EQ - NASDAQ

Good afternoon. My name is Bill, and I will be conference operator today. At this time, I would like to welcome everyone to the EMBARQ's second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Trevor Erxleben, you may begin your conference.

Good afternoon and thank you for joining us for Embarq Corporation second quarter 2007 investment community update. With me today are Chairman and Chief Executive Officer, Dan Hesse; and Chief Financial Officer, Gene Betts. In addition Tom McEvoy, President of our Business Markets Group and Mark Kenyon Vice President of Marketing and Product management for our Consumer Markets Group will be participating in the Q&A session at the end of the call. Mark by the way is sitting in for Harry Campbell, who had another commitment and wasn't able to join today. Before we get started, there are two things I'd like to bring to your attention. First, for those of you who have downloaded the presentation from our website, on slide 2, you'll see our cautionary statement regarding forward-looking statements. During the call, we'll be discussing forward-looking information and expectations that involve a number of risks and uncertainties, which may cause actual results to differ from our expectations. A detailed discussion of these risks and uncertainties are included in our SEC filings and I would encourage you to review those filings carefully. Second, throughout the call we will be referring to non-GAAP measures, which in our press release are reconciled to the appropriate GAAP measures. One non-GAAP measure in particular I'd bring your attention to is our so-called as adjusted basis of reporting. Those of you who have listened to our previous calls maybe familiar with the differences between our as adjusted and GAAP reporting, but I will go ahead and review them again briefly. As part of our spin-off on May 17th, 2006 EMBARQ received from Sprint Nextel certain customer relationships, assets and liabilities, the most notable of which are the long distance voice customers in our service territory. Our GAAP results only reflect these transfers after May 17th, 2006, which means our pre-spin GAAP results are not fully comparable to our post-spin GAAP results. Our as adjusted results however, assume the transfers from Sprint Nextel occurred on January 1st 2006, which we believe makes them more useful for historical comparisons. Thus throughout the call, when we refer to results for any period prior to the third quarter of 2006, we will be referring to our results reported on an as adjusted basis. Alright, with those important topics covered, I will now turn the call over to Dan, so he can share his thoughts on the second quarter.

Thanks Trevor and good afternoon everyone. The second quarter marked our first anniversary as a public company. A year ago, we faced deteriorating trends in several areas, but after taking aggressive action, those trends are now beginning to look more favorable. As a result, we have improved the 2007 outlook in most areas including revenue, operating income, capital expenditures and access lines. In the past, we set our goal as to return to top line growth by the beginning of 2009. And as the graph on slide 4 illustrates, we are making good progress toward that objective. In the second quarter, the year-over-year decline in telecom revenue was less than 1%. As the growth in data, high speed internet, and wireless revenues almost completely offset the decline voice. Our revenue metric for our Consumer Group that we watch very closely is average revenue per household (ARPH) what we call Arph, which is up 6% year-over-year, the highest rate of growth for this metric since we began measuring it. Growth in ARPH is an indication of success we had in bundling high-speed internet and wireless services with our local service. In addition to contributing to overall revenue, penetration of multiple products has maximized the life time value of our customers by reducing the rate of churn. Almost a fourth of our consumer households now have HSI service and those customers have a 40% lower rate of competitive churn. In addition to the improving revenue trend for the third consecutive quarter, we saw improvement in access line losses relative to the prior year. In total, access lines declined by a 146,000, which is 5,000 fewer than in the second quarter of 2006. Although the decline in business access lines was higher than a year ago, due to an increased number of business closures, access line metrics in business get more focus than they should. The biggest driver of access line disconnects in business continues to our strategy of proactively migrating the customers to EMBARQ high capacity data connections. In fact only 10% of business line disconnects are due to a competitive loss. As a result, we've seen business revenues grow fairly consistently in spite of reported access line declines. In our Consumer Group, where access line metrics are most meaningful, seasonal factors typically make Q2 the toughest quarter of the year. Naturally, then the decline in consumer lines increased sequentially to 127,000, but more importantly that level is 8000 better that it was a year ago. Cable VoIP availability expanded again this quarter reaching just under 65% of the households in our operating area, up from a little over 50% a year ago. As stated earlier, we expect the rate of access line loss this year to be better than our original outlook. So a more favorable access line trend is being driven by a combination of several factors including greater product and service penetration, our increased focus on customer satisfaction and the expansion of our distribution channels. A relatively new channel initiative with potential for the future is our Reconnect program; we've begun with other local telecom companies. In consumer markets, the primary driver of an access line disconnect is a customer moving to a different home. In fact nationally, about 15% of the population moved this year. If a customer moves within our operating area, we can transfer their service to their new address. But if they move out our territory, until recently no transfer process existed. Now however, we have agreements with several of our industry peers to refer customers moving from our markets to theirs and from theirs to ours. Turning to slide 5, second quarter Data revenue totaled $188 million, which is 6% higher than a year ago. Within the data lines, special access revenues from both wireline and wireless carriers contributed to wholesale data growth, while Ethernet services continue to be the key driver of high capacity business data growth. We recently received two important certifications in the second quarter from the Metro Ethernet Forum, a non-profit international industry consortium. The first was MEF 9, which certifies that EMBARQ metro Ethernet networks are fully capable of providing business customers with a reliable suite of Ethernet services, including Ethernet LAN private line and virtual private line or VPN. We also received MEF 14 certification, which reinforces that we have the capabilities necessary to manage the quality of our Ethernet network and enabling us to offer business customers a standardized set of service level agreements or some of you may know it as SLAs. Turning to high-speed internet, second quarter net adds total 52,000 bringing our subscriber base to more than 1.15 million at quarter's end. As I mentioned earlier, seasonality had a negative impact on consumer markets during the second quarter, which is the primary reason net adds were below the recent trend. In prior years, we've seen a similar seasonal impact, although last year it was muted by very strong initial demand for the innovated permanent price HSI offers we introduced nationally on the first day of the second quarter of 2006. With HSI capable access lines now representing about 77% of the total and penetration of cable lines at 22%, we continue to have room for future growth. HSI revenue grew more than 27% year-over-year to $121 million in the second quarter, while ARPU was relatively stable sequentially at $36. Although small at this point, it's worth noting that we are beginning to see a revenue contribution from the EMBARQ branded portal we launched in the first quarter. If you go to myembarq.com, you can take it a tour that shows the customizable features and advanced e-mail functionality that are available to our HSI subscribers along with the award winning online security tools. Overtime, we'll continue to enhance myembarq.com to increase its value to our customers as well as its contribution to our results. We introduced innovative online voice mail functionality this quarter as we looked to drive integration across our product and service portfolio. Provided at no additional charge to new and existing voice mail subscribers, this feature enables customers to see a list of their voice mail messages, listen to them in any order and change or record a new greeting via a user friendly web interface. In wireless, we introduced innovative features in five markets this week. And in the second quarter, we contributed or we continue to add to our subscriber base. As we've emphasized before, our wireless strategy is founded on integrating the functionality of wireline and wireless. This is what will set us apart. If we are to have a competitive advantage, we need to bring these new advanced features to market. The first of the new features we introduced this week known as Find me, Follow me enables customers to have incoming calls to either their EMBARQ home or wireless phones routed to the other phone or to one additional pre-selected number. Customers setup their call reading preferences by the same web interface utilized by the online voicemail feature I just described. On the web, they can select specific hours and days to automatically enable and disable Find me, Follow me functionality. Alternatively, customers can turn it on and off manually using either the wireless or their wireline phone. When someone calls at EMBARQ customer's wireline number, our second new integrated calling feature, incoming call transfer enables them to transfer the call to either of two pre-selected numbers after they have answered it. For example, if the customer receives a call on their home phone, and they need to leave the house, they can simply transfer the call to their wireless phone and continue the conversation after they have left home. They can also subsequently transfer the call back either to their home phone or to the other pre-selected number. Incoming call transfer preferences are easily customized using the same portal as Find me Follow me and online voicemail. And it can also be turned on or off by a wireless or wireline phone. By providing seamless connectivity between wireline and wireless domains, we intend to maximize the value of the home phone. Wireless net adds in the second quarter totaled 18,000, bringing our base to 89,000 at quarter's end. Wireless dilution declined to $20 million relative to the updated historical numbers provided in our press release. Revenue meanwhile grew $11 million in the second quarter. As we innovate and as we make progress toward our goal of top line growth, we are also keenly focused on operational improvement. One example we've mentioned in the past is an ongoing company wide benchmarking program from which we will be getting initial readouts over the next 2 months. In the meantime, we have identified 2 projects that address opportunities that came to our attention in the course of evaluating ourselves relative to other telecom and non-telecom companies. The first is an overhaul of the work force management systems in processes utilized to dispatch technicians in our network organization. By the end of 2008, our objective is to migrate from multiple dispatch operations to a single organization platform for all dispatch work. In addition, by leveraging GPS technology along with real time ticket information update, we expect a better optimized routing, simplified reporting, and improved customer satisfaction, particularly as it relates to the predictability of technician arrival times. The second project is a simplification of our product in our portfolio, which over a long period in our company has become very cumbersome to manage. As we introduced new rate plans, we didn't eliminate old ones. Our current support systems must accommodate an enormous number of codes for different prices, promotions and various other elements of our product and service offerings. Over the next few years, our goal is to dramatically simplify this structure, which we think will have several important benefits. And particularly, we expect to increase the efficiency and flexibility of our systems, enable our customer care reps to be more effective and again improve customer satisfaction. Both of these projects will leverage existing resources to a large degree, so any near term increase in our expense run rate should be limited. We expect the resulting benefits to then build over time, reaching an annual run rate of roughly $50 million per year in the next two to three years. In closing, it's clear we've made a great deal of progress over the last year in our financial performance in and other important areas like innovation, competitiveness and customer satisfaction. Even though we have improved our 2007 outlook in a number of areas, we certainly have more work to do to achieve our long-term goal of top line and bottom line growth. But I think we are heading in the right direction. In addition to the project I mentioned, Jean will talk about other things we are doing to improve our operating efficiencies and effectiveness over the long term. And as always, he will share his insight on our second quarter results and our outlook for 2007. Jean?

Thanks Dan and good afternoon everyone. Our results in the second quarter were strong and the improvement we are beginning to see in key trends is very encouraging. We saw sequential increases in both revenue and operating income. This is very notable given that the second quarter tends to be seasonally challenging. If you turn to slide 7, revenues were up slightly on a sequential base. Total revenue for the second quarter increased almost 1% to over $1.6 billion. Telecom revenue increased slightly to $1.48 billion. Consumer revenue declined only modestly both sequentially and year-over-year, growth in average revenue per household, ARPH as Dan just explained is nearly offsetting the impact of your access lines. The increase in ARPH is being driven by sales of high speed internet, wireless and other complementary products. Wholesale revenue declined modestly year-over-year, but grew sequentially on a recurring basis for the first time in several quarters. Special access growth helped offset the decline in minute driven switched access. Recurring database revenue also increased driven by the addition of a large customer. Business revenue increased both sequentially and year-over-year. Finally, Embarq Logistics revenue increased more than 10% between the first and second quarters, this is relatively normal as customer purchases tend to be low in the first quarter every year. If you would turn to slide 8; operating income in the second quarter was below the year ago level, driven by the year-over-year revenue decline or our startup cost in the full run rate for corporate overheads. Items impacting second quarter operating income include non-recurring separation cost of increased SG&A by $8 million and miscellaneous non-recurring items they collectively reduce cost of service by $5 million. Sequentially, operating income increased, both interest expense and our effective income tax rate were relatively consistent with first quarter. Diluted earnings per share increased from $1.05 in 1Q to $1.15 in the second quarter. Sequential revenue, income and EPS improvements clearly represent solid progress relating to where we were a year ago. In addition to the projects Dan described, I'd like to highlight some of the benefits we're seeing from simplification and productivity improvements. Our efforts in these areas have contributed to the progress we've made to-date and I think these are also good examples of the types of improvements we will make in the future to drive future performance. Simplifying our products and services in ways that makes sense to customers like we did with our straight forward HSI offers, not only helps drive sales, it contributes to customer satisfaction and reduces calls to our customer care group. We have also made system and process improvements often driven by feedback from our customer care team, which have reduced both the number of repeat calls and the average time it takes to handle those calls. We have also increased the level of partnership between our customer care and network organizations. In some cases, we actually increase call handle time to ensure that we understand our customers' issue. This helps avoid unnecessary technician dispatches. The savings in our network organizations more than offset the increased customer care cost. Individually, these may or may not sound like significant changes, but taken together they have got a major impact. In fact, over the course of the last year, we've realized savings of approximately $20 million from these items. At the same time, we've seen an increase in overall customer satisfaction, which is critical. Going forward, we will continue to look to simplify and streamline our business in ways that make sense for customers. For example, we will be rolling out a new billing format to reflect speed back recollective from both our customers and our customer care team. Among the changes we've made is an improved layout to make charges for our product and service bundles easier to understand. Taxes and surcharges are also presented more clearly. In addition, customers will have the option of receiving a summary bill that is printed on two sheets of paper instead of more detailed billing that often isn't wanted or needed. One final item that will impact our results going forward are our amendments to our post retirement benefit plans that are outlined in the press release. Although most changes won't take effect until January 1, 2008, a liability reduction of $301 million is reflected on our second quarter balance sheet. We'll begin amortizing this reduction in the third quarter, which will reduce post retirement benefit expense by approximately $20 million over the second half of 2007. Beginning in 2008, the annual expense reduction from these amendments will be approximately $40 million. However, amortization of prior year amendments approximating $20 million annually will end at the end of 2007. Thus the net impact in 2008 is approximately $20 million of expense improvement. Turning to slide 9, the second quarter capital expenditures of $188 million were significantly lower than 2Q of '06 due to timing and reduced spin-off requirements. Although CapEx increased a bit from the first quarter level, year-to-date we are running favorable to earlier expectations. On a year-to-date basis, free cash flow before dividends totaled $357 million. In the second quarter, free cash flow was impacted by the timing of a couple of large outflows. The first is $164 million in interest on our senior notes which we paid semi-annually in the second and fourth quarters. Also our April and June estimated income tax payments both occurred in the second quarter as well, which represent $241 million. Using free cash, we paid our dividends of the second quarter at the new rate of $62.05 per share. Looking ahead, the post retirement benefits changes will impact cash flow beginning in 2008. We expect annual pre-tax cash savings to be approximately $30 million. In closing, as Dan indicated earlier, we have raised our outlook for 2007. On slide 10, are our old and new expectations for the year. Starting with access lines, if cable VoIP continues to expand at the relatively modest pace we've seen recently, our access line result should be better than our original outlook. Instead of a mid to upper 6% rate of decline, we now expect loss to be in the low to mid 6% range. We are also increasing telecom revenue guidance. Instead of $5.77 billion to $5.87 billion range, we are nor projecting telecom revenues of $5.87 billion to $5.92 billion. For consolidated operating income, we are changing our outlook from a range of $1.45 billion to $1.55 billion to the new range of $1.51 billion to $1.56 billion. This includes roughly $30 million of non-recurring spin-off expenses, $70 million to $80 million for wireless dilution and depreciation and amortization of approximately $1.06 million. Finally, our outlook for capital expenditures is improved, due largely to reduced requirements for spin-off related projects. Instead of the $870 million to $890 million range we provided previously, we now expect CapEx to be approximately $865 million including spin-off related capital of $15 million. With that I will pause, so that we can take your questions. We will also see if Trevor has any luck with his one custom per closing rule this quarter.

Thanks Jean. While the operator opens the line for questions, I would as Jean indicated, ask that you refrain from multi-part question excuse me, it looks like we have about 20 minutes available for Q&A and frankly not so many people on the queue. So I think we have a good chance of getting to every one this quarter. Bill, since there aren't too many people in the queue, maybe you should remind folks about the process, before submitting the question and go ahead and introduce the first person if you will. Question And Answer

[Operator Instructions]. And first question comes from Simon Flannery with Morgan Stanley.

Good afternoon everybody. Dan could you talk a little bit more about the progress of the wireless business? There is been a lot of in the newspapers that couple of MVNOs and so forth. Think about how you are getting the sort of benefits that you were hoping in terms of the bundles and lower churn and so forth and are you on the path that you want to be onto get to breakeven and positive profitability or and if not what do we need to change to see that happening so that this can start to really ramp in terms of financial performance next year?

Thanks for the question Simon and it's a good one. Because it is challenges the wireless market is a highly competitive one and we are still, kind of in process of getting the word out there that Embarq offers wireless service and our challenge is we have decided to come into the market not only as a new wireless company but with a fundamentally different strategy. We are looking for customers that contributes specifically to our business that has retained the landline. So for example we don't offer free nights and weekends. We don't offer really large buckets because of the financials of the MVNO. We are offering wireless only really as a retention tool with respect to the landline. So we just launched as I mentioned on the call earlier this week. So it didn't effect the second quarter at all. These new integrated calling features that find me, follow me call transfer features and what have you and we have more coming and we think that is going to be crucial to differentiate our product and quite frankly makeup for the fact that you don't have things like nights and weekends. So we continue to make progress, would I like to be making progress faster, absolutely as you know Simon, I am a wireless guy and you know, I would like to be seeing us have even more success than we are, but if you take a look at our subscriber numbers quarter-over-quarter, they continue to grow and we again are focusing on high quality subservient. Because of the things that I just mentioned, it limits the size of our market. We are not going after big bucket customers, we are not going after wireless only customers, we are not going after the free nights and weekends customer, and we are going after a particular type. So we have consciously limited the size of the market. So it's a combination of quality and quantity. So we are still confident we will get to the breakeven of the wireless business as a standalone, and it will contribute positively to the overall value of Embarq. We are on track to get there. I wish we were there a little bit faster than we have gotten there so far though.

Good question, Simon. Thank you.

Thank you.

Your next question comes from the line of Jonathan Atkin, with RBC Capital Market.

Yes, I was curious if you could invite a little bit of an update on the video business in terms of current trends and future plans. And then Dan you mentioned briefly this referral program in partnership with other telecom operators. Can you give us some flavors who your partners are, and what kind of impact that had on your line to success this quarter? Thank you.

With respect... let me take in this multiple part question, and in reverse order with respect to the move referral program, its kind of a one transfer program if you will, it includes six medium size local exchange carriers. I'm not at liberty to say who they are, we have all agreed, we wouldn't go public with that. We launched it right at the end of the quarter so it has not had a significant impact of Q2 results but the initial results in the first few weeks are very favorable. So we have our fingers crossed this will be a positive development for us. Secondly, on the video front, our video strategy remains the same and that is that you know we have a partner in Dish networks we continue to you know bundle satellite television as one of the key areas, one of the four key areas of our bundle. We are evaluating, we are doing technical trials being in the management team spent time visiting other telecom carriers who have deployed to telephony [ph] based video offers. We are studying it. Right now quite frankly the numbers just don't work for us with our density and in our markets but that could change overtime but right now I would not anticipate a change in our video strategy which right now is based upon our partnership with Echostar.

Thank you.

Thanks John.

Your next question comes from Chris Larson with Credit Suisse.

Thanks. A question for you on DSL. Do you, I know you said it was a seasonal slowdown or but I am looking year-on-year your down, your net adds were down we saw the same thing at AT&T. We are actually seeing the same thing at ComCast is there do you think that the market is getting fully penetrated. Have you lost any shares or done less marketing anything else that could explain why DSL ads were down year-one-year?

The main explanation is that, as I mentioned in April 1, of '06 is when we came out with the new pricing strategy. So we normally do see a big decline in Q2 and HSI net adds DSL net adds and we didn't see that in '06 because of the kind of a brand new offer. So Q2 of '06 was a bit of an anomaly. That being said, the HSI market is beginning to get more competitive largely because what we are seeing is the cable companies for a long time have had kind of one size fits all approach for their price piece net offer and now they are beginning to offer lower speeds like sub 1.5 and 1.5 megabit kinds of speeds that are lower price points. So I think they are seeing a need to bring the price point down and become more competitive. We are looking at what's going on in the industry. We are relatively under penetrated compared to a number of other telecom companies. So our hope is that we'll see the slowdown perhaps later than they do, but yes there was a year we call the first 12 months beginning at April 1 of '06 where we had some new pricing in the marketplace and we saw a very, very strong 12 months period in terms of HSI adds. I don't know if we can get back to those levels, but I would expect Q3 to begin bouncing back more favorably.

Thank you.

Thanks for the question Chris.

Your next question comes from David Janazzo with Merrill Lynch.

Good afternoon.

Hi David.

Hi Trevor. Dan you mentioned a number of efficiency items and then also the benchmarking process. Can you give us a little more detail on what's involved in the benchmarking study, what you are looking at? And when we might expect to hear some outcomes?

Yes Dave. Actually this is Trevor. I'll take that question because I am involved in that quite a bit. It really, as Dan indicated, is a process that we are looking at the entire company whether it's a network organization or a customer care organization or financial HR. So it’s really is a company wide process. We are looking at companies within telecom and outside of telecom to try to identify what is that truly best in class and then take action from there. So, it is hard to be real specific about what those actions will be and what the amounts might be that come out of the process, but it is something we are, as Dan indicated, ramping up in the next couple of month and probably will become an input into our 2008 finding cycle. So that might be a good timeframe too to think about us talking more specifically.

Will I hear more on the next conference call perhaps?

I don't see it putting out 2008 guidance on the next call. So probably a little bit beyond that.

Okay thanks.

Thanks David.

Your next question comes from David Barden with Banc of America.

Hey guys, thanks for taking the question. Questions all… I am sorry the one was just I wanted to follow up again on the wireless question Dan, let me push back on the, things are progressing, we are taking up the dilution in other 10 to possible $20 million for just this year and to the point about MVNOs, I think that there are some documents filed for a company that once become public that wasn't even breakeven until you have several million customers. Obviously there is brand and distribution to be built there but could you flush out a little bit more exactly I mean how do you get to some kind of standalone breakeven before we factor in the churn benefits because it just seems hard we as we add 14,000 customers quarter and look at $80 million resolution that we are going to get to that point if you kind of look the other direction got rid of that added $80 million to your cash flow stream at a 10 times multiple you guys have a pretty big value boost. I am not sure I kind of understand how you think about value creation in that context. And then just quickly on that Medicare change or the life insurance change, a lot of telecom companies have tried to do this in the course of their labor-union negotiations contract time. It’s always gone over like a lead balloon. Could you kind of be specific about what you've talking about with unions to when your next big... next big contracts are coming up and what if any kind of fall out could emerge from making this change? Thanks a lot.

Dave, why don't we take from that point... when we start with... let me introduce Net Holland who heads a [inaudible] here and then I'll come back to the wireless question.

The unions are been revised virtually as we speak. We do not have a volume obligation nor do we have a requirement in any of our labor contracts to continue this kind of benefit for retirees.

On the wireless question, we are different then a lot of other MVNOs and that it really depends upon when you look at the economics whether you look at on a fully allocated basis, how many cost you allocate to the wireless business versus truly incremental or fully distributed. The things what we were doing to make sure that we get to profitability are exactly some of the things I mentioned earlier which is making sure that we are not offering things like large buckets and free nights and weekends in our kind of existing plans, really understanding what the economics are of MVNOs and how they work and we just need to get better at leveraging our existing channels, our retails. We also have existing retail, which is crucial to being a successful wireless company. As a matter of fact this quarter, we just opened our 52nd retail store in Lebanon, Ohio. That being said, I do not disagree at all or have any problems with your skepticism. That will be one of the few MVNO companies to build a profitable business. We are taking a risk here, but we really do believe that by adding features and capabilities that have never been in the market before. Use integrated capabilities that I was describing earlier that make wireless work with landline that there is a new untapped market there that where we can differentiate ourselves vis-à-vis the other wireless carriers. If we were just going to be reselling that, and we were just an identical company in terms of our offers, I don't think we could be successful. We wouldn't have the strength to compete with AT&T wireless, Verizon, or Sprint or what-have-you; we have to come up with something different. We are just on the beginning of that journey, it’s unproven. I would continue to maintain your skepticism until we have demonstrated that that we can get there. So we still do have dilution in our business. We have a plan in place to get this thing breakeven and as you mentioned, there are significant incremental benefits to the company in terms of churn reduction, which is where a lot of the real net financial value as the shareholders in Embarq. So we think it's the right strategy but it’s hard work. Thanks.

Dave, thank you.

I might add on to that just to make sure everyone is clear on the guidance on wireless. While here all the guidance has gone up, largely that is only due to the fact that we have refined our accounting methods. So in other words while it's going up roughly say 20 million in terms of the wireless delusion, that was 20 million that otherwise would have been the wireline side of the business. So it's really just to refining our estimate of the cost allocable to wireless and it's not an incremental cost dutiful business.

Thanks for that Gene.

Your next question comes from Michael Rollins with Citigroup.

I had a question about the cash flow statements. This is the second sequential quarter. Wherein the cash flow statement, you had a significant stock-based compensation expense and so some of your peers exclude that from normalized EBITDA. I am curious if you could confirm whether or not that's been excluded from your definition of EBITDA and then if you have some guidance in terms of what that non-cash compensation will look like from a full year perspective? Thanks.

Those amounts are not excluded. Michael they are included in the we don't usually dig here but in the operating income numbers we provide and probably not in position right now to give guidance from that specific amount.

Okay. Thanks.

Thanks.

Your next question comes from Gaurav Jaitley with UBS.

Great. Thanks guys. This is Gaurav Jaitley. Good afternoon. I realized it's been it's only been a quarter since you last increased your dividend but given your better than expected outlook for access lines, for revenue operating income given all the initiatives on the cost side including having Trevor multitask as though benchmarking of that, what... how do you think about use of cash from here. I mean have you got extra $30 million from the benefit plan changed for next year. How often do you look at this and with the leverage at 2.2... low two times what kind of comfort level you have with that leverage and have you had conversation with your rating agencies in terms of how much you can take that up without jeopardizing... you must be in great metrics that would be great? Thanks.

How many question was that?

Just one use of cash.

I'll just say overall, as we are going to get in the past, the board plans are regularly evaluate our equity and our dividend polices and we will continue to do so. There is not as kind of set schedule if you will but this is something the board will just continue to look at and so as you mentioned it gives us increased flexibility clearly when the operating performance improves.

Great thanks.

Thanks Gaurav.

Thank you.

Your next question comes from Michel Nelson with Stanford Group.

Yes thanks for taking the question. I was wondering could you give some commentary on what you are seeing in the former Delphi markets in Florida in terms of cable to avoid competition there? Thanks.

Most large exposure to Delphi is in Virginia around the Charlotte area but not a whole lot in Florida.

But the lines of they... the lines that they have previously had not rolled out voice to Michael they... we have not in this quarter seen them rollout voice to, so its still a potential for this year. We are kind of been waiting to see more but it is obviously hard to for us to predict.

Okay thanks.

Thanks Michael.

Your next question come from Tom Fitz [ph] with Lehman Brothers.

Yes thanks for taking the question. You had mentioned special access as a source of strength this quarter. Could you characterize the strength to whether it was wireless backhaul whether it was corporate demand and whether there was any geographic emphasis or was it more in your metro markets than your rural markets? Thanks.

Tom I think in the script we point to both wireline and wireless because they are both contributing. And so between metro and rural it's a little bit hard to distinguish but between the two market segments, wireline and wireless we feel good about the trajectory in both of those.

Okay. Great. Thank you.

Thanks Tom.

Your next question comes from Mike McCormack with Bear Stearns.

Thanks guys. Can you give us a sense the margins in what obviously the slower seasonal quarter, it looks like I know last year is a not great comp but last year's quarter from first to second, you saw some pretty good relief on SG&A and cost of service and yet, the seasonal benefit maybe on the cost side didn't seem to appear this quarter. Was there something else in the cost that we should be thinking about and then hit the... on the second one but on business line weakness, I think you made a comment about either business was closing or something on the economy. There is something... is there trend beginning there that we are seeing some pressure in the business market from economic pressures? Thanks.

Let me take yours and reverse as well. Now this is Tom McEvoy, who is head of Business Markets who will address your second question.

Thanks Dan. Hey Mike this is Tom. We are definitely seeing some economic pressure around business closure and that was mentioned in the script. Our losses as Dan mentioned to competitors is actually down in the quarter. The good news is although we see disconnects increased to business closure our overall revenues continues to grow and our revenue per site or in the terms damage using kind of our arc continues to grow in the business sector. So we see a healthy economy of businesses buying more products from us especially larger bandwidth price specifically in Ethernet but we do see some of the business closures taking place.

Is that a trend that's just beginning. Is it something that we should be thinking about going forward or is it just sort of lumpy and happens here and there?

We've seen the trend probably over the last six months; we've seen business closures higher than we've seen same period last year. So it's definitely something we are keeping our eyes on.

And Mike, this is Gene. On the other question in comparing to the first quarter and second quarter last year. I think there is two items that I would mention, one is we are now at full overhead levels as we're coming out the spin off we weren't fully staffed up and ramped up so that impacted second quarter of last year favorable. The other thing you may recall the long distance situation we had last year where in 2Q, we weren't aware that Sprint was going to be bonus more to a long distance that didn't catch up until 3Q and of course now we are at normal break. So I think those are two items unique to the second quarter last year.

Thanks guys.

Thank you Mike.

Your final question comes from Kent Custer with A.G. Edwards.

Thanks for taking the question. I just wanted to ask if you could talk a little bit about what you are seeing in terms of cable competition. You mentioned the freight increase and the footprint and some new offering to the lower end. Is pricing stable at the more traditional broad been with levels and are you seeing more competition in terms of increase in bandwidth? Thanks.

I'll let Mark Kennien [ph] talk about that from a consumer point of view and then Tom McEvoy from a business perspective. Go ahead Mark.

Okay. As Dan said, we are seeing some increased competition in the high-speed Internet business and saying cable companies increase their speeds on the high-end a bit. Mostly the same prices they are charging, or we are charging before. How they have steered their service and are going after dial conversion customers with $20 price points for 1.5 service. And so we are seeing an increase in competition in high-speed Internet. On the voice side, I think most of our information implies that our disconnect rate is really flattened considerably since their early days of launch in '04 and '05. So I am not seeing a whole lot on the voice side particularly on the pricing front still very centered around the $40 price point for limited service and obviously in bundles both high-speed Internet and voice have been discounted but still those price points are in the $99 range. I think they are pretty stable quite frankly on the pricing front.

On the retail business side specifically in the voice area we really haven't seen a big change in the level of competition quarter-to-quarter or at all this year. What... the thing we are seeing happening more on the high-speed Internet side in the small biz sector, we definitely see several cable companies coming out with a business class high-speed Internet product which several in our markets we hadn't seen in the past. So we have got some very, very value-added bundles that we have put out in that market and we have been very successful to continue to bring on acquisitions of customers and also retain those high-speed Internet customers.

Thank you very much.

Thanks Kent. And that will unfortunately have to be the last question because we are out of time. If you would like to listen to a replay please visit our website investors.embarq.com. Thanks again for joining us and have a good evening.