Shenandoah Telecommunications Co (SHEN) 2009 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Shenandoah Telecommunications third quarter of 2009 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Adele Skolits, Chief Financial Officer. Please go ahead, ma'am.

Good morning and thank you for joining us. The purpose of today's call is to review ShenTel's results for the quarter ended September 30, 2009.

Our results were announced in a press release distributed yesterday morning, and the presentation we'll be reviewing is included on our website at www.Shentel.com. Please note that a replay of the call will be made available later today; the details were set forth in the press release announcing this call.

With us on the call today are Christopher French, our President and Chief Executive Officer, and Earle MacKenzie, our Executive Vice President and Chief Operating Officer. After our prepared remarks, we will conduct a question-and-answer session.

I will begin with slide two of the presentation. While we don't provide guidance with respect to specific future financial results, we caution that this call may contain forward-looking statements which involve a number of known and unknown risks and uncertainties. These may cause our actual results to differ materially from these statements.

ShenTel provides a detailed discussion of various risk factors in our SEC filings, which you are strongly encouraged to review. You are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements.

Also, in an effort to provide useful information to investors, we note on slide three that our comments today include non-GAAP financial measures. Details on these measures, including why we use them and reconciliations to the most direct most comparable GAAP measures, are included in this presentation. I'll turn the call over to Chris now.

Good morning and thank you for joining us. We are pleased with our operating results during the third quarter of 2009. While economic conditions remain weak, our wireless business was able to continue its growth.

During the quarter, we further expanded our wireline operations with upgrades of additional systems within the cable markets we have acquired. These investments are positioning our Company to offer expanded services and generate future growth and earnings.

As you can see on slide five, on a consolidated basis we are reporting net income of $6.3 million for the a quarter, compared to net income of $6.7 million from the third quarter of 2008, a decrease of 6%. Net income from continuing operations was also $6.3 million for the quarter, as compared to $7.4 million in the third quarter of 2008.

This year's third quarter included a $0.8 million after-tax loss from the cable operations we acquired from Rapid Communications. We expected to incur these losses while we rebuild the cable systems and launch new services, which in turn should create long-term value.

On slide six, we have listed the progress we've made in several areas of the business. Upgrades to the acquired cable systems continued at a good pace, with 40% of those markets now upgraded to two-way capability and are now offering high-speed data and other premium video services.

In the wireless segment, we added seven cell towers and 16 CDMA base stations in the third quarter, as well as adding EV-DO capabilities to 28 additional sites. EV-DO is now available to 94% of our covered POPs.

While the process is taking longer than expected, we are progressing towards closing the sale of our converged services operations. The market conditions are not ideal for a sale, but we have been pleased with the continued interest in these assets and expect to be able to execute a sale in the fourth quarter.

We have now closed on the purchase of the telephone assets of North River Telephone, a 1,000 access line cooperative in northern Augusta County, Virginia. We expect to begin offering DSL service to these customers by year-end as we got an advance start on the engineering and construction that is required.

Economic conditions continued to impact our growth rates. And it's still unclear how long or deep this recession may be. In the current environment, our gross additions exceeding the third quarter of 2008 is very positive. However, our churn rate is up over the same quarter last year, as well is slightly above the rate in the second quarter of 2009.

Despite these headwinds, we remain committed to making decisions that will position the Company for long-term success. We'll continue to invest in capital projects, which we believe will help achieve our long-term goals and better position us for increasing growth as the economy recovers. I will now turn the call back to Adele to review our financial results in more detail.

Thank you, Chris. I will begin on slide eight.

As Chris mentioned, we are pleased with our third-quarter results. For Q3 2009, earnings per-share from continuing operations were $0.27, in comparison to $0.31 for Q3 2008. Including the results of discontinued operations, earnings per-share were $0.27 for Q3 2009, in comparison to $0.28 for Q3 2008.

Moving on to slide nine, operating income for Q3 2009 was $10.6 million, or down by $1.9 million from Q3 2008. The acquired cable operations will continue to negatively impact earnings until the networks are fully upgraded and we increase the number of services sold.

In the long run, these enhancements will give us the opportunity to significantly increase penetration and revenues per customer through expanded services. But they will continue to generate operating losses in the near term.

These operations, acquired in December 2008, incurred an operating loss before taxes of $1.3 million in Q3 2009. In the wireless segment, the net operating income dropped by $300,000. Average PCS customers grew by 7% and service revenues by 4% in Q3 2009 over Q3 2008.

Results were impacted by the expansion and improvements to the PCS network, which increased the segment's operating costs by $1.2 million and depreciation by $900,000 in Q3 2009 over Q3 2008.

As we have discussed in previous earnings calls, we incur additional operating costs related to additional and enhanced cell sites in advance of the incremental revenues they produce. In the short run, these increased expenses will reduce the margins in the wireless segment. In the longer term, we expect that the margins will improve as a result of the additional data revenues and the additional customers in new and better coverage areas.

In the wireline segment, net operating income is down by $700,000. The most significant reason for this decrease was a drop in access fees, primarily as a result of the Q3 2008 retroactive access fee adjustment.

On slide 10, normalized OIBDA for Q3 2009 grew to $18.7 million, in comparison to $18.4 million for Q3 2008. Our OIBDA margin stands at 47% for Q3 2009.

Please keep in mind that we account for PCS revenues net of certain Sprint-Nextel fees. These fees essentially represent the net payment to Sprint for many income and Sprint expense lines accounted for separately by other wireless carriers. As a result, our margins as a percent of revenues are not directly comparable to other telecommunications companies.

Cash flows on a consolidated basis appear on slide 11. Net cash from operations increased by $10.2 million in Q3 2009 over Q3 2008, while capital spending and other investments decreased by $8.1 million in Q3 2009. We expect the significant PCS network enhancements and the upgrade of the acquired cable TV assets to be essentially completed by the first half of 2010.

Our existing credit facilities and cash flow from operations are expected to be adequate to support these projects and our other capital expenditures.

Once again, please keep in mind that ShenTel is in the process of closing our defined benefit pension plan and will be distributing its assets. We are now waiting for a technical advice letter for the IRS as part of the process for obtaining a determination letter regarding the termination.

We cannot predict as a result of waiting for the IRS to complete their review when this plan will be terminated. When the final IRS approval is received and the assets are distributed, we expect to record an incremental $3.5 million of expense related to terminating the plan and make a payment of $1.7 million to fund full liability to employees. These numbers are as of the quarter ended September 30, 2009, and we expect these amounts to increase by approximately $100,000 per quarter until the plan is closed.

At this time, I'll turn the call over to Earle to go into greater depth on some of the operating factors driving our results.

Thank you, Adele. Good morning, everyone. Slide 13 shows the wireless customer growth over the past 21 months.

At September 30, we had 219,353 PCS customers, an increase of over 6.5% from a year ago. The growth curve is significantly slower than in the past several years, but we continue to build a high-quality customer base. I'll remind you that all of these customers are postpaid, since we do not have a prepaid option and do not sell Boost on the iDEN network.

You see on slide 14 that we actually had more gross additions in the third quarter of 2009 than we did in the same quarter last year. We are very encouraged that we put on more gross additions in September 2009 than we did in September 2008 when we first saw the impact of the current downturn.

Net additions were 3,286 this quarter, compared to 5,380 last year, due to an increase in churn from 1.85% to 2.17%. The increase in churn is not related to an increase in bad debt, with bad debt as a percent of gross billings actually less in the most recent quarter than a year ago. The increase is due to customers porting to primarily AT&T and, we assume, the iPhone. The irony is that we have a much better -- much more robust 3G footprint, but there is no denying the power of the iPhone in the marketplace.

We continue to reap the rewards of our decision to aggressively build out our EV-DO coverage. Slide 15 shows that our gross billed data ARPU continues to grow, resulting in an average of $19.07 per customer per month during the third quarter. This represents almost a 14% increase from the very healthy $16.76 we had a year ago and about 4% from the second quarter of this year.

The decrease in total ARPU results primarily from a significant drop in roamer revenue from our customers traveling outside the Sprint nationwide network and lower one-time fees.

Slide 16 provides you a reconciliation between our gross billed revenue and the net service revenues reflected in our financial statements. The improvement in bad debt and service credits from a year ago results in a 5% increase in net revenues from a 4% increase in gross billed revenue.

We continue to have approximately half of our gross additions select the high revenue plans of $100 or more per month as shown on slide 17. The recently announced Any Mobile Anytime plans that allow customers to call any mobile customer on any network appears to be positive. It's not yet produced a significant number of new gross additions, but it has created a buzz and our sales channels are very excited to have the option to offer to existing customers and new prospects.

One question we had was whether the change would result in current customers downgrading their plan if most of their calling was mobile to mobile. Approximately 25% of our existing customers automatically qualified for this enhancement, due to their current rate plan. To date, we've seen a meaningful number of current customers upgrade to qualifying plans rather than customers downgrading, although it's too early to have enough data to confirm any trend.

We continue to sell a good cross-section of phones. What is noteworthy is our industry-leading level of data revenue when we don't sell a particularly high percentage of smart phones. If you go back and look at the best-selling phones over the past several quarters, you see that the LG Rumor and Rumor 2 have been the top-selling phones through our control channels.

Our aggressive wireless construction program, started in 2008, is now coming to a close. Slide 18 shows the large number of cell sites we've added over the past two years, along with EV-DO sites, to provide 3G coverage to 94% of our covered POPs. We have a busy fourth-quarter plan with another 27 sites expected by year-end.

Almost 40% of total cell sites will have been built as part of this two-year construction program. As a result, we have accomplished our goals of keeping ahead of capacity requirements in the busiest parts of our network; significantly improving our coverage, particularly in Pennsylvania; and providing the most robust 3G coverage in our service area.

We may have a few sites that will get pushed into early next year, but at that point we expect a significant drop in capital expenditures. The ongoing needs will be success based, primarily adding additional capacity.

Moving to our wireline segment on slide 19, you see that we continue to have modest access-line losses. Our broadband penetration using DSL in our telephone footprint is now at 45% with monthly broadband ARPU of almost $40. We are continuing to enhance our network to offer higher speeds, with many of our customers now able to get 10 MG or more.

The customers from our recent acquisition of North River Telephone are not included in these numbers. We've actually started construction of the North River DSL network prior to closing, so we'll be able to offer DSL to some customers before the end of the year and to all customers by spring 2010.

Significant efforts continue on our cable operations. We will have owned the Rapid Cable properties for a year at the beginning of December. Work continues to rebuild those networks. We will not complete the upgrade of as many systems in 2009 as we had earlier predicted. But we are still on target to have all construction completed in 2010.

This quarter, on slide 20, we have started to show revenue-generating units, or RGUs, for our cable operations. As a reminder, we include the broadband DSL customers located in Shenandoah County, where we are the telephone company, in our wireline segment, although the 8,000-plys video customers located in Shenandoah County are included in the cable segment RGUs.

As we have upgraded the acquired networks, we have relaunched with Internet. To date, we have relaunched systems covering 40% of our homes passed with additional franchises being relaunched almost weekly through the end of the year, to have almost 50% completed by December 31. We're in the final stages of planning and preparation to launch voice in the upgraded markets in early 2010.

Additionally, we will start focusing on business customers in 2010.

We are seeing good growth of new customers in the relaunched markets, but continue to have churn in the markets that have yet to be reconstructed. Prior to acquiring these markets, Rapid was experiencing losses of over 300 customers per month and that was with a very liberal disconnect policy. We've made good progress in slowing the loss of customers, but our numbers will continue to be impacted until we are able to finish the upgrades next year.

My final slide, slide 21, breaks down the year to date and our current view of capital expenditures we'll have for the balance of the year. We have a number of big projects ongoing in all three segments -- three of our segments. Approximately $5 million of capital expenditures that we had originally planned for 2009 have been moved into next year, with the balance of our original projected CapEx representing primarily success-based construction, which we have dropped from the plan due to the slow economy and the opportunities not developing at this time. I will now turn it back over to Adele.

This concludes our prepared remarks. Operator, would you now review the instructions for posing a question?

(Operator Instructions). Ric Prentiss, Raymond James & Associates.

A couple of questions for you, starting on the wireless side. Can you talk a little bit about the competitive landscape that you're seeing out there? Like you mentioned, you guys don't have the Boost offering on the iDEN platform, but not having a prepaid product that I'm aware of, how is that affecting your ability to be competitive in the marketplace right now?

This is Earle. It certainly has an impact, especially on the customers with a lower credit rating. We are finding that a number of customers are coming in inquiring about service, but do not meet our credit requirements. And so, at this time, we do not have an option.

So we assume, at that point, they're going to one of the prepaid options that are available in the marketplace. But overall, as you can see, it really hasn't had a significant impact on our ability to generate gross additions.

Right. And as Sprint looks to close the Virgin transaction and bring that in-house, will that change anything? Virgin was obviously an MVNO previously, but once it goes inside of Sprint, how is that related with your contract with Sprint?

We are in discussions with Sprint right now about how that will impact us, and at this point I don't have an answer of exactly how that's going to be working going forward.

All right. And then, Tracfone has a new product out there, a fairly new product out there, called SafeLink, going after lifeline subsidies and lifeline type usage. It looks like -- now this isn't entirely, but it looks like in the entire state of Virginia, they might've had 75,000, 100,000 subscribers. I wonder if you're seeing any impact from Tracfone's lifeline product at all, also?

We really haven't, either on our wireline or wireless business. With our wireline rates at $8.00, it's kind of hard for it to be competitive there, and on the wireless side, we really haven't seen any impact either.

Great. I'll come back in for questions after others get a chance.

Barry Sine, CapStone Investments.

I wanted to ask questions in three areas. Let me kind of start out following up on the same topics Ric was asking about. In terms of PCS, in terms of your churn rate, I wonder if we could kind of delve into that breakdown, where you think the churn is going to in terms of, first of all, involuntary non-bill payment, how much of that is there, where are you seeing customers get ported out to that are churning. Do you have any more visibility on churn?

The number one reason that we do have churn is customers not paying their bills. But that really hasn't changed dramatically over, probably, the last six quarters.

So we haven't -- the good news is that because we've had a fairly restrictive credit policy in the past and we've really gone after the best customers, we haven't seen any spike in spite of the fact that there is certainly more unemployment than there was six quarters ago.

As we look at porting, although we do know which carriers they are going to, we get a good percentage of customers from all the carriers, but the two largest ports out are AT&T and Verizon, which is probably not surprising compared where they are nationally in the competitive landscape. But as we call up these customers afterwards and find out the reasons for them leaving, as I mentioned in my prepared remarks, the number one reason is folks buying the iPhone with the irony being that we actually have a much better 3G coverage than AT&T. But there's just a certain cachet of carrying an iPhone.

Okay, can you give any sense in what percentage of your churn is that involuntary non-pay churn?

It's less than half. About 40% of it is involuntary.

And that's been relatively constant, you've said.

Yes.

Turning to the new cable markets, the Rapid markets, I want to ask a couple of questions just to help me understand and model out how that's likely to look going forward. A couple, so a couple (technical difficulty) [complicated] questions on that.

First, if you could remind us of the number of homes passed. You've given us some upgrade milestones -- 40% today, 53% by year-end. What do you expect that to be at the end of the first quarter? When do you hit 100%? And then, lastly, on that, what kind of a take rate are you seeing so far in markets -- let's say towns you've been in for a month -- you've had an adequate opportunity to start marketing.

This is Earle. You asked a lot of questions. I'll try to remember them all. If I don't, please ask again.

As far as the number of homes passed, it's approximately 44,000 homes passed. We have constructed or finished 40% of them. We'll have over 50% done by the end of the year. We expect that the entire project will be done by middle of next year, and the exact number at the end of the first quarter is really dependent an awful lot on weather.

We have some real -- more severe weather or probably one of the most severe weathers in the East Coast happens in West Virginia. So it depends on how mild the winter is. If the winter is relatively mild, we'll get a good portion of that done in the first quarter. If not, it will get pushed off into the second quarter.

But at this point, we feel very confident that we'll have 100% of it upgraded by the middle of next year.

As far as results from markets that have been upgraded, kind of two parts to that. Number one, existing customers -- a good percentage of existing customers are upgrading. Most of our customers, when we bought the system, had analog -- you know, the basic analog service and obviously no other services.

A good number of them are upgrading to our digital tier, which we have over 100 channels in, and we're having some good, as you can see, some good luck in selling the Internet product. And we offer a 1, 3, and 5 MG, and the majority of our customers are moving towards the 3 MG option.

Can you give us any data on the, let's say, the first market you'd've entered into that's perhaps a bit more mature from a marketing standpoint, and how successful you've been?

I don't know exactly how to answer that question. We've put on probably, I would say, several hundred new customers and probably several hundred upgrades in the Covington, Virginia, market, which was the first one we cut, which was just at the end of the second quarter.

When I look at the third quarter, we've added hundreds of customers or hundreds of RGUs in that market. And that market has about 8,000 homes passed. So it is the largest single market that we have, and we have been selling there with a door-to-door direct sales force for about 60 days.

That's helpful. And my last question, and Adele, this might be for you. In terms of thinking about capital spending for 2010, I know you haven't given guidance on that. But obviously PCS capital spending is going to go down pretty significantly. Cable capital spending is going to continue pretty strong for the first half of the year, and then drop off in the second half.

So if I think about, let's say, a 50% reduction in PCS capital spending, 25% in cable capital spending for all of next year, I get to about $45 million in CapEx for the year. Directionally, is that the right way to think about things? I know you haven't given an actual guidance number on that.

That, directionally, makes sense. The cable spending is what's going to determine that predominantly, and again, as Earle pointed out, we'll be at 53% upgraded by year-end. So that will taper off, and as we've pointed out before, the PCS spending will be success based at that point and considerably lower than it has been since we've been installing EV-DO and expanding our central PA coverage.

[Greg Burns], Sidoti & Company.

A question on the rollout of cable. I guess it's progressing a little slower than you had earlier anticipated. Is that market-related or what are you seeing there? Why is it taking a little longer than you had previously anticipated?

This is Earle again. The primary reason, actually, is permitting. Because we are on the -- we share poles with the power companies and there are several different power companies that we cross over with Verizon and Frontier in West Virginia, the permitting process has taken longer than we anticipated.

What we're finding is that each one of these pole owners are taking the maximum 60 to 90 days to give us the permission to get on the poles, and then we also have to have any make-ready that needs to be done by the owner of the pole. And so that's been the primary reason.

The good news is that with the economy soft, we haven't had any shortage of equipment or contractors. So that we actually do have all of the resources that we need in order to build them out, and actually, if we had been able to get the permitting done sooner than our anticipation, we could actually be ahead of plan at this point. So it hasn't been a problem with anything other than just the permitting on the poles.

And then, if I look at your CapEx guidance for the year and kind of back into the fourth quarter, it looks like it's going to be around $24 million. It looks like you're going to be upgrading about the same percent of homes passed on the cable side in the quarter to get to your year-end guidance. Is there any reason why it's so significantly higher than the third-quarter CapEx number?

Much of it is just the timing of payments. What we've tried to provide to you is not necessarily where we've committed to dollars, but where we're actually paying for those expenditures. And so, it's really just the management of our accounts payable, and I'll turn it over to Adele. She may have some additional insight.

As Earle pointed out, we've made significantly more commitments to that, but we are accrual basis. We'll undertake to record the capital expenditures when we have actually received the service or the good in question. But these processes, as you know, always take a bit longer with zoning and so forth than you'd expect.

Okay, thanks. And then finally, on -- looking at the ARPUs on the wireless business, I guess you mentioned the voice ARPUs were being impacted by customer roaming. Is that something that could reverse going forward and you might see an uptick, or is that going to kind of continue to trend lower?

Well, it's actually -- when our customers roam off of the Sprint network, with the agreement that we have with Sprint, we basically have a bill and keep on the revenue, and then we pay a percentage of that to Sprint for our settlements.

What we have seen over the last four quarters has been an ever-decreasing amount of roaming off the Sprint network, and that's a combination of maybe the economy with people traveling less, but also the fact that we continue -- the Sprint network continues to grow with more and more cell sites being built by affiliates or by Sprint, so it really only represents revenues that we are collecting from our customers for them to be on the Verizon network or previously on the ALLTEL network.

So it is possible that it could reverse. To some extent, I doubt if it will come back to its all-time highs.

Ric Prentiss, Raymond James & Associates.

A few extra ones, guys. Earle, you made a point about your network versus AT&T's iPhone. Can you talk a little bit about how the backhaul at your network is being provided right now? How much fiber do you have to your sites? Are you putting in more fiber yourself or who are you using?

As you are aware, we do have a fairly significant amount of fiber that we own. Up through and into Pennsylvania, we actually own the fiber backbone that our wireless business is operated on.

In Pennsylvania, it's a combination of our partners, who is now CenturyLink, who is part of Valley -- ValleyNet, and we also lease capacity from some other third parties.

We have been building fiber to sites. We probably have about two dozen sites right now that we have built fiber into, our busiest sites, where we find -- primarily are focusing where we own the tower. We're now going to start looking at where we don't own the tower and working with the tower owner, if possible, if they are interested in us building in.

But we see building out fiber to our busiest sites as key to continue to provide a high-quality product. So it's something that we are already in the process of doing, and we'll continue to devote capital to that over the next couple of years.

And then, on the data ARPU hanging around the $19 level. Can it go up from that? Have we seen -- is it plateauing? Just kind of what are your thoughts as far as data ARPU trends looking forward?

It grew 4% just in this quarter. So, I think that it will continue to grow, especially with the incentives that -- the Any Mobile Anytime plans require you to buy one of the high-end price plans. Most of those include a fairly significant data component, and so I would think that it will continue to grow as we see customers migrate to the Any Mobile.

And if you look at your base, what percent of your base does have smart phones?

It's about 13% of our base has a smart phone.

So kind of to your point, that's still a pretty low number.

It's a very low number. But what we find is that our customers find very creative ways of using lots of data on kind of that mid-range phone. The Rumor is not a particularly high-featured phone, but it is by far our best seller, and we basically sell a data plan with everyone that goes out the door.

And our current sales, 20% of gross additions right now are smart phones and data cards, right, Earle?

Right.

So that will only increase it going forward. And I think the other point to be made here is that we follow Sprint's definition of smart phones, and it's generally more conservative than others in the marketplace.

That's true. And then, final question, Clearwire. A lot of building going on, a lot of ramp-up. Any of your markets on the drawing boards? Any discussions with Sprint about when you might see a 4G network come to town? And would you be required to build it or would it be someone else?

Once again, this is Earle. We would not be the one to build it. That is not within our current agreement with Sprint, although we continue to look at how we can participate in the 4G arena.

What we have -- what is happening, though, is that we have had inquiry by Clearwire to get space on our towers in the Harrisburg and York part of our Pennsylvania coverage, which is actually -- as they're looking at it, part of the greater Philadelphia buildout. So we anticipate that some time in 2010, we will have some 4G coverage actually in our footprint.

And how does that work? So, is -- do you have the right under Sprint's agreement to market that like Sprint does? Or would it just be Clearwire coming to town?

No, we would -- it would be a quasi-MVNO. I'm not sure exactly how to describe the relationship, but the customer would have a 3G, 4G device. They would use it. They would be our customer, and we would continue to have that relationship with the customer.

(Operator Instructions). Will Lauber, Sterling Capital Management.

I was actually going to ask that 4G question myself. Do you see, I guess, any of your competitors -- obviously Clearwire through Sprint wouldn't be necessarily a competitor. Would there be any competitive threat, you think, over the next couple of years that the 4G would be necessary? For competitive reasons?

This is Earle. It's -- I don't really have any insights into Verizon or AT&T's plan, but when you look at the number of POPs that both of them claim that they will build out as part of their 4G plan, it certainly is not a nationwide 4G footprint.

I would think that it could be possible that there could be some areas on the fringe as they build out Washington or Philadelphia, but as far as them focusing on the majority of our footprint for 4G, I don't anticipate that in the next couple of years.

That's what I was guessing. And then, we've been, I guess, talking about the CapEx for next year. Just kind of like in a longer-term picture, if it looked out two years out after that, next year I'm assuming the cable will be pretty much done and then your wireless business then will be pretty much done except any success-based spending. When you look out, say, two or three years down the road, I mean is it basically just maintenance and success-based capital spending?

Yes, that is the case.

Without an acquisition or some significant change in technology, as we look out the next couple of years it's really just maintaining and keeping up with growth.

Okay. And then on the acquisition front, is there -- do you guys have any preference -- will there be other local phone companies in adjoining areas or cable companies? Is there any preferences on potential acquisition targets?

This is Chris. I guess we are open to any of those that look like good opportunities and make sense.

Obviously, the closer to home, and closer to our existing network where we could realize some synergies, would be attractive to us.

As far as focus, we think certainly the cable networks probably wins out as far as a starting point, but any acquisition, the real focus is going to be broadband and all three services. So with the cable networks, we think there is an easier path to adding the broadband in voice, but certainly we would look to do that with telephone networks as well.

And my last question. I don't think you guys have covered it in this call, and if you did, please excuse me. But what -- I know that you -- it's been mentioned in the past that with the Rapid cable acquisition that a lot of you are finding out that, I guess, a decent amount of the customers were not paying for the service. Can you shed any light on what you've found so far as what percentage of their customers were not paying for the service?

This is Earle. We are working through auditing the systems as we are upgrading them. The industry normally sees a fairly significant amount of customers stealing service, especially in an MDU environment.

We have seen probably upwards of 15% to 20% of homes passed, in our worst cases, have been stealing service, but what we have found, as we went back and looked at the policies and procedures of Rapid, in most cases they didn't even dispatch someone to disconnect the service. And so, they would stop billing the customer, but they wouldn't necessarily disconnect the drop to the house.

So we're cleaning that up. We're knocking on the customers' doors. We are attempting to bring them on as a customer, but we are going to take a much more aggressive position than Rapid did as far as monitoring who is using our network.

Okay, so if it's the 15% or 20% of that number, when you guys are knocking on their doors, what percent decided to start paying as to just getting rid of the cable completely?

Once again, it depends on the market. But it's anywhere from 25% to 40%.

That will start paying?

Yes.

At this point, we have no further questions. I would like to turn the conference back to Ms. Adele Skolits for closing or additional remarks.

Thank you. Our Q will be released before the market opens tomorrow for those of you who have more questions or want to delve into greater depth as to our results. We certainly appreciate your participation. I'd like to invite you to let me know if there are additional details you'd like to see in the future. My contact information was provided on the press release.

Again, ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may disconnect.