Spok Holdings Inc (SPOK) 2006 Q2 法說會逐字稿

Good morning everyone, thanks for coming to our investor meeting. My name is Scott Tollefsen, I'm the Company's General Counsel and Secretary. I'm going to read a couple of brief Safe Harbor related statements and then introduce Vince Kelly, our President and CEO, who will lead off the meeting.

This presentation may include forward-looking statements that are subject to risks and uncertainties relating to USA Mobility's future financial and business performance. Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans which are dependent upon future events or conditions. These statements represent the Company's estimates only on the date of this presentation and are not intended to give any assurance as to actual future results. USA Mobility's actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based upon assumptions the Company believes to be reasonable based on available information, they are subject to risks and uncertainties. Please review the risk factor section relating to our operations and the business environment in which we compete contained in our second-quarter Form 10-Q and our 2005 Form 10-K, both of which are on file with the Securities and Exchange Commission for a description of these risks and uncertainties. USA Mobility assumes no obligation to update any forward-looking statements from past or present filings and presentations. One other statement. In this presentation, USA Mobility references non-GAAP financial measures as defined by Regulation G adopted by the Securities and Exchange Commission, such as EBITDA. These measures are used by financial analysts and institutions for evaluating the performance of companies in our industry. Our management uses these measures as a basis for assessing operating efficiency, overall financial performance and profitability. USA Mobility has provided a reconciliation of these measures to the most directly comparable GAAP measure in our August 8, 2006 earnings release, which is contained in your information packets. EBITDA, or earnings before interest, taxes, depreciation and amortization, is defined as operating income plus the add-back of depreciation, amortization and accretion. A reconciliation for EBITDA is included in our press release and in the statement of operations included in this presentation.

Now I would like to introduce Vince Kelly, our President and CEO.

Thank you, Scott, and welcome to our much-delayed investor update and presentation. Hopefully next year, we will be able to do this in the February/March timeframe so it will be much more soon after the end of the year than what we're able to meet with you this year.

I want to introduce the management team. I've been in this industry almost 20 years and I will say without question that this is the finest management team that I have ever been associated with in this industry. You just heard from 1, who's our General Counsel and Corporate Secretary. He joined the Company in May of 2005. He has over 25 years of legal experience managing the legal and regulatory affairs of leading operating companies in the communications industry, including SES Americom, Vivendi Universal Interactive Publishing and Hughes Communications. Mark Garzone was appointed Executive Vice President and Chief Marketing Officer -- can you flip the slide here? -- and Chief Operating Officer in January of 2006. Prior to joining us, Mark was the Vice President of Marketing at Nextel Communications. Mark has over 20 years of service in the selling and marketing function with over 10 of those years in the wireless industry.

Peter Barnett. Peter is our Chief Operating Officer. He plays a key role in the Company's information technology infrastructure and operational strategies. His responsibilities include customer service, collections, inventory, engineering and information technology. He has over 26 years of experience in the wireless messaging industry, beginning with graphic scanning and radio relay in 1980. He is responsible for the plan to reduce many of our major expense categories, including telecommunications, site rent costs and repairs and maintenance. As we go through the presentation today, you will see how critical that is to our future.

Tom Schilling. Tom our Chief Financial Officer. He joined us in January of 2005 right after the Metrocall/Arch merger. He has played a key role in our integration efforts. Tom has over 18 years of financial and operational experience in the communications industry, including positions as the CFO Cincinnati Bell, as well as positions at MCI and Sprint.

And finally, I'm going to introduce our Executive Vice President of Sales, Mr. Jim Boso. He's not here with us today because we had a very large messaging opportunity come up in the health care sector. I wanted him to be there meeting with the telecommunications director of this particular hospital group. And so that's where he is today turning to sell wireless and services from U.S. USA Mobility. But I'll tell you, Jim has over 10 years of experience in the wireless messaging industry and 24 years in the telecommunications broadcast and entertainment industries, including serving as Vice President of the Broadcast Division of Bass Brothers, Senior Vice President with [Storer] Communications and Chief Executive Officer of Spectravision. Our 11 regional vice presidents and our entire sales organization report to Jim.

What we're going to do today for those of you that are in the room and those of you that are joining us by teleconference is walk you through a presentation that talks about who we are, what we do, where we have been, and most importantly, where we're going. With respect to who we are, we're going to give you a quick background on USA Mobility, we'll talk about what our operating strategy is, we'll talk about where we see paging today fitting with respect to wireless communications. In terms of what we do, we're going to reiterate our strategic vision statement because that's the litmus test that governs all decisions that we make. Mark Garzone is going to talk about sales of our products and services and then Peter Barnett will talk about our operating focus with respect to keeping a long-term, low-cost operating platform. We'll talk a little bit about the integration, and then Tom Schilling will share with you our second quarter results and talk about some of the trends that we see in the business. And then finally, I will come back up and wrap up with respect to where we're going.

First of all, USA Mobility is headquartered in Alexandria, Virginia. We have a major operations center in Dallas, Texas where we have our information technology group, our engineering function, our inventory function and a lot of our customer service. We were formed in November of 2004 by combining the two leading independent paging companies out there -- Arch Wireless and Metrocall. We are the largest provider of local, regional and nationwide one-way and two-way narrow-band wireless messaging services. At June 30th, we served 4.4 million subscribers on a national basis. We're a debt-free company. We have over 40 years in paging and wireless communications. Metro call was founded in 1963 and been in the paging business ever since. We focus on providing wireless products and solutions really to our three largest sectors of our focus -- our health care sector, our government sector and large enterprise, what you would call Fortune 1000 type enterprises. We're committed to creating value for our customers through cost efficiencies. We want to be able to solve our customers' wireless communications needs, not just for paging but for all of their wireless products and services. We'll talk more about that in a couple of minutes. We provide expertise in the latest technology applications and wireless devices. We've been very successful in the health care sector doing this and it's something that we need to extend our other verticals, particularly government and the large account enterprise type customers. We think we have great customer relationships and distribution capabilities and we can use that to our benefit in terms of taking advantage of some opportunities in the future.

From a scale perspective with respect to the traditional paging industry, we represent about 59% of the market as measured by number of subscribers at 4.4 million subscribers. You can see the other competitors up here on the slide. Our next largest competitor is AMSI, which is a combination of the old SBC paging and Verizon paging. Then there's SkyTel, [Teleprensa] is very small, and then all other paging competitors comprise about 11% of the subscriber market.

A couple of things that differentiate us from the others, not just our scale, but our paging networks. We have to largest networks in terms of number of transmitters and geographic reach by far compared to any other paging company. And in fact, many of our paging competitors pay us to put their customers on our networks because our network cover places they don't. Our customer base, our customer service, our sales force are the largest, most diverse in the industry. If you think about it, all the mergers that took place and all of the consolidations that has taken place, our regional technical managers, our regional vice presidents, our sales managers are the cream of the crop with respect to this particular industry. They were the people that were selected in the integration process to be the people that continued with the company going forward and I believe that they're the best there is in the business. We're clearly the industry leader with the scale to drive the lowest cost and most sustainable cost structure in our sector in the long-term. What I'm talking about there is a couple of things. A lot of costs in this business are driven by very few categories. You will see about 70% of our operating expenses is in headcount, site rents and telecommunications. And headcount we've done a lot of work in and Tom will talk about that in a couple of minutes. Site rent is our next-biggest cost, and if you think about it, when Metrocall and Arch merged, we were able to go to our large landlords, we went to our largest landlord, Global Signal, and because of the added leverage that we had with the merger, we would able to cut a very good deal for our long-term cost structure because it's just simple as saying if we could get a major improvement, we're not going to be able to stay on your sites, we will have to move on. They said, yes, we were ecstatic, we got a good deal because we think they made a good long-term decision to continue a revenue stream for a long period of time. We benefited from that, it was a win-win for both organizations.

After we did that, we had a similar experience with American Tower Corporation. They came to us and we had met and we had a similar negotiation and got a phenomenal deal with American Tower in terms of being able to have a good long-term low-cost site rent operating platform.

What has happened in the new information is that subsequent to those two deals, and Peter will talk about this a little bit when he does his presentation, is many of the other tower landlords have contacted our engineering group and said please don't move us off our sites and put us on Global Signal or American Tower, we will lower our price. Because what they're faced with is, they can get what they're getting now, or they can get zero, or they can lower their price to where we think our cost needs to be anyway and keep some level of revenue. What happens with a lot of these tower companies is that where the actual antenna sits on the tower and the space that we use with that particular tower, there's not a lot of other alternative technologies that would use that anyway so they might as well get something. So because we were the largest, because we had this extra leverage, we were able to do that. I don't think that there's anybody else in the industry that can get that kind of a cost structure over the long-term and I think that's going to continue to differentiate us going forward.

In terms of looking at our operating strategy, it's a free cash flow based strategy. And really that will be the litmus test with which we measure all of our decisions going forward -- free cash flow. It's really supported by three primary tenets. The first one is, we have a customer base, 4.4 million subscribers. We know it's eroding. We want to mitigate the rate of erosion. We have been relatively successful doing that, we need to be a lot more successful in the future. One of the ways to mitigate that is by providing high-quality customer service. We want the pagers to work where they need them to work and we want to be able to answer their questions and give them a good clean bill and offer them a good product at a decent price. And so that is very important as the first tenet that supports us. But we also want to be able to sell new products and services. It is clear and becoming more clear on a daily basis that, no matter what we do, we are going to continue to lose some level of our customer base. There is going to continue to be erosion. I don't foresee right now -- it would be nice if it happened -- but I don't foresee right now a period where it's just flat and we have a level customer base and there's no churn at all. I don't think that's going to happen. So we have to be able to recognize that, we have to be able to take advantage of that. If customers are leaving paging, they're going somewhere. They're most likely not leaving wireless communications. We have to be able to capture some of that. We do some of that today, we need to do more of that in the future and we have to be able to do that consistent with our free cash flow litmus test. Mark Garzone will talk a little bit about that and you'll hear more about that in quarters to come from us.

And then the last piece is the cost efficiencies. We have to continue extracting costs from this business. Peter Barnett will talk about that. That's his primary focus on the business is from an operations standpoint, we have to be very efficient and take costs out. We took over $100 million in expenses out in 2005 on a pro forma basis from 2004. We will take over $90 million of expenses out this year. We need to continue focusing our efforts on right-sizing this business and being efficient. If we can do those three things, we will continue to support a free cash flow strategy and maximize that stream of cash flow for as long a time as possible. And that's what the goal is here and we'll talk about that and we'll actually have a graph later where we'll actually look at that.

We've focused our sales and service efforts around our core group of business units users -- the health care, government, the large enterprise users -- that appreciate what I would say are the big attributes of paging -- wireless messaging. Significantly lower cost. You look at an $8 or $9 type ARPU, significant reliability. We talked about this when we testified in front of the FCC's Katrina panel, we talked about this when we testified a couple of weeks ago in front of Congress and people recognize it. Congressman Shimkus in the hearing pulled out a mobile phone at a patron and said, I keep both of these of these because sometimes the mobile phone doesn't work and the pager does and I have to get the message. That is a fact. We know it, we know paging works well relative to mobile phones in certain situations where there's an emergency, et cetera, so that is a value that we continue to sell and we continue to focus. And superior network coverage. We do have very large one-way and two-way network. We cover a lot of geography in terms of where people are in this country. And it's something that we think is a core differentiator between us and other paging companies and mobile phone companies quite frankly and something that we continue to sell.

Has the strategy worked? We think the strategy has worked. If you go back and you look at six quarters ago, our first full quarter of combined operations on about $165.8 million worth of revenue, we did about $28.6 million of cash flow. Six quarters later, we have lost about $38 million worth of revenue. We just turned in $127.2 million worth of revenue, but we also turned in almost $33 million of cash flow. So we've been able to take costs out of the business, we've been able to keep the relative rate of free cash flow high, which is consistent with our strategy, our litmus test in terms of running a free cash flow based company. In the last six quarters, we've generated $197 million of free cash flow and we've paid off all of our bank and we've paid $122 million worth of dividends which are treated as a return of capital to our shareholders. So I think at least for these six quarters that we've talked about, our strategy has worked.

In terms of the profile of the paging user today, the core group of enterprise users that we talk about is kind of our three major sectors, recognizes the low cost, the reliability and the network coverage issues. The user segments within those core groups would make a lot of sense to you as you read them on this chart. It's your IT teams, it's people like doctors and nurses and code teams who need to get the message. There's oftentimes where we will sell into an account where they'll have multiple forms of wireless communication devices. State police is one of them I think of that comes to mind. They have radios in their cars, they have other wireless communication devices. A lot of times they will wear a pager on their harness as simply a backup communication service. Through software that we sell and that they can obtain through third parties, you can direct messages to go to multiple wireless devices, so if you want to get somebody and the mobile phone was down and you send them a message, you could send it to an alphanumeric pager, a text messaging pager, they would also get that message. So if one device was down, the other device was up. So those are areas where user communities within these three core segments of our business appreciate the value of paging.

Where we have not done well and where the industry has gone from 40-plus million subscribers to where it is today is on the retail side, on the consumer side, on the individual side. If somebody is going to make a decision to have one wireless communications device as an individual consumer, generally we're finding they go with the mobile phone. That's just a fact. So we don't spend a lot of time, money or effort trying to target those users for paging services. We stick with our knitting, we stick with what we know works, which is the health care, the government and the large enterprise customer bases.

We think paging still makes a very big difference. When we talk about 9/11 and kind of looked at the quote up here from [Lisa Thompson], who is the manager of Arlington County, Virginia's wireless communications systems, they used our pagers during 9/11. I think the most important and telling sentence up there is that wireless messaging has always been an integral part of our public safety life, here but it has proven to be mission-critical to the work we do. People that are in the emergency response business, which is a big portion of our customer base, have a high value on reliability and on the device working when things go wrong. So if you have a situation where you lose power or you have a situation where the land lines go down and most of the mobile phone transmitters are connected to the network through a copper wire that goes through their transmitter, you can lose that service. We have a service that we offer that is broadcast at about 3500 watts generally off of a very high tower and we control that through a satellite. We simulcast it. So what that means, if you're a customer in the emergency service business is that your pager may be in New Orleans and the tower may have been blown over down the block, but a tower 12 miles away or a tower eight miles away broadcasting at 3500 watts from 300 feet off the ground is still going to get the signal to you, whereas your mobile phone and other wireless communications device went down. That is important, people value that. When we looked at 9/11 Commission, I think that this quote down at the bottom of the page sums it up quite well. Almost all aspects of communications continue to be problematic from initial notification to tactical operations. Cellular telephones were of little value. Radio channels were initially oversaturated. Pagers seemed to be the most reliable means of notification. I mean, it's true. If you have a brownout here in Manhattan, a lot of the mobile phones are not going to work because power is gone. Because we have so many hospital towns where we have transmitters where we're tapped into their emergency power supply, if you have to get a message in an emergency in New York, you're going to get your message on your two-way wireless communications device, which by the way, is powered off a AA battery. If you care about surviving or if you just care about getting information to first responders, you're going to be more successful with this. And when we testified in front of the Katrina panel and we had all the sheriffs there and the people in the emergency response and the people from the FCC, I pulled out this pager and I literally pulled out a plastic baggie with a couple of AA batteries in there and said -- here's your emergency communications product. So it still works, it's something that we obviously still believe in. We realize that there is a natural churn and a natural attrition going on to other technologies, but it's still something that I think that we will continue to harp on and continue to sell because we believe it saves lives and we believe that there's a value and we believe that there's organizations out there that will pay for that value.

When we looked at Hurricane Katrina, we had a couple of correspondences, one of them that came with respect to the industry from a FEMA search and rescue representative, talked about the ReFLEX networks working fine and communications flowing through the units. ReFLEX is the wireless communications protocol that we use on our two-way networks. When we looked at [Mike Meyers], who was the manager of the information systems at Tulane Lakeside Hospital, which is one of our accounts down there, he said -- your dependability became more evident when other cellular and paging providers lost service after Hurricane Katrina and your service is still going. He didn't just say cellular, he also said other paging providers. We have a very large paging network. We have 11 regions in this country, we have 11 regional technical managers. They have employees that work for them that are engineers that focus on emergency communications, such that when we know a big storm is coming or when there's a problem coming, we can send a SWAT team in and we can make sure the signals continue to get through. We have things that we call COWs -- coverage on wheels. They're mobile transmitters with a generator that we'll send in with a team. We have that, a lot of our competitors can't match that and cannot keep the network up in times where we can keep the network up. That's something that we think is a value -- people want critical communications, we offer it.

In terms of what we do, our strategic vision statement really focuses on four primary things. Number one, we're going to operate a selling and marketing company focused on servicing wireless communications needs of our customers. Number two, we're going to operate a free cash flow business strategy. Number three, paging and narrow-band PCS messaging will continue to be a viable alternative for customers for all the reasons I just talked about. Number four, we think our customer relationships, those accounts that we have, will potentially open up additional opportunities for us in the future.

In terms of our tactical focus to support that strategic vision, again, we said our three primary tenets are servicing our existing customers, sales of new products and services and cost efficiencies. With respect to selling and marketing initiatives, Mark Garzone is going to talk about that in a couple of minutes. But it's not just -- to me, the feature is about not just retaining the paging customers we have right now because we know that no matter what we do, we're going to continue to lose subscribers. But it's also about tapping into some of that subscriber loss, figuring out where they're other going and capturing some of the economics associated with that. Right now, we'll get paid roughly a $200 commission to sell a mobile phone. We will pay some of that back to the sales person who sells that mobile phone, so maybe he'll get $140, $50 net on an average transaction. But if you had an $8 ARPU and a 30% margin on that ARPU, that's $2.40, you have to do a lot of $2.40 cents to equal that $140 we get from selling those mobile phones. Now we're only selling 6000 mobile phones right now on a quarterly basis, we're making about $2 million a quarter from it. We know that when a lot of our subscribers are leaving us, they're going to that technology. We have to do a better job getting in front of it. That's one of the things that when we brought Mark Garzone in from Nextel and he'll talk about this and it's one of the things he's focused on, we have to tap into that. We want that consultative relationship with that customer. We want to be able to solve all of their wireless communications needs. We've had very large accounts come to us and say, we want you to manage our wireless communications portfolio, not just paging, but everything. That I believe is a big part of our future and we need to do that consistent with the litmus test I talked about, which is our free cash flow strategy. We can't do it with a hockey stick or a J-curve business plan and we're not going to come in here, we're going to borrow money and create an (indiscernible). That's not where we are going, but we have to recognize the realities of the business and we have to do I think a better job of capturing some of that as it's going out the door.

No question that paging by itself will continue to fill up a lot of cash flow for a long period of time, but I think that as we go forward, we need to do a better job recognizing that some of the subscribers are going to leave us and capturing the opportunity associated with that.

Also, to be successful long-term, we've got to continue to take costs of this business. Yes, we took cover 100 million out in 2005, yes we'll take over 90 million out in 2006 in terms of operating expenses. We went from 2800 employees to 1300 employees. We're not going to go from 1300 employees to zero. So the amount of employee contraction going forward on an annual basis will be measured in the hundreds. And so where we're really going to have to get our cost savings are in our network cost, our telecommunications cost, our outsourcing, our repairs and maintenance. Those are the areas where we're going to have to get more efficient, and Peter Barnett will drive that.

With respect to our selling and marketing initiatives, focusing on those three verticals that we talked about, those three verticals represent about 57% of our direct monthly recurring revenue. And it's very important that we continue to focus the money that we spend on this company supporting that revenue stream because that's where we're going to have our best return. One of the things that you guys had asked us for and one of the things that we're going to start doing going forward was more information on the subscriber base. And so we put some schedules in the press release that we put out last night, we have some data for you that we're going share with you today, we're going to continue providing to you this type of data. We need to stop short at the point where we actually start talking about specific customers because it is competitive out there. And so I even want to be careful when we kind of get to -- drill down too much into some of the verticals and you start figuring out who some of those customers might be. But having said that, if you look at our customer base, 87% of our 4.4 million subscribers are what we would call direct customers, customers that we own that relationship, we send them a bill, they call us when they want something. 13% is indirect customers, so you might think of them as wholesale type customers -- other paging carriers who are using our network, just other resellers who are using our network. What we really focus on is that 87%, that direct customer base. And if you take that direct customer base and you split it up, you'll see that 35% is represented by the health care sector, 19% by the government -- and government includes federal, state and municipal -- and then 12% is represented by that large enterprise, that kind of Fortune 1000 group that we talked about, with about a third of the rest of the base, the direct base, being in all other categories. If you look at the net unit loss experience across that customer base, obviously, our largest vertical, the health care vertical, has by far the best statistics. We lost 0.2% in the health care vertical in the second quarter, which is obviously a great quarter for us. Actually in the month of June, that vertical grew. So it's there where we know that we need to continue focusing a lot of energy and effort. Government and large enterprise at 4.1% and 4.3%, respectively, and then all other at 6.6%. So in terms of stratifying the base in terms of our big verticals, this is the churn that we're seeing in terms of the net unit losses with respect to that base, and that's the relative scale. In terms of stratifying the base by size of account, size of account being number of units per account, and you look at it across the slide that we're looking at on page 20, it won't surprise you that as you kind of move down the table in the middle of the page there, that account size table, you see that the churn as the accounts get larger, the losses get smaller. So we're having most of your losses kind of in that 1 to 100 unit account range, and it's the 100 to 1000 unit account size where you're having the least amount of losses. The dynamic though that happens there is that the accounts where you're having your higher loss percentages also happen to have your higher ARPU, so you're seeing more of an impact historically on revenue than you are even on the subscriber erosion because of that dynamic. Yes, these guys down here are very stable relative to the rest of the base. They also have lower ARPU, so that explains a little bit why when you see some of the churn statistics on subscribers, the revenue has not always followed as closely, and it's because of that dynamic. So this information we will continue sharing with you on a go-forward basis. We will put it in our public filing and in our press releases.

Our marketing focus, before I turn it over to Mark, I just want to say, this is going to be where I think we can have the biggest impact on that capturing of that lost revenue opportunity on the retention of the existing revenue. We saw a need to upgrade the talent that we had in the company that was focus on that earlier in the year. We went out and we did a search and we came up with Mark Garzone, who is now building an organization and I think he's doing a great job at it. And with that, Mark, I'm, going to turn it over to you.

Hello everyone. What you're hearing Vince say and the overarching I think theme to this is presentation is focusing on the core -- protecting our core revenue, looking at new core segments. The recurring theme in my presentation you will see is the importance we are placing now on our customer base. And again, as Vince stated, we have -- very few wireless companies have 4.4 million subscribers that they can tap into and sell additional products and services into. That's something that we view as a huge advantage to us and we're going to start to exploit that opportunity.

We've changed our brand identity and now we have to build equity against that brand and really start to execute against the one source for wireless message. We have defined our core segments, as Vince talked about, and we've redefined it down to basically three -- health care, government and enterprise -- and they represent a large portion of our recurring revenue. Now what we have to do is completely focus on developing out those opportunities. And some of those tolls that I'll about later will show you how we're going to get there.

Also, better, more efficient and more frequent communication to our customer base will help us effectively manage our customer lifecycle by helping us provide them better customer service and also identify additional cross-sell and upsell opportunities. So real simple there. If we're selling into and IT department and we have a great relationship with that customer, it should be easy for us to sell into -- sell other additional products into that department, as well as look for other opportunities within that organization to sell paging and other products too.

From a segmentation standpoint, the creation of a marketing database has enabled us to identify additional opportunities in our core segments. As the leader in the paging world, we pretty much know and we've pretty much tapped the primary markets. What we've found looking at our customer base and developing this marketing database is there are a lot of opportunities in secondary and tertiary markets. They're smaller opportunities, but they're still profitable opportunities, and now we're aggressively going after those particular opportunities.

What we've also began doing is developing products and bundling services and applications to sell into specific vertical core segments. Again, as Vince talked about, we've recently launched, before hurricane and wildfire season, we've repackaged the FLEX network, specifically geared towards first responders and it's, again, taking a page from my former employer, you have the same product and service, you package it slightly differently, you sell the features and benefits of what the FLEX network and what wireless messaging can do in emergency situations and help first responders in critical -- increase their critical communications. But this is something that we will continue to do. Health care vertical is coming out within the next three weeks, again, where we're packaging our products, cellular products and additional services that we have with some of our joint ventures. And it will just give us something else to talk about to the companies that we already sell to in our core segments.

In an attempt to mitigate churn, a customer research study is also underway help us better understand why customers are turning off our network -- could it have been addressed and could it have been prevented, meaning are they going to a competitor because of coverage or because service and how can we have gotten in front of that. Or, what if any technology migration exists -- are they leaving paging and going to another wireless device? The benefit here is this will help us plan for future marketing activities that specifically address our customer concerns. And right now, this will provide us factual data to really go out there and measure it, really go out there and address our customer issues.

From a product development standpoint, we will focus on products and applications that will enable us to be the one source for wireless. This provides us the best opportunity to retain customers in our core segments and then grow their existing revenue stream. That's a key focus for us and it has been a key focus for the marketing organization since I got here six months ago. We want to evaluate existing telemetry applications that sit on our network to make sure we've maximized that opportunity and make sure they're still profitable for us. Along with that, we want to continue to explore any possible additions on the telemetry side.

The cellular portion of our business, as Vince talked about, represents a small overall percentage of our revenue, but it's important for us because it allows us to maintain relationships we have with our customers and sell additional products and services to them.

One-way messaging remains a highly reliable method of communication in our core segments. Its ability to be used in restrictive environments is especially important in the health care and manufacturing segments. It's very affordable and provides superior in-building coverage. But overall, paging maintains a key advantage over other forms of wireless communications, specifically cellular communication with our group messaging feature and our extended battery life. The fact, the part that Vince talked about before where he talked about simulcasting -- the cellular carriers can't do that yet and that's the big shortfall in a lot of, again, first responder situations.

Two-way messaging combines the reliability and affordability of paging with the efficiency of e-mail. Our two-way messaging process is perfectly suited for dispatching work orders to mobile work forces. We believe there are the reasons we continue to see brisk sales of this products. I think one of the other major advantages that we have is we provide nationwide coverage on all standard rate plans for as low as $25 per unit per month. In comparison, other wireless devices, like data-only BlackBerries, provide similar capabilities at a much higher price point. So again, even against -- in a pure technology view where BlackBerry (indiscernible) seem to contain a superior -- it's superior from a technological standpoint, when we go at it, data-only BlackBerrries our two-way messaging, we provide equal if not better products and services and communications capabilities at a much lower price point.

Voice and data services. Here, our intent is to offer the greatest choice of messaging, voice and data services to our customers. More importantly, we have developed the expertise within our sales organization to sell and service our customers' wireless needs. These services also help us to mitigate churn and maintain key customer relationships by providing us the opportunity to upsell existing paging customers with other wireless products and services. We currently have relationships with the three major cellular carriers -- Sprint-Nextel, Cingular Wireless and Verizon Wireless. We also have a relationship with [Rim] and [Vocera] Communications.

On the system solutions side, this is an area that truly typifies our one source for wireless theme. Through a consultative sales approach, we offer customized wireless solutions for those enterprise organizations that have complex wireless needs. These offerings are done mostly through strategic alliances with niche wireless and software organizations. The joint product offerings typically integrate proprietary, legacy standards-based communications systems and software, thus providing interoperability among multiple device types, networks, wireless, PBX and other hands-free voice systems. Similar to our data service, voice and data services, our ability to provide these services to our customers in our core segments helps us mitigate churn while providing our customers increased communications, reliability in critical situations across different types of communication networks.

That's the last of my presentation, I'm going to turn it over to Peter Barnett now.

Thank you, Mark. Welcome to our conference today. Since the merger of Metrocall and Arch in November of 2004, our operating focus has been eliminating cost redundancies and improving efficiencies literally on a day-to-day basis. The costs are broken into three primary categories -- SR&M, service, rent and maintenance; S&M, sales and marketing; G&A, general and administrative. SR&M costs associated with providing our technical networks, including pager repair and maintenance on our networks. Sales and marketing is selling and retention of customers, G&A is associated with our customer service, administrative functions, back office functions such as sales support, inventory fulfillment, accounting and legal. When you think about our top three costs, they're headcount, which we've talked a little bit about. We've reduced headcount by 1536 employees so far. Site rent for our transmitters, and site rent is directly proportional to how many transmitters we have in service. We [reduce] 3858 transmitters so far and renegotiated our major contracts as far as site rent and telco. So our primary focus on cost savings going forward though is the rationalization of our networks and our systems, networks being transmitters, systems a direct proportion to our telco costs.

So when you think of network rationalization, I know we get a lot of questions about network rationalization but it's not just about deconstructing networks to cut costs. It's a strategic plan to maximize networks, enhance coverage and create long-term cost efficiencies. And what that means is that we actually break down our systems into approximately 50 zones in the United States. We actually look at each of those 50 zones. There are multiple transmitters systems, there's multiple frequencies in each of those zones. We take a look at what zone, what frequency within each zone we want to use for our long-term systems. We call that our go-to frequencies. So what happens within a zone, say such as New York, is that we've picked a go-to frequency. All of our new sales and exchanges of our pages to our customers that they've broken a pager, a pager needs to be sent out, and there are hundreds of thousands of those transactions on an annual basis, roughly about 140,000 transactions 12 months out of the year, that's touching a lot of your customers. The goal is, every time you touch a customer, you're putting them onto a go-to frequency.

Now, how does that go-to frequency compared to the frequencies we're taking down is that literally on a zone-by-zone basis, we take a look at the coverage area of the existing frequency, we take a look at the existing coverage of the go-to frequency and usually the go-to frequency is more transmitters than the transmitter system we're taking down. Now what happens is that the coverage could have some slight differences and we actually add transmitters or augment the coverage prior to doing the collapse. So it should have a minimal customer impact. So we work very hard with engineering. Everything single collapse we do is pre-engineered and any customer that is affected is contacted, and in some cases we do have to change out some of our pagers. So -- and what happens if we have to touch our customers? That is done either through the call center or through the field. We notify them by letter, we'll notify them by phone, we will contact the customer 30 days before we look at taking down a system, we'll start working with whatever issues they have for their unique locations or use of our devices. And field swaps, we typically reserve any account that has over 100 units. We actually have sales reps go out to that account and treat that account as if they're going to be a whole new customer all over again. And yes, it is impacting to them from a device perspective. Their phone numbers are the same and most people though, after they go through a rationalization process, have a better coverage and a new pager than they did prior to the rationalization. So there is biweekly calls on all of our rationalization efforts with individual stakeholders. So if we're working on New York, every level of management and sales is involved in what's going on in that market, how it's going to affect customers, what customers are going to be affected.

Indirect notification -- we talk about our indirect base, they're notified by letters usually 120 days prior to a rationalization. We notify them how many pages they have, we try to work with them for equipment and stuff like that.

So how big is our rationalization efforts? In 2005, we reduced 2995 transmitters. The majority of those transmitters came down through the collapse of one of our two-way networks. Originally, when the two companies came together -- Arch through the PageNet acquisition and Metrocall through the WebLink acquisition -- each had a duplicative two-way network. Now what happened on that zone-by-zone basis is we looked at each of the two networks. The surviving network, which we made the go-to frequency for was the WebLink network, and wherever there was a coverage difference between Arch network and then Metrocall-WebLink, we actually added transmitters back through that. So take a look at 2005, we actually reduced 3340 transmitters, but we actually added back 257 transmitters for both one-way and two-way deconstruction. And of that 257, about 185 was built specifically for two-way. Now if we size that last year, we also added 45 transmitters for customer-specific applications. Usually, it was a hospital or a large campus environment of some of our larger customers.

We also added VHF and UHF to some of our older systems, not necessarily our biggest networks, but they provide coverage in niche areas of the United States for some specific area -- upstate New York or the Poconos or something that might have been a holiday type, vacation type area that we've had to add transmitters to 900 [meg] which no one else has been covering 900-meg transmitters or have covered for the last couple of years.

So when you think about 2005, we took out almost 3000 transmitters. At the end of 2005, we still had 15,521 transmitters. Now I think what you need to think about though is, what does that really mean to our businesses and stuff? We talk about having 4.4 million customers. If you were to actually fill up all of those transmitters and networks with pagers, we'd probably have coverage with 10 million-plus subscribers. So there's lots of capacity and we have to get rid of that capacity without affecting customers, and we work on that every single day.

Our 2006 activity so far has been the -- I want to show you our five-year plan in a moment and I would tell you that we work hard in channel rationalization every day in the field and the goal literally is, we put a plan together, and the goal is on a daily basis, weekly basis, monthly basis, take out as many transmitters as we can to get ahead of that curve of paying leases. We might take out an extra 400 of 500 transmitters, but there's a timing issue that we always talk about, is when does that lease expire. And that has always been some of the biggest issues we've had with rationalization. And we prioritize our system collapses today to maximize recurring rent savings. If you have a choice between taking out 60 transmitters in New York and taking out 60 transmitters in New Jersey, we take a look at the rent savings associated with them. Sometimes those 60 transmitters, some of them are free, some of them are on master lease agreements, some of them are old, cheaper leases and we have to balance that whole cost of that system versus the number of subscribers that are left and take down the savings that give us the best bang for our buck.

So when you think about what does site savings mean as we move forward over the next five years, this year, in 2006, we expect to spend close to $100 million on site rent. So it's $100 million with an average number of transmitters at 14,883. In the New York area, we operate on 10 systems, 30-some-odd frequencies. What we have to do is literally on a frequency-by-frequency basis, is watch how many customers are coming off, figure out when the best time is to remove the rest of the customers through forced rationalization and then collapse a system-by-system basis until it gets down to the number of systems you truly need to provide customers in the New York area. And so literally as customers churn off, different frequencies, different systems, we try to put that into a box, analyze it, and we take it down a system at a time. And as you can see, based on our exchanges and pushing stuff to go-to frequencies, we'll have less frequencies, less systems, less transmitters on a year-by-year basis.

If you were to go back to 2004 prior to the merger, at probably January of 2004 between both companies and probably we're looking at 20,000 transmitters. So we've made significant progress for 2006 and we don't see any reason based on the number of exchanges that we're doing, the sales that we're doing and the movement of customers to the right go-to frequencies, and you cannot manage putting those customers on the best systems, best protocols, make it as efficient as possible, drive the number of transmitters down, which theoretically drives down the cost of rent. That and associated with our MLAs on Global Signal and American Tower as well as some of the smaller mom-and-pop tower companies coming to us asking us to -- they are coming to as saying, we'll reduce your rent, please stay on our site. So we have more flexibility than we ever had to manage our site costs. Is it an easy job? The answer is no. It's probably one profit the biggest projects I've seen in my career in the paging industry, but absolutely required to get the costs out to maintain our EBITDA as we moved into the future.

The revenue support and support of our revenue and our sales and marketing efforts in the Company, you have to have great customer service in our minds. You can say that -- I don't know how many of you guys call into your cellular provider though, but I always find dealing with the cellular companies to be difficult from a -- call in and try to find information about my phone and what I want to do. Once you get a hold of somebody, it's fine, but do you get a hold of somebody? And the goal is to provide superior customer service with a multi-tier, [multi-queue] platform geared toward the size and type of customer, how they use our products and 75% of the calls are outsourced today, 25% of the calls are insourced. We've partnered with a professional call center in a win-win relationship which we believe gives us the best future variable cost structure. As we have special use of our system, we actually try to gear those people to the appropriate tiers.

Our commitment to customer service is to have our customers reach a live operator. We do not screen our calls by IVRs and -- with extensive IVR systems trying to guess what that customer wants. Our focus is business to business. A business calling another business doesn't want to deal with the IVR usually. The people that deal with us that want to put pages on our system, we try to cater to how they want to do transactions with us. If they want to call customer service, let's give them customer service. There's a separate number for an IVR system. We have applications on the Web for self-fulfillment, for managing a customer's whole account, but we try to gear it towards how they want to manage their business with us.

So our customer service is segmented by national and strategic accounts, major accounts and individual and small-business accounts. So there's three service segments that we frame our customer service into -- national and strategic accounts, that's primarily our 500-plus unit accounts. Any escalations from any other call centers go into that same queue and it's insourced in Dallas with and average tenure of about six years. Our major accounts with the specialty queues, including medical and government, supporting primarily 100 to 500 unit accounts, and someone could say, well how can government be in 100 to 500 unit counts? Even as when we talk about government, each little branch of government that we deal with they, tend not to be thousand-unit accounts, they tend to be 500-unit accounts, whether it's the FBI, IRS, local police, state police, so there are smaller groups of people wanting a specific kind of service from us. And we outsource this to [Teleperformance] in Pensacola, Florida with an average tenure of three about years. If you take a look in Q3, we sold the Pensacola call center to [Calltech]. That creates an instantaneous variable cost structure in Pensacola, future cost savings for sure as they maximize that building in a way that we weren't able to maximize it. And then individual and small-business accounts, primarily one to 99 unit accounts, and it's basic services. They really don't have group calls, they don't have a lot of special billing needs. And we call that our vanilla paging tier of customer service that's outsourced to Teleperformance in Columbus, Ohio and Columbia, South Carolina with a tenure of a little over one year.

As I mentioned and I really wanted to stress is that we tailor our service delivery to meet the needs of our business customers, no matter what size they are, no matter how they use it. So when you think of even our national accounts, we don't have one national account group that we have all of our customers calling into. It is segmented by how they use our pagers. And that makes it easier to get into them into a queue where they have the best expertise for how they're using their pager. We try to differentiate ourselves from competition by delivering this level of customer service and sales support while maintaining our what lowest cost structure with timely and sensible executions of ongoing reductions.

Our service level today, by the way, with a live operator, we answer 90% of the calls in less than 20 seconds. And I would put that up there among best in class of wireless providers. Just call any cell phone company or other paging company, and I would say that that is better even [though].

And we believe we've been able to reduce cost and maintain superior customer service both internally and working with our outsource provider by retaining the best employees. Six years tenure for our national accounts group is very, very good. We have added technology not on the front end to screen the calls, but on the back end, how do we make those calls as quick and efficient as possible. The shorter time that they're on with a customer, ideally they've met the customer's needs and that actually drives the best efficiencies you can. Get the customer on and off the phone, hopefully you've done everything that you could to help customer and satisfy what they need from us. And we have leveraged tenured, experienced managers as we have changed our cost structure and as we move people around. We've taken our tenured, experienced managers and leveraged them not just for live customer service phone calls, but for e-mail, correspondence, [NOC], escalation, stuff like. We have a NOC center in Dallas that we have technical [escalations] that are handled on a 24-by-7 basis. So we have used the managers that we had in our call centers and leveraged them across multiple types of transactions, not just customer service today. We believe the net effect is to produce more efficient operations at lower cost with high quality customer service and support and aids in revenue retention. We that, I'd like to turn it back over to Vince.

Thank you, Peter. In terms of where we have been in the integration results, obviously, we merged in November of 2004 and by midyear 2005, we had converted to a single billing system which is critical in order to achieve some of the efficiencies that Peter just talked about with respect to customer service. Peter and his team were the ones that were responsible for doing that conversion.

Additionally, we reduced a large amount of our corporate facilities and back office operations. Really, this is where we have consolidated our operations around our Alexandria headquarters and our Dallas operating hub. We paid off all of our bank debt by August of last year, $140 million that we had used to fund the Metrocall/Arch merger and became a debt-free company generating free cash flow, which we think is important.

One of the things that happens, one of the challenges that we have in this environment when we meet with some of our large customers is they will ask us up about our viability going forward. When they're making long-term purchase decisions, they want to know -- hey, are you guys going to be around for a long time? Being a debt-free company, throwing off free cash flow and quite frankly one of the things that factored into our recommendation to the Board to pay a recurring dividend -- all of those our characteristics of companies that have long-term viability. And so we have a bullet point up here, it's something that we list as an accomplishment, but I want to put in the proper context in terms of looking at the business holistically, because I think it's very important. It's important for management morale, it's important for salespeople and it's important for those customers when they're making those decisions with us.

We just came off of a second quarter review and management meeting a couple of weeks ago and I will tell you that with the sales managers, the regional vice presidents, morale is about as high as I have seen it right now since the merger. And that's important because when you have a business that is losing subscribers from a growth standpoint and you have to put a lot back on every quarter to try to mitigate that, it's important to have big morale. So I don't want to under-emphasize the importance of being debt-free, throwing off free cash flow and paying this recurring dividend.

Another thing that we did, it's an administrative thing, but we do a legal entity reorganization. It will eliminate thousands of compliance returns that we need to do on a state-by-state basis. Peter talked a little while ago about our rationalization of our networks and he talked about the fact that last year, we were able to completely take down and one of our duplicative two-way networks and put all of those customers effectively seamlessly without affecting customers onto a single network. That will save us over $21 million, Peter, in the long run just on site rents alone for the two-way network that we took down. That's on an annual basis, but that was significant.

I think another thing that he said that a lot of times we don't focus on is that as we go through our channel rationalization process, a lot of times what's happening is we go to these go-to frequencies is customers' coverage is actually improving, not getting worse. We have over 4000 transmitters on our nationwide one-way go-to network. That's about twice the size as the next largest competitors. So as we do rationalize people onto our go-to frequencies, a lot of times they're finding that their network coverage improves. That was the case with one-way and that was the case with two-way. We've already talked about the master site lease agreements we've been successful with, significant progress on reducing our cost structure. Peter just talked about that. And we also took out a lot of redundant facilities. We took out 106 paging terminals, many storage facilities saving $885,000 per month doing that.

We added a potential future [newer] source of revenue in terms of the deal that we cut with AMDS to put meters on our two-way network. Going forward, we will actually build the network for them, we will maintain that network. Sensys has since bought out AMDS's position in that deal; we view that as a positive because Sensys is actually the company that manufactures the electric gas and water meters that ride on that network. And so we think that's positive and that's one of multiple telemetry opportunities that we continue to look at and explore.

We continue to refine our management and operating structure and really put a focus on selling and marketing. In a couple minutes, you'll hear from Tom and you'll look at the operating costs by category. One of the things you'll see it we haven't taken a lot of cost out of the selling and marketing function. It's because we're trying to make an effort to mitigate the subscriber erosion and to capture some that lost revenue potential.

We did take a lot of heads out. Tom will go through the chart in a couple of minutes. We took them out of the staff, not just the staff, we took a lot of management costs out and we have paid $122 million worth of dividends since we merged.

But to put things in context for you, I think as we look at this slide on page 38, all of you would agree with me, this is a tough business. Three years ago, we had on a pro forma basis 7.68 million subscribers. This year, we will have somewhere between 4,050,000 and 4.1 million by the end of the year. We lost 22% subscriber erosion in 2004, 18% in 2005 and we'll be somewhere between 16 and 17% this year.

From a revenue perspective, it has been even more difficult. We did over $1 billion on a pro forma basis in 2003. This year, we will do less than half of what we did in 2003 just three short years ago in terms of revenue. The rate of revenue erosion has slowed from 22.3% in 2004 to 21.6% last year, and this year, it will be somewhere between 19 and 20%. But I don't think that anybody can look at this slide and not conclude that this is a tough business that we're in and the challenge is to try to stay ahead of that curve, try to continue extracting costs and try to maintain that positive cash flow stream for as long as possible. It takes a lot of effort and a lot of work to do that. If you take a look at our public filings and you look our risk factors, factor number one is that revenue retention because we are faced with a lot of competition out there. Factor number two is our ability to take those costs out, all of the things that Peter just talked about. Factor number three is the ability to maintain a management team that in this environment is willing to hustle and work and do the things that need to be done. And I said this earlier and I'll say it again, this management team that we have up here and our regional vice presidents and our direct sales managers and our regional technical managers and our regional product managers are the best people I've ever been associated in 20 years in this industry. They're positive people, they're good at what they do, they are real asset to the Company. And I think holistically when we look at everything that we do, the decisions that we make to support our free cash flow strategy and things like not levering the Company up to things like paying a recurring dividend -- all of that I think is important to keep that machine going because that's critical to our success.

One way you can look at that and say gee, maybe this guy has a point, is that over time, we've been able to mitigate some of the subscriber erosion. You can look at -- two years ago in the second quarter of 2004, we lost 435,000 net subscribers. This past quarter, we lost less than half of that -- 203,000 net subscribers. Yes, the Company's much smaller, yes you're putting out a lot less units than you used to put out on a gross basis in the old days. Of course, we have a lot less we're spending on that. And when you look at really what happened here in the last two quarters, in the first quarter we lost 252,000 subscribers on gross losses of 404,000 and we added by the top the pile, if you will, 151,000. In the second quarter, we increased how much we added back on the top of the pile. We added 157,000 subscribers and we lost on a gross basis less -- 360,000. So that's how we got to the 203.

So yes, the churns have been improving, but they improve for a reason. They improve because we have people out there with customer relationships that are hustling that are selling the benefits of paging in our wireless communications capability and that are motivated and that are making this 157 happen, and we have them motivated to do it again in the third quarter and again in the fourth quarter, and motivated on providing good customer service to mitigate the amount of subscriber losses. We talk about this all the time, we just had this conversation the other day as a management team -- do we provide too good a customer service? I called Verizon a couple of weeks ago because I wanted change the plan that I had my wife and mother on, and it's very hard to get customer service out of those guys. You will eventually get somebody, but you will not come away from that experience in a good mood. You call us, you get a live operator, we take care of you right away.

Are we doing too much? It's very hard to quantify and very hard to measure because I worry if we don't do that, will this 203 -- will we not do as good, will we have a higher gross loss, 360? So that's something that we constantly have to measure. Yes, there's some variability in that, and yes, over time we'll continue to the study that, see if we can't take those cost down further. But it's important that we remember the business we're in and that there's a lot of moving parts to it and a lot of what comes off the bottom of the pile needs to be replaced and go back on the top of the pile -- we want to mitigate all that.

With respect to slide 40 and looking at the year-over-year subscriber change, again, we've seen improvement. On our annualized basis, we lost 17.2% here in the second quarter. If you go back to the second quarter of last year, it was 20.7%. So not an incredible improvement, but generally in the right direction and the right trend. Where it has been a little more challenging and where obviously it's the most important is on the revenue side of the business because the dynamic we talked about earlier where the subscribers that we are losing tend to be on the smaller accounts where there's less subscribers per account but they have a higher ARPU. We haven't had the same kind of one-for-one benefit on revenue. We did see some improvement in the first three quarters of 2005, did not have a good fourth quarter of 2005 in the first quarter, marginal improvement in the second quarter, a little more improvement. We are optimistic that that trend will continue getting better going forward. But that's the battle that we fight. That's where the real kind of push comes to shove here in terms of the future. So what we have to do is be realistic about this, we have to focus our selling and marketing efforts to continue that high level of gross additions to those core customers that appreciate the value, the key attributes, the paging. We have to try to capture some additional revenue opportunity to our sales of other wireless devices. We were very successful in the health care sector in maintaining subscribers, maintaining revenue and having the lowest churn. We looked at that closely and one of the things we did in the health care sector is we provided many other products and services from our integrated resource manager to the emerging product that we sell to Vocera devices that we sell, many products and services. And the lady that ran that sector for us, Nancy Green, was very much an innovator and very creative at bringing these things -- and when they go into hospital and sell them these packages, it's not just paging that they're selling them. They can sell them anything. We have taken her, we've promoted her, we've put her in charge of business development. She's working with Mark Garzone and his team. She's going to be taking that concept and expanding it into our government accounts and expanding it into our large enterprise accounts because we want to capture what we did really well in the health care sector and transition that over into the government and into the large enterprise sector. So very, very important. Tom's going to come up and talk a little bit about the operating expense trends that we see in our business and where we're going. Tom, do you want to come on up?

Thanks, Vince. Well with the setup that Vince just did on our revenue, when you have a business that's declining on revenue by 6 to 8 million a quarter, you obviously have to put a lot of focus on expense to keep the expenses under the revenue line.

The top chart here of the bars just show our last six quarters of operating expense. This is operating expenses excluding depreciation and amortization accretion and shows from first quarter of 2005, which is the first full quarter of operations for USA Mobility through our second quarter of 2006, which we just announced last night, and you can see from first quarter of 2005 to the second quarter of 2006, we removed $33 million of expenses, or about 27% of our cost structure, has been reduced during that six-quarter period of time. On an annualized basis in 2005, we removed $107 million of expense versus -- or 2005, we removed $107 million of expense versus 2004 which is on a pro forma basis when both Arch and Metrocall were operating separately for most of the year. That was about 19%. With the revised guidance we gave last night, we're now expecting to see 2006 expenses go down on a year-over-year basis from 92 to $97 million, or 20 to 21%.

Now obviously, when you look at revenue over the same period of time as I talked about from the first quarter of 2005 to the second quarter of 2006, the revenue declined about 23%. Our expenses were actually reduced by 27%. So we actually have been fortunate over the last 18 months to reduce our cost at a faster rate than our revenue. However, due to relative size of revenue and expenses, we've still lost $5 million of the EBITDA in that time period. So even with the aggressive reduction of cost we've had, it is hard to stay ahead of that. We've had the same kind of phenomenon in the second quarter to the first quarter. Even though we've reduced cost at a faster rate, we still lost $1 million on the EBITDA line. And so that is why we keep constantly focusing on the operating expenses.

Next, just to break them down a little bit more, and this is a little bit redundant with -- you've seen how we report our expense in terms of the service, rental and maintenance expense on selling and marketing and our G&A. What this slide does show on the graph is the relative reductions to SR&M and G&A versus what we've done with selling and marketing. As Vince said, we've been very protective of our selling and marketing expense to keep those resources in the field to help mitigate the revenue churn that we're experiencing. And we think that's key as we go forward and we're going to continue to maintain that investment as long as it's economically justified for us.

The important thing to look at in our expense structure is that there's three key items that make up 70% of our expenses. It's our payroll expenses, which is directly attributable to our headcount. And our site rents, which is about 28% of our cost structure and our telco expense, which is just under 12%. Our payroll and related expenses up until this point through the second quarter of 2006 have delivered over a third of our total cost reductions. And we will get into that in the next slide a little bit, you can put that in proportionality. But you can only go headcount expenses -- the dynamics of cutting these expenses is quite different, as Peter went into. Payroll expenses come down very quickly when you reduce headcount. The other expenses, which are site rents and telco expense, which is about 40% of the cost structure, less than a third of our expense reductions have come from those areas because they are -- because of the complications in engineering them, putting the plans together and then executing those plans, it takes a lot longer to get those costs out. So as we move forward, we do expect on a quarterly basis, it's going to be tougher to get the costs out because we don't have that quick hit of the headcount reductions.

This gives you a little bit more granularity our where we have been in terms of our headcount history. When we came together, we had 2844 people employed with the Company. And you can see, we rapidly began right-sizing the organization shortly after the merger in November of 2004. To date through June 30, 2006, we now have 1308 employees with the Company, so we've taken out over 1500 people. Now that's why I say things get tougher as you move forward, the reason being, obviously, it's impossible for us to remove another 1500 people when we're down to 1300. It's also going to be impractical for us or implausible I think for the next 24 months to get anywhere close to a 50% reduction in addition as we've achieved over the last 18 months.

Service rent and maintenance is about 50% of our cost structure, and the reason being is about 75% of our sales are -- SR&M expenses are from site rents and telco expense. And with the lag on that, we have only gotten about a third of our cost reductions to date from the SR&M area, even though it's about 50% of the cost structure. As Peter talked about in his five-year plan for site rent, we see that accelerating in 2008 and 2009 when we start to get -- really mine the benefits of both reduction in the sites, number of sites we have, as well as a reduction in the average fees we pay per site as we leverage the American Tower and Global Signal long-term contracts that we signed earlier.

Selling and marketing expense -- this just sort of sets up a little bit, we've talked about this a little bit as we have maintained the investment. We did right-size the selling and marketing organization shortly after the merger and before the end of 2004 in the fourth quarter, so we had a pretty large reduction to right-size that organization. But since then, you can see, it has been a relatively constant investment as we go forward and it's key to keeping those relationships alive and mitigating to the extent possible the revenue churn that we see.

General and administrative expenses -- this is where we've really taken the biggest chunk of expenses out. Our G&A includes probably more than a lot of folks generally think of in a G&A item. It includes our customer service, it includes our inventory management and fulfillment and it includes all of the staff-related functions, like IT, accounting, finance, legal, human resources. Roughly about 50% of it because it's the customer service and inventory and fulfillment, as our revenue and our customer base decline, we can manage that to be very variable with revenue. The other 50% is much more of a fixed infrastructure admin cost that is tougher to take down just instantly with revenue. But again, we've taken out about -- a 50% reduction in our -- or I'm sorry -- a 35% reduction in our costs since the first quarter of 2006 on the G&A side.

Operating efficiency, it's just an operating metric that we've shown for the last few quarters. This just basically takes you back and looks at the amount of revenue the Company has relative to its employees on an annualized basis. And we have shown the four quarters that preceded the merger and you can see that on a combined basis, Metrocall and Arch operating separately were continuing to lose ground in terms of its operating efficiency. It was not able to cut the cost to keep up with the revenue decline from the fourth quarter of 2003 through the third quarter of 2004. You can see instantly with the merger, we began to really get a lot more efficiency. So if you just draw a line from that 244 over through the $351,000 per employee we have in the second quarter of 2006, all really attributable to combining these companies and getting the operating efficiencies.

Finally, I know we've had a number of inquiries from this group about how significant cellular is and how much revenue we get from it, subscribers. So we are disclosing a little bit more disclosure here on our cellular. What this chart does is shows that on the right-hand -- or the left-hand side are cellular unit sales by quarter. You can see that we're averaging somewhere between 7000 and 8000 a quarter of cellular unit sales, which puts us on pace for about 30,000 cell phone sales a year. On the right-hand side, the bars represent the quarterly revenue. That revenue is coming from both activation commissions that we get from the carriers, as well as residual that we get from the Nextel-Sprint contract. Breaks down roughly -- about 25% of it is residual on the subscriber bases we have sold, and about 75% is activation revenue.

Now the black line that goes through the chart here shows the percent of our total revenue that cellular represents. And while it is a very small portion of our revenue, there's a couple of key aspects we have to keep in mind that we think are important to our cell phone sales, is -- first, it offsets about 20% of our sales and marketing cost. So that $2.1 million in revenue for the second quarter, while not significant in terms of our total revenue, it is about 20% of our selling and marketing expense, in our investment. That helps us -- that means that our paging revenue only really has to support the other 80%. So really it helps us be more efficient with our sales force. The second aspect of it is, from a customer relationship standpoint, if you're dealing with your customers and they're going to be switching technologies anyway or they're going to take certain things they're doing on two-way pagers and moving it to BlackBerry, we might as well be the people who are out there selling that to them. It keeps us in the game with them, it keeps the relationship strong. So we're big a advocate of that.

Third, and not to be lost, is if we didn't sell a portfolio of products, we don't believe we would be able to retain or attract the caliber of sales people that we have. But if they're only selling pagers, it's a very tough sell to recruit good sales people.

Next thing I wanted to is we have changed some of the disclosure and we will keep this disclosure pretty consistent in our press release as we go forward. We just want to go through -- a lot of it's the same information that has been reformatted and maybe expanded, but I'll just kind of go through with this real quick with you. First in our income statement, what we have added is a trended view so you can see from the first quarter of 2005 through the second quarter of 2006, we have expanded the revenue detail that we give to include paging service; cellular, which we just reviewed, product sales. Our product sales, what is contained in there is two primary items. It's when we sell pagers to our customers, if they're go to buy their own pagers as well as lost pager revenue, which is when a customer loses their pager, they have to buy it to get a new one if it's on a rental program. And our system sales that we sell to hospitals and other campus environments, that is what makes up our product sales. Our other revenue stream is for the most part our consolidation of a 51% owned subsidiary, GTES, and that's where their revenues get consolidated. And you can see that we come down and we -- it's the same sort of format from an operating expense and income statement standpoint, but then we provide the reconciliation to EBITDA at the bottom.

Units in service, again, it's a six-quarter trend here that you can see and we'll add to this as we report new quarters. But it gives between our direct one-way, direct two-way, indirect one-way and indirect two-way, what our beginning units and service, our gross placements, our disconnects, our net activity as well as our ending balance.

And then this provides a little bit of information on our average revenue per customer, again, by the same revenue or by the same breakdown, giving you totals for total one-way and total two-way. And we do the same format for gross churn and the net churn percentage.

And this is the chart that Vince went over earlier. Just gives an account stratification. Obviously due to the billing conversion that we went through and the combining of all our customer base, as far back as we can give good data on this is that our fourth quarter in 2005, but we will continue to build on this as we go forward and I think it's something everybody has expressed an interest in seeing. Also at the bottom of this chart, we have our cellular revenue and our cellular activations each quarter.

In the operating expense, again, we have a trended view of some of our operating expenses. We have expanded this to include all of the disclosures we had typically made in our 10-Qs and our 10-K, but it just gives you a nice picture here so you can see a trended basis on this going forward.

And then finally balance sheets, which obviously hasn't changed much, and our cash flows. With that, I will turn it back over to Vince.

Thank you, Tom, and thank you for bearing with us. I know this has been long, but we wanted to provide a lot of information and we appreciate your patience. And those of you that are joining us by phone, we appreciate your patience and sticking with us.

This is a quote from the independent FCC Katrina panel. I'm not going to read it to you, you can look at it yourselves. But it basically sums up our view on paging. Paging is as relevant today, if not more so than ever. Whether or not it's a natural disaster, whether or not it's a man-made situation, we think paging is still going to play a vital communications role going forward. There's a lot of people that agree with us, including the independent panel from the FCC.

Evolution, where we have been, where we're going. 2005 was about integrating these companies, really kind of building the management team, building a long-term, low-cost operating strategy. 2006 is about execution, maximizing those network rationalization opportunities which Peter talked about, really focusing on selling and marketing and taking a re-look at what we're going to do going forward and exploring those complementary products and services. 2007 and beyond is going to be about continuing the free cash flow focus, continuing to target those core groups of users, but implementing complementary products and services, and again, enhancing our efficiency.

Tom talked about the fact that getting good sales people is challenging if all you're doing is selling pagers. I try to speak to our top 10 sales reps every month once the numbers are out and have conversations about them -- what do we do well, what don't we do well, how can we do better, what are your customers saying? I will tell you right now, if we weren't selling other communications products and services, we would not have most of those top 10 individuals.

I'll also tell you if you look in the data that Tom shared with you and look in the selling and marketing section, you will see that the total commissions we paid to our sales force in the second quarter was about $2.3 million. When you look at the amount of money that we collected from the cellular from companies, it was about $2.1 million. So another way of looking at it is the commissions that we're making from the cellular phone companies is going a long way to subsidize the commissions we're paying our sales reps and we're paying those to them for both cellular placements and paging placements. So I think it's important that we remember that complementary products and services is important to our future.

In terms of our strategy for capital allocation, we've told you this since day one -- we believe in returning capital shareholders. There's different ways to do that. Management made a recommendation to the Board, the Board accepted the recommendation that we would pay a $0.65 per share dividend beginning in the fourth quarter of this year. We will continue doing so for as long as possible. We think we have decent visibility that we've continued to do that for quite some period of time into the future. We also think that a prudent level of investment back into the Company is important. So we will continue without making huge investments and utilizing a lot of cash making a focused attempt on the mobile telephony side and on the wireless data side to enhance our portfolio of products and services and capture some of that customer churn with other products and services as it leaves.

In terms of our forecast, we gave you a forecast early in the year about what we thought we would do for 2006. We've tightened up those ranges for you for the balance of the year. We're going to be at the higher end of the revenue range, we'll do 495 to 500 in that range. We originally told you 480 to 500. We will come in below the original guidance we gave you on operating expenses. We now with think we'll be somewhere between 363 and 368. That compares to original guidance of 370 and 380. We spent a little more on pagers, will be 20 to 22 million in CapEx. We had told you originally 15 to 20 million. We are buying more paging devices right now. We think that's a good thing for the long-term. And so that is our revised guidance in terms of where we'll come in for 2006.

Someone once told me, and we've all heard a picture is worth 1000 words. When you kind of look at this slide, it really sums up the challenge that we have, the risks that we have, and also I think in some respects, the opportunity. The opportunity is the area between the curves, the blue line representing the cash that comes into the Company, our revenue, the red line representing the cash that goes out of the Company, which is effectively our operating expenses and the capital expenditures that we incur to buy devices and a little bit of infrastructure. The area between those curves is free cash flow and you can see going back to the first quarter of '03, we have generated a lot of free cash flow. There has been a lot of area between those curves on a historic basis all the way through the second quarter of 2006. We had been running it at 20% or erosion in this company and in this industry. That, simply stated, needs to slow down for us to generate a lot of free cash flow for a long time into the future. We think based on our visibility that we're seeing positive signs that that is beginning to slow down and the trends certainly indicate that. What we don't know and it's our number one risk factor in our public filings is will there be other impacts on our business from other wireless technology that we can't foresee right now? Will we wake up one morning and BlackBerries all be free to everybody and all of a sudden some of the coverage issues solved. These are all things that we have to deal with going forward, not just in terms of talking to our shareholders quite frankly, in terms of talking to our customers and our employees. So that is part of the challenge. The red line, yes, we have taken a lot of cost out of this. But I think you have heard from the guys today, it's going to be harder and harder as we go forward to get costs out. We're certainly not going to be able to take them out at the rate we've taken them out before. We don't know what that revenue erosion line is going to be ultimately. That is the bet here. We put a 10% line up there and a 15% line up here. We haven't seen a 10 or a 15% trend yet. If it's 20%, it's go to be difficult in the long-term to generate a lot of cash flow. If it's 15%, its starting to get better because we think we'll take a lot of costs out. If it's 10%, I think everybody in this room is going to be very happy with the ultimate result. So, again, under the concept that a picture is worth 1000 words, that is the challenge that we deal with. In our management meetings, we call it managing between the lines. There's nothing more important that we do. We have to be very focused on this and we have to acknowledge and understand where we are.

So in conclusion, we're going to continue to operate and execute on the values set forth in our mission statement which supports the free cash flow operating strategy, our litmus test. We'll continue to generate a lot of cash into the future where we turn the majority of that cash to you through the recurring dividend and we'll take a little bit and we'll invest in future opportunities going forward, particularly on the selling and marketing side. We continue to believe paging is as relevant as it ever was. We continue to be fervent, energetic believers of the story. We go to Congress, we tell it. We just started our own political action committee, our shareholders are allowed to contribute to that political action committee to help with candidates on a bipartisan basis that want to help us with legislation on emergency communications. We continue to talk to the SEC and talk to these large government accounts and try to penetrate that better with respect to the paging opportunity.

That is our story. That was the canned presentation that management had for you today. All of us are available now to take questions from the audience and also take questions from the callers that are on the call. Why don't we start with the audience here today. All of you may need to come up because the microphone that goes to the people that called in, they won't be able to hear you from there. Go ahead and ask your question.

[Chip Odith], [Haven] Capital.

(OPERATOR INSTRUCTIONS)

-- and earnings per share with all of the guidance on EBITDA and OpEx and I think you were talking 100 million free cash flow for the year about seven months ago. Can I get a number on where we're going on that?

For 2006?

'06.

I think (indiscernible) like we talked about on our previous calls, you probably kind of take some of the middle of the range. So if you're at 397-ish, I think most are taking like a 397-ish and maybe a 360 -- oh, that one?

The question was -- we haven't given specific cash flow guidance, but you can certainly interpret from the guidance we gave on our revenue from 295 to 300, or I mean from 495 to 300, and then the 363 to 368. Obviously the delta between those is going to be about 130, minus the CapEx of about 20 to 22. So that is generally the range of the cash flow.

Right, which is why I apologize, not having had time to work through that. What does that turn into -- earnings, more or less?

On an earnings per share, to tell you the truth, I don't -- from a tax perspective, I haven't gone down to look at -- we haven't spent a lot of time on earnings per share, so I'm not sure what that would interpolate down to. But I think from a cash flow perspective is what we're -- that's the range we would be in.

My second question, Vince, is more long-term, which is -- it sounds like if you want to more deals like you are working on with the large computer company, that in the future if you're not already, you're going to be competing with AT&T and Sprint, Verizon and other people that want to be a one-stop shop for telecom service or wireless service, either outsourcing or consulting or management. Not that theirs is the greatest, but (MULTIPLE SPEAKERS).

There's a major differentiator though for us. It is tough because they're very aggressive. But when Verizon walks in there, they're trying to sell Verizon products and services. When we walk in there, we're selling a suite of wireless communication services, which includes paging on the low end, it includes wireless messaging in terms of BlackBerries, it includes mobile telephony in terms of the latest and greatest phone and we can sell for multiple carriers so we can get the best deal and really be consultative to that particular customer and help them manage their total wireless communications call. Look, I am not going to disagree with you when you tell me, gee Vince, you're in a very competitive business. I can't imagine -- we all just looked at the graph a second ago -- being in a tougher business right now. It is a tough business, but we think that there's a lot of reasons why, particularly with the large enterprise accounts, the government accounts and the big Fortune 1000 accounts, that we have a lot of credibility when we walk in there because we can sell them to save their costs. And typically who you're negotiating with is an individual who is in charge of the telecommunications purchasing decision for that particular entity which plays to us because they are more often driven by the overall cost than they are by the end users who may or may not be happy that they're down in the boiler room and they're getting a pager as compared to that mobile phone they wanted -- they're not the ones that made that decision, it's that telecommunications purchasing agent. So I still think, I hear you, I don't disagree with you. We've talked about this quite a bit, but I still think there's some opportunity for us there.

Can you discuss the Board's decision to institute a recurring dividend versus a share buyback and kind of status of the NOLs?

I will take the first two and then you can take the status of the NOLs. There's a lot of different ways that you can go about returning capital to shareholders. You could buy stock back, you could pay these special kind of onetime dividends, you could do a recurring dividend. With respect to the stock repurchase, it's very difficult in this environment for us as a Board to look at the dynamic that I put up there on that graph and do evaluations and come up with a consensus on what you want to do with respect to a stock buyback, as opposed to doing a dividend, which right now, knock on wood, is return on capital that treats everybody exactly the same. If they like the stock, they get the money, they can buy more; if they don't, they have the cash, they can invest it somewhere else. We've talked about this a great deal at the Board level, spent a lot of time on it. Frankly management came in and recommended the recurring dividend for a lot of reasons. We ruled out the -- continuing to do the special onetime dividend and just letting the cash build because we just didn't not feel like that was a good way to operate going forward. We kind of heard loud and clear from the shareholders the last time we did that, that we want some more certainty with respect to what your longer-term plan is, and this is something that we feel good about, that we know we can continue to do for quite some time into the future at that level. And so that's why we made the decision. That's one thing that we could get unanimous consensus on. With respect to the NOL, Tom do you want to --?

Let me just specifically -- obviously, the status of it is, we still have about $220 million of deferred tax assets on the balance sheet. We expect to fully utilize them, that value prior to expiration. But if there's a specific below that, let me know.

I guess a stock -- would a stock buyback invalidate your NOLs, because you said (MULTIPLE SPEAKERS).

Where are we on our change of control, at 30?

Change of control, we're at about 36%. It's roughly the same as in our first quarter filing. There would be an impact if you had a change of control. It would minimize the usage of your NOLs and it's a very complicated calculation. It depends on the value of the Company at the time of a change of control, so there's a lot of variables so it's hard to give just a canned answer on that. But yes, it would have impact. At this point and time, we don't they expect it to be as material of an impact as it was a couple of years ago at the time going into the merger. So it's relative -- it's the calculation that you would use, the limitations that would be placed on us would be less rather than more then just a few years ago.

Just as a follow-up to that, it looks like the income tax expense has been going up quite a bit over the past two quarters. Does that mean you're eating through your NOLs at an increasing pace?

This quarter, one of the reasons that it went above where our normal rate of about 39% would be as there was tax reform in the state of Texas that by reforming their income tax, essentially what that did is take some of the income tax, the deferred tax asset that was associated specifically with Texas, and reduce that. And so I think that was about 1.3 million or something of an increase on our taxes for the fourth quarter. But yes, as you see that income tax, essentially as you have an income tax expense there, it's essentially eating away at the deferred tax asset. It's a use of the deferred tax asset.

(inaudible - microphone inaccessible).

Our rate right now I think is about 38.9 or something, or 39%. So you should probably think about that going forward.

I wanted to thank you first for the additional disclosure and also to congratulate you on managing your costs in what can't be an easy operating environment. My question is about the attrition rate of subscribers in the government business. It's very high relative to the compelling nature of the story that you describe having to do with reliability and emergency response. And I wonder what color you have as to why it's as high as it is and what it would take to slow that attrition rate down and actually turn it into an increased sales opportunity?

You're talking about my single biggest source of frustration with this business right now, has been our ability to impact what I think should be the primary consumer of our products and services with a positive result there. We still have a lot of government accounts. The ones we have I think value our products and services particularly when there's an emergency. But as you saw, we're still losing them at over 4% on a quarterly basis and they should be right up there with the health care. It is a very difficult sector to penetrate. We have brought in lobbyists, we have brought in consultants, we have had people at the highest levels of government come in and tell us, Vince, there's no such thing as a government decision maker, there's just influencers. We have done I think a lot of things more aggressively recently than we have done in the past to try to turn that. I think we're making progress. It has been slow. We're going to spend a lot of time on this committee that's looking at this revising the whole emergency response network in this country because we think that, if anything, the group call capability that we have in paging today where we can put on -- each one of you have an individual messaging device from USA Mobility, we can put a second address on your device that won't interfere with when your employees want to get a hold of you, that won't interfere with when your wife wants to get a hold of you. But if we needed to send to a group a message, it is a very little utilization of our network, but we could broadcast everybody. There's an emergency, here's what you have to do. Center for Disease Control, go do it; FEMA, go do it. We can do it. The mobile phones don't want to do that. We were testifying and we got into a little issue the other day with the mobile phone companies. They don't want to do that, they say it's hard on their networks. I also happen to believe that they want to continue to protect the SMS, the text messaging revenue that they get on -- I think there's something that's contrary to public policy there with them. I'm not done with that, by the way. But I been frustrated by it. It's something that I'm personally spending a lot of time on, Scott's spending a lot of time on. We're going to go the balance of this month and into September and work with some of the staffers up there that are working on these committees, because when we tell them the story, they believe it. But you've got to get somebody high up to make that decision that they're going to make a bet on paging, which is a technology -- when you talk to some of these guys, when you first go in and have the meetings, what you hear is that they've looked at our technology and they think that's the past, not the future. And we've had that. We've gone in and met with DHS, we've met with all of them. And you will get that feedback sometimes. Yet, you'll sit there like we did today and you'll explain the benefits of paging to these decision makers and they'll sit there and they're nodding heads. The Katrina panel will issue a report in black and white. You'll get it from talking about the aftermath of 9/11 in black and white from government agencies. We've got these testimonial letters that they will send us, thanking us for our service. But getting that and converting that into an executed purchase order from the government has been a great source of frustration. We have government specialists we've hired that do nothing but focus on the [VAR] and focus on how you get into and correct those government accounts. On the GSA contract, actually on a number of contracts, we've started going to their trade shows and putting up our own booth and selling the benefits of our wireless messaging services. But you're right -- that 4.3%, 4.4% should be looking more like what we're seeing in the health care. It's a huge area, we really need to focus on it. It's something that, Mark, we have to get and do better job on. But I agree with you. And Scott has put a lot of his energy and efforts into it on Capitol Hill and will continue doing it. We're doing it with the FCC, we're talking to them on a regular basis about paging, and they all agree with us, it's just bridging from their agreement to getting that executed purchase order and growing that business. That has been tough. As I said, we had a good second quarter in the health care sector. In the month of June, we actually grew in the health care sector. I think we have to find ways to sell other products and services that complement paging as well because that is what made us successful in the health care sector, but we're not going to -- no stone will be left unturned with respect our efforts in that area. He has the microphone.

My question relates to actually slide 62. What sort of rate of revenue erosion did you guys assume going forward in your guidance of at least a five-year sustainable dividend?

First of all, we didn't give a five-year projection with respect to our revenue erosion. We looked at our business plan and we looked at how much cash we think we can throw off. If we see some improvement in those specific strata on those account-sized strata that we gave you and what we think we can do with our cost structure, and that is where we came up with $0.65 a share that we think we can do for a long period of time. If -- that is not a guaranteed. Our biggest risk factor, number one, is that revenue erosion. Our biggest risk factor number two is our ability to extract those costs. I'm not going to back away from that and say that is a slam dunk. At this point, we've had very good results with respect to lately achieving what we've forecasted and seeing it on an incremental basis quarter-by-quarter come in where we think it's going to be. And so, hopefully, that's the basis with which we did that forecast and the basis with which we declared this recurring dividend. If it turns out not to be the case, we'll obviously be letting you know and we would have to change it.

I guess that's sort of what I'm wondering about, is you guys must have a certain amount of comfort -- when you decided to go away from the onetime dividend model and to institute a recurring dividend of -- a pretty high dividend. So I'm just wondering how aggressive were you in your assumptions going forward that makes you comfortable that you will be able to sustain that dividend for a couple of years?

I think we have told you that that's something that at this point, we're comfortable with. If we don't achieve things that are in our business plan, we'll come back and we'll let you know. Like I said, there's no guarantee, it's a challenging business. You saw the managing between the lines graph. So I don't want you to leave here with -- thinking that there's a guarantee that we're going to be able to do this. We're going to work hard to achieve that, and hopefully for everybody's benefit, we do achieve it.

Thank you.

You talk about that your market share is 59%. What of the possibilities of you acquiring someone in your business to increase that since you are the low-cost provider?

We have looked at all of the acquisition opportunities in the industry that have come up so far. We're going to go back and look at some smaller ones. I want to be careful what I say because to the extent that you go through that exercise, generally you have a nondisclosure agreement. So I cannot talk about those specifics, but we would only want to do a transaction that we thought was accretive to our shareholders. So we're not interested in paying a big telecommunications company a ton of cash to buy their subscriber base that we also think we will otherwise capture in the marketplace over time just because we execute better than our competitors. I think there's some smaller ones out there that we could acquire, but I want to be careful there because one of the things that we have to look at when we acquire other paging companies is what networks they have, what frequencies their customer is on, how does that mesh with our integration strategy in our go-to networks. You buy a company with a lot of high-band frequencies and high-band pagers, that's not going to be part of your long-term platform. Now you have CapEx because you have to go replace all of those pagers ultimately; it just adds to the cost. We've made offers to companies that says, here's an amount we'll pay you, but we think our true cost is there because we're going to replace these pagers. And they kind of balk at that and walk away. People will make short-term decisions and pay a larger amount to get some cash flow to date that we don't think is sustainable long-term. We're not going to make that mistake. We don't need to make that mistake. We have the best operating network out there right now and we have the most customer relationships. Competitors that are underneath us cannot make that statement and some of them right now are having some technical difficulty quite frankly that is going to benefit us. So I don't want to go overpay for something that we can otherwise pick up the old-fashioned way. Having said that, yes, do we continue to look at smaller opportunities from time to time? Yes. Have we executed on any of them recently? No. Are there a couple in the crosshairs? Yes. And we will keep you posted on that, but it's not going to be huge.

Thank you.

Thank you. Just a follow-up question on the CapEx. Given your network rationalization, do we presumably know what forward-looking CapEx is going to be just related to switching out the pagers when we look on your network rationaliztion on slide 30?

You mean, do we have a prediction for the next five years on CapEx or?

(inaudible - microphone inaccessible)

If you take a look at our capital, the biggest issue right this moment is not our one-way pagers. We had forecasted what I think was adequate capital within everything we looked at. Where we're getting our most pressure believe it or not right this moment is on our two-way pagers. We have some specific accounts that want long-term forecasts for them to continue to do business with us and they are very big Fortune 1000 accounts that, they think that as long as we provide them new pagers, they will continue to make an investment with us and our service. So if you take a look at a large part of our difference of capital even this year, we are going to begin to buy some two-way pagers for specific accounts beginning this year. So -- and you did take a look at next year -- it's more of a two-way issue I believe than a one-way issue as has been in the past.

But it terms of quantifying it for his question is you rationalize the network and you get it through force rationalization. Let's say this year, you do $21 million or so in CapEx on pagers. You're not looking at a situation where you roll along in a couple of years and you're seeing a $40 or a $50 million a year, you're seeing relatively the same level of CapEx on a go-forward basis, not -- if you're thinking, is there going to be some big huge increase.

I guess are we allowed to disclose how much (inaudible)

No, not that much granularity. But as you go forward, as Vince said, I don't expect to see huge variation in our CapEx. In fact, what happens is you may have force rationalizations in the future which drive up incrementally that aspect of it. But as the same time, as the subscriber base gets smaller, as Peter mentioned earlier, we're doing about 140,000 transactions every month. As the subscriber base gets smaller, that transaction count goes down and that transaction count drives capital. So you can get a lot of pressure downward (MULTIPLE SPEAKERS).

As well as we're doing (indiscernible) we are doing an investment in one-way pager purchases, but probably replacing our one-way pager purchases about every four to five years right at this moment. And as long as you have customers, you're going to need to replace those pagers. So.

Of the 365 million or so of OpEx, does that includes the restructuring and severance packages? And if so, how much does that represent and what should we expect of that going forward?

Yes, it does include that amount. They only thing it excludes is our depreciation and amortization and accretion. We had originally, I think -- one of the places we saved a lot of money this year was in what we thought we may take out there. One of the big transactions was the -- Peter mentioned we sold essentially our Pensacola call center to Teleperformance, who is our outsource provider. That helped us frankly avoid a lot of shutdown costs that would have gone through that line item, as well as severance costs for some employees who we would've had to start making cuts there ourselves. So that did avoid it. I think this year, we're probably going to come in at closer to the $2 million range. I think last year, we were at -- I know in the second quarter last year, we were at 9 million alone in the second quarter last year, so it's going to come down substantially this year. So it's probably a lot of the savings originally, I think we expected that to be 4 to 5 million, now it's probably going to be around $2 million.

We have another question from the audience, and then I would like to take a couple of questions from our call-in listeners. Yes sir?

I had two questions. The first one with respect to your government contracts and some of the hurdles that you're experiencing. What efforts are you making to change the regulatory framework or the statutory framework where there's an affirmative obligation for the municipalities or the states or even some of the federal agencies to adopt paging? Not just in trying to influence the purchasers, the people that are making the decisions, but actually change that? And then I had the second question follow-up is on the NOLs. Would the company consider putting in a 4.95% ownership limitation to protect NOLs going forward?

With respect to your first question, we are making efforts at the FCC and also with Congress to influence the regulatory policy and the legislation that's under consideration. The FCC has been working for awhile to expand the Emergency Alert System, which most of us have heard referred to in the past as the Emergency Broadcast Network, previously been used as a basis for distributing alerts over broadcast television and broadcast radio. It's being expanded to include other forms of wireless and wireline communication. We have been very active and I think pretty effective in being able to demonstrate the importance that paging can offer, the value that paging can offer to that expanded system because of our independent proprietary network, which is not linked for carriage purposes with the broadband wireless network, and therefore isn't subject to the same vulnerabilities as that network. And as Vince has referred to repeatedly throughout our presentation, there is an increasing body of evidence that shows that the paging network continues to function during circumstances that bring down the ability to transmit over the broadband wireless network.

We're also active in Congress with the hearings and the gathering of evidence in support of Congress's efforts to expand what they call a National Alert System to create -- expand it based upon the old broadcast system and expand it in a way that's slightly different from what the FCC is talking about. And a hearing was held by the Telecom Committee of the House Commerce Committee a couple of weeks ago. That was one of the events at which Vince has testified for the Company to explain again what capabilities we offer. That legislation in the House that's currently drafted does not provide for mandatory participation by all wireless carriers. The FCC is still soliciting comment from all of the industry representatives as to whether their system ought to be mandatory.

The Senate had worked on a similar bill to that of the House last year, and their bill is sort of trailing their effort, it's trailing the House's effort to try to come to some agreement. There maybe action on these bills before the current election, which would be beneficial we think for our industry and for our company.

Added to the mix in these considerations is the fact that the President issue an executive order about a month ago in which he assigned to the Department of Homeland Security the obligation to create a National Alert System less defined in terms of the scope of that executive order. But it clearly overlaps what the FCC is working on and what Congress is attempting to address. So we're still determining all of the different ways in which we will be able to influence that process as well.

Tom, you want to talk about the NOL limitation?

Yes, let me kind repeat the question, or what I think it was. It was -- would we contemplate a limitation on ownership to protect the NOL? Actually, we already have one. Essentially nobody can be a 5% holder without gaining prior approval from the Company or notifying the Company once we get over I think it's 42% versus where we are on 36% now. Then, the Company would have the right to deny that transaction from going through. So far, what you see though, there are a lot of rules around 382, the IRS. And so you see some of our holders who may own more than 5%, but because of the way they hold it and the way they manage their accounts, they may actually be three separate owners at 2% each in terms of the funds. So we manage that very carefully, we go through a quarterly study that we look at that and make sure that we do questionnaires with some of our shareholders to make sure we are where we are. And we do have the ability in our corporate bylaws to undo a transaction if something happened without prior notification.

Do we have the ability for some of our callers to ask a question? Let's go ahead and take questions from callers.

[Jim Kiefer], [Artisan] Partners.

Thanks for holding this meeting and I certainly appreciate the additional disclosure, the dividend policy versus share repurchase. I think you have taken a sensible approach there. My question revolves around the projections that you've presented, not so much in general about it, but what it implies. In particular, I'm looking at the cost -- operating cost that you're talking about. If my numbers are correct, year-to-date, you have had 185 million in operating expenses. And so that would leave somewhere from 178 or so for the rest of the year. Yet in this latest quarter, you had 89 of operating expenses. So I'm trying to understand what you were trying to imply as far as cost saves for the remainder of the year?

To answer the question, yes. As we tried to I think talk about this afternoon, what we saw this year is that we got sort of down to the level we expected to get to at the end of the year much faster. And again, a lot of that I can't stress enough came from headcount. Headcount is one of those things that it's sometimes hard to do in terms of a management decision to take those heads out, but it's a very easy cost to get out and it's very fast. Those are largely behind us. As we look at the second half of the year and beyond the second half of the year, as I mentioned about a third of our cost reductions to date since we -- since the merger have come from headcount. Going forward, it's going to be just a fraction of that. So 100% of our cost reductions in the future have to come from the other two-thirds of our cost structure. So we do expect our expenses to have a little bit of a pause in the second half of the year in terms of the kind of reductions we've been able to do quarter in and quarter out. So I think the numbers do imply what they imply, which is that we expect a little bit more stability from where we are in the second quarter through the remainder of the year. As always, we will try to beat those numbers, but at this point in time, it's looking like we'll be much more stable over the next two quarters than the kind of reductions we've seen in the last five or six quarters.

Understood, thank you. One quick question as well. I was curious if this meeting is going to then lead to more of an open door policy for discussions with shareholders?

Let me address that one. A couple of things. Number one, this meeting was awful late in terms of when we wanted to initially have it, and a couple of things got in the way. We had one opportunity that was facing us that didn't pan out, and that was why we initially postponed it, and then we had a situation where from an audit perspective, we had to restate financial statements with respect to our asset retirement obligation and the deferred tax asset and a number of other things, and then we ended up delaying it until we through a very protracted process with the auditors on that. That's all behind us, we're having the meeting.

Our intent going forward would be on a quarterly basis, speak to the shareholders, walk you through our business, stay on the line as long as we need to stay on to answer all of your questions, do that publicly so that there's no Reg FD issues there. And then -- and Tom and I need to get together to talk about this -- come back here and meet with you again in either late February/early March time frame and talk to you about how the year ended up and what we foresee for 2007, specifically with similar guidance to what we've given you in the past.

In terms of taking shareholder calls, when the shareholder calls us, we do answer the phone and we talk to them. But as you guys know how the rules work, we cannot really answer your questions on a one-on-one basis anymore and comply with the Reg FD rules. We've been very carefully coached on that and I think the coaching is right based on some of the things that we've seen go on out there in the marketplace. So that's basically our policy. It's something that I support, that the Board endorses, and I hope that's good for you.

Okay, thank you.

Matt Teplitz, Quaker Capital Management.

Also, thanks for doing this meeting. Quick question, as you guys look out to '07, I think you've laid out specific expectations for network savings of I think 20 million in '07 versus '06 and I think another 25 million in '08 versus '07. Are there any other discrete buckets at this point that you could size for us? I realize the revenue part of the equation is harder to estimate obviously, but there must be clear cost buckets you're identified and could you share any of that? I know talked about the legal reorg and that saving you money. I'm just wondering if you could help with any of those, that would be much appreciated.

Okay, we haven't given specific guidance on operating expenses for 2007 beyond what Peter had in his slides with respect to the network rationalization effort, so I don't want to quantify today. We will be doing that, but we will probably be doing that in early 2007. We're in the process right now of going through our internal budgeting and forecasting process for 2007 and beyond updating what we had done last year. And there are categories like customer service that we talked about which is relatively variable where costs will come down. There's some headcount areas where cost is going to come down, there's some telecommunications expense areas where cost is going to come down. There's repair and maintenance areas with respect our inventory and plant where cost is going to come down. All of these things are things that we know and things that we've already quantified internally, but we have not finished at analysis, we've not finished the 2007 forecast that we intend to present to our Board this fall. And so at this point, I don't want to give specific guidance, other than what we have done on the network rationalization piece, because that being the biggest piece, we wanted that done first and to make sure that we felt good about that.

Okay. Can you just update us on the status of I guess auditors? And since I guess that is limiting your ability to get a 10-Q out there?

I will take that. We did issue a [12-B-25] last night but just because we wanted to get it out before this meeting. We expect at this point that we will file our 10-Q on or before the 14th of August, which is the five-day grace period that's built in from the SEC. Really as we presented our numbers and put our press release out last night, we made an auditor selection late in the process. Grant Thornton was hired by our audit committee. They have done a tremendous job of getting through things very quickly and very constructively. The numbers side of the audit or the review -- it's not an audit -- but the second quarter review are essentially done. Our Q is sort of sitting, waiting to be filed. What we are waiting on is there's a lot of requirements on the accounting firms to have all of their T's crossed and I's dotted as it relates to the documentation of internal controls. Grant Thornton is going through that process. As soon as they get that done, essentially we will then file. So it's a lot of paperwork requirements and documentation requirements that we have to go through with them. And as soon as that's done, we'll release the Q.

But our expectation is, it will file on the 14th, right?

On or before the 14th.

Five days, okay.

Thank you.

At this time, we have no other phone questions.

We have one more question from the audience I believe. Actually, we're going to have two more questions.

I might ask you to state your name, that way we'll have it for the transcript too.

Brian (indiscernible). Just going back to the government question, the decline -- can you tell us what -- are they going on alternative service or another communication device?

It's all across the board, it's just across the board. DNS is working on a huge project that integrates a lot of wireless communications platforms, principally mobile phones. We have lost government accounts just because of budgetary reasons, particularly when you look at the state and the municipal accounts, which the majority of our government accounts, when we talk about government accounts, we tend to initially think federal, but the majority of our government accounts is state and local. There's been budgetary constraints where they've just cut back. It's really not dissimilar from what we've seen in the rest of our customer base. I wish there was one thing that we could attack and use to our advantage, but at this point there's not. We are working with several concepts in terms of going into the cities and the city managers, but you have to be careful which city you do it, because most of them have financial issues for when there is something like a Katrina coming, having an emergency group broadcast capability to notify citizens and notify your first responders that this is coming. And we are able to demonstrate and document for them what we worked where other systems didn't work. But they are slow to move. I'll tell you, it is a very frustrating exercise for us to go through. But we're not going to give up, we're going to keep on pushing it. We've got to see improvement in that sector. It's very important.

is it an issue of their getting rid of redundancy, or there's just -- I'm assuming they have some type of other -- (MULTIPLE SPEAKERS).

There's technical migration that goes on to other communication devices. The government accounts love to get BlackBerries, they love to get mobile phones. We see that on a daily basis with them. So it's a technological migration that we're dealing with. Like I said, it's not dissimilar from what we're seeing in the rest of our customer base. Next question is a gentlemen in the back here.

Brian (indiscernible) [& Goldfarb]. I was wondering if you could tell us a bit more about the people who are having the service dropped, what those profiles are like? And also, if you look at disconnects versus mobile phones being sold, it's about 2% of your disconnect. So can you talk about how (indiscernible) to mobile phone from say pagers?

Most of the churn that we're seeing in the business is still coming from our smaller account sizes, and it's clear where they're going. They're going to BlackBerries and they're going to mobile phones. That has been a phenomenon that -- this industry's experience since we were 40 million subscribers to where we are today. So nothing has really changed there with respect to that. The only thing that I think has gotten harder in some respects is that the price, if you were to kind of graph cost versus functionality, the price per functionality of some of these competing technologies is quite frankly coming down and that makes it tough on us. What you used to pay for a BlackBerry compared to some of the deals you can get today, that price has come down and there's a lot more functionality there. So that's a challenge for us. And that's where you're seeing a lot of this migration go to. A lot of these large accounts that have lower churn characteristics and a lot of these hospital accounts that are very, very stable don't just have pagers, they have multiple products and services from us. So it's not like we're just going to lose those subscribers to another technology because they're already using the other technology and that's where we've been successful. We have just had one huge hospital account, which if I said the name, it's a household name. I don't want to say the name because it's a public meeting and our wireless competitors may go knock on their door, but they had 6000 pagers with us and they told us at the beginning of the year they would like to transfer 2000 of those pagers to BlackBerries, but they wanted us to own that business and for us to provide the BlackBerries and they would keep 4000 pagers. And we did that, and now they've come back to us and said we like these BlackBerries, we would like all 6000 to be BlackBerries. That's the kind of thing that we're dealing with. Now we're going to sell them that BlackBerry, we get a heck of a nice economic bump from doing, the, is short-term because we lose the recurring revenue on the paging side. But it's still something that we are facing with, it's the reality if this business. And so that's the challenge here, that's what we're talking about.

Any other questions? If not, I want to thank everybody for coming, for spending what turned out to be a lot of time with us, over two hours. And those of you that were at the shareholders meeting, even longer. I appreciate it. We look forward to talking to you after our third quarter results and we look forward to coming back and meeting with you hear early in the year in 2007. Have a nice day and we'll see you and talk to you real soon.

Thank you for your participation. Everyone on the conference call, you may disconnect at this time.