Array Digital Infrastructure Inc (AD) 2002 Q2 法說會逐字稿

Good morning. My name is Brook. I'll be your conference call operator today. At this time I would like to welcome everyone to the Telephone Data System. And the second quarter conference call. All lines have been placed an mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and then the #1 on our telephone key pad. If you would like to withdraw your question, then press star and two on your telephone keypad. Mark Steincroft, vice-president of corporate relations at TDS. Thank you. You may begin your conference.

Good morning, everybody. Thanks for joining us once again this. Sandy Helton, executive vice-president of TDS, Jack Rooney executive vice-president and finance CFO at U.S. Cellular and executive finances staff operations and CFO with TDS Telecom. A replay of the teleconference will be available today starting at 1 o'clock Chicago time until Wednesday July 17th. The replay number is 800-642-1687. The pass code is 4818052. This call is being simultaneously webcasted on the investor relations section on the TDS website at www.TLDA.com and will be available for the next two weeks and thereafter will be archived on the website. The information on the summary operating data pages of the press releases changes almost every quarter these days as we add new information so be careful to view that. And realize that the format and some of the content might have changed. As always, it's important for you to know that some of the discussion today, either in our prepared comments or during the Q and A session are representative of forward-looking statements. While these statements are based on the most reliable data available at this time, any forward-looking statements involves certain risk and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risk and uncertainties are many and varied and can and do change from quarter to quarter and are noted in the press releases. Investors and any other interested parties are strongly encouraged to read the company's annual report as well as the filings of the SEC to get a better understanding of the company's operations and any changes. This call is being recorded by TDS and is copyrighted material. It cannot be recorded or rebroadcast without Telephone and Data Systems' express permission. Your participation implies consent to our taping. Please drop off the line if you don't agree to these terms. If you're not getting notification from us about the teleconferences or have changed your e-mail address, please contact me and we'll get you all set up. Also, if you have some suggestions how we can more effectively get information to you or you have some suggestions about additional information you would like to see in our press releases, please give me a call to discuss it. At this time I usually try to remind that TDS and U.S. Cellular will be speaking at investment conferences later on this fall. The two that are coming up immediately TDS presenting at the Morgan Stanley conference in Florida, September 9 and 10. I don't know which date we're presenting quite yet. And both TDS and U.S. Cellular are presenting at the UBS Warburg conference November 11 through 13. Also, if you're in the Chicago area or Madison area and you would like to meet with management or business units, all of whom we make available to the investment community, we'll make that happen. Press releases were posted to the TDS home page shortly after going out over the wire and U.S. Cellular post their releases to their website as well. I'll turn the phone call over to Sandy. Thank you.

Thank you. Good morning. I'll quickly review the highlights. All three of our business groups posted improving month to month as we move through the quarter. Some of this is typical seasonal. It's a little too early to say if the trend reflects some improvement in economic conditions but hopefully that's the case for the most part our operating results are at or slightly better than expectations. Fortunately it was a business as usual quarter the details of which Ken and Dave will cover in a few moments. Revenue totaled 724 million dollars in the quarter an increase of 12.5. Solid revenue growth of 8.7 in service revenues with significantly higher equipment sales which Ken will explain in his remarks. U.S. Cellular recorded improved year-over-year average revenue per unit or ARPU due entirely to hire retail service revenue this is the second quarter in a row which it improved year to year. TDS Telecom revenues were up 17.4 percent with growth bolstered by the acquisition of [course communications] and exceptional growth of 77 percent in the operation of TDS Metrocom. Cash flow increase the 6.1 percent to 246 million dollars. Operating cash flow like revenue growth due to hire expense, the cost of funding TDS Metrocom expansion. Diluted earnings per share was a dollar 25 cents an increase of 40 percent compared to 89 cents a year ago object a comparable accounting basis. Please keep in mind that TDS received in telecom in the quarter. During this quarter we monetized the majority of two of our equity positions at TDS, 2,361,000 shares of [Vesera] were monetized in a 5 year variable prepaid forward transaction on May 7. Forward and cap prices for this transaction were 8.82 and $11.47. The purchase totaled 18.9 million dollars. Taxes on any gain are deferred until maturity. At U.S. Cellular, 10,245,000 of [Votaphone] were monetized in a similar manner on May 16. Lower end cap price with $28.6. 160 million are anticipated to be used to partially fund the PrimeCo acquisition. Again a very solid quarter based on the hard work of our 9800 associates. Our ongoing focus on the very best customer service helped deliver excellent operating results in the first half of the year and we are confident it is the wing strategy for the second half of the year and the years to come. Let me turn the call over to Ken Meyers.

Good morning and thank you for your time today. Second quarter earnings release that U.S. Cellular issued this morning includes a whole page of key business metrics as well as the income statement of the second quarter and the balance sheet of June 30. I will spend a few minutes putting those results in perspective instead of repeating the information you already have. First, this quarter we saw an increasing in total average revenue per customer from $47.26 in the second quarter of last year to $48.48 this quarter. This improvement was driven by an in crease in retail revenue per customer that averaged $37.93 this quarter. That's $1.28 increase own a year-over-year basis. This follows a concerted efforts by the company to increase retail revenue by focusing or marketing initiatives on higher rate plan. This is the second quarter in a row that retail revenue has grown on a year-over-year basis with the current quarter's increase large enough to offset the expected decline in roaming revenue. Second, we saw strengthening demand throughout the quarter. April was weak there a customer growth perspective. May improved and June was even stronger and achieved internal targets that were set nearly ten months ago. While it's too early to tell just where the economy goes next the last month has been encouraging. Third, as sandy mentioned equipment revenue was up sharply year-over-year and sequential basis. This reflects a change in the company's distribution plan. And is more reflective of what we would expect going forward. This quarter we implemented a program to in sent our dealers to buy their phones directly from U.S. Cellular. This allows us to ensure the quality of handsets that our customers receive and increases or purchasing power with our vendors. The effect of this program is to increase both equipment costs and equipment revenue. It has negligible effects on cost per gross ad. It added 391 is above our targets. Clearly lower ad volume affected us while at the same time we did increase advertising in the second quarter to support some new pricing plans. Also, this calculation includes all of our marketing costs. Including amounts spent on future product offering such as data. These more future oriented costs added about $12 to cost per gross ad this quarter. We plan to test 1X product offerings this quarter in one of our existing CDMA markets and year on schedule to roll out CDMA by year end. With respect to the PrimeCo acquisition we continue to make progress. We have a team working on integration and launch. We have cleared Hart, Scott, Rodino, closed $250 million bank line and monetized our Votaphone holding this quarter. We hope to place some long-term debt and close the acquisition during the third quarter. Now, with one half the year gone there are three turns of that developed. While deman has strengthened each quarter it has been weaker than originally expected. As such we are now targeting to add 260 to 280,000 net new customers this year. This excluded the effects of any acquisition including the pending PrimeCo deal. And reflects the slower growth we have seen so far. Second, cash flow continues to grow nicely. However, lower than target the customers the second half will have a slight effect on revenue and cash flow. Based upon our revised targets for customer growth with your tar getting the operator cash flow in the 670 to 690 million dollars, the 710 million dollars range we were looking for earlier this year. Finally, we see little current effect on capex since our CDMA conversion is a main driver and this is on track. In fact, if we could, it would seed up this conversion process given its compelling economics. As I said last quarter we will update or targets for the effect of the PrimeCo acquisition once it closes. At this time due to the uncertainty as to the closing date just not possible to quantify the current calendar year effect. Recapping, we saw respectable pickup in growth in the quarter adding 30 percent more new customers this quarter than in the first quarter of this year. Second total average revenue per customer increase the slightly on a year-over-year basis despite a decline in the absolutely level of running revenue. An increase in retail revenue per customer was the main driver behind this result and this continues a trend we saw last quarter. Customer loyalty remained high as evidenced by our 1.7 percent postpay churn rate. These last two factors drove 176 million dollars of operating cash flow. Finally our CDMA conversion overlay program is on schedule. Thank you for your interest this morning, now let me turn the call over to have Dave [Witworth], TDA Telecom.

Thanks, Ken. Q2 businesses, ILEC equivalents grew 2.1 percent for the second quarter excluding the effect of acquisition is which solid growth in difficult economic period. In addition to the internal line growth we continued to increase penetration in our key vertical services and products including dialup and high speed intended and long distance. Specific to our LD product we continued to use global crossing for the service. However we have contingency plans in place in case service becomes problematic in the future. MCI WorldCom represents one of the larger long distance provides for our customers. We would typically have 10 to 12 million dollars. We have been monitoring this situation for sometime and will continue to keep this account current. In the events of bankruptcy there would be some recourse in the pooling brothers. In the event they are no longer able to provide service, their customers would simply move to another long distance carrier including possibly our own on a going forward basis. 1 million dollars of which relating to the first quarter. These revenues are included in the network access and long distance revenue category. This much resulted from the correction of an error reported by the FCC recently. We had contemplated this corrected level of funding in our business plans for 2002 and it has always been part of our guidance. Total ILEC revenues were up operating cash flow grew 10.5 percent in line with our line. ILEC customers both dialup and high speed increased by 6,000 in the quarter. The market available covers 44 percent of our ILEC access lines and they serve 6600 customers. When added to those served in our see lack markets brings the tomorrow to 16,500 customers. Continue to add market share and crisply ILEC equivalent lines increased 22,400 an increase of 72 percent. Nearly 77 percent for the quarter while cash flow losses were on plan. We have seen slightly higher levels of churn during the last two quarters primarily for nonpayment. We have recognized these results and have put procedures in place to manage it. During 2002 we are continuing to roll out the service expansions in Michigan that we began last year as well as deeper penetration in our other markets. Capital expenditures for 2002, 130 million dollars in the ILEC business excluding acquisitions and 55 to 65 million in the CLEC business, we are scaling back the CLEC pricing for fiber and much lower costs from construction contractors. Of our previously announce the acquisitions in New Hampshire, the MCT access was finalized on May 31st and contributed to one month, revenues of 1.3 million and operating cash flow of 600,000 in the quarter: Closed on July first and therefore had no impact on the quarter. We expect revenues of 10 to 12 million dollars and operator cash flow of 4 to 5 million dollars in the second half of 2002 for these acquistions. Capex associated 2 and a half to 3 and a half million dollars for that same period. And integration for these two operations is going well. Turn it back to Mark.

Brook, we're ready to go into Q and A whenever you are.

If you would like to ask a question, press the star and the #1 on your key pad. We'll pause for just a moment to compile the roster. First question Rick Prentice with Raymond James.

Good morning, guys. A couple questions for you. First, Ken, the renewed or updated guidance of net ads to 260 to 280,000, does that include both external and internal customer ads?

I don't know what you mean by internal external. Those are all internally generated through our marketing channels. It does not include any effect of pending acquisition. I talked about the acquisition at closing.

Didn't you have some accesses or some small markets that increase the customer account.

We did but those are not in that number.

That is true internal customer ads.

That's correct.

Next question on cost per gross ad. You mentioned 12 dollars in the quarters had to do with future data service. Had there been any of that type of spend tires in the last quarter.

Very very little. We started building that group this quarter.

All right. And any hints you wanted to give us as far as the 1X trial, how you'll be pricing it?

Not at this point in time. It is strictly much more of a functionality test looking at some blue applications as well as other alternatives.

Not a marketing test, just more how does the work and how do people adapt to it.

That's right. There's a lot around the customer data that needs to be worked out.

All right. And then lots of other potential speculation of licenses coming on to the market. What has gotten their directory business, sales, indication of interest. Any interest in buying parts of Qwest, wireless business or any other wireless licenses out there or if so how would that be approached given the current capital markets.

I think we have been clear that our strategy is to strengthen the footprint where we have presence to look at I markets where aren't as strong and move out of them. Speculation as to any individual transaction is something that I just can't engage in.

Sure. And then the long-term debt market conditions or what's -

We want to get the quarter behind us. And yeah, the market hasn't been the most favorable environment over the last 60 days.

All right. Good luck, guys.

Your next question comes from Ken [Enwright] with MSS Investment Management.

Good morning. Sandy, two questions. Metrocom, it's my opinion since the deal has been announced that $10 of the value ascribed just to the debt portion of Metrocom has been input in the deterioration of TDS stock and nothing ascribed to the asset ledger, additional deterioration has come from does this change the rules of strategy? My question is this, can you put some parameters about what Metrocom will be in terms of much financing need over the next years? How much you're willing to spend, what you won't spend and just a change in the strategy.

Are you referring to PrimeCo or Metro -

I'm sorry. The whole question is about PrimeCo.

All right. I think as Ken has indicated, once we expose the PrimeCo transaction we'll be given more definitive expectations the near term and revenue cash flow needs are. I can simply say that we have reviewed the acquisition and we believe that it's returning a greater than cost of capital return.

I just want to add one thing. We keep on talking about the rural strategy. And as sort of a one of the guidelines of setting the strategy, I don't think we've ever defined the strategy for this company as a rural strategy. In fact, significant parts of our operating income and revenue come from metropolitan areas like Milwaukee and Madison. And the future of this company isn't tied to serving the the, necessarily, serving only a rural areas of this country.

Okay. The second question is just, in terms of closing the loop on the Deutchtel and VoiceStream. By my estimation, DeutchTel after tax proceeds represent 28 percent of the current market capitalization. An astounding number. Can you talk about any progress in what is going on? You've made progress in [Votaphone]. Anything going on with the DeutchTel and in terms of closing that loop and bringing the proceeds back to the shareholder.

Well, I appreciate your recognition that we have acted on the strategy that we described before. In terms of monetizing the Votaphone for PrimeCo acquisition which we believe is a very good operating investment. And that will be the way we look at our marketable securities portfolio going forward in terms of trading the expected value in the securities for a higher value in operating.

Do you have any opinion on the prospects for DeutchTel that are different than the market seems to indicate?

Well, I think we have been very constructive on DeutchTel and we have the stock have felt that the stock is undervalued but we clearly acknowledge that in the past there was a higher price that exists today. But we do have expectations that the price will go up for Deutch Telecom.

Your next question (inaudible) with (inaudible).

Great. A couple of questions on the TDS side. Can you characterize the access line growth, not necessarily just VGE but the much actual line growth. The Metrocom side, the line ad is a little bit lower than what we were looking for. Can you give us an idea of what is going on on the competitive front. You're actively looking at some of your - looking at some of the ads and bad debt expense and trying to control some the churn there. What exactly are you doing to scrub the customer base? Thanks.

Sure. Well, internal line of growth was about that 2.1 percent. If you look at just physical line count growth was about 8/10 of a percent. That relationship is consistent. It looked a little stronger than. Relative to the Metrocom part of the growth is due to nonpay. Primarily all of it. All they we have competitors in the market that we're in. Those tend not to be our biggest issues. It tends to be nonpay I. It's primarily on the residential side. So what we're doing is working to make sure that our credit scoring techniques are indeed correlated with our bad debt experience and making whatever corrections we need to do to make sure that we're able to identify that early on in the process. And that's probably what has impacted the line growth a little bit in the month. We're not going to keep those customers around for an extended period of time. The other thing, we accelerated that process so we get to those customers quicker. If the churn would have been lower we would have had a little birth higher line growth.

Do you think you've completed that process or something we should see for another quarter or 2.

I think we've got most of it under our belt. The economic conditions certainly have some impact in terms of it but I think we're cracking down on it a little harder.

One last question on long distance pricing are you seeing any significant drops, and how about bids from other carriers? Thanks.

We typically don't talk a lot about our pricing in terms of that. I think our rates are very reasonable. I don't think there's been a lot of movement in that area.

Okay. Great, thanks a lot.

Your next question comes from Will Power with Robert Baird.

Good morning. A couple questions for Ken. First with regard to the he revised net edition guide. What do you expect the drivers to be in the second half of the year. In part an economic recovery. It still looks to me that the net addition guidance assumes the sending half of this year strong, any additional color along those lines and then any color around the minute of use trends. I assume that's the fact for the higher ARPU, whether they're increasing offpeak or any color there would be helpful.

With respect to the first question, in terms of ad growth, yes, we are expecting the second half of this year to be stronger than the first half of this year. Last year was kind of anomaly where that didn't happen is the first time we've seen that. And we've always looked at this year and expected to see a second half that is stronger kind of economy underneath it. That's still our expectation. In terms of minutes of use, minutes of use, for our customers averaged 280 minutes in the quarter. That's up from 215 in the second quarter of last year. When we look at, that one minute of use offset work as percent of total are still running in the eight percent range that they - that they have now for about the last two years. As minutes of use grow per customer the total units off network grow but the total percentage the usage it's not change. Peak, off peak, really varies dramatically by market. And the demographics underneath the market. There are markets that are more influenced by college populations that clearly have a much bigger offpeak usage than other,. On average we are seeing more minutes offpeak in terms of the mix peak, offpeak, than we have. That continues to evolve as people are now using their phones more throughout the day instead of the relatively concentrated usage that used to happen right around certain peak hours.

Okay. Thank you.

Your next question comes from Ned [Sacker] with Thomas Weisel.

Good average. Good numbers, ladies and gentlemen. Part of the question, can you tell us how far along you are in that process, theme roll out. Percentage of the pops covered or the subscriber base at this point.

Where we're at right now, is going into the decision approximately one-third of our markets were covered with CDMA and two-thirds with TDMA. Our target was to get the state of Iowa converted this year. Which would mean we would put an overlay system on top of the whole TDMA network throughout. That's our plan. We are on target to do that before the end of the year. In terms. Percentage of pops it would get us to, I don't have that number. He know I spoke about that before, especially when we made this decision. I can dig it up.

That's fine. I would like to follow up with you on that: The other question I had, the improvement in retail revenue is that a change in plans or just more usage on the part of customers? What is driving that? Also, could you comment on the current competitive environment within your territories that things are getting more promotional, less, what have the trends been across the quarter, etcetera.

Clearly over the last year, they are - there are more minutes in the various packages that are available out there at any given price point. But I think the big change over the last year has been the focus of our marketing promotions and all of our initiatives at rate plans at $35 and higher. So yes, minutes of use are up but it's more a matter of where you focus our marketing efforts.

We're trying to put a maximum value in the higher rate plans. To tract our customers and competitive situation, it's kind of hard to say that a business which is 100 percent promotional can get more than 100 percent promotional.

Okay. Are there any trends of late that are worth note?

I don't know that I've seen any major trend. I guess the way I described the sense of the market is that the, it's still a very promotional market. The rate of decline in some of the pricing packages has slowed.

Thank you very much.

Your next question comes from Roger Zack with Cafe' Financial.

Thank you. I have a few housekeeping questions. U.S. Cellular, Ken, if you can mention about what the churn rate was for the quarter. I late to make you repeat it, could you just go through the CBGA, the reason it was a little bit above your plan. The TDS side, the capex mentioned for the acquisitions on the 2 and a half to 3 and a half million, is that included in the total 120 to 130 for the ILEC operations and also if you can tell us what the total U.S. Cellular for the quarter was.

Let me start. Churn for the all-in 1.8 percent is the number. Per gross ad, I said there were three different things in there, one type, there's no - that's higher than we expected. Underneath that, we've got with one of the lower volume. 2, one the lower volume. 2, we did some more advertising to support some price plans that were rolled out early in the - early in the second quarter. And third, we are starting to invest in the marketing area around a data group that's something we hadn't been doing yet. Where we were TDMA wasn't appropriate yet. Now that we're doing that, that's driving some marketing dollars. All marketing dollars are in cost per gross ad. We're seeing that about 12 bucks in this quarter.

Okay. Great: Capex relative to any access is.

The capex is not included in that original amount. USF all-in from all different sources would be about 22.

Next question Todd Rosenbloom from (inaudible).

One, the roaming revenues although they are down year to year, popped up a little bit sequentially. I wonder if that's more a seasonality things or sock is turning although I doubt it. And then exposure to WorldCom, you mentioned the receivable that's out there, I you need about 10 to 12 million, doing what general communication is doing which is writing off some of that as bad debt.

First question on roaming that is definitely a 00:59:18 seasonal trend. One we've seen year in and year out. Second quarter picks up in terms of total minutes of use 00:59:25 versus the first quarter. 00:59:27 >>ANALYST: Okay. 00:59:28 >>UNKNOWN SPEAKER: I think the issue on WorldCom, it does represent a relatively large access provider for us. Probably the only 00:59:35 solution is either to write it off or not. There's really not much in going part way. We'll watch it at close as we 00:59:44 can. 00:59:46 >>OPERATOR: Your next question comes from David [Paulisano] with Stevens, Inc. 00:59:51 >>ANALYST: Hi, guys. Your all-in churn was 1.8 00:59:56 percent. What do you think it will be going forward once you bring in all the PrimeCo customers, a big percentage of them are prepaid.

1, as we look at PrimeCo, on the front end, I don't - I'm not able to give you a number. The reason I'm not is depends on when it comes in and what the mix is. Early on, we will have the prepaid customers that are there. Which already been fade for that are generating revenue, generating margin. And we expect to continue to support them. Going forward, we would expect to support that product line but focus more on traditional wireless offerings so over time that mix will shift. It will shift to a post paid type of business, that's what our plan is. With that shift in postpaid business and the introduction of our level of service to this market we would expect to see their churn rate improve in terms of how it plays through the mix, it's really a matter of a numbers, in terms of the number of customers when we get it based upon where we're at right now, that would be about 10 percent increase in our commercial.

Okay. Thanks. On the CBGA going forward over the next couple of quarters will we be seeing something similar to the 12 dollars you talked to about earlier.

I think the $12 is in there but some of the other components of that improve.

1.9 on TDS. Of the CLEC operations. Can you give us a better feel for the trend in EBITDA going forward when you think it starts trending down significantly toward EBITDA positive?

Our plan would be that TDS Metrocom would be EBITDA positive for the full year. Not in a significant way but it would be EBITDA positive next year and free cash flow positive the year after that.

In '04.

Yes.

Your next question is from Mike Valejo with Legg Mason.

I have a couple of questions. When you're indicating that CBGA is going to show some improvement, can you give us some sort of bracketing on what's going to happen there. The ARPU which obviously was much better helped by inbound roaming. What do you expect to see with those two, if you can give us some numbers that would be a great help to be specific.

All right. I can't give you specific numbers. As hasn't happened yet. But based upon the expected volume that we're looking at in the second half, I would expect to see cost per gross ad trend down closer to where it was in the first quarter than where it was in the second quarter. With respect to average revenue per customer, you are really talking about two separate components that go into that number. One is the roaming revenue side which really has got nothing to do with or customers backup divided by our customers get this number and our second one is retail. With respect to the retail side of it, based upon what we're seeing in the current environment I would expect to see year-over-year improvements in retail revenue again in the next couple of years. Roaming, I think that we've talked about overall roam that we expected total dollars to be coming down on a year-over-year basis. What we're seeing this quarter, it was down about 5 million dollars on a year-over-year basis, where sequentially, though, you'll get into the seasonality where second and third quarters are your highest roaming traffic period. We should see that seasonal trend continue.

Could we turn over to the ILEC operation and get some sort of sense of what the normalized numbers are. Could you give us a sense of what the EBITDA in the quarter was without course and without the New Hampshire acquisition. I've got line growth, I'm assuming New Hampshire is 19.2 in the quarter and 44.1 for chorus. So it looks to me like I've got 0.3 or 0.4 percent growth which is a little bit different than what you're indicating but maybe my numbers are wrong. I'd like a sense as far as line growth goes. If you have any sort of sense of what kind of substitution there is in the wire line operation for wireless or broadband or whatever it happens to be. Thanks.

Sure. We added in the quarter, MCT represented about 19,200 equivalent lines. Represented 18,800 traditional lines. The growth ends up being for the quarter about 2,000 on an internal growth basis which that is it 8/10th of one percent comes in. From a margin perspective, if you strip out the impacts of Chorus and strip out the impacts of MCT, growth in EBITDA and revenues the margin stayed at exactly the same at 50.3 percent. It grew about 3.7 percent, something like that.

What was growing 3.7 percent?

Revenues and cash flow, he can including the effect of those acquisitions.

Your next question Greg (inaudible) from Loop Capital Markets.

Most of my questions have been answered. Are you guys on the CLEC side using uni for anything, you're primarily facilities base but is there any uni -

At TDS Metrocom we're 100 percent switch. We do lease unbundled loops for our access to our customer and some small business customers but you're talking about a Uni model. Right. We do lease the line.

That's the from -

That's from SBT America tech.

That is that plan to do that at all, lowering charges?

Not really. The uni rates are negotiated with the carrier. All that factors into the general pricing but I don't think there's anything on the horizon. I think, though, that there is more discussion in the industry about UNIs which is renting or switching the whole element. We do some of that is US Link and then over time we migrate those to a facilities bank. But that is a much smaller component.

Your next question comes from Glen Waldorf with UBS Warburg.

One additional question for Dave following up. Are you seeing any substitution at the ILEC level in terms of technology or any other forces there.

Yeah. It's difficult to put your finger directly on it. Certainly we know that customers our own customers who take DSL oftentimes that a substitution in terms of a second line, we know that's the case. We know that in some cases, especially in some the more remote and vacation type areas, wireless certainly is a substitution in many cases, not probably the worst thing that can happen to us. But awfully hard to predict where it is. At the same time, I would say that our more rural focus does have little different thing. We don't have the large apartment complexes, things like that. The more transient younger work force type that typically are more committed on the cellular side. It's a little different composition of our customers.

Can you quantify for us what the second line penetration is?

They're running about 13.3 right now.

Which is consistent. Just can you also touch on how your marketing features to your base. You've had some good penetration long dance. Can you give us some color on that how much is organic versus acquired long distance ads.

We've continued to be successful in putting in long distance customers. Some of that is our good marketing, some the of it is some the tactics that some of the other LD providers are doing to our customers and they become frustrated. We've done the traditional consumer type stuff. Billboards and there's and that type of stuff. We do offer a promotion that if a customer does indeed take our internet service and long distance product we give them a discount on their internet servicing and that helps to tie customers together. Features tends to be something once customers understand how they can use them and make them part of their life, they're real receptive to it.

Great a higher level question for sandy. Just in terms of what is happening in DeutchTel, do you have any insight in what is going on there. What do you think about monetizing that stake, how long will it take the stock to go back up to a level where you consider monetization?

Glen, I'm afraid I'm just like you reading the papers about what is going on in Germany right now. I don't have added insight with regard to the current topics of discussion. And what we do is every as I mentioned we do continue to look at what we think the expected appreciation in the stock is, and other investment opportunities. And we look at that on an ongoing basis.

Well, thanks very much. Good quarter.

Thank you.

Your next question comes from Colette Fleming with UBS Warburg.

Hi. Actually, Mark Carney. A couple housekeeping items. Did you, Ken, did you guys launch any further PCS pops, we calculated about of a million nonoverlapping PCS pops were launched as of last quarter were there any new markets?

No.

The percentage the handsets you guys sold, I know you said you are starting to sell your own for the purchasing power: Numbers historically have been 55 to 60 percent. Did you give the percentage?

I don't understand the question.

The percentage of the handsets that U.S. Cellular sold typically through your stores is 55 to 60 percent. Could you give me the percentage for this quarter?

Are you talking about the channel ads or were you talking about actual handsets going through?

The channel ads, I guess the number - this number we usually track. I think you also mention that the you're also trying to sell more handsets to your retailers. So if you can help me out with each of them.

In fact, channel ads is the number you used to use. And the channel really haven't changed dramatically in the last quarter. The number there you're looking for now in terms of total equipment sales is one I don't have in front of me that we'll have to dig out.

Okay. Great, thanks.

Your next question is from Marty [Dropkin] with CSSB.

Hi. I want to dig in a little bit more on the ILEC KLine ads. I realize that you said it's start to trend a little bit better throughout the quarter and you saw an uptick in June. Are you seeing that same kind of steady base or even an increase in the first couple of weeks that you've seen in July. And are you seeing it across any particular customer bases? Is it more residential or business or any particular geographic areas?

I don't really have any insight in the first three weeks in July, Marty. I think there is certainly some impact in the ILEC business. Certainly one the tools we have relative to collection is disconnect. I think in tougher economic times a customer will live with that disconnects for a long period of time. Customers start recovering and start getting their phones reactivated that things are coming back from an economic perspective.

You have seen customers turn off, turn it back on?

Yeah. Businesses that contract or expand a little bit. We are primarily a residential focus. 70 percent of our focus is residential. There's no one particular area or geography or demographic segment that is any different than any other.

Okay. On your capex forecast, slight, but you've raised your ILEC a little bit. Along those lines, 70 million dollars for the first 6 months, you're on a trajectory do - far below the number you gave for the quarter. You think there's a chance you fall below that or enough spending in the second half.

The summer tends to be our higher spend period especially in the second quarter where we take on materials and things like that that are used for the simply construction season. I think there's a little bit of room around the ILEC capex it's relatively broad I realize. There's always a chance we could run a little bits under that.

Could you break the 42 million between ILEC and CLEC?

Sure. For the 42 million we had fourth quarter 25 million related to the ILCA business. About 15.7 related to Metrocom and the rest was US Link.

Okay. On DSL, did you trade any new marketing initiatives on the big increase or any promotional activity?

Obviously, we continued to do that. Word of mouth helps a lot in terms of it. We've had a very aggressive program where we've captured information about customers who have expressed an interests prior to us launching the product and we were able to work those. It is one that does sell well by word of mouth. Customers are seeing it. We do leverage off of advertising that's done in urban areas, our customers that see the TV spots in their particular market come to us and ask about that particular service. We're running kind of a normal promotions but nothing extreme in terms of significant. We're not giving away motion of service or anything like that.

Nothing different there. Just word of mouth and catching on a little bit.

Yep.

Okay. Finally, the 2 million increase in USF, one million was the first quarter, the other million on a recurring basis or just one time.

No. Recurring. About a million a quarter.

Your next question comes from Bill Moore with Hamilton Investment Management.

Hi. Good morning. I want to follow up on the financing status for PrimeCo. I know you had sold the Votaphone shares and in process arranged some bank lines I'm trying to find out where we stood in the whole purchase price.

We have entered into a new bank revolving credit agreement, 250 million dollars. And so if we look at the end of the quarter now, we have most of the 500 million dollar revolving credit agreement the company had in place available plus the additional 250. But our financing plans also had us going to the market for some long-term debt. We are now waiting to let this news get out there and see what the market has available right now. As you know, it's been a relatively ugly market over the last couple of months, especially in the Telecom arena but that's still part of our plans.

The contingency plan is for existing credit facility.

Yeah. Again, we have our existing one as well as the new one. But we would like to see some long-term debt underneath that.

Have you had any discussions in the rating industries? I know there was some much contingencies on the new bank line, and your rates on those lines.

We talked for the rating agencies, in connection with the original announcement of the deal. And at that point in time they both came out and affirmed.

Great. Thank you very much.

At this time there are no further questions.

Thanks, everybody, for joining us on the teleconference today. Ken and I will be available later today in our offices. Have a good week.

Thank you. This concludes the conference. You may now disconnect.