CenturyLink, Inc. (CTL)

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CenturyLink (CTL)

Q4 2010 Earnings Call

February 15, 2011 11:30 am ET

Executives

Tony Davis - Vice President of Investor Relations

Glen Post - Chief Executive Officer, President and Director

R. Ewing - Chief Financial Officer and Executive Vice President

Karen Puckett - Chief Operating Officer and Executive Vice President

Analysts

Donna Jaegers - D.A. Davidson & Co.

Batya Levi - UBS Investment Bank

Frank Louthan - Raymond James & Associates

Timothy Horan - Oppenheimer & Co. Inc.

Simon Flannery - Morgan Stanley

Scott Goldman - Bear Stearns

David Barden

David Coleman - RBC Capital Markets, LLC

Presentation

Operator

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

Tony Davis

Thank you, Syed. Good morning, everyone, and welcome to our call today to discuss CenturyLink's fourth quarter 2010 results released earlier this morning. The slide presentation we will be reviewing during the prepared remarks portion of today's call is available on CenturyLink's IR website at ir.centurylink.com or the Investor Relations section of our corporate website at www.centurylink.com. At the conclusion of our prepared remarks today, we will open the call for Q&A.

Now turning to Slide 2. Slide 2 contains our Safe Harbor language for your information. We will be making certain forward-looking statements today, particularly as they pertain to guidance for 2011, the Embarq integration and the pending acquisition of Qwest and other outlooks in our business. Please review our Safe Harbor language found in our press release and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.

Moving to Slide 3. We ask that you also note that our earnings release issued earlier this morning and the slide presentation and remarks made during this call contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available in our earnings release and on our website at www.centurylink.com.

Turning to Slide 4. Your host for today's call is Glen Post, Chief Executive Officer and President of CenturyLink. Joining Glen on our call today is Stewart Ewing, CenturyLink's Chief Financial Officer. And also available during the question-and-answer period of today's call is Karen Puckett, CenturyLink's Chief Operating Officer. Our call today will be accessible for telephone replay through February 21, 2011, and accessible for webcast replay through March 7, 2011. For anyone listening to a taped or webcast replay of this call or for anyone reviewing a written transcript of today's call, please note that all information presented is current only as of February 15, 2011, and should be considered valid only as of this date regardless of the date listened to or reviewed.

As you turn to Slide 5, I will now turn the call over to your host today, Glen Post. Glen?

Glen Post

Thank you, Tony. We appreciate you joining us today as we discuss CenturyLink's fourth quarter and full year 2010 operating results, as well as selected operational updates and 2011 guidance information.

First, we reported solid results for the fourth quarter and for full year 2010. We achieved operating revenues in the fourth quarter that exceeded the top end of our guidance, and diluted earnings per share near the top end of our guidance. Operating revenues for full year 2010 were $7.04 billion, representing a year-over-year increase of 41.6%, primarily driven by the mid-2009 acquisition of Embarq along with the continued growth and strategic revenues.

Second, we achieved solid high-speed Internet subscriber additions during the fourth quarter and full year 2010 resulting in an annual subscriber growth rate of more than 7%. Additionally, we improved our absolute access line decline by more than 20% for full year 2010 compared to pro forma full year of 2009.

We also continued the expansion of our Prism, our IPTV service, and we're expanding our Ethernet Private Line Service across our footprint to better serve our business and wholesale customers. Now the integration of Embarq continues to proceed well and we continue to make good progress towards completing the pending Qwest transaction.

Now moving to Slide 6 in the deck. Operating revenues were $1.72 billion for the quarter, slightly ahead of the $1.71 billion top end of our guidance. Diluted earnings per share, excluding non-recurring items, were $0.76 per share, $0.01 lower than Street consensus according to FirstCall.

Our cash flows remained strong as we generated free cash flow of $342 million in the fourth quarter, excluding $9.1 million of capital investment related to the Embarq integration. Additionally, we achieved approximately $85 million of total operating expense synergies associated with the Embarq integration during the fourth quarter, ending the year with annual run rate synergies of $340 million.

There were a few factors that contributed to our operating revenues exceeding the top end of our previous guidance for the quarter. First, we lost fewer access lines that we had forecast for the quarter. Second, our access benefit use declined at a slower rate than we had anticipated for the quarter. And finally, we had a couple of prior-period true-ups that positively impacted revenue. There were also a few expense items that were higher than we had anticipated for the quarter. First, we incurred higher pull rental expenses than anticipated due to seasonal cost adjustments under certain contracts. And second, we incurred higher contract labor and overtime charges than expected, driven by the expansion of our IPTV service, weather impacts and conversion initiatives.

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