Lumen Technologies, Inc. (LUMN) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to CenturyLink's Third Quarter 2011 Earnings Conference Call. [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. Sir, you may begin.

Thank you, Syed, and good afternoon, everyone, and welcome to our call today to discuss CenturyLink's third quarter 2011 results released earlier this afternoon. Unless otherwise noted in the press release or in our remarks and related materials this afternoon, the third quarter results discussed in the press release and during this call relate to CenturyLink, including Savvis from July 15, 2011, and prospectively thereafter. The slide presentation we will be reviewing during the prepared remarks portion of today's call is available in the Investor Relations section of our corporate website at ir.centurylink.com. At the conclusion of our prepared remarks today, we'll open the call for question and answer. On Slide 2, you'll find our Safe Harbor language. We will be making certain forward-looking statements today, particularly as they pertain to guidance for fourth quarter and full year 2011, the integration of Embarq, Qwest and Savvis and other outlooks in our business. We ask that you review our disclosure found on this slide as well as 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. We ask that you also note that our earnings release issued earlier this afternoon and the slide presentation and remarks made during this call contain certain non-GAAP financial measures. A reconciliation between the non-GAAP financial measures and the GAAP financial measures are available in our earnings release and on our website at www.centurylink.com. Your host for today's call is Glen Post, on Slide 3, Chief Executive Officer and President of CenturyLink. Joining Glen will be Stewart Ewing, CenturyLink's Chief Financial Officer. And also available during the question-and-answer period of today's call will be Karen Puckett, CenturyLink's Chief Operating Officer. Our call today will be available for telephone replay through November 9, 2011, and accessible by webcast through November 23, 2011. Anyone listening to a taped or webcast replay or reading a written transcript of this call should note that all information presented is current only as of November 2, 2011, and should be considered valid only as of that date, regardless of the date heard or reviewed. With that, I'll turn the call over to your host today, Glen Post. Glen?

Thank you, Tony. Good afternoon, everyone. Thank you for joining us today as we discuss CenturyLink's third quarter 2011 performance, and share our strategic areas of focus heading into the months ahead. I also have with us today our business unit heads. They will be available for questions as needed. We have Chris Ancell, who's over our BMG Group, Business Markets Group; Bill Cheek, over our wholesale Markets Group; and Jim Ousley, over at Savvis operations. Our results were solid for the quarter as we continue to invest in key areas of growth, meet our integration objectives and build positive momentum in a number of areas across our business in what continues to be a challenging economy and very competitive environment. Let's turn to Slide 5. Third quarter diluted earnings per share, excluding special items, were $0.34 at the top end of our guidance and reflect the full noncash impact of purchase accounting rules related to the Embarq, Qwest and Savvis transactions. Also included here is pro forma adjusted diluted earnings per share which were $0.61 for the third quarter and exclude certain noncash purchase accounting adjustments. We believe this adjusted diluted EPS figure provides a better view of the performance of our business. Stewart will provide more detail on the methodology for this calculation shortly. Operating revenues for the quarter were $4.596 billion on a consolidated basis compared to $1.748 billion in the third quarter 2010. The increase is due to the $2.73 billion and $223 million in revenue contributions we've realized with the Qwest and Savvis acquisitions, respectively. Our strategic revenues grew 5% to $2 billion, driven by growth in our high-speed Internet customer base, while our legacy revenues for the third quarter are $2.21 billion, a decrease of 11.2% from pro forma third quarter 2010. We expect strategic revenues to soon exceed 50% of total revenues. We maintained our track record of strong free cash flow, generating $891 million for this quarter ahead of expectations. Our cash flow continued to support our financial strength and provides us with the flexibility we need to capitalize on opportunities to optimize the customer experience and maximize shareholder value. To take advantage of these opportunities and promote the long-term growth of our business, we are focused on investing in 4 primary growth drivers: broadband expansion and enhancement; our fiber-to-the-tower initiatives; Managed Hosting and cloud services; and CenturyLink's IPTV offering, Prism TV. We believe that these growth drivers will change our overall growth trajectory over the next few years. Slide 6 offers more detail on each of these growth drivers and they specifically apply to the quarter. We continue to make significant investments in the expansion and enhancement of our broadband network. We achieved a net increase of 57,000 high-speed Internet customers this quarter, a substantial increase over the 12,000 we had in the second quarter of 2011. We continue to make progress in developing and expanding our fiber-to-the-node infrastructure. We've also enabled over 330 central offices now with Ethernet over copper capability targeted toward, of course, the SMB market. To meet the increasing data transport needs of wireless carriers, we have also been working to complete fiber build as part of our fiber-to-the-tower initiative. In the last quarter, we made substantial additions to our fiber-to-the-tower infrastructure. The integration of Savvis has given us new opportunities in Managed Hosting and cloud services, which represents one of the most attractive growth areas in our sector today. We've already seen initial success marketing the Savvis offerings across our business segments and are investing in the expansion of the Savvis data center capacity to meet growing demands for these services. Finally, we're pleased to report that CenturyLink Prism TV, our IPTV offering is performing well in the markets where it's currently available. We expect to generate strong sales trends and additional markets in the future. We are optimistic about our Prism TV products and its impacts on future performance. Moving on to our operating segment highlights, let's begin with Slide 7. The Regional Markets segment generated $2.2 billion in total revenues. This is down 6.1% for the total revenues generated pro forma third quarter of 2010, due primarily to the continued decline in legacy services compared to last year. Total strategic revenues for the segment were up 2.5% from pro forma third quarter 2010 and up 5.3% when normalized for allocations between strategic and legacy classification and certain one-time items coming in at $720 million revenue for the quarter. For the full quarter of implementation of our local operating model and more aggressive direct response to marketing strategy, we saw strong momentum on high-speed Internet, sales in legacy Qwest markets. We reported a reduction in access line loss of more than 20% this quarter compared with the pro forma third quarter and more than 15% sequentially. We also successfully reduced our access line loss rate for the trailing 12 months to 7.1%, down from 7.8% in the third quarter of last year. We were encouraged by our 25% growth in Prism TV sales sequentially quarter-over-quarter, driven by expansion in new markets and increased sales channel focus. We're seeing continued success under our fiber-to-the-node initiative with 1 million homes to be added by year-end 2011 for a total of 5.75 million homes with fiber-to-the-node access. In the Business Markets, we continued to generate sales in strategic data services in legacy CTL markets and have seen an improvement in sales productivity in legacy Qwest markets due to heavier focus on the SMB sector. Shifting to the Business Markets Group. We continued to drive sales, generating $927 million of total revenues, down 5.1% from total pro forma third quarter 2010. We continued to benefit from our advances in high-bandwidth offerings, although not yet offsetting the legacy revenue decline. Total strategic revenues increased by 2.1% from pro forma third quarter of last year up to $443 million. If you exclude the Low Speed Special Access revenue, our strategic revenue increased by 6% quarter-to-quarter. We exited the third quarter with a strong sales funnel. We expect it will provide additional sales opportunities in the fourth quarter. We've seen early success cross selling our Managed Hosting and cloud services, as well as our advanced network services to business customers in the Savvis and Qwest legacy markets. And we intend to capitalize on additional opportunities in future quarters. We won our second large federal networks contract this year, demonstrating our continued ability to serve out the federal government sector, a long-term customer of CenturyLink now. Finally, we have strengthened our frontline sales team in an effort to drive additional business and increase our future revenue stream. Let's move on to our Wholesale Markets Group on Slide 8. Strategic revenues were up by 9.1% to $573 million, offset by legacy declines. This solid third quarter growth was driven by our expansion of wireless carrier bandwidth and Ethernet sales as part of our ongoing initiatives to broaden our wholesale client base. Improving our Ethernet and data transport services remains a top priority for us as we continue to win contracts from wireless and other wholesale customers. As I mentioned earlier, we also continued to make progress on the fiber-to-the-tower buildout initiative, including nearly 1,000 fiber build this quarter to bring our total up to nearly 8,200 fiber connected towers today. We have plans to complete an additional 2,000 sites by the end of this year. The fiber-to-the-tower initiative continues to strengthen our wireless data transport capacity, and we remain focused on meeting the growing data transport needs of wireless carriers in 2011 and beyond. As we outlined in our press release, Savvis will now be reported as the fourth operating segment. Stewart will provide more detail in a few minutes. Overall, Savvis had a solid third quarter as the demand for Managed Hosting and cloud solutions continues to grow. Operating revenues for the segment were $223 million between July 15 to closing date of the Savvis transaction at September 30, while pro forma operating revenues were $260 million, an 8.3% increase from pro forma third quarter of last year. Savvis continued to see strong demand for Savvis Symphony cloud solution suite as cloud compute revenue continues to increase, led by steady demand for private dedicated solutions. While bookings in the third quarter were slightly lower than the last quarter, Savvis experienced good traction and attracting new customers to the business, with particular success in the healthcare industry. The global economic environment is contributing to a challenging sales cycle across all verticals, but demand has not slowed. We remain confident that Savvis would finish 2011 strong. We expect to see an increase in bookings in the fourth quarter over the third quarter. Managed Hosting and cloud services are important to the future of our industry and we are committed to investing in this key growth driver. As part of this commitment, we are expanding our data center footprint to 5 cities to bring our total sellable square footage to approximately 2 million square feet by the end of this year. As shown on Slide 9, we continued to make progress on our integration objectives and hit all our key milestones and synergy targets. We remain on track to meet our 2011 and 2012 integration, operating and synergy goals. We substantially completed the integration of the Embarq and plan to fully complete it by the end of this year. We are also on track to complete the conversion of our Qwest financial and HR systems by year-end 2011. To provide a little more color on the Qwest integration on the financial basis, we are on track to achieve synergies of $80 million to $100 million for 2011. We expect to close the year at a run rate of $190 million to $200 million in terms of synergies. And finally, we expect to achieve an annual operating expense synergy run rate of $575 million from the Qwest acquisition over the next 3 to 5 years, as well as a capital synergy number of about $50 million over the next 2 years. Despite large cost reductions made by Qwest prior to closing of the transaction, these synergy targets are in line with our initial projections, and we are confident we will achieve all of them as planned. Our acquisitions are steadily improving the performance of our business from both an operational and financial standpoint. Once the integration process is complete, we believe these acquisitions will provide us the scale and scope we need to act on compelling new opportunities for growth. Our targeted annual run rate synergies from these 3 acquisitions total more than $1 billion once fully realized. We are also creating new advantages in data supply and transport as a result of our recent transaction. So far the 210,000 route miles of our new combined network have substantially expanded our footprint and granted us access us to new markets. Also, Qwest and Savvis have supplied us with a superb suite of products and services to serve business enterprise customers throughout the country. These offerings combine the data centers that we acquired from the Qwest and Savvis transaction, position us as a global leader in Managed Hosting and cloud services and provide us with compelling long-term growth aspects and cross-selling opportunities. As I mentioned earlier, CenturyLink Prism TV represents one of our 4 key growth drivers in our target markets. Slide 11 lays out progress around Century Prism TV and our plans for this offering in the future. While IPTV revenues are currently less than -- less central to our top line than other parts of our business. Prism is having a material impact on line loss, high-speed sales and product attach rates in the markets where we offer this service. I'd like the draw your attention to a couple of highlights on the slide. Over the past 12 months, our Prism subscriber base has grown 103% with nearly 25% growth in the third quarter alone. In terms of pull through of other services, 70% of our Prism customers have a triple play and almost 50% of our Prism inwards are new customers with strong attachment rate to high-speed Internet and voice services. As of September 30, there are approximately 54,000 Prism subscribers and the services are now available to 1 million households across 8 markets. To achieve our goal of reaching 4.5 million to 5 million households by the end of 2015, we're planning to launch CenturyLink Prism TV in 2 additional markets in 2012, with additional launches planned for 2013 through 2015. We do not expect capital spend for Prism TV to exceed $250 million annually between 2012 and 2015, and we anticipate that the service will become EBITDA positive across all launched markets by the end of 2015. We're taking a very capital efficient approach to Prism deployment by leveraging existing network investments such as fiber-to-the-node to keep start-up capital costs for household passed under $200. With that, I'd like now to turn this call over to Stewart for an in-depth look at our financial results. Stew?

Thank you, Glen. I'll take the next few minutes to review some of the financial highlights from this quarter, and I'll then spend a few moments explaining and expanding on the guidance that we included in our earnings press release. As Glen noted earlier, we have begun to report pro forma adjusted diluted EPS, a figure which calls out certain unique items that we believe will help you better understand our results and provide a clear picture of our underlying business. Pro forma adjusted diluted EPS excludes most of the impact of noncash items on diluted earnings per share resulting from business combination accounting rules, as others in our industry have done following large acquisitions. Those items excluded are the noncash impact of amortization of intangibles and the noncash impact to interest expense of the assignment of fair value to debt outstanding related to the Embarq, Qwest and Savvis transactions. For third quarter 2011, our adjusted diluted EPS was $0.61. Beginning with Slide 13, I will take you through our consolidated financial results. In order to be more relevant, I'll be reviewing the financial results on a pro forma basis as if Qwest and Savvis were fully included in the results for all periods. As you can see, we generated a strong operating revenues and cash flows during the quarter. Operating revenues were $4.63 billion compared with third quarter 2010 pro forma operating revenues, declined 4.6% from $4.86 billion a year ago. Strategic service revenues for the third quarter were $2 billion, up from $1.91 billion in pro forma third quarter 2010. Legacy service revenues for the third quarter were $2.21 billion, a decrease of 10.8% from the $2.48 billion in pro forma revenue in third quarter 2010. Data integration revenues represented $166 million and other revenue consisting primarily of Universal Service Funds was $247 million. Pro forma cash operating expenses declined about 1.7% compared to third quarter 2010, with synergy achievements and other cost reductions partially offset by the costs related to the additional rollout of Prism TV, the write-off of certain previously capitalized IT projects related to the business combinations and other items outlined in the press release. We continue to be proud of our strong operating cash flow generation, which was $1.89 billion for the third quarter. Our free cash flow generation, which is defined as net cash provided by operating activities excluding special items less capital expenditures, was $891 million this quarter and represents a decrease of about 8.6% from $969 million in pro forma third quarter 2010. The decline in free cash flow was driven by an increase in capital expenditures of $110 million. Now turning our discussion to our operating segments. On Slide 14, as you all know, last quarter, we began reporting results for our Regional Markets Group, Business Markets Group and Wholesale Markets Group. This quarter, we've also added Savvis as a discrete operating segment and we'll be discussing it as a separate segment as well. The Regional Markets Group generated $2.22 billion in operating revenues, which represents a decrease of 6.1% over pro forma third quarter a year ago. Strategic revenues grew to $729 million in the quarter, up 2.5% pro forma year-over-year. Excluding certain one-time items and shifts in the allocation between strategic and legacy revenue categories during the third quarter, the normalized growth rate for strategic revenue was 5.3%. Legacy revenues for the segment declined $156 million or 9.7% from pro forma third quarter 2010. Our data integration revenues for RMG declined $5 million or about 13.5%. Our total segment expenses in RMG declined 3.4% to $1 billion from pro forma third quarter 2010. Our expense reductions for the third quarter were mainly driven by synergy achievements that were partially offset by costs related to a rollout of Prism TV in additional markets during 2011. Moving to Slide 15, our Business Markets Group generated $927 million in operating revenues during the third quarter, which represented a decrease of 5.1% from pro forma third quarter 2010 and was a result of declines in legacy services which more than offset growth in our high-bandwidth broadband offerings. Excluding the decline in data integration revenues, the total percentage decline for the quarter was only 2.9%. Third quarter strategic revenues increased by $9 million or 2.1% to $443 million from pro forma third quarter 2010, driven primarily by Ethernet and MPLS services. Our legacy revenue for BMG declined from third quarter 2010 by $33 million, while data integration revenues decreased $26 million or 16.3%, primarily due to lower equipment sales opportunities. Our total segment expenses in BMG declined by 1.2% to $570 million from pro forma third quarter 2010. Moving to Slide 16, our Wholesale Markets Group generated $979 million in operating revenues, a decrease of 3.2% from pro forma third quarter 2010 as access and long distance revenues continued to decline, but were partially offset by the acceleration in wireless carrier bandwidth expansion during the quarter. Strategic revenues for WMG grew to $573 million, representing a 9.1% increase from third quarter 2010, primarily driven by continued data transport from wireless providers. Our legacy revenues declined by $80 million or 16.5% to $406 million. Our total segment expenses in WMG declined to $297 million from pro forma third quarter 2010. Now turning to Slide 17 in our Savvis segment. During its first quarter as a distinct operating segment, Savvis generated $223 million in operating revenues and $260 million in pro forma operating revenues, resulting -- representing an increase of 8.3% from pro forma third quarter 2010 revenues of $240 million. This growth comes primarily from year-over-year increases of 22% in Managed Hosting and cloud services revenues, 12% growth in hosting revenues and a slight decline in network services. Savvis' operating expenses were $200 million in the third quarter compared to $189 million in pro forma third quarter 2010. This increase of 5.8% is due to staffing and maintenance costs to drive Managed Hosting growth across sales, consulting and operations, as well as costs for data center expansions. Now moving to Slide 18, which addresses our guidance for the remainder of year 2011. For the fourth quarter of 2011, CenturyLink projects total revenues of $4.60 billion to $4.65 billion and operating cash flow between $1.87 billion and $1.92 billion. For full year 2011 and the pro forma full year 2011, CenturyLink's previous guidance for operating revenues, operating cash flow, capital expenditures and free cash flow has not changed. We are also providing additional guidance for pro forma adjusted diluted EPS for full year 2011 to be in the range of $2.68 to $2.72, and on a pro forma basis, to be in the range of $2.65 to $2.69. Pro forma adjusted diluted EPS for fourth quarter 2011 is expected to be in the range of $0.58 to $0.62. This compares to $0.60 in the third quarter of this year. We also continued to anticipate that our dividend payout ratio will be approximately 50% based on our previous pro forma free cash flow guidance of $3.4 billion to $3.6 billion. That concludes our prepared remarks. So at this time, I'll ask the operator to provide instructions for the Q&A portion of the call.

[Operator Instructions] Our first question comes from David Barden from Bank of America.

I guess first question, I guess, Stewart, in the text of the result, you guys stated you absorbed some significant costs related to storms that impacted the EBITDA, which I do not believe you excluded from the adjusted EBITDA number. If you could kind of walk us through that, it would be helpful. And then, I guess, the next question would be just on the larger issue of now that we've gotten to the resolution of the intercarrier comp and U.S. effort that it looks like we're getting closer there, and you look ahead to 2012 and 2013, do you guys see now or projecting potentially material impacts, positive or negative, to the cash flow outlook of the business?

Yes. So related to the storm expense, no, we did not exclude that as a special item in the third quarter. We had about $8 million to $10 million of expenses in the third quarter. We expect to have probably another $6 million of expenses related to storms in the fourth quarter. Glen, if you can address...

David, on the FCC order, we, along with rest of the industry, are really waiting on the order to be published. It's basically a 500-page order. So we expect to be it in a lot more detail and it will ultimately really determine our view of it. But based on what we know today, we believe the reforms they are purposing are manageable for us and that long-term our customers and the company will benefit from the newly created Connect America Fund. Until we really have more detail though, we aren't going to really project the impacts. We will provide you more information when the order is published. But right now, we don't see any major impacts, positive or negative, is the way we view it right now.

And if I could just follow up guys one last one. Just on the line performance. The line losses improved pretty quickly relative to, I think, our expectations. Are you attributing that to the management approach in the local markets? Obviously, when the Embarq deal came through, it was mostly in the larger markets where they had an impact. Or is it the Prism TV or is it some other effect?

Well, it's not Prism TV, Dave. We don't have that in any of the Qwest markets, an improvement for most part in the Qwest markets. Our local operating model, we think, had a major impact. Our go-to-market approach -- greater direct response marketing efforts that we've been successful in the smaller markets. And a lot of you don't think that work in the larger markets, we are proving that they do. We do get good response from those. And Karen may provide further detail later on the call, but we feel good about the approach we're taking in these markets and it’s making a difference.

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

Just a question on the guidance, the change in the EPS guidance, is that attributable just to the change in definition or is there any revised outlook on the operating fundamentals that's included in the updated EPS guidance? And then looking at the operating cash flow guidance, that's unchanged, but it would imply about $100 million sequential increase versus the 3Q run rate just to get to the midpoint of that guidance range. So I'm just wondering how you get to that improvement if it's more towards the low end that we should be expecting. And then just finally, operationally, you talked about cross-selling opportunities with Savvis and CenturyLink. I was just wondering if you could expand on those comments, and what kind of bookings you're seeing from legacy CenturyLink customers for like managed services and Colo?

So Dave, just from our guidance standpoint, the change in the EPS, basically, it's really the -- effectively, the guidance is the same as it was in the third quarter for the full year. We basically are just changing to eliminate the effects of the acquisition accounting with respect to amortization of the customer base. And the interest amortization that occurs as a result of the marking the debt to fair market value at the date of acquisitions. So that's really -- no real fundamental changes in the business, just to hopefully get some of the noise out of our EPS number related to the acquisition accounting. From the standpoint of the operating cash flow, improvement, I mean, we expect to get to somewhere around the midpoint basically.

Just if I could interrupt for a second, how does that -- how do you get to the midpoint, is that going to be on revenue, stronger revenues, or OpEx reductions because if you just sort of assume 3Q operating cash flow for the fourth quarter, you're at $7.8 billion? So I'm just wondering how you get to that $7.9 billion if you think you're going to get to the midpoint?

Yes. We are going to have to basically -- I'd like to get with you offline and just go through your numbers that you're looking at so we make sure that we're in sync. I mean, we're really expecting about the same level of operating cash flow that we were expecting into the third quarter. There's really no significant change in the guidance that we're giving.

The false cost setting [ph] opportunities with Savvis and business customers, the sales we've achieved so far have been relatively small, but there's a lot of activity, and we're seeing tremendous demand from our -- interest and demand from customers across our footprint with the BMG customers and also our small business customers already looking for hosting services. So it's a lot of activity going on. And also, we're seeing activity on the Savvis side for the expanded network capabilities that CenturyLink brings. So a lot of interest. So it will be -- this won't have to indicate -- it's the long sales cycles for really large customers, but we're seeing a lot of interest right now. I'm very optimistic about the opportunity here.

Great. And just one follow-on. You mentioned that 3Q bookings in the Savvis business were slightly lower, but you expect 4Q bookings to be stronger than 3Q. What gives you that confidence in the improved bookings outlook?

Well, I'll let Jim add to this, but we saw a lot of slowdown in decision making by the financial institutions as reorganization in some of those non-res and some of those areas we expect to see decisions made in the fourth quarter that we thought were going to be happening in the third quarter. And we're just seeing a continuum of strong demand. Jim, do you want to add anything?

The other major things that's causing -- this decision making is taking longer because of the economic environment, but also our deals are much larger now and thus the time to make the decision is dragging out. So we had -- and that's, it's a little lumpier. We have big deals in the quarter that get push into the first, next quarter. So we're going to see a very strong fourth quarter in bookings and we're going to see bigger size orders, both in the fourth quarter and going into next year.

And our next question comes from Mike McCormack from Nomura Securities.

Just a couple of things. First, on Prism, your thoughts on the Qwest that Burnhouse [ph] sets up there and can you give us some numbers around success-based capital -- I'm sorry, around passing capital. But could you give us a little more color on what are the costs on the success-based spaces and maybe some penetration data points in some of the early markets? And then lastly just for Stewart, on the credit markets, any thoughts, given the current environment out there, on your leverage targets and use of cash going forward?

Mike, this is Karen Puckett. In terms of the Prism TV success base, the capital Glen was talking about, is capital all in of that usually about 20-plus percent is success based. And in terms of, I think, you had a question on penetration, we look at the maturity or the age of the market and we have benchmarks that improvement every 3 months over a year. First, we expect the market to be well over 10%, second year, in the high teens to low 20%.

Karen, any expectations with respect to ARPU baked into your overall profitability expectation?

We're experiencing -- in terms of our triple play ARPU right now, we're experiencing about 160 ARPU and that will grow as we get more customers and are able to do things like advertising and such, add more feature sets.

And Mike, with respect to the credit markets, if you look at trailing 12 months debt-to-EBITDA with leases, we were about 2.6x debt to EBITDA, without leases, about 2.5x. Our target is more in the low to mid-2 range. We do continue to expect to pay back between $1.5 billion and $2 billion of debt in 2011 and 2012, of which we've paid back a little over $700 million at this point.

And the target payout ratio is still, do you think, 50% is the right thing to think about or should we think about something higher than that?

I mean, I think it's -- our board will review our dividend periodically, but we are focused on retiring debt over time.

Our next question comes from Batya Levi from UBS.

The metrics, when you look at broadband adds and line losses were much stronger than we expected. Can you provide some sense of that strength that continued into October or have you seen any increased activity from cables? And when you look at margins, it was a bit lower than we thought. You mentioned some one-off item, and I was wondering if you could talk about some of the underlying expense trends, if there is more opportunity to cut cost there and if we should expect that to improve from here on.

Batya, we couldn't the first part of your question. You talked about the broadband adds, the line losses than expected. We couldn't hear the next -- the rest of that.

Is the strength continued into October or have you seen any increased activity from the cable guys?

Yes, I would just say that the programs that we have in place are working well for us. I think I just talk about the quarter for a moment in terms of our high-speed. We're very pleased and proud of the team for just excellent execution. The local model definitely is kicking in. We're holding the general managers accountable for the performance in their market. We put our new go-to-market in place. The increase in the shift into direct mail, direct response, marketing to noncustomers and marketing into Tier 2 and Tier 3 markets have had made a difference. We did get an incremental juice from the DTV, NFL package. They did a lot of promotion, so we benefited from that, pulled through some HSI on that, as well as our brand campaign that's been out. So that was some incremental juice that won't happen in fourth quarter. So the programs will remain. In fourth quarter, we normally see HSI seasonality does slow down and also just focused on the continuation of the bundle. And then in terms of just access line losses, we just continued to improve there -- the outs continue to improve as well as in.

And Batya, with respect to margins, we did have some one-time expenses in the third quarter, primarily around, generally one-time expenses, the storms, again, about $8 million or so. But again, we'll have some of that, again, in the fourth quarter. We'll have about $6 million, we think, probably in the fourth quarter. We also -- third quarter is a little bit heavier on maintenance and utilities, as you're aware, just with higher costs during the summer, and from a utility standpoint, higher utilization. And also we're able to get maintenance done then. In the fourth quarter, we would expect the margins to be about the same as they were in the third quarter. We're going to have a few expense increases in the fourth quarter, about $17 million of so, of which $15 million to $20 million really related to higher revenue along -- around Universal Service, and potentially CPE that we expect to sell to customers. And then we'll have wage increases for the union employees at Qwest that will take effect in the fourth quarter as well.

Our next question comes from Simon Flannery from Morgan Stanley.

Can you talk a little bit about, what are the, sort of, the next buckets to come through? You talked about ramping it up to $190 million to $200 million by the end of year, so is this network grooming? Is this headcount? What are the big projects in the near term? And then you've had a few months now with your Verizon Wireless relationship. I'd be interested in your reflections on how that's going and how you see wireless as part of your overall portfolio?

So, Simon, yes, I mean just in the buckets between the third quarter and the fourth quarter, we'll start to see additional synergies towards the end of the fourth quarter and early first quarter of next year really in the finance group as we get the SAP conversion done and for the finance and the HR systems, as well as some of the investments that we made this quarter and early fourth quarter related to consolidating the networks will start to show up in terms of synergies related to that as well. And those are probably the 2 larger buckets that we'll see between third and fourth quarter. Finally, regarding the wireless, the Verizon agreement, we've been pleased with the agreement thus far. We have actually focused more on the video model that we have, the wireless bundle in the last couple of quarters because that's where the opportunity was initially. We expect next year to put more emphasis on the wireless bundle, and we think the agreement with Verizon is very attractive. And as I mentioned earlier, we're actually making a little money with this agreement with them, so we don't have any real concerns at this point.

And our next question comes from Frank Louthan from Raymond James. Frank G. Louthan - Raymond James & Associates, Inc., Research Division: I guess a question for Karen. Is anything on the IT side, looking at through the improvements in some of the line metrics and so forth, and seeing you've gotten some of your go-to-market strategy in place in some of the Qwest territories, how much more do you have? Any more systems do you have, any other sort of IT barriers that left to beginning to sell, take that strategy to the entire network at this point?

Well, the IT systems really don't keep us from taking our go-to-market or any of the changes that we need to make in the market. That's not a barrier or a challenge at all. I mean, there are set of different systems, but we're capable of making the changes and doing what we need to do in the Qwest market. Frank G. Louthan - Raymond James & Associates, Inc., Research Division: Okay, great. And then, I guess for Jim, as you're looking at the Savvis transition here, where are you as far as, and I apologize I missed the early part of the call if you've covered this, so where are you as far as being able to cross sell within the Qwest territory? Is that part of why you're seeing the transition to larger end customers getting those larger opportunities? And what is sort of the outlook for getting in front of those customers over the next 12 months?

Well, I think, the outlook is very good in that, but we're really at the beginning stages of this and basically just getting the engagement rules across channels, formalized which has happened, and we're just beginning training of the BMG sales organizations. So we have a lot of prospects which initially come into the system. They take some time to materialize. But as people get trained, we get the support [ph] of organizations in place. 2012 is when we'll start to see the real advantage. And the bigger customer issues were really generated -- were previously generated by our activities in Savvis. So those haven't come from those activities yet.

Our next question comes from Michael Rollins from Citi Investment.

First, I was curious, if you look at just the expense structure, I know you did mention some of the transitory issues that you had, like from the storm costs, et cetera. But if you sort of take synergy out of the discussion for a moment, how should we think about the negative operating leverage in the business as you lose revenue and then translating that to the EBITDA line?

Mike, we believe that we can continue to take costs out of the business now. Obviously, as you lose the high-margin legacy revenue, it becomes tougher and tougher on a dollar-for-dollar basis really take that out, but we'll be working next year to try to take additional costs out of the business. The other thing though that from a positive standpoint, we believe that there's really good opportunity on the revenue side to really turn the top line over time as well. It won't happen in 2012, may or may not happen in 2013. It's just hard to say at this point. We're not ready to put a pen in it, but we believe that with the products and services that Savvis has and the ability to cross sell those services into the customer base, that we have another tenet would be the IPTV rollout that Glen spoke about earlier and the additional revenue and lower customer losses we expect to see related to that. And then just the increased sales forces that we expect to have, both in the BMG Group and in the RMG Group, to try to take market share back away from the cable companies and the CLECs areas. We believe that these 3 opportunities really give us a lot of opportunities in the future to hopefully try to start growing revenue at some point.

This year, the fiber-to-the-tower investment should have stabilized as we're going forward as well.

Our next question comes from Chris Larsen from Piper Jaffray.

So I had a few questions. First of all, let me go back to the comment on Prism. Qwest had rolled out high-speed data capabilities to about 3 million homes, if I'm not mistaken. What are your thoughts around rolling Prism out on top of those already upgraded data rates in the Qwest territory? And then secondly, on the integration of Savvis, you did a great job telling [ph] us the integration of the Embarq and the Qwest properties. So I wonder if you could talk a little bit about how the integration is going there. I know it's not so much about cost savings, but talk about integrating the sales force and then possibly even cross selling the Qwest data centers that you've got now in your portfolio that the Savvis sales force knows how to sell, your thoughts on that and where you are on that process.

Yes, first of all, Chris, the fiber-to-the-node has been very beneficial to us as we roll out Prism TV. You've got fiber deep into the network, closer to your customers, so it's a real advantage for us. It helped set up the rollout of Prism TV, and one of the reasons that the maximum we will spend in any year is $250 million. We expect it to be less than that in those years for the next 3 to 4 years. But that's a key reason. We can keep our cost per customer under $200 a customer for this effort. So it's certainly an asset for us. As far as with the Savvis and the Qwest data centers, we will actually move the Qwest data center operation over to Savvis beginning of the year. We should see impacts from that. Savvis is, obviously, that's where their focus is, and we have not seen a lot of growth in data hosting in the Qwest side, CenturyLink side to date. So we think that will be a positive for us. We've just -- Jim just mentioned we have completed the rules of engagement across the sales forces now. SO we are moving forward quickly with that. We're training the CenturyLink sales force, enterprise sales force, to sell the cloud and the hosting product. So we feel very good about where we're headed. We're also seeing demand from our business customers or interest by business customers for the expanded enhanced network that CenturyLink brings for the Savvis sales efforts to Savvis customers. So we feel very good about this whole process.

Our next question comes from Scott Goldman of Goldman Sachs.

I want to revisit Prism for a second. You talked about spending up to $215 million in CapEx in any give year. It sounds like it could be a little bit lower than that based on what Glen just said. But if you could just refresh us on how much you spent in 2011 on Prism in terms of CapEx. And then as you sort of thinking about it, I know you're not going to give us guidance for next year, but as you sort of think about fiber-to-the-cell, fiber-to-the-node spend like are we staying at current levels, are you willing to bring CapEx above current pro forma levels to do Prism IPTV or is that something you think you can keep in doing under the current budget?

In 2011, we're spending about $90 million on Prism product, expectations and, Scott, we do not expect to increase the budget for this. We just had no other activity in the budget. We would expect to keep within our current guidance in the $3 billion range for our capital budget. So there may be other things that would eventually call us to make a decision to go a little higher, but it would not be the Prism investment.

Okay. And then just if I could, maybe talk about Qwest a little bit. You had another quarter quarter you've been to sort of take a look in the books and get to know the customers a little bit better. Anything else? Last quarter, you talked a bit about the CPE, maybe you can give us an update on maybe anything else you've learned over the quarter. And then as I look at the BMG results, looks as though strategic services revenues slowed a little bit. Maybe you can comment a little bit, is that macro related or just maybe comment about what's happening in the strategic services side of BMG.

First of all, at CPE, we have seen some delays last quarter and pushing into this quarter. The kind that we're seeing the slowdown in decision making, but there's a lot of activity. We're seeing some good bookings come into the fourth quarter at BMG on those quarter. And I'll let Chris -- you want to talk about maybe the strategic revenue question Qwest, Chris?

We're seeing a couple of things on the strategic side. One of things is in the -- as Glen mentioned earlier, in the low-speed private line space, we continue to see pretty significant migration and cost compression go on there. And then the other one that we saw specifically in the strategic space is around acquisition and retention of new customers. As Glen said, we had a couple of significant wins where the expectation on the part of customer in terms of transition, credits and services are fairly significant. And so we saw some of that in the third quarter as well.

And to clarify that, we have a 3- to 5-year contract with the customer. When you renew the contract, process have gone down, so we have to renegotiate the new contract prices and that's what we're dealing with there.

And our final question for today comes from Tim Horan from Oppenheimer. Timothy K. Horan - Oppenheimer & Co. Inc., Research Division: Karen, you obviously have a great track record of improving operational performance, but can you give us maybe a little bit more detail what you're doing to improve the buying growth here? And Stewart, can you maybe just remind us what the pro forma revenue growth trends have been in the last couple of quarters? And I guess the question being, is the 4.6% near the bottom of what you expect and we can start to see improvements here?

Tim, the question was around improvement of -- you said line performance? Timothy K. Horan - Oppenheimer & Co. Inc., Research Division: Well, line and broadband, you've done a great job here, but can you give a -- little more specific on what you're doing?

Yes. If I just look at some of the basic foundational things, one, it really is holding the general manager as a local model. The accountability, they have clearly a line of sight that you can't have from a corporate headquarters, and so they know what are the right grassroots, the marketing programs to implement in their markets, be it military, colleges, schools. They also work back with the corporate marketing group to make sure that we've got the right placement in terms of media, in terms of our direct mail, just increasing that direct mail and marketing to more of the noncustomers, as well as the Tier 2 and Tier 3 markets. We increased our promotional call volumes significantly as a result of that. The Price-Lock which is a high-speed, it's a double play, it's a data and a voice play, has worked very well for us. Customers like the Price-Lock for 5 years. The give them some assurance in terms of their budget and it gets them in a bundle. So those are really -- and then from a channel standpoint, the call center, there has been a lot of focus on just sales execution in our model in terms of how we sell from a top-down approach, working through the needs of the customer. And we've improved our sales per hundred rate in every category there too. So I'd say just good execution by the team.

And Tim, with respect to the revenue trends, yes, we do expect it to get better from here. Fourth quarter, we would expect somewhere between 3.5% to 4% if you look back fourth to fourth. So we do expect an improvement from the third quarter amount. Additionally, I guess, you'll have to look at 2012 to see what the impact of the FCC order is once we have an opportunity to first receive it and then get through the 500 pages. But as Glen mentioned, at this point, we don't expect that to be materially negative to us.

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

Thank you. Before closing, I would like to briefly outline our strategic objectives to drive long-term shareholder value, I think that's on Slide 21. First, we are committed to creating a powerful portfolio that will drive revenue and cash flow growth. Second, we are committed to investing in our network to increase penetration of broadband in our markets. We're also focused on intensifying customer and revenue growth and strengthening our customer and revenue and retention efforts. We are committed to investing in and developing new products in related business initiatives that will help us keep pace with our rapidly evolving industry. Fifth, we are focused on successfully completing the integration efforts surrounding the Qwest and Savvis transactions, and achieving our stated synergy targets. And finally, we remain vigilant about maintaining our strong balance sheet while managing operating expenses and making prudent investments in our business. In summary, overall, we are pleased with the third quarter results, and we are optimistic about our business in the months ahead. Thank you, all, for being on our call today, and we look forward to speaking with you in the months ahead. Thank you.

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