the declines associated with those items.

The declines that we would expect from those items in 2011 would be approximately another $30 million or so. There was about $80 million of items baked into the 2010 guidance now that do not affect cash flow. Because basically, one of them relates to a purchase accounting adjustment and the other relates to the way that we’re going to book revenues and expenses associated with the promotional costs.

Dave Coleman

If I could just add another question, just as far as the billing conversion, you mentioned Ohio’s complete, North Carolina would be next. Would you anticipate having the North Carolina billing conversion completed?

Glen Post

Regarding North Carolina, we expect in the second quarter haven’t that complete, we are on target to achieve that right now.

Dave Coleman

Great, thanks a lot.


Our next question comes from Simon Flannery.

Simon Flannery – Morgan Stanley

Thank you very much. Good morning. It was nice to see the dividend increase. Can you talk a little bit about your thoughts on pay out ratios, appropriate leverage targets, and use of free cash flow this year, your high level of the pension and the debt maturity, are buybacks something that could be on the table later this year if you get more clarity on the synergies and the economy and so forth?

Glen Post

Simon, this is Glen. Stewart may follow us more on the (inaudible) but we looked to stock buy versus the dividend, we decided the dividend was the best way to balance returning cash to shareholders and manage with the balance sheet this year. As you know, we do value our investment grade credit rating. And this year, we have about $500 million of debt maturities coming up. We believe we should pay off that debt in order to secure our ratings.

And as you know, returning cash to shareholders is also important to us, as four years to five years before, the Embarq transaction will be turned 90% of our free cash flow to shareholders, it is important to us. So, we did increase our dividend to reflect that commitment as well. And we have increased our dividend been, continuing over the years, historically. Next year, we do not have any significant debt maturities. We will address the best use of free cash flow at that time.

Simon Flannery – Morgan Stanley

Thank you.


Our next question comes from Frank Louthan.

Frank Louthan – Raymond James

Great, thank you. Just wanted to address the guidance, your run rate for the low end of the guidance for Q4 implies, something a little bit higher than what you’re giving for the full year. Is there anything that you’re anticipating, any cost pressures coming in the second half that we should be cognizant of?

And then give us an idea in some of your larger markets that you acquired, more urban markets, what’s the economic outlook in those properties has been since you’ve taken over maybe contrast fourth quarter to third quarter versus last year, are you seeing any stabilization, any difference in line losses, any of your marketing programs having an impact? Thanks.

Glen Post

Frank, basically the wireless customer, the rehoming some of their 800 traffic that we’re routing for in the day. That will ramp up somewhat during the year. Additionally, we plan on investing in IPTV and other markets this year. And that will ramp up some through the year too. So those are probably the two more significant items. USF, we had some decline in the first quarter that is going to be a continued declined for the year as well.

And regarding the results in urban market we’ve been very pleased with the results in urban markets. We’ve seen a significant decline in the rate of line loss in our larger markets, we’ve also seen a turnaround in the vast majority of the larger markets in HSM and so we believe our local market focus and our marketing effort are paying off. And they are working in the urban markets which is we were hoping for which we don’t know if you really get there. So we are pleased by it now.

Frank Louthan – Raymond James

Okay, great, thank you.


Our next question comes from Chris King.

Chris King – Stifel Nicolaus

Good morning. Most of my questions have been gotten to already actually, but just wanted to get a general sense on the regulatory environment in Washington, obviously, with the broadband plan being due here within the next month or so, hearing about a number of potential issues, coming forward for the industry over the course of the next several years, just was wondering what you guys are going to be looking for, in the broadband plan, in particular, and how you see that plan moving forward at the commission and throughout Washington over the course of the next 12 months to 18 months or so?

Glen Post

Yes, Chris, the FCC is considering, indicate com reform and USF reform in the context of the national broadband plan; we will have more clarity on these issues when they release the plan and I think it’s the target date of March 17th. We believe that ICC and U.S. reform is needed. We support the efforts that are currently underway. There is much discussion, if you will know will be in the broadband plan. We don’t want to speculate at this time. We do believe the commission will take a measured approach to change and interfere compensation in USF support, but we’ll wait until the plans gets released and we’ll carefully evaluate it then. While we do believe that the FCC has a unique opportunity to provide much needed reform to advance broadband deployment in unserved areas as well as improved USF and interfere compensation.

Chris King – Stifel Nicolaus

Do you expect to see anything coming out of the plan in particular that would dramatically change your outlook toward broadband, obviously, across your footprint, broadband availabilities that are fairly high level already, but certainly, outside of that, you hope to see realistically kind of anything coming forward that would incent you to dramatically increase speeds or go perhaps to different network architecture over time or anything along those lines.

Glen Post

Our focus to USF is going to change from voice to data. I don’t think there’s any question about that. To what extent that’s going to enable us to expand or improve service, we don’t know yet, but it’s certainly, is a step in the right direction in our view and we will see the details, but it could actually enable us to bring more services and higher bandwidth to some of these more r rural areas that we serve.

Chris King – Stifel Nicolaus

Thank you.


Our next question comes from Chris Larsen.

Chris Larsen – Piper Jaffray

Hi, thanks. Two questions for you. I wonder if you could just give us a little more detail on the IPTV comments and what the types of markets you are thinking about expanding to, just how aggressive you want to be there? And then last quarter you talked a little bit how you are coming on, starting to think about other transactions you might do. Where do you feel you are in terms of considering additional transactions on the consolidation front? Thanks.

Glen Post

Chris, we expect to begin IPTV expansion this year, as a matter of fact, as you know we are in three markets today. We expect to rule out in five additional markets. These will obviously be more urban areas. Our 2010 capital budget reflects those investments which are not really that significant as we’ve already invested in our high-speed internet in lot of these areas, the incremental costs to for IPTV is not that great, actually, so, it’s all baked into our capital budget plans.

We expect really a little incremental expense costs of about $30 million this year operating expense as we roll on IPTVs, so we’re little over that and we’re finding that a very strong pull-through effect in terms of high-speed internet and about 85% of our IPTV customers also are taking the high-speed internet product. It significantly impacts churn. So we think its going be a really good product in these more of markets.

Chris Larsen – Piper Jaffray

Is that to say that 2010 is sort of a gather information year end and maybe in 2011 also, depending on what I guess the broadband plan says that you might get a bit more aggressive in 2011 with IPTV?

Glen Post

That’s a possibility. We just don’t measure it. We know that every market is conducive to this IPTV investment and roll out that we’re not sure, but it’s a big size market that we serve are more questionable and it certainly will be nice to see if this plan would enable roll out of higher speed especially in some of these markets.

Your second question regarding the additional M&A considerations, we need to get past this North Carolina conversion, which in the second quarter, we will have as I pointed earlier that we represent 25% of the conversion of the Embarq market. Once that’s done I feel we will be in a position to consider other opportunities for consolidation or acquisition. Our primary focus right now is getting this Embarq conversion is done right.

Chris Larsen – Piper Jaffray

Great, well, thank you very much.


Our next question comes from Tim Horan.

Tim Horan – Oppenheimer

Thanks. Two questions. One on, can you talk a little bit more on the urban markets, what really causing the turnaround there, just a touch more detail? And secondly, I was just trying to understand the earnings guidance a little bit because your run rate on this quarter, you’re up around 380 and your guidance kind of down around 315.

The reasons you’re giving some of where you before but you talk about here lower access, lower USF and line losses and that these are kind of unusual items, but it’s a fairly based on the 20% step down versus the fourth quarter run rate. And those items for me just seem to be kind of normal course of business frankly over the last five years to six years or more. So I’m a little confused on the earnings guidance and is this kind of the new starting point for earnings going forward '011 or '012, do you think or will these kinds of trends continue into '011 and '012? Thanks.

Karen Puckett

Tim, Karen, I am going to take your first question around the urban turnaround, I think Glen did a great job of answering that, but let me give you a little more specific. I would start first with the operating model. We have five regions now, we got general managers out into the market, so, we have about 20 general managers and they’re held accountable on a day-to-day basis for serving the customer, and adding new ones, and so, I think that just they’re focused day-to-day on where they’re at and their unit makes a significant difference.

Secondly, I would say, from a marketing standpoint, we are pleased with go-to-market changes we’ve made, one, we started doing more direct mail targeted direct mail and we started going after non-customers. And so that’s been a great uplift. In fact, our inwards have improved in these markets pretty significantly.

And the third thing I would say is it’s not just on the consumer side. It’s also on the enterprise side. We’re seeing the same focus there and the same results in terms of new customers, our core network has been a significant facilitator in adding some of these customers that have facility in market and out of market to put our core network. We nearly have a national IP network that we can carry traffic in for that customer.

Tim Horan – Oppenheimer

Thank you.

Stewart Ewing

And then on the earnings guidance and kind of the run rate '011, '012 and beyond, as I mentioned, it seemed to be kind of normal course of things we’ve seen over last couple of years, I am not sure why you kind of calling it unusual items.

Glen Post

First of all, I guess universal service fund declined, is $45 million this year which is higher than normal. We would expect it to be somewhere in the $25 million or so range next year. Additionally, part of the step down in the quarters is the wireless carrier, that’s rehoming their 800 traffic that ramps up during the year. That’s about $33 million this year.

And then next year, in 2011, that’s part of the $30 million decline we expect in 2011, $11 million is that and then about $18 million of the where we’re moving our long distance traffic, off of someone else’s network, but we drive our own network. Additionally, I guess, IPTV ramps up during the year as well. So that would be a reason that the first quarter EPS guidance would be higher potentially then especially when you get maybe to third quarter and fourth quarter.

Tim Horan – Oppenheimer

But basically this is a good run rate for starting point for '011 or '012 and beyond this?

Glen Post

Yes, really, if you look at revenue, there is a $140 million revenue items that are in 2010 guidance, decline or is that are in 2010 guidance. And those same items we wouldn’t expect to decline, but about $30 million again in 2011.

Tim Horan – Oppenheimer

Great, thank you.


And our last question for today comes from David Barden.

David Barden – Banc of America

Hey guy, thanks for taking the question here. I guess just two questions; I apologize to keep beating this horse, Glen and Stewart, just on the guidance. So we got this kind of encyclopedia of things that we’re doing, we’re changing some accounting, and other noncash items, and then there’s some cash items which are the USF, the Alltel, the wireless migration and some other things.

I guess, frankly, it just would be really helpful for you to kind of tell us, okay, what’s in that 6% midpoint decline specifically, what’s in that incremental 2% of revenue pressure that you are guiding to? And then, because the wording here says that the $3.10 of earnings does not include kind of these nonrecurring items, I can’t really tell whether those incremental unusual items are in that guidance or not.

And the last thing I had a question about was, Glen, I think you said that because you’re going to focus on integration this year, you’re not going to be doing business as usual cost cutting and I guess that seems to have been maybe one of the bigger disconnects between what people were expecting and what you are guiding to is that, you are not going to get cost cuts and synergy, you’re just going to get the synergy and no cost cuts, why is that, why can’t you do both and are you just being conservative or is there a real reason why that’s going on? Thanks.

Glen Post

David, let me tackle the first question first. Basically, the unusual items that we’re calling out, in 2010, unusual revenue items, they are included in the guidance that we gave for EPS. So that’s not in addition or outside of the guidance that we gave. Those items totaled about $140 million. If you exclude them you get to about a 6% r revenue decline from 2009 to 2010.

Those $140 million of items, we are moving our long distance traffic in the past. Embarq received originating access from a carrier that carry their long distance traffic that amounts to about $47 million. That revenue goes away, but that revenue was also an expense that Embarq had on their financial statements too, as they paid that carrier transport terminated access and an administrative fee. So, basically, that’s about $47 million and we will save money when we transfer that long distance traffic over to our internal network. So that’s 47 million, that basically comes out of revenue, it’s going to come out of expense as well.

The another $33 million basically is a wireless carrier, where we’ve been taking their 800 number traffic and basically routing it to where it needs to go. So that’s $33 million. We would expect $11 million of that to carry over and be an incremental decline again in 2011. Embarq was basically reselling or MVNO from a wireless standpoint, so they were selling cellular service. Basically they terminated that arrangement. That represents $20 million decline in revenue between 2009 and 2010 and basically doesn’t carry forward into 2011 or no incremental decline in 2011.

CenturyLink had about $10 million or legacy CenturyTel had about $10 million of legacy access revenue true-ups that occurred in 2009 actually that will not reoccur in 2010. So, that’s a decline that we wouldn’t expect to go, to decline again in 2011. And then the revenue recognition impacts, we had about $15 million of revenue, historically, CenturyTel, our promotions for services that we provide our customers we book the revenue and the expense associated with those promotion on a gross basis, so we book revenue gross and we book the promotion expense, as an expense item.

Embarq reflected their promotion expense as a contra revenue, so we changed our accounting practices and are following what Embarq did and are now accounting for promotion expense as a contra revenue, so that impact is about $15 million decline in revenue in 2010 again, with no incremental decline in 2011.

The other $15 million of the revenue recognition impacts relates to purchase price accounting or purchase accounting rather, Embarq had about, in this period, had about $15 million of revenue that they had, that previously was deferred, that really relates to installation revenue associated with initially connecting customers, that revenue basically, they didn’t recognize the time they collected the cash, they deferred it and they recognized it over the life of the customer. Purchase accounting, SAB 104, its what they were following basically, purchase accounting require us to eliminate that deferred revenue as of the acquisition date, so, again, that’s about a $15 million decline in 2010 versus 2009. And again, that would not reoccur in 2011.

David Barden – Banc of America

Got it, thanks.

Glen Post

Sorry about that. I didn’t really thought to be–

David Barden – Banc of America

Feel free to put that information in the releases, Stewart. And then Glen, just on cost cutting?

Glen Post

It’s like a question, we stated, we are ahead of schedule, and achieving our synergy targets. We will take over $200 million out of the incremental that was out of the business in 2010. Also, this year we expect to complete 80% in the conversions of Embarq markets to our billing customer care, provisioning, plant record systems. and this level of work and this amount of cost taking this amount of cost out of the business puts a lot of stress in organization, and puts stress on our ability to maintain high quality customers, service, and we are focusing on the long-term success of the conversion of our business.

So we don’t want to take out the cost too quickly. And we think that could be a mistake. We will take the necessary steps over time to keep our expense levels and line of the revenues. And as we get these conversions done, we will address an issue, as we need to. And as you know, we have done well with that over the years

David Barden – Banc of America

Right, okay, thanks, guys.


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 Post

In closing, CenturyLink once again delivered very solid financial and operating results for the fourth quarter, I’m especially pleased with the second half of 2009 results given the significant amount of time and focus we have committed to the Embarq integration process, our employees have done an outstanding job of maintaining a strong focus on taking care of our customers, and doing what is necessary to ensure smooth and successful integration.

The Embarq integration process continues to proceed well and we are on track to achieve our synergy targets, associated with the acquisition, and I am confident we are going to see a lot of benefits from this merger of our companies. Thank you for participating in our call today.


Ladies and gentlemen, this concludes our conference call for today. You may now disconnect your lines. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!