Spok Holdings Inc (SPOK) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to USA Mobility's fourth quarter and year end assessor conference call. Today's call is being recorded. We have Vince Kelly, President and CEO, and Tom Schilling, Chief Operating Officer and CFO. 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 our fourth quarter and 2007 year-end investor update. Before we discuss our operating results, I want to remind everyone that 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 on 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 most recent Form 10-K and related company documents, filed with the Securities and Exchange Commission. Please note that USA Mobility assumes no obligation to update any forward looking statements from past or present filings and conference calls.

We are pleased to speak with you today regarding our 2008 outlook as well as our fourth quarter and 2007 operating results, which were in line with the upwardly revised financial guidance we provided last August and clearly represented another year of solid progress for USA Mobility. Over the next few minutes, we plan to cover the following areas: number one, review our accomplishments since the merger three years ago. Number two, review our fourth quarter and year end 2007 results. Number three, provide financial guidance for 2008, number four, discuss some of the risk factors facing the company including updating you on our appeal of the FCC's backup power order, and lastly, number five, list our key business goals to the current year and our focus for the future.

As you know, USA Mobility was formed on November 16th, 2004 in the merger between Arch Wireless and Metrocall Holdings. Since that time, there have been many significant changes in the company's operating structure and financial metrics and I wanted to share some of those three year comparisons with to illustrate the magnitude of the changes our company has gone through over that time frame. Pro forma revenue in 2004 was $789 million compared to $425 million in 2007, a reduction of 46.2%. During that time, however, the annual rate of revenue erosion has declined from 21.6% to 14.7%. Pro forma operating expenses, excluding depreciation and amortization and accretion for 2004 totaled $567 million, compared to $300 million in 2007, a reduction of 47.1%. Pro forma EBITDA was $222 million in 2004, versus $125 million in 2007. However, our EBITDA margin of 28.1% in 2004 has remained comparable with our EBITDA margin of 29.3% in 2007.

Pro forma capital expenditures for 2004 were $32.6 million, compared to $18.3 million in 2007, a decrease of approximately 44%. Pro forma operating cash flow totaled $209 million in 2004, against $114 million in 2007 with cash flow margins remaining relatively flat at 26.5%, and 26.9% respectively. Units in service totaled 5.967 million at year end 2004 compared to 3.485 million at year end 2007. However, annual net churn has reduced from 22.3% to 15.1% during that period, while gross churn has reduced from 42.6% to 29.2%. Pro forma average revenue per unit was $9.06 in 2004, compared to $8.55 in 2007, a relatively modest decline, given the shift in our base over time to larger accounts with volume discounting. Also, our employee headcount decreased from 2,844 at the time of the merger in 2004, to 1003 at year-end 2007, a reduction of more than 64%.

We established a $140 million credit facility at the time of the merger and successfully repaid that entire debt during our first nine months of operation. Finally, we returned approximately $40 million in cash distribution to our stockholders in 2005, $100 million in 2006, and $100 million in 2007. As you can see, our organizational and financial profile has changed quite dramatically over the past three years. At the end of 2008, we'll be less than half the size we were there in 2004. Despite the significant decline in our subscriber and revenue base, we've been able to continue to effectively market our service, reduce expenses, eliminate debt, stabilize prices, maintain margin, and generate enough free cash flow to return significant capital to our stock holders on an annual basis. We are extremely proud of this record of achievement, it is a testament to the dedication and hard work of our employees, and the loyalty of our core market segment customers.

Before Tom reviews details of our fourth quarter and 2007 financial results, I wanted to briefly highlight some of our key accomplishments during this past year. Subscriber and revenue trends continue to improve during 2007. This improvement is mostly attributable to the extraordinary efforts of our sales team to generate gross page replacements, minimize turn and implement pricing increases to our customer base, while the annual rate of subscriber erosion remains high, I want to commend Jim Boso, our Executive Vice President of Sales and Marketing and his team for outstanding performance in 2007. We reduced operating expenses substantially in 2007, consistent with our goal to manage a low-cost operating structure. Credit for this significant improvement goes to our entire management and staff.

During 2007, 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 a reduction of the 2206 transmitters and a total cost savings from network rationalization of $20.8 million, compared to 2006. We also made several important changes to our management structure during the year designed to create to a more efficient senior leadership team. Tom Schilling, our Chief Financial Officer, added the title of Chief Operating Officer. Jim Boso, Executive Vice President of Sales became Executive Vice President of Sales and Marketing. Bonnie Culp, our Senior Vice President of Human Resources, became our Executive Vice President of human resources, and Tom Fain, Vice-President of Corporate Technical Operations, was promoted to Chief Technology Officer. These changes were important and necessary steps to streamline our organizational structure as the company and industry continue to evolve.

Finally, we again met our goal of generating substantial free cash flow in 2007, allowing us to return capital to stockholders consistent with our stated strategy, including quarter cash distributions of $0.65 per share, and a special cash distribution of $1 per share, we returned approximately $100 million in capital to stockholders for the second year in a row. In addition, our board of directors on February 13th, 2008, declared a $0.65 per share quarterly cash distribution for stockholders of record as of February 25th, payable on March 13th. Similar to previous cash distributions, we expect the entire amount of this cash distribution to be paid as a return of capital. I'll comment on up the company's outlook in a few minutes, but first our COO and CFO, Tom Schilling, will review our fourth quarter and year end financial results and share additional observations on our recent operating performance. Tom?

Thanks, Vince, and good morning. Before I review our operate interesting financial results, I want to note that we expect to file our 2007 Form 10-K on or before Monday, March 17th. I encourage you to read the 10-K as it offers significantly more information on our business than we can possibly cover on this call, including out risk factors. Overall, we're pleased with our fourth quarter and 2007 results, which were largely in line with our previous financial guidance. The annual rates of subscriber and revenue erosion continued to show modest improvement. ARPU levels remained stable, and we continued to substantially reduce operating costs. However, the rate of subscriber cancellations remain high, putting considerable pressure on our recurring revenue stream and our underlying cost structure. In total, the subscriber base did experience modest improvement in the annual rate of net unit erosion.

We ended the year with 3.485 million subscribers, which represented an annual decline of 15.1%, compared to 16% decline in 2006. However, on the direct side of our business, the annual rate of net unit loss was 14.5% compared to 14% in 2006. As we've discussed previously, the lack of net unit loss improvement within the direct customer base is very disappointing. We had expected that as our customer mix changed toward the lower churning segments of healthcare government, and large enterprise, the composite rate of the net unit loss would improve. The change in customer mix has continued as expected with our three core market segments increasing from 56% of our subscribers at the beginning of 2006 to 68% at the end of 2007. At the same time, we've experienced deterioration in the rate of net unit loss, within each of the three core segments. The combined annual net unit loss within our core segments was 8.1% in 2006, and increased to 10.1% in 2007. This is primarily due to the accelerating migration to alternative wireless technologies across all segments.

On the indirect side, net units declined 19.1% in 2007, compared to 27.9% in 2006, and 35% in 2005. The improvement is largely due to improved gross additions. In 2007, indirect gross additions were 138,000 compared to 123,000 in 2006. This improvement can be attributed to a more focused sales effort in our indirect channel which began in the third quarter of 2006. Within our core market segments, healthcare continues to be the most stable, with a net unit loss of 1.3% in the quarter, while government and large enterprise sectors were 4% and 4.3% respectively. Healthcare now represents 37.1% of our total subscriber base at year end, up from 32.5% a year earlier. During the same period, our government sector increased to 17.8%, from 16.5%, and large enterprise to 13.5% from 10.3%.

Our direct subscribers base continues to become more concentrated around larger customers, those with more than 1,000 units. These larger customers represented 47.3% of our total direct subscribers at the end of the fourth quarter, compared to 43.6% at December 31, 2006. While the ongoing migration towards larger customers continues to have positive impact on our annual rate of net unit loss, this evolving customer mix also puts pressure on our long term ARPU trends, since larger customers tend to have lower ARPU.

Total revenue for 2007 was 424.6 million, compared to $497.7 million in 2006. The annual rate of revenue decline improved to 14.7% in 2007 from 19.5% in 2006. Total revenue in the fourth quarter was $100.2 million, compared to $116 million in the fourth quarter of 2006, a 13.6% decline. Paging revenue for the year declined 16.1% to $389.5 million, from $464.2 million in 2006. However, the decrease in paging revenue was somewhat offset by modest increases in cellular phone sales, product sales, and other revenue during 2007. Fourth quarter paging revenue declined 14.6% to $91.8 million from $107.5 million in the year-ago quarter. Total paging ARPU increased to $8.62 in the fourth quarter from $8.57 in the fourth quarter of 2006, and was flat as compared to the third quarter ARPU. Fourth quarter direct ARPU of $9.09 was level with the year earlier quarter and down from $9.16 in the third quarter. Indirect ARPU, however, increased to $5.06 in the fourth quarter from $4.92 in the fourth quarter of 2006.

As we've mentioned on previous calls, there are two primary drivers of the ARPU results in 2007. The first was structural pricing changes we implemented to bring more uniformity to the pricing of units with certain enhanced features. The second was improvement in the rate of billing and service credits issued to customers. While these improvements will continue to positively impact recurring ARPU and revenue going forward, they were largely one time actions. Accordingly, while we will continue to pursue opportunities to increase our pricing where appropriate, we expect to return to a more normal rate of ARPU decline in 2008 based on the customer mix issues I noted earlier.

Turning to operating expenses, we continue to make excellent progress in 2007, although overall expense reduction slowed from prior years as we expected. For the full year, operating expenses, excluding depreciation, amortization and accretion were $300.1 million, a decrease of 16% from 2006, which importantly is higher than the 14.7% rate of revenue decline. We're pleased that for the second year in a row we were able to reduce costs at a higher rate than our revenue declined. Fourth quarter operating expenses were $75.7 million, a reduction of $9.5 million or 11.2% from the $85.2 million in the fourth quarter of 2006. As Vince noted in his opening remarks, while we are pleased with the overall cost reductions achieved in 2007, our ability to take out costs out of the business is becoming increasingly challenging.

Service, rental, and maintenance, or SRM expenses for 2007 declined by $25.2 million, or 14.2%, to $151.9 million, compared to $177.1 million in 2006. With site rents accounting for nearly 60% of the annual expense reduction. SRM expenses in the fourth quarter decreased 11.9% from the year-ago quarter and were essentially flat with the third quarter of 2007. As noted in recent earnings calls, our site rent costs in 2007 were higher than we previously projected due to costs associated with lease negotiations and underutilization of our more cost effective master lease agreements. We've made substantial progress in site conversion process in recent months, but we still have a lot more work to do. While we don't plan to provide new long term projections on annual site rent savings at this time, we will continue to keep you updated on a quarterly basis on this key expense reduction initiative.

Selling and marketing expenses for the full year were $38.8 million, a decrease of 11.6% from the $43.9 million in 2006. For the fourth quarter, sales and marketing expenses declined 19.4% to $8.7 million, from the $10.8 million in the fourth quarter of 2006. Selling and marketing expenses decreased over the past year primarily due to lower headcount as we continue to right size our sales organization to reflect the customer requirements and future sales opportunities. General and administrative, or G&A expenses were $96.7 million for the full year of 2007, a reduction of $31.2 million, or 24.4% compared to $127.9 million 2006. In the fourth quarter, G&A expenses were $23.3 million, down 18.3% from the year earlier quarter. Annual expense reductions were largely fueled by lower payroll costs and were benefited by tax refunds and other nonrecurring benefits.

Headcount at the end of 2007 was 1,003, a reduction of nearly 19% from the beginning of the year. Overall, within SRM, F&M and G&A expenses, approximately 16% of our total annual cost reductions came from lower payroll expenses. Severance and restructuring expenses in 2007 totaled $6.4 million, compared to $4.6 million in 2006. Severance and restructuring expenses include severance costs associated with reductions in work force and contract termination costs for real estate leases and other leases that longer provide future benefit. A total of $5.2 million of the 6.4 annual expense was taken in the fourth quarter, in connection with work force reductions, including our previously announced management realignment, as well as planned reductions in force for 2008. Of the $6.4 million in expense for severance and restructuring, we expect $5.6 million will be paid in cash throughout 2008 for planned workforce reductions and lease termination costs.

EBITDA was $124.5 million, or 29.3% of revenue for 2007. This compares to EBITDA of $140.4 million, or 28.2% of revenue for 2006. The reconciliation from operating income to EBITDA has been provided in our earnings release. Depreciation, amortization and accretion expense was $48.7 million for 2007, compared to $73.3 million for 2006. The annual reduction is attributable primarily to fully depreciated transmission-related equipment and paging devices, as well as reduced amortization of the acquired Metro Call subscriber list. Interest income for the year totaled $3.4 million, reflecting investment of accumulated cash balances, compared to $3.9 million in 2006. Pretax income for 2007 totaled $81.4 million.

As announced last night in our form 8-K filing, we restated our third quarter financial results to increase income tax expense by $4.8 million. The $4.8 million is associated with income tax liabilities for which the statute of limitations have lapsed during the third quarter. In the third quarter, we recorded the release of these liabilities as a reduction to income tax expense. However, in finalizing the 2007 income tax expense, we determined that the $4.8 million of liabilities was attributable to DTAs, deferred tax assets, existing prior to Arch's emergence from bankruptcy on May 29, 2002.

Therefore, the release of these liabilities should have been reported as an increase to additional paid in capital and not reported through the income statement. This restatement has resulted in a material weakness of internal controls over financial reporting for the income taxes in 2007. The company outsources its income tax accounting to KPMG LLP and will work together with KPMG to remediate this material weakness. Income tax expense for 2007 was $86.6 million, compared to $31.6 million in 2006. In the fourth quarter, we reported $61.8 million of income tax expense, of the $61.8 million, $54.3 million reduced the carrying value of our deferred income tax assets, or DTAs. The total balance of both our short term and long term DTAs at December 31, 2007, was $94.5 million. Accounting rules require us to evaluate whether or not the company will use all of its DTAs to offset future taxable income. That evaluation is based on our subscriber and revenue trends, as well as our expectations on expenses and capital costs.

For purposes of the DTA evaluation, we forecast the future levels of taxable income based on the latest available information. Our forecast indicates that we will generate approximately $230 million in gross taxable income over our planning horizon. This level of taxable income requires a reduction in the carrying value of our deferred tax assets, so that level of taxable income after considering our future effective tax rate of approximately 38%. We will continue to evaluate our subscriber, revenue, and expense trends, and will adjust the carrying value of the DTAs either up or down as circumstances warrant in future quarters.

As a result of the incremental income tax expense, the company reported a net loss of $46.7 million, or $1.70 per fully diluted share for the fourth quarter, compared to net income of $8.3 million, or $0.30 per fully diluted share in the fourth quarter of 2006. Absent the incremental income tax expense, net income in the fourth quarter would have been $7.6 million, or $0.28 per fully diluted share. The higher income tax expense resulted in an net loss for the year of $5.2 million or $0.19 per fully diluted share, from $40.2 million, or $1.46 per fully diluted share in 2006.

Capital expenses were $18.3 million for 2007, compared to $21 million for 2006, with the year over year decrease primarily due to fewer paging device purchases, which account for approximately 80% of our capital expense. Fourth quarter capital expenses were $5.2 million, compared to $6.8 million a year ago. Finally, with respect to financial expectations for 2008, we're providing the following financial guidance with the usual caveat that our projections are based on current trends, and those trends are always subject to change. Accordingly, we expect revenue for 2008 to be between $345 million and $355 million. Operating expenses, excluding depreciation, amortization and accretion, to be between 250 and $255 million. And capital expenses to range between $18 million and $20 million. With that, I'll turn it over to Vince.

Thanks, Tom. Overall, we were very satisfied with USA Mobility's operating performance in 2007. We continued to generate substantial free cash flow, made progress in selling and marketing to our core market segments and managed the company profitability, with a low cost operating structure and most importantly we continued to focus on positioning USA Mobility for the future. While the company made significant progress in 2007, the fact remains that we continue to operate in a highly competitive and challenging industry. As a result, we continue to face a number of competitive, regulatory and economic risks to our business every day and we expect to continue to face these risks for some time to come. You can read about our risks in detail in our form 10-K, but because of the potential impact of some of these, I wanted to specifically call three of them to your attention.

Number one. Our rates of subscriber and revenue erosion may not continue to improve. Although erosion rates did improve in 2007, there's no guarantee that we'll be able to repeat that success this year or in the future. We have been able to generate a reasonably good level of subscriber placements on a quarterly basis, however, unfortunately those placements have been consistently outpaced by gross subscriber cancellations at a rate of about two cancels for every gross placement. This trend is the single largest risk to our future cash flow generation potential. We can not predict that trend will reduce itself anytime soon. Similarly, while we've been able to keep product pricing relatively stable in recent years and even implement selected increases to part of our customer base in 2007, there's no assurances that that ARPU levels will remain -- it will improve going forward. Our units and service combined with the related ARPU is what guides our revenue, and thus our revenue erosion rate.

Risk number two, it's become increasingly difficult to reduce our operating costs at a pace in line with our declining revenue base in order to maintain cashflow margins. While our management team has done an outstanding job of reducing costs over the past three years, our ability to continue to generate incremental savings has become a major challenge as we've harvested much of the low-hanging fruit. Number three, as you know, we currently face a major regulatory challenge this year that potentially could have a sizable financial impact on our operations, and that's the Federal Communication Commission, or the FCC's backup power order.

Last year, the FCC issued the order requiring among other things, that large commercial mobile radio service providers, including USA Mobility, have at least 8 hours of backup power at each transmission site to minimize communications outages during emergencies. We believe this order is legally flawed in several respects. For example, the FCC did not give proper notice that it was considering such a requirement and it completely disregarded factors unique to paging such as our simulcast high-powered network architecture that make a nationwide backup power requirement unnecessary. Accordingly, in concert with other wireless providers and trade associations, we have petitioned to a review of the order in January in the DC Circuit Court of Appeals. Our petition requested an expedited review by the Appellate Court which was granted. Oral arguments will take place in May, and the Court is expected to issue a decision this summer. At the same time we filed our petitions, Sprint filed a stay motion. Last week on February 28th, the Court granted the stay.

Prior to the stay, full compliance with the order for those subjected to it, likely would have been required by March of 2009, based on the Office of Management and Budget's expected approval of the order this month. All companies impacted would have had to provide detailed site data to the FCC six months before the final compliance deadline, most likely in September 2008. While we're delighted with the outcome with respect to the stay, we still need to proceed with the case in federal court in order to obtain what we feel is the correct final outcome, because comply with the order would place an enormous financial burden on our company, reducing cash surpluses and lowering our margin. It would take a major toll on USA Mobility on top of technological and competitive challenges we already face.

Against this back drop of current business risks, and challenges, I want to emphasize that the board and management remain committed to our long stated goal of returning capital to stock holders. That is a goal we established at the time of our merger three years ago and one that we will continue to pursue. In August 2006, we announced the implementation of a regular quarterly cash distribution. We set the amount of the cash distribution at $0.65 cents per share per quarter, or $2.60 per share annually. we also communicated that our ability to sustain that level of distribution would be incumbent upon our rate of revenue erosion.

As we've discussed over the past several quarters, subscriber erosion has not improved in line with our expectations, and subscriber erosion drives revenue erosion. In light of the continued high rate of subscriber erosion and expectations for future cash flow, the board is currently evaluating the level of our regular cash distribution amount with the intent to set it at a level that will be sustainable over the next several years. We expect to announce within the second quarter what that amount will be going forward. We realize that setting the regular cash distribution to a longer term sustainable level will result in excess cash being generated in the short term. Due to the significant reduction in our stock price over the past 9 months, management and the board are also evaluating the best strategy for returning that excess capital to our stockholders. This strategy may include periodic special cash distributions, a stock repurchase program, or combination of both. We do not anticipate making a final decision on this until we have some further clarity with respect to the FCC backup power order.

However, as we've communicated in the past, we remain committed to returning excess capital to stock holders and investors should not view today's discussion as a change in our position with regard to excess capital. Notwithstanding our risks and challenges, as you just heard from Tom, we expect to generate strong operating results for 2008, which would yield significant cash flow. I want to enumerate our four primary business objectives and goals for 2008. While we made considerable progress on each of these objectives during 2007, they remain equally high priorities for us this year.

Number one, drive free cash flow through a low cost operating platform. We will stay focused on reducing our operating expenses as necessary in all areas of the company, including network operations, sales, and marketing, and administrative overhead in order to achieve our 2008 business plan. Beyond 2008, we need to make changes to our network, our sales and back office functions to improve future result above these indicated by the current trend. This will involve a challenging or fundamental assumptions of where we offer our service, how we market, what segments we support, and at what prices and related ARPU levels.

Number two, maintain revenue per unit. Meaning ARPU at or above current levels within our core market segments remains critically important in order for us to offset anticipated future revenue erosion. With price increases becoming a greater challenge, especially in the current economy, we will need to make greater effort to educate customers about the many benefits of our products and services. Number three, reduce paging subscriber erosion. We will redouble our efforts to generate pager replacements despite a continuing migration of subscribers to competing wireless technologies. Going forward, we expect USA Mobility to continue to play an important role in the wireless sector, because paging still offers the distinct advantages of greater signal strength, reliability of messaging delivery, extensive network coverage, and significantly lower costs.

Number 4, focus sales opportunities around our core market segments. Focusing on sales and marketing priorities around our core market segments of health care, government, and large enterprise is clearly our most important goal with the most potential to positively impact our future and change the direction of the business indicated by past trend. To better serve these markets, last year the company created sales teams to focus exclusively on these key market segments. For healthcare in 2007, we created new sales leadership positions and a new sales team made up of AllStars with previous success in the healthcare industry.

This team was specially trained to pursue complex solution sales across the entire portfolio of paging cellular and advanced systems solutions. During 2007, we made significant progress in the health care market through two key product introductions. The first was the introduction of Reddy Call Coaster pagers which are used to hospitals to eliminate congestion in their waiting room. USA Mobility was the first company to launch this type of pager that runs on a wide area network which makes it easier to sell, install, and gives the broadest coverage available for the hospital. The second was the introduction of the private medical messaging network which is a dedicated paging and communication system that manages messaging traffic for a single hospital campus or across multiple campuses. We found that a complete messaging solution like this is a successful way to penetrate new hospital accounts and makes it very difficult for other wireless vendors to compete, either in terms of capabilities or price.

Last week, we participated in the annual health care information and management systems society, or HIMSS trade show in Orlando. HIMSS represents a great opportunity to get in front of 25,000 health care exhibitors and health care professionals. This year USA Mobility had our largest floor presence ever and we engaged sea level decision makers with discussions about where our advanced solutions are most appropriate. At HIMSS, we demonstrated for the first time our innovative PageSync product. PageSync allows our paging customers to receive their pages on a Blackberry or SMS handset. We believe this product solves a critical need by giving our customers a solution that unifies paging with voice and e-mail data centric handsets like Blackberrys, providing unique benefits of both solutions on one device.

We're continuing our sponsorship with the American College of Emergency Physicians, or the ACEP in 2008. This trade organization is our direct channel to this important group of physicians. Our two organizations share many common objectives such as having reliable messaging in a hospital environment, as well as improving emergency medical response to disaster situations. We were honored by the ACEP with an EMS award at the first quarter board meeting. Jim Boso, our Executive Vice President of Sales and Marketing, and Dan Brose, our Vice President of Marketing had an opportunity to make a product presentation to their board, made up mostly of physicians themselves, the board members gave them an overwhelming positive response to our PageSync product. The relationship between USA Mobility and Sprint is as strong as ever, and presents many additional opportunities in the health care market. Sprint's been very supportive of our health care solutions team and impressed with our success in engaging sea-level executives and hospitals. We believe there are great synergies to be had by working more closely together that would increase penetration in the health care market for both companies. Together we're evaluating ways to strengthen the partnership between the two companies at the field level.

We're also expecting 2008 to be a breakout year for our relationship with Vocera. Vocera is a hands free voice communications solution that gives nurses and other healthcare providers greater mobility and speed of response in their day to day activities. This application aligns well with our solutions sales approach and our focus on emergency communications. Vocera greatly values our deep penetration of the hospital markets and the priority we can bring to their solution with our thousands of hospital customers. In the government vertical, we named new leadership for the federal sales function late in the year. Our team has worked with the FCC joint advisory committee for communication capabilities for emergency, medical, and public health care facilities. USA Mobility participated in the public meetings and submitted information regarding the benefits of paging technology. We are are pleased at the recent report to Congress, the Joint Advisory Committee referenced USA Mobility's submission that quote one way and two way paging services which also often use satellite capabilities are a cost effective and reliable choice for healthcare organizations and are necessary in a disaster situation, end quote.

We're also working to expand the scope of our GSA contract to include the company's complete portfolio of products and services, allowing us to participate in a greater number of government sales opportunities. To pursue these opportunities fully, the company has dedicated specialized sales and engineering support for our advanced software solutions to the government vertical. For the large enterprise vertical, we named new leadership to what was previously our national accounts team. In the coming year, this team will place a greater emphasis on new account acquisitions and renewals of contracts with Fortune 1,000 accounts. The sales team went through extensive training on Sprint's complete line of wireless voice and data products. This train will allow the team to pursue cellular sales opportunities with these very large accounts.

We believe that working with these large accounts and cellular opportunities is critical or many reasons, one of which is that these type of accounts are moving from paging to cellular at a more rapid pace than in our other core vertical market segments, and as with government, the large enterprise vertical now has dedicated sales and engineering support for our advanced software solutions. We believe that dedicating sales and marketing resources to better meet these needs of these key market segments offers us the best opportunity to compete for new accounts and more deeply penetrate existing customer accounts with our full line of wireless products and services. These vertical sales and marketing efforts are crucial to our future. I said earlier that past trends have shown two subscriber cancellations for every new pager placement we make. That is not the case on our health care vertical which has been much more stable. In fact, while our total units in service decreased in 2007 by 15.1%, our health care units in service decreased by only 3.6%. Clearly, our goal is to improve on this result by partner by partnering with our healthcare customers to identify new and additional wireless solutions to support their operating needs while focusing on growing revenue from this, our most variable segment. These and are will remain our primary objectives for 2008 and beyond.

In summary USA Mobility recorded another year of outstanding progress in 2007, despite ongoing industry challenges, we continued to operate the company profitably while meeting our primary performance targets, reducing operating costs, increasing organizational efficiencies and focusing on selling efforts on our cost business subscribers through without the country. At the same time we met our goal of generating substantial free cash flow that enabled a return of capital to our stockholder of approximately $100 million. Although we continue to face multiple risk in the competitive business environment in 2008, we were extremely pleased with our accomplishments in 2007 and look forward to leveraging that success to achieve further progress this year. As usual, we will keep you updated on our progress and other corporate issues on future earnings calls and press releases.

With that, I will 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. The question and answer session will conducted electronically. (OPERATOR INSTRUCTIONS). We'll go to [Ray Cavelot of Farnham Street Capital].

Thank you. In analyzing your DTAs, you talked about a planning period. Is that a five year or three year planning period?

Essentially it's actually a longer term than that under our particular circumstances of our business, we think our revenue is fairly well predictable, since we don't have a -- it's not like we have speculative growth, it's more of a rate of decline. S o it goes out actually several years. To arrive at -- basically we forecast revenue out as far as we can reasonably, and then to the point where we believe we can reasonably forecast profitability underneath that revenue. Goes out about 15 years.

15 years. Thank you.

(OPERATOR INSTRUCTIONS). We'll go to Gregory Lundberg of Communications Equity.

Good morning guys. Two questions. The indirect two-way ARPU was up a lot sequentially. Just wanted to get an explanation for that, and also, tower lease expense up sequentially. Could you give us the ending transmitter count and sort of us maintain why that's happening on that line? Thanks.

Yes. They first question -- Oh, yes, we had certain pricing increasing on some resellers, people who use our network to resell two way paging. Those were implemented in October, and that's what was reflected in the fourth quarter. On the --

We ended the year end sites Greg at roughly 11,000, right in that ball park, in terms of 2007. We'll end this year at roughly 8500 sites. So you can say we continue to aggressively continue to take the site down. We reorganized our site leasing group this past year, and also had new leadership put in with Tom Fain, but we've been making since we've done that really solid progress. So last year while we were behind in terms what what we had internally forecast for our site rent expense, this year, at least the way it's progresses so far, we're ahead, so we've made a lot of improve there will.

And the transmitter sites at the end of the year were 11,335.

Great, thank you.

We'll go next to Mark Kaufman of MLK Investment Management.

Hi, gentlemen. Had a question about the new product sales you're talking about, and those that say the ability to get the paging on the Blackberry. Now, where would they show up? Would they show up in the indirect, or the direct, how you would account for those going forward?

This is Tom. Yes, they will be direct subscribers. They are our customers who we bill for. the only difference on page sync versus our traditional paging is that the delivery mechanism is over a different network and not the paging network.

Would that have any effect in it's reliability?

It does. I mean, this is the quandary. And I went down to the HIMSS show last week in Orlando and I met with a number of CIOs and talked to our sales force. The whole health care industry and segment has a lot going on right now in terms of records and things they're trying to do and spend money on. They're also look at wireless and they want to be able to do a lot of things over wireless platforms, even though they are still huge consumers of what we call plain old paging. The problem with the reliability issue on these things is you can give people Blackberries and put applications on Blackberries and do and do some wonderful things, and when everything is going fine, when there's not an emergency, yes, there's more functionality, and it works better. Now, it's much more expensive.

The problem as you probably well are identifying is that the one time you really need it, and that's big emergencies, like when the bridge collapses in Minnesota, the local cells on the mobile phone net works which provide the service get overloaded, it doesn't work, whereas paging, because of simulcast technology, would continue to work. So there is a reliability issue there. I mean, people continue to look at these others technologies and say, gee, we can do so much more. The real crying shame about that is from a national perspective from an emergency response perspective is that as these subscribes move away from paging, they are going to sacrifice reliability at the time they most need it. Request & while they may not say that right away, they may say, wow, even to the I'm paying a lot more, look at these extra things, I can send messages with attachments, et cetera, unfortunately at the time they most need it, they're going to wish they had paging back.

And we've seen scenarios where we've had large medical accounts transition over to some of these other devices and there would be an outage with someone's network, we won't name names and we've been called in the middle of the night and been asked to come out with literally thousands of pagers the next day to give it back to them. So you've got an application right now where doctors all over the company have a lot of pagers, those paper numbers are imbedded in their business cards, in the yellow pages, et cetera, their customers have had them for years and years, you can put an application on a Blackberry which I think very versatile and functional where that Blackberry has a separate address for that old pager number and the messages will pop up on that Blackberry with a separate signal and everything, and it's great, and you can have a log, you can have a list, you can get acknowledgements but the reliability issue is still going to be the problem when there's a huge emergency. When these not, it's probably going to work great.

I have a -- not a related question, but a little different question. On the section 382, are you implying that you're past the period now that if there was a change in equity ownership, the company would lose the availability of the NOLs?

We are -- no, at this point, there's a change in ownership, you still have a substantial reduction in the reduction the usability. What it's been is how close we were to a 382 change in control ourselves, and that is falling substantially at the end of the year.

The way you measure it, is you keep a three-year rolling average, and as time shifts forward, things that happened three years ago drop off, and so you create more room under that calculation. Right now we have more room than what we had, say, a year ago.

Oh, okay. Thank you. I'll free it up now.

We'll go next to [Philip Heinz, Van Bergam].

Good morning. Could you give us more details as to what you're looking at for a dividend? You still have $2.30 cash the balance sheet and with your guidance you're looking at almost $3 of free cash flow this year. What will the board look at when reevaluating the level of the dividend?

We will look at long term sustainable dividend level, and that's for a recurring dividend, which would be, , something we pay each quarter. In addition to that, if we end up declaring a dividend at a given rate find out that during the year, once we get past this FCC backup power order, we have a significant amount of cash left over after paying to the recurring dividends, we'll either do a special dividend or a share repurchase program for some combination of both. The board is analyzing it right now, and hopefully during the second quarter we'll be able to announce what that defendant level will be going forward. We may not be able to announce by then what we're going to do with the excess capital, because we want to get through we think it's sometime this summer on the FCC backup power issue, and then once we know that we're not subject to that, we'll have additional capital that obviously we distribute to our shareholders, but the plan is to give it back to the shareholders not to keep it.

It's fair to assume that could return close to 100% of the free cash flows to the shareholder, assuming a favorable FCC rule something

Yes, by one mechanism or another, but your answer is basically yes. There's always a minimum level of cash you want to keep our your books for making payroll, making site rent payments, which were once a month big telco payments, but, Yes, the answer to your question would be yes.

Great, thank you.

And we'll go to Mark Kaufman of MLK Investment Management.

Hi. This is a follow up question related to the FCC mandate. If you're reducing the number of towers you use, that reduces the potential liability, is that right?

Absolutely.

I guess it also is a question of how do you estimate the liability for you guys going forward if it's --

Yes, I mean it's -- I would say don't get me started, Burt the whole thing is just nuts. First of all, it shouldn't even apply to us, because number one reason transmitters go down is wind and number two is flooding, power is third. But if a transmitter on a paging network goes down, it's different than a mobile phone network, when that transmitter goes down, there's other transmitters in the area, because we simulcast and we use high power, not low power, the pagers continue to work. Number one it didn't make on sense to apply to us in the first place. Number two, this is a business that at least from the paging side, I think everybody can recognize, is kind of a melting ice cube. And as we roll forward we go from 11,000 transmitters this year to 8500 next year, by 2012, it will be down quite a bit five years from now, and so why would you put a generator, or a backup battery supply in a transmitter this year that you know you're going to be taking down next year? But there is no exclusion from the requirement for that. There was no, like, common sense clause in there anywhere, and it just gets crazier from there.

These sites, there's not a lot of room in these sites. Things are packed in. If you have a wireless carrier going and shoving his generator, his backup power supply in there, there's not even room at these sites. We talked to the tower, I had lunch with one of the CEO. of the the biggest tower companies out there, and I said Vince, a lot of our sites, you have these 99 year ground leases and we're not sure we can start tearing up the ground around the sites and putting in these concrete pads you'll need for generators, and -- by the way, you'll need multiple generators. We're going to have five or six separate generators at a given site, because the way the rule is written, each person has to provide their own power. Well, generators create noise, they create pollution.

The generators that are more expensive burn the cleaner fuel. Some you can buy enclosures that make them quieter but even the generator manufacturer guys are saying this makes sense. Probably what would make the most sense at some point would be to have one power supply that everybody at a given power could plug into, but you've still got all the zoning issues and there's just -- if a flood comes through and you've got a bunch of fuel -- the whole thing was not thought through, the whole thing was not discussed with industry. Unfortunately, it just smacks more of a political gut wrench type decision than it does something that was really worked through that's in the best public interest. You want to do something that's in the best public interest, require mobile phone manufacturers to put pagers in their phones, so that when their network goes down, they can still get messages from our network which simulcast, that would make sense, but people -- anyway, don't get me started.

Well, offer that as a trade off.

Yes.

Thanks.

(OPERATOR INSTRUCTIONS). We'll go to Lee Crockett of MSB Global Investment.

Good morning. I was wondering if you could help me out with some industry data. You have just under 3.5 million subscribers at year end. Do you have any estimates or guesstimates as to the number two, three, and four players as to their size at the end of the year?

We are over 60% of the market right now. I think the FCC had their report that they just filed recently, Congress -- I think it was as of 2006, that said it was 6.1 million total subscribers at the end of 2006. So -- because the other companies are private, I can't tell you exactly where they are with respect to the end of 2007, others than to tell you it's a pretty safe bet that they would be eroding at a faster rate than we're eroding because a lot of the customers we pick up are theirs because they aren't happy for a variety of reasons.

Given that you sense that they may be eroding faster than you do, at some point, either those players have to go out of business, as their fixed costs are just too significant given their subscriber base, or the industry has to consolidate at some point. Would it have been cheaper for you to buy subscribers through your marketing and sales department, or, could you just give us an color as to how you see the industry playing out?

Yes, I can, and it's a good question, and something that we talk about and think about all the time. First of all, I believe the business is very scalable. I remember when I came here in 1987, we had 43,000 subscriber and we made net income. We own a portion of a company that is significantly smaller than us, and still makes a nice cash flow margins. And I think depending on where you want to offer service, and that's a biggest position for the large carriers. There are a lot of smaller carriers out there in the states and regions that can make a nice income for a long time to come. I think in some respects, it's bigger on the tougher guys. I think us being the -- tougher on the bigger guys.

Us being the biggest out there, we have nationwide networks, we're consolidating down to a number of go to frequencies and taking out a lot of infrastructure, put there will come a time where at some point we have to make a decision do we want to offer paging service in Boise, Idaho, is there enough critical mass there with subscribers, or does it make more sense to be more of a regional player. We've got a big team that is focused on constantly doing that evaluation and looking at the profitability of each market segment and then making determinations with respect to where we want to take down transmitters and over what rate we want to do it, because you don't want to do it at such a rate that it negatively impacts your churn, but you have to be able to maintain margin where you offer service. So I think, as the ice cube melts we can continue for a long time to stay profitable, and I think some of the smaller guys can do too. I think any of the bigger guys that are trying to communicate with us for the larger accounts on the nationwide business, I think they're going to at a much more disadvantage in terms of what their cost structure is going forward. But it's still, even having said that, and, we've looked a at couple of them over the years, it makes more sense for us to capture the subscribers in the open market with our selling and marketing effort than it would to buy them, because if you buy them, then you're stuck with their network infrastructure, and then you've got even more that you need to deconstruct and consolidate as opposed to picking them up and putting them onto your already relatively efficient networks, just in the open market.

At this time, there are no other questions in the queue.

Okay. Well, thank you everyone for joining us today. We look forward to speaking with you after we release our first quarter results in May. Thanks again, and have a great day.

That concludes today's conference. You may disconnect at this time.