Company Updates 2008 Outlook
OVERLAND PARK, Kan., April 29 /PRNewswire-FirstCall/ -- EMBARQ (NYSE: EQ)today announced results for the first quarter of 2008, including recordearnings and cash flow. The company reported total revenues of $1.57 billion,operating income of $434 million, diluted earnings per share of $1.38 and cashflow before dividends of $286 million.
'Improving efficiency continues to be one of our key focus areas and thatwas certainly evident in our earnings and cash flow results this quarter,'said Tom Gerke, EMBARQ Chief Executive Officer. 'Given this strongprofitability and the ongoing growth in high-speed Internet and data revenues,we continue to forecast cash flow improvement for full-year 2008.'
First Quarter Highlights -- First quarter operating income, diluted earnings per share and cash flow before dividends reached their highest levels since EMBARQ became a standalone company in mid-2006. -- Operating income increased 17 percent year-over-year to $434 million. -- Diluted earnings per share increased 31 percent year-over-year to $1.38. -- Cash flow before dividends increased 14 percent year-over-year to $286 million. -- As of April 25th, EMBARQ had repurchased approximately 5.97 million shares at an average share price of $40, which represents 48 percent of the $500 million share repurchase authorization the company announced on January 9, 2008. -- The company recently introduced EMBARQ(TM) eGo(TM), a next-generation home phone that combines the quality and reliability of traditional voice service with Internet-enabled features and functionality. -- For business customers, the company recently announced EMBARQ(TM) Business Security Solutions, which includes desktop, network and e-mail security, as well as continuity services such as back-up, recovery and re-routing.
Financial Results
EMBARQ reported consolidated operating revenues of $1.57 billion for thefirst quarter of 2008, which represents a decrease of 0.4 percent sequentiallyand 1.1 percent from the prior year period. Despite a 7.3 percent decline inaccess lines compared to the year ago period, Telecommunications segmentrevenues declined by 0.5 percent compared to the previous quarter and 1.6percent year-over-year to $1.46 billion. Growth in high-speed Internet anddata revenues partially offset a decline in voice revenue. The Logisticssegment reported revenue of $115 million, which is a 1.8 percent sequentialimprovement and a 5.5 percent increase relative to the prior year period.
The decline in revenue in the first quarter was more than offset byimprovements in operating efficiency and wireless dilution, as well as lowerseverance and spin-off expenses. As a result, consolidated operating incomeimproved 17 percent relative to both the prior quarter and prior year period,reaching $434 million in the first quarter.
Operating income was impacted by the following items:
Increase (Decrease) 1Q-08 4Q-07 1Q-07 (in millions) Severance expenses $0 ($31) ($14) Spin-off related expenses $0 ($5) ($9) Net wireless dilution ($14) ($14) ($22)
Diluted earnings per share were $1.38 for the quarter, up from $1.05 inthe year ago period and $1.23 in the fourth quarter.
Capital Expenditures and Cash Flow
Net capital expenditures during the period were $177 million, a decline of1.7 percent year-over-year.
EMBARQ reported cash flow before dividends of $286 million in the quarter,an increase of 14 percent compared to the prior year period.
The company paid a dividend of $0.6875 per share in the first quarter, andrepurchased approximately 3.35 million common shares at a cost of $135million. Through April 25, 2008, the company purchased an additional 2.62million shares at a cost of $104 million.
The company ended the quarter with net debt of $5.6 billion, a sequentialreduction of $187 million.
Subscriber Results
EMBARQ reported a decline of 120,000 access lines in the first quarter,ending with 6.19 million access lines. During the quarter, the company added63,000 high-speed Internet subscribers, bringing the total to 1.34 million.Video net additions totaled 17,000 during the quarter, resulting in thecompany ending the quarter with 217,000 of its customers subscribing to videoservices.
2008 Outlook
The company updated its 2008 outlook originally provided on February 7,2008. Current expectations for the year are as follows:
-- Absolute access lines losses over the remainder of 2008 are expected to be closer to prior year levels than in the first quarter. The company's previous expectation called for access line losses to be flat or slightly higher than 2007 levels throughout 2008. -- Driven by the decision to transition away from its wireless MVNO, the company lowered its outlook for both wireless revenue and telecommunications segment revenue by $30 million. The updated range for telecommunications revenue is $5.72 to $5.80 billion. The previous range was $5.75 to $5.83 billion. -- Wireless dilution is expected to be approximately $20 million, which is within the previously provided range. -- Capital spending is expected to be approximately $780 million, which represents an improvement of $20 million from the previous outlook of approximately $800 million. -- Cash flow before dividends is expected to be between $960 million and $1.0 billion, a $10 million increase from the previous range of $950 to $990 million.
Conference Call
Today EMBARQ will hold a conference call beginning at 4:30 p.m. EDT. Dial-in numbers for the conference call are (866) 245-2310 (U.S. and Canada) and(816) 650-2838 (International). The code required to access the call is38553950. Please plan to dial in at least five minutes before the scheduled
start time. A simultaneous audio webcast of the call and a downloadablepresentation will be available at http://www.embarq.com/investors.
For those unable to participate live, a replay of the call will beavailable until May 13, 2008, by dialing (800) 642-1687 (U.S. and Canada) or(706) 645-9291 (International) as well as at http://www.embarq.com/investors.The accompanying presentation will also be archived and available for downloadat this website.
Cautionary Statement
This news release contains 'forward-looking statements' within the meaningof the securities laws, including statements relating to EMBARQ's outlook orexpectations for earnings, revenues, expenses, depreciation and amortization,asset quality, access line declines, cash flow measures, customer growth,wireless dilution, or other future financial or business performance,strategies or expectations. The words 'estimate,' 'plan,' 'project,''forecast,' 'expect,' 'intend,' 'anticipate,' 'believe,' 'seek,' 'target,''guidance,' 'outlook' and similar expressions are intended to identifyforward-looking statements. These statements reflect management's judgmentbased on currently available information and involve a number of risks anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements. With respect to these forward-lookingstatements, management has made assumptions regarding, among other things,customer and network usage, customer retention, pricing, operating costs,technology, and the economic and regulatory environment.
Future performance cannot be ensured. Actual results may differmaterially from those in the forward-looking statements. Some factors thatcould cause actual results to differ include but are not limited to: theeffects of vigorous competition in the markets in which we operate, includingaccess line loss to cable operators and wireless providers; the impact of new,emerging and competing technologies on our business; the effect of changes inthe legal and regulatory environment and the impact of compliance withregulatory mandates; potential fluctuations in our financial performance,including revenues, capital expenditures and operating expenses; the impact ofany adverse change in the ratings assigned to our debt by ratings agencies onthe cost of financing or the ability to raise additional financing if needed;the effects of mergers, consolidations or other unexpected developments in theindustries relevant to our operations; the failure to realize expectedimprovement in operating efficiencies; the costs and business risks with thedevelopment of new products and services; the uncertainties related to ourinvestments in networks, systems and other businesses; the uncertaintiesrelated to the implementation of our business strategies; the inability ofthird parties to perform to our requirements under agreements related to ourbusiness operations; our ownership of or ability to license technology thatmay be necessary to expand our business offerings; restrictions in our patentagreement with Sprint Nextel; unexpected adverse results of legal proceedingsinvolving our company; the impact of equipment failure or other breaches ofnetwork or information technology security; potential work stoppages; adetermination by the IRS that the spin-off from Sprint Nextel should betreated as a taxable transaction; the volatility in the equity market; thepossible impact of adverse changes in economic, political or other externalfactors, including hurricanes and other severe weather, over which we have nocontrol; and other risks referenced in our Annual Report on Form 10-K,including in Part I, Item 1A, 'Risk Factors', and from time to time in otherfilings of ours with the SEC.
Forward-looking statements speak only as of the date they were made, andEMBARQ undertakes no obligation to update or revise any forward-lookingstatements in light of new information or future events. You should not placeundue reliance on any forward-looking statements, which speak only as of thedate of this release. EMBARQ is not obligated to publicly update or releaseany revisions to these forward-looking statements to reflect any events orcircumstances after the date of this news release.
Selected Financial Data (Unaudited) - Current Period Results Compared toPrior Year
Consolidated 1Q-08 1Q-07 Fav/(Unfav) Net Operating Revenues Voice $1,024 $1,084 ($60) -5.5% Data 198 189 9 4.8% High-speed Internet 133 116 17 14.7% Wireless 16 9 7 77.8% Other services 62 60 2 3.3% Service revenues 1,433 1,458 (25) -1.7% EMBARQ Logistics 115 109 6 5.5% Other product 23 22 1 4.5% Product revenues 138 131 7 5.3% Total Net Operating Revenues 1,571 1,589 (18) -1.1%
Operating Expenses Cost of services 390 417 27 6.5% Cost of products 138 127 (11) -8.7% Selling, general and administrative 358 404 46 11.4% Depreciation 251 270 19 7.0% Total Operating Expenses 1,137 1,218 81 6.7%
Operating Income $434 $371 $63 17.0% Interest expense 104 109 5 4.6% Other expense (income), net (1) 0 1 n/a Income Before Taxes $331 $262 $69 26.3% Income tax expense 119 102 (17) -16.7% Net Income $212 $160 $52 32.5%
Diluted Earnings Per Share $1.38 $1.05 $0.33 31.4%
Telecom 1Q-08 1Q-07 Fav/(Unfav) Net Operating Revenues Voice $1,024 $1,084 ($60) -5.5% Data 198 189 9 4.8% High-speed Internet 133 116 17 14.7% Wireless 16 9 7 77.8% Other services 62 60 2 3.3% Service revenues 1,433 1,458 (25) -1.7% Product revenues 23 22 1 4.5% Total Net Operating Revenues 1,456 1,480 (24) -1.6%
Operating Expenses Cost of services 389 417 28 6.7% Cost of products 33 30 (3) -10.0% Selling, general and administrative 348 392 44 11.2% Depreciation 250 267 17 6.4% Total Operating Expenses 1,020 1,106 86 7.8%
Operating Income $436 $374 $62 16.6%
Logistics 1Q-08 1Q-07 Fav/(Unfav) Net Operating Revenues 115 109 6 5.5%
Operating Expenses Cost of services & products 106 97 (9) -9.3% Selling, general and administrative 10 12 2 16.7% Depreciation 1 3 2 66.7% Total Operating Expenses 117 112 (5) -4.5%
Operating Income ($2) ($3) $1 33.3%
Selected Financial Data (Unaudited) - Current Period Results Compared toPrior Quarter
Consolidated 1Q-08 4Q-07 Fav/(Unfav) Net Operating Revenues Voice $1,024 $1,032 ($8) -0.8% Data 198 193 5 2.6% High-speed Internet 133 128 5 3.9% Wireless 16 16 0 0.0% Other services 62 59 3 5.1% Service revenues 1,433 1,428 5 0.4% EMBARQ Logistics 115 113 2 1.8% Other product 23 36 (13) -36.1% Product revenues 138 149 (11) -7.4% Total Net Operating Revenues 1,571 1,577 (6) -0.4%
Operating Expenses Cost of services 390 399 9 2.3% Cost of products 138 141 3 2.1% Selling, general and administrative 358 404 46 11.4% Depreciation 251 263 12 4.6% Total Operating Expenses 1,137 1,207 70 5.8%
Operating Income $434 $370 $64 17.3% Interest expense 104 104 0 0.0% Other expense (income), net (1) (1) 0 0.0% Income Before Taxes $331 $267 $64 24.0% Income tax expense 119 77 (42) -54.5% Net Income $212 $190 $22 11.6%
Diluted Earnings Per Share $1.38 $1.23 $0.15 12.2%
Telecom 1Q-08 4Q-07 Fav/(Unfav) Net Operating Revenues Voice $1,024 $1,032 ($8) -0.8% Data 198 193 5 2.6% High-speed Internet 133 128 5 3.9% Wireless 16 16 0 0.0% Other services 62 59 3 5.1% Service revenues 1,433 1,428 5 0.4% Product revenues 23 36 (13) -36.1% Total Net Operating Revenues 1,456 1,464 (8) -0.5%
Operating Expenses Cost of services 389 397 8 2.0% Cost of products 33 39 6 15.4% Selling, general and administrative 348 395 47 11.9% Depreciation 250 262 12 4.6% Total Operating Expenses 1,020 1,093 73 6.7%
Operating Income $436 $371 $65 17.5%
Logistics 1Q-08 4Q-07 Fav/(Unfav) Net Operating Revenues 115 113 2 1.8%
Operating Expenses Cost of services & products 106 104 (2) -1.9% Selling, general and administrative 10 9 (1) -11.1% Depreciation 1 1 0 0.0% Total Operating Expenses 117 114 (3) -2.6%
Operating Income ($2) ($1) ($1) -100.0%
Non-GAAP Definitions & Reconciliations
The following non-GAAP (generally accepted accounting principles) measuresshould be used in addition to, but not as a substitute for, the informationprovided in EMBARQ's consolidated financial statements.
Net Debt
Net debt is consolidated debt, including current maturities, less cash andequivalents. EMBARQ believes that net debt provides useful information aboutits capital structure.
Reconciliation - Net Debt 1Q08 4Q07 1Q07
Current maturities $99 $99 $37 Long-term debt 5,575 5,779 6,058 Less: Cash and equivalents (52) (69) (46) Net Debt $5,622 $5,809 $6,049
Net Capital Expenditures
Net capital expenditures are capital expenditures less proceeds fromconstruction reimbursements. EMBARQ believes that net capital expendituresprovides useful information about the capital requirements of its operations.
Reconciliation - Net Capital Expenditures 1Q08 4Q07 1Q07
Capital expenditures 179 263 183 Less: Proceeds from construction reimbursements (2) (3) (3) Net Capital Expenditures $177 $260 $180
Cash Flow Before Dividends
Cash flow before dividends is net cash provided by operating activities,excluding the effects of changes in assets and liabilities and other non-cashitems, less net capital expenditures. EMBARQ believes that cash flow beforedividends provides useful information about its capacity to return value toshareholders and reduce debt.
Reconciliation - Cash Flow before Dividends 1Q08 4Q07 1Q07
Net cash provided by operating activities $593 $397 $480 Add: Changes in assets and liabilities, net of other non-cash items (130) 56 (50) Net Income excluding depreciation 463 453 430 Less: Net Capital expenditures (177) (260) (180) Cash Flow before Dividends $286 $193 $250
Because Embarq cannot accurately predict the level of cash flow fromoperating activities and proceeds from construction reimbursements, Embarqdoes not provide reconciliations to GAAP of its forward looking measures ofcash flow before dividends and net capital expenditures.
Other Financial Measures
Average Revenue per Household is calculated by dividing consumer revenuesby average primary consumer access lines. While this measure is not definedunder accounting principles generally accepted in the United States, themeasure uses a GAAP measure as the basis for the calculation. EMBARQ believesAverage Revenue per Household provides useful information concerning thesuccess of its bundling initiatives and performance in attracting andretaining high value customers.
HSI Average Revenue per Subscriber is calculated by dividing high-speedInternet revenues by average high-speed Internet subscribers. While thismeasure is not defined under accounting principles generally accepted in theUnited States, the measure uses a GAAP measure as the basis for thecalculation. EMBARQ believes HSI Average Revenue per Subscriber providesuseful information concerning the appeal of its high-speed Internet pricingplans and performance in attracting and retaining high value customers.
Reclassifications
Universal Service Fund Receipts and Surcharges
In the first quarter of 2008, Embarq reclassified universal service fundsurcharges related to long distance and wireless services from consumer andbusiness to wholesale. All universal service fund receipts and surcharges arenow reported within the wholesale operating unit. A comparison of operatingunit revenues both before and after the changes is provided below. Prior tothe fourth quarter 2006, universal service fund surcharges related to wirelessand long distance were not material.
As Currently Reported 4Q-07 3Q-07 2Q-07 1Q-07 4Q-06 3Q-06 Operating Unit Revenues Consumer $652 $658 $669 $676 $655 $668 Business 389 388 384 383 377 389 Wholesale 423 427 429 421 470 424 Telecommunications segment 1,464 1,473 1,482 1,480 1,502 1,481 Logistics segment 113 121 123 109 115 125 Net operating revenues $1,577 $1,594 $1,605 $1,589 $1,617 $1,606
As Previously Reported 4Q-07 3Q-07 2Q-07 1Q-07 4Q-06 3Q-06 Operating Unit Revenues Consumer $658 $665 $675 $682 $671 $668 Business 390 391 385 384 381 389 Wholesale 416 417 422 414 450 424 Telecommunications segment 1,464 1,473 1,482 1,480 1,502 1,481 Logistics segment 113 121 123 109 115 125 Net operating revenues $1,577 $1,594 $1,605 $1,589 $1,617 $1,606
Switched Access Lines Beginning in January 2008, EMBARQ no longer includes in its businessaccess line counts lines that support its internal administrative andoperational activities. Accordingly, access line counts for all prior periodshave been updated to reflect this change. A reconciliation of these changescan be found below.
Access Lines 1Q-08 4Q-07 3Q-07 2Q-07 1Q-07
External Access Lines 6,192 6,312 6,403 6,533 6,681 Internal Company Lines 161 162 162 158 156 Access Lines - Previous Reporting Methodology 6,353 6,474 6,565 6,691 6,837
Access Lines 4Q-06 3Q-06 2Q-06 1Q-06
External Access Lines 6,754 6,845 6,967 7,119 Internal Company Lines 154 153 150 149 Access Lines - Previous Reporting Methodology 6,908 6,998 7,117 7,268
About EMBARQ
Embarq Corporation (NYSE: EQ), headquartered in Overland Park, Kansas,offers a complete suite of communications services. The company hasapproximately 18,000 employees and operates in 18 states. EMBARQ is includedin the S&P 500 and is in the Fortune 500(R) list of America's largestcorporations.
For consumers, EMBARQ offers an innovative portfolio of services thatincludes reliable local and long distance home phone service, high-speedInternet, wireless, and satellite TV from DISH Network(R) -- all on onemonthly bill.
For businesses, EMBARQ has a comprehensive range of flexible andintegrated services designed to help businesses of all sizes be moreproductive and communicate with their customers. This service portfolioincludes local voice and data services, long distance, Business Class HighSpeed Internet, wireless, satellite TV from DIRECTV(R), enhanced data networkservices, voice and data communication equipment and managed network services.
For more information, visit http://www.embarq.com.
Embarq Corporation Consolidated Statements of Operations ($ in millions, except per share amounts) (unaudited)
Schedule 1 Quarter Ended March 31, 2008 2007
Net Operating Revenues Service revenues $1,433 $1,458 Product revenues 138 131 Total net operating revenue 1,571 1,589
Operating Expenses Cost of services 390 417 Cost of products 138 127 Selling, general and administrative 358 404 Depreciation 251 270 Total Operating Expenses 1,137 1,218
Operating Income 434 371 Interest expense 104 109 Other (income) expense, net (1) - Income Before Income Taxes 331 262 Income tax expense 119 102 Net Income $212 $160
Basic Earnings Per Share $1.39 $1.07 Basic weighted average shares 152.7 150.2
Diluted Earnings Per Share $1.38 $1.05 Diluted weighted average shares 154.1 152.4
Embarq Corporation Condensed Consolidated Balance Sheets ($ in millions)
Schedule 2 March December 31, 31, 2008 2007 (unaudited)
Assets Cash and equivalents $52 $69 Accounts receivable, net 579 616 Inventories, net 128 138 Prepaid expenses and other current assets 182 163 Total current assets 941 986
Net property, plant and equipment 7,659 7,748 Prepaid pension asset 126 108 Other noncurrent assets 62 59 Total noncurrent assets 7,847 7,915
Total assets $8,788 $8,901
Liabilities and stockholders' equity Current maturities of long-term debt $99 $99 Accounts payable 404 387 Payroll and employee benefits 140 208 Accrued income taxes 153 27 Accrued operating taxes 90 97 Deferred revenue 200 202 Accrued interest 136 56 Other current liabilities 107 122 Total current liabilities 1,329 1,198
Long-term debt 5,575 5,779 Benefit plan obligations 320 320 Deferred income taxes 1,124 1,130 Other noncurrent liabilities 207 210 Total noncurrent liabilities 7,226 7,439
Stockholders' equity Common stock 2 2 Paid-in capital (232) (231) Retained earnings 728 623 Accumulated other comprehensive income (loss) (130) (130) Treasury stock, at cost (135) - Total stockholders' equity 233 264
Total liabilities and stockholders' equity $8,788 $8,901
Embarq Corporation Condensed Consolidated Statements of Cash Flows ($ in millions) (unaudited)
Schedule 3 Quarter Ended March 31, 2008 2007
Operating Activities
Net income $212 $160 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 251 270 Deferred and noncurrent income taxes (20) (36) Provision for losses on accounts receivable 21 17 Stock-based compensation expense 9 14 Net losses (gains) on sales of assets - (3) Other, net 11 11 Changes in assets and liabilities: Accounts receivable 16 14 Inventories and other current assets (15) (28) Accounts payable and other current liabilities 133 75 Noncurrent assets and liabilities, net (25) (14) Net cash provided by operating activities 593 480
Investing Activities Net capital expenditures (177) (180) Proceeds from sales of assets 2 17 Net cash used by investing activities (175) (163)
Financing Activities Changes in debt, net (205) (360) Dividends paid to stockholders (107) (4) Repurchase of common stock (115) - Common stock issued 4 35 Other, net (12) 5 Net cash used by financing activities (435) (324)
Change in Cash and Equivalents (17) (7)
Cash and Equivalents at Beginning of Period 69 53
Cash and Equivalents at End of Period $52 $46
Embarq Corporation Operating Statistics (Revenues in millions; lines and subscribers in thousands) (unaudited)
Schedule 4 1Q-08 2007 4Q-07 3Q-07 2Q-07 1Q-07 Service and Product Revenues Voice $1,024 $4,238 $1,032 $1,051 $1,071 $1,084 Data 198 765 193 195 188 189 High-speed Internet 133 489 128 124 121 116 Wireless 16 51 16 15 11 9 Other 62 243 59 61 63 60 Service revenues 1,433 5,786 1,428 1,446 1,454 1,458 Logistics 115 466 113 121 123 109 Other 23 113 36 27 28 22 Product revenues 138 579 149 148 151 131 Net operating revenues $1,571 $6,365 $1,577 $1,594 $1,605 $1,589
Operating Unit Revenues Consumer $656 $2,655 $652 $658 $669 $676 Business 381 1,544 389 388 384 383 Wholesale 419 1,700 423 427 429 421 Telecommunications segment 1,456 5,899 1,464 1,473 1,482 1,480 Logistics segment 115 466 113 121 123 109 Net operating revenues $1,571 $6,365 $1,577 $1,594 $1,605 $1,589
Access Lines (1) Consumer 4,172 4,272 4,345 4,461 4,588 Business 1,861 1,876 1,887 1,896 1,909 Wholesale 159 164 171 176 184 Total 6,192 6,312 6,403 6,533 6,681
Average Revenue per Household (HH) Consumer revenue $656 $652 $658 $669 $676 Average households 3,926 3,997 4,076 4,180 4,261 Monthly revenue per average HH $55.70 $54.37 $53.81 $53.35 $52.88
High-speed Internet Lines Consumer 1,132 1,074 1,017 963 916 Business 167 164 160 154 149 Wholesale 41 39 39 39 39 Total 1,340 1,277 1,216 1,156 1,104
HSI Average Revenue per Subscriber High-speed Internet revenue $133 $128 $124 $121 $116 Average HSI subscribers 1,309 1,247 1,186 1,130 1,061 Monthly revenue per average subscriber $33.87 $34.22 $34.85 $35.69 $36.44
Wireless Subscribers Consumer 101 101 98 81 65 Business 11 11 10 8 6 Total 112 112 108 89 71
Entertainment Subscribers 217 200 190 178 170
(1) Beginning in January 2008, we no longer include in our switched access line counts those lines that support our company's internal administrative and operational activities. Accordingly, access line counts for all prior periods have been updated to reflect this change.
SOURCE EMBARQ
