Qwest Communications International Inc. Q1 2010 Earnings Call Transcript

| About: CenturyLink, Inc. (CTL)

Qwest Communications International Inc. (NYSE:Q)

Q1 2010 Earnings Call

May 5, 2010 9:00 a.m. ET


Kurt Fawkes - SVP, IR

Ed Mueller - Chairman and CEO

Teresa Taylor - COO

Joe Euteneuer - EVP and CFO


James Ratcliffe - Barclays Capital

Christopher Larsen - Piper Jaffray

Michael Rollins - Citi Investments

David Barden - Bank of America

John Hodulik - UBS

Frank Louthan - Raymond James

David Coleman - RBC Capital Markets

Peter Rhamey - Capital Markets

Simon Flannery - Morgan Stanley

Timothy Horan - Oppenheimer


At this time, I would like to welcome everyone to the Qwest conference call. (Operator Instructions) Mr. Fawkes, you may begin your conference.

Kurt Fawkes

Thank you. Good morning and welcome, everyone, to Qwest first quarter earnings call. Today I am joined by Ed Mueller, our Chairman and CEO; Teresa Taylor, our COO; and Joe Euteneuer, our CFO.

We will begin today's call with a few comments on the quarter from Ed followed, followed by a review of segment results from Teresa. Joe will conclude our prepared remarks with the discussion of our consolidated financial results and outlook. We will then open it up for your questions.

As we begin our call, let me point you to slide three and remind everyone that today's discussion contains forward-looking statements. These statements are subject to significant risk and uncertainties. These risks and uncertainties are discussed in detail in our periodic filings with the SEC and I strongly encourage you to thoroughly review them. Additionally, we do not adopt analyst estimates nor do we necessarily commit to updating forward-looking statements that we will be making this morning.

To supplement the recording of our consolidated financial information, on our call today we will be discussing certain non-GAAP financial measures, including adjusted EBITDA, adjusted free cash flow, and net debt. A full reconciliation of these measures is available on our web site.

Moving on to slide four, earnings per share for the quarter was $0.02 compared to $0.12 in the first quarter of 2009. The current quarter earnings include a $0.06 charge for tax changes under the Medicare Part D program and $0.02 for the early retirement of debt and severance and restructuring charges.

The year-ago period includes a $0.01 charge for severance, which was offset by a $0.01 benefit for a lower tax rate. In addition to these adjustments, reported earnings had been affected by dilution from incremental, non-cash, pension and OPEB expenses. In the current quarter, this dilution was $0.01 per share and in the year-ago period it was $0.02 per share.

Turning to slide five, we have made some changes this quarter in our continual efforts to improve the transparency of our recording. These recording changes include revised definitions for cost of sales, selling and administrative expenses, expanded detail disclosure of segment expenses and additional assignment of overhead costs to our segments where management accountability exists. As a result, segment expenses have been restated to include the assignment of real estate, procurement and insurance costs.

The six new categories of expenses that we are now providing at the segment level, will give added insight into the variable, fixed and acquisition cost leverage that we pull in managing EBITDA and free cash flow.

On the income statement, these costs along with costs for fleet operations and posting centers have been reclassified from general and administrative expense to cost of sales. We have also revised our subscriber and access line metrics to align with our revenue recording.

As a result, we have removed approximately 400,000 affiliate access lines. We have also aligned our recorded video subscribers to fully capture all billing subscribers under our agreement with DIRECTV.

Finally, we removed business and wholesale subscribers from our reported high-speed internet units in our mass markets group. We have provided results with these new classifications for the past 12 quarters on our website.

With that I am going to turn it over to Ed.

Ed Mueller

Thanks Kurt and good morning, everyone, and thank you for joining us today. I want to begin by saying I'm very pleased with our continued execution and results in the quarter. We are off to a solid start in 2010 with improving revenue trends and expanding EBITDA margins.

Our performance in the quarter is a demonstration of the sharp focus we have on our key initiatives to drive the top-line, while maintaining disciplined expense management to improve operating efficiencies. We continue to see strong growth in our strategic revenues and we are aggressively pursuing broadband based initiatives.

In the quarter, Qwest again strengthened the balance sheet and enhanced financial flexibility. We clearly have solid momentum across our businesses and we intend to maintain this momentum throughout the year and leading up to the close of our planned merger with CenturyLink.

I'm very excited about the prospects that arise from our combination of CenturyLink and Qwest; with this transaction, the combined company will become an even stronger competitor as a national player with substantially increased scale and broader scope. The increased scale will allow us to invest in and deliver differentiated products and services that our customers will demand in the future.

The combination creates new strategic opportunities with other industry participants, including marketing partners and network suppliers. This transaction will provide several benefits for our shareholders. At the exchange rate of 0.1664, it provides a 15% premium from the closing price of our stock on the day before the announcement. Qwest shareholders can also participate in a future upside that will be supported by strong operating synergies.

In addition, our shareholders will receive a higher dividend following the close, which is the equivalent of about $0.48 per share or a 50% increase.

Finally, this transaction accelerates our deleveraging and provides financial strength and flexibilities. Activities are already underway to begin the detailed planning for the integration of our two companies. We have also engaged with the various commissions and other agencies that will need to approve the transaction and of course you would receive updates on our progress throughout the year.

To sum up, I'm very excited about our execution in the quarter and very confident that our transaction with CenturyLink will further bolster our results and drive superior shareholder value. Our strategy and execution will not change as a result of this announcement and I suspect our efforts to improve the top-line, while increasing efficiency and productivity will continue to produce improved results.

Now I'll hand it off to Teresa, who will discuss our business unit performance.

Teresa Taylor

Thank you, Ed, and good morning, everyone. I'm pleased to give you an update on our operations.

We have a solid start to the year and we continue to achieve good operating momentum in the first quarter. We made strong progress on our goals to improve our revenue trajectories with each of the business units reporting improved year-over-year comparisons.

Overall, we continued to experience strong demand for strategic products, which grew 5% compared to the year-ago quarter. This was driven by 33% growth in enterprise IP services and a higher take rate for fiber based consumer broadband. We also continue to maintain a disciplined focus on the bottom line and reported steady margin improvement.

I will begin the discussion of our individual business unit performance with the business market segment on slide 10.

In the enterprise space, we are beginning to see signs of increased customer activity, although we are in the early stages of that cycle. While our sales remain stable in the quarter, sales activity levels and pipeline ramped up. Business markets reported first quarter revenues of $1 billion. This was flat with the prior year's quarter and down 1% sequentially.

However, recurring revenue was up modestly compared with the fourth quarter. Strategic revenues within business markets increased 8% compared to the first quarter of 2009; this was driven by strong demand for MPLS IP services.

In the quarter, strategic revenues were 43% of total business revenues, compared to 39% a year ago. In response to growing demand for hosting and cloud-based infrastructure services, we opened our 17th nationwide CyberCenter in the Washington, D.C. area. Our data centers provide highly secure, reliable scalable services and a cloud computing infrastructure.

In the first quarter, business market segment income of $400 million improved 5% year-over-year and 2% in the fourth quarter. The increase is primarily due to customer acquisition efficiencies and lower facility cost.

In summary, we are well positioned to grow the enterprise top-line and we continue to expect revenues will start to pick up in the second half of the year.

As you know, we have been very disappointed in our pursuit of possible revenue growth and you should expect us to maintain that discipline in the quarters ahead.

Results for our wholesale segment are summarized on slide 11. Wholesale results reflect an increased strategic product mix and improved top-line trends. Strategic revenue now represents 46% of total wholesale revenue compared to 41% a year ago.

Segment revenue for the quarter totaled $685 million, a decline of 11% year-over-year and a marked improvement from the 14% decline last quarter. Wholesale revenue declined 1% sequentially. During the course of the quarter, we experienced improving access revenue trends, another sign that economically sensitive services such as long distance may be improving.

We saw the same activity in our retail long distance volumes. While these trends are encouraging, our wholesale legacy revenues still decreased 19% year-over-year and 4% from the last quarter.

As a reminder, the annual decline was in large part due to proactively managing long distance profitability throughout late 2008 and early 2009. We continue to expect wholesale long distance revenue comparisons will improve beginning the second quarter. In the quarter, strong improvements in network facility costs contribute to a sequential improvement in wholesale segment income and a margin of 67%.

Our wholesale growth made significant progress in the quarter to deliver fiber based backhaul services for wireless carriers. This provides an avenue for strategic revenue growth, while protecting existing copper backhaul services. Although it's still early, bandwidth fixed rates on the initial cell sites in service are exceeding our expectations.

We will have a modest amount of revenues from this program this year. However, we continue to believe over the next couple of year, fiber based backhaul services could add 1% to 2% for annual consolidated revenue.

Now, we'll turn to mass markets results on slide 12. As a reminder, we completed the migration to our new wireless reseller business model last quarter. Excluding the impact of this transition, mass markets revenue for the quarter declined 7% year-over-year and 1% sequentially.

Strategic revenues improved 3% from the fourth quarter and 5% year-over-year, while legacy revenue declined 11% due to lower demand for traditional local voice services. In the quarter, strategic revenue grew to 31% of total mass markets revenue compared to 26% a year-ago.

In the first quarter, our small business unit produced a little more than $900 million in annual revenues and represented about 20% of the mass markets total revenue. For the first time since 2008, small business revenues were stable in each month during the quarter. We are hopeful this is a positive sign for better results in the future.

Segment income of $627 million declined 9% year-over-year and 3% sequentially. Segment margin of 53% improved 110 basis points compared to the first quarter last year. Mass markets have done an excellent job matching expenses to volume. In the quarter, total expenses declined 13% from the first quarter of 2009.

Our quarterly subscriber results are contained on slide 13. We continue to make steady progress on retention efforts during the quarter. The absolute number of consumer access line losses is at the lowest level since the fourth quarter of 2007, an improved 22% from the year ago period.

We also grew our revenues from customers we retain. Consumer ARPU improved in the quarter to $62, up 7% compared to the fist quarter of 2009.

Net broadband subscriber additions were 40,000 for the quarter. We continue to expand our fiber to the node footprint and services are now available to approximately 3.8 million residential households.

We added 64,000 new subscribers on fiber services, ending the period with approximately 480,000 broadband fiber subscribers. This is about 17% of mass markets high speed internet customers.

In addition to generating stronger share flow, our FTTN subscribers are migrating to higher speeds, which generates the high ARPU. On average FTTN customers generate a 15% lift in ARPU compared to traditional DSL customers. And we believe migrations to the fiber services provide a great growth opportunity.

We continue to have good success from our key business partnerships that drive improved subscriber retention. In the quarter, we added 11,000 video subscribers bringing the total to 951,000 at quarter's end. In total, we increased the number of Qwest build Verizon Wireless users by 84,000 and ended the period with 922,000 total customers.

This year our mass markets group remains keenly focused on acquiring and retaining customers by enhancing the customer experience. We are seeing early signs of success from our initiative such as on boarding process for consumer broadband users and we achieved a reduction in HSI during this quarter.

Additionally, we launched @Ease packages that provide additional text support and security features.

In closing, I'm pleased with the progress we've made as we begin the year, and I look forward to updating you in the quarters ahead.

Now I will turn it over to Joe.

Joe Euteneuer

Thanks, Teresa. Good morning everyone and thank you for joining us today. As we begin 2010, I'm pleased we have delivered another solid quarter. The improvement in the top-line is very encouraging and it puts us ahead of schedule for meeting our revenue improvement goal for 2010. I think it is also very noteworthy that we again achieved both sequential and year-over-year improvement in EBITDA margin.

Our free cash-flow was solid in the quarter and we continue to strengthen the balance sheet. Now let's turn to slide 15 so we can talk about the income statement.

In the first quarter, consolidated net operating revenues of $2.97 billion declined 6.5% compared to the prior year. Excluding the impact of the wireless transition, revenues declined 5%. As you will recall in the fourth quarter our year-over-year decline was 7% excluding wireless.

As Teresa noted, the improved year-over-year comparison is due to stronger result in each segment. First quarter revenue declined 1% sequentially compared to a 2% sequential decline last quarter. This was in part due to the wrap up of the wireless MVNO business in the fourth quarter and better wholesale performance.

Consolidated strategic service revenue increased 5% compared to the year-ago quarter. We continue to improve our revenue mix by shifting to fiber based initiatives and IT solutions.

In the quarter, strategic revenue accrued at 37% of total revenue from 33% a year ago. This quarter is a good demonstration of our progress in turning the top-line, for maintaining a disciplined approach to the bottom line.

Total operating expenses improved 9% from the prior year and 6% sequentially. The improved operating cost are driven by our continued efforts to increase operating efficiency through process improvement, lower customer service and acquisition cost in mass markets and decline in wholesale facility cost.

Approximately 25% of the annual facility cost decline was due to wireless migration completed last year. Adjusted EBITDA was $1.12 billion for the first quarter, a 4% improvement from $1.09 billion in the fourth quarter and a 2% decline from $1.15 billion a year ago.

The adjusted EBITDA margin of 37.9% expanded by 170 basis points sequentially and 180 basis points compared to the first quarter of 2009.

Moving on to slide 16, we continue to strengthen the balance sheet in the first quarter and improve our financial flexibility. We ended the first quarter with net debt of $11.7 billion compared to $12.8 billion in the first quarter of 2009. Cash plus short term investments increased to $1.9 billion from $547 million a year ago. Net debt to annualized adjusted EBITDA was 2.7 times at the end of the quarter, a slight improvement compared with 2.8 times a year ago and flat with the fourth quarter.

In January, we raised $800 million in eight-year notes with a coupon of 7.5%. In February and March, we called $525 million in notes early and successfully completed the cash tender for $916 million in notes.

These two actions reduced total debt by $1.5 billion of the $3.5 billion planned reduction through the first quarter of next year. Now let's turn to slide 17 which shows details on adjusted free cash flow and capital expenditures.

In the quarter, we continued to maintain strong disciplined management of receivables and payables. DSOs improved year-over-year to 37.8 days. Our collection stat continues to do an outstanding job for us. Bad debt expense improved to just 0.8% of revenue in the quarter, compared to 1.6% for the same period a year ago.

Adjusted free cash-flow for the quarter was $335 million reflecting the usual first quarter seasonality. Capital expenditures were $387 million compared with $334 million in the first quarter of 2009.

We saw an increase in capital expending in this quarter, in part due to a cautious investment climate in late 2008 and early 2009, increased spending on our strategic initiatives and timing of cash payments.

Before I close my remarks with the discussion of our guidance, I'd like to quickly update you on our progress of improving returns on invested capital. This is depicted on slide 18. As you can see, we've made a consistent improvement in this area over the past few years. And this past year, we started earning above our weighted average cost to capital. This is largely the result of steady operating income and declining net investment balance.

Now let's turn to our guidance on slide 19. This year we've turned our focus to the top-line, while maintaining a diligent focus on the bottom line. I'm pleased that we're beginning to see improved trends in revenue, largely driven to date by improved customer retention. Our focus going forward will be to bolster these trends through increased new customer acquisition.

For the near term, we continue to see a stable outlook for business markets with revenue beginning to improve in the second half of the year.

In wholesale, we are likely to continue to report improving year-over-year rates of the client as the long distance comparisons start to improve next quarter. In the short run, mass markets revenue will continue to follow access lines trend, partially offset by increased ARPU from bundled services and growth in high speed internet subscribers.

Due to the sharp decline in wireless revenues throughout 2009, mass markets is expected to have easier reported revenue comparison over the course of the year.

In looking at our overall consolidated revenues, we expect that are our reported year-over-year comparisons will continue to improve over the course of the year. Our goal continues to be, to reduce reported year-over-year revenue declines, to a low mid-single digit rate by the fourth quarter of this year.

And as I noted earlier, our first quarter result have us on good pace to meet that goal. We continue to expect adjusted EBITDA to be in the range of $4.3 billion to $4.4 billion.

We expect steady to improving margins in 2010 compared to 2009. As a reminder, we do have some seasonality in our EBITDA, results due to increased spending in warmer months for example, and we expect the same this year.

The outlook for capital investments is $1.7 billion or less. We may use lease financing in 2010 for some portion of this capital spending, as we did in 2009. Our capital spending program will reflect our opportunity in fiber to the cell, while we continue to invest in fiber to the node on an integrated basis.

The combination of continued solid cash flows from operating activities and strong investments in the business is expected to produce adjusted free cash flow of $1.5 billion to $1.6 billion for the full year of 2010.

We do not expect to make any funding contributions to the pension plan in 2010. Our current expectation is that we will not have any required funding in 2011 as well. As you will recall, we previously thought that our funding requirement for 2011 could be in the range of zero to $120 million.

We continue to expect to pay taxes of approximately 2% this year. As we noted in the CenturyLink merger announcement, it is our current expectation that we will continue to pay a quarterly dividend of $0.08 per share to the close of the transaction.

In closing I would like to reiterate how pleased I am with our results to this quarter. I share Ed and Teresa's optimism that we will continue our momentum throughout the year.

With that I turn the call back over to the operator and will open the lines for questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from David Barden with Banc of America.

David Barden - Banc of America

Hey guys, good morning. Thanks for taking the question. Good quarter for you guys. Two question if I could; first, Ed, maybe you could talk a little bit more about the conversation in the media right now about Qwest plans, potentially to talk to SkyTerra and do something more on the wireless business there.

What can you say about that, maybe strategically if not specifically? And how might that be impacted by your CenturyTel relationship?

And then the second question, could you be more specific about, what you're seeing either in certain verticals or in sales funnel that makes you as confident as you seem to be, that the second half is going to be an enterprise recovery in revenues? Thanks.

Ed Mueller

Morning David, this is Ed, you know we don't comment on…

David Barden - Banc of America

I had to try.

Ed Mueller

I love how you do that though. We stay with our strategic goals we laid out in February, where we would always take any kind of look at how we would improve the wireless. But we live our Verizon relationship, David. So with that I'll give you back to Teresa, thanks.

Teresa Taylor

All right, as far as the enterprise business, we see a couple of things happening. One is just more proposals in general on the street, some more customers asking for proposals and business and in conversation, so the funnel is bigger than it's been in the past. The new business is higher than we've seen in, really all of 2009. So that's why we're feeling confident that as the second half of the year comes in, we've got a lot of activity.

Equipments is up, so that the non-recurring side, which typically is a sign that the recurring is coming right behind you, that people are refreshing their networks or expanding their network.

David Barden - Banc of America

Any particular verticals, Teresa, that are driving or is it more of a across the board?

Teresa Taylor

No I would say it's across the board.


Our next question comes from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Ed, we've had a couple of weeks to digest the merger now. Can you just talk about what you're hearing from the employees, what you're hearing from your customers, particularly the business customers?

And does this really gives you a higher profile going forward and make people feel even more confident about selecting Qwest? So any sort of business and employees sort of impact there?

And then any color on the sort of state approval process, how you're thinking about the key states there from conversations you may have had with them or the SEC over the last several weeks? Thanks.

Ed Mueller

On the customer front, it's actually very positive. We're just beginning our integration teams to talk about all of these items, as you know we run our companies separately and will continue to do that. But our customers, they're excited about our financial flexibility.

The announcement that we're keeping our BMG Group In Tech run by Chris Ancell, who works for Qwest right now, is really a good move for our customer base. And we also believe we'll pick up some markets as an example, some on-ramps and off-ramps in CenturyLink territory particularly Las Vegas, as well as central Florida.

So that's been good. Employer action has generally been good. It all depends, however, how you're personally impacted, so we're mindful of that. We're very in tune to how it impacts the employee body. But by and large, I think we always look at ourselves as not a Denver company, we're a national company. And our employee body is excited about the security of a better financial future.

And I think that's how we position it, Simon, and really has the added virtue being the truth. And so having a bigger financial foot print, way more free cash flow, a dividend increase for our customers de-leveraging; and all the things we put out is great.

On a state approval front, it's a little early to tell but we don't see that as a big hurdle. There's some overlapping states, which CenturyLink provides well, it's minimal.

But the states that do overlap. CenturyLink has a good reputation. We have a good reputation, so at this point I think we're very optimistic that this will get closed in a nice way and speedily.

On the national front, I know you didn't ask about this, but on a national front, because it's a share-per-share as well as it has really no heading trust implications that we see, maybe a little, but not much. We think that being a third strong provider in the nation is a good thing for the competition as well as the marketplace.


Our next question comes from John Hodulik with UBS.

John Hodulik - UBS

Just a quick question on, I mean for Joe on the margins, the 180 bits annual increase in the margin was different more we than looked for, and it seems like you're going the opposite direction of some of your peers.

I know you don't give specific guidance on IBITDA margin, but is this a decent range or at least in the ballpark of what we can expect for sort of the year-over-year numbers? And is there anything in there that would have sort of boosted margins this quarter that more on a one time basis?

Joe Euteneuer

There is nothing on the one time basis and I think if we can maintain this margin and grow the top-line, we're in great shape.


Our next question comes from Tim Horan with Oppenheimer.

Tim Horan - Oppenheimer

Joe, on that question our access in USF was up a lot, I know Teresa had said that minutes of use were up, but it seems to be up quite a bit more on a revenue front. Was there anything one time or a two up there on the USF front?

Joe Euteneuer

It's just an increase in the rate.

Tim Horan - Oppenheimer

Then Ed, you know the one of the big push backs we're getting on Qwest-CenturyLink right now is, particularly when you look at these results, which are very, very strong, it seems like you can kind of get back to positive revenue growth next year and stock buyback should be at $0.50 a share on earnings in a couple of years.

I know you had a base of 17% free cash flow yield, but seems so cheap to sellout now, why sell out? Basically, what was this issue with timing on not doing this now?

Edward Mueller

I don't think it's a sell out to start with, I think our results will continue; that's good for the combined company. We get no synergy. If we don't combine, I think our results were literally 50% of the company going forward. So all the results that we're producing will be good and the synergies, not only are their cost synergy, I think they're overtime from the customer side, there'll be good synergies in the marketplace.

We have built out our fiber to the node, they are experimenting with and being successful on some IPTV that we would not have invested in otherwise and our wholesale fiber to the cell build will be expanded on and off ramps. I think now is a great time, Tim, to put the companies together.

Tim Horan - Oppenheimer

So those synergies would have been there a year from now. Also, was there any more thinking on the timing for now; was there anything special about now?

Edward Mueller

Well, yes, because we could do it now. I mean I think predicting the future and deciding on the future for thinking that you're going to price it into the future, I don't think makes as much sense as dealing with it today. And what we know and particularly the cost synergies we get right away.

So that's a benefit to our shareholders initially as well as the de-leveraging, Tim, and the dividend increase which, yes I know it's been said, but maybe we could do that later on, but we're going to have free cash flow over and above the dividend, that's much greater power in the marketplace as well as future kind of initiatives that this combined company could take advantage. And the sooner you do that, the better.


Our next question comes from Michael Rollins with Citi Investments.

Michael Rollins - Citi Investments

Just a follow-up on the small business side in mass markets, what are you seeing out of that channel and are you starting to see some signs of stabilization there?

Teresa Taylor

Michael, I would say that we are. So I know that we were pleased that the small business revenue basically flattened out for the three months of the first year, which we've not seen for quite a long time, so that's very encouraging. And on the consumer part of mass market, we're seeing that access lines that lots of it is stabilizing. And we're getting good retention numbers, good churn numbers, so well, it's not moved upward, it does feel like it's beginning to stabilize.

Michael Rollins - Citi Investments

And then, just a follow-up on the mass markets, as you look at the ARPUs, that you're disclosing, what you see as the key factor right now or key two factors that's driving that ARPU higher, is it more of the yield in like wireless commission's coming through, is it raising prices or speeds on broadband, can you qualify that for us?

Teresa Taylor

Sure, the majority is coming from moving our customers up in speed. So as we're migrating them from 1.5 to 5 or 7 to 12 or up to 20, that's where the majority of it's coming from. And we're also doing a good job of add on services. I mentioned the products we rolled out called Qwest @Ease, which is an incremental monthly fee for technical support and additional security on your internet services.

So we're doing a good job of adding in additional features once we have the broadband subscribers in place.


Our next question comes from Chris Larsen with Piper Jaffray.

Chris Larsen - Piper Jaffray

Ed, I'll go back to the earlier question on the wireless and investing with the Harbinger folks. Is there anything in the merger agreement that would prevent you from doing a large investment with SkyTerra? And then Joe, the convert is now well in the money, you have excess cash reserves set aside if you needed to buy that back for cash going into year end.

So assuming that that convert actually converts to equity, will you then use that cash to de-lever or carry that cash into the merger? I assume, you're prevented from repurchasing share, so just assuming it had to be debt related.

Joe Euteneuer

Okay, so on debt thing, obviously we've been opportunistically and consistently trying to deleverage the Company. We've laid out our plans through the first quarter of 2011 to take off $3.5 billion of debt, and we'll continue to do that.

Edward Mueller

Chris, on the SkyTerra, again no comment on anything we do strategically as well as M&A kind of work.

Chris Larsen - Piper Jaffray

And then if I could just follow on. Joe, you said earlier that the USF access rate had gone up, what contributed to that rate going up since the rates have been going down historically?

Teresa Taylor

So I'll take that, Chris. So when we give USF rate, I think, we said every quarter it's very complicated metrics that occur. So it's just a natural lift that will occur in the rate structure, and sometimes we get it up and sometimes we get it down. In this particular quarter, we got our rates up, as we adjust for the quarters.

Joe Euteneuer

Chris, on lending follow-up, you asked a limitation. There are no limitations to what we can do running our company here on this front.


Your next question comes from Frank Louthan with Raymond James.

Frank Louthan - Raymond James

Looking at your tower business, and you're running fiber to towers. Can you give us an update on that, how many you've got under contracts, and the number that are billing? And how much of this is representing net new revenue versus just kind of replacing some existing market share that you have on copper with a more structured and little bit longer-term legs to it?

Teresa Taylor

So as far as the number, when we did our presentations in New York in February we talked around 4,000, it's still around that place, but they come and go. And the reason they come and go is that sometimes we'll move a site based on a carrier's needs, and so it's still around that place. As far as the movement that we're encouraged and that the initial installations are coming in at a higher bandwidth than we had originally anticipated and which is all good news. And you can see that in the wireless business that the demand it just continues to go through the roof.

As far as the revenue, there is two things. One, we are protecting the copper that we already have there and then we're incrementing up by bringing fiber and higher speeds in there. So for us, it's both the protection and the incremental growth. The incremental growth at this point for 2010 is fairly minimal, but we anticipate that growing significantly in the years to come.

Frank Louthan - Raymond James

And on the data center in Washington, how many square feet do you have there and are you planning on adding any more data centers to your footprint over the next 12 months?

Teresa Taylor

So while we don't have immediate plans, we are always looking for new data centers. So we're being optimistic and opportunistic when there is a real estate deal to be had. That's what we did Washington, D.C.

So right now that center has an existing customer in it, so we actually bought from someone else, and it runs around 3,500 square feet, so it's fairly small, that particular facility. But it's next to a couple other ones that we have. Yes, that particular customer is at 3,500 square feet. I am sorry you asked about the whole center?

Frank Louthan - Raymond James


Teresa Taylor

Whole center is about 17,000 square feet.


Your next question comes from Peter Rhamey with Capital Markets.

Peter Rhamey - Capital Markets

Bouncing between calls here, so excuse me if this question has been asked. But when I take a look at going into your CenturyTel transaction, I was hoping that, Ed, you would be able to elaborate a little bit. What type of the work can you do in advance of that acquisition or merger that doesn't bias your existing business that would allow you to hit the ground running when that deal actually closes? And if you can elaborate on that thing, could you give us sort of a status report what you've learned since that deal was announced? It's been several weeks in terms of synergies. That synergy number was at the low end of historical ranges.

Edward Mueller

Okay, Peter, as you know or probably know there are strict rules on running your company. We run it separate. They run their separate. But there are planning that goes on. We've just begun that. We have named an executive to interface with their executive. Our executive reports to me, their executive reports to Glenn. We'll start the planning of integration and so we're on the early stages of that.

As far as synergies, we're staying just where we are with our public announcement. The planning will go forward and we will do all the necessary which underneath the legal rules that keeps us running our company separate.

Peter Rhamey - Capital Markets

It does not make sense that if your executive does find along with the Glenn Britt's team, he does find additional synergies, is that something that you would share with investors or is that something that you'd just like to go with into the close?

Edward Mueller

Honestly, I don't know the answer to that one, Peter. We'd have to get way down the road and then decide that that'd be pretty clear I think. I mean a lot of the synergies get planned and they get executed. I think just thinking ahead, I would be trying to execute something before I try to update it.


Our next question comes from James Ratcliffe with Barclays Capital.

James Ratcliffe - Barclays Capital

Couple questions around your fiber to the node deployments. It looks from the numbers like you lost non fiber to the node consumer broadband customers. Was that just the effect of transition or are you actually losing share in your non-FTTN areas?

And related to that, where do you see FTTN getting as a percentage of your overall residential footprint in terms of coverage? And finally, competitively what did you see in the quarter in terms of promotional activity from your cable competitors versus previous quarters?

Teresa Taylor

So, yes, we are seeing the DSL footprint shrink in some cases because we're making that shrink, when we're moving our customers into FTTN, and it is very competitive. So at the lower end, there has been an increase of competitive activity by the cable companies, which is somewhat surprising that they've come down market a little bit if you want to think of it that way.

So to answer your promotional question, as always, I mean, I wouldn't say they've changed their pattern at all, but they continue to put promotions in the market as we do and it still is a very competitive marketplace.


Our next question from David Coleman with RBC Capital Markets.

David Coleman - RBC Capital Markets

Just two questions. I know, you said for 2010, it's more of a year on trying to drive revenue growth, but you had very strong margin improvement in the first quarter. Just wondering if there's areas of additional OpEx reductions that we can anticipate for this year?

And then secondly, on the fiber to the tower business, just wondering if you could talk about how competitive the RFP process is, and if there is any indication from other carriers that are on the sites to sell capacity to them? Thanks.

Joe Euteneuer

So, in regards to the margin thing, look, we always are everyday looking to ways to be more efficient, but remember, we would be very pleased to maintain the margin we have as we grow the top line. So, our focus is really turning the top line and maintaining the discipline on our EBITDA and maintaining that margin.

Teresa Taylor

And as far as the fiber to the cell and the competition we see, there is competition. We see it coming from two places; one is the cable companies as well as just companies that build fiber. They are coming out of the woodwork actually of just companies that are popping in it for an opportunity and so they have aggressive pricing. They may only go after a few sites very strategically, but they are definitely in there.

We're very pleased with our results. We feel like we are winning more than our fair share of the work. We are confident about that but there clearly is competition in the space.

Kurt Fawkes

Okay. That wraps up our call. If you have follow-on, please feel free to give us a call at Investor Relations, and thanks again for your interest in our Company this morning and we'll talk to you soon.


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

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