Shenandoah Telecommunications Co (SHEN) 2015 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Shenandoah Telecommunications first-quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Adele Skolits, CFO. 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 March 31, 2015. Our results were announced in a press release distributed this morning and the presentation we'll be reviewing included on the Investor page of our website at www.Shentel.com.

An audio replay of the call will be made available later today. The details were set forth in a 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.

As always, let me refer you to Slide 2 of the presentation which contains our Safe Harbor disclaimer and remind you that this conference call may include forward-looking statements subject to certain 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 statement.

Also, in an effort to provide useful information to investors, we note on Slide 3 that our comments today include non-GAAP financial measures. Details on these measures, including why we use them, and reconciliations to the most directly comparable GAAP measures are included in our SEC filings. These reconciliations are also provided in an appendix to today's slide presentation.

I'll turn the call over to Chris now.

Thank you Adele. We appreciate everyone joining us this morning. We had a really great 2015 first quarter and I'm pleased to have this opportunity to provide details about the Company's continued growth.

On Slide 5, you'll see the first-quarter net income of $10.3 million, an increase of more than 19% compared to the prior year attributable primarily to continued growth in the wireless and cable segments. Adjusted operating income before depreciation and amortization, or OIBDA, for the quarter increased more than 12% to $35.7 million. Revenues were $84.3 million in the first quarter, an increase of almost 5% from the prior-year period. Increased revenues in the wireless segment were a result of wireless subscriber growth, partially offset by lower revenue service plans associated with handset financing and leasing plans. Our cable segment revenues also improved as a result of an increase in the total number of revenue-generating units, or RGUs, and customers selecting higher-priced digital TV services and higher-speed data access packages.

Our wireless highlights are shown on Slide 6. We experienced solid growth in this segment with increased customers for our post and prepaid offerings as a result of our upgraded network, leveraging Sprint's national marketing along with our regional advertising and providing high-quality global customer service. Postpaid customers grew by 5.8% compared to the prior year and prepaid customers by 6.7%. Operating income for the quarter grew almost 16% when compared to the first quarter of 2014.

Turning to slide seven, our cable segment also delivered strong growth as demand for our high-speed Internet and voice services outpaced the anticipated decrease in video subscribers. Operating revenues increased almost 14% to $23.3 million while cable-adjusted OIBDA grew 33% to $5.1 million. Solid growth in RGUs of over 6% drove this increase.

As you can see, we are making steady progress increasing the margins in our cable business, which now reaches 18%. We expect to continue to improve the margins through better penetration, selling more services per customer, and the shift in the mix of services we sell from the lower-margin video service to the higher-margin Internet and voice services.

Other highlights worth noting can be found on Slide 8. Our fiber lease revenues declined slightly to $8 million and our 154 towers generated $1.7 million OIBDA from lease revenue, down slightly compared to last year's first quarter. Fiber revenues for both periods were impacted by one-time adjustments. The decline of tower revenues was due primarily to decommissioning of iDEN leases during 2014.

We are pleased to have delivered steady new growth and improved profitability in the first quarter. Our upgraded networks are offering the enhanced coverage and high-quality service that our customers demand and as a result, we are also attracting new customers who are subscribing to additional offerings.

As we've reviewed in previous calls, with the system upgrades completed, our capital expenditures have come down, resulting in higher free cash flow. We continue to evaluate our alternatives for putting our cash to work. These include, in order of priority, strategic acquisition opportunities in both the wireless and cable markets, returning capital to shareholders by increasing our dividends, or further reducing some of our debt. Given our relatively small float, we continue to believe that share repurchase is not an option that we think makes sense for us.

I'll now turn the call back to Adele to review the details of our financial results.

Thank you Chris. I'll begin my remarks with Slide 10, which summarizes our Q1 2015 results. As you can see, all of our key financial metrics rose substantially in Q1 2015 over Q1 2014 with operating income up 18%, net income and basic earnings-per-share, or EPS, up 19%, and diluted EPS up 17%.

On Slide 11, I've shown the calculation of adjusted OIBDA. Here you can see that adjusted OIBDA grew by nearly $4 million, or 13%. Depreciation grew by nearly $1 million in Q1 2015 over Q1 2014 as a result primarily of the incremental depreciation on network enhancements required to meet the growing data needs of our customers.

While the total fair value of the stock awarded in Q1 2015 was up over Q1 2014, the incremental share-based compensation expense dropped. This drop resulted from a portion of the awards coming in the form of relative total shareholder return performance-based compensation. These awards vest evenly over a three-year term whereas most of our historical awards vested on a more accelerated basis. Finally, the impact of the disposal of assets was negligible in Q1 2015.

Slide 12 shows our growth in adjusted OIBDA by segment. Cable led the way with a 33% improvement, followed by the wireless segment with a 15% increase. The cable improvements are consistent with longer-term trends, as Chris mentioned earlier.

On Slide 13, I've analyzed the changes in adjusted wireless OIBDA results between Q1 2015 and Q1 2014. Postpaid handset and customer acquisition costs are down by $3.5 million. As Earle will discuss in greater detail in a moment, the shift to leasing and equipment installment billing to finance handsets drove this decrease. And a related shift in postpaid service pricing, the postpaid billing rates are down 6% during this period. So, while average customers grew by 5.5%, net postpaid service revenues grew by just $200,000. Prepaid revenues grew by $900,000 related primarily to growth in the average prepaid customers of 6.3% and a 2.1% increase in the average monthly billing rate to each customer. Increases in the rate Sprint charges us to support prepaid customers in addition to the increase in the customer base drove a $1.1 million increase in prepaid support costs.

On Slide 14, I've shown the components of the changes to adjusted cable segment OIBDA. The positive changes include significant growth in high-speed data revenues, which grew by $2.4 million as a result of an 11.4% increase in average high-speed data customers. In addition, video revenues grew by $800,000, primarily as the result of the price increases which we implemented in January to offset the increases in the video content providers' rates. The average number of video customers actually dropped by 1.9% during this time period, consistent with industry trends.

Voice revenues are up by $400,000 as a result of a 21.4% increase in those customers. Bundling of services to promote customer growth resulted in a $1 million increase in discounts and promotions. The increases in content providers' rates drove a $1.3 million increase in programming costs.

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.

Thanks Adele. Good morning everyone.

Starting on Slide 16, we ended the first quarter with 291,078 postpaid users and 438,861 total users for a penetration rate of approximately 20% of covered POPs. 80% of our postpaid users have a smartphone. 94% of our postpaid smartphones have LTE capabilities and 49% of the postpaid smartphones have SPARC capabilities. All our concerted efforts have paid off as only about 2% of our customers still have a 4G WiMAX phone.

Moving to Slide 17, net postpaid ads were 3,211 for the first quarter. Q1 net adds were up substantially from the 1,304 in the same quarter last year. Postpaid gross adds were 17,105 for the quarter compared to 15,585 in 2014. First-quarter churn was 1.6 compared to 1.7 last year and 1.9 in the fourth quarter.

So, let me give you some additional first-quarter 2015 stats. Our port-in ratio was a positive 1.7 to 1. Smartphones represented 59% of net adds with tablets and connected devices at 41%. As of March 31, tablets represented 4.7% of our postpaid base. 42% of our gross adds took traditional subsidized phone plans. 35% selected installment sales and 23% leased their phone. As of the end of the first quarter, over 79% of our postpaid base is still on a subsidized rate plan.

Upgrades in the quarter were higher than our historical level at just over 8% but lower than the 12% upgrades we had in the fourth quarter. 28% of our upgrades came through Shentel stores. The breakdown of Q1 upgrades is 52% selected a subsidized phone, 17% installment sales, and 31% a lease.

The Cut Your Bill in Half promotion continues to help get prospects in the door with store traffic up about 5% year-over-year but only about 6% of the Q1 gross adds selected the Cut Your Bill in Half service option.

Customers leasing or buying their phone and promotions continue to impact our gross billed service revenue per postpaid user, shown on Slide 18. First-quarter gross billed revenue was $61.06, a reduction of $3.87 from the same quarter last year and down $1.68 from the fourth quarter. As a reminder, when any of our customers purchase their phone on lease or installment, the equipment revenue and cost of goods sold are recorded on Sprint's financials. Our equipment revenue only includes the amount we collect for phones from customers staying on subsidized rate plans and accessory sales.

The reconciliation of gross billed postpaid revenue to net postpaid service revenue recorded on our financials is shown on Slide 19. Total postpaid billed service revenue was down less than 1% to $53 million from the first quarter last year and net was up about 1%. The increase in net was the result of lower discounts and credits in 2015.

We share prepaid stats on Slide 20. We had higher prepaid gross adds in Q1 at 23,600 and net 2,621 compared to 19,200 gross and a net of 1,490 last year. Within the net gain, we saw a significant increase in Boost customers with a decline in Virgin Mobile and Assurance. We ended the quarter with 147,783 prepaid users, an increase of 6.7% from a year ago. At the end of the first quarter, 74% of our prepaid users had a smartphone with 23% of the prepaid smartphones having LTE capabilities.

On Slide 21, you see that prepaid churn was higher at 4.8%, reflecting the shift in the prepaid base to Boost from Virgin Mobile and Assurance. Average gross billed revenue was $28.51. Even with the price reduction in Boost during 2014, the shift to Boost Mobile being a larger percentage of our prepaid base resulted in higher prepaid gross billed revenue.

Before we move to cable, let me share some network stats on Slide 22. We have 542 sites. 95% of the sites have 800 megahertz LTE service. 126 sites have a second 1,900 megahertz LTE carrier. We been able to harvest 10 megahertz of our original 30 megahertz for LTE and will continue to deploy the second 1,900 LTE carrier as need grows. 84% of all of our data traffic is on LTE with 35% of LTE traffic on 800 megahertz. Average speeds are approximately 5 megabits.

Data usage grew by 15% in the first quarter with LTE up 19% and EVDO down approximately 5%. The average customer used approximately 3.8 gigabytes per month in the first quarter.

We have 800 megahertz voice service on 95% of our cell sites. Approximately 28% of the voice traffic is on 800 megahertz. Voice usage decreased slightly in the first quarter. Dropped calls were at 0.6% and blocked calls at 0.4%. We have our fiber built to 194 cell sites, 152 Shentel sites, and 42 for others with 22 additional sites under construction and 11 in engineering.

Now for our cable results on Slide 23. We added 2,299 net RGUs in the first quarter for a total of 124,015. We added 1,836 new data users, 850 new voice users, and lost 387 video users. We added 894 net new customers, now totaling 72,192 buying, on average, 1.72 RGUs each. During the first quarter 2015, we crossed over and have more data users than video users.

Average monthly revenue per RGU and per customer is shown on Slide 24. Average monthly bill per RGU increased $3.52 to $59.72 driven by a video price increase in January and an increase of over $6.00 in data ARPU due primarily to customers purchasing higher data speed options.

In reference to our video price increase, we made the decision to pass on 100% of all video cost increases and will no longer continue to subsidize video with our data and voice margins. Even with the hefty video price increase in January, our video losses were minimal. The first quarter 2015 average monthly revenue per customer grew $9.96 from $92.24 in the first quarter of 2014 to over $100 for the first time at $102.20. That's up $5.42 from the fourth quarter of 2014.

Slide 25 shows the change in homes passed, RGUs, and penetration by service between the first quarters of 2014 and 2015. We've added over 1,300 additional homes passed, added 7,423 additional net RGUs and 1,522 net new customer relationships. We've added 5,127 net data RGUs to push our penetration to almost 31%. We added 3,313 voice RGUs, exceeding 11% penetration, and lost 1,017 video RGUs.

We continue to significantly increase our digital penetration as we convert our 750 and 860 systems to all digital. That project will be completed this year.

Just as a reminder, we expect our traditional drop in RGUs in the second quarter as our college student customers will be going home from for the summer.

Our wireline segment continues to be very stable. On Slide 26, we ended the quarter with 21,669 access lines. We continue slow but steady DSL growth, ending the quarter with 12,825 DSL users. As you recall, we don't count our video-only cable customers that we serve in our regulated phone service area in our cable stats.

Slide 27 shows our fiber lease revenue recorded in our wireline segment broken down between affiliated and non-affiliated. The reduction is the result of revenue adjustments recorded in both periods. On the right side, in the first quarter of 2015, we signed $4.8 million in new nonaffiliated fiber contracts compared to $2.8 million in 2014. Revenues are recorded based on which segment the underlying fiber asset resides.

Our last slide is Slide 28. We've not changed this slide from our year-end call. We're still on track to spend over $74 million in 2015, broken down as shown with SPARC starting to be deployed in the second half of 2015.

I'll now turn the call back to Adele.

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

Absolutely. (Operator Instructions). Ric Prentiss, Raymond James.

Earle, I want to start with the SPARC project. You mentioned how the deployment will start with second half of this year and that like 49% of your smartphones on postpaid are already enabled with it. As you think about that project, I think, in the past, we've heard a 150,000 to 175,000 per site that you do it at. What's involved in that process and compare it to the Vision project that was a rip and replace.

Well, because we did Vision, the deployment of 2.5 is going to be relatively simple. I never want to say simple because nothing ever is. But we will be just adding a 2.5 carrier card into the base station and the base stations are all set up to be able to take that card. And we will have to put an additional set of antennas on the tower because the antennas that we put on the tower were a combination 800/1910 antenna. So we already have been working through and been working for well over a year with the tower sites that we had designated as being high traffic and have most of the agreements done at this point. We have all the work done for the ones that we are going to deploy this year and a lot of the work done for the ones we're going to deploy next year. So, the amount of work will be relatively small. Obviously, it will require climbing the tower but not nearly the effort that was done for Network Vision.

And will there also be a separate radio at the 2500 then too at the top of the tower?

Yes, there will be a separate radio head.

Okay. At the tower show last week, there was a lot of discussion about small cells. Are you anticipating any small cell deployment in the markets where you are going to roll out the SPARC project?

We actually have done kind of taken two different approaches. One, we think the best use of small cells is actually in-building, and we've deployed them in a number of buildings and malls and we're getting very good results from that.

We did do one exterior or outside deployment in Hagerstown. And just because of the density of our markets, we didn't really get the bang for the buck on that deployment. And so at this point, our plan is to use the small cells in-building and in areas like stadiums or that sort of thing that there would be a lot of folks in a very small geographic area. But because of our density, the outside ones on poles really have not given us the results that we had hoped.

Makes sense. Where do you think the breakpoint is for the density to where a small cell would make sense? And what was the Hagerstown density that you tried it at?

We don't think that even Harrisburg, which is our most dense market as far as population, made sense. And Hagerstown, where we have penetration of about 35% penetration, obviously, we have a lot of users. And this is a city of 100,000 people, and so that's pretty dense. But still you don't have the high-rise office buildings. You don't have the density of residential or business users that you would have in a top 50 city. And so we really don't believe we have any application where the exterior small cells make a lot of sense.

Okay. And then an operational question. Churn was down nicely in the quarter but gross adds were a little lighter than we were looking for. Can you kind of frame what was happening with the churn and can that continue? And what do you think is going on with the gross add switcher pool?

I think just in the entire industry we saw kind of a slower quarter for people looking to change. We had such a high activity in the fourth quarter reflected also by our upgrades. So I think upgrades is kind of an indication of people out looking for potentially changing. We did have very good port-in at 1.7 to 1, but we had better traffic than we had a year ago. So we really weren't disappointed with our gross adds. They were pretty much in line with what we expected for the quarter.

And churn, there was just less promotion going on in the marketplace. We really had not, as I've said before, we're really not impacted terribly by T-Mobile and both Verizon and AT&T pulled back in the first quarter, which gave us a nice churn number.

Great. Thanks Earle.

Barry Sine, Drexel Hamilton.

I wanted to better understand. I think there was a comment, you talked about your traffic was up about 5% versus the year-ago period. What was driving people into the stores?

And specifically, I want to ask about the Sprint Cut Your Bill in Half promotion. Kind of interesting. That seems to be a big traffic driver but then when they come into the stores, you don't release sell them that. You kind of sell them something else, which sounds a little bit suboptimal. What was overall promo activity and what are you doing as we go into second quarter that may be different and drive different results for second quarter?

That was a multipart question. I'll try to answer. If I miss something just ask again Barry. The Cut Your Bill in Half promotion and the amount of advertising that Sprint has put around that really did drive store traffic. We had a lot of folks that came in. As I mentioned, we did have 5% higher store traffic that a year ago. A lot of the folks came in curious about that promotion. But as we talked about before, part one of that promotion is you have to give up your existing phone in order to -- and then sign up for EasyPay or installments on that. What we find is there's a lot of resistance of customers giving up their phone because they feel like that's value they could sell it to somebody else.

Also, you have to take exactly the same service that you have. So if you were getting 2 gigabytes of data, you have to stay with 2 gigabytes to get the half off. And with usage, data usage going up, a lot of folks don't want to be limited by the plan they were on. They are kind of looking for a plan with more usage. So it does get people in. They are curious. In a 30-second commercial, we really can't explain all the ramifications. So I think it does require a little bit of time with the customer. And as I said, only 6% of our gross adds were people taking the Cut Your Half promotion. So not a big take rate. But what we were able to find in many cases and as a result in our numbers is that we do have a price plan that does make sense for them. And so we -- it does take some time. Your comment was suboptimal.

With all the things that are happening in the marketplace right now, with things happening with the phone and with the service pricing, it really has extended the amount of time it requires meet with a customer in order to sign them up. And so we've had to add some additional staffing in our stores in order to do that because the one thing you don't want to do is someone to walk out the door because they had to wait too long.

So I think, generally, we've been very pleased with the reach and frequency of Sprint's national advertising. It is significantly higher than it was a year ago. And even though the promotion in and of itself isn't a big driver of numbers, it has been very, very effective as far as getting customers in the store. We are already into May and believe it or not, it's still driving customers into the store. So, we are continuing to have -- we always have felt like if we have an opportunity to talk to the customer, we've got a very good chance of closing them. And so we continue to look for ways to get customers in the door. Locally, we are running some promotions on accessories and that sort of thing, which help not doing -- we haven't had to do as much advertising, promotion advertising, with Sprint at a high level. So what we've been doing locally is continuing to focus on our 4G LTE network, which Sprint is not doing nationally, and have gotten some recent numbers for instance on net promoter score which shows that our net promoter scores are continuing to rise. So, not only is the perception good because of the brand type advertising we're doing, our customers are giving us higher and higher scores as they are enjoying the benefits of the upgraded LTE network.

Okay. I think that covered most of those.

In terms of Sprint network quality, maybe we could talk about how that's changed and how that has impacted your business in terms of gross adds and in terms of churn. And if so what I'm asking about is the network quality in both adjacent markets as well as in some of the urban centers, like a Washington DC where your customers are likely to room to, has that materially changed? Is that a bit of a negative still? Is it becoming a positive? Where are we?

It is improving. I won't say that it's a positive yet. It's less of a negative. You know, Sprint is continuing to build out.

The real issue is not so much in the urban urban areas as it is in the between areas. We've talked about that before, the areas where they leave our area and go into the Sprint area where Sprint has not been as focused as they have been in the urban areas. It is improving. We have a working to-do list with Sprint and their engineers to improve the quality of the handoff in the areas that are immediately surrounding us and Sprint has committed to build some additional cell sites as we will continue to augment our network. But I won't say that it's changed dramatically, but it has improved.

Okay. And then kind of a similar question in terms of marketing on the cable side. Adele's Slide 14 shows a $1 million increment on discounts and promos versus a year ago. So, what were you doing in the quarter that drove the results and whatever you were doing? Has that continued into second quarter?

Our primary promotion in the first quarter was actually a promotion that doesn't cost us anything. We actually offer a discount if you take two and a further discount if you take three services from us. And it turns out that, depending on the combination of product, if you take a triple play from us, basically local phone is free. And so we actually did our promotion based on our regular everyday pricing but basically saying buy two get one free. And so what we saw was a higher percentage of triple play customers -- or triple play sales in the first quarter because customers were taking advantage of that promotion.

As we move into the second quarter, we are focusing very heavily on data or the Internet. You know, that is our primary differentiator between ourselves and the incumbent telephone company in that we can offer up to 100 megabytes. And so we continue to focus on that and a combination of new customers and, interesting enough, the number of customers that are upgrading. We are seeing, on an annualized basis, about $200,000 a month of upgrade revenue, most of it in Internet, as customers continue to move from 5 to 10, 10 to 15 and up the scale. As their data needs change, they need a faster and faster pipe in order to have that good experience in the home.

Okay. Thank you very much Earle.

Kevin Smithen, Macquarie.

Can you give us an update on the cable sector M&A prospects? What does the Comcast FTC news mean for the world cable space?

And as regards to the video product, it sounds like you were going to fully pass through video programming cost increases and you are willing to tolerate higher churn although you didn't see it in Q1. But how do you think the industry in the rural cable space is looking at video? And how much network upgrades are needed in the rural markets for some of your competitors to really support a broadband, sustainable broadband growth?

Boy, Kevin, that was even a more complex question then Barry asked. So I'll try to answer all your questions, but if I don't get pieces of it, jump in.

As far as acquisition prospects, there really is nothing formally on the market right now that we are aware of. We have continued to talk to our smaller operator neighbors and have made it clear to them that we are interested in continuing to expand our footprint, especially at the right price. I don't know of any midsized cable operators that are contemplating a transaction, but we obviously will continue to monitor that. And we continue to be in contact with the big guys, letting them know that if there are some properties they want to shed, we are certainly very interested.

As far as the Time Warner Comcast merger, as -- and I think I've mentioned before I sit on the board of the American Cable Association. The American Cable Association was not opposed to that merger but we were asking for certain terms and conditions that would protect the small guys, especially on the programming side. So, I'm not sure that the merger not happening really has a tremendous impact on the day-to-day operations of small cable operators. They could have had an impact if it had happened. I think not happening probably doesn't have a lot of upside. It just doesn't have the downside that the merger could've happened.

As far as investment, that's what we're finding. The vast majority of smaller cable operators just do not have the access to capital to do the upgrades that's required that we've done to get to the 100 Meg.

And even more important, Kevin, is the access to fiber. That middle mile is a real killer for a lot of midsize and small cable operators. The fact that we own and operate 4,300 miles of fiber gives us that middle mile and we are able to carry that traffic at a very reasonable cost. When I talk to my counterparts who don't have the fiber backbone that we have, they are paying a very large percentage of their Internet margin or their data margins to that third party. And so where broadband definitely is kind of the growth business for all of cable operators, if you don't have an effective contract and a good price on that middle mile, it can certainly impact your ability. And in many cases, the small cable operators (technical difficulty) they've been talking about data caps. But a lot of the small operators have had data caps for a while simply because they don't have the amount of -- the capacity in their middle mile.

Did I miss anything? I can't remember here. I think I got them all.

That was very helpful. Thank you.

David Dixon, FBR.

The first question I had was on the 2.6 deployment, the timing of that deployment being set for the second half of the year. Was that faster than expected? I think originally we were talking about 2016.

We've always said that we were launching 50 to 75 sites this year. It was just always going to be at the end of this year. We really -- even though we've continued to have very, very high utilization, at this point, we've had enough capacity to be able to carry it. But we are looking forward to using it as a laser, not as a broad way to identify sites that do have high usage. And that's going to be primarily in our Hagerstown, Martinsville, Harrisburg, Harrisonburg, Winchester markets is where we are going to be deploying those sites.

Thanks. So I'm assuming with this question that you've been privy to some of the efforts by SoftBank to move towards what is more indoor small cell approaches in Band 41. And I'm just curious if you could talk, wondering if you could talk about implications if SoftBank does make that strategic shift from a network build standpoint to indoor and what it means for the macro deployment pass, the Band 41?

From our standpoint, we are going to use it on a very limited basis where we have buildings that we are having difficulty providing great service in. We don't have any fixed skyscrapers. We don't have any -- for us, a three- or four-story building in a big building. So, I think it's a very different build for us or a very different utilization for us than it would be for Sprint in major metropolitan areas. You know, I can tell you that, for instance, we have inserted some recently in a shopping mall and it has done a great job of improving the quality just because of the construction of the mall inside and it has taken capacity off of the macro cells that surrounded them all. And so from our standpoint, that was a very good utilization of CapEx in order to improve the customer experience and to get a better overall network experience. But as far as the same approach that Sprint is using, it's not going to be the case. It's just very different markets.

And have you been privy to the group data from SoftBank, Earle? Have you seen any of that data on network performance?

We have not.

Okay. So I'm just wondering. With the network density that you have relative to Sprint, does that allow you to move forward faster on VoLTE perhaps than Sprint's plans?

Yes, I think we could. We've looked at it. I'm just not sure that, once again, we need to do it as quickly. What we'll be continuing to monitor is the customers to LTE capacity phones. And as you see, we've already got pretty good penetration already and I think that we will -- once we feel like we are kind about that tipping point, I think we can go to VoLTE very quickly.

And have you measured the network performance in terms of being ready for VoLTE?

I think when we -- we believe that within the 12 months to 18 months where we may start to look at that, we'll be in great shape.

Okay, great. Then lastly, with 84% of your traffic on LTE, could you remind me how many 3G devices you've got left and what the strategy is to get to 100%?

Well, 80% of our folks have a smartphone and the vast majority of those are LTE-capable, so we've probably got about 25% of our overall customer base doesn't have an LTE phone. I would think that we will see the same kind of migration we saw in the 4G WiMAX phones where we can move the vast majority of them over the next 12 to 18 months but there's always going to be that couple percentage that we are going to have to drag over the line. And once we get to that point, we'll be able to -- we will have a different strategy on how to deal with those -- the last couple of percentage.

And just the relative speed -- sorry, I forgot another question here -- was just with respect to 5 megs and how that compares to the competition, whether that's causing any -- churn was obviously very good, but whether that's causing any kind of churn issue in the base at all in terms of the (multiple speakers)

Not that we are aware of. It's a little dated now but RootMetrics did a comparison of the systems in Harrisburg, Pennsylvania, which is the only market we have that's large enough to kind of hit the RootMetrics scoreboard. And basically they gave us a rating that was equal to Verizon, and so we feel very good about where we are overall.

Okay, great. Thanks very much.

(Operator Instructions). Ric Prentiss, Raymond James.

Hey guys. One quick follow-up for Chris. Chris, in the beginning of the presentation, you spoke obviously about your free cash flow position looking really, really well, evaluating ways to put it to work with strategic firsts, then dividends, then debt but not stock buybacks. Given that you are about to drop under the 1 turn of leverage zone and Earle's comments on strategic sounds like there's some out there but nothing imminent and your dividend policy I think is still kind of an annual dividend policy. How should we think of this given that your leverage is dropping, your free cash is getting better. What should we think of as far as the timeline to putting that balance sheet to work?

Ric, we probably won't be making any changes midyear. The board will probably assess where we come out towards the end of the year when we do the annual assessment on declaring the dividend. That a little bit helps I guess timing-wise because, if nothing does materialize on the M&A side, then we are free to declare the dividend, whether that's raising the regular rate, or we always have the option we could also declare a special dividend if the situation warrants it at that time.

That makes sense, that the rest of this year you can just see what materializes on the strategic front and then get the board together and check dividend strategy towards later in the year.

Yes.

Great. Thanks.

It looks like all the questions that we have. Thank you for participating. Please let me know if there is information you would like to see us cover in future calls. My contact information was provided on the press release.

And again, ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.