Spok Holdings Inc (SPOK) 2006 Q3 法說會逐字稿

Good day, and welcome everyone to USA Mobility's Third Quarter Investor Conference Call. Today's call is being recorded. On line today, we have Vince Kelly, President and CEO; Tom Schilling, CFO and Treasurer; Peter Barnett, COO; Scott Tollefsen, General Counsel and Secretary; Mark Garzone, Executive Vice President Marketing; and Shawn Endsley, Controller.

At this time, I'd like to turn the call over to Mr. Kelly. Please go ahead, sir.

Good morning. Thank you for joining us for this company update. Before we begin, our General Counsel, Scott Tollefsen will make a brief statement.

Today's conference call 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 or revenue, expenses and income as well as other predictive statements or plans dependent upon future events or conditions. These statements represent the company's estimates only on the date of this conference call 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, which the company believes to be reasonable based upon available information, they are subject to risks and uncertainties. Please review the risk factors section relating to our operations and the business environment in which we compete contained in our 2005 Form 10-K and related company documents filed with the US Securities and Exchange Commission for a description of these risks and uncertainties. Please note that USA Mobility assumes no obligation to update any forward-looking statements from past or present filings and conference calls.

Thank you, Scott. Before Tom and I update you on our third quarter results, I wanted to again thank those of you who were able to attend our August Investor Meeting in New York, either in person or by phone. The meeting not only gave us the chance to meet many of you, but it allowed us the opportunity to fully brief you on our operations and business strategy. At the same time, I hope the presentation gave you some insights into USA Mobility and have a look at us from an investment perspective. For those of you who may have missed the meeting, our presentation is still accessible in our Investor Relations section of our website. Likewise, a transcript of the meeting was filed in an 8-K on August 15th. While 90 days have passed since that meeting took place, I mentioned it today for two reasons. Number one, most of what was discussed then is still relevant in time with today; and number two, some of the information we will share with you this morning will update you on topics discussed at that meeting. I would also note that we expect to host our next Group Investor meeting in early May, in conjunction with our annual shareholder meeting. The meeting will most likely be held again in New York City. We'll keep you advised on the details of that meeting when they are firmed up.

Given the amount of material we covered in August, we thought we'd keep our prepared remarks relatively brief this morning. This should allow us some additional time to address your questions.

As we approach the second anniversary of the merger between Arch and Metrocall, I wanted to take a quick moment and recount the enormous progress we've made over the past two years. Among our accomplishments, we merged and successfully integrated the nation's two largest paging companies. We assembled a dedicated and highly motivated management team. We realized substantial merger synergies and cost savings by reducing operating expenses excluding depreciation, amortization and accretion from pro forma $567 million in 2004 to $460.1 million in 2005, and to below $360 million expected for 2006. Reducing cost over $100 million per year, while increasing our sales productivity, and investing in marketing represents a solid accomplishment.

We generated $230 million in free cash flow since December 31, 2004. We retired $140 million in bank debt and became a debt-free company. We returned the $123 million of capital to shareholders in the form of return of capital special dividend distributions. We announced the adoption of a quarterly regular dividend beginning in the fourth quarter of 2006. We negotiated long-term and cost-effective agreements with our major site landlords and vendors. We began exploring numerous alternative sources of revenue. We upgraded and refocused our sales and marketing organization around our key customer segments, specifically healthcare, government and large enterprise. We've redefined our business strategy and expanded our marketing message to reflect our capability as a provider of multiple wireless services. And we adopted a new logo, brand identification and tagline, "One Source for Wireless," to communicate our new business focus.

These are just a few of the company's numerous achievements since the merger. While there is clearly much more work to be done, I am very proud of what our team of dedicate employees has accomplished over the past 24 months.

In terms of our results year-to-date and our outlook for the full year, obviously we are pleased with our ability to place units into our customers' hand. We have seen increases in our gross additions yet again in the third quarter, as well as continued improvements in our sales productivity reflected by an increase in monthly additions per rep. We have worked very hard to incentivize and motivate the sales team to achieve this, and we will continue to focus on selling and marketing as a priority in 2007.

We are also very pleased with our operating expenses and our continued drive to position the company with a long-term, low-cost operating structure. As such, we have improved our outlook in this area by lowering our anticipated full-year expense guidance of today's earnings release.

With respect to the third quarter, I am pleased to report that our operating results compared favorably in most areas to our forecast and represented another solid quarter of progress for the company. Tom will review the financial details in a moment. However, key highlights of the quarter are follows. Number one, subscriber trends for the most part continued to improve during the quarter with the annual rate of unit erosion declining to 16.7% from 17.2% in the second quarter and 17.6% in the first quarter.

Net unit losses for the quarter were 172,000 compared to 203,000 in the second quarter and 252,000 in the first quarter. Also, net subscriber churn improved to 3.9% from 4.4% in the second quarter as gross placements increased for the second straight quarter helping to partially mitigate the impact of our gross unit cancellations. In addition, sales productivity continued to improve with direct monthly adds per sales rep increasing to 141 in the third quarter compared to 134 in the second quarter and 117 in the first quarter. This resulted in yet another consecutive increase in total gross subscriber additions to 165,000 in the third quarter compared to 157,000 in the second quarter and 151,000 in the first quarter. Our internal budget forecast for the third quarter gross additions was 155,000, so obviously we are pleased with these results.

Number two, while we are encouraged by our recent subscriber gross addition trends or improved sales productivity in the modest sequential improvement in a rate of gross subscriber cancellations, we are disappointed that our gross cancellations have been running higher than we anticipated to the third quarter. Total gross subscriber cancellations were 337,000 for the third quarter or 7.6% as compared to 360,000 in the second quarter or 7.8%, and 404,000 in the first quarter of 8.3%. Our internal budget forecast for the third quarter had been for gross cancellations to be $320,000. So, obviously we are disappointed with these results, so we need to redouble our efforts and [it's hard to] control area.

Item number three. Revenue declined $7.7 million during the third quarter compared to $7.7 million in the second quarter and $8.5 million in the first quarter. The annual rate of revenue erosion rose slightly during the quarter. The revenue impact of our sequential slowdown and net subscriber losses was offset by a reduction in our average revenue per unit.

In a couple of minutes, Tom will talk about this dynamic. Nonetheless as we said previously, we continue to expect to see improvements in the annual rate of revenue erosion over time.

Item number four. Operating expenses less depreciation, amortization and accretion for the third quarter declined 3.7% to $86.3 million well ahead of plan. Expense reductions came from virtually all expense categories and reflect our ongoing commitment to manage costs efficiently and in recognition of our lower revenue base. Going forward, we expect operating expenses will continue to decline albeit at a slower rate than we've experienced since the merger.

Item number five. We paid a special cash dividend of $3 per share in July, representing a total distribution of approximately $82 million. As we stated at the time, we expect the distribution will be treated as a return of capital based on full year results. Once again, the distribution confirmed our cash flow strategy and commitment to return cash for shareholders.

Number six. Also reflecting our capital allocation policy, we adopted a regular quarterly dividend of $0.65 per share of common stock. As announced last week, the first quarterly dividend will be paid on December 7, the holders of record on November 16. This dividend will also represent a return of capital to our shareholders.

During the third quarter, we also made a concerted effort to communicate our expanding capabilities as a provider of multiple wireless services beyond traditional paging and wireless messaging. As a follow-up to our corporate branding strategy launched last spring, which repositioned the company under the tagline, "One Source for Wireless," we unveiled a new website at usamobility.com in late September that better described the scope of our products and services and gave site visitors more tools and information about how we can meet their wireless solutions needs.

Another key initiative during the quarter was the deployment of emergency response teams and resources to key high risk locations in advance of the hurricane season. Although the number of severe storms was less than anticipated this year, we were still able to provide emergency relief for paging and advanced messaging customers who were affected, including government agencies and private industry.

As for those customers in high risk areas, who were not affected by major storms, I suspect they were glad to know our response teams were standing by and ready to provide support if needed. Overall, we had a very good quarter and we look forward to continue progress as we execute our business plan over the balance of the year.

I have more to say about these and other items in a few minutes including some new marketing initiatives and our business goals for 2007, but first our Chief Financial Officer, Tom Schilling, will review the company's third quarter financial results and share additional observations on our operating result.

Thanks, Vince and good morning. As Vince mentioned, our third quarter results are a bit mixed. We're extremely pleased that gross pager placements and cost reductions continue to exceed our expectations. However, we are disappointed that the rate of subscriber cancellation has not improved as much as expected.

I will start with the subscriber base where we continue to see modest and steady improvement in the rate of net unit loss. As of September 30, 2006, the company had 4,259,000 units of service consisting of 3,721,000 direct units and 538,000 indirect units.

On the direct side of our business, our net unit loss in the third quarter was 3.5% compared to 3.7% in the second quarter. The entire improvement in the net rate is due to increased gross additions from 3.3% in the second quarter to 3.5% in the third quarter, while the rate of disconnect remained constant at 7% in both quarters. The 7% disconnect rate we experienced in the third quarter was actually higher than the 6.6% disconnect rate from the third quarter of 2005. We had expected to see improvement in the disconnect rate experienced last year. The annual rate of net subscriber loss in our direct base in the third quarter was 14.3% and has not seen improvement since the fourth quarter of 2005.

On the indirect side, subscribers at the end of the third quarter were 538,000, a decline of 6.7% from the end of the second quarter, and this is a marked improvement from the 9.2% decline experienced in the third quarter of 2005. As I mentioned, total subscribers at the end of the third quarter were 4,259,000, which is a decline of 3.9% from the second quarter.

As part of our earnings release, we've included a new schedule that provides supplemental subscriber statistics by customer segment. We view and manage the business within these five segments, which include healthcare, government, large enterprise, other direct and our indirect segment. As we've discussed previously, we view the healthcare, government and large enterprise segments as strategic as they have significantly less subscriber erosion than the other two segments.

In the third quarter, for example, healthcare, government, and large enterprise segments combined had a net unit loss of 2.1% while the other direct and indirect segment collectively had a net unit loss of 6.3%. This threefold differential and net churn rate has resulted in a steady and rapid customer mix shift towards our strategic segments.

In just the past six months, our three strategic segments have increased from 55.6% of total subscribers to 58.2% of total subscribers. We expect this mix shift to continue as we increase our vertical marketing initiatives.

Direct revenue per unit or ARPU declined 1.7% from the second quarter to $9.16 in the third quarter. Indirect ARPU declined 3% in the third quarter to $4.82, and in total ARPU declined 1.6%. The primary driver of our ARPU decline is the changing mix of our customer base and to a lesser extent, reductions in pricing at a customer level. We've included a schedule with our earnings release that stratifies our customer base by account size. It shows that our smaller customers have significantly higher ARPU than our average, but it also shows these customers are churning faster, thereby becoming a smaller percentage of our total subscriber mix.

As you can see, each stratification of customer size under 1,000 units has decreased as a percent of total direct units over the past year collectively from 61.1% to 57.5% of total subscribers. And obviously, the customers with more than 1,000 units have increased as a percent of total from 38.9% to 42.5%. Since the ARPU for customers with more than 1,000 units is about 14% lower than the average and the ARPU for smaller customers exceed the average ARPU by as much as 50%, this continual shift is driving the majority of our ARPU decline.

While mix is the most significant driver of ARPU -- of the ARPU decline, we do continue to experience competitive pricing pressure. The compensation and its impact on ARPU is most evident in retaining and winning larger customers. This competition comes from other paging providers as well as competition with cell phones and wireless PDAs.

As a result of the decline in ARPU and the decline in subscribers, paging revenue declined 5.7% to $112.1 million for the third quarter. Cellular revenue was $1.7 million, a decline of $368,000 from the second quarter. The reduction in revenue is from lower activations and is driven mostly by our intense focus and success on driving paging gross additions. We have recently begun hiring Regional Product Managers responsible for increasing our cellular sales. This we expect will allow us to increase cellular activations in the future without negatively impacting paging gross additions. Product revenue primarily consists of pager device sales for both lost devices and the sale of new devices, and also includes sales of Integrated Resource Manager or IRM system sales.

Product revenue for the third quarter was $4.9 million, a reduction of $329,000 from the second quarter. Pager device sales have been declining along with our subscriber base, while the IRM system sales increased about 3% in the quarter. Total revenue in the third quarter was $119.6 million, a decline of 21.3% from the third quarter of 2005.

Third quarter operating expenses excluding depreciation, amortization, and accretion were $86.3 million, a reduction of $3.3 million or 3.7% from the second quarter. Compared to the year ago quarter, operating expenses declined $24.1 million or 21.8%, which outpaced the annual rate of revenue decline of 21.3% that I noted a moment ago. While the 3.7% reduction in operating expenses, excluding depreciation, amortization and accretion, is the smallest quarterly decrease since the creation of USA Mobility, it is also important to note that it exceeded our expectations. As we had discussed at our meetings and conference call on August 9, we had expected little reduction in expenses in the second half of the year.

Service, rental, and maintenance expenses in the third quarter was $42.5 million, a reduction of 5.1% from the second quarter and a reduction of 21% from the third quarter 2005. The $2.3 million cost reduction in the quarter was driven largely from site rents, telecommunications, and repair and maintenance expenses.

Within the $2.3 million savings, nearly $700,000 was non-recurring benefits related to settlements of telecommunication contract disputes in the quarter. However, the $1.6 million of recurring savings still exceeded our original expectation.

Selling and marketing expense in the third quarter was $10.9 million, a decrease of 1.7% from the second quarter, and 3.5% decrease from the year ago quarter. As we've discussed previously, we have maintained a relatively stable investment in sales and marketing to continue to drive the gross paging additions.

General and administrative expenses or G&A were $31 million in the third quarter, a reduction of 3.8 million -- I am sorry 3.8% or $32.2 million in the second quarter and a reduction of 28.6% from the $43.4 million in the third quarter of 2005.

Cost savings in the quarter were driven largely by payroll related cost and facilities expenses. EBITDA, which we define as operating income plus the add back of depreciation, amortization and accretion expense, and for which we have provided a reconciliation in our news release, was $33.3 million or 27.8% of revenue, that compares to EBITDA of $37.6 million or 29.6% of revenue for the second quarter.

Depreciation, amortization and accretion expense was $18.4 million in the third quarter, a 2.9% decrease in the second quarter, and 36.4% decrease in the third quarter of 2005.

Third quarter operating income was $14.9 million and income before tax was $15.7 million. Our income tax expense was $7.1 million resulting in net income of $8.7 million or $0.31 per share.

Capital expenses were $5.2 million in the third quarter, an increase from $4.6 million in the prior quarter. Our capital expenses is largely driven by pager device purchases.

Finally, the company's cash balance on September 30, 2006 was $58.7 million. Based on our third quarter results, we remain comfortable with the updated revenue and capital expense guidance for 2006 that we provided in our August 9 Investor meeting in New York. To repeat that prior guidance, we expect revenues for 2006 to range between $495 million and $500 million, and capital expenses to range from $20 million to $22 million. We are, however, lowering our guidance on operating expenses excluding depreciation, amortization and accretion from our previous range of $363 million to $368 million to $354 million to $356 million. We're always pressing the envelop on cost reductions while balancing the need to provide the excellent and reliable service our customers expect. When we achieve success beyond our expectations or when we meet resistance when achieving our expense goals, we will always try to communicate that to you in a timely manner.

With that, I will turn to back to Vince.

Thanks Tom. Before we open up the call for question, I wanted to comment briefly on several items including; number one, subscriber trends; number two, revenue trends; number three, alternative sources of revenue; number four, marketing initiatives; number five, our bid to participate in government's Disaster Relief program; number six, our progress on network rationalization; and number seven, our business goals for 2007.

With respect to number one, subscriber trends; as we noted earlier, we are pleased to see subscriber trends improve sequentially in the third quarter, generally consistent with our expectations. We ended the quarter with over 4.2 million units of service, which was slightly better than our internal business plan.

Looking ahead, we expect gross placements will continue to decline over the next few years, but our productivity per sales rep will continue to improve. We also expect these gains will continue to be offset by gross unit disconnects. That said, we expect the total amount of net unit losses as well as the rate of that unit loss will continue to decline overtime. We've done a good job in the area of gross unit placements and sales productivity. We need to next put our focus in the area of subscriber gross unit cancellations. This is obviously a much more difficult challenge to tackle due to the fact that own research indicates most customers we are paging for mobile telephony and broadband wireless technology as opposed to competing paging carriers. More on this in the quarters to come.

Number two, revenue trends. Although the pace of revenue erosion in the third quarter improved slightly from the second quarter in absolute dollars, we were disappointed that the overall rate of erosion was up on a percentage basis. Nonetheless, consistent with our subscriber outlook, we continue to believe that the rate of revenue erosion will improve overtime, and we are working diligently with our sales and marketing teams towards that end. The challenge here is two fold. We've to slow the rate of gross cancellations and find ways to enhance ARPU going forward. Management is keenly aware of both of these priorities and much focus will be applied in the coming years to these key drivers.

With respect to number three, alternative sources of revenue, as we noted in our New York meeting, we are continuing to explore opportunities to generate additional revenues from our existing network infrastructure and nationwide sales force as well as evaluate potential opportunities outside the company that may support our overall cash flow based strategy and potentially offset the continued loss of paging revenue. To date, we've not had great success in turning these opportunities into revenue. This simply has to change. Towards that end, we established a new Business Development group within our Marketing group during the third quarter under the direction of Nancy Green, who was then Vice President of New Business Development. Nancy has more than 20 years experience in the sales and marketing of new systems technologies and helped launch our Systems Applications division several years ago. Under her leadership, we are currently exploring new business opportunities and strategic alliances that can complement our core paging and wireless messaging services and provide additional revenue opportunities in our core segments.

While we have nothing concrete to announce from these exploratory activities at the moment, we are excited by the momentum this group has established and we will keep you informed of its progress overtime.

Number four, on marketing update. As of September 30, our sales and marketing staff consisted of 437 professionals. They sell the company's paging products and services on a nationwide basis, as well as resell other wireless products and services such as Sprint Nextel Mobile phones and BlackBerry wireless email devices under an authorized agent agreement. They also offer customers and prospective customers a broad range of wireless support services and other customized wireless data solutions.

I believe one of the most important initiatives the company has ongoing right now is the separation of our marketing strategy and ultimately our service strategy into focusing on our three distinct market segments, including healthcare, government, and large enterprise, which makes up approximately 58% of our subscriber base and 54% of our total paging service revenue. These top three segments also have the lowest churn rates within the base. We believe this targeted market approach will allow us to better define our sales goals and objectives for each market segments. This includes specific vertical market focus and strategies, integrated marketing plan, vertical sales channels, targeted packaging and positioning, bundling segment-specific products within specialized pricing, and recruiting of vertical segment experts.

During the quarter, we launched the Unication M90 pager, the first new two-way paging device since the merger. The M90 offers advanced features including a high resolution display and icon-driven user interface greatly improving customers' messaging experience. Additionally, the address book backup and restore utility easily installs on a PC and includes the ability to synchronize the address book to Outlook. We believe these features on the M90 help us better position our advanced messaging services into the large enterprise segment. Also, importantly, it shows our customers that there is a future in paging and that we have made the requisite investment of providing a future path for the 2-way narrowband messaging needs.

We continue to make strives in defining additional opportunities in our most profitable segment, Healthcare. As part of our overall effort to increase share and revenue in the healthcare market, we developed a highly detailed hospital database, which when matched against our customer data, provided us a detailed penetration analysis and insight into future opportunity. Hospitals are a well-defined and limited set of account; therefore, this database will enable [sale] to uniquely track the activity against each hospital. Our objectives for the Healthcare segment initiative are to increase penetration in our core medical segment by expanding business within existing hospital accounts, to add new accounts, and to bundle paging, cellular and systems products within those accounts.

Item number five, our government business initiative. Also as we mentioned at our New York meeting, we have continued to make the case for the emergency response capabilities of our paging network with Federal, state and local government officials. We believe the creating awareness of the value of paging among policymakers will lead to greater appreciation of paging and increased opportunities for using our network. We have already had some encouraging results. We presented testimony to the FCC's independent panel on the impact of Hurricane Katrina on telecommunications networks during March. And the panel issued its report to the FCC in June, had strong craze for paging's performance and contained recommendations on for the increased use of paging for emergency communications.

In July, we presented testimony to the Subcommittee on Telecommunications and the Internet of the Committee on Energy and Commerce of the US House of Representatives concerning the Warning, Alert and Response Network, or WARN Act. Congress passed the WARN Act in September, and the President signed a bill on October. The new law will allow us to provide local, regional and national alerts in cases of natural and manmade disasters. We believe that providers of competing or substitute wireless services that don't use a broadcast operating model or offer large group call adjustability, are less likely to provide these alerts resulting in an advantage for us.

Employees and shareholders have supported the development of our new PAC, a Political Action Committee. Our non-partisan PAC will provide the means to support the election campaigns of Federal candidates that we believe understand paging's value and will support policies that favor our industry. We thank those employees, directors and shareholders who have contributed. Those interested in making a contribution can contact our General Counsel, Scott Tollefsen.

On the executive branch side we have taken every opportunity to educate the regulators about paging and to share the company's view in FCC rule making proceedings that would affect our operations. We've advocated for programs that would offer us business opportunities or independent validation to be used in retaining or adding customers. We've also had success warding off potential increases in cost that would depress our margins that drive customers away. We've seen increased understanding by the regulators of paging's value and its areas of differentiation from other wireless devices.

By continuing our involvement in policy matters before the Congress and the FCC by repeatedly highlighting our advantages, such as low-cost reliability and our independent infrastructure and by demonstrating an awareness of how we can contribute to achieving the government goals and wireless communications, we hope to find more opportunities to sustain and increase our government and emergency response business. Today, we believe we have convinced to many officials that paging should play a more prominent role in providing mission critical communications for government emergency team and first responders and we hope to convert that support into increased government sale. We understand the wills of government [often branch] slowing, so we are prepared to pursue this initiative for as long it takes.

With respect to item number six, network rationalization. Although our overall merger integration was completed nearly a year ago, we continue to pursue cost efficiencies to one-way network rationalization. During the third quarter, we eliminated redundant locations, consolidated equipment within each site and we moved excess capacity, including the removal of an additional 358 transmitters.

Year-to-date, we've added 163 transmitters to meet specific customer requirements and we moved 1,181 transmitters for a net reduction of 1,018. In the fourth quarter, we expect to remove more than 900 additional transmitters. By year-end, we will have moved 120 sites from individual leases, sites covered under more cost effective master lease agreements with Global Signal and American Tower. Network rationalization savings in the third quarter were on track and we will exceed rationalization targets for the fourth quarter and all 2006.

2007 network rationalization plan will include the estimated net reduction of at least 2,200 transmitters. As part of our future network rationalization plan beginning in 2007, additional telecommunications and satellite savings will be realized with the initial and limited rollout of a new satellite service provider. Over the next few years, we expect a significant net reduction in sites per year that will substantially reduce our long-term operating costs.

And finally, item number seven, business goals for 2007. I thought I would share with you today some of our key business goals for 2007 that I and the management team have been working on -- to continue to review and refine our sales and marketing segmentation approach to our core paging and messaging customers to enhance revenue opportunities and to minimize subscriber churn; to identify and pursue new sources of revenue that are complementary to our existing business and expertise and that are consistent with our free cash flow strategy; to further implement our one-way network rationalization plan and gain additional savings to cost efficiencies and site vendor negotiation; to pursue across the board business efficiencies and cost containment initiatives to ensure expenses reflect anticipated revenue decline; to continue to run the business consistent with our free cash flow base mission statement and return the majority of that cash flow to our shareholders.

With that, I will ask the operator to open up the line for your questions. In order to allow everyone a chance to ask a question, we would ask you to limit your initial questions to one and a single follow-up. After that, the operator will circle back for additional questions if time allows.

[OPERATOR INSTRUCTIONS]. Our first question will come from [Leroy Wagner], Private Investor. Please go ahead.

Good morning. I am a USA Mobility shareholder and I would just like to make a brief statement and end with a simple question. I feel it's important that the company clearly and broadly publicize the tax status of the company's dividend payment, and if any part of the dividend maybe a non-taxable return of capital, I ask that you please so advice us in press releases, quarterly reports, annual reports, shareholder letters, so on. One reason I feel such advices are important is because my experience has been that brokerage firms cannot always be relied upon to correctly report the taxable status of dividend payments on the annual Form 1099 that they provide to their customers. It seems that I'm currently suffering from this particularly form of broker error and that my broker reported the $1.50 dividend paid on December 21, 2005 as being a fully taxable distribution. Now, on the last few days I've come to the understanding that this $1.50 dividend was a non-taxable return of capital. And my question is, am I correct in this understanding? Thank you.

Yes, Leroy, thanks for the question. This is Tom Schilling. Yes, it was a non-taxable return of capital. All of it, as well as the $3 dividend we paid on June 30, are declared on early July, I guess, the payment on $3. We did notify all the brokerages and -- our Computershare, our shareholder services, who distributed the dividend, did know that it was a return of capital. We also put that if you notice in our recent announcement declaring a dividend of $0.65 in fourth quarter, our first regular dividend. We also noted in the press release that this was going to be a return of capital.

I'm sure you did notify the broker, and I imagine it's there where the ball was fumbled, and yes you are correct. You did seem to indicate the non-taxable status of that $1.50 dividend in some of your recent press releases and it is that, that triggered me into doing -- let's say, this research to find out what the tax status on $1.50 was. But -- and obviously now I have a tax return that has a problem.

Okay, Leroy, we're sorry about that, and we will continue to state the tax status of our distributions out there declared by the Board.

Thank you. And please don't misunderstand me. I'm not suggesting that there was any problem or that the company did anything wrong in this. I'm just hoping there might be some greater publicity with regard to tax status of dividends, because I'm sure there'll be many dividends that will be non-taxable in the future.

Yes, each time we declare one or the Board declares one, we will make sure that we also state what the tax status of that is. And just to make double sure, the dividend that we're going to pay here on December 7 will represent a return of capital to our shareholders.

Thank you very much. Thank you for your attention.

Okay.

[OPERATOR INSTRUCTIONS].

Okay. We -- Due to the wonders of technology can see -- all right, here comes a question.

We have a question from [Mark Kaufman], MLK Investment.

Hi, gentlemen. I just had a question as it pertains to the course of this return of capital issue. In the foreseeable future, the quarterly dividend, do you anticipate those to be also return of capital?

We did announce the fourth quarter dividend will be -- that's an item that we will actually announce each quarter. But, yeah, for the immediate future, I expect -- through 2007 right now, we would expect it to continue to be return of capital.

Thank you.

And we'll go next to Ed Kressler, Angelo Gordon.

Hi, good morning guys. Thanks for having the call. Quick question for you. On ARPU decline, it looks like it picked up a little bit. You mentioned that it's largely due to mix shift, I guess, to the larger accounts, which are lower revenue generation. But in the future, I mean, how do we think about this thing? I mean, as we kind of hit this quarter we are hoping for in terms of healthcare and government and large enterprise, I mean, that mix shift will over time, kind of, get done. And then we are just taking about competition with cell phones and other people leaving for other devices, right? I mean, I can kind of get my hands around running a model, looking at different customer decline rates; it's ARPU that just is an absolute puzzle to me. I mean, is it -- in next two, three years, are we going to see the decline be more related to competition than we are to mix? How you think about ARPU when you forecast it out over the next several years?

I mean, ARPU is obviously very different depending on the size of the account and in some cases is different depending on the segments that we are in. But, I have been looking at this question myself and with the management team, as we have been planning for the future and just in terms of how we are going to manage this company going forward to maximize the long-term cash flow potential that this creature, this communications, this recurring billing creature can generate. And I kind of come to the conclusion that we are going to break the business out more focused on the vertical segment than we have in the past and that we have to manage it more like that instead of traditionally managing it the way we have managed it geographically. We have already got someone running healthcare. We have already got someone running PCS. We have already got someone in charge of business development. We still need to find a specific leader for government and a specific leader in several of our other smaller segments. And what we need to do is, continue to look at how we motivate our sales machine, our sales people in general, and what specific drivers are in the commission plan for the money that they earn and we need to focus more that on ARPU and focus more that on what we call an MRR model, monthly recurring revenue model, for the sale of other products and services or ancillary products and services that go within that specific segment, specifically the healthcare, government and large enterprise.

So, if you look at it now, our sales people are compensated based on a mix of monthly recurring revenue, which is aggregate monthly recurring revenue from a base of their size, a retention factor; in other words, the churn mitigation factor and the PCS or mobile phone factor. And what we have to do going forward is, we don't want to -- because we don't want to break that which works, right now their productivity is extremely high. They are doing extremely well. But we want to find ways to also incent the ARPU and we want to find ways to incent the segment, because all things being equal, if I put on as a sales person a device in the healthcare segment, and I put on a device in the large enterprise segment; in general, the present value of that healthcare placement is going to be much higher than it is in the large enterprise segment simply because the net churn rate is much lower in the healthcare segment. So, we want to try to incent the right segment, and we want to try to incent ARPU opportunities within this segment. And in order to do that, you got to be selling more than just a plain old paging service, because we are still going to be the lowest price of the wireless communications portfolio than any of those given enterprises has. But having said all that, as it relates -- as that relates to the future, as that relates to your specific question, I would imagine you would see less compression within this specific segments by size of account on ARPU in the future than what you've seen in the last year. I think there has been a variety of reasons why we have seen some of that come down, some of it competitive in nature when these large accounts just renew. But we haven't been successful in my view of selling those additional applications and those additional recurring revenue opportunities that can help to drive that back up. So, it's kind of a longwinded answer to your question that I would expect to see some level of stabilization within ARPU going forward within this specific segment, not huge decreases.

Great. I appreciate your answer. Thanks so much.

Sure.

We will go next to [David Nelson], Wolf Point Capital.

Hi, guys. Thanks. A quick question on a technology issue that I am just not familiar with probably, would you all talk about going into the hospitals or going in the government workers and those being a, kind of, core base, I guess, it's consumer that doesn't change quickly, things like that. If you -- in my mind at least, very obviously completely simple minded here -- if you take a pager and you also have a telephone as a doctor per se or so in the hospital, you have two devices you're carrying around. What stands in the way from getting you from a pager to a combined pager telephone? I know in the past you've said that the SMS technology is something that the cell phone providers don't really want to give away and they don't want -- they want to get paid for it and by using your technology they are not getting paid obviously. Is there something in the future you all see as a way to couple the pager technology, which obviously your cell is, that it's a better technology and it works better in a emergency situation and blah, blah, blah. Is there anything that kind of stands in the way to getting to the next step, which is combining technology and is that something that even would be a better element to offer the customer than currently the offering available?

Yes. I think it would be a great idea and we've tried to do that for years. We have struggled with the acceptance from the large cellular telephone providers, and frankly even from their industry association with efforts to do that. Obviously, it's something that we think would make a lot of sense, because there are different characteristics with paging, particularly the multiple addressability of paging. In other words, for broadcast technology, if everybody that had a phone also had a paging device within that phone with a common cap code for large groups like emergency response, so you can send them all the same message very, very quickly is very efficient from an air time perspective. But we've not been met with a lot of success in that area. It's not to say we won't continue to try, but I think for the foreseeable future, at least in our business plan, we are planning on those devices that will continue to be separate devices.

Okay. Thanks.

Now we will take a follow-up from Ed Kressler. Your line is open.

Hi. Just another quick question. In the -- in terms of direct subs in our, kind of, core verticals, what happened to healthcare in this quarter? I mean, it looks like government, large enterprise and other were stable that, you know, large enterprise even was quite -- much better. But, it looks like healthcare had quite a bit of downtick. Was there a large account that was lost or what's going on there?

Yes, Ed, this is Tom. Good question I think, what we've seen is that we do have some anecdote. Nothing specific happened with a large customer, so we didn't have any of that. We look at our customer base quite a lot. What we do see is there is a little bit more fiscal year ends in the third quarter for hospitals, and we believe that what -- what we see is in the third quarter a little bit of an uptick in what -- hospitals, what we would call our annual cleanups of expenses as they are doing budgeting for new years and making sure that they are only using units that they need, etcetera, and doing just sort of expense rationalization at our hospital customers. That's right now what we believe really happened in the third quarter.

Okay. So, I mean, that's a seasonal thing in nature you think and little kind of like will be 0.5% type number over the prior two quarters, which can average them out, and then we jump up above one. But you think that's kind of [dump] in the third quarter, go back to kind of more normalized in the fourth potentially?

Right now that's the best we can look at. As we go forward and have annual comparisons that we see next year, this data, the segmentation that we've completed is really we only have going back to the fourth quarter of last year. So, we'll see as we go forward what those things are seasonal trends that we see within each segment.

Got you. Okay. And one last -- just a comment as well, and this is not to be nitpicking. You guys did a great job at the analyst meeting in August, and you are getting some information out there, which I think is absolutely terrific. So, l want to give you kudos for that first of all. But one little nitpicking think is, the Q hit right around the time of the conference call. It would be great if we could have the opportunity to, kind of, review that to get some questions in before -- get some understanding in our heads and ask some questions on the conference call. I know you guys are pretty strict about FD, which is fair. But just give us the opportunity to get through that stuff. But -- at the end of the day keep up the good work, keep up the information flow. You guys are doing a good job.

Fair point. Thank you.

And at this time we have no further questions standing by on our question roster. I'd like to turn the conference back to Mr. Kelly for any additional or closing comments.

Once again, thank you very much for joining us today. We look forward to speaking with you next quarter after we release our fourth quarter and year-end results. Thanks and have a great day.

Thank you everyone for your participation on today's conference call. You may disconnect at this time.