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Qwest Communications International (Q)

Q4 2010 Earnings Call

February 15, 2011 9:00 am ET

Executives

Joseph Euteneuer - Chief Financial Officer and Executive Vice President

Kurt Fawkes - Senior Vice President of Investor Relations

Edward Mueller - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee

Teresa Taylor - Chief Operating Officer and Executive Vice President

Analysts

Peter Rhamey - BMO Capital Markets Canada

Kevin Smithen - Macquarie Research

Frank Louthan - Raymond James & Associates

James Ratcliffe - Barclays Capital

Timothy Horan - Oppenheimer & Co. Inc.

Michael Rollins - Citigroup Inc

Simon Flannery - Morgan Stanley

Scott Goldman - Bear Stearns

David Barden

David Coleman - RBC Capital Markets, LLC

Mike Liddell

Presentation

Operator

Good day, everyone, and welcome to the Qwest Fourth Quarter 2010 Earnings Results Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Mr. Kurt Fawkes, Senior Vice President, Investor Relations. Please go ahead, sir.

Kurt Fawkes

Okay. Thank you, Miranda. Good morning, everybody, and welcome to Qwest fourth quarter earnings call. We'll begin the call this morning with a few comments on the quarter from Ed Mueller, our Chairman and CEO. Ed will be followed by Teresa Taylor, our COO, who will review segment results. And then Joe Euteneuer, our CFO, will review our consolidated financial results and first quarter outlook. Ed will conclude with some closing remarks before we go to open it up for your questions.

As we begin our call, let me point you to Slide 3 and remind everyone that today's discussion contains forward-looking statements. These statements are subject to significant risks and uncertainties, and we discuss these in detail in our periodic filings with the SEC. And of course, I strongly encourage you to thoroughly review our filings. I also want to point out that we do not adopt analyst estimates, nor do we necessarily commit to updating any forward-looking statements that we will be making this morning.

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

Now, we'll move on to Slide 4 to touch on EPS and some special items that impacted our earnings per share in the quarter. Our reported loss per share for the quarter was $0.09, and that compares to earnings per share of $0.06 in the fourth quarter of 2009. The current quarter includes a $0.15 charge related to the conversion option on the convertible notes, which we redeemed in the fourth quarter. The remaining one-time charges in the quarter total $0.06 per share and include accelerated stock-based compensation, legal merger and severance expenses. Excluding special items, earnings per share were $0.12 in the fourth quarter. That's a 15% improvement compared to $0.08 in the year-ago quarter.

For the full year, earnings per share, excluding the special items, were $0.44 per share, compared to $0.38 in 2009. That's a 16% improvement. The earnings improvement in both the fourth quarter and the full year principally reflects stable EBITDA, lower depreciation and pension expense and reduced interest cost. Before any merger-related accounting impacts, depreciation expense is expected to decline again in 2011. With the significant reduction in debt over the past 12 months, we will also have a meaningfully lower interest expense in the coming year again.

So with that, I'm going to turn it over to Ed.

Edward Mueller

Thanks, Kurt. Good morning, everyone, and thank you for joining us today. I want to begin by saying I'm very pleased with our performance for both the quarter and the full year. In light of challenging conditions, we achieved a number of milestones during the year, including record high margins and record low debt levels, and we made significant progress on key initiatives to drive shareholder value.

Our investors benefited from a 91% total return in 2010. As we completed the year, we continued to improve top line trends, expand margins, generate significant free cash flow and we achieved our guidance expectations. We continued to see strong growth in our strategic revenue as we aggressively deployed fiber-based broadband services. Strategic revenue is a greater contributor in each of our three business units. Overall, strategic revenue now represents 40% of the company's total revenue.

Our effort to improve margins is another area where we had strong success in 2010. For the full year, our adjusted EBITDA margin was once again at its best level since the merger with U S West in 2000. We also continued to strengthen our financial flexibility by improving the balance sheet. Our progress was recognized earlier this year by a rating agency upgrade. During the fourth quarter, we redeemed all of the $1.1 billion outstanding convertible notes. And as of today, we've achieved our stated annual debt reduction goal of $3.5 billion announced in February 2010.

In addition, I'm very pleased with the progress we're making toward the completion of our merger with CenturyLink. We have reached several key milestones in the approval process, and we continue to make progress with the remaining agencies and commissions required to review the transaction. To date, we have received approval in 18 states. In addition to the FCC, we have four states remaining to review and approve the transaction. While the pace of regulatory approvals can be difficult to predict, we currently expect to receive all required regulatory approvals in the first quarter. That being the case, we are currently planning toward an April 1 closing date, and activities are well underway in the planning process for the integration of the two companies, including naming the next tiers in the organization structure. Of course, our target dates for regulatory approval and closing could be pushed back as these final processes unfold. But we continue to believe that we will receive all approvals and close by April 1.

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