Equillium, Inc. (EQ) Q4 2008 Earnings Call Transcript

Good afternoon. My name is Kristy (ph), and I will be your conference operator today. At this time I would like to welcome everyone to the EMBARQ fourth quarter 2008 earnings release call. (Operator's instructions) Thank you, Mr. Erxleben. You may begin your call.

Thank you, Kristy. Good afternoon, everyone, and thank you for joining us for EMBARQ Corporation's fourth quarter 2008 investment community update. With me today are our Chief Executive Officer Tom Gerke and Chief Financial Officer Gene Betts. In addition, Tom McEvoy, President of our Business Markets Group and Harry Campbell, President of our Consumer Markets Group, will join us for the Q&A session at the end of the call. Before we get started, there are two items I'd like to bring to your attention. First, if you've downloaded the fourth quarter presentation from our website, please turn to the cautionary statement on slide two. As that slide indicates, our comments today will include forward looking information and expectations involving a number of risks and uncertainties that could cause actual results to differ from our expectations. With that in mind, I would strongly encourage everyone to review the detailed discussion of risks and uncertainties included in our SEC filings, and particularly the risk factor section of our annual report on form 10-K. Second, during our remarks today we will be referring to certain non-GAAP measures. In the appending of the presentation, as well as in the definitions' section of our press release, we've included reconciliation of these measures to the appropriate GAAP measures. Again, I would encourage everyone to take a few moments to review those reconciliations so it's perfectly clear how the non-GAAP measures are derived. Okay. With those very important topics covered, I will turn the call over to Tom.

Thanks, Trevor. Looking back on 2008, it's been a challenging year for businesses, literally around the globe. At EMBARQ, in addition to dealing with many of the same economic issues, we have, of course, been working on our announced merger with CenturyTel over the last few months. It wouldn't be unusual for a company to get distracted under those circumstance, so I am proud of the EMBARQ team for maintaining its focus and delivering solid results. Cash flow in particular was very strong in the fourth quarter and throughout 2008, exceeding the upper end of our most recent outlook, and far surpassing what I think many people would have predicted at this time a year ago. To produce strong cash flow numbers, we've had to be very diligent in managing expenses and capital expenditures. As noted on slide four, the impact of the economy, which has been evident in our top line results over the last few quarters, increased a bit in Q4. In our telecom segment, revenue was down 5.3% year-over-year to $1.39 billion for the fourth quarter. For the full year, telecom revenue dipped 3.6% to $5.69 billion. Access line losses remain the key driver of the decline in telecom revenue, and in the fourth quarter, total access lines declined by 157,000. That's 66,000 more lines than we lost a year ago, but represents a sequential improvement from the third quarter of 2008. This quarter-over-quarter improvement was driven by our consumer markets' group. And while the year-over-year comparison was not as favorable, the gap versus the prior year narrowed from the November through January time period. Thus, while lower gross additions could continue to impact net line losses, there appear to be early signs of improvement in our consumer line trends. Unlike consumer, line-loss trends in our business markets group got a bit worse both sequentially and year over year. The deterioration hasn't been dramatic, but we have seen an increase in the number of disconnects attributable to the economic slowdown. Moving from voice revenue to the data category, Q4 revenue increased 4.7% from the prior year period, reaching $202 million. Full year data revenue also grew 4.7% totalling $801 million. Although the rate of growth has slowed somewhat, both business and wholesale data continue to benefit from the favorable secular trends. In fact, in the current environment, many business customers are talking to us about what data and related value added services can do to help them increase the efficiency of their operations. Enabling this kind of conversation, whether it's about increased efficiency, added functionality, or enhanced security, is a focus of our business product and service strategy. In Q4, we added to our portfolio of security solutions with the launch of EMBARQ Security Assessment Services and Managed Security Services for medium and large enterprise customers. EMBARQ Security Assessment Services are designed to identify security vulnerabilities and provide guidance on the actions necessary to address them. Areas of focus include prevention of hacking, web application and wifi network security, and proper firewall configuration. EMBARQ Managed Security Services offer 24 hour monitoring and management of network security devices. In addition to helping reduce costs, these services can help reduce the risk of security incidents and allow the company's internal IT staff to focus on more strategic projects. The final revenue category I'll discuss today includes consumer and business high speed internet series. In the fourth quarter, HSI revenue grew more than 10% year-over-year to $141 million, while full year revenue was up more than 12% to $549 million. We added 24,000 new HSI subscribers in Q4 which is below the prior year level, but consistent with our results in the second and third quarters. HSI ARPU was also relatively consistent with the last two quarters, holding in the mid $33 range. As we continue to grow our subscriber count, we are also expanding the portfolio of products and services that are available to our high speed internet customers. In the first quarter, we enhanced our business class HSI offers with several value added services. And for consumers, we focused on providing video, music, and other content, via myembarq.com portal. Our latest HSI related initiative is a new computer support service we call RescueIT. Leveraging capabilities, we already have, to a large degree — this service essentially makes us the IT help desk for consumers and small businesses. RescueIT provides support for a wide range of computer issues. Among other things our technicians can help install or troubleshoot hardware and software, setup a new computer or home network, and deal with the security threats and virus problems that have become all too common. One of the key advantages we have in providing this service is that we can quickly check customer's network connection before moving on to diagnose other potential issues. Although we do offer onsite service, our remote support capabilities have proven to be effective, resolving well over 90% of our customer issues in our experience so far. After rolling out RescueIT for consumers across our footprint in third quarter, we are already seeing good results. In fact, we added 13,000 RescueIT subscribers in Q4, which is more than half the number of consumer HSI customers that we added in the quarter. Recently, we made RescueIT available to SOHO and small business customers as well. Between consumer and business, we think this can be a $10 million revenue stream in 2009. Besides providing a new source of revenue, RescueIT is important because it builds on our commitment to delivering a superior customer experience. In the second half of 2008, the positive impact of that commitment was reinforced when our wholesale business and consumer market groups were all recognized for their service quality. For the second year in a row, wholesale markets won three national best in class awards from Atlantic ACM, a leading telecom research, consultancy, and benchmarking firm. Based on more than 2,000 customer ratings, awards were presented to our wholesale group for overall customer service, timeliness of provisioning, and quality of sale representatives. EMBARQ Business received recognition from Atlantic ACM for the first time this year. Like wholesale, our business team received awards for overall customer service and timeliness of provisioning, as well as for enterprise data, price, and quality. Our consumer group meanwhile, made significant progress in JD Power's 2008 Residential Voice Study, improving from the fourth quartile to the second quartile, among the 10 providers that were measured in the customer service category. Of course, our objective is to be number one, and we have several projects ongoing that we believe will go a long way to making us achieve that goal. One example is a trial we have underway that replaces automated voice response units with live customer care representatives. Research shows that dealing with automated menus and multiple call transfers is a major source of customer frustration. The question of course is whether such a program can be implemented economically. Although we haven't concluded the trial yet, early indications are that increased accuracy of call transfers may in fact, be able to offset the incremental cost of live care representatives relative to an automated solution. This focus on customer service provides a good transition for a brief update on our strategic merger with CenturyTel, a shared commitment to serving our customers, communities, and shareholders, is one of several things I think will contribute to the success of the combined company. Although there is still work to be done before we close the transaction, we've made a great deal of progress, including the overwhelming approval of the merger by shareholders of both companies, DOJ clearance, written approval by the state of Mississippi, and at least provisional approval by Georgia and Florida. We're still working towards approval by the FCC and regulatory bodies in the remaining states, and those processes are proceeding consistent with our expectations. In anticipation of a second quarter close data, the integration planning process is well underway. Senior leadership positions have been announced and additional leadership positions are expected to be finalized shortly. IT platform selections have been made in key areas such as customer care, billing, enterprise resource planning, and workforce management. And project managers and subject matter experts who will drive the integration on a day-to-day basis have been identified for every functional area in both organizations. In closing, the work we've done with CenturyTel since the transaction was announced has reinforced my belief in the potential of the combined company. Our complimentary, strategic, operational, and financial strengths, not only enable us to maintain our momentum, but provide opportunities for even greater success in both the short and long term. Of course, as we continue to work towards prompt completion of the merger, we remain very focused on the performance of our standalone business. In 2008 we successfully managed through a difficult economy and posted solid results, and I believe we have the ability to do the same in 2009. Our outlook for the future is among the topics Gene will discuss. So, I will let him take the call from here.

Thanks, Tom. I'll begin with an overview of revenue for our consumer wholesale and business organizations. As you can see on slide seven, each group's results reflect the comments Tom made about the uptake and economic pressure, but there are also trends that mitigate the impact in each area. In consumer, the effect of access (inaudible) is moderated to some degree by ongoing growth in high speed internet revenues. As a result, at 602 million in the fourth quarter and 2.52 billion for the full year, a decline in consumer revenue continues to be much lower than the rate of access line loss. Another factor affecting our consumer comparisons is the decision we made in early 2008 to begin winding down our wireless business. Naturally, fourth quarter revenue was hurt by that decision, but wireless profitability has improved substantially. In fact, the wireless business made a $3 million positive contribution in Q4 compared to dilution of 14 million a year ago. For the full year, dilution declined from 77 million in 2007 to 15 million in 2008. In our wholesale group, revenue declined to 403 million in the fourth quarter and 1.64 billion for the year. These results reflect lower switched access revenue, partially offset by growth and spacial access services provide other wireline and wireless carriers. Finally in business, data growth is offsetting much of the decline in voice revenue. As a result, business revenue was down only modestly overall, totalling 381 million in the fourth quarter and 1.53 billion for the full year of 2008. Although the telecom segment represents the majority of our operations, we have also operated a product distribution business for many years. Two weeks ago however, we announced an agreement to sell EMBARQ Logistics to KGP Telecommunications. Procurement, logistics, and supply chain services are KGP's primary focus, so we expect their expertise in the assets of EMBARQ Logistics to be a very effective combination. The transaction is expected to close before the end of the first quarter which will obviously reduce our headline consolidated revenue numbers going forward. However, given the low margins inherent in the logistic segment, we expect limited impact on cash flow and improvement in our consolidated operating margin of approximately 200 basis points. Turning to slide eight, our profitability in the fourth quarter and throughout 2008 has been solid, in spite of the top line pressure we've experienced. Whether you look at operating income, operating margin, or earnings per share, there has been marked improvement from prior years. Operating income rose to 418 million in the fourth quarter and 1.63 billion for the full year. Compared to full year 2007 results, operating income increased 8.6% in 2008. Operating margin was also much improved from the year ago level, increasing to 26.7% in 2008. As I mentioned earlier, our operating margin would have been approximately 200 basis points higher for the full year excluding the results of the logistic segment. Items impacting Q4 expenses included an $11 million favorable severance adjustment to cost of service. Offsetting that amount was a $16 million negative severance adjustment recorded in SG&A. Thus, the net impact of severance in the fourth quarter was -5 million. There were also a handful of nonrecurring items besides severance that affected operating expenses in the quarter. Among those items were (inaudible) for compensation and benefits as well as property tax and other small adjustments. In total, these items had a positive impact of approximately 20 million in the quarter, with about half reflected in cost of service and half in SG&A. Finally, below the line income taxes were about 8 million higher than what you would calculate using our normal 37.5% rate. That amount is attributable to a nonrecurring adjustment related to state income taxes. In addition to solid operating profitability, earnings per share benefited from the execution for a share repurchase program. Over the first three quarters of the year, we were able to repurchase 11.8 million shares which is more than 7.5% of the total outstanding at the beginning of 2008. As a result, diluted earnings per share increased almost 9% from the prior year period to 1.34 in Q4. For the full year, diluted earnings per share increased more than 17% to a total of $5.22. This solid income performance, combined with increased capital efficiency translated into very strong cash flow results. As highlighted on slide nine, capital expenditures and cash flow before dividends both improved substantially from prior year levels. Focusing first on capital expenditures, there is a claim that new home construction that has been a headwind for access lines continues to provide a strong tailwind for capital expenditures. In fact, capital for new service addresses was more than $100 million lower in 2008 than 2007. We have also taken steps to improve the efficiency of infrastructure deployment that's enabled us to maintain our level of investment in growth products and new capabilities while improving overall capital efficiency. As a result, total 2008 CapEx of 675 million was 144 million better than the prior year. As a percentage of telecom revenue, there was also marked improvement from near 14% in 2007 to less than 12% in 2008, which is more consistent with our industry peers. The combination of lower capital requirements and solid profitability resulted in record cash flow before dividends of 295 million in Q4. For the full year, cash flow was just shy of 1.1 billion a major improvement from the prior and above the upper end of our expectation for 2008. One item on the balance sheet I would bring to your attention is our liability for defined benefit pension plans. Due to a decline in asset values over the last year, plan obligations exceeded assets by 1.1 billion on an accounting basis a year in. Although EMBARQ is not required to make any contributions in 2009 under ERISA funding guidelines, we have historically chosen to contribute more than the minimum required. In 2009, we expect the pretax contribution to be approximately 150 million compared to contributions of 75 million in each of the last two years. Looking ahead to 2009 as Tom indicated earlier, closing our strategic merger with CenturyTel is a key priority. However, we also remain focused on producing solid operating and financial results. In light of the economic environment, that means continue diligence in terms of expense and capital management. Although we've made a great deal of progress over the last 2.5 years, there are opportunities for additional improvement in both expense and capital efficiency. In the first quarter of 2009, we expect to see an incremental expense benefit from the workforce reduction we undertook over the course of the third and fourth quarters of 2008. Last quarter, we indicated that the annual benefit would be in the $70 million range, and though we realized some of that in Q4, an annual run rate of approximately 60 million remains to be realized in 2009. We continue to pursue process improvement initiatives that have a benefit to us as a standalone company and also can be leveraged after the merger closes. For example, we have a project underway that will automate order flow to the provisioning and billing platforms utilized by our wholesale markets group. The resulting increase in speed and accuracy should improve both the customer experience and our operating efficiency. We also plan to make more information available to our wholesale customers via the web, increasing the transparency of the process. In our procurement group we continue to focus on optimizing inventory levels and reducing purchasing costs. In addition, we expect process improvements implemented in 2008 to further enhance the efficiency of capital deployment in the field. With ongoing focus and discipline, we're optimistic about continuing our solid 2008 performance into 2009. The outlook we're providing today covers the first half of the year given that we expect the merger with CenturyTel to close in the second quarter. As you can see on slide 10, we expect revenue to remain under a bit of pressure for the near term. As Tom indicated earlier, there appears to be early progress in consumer access line trends, but we haven't built substantial improvement into our expectations at this point. Thus, our first half telecom revenue outlook is 2.68 billion to 2.72 billion. This compares to the 2.9 billion we reported for the first six months of 2008. Given the likelihood that new service addresses will remain at a relatively low level, we expect capital expenditures to be less than 300 million in the first half of 2009. Doing the math, that would be a little over 11% of our first half outlook for telecom revenue. Finally, we expect expense and capital discipline to largely offset top line pressure again in 2009. Thus, our first half outlook for cash flow before dividends of 560 million to 580 million compares favorably to the 560 million we reported in 2008. I would also note that this range excludes any accounting gain or loss we might record on the EMBARQ logistics transaction. On that note I'll turn the call over to Trevor again so he can facilitate the Q&A session.

Thanks, Gene. While the operator opens the line for questions, I would ask everyone to limit, if possible, the number of multiple and multi part questions that are asked. It looks like we have about 20-25 minutes available for Q&A at this point and we would like to get to everyone who is in the queue if possible. Kristy, before you introduce the first question, would you mind reviewing the process for submitting questions?

(Operator's instructions) Our first question comes from Batya Levi from UBS. Your line is open. Batya Levi – UBS Thanks a lot for the question. I wanted to follow up on the margins. If I adjust for the two (inaudible) you had mentioned, I think margins were flatter sequentially at about 44% of sales. I wanted to check if that's sort of in the ballpark. And also, looking into the first half, how much should we bake in for higher pension expense? And along with that and the top line pressure that you suggested will continue, do you expect the workforce reduction to offset that so basically should we expect margins to continue to move up in the first half from the fourth quarter level? Thanks so much.

On your first question, I think you were referring to our EBITDA margin of approximately 44%, which includes the EMBARQ Logistics impact. Just to make sure we're clear on this, we said that the impact of removing EMBARQ Logistics on operating income margin was approximately 200 basis points. It's more like 250 to 300 basis points on EBITDA margin. So, post the sale of that, we would expect that to go up by 250 to 300 basis points from the 44% level. I think your second question had to do with pension expense and this year, in 2008, we recorded approximately $30 million, and that excluded expenses related to employee separations. Our guidance accounts for an additional 10 million of pension expense in 2009. Now, you might think well, that doesn't seem like a lot relative to what's happening in the market, but keep in mind that the accounting methodology uses a five year smoothing assumption, and so actually when the markup was performing better in previous years, we weren't recording as much benefit due to the smoothing and likewise when you have a bad year it isn't as impactful. Also, some of the other assumptions, in particular the discount rate — to use the discount to liability is very significant. As you can guess, with interest rates increasing, that increases the discount rate which has an offsetting effect on the liability. So, net-net we expect a $10 million increase in expense in '09. And as I said in my script, we expect the funding to be more like 150 million pretax, that would be like 100 million after tax, as opposed to 75 million pretax the last couple of years. And your final question was on the top line pressure, do we expect that to be largely offset by workforce reduction — Batya Levi – UBS That's right.

— and as I indicated in my script, whether it'll be dollars for dollars is hard to say, but we expect a substantial loss out of that. Batya Levi – UBS Okay. Thanks a lot.

Batya, it's really clear, I think, in the guidance that year-over-year the revenue is down somewhere between $180-220 million, but our cash flow expectations are equal to last year or slightly better. Between 50 and 60 is coming from CapEx and the rest is coming from increased efficiency which we've delivered consistently over the last 2.5 years since the spend. Batya Levi – UBS Okay. Great. Thank you.

Our next question comes from Frank Louthan with Raymond James. Your line is open. Frank Louthan – Raymond James Just to maybe build on that a bit, how should we think about, and maybe your cash flow guidance does assume this, but the proceeds from the logistics and then I think you said $150 million pension payment. What are you going to do with the proceeds and is that 150 going to be paid prior to the close or should we think about that readily throughout the year? Is that going to be something that CenturyTel will be paying into post the close? How should we think about that from a cash flow perspective.

On the pension plan, the payments are not due until September 15th, so there is a year lag so you make a payment based on '08 actuarial results by September 15th of '09. And so typically those payments aren't made until later in the year, which presumably could be after the close of the transaction. Now, there's no preclusion on putting the funds in later, but I think our operating assumption would be that would be a post close contribution. And I'm sorry, Frank, what was the other part of the question? Frank Louthan – Raymond James The proceeds from selling a logistics, is there any debt at that level and what do you plan to do with that or is that just going to add to the cash position before the closing?

No. It would just be incremental cash and there would be some timing because there is basically three components. There would be a selling price, there would be working capital improvement as we do not need to carry as much inventory as we used to, and then there would be tax benefits. We are filing our 10-K probably tomorrow and there will be some further disclosures in there. Frank Louthan – Raymond James Great. Thank you.

Our next question comes from Simon Flannery with Morgan Stanley. Your line is open. Simon Flannery – Morgan Stanley Thank you very much. Good afternoon. I wanted to just come back to the line loss figures. Perhaps you could just expand a little bit on your comments about November through January? You're saying that you're seeing fewer disconnects and is that because of less cable competition or foreclosures stabilizing in some of your markets? If you can comment on anything around what's this geographic impact, is it fairly broad based now or are you still seeing more pressure in certain markets than others? Thanks.

Simon, this is Harry. I'll start with that from a consumer standpoint and then we'll see if Tom wants to add anything from the business. Specifically what we're talking about in the period from November to January is the gap versus year ago has gotten smaller. So that's a way to think about it. We continue to have a growth add issue, and it's a lot of economically driven — in fact, our losses to cable just have not been accelerating at all. In fact, it's flat to kind of down. What's happening is there's a lot more economic pressure going on than there is competitive pressure. Your question direction about geography — we feel it everywhere, but there are pockets that are worse. We don't talk about that from a metric standpoint, but it's very straightforward when you can see some of the unemployment numbers across the country. And we just feel like what's happened is that the trends have started to firm up a bit.

And from a business perspective, Simon, similar to what Harry was talking about, the economic pressure. Our existing customers are staying with us, but we are seeing them order less of line based services, and where they're shrinking locations, we see them pull line based services out. And we continue to see really great growth though on that beta and IP product set. And I think in discussions we've had before, we don't count those as voice grade equivalent lines so when we substitute a product with a (inaudible) IP product, it comes out in our line. And similar to Harry, it's pretty much spread across where we operate. Simon Flannery – Morgan Stanley Okay. Thank you very much.

Our next question comes from Michael Nelson with the Stanford Group. Your line is open. Michael Nelson – Stanford Group Company Hey. Thanks for taking the question. My question is regarding your cost-cutting initiatives. Now you've obviously shown significant improvement as evidenced by the margin expansion in the quarter. I wonder if you can talk about what you're doing to improve your productivity, how you monitor the call load and relate it into the operating leverage in your business, and maybe what percent of your costs you consider variable? Thanks.

On that let me jump in. As I think I may have mentioned before on calls, we are a big believer in two or three dimensions of capital efficiency and expense efficiency. One which we call load, price, and productivity, is basically any large process, and a customer call center is a perfect example. We keep track of the inbound load, how many calls are coming in. We keep track of the productivity of the people in the center and the unit costs of course and whether those are improving year over year. And we make almost real-time adjustment in Harry and Tom's organization. I would say our workforce, it turns over a lot, so it's relatively to make adjustments. We've closed four or five call center sat least in the last year or two. There's loads that have come down, not just due to somewhat lower customer base, but also because of fewer reasons for people to call those customer service centers as customer service improves. Likewise in network, and really any area where there's a large volume of recurring transactions and good metrics that you can track, we do that automatically. In addition, over the last year or so we've rolled out these other initiatives which are for things that aren't quite as easy to monitor where we need to cross departmental lines and try to get every aspect of capital efficiency and expense efficiency, and also to benchmark not just other telecom companies, but to benchmark to best in class which may not be within the telecom sector.

This is Tom with business. We also have a lot of initiatives around allowing our customers to do business with us through the web, and that really takes a lot of costs out of the business if we're not having to handle telephone calls. So, for instance, in the business base we ruled out a portal and a platform in the fourth quarter that allows our customers to view their bills on the web, to look at the data, to sort the data they want to look at, buy, and spend time using it to make their organizations more efficient in the way they look at their costs by department.

Now I think, Michael, you had also asked to what extent do we consider our costs to be variable, and I think a surprisingly high amount compared to the fairly widespread perception that there's a large fixed cost at telecom which I think is true in terms of the initial network build out of a totally new network. But of course our network has been in existence for years, so what we — on the back of an envelope, if we lose a dollar of revenue, we would assume kind of on average that 50% of that basically comes out almost automatically through these LPP load price productivity stats that we run and then we usually have an objective of trying to get another 25% or so, and hopefully all of it if we could, through other productivity improvements and just continual process improvements. So, I think it's more variable than people recognize because there are a lot of monthly costs like building, customer care, etcetera, that relate to that. On the CapEx side, we're asked at times what's our maintenance level of CapEx, and I think roughly speaking, probably we would say 50% or so, 50-60% is required, but then let me break that down. When we say that 50-60% is required, a big piece of that is new customers, which technically aren't required, but from a practical standpoint we obviously want to hook up as many new customers as we can. So, we treat that as required. Well, that piece is significant and that has run anywhere, depending on the level of NSAs from probably 32% to 44-45%. So, if you subtract the NSA component, what you conclude is on the capital side they are somewhere and 20-25% is more your kind of minimal CapEx not related to new customers or growth. And again, our 10-K, which we will file in the next day or two has a table in there that I think will provide some more visibility to do that. The only thing I would say, when you look at the table, recall that in the customer connection related number, NSA's is a big piece of that. So, if a table says success based capital, that doesn't include the basic NSA requirements which are more in the base amount. Michael Nelson – Stanford Group Company That is very helpful. Thanks. I appreciate it. Good luck.

Thanks, Michael.

(Operator's instructions).

Kristy, it sounds like we've had our last question for the day.

Actually, we had one more just queue in. It's from Dave Coleman with RBC Capital Markets. Your line is open. Dave Coleman – RBC Capital Markets Oh great. Thanks a lot. Just following up on that last question that about 50-60% of CapEx is required or I guess associated with new service addresses. Is that safe to assume that the 300 million of CapEx for the first half of '09, about 150 million of it, is associated with NSAs?

Okay. Let me back up for a second. I said that 50-60% is what we would consider to be non discretionary, and of that, anywhere — depending on the year from probably 32% — well, let me see. If you have $100 of capital, let's make sure I don't get the percentages confused here — we would say that $50-60 of that is non discretionary. However, depending on the year, $32-43 of that is new service addresses. So, if you take the difference and say well, we wouldn't have to go to a new service address except for (inaudible) cases, but we want to. So, we call it non discretionary because from a business perspective, we want to build new customers. But if you say what's that component beyond building to new customers, it's somewhere in the $0.20-0.25 per dollar of CapEx is sort of that maintenance capital or whatever you would call it. In our 10-K we have some disclosures that will show in addition to what I just talked about, the other $0.45 roughly, is sales success based. It's because of new customers beyond — and NSA we define as just hooking up a line to a house as opposed to providing a new data service or an ethernet service or something like that.

So, Dave, on that $300 million guidance, Gene said 34% is new service addresses, so that means on that $300 million guidance you're going to have roughly $100 million, maybe a little bit more than that in NSA. Dave Coleman – RBC Capital Markets Okay. Great. And then just on the transaction with CenturyTel, you mentioned three states that you've received approval. How many remaining EMBARQ states are required to approve the transaction and are there any states that are taking longer than anticipated or is there any kind of pushback that you're getting from state PUCs?

Yeah. This is Tom Gerke. We're having very solid progress very much as expected, and frankly it really relates to the underlying facts. You've got two strong balance sheets, no new incremental debt. To the extent anything needs to be replaced there's a very small amount and our recently announced revolver amendment that's in place fully takes care of it. Two proven operators, no IT issues, they recently really upgraded to very much state of the art IT. Frankly, good relationships by both companies with the PUCs, so it's not like they've been waiting for an opportunity to discuss some dissatisfaction that they generally have with us, none of that. And frankly, the combination allows kind of the different set of products and services that we each have and in some areas we're out in front of them, in some areas they might be out in front of us to bring those combined products and services across the entire footprint. So, it's just an absolutely compelling case for being in the best interest of the consumers as well as the shareholders as witnessed by the overwhelming support we got there. So, in terms of the states, we've got more or less three there and round figures, roughly a dozen or so, left to work our way through, but we're very satisfied with the progress and therefore feel as good or better about the second quarter than we did when we announced the deal. Dave Coleman – RBC Capital Markets Great. Thank you very much.

Okay. I do believe that's our last question for the day. So, thanks to everyone for joining us and have a good evening.

Thank you, sir. This concludes our conference call for today. You may now disconnect your lines.