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.