Good morning, my name is Katie and I will be your conference operator today. At this time I would like to welcome everyone to the Qwest First Quarter 2007 Earnings 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. I would now like to turn the call over to Stephanie Comfort, Vice President, Investor Relations. Please go ahead.

Good morning everyone, and welcome to our call. We're here to discuss our first quarter results. With us on the call this morning are Dick Notebaert, our Chairman and CEO and John Richardson, our EVP of Finance and CFO. Before I turn the call over to Dick, I would like to remind everyone that we will be making forward-looking statements. These statements contain risks and uncertainties which could cause actual results to differ materially from those expressed or implied here on the call. Those risks and uncertainties are on file with the SEC. Additionally, we do not adopt analysts' estimates nor do we necessarily commit to updating the forward-looking statements that we make here. Also, let me mention that in order to supplement the reporting of Qwest consolidated financial information, the company will discuss certain non-GAAP financial measures, including EBITDA, free cash flow and net debt. A full reconciliation of non-GAAP measures is included in the quarterly earnings section of our website. With that, I'd like to turn the call over to Dick.

Thank you, Stephanie. Good morning everybody, welcome to the call. With the first quarter results we reported this morning, we were off to a solid start for 2007, as we progressed towards our long-term goal of sustainable value creation. Our results this quarter build on significant achievements of the entire Qwest team over the past few years and we are committed to continuing this progress in the future. Our focus on the fundamentals produced margin expansion, earnings growth, disciplined investments spending, increased free cash flow, and continued progress on our share buyback program. We also achieved exceptional customer service levels across the board, further evidence of our commitment to differentiate Qwest through superior customer service. Our results demonstrate that our strategies are working and our intention is to maintain that discipline. Here are the first quarter highlights. Revenue totaled $3.4 billion, a decline of just under 1% year-over-year and just over 1%, sequentially. Now, both comparisons reflect our de-emphasis of the lower margin legacy products, such as Dial Access and we have talked about that in the past. The anticipated reduction revenue from a large equipment contract is also there. That, we also disclosed as a onetime event last year, and regulatory settlement impacts. Without the impact of these items, revenue would have been slightly up. The underlying trends continue to support modest growth despite continuing access line losses as customer demand and a clear value proposition for our portfolio of growth products continue to drive volume, ARPU and bundle penetration. Data revenue growth from the quarter was 11% year-over-year, similar to the growth we experienced in the fourth quarter. Data revenues now comprise 35% of Qwest total revenue. That is consistent with our strategy to migrate from legacy to next generation products and services. I want to comment briefly…

Thanks Dick and good morning everyone. We are very pleased that the first quarter delivered on so many of the initiatives we focused on, in our past discussions, and I'll begin with revenue. Our revenue totaled $3.4 billion in the quarter with continued strength in key underlying trends. Specifically, the first quarter revenues absorbed the impact of regulatory fees and settlements, the revenue reductions from a large data equipment contract last year, as well as the strategic de-emphasis of low return products. These items affected total revenues by $75 million year-over-year. We consider the underlying low single-digit revenue growth Qwest achieved to be a more accurate reflection of the trends in our business as we enter 2007. Revenue in the mass-market channel grew both sequentially and on a year-over-year basis. As discussed in the prior quarter, universal service fund rate changes and regulatory settlements affected the year-over-year comparability. These items totaled $23 million in the quarter. Excluding these regulatory impacts, year-over-year revenue grew 3%. The success of our bundles and the focus on driving higher value, higher ARPU products continue to offset the impact of access line pressure. Mass market access lines declined 6.5% year-over-year, however, over the same period our total connections increased by 2.4% and our consumer ARPU grew 6.1% to $52. Our quadruple play including digital voice, high-speed internet, video and wireless allow us to sell more products to existing bundle customers even as we increase the number of customers choosing the bundle. 41% of our bundle customers have three or more products in the bundle up from approximately 30% a year ago and this is helping to increase our ARPU. As an added benefit, each product added to the bundle, especially above the three product mark, increases our ability to retain these most valuable customers. We…

Thank you, John. Our priorities for 2007, to repeat what we have said is to drive modest revenue growth, to improve our EBITDA margins, especially through optimization and productivity initiatives and to increase free cash flow. I think in closing our prepared remarks, one has to say that our strategies are working. Our progress is demonstrable. We have momentum that is tangible and a positive outlook for the future based on the opportunities we have in front of us. And now Katie, we'd be happy to take questions.

(Operator Instructions). Your first question comes from John Hodulik with UBS.

Good morning.

Good morning, John.

Two quick questions, first, Dick on the business trends, given the tough comps here in the first half, if you look after the second half with the trends you are seeing in the business and what's happening in the industry. How fast do you think this business can grow? And second of all, as it relate to margins, you've been sticking to your guidance for mid 30s, you had 34%. First quarter is usually on the lighter side given that the sequential trends you've been seeing, how do you expect it to trend throughout the year given all the cost cutting initiatives and the forbearance you have seen? Is this expected to be toward the low end and in other words I was looking for a definition of mid 30s, we are talking 35, 36 or sort of closer to 34?

John, well we have been very careful not just say 35, 36 or something, but we've set in the range of the mid 30's and 34 is pretty good and we do believe there is upside and there is opportunity for us to continue what we have done on the run rates on our expenses and productivity improvements. It's a first quarter that's usually if you go back and think about a year ago. John and I were talking about this last night, if we think about a year ago where our margins are always lumpy in the first quarter and sort of be $3 million up gives us a feeling that we are on the right path and we are doing the right thing. The BMG, on the Business Markets Group, if you look at the wins, we feel that the opportunities there we've had some wins, those sales wins have not translated yet in to revenue because we have to execute, implement, and then start the billing cycle. So, I think we are still in a position to do what our folks have said they would do, which is to grow that sector of the business modestly this year. And I think we are on a pretty good trajectory, especially, with the Networx contract. Now Networx, probably won't generate a lot of revenue until fourth quarter, I think, and then it will start to ramp up, because we've got to go through the test cycle and the different things. But, I think it's indicative of where our Business Marketing Group is targeted and going. And John, you want to add anything on the markets issue.

I just think on the margin side, we have our guidance out there of a plus 400 for the year, and we have come out of the year very well. And it gives us increased confidence that the goals we have are in reach. On the revenue side, John, I think that we believe that the underlying trends in the mass markets area if we take out some of the unusual charges we had about 3% growth rate. And wholesale holding fairly flat this year. And again in that growth, Dick has talked about in revenues and business where the timing is right for us, really I mean, with the technology changes and the industry consolidation. And of course, with the Networx with us, being recognized as a Tier 1 telecommunications provider by the government, we have the opportunity to grow the revenue there. And it's incumbent upon us to execute against that opportunity.

And one last comment on the free cash that John mentioned. There is always the opportunity for variance within and without, so I think we are off to a decent start.

One quick follow up. Any comments on the timing of when you would make a decision regarding the return of additional cash to shareholders?

We haven' made a decision and we have had our first discussion at the board, but we have to do what we've done in the past, which is be very disciplined. I think if you look back on our track record, we are fairly predictable. It's pretty obvious, but we are disciplined and I think we'll stay with that for now.

Okay. Thanks.

Next question Katie?

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

Hey, good morning guys. Thanks.

Good morning David.

Good Morning David.

May be just on the income statement, and may be three questions, just three kind of surprises for me. One was on the data and internet revenue segment, the loss of growth momentum in that segment in the first quarter and seeing some nice steady growth quarter-on-quarter for the last year, so and kind of just a very slight sequential down tick. If you could talk about how all these kind of year-over-year pressures you are talking about might have come in to play sequentially on the data and internet revenue line? And then second, the cost of sales, down almost $100 million quarter-over-quarter. It's just such a huge amount of money saved in one very short period that, I guess the question is really, you talk about kind of the run rate trends, obviously that kind of run rate trend is impossible. But, it just seems like so much must have come to fruition in that quarter that I have to ask where can it really go from here and what was done to get that kind of significant cost savings? And then the last thing John, it looks like the amortization expense sought of disappeared in the quarter and I just want to get a sense of where that went? Thanks a lot.

Dick, do you want me to take crack at these--

I'll do the first and then you wait on the amortization. On the data and internet revenue, I guess I would push back a little bit. I don't think there is anything there that would give me a feeling that momentum isn't there for us. I guess if I look over in the mass markets, our growth was 37% (inaudible) very solid for us. And ARPU was very good. So, if I look at it, the one thing I would point to that doesn't give me a concern is the change in the one time revenue, that's customer premises equipment, CPE, that's non-recurring revenue versus the monthly recurring revenue which we are really focused on building the MRC, the annuity business. The other thing is if we look at our wholesale side, the IP long-distance had a slight decline. That doesn't leave me uncomfortable. I think Roland and the guys are focused on exactly what they should be. So, those one time hits, could feed the beast, so to speak, with a one time customer premises sales. But that's not what we are about. We are about sustainable, predictable revenue. So, I think you see us as we said, John and I both said in the opening remarks, we want to deemphasize the dial business and we want to make sure that if we get a huge government contract or good, pardon me, any large contract for onetime that we point that out as we disclosed last year same time . On your question on margin, just repeat that for me.

Well, just the cost of sales, Dick.

Yeah.

Just $1.32 billion versus $1.4 billion, $1.5 billion in the fourth quarter, $1.42 billion in the first quarter last year and just a big sequential jump downward and there might have been other costs in the fourth quarter obviously, but just such a huge change in one quarter makes me ask the question where can it really go at the margin?

Well, again I would go back and I'd point to two things and not to sound imperative, but when we do a onetime sale of customer premises equipment, whether it's routers or some other type of equipment, that's also an expense item. I would also point out at that margin on the customer premises equipment is usually narrower than the margin on the network or on our annuity business. The other thing is our employee count. You could see that, we had a significant improvement or reduction in that area if you will. And I think that all goes together and to point that out again, I think if you look at this quarter versus what we've done with customer premises equipment in the past, you can see translate there. Let me stop at that point and let John continue.

Amortization

One other point. Do you remember on our call, we had for the December quarter, we simply had higher than normal cost. Remember we said that you're better off going in to '07 coming off for the third quarter.

Right. The onetime cost from the storm and things like that.

As you look at it sequentially, please take those -- if you go back and look at what we said at the transcript from the December quarter, I think you'll find a very consistent path that helps explain the number you’ve just raised. I think I've done the first two, so John will do the amortization for you.

And David on the amortization side you might recall that in the 2006 10-K we indicated we had done an analysis of the lives of our capitalized software, and as a result of that analysis we extended the lives a bit, and that caused a reduction in the amortization of capitalized software, that's the single biggest reason for the change there.

And when will it go to zero or where is the run rate amortization number in the quarter, John?

Well it will never go to zero, because I know we continue to invest, but the run rate that we had in the quarter here is going to be pretty consistent with what we have for the rest of the year.

Okay, thanks.

One last thought on the comment on the data growth, I think I just ought to add one thing, if you took out what John mentioned and I mentioned on that one data sale or customer premises equipment sale we had, we actually year-over-year, increased the data growth. If you take up that one-time shop, which we both pointed out in our opening remarks. Okay Katie, we'll take another question.

Your next question comes from Jonathan Chaplin with J.P. Morgan.

Good morning, and it's actually Weston Tucker filling in for John. Just two quick questions. First on revenue: Could you give us a sense on a year-over-year basis in wholesale where we are at in terms of the pressures from consolidation on sort of rolling off year-over-year, and then second just a follow-up on John's question a little bit just in terms of EBITDA margins, you were already at 34%, you are going to mid 30’s, I guess, can you just talk about the opportunities to expand the margins on a sequential basis throughout the rest of this year, if that's something that should be achievable, and if not, just some of the opportunities for that would be great?

Now let me do the second part first. We have to be very-very careful on sequential. We have said for the last couple of years just as we did if you look, as John pointed out, the first quarter is usually lumpy. We did very well in the first quarter; there were some timing issues of $300 million better and the margin did improve. I think we have to look at it as directional and where we want to go, and we think there is opportunity for us to improve our performance. We have said that, our consistent commitment to our owners is to do that in a sustainable way. So, sure, there is more opportunity as we look at the year. I'll be a little uncomfortable saying that every quarter is going to be better than the quarter before, don't read anything into that. I am just saying that, as I look over the last several years, it's always possible like we did in the December quarter to have something there. What was the other question?

Just on revenue in wholesale. How, on a year-over-year basis, is where we are getting at with the pressures of consolidation, kind of starting to ease or where are we at with that?

Well, you got to compliment the wholesale group because remember we lost Verizon, when they bought MCI, and they groomed all that stuff away. It took us two quarters and we got it back which is pretty good. So far, we feel that our ability to find higher ARPU traffic and opportunity is there, and even if some people start to groom some stuff and they haven't, but even if they start to groom some stuff we feel that we could target this with higher margin opportunities in the reseller type business. And, we did see, just to give you a feeling, we did see in this quarter our friends at Sprint Nextel groom some of their traffic away from us and a sizeable amount, don't you think, John?

It is a fairly sizeable amount, absolutely.

And yet rolling the team we’re able to do a good job of replacing that traffic on our network. So I think as we look at the year, we think the opportunity is there even with the consolidation grooming. Let me stop and just ask John to comment, do you want to comment on my margin comment, anything you want to add to the margin?

You've indicated that there can be bumps in a road as we had in the fourth quarter…

We don't anticipate anything in our cost.

We don't anticipate any, however our cost initiatives are well in place. Our productivity initiatives are reaping rewards for us. We continue to focus in the facilities cost area to drive down cost there. And also in the administrative side of the business we are continually focusing on making sure that we have ourselves sized up for the size and demands of our business. So, we believe that through these modest revenue opportunities we have and cost down opportunities that we can continue to grow our EBITDA.

Great. Thank you very much.

Thank you. Thanks for your question.

Your next question comes from Frank Louthan with Raymond James.

Great. Thank you. A couple of questions; looking at the SME business alliance growing a little bit, talk to us about that, I was just seeing a lot of activity across the industry in that sector. How are you defining SME business, and give us some idea of where are you seeing the strength there? And then just entering looking at your videos, 7% penetration, kind of a leader in satellite penetration. Why do you think that you are seeing more success there relative to some of your peers? Are you seeing -- do you think you have less cable competition, just in general, or some thoughts on the success there? And where do you think that penetration can go overtime? Thank you.

Yeah, that's the first time anybody has ever asked us if we had less competition; that felt good, thank you. On the DirecTV, we are really focused in on the bundle and the package, and you can see the increase in the percentage in the take rate. And, we have a very good relationship with DirecTV, Chase Carey and the team. The other thing is, I think a lot of people are frustrated with the cable company's quality of service and the attitude. And DirecTV as John said, gosh, they have all those HD channels now. That's a great package, great bundle while we had the football package, now you've got the NASCAR package. I think it's an outstanding product, I mean I subscribed to it, I definitely liked it. And we focus very strongly on that versus other alternatives. On small biz, we grew the lines; we grew access lines in small business. The one thing that Tom Richards and his team and Paula Kruger from the Mass Markets that we've done depending on where you want to draw the line, the one thing that we have really tried to do is to work on tailoring our products or bundles that we have for the consumer, moving them over and tailoring products for the small business person. An example, if you are one man entrepreneur and you are doing HVAC, you really don't want to have to think about, do I buy this product or that product, just give me the package that'll make me more efficient and I don't want to deal with it. So, Dan Yost who runs our Product Group has really focused in on taking those things we've learned from the consumer and just rolling them into the small business area. It's made a big, big difference for us. And one last comment on DIRECTV. When we look at the margin that we got in our contract and it's fixed, and then we look at alternatives, that's a very solid business for Qwest. And reselling their service has been very productive for us on a financial basis and we'll continue to pursue that. As we monitor how other people are doing with IPTV or cable overbuild.

Just quickly to follow-up. Seeing on the small business that's really sort of the four or five lines or less sort of a small business that is where you are seeing the real success there?

Yeah. And think of just $3,000 in communications spending and below. I mean that's the way to look at this, $3,000 in spending and below. And again, if you look at we moved Price for Life over to the small business customer. I mean we were doing the same things there that we've done on the other side and it's got new traction. We also have looked at enhancing some distribution that we were doing on an outbound basis and that's also paid off.

Great, thank you.

Katie, we'll take two more questions.

Your next question comes from Tom Seitz with Lehman Brothers.

Yeah. Good morning, thank you very much for the taking the question. I guess, starting off congratulations on being selected as part of the Networx Groups.

Thanks Tom.

Sure. My question is given the breadth of that contract is there going to be any material CapEx spent in advance of bidding on pieces of that contract. I mean, certainly Qwest has done a lot of government business in the past. But, just given how big that is I am wondering is there going to be any sort of spending ahead of bids that will move the needle at all on CapEx? And then second question following up on Frank, it sounds like your appetite for IPTV right now, even with some of the success AT&T appears to be having, taking that to scale is pretty mute. But, given that half of the wireline CapEx spend is depended on producing higher speeds. Can you update us as to what percent of our access lines are now below say 3,000 feet?

Well, I can't, if I think about 3,000 feet, I can't on the remote -- on top of my head I can't do that for you. I can tell you where the speeds are going. Well, look 83% of our customer base can get high speed internet from Qwest, 98% of them can get a meg and a half or more. Over 50% can get 3 to 5meg, and over 25% can get 7meg, and those speeds are moving up. Now, we also do fiber-to-the-home on new developments. We have said that before, and we continue to do that. So, our plant is in pretty good shape overall and we think with the remote terminal placement where it is and than if we need to do pair bonding we can get the speeds up to where we need for the customers, bandwidth and future bandwidth, so that they can do streaming, so they can download in content shift based upon some of us would call it consumer emancipation, I saw that in a newspaper article, I kind of like that, so you aren’t tied to the cable company, you can do what you want, when you want. So, I think we are in pretty good shape, we got the IPTV stuff out at mineral in our lab, and we are looking at it. Our problem is that when we look at return on invested capital, if you believe in content shifting, what's the timing of it. And again our penetration rate with DIRECTV and they are reselling our high-speed Internet, and that's pretty good 7%, I mean that's we are adding quite a few customers. So if the customer is happy, we are happy and then that's what matters. On the Networx contract, on the federal contract my feeling is that we have the benefit over the last year, actually for last several years of having a very good high-speed backbone network, our ultra long-haul as I mentioned in my call and that by the way, that translates into our OC-768 that will be done in June. We anticipate it being done in June, borrowing any foreseen happening. We invested last year in the centers, in the control center and doing the stuff within the context of our CapEx budget. If we get something huge of course we'll deploy capital but it's tied to revenue and that's tied to margin because this is a profitable business. So, to me that's our disciplined approach. John, do you want to add anything on the CapEx?

I think other than as we got ready for this contract we did spend a fair amount of capital and it was within the confines of our capital budget and we believe going forward that it’s a manageable item.

Yeah, what we are doing is we aren’t spending on the legacy. I mean, we have got the zero-based budgeting process that I think we are the only ones in the sector that have gone this direction. And its working and we have been able to invest where we need to like the new hosting center in Seattle, and for the Networx contract. So, I think we are in a good shape.

Okay. Thank you very much.

Yeah. Thanks for the question. One more question operator, Katie, this is the last one.

Your last question comes from David Janazzo with Merrill Lynch.

Good morning.

Good morning David.

Good morning David.

On the forbearance topic, can you give us an update, may be walk us through some of the opportunities there, quantify if you can and then talk about the timing?

Yeah David, that's a great question and I thought I might get off the call without answering it. We did get the forbearance petition granted to us. We do feel that there are significant expense and customer service opportunities there to make the customer experience even better and at the same time reduce the expenses. We are in the process as we talk on this call of implementing those productivity improvements. We would expect to see some portion of that improvement in expenses this year. We would expect to see a meaningful; I think it’s a significant number for that would be in '08 giving us a good running start into '08. So, and I am reticent to give the number out unless John wants to but we'll see some expense savings this year as we execute and make sure that we do this right and then most of it are a good majority that we'll see in the '08 opportunity. Yeah, jump in John.

Yeah, I think that it is a meaningful number and the other thing that I would say is that not only affects in our operating expenses to reduce the network operations expense and the administrative requirements, particularly those that are touching the regulatory frameworks to be operated under. But also, we'll get OpEx savings and we should see some CapEx savings as well. So, it's going to run across the game at the war of operations.

And most important of all the expense is very important for us on our EBITDA, but the customer experience should be a lot more pleasant.

I agree.

Than what we've had to do, we have had this red dot, green dot, different QC, QCI, very complicated and the customer doesn't appreciate all of it. The issue is there, but that will be good for the customer, and again, we are as we talk on this phone and the June quarter already starting to execute that plan.

Thank you.

Yeah, thank you. And let me close the call by thanking everybody. I think as you look at the press release, and especially that chart on the top, you can see that we had a solid quarter, and let me define solid. Solid to me is making progress on our journey that we've said over the last couple of years, and it's very consistent with what we've done as we closed out the December quarter with what we said. And here we are doing again what we said we would do. We will continue to look for ways to reward share owners. I talked about that on the Q&A, and we think we still have productivity opportunities and revenue, modest revenue growth is an opportunity that's in front of us. I'd like to thank everybody for being on the call, and with that we'll sign off. Thank you, Katie.

Welcome. This concludes today's Qwest's first quarter 2007 earnings conference call. You may now disconnect.