Lumen Technologies, Inc. (LUMN) Q1 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the CenturyLink's First Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Tony Davis, Vice President of Investor Relations. Mr. Davis, you may begin.

Thank you, Syed. Good morning, everyone, and welcome to our call today to discuss CenturyLink's first quarter 2010 results released earlier this morning. For those of you who have access to the Internet at this time, a slide presentation is available on CenturyLink's IR Web site at ircenturylink.com or the Investor Relations section of our corporate Web site at www.centurylink.com, which we will be reviewing during the prepared remarks portion of today's call. Unless otherwise noted in the press release, the slide presentation or in our remarks this morning, the first quarter 2010 results discussed during our call today include the effect of the Embarq acquisition completed July 1, 2009. At the conclusion of our prepared remarks today, we will open the call for Q&A. On Slide 2, you will see the Safe Harbor language we've provided for your information. We will be making certain forward-looking statements today, particularly as they pertain to guidance for the second quarter 2010 and full year 2010, selected other information regarding 2010, the Embarq integration and the pending acquisition of Qwest and other outlooks in our business. We ask that you 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. Turning now to Slide 3. As a result of the recently announced Qwest transaction, we are required to provide the additional information on this slide disclosing matters relevant to that transaction. We ask that you review this additional information, which is also in our press release, the slide presentation, of course, and our SEC filings. Moving now to Slide 4. We ask that you note that our earnings release issued earlier this morning and the slide presentation and remarks made during this call may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available in our earnings release and on our Web site at www.centurylink.com. Turning to Slide 5. Your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink. Joining Glen on the call today is Stewart Ewing, CenturyLink's Chief Financial Officer; and also available during the question-and-answer period of today's call is Karen Puckett, CenturyLink's Chief Operating Officer. Our call today will be accessible for telephone replay through May 11, 2010, and accessible for webcast replay through May 24, 2010. 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 May 5, 2010, and should be considered valid only as of this date regardless of the date listened to or reviewed. As you turn to Slide 6, I'll now turn the call over to your host today, Glen Post. Glen?

Thank you, Tony, and thank you for joining us today as we discuss CenturyLink's first quarter 2010 operating results and selected operational updates, as well as guidance for the remainder of 2010. We're pleased with our results for the quarter as we exceeded our expectations for both revenues and earnings. We also achieved very strong high-speed Internet additions and saw significant improvement in access lines losses, especially in the urban Embarq markets. We continue to be excited about the transaction between CenturyLink and Qwest. The transaction is truly transformative in that it creates a national industry-leading communications company with significant scale and scope. The combined company will be even more competitive with an operating presence in 37 states, with approximately 5 million broadband customers and 17 million access lines. I'm confident the transaction will provide significant benefits for all of our shareholders, our customers and the communities that we serve. We'll have the scale and national scope to provide a compelling array of broadband product and services to our entire customer base. We expect the transaction to be immediately accretive to free cash flow per share, excluding integration costs, while strengthening the sustainability of CenturyLink's dividend by lowering the company's payout ratio. We have begun the integration process and expect to have the vast majority of all required regulatory filings completed before the end of this month. And I look forward to updating you in the months ahead, as we bring these two great companies together. Moving to Slide 7 in the deck. We're pleased to report solid financial and operating results for the first quarter. First, operating revenues exceeded increased $1.8 billion for the quarter, which is at the top end of our previous guidance. There were several factors contributed to our strong operating revenues for the quarter. First, we experienced a significant sequential and year-over-year improvement in the rate of access line loss. We also achieved stronger-than-anticipated high-speed Internet customer additions during the quarter. Additionally, we saw an improvement in our access minutes of use trends compared to our original estimates for the quarter. And finally, we experienced a higher-than-anticipated data circuit demand from wireless providers adding capacity to their networks to handle increasing wireless data traffic. Diluted earnings per share excluding nonrecurring items was $0.93 per share for the quarter or $0.05 per share above the top end of our previous guidance of $0.88 per share and $0.07 ahead of the August census [ph] estimates of $0.86 per share. Now several factors contributed to this outperformance during the first quarter: First, the revenue performance outlined a moment ago was a contributing factor; additionally, we have been able to achieve synergies from the Embarq acquisition earlier than we originally anticipated; and finally, our employees continue to do an excellent job in containing operating cost across our business. We also generated strong free cash flow of $465 million excluding nonrecurring items during the first quarter, which represents the highest quarterly free cash flow generation in the history of our company. When we announced the Embarq transaction in October 2008, we had originally anticipated approximately $300 million of full run rate operating expense synergies. After further diligence and deeper insight into the benefits of the merger in 2009, we updated the anticipated operating expense synergies to $375 million. We achieved approximately $20 million of incremental synergies during the first quarter, which brings annualized operating expense synergy run rate to approximately $270 million. We currently expect to exit 2010 at approximately $300 million annualized operating expense synergy run rate. Turning to Slide 8 in the deck. We had high-speed Internet customer additions of approximately 70,000, which represents a 50% sequential improvement over fourth quarter 2009 high-speed Internet additions, and a 10% improvement over pro forma in first quarter 2009 adds. We ended the quarter with 2,306,000 HSI customers or 38.9% penetration of our broadband-enabled access lines and about 35% of total addressable access lines. Our first quarter line loss of approximately 125,700 represents a 14% sequential improvement over fourth quarter 2009 access line losses and a 26.5% improvement over pro forma first quarter 2009 access line losses In the Embarq markets, we have seen significant improvements in key customer service metrics. Commitments met, appointments met and out of service cleared in 24 hours over the past nine months: We've seen improvement in all of those areas. We also continue to experience strong demand for our video bundles, that we added more than 33,000 satellite videos customers during the quarter. We continue to develop our IPTV capabilities in Columbia and Jefferson City, Missouri and La Crosse, Wisconsin and we are pleased with the results in these markets. Now we're in the preliminary stages of launching IPTV service in two additional markets, and we expect to roll out IPTV service in a total of five new markets by early 2011. Slide 9 shows the time line illustrating the steady progress we've made towards fully integrating the Embarq operations. In the months between our announcement of the Embarq acquisition and the close of the transaction, we worked diligently to put our region operating model in place in all our markets in day one, and also, we're ready to go with new broadband product offers. This readiness from day one contributed to the strong performance we reported for the third quarter of 2009, our first quarter as CenturyLink. Within four months after close, we have converted 100% of our financial and HR systems. We've lost our new brand and completed a first legacy Embarq customer conversion for our billing and customer care system. With the recent completion of the billing and customer care conversion of the North Carolina market, and 25% of the Embarq customer base converted to CenturyLink's billing system and customer care platform, we have a clear path to completing 100% of the Embarq customers to CenturyLink's systems by the third quarter of 2011, so we're very pleased with where we are with the conversion process. We currently expect to have fully completed the migration of the Embarq long-distance traffic to our network but midyear 2011, as well. We have an additional large customer conversion scheduled for later this year and expect to have about 50% of the legacy Embarq customers converted by year end 2010. As we have announced, we expect to complete the Qwest transaction in the first half of 2011, and we believe beginning the Qwest integration will dovetail nicely with our expected completion of the Embarq integration in late 2011. As we stated during our call announcing the Qwest transaction, we expect the Qwest integration and synergy realization to occur over a three- to five-year period. As we see on Slide 10, we have experienced a significant improvement in the level of access line losses both year-over-year and sequentially over the three quarters that we reported since the close of the Embarq transaction. Our first quarter 2010 line loss of 125,700 access lines represents a 14% improvement over the 146,000 loss in the third quarter, a 26.5% improvement over pro forma first quarter 2009. This rate of improvement is particularly dramatic if you look at our pro forma 193,000 access line losses in the fourth quarter of 2008. We have seen a significant decrease in announced or disconnect orders in both the consumer and business segments, which we believe is due to the success of our bundled offerings, our value-based marketing strategy and the modestly improving economy, at least in some areas. We've also increased our focus on non-customers, a couple cord cutters and strengthening our distribution channels really across-the-board. Turning to Slide 11. We also have seen a strong improvement in the rate of growth in broadband subscribers, as demand for broadband remained strong and customers responded well to our pure broadband offers and our local operating model. Our first quarter 2010 net adds of 70,000 represents a sequential improvement of 50% and a 10% year-over-year improvement. The growth we've seen since closing the Embarq acquisition continues to be driven, primarily, by aggressive broadband strategy, our launch of pure broadband and our targeted marketing strategy. We're pleased with the strong high-speed Internet growth over the last several quarters. However, it is important to note that with the much higher penetration rate today versus a year ago, we expect it to be more difficult to maintain this rate of growth going forward. Also, in line with past second quarter trends, normally seen across our industry, we expect second quarter high-speed Internet net additions to be in the range of 32,000 to 36,000. However, keep in mind that this will still represent a 20% to 25% improvement over the second quarter of 2009. For CenturyLink, the normal second quarter seasonality is impacted, in particular, by the migration of Florida wintertime residents returning home to the northern states. Going to Slide 12. Access line performance and high-speed Internet customer growth trends in our top urban markets have been strong since July 1, 2009 closing, as we experienced a significant decline in the rate of access line loss and have turnaround in high-speed Internet customer growth in those markets. Now we believe this limitation of CenturyLink's regional operating model with local market accountability, our targeted sales and marketing approach, along with a modestly improving economy have been key drivers of this turnaround. The 20 general managers responsible for local market operations across our five regions are responsible on a day-to-day basis for serving our existing customers and driving new customer additions. From a go-to-market standpoint, we've made significant changes in the marketing approach utilized in these markets, introduced a new product and service offerings offering to stimulate customer demand. It's important to note that the changes in market strategy have not been just consumer focused but is also focused on the enterprise side of our business. For instance, our core network provides a national IP overlay that's been valuable in attracting new business customers with locations both in market and out of market. I'll now turn the call over to Stewart for additional financial highlights and the review of our second quarter and full year 2010 guidance. Stewart?

Turning to Slide 13. Thank you, Glen. During the next few minutes, I will review highlights of our first quarter 2010 operating results and make a few brief remarks regarding our capital structure, and I will conclude my comments this morning with a discussion of second quarter and full year 2010 guidance provided in our earnings release issued earlier today. Turning to Slide 14. Since we reported significant nonrecurring or one-time items during the first quarter, I want to make a few remarks regarding those items before I discuss the first quarter normalized results with you. First, we incurred approximately $21.5 million of pretax expenses or about $0.045 per share related to integrationed expenses associated with the Embarq integration. Second, we incurred approximately $15 million pretax or about $0.03 per share of Embarq transaction severance-related costs during the quarter. And last, we recognized $4 million in the income tax charge of about one penny a share due to a change in the tax treatment of the Medicare Part D reimbursement. In the aggregate, these items represent the $0.09 difference in normalized diluted earnings per share of $0.93 and GAAP diluted earnings per share of $0.84. Also this quarter, we changed the revenue line item reporting of subscriber line charges from where it was previously reported as network access revenue to where it is now reported as voice revenue. Additionally, we included fiber and CLEC revenue in other revenue. Prior periods have been adjusted to reflect these reclassifications. Now moving on to Slide 15. Due to the size of the impact of the Embarq acquisition on first quarter 2010 results as compared to first quarter 2009 results, I'll not discuss the percentage increases between first quarter a year ago and first quarter this year. However, I do want to point out that if you look at the percentage change column on this slide, the good news is that we were able to translate the increased revenues from Embarq into larger percentage increases and operating cash flow and net income. Also, please note that the last page of the financial schedules accompanying our earnings release this morning reflects CenturyLink's first quarter 2010 results excluding nonrecurring items compared to pro forma results for first quarter 2009, assuming the Embarq acquisition had been completed then. Now turning our attention to the results for first quarter 2010 compared to first quarter 2009 results, excluding nonrecurring items from both periods, as outlined in our financial schedules. For first quarter 2010, the operating revenues increased $1.165 billion to $1.8 billion from $635.4 million in first quarter of 2009. The Embarq acquisition contributed operating revenues of $1,255,000,000 during the quarter. Additionally, it is important to remember that effective July 1, 2009, CenturyLink began eliminating revenues and corresponding expenses each quarter associated with the discontinuance of regulatory accounting for certain regulated operating entities. The amount of revenues and corresponding expenses eliminated in first quarter 2010 was $51.8 million. First quarter 2009 results do not reflect these same eliminations, due to the July 1, 2009 effective date of the discontinuance. Cash operating expenses increased $535.7 million from $329.8 million in first quarter 2009 to $865.5 million in first quarter this year. Due to $593 million of cash operating cost associated with the Embarq acquisitions, which more than offset the reduction in operating cost associated with the discontinuance of regulatory accounting for certain regulated operating entities that I mentioned earlier. For first quarter 2010, we generated an operating cash flow margin of 51.9% compared to 48.1% in first quarter 2009. Depreciation and amortization expense increased to $353.2 million in first quarter 2010 from $127.6 million in first quarter 2009, 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. Net income attributable to CenturyLink for the quarter was $279.2 million compared to $81.9 million in first quarter 2009. Diluted EPS for the quarter increased 13.4% to $0.93 from $0.82 in first quarter a year ago. As Glen mentioned earlier, we generated strong free cash flow of more than $465 million during the quarter compared to approximately $164 million in first quarter 2009. Now turning to Slide 16. From a capital structure standpoint, CenturyLink remains very well positioned. As we stated in our fourth quarter 2009 earnings call in late February, we elected to make a $300 million contribution to one of our pension plans during the first quarter of this year. As of March 31, 2010, and after having made that pension contribution, CenturyLink's debt-to-equity ratio was 0.81:1 and net debt to first quarter 2010 annualized operating cash flow was 2.0x. As we mentioned last quarter, our debt maturities are very manageable, with maturities of approximately $500 million, $20 million and $330 million in 2010, '11, and '12, respectively, excluding the pending Qwest merger. As we also previously stated, we intend to pay off the $500 million of senior notes that mature in October of this year. Our next significant debt maturity tower, excluding the pending Qwest transaction, is approximately $2 billion in 2016. So we continue to generate strong cash flows, maintain a solid balance sheet and have very manageable maturities over the next several years. We are confident that our financial strength and liquidity provide us the financial flexibility to take advantage of opportunities and meet challenges as they arrive. Finally, on Slide 17, I would like to discuss the second quarter and updated full year 2010 guidance provided in our press release this morning. As a reminder, costs incurred by CenturyLink during 2010 related to the Embarq integration are considered 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 second quarter and full year 2010 diluted earnings per share guidance. Additionally, our second quarter and full year guidance also excludes any transaction or integration costs that may be incurred related to the pending Qwest transaction. With those points in mind, we are updating our 2010 guidance to reflect our first quarter results and our expectations for the remainder of the year. We expect operating revenues for the year to be 6.5% to 7.5% lower than 2009 pro forma operating revenues. Our previous guidance was a decline of 7.5% to 8.5%. The improvement is a result of better-than-originally anticipated access line and broadband customer results, data and business revenue opportunities, slower migration of a wireless carrier's traffic off of our network and improved access minutes of use trends. If you remember last quarter, we indicated that excluding the unusual items, 2010 revenue would have declined 5.5% to 6.5%. Now basically excluding those items, revenue would have declined 4.5% to 5.5% on a pro forma basis, again, assuming the Embarq transaction had closed January 1, 2009. Our first quarter performance and the expected improvement in revenue during the remainder of the year results in a $50 million increase in the range of our free cash flow guidance, which is now $1.525 billion to $1.575 billion, and an increase in our range of diluted earnings per share guidance of $0.10, which now moves to $3.20 to $3.30 per share. We continue to expect 2010 capital expenditures to be in the range of $825 million to $875 million. For the second quarter, we expect operating revenues to be in the range of $1.745 billion to $1.775 billion. We expect diluted EPS to be in the range of $0.82 to $0.86. The sequential decline in diluted EPS from first quarter to second quarter is due to the expected access line and access minutes decline, partially offset by growth in revenue from high-speed Internet customers. Additionally, as you'll recall, we typically have a seasonal increase in maintenance expense and related outside plant activities in the second quarter. That concludes our prepared remarks for today. At this time, I'll ask the operator to provide further instructions for the question-and-answer portion of our call.

[Operator Instructions] First question comes from David Barden from Banc of America.

Just first, maybe Stewart, the guidance that you guys set out last quarter, I think, was a little conservative relative to where people's expectations were originally because I think you guys laid out a plan for the year to focus more on the integration process of Embarq than on cost cutting itself. I was wondering if you could kind of talk a little bit about your thought process for the rest of the year and the increase in the guidance, which does seem to be more revenue driven. But I was wondering if you could kind of talk a little bit about that balance of integration and cost cutting. And then the second question, if I could, Glen, when you see a result out from Qwest today, presumably it's not a surprise to you, but 37.9% EBITDA margins and rising, is there any part of you that gets nervous that the integration synergies that you are trying to get three to five years from now are something that the Qwest management team will start to carve out sooner rather than later in order to get the guidance that they've put out there? I guess what's your comfort level with that kind of dynamic, as we look into the close next year?

David, first, you're correct. Really, the increase in our guidance and the improvements really that we experienced in the first quarter and expect to experience in the remainder of the year are really revenue driven. And insofar as our expectations with respect to expense levels and integration costs associated and not cutting expenses as we indicated last quarter because of the integration efforts that are ongoing, I mean, that still stands. So again, the guidance is really more revenue driven than anything else.

And David, regarding the synergy numbers, we expect Qwest to continue to cut costs in line with the need with their customer levels and revenue levels, of course. And it could impact our synergy levels to some degree. But I'm still very confident that these levels we have announced, the $575 [ph] million operating synergies is very achievable. So I can even be [ph] confident we can meet those synergy targets.

We actually heard, again, Qwest talk a little bit earlier today about the strength in the -- strengthening signs in small business and enterprise and a rising conviction of improvement in the second half. Relative to the increase in your revenue expectations for this year from a quarter ago, could you speak to the difference between your improvements in Embarq properties in the consumer market and then the trends in the business market?

David, we think we're seeing some economic improvement in the consumer side. But I think it's showing up more in the enterprise than the consumer, really. We're seeing, especially on the wholesale side, the demand for special access has increased significantly, both on the wireline side and the wireless side. We saw DS1s from our top three, the large special access customers increased about 70% from fourth quarter and also on the past 12-month rolling average. So significant increase there. And also on the wireless side, we're seeing increases in the 40% range over fourth quarter, 30% range over rolling 12-month average. So I think this could be a sign of a change there, an improvement in the economy that we're hoping will -- I don't think it's going to be an immediate recovery, but at least an indication that the economy has bottomed out and starting to move over, especially on the enterprise side.

And again David, probably about half of our revenue, or a third or so of our revenue increase was really due to the access line improvements that we saw and the 70,000 broadband customers that we added, which was higher than our expectation for the first quarter. Additionally, the wireless customer that we had talked about last quarter, in terms of migrating traffic off of our revenue, they're running a little bit behind schedule, so we expect that to contribute about an additional $8 million or so to revenue this year more than we had anticipated.

Our next question comes from Batya Levi from UBS.

A question on margins. They were much better than what we were looking for, even though the synergies came in sort of in line. Can you give a sense if there were any one-timers in there? And also, can you talk about the drivers of the improvements in your core expense structure and if we think that could be a good run rate? So I was just wondering if you could talk about the drivers of the improvements in the core expense structure and if this is a good run rate going forward.

Yes, in terms of the margin improvement, I mean CPE sales were about $4 million or so higher than expected, in terms of a one-time item. But other than that, really no one-time items in the quarter, just general improvement, again, from lower access line losses and higher high-speed Internet customer additions. And then the improvement in the demand for the special access circuits, primarily driven, again, by our wireless customers. So that's really what drove the revenue and drove the margins. In terms -- I mean, that's really what did it in the first quarter and from an expense standpoint, I think we're pretty much in line with where we expected to be. Although synergies, we achieved a little bit higher, about $8 million or so of synergies in excess of what we had in our guidance that we gave last quarter.

Last quarter, you had mentioned that the one-time hit should be around $140 million. You mentioned that wireless customer could bring in $8 million more than you thought. So is the rest of the hit still good or for the remainder of the year?

Yes, the rest of the hit's basically good. It's a little bit over $130 million or so now that we expect, in terms of the one-time or unusual items hits.

Our next question comes from Mike McCormack from J.P. Morgan. Michael McCormack - JP Morgan Chase & Co: Can you talk a little bit about what you're seeing out there from a promotional standpoint from the cable operators? And then, the line loss rate of improvement or less decline, I should say, can you just sort of bifurcate that between your urban and rural markets and let us know sort of where you're seeing the trends there?

Karen Puckett. In terms of cable competition, we're not seeing new promotion per se. I think they've been pretty consistent for a couple quarters now. And from an expansion standpoint, not a lot of expansion in terms of their VoIP expansion. So I think that they're leveled off there. In terms of the access line improvement, urban versus rural, what I would say there is that outs are down in both categories, probably more improved in the urban areas just because we're kind of cycling through the move churn that we experienced initially during the downturn. And on the inside, I would say that ins are still declining, but the decline is improving and we see more of the improvement in the improvement of the inwards in the urban markets. And a lot of that is just our changes in the go-to-market.

Our next question comes from Dave Coleman from RBC Capital Market.

Just a clarification on your revenue guidance. Is that 1% change -- I guess, from the midpoint of the previous to the current guidance. Is that 1% increase pro forma or actual reported revenues in '09?

Yes, it's pro forma '09.

So if I take the pro forma number, a 1% increase, that gets me to about $76 million of upside. But your free cash flow guidance increases by about $50 million. So I'm just trying to understand what the delta is between the two or if it's just conservatism.

Yes, I mean, you're pretty close in terms of the numbers. There's slight expense increases associated with the some of this revenue.

And then, I know you're doing LTE trials, I think, in one market. There's been talk of Harbinger and SkyTerra looking to possibly wholesale the spectrum that they have for an LTE network. Any comments as far as interest in partnering with Harbinger/SkyTerra for that or of that spectrum that you'd look to get your hands on to add wireless to the bundle?

Yes, we don't have any comments this morning about the Harbinger/SkyTerra or if we know they're there and that folks have been talking with them. But we don't have insights into that at this point.

Is wireless something that you'd look to add to the bundle? Is it important? Or is it just sort of opportunistic as an edge-out broadband strategy?

I think wireless is an important strategy over time. We'd love to have a good path to a wireless service in the bundle, and we're going to be looking at those opportunities in the months ahead. I know that, as you're aware, that Qwest has a partnership that seems to be working well with Verizon. We'll be looking at that opportunity. And another thing is we get with the Qwest transaction, it puts us in a really good position, we believe, to partner with wireless carriers or other strategic opportunities for putting wireless in the bundle in a months and years ahead. So we're continually monitoring and investigating our strategy. But we do think wireless is important to our future.

Our next question comes from Simon Flannery from Morgan Stanley.

We've had a few weeks to digest the national broadband plan. Perhaps you could give us update as on your thoughts on particularly as it regards a set of universal service, intercarrier comp and what you see as the impact over the next couple of years. And then, if you could expand on the IPTV comments, expansion to five markets, is that going to be material in terms of the costs? And has something sort of happened in terms of proving out the business case here that you feel more comfortable in terms of expanding IPTV at this point?

Simon, first of all, on the national broadband plan, we've, of course, carefully reviewed the plan, and on balance, there were no big surprises. Overall, we support the direction that the FCC is taking, reforming some of the key policies, such as universal service, intercarrier comp and compensation for VoIP traffic, Voice over IP traffic. Also, I think the recent comments from Chairman Genachowski are encouraging and he has pointed out the need for steady and measured reform [ph] over a reasonable transition period. Also talked about the need to avoid a flash cut approach with the process, and we agree with this. We will [indiscernible] participate in this process and industry needs reform here that provides more clarity, more stability and greater predictability in terms of making network infrastructure investments. So we look forward to this process. And as far as impact on ARPU and revenue, we don't have any use of that [ph] today. We think it will be a process over time. I think there'll be a, specifically, a more focus on support of broadband, the universal service versus voice. So we think that change will occur and could be positive for us in bringing higher speed to specialty to a lot of these real markets that we serve. Concerning the IPTV, especially in the five markets, as far as the incremental capital costs, it won't impact our capital budgets, as far as increasing it. It's going to be within the levels we've talked already. We're encouraged with what we're seeing with the economics improvement and economics of IPTV, as costs come down, set-top box prices come down. We feel like it's going the right direction. The technology is working well. And we are looking forward to expanding that. I think we anticipate about $30 million of additional costs this year, operating cost that's in our outlook. So we believe IPTV is an important part of our future, and we'll be looking for ways to continue to expand our investment and the rollout of this product in the months ahead.

Simon, as you look and think about our guidance and performance in the first quarter, we still do have those -- that's why you can't really take -- part of the reason why you can't take the first quarter and really just extrapolate it to the remainder of the year. One is, we'll have continued access line in access minute loss. And secondly, in the back half of the year, we have some of the IPTV costs coming in as we turn up some of these markets.

Our next question comes from Jason Armstrong from Goldman Sachs.

First on just the recent ratings agency actions. Just wondering how aggressively you intend to fight to maintain an investment-grade rating. And does that mean outside of the dividend, free cash flow is just purely directed to deleveraging? And then maybe second question, you made a comment about the second quarter broadband additions and you threw out a range of 32,000 to 36,000, which obviously, is a very tight range so early in the quarter. That implies a great degree of visibility and predictability in the Broadband business and to some extent, confidence, I think, in the stability of the competitive environment from now until the end of the quarter. If all this comes together, I don't think that's fully appreciated by investors. It'd be helpful to have you give us a context of how you set up that tight of a guidance range.

Jason, in terms of the rating agency action, I mean, we expect to continue to work really hard with the rating agencies and try to continue to convince them that we believe that on a combined basis with Qwest, we'll have investment-grade metrics. We will, if you look at it on a pro forma basis, generate significant free cash flow that allows delevering over time, as well as significant synergies. So in terms of cutting the dividend or anything like that, I mean, we don't have any plans to make drastic measures like that to retain the ratings. So I think we'll just have to work real hard. Hopefully, our performance between now and the time we close in almost a year will give the rating agencies the clarity that they need to be able to maintain investment-grade ratings for us.

Jason, regarding the high-speed Internet targets, I mean, we don't mean to indicate there's no risk for those targets. It is a tight target. We believe we have a good visibility into our markets. Our local operating model, I think, gives us a lot of visibility into what's going on in the markets. We know the specifics on the customer segments we're targeting. We believe -- and we'll be successful in this quarter as continue to drive strong HSI adds. We believe the economy has, at least, bottomed out to some degree, and that's part of our confidence here. So it's just a combination of things, the reason we believe we can give that tight of guidance.

And if you think about visibility in that business, I mean, the cable companies have printed good results, especially in areas where you've seeing DOCSIS 3.0 upgrades pushed out to the market. Does that type of product, which seems to be a little bit more competitive, does that change your visibility into the Broadband business in your forecast?

Well, it certainly brings more competition to the market. But we have our own bundles. We think we can bring real value. We invested heavily in our own markets. We've got fiber deep into our networks and continue to expand that technology or that investment in our markets. So we feel good that we can continue to compete with cable companies. And then, as we roll out IPTV, it has an 85% pull-through for us on high-speed Internet, so we think that's going to have an impact for us going forward. So we expect to compete.

Our next question comes from Chris King from Stifel Nicolaus. Christopher King - Stifel, Nicolaus & Co., Inc.: First of all, I just wanted to circle back on the margin side of things and, obviously, kind of certainly dropped 2010 realizing that you guys are going to have some expenses in the back half of the year. But kind of longer term, looking out x Qwest, where margin levels now that we haven't seen in, certainly, several years, even over the last two quarters now, kind of north of 51%. Where do you guys feel you can kind of run this business margin-wise, kind of long-term assuming what you see is at least the near-term future with respect to access line decreases and continued growth on the DSL side? And secondly, just wanted to get kind of a broad-based impression from you, if I could, with respect to your national footprint now kind of after the Qwest deal closes and how you guys view your vendor relationships, particularly vis-a-vis the satellite television product offering, as well as potentially a wireless product offering? I guess question is does that change your view of those relationships kind of outside, just wanting to take advantage of your larger scale, in other words? Do you look at something more like the kind of a strict financial equation whereas -- does it become, I guess, at some point a more attractive asset for you to want to require outright aside from kind of the strict financial considerations given your kind of national footprint going forward?

Chris, on the margin, basically I think what we're benefiting in the first three quarters or so after closing the Embarq transaction is really from the realization of the synergies, so the margins are benefiting from that, as well as we've been successful at turning around the access line losses and the high-speed Internet additions and see additional contribution from some of the wireless companies in terms of ordering more special circuits than in the past. So I think it's just a combination of the two. Longer term, as you continue to lose access lines, and as you continue to lose access minutes, you would expect that margins would contract somewhat as you run through basically the synergies that we can achieve out of the acquisition. And then additionally, as we mentioned, we'll have some costs associated with IPTV in the back half of the year that will help long-term. But in the short-term, they'll hurt margins somewhat.

Chris, regarding the questions about the [ph] scale, obviously, it gives us a significantly greater scale, really both companies greater scale. What it does for us, it puts in a position to really leverage that scale, we believe, to partner with other providers, other wireless providers, video providers. We'd certainly like to have something closer to the owner net economics than we have today. But we'll use that leverage to really drive better deals for us, better terms, hopefully. We have no plans right now to go buy a wireless provider or a satellite or video provider. Those are certainly potential options for us, but that's not our focus. Our view is we'll be looking at partnerships and ways to really improve the economics for us is our view right now. But we do appreciate the value that this greater scale is going to provide us in these partnership relationships.

Our next question comes from Chris Larsen from Piper Jaffray.

Karen, earlier in the call, somebody mentioned something about targeting the cord cutters. What exactly are you doing there to get those cord customers back? And then secondly, Stewart, on the Qwest call, they mentioned that their USF revenue was actually going up. Wondering if you could just talk a little bit about what you're seeing on the USF and access rates as well.

Chris, on the cord cutters, it's really with our pure product, but in general, what I would say in terms of the performance, especially in the urban areas are the EQ markets, we are targeting non-customers and getting good results there with pure and our promotions. So it's not the pure, it's the promotional aspect of that product, too.

And Chris, on the Universal Service Fund, I mean we indicated last quarter we expected Universal Service Fund revenue, the High Cost Loop Fund revenue to decline about $45 million in 2010 for us, and that still holds true. And we're still seeing declines in access revenue as well, but just not at the level that we had expected at the first of the year.

And the decline in the absolute dollar figure, is that more a function of access line losses? Or is that also due to rate reductions? Or are you seeing any rate changes on USF?

Well, I mean, the formula changed at the beginning of the year, but no further changes during the year. So basically, the $45 million was just a combination of the change in the formula, the nationwide average cost per loop increasing at the first of the year, as well as our expenses and investment coming out. So that's really what created the $45 million decline that we're experiencing this year. And the decline in access revenues is really minutes driven. Some declines related to a state or two possibly adjusting rates during the year but mostly due to minute declines.

And our last question for today is from Michael Rollins from Citi Investments.

Could you give us a little bit more detail on what's happening with primary access lines maybe in terms of units or maybe you can update us on the percent of primary homes or lines that are taking your video product? And is there a way investors should be thinking about, if you look at the totality of the revenue change, how the Consumer business, for you, is doing relative to that enterprise or business markets group that you would identify within your internal segments?

Most [ph] of the primary access lines and take rates -- as I said before, we continue improving out and inwards are improving because of the change to go-to-market, both going after non-customers, so it could be wireless only or cable customers that we don't have today, and upgrading our base with high speed. But in terms of primary, I would say that the ins are improving. They're still declining year-over-year, but we're seeing an improvement. So we are seeing improving in take rates for primary homes. And then on the revenue change, consumer impact versus business, do you have that Stewart?

And Karen, can you also just give us a number on primary? Or in the past, you've given us the percent of primaries that are taking your video product. Can you give us one or the other there?

Yes, Michael, it's about 12.9% penetration's what we have today.

And that includes the LTV, DBS [ph] or IPTV.

Mike, in terms of the revenue mix impact, I guess of the change in the guidance, probably about half or so of the revenue is related to enterprise revenue, whether it be the circuits that the wireless carriers are ordering or pay station revenue at some of the prisons that we serve and things like that. And the other half is really related to the improvements in the Consumer business around lower access line losses, as well as broadband additions.

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

Thank you. In closing, CenturyLink is off to a strong start in 2010. We achieved solid first quarter 2010 results. We continue to be hit key milestones in the Embarq integration process. Over the past nine months, our employees have done an excellent job of remaining focused on the day-to-day operations of our business, while simultaneously integrating the Embarq acquisition. Their hard work and dedication has enabled CenturyLink to achieve synergies from the transaction at a faster pace than we originally anticipated. We expect the Embarq integrations to remain on schedule and to be near completion at the time of the anticipated closing of the Qwest transaction. We're excited about a future that includes continuing opportunities to create value from the Embarq integration, as well as new opportunities related to the Qwest transaction. Thank you for participating in our call today, and we look forward to speaking with you in the weeks and months ahead.

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