AT&T Inc (T) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to the Dobson Communications second-quarter 2004 earnings results conference call.

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Mr. Warren Henry, Vice President of Investor Relations.

Please go ahead, sir.

Thank you and good morning.

Today's conference call will contain forward-looking statements 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 2004.

Such statements are subject to a variety of risks and uncertainties, and actual results may differ materially from those projected.

We discuss the risk factors that could impact the Company's overall business and performance in more detail in our reports filed with the Securities and Exchange Commission.

Given these concerns, investors and analysts should not place undue reliance on forward-looking statements.

Once again, this quarter our financial presentation as explained in yesterday's press release and 10-Q is affected by the June 2003 acquisition of the two new properties in Alaska, the August 2003 acquisition of American Cellular, the mid-February 2004 acquisition of Michigan RSA 5 and the acquisition on June 17th of NPI.

Results of these acquired properties are included in our numbers only from the date of acquisition unless otherwise specified in our comments.

With that, I would like to turn the call over to Everett Dobson, President, CEO and Chairman of Dobson Communications.

Welcome to the Dobson Communications second-quarter earnings conference call.

In addition to discussing the most recent quarter, we are also taking this opportunity to update guidance for the remainder of 2004.

Our objective at Dobson Communications is to be the premier regional wireless provider in the U.S..

As we began to analyze our 2004 performance, there are many things that I believe are exceptional in nature and some things that I would call work in progress.

In some areas, there is much work to be done, but rest assured the team at Dobson Communications will not accept anything less than best-in-class.

In analyzing the first half of 2004 against our expectation we outlined in February, we have not yet delivered on our expectation that ARPU would trend upward compared to '03.

However, I remain committed to and convinced it well.

In the first half, we did not see growth adds that we expected; however, the trend towards the end of the second quarter is very encouraging.

On the cost side, our earlier forecasts developed in two primary areas.

First, we underestimated the demand of our GSM product to our existing TDMA-base.

As a result, upgrades where subscribers find a new contract in exchange for a subsidy handset went from an average of approximately 90,000 per quarter to 125,000 when we launched GSM in the second quarter.

But as we have said in the past, (inaudible) subscribers are higher ARPUs subs for us, and therefore, we're pleased by this occurrence for future results, although disappointed with the cash expense impact near-term.

Secondly, we made a conscious decision to increase advertising spending in the second quarter by an additional 3 million.

This is more of a tactical marketing decision as we launched GSM to announce to the marketplace that we have something very good to talk about.

I have said in the past that ARPU is the single biggest upside for the company.

It has also been our biggest challenge in recent quarters.

I will refer to Doug's comments later on many of the ethics, but let me say that we are in the midst of a multi-prong comprehensive plan to improve ARPU.

On the positive side, we completed our GSM launch throughout all of our markets, and more recently we have completed our EDGE software upgrade throughout as well.

And more importantly, we're beginning to realize some of the benefits of our new GSM network in the form of increasing sales and migration.

Additionally roaming minutes in the first half were in line with our expectations, and thus far in the third quarter, we remain on plan.

However, in the near-term, roaming remains somewhat volatile.

Uncertainty surrounding AWE subscriber growth, GSM migration, as well as the merger itself are somewhat difficult to gauge.

Long-term I do believe that it will become a much more predictable revenue source.

Earlier I said I want to be the premier regional wireless provider.

We don't believe that happens without significant and continuous product development.

We detailed many of these products in our February investor meeting, such as Phone in a Box for Ebo, Blackberry devices, merge products, a hands-free base and many more that we have launched or will launch.

In terms of guidance for the remainder of 2004, we are forecasting based in large part on the realities of many of the trends that we saw in the first half. (inaudible) is to understand our near and long-term objective.

It is never easy to summarize any business in a few sentence, but if I could, it would be at we are first and foremost focused on increasing ARPU.

We have invested heavily in a new network and GSM technology, a new billing system, superior customer service, new products and lower off net roaming expense.

We believe our value proposition has been raised and should deliver more revenues per subscriber.

And as we saw in the second quarter, if necessary we will increase advertising dollars to deliver our message.

As you look at our second-half guidance for churn in net adds, you'll see it is somewhat more conservative than before, which is in some part a function of our implementation of the aggressive push for higher ARPU.

Dobson Communications is over 14 percent penetrated, which is higher than our peer group and most of the national operators.

However, we receive less for our products.

Our ARPU is $40.

The industry average is closer to 50.

We do have over 1.6 million subscribers.

For every dollar improvement, that would translate (inaudible) of almost 20 million in annualized revenue, and with our recent investments, we believe our business is capable right now, and therefore, revenue growth should translate into earnings growth.

And now I would like to touch on a final few topics.

First, let me give you a brief update on the agreement surrounding the AT&T Cingular transaction.

First of all, we have nothing new to announce.

To remind everyone, we have the right to buy at fair market value from Cingular certain assets where we currently compete with Cingular.

Additionally we have (technical difficulty)-- roaming agreements with AT&T and Cingular, and therefore, an opportunity exists to combine all agreements into one.

As you would expect, I cannot comment on the specifics of the discussion, but I will point out we would like to reach a new deal, but unlike some other recently announced Cingular deals, we are not under any time line that is driven by the merger itself.

If it happens after the merger and it is mutually beneficial, that is okay as well.

Finally, I would point out as a significant shareholder I, too, am disappointed with the lack of progress in increasing the ARPU thus far.

I have asked Doug to be very specific about our initiatives in that area.

On increased costs associated with faster migrations from TDMA-to-GSM, I think that is a good thing.

However, we are analyzing the feasibility of decreasing the cash subsidies we currently pay for in migration, which would in turn either slow it down or reduce the cash expenses associated with it.

And now I will turn it over to Doug Stephens.

Thank you, Everett, and good morning.

This morning I want to focus the bulk of my comments around ARPU to help you understand our current results and to share the initiatives that we have implemented to improve this metric for the balance of 2004 and beyond.

First of all, the weakness in ARPU in the first half of the year and the revision of ARPU guidance related primarily to reduced overage charges on TDMA plans, an increase of approximately $1.00 per month per subscriber in credits and rebates, which reflected us responding to heightened competition at WLNP, a higher percentage of growth adds to the reseller channel, and an increased sale of partner plans.

The total ARPU of $40.03 for the second quarter compared with $38.83 for the first quarter of the year a year ago, so we are moving the number in the right direction, and we expect that trend to continue based on the following.

First, we're continuing to experience a higher level of GSM sales as a percentage of total gross adds and higher migrations than had been anticipated.

GSM accounted for 53 percent of postpaid gross adds in the second quarter, and Alaska did not start selling GSM until July.

In terms of migrations, we migrated 68,700 TDMA customers to GSM in the second quarter, an average of about 22,900 per month.

As we've said, migrations continue to run at a higher pace than plan.

I'm sorry.

I have a mix-up slip here and I apologize.

But they are running higher than planned, but we do expect them to come back in line.

We are reviewing that right now, and we are going to be restricting who qualifies potentially in the future based on what we find out through this analysis as Everett talked about.

As we said last quarter, we expect to see a $5.00 to $6.00 increase in ARPU in postpaid GSM calling plans compared with postpaid GMA.

Promotion for some of the early doctors diluted the ARPU effect initially, but these will expire during the third quarter.

Second, we expect ARPU to continue improving due to changes in the pricing structure that we've implemented for TDMA plan.

We have initiated TDMA price increases to encourage higher GSM sales and to improve TDMA ARPU for those who still achieve the Legacy technology.

We have discontinued TDMA plans with a monthly recurring charge or MRC less than $40, raised MRC for partner plans and virtually eliminated TDMA promotions.

Third, we are implementing an increase in regulatory fees from an average of $1.10 per sub to $1.75 per subscriber per month to fund federally mandated programs like E911, WLNP and others.

This brings us in line with other wireless providers.

Fourth, we are currently analyzing our existing TDMA customer base to identify (inaudible) ARPU subscribers with plans to migrate them upward or to possibly initiate price increases.

We have modified our commission instruction and calling plans to properly motivate the sales team and customers toward much higher ARPU plans.

And last but certainly not least, we will be launching our enhanced data offering later this quarter, which will result in the data revenue stream becoming a more significant factor.

As noted, we added a large number of GSM customers in June, and at about the same time, the early customers who took the data package started to run out of their initial two-month free window.

Currently we began to see some data revenue flowing through in the last month of the quarter.

With these and other programs, we expect sequential quarter-over-quarter ARPU increases to continue for the balance of 2004, and in addition, in the fourth quarter, we also expect ARPU to be positive on a year-over-year basis and for this positive year-over-year comp to continue into 2005.

As discussed on the first-quarter conference call, we did increase our advertising spending about $3 million in the second quarter to announce our entry into the GSM arena.

We did see traction increasing throughout the quarter.

Our store traffic is (inaudible) sales with April total gross adds at about 30,000, May at about 35,000 and June at 42,000 gross adds.

Specifically on postpaid gross adds, we saw a 25 percent increase in postpaid gross adds in the June/July period compared to the run-rate for mid-April through May.

Spending is now back to more historical levels, and we are working with our advertising agencies to determine if and when we may want to improve advertising spending again later this year.

Now to discuss some new products.

As planned, we did launch our new Ebo Phone in a Box product and MERGE LANline replacement product in the second quarter.

We were the exclusive launch partner for MERGE when it rolled out in May.

The bulk of our new products will be rolled out in the third quarter.

We plan to launch our Wildseed identity handset, which is aimed primarily at the youth market and EDGE PC card in the next 30 days.

We are in trial today with 10 different customer accounts on the Blackberry product, and assuming the customer experience continues as it is currently going, we do plan to go commercial at launch on or about October 1st.

We signed a new agreement with InfoSpace, which provides Cingular's enhanced data platform, and through this agreement, we will have access to handset initiated downloads, games and (inaudible), and Yahoo! instant messaging, along with a host of other on-demand services.

On WLNP, we continue to see our port-out outpacing our port-in post the May 24 implementation but at a declining rate.

Obviously with 1.7 percent postpaid churn for the quarter, WLNP's impact was not dramatic (technical difficulty)-- although (technical difficulty)--.

Next I would like to note our progress in Alaska.

We did complete the GSM overlay in the second quarter as planned.

We launched in (technical difficulty)-- GPRS, EDGE and we've announced a media distribution agreement with GCI, the largest telecommunications company in the state.

This launch allowed GCI to actively grow its subscriber base through full (inaudible) customer-care integration of our platforms.

GCI is threaded to a much greater emphasis on bundling wireless with the rest of its products, wireline, long distance Internet and cable television.

Obviously the agreement should enable us to grow our subscriber base in Alaska much more rapidly.

In conclusion, as Everett stated, our primary emphasis remains on increasing ARPU.

New products, pricing changes, advertising focus, all of these strategic initiatives are higher focus on ARPU, and I look forward to reporting further progress on the next conference call.

With that, I will turn the call over to Bruce Knooihuizen.

Thanks, Doug.

There are a couple of topics I would like to cover this morning, primarily focusing on what we have accomplished in the first-half of the year and how it affects the second-half.

Doug spent some time discussing our plans and initiatives for local service revenue ARPU enhancement, so I will spend most of my time discussing expenses.

In addition to walking through guidance, I will also talk about capital expenditures for the year, our balance sheet initiatives and the second quarter and finally our free cash flow position, including what we expect for the second-half of the year.

For the first-half of the year, we produced 168.8 million of EBITDA.

This was on a total revenue of 468.2 million and operating expenses of 317.3 million.

The first-half results only include the NPI transaction from the date of closing, which was June 17.

As compared to our regional guidance, two line items emerged in the first-half of the year which will have revised targets for the second-half.

They are local service revenue and sign and equipment costs.

The first item, local service revenue, has been impacted by lower net adds and ARPU.

Doug has gone through the steps we have taken to improve this item, but there is a carryover effect from the first-half of the year to the second.

The second item, selling and equipment costs, also have two components that we have budgeted continuing into the second-half of the year.

These are higher advertising costs and higher volume of customers migrating from TDMA to GSM.

We have projected a range of EBITDA of 166 million to 176 million in the second-half of this year.

This is based on total revenue of 530 million to 535 million and total operating expenses 360 million to 365 million.

Let me go through some detail.

Roaming minutes are used for approximately 360 minutes for the quarter.

This was up slightly as compared to the MOUs in the second quarter of 2003 on a pro forma basis.

The roaming yield in the quarter was about 14 cents, consistent with our contractual reductions.

Our guidance for yield as discussed in our February investor conference was 13.9 cents.

Based on our new expectations for carrier mix, along with revisions to contracted rates with certain smaller carriers, we expect that the yield for the second-half 2004 will be closer to 13.6 cents, resulting in a yield for the full year of 2004 of 13.8 cents, which is substantially in line with our full-year 2004 expectations.

Cost of service in the second quarter of this year was 62 million, bringing the total cost of service for the first-half of '04 to 116.2 million.

Cost of service in this quarter was up from the first quarter, primarily as a result of increased network cost from the deployment of GSM and EDGE and the addition of 58 sales sites to the network.

Q1 of this year was also positively affected by onetime credits received from certain network costs.

In the second-half of '04, we expect cost of service to increase from the second-quarter '04 run-rate by approximately 10 to 13 percent or 12 to 16 million from the last half of the year.

Much of this increase is from the inclusion of NPI for the entire second-half of '04.

NPI will add approximately 6 million in internal cost service over the last six months.

In-collect expense, which was approximately $4.30 per sub in the first-half of '04, will increase seasonally in the second-half of '04, which should result in an increase in in-collect expense in the second-half of '04 of 4 to 5 million.

Lastly, networking expenses will increase 4 to 6 million in the second-half of '04 as we completed the EDGE overlay and site build.

In our February investors conference, we stated that we expected cost of service to achieve low single digit improvement over the $13.90 per month per subscriber we experienced in 2003.

Included in our second-half forecast, the cost of service per subscriber per month will come in at a range of $13.23 to $13.44 for the year, consistent with our February guidance.

General and administrative expenses in the second quarter of '04 was $43.1 million.

In the second-half of '04, G&A expense will increase very modestly from the first-half '04 due primarily to incremental subscribers added in the NPI acquisition and increased bad debt expense resulting from the increased level of revenue.

Our original expectation for G&A cost was that these costs per sub would increase 5 to 10 percent in 2004 from the $8.60 per month per sub we saw in 2003.

We continue to expect the 2004 full-year results to be in line with our original expectations at approximately $9.25 per subscriber or an increase of 7.5 percent over the 2003 level.

Marketing and selling expenses in Q2 '04 was 33.8 million.

This is up from the first quarter, primarily due to increase in advertising expense as both Doug and Everett mentioned the $3 million.

We expect to spend similar levels on advertising in the second-half of the year as we did in the first-half.

Other selling expenses will track with the gross add activity.

Net equipment cost for the second quarter of '04 was $16 million.

Post and pre-paid gross adds increased slightly in the second quarter, but the big increase in equipment costs was driven by the increase in upgrade transactions.

In the second quarter of '04, we did approximately 125,000 equipment upgrade transactions versus approximately 90,000 in the first quarter.

Costs related to upgrades has increased as a result of this increased demand for our GSM product and the existing TDMA subscriber base.

However, we have seen a slight decline in the net cost per handset in the second quarter as we continue to negotiate for lower-priced handsets to help manage this cost.

As discussed earlier, we are also evaluated our policy per handset pricing associated with these migrations that could slow the volume or reduce the subsidy per transaction.

That being said, we are expecting upgrades in the second-half of '04 to increase slightly from the level we have experienced in the second quarter of '04.

However, we are also expecting a slight reduction in our net loss per handset transaction for both upgrades as well as gross adds.

As a result of all of this, we expect net equipment costs in the second-half of '04 to increase marginally from what we saw in the second quarter of '04.

Moving on to capital expenditures, we incurred 37.6 million at ECS and 10.9 million at American Cellular in the second quarter for a total of $48.5 million.

This translates to 88.9 million spent year-to-date.

In the quarter, an additional 58 (inaudible) cell sites were churned up for commercial service, bringing Dobson Communications' total cell sites up to 2243.

This total includes cell sites required in the NPI transaction.

For the balance of the year, we expect to build additional cell sites, increase our switching capacities, comply with SEC mandates such as E911, improving and upgrading the NPI network, as well as system and retail store improvement.

The completion of these items will bring our total capital expenditures to our previously guided level of 140 million.

On the balance sheet, in the second quarter, Dobson used 12.8 million of its cash to purchase 18.2 million face value for its 12.25 percent and 13 percent secured stock securities.

Since the end of the quarter, Dobson has purchased an additional 6 million of the 13 percent for 4.5 million.

Through these purchases, Dobson will save approximately 3 million in dividend payments annually.

Finally, Dobson ended the quarter with 99.6 million in cash on its balance sheet.

For the quarter, the Company used approximately 42 million of its cash primarily to meet operating cash needs of 23 million and to fund its open market purchases.

Operating cash requirements were primarily cash interest and dividends of 39.9 million.

Cash capital expenditures of 50.6 million and increased working capital needs of 17.7 million.

In the case of working capital needs, in addition to the normal seasonal working capital increases, the Company experienced a $6 million increase in inventory for the GSM rollout, 4 million in roaming receivables due to GSM roaming processing, and 4 million in prepaid insurance costs.

In the quarter, DCS also borrowed 28 million on its revolver to fund the NPI acquisition.

For the second-half of the year, Dobson expects to be free cash flow breakeven.

Major uses of its cash flow include cash capital expenditures of approximately 59 million, cash interest and 12.25 and 13 percent preferred dividend of 118 million offset by a positive working capital requirement of approximately 9 million.

Items that could affect the cash position include EBITDA variances, the timing of capital expenditure payments and preferred stock dividend payments.

Bank covenants will be tight for the remainder of the year.

We have a variety of alternatives, including using our cash on the balance sheet, negotiating additional flexibility with the bank, as well as other alternatives.

We will continue to monitor the situation and take appropriate action if and when necessary.

Thank you for your time.

I would now like to turn the call back to the operator for any questions.

(OPERATOR INSTRUCTIONS).

Sandy Liang, Bear Stearns.

I wanted to ask a couple of questions about GSM.

What is the incremental cost for migration?

I understand it would be the handset subsidy, but what are you budgeting in terms of to migrate a TDMA customer to GSM, what does that cost you?

And in the past, you talked about an incremental $6.00 ARPU from GSM customers, and I heard Doug say something about early adopters, but I did not catch what the comment was.

But at the current rate through the end of 2005, do you think that a year from now those new GSM customers will still give you an additional $6.00?

Let me answer the first question regarding the cost of migrating customers.

To migrate an existing TDMA customer to GSM is primarily the subsidy on the handset.

In the second quarter, that was approximately $85 per subscriber.

As we go forward, we assumed that that number will come down slightly, but it is going to be in that range.

And on the second part of that question specifically, as I have found my notes and got things straightened out, I apologize for not making it clear on the call.

But what we had -- when we initially launched GSM in select markets, we came out with a promotion on GSM.

It has now been stopped, but the promotion was a $25 credit for four months.

Now that goes away throughout the third quarter, but what it did have there is an impact of about 30,000 customers that would see that promotion.

So at the end of the day with that promotion out of the way, we do, in fact, see the results being the desired results and delivering us that five to six months that we talked about back in the February time line.

And is this $5.00 to $6.00 -- I mean I guess your data product is kind of relatively immature.

With additional offerings with EDGE and so, do you expect that to be constant over the next year?

What kind of trends are you seeing in those GSM customers?

It is hard to say on the data right now because our -- we are so new into it.

And the end game, which is the new product coming out and what we are testing the 23rd of this month going to launch on September 15th was the new enhanced product.

But I think to your point there is some upside in data.

So I think when we look at that $5.00 to $6.00, I think that is a solid number for GSM, and there are other things out there that may help us meet or beat that number.

Okay.

I am sorry.

Just one more quick one.

What was the total leverage at the end of the second quarter as calculated for the purposes of the bond total leverage covenants?

It was about 7.2 times.

Phil Cusick, Bear Stearns.

I wonder if you could talk a little bit about the unlimited plans out there, the percent of the new GSM adds on unlimited plans?

The percent of the unlimited plans --

Or the percent of GSM subs today on the base on unlimited plans?

It would be of the total unlimited plans, of the total GSM plans, we have about -- in the 30 to 40 percent range on the unlimited plan.

Okay and also I noticed the postpaid churn guidance really looking for an uptick in the second-half from 1.7 percent this quarter.

Is that WLNP related, or is there something else going on there?

Great question.

It is twofold.

Certainly WLNP plays a role in that.

It does pick it up a little bit.

I would also add that with the initiatives that we are putting in place with our focus on ARPU companywide we are going to be doing a host of things that will have we think a very positive impact on churn but may have a slightly -- a positive effect on ARPU but may have a slightly negative impact on churn.

So it is a combination of WLNP and initiatives that we are putting in to strengthen ARPU.

So that sounds like you are going to go out and find the low ARPU subs and either raise their prices or force them onto a new plan.

We are certainly going to look at that, and I would add that we won't do anything globally.

What we're going to do is go out and move some -- we are going to entice customers to move to different rate plans certainly.

As far as forced migration, you get into a fairly scary program.

Those customers are paid for, and we don't want to do anything to upset the base.

But we do believe that there is opportunity where we sit in ARPU right now to move a select portion of our base to different rate plans.

Then one more quickly.

What was your overall minute usage level in the second quarter?

Hold on one second.

In the second quarter, our full customer MOUs per sub per month was about 460 to 470 minutes.

Steve Flynn, Morgan Stanley.

I was wondering if you guys could comment a little bit about your view of the Company's liquidity?

I guess I was a little bit concerned by the fact that in June your board authorized you to utilize $50 million to repurchase preferred securities; however, you stated that you believe you will likely be in violation of your apparent leverage test under the DCS credit facility.

Can you talk about what you're thinking about with recruiting going forward, and with about $32 million of capacity left under that $50 million authorization, do you plan to utilize that liquidity?

Do you think that would be an appropriate use of capital?

In terms of a liquidity standpoint, obviously for us the important thing is to meet our covenant commitments.

So obviously that will influence it and when and if we use any of the additional money to buy back preferred securities.

The board had authorized 50 million, but obviously we did not come close to spending the 50 million to date.

And as I said, our focus is on paying covenants and ensuring that we can meet those or get the flexibility from those if we need to.

I would like to make one point of clarification.

Earlier Sandy asked about our leverage at our Dobson Communications Systems, including the bond and he gave a 7.2 times multiple.

That is through the PIC.

If you back up the PICs on a net debt basis and just look at the debt through the bonds and adoption side, it is closer to 5.8 times.

Okay.

As a follow-up, how much do you think you'll have to reduce your senior note balance to maintain a compliance at the DCS covenant by the end of the year if you do not receive a waiver?

Well, obviously that depends on where the cash flow comes in, but it could be up to 50 or 60 million based on the projections that we cited, and obviously it could be a lot less if we do better.

The big factor in that describing it is the EBITDA that we've produced in the second-half of the year.

Okay.

Just a separate question.

Can you talk a little bit -- you talked a little bit about CapEx, but if you can give us an idea in the beginning of the year you talked about CapEx of $100 to $140 million this year.

It looks like you're going to be at the high-end of that range.

However, your roaming minutes of use and your retail subscribers are a lot lower than you expected in the beginning of the year.

Can you give us a little bit more color on why CapEx is still at the high-end of the range even though a lot of the volumes are lower than expected?

Can you talk about what some of the drivers are there?

Sure.

Again the range we gave you was from 110 to 140.

A significant portion of that was spent to upgrade our system to GSM and EDGE, and a big part of that was also the planned expenditures on the NPI acquisition.

It did meet federally mandated programs such as E- 911.

When we look at the network, one of the keys that each year from all customers and all conference calls is the need to continually improve the network, to ensure that we don't get dropped calls above acceptable levels, that we keep clear lines so people can get through, and we are still sharing that with customers.

So we feel it is important for us to stay with the network bill plan at the upper end that we had expected to spend at the beginning of the year.

Now obviously the year it is not over.

We will review that and review each month on what we expect to plan.

But I think for purposes of planning for this audience, we should expect us to spend the full 140.

Now whether we do spend the 140 by the year-end will be determined over the next few months on what we are seeing in the marketplace.

But there are a lot of costs associated with just making sure that on network is as good as it needs to be based on the customer demand.

Okay, thanks.

Ethan Schwartz, CRT Capital Group.

First question, you mentioned a $85 subsidy.

I think you meant -- you said per sub, but I think you meant per GSM migrate or new GSM customer.

What is the subsidy for TDMA customers who are simply changing handsets?

You're right.

The $85 was per subscriber who migrates.

The TDMA numbers would be a little less than that.

What is our adverse subsidy on that? (multiple speakers).

In the low 80s, high 70s, in that area.

Not significantly different but a little bit lower.

What percentage of the basic is on GSM right now again?

It is roughly 10 percent.

And I realize that you're going to be eliminating some of the price packages that you were granting to new GSM customers, but prior to that elimination, what was the average ARPU of the new GSM customers?

Without the promotions in there, it was right at the $50, and again that is with very little data also.

And --

Just so we are clear, we're not eliminating the GSM rate plans.

What we're doing is eliminating the promotion that we have put on some of those rate plans.

The rate plan strategy we are very comfortable with.

We like the adopter on GSM.

We just want to make sure that we don't make the offer.

We don't need to put the promotion at rest.

We are growing just fine without that.

Since we pulled that, which has been effectively a month or two, we have not seen a reduction necessarily at all in gross adds.

So we just adjusted the offer that we had in the marketplace.

Okay.

TDMA ARPU, how does that change for customers who migrate to a new not -- not to migrate but who swap to new handsets?

Do you get any bump on that, or are you basically just taking them back in at the same ARPU?

I will answer that a couple of ways.

First, certainly some of the early TDMA customers -- this is some of the dynamics of what has happened.

Some of the early TDMA customers who had moved to GSM were the higher TDMA customers.

Obviously that is both low and high-end customers.

The people that most need and desire GSM are typically your higher end customers.

So the early phases you don't win as much as you do as you get deeper into the base.

So we will see that become much more apparent.

As we move through and get a higher percent on GSM, we are going to see -- we will get a lot bigger impact from those lower TDMA customers that come up to GSM.

Let me ask you a conceptual question.

You had about 120,000 upgrades in quarter and something more than half of those were GSM.

But that is still a pretty significant proportion that are just switching from one TDMA phone to another.

What kind of competitive pressures are forcing you to subsidize those people with the new TDMA handsets?

Do they have options in those markets?

Why are they not moving to GSM when they switch handsets?

That is a great question.

First, I would say that Alaska is certainly a big piece of that.

Alaska did not (technical difficulty)-- TDMA throughout the second quarter.

So take Alaska out and assume that that number is going to change dramatically, but there are some pockets where there are no neighboring -- in some categories neighboring roaming partners today on GSM.

Those areas I think will be corrected over time, but in today's environment there are few areas where the TDMA offer allows them to roam to neighboring areas and GSM products do not.

I guess my question is why do you even have to grant these people a new phone?

In other words, if they have no choices for roaming, they basically have to stay on TDMA.

Why do you have to even incur any subsidy to keep them on a TDMA plan?

I guess some of it would come from lost and broken handsets.

We certainly are not stimulating anyone to move from TDMA to TDMA.

The only reason that we would do that is, first off, we are giving them a two-year contract on that, so that is the upside.

There is no motivation for the base to go out there and say, boy, let's try to get somebody to move to TDMA and take a handset subsidy.

We want to do everything we can companywide to move them into GSM.

But if they come in and they are out of contract and they need a new handset and all we have to offer them in that specific market that is competitive is TDMA, unfortunately we are forced to put them into that product.

But I do think that will drop-off substantially over the next couple of quarters.

I mean it already has.

Understand Alaska was the biggest piece of what we saw, and we are going to see some of these other pockets get filled in around them, and it will continually get better.

We will continually make it less attractive to migrate from TDMA to TDMA, and as we talked about, we are also going to make it slightly less attractive to move into migrate the GSM.

We think that there is an opportunity for us to take less of a subsidy and still have the same impact on the marketplace.

And can you give us any update -- and maybe this has not changed since your presentation -- by POPs or by subscribers what your total overlap will be with the new AT&T Cingular once that deal closes?

You talked about high 40 percent range.

Is that still sort of where it is or any clarity on that?

I don't happen to have the specific percentage of POPs.

It was in our investors conference presentation that we gave in February.

I think we gave one presentation subsequent to that.

Thanks very much.

Warren is telling me it's about 3.8 million POPs.

That will be 11.5. (multiple speakers)

Adam Tuckman, Golden Tree.

I heard Bruce answer Steve's earlier question regarding the board's process and what is required as it relates to paying preferred dividends and buying back preferreds, and I am not sure I really heard the answer.

So I'm trying to understand with two revisions to guidance and a few quarters of under-whelming results, why you guys decided to pay the preferred dividends and buy back preferreds and what goes into the decision process at this point with the board to make the same decision going forward?

And I guess the second question would be for Everett and it relates to your confidence in the business and the ability to turn and how convinced you are.

And I'm just wondering what are the couple of data points that you're looking at that you think are material to having that thought?

Let me address the first question again, and that is the decision-making process on the preferreds.

What we go through is an analysis of our cash position, an analysis of returns on investment, and we go through an analysis of our liquidity position at the time the board gave us authorization to spend 50 million.

Now we have spent significantly less than that because of our continued analysis from the changing environment associated with all three of those factors, and that is where we stand today on those acquisitions.

Okay.

It is it that you feel as though you have had less foresight into what is up ahead and that is why you have shaved back from the $50 million that was allocated for this purpose?

Have there been certain trends that have changed?

No, I think when we look at price of securities, when we look at our overall liquidity position, when we look at the different borrowing groups, that at this point we feel it is prudent to hold onto cash and to look at what other needs might be that may or may not be more pressing than buying back preferred stock.

Okay.

Subsequent to the second quarter, you actually made a preferred purchase, and on this call and in yesterday's release, you have taken down guidance.

Yes, we made a small purchase subsequent to the second quarter.

And yet you still might be in covenant default with the banks at the end of the year?

We don't expect that we will be.

Okay.

I guess can Everett take the question second question?

Sure.

I think it was a broad question about the confidence in business, which I guess I can go about anywhere with it.

I think there's several things you need to keep in mind.

First of all, the franchise is relatively stable.

We have got some challenges if you will, but there is a lot of things that I look to that I do see as very positive, namely (inaudible) I suppose.

We embarked on an initiative to increase gross adds through our GSM program this year, and if I look at the June and even July results, we saw in both months roughly about a 26 percent increase in each month from the average of the preceding five months of January through May.

So sequentially we saw an uptick in gross adds in postpaid once our advertising program was launched, which essentially came out in May, and once we started to get the distribution channels geared up and got the phones in the stores, so that is very encouraging.

If you look at the ARPU initiatives, we did see, as we explained hopefully in detail, we did see surprising lower results in our TDMA ARPU that were driven in part by some of the things we talked about, lower MRC plans, partner plans, the overage was not there.

We have taken corrective actions to improve those areas.

Somebody asked the question why would you have a TDMR when you subsidize a TDMA to a TDMA migration?

It's a very good question, but the reality of it is if we are subsidizing it and (inaudible) we are subsidizing it today, we are only subsidizing it to some of the better paying plans as compared to before.

So I think that will certainly help.

I'm encouraged that roaming minutes are on plan thus far.

As I said, I think there is still some volatility in that.

I think there is a question mark as to AT&T's success for the year, although certainly they had a much better second quarter than they did the first.

So we hoped obviously that they perform in the second half and that particularly that the GSM performance is on plan because frankly that is where our capacity is, that is where our network is.

I could go on and on.

This company has 500 plus towers that we own.

We are one of the largest tower owners in the country, and I think in the top 10 or so in terms of the number of towers that we own.

So we will be looking at and assessing the value of those towers in relationship to our current leverage, and we may, in fact, consider certain alternatives surrounding that.

So all in all I am confident with the ARPU initiatives.

I am confident that the gross adds are certainly better.

They are not where they need to be and they are not where I think they could be in the future, but the long-term franchise I think is very stable and I think the management team has demonstrated in the past that it has gone through some challenging periods, and we are certainly in one right now, but if you look at the business -- I like to suggest if you want to really look at troubling times, look at the business three years ago when we had more EBITDA three or four years ago when we had more -- excuse me, we had more roaming revenue than we had EBITDA.

So we had negative local profitability.

Today we've made significant improvements in the profitability of our local franchise and ARPU needs to improve.

When you boil it all down, ARPU needs to improve and it will improve.

Our penetration is reasonable compared to the industry.

Our value proposition that we offer consumers is reasonable.

We need to charge more for it, and we are going to charge more for it.

Everett, in your mind, what is the reason for the timeframe before either new talent is added to the management team before the company pursues strategic alternatives like a sale?

Well, I don't know if we have a timeframe on that kind of stuff, but that is the kind of discussion obviously we will have with our board directors no on conference calls.

But you know as a significant shareholder, I look at it from two sides, and I look at the quality of the team and I continually stress that, not only the team but myself included.

Those are issues that are -- obviously will over time be discussed with our board, and in terms of the sale of the business, you now I don't see that deep values that that is even remotely possible at these particularly deep values.

Again you're talking about a company that does not have what I would consider significant liquidity issues.

We have got $100 million in cash, the facility that we are talking about a potential covenant issue in the future you know at the guidance we talked about and it very certainly could be a covenant issue since the company has $100 million of cash.

The credit facility in terms of our overall capital structure, the senior credit facility that might have the covenant issues is relatively small now.

We don't take it lightly.

We've take it very seriously, and we will address it very affirmatively as Bruce talked about.

We have the options in line, and we will address those.

We will take one more question.

Romeo Reyes, Jefferies & Co..

Good morning, gentlemen.

A couple of quick questions for you.

On the ARPU side, when you migrate a TDMA customer to GSM customer, you articulated earlier that you are getting about $50 per new GSM customer.

What is the ARPU on the customer that has migrated to TDMA?

Are you seeing a customer that pays you $75 go down to $50 and that is why your ARPU on average is not going down?

Or are you getting customers that basically are paying you $43, $44 and migrating up to 50?

Which way is it going?

Is the ARPU going down when the customers migrate to GSM or is it going up?

That is the first question.

The second question is on roaming.

I don't know if -- I apologize if I missed this one -- but can you give us a sense of what the roaming was for the Am Cell and DCS subsidiaries?

And then the third question with respect to CapEx, you talked about I guess $140 million for this year which was at the high end of guidance.

Can you give us a sense of how much of that was the additional cell sites, the E911, the NPI improvements and the system retail store improvements so we can get a sense of what the recurring '05 CapEx is likely to be?

Thank you.

On the migration question, I don't have the actual number of the average of what the TDMA ARPU was that is migrating to GSM.

But I will tell you that the early subs we saw -- I wish we had a whole bunch of $75 TDMA customers, and we probably would not have some of the challenges we are talking about in the ARPU guideline.

But they certainly are higher than what is going to -- as we go out deeper on the base, it will continually get into lower TDMA subs.

The ones that are moving tend to be probably at par with where we are at with GSM, maybe a little bit higher, but we have got both.

We are just does not seeing the impact that we had hoped out of the gate.

But as we work through that, there is a whole lot customers on TDMA that are well below our GSM ARPU that we will move up over time.

On the roaming question, I'm assuming you're looking at or thinking about minutes.

The roaming revenue is in our press release breakout.

We had about 21.5 million, a little under 21.5 million at Am Cell in terms of revenue, the (technical difficulty) being at DCS.

You're correct.

It is the roaming minutes that --

(multiple speakers).

In minutes we had about 145 million minutes at American and the balance is at DCS.

And the third question was on the CapEx.

What was that question?

I'm sorry.

The question was you talked about a bunch of onetime stuff, the additional cell sites, the E911, the NPI, the assistant retail store improvements.

I assume that maybe correct me if I'm wrong, but is that just onetime CapEx in 2004?

And can you give us a sense how much that is and what the likely recurring CapEx is going to be beyond 2004?

I think the real gist of that is, what do we think CapEx will be going forward on sort of more of a maintenance type CapEx, and as we said before and we feel pretty good that we had projected 140 million for this year in CapEx from both combined American and Dobson, and a going forward level, we believe it's probably closer to $100 million level.

Thank you.

I will turn it back to the operator.

Do we have anymore questions.

I think that was the last question.

Well, I appreciate the attendance.

I appreciate your questions.

We understand the difficulty right now and some of the particularly ARPU initiatives.

We are committed to it, and we will remain focused, and as always we are standing by for further questions.

Warren and Bruce and the team are available throughout the day if we have any follow-ups.

Thanks.

This concludes today's conference call.

We thank you for your participation, and you may disconnect at this time.