Spok Holdings Inc (SPOK) 2006 Q4 法說會逐字稿

Good day, and welcome to USA Mobility's fourth 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 of Marketing; and Shawn Endsley, Controller.

At this time, for opening comments I'll turn the call over to Mr. Kelly. Please go ahead, sir.

Good morning. Thank you for joining us for the fourth quarter and year end 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 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 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 that 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 third quarter 2006 Form 10-Q and our 2005 Form 10-K and related Company documents filed with the Securities & 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 fourth quarter and 2006 operating results, I wanted to let you know that we've scheduled a meeting for investors on May 16 in New York City. Our investor day, similar to the one we hosted last August, will begin at 10:30 a.m. Eastern Time immediately following our annual meeting of stockholders, which will get underway at 10:00 a.m.

Like last year, both meetings will be held at the offices of Latham and Watkins, our outside legal counsel, at 885 Third Avenue. We'll announce further details of the analysts meeting at a later date, but I wanted to mention it to you today so you could add it to your calendar of upcoming events.

We're delighted to speak with you today regarding our 2006 operating results and what we feel was an outstanding year for USA Mobility relative to 2005. I'm pleased to report that overall results compared favorably to our guidance and represent another solid year of progress for the Company. In the next few minutes, we'll review some of the accomplishments we've achieved over this past year, as well as provide you with an update on our current business initiatives and expectations for 2007.

At the beginning of 2006, we established the following goals for the Company: Aggressively market our existing products and services and decrease the outflow of subscriber units and revenue; improve and refine our sales and marketing initiatives, especially those surrounding our core market segments; aggressively reduce operating expenses without negatively impacting sales productivity; pursue our long-term network rationalization plan lowering cost through the use of master site lease agreements, gaining additional savings through ongoing site vendor negotiations and expanding our coverage footprint on our go-to networks; continue to run the business consistent with our long-term strategic vision as the selling and marketing company focused on serving the wireless communications needs of our customers with a variety of communications solutions while executing an efficient, profitable and free cash flow based business strategy.

I'm pleased to report that we achieved great success on these goals during 2006. Subscriber trends continue to improve as our net unit losses for the year declined by $781,000, or 16%, from $1.1 million, or 18.1% in 2005. The slowdown in net unit losses resulted in part from consecutive quarterly increases in gross page replacements, the first year we've experienced quarter over quarter gains and gross adds in many years. Gross subscriber additions increased to 169,000 in the fourth quarter from 165,000 in the third quarter, 157,000 in the second quarter, and 151,000 in the first quarter.

I would like to specifically thank Jim Boso, our Executive Vice President of Sales, as well as our regional vice president, sales managers, and account reps for a phenomenal effort in 2006. Year-over-year revenue trends also improved with the rate of revenue decline slowing to 19.5% in 2006, from 21.6% in 2005 as compared to pro forma 2004.

We significantly lowered our operating expenses, excluding depreciation, amortization and accretion, by over $102 million or 22.3% during the year compared to an 18.9% reduction in 2005 as compared to 2004 pro forma expenses, a credit to the tremendous efforts of our entire management team. A big credit for this success goes to our Chief Operating Officer Peter Barnett and his team of professionals for their tireless efforts over the course of the year.

In addition, we reduced companywide head count by 24% during 2006. The reduction in payroll expense, coupled with slowing revenue erosion, produced another significant improvement in the Company's operating efficiency as measured by revenue per employee. Also, sales productivity has remained relatively constant throughout the year as we have rationalized our sales force in recognition of our smaller subscriber and revenue base with direct monthly gross adds per sales rep of 126 in the fourth quarter, 141 in the third quarter, 134 in the second quarter, and 117 in the first quarter.

During 2006, we made additional progress in rationalizing our paging network by eliminating redundant locations, consolidating equipment within each site and removing excess capacity. The net result was 1,980 fewer transmitters. Total cost savings from network rationalization exceeded $24.9 million in 2006.

We redefined our sales and marketing strategy during the year to highlight the Company's capability as a provider of multiple wireless services. In doing so, we reorganized and began to enhance our sales and marketing organizations while launching a corporate rebranding program to more effectively communicate the scope and depth of our service offering beyond basic paging and two-way messaging.

Under the new corporate logo and tag line, "One Source For Wireless", we've created greater awareness of the Company's expanded services within our customer base, as well as generate a considerable visibility among a wider set of potential enterprise customers. We also refocused our sales and marketing goals around our core business segments of healthcare, government and large enterprises during 2006.

We believe that by concentrating on the key vertical markets, we can solidify existing customer relationships and leverage our accumulated knowledge of these industries, including the mission critical nature of many businesses in these segments to broaden our presence and create new sales and service opportunities.

Finally, we met our 2006 goal of generating free cash flow and returning capital to our shareholders in the form of cash distributions. We paid a special distribution of $3.00 per share on July 21, 2006, representing return of capital of $82 million to our shareholders. We paid our first quarterly cash distribution of $0.65 per share on December 7, 2006, representing a return of capital of $17.8 million. Also, we'll pay our second quarterly cash contribution of $0.65 per share next Thursday, March 15.

In addition to meeting our stated goals for 2006, the Company made substantial progress during the year in numerous other areas. I'll comment further on those and other business issues in a few minutes. But first, our Chief Financial Officer, Tom Schilling, will review our fourth quarter and year end financial results and share additional observations on our recent operating performance.

Thanks, Vince, and good morning. After reviewing our financial performance for the fourth quarter and full year 2006, I'll share our financial guidance for 2007 with respect to revenue, operating expenses and capital expenses. I would also note that we expect to file our 2006 Form 10-K on or before next Friday, March 16. I encourage you to read the Form 10-K as it offers significantly more information on our business than we can possibly cover on this call.

In reviewing our results, I'll start with subscriber base where we continued to see improvement in the rate of erosion. The quarterly rate of unit erosion was 3.6% in the fourth quarter compared to 3.9% in the third quarter. For 2006, our net unit loss improved to 16% compared to 18.1% for 2005. We're very encouraged by the consistently higher gross page replacements in each quarter of 2006.

In fact, this was the first time we experienced such sustained, positive trend in gross additions in many years. Although we still expect disconnects to outpace gross additions for the foreseeable future, we believe our ability to add new business on a quarterly basis reinforces our contention that there is still continuing demand for paging and wireless messaging services in today's market place.

On the direct side of our business, net unit loss for the fourth quarter improved to 3.3% and the annual rate of net unit loss improved to 14%. The most significant factor in our improving rate of net unit loss is the continued concentration of our customer base toward our core segments and toward larger customers in general.

The healthcare segment, which represents about a third of our direct customer base, continued to be the most stable in our customer segments. Net unit loss in this channel was 0.4% for the fourth quarter, a fraction of our overall direct net unit loss of 3.3%. Additionally, our direct subscriber base continues to become more concentrated around larger customers, those with more than 1,000 units in service. These larger customers represented 43.6% of our total direct subscribes at the end of the fourth quarter compared to 42.5% at the end of the third quarter and 38.9% in the fourth quarter of 2005.

While this continued concentration is the biggest driver of our improved rate of net unit loss, it is also the biggest driver of our ARPU decline. In fact, this change in customer mix is responsible for nearly the entire $0.07 in ARPU decline we experienced in the fourth quarter, and about half of the $0.48 year-over-year decline in ARPU.

On the indirect side of our business, net unit loss improved to 5.7% in the fourth quarter versus 6.7% in the third quarter and 8.7% in the second quarter. The improvement in net unit losses in the fourth quarter was principally the result of a 13,000 unit, or 45%, increase in gross additions compared to the third quarter. This improvement was largely due to organizational changes implemented at the end of the third quarter and a rejuvenated focus on servicing this channel.

Reported revenue for 2006 was $497.7 million compared to $618.6 million for 2005. The year-over-year rate of revenue decline was 19.5% in 2006, 2 percentage points better than the 21.6% decline in 2005. Reported revenue for the fourth quarter was $116 million, a decrease of $3.5 million or 2.9% from the third quarter. This was the smallest quarterly revenue decline we've experienced in both absolute terms and percentage terms since USA Mobility was established in November of 2004.

As I discuss the components of revenue, I'll highlight some of the reasons for the improved result. Paging revenue for the fourth quarter was $107.5 million, a decline of $4.6 million dollars, or 4.1% from the third quarter. This is the smallest decline we've experienced at USA Mobility. There are two primary reasons for the improvement here. First, the improvement in net unit loss in the quarter, which we just spoke about, and second, the ARPU declined just $0.03 per unit in the fourth quarter compared to the third quarter. This is a result of our continued focus on maintaining rates at a customer-by-customer basis, and targeting increases for smaller customers and certain larger resellers in the indirect channel.

Cellular revenue for the fourth quarter was $1.9 million, an increase of 8.6% from the third quarter. The increase resulted from higher commission rates as unit sales were actually 8.7% lower in the fourth quarter. The higher commission rate is a result of our move to an exclusive relationship with Sprint Nextel and a better sales mix of rate plans.

Product sales, which consistent of new pagers, new pager sales, lost pager revenue and integrated resource management system sales, increased 11.2% from the third quarter. The increase was principally due to increase in lost pager revenue. Other revenue also increased in the quarter by about $400,000 to $1.3 million. This revenue category is made up mostly of GTES, a 51%-owned subsidiary of USA Mobility.

Turning to operating expenses, we continued to make excellent progress in 2006. For purposes of this call, I will first discuss operating expenses excluding depreciation, amortization and accretion then I'll comment on those items separately. For the full year, operating expenses were $357.3 million, a decrease of $102.8 million or 22.3% from 2005. This marks the second consecutive year that we removed over $100 million in annual operating expenses.

Fourth quarter operating expenses were $85.2 million, a reduction of $16.4 million, or 16.1% from the fourth quarter of 2005. As we had previously guided, the rate of expense reductions was higher in the first half of 2006 than in the last half. During 2005 and in the first half of 2006, much of the expense reductions were lower hanging fruit resulting from the integration of Metrocall and Arch. In the last half of 2006, and as we move forward, expense reductions will become more difficult to achieve.

Service rental and maintenance expenses in the fourth quarter were $41.8 million, a reduction of 1.7% from the third quarter and a decrease of 15.5% from the fourth quarter of 2005. The cost reduction in the quarter was driven mostly by repair and maintenance costs, payroll costs and telecommunications expense. The savings in pager repair and maintenance is largely a result of insourcing that function beginning in the third quarter. In the past, we had outsourced the bulk of our pager repair and maintenance. We believe this will remain the lower cost option for the foreseeable future.

For the full year, SRM expense decreased $38.7 million, or 17.9% to $177.1 million in 2006. Almost two-thirds of the annual reduction was in site rents, and about a quarter of the expense reductions came from telecommunications expense with the balance coming largely from payroll.

Selling and marketing expenses were $10.8 million in the fourth quarter and have remained relatively stable over the past eight quarters. We'll continue to invest in our selling and marketing efforts as long as we see those investments pay off in the form of new gross additions. For the full year, selling and marketing expenses were $43.9 million, roughly flat with the $43.4 million in 2005.

General administrative expenses, which include customer service, inventory and other support costs, were $28.5 million in the fourth quarter down from $31 million in the third quarter, and $39.7 million in the fourth quarter of 2005. In the quarter, we benefited from a refund of telecommunications excise taxes from the Internal Revenue Service. The net benefit of this refund was $2.2 million in the fourth quarter. G&A expenses were $127.9 million for the full year 2006, a reduction of $51.9 million, or 28.9%. About 40% of the annual expense reduction was fueled by payroll costs, but nearly every area of expense contributed proportionally within G&A.

Overall, within SRM, selling and marketing and G&A expenses, approximately 30% of our annual cost reductions, came from payroll expenses. Head count at year end 2006 was 1,235 full-time equivalent employees, a decrease of nearly 24% from the beginning of the year.

Severance and restructuring expenses for 2006 totaled $4.6 million, compared to $16.6 million for 2005. Severance and restructuring expenses included severance costs associated with the reduction in our work force and other contract terminations for real estate leases, service contracts and other leases that no longer provide future benefit. Fourth quarter severance and restructuring expense was $3.4 million. About $800,000 represent cash expenses in the quarter with $2.6 million for planned reductions in force over the next 12 months. The $2.6 million will become cash expense during 2007.

EBITDA, which we define as operating income plus the add back of depreciation, amortization and accretion, was $140.4 million, or 28.2% of revenue for 2006. This compares to EBITDA of $158.5 million, or 25.6% of revenue for 2005. For the fourth quarter, EBITDA was $30.8 million, or 26.6% of revenue, compared to $41.8 million, or 29.2% of revenue for the fourth quarter of 2005. A reconciliation from operating income to EBITDA has been provided in our earnings release.

Depreciation, amortization and accretion expense for 2006 was $73.3 million, and for the fourth quarter was $17.2 million, which compares to $131.3 million for 2005 and $26.6 million in the fourth quarter of 2005. The annual reduction is driven primarily by lower depreciation expense of $48.5 million and lower amortization expense of $9.8 million. The lower depreciation expense resulted from fully depreciated transmitter and related assets and fully depreciated pagers. The reduction in amortization expense is due to lower amortization of the acquired Metrocall subscriber list. The large decrease in depreciation, amortization and accretion drove a $40 million increase in operating income to $67.1 million for 2006.

Interest income totaled $3.9 million reflecting accumulated cash balances. Pretax income was $71.7 million. Our income tax expense was $31.5 million, resulting in net income for 2006 of $40.2 million, or $1.46 per share. Operating income for the fourth quarter was $13.6 million with net income of $8.3 million, or $0.30 per share.

Capital expenses were $21 million for 2006 compared to $13.5 million for 2005 with the year-over-year increase primarily due to pager device purchases which make up about 90% of our total capital expenses. The fourth quarter of capital expense was $6.8 million and includes about $900,000 for network vehicles.

Finally, with respect to our financial expectations for 2007, we are providing the following financial guidance with the usual caveat that our projections are based on current trends and that those trends are always subject to change. Accordingly, we expect revenue for 2007 to be between $400 million and $410 million. Operating expenses, excluding depreciation, amortization and accretion, to be between $295 million and $300 million. And capital expenses to range between $18 million and $20 million. With that, I'll turn it back over to Vince.

Thanks, Tom. Before we open the call up for questions, I wanted to comment briefly on several other items that may be of interest to you including number one, the impetus behind our shifting strategic sales and marketing focus, number two, where we stand with respect to participating in the government's emergency preparedness program, number three, provide a network rationalization update, and number four, give you a brief overview of our business goals for 2007.

With respect to number one, strategic sales and marketing shift. Relative to our expectations at the beginning of 2006, we're extremely pleased with our operating performance this past year and, most particularly, with our ability to continue to place units into the hands of our customers.

We're very encouraged to see yet another increase in our gross additions in the fourth quarter, as well as solid performance all year long in our sales productivity as measured by monthly additions per rep. In addition, we were gratified to achieve a significant reduction in our operating expenses and fulfill our commitment to operate the Company with a long-term, low cost operating structure.

Overall, we believe our management team executed our 2006 operating plan as well as anyone could have expected, and without question our talent and dedicated employee work force implemented that plan flawlessly. Once again, our team is fully committed to meeting our goals for 2007. However, we're well aware that we have much work ahead of us as the paging sector continues to lose customers and revenues to competing wireless services that offer a variety of enhanced features with increasingly attractive pricing.

Although paging still offers the distinct advantages of low cost, strength of broadcast signal and ubiquitous network coverage, those advantages alone have not been enough to effectively stem the migration of the industry subscriber base. In fact, our gross unit cancellations, while improving sequentially each quarter, have still been running high over the past year. Total gross cancellations were $404,000 or 8.3% in the first quarter, reducing to $360,000 or 7.8% in the second quarter, $337,000 or 7.6% in the third quarter, and finally, $323,000 or 7.6% again in the fourth quarter for a total of $1.4 million gross disconnects in 2006. We need to work even harder this year to reduce the rate of cancellation.

USA Mobility's management team has spent a considerable amount of time these past two years studying and evaluating industry subscriber trends, analyzing the variables from competing services to account size to service quality to vertical market requirements that influence both demand for paging services, as well as cancellation decisions.

The three major conclusions we've drawn from this analysis are as follows. Number one, gross additions in productivity per sales rep will continue to be offset by higher gross unit disconnects for the foreseeable future, albeit at a slower pace as subscribers continue to migrate toward other providers that offer technologically advanced wireless services.

Number two, in spite of ongoing unit disconnects, USA Mobility maintains excellent relationships among our widely diverse customer base of large and small corporations and organizations located from coast-to-coast due largely to the superior capabilities and knowledge of our sales organization and respect for the high quality of service we provide.

Number three, there is clear evidence that large customers in our key vertical market segments have a significantly greater interest in continuing paging in wireless messaging services than subscribers with fewer units outside of our top three segments. In fact, the majority of our customers in healthcare, government services and large enterprise indicate that they're still very satisfied with paging and plan to use at least some paging services in the future.

Accordingly, over the past year, we've begun shifting our sales and marketing focus to those key vertical segments where is we have substantial market knowledge and where we have many long-standing customer relationships and contacts. Today, this redefined sales and marketing mission is our highest strategic priority, one that we're now aggressively pursuing.

At the same time, we believe it remains vitally important for us to continue to provide ongoing sales support and quality service to our entire customer base including those in non-core segments, both to minimize the overall rate of gross cancellations, as well as maintain optimal levels of monthly recurring revenue. The three key segments of healthcare, government and large enterprise made up nearly 60% of our direct subscriber base for the quarter ended December 31, 2006, compared with about 56% for the quarter ended March 31, 2006.

Our subscriber and revenue mix from these segments has increased significantly due to both higher gross placements in these segments and lower gross disconnect rates relative to our other customers. Over the course of 2006, our quarterly net rate of subscriber erosion improved each period. In the fourth quarter, our rate of net subscriber loss was 3.6%. However, when we break this down to our segments, we see that in the fourth quarter, healthcare lost 0.4% in the entire quarter, government 3.6%, large enterprise, 2.9%, other direct, 6.4%, and indirect, 5.7%.

This clearly shows why we're intensely focused on these three strategic segments, particularly healthcare, as we move forward. With respect to our vertical market focus, our overall objective is to own and manage each customer relationship through the entire revenue life cycle. In other words, we want to create a vertically focused sales force properly trained and equipped that can successfully interact at the executive level of any organization and effectively position USA Mobility as one source for wireless, especially at that critical moment when an organization may contemplate alternatives to paging.

We're currently in the process of enhancing the skill set of our sales force in 2007 through new training programs, and in some cases, additional targeted hires to help meet the challenges we face with the introduction of new and advanced technology. In support of this evolving strategy, we've also created a vertically-focused marketing support function, a line of resources of necessary corporate disciplines around this vertical effort, created a comprehensive database to track each segment and identify unit and revenue opportunities in each, and developed and launched a portfolio of products and services targeted to individual segments.

These support initiatives include everything from specialized advertising and marketing campaigns, trade show attendance and market specific promotions, use of such channels as telesales and web sales, targeted packaging and positioning, bundling specific segment products with specialized pricing, and recruiting of vertical segment experts.

For example, to help create broader awareness of our services in the healthcare market place, which is our largest and most stable segment, we're now advertising in Health Data Management magazine to reach its targeted audience of key technology decision-makers in IT team management, healthcare administration and operations and nursing management. We've also scheduled ads for other healthcare publications, including Healthcare's Most Wired and Health Management Technology.

In addition, we recently formed an alliance with the American College of Emergency Physicians, the ACEP, to help increase awareness and support for USA Mobility in our portfolio of products among key hospital decision-makers and influencers. The ACEP partnership creates the opportunity for us to market both paging and cellular products directly to the organization's 25,000 members and affiliates across the country.

It also gives us exposure to a wide range of healthcare audiences through ACEP's education, research and policy development program including a high profile program to promote emergency preparedness for disasters. We also recently participated in the annual conference of the Healthcare Information and Management System Society, or HIMMs, the healthcare industry organization focused on IT and management systems. At this key healthcare industry event, we displayed our messaging services along with those of two of our key strategic partners, Vocera Communications and Amcom Software. Our goal was to reinforce our "One Source For Wireless" capability and present an integrated healthcare communications solution that's a critical component in hospital and other healthcare organizations.

Among the most effective wireless communication solutions we offer the healthcare market is our proprietary, private medical messaging network where we architect and deploy a private messaging network to manage messaging traffic for single site or campus environments. The USA Mobility private medical messaging network service brings speed, reliability and control to critical hospital messaging.

It provides nearly instantaneous, independently survivable alpha numeric messaging to code teams, trauma teams, disaster preparedness personnel, security, on-call caregivers, and any other key staff members who should never have to wait for a page. The private medical messaging network is a solution-based sale based on delivering enhanced value to the critical healthcare segment.

We also offer an additional option for seamless message integration from the customer's private medical network to the wide area USA Mobility paging network, two-way network, or any e-mail enabled device. This allows messages to be managed from their campus network onto our broader network seamlessly and customers to receive their messages wherever they are.

Throughout the course of 2007, we'll continue to focus and define wireless communications solutions coupled with software applications [INAUDIBLE] and productivity issues in specific industry segments.

Number two, our government emergency preparedness plans. During 2006, we also continued to make the case for the emergency response capabilities of our paging network with federal, state and local government officials to increase the involvement in government affairs and legislative relations activities. We advocated fair regulatory treatment for our industry and our customers in rulemakings and other proceedings before the Federal Communications Commission.

We also presented formal testimony to an FCC panel in March and to a Congressional subcommittee in July describing the unique and significant performance advantages of paging technology versus those of land line and mobile phone providers in reacting to natural disasters and other emergencies. In fact, to demonstrate our emergency response capabilities as well as meet our obligations to our customer base, we deployed emergency response teams and resources to key [INAUDIBLE] locations last August in advance of last fall's hurricane season.

In all of these activities, we refocused the attention of wireless service users on the capabilities of USA Mobility's paging networks to provide independent back-up to broadband wireless systems and to put inexpensive wireless communications in the hands of people who lack other wireless resources. We're convinced that paging services provided by USA Mobility can help emergency responders at the federal, state and local levels operate with greater efficiency and safety.

We're working diligently to ensure the value of our technology is recognized by government policy makers, that we can respond to the needs of those who are responsible for our nation's important public safety programs. Ultimately, we believe that creating awareness among policy makers will lead to greater validation of paging and increased opportunities for use of our network.

We're in the process of developing new products and services that cater directly to the needs of our government and large enterprise segments. For example, in 2006, the Company launched its first responder communications network, a wireless communications solution that delivers reliable, survivable wireless communications on a fully deployed nationwide network. This cost effective solution can serve as primary communications or as a redundant back-up network.

In addition, to help support our government in legislative outreach efforts, we established a political action committee in 2006 through which employees, shareholders and others can provide the means to support the elections of federal candidates who we believe understand paging's value and will support policies that favor our industry. We're grateful to those who have contributed to this initiative to date.

In short, by continuing our involvement in policy matters before 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's goals in wireless communications, we hope to find more opportunities to sustain and increase our government and emergency response business.

Number three, network rationalization update. During 2006, we continue to pursue cost efficiencies through our network rationalization plan that we began over two years ago with the merger of Arch and Metrocall. As I noted earlier, during the year we eliminated redundant locations, consolidated equipment and reduced excess capacity yielding a net reduction of 1,980 transmitters. Cost savings from our network rationalization exceeded $24.9 million in 2006. Our 2007 network rationalization plan calls for a net reduction of more than 2,200 transmitters with an additional cost savings of approximately $23 million.

In addition, we expect to realize additional telecommunications and satellite savings in 2007 including the limited rollout of a new satellite service provider. A positive byproduct of this effort is that in many cases we're actually enhancing our network coverage and footprint.

As we remove transmitters in markets from our non-go-to networks, we often add some transmitters back to match or enhance coverage on our go-to networks. The net result is that our overall transmitter base related costs are being reduced but our customer coverage is also often enhanced in the progress. Beyond 2007, we expect additional net reduction in sites that will continue to reduce our long-term operating costs.

And number four, business goals for 2007. Finally, I thought I would share with you our four primary business objectives and goals for this year. Number one, drive cash flow by supporting a low cost operating platform. Throughout 2007, we expect to continue to reduce our underlying cost structure. These reductions will come from all areas of operations but most significantly from our continuing network rationalization efforts.

Number two, preserve revenue per unit. Our customer base continues to become more concentrated around larger customers who are characterized by a larger number of units and service per account, but due to volume discounting having lower revenue per unit as compared to the smaller volume accounts which are leaving at a faster rate. This concentration has, over the past several years, had the effect of reducing the Company's overall average revenue per unit. During 2007, we intend to reinforce the valuable attributes of paging to our customers in order to minimize the effect of our changing customer mix on revenue.

Number three, reduce paging subscriber erosion. We'll increase our focus on loyalty programs and other customer care programs in 2007 to effect continued improvement in the rate of subscriber disconnects. At the same time, we'll continue our focus on sales and marketing to produce high levels of productivity in gross unit placements.

Number four, maximize revenue opportunities around our core business segments, particularly healthcare. Healthcare customers are the most stable and loyal paging customers and represent about one-third of our subscriber base. We offer a comprehensive and robust suite of wireless messaging products and services focused on healthcare and campus-type environments. We'll use these advantages to target additional sales opportunities in the healthcare, government and large enterprise segments in 2007.

With that, I'll ask the operator to open the line up for your questions. We would ask that you limit your initial questions to one and a follow-up. After that, we'll take additional questions as time allows. Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll go first to Ed Kressler of Angelo Gordon & Company.

Hey, guys, good morning. Quarter looks actually pretty good. You know, the subtrends continue to look good as the net disconnects kind of decrease on an annualized basis.

I guess what's more surprising to me than anything else is that ARPU is surprisingly good considering that the customer mix continues to trend towards, we're having more success with the large customers, but they're less profitable. Behind that then, what's going on? Are we just seeing the ability to price better as competing services don't decline in price as much? I'm trying to figure out why we seem to have a little bit more pricing power than maybe than I would have expected?

Yes, this is Tom. Thanks for the question. Actually, as I mentioned in my remarks, one of the things that happened during the fourth quarter is that we constantly are trying to hold the line on a customer by customer level, but at the same time we did implement some rate increases on the smaller end customers, on segments of our smaller end customers, as well as on some larger resellers in the fourth quarter which helped contribute to that overall ARPU.

Got it. Okay. I'll get back in queue. Thanks.

[OPERATOR INSTRUCTIONS] With none (questions) holding, we'll just pause a moment to allow everyone a final chance to signal by pressing star 1. We'll return to Ed Kressler, Angelo Gordon & Company.

Hey, guys. Maybe I'm the only one here.

There is a lot of people here, but please feel free to ask your questions.

I'm the only one that's not shy. You mentioned you took out 1,980 transmitters over the, was that full year '06? What is the year end number of transmitters? Active? Do you have that?

I don't have that handy right now but we'll get you that information.

Let me go at it a different way then, I guess. What I was really trying to get at was the number --

Hang on one second. Our controller here, is the man with the answer. 13,541.

That was the end of 2006.

13,541. We're looking at taking out -- you mentioned taking out like 2,200 over the full year '07?

On a net basis. To get to 2,200, you end up taking out more than 2,200, but as I said earlier, for certain customers, oftentimes you'll go and add some transmitters back so the net number will be around 2,200.

Okay. So, are we looking at -- we're actually looking at having probably fewer transmitters than at the August meeting? For '07 at the end of the year?

Yes. By the way, I should mention that. When we meet with you guys in May, at our investor day, we're going to be presenting and we're going to update all of that information.

That stuff was great. That package is very valuable to me.

We'll put a lot of work into it. We'll have the information.

I'll just ask one more while I have you then. We're looking at the subscriber trends. Can you just explain to me because I haven't just gone back and verified for myself, what's the seasonal nature of disconnects? It is driven by customer budget and things like that, but is fourth quarter more of a disconnect period of time for people? Or how does that play out during the year?

You know, traditionally, you know, as our customer base has gone through the changes it has over the last couple of years, there used to be really distinctive seasonality in the fourth quarter and first quarter. Seemed to be where the largest amount of disconnects were. It doesn't seem to be quite as pronounced as it used to be. Certainly this year, we didn't see that kind of phenomenon in the fourth quarter as much as we had last year. So, I would tell you the seasonality is starting to wash away a little bit as we come down to our core business customers.

Got it. Got it. Okay. Great. Guys, good job in a tough environment. Thanks very much.

We'll go next to [Samir Sanghani of Sanghani Funds].

Hi there, guys. I guess there is more than one person on the line. I want to ask a long-term question and I don't want exact guidance but just kind of a feel. You said you had about 60% of your current subscribers are in your core markets, the government and healthcare and some of the large enterprises. If you're looking out like five, seven years, do you expect the other 40% to slowly kind of erode to almost zero, and then most of that other core segment to still be there, maybe in 10%, 20% less? Is that a reasonable expectation which would imply maybe around 50%, the number of subscribers out five, seven years from now?

The way I look at it. We're not going to provide a forecast past what we've done for 2007, but talking about it conceptually, I would expect fully that the non-core segments would continue to churn off at a faster rate than core segments. You saw, 0.4 of a percent for healthcare in the entire quarter, that's close to being flat.

Right.

There's roughly a 30-year base that's on a net basis, not churning much at all. We're putting a lot of effort into that. We would hope to be able to improve that over time. And that's similar with government and large enterprise. They churn at a larger rate than healthcare, but that's where we're really kind of building our focus so when we're trying to see what the return is on sales people putting a lot of effort into training, it really makes sense for us to focus on those three verticals.

We'll take all of the other business we can get. But you're not going to see a big infrastructure being built and money on the marketing side being spent to go after the non-core segments. There's smaller regional carriers and people that can certainly provide service to the smaller companies over time. But from a provider of a national network and with spending dollars, marketing and sales training, we really need to focus it and will focus it on those lower churning, larger customers that will help our cost structure.

What you're suggesting is not unreasonable. It is hard to give you the exact percentages that the base will be. But that would -- I think you're pretty close to where it is going to go.

Okay. I appreciate that. I just wanted to know -- I'm thinking worst-case scenario and maybe 50% of the current subscriber base will be there five to seven years out. Just want to know if I'm in the ballpark.

Yes, I'm not going to give you a projection, but conceptually you know what we're talking about.

Okay, thanks.

Thank you. [OPERATOR INSTRUCTIONS] We'll go to [Mark Kaufman] of MLK Investment Management.

Good morning, gentlemen. I guess just kind of a broad question about analyst coverage. I got one analyst out there who says the stock is going to 11, and I'm a just curious, what kind of other reception you get from potential coverage on the street of the Company, it certainly is a hard story to tell because everyone loves to see top line growth and it is not something that you guys can peddle right now.

So, I'm just curious to see what you guys think about conceptually about getting the word out on the Company, whether it is a yield play or, liquidation play? I'm not quite sure. The people ever think about is there any value in the Company's licenses? The air space you have?

You know, it is kind of an open ended question, Mark. I understand what you're saying. Our focus, which I want to make clear. We've talked with our board at length about this, but our focus is to run this business as best we can and our specific focus, our tactical focus for 2007 is on those four items I just kind of walked through a couple of minutes ago.

We're not spending a lot of time talking to analysts or going out and trying to tell the story. We're spending a lot of time trying to execute and turn in good numbers with respect to the expectations and the guidance that we give out there. I did see the one report that you talked about. There is a lot in there I don't agree with. I think, for the 2007 guidance that we gave, it is probably not that far off from what he had in his model for 2007.

I might have a more optimistic view of outer years from what he had in his model but who's to say who's right. There are a lot of things that can happen. We certainly see some positive trends and if those positive trends were to continue or improve, obviously, you'll see a better result over the long-term.

But we're not going out and sitting down with analysts and spending a lot of time with them while they work on their models and things such as that. We're talking to our shareholders once per quarter on these quarterly calls, and then we have this annual investor day which is coming up pretty soon. I encourage you to come to that where we would lay out a lot of information. That will continue to be our strategy with respect to communicating to our shareholders.

Thanks.

Any further questions, Mr. Kauffman?

No, not at the moment. Well, I guess not so much a question, but it is interesting annualizing your fourth quarter revenue and thinking about where your projections are, clearly, you're looking for continued slowdown in the rate of decline. And I imagine forecasting that out into 2008, as well, is a possibility?

Yes, I think that's right.

Okay. Sort of the question as the last individual had. If it so much goes away over time, but it seems as though maybe -- I don't know, possibility that it is getting closer to that core base sooner than later?

Yes, I mean, we kind of stratify our base between those core segments and do our own forecast on each layer. And the aggregate is what you guys hear when we give guidance.

Certainly, if we saw better trends or saw an improvement, that would bode much more positive for us than what we've given you guys in terms of guidance, but we are assuming there's some level of continued improvement here in these trends and we're very focused on those segments that have the best characteristics as you heard.

One other question since I guess the last call, I'm not quite sure. I know we've had a change in the makeup of Congress, I'm not quite sure exactly when the last call was relative to that time. And do you think there is any more focus on homeland security, will that have any potential impact? Is it something you're trying to seek out?

There is a lot of focus, a lot of activity. We're spending a lot of time and effort on it. We're hopeful it is kind of a long lead time sales cycle, if you will. But we're very hopeful that our efforts will pay off. Scott, you want to comment on that? Our General Counsel, Scott Tollefsen.

Your question is a good one. A change in the leadership of Congress means that a potential reassessment of Congressional priorities. There are some issues that will probably get a fresh look in this Congress in terms of homeland security and integrated interoperable communications.

Of course, we don't offer the voice element in terms of interoperability. But we offer quite a bit in terms of a redundant, fully independent back-up capability, as Vince referred to earlier, to back up broadband systems for wireless communications, as well as our very low price point. We're investigating the needs for wireless communications of various government agencies. And also staying very involved in some of the FCC regulatory proceedings that would affect how robust our industry can remain and we're very hopeful.

Okay. Thanks very much.

Thank you. We'll go to Greg Lundberg of Communications Equity.

Hey, gentlemen. The ending transmitter count was quite different from the August numbers. It was about 700 lower. You thought you were going to be around 14,245. Where did the extras come out? And how has that changed the average cost per transmitter number that you put up, which was $560? Thanks.

I don't believe that the average cost per transmitter changed significantly but in reality, we have a multi-year plan for taking down and consolidating networks to our go-to frequencies. We take as many transmitters out as long as we can as long as the load in the market justifies the taking out of transmitters. We had some markets that actually had fewer pages that than we originally projected. We have some markets that had more pages than we originally projected. We take out transmitters as load permits. We literally are taking out transmitters as fast as we possibly can, and as the changes in our customer base and types of usage of pagers, we will accelerate the plan accordingly. Our goal is to take out as much [INAUDIBLE] as fast as possible. The more pagers we put on go-to frequencies, the less we have on other frequencies, the easier it is to take them down.

That was Peter Barnett, by the way, our chief Chief Operating Officer.

And the numbers for '07 in the August book were 2,600. Now, they're 2,200, given that there was a little bit of trade-off there than between 2006 and 2007. Is the long-term goal that you laid out for '08, '09, '10 still philosophically what you're looking at?

It is. We actually added more transmitters to free sites which actually causes a higher number of transmitters, not necessarily a higher cost per transmitter or a higher lease cost in our P & L.

Great. Thanks.

Thank you.

Thank you. With no further questions, I would like to turn the conference back over to Mr. Vince Kelly for any additional or closing remarks.

Well, look, thanks very much everyone for joining us today. We're really looking forward to speaking with you after we release our first quarter results in early May, and then we're hopeful that you will come to our investor day and/or shareholder meeting in New York on may 16. Thanks again. Have a great day, everyone.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.