AT&T Inc (T) 2002 Q2 法說會逐字稿

Please stand by. Good day,

everyone. Welcome to the Dobson Communications

second quarter earnings result conference call. Today's

call is being recorded. For opening remarks, I will

turn over to Mr. Warren Henry, vice president of

investor relations. Please go ahead.

Thank you and good

morning. This conference call contains forward-looking

information within the meaning of the Private Securities

Litigation Reform Act of 1995. These include, but are

not limited to statements regarding the company's plans,

intentions and expectations for 2002. Such statements

are subject to a variety of risks and uncertainties

that could cause actual results to differ materially

from those projected. Extensive discussion of the

risk factors that could impact these areas and the

company's overall business and financial performance

can be found in the company's reports file wide the

Securities and Exchange Commission.

Given these concerns, investors and analysts should

not place undo reliance on forward-looking statements.

I will turn it over to Everett Dobson.

Thank you and

good morning, everyone. Welcome to our second quarter

conference call. With me this morning are Bruce

Knooihuizen, CFO, Doug Stephens, interim COO.

We will be available for questions later. I would

like to (inaudible) success in executing its plan

for the first part of 2002.

As we discussed at the beginning of the year, our

first priority this year has been to improve profitability

of our local service. In second quarter, our results

continue to trend in the right direction. At Dobson,

(inaudible) increased to $45 for the second quarter

of 2002, compared with $44 last year. On the American

Cellular side, we had gain of 20 cents to just over

$40. On proportionate basis we increased our year

over year six quarters in a row. The increase in

revenue was complimented by decrease in CCPU at Dobson.

The CCPU dropped to $23 this year. Again,

in the second quarter. On the American Cellular

side, we had a slight gain up 13 cents to $20.06.

Consequently, the EBITDA on Dobson business

increased 19%, compared to 12% a year ago and 24%

American Cellular compared to 21% a year ago. Local

service margins assume 8% margin in roaming business.

This is something we discussed on the last conference

call. This positive trend should continue because

we are selling increase percentage of calling plans

that concentrate traffic on low-cost network and those

of our primary roaming partners. These preferred

network plans constituted 58% of growth in the month

of June. The first month we offered both of them

throughout the markets. Second roaming revenue is

holding up well despite step-down in rate we agreed

to in February as part of the 10-year roaming agreement

with Cingular Wireless. Roaming revenue on the

Dobson side was down and American was higher than

a year ago at 1.3 million. This reflects strong increases

in use at both. Dobson's roaming minutes were up

34% and American increased 44% over last year in

the same period.

Since our last conference call, roaming minutes continue

to grow. Margin growth should be positive. At the

final step-down in Cingular rate, continued growth

should have more favorable impact on bottom line.

Third, improved profitability of local service business

and strength of roaming business has had impact on

EBITDA margins this year. For second quarter,

Dobson EBITDA increased 130 basis points to

41.7%. American Cellular EBITDA increased

more at 160 basis points to 40.6. Fourth in the second

quarter, Dobson continued to grow subscriber base

and transition from analog to digital calling plan.

That helps us manage churn. Gross ads were higher

in all markets, especially in American Cellular and

churn was 1.7%, which puts us among the best in the

customer retention in the industry.

In Dobson markets, 23,300 net ads, represented 11.6%

compared to 11.2 3 months earlier. American Cellular

added 15,700 net subscribers and increased penetration

to 12.9% to 13.2 over the same three months. Additional

positive is we are adding higher load churn, contract

customers as we grow. Our pre-paid customer base

contracted during the quarter as consolidated four

prepaid venders into one and prepared to relaunch the

product.

As a result, proportionate in the second quarter,

we added 34,000 subscribers to the subscriber base,

but with the reduction in prepaid subs, it resulted

in addition of 30,000 new proportionate subscribers

again. Doug will explain next, we plan to grow the

prepaid segment of the base, but are going to grow

it the right way. We believe the new product we are

in the progress of launching will enable us to (inaudible)

with lower risk and stronger profit contribution than

we previously enjoyed. We are pleased with our performance

in the second quarter.

We had 6000 analog and digital migrations in the Dobson

network this past quarter, compared to last year.

At American Cellular, 11,600 compared with 13,000

last year. That had a positive impact on cost of

service equipment cost and cpga, the latter increased

to (inaudible) on a proportionate basis from 461

for the same three months in the previous year. These

migrations, combined with our high level of digital

gross ads increased digital segment of subscriber base

to 82% at end of second quarter, compared to 62%

at the same time last year.

Before turning over to Doug, I would like to call

your attention to the members of the Dobson team whose

performance is exceptional. Our goal for 2002 was

to grow and grow profitably, (inaudible) excellent

performance in our call centers and our people are

raising their standards of achievement quarter after

quarter. Low churn requires tremendous networking.

Our engineering group keeps our network working,

despite increase in MOUs, and it shows. To keep

increases boot and reducing bad debt, you must sell

excellent product, have strong call center team, managing

customers and keep current on payments. Finally,

to improve profitability as much as we have, our sales

force must focus on selling high-value products to

the right customer. Fortunately, our product is now

in profitable and competitive. We appreciate the

great job. I will turn over to Doug.

Thank you, Everett

and good morning. Dobson enjoyed another solid quarter

from operational standpoint. Initiatives put in place

last year and first half of this year are delivering

desired results and in some cases, exceeding expectations.

In 2002, our number one focus has been to improve

local profitability through introduction of preferred

network national plan. Local rate plans have limited

or no off-net roaming exposure and preferred network

plans offer customers access to select, preferred networks

with no roam and toll charges. Preferred plans were

launch in the (inaudible) quarter with the balance

of markets offering the plans by the end of May.

Combined, preferred network plans constituted 2-thirds

of the gross ads in the month of June, which was the

first month both plans were offered throughout the

Dobson markets.

This shift had a positive impact on financial results.

Average revenue per unit has risen or is rising in

Dobson and American properties and Dobson were 45

dollars, versus 44 a year ago. American grew slightly

in second quarter to just about $40. What we call

real ARPU was $34.38 in Dobson properties this

quarter, versus $32 a year ago, a gain. $30.79 in

the American Cellular, versus 29.94 last year, 85-cent

gain. These gains, multiplied by our customers at

Dobson and American Cellular obviously have a dramatic

impact on local service profitability.

Cash cost per unit on year over year basis is trending

positively. CCPU reflects operating costs not

related to acquiring new customers or to the wholesale

roaming business. Our calculation is never stated

(inaudible) on roaming. Second quarter CCPU

declined in the Dobson properties year over year.

American second quarter CCPU was up slightly

year over year, but declined from fourth quarter of

2002 to the first quarter of this year than in the

most recent quarter. Our traditional national roaming

plans, including No Roam and No Tell anywhere in

the country are offered at low end $29 and $39 access

point, amounting in reduction to 5% of gross adds

in second quarter, compared to 15% a year ago.

From a sales strategy perspective, it is obviously

important we are selling increased percentage of higher

margin that minimize exposure to expenses. In cases

of customers wanting a national plan with no roam and

no toll anywhere in the U.S., we are limiting to

the plans profitability for Dobson and American Cellular.

Our strategy of highlighting the planning while

minimizing the pure national plans are allowing us

to grow at exceptional pace, improve EBITDA and

maintain low customer churn rate.

On the net add front, we added 34,100 subscribers

and reseller channel shrunk by (inaudible). On

year to date basis, our prepaid subscribers negative

22000 and reseller has been reduced by 750, compared

to positive 4450 prepaid and 9060 reseller adds for

the same period a year ago. I do anticipate healthy

growth in the future, today we are focused on adding

higher churn, to post paid subscribers. With lower

penetration in the markets overall, we have luxury

of growing the prepaid segment deliberately. Currently,

our prepaid accounts for only about 1.7% on the Dobson

subscriber base and 1% of American Cellular. We

do believe the new prepaid platform we are launching

with Boston Communications Group will reestablish

normal growth in the prepaid channel. We are anxious

to have the product that offers both roaming and competitive

pricing in the prepaid arena with margins that contribute

significantly to the business model. Without question,

we can successfully target credit challenged customers,

as well as those in businesses looking to budget or

control the cost of wireless service.

We anticipate having all the markets on prepaid platform

in the next three to four months. Consequently, strong

current growth on the post paid side and roll out of

the new prepaid product, we are confident we can continue

to grow our subscriber base at exceptional level throughout

the balance of the year. We are also following through

on initiatives to improve operating cost structure.

In the second quarter, we shut down customer contact

center in California and shifted service to the West

Coast customers to relocated Deluth, Minnesota center.

We announced our plan to close the Wasau, Wisconsin

customers and serve them at Deluth, as well. We

will complete that by August. We restructured corporate

marketing operations and information services departments.

We did adjust reporting structure and responsibility,

while reducing overall headcount in an effort to control

corporate overhead cost and better align the organization

to achieve operating goals for the year.

Our low 1.7% churn resulted from numerous initiatives

in the organizations. Throughout the year, we have

seen consistent improvement in key statistics that

measure our success and satisfy customers and retaining

their loyalty. From January to June, we have seen

improvement in service level, speed of answer, and

current 30-day receivables, while seeing decline in

our net write-offs. These achievements are outstanding

indicator of the excellence and focus of the people

on the Dobson team, including call center groups,

sales force in the field, engineering staff and everyone

here at the corporate office in Oklahoma City. With

that, I will hand over to Bruce Knooihuizen, our

chief financial officer.

Thank you.

Between the press release, Everett and Doug's comments,

you should have a good understanding. I will try

to limit my comments to other non-operating issues.

First, I would like to talk about American Cellular.

Because of current discussions with the banks, there

is a limit to what we can say at this time. As I

am sure you saw in the press release, American Cellular

is in violation of total leverage covenant. The press

release further explains certain rights the bank can

trigger. From operations standpoint, we are pleased

with the continued progress we have made with American

Cellular. Service revenue is up 16% over last year.

Roaming revenue is up 2%, despite the larger than

normal step down in rate. More encouraging is the

success of local service profitability efforts, which

as Everett mentioned, is key component to the 18%

growth in EBITDA in the first half of this year,

compared to last year.

Given the current situation, the banks have restricted

American's access to its credit line. However, as

of June 30, we have an excess of 4.7 million unrestricted

cash and (inaudible) restricted cash. The restricted

cash is restricted to pay interest on the bonds. Based

on our projections, we should have sufficient cash

on hand, along with cash generated through operations

to meet operating needs through the end of the year.

During this time, we hope to resolve this issue with

the banks and continue progress in operations we have

made so far. While we believe there is a workable

solution to all parties involved, we cannot give assurances

that one will be reached.

Because of the status of the conversations, we request

questions be limited to operations, only. Now, moving

to Dobson. As of the second quarter, Dobson Communications

has switched external auditor from Arthur Anderson

to kpmg. As part of kpmg's engagement, they have

reviewed second quarter and six month results, including

the first quarter results. That review encompassed

review of critical and significant accounting policies,

as well as a system of internal control.

Kpmg reviewed the process used by the company project,

as well as performing (inaudible). As a result

of their review, one item came up that required amendment

to the first quarter results. As part of the sale

of properties to Verizon Wireless, Dobson Communications

inadvertantly missed an entry for minority liability,

understating gain from the sale of assets by 7.1 million.

Therefore, the amended 10-Q filed this morning restated

first quarter earnings upward by the 7.1 million.

There is no cash impact from this adjustment.

We continue to take advantage of the strong operating

results to strengthen Dobson balance sheet. As noted

in the press release, cash position remains strong

at $243 million as of June 30. This does not include

additional $32 million held in various escrow and

positive accounts, which we expect to get back over

time. We reduced long-term debt by $31 million and

included the sale to Verizon Wireless by 240 million

year to date. In addition to our cash, we have access

to our credit line of approximately $118 million,

and $30 million for Dobson and suspect signet respectively.

Capital expenditures are in line with our guidance.

And as we have said previously, we expect to be free

cash flow positive for the year and in particular for

the last six months, generating sufficient cash flow

to cover interest payments, capex, debt amortization

and working capital needs. We have worked hard and

will continue to bring inventory levels down, improve

receivables and increase bad debt expense and write-offs.

Talking about our stock repurchase plan. Our stock

repurchase plan has been in place for a year. For

the second quarter of this year, we purchased approximately

$415,000 shares at average price of $1.50, bringing

total purchases to slightly more than $-4.2 million

shares. Finally, we committed at the beginning of

the year periodically review guidance and provide updates

to the business developed through the year. Now that

we are through seven months of the year, we feel good

about the guidance we gave at the beginning of the

year, with a couple of potential adjustments. First,

our company sales teams are meeting the objectives

we set for them. Agent distribution channels are

producing solid results.

However, reseller channel has not met production that

they produced last year. Our confidence in that channel

picking up the pace in the last half of the year is

low. Because of that, it will be a channel that hit

the low end of net addition guidance, thus, we are

revising expectations for the year from a range of

130 to 140,000 new additions to 120 to 130 proportionate

net adds. We lowered target on net adds, but are

pleased with progress on local profitability and our

ability to continue to grow minutes on the network. Progress

in each has led us to be highly confident we will be

at the top end of our EBITDA range or above and

again, our range originally was $338 million (inaudible)

proportionate EBITDA. At this point, I would

like the operator to assist us in taking questions.

Thank you. 00:36:19

Thank you. The question-and-answer

session will be conducted electronically. If you

would like to ask a question, press * 1 on your telephone

keypad. Once again, that is * 1. We will proceed

in the other you signal us and take as many questions

as time allows. We will pause a moment to assemble

the roster.

Our first question today will come from Ethan Schwartz.

One question. When you filed

the Cingular agreement, there were a couple of exhibits

you left out. Do any of those cover the termination

rights for you or Cingular, particularly if they are

merged or acquired by another company?

Dobson I don't know the answer to that off the top

of my head. I am sure there are certainly clauses

in the agreement with respect to change of control.

I don't know whether or not they actually terminate

or not.

Any chance I could call you

off line and see if we can go further with that?

Yeah, I think

we will want to disclose it to everyone. We will

research that and let you know.

Appreciate it. Thanks.

Our next question will come

from David Dejausey with Merrill Lynch.

Is there stat us on the dccl

loan?

No change since

the last time we reported. The loan was extended

through next March. There is a one-year option period

if a payment is made - or if payments are made throughout

the year to a certain level. There hasn't been update

or changes in the situation.

Okay. Thanks. C

Next is Andrew Gardener

with Lehman Brothers.

Good morning. Just wondering

if you could give us more detail on the new prepaid

offering you are going to roll out, specifically around

some of the provisions you may have, more sort of new

features you may have that you think will maintain

churn at such a good level given the problems the other

carriers have seen with similar products. Thank you.

First, I don't

want to speak, churn will be low. The churn aspect

of prepaid by design will be higher than post paid.

I don't think our platform will be a lot different.

Our growth and focus because first off - the ability

for us to make money is better. Secondarily, what

it offers the consumer is stronger than in the past.

You have the ability to roam to preferred networks,

not everywhere, but preferred networks, which is (inaudible)

to consumers in the market we are launching this

in, that are in metropolitan areas they travel to on

evening, weekends and for work. The rate is in line

with the national player on prepaid. It has been

a product that we really have not sold a whole lot

of because of the platforms we have been on. Now

that we are getting to one, we think we have something

- consumer acceptance will be higher on and our ability

to make I margin is better.

Now, customer behavior will remain, but when we don't

get a contract, you will see higher churn.

One of the key elements

in this prepaid package from an economic standpoint

- one reason that churn is perhaps not quite as critical

as in the post paid, we do plan in recovering upfront

marketing cost on this plan at the time of sale. So,

that allows us as we go forward to be profitable in

this plan.

thank you.

Next, we will hear from Todd

Rickmyer with Bear Stearns.

It is (inaudible) silver on the

line. Three quick numbers. First of all, can you

give us blended churn for both acc and tcc? Also,

we didn't get a balance sheet. Could we get DSOs

over the year and (inaudible) per subscriber?

Blended

churn was 1.7% on proportionate basis. Each entity

was 1.7 for the quarter, very consistent. In terms

of minutes of use, again, we are averaging little over

200 minutes per use by our subscribers, minutes used

by our subscribers on our networks, as well as when

they roam outside the network. The last item was

days sales outstanding, just accounts receivables numbers.

Our accounts receivable, we have over 90% of our

accounts receivables are current or 30 days.

Okay. Thank you.

Next we will hear from Dominick

(inaudible) with Capital.

Can I have outstanding on

(inaudible) Signet and American Cell, please?

Sure. In terms

of dock bank debt 486 million. Signet, 296 million.

And American is $916 million outstanding. That

is bank debt.

Thank you.

Our next question comes from

Gregory Lundberg with Morgan Stanley.

Good morning. Bruce, could

we have the Dobson leverage covenant and bank calculation

for the quarter?

Dobson?

Sure. Hold on for a second.

As Bruce mentioned,

it is about 4.5 covenant. The requirement is 6.5,

I am sorry. The requirement is 6.5.

Okay. 1.7% churn is by far

the best result in several quarters. Is there anything

in particular you have done to bring it down by so

many basis points? Not just over time, but sequentially,

as well?

I appreciate you

noticing. I don't know that I would comment it was

one thing. It is a multitude of things. Certainly

by us launching our on-network national plan, we have

been received well. If you go out and look at the

way our customer contact centers are functioning today,

we have reduced the size of them over time and continue

to do that (inaudible) closing this month. So,

we have fewer centers to manage. The people in there,

I think we wound up keeping phenomenal people and

they are doing a good job. The process is in place

and it is about taking calls and listening to customers

and finding out their issues and resolving them. Over

the past few quarters, we have done a good job of focusing

on that. That is our objective and I hope to continue

going forward.

Lastly, are you open to asset

sales similar to Verizon moving throughout the year?

We are not pursuing

asset sales at this time. In this environment, we

like everything we own today. We don't see any really

compelling reason to pursue that strategy right now.

Thank you.

(inaudible) has a question.

Good morning, guys. Couple

of number questions and then I guess maybe one or

two big picture questions. I don't know if you provided

guidance on the roaming revenue for both Dobson and

American Cellular for the year?

We said

it would be basically flat for the year, maybe a slight

gain on year over year basis, but essentially flat.

Going forward, I know you

haven't talked about '03, but you have seen I guess

the first impact of the step down on the Cingular

side. Minutes are picking up nicely '03 versus '02.

Could you provide numbers there?

We are not prepared

to discuss our view on '03. We do have rate step

down throughout this year and into next year, at which

time we expect rates to stabilize for several years,

frankly. Obviously, if we were MOU growth in the

outer year, we expect to see revenue growth.

Okay. Similar numbers to

'02? The three numbers will probably be flattish kind of

compared to '02?

Yeah, and

if you look at the numbers, that is pretty consistent

with what we have seen.

Obviously, when

we get closer, we will be more specific on that. At

this time, we will not give guidance on '03.

'03, we are

not ready to.

Fair enough. On the balance

sheet, sticking with Dobson, you have some cash on

hand on books. And you have looks like (inaudible)

free cash flow. I mean, any type of - interest in

taking down some of the debt that (inaudible) with

stress levels? Are you allowed to do that under

bank covenance?

We have

the ability to do that. Obviously, we look at all

our options. But, cash is very important to us at

this point in time. But, we always look at all

opportunities.

Okay. Then, going back to

American Cellular. I know that you said you are

not prepared to really give a lot of more information,

but I mean, first of all, what is the tax basis for

that investment?

Our?

Right.

Roughly

$400 million.

Right. But you are not taxpayers

and if you cut the cord, you will not receive tax benefit,

other than building up nol.

We will

have a capital loss.

But, no real cash benefits

for the foreseeable future?

The cap

loss can be used to offset upon Verizon properties

we had capital gains on.

All right. And the worst

case scenario the banks are not accommodated and given

the fact American Cellular's situation obviously

changed the stock and the debt of Dobson and Signet.

I mean, are you prepared to say this is it? It

is what it is and just walk away?

The answer

is yes. We view the American Cellular debt as nonrecourse.

We expect to see a workable solution. But, if

it is not a solution that makes sense for us and our

shareholders and our stakeholders, including bond holders

with Dobson Communications, then it is not something

we will pursue.

Okay. All right. Thank

you.

If you would like to ask

a question, press * 1 on your telephone keypad. Next,

we will hear from Sammy Lang with Bear Stearns.

Good morning. I am wondering

if you can update us on the status of the GSM overlay

and I guess related to that, I know you are not giving

guidance on '03, but one pier for U.S. cellular says

capex would definitely not be higher than 2002. Can

you give us similar color?

Sure. I think

we previously had said our plans are to roll out GSM

virtually throughout our entire footprint and all of

our markets. We further suggested that we would begin

in the second half of the year. The build for GSM

in limited locations is ongoing. We expect to have

some markets up by year-end. I don't know if we are

prepared to disclose for competitive reasons just yet

where those are. As to next year's capex, we have

not finalized plans for next year, but I don't know

we are prepared to say it will go down. I think a

lot - most of the GSM capital will be deployed

throughout next year. So, that is roughly $10 per

pop as we disclosed for initial deployment and $50

million in total counting American Cellular for edge.

So, somewhat depends upon when edge is deployed and

how much we get done next year.

What do you think will affect

your decision on the speed of deployment of edge?

Is this necessary over the next couple of years?

It is anyone's guess

as to edge. My personal view, it is the component

of GSM that frankly will allow us to offer competitive

products, not that gprs is not competitive. But,

I believe the consumer will really value the what

edge brings to the equation here.

In terms of timing for edge, it is dependent

upon a, our wholesale business, and b, the devices

available for edge. So, we are not going to obviously

deploy capital without some rationally business case

to be made. (inaudible) edge will be widely accepted

worldwide accepted component of GSM. We will add

a lot of customer benefiting features that we will

like to deploy and will want to deploy.

Would it detract from voice

capacity at all?

Not really. Frankly,

I think if you look at Dobson Communications, you

start with the understanding that we have tremendous

amount of spectrum, the 25 MHz we have and predominantly

rural America is a lot of spectrum for all of our

needs, including overlay and adds of edge.

Thanks. That is helpful.

One quick question. What was your roaming MOU

at Dobson up year over year in terms of minutes?

In terms of MOU

growth in second quarter at Dobson and End Cell,

I think I gave that in my talk, but I don't - 34%

at Dobson and 44% at End Cell. Is that correct?

MOU growth from second quarter to second quarter.

Great. Thank you very much.

At this time, we have no

further questions in the queue. I will turn back

to Everett Dobson for closing remarks.

Great. Once

again, it has been our practice to disclose as much

as anyone. We believe that disclosure fully disclosing

on what is somewhat a complicated capital structure

is important. We obviously are sensitive to certain

issues, but feel free to call with questions. We

have a team here that can answer them. I will sign

off and tell you thank you very much.

That concludes today's conference

call. Thank you for joining us today.