Lumen Technologies, Inc. (LUMN) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to CenturyLink's Fourth 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, Saeed. Good afternoon, everyone, and welcome to our call today to discuss CenturyLink's fourth quarter 2011 results released earlier this afternoon. The slide presentation we will be reviewing during the prepared remarks portion of today's call is available on our Investor Relations section of our corporate website at ir.centurylink.com. At the conclusion of our prepared remarks today, we will open the call for Q&A. 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 2012, the integration of Qwest and Savvis and other outlooks on 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. Turning to Slide 3. Your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink. Joining Glen today 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 and leader of our Regional Markets Group; Chris Ancell, who's President of our Business Markets Group; Bill Cheek, President of our Wholesale Markets Group; and Jim Ousley, CEO of our Savvis Group. Our call today will be available for telephone replay through February 22, 2012, and accessible by webcast through March 8, 2012. 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 February 15, 2012, and should be considered valid only as of this date, regardless of the date heard or reviewed. As we move to Slide 4, I'll now turn the call over to your host today, Glen Post. Glen?

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today as we discuss CenturyLink's fourth quarter 2011 performance and share our strategic areas of focus heading into the months ahead. Our results were strong. During the fourth quarter, 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 despite a challenging economy and a very competitive business environment. Now turning to Slide 5. I want to highlight a number of accomplishments we achieved during 2011. First, we completed the acquisitions of Qwest and Savvis, adding strategic high-quality asset to CenturyLink, which further diversified our revenue mix, broadened our portfolio of assets that strengthen CenturyLink's position as a leading communications company. We've also added a global aspect to our business through these transactions. Second, during the fourth quarter, we achieved operating revenues above the top end of our fourth quarter revenue guidance. And for full year 2011, we successfully lowered the rate of revenue decline to 3.8% from approximately 5.6% for pro forma full year 2010. We also successfully completed integration of Embarq and made solid progress with the integration of Qwest and Savvis while reaching our full operating expense synergy target for Embarq and exceeding our 2011 operating expense synergy target for Qwest. From an operating metrics standpoint, the rate of access line loss in our business continue to decline in 2011, improving from 8% at year-end 2010 to 6.6% at the end of 2011. Additionally, we experienced solid broadband subscriber growth of nearly 240,000 subscribers during 2011, a 4.5% decline -- I'm sorry, improvement. We completed over 1,500 fiber-to-the-tower builds during 2011 and enabled Ethernet services to more than 430,000 exchanges since April 1, 2011. Lastly, we expanded our Prism TV product through 5 additional markets and now pass over 1 million homes. We ended 2011 with a penetration rate of about 7% of homes passed. Moving to Slide 6. We entered 2012 excited about our business and the prospects for continued top line revenue improvement, as well as customer retention and growth. The chart on this slide illustrates we have slowed the rate of revenue decline on a pro forma basis from roughly 5.6% in 2010 to 3.8% in 2011. We expect to significantly reduce the rate of revenue decline in 2012. This continues our path toward revenue stability and eventual growth as we begin to see our strategic initiatives to have a greater impact on our revenue streams. Top line revenue trends improved in 2011 as we began to realize the benefits of our higher index to growth. Nearly 60% of our revenue has now come from business services as a result of the Qwest and Savvis acquisitions. We're also encouraged by our ability to continue to mitigate line loss now at 6.6% from 8% a year ago. Our investments in fiber-to-the-node and fiber-to-the-tower, are paying off. Our broadband subscriber growth in fourth quarter is best-in-class among Starbuck [ph] peer group. We have seen a pickup in the legacy Qwest markets in the second half of the year as the extension of our local operating model has begun to gain traction in these large markets. We're pleased with the overall revenue mix shift in the business. Our strategic revenue, plus Savvis accounts now, it's now the fourth quarter of '11, nearly 44% of our revenue, up from 40% a year ago as we continue to reindex our business to areas of growth. We're seeing growth in strategic revenues. They grew over 6% in 2011, and we expect this growth will continue in 2012. Our business markets, strategic revenue growth when adjusting for material private line services accelerated the fourth quarter '11 to nearly 8% as we see continued high demand for next-generation IP services like MPLS and Ethernet. Turning now to Slide 7. As discussed last quarter, we're focusing our resources in areas that we believe will drive our future growth. They include broadband expansion and enhancement, including fiber-to-the-node deployment, the expansion of CenturyLink's IPTV offering of Prism TV, our fiber-to-the-node initiative and our managed hosting cloud services. We are pleased with the progress we've made on each of these key areas during 2011 and expect to invest in it and to drive results for these initiatives in year 2012 and beyond. We continue to make significant investments in expansion and enhancement of our broadband network and achieve a net increase of over 70,000 high-speed Internet customers in this quarter. We also successfully expanded our fiber-to-the-node infrastructure to an additional 340,000 living units during the fourth quarter and into 2011 with 6.1 million fiber-to-the-node-enabled living units. Looking forward into 2012, we expect to enable approximately 1 million additional living units in the year and -- end 2012 with about 7.1 million fiber-to-the-node enabled living units. Now turning to Prism TV, we're focused on expanding our footprint and growing our subscriber base, and we're encouraged by the 30% growth in Prism TV subscribers during the fourth quarter as we ended 2011 with over 70,000 Prism TV subscribers. We also continue to see Prism TV have a positive impact on churn and line loss trends, and we continue to experience greater than 90% broadband pull-through rate with our Prism TV sales to new customers. We also look forward to launching Prism TV in our first legacy Qwest market in the coming months. Continuing with our fiber-to-the-tower initiative on Slide 8. We continue to make progress with fiber-to-the-tower buildout initiative, which strengthens our wireless data transport capacity and enables us to meet the growing data transport needs of wireless carriers in 2012 and beyond. Now during fourth quarter, we completed over 1,250 fiber builds and finished the year with nearly 10,200 fiber-to-the-tower builds completed. We expect to build fiber to another 4,000 to 5,000 towers in 2012. Lastly, we remain committed to investing in the managed hosting cloud services space in the months ahead. We believe part of our operation -- this part of our operation has significant potential for growth in the coming months and years. As part of our commitment, we expanded our data center footprint during the fourth quarter as we opened one center and added space and centers in 2 other cities to bring our total sellable square footage to 1.3 million by the end of 2011. We anticipate adding another 100,000 additional square feet of sellable space during 2012. Also, we're pleased to announce Savvis has been recognized by the analyst firm Gartner as a leader in both the Magic Quadrant for Public Cloud Infrastructure as a Service and the Magic Quadrant for Cloud Infrastructure as a Service and Web Hosting. And we believe this esteemed recognition solidifies Savvis' reputation as an industry leader in this space. With that, I'd now like to turn the call over to Stewart for an in-depth look at our financial results. Stewart?

Thank you, Glen. I'll spend the next few minutes reviewing some of the financial highlights for the fourth quarter, and then I'll provide an overview of the guidance that we included in our earnings release issued earlier this afternoon. Now turning to Slide 10. First, in order to provide more relevant comparisons, 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 strong operating revenues and solid cash flows during the fourth quarter. For fourth quarter 2011, operating revenues were $4.653 billion on a consolidated basis, slightly above the top end of our guidance for the quarter, representing a 3.2% decline from pro forma fourth quarter 2010 operating revenues and a sequential increase of 0.4% compared to the prior quarter. Strategic revenues grew 4.7% to $2 billion, while our legacy revenues for fourth quarter were $2.2 billion, a decrease of 9.5% from pro forma fourth quarter a year ago. On a full year basis, operating revenues declined 3.8%, which was a little better than an anticipated 4% year-over-year decline and a nice improvement over the approximately 5.6% decline in pro forma operating revenues for 2010. You will recall when we reported earnings last quarter, we outlined and spoke about adjusted diluted earnings per share, similar to what other companies in our industry have done following a major acquisition. Adjusted diluted EPS excludes acquisition integration costs and any other special items that may occur during a given quarter. It also excludes the noncash impact of the amortization of intangibles and the noncash impact to interest expense of the assignment of fair value to debt outstanding from the application of business combination accounting rules to recent acquisitions. Adjusted diluted earnings per share were $0.55 for the fourth quarter. Excluding a $30 million additional noncash employee benefit cost due to changes in the discount rate and actuarial assumptions, the adjusted diluted EPS was $0.58 for the quarter. Total cash operating expenses increased 1% in fourth quarter 2011 compared to pro forma fourth quarter a year ago, with the synergy achievement and any other cost reductions offset by additional noncash employee benefit cost driven by the reduction of the discount rate and the actuarial assumptions and higher-than-anticipated network expenses and customer premise equipment cost that more than offset lower salaries and wages, marketing and advertising expenses. We generated solid operating cash flow of approximately $1.85 billion for the fourth quarter, especially if you consider that we incurred the approximately $60 million of higher-than-anticipated operating expenses during the quarter. Additionally, we achieved free cash flow, which is defined as operating cash flow less cash paid for taxes, interest and capital expenditures and additional adjustments to other income, of $515 million during the quarter. Our strong cash flows continue to provide us the financial strength and flexibility we need to capitalize on opportunities and meet the challenges that arise and take advantage of opportunities that arise to drive long-term shareholder value. Now turning to Slide 11. I'll begin the operating segment discussions today with our Regional Markets Group. Further, I want to remind you that we will be providing revised pro forma segment financials when we report first quarter 2012 results, reflecting the transfer of legacy Qwest data centers to the Savvis operating group, which we accomplished as of the first of the year. Regional Markets Group generated $2.24 billion in operating revenues, which represents a decrease of 3.9% over pro forma fourth quarter a year ago. Strategic revenues grew to $761 million in the quarter, up 5.8% pro forma year-over-year. Legacy services revenues for the segment declined $136 million or 8.6% from pro forma fourth quarter 2010. Our total segment expenses in RMG declined 2.7% to $991 million from pro forma fourth quarter 2010. Our expense reductions for the fourth quarter compared to previous year were mainly driven by synergy achievements, which were partially offset by costs related to the rollout of our Prism TV product in additional markets during the year. Moving to Slide 12. Our Business Markets Group generated $947 million in operating revenues during the fourth quarter, which represented a decrease of 3.3% from pro forma fourth quarter 2010. Excluding the decline in data integration revenues, the total percentage decline for the quarter was only 1.2%. Fourth quarter strategic revenues increased by $12 million or 2.8% to $446 million from pro forma fourth quarter 2010, driven primarily by Ethernet and MPLS services. Excluding low-speed private line, strategic revenue grew 7.8% from the year ago period. Legacy revenue for BMG declined from fourth quarter 2010 by $22 million, primarily due to ongoing migrations of customer acquisitions, applications from legacy, LAN and voice products to next-generation IP and Ethernet solutions. While data integration revenues decreased $22 million or 12.7% due to the unusually higher results for fourth quarter 2010. Our total segment expenses in BMG increased by 1.7% to $587 million from pro forma fourth quarter 2010 as we experienced higher expenses related to CPE and an increase in the number of sales professionals. Moving to Slide 13. Our Wholesale Markets Group generated $955 million in operating revenues, a decrease of 4% from pro forma fourth quarter 2010 as access in long-distance revenues continue to decline, but were partially offset by wireless carrier bandwidth expansion during the quarter. Strategic revenues for WMG grew 5.4% to $564 million from fourth quarter 2010, primarily driven by continued strong data transport demand from wireless providers. Our legacy revenues declined by about 15% to $390 million. Now turning to Slide 14, in our Savvis segment. Savvis generated $260 million in operating revenues, representing an increase of 3.6% from pro forma fourth quarter revenues of $251 million. This growth comes primarily from year-over-year increases of 12% in managed hosting and cloud services revenues with total hosting year-over-year growth of 7% and a slight decline in network services. Savvis' operating expenses were $208 million in the fourth quarter compared to $193 million in pro forma fourth quarter 2010. This increase of 7.8% is driven by additional cost to support revenue growth across staffing, expansion of data centers, third-party services and sales and marketing. As shown on Slide 15, we continue to meet our integration objectives and achieve all our synergy targets as we realize the benefits of the Embarq, Qwest and Savvis acquisitions. We completed the integration of Embarq during the fourth quarter and achieved our targeted annual run rate synergies of $375 million. With respect to Qwest, we ended 2011, having achieved an annual operating expense synergy run rate of approximately $235 million or about $35 million better than our expected year-end 2011 exit run rate, primarily due to achieving certain synergies earlier than anticipated. In total, we expect to achieve an annual operating expense synergy run rate of $575 million from the Qwest acquisition and anticipate reaching that synergy target over the next 2 to 4 years. During the fourth quarter, we successfully completed the conversion of the Qwest financial and HR systems as we had planned and previously discussed with you. Slide 16 addresses our 2012 guidance. For first quarter 2012, CenturyLink projects total revenues of $4.58 billion to $4.64 billion and operating cash flow between $1.84 billion and $1.90 billion. Adjusted diluted EPS is expected to be $0.57 to $0.63 per share. For full year 2012, CenturyLink expects operating revenues of $18.2 billion to $18.4 billion, representing an annual decline of 1.5% to 2.5% from 2011. Continued successful execution of our local operating model, further investment in broadband and IPTV video and key initiatives in the business markets and managed services areas will fuel further revenue improvement in 2012. We estimate operating cash flow of $7.4 billion to $7.6 billion and adjusted diluted EPS to be in the range of $2.25 to $2.45. We expect to generate free cash flow of $3.2 billion to $3.4 billion. Capital expenditures are expected to be slightly below 2011 and range from $2.6 billion to $2.8 billion, excluding approximately $100 million of integration-related capital. To elaborate on the expense portion of our full year 2012 guidance, we continue to take costs out of our business through synergies and other incremental expense cuts. At the same time, we're investing both capital and operating dollars in other growth areas of the business. While this causes our expense trends to not reflect the cost management that we've undertaken, we believe these investments are important to achieve our fundamental goal, which is profitable top line growth. Our 2012 EBITDA expectations reflect the combination of factors: Incremental synergy achievement of $250 million in 2012; ongoing cost management initiatives aimed at streamlining processes and rightsizing our support structure; continuing disciplined investments in strategic growth initiatives, including IPTV expansion, fiber-to-the-node and fiber-to-the-tower footprint expansion; business markets growth initiatives and hosting and managed services. We expect to exit the year with $450 million in run rate synergies from the Qwest acquisition on the path to deliver the full $575 million we have previously communicated. 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] The first question comes from Mike McCormack from Nomura Securities.

Just thinking about the EBITDA trend, Stewart, throughout the year, we saw margin pressure sort of building throughout the year. With the 2012 expectation, it looks like there's something to recover in Q1 and stayed pretty strong throughout the year. Just trying to get the puts and takes there. And I noticed also BMG margins took a pretty strong hit in the quarter. Just trying to figure out if that's a seasonal impact or whether we'd see continued margin pressures there?

Mike, for BMG, the CPE was a portion of the margin hit that they took in the fourth quarter. And in terms of 2012, yes, we would anticipate -- we see some normal seasonal improvement in the first quarter. I mean there'll be some continued pressure during the year, but we hope to relieve some of that pressure with the continued synergy achievement that we expect during the year, as well as our business as usual expense cuts.

Our next question comes from Batya Levi from UBS.

One question on the EBITDA, reported EBITDA for the fourth quarter. I think you missed your guidance a little bit. Can you go through the drivers for that? And if that number also has impacts on the noncash pension and OPEB cost? And how should we think about that pension cost? How much of that is included in the EBITDA guidance for 2012?

Yes, so Batya, the reason we missed the EBITDA guidance slightly in the fourth quarter was due to the additional expenses in the fourth quarter. Again, about $40 million of that related to pensions and benefits, $30 million of which was really noncash and is really included as a cash expense in EBITDA, the way we handle it. But that $30 million related to lowering of the discount rate and changing in some of the other actuarial assumptions related to primarily long-term disability. The other $10 million really related to the medical expenses being about $10 million over what we had expected for the quarter. So that was about $40 million. Additionally, we had some network expense, incremental network expense in the quarter of probably $25 million, $25 million to $30 million or so. Some of that was driven by the additions that we had with respect to high-speed Internet, our IPTV. That growth drove some incremental expenses, as well as completing the connections, the Ethernet connections to fiber-to-the-tower. So that really accounts for most of the other expense increases during the quarter.

And for 2012 guidance, how much do you think pension and OPEB is going to hit EBITDA?

So we'll have about -- there's about $50 million or so. When you combine pension and OPEB, that hits expense as a cash expense in our EBITDA number.

Our next question comes from Frank Louthan from Raymond James. Frank G. Louthan - Raymond James & Associates, Inc., Research Division: Can you walk us through sort of the trends of the Savvis business? It looks a little bit lower than we would have thought in the quarter. When did the bookings turn into sales and actually start hitting the books? And then what's the status with the Qwest data centers that were sort of underutilized? And at what point should we start to see that either be lumped into that Savvis business or start to see that start to grow?

Frank, this is Glen. I'll start, we'll then ask Jim Ousley here to really go into a little more detail. We had low bookings in the third quarter. Of course we knew we had some federal stuff coming in -- flowed into the fourth quarter there and we had some higher churn as well in the third quarter. All that caused the -- some delay in the revenues. With the larger deals that we're working on, there is a larger time frame required for it to complete those. But overall, we think we'll see that pick up in the first quarter and we're going to spend some revenue in the second quarter. And we're seeing in 90 days or so lag on the revenues. But Jim, do you?

Yes, this is Jim Ousley. Third quarter obviously was when the transaction took place, so we had a lull in bookings in the third quarter due to the transaction. Customers waiting to see if there was going to be an impact, what was going to transpire, employees of course are also, so third quarter bookings definitely affected the fourth quarter. The very positive aspect is once that was all done, we communicated with our customers. We had the strongest fourth quarter bookings we've had in several years. So that fourth quarter bookings will reflect in revenues, starting the end of the first quarter and into the second quarter. So we see the recovery out of the third quarter lull as very strong. Frank G. Louthan - Raymond James & Associates, Inc., Research Division: Okay, great. And maybe, Stewart, can you comment on use of cash? I'm seeing you're still working on some of the debt repayment commitments you've made and then thoughts on use of cash after that?

Yes. So Frank, basically, we'll -- it'll take most of the year to really complete the $1.5 billion to $2 billion pay down of debt commitment that we made to the rating agencies and really, frankly, take most of the free cash flow that we have this year that won't be used for dividends. So yes, I would expect that towards the end of the year, as we see how we have performed in 2012 and have our outlook pulled together for 2013, we'll talk with the board about use of cash going forward.

Our next question comes from Simon Flannery from Morgan Stanley.

You had strong broadband results, and you talked a little bit about the local market. Is this something that you think there's an opportunity to continue into 2012? Perhaps if you could just talk around some of the things you're doing there and the results you're getting? Also, in terms of the capital spending budget, I think the capital spending is coming down a little bit in terms of intensity. Just talk about how much of this is related to things like IPTV and sort of growth initiatives, how much is sort of maintenance.

Simon, Karen Puckett. In terms of the broadband growth, we did have a good quarter. Key enablers, really the local market, holding the general manager accountable for specific and getting the local team involved. Secondly, our go-to-market continues to ramp the changes we've made. Marketing to noncustomers, more DM, the 5-year Price-Lock, as well as Bundle Your Way is playing very well for us. And then our channels and our call center channels we've improved pretty significantly ourselves per 100. The other benefit we're really ramping on some retention programs that we've been working through. So all of that is equated to this overall significant improvement in broadband, especially in the Qwest market.

Great. And so something that is sustainable into '12?

We're optimistic about 2012. And typically, first quarter, we had such a strong fourth quarter, first quarter likely will not. We're putting some plans in place to make sure of quality of customer, less peers, so that would have an impact in terms of inwards. But in terms of quality, double play kind of customers, we'll continue to focus there and see what happens here in the first quarter.

And on CapEx?

On CapEx, Simon, first of all, about 25% of our capital budget is what we would consider just maintenance. If you look at other, a few other big buckets that are really associated with our growth drivers, basically, with respect to the Savvis and the hosting business, we'll spend between $330 million and $350 million in 2012. Our fiber-to-the-tower initiative, somewhat dependent there on finalization of plans by the folks that we're building the towers for or building the fiber-to-the-tower for. But expect to spend $250 million to $275 million there. High-speed Internet related, which would include our fiber-to-the-node continuation, which is a project that Qwest has had ongoing for several years, we expect to pass about an additional 1 million homes in 2012 with fiber-to-the-node. We'll spend $290 million to $320 million there. That includes extra -- additional capacity as well and modems for the fiber-to-the-node financial side customers, things like that. In our Prism and video, we'll spend, some of this is success based, but somewhere between $80 million to $120 million. So that's about $950 million to $1.05 billion, or so for the capital budget this year. And again, another 25% or so is maintenance.

Our next question comes from Tim Horan from Oppenheimer. Timothy K. Horan - Oppenheimer & Co. Inc., Research Division: Three questions, if you don't mind. What kind of speeds can you get on the fiber-to-the-node improvements or potential, anyway, in a couple of years? And how many homes do you think you can really economically build out to over time? And then secondly, now that you've really gone through a lot more, you're done with Embarq and looking at Qwest, are there any real differences in integration between Qwest and Embarq? And then lastly, why aren't you counting, maybe the pension hit as a little bit onetime in nature here?

Okay. First, Tim, regarding the fiber-to-the-node, we normally expect to get 20 to 40 megabits buildout. With that expected bonding, we can take that to 40 to 80 megabits. That's the range we're looking at on fiber-to-the-node. And as far as how many homes you can economically build over time? We're still working through that with technologies changing and improving all the time. We're about, I think, about 37% of our homes now built to the fiber-to-the-node, plus we have other direct, other loop shortening efforts and we have -- now we're getting 10 to 15 megabits in a lot of other areas without fiber-to-the-node, using just our loops. Even up to 25 megabits in a lot of our -- in all of our base level, of our Prism TV areas, which are not Qwest really not fiber-to-the-node. This are fiber builds and shortening, loop-shortening capabilities. So although we feel good about where our network is right now. We've got a lot of work in the network, and it's really a high-quality network in most of the cities we're in.

And Tim, just in terms of differences in integration of Qwest and Embarq. Really, the Embarq systems are more complicated than the Qwest -- I'm sorry, Qwest systems are more complicated than the Embarq systems were. Just if you take, for example, the conversion of the financial and HR systems, there were many, many more systems that surrounded the financial and HR systems that were feeding the Qwest financial systems that we had to provide interfaces for and things like that associated with the conversion to the ERP systems that we use. So it was a much more complex conversion than the Embarq conversion. If you look at the billing and customer-care conversions, there too, you'll have more complexities associated with Qwest than we do with Embarq. With respect to the employee benefit cost in the quarter, first of all, I guess there were not pension costs, which others, I guess, had called out as changes in the discount rate, impacting in their fourth quarter. This was really for us related to our long-term disability plans, and it was the result of the discount rate decline, as well as some other actuarial costs associated with medical insurance. But basically, we have that adjustment at the end of each year. It's just that it was higher in the fourth quarter this year than it typically is due to the decline in the discount rate primarily.

Our next question comes from Phil Cusick from JPMorgan. Philip Cusick - JP Morgan Chase & Co, Research Division: I wondered if you can delve into 2 numbers a little bit. First, on the business market side, the direct expenses have been ramping for the last few quarters. Can you talk about sort of what's driving that? You've talked about sort of adding to sales there in the past, but help us out there.

Yes, so that's it. Basically, you see some fluctuation from quarter-to-quarter with respect to CPE expense. That fluctuates kind of based on the CPE revenue that we see quarter-to-quarter. But the other driver of expense increases in BMG had really been the sales people that we've added over the past 3 quarters or so. So we ramped up the sales force to try to basically get to revenue stability hopefully on BMG, and it has resulted in improved sales bookings quarter-to-quarter. Over the last 3 quarters, we've seen higher bookings than Qwest had previously seen in the few quarters prior to the acquisition. Philip Cusick - JP Morgan Chase & Co, Research Division: And does that feel more sales-driven? Or is it an improvement in the overall business?

It's more sales-driven. We've really not seeing any difference, that we can tell at least, associated with the economy at this point. Philip Cusick - JP Morgan Chase & Co, Research Division: Great. And then on the wholesale markets revenue, the strategic revenue declined this quarter. I would think that with all the towers coming online that would continue to increase. What should we be thinking about there?

Yes. We had a couple of one-time adjustments in the fourth quarter that impacted the strategic revenue on wholesale. But again, it's just a one-time adjustment that we had there. Basically it's a settlement or accrual for settlement with a carrier, more or less. Philip Cusick - JP Morgan Chase & Co, Research Division: Okay. So without that, it would have continued its upward trajectory?

Yes. Without that, we would have had continued increase. We're very pleased with the fiber-to-the-towers that we installed during 2011 and especially in the fourth quarter and expect that to -- as well as copper circuits, as the wireless carriers continue to order the towers where we don't have fiber. So we expect to continue that trend of upward revenue hopefully on the strategic side in the wholesale business. Philip Cusick - JP Morgan Chase & Co, Research Division: Great. As long as we're on wholesale, maybe you can help us on the legacy side. Down 17% in 2011 versus '10, how should we think about that trending in '12?

Yes. Basically that's minutes of use-driven. Our minutes of use, were down probably a little over 15% in 2011. And what you'll see in 2012 is, with the implementation of the plan that the FCC has put in place, we'll see the Switched Access revenues over the course of the next few years decline significantly, pretty much go away. But the good news there is that we're hopeful that we'll get some relief on -- get some additional Universal Service Fund revenues associated with the broadband plan that they have in place, as well as, we got some flexibility to make some rate adjustments with our customers as part of that as well.

Our next question comes from Kevin Smithen from Macquarie.

I'm wondering when you think about the trade-off between higher operating expenses and getting to revenue stability sooner, how do you evaluate that trade-off going forward? And if you had the opportunity to go out and spend another $200 million or $300 million in 2012 to get maybe another 20 or 30 basis points of year-over-year growth exiting the year, is that a trade-off that you'd make? And at what point do you say, we've invested enough and we're drawing the line in the sand in OCF and free cash flow?

Kevin, a couple of things or points, I'd make, Stewart may want to follow-up. First of all, the legacy revenue losses, those are high-margin revenues, and we're going to expect to see that mix change. So they were just talking about with the minutes of use issues we have. That's going to be reduced. At the same time, we think we have really, strong opportunity to grow -- for growth in our major strategic initiative areas with our continued broadband expansion, with our fiber-to-the-node, with our Prism TV efforts and our fiber-to-the-tower. That's going to help stabilize our revenues and grow revenues over time. And then finally, the managed hosting cloud services, we think there's outstanding growth potential. Bringing all those together, we believe that we're on a good track to, where we can -- with the reduction in revenue losses this year, that we should see an evolution toward revenue stability and eventual revenue growth. So we feel good about what we're doing for specific opportunity, every one, it just depends.

And where do you expect to end the year in terms of year-over-year revenue declines exiting Q4 of 2012?

Not really ready. We'd rather see the year develop a little bit, but I mean we're comfortable in the 1.5% to 2% range for the full year.

Our next question comes from Tom Seitz from Jefferies. Thomas O. Seitz - Jefferies & Company, Inc., Research Division: The cable companies are increasingly talking about Wi-Fi hotspots. For now it's an add-on for their higher-tier broadband customers. I know you've done one-off Wi-Fi projects in the past. But is that something that you're looking at as a retention tool or potential opportunity down the line in connection with your broadband offerings?

Yes. It is and we're looking at it. Of course, we do have a number of hotspots across the country today. We're looking also for an opportunity to -- for offload opportunities for wireless carriers, even our Wi-Fi. So that's another area we're looking that we think could drive more traffic and then be a revenue generator. So yes, it is an area we continue to look at, Tom.

Our next question comes from Kathy [ph] From UBS.

Just 2 quick questions. First, hoping you can give us kind of your current thoughts on potential M&A over the next 18 months or so. And then second, related to that, I'm wondering if you can also give us your thoughts on some comments AT&T made about divesting access lines, what your appetite might be for access lines.

As far as M&A potential, we're focused today on our 4 primary growth areas that I just talked about. And we have also -- second, we're focused on integration of Savvis and Qwest, and we have to get that right. And so we're not -- we don't feel a need to go out and acquire right now. Doesn't say we wouldn't look at opportunities that came along that drove long-term shareholder value, but that's not our focus today. As far as AT&T, we won't comment on AT&T lines. We don't know what their plans are. We've heard those rumors for many years, a number of years now and we won't comment on that. But we don't think we need to just go out and buy access lines for additional scale. So if there's an opportunity there that drives shareholder value, we consider it. But it's not a real big appetite from our view today.

I'd like to hand the conference back over for any closing remarks to Mr. Glen Post.

Thank you. Turning to Slide 19, we are pleased with where the company exited 2011, and we feel well positioned to achieve our goals in 2012. Since 2011, we generated pro forma revenues of $18.7 billion, a 3.8% decline from pro forma 2010. Our revenue continues to shift toward faster-growing strategic services, now representing nearly 45% of our total revenue. And we expect that decline to be reduced, in revenues, to be reduced to 1.5% to 2.5% in 2012. Also, after several years of hard work from our dedicated employees, we have successfully completed the Embarq integration, and now we look ahead to completing the integrations of Qwest and Savvis, and we feel we've made solid progress in both of those fronts so far. Our local operating model continues to prove effective and show long-term benefits to our operating trends, as illustrated by the improved access line losses, the higher broadband subscriber growth and increased Prism TV customers we saw during the past 2 quarters. With our broadband suite of products -- product suite and the strong asset mix, we are gaining momentum across selling products throughout the business segments. We feel we'll see that continue to grow. And overall, we're pleased with the quarter results and are optimistic about our business. So thank you for being on our call today, and we look forward to speaking with you in the months ahead.

Thank you. And 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.