CenturyLink, Inc. (CTL)

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CenturyLink (CTL)

Q2 2011 Earnings Call

August 03, 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

Christopher Larsen - Piper Jaffray Companies

Michael McCormack - Nomura Securities Co. Ltd.

Philip Cusick - JP Morgan Chase & Co

Batya Levi - UBS Investment Bank

Michael Rollins - Citigroup Inc

Simon Flannery - Morgan Stanley

Scott Goldman - Goldman Sachs Group Inc.

David Barden

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the CenturyLink's Second 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.

Tony Davis

Thank you, Syed. Good morning, everyone. We apologize for starting a few minutes late and appreciate your patience. But welcome to our call today to discuss CenturyLink's Second Quarter 2011 Results released earlier this morning. Unless otherwise noted in the press release or in our remarks in related materials this morning, the second quarter results discussed in the press release and during this call relate to CenturyLink, Inc., including Qwest, effective for the full quarter, but excluding Savvis. Savvis results for second quarter 2011 are addressed separately in the release and our prepared remarks for today. Savvis is otherwise only included in the 2011 outlook information provided for full year 2011 and pro forma full year 2011. 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.

Turning to Slide 2, it 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 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 our SEC filings which describe factors that could cause our actual results to differ materially from those projected by us and our forward-looking statements. We ask that you also note that our earnings release issued early this morning and the slide presentation and remarks made during this call contain certain non-GAAP financial measures. 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.

Now turning to Slide 3. The participants for today, 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 August 9, 2011, and accessible for webcast replay through August 23, 2011. And 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 August 3 and should be considered valid only as of this date regardless of the date listened to or reviewed.

So as you to turn Slide 4, I'll 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 second quarter 2011 operating results, as well as selected operational updates and 2011 guidance information.

We delivered solid financial and operational performance for the second quarter of 2011, including revenue in line with our guidance range, and improved access line trends. Our second quarter 2011 results are significantly impacted by noncash accounting charges resulting from purchase price accounting for the Qwest transaction. These charges significantly impact our net income and earnings per share, depreciation and amortization increases as we amortize the value of size of the Qwest customer base.

However, it's very important to note that the purchase price accounting adjustments have no impact on the cash close [ph] of the company and also the accounting adjustment should not in any way affect the economics of the Qwest acquisition. We continue to believe the Qwest transaction is a great strategic combination to improve the growth characteristics of our combined company.

Initial Qwest integration efforts are underway and we have now implemented our local operating model in the legacy Qwest markets. Synergy team [ph] in the second quarter is in line with our expectations. This August 9, we expect to launch a CenturyLink brand into Qwest markets. Also, the final Embarq conversion was completed in late July, marking the end of all major integration activities associated with that kind of transaction approximately 25 months following the close. We have a couple of smaller systems conversions left but the vast majority is now done. And we're on track to achieve the target $375 million in annual run rate synergies later this year. Additionally, we're pleased to welcome Savvis to the CenturyLink family following the close of the transaction with them on July 15.

Now moving to Slide 5 in the deck, I'll cover some financial highlights for the quarter. We achieved operating revenues of $4.4 billion for the quarter, hitting the lower end of our guidance range. The strategic revenue grew by 6% and legacy revenue declining 10.5% as compared with pro forma second quarter 2010. Diluted earnings per share, excluding special items, was $0.44 per share, the lower guidance range due to higher than anticipated amortization related to the business combination accounting of the Qwest properties. Excluding this unexpected increase, earnings per share would be $0.64 and in line with our initial guidance range. Excluding the impact of noncash items, our cash flows remain strong as we generated $950 million of free cash flow during the quarter. Strategic revenue growth of $98 million was driven by high-speed Internet, special access and MPLS growth over the past year.

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