AT&T Inc (T) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to the Dobson Communications third quarter 2006 earnings results conference call.

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

Please go ahead, sir.

Good morning.

Today's 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 and expectations.

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

We discuss the risk factors that could impact the Company's overall business and performance in our reports filed with the Securities and Exchange Commission including the third quarter 10-Q which we plan to file later this week.

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

With that, I will turn the call over to Steven Dussek, CEO and President of Dobson Communications.

Thank you, Warren.

Good morning to everyone on the call.

We appreciate all of you joining us today.

On the call with me this morning are Chairman Everett Dobson and CFO Bruce Knooihuizen.

We are very pleased to report Dobson Communication's operating and financial results for the third quarter of 2006.

For the third consecutive quarter, our results reflect solid execution of our growth strategy.

Our subscriber base grew during the quarter as we added 23,500 net additions and 1400 acquired subscribers in Alaska.

ARPU again increased quarter over quarter to $49.16, up from $47.89 in the second quarter 2006.

Our subscriber growth coupled with our continued focus on revenue enhancements led to record service revenue of $232 million.

Customer churn remained low coming in at 1.95% on a post-paid basis.

This was 87 basis points below the 2.82% level of post-paid churn for the third quarter last year.

As we have said, our goal is to keep post-paid churn below 2% and we accomplished this once again in the third quarter of 2006.

Roaming minutes of use grew at a healthy pace, up 26% from the third quarter last year to 846 million minutes of use.

With an average yield of $0.103 cents, this generated roaming revenue of $87.4 million for the third quarter of 2006.

A year-over-year increase of 8.6%.

We reported $124.7 million in EBITDA for the third quarter.

An EBITDA margin of 37.1%.

Our EBITDA margin represented an increase of $270 basis points over EBITDA margin for the second quarter of 2006.

In contrast, EBITDA margin improved only 110 basis points from the second quarter to the third quarter last year to 37.8%.

Finally, at the end of the third quarter this year, 86% of our total base and 90% of our post-paid subscribers were on GSM calling plans.

As we conclude 2006 and move through 2007, we are focused on effectively completing the GSM transition of our customer base and realizing additional operating efficiencies.

There are a number of key initiatives that have produced significant operating improvements in 2006.

And we expect them to support continued growth of our subscriber base, increased ARPU and improved profitability.

First, we continue to strengthen and improve the overall customer experience from the point of sale to the quality of our networks to how well our customer care organization services our customers after the sale.

The overall customer experience is better than it's ever been.

Our care teams are proactively speaking with customers more frequently with the overall goal of improving retention.

Their increasing effectiveness is indicated by our low level of post-paid churn and by the fact that we continue to increase the percentage of post-paid customers under contract, which stood at 86.4% as of September 30, 2006.

Without question, our continued investment in our network has proven to be a primary catalyst in our improved customer experience.

The strength of our network performance has been instrumental to the increases in sales and customer satisfaction and to our low churn rates.

In the third quarter of 2006, we put 73 new sales sites on air bringing the total to 264 additional sites in the last 12 months.

In addition to our sales site bill, we are nearing completion of our NetMAX project which includes the installation of car mounted amplifiers and other high powered amplifiers throughout our network.

NetMAX was designed to help extend coverage and capacity of our existing sale sites and to improve the overall quality of the network.

Another 109 cell sites were added to our network through our Texas 15 acquisition in June and two Alaska properties in August.

At the end of the third quarter, our network included a total of 2850 cell sites.

We are very pleased with the performance of our network and believe that our network investment is directly related to increased customer satisfaction and has helped significantly in our focus on lowering post-paid customer churn below 2%.

The second key initiative was increasing growth subscriber additions.

Third quarter total gross ADS increases 6.2% year-over-year and even more impressive was the 8.6% increase in post-paid gross ADS.

This improvement stems from a variety of factors.

The improvements to our network have played a role in our ability to increase growth subscribers.

In addition gross ad goals reflect subtracted promotions an expanded lineup of hand sets, and calling plans that differentiate CellularOne throughout its markets.

The other key element in our increased gross ADS was the continued strengthening of our distribution channels.

Next, our customer care centers are doing an excellent job of servicing our customers after the sale.

Our care teams are focused on call quality, first call resolution and reducing the number of calls our representatives handle directly.

An increasing number of customers are utilizing our self-serve technology IBR technology, and we remain keenly focused on getting additional efficiencies in this area throughout 2007.

All of these efforts have contributed to another key initiative, continuing to grow ARPU and service revenue.

Total ARPU increased 5.1% to $49.16 for the third quarter of 2006 compared with the same period last year.

While we continue to see pressure on the voice component of ARPU, this was more than offset by gains in data and ETC revenue.

Data ARPU increased to $4.34 in the third quarter of 2006, a gain of $1.78 over the third quarter of last year.

We expect data ARPU to continue growing in 2007.

The ETC portion of ARPU increased year-over-year by $1.75 to $2.91 for the third quarter of 2006.

Data ARPU has increased as we transition our base to GSM and as we strengthen our data platform with additional data services and devices.

At $4.34, third quarter data ARPU was 8.8% of total ARPU for the quarter.

This compares with data ARPU that was 7.9% of ARPU in the second quarter and 7.1% in the first quarter of 2006.

SMS and ring tones are still our most popular data services, but we are starting to see the positive effect of short coat campaigns that allow customers to buy or sign up for products or service downloads the other data enabled hand sets.

In summary, our growth and service revenue this year has corresponded with our success in adding subscribers to our base and growing ARPU which has been driven primarily by data usage and increased ETC.

We expect these revenue trends to continue into 2007.

In terms of expectations for the rest of this year, our 2006 guidance remains basically in tact and unchanged.

And I would like to provide additional color in two areas.

Net ADS from the third quarter exceeded our full year guidance.

Based on our October results, the fourth quarter appears to be trending in a similar fashion to the third quarter.

So that gives you a sense of the subscriber growth we expect to see through December.

Another positive has been the growth of operating revenue, which increased in the first nine months slightly above the 4% top end of our 2006 guidance range.

However, operating expenses have also been slightly higher than expected.

We would expect these trends to continue.

The net sum of these trends result in our EBITDA expectation remaining in the range of $435 million to $445 million for the year.

We've recently made several excellent acquisitions.

Texas RSA 15 which fits strategically in our central Texas footprint as well as the Nome and Kodiak markets in Alaska.

In early October, we completed the acquisition of Highland Cellular in West Virginia and Virginia.

There are several aspects to the revenue and cash flow opportunities in these acquisitions.

The new Texas and Alaska properties are generating minimal revenue and slightly negative cash flow at this time.

But we expect them to contribute to our growth as we begin adding subscribers in these markets, capture roaming traffic, and and take advantage of in-collect savings as our customers in adjacent CellularOne territories begin using these new networks.

Highland Cellular is a much different picture.

Given that it was a more mature business with solid revenue and cash flow.

It has an excellent network that covers 357,000 pops and is already generating revenue and cash flow from approximately 50,000 customers, the vast majority of which are GSM post-paid customers.

We expect this market to add to our revenue and cash flow results as we move into 2007.

Now, I'd like to discuss other recent achievements and how we expect them to generate future value for Dobson and its shareholders.

American Cellular recently participated in FCC Auction No. 66, and we were very pleased both with spectrum that we were able to purchase and the long-term opportunity that it presents.

We achieved our objectives in the AWS auction.

First we wanted to add spectrum over our current footprint, especially in critical markets where we might be spectrum constrained in future years.

Second, we wanted to add spectrum in adjacent markets that have a strong community of interest.

And finally, our bidding was focused on a broad mobility strategy that would eventually entail multi-band hand sets with nationwide coverage.

The results of Auction 66, including our spectrum purchases met these objectives.

We significantly increased our spectrum inventory for an average cost of $0.16 per megaHertz pop including AWS spectrum over critical markets such as Up-State New York.

We also purchased what we see as high value spectrum in adjacent markets giving us flexibility to extend our growth strategy in the future.

Both T-Mobil and Cingular, our primary roaming partners, were active in the AWS Auction increasing the likelihood that manufacturers will have multi-band GSM and UMCS hand sets available to market when the spectrum becomes cleared for use over the next several years.

We expect our AWS spectrum to be cleared starting in late 2007 and into 2008, and our intent in acquiring this spectrum was focused on future wireless technologies.

For these reasons, we do not expect the new spectrum to have any material impact on 2007 CapEx.

In addition to our Auction 66 success, we recently signed an agreement under which Trac Phone Wireless is authorized to begin selling GSM phones for use on our network.

We don't expect to see the impact of this agreement until 2007.

In summary, we are very pleased with our accomplishments thus far in 2006 and how those accomplishments set the stage for future growth.

Through the first three quarters of 2006, we have increased growth subscriber additions while managing post-paid churn down below 2% and holding it there.

Consequently, we have added 43,300 net subscribers to our base organically and with the Texas, Alaska and Highland -- Highland Cellular acquisitions, we have acquired approximately 52,000 additional customers of which approximately 1900 are in our third quarter 2006 numbers.

For three quarters, we have continued to increase ARPU driven by steady increases in data usage and higher ETC revenue.

With our subscriber growth, this enabled to us generate record service revenue in the third quarter of 2006.

Growing usage has remained strong and our average blended yield has been stronger than expected.

Despite operating cost increases related to new markets, increased gross ADS, additional cell sites and other factors, we have continued to grow EBITDA and we are beginning to realize some of the operating efficiencies that we expect will enable us to continue margin expansion in 2007.

In closing, we are very pleased with our third quarter accomplishments, especially because it capped three quarters of consistently improving results both operational and financial.

We are creating value through sustainable, profitable growth, and we expect the future to be increasingly positive.

With that I'll turn the call over to Bruce.

Thank you, Steve.

On this morning's call, I'd like to provide additional color on several items that Steve mentioned.

Looking at the operating and financial objectives that we set up at the beginning of 2006 and how we have consistently achieved our objectives in the first nine months of this year.

Before getting into the operating results, I would like to point out that in the third quarter Dobson Communications achieved a positive $0.14 of earnings per share on a fully diluted basis.

Of the $0.14, approximately $0.08 was due to a tax adjustment for realizable NOLs which we had previously reserved.

The other $0.06 is what I would classify as business as usual earnings per share.

On another point of clarification, on Table 1 of our press release, there is a line titled "Diluted Weighted Average Common Shares Outstanding."

For the three months ended September 30, 2006, we show 203.5 million shares.

While the number of shares for the nine months ended September 30, 2006, reflects 173 million shares.

The difference of approximately 30 million shares is the total of common shares that would be issued if we converted all our series to preferred stock and our convertible bond.

The accounting rules state that if through a series of calculations these instruments are diluted, we are required to include them in our share counts.

If they are anti-diluted, they are excluded.

In our case, when looking at just the current quarter, these securities are dilutive and thus are reflected in our share count as if they had been converted.

However, when calculating the impact for the year-to-date period, these securities are anti-dilutive thus our share count in this case is not adjusted to reflect these securities.

With that explained, let's turn to our operations.

Total EBITDA margin for this quarter was 37.1% which was slightly lower than the same quarter last year when it was 37.8%.

This year, we are expensing options that we didn't last year, we're reflecting the costs in new acquisitions which in the short term have a slightly negative impact on earnings, and we have the impact of high gross ADS.

In fact, premarketing margins actually increased slightly from last year.

Premarketing margin for the third quarter of 2006 was 59.5%, an improvement of 20 basis points over the third quarter last year and 60 basis points over the second quarter 2006.

Aside from our revenue growth, our increased premarketing margin in the third quarter reflected a net decline in G&A expense of 3.2 million from last year despite the additional options expense that we recognized starting January 1 of this year.

The biggest improvement in G&A in the past year has been in securities expense which was 5.8 million in the third quarter of 2006, versus 9.4 million for the same quarter last year.

In terms of other premarketing expenses, costs of service again increased sequentially and on a year-over-year basis in the third quarter 2006.

Let's look at the two key components.

Total network and cell site expense was higher by 4.4 million in the third quarter of 2006, accounting for the largest year-over-year increase in costs of service.

This higher cost relates to 264 cell sites built in the past year and to the 109 cell sites that we added with the Texas and Alaska acquisitions.

In the fourth quarter of this year, we will also have the additional expense impact from the acquisition of Highland Cellular which operates 79 cell sites.

In-collect expense was the second factor in higher cost of service.

In-collect in the third quarter of 2006 was 22.3 million, a year-over-year increase of 3.7 million.

However, the growth rate in in-collect minutes per subscriber continued to slow in the third quarter of 2006.

In-collect minutes per subscriber increased from 78 million -- 78 minutes per user in the second quarter of 2006 to 84 minutes in the most recent quarter, an increase of 7.7%.

This is less than half the growth rate of in-collect minutes per customer from the second to third quarter last year.

In 2005, in-collect MOUs per subscriber increased 15.7% from the second quarter to the third quarter versus the 7.7% growth rate this year.

The slowing growth rate of in-collect MOUs with our complement of products further validates our growth strategy.

As we have already noted, sales and marketing expense and equipment expense increased with higher gross ADS and retail operating costs in the third quarter 2006.

CPGA increased to approximately $434 compared with $421 in the same period last year.

Primarily reflecting increases in agent commissions, retail rents and other retail operating costs.

Our equipment subsidy actually declined to $89 per hand set in the quarter compared with $92 in the third quarter last year.

While CPGA increased year over year, the third quarter costs declined sequentially by $40 per gross AD from the second quarter.

Capital expenditures for the third quarter of 2006 were 35.1 million with 24.6 million at Dobson Cellular and 10.5 million at American Cellular.

Year to date, we have spent 116.5 million of our 170 million full-year guidance.

Finally, at September 30, 2006, our balance sheet included a total of 222.5 million of cash and short-term investment. 2.6 billion in long-term debt and 135.7 million in preferred securities.

During the quarter, we closed on a secured credit facility at American Cellular which provides the ability to borrow up to $250 million.

Some of the proceeds from this facility have been used to fund our participation in Auction 66 and the Highland acquisition.

We completed these transactions after the end of the third quarter using $119 million of our cash and investments and borrowing an additional $25 million from the ACC credit availability.

Focusing on our liquidity for the quarter, we generated almost $20 million in free cash flow from operations.

This is excess cash flow after capital expenditures, after interest, after dividends and changes in working capital.

In addition to the cash in our balance sheet, we also have 125 remaining availability under the ACC credit facility and 75 million in DCF's undrawn revolver.

In closing, we were pleased with our operating and financial achievements in the third quarter.

Growing our subscriber base, increasing ARPU and increasing EBITDA.

We have a balance sheet with no near-term amortization requirements, growing free cash flow and the flexibility to lower our borrowing costs to opportunistic refinancing.

We are well positioned to continue accomplishing our objectives for 2006 and beyond.

With that, I would now like to open the call to questions.

Thank you.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

And our first question will come from Ric Prentiss with Raymond James.

Good morning, guys.

Good morning.

Nice movement on the pass here.

I want to talk about what kind of the next game is that people might not be fully understanding how you are going to achieve it and that's on the data side.

You guys have moved up the curve.

You mentioned how you are up to $4.34 there.

Sure seems to us there's a lot more upside to move that data revenue up.

Let's talk a little bit about how are you selling the data product today.

Is it bundled or is it ad hog kind of usage?

How are customers buying the new hand sets?

Do you have enough of the new handsets into their hands to buy these products?

And also on the roaming side, interesting on the Rural Cellular call that just ended, they mentioned that they're getting data roaming revenue that's really spiked up, also, like 3.4 million in data roaming versus under a million a year before.

So are you seeing data help your roaming business as well?

And the final piece of this long-winded data question is any push to have to spend money in '07 put in UMTS to kind of keep the trend going?

Thanks, guys.

We'll try to capture all of that for you, Ric.

Multiple questions in there.

Today we do sell the -- our data services in bundled packages.

We also -- we have three different-- we called it our data -- it's called signalling.

And we have three different price point levels that we sell it at.

So we're very happy with the sequential growth of our data ARPU and the continuation of our sales teams to sell through that product in all of our channels.

So yes, we do have it bundled with great plans.

We sell it as a bundle, but we can also sell it into the base with one of the three packages.

In terms of hand sets, we are continuing upgrading our hand set lines.

We've got a lot of the phones coming in here in the fourth quarter, but certainly our base has got the capabilities of taking advantage of data in terms of the hand sets into the base.

So we're -- we are positioned very well to continue to see this data ARPU grow and we fully expect it to.

We -- I mean, as we said on other calls certainly seeing other carriers in that $5, $6, $7 range and higher, we don't see any reason why we can't progress into those same areas.

So, we feel very good about the way that our data services have moved and the future of data ARPU.

So we're positioned well with the packages.

We're position positioned well with our hand sets.

In terms of the roaming component of your question, I'll let Bruce address those particular aspects.

Yes, just real quickly.

We've chosen not to disclose the part of our roaming that's data related, but when you look at our yield, Ric, one of the reasons, really the two primary reasons that our yield is coming in higher than what we anticipated is because of the data revenue that we're getting from roaming.

So it's been a good addition to ours as well.

And then from a UMTS CapEx standpoint?

Next year, I will tell you that right now our plans in our CapEx don't necessarily contemplate any major UMTS rollout.

So we will be doing a trial in the first quarter of next year.

And then from there, we will see how things go.

But we don't have a plan in our CapEx that has major UMTS rollout into next year.

And then one quick follow-up.

I was writing too fast.

Bruce, when you talked about your refinancing, I missed some of what you said.

What are your thoughts as far as attacking some of the high-cost debt now that EBITDA really has been growing nicely and the free cash flow production has been pretty strong?

What are your thoughts as far as what you might go after and what kind of time frames you could go after them?

Well it's really still pretty consistent with what we've been saying.

We've got a couple securities that are in our estimation high cost securities, and it's just a matter of waiting until the timing is right between the call price of some of these securities versus the price out in the capital markets to refinance them.

Obviously, we want to refinance when it's MPV positive for the Company and the shareholders and I think hopefully if the markets keep moving the way they are and get closer and closer to call dates, you know that makes it more attractive each day.

So we'll just be just watching those factors, and when they converge, we'll do some refinancing.

So stay tuned.

Stay tuned.

Thanks.

Great.

Good luck, guys.

Thank you.

Our next question will come from Jonathan Schildkraut with Jefferies & Company.

Great.

Thank you for taking the questions.

If you could tell us a little bit about what your expectations for the new properties are in terms of ability to drive incremental roaming MOU gains.

Are these high-roaming markets or are they complementary to your overall footprint?

And are you able to bring in those new properties under your existing roaming agreements?

In terms of the properties, personally, we bought those more for the growth potential within the market, but they do complement our existing markets in a number of aspects.

Steve mentioned earlier that in our neighboring areas customers, when they come into these properties will now not be off net but rather will be on our networks.

So that's lower costs for us.

In terms of the roaming, it's relatively consistent with what we see in other markets in terms of the kind of roaming we'd expect.

What was the next question?

Can they come in under the current umbrella of agreement?

And we anticipate that yes, they will come in under the current agreements.

All right.

Great.

Just a last question here.

You mentioned earlier that you'd be able to use the new Auction 66 spectrum maybe in early 2008, could be available to you.

When are you expected to pay for that spectrum?

We've already paid for that spectrum.

Okay.

Thank you.

Thank you.

And our next question will come from Pat Dyson with Credit Suisse.

Thanks.

Good morning.

A couple questions.

I guess first on that Am-Cell side, your net ADS growth there has been a bit stagnant relative to what's been going on at DC.

Should we expect to see some rebound there or are there some other issues that are going on that we're not aware of?

And then secondly, as we look into 2007, is the outlook for margin improvement really just driven by continued subscriber growth and steady roaming trends or do you see there are costs that you could take out of the business and I guess particularly are there any legacy TMA costs that you see that could benefit the cost of service line?

Okay, Pat.

Let me start with the American Cellular.

Yes.

The growth in terms of net ADS on American Cellular have been slower than what we've seen on the Dobson side, though we continue to see improvement.

Generally speaking, American Cellular has been much more affected by the reseller Trac Phone, a bigger part of their lines had come in through the reseller and as you know that that part of the business has been weak this year with the exception of our reselling partner up in Alaska which is not Trac Phone.

So we're seeing higher growth on Dobson.

Next year we'll see how Trac Phone works next year, but we signed a new agreement with them to start selling GSM plans so we've got high hopes as we go into next year which should again help American Cellular.

And so, we should -- what about specifically looking at post pay.

Should we see some rebound there?

Continue on post page of two areas that we keep working on is increasing on what we're able to do on post paid and then the churn rate.

We can make more progress on churn.

I'm not suggesting we will, but certainly we're working towards that.

That will help as well.

Okay.

Just on the outlook for margin improvements.

Yes.

We think it's room for margin improvement.

It comes from a number of different aspects.

Not one of them is significantly larger than the other.

There are some opportunities to get additional TDMA improvements as we turn down that network.

We've been seeing some of those all along and taking them where we could, but there are some additional ones.

Certainly as we add more subscribers, that by itself will help as we spread more of our fixed over a bigger base which should help margin improvements as well.

And as Steve mentioned, we think that there's growth in data services and data ARPU so that should help our margins as well as we go forward.

Okay.

And then just finally can I get the roaming breakout between DCS and Am-Cell?

Are you talking minutes --

Yes, roaming minutes.

Dobson cellular was 466 million, Pat.

Okay, great.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll go next with Ana Goshko with Banc of America Securities.

Hi, thanks.

I have some questions on cash flow, but first I wanted to clarify there was a $20 million number mentioned.

Is that cash from operations or is that kind of a free cash flow number?

That is a free cash flow number that is after dividends and interest after CapEx after working capital.

Okay.

So $20 million in a quarter So year to date, you're running by my calcs, about 15 million positive, is that right?

How much positive did you say?

15, one five.

Ours is actually closer to about 10 million positive.

Oh, so 10 million positive.

Okay, so my question on cash flow then, I know that you reaffirmed all of the guidance but I just wanted to highlight.

In my notes I had free cash flow guidance for the year of 40 to 50 so I guess if you are running ten year-to-date, are you expecting a working capital kind of inflow in the fourth quarter and do you feel good about that 40 to 50 number for the year some.

Yes, we still feel good about that number.

A big part will come through working capital improvements in the fourth quarter as well as some other things.

Yes, that's what we're implying that we should have a large positive free cash flow from operations in the fourth quarter.

Okay, great.

That's a great clarification.

Thank you.

And our next question will come from David Janazzo with Merrill Lynch.

Good morning.

Good morning.

You talked, Steve, about some of the Auction 66 related opportunities.

Could you just go into a little more detail on what you could contemplate within current markets flexibility in adjacent markets and then other technologies.

And how are you thinking about 700 megaHertz at this point?

First of all, I think I'd just like to reiterate that from our perspective on the Auction that we are very pleased with the outcome getting the additional spectrum over our current footprint and giving us the growth opportunities for the new technologies whether it's 3g and beyond.

So we feel that getting that footprint over our -- or getting that spectrum over our current footprint was achieving one of our primary objectives.

The additional markets or adjacent markets give us in our view flexibility as we look forward into future growth opportunities.

So they are clearly adjacent to our current clusters, and would provide us obviously the synergies there from marketing in close proximity to our current clusters.

As we look forward to what are some other opportunities for us to expand our growth in the future, certainly those adjacent markets would potentially play into that.

As we sit here now, we're looking at we'll sit back and certainly stay close to what our roaming partners, T-Mobil and Cingular are doing and watch their progress over the course of 2007 and see what opportunities that might yield.

But as we sit here today, that is our vision into the future of what these -- what this additional spectrum can provide us.

Again, I would reiterate in terms of as we look at '07 in terms of any potential impact we see.

There's very little material impact to our CapEx in 2007 from the Auction piece.

So again, it gives us some flexibility, David to -- as we look at additional growth opportunities in the adjacent markets and gives us the flexibility for new services as we roll out, potentially roll out new services in our current footprint.

Andy initial thoughts in the 700 megaHertz auction?

I think's just too early to tell.

This is Everett.

It's intriguing.

It's very good spectrum for a lot of purposes, but there's a lot of jostling going around, if you will, on how that spectrum's going to be distributed and when it's going to be auctioned.

Stay tuned.

It's intriguing.

But, we're very pleased with our spectrum position right now.

Particularly at the AWS Auction.

Thank you.

Next we will go to Michael Nelson with the Stanford Group.

Thanks a lot.

Congratulations on nice execution.

First could you take a little bit about the puts and takes in the costs of service.

You mentioned the rate of growth of in-collect MOUs have slowed.

How are you balancing that with the pickup in your state-wide unlimited plans and what percent of the gross ADS now come from those unlimited plans?

Also, what impact have the acquisitions had on network costs and what should we expect on that line item going forward?

Thanks.

Let me talk a little about the in-collect component and generally as total minutes of use have increased, and it's not just our systems but other systems, we find that subscribers use more minutes off network, but again, one of the things that we monitor and watch closely is our subscriber profitability.

And if subscribers are using amounts that are unreasonable off-network, we have the ability to move them to other price plans or move them off the network.

So that's part of our ongoing work that we do in managing our subscriber base.

In terms of state-wide plan, they're still producing probably 35 to 40% of the total gross ADS that we're doing.

So it's not the majority, but it's a fair amount of our gross ADS.

What we're finding on our state-wide plans is that actually the financial results are coming in better than what we had originally modeled, that they're using less off-network minutes than what we originally expected and they're bringing in higher ARPU.

We don't disclose particulars about any plans, but we are finding that on the state-wide plan that when you look at their net ARPU, which is the ARPU less the in-collect costs, they are still incrementally above all of our other plans.

So from a standpoint of what we'd expected, we're seeing better than what was expected from those plans.

What was the second part of the question some?

Network costs.

Oh, network costs.

From the acquisitions.

Network costs from the acquisitions, you're going to see similar types of increases in our network initially from the acquisitions and so for instance, you looked at the increase that we saw in our costs of service when we added the 109 cell sites for the new acquisitions.

You'll see similar type things when we add in Highland.

Going forward, there's some opportunities for us in costs of service generally.

Yes, there will be.

The big benefit we'll see more quickly will be the benefit in our in-collect cost with those acquisitions.

In other words, as we said before, our customers who currently or previously when they went in those markets were roaming.

Now will be on our own network, and so that cost in-collect cost should go down from that standpoint alone.

Great, thanks a lot.

Good luck.

Thank you.

And our next question will come from Patrick Comack of Zachary Investment Research.

Yes.

Hi.

First question is what were the customer MOUs in second quarter '06 third quarter '06?

Second question is, as the state plans become a bigger part of your customer base, do you have any fear that customer MOUs could get out of control and perhaps go into the thousand minute, 1500 minute per month area like we're seeing perhaps at fun com?

Third is it seems like, Bruce, that it'll be difficult for to you get to even the low end of your EBITDA guidance considering that your gross service margin dipped by ten basis points on a sequential basis, so just doing the math, I don't see how you get $111 to $121 million incremental.

EBITDA gets you to your guidance.

I mean, or does the acquisitions help you there?

Thanks.

On that last one.

Acquisitions will help a little bit but our belief is that we'll get there, and I don't know how to comment other than that.

We believe that we'll reach the range of our guidance.

Which we reaffirmed.

Which we reaffirmed today.

In terms of minutes, our subscribers, our subscriber's used about 660 minutes in the second quarter of this year, and it's just a little under 700 in the third quarter.

Keep many mind there is some seasonality in usage.

Second and third quarters tend to be the highest but overall our usage has been trending up a little bit.

In terms of where our total usage goes, how quickly it gets and what's reasonable and unreasonable, as we continue going up in time, our networks will be coming more and more efficient.

As we've said, statewide represents only about 35 to 40% of our gross ADS and we have a lot of other plans.

Okay, thanks.

Thank you.

Now we will hear from [Palo Goldmaster] with Westminster Financial.

And your line is open.

You want to go to the next question?

Thank you.

And the next question is from Todd Rethemeier with Soleil Securities.

Thanks.

Good morning, guys.

Two quick questions for you.

You talked about UMPS trial and could you just give a little more detail on that -- how -- which market is it, or maybe not which market, but how big of a market are you doing it and what the CapEx is going to be for that?

And then the second question, the T-Mobil roaming what percentage of the business is that now?

Todd, this is Steve.

The UMPS trial we'll be doing in West Virginia, we've selected a partner to do that with in terms of the CapEx.

You know, it's in our overall guidance but it's minimal there.

In terms of T-Mobil,

It's roughly 14%.

Okay.

And then one last clarifying thing.

You said that you've already paid from the spectrum from the auction.

That happened in the fourth quarter not before the balance sheet that you printed, correct?

That's correct.

In fact, the -- when I mentioned about us using 119 million of our cash from the fourth quarter and borrowing an incremental 25 million that was for both to pay balance of Auction 66 spectrum as well as Highland Cellular.

Okay, great.

Thanks.

And now we will here from Andrew [Morry] with [Indiscernible].

Yes.

Thank you for taking the call.

One clarification on the acquisition and the cost of service, I think I understand the point of, eventually the growth potential in those markets and more specifically up front reducing your in-collect costs, but what's your time frame roughly where you should see that benefit on the cost of service line because I guess shouldn't we see the benefit of reducing in-collect costs pretty much right away as those extra cell sites are in your network?

Yes.

You're absolutely right on in terms of the in-collect costs.

As soon as we close on those properties and get the cell sites in place, you're right, that's a day one.

In terms of longer term benefits in networking and pricing and things like that, that's a little longer term.

So is the net of that -- that these become, I don't want to say accretive, but they lower your service costs as a percent of revenues only after you get the growth potential of having some subs come on from those from growing that property?

Or can it be additive just from the in-collect costs in those areas?

Well, each market is unique, but I'm trying to think what your question is.

Generally, we think that next year these properties are accretive and they will add EBITDA to us next year from that standpoint.

Okay.

And then, just one other follow-up on the marketing expenses which I know you've been clear about adding resources there and helping improve the channels, et cetera.

How far do you think you are in that process as far as do you think it's another couple of quarters of growing net spend or another couple of years?

Can you just give us some more color on that?

Thank you.

Could you ask that question again.

Andrew, you want to rephrase that?

The marketing expenses.

I know you've been raising the marketing spending for the last three, four, five quarters pretty noticeably and as far as expanding channels, I think you mentioned strengthening the distribution channels.

If you could just comment on where you think you are in that process and how much more needs to happen?

Well, in terms of the spend on marketing, a lot of that spend was due to the fact that we're doing a lot more gross ADS through our post and prepaid channels, which you recognize the cost.

Reseller is obviously is a much cheaper channel from that standpoint.

So you're seeing some of that.

In the third quarter, you know, our goal is to try to drive down CPGA and while year over year we didn't quite accomplish that because we expanded a lot of that, I think when you start looking at the third quarter versus second quarter, we saw some improvements there in at least the per unit gross ad in total dollars, that will be very dependent on the volume of gross ADS we do,

But we're continually looking for new opportunities and we're continuing to look for opportunities that are more efficient than what we currently have.

So we're constantly going through for instance, we possibly go through no of some of those channels and try to eliminate the indirect folks that aren't producing add any more that can produce and we do that throughout the distribution channels.

Okay.

Thank you.

Next we'll hear from David Sharret with Lehman Brothers.

Good morning.

Just following up on the ARPU side.

With the level you're at in the third quarter, typically as you go from your third to your fourth quarters, ARPU tends to dip a little bit based on usage and other seasonal factors.

Just wondering if you're expecting to see that and what you're seeing in terms of that in the fourth quarter and if you could maybe a medium term outlook, maybe a couple of quarters given the data opportunity you talked a lot through out the call.

Do you expect to see potential for ARPU growth from here or given some of the voice dilution, it just more flat in terms of a medium term outlook?

My second question was regarding just roaming.

If you could just remind us when the next scheduled stepdown is in your roaming rate with Cingular?

Thanks.

With respect to ARPU, as we did, we reiterated our guidance, 48 to 48.50 and we feel very good about the ARPU for our fourth quarter.

Some of the things that we're seeing as I mentioned was continued growth on the data side.

We also have a couple of revenue enhancements that have gone in in the fourth quarter.

Those will help us in terms of reaching that ARPU level.

So we feel comfortable in our reaffirmation of our guidance at 48 to 48.50

And again, in terms of where it goes from there, we'll address guidance in February for 2007, but generally speaking, we can -- we would continue to see or expect to continue to see that data growth and despite the pressures on -- continued pressure on voice ARPU, we feel very good about the data side of that being able to grow, as I mentioned, earlier on the call.

In terms of the next step down in the rate, the roaming agreement with Cingular, I believe it was January 1, '07.

If you remember when we originally announced the agreement with Cingular, we had a relatively large stepdown that first year but then this year and next year the stepdowns were quite a bit smaller.

High single-digit percent?

Mid-single digits is what I think what we had said before.

Okay, thanks.

And our final question will come from Jonathan Atkin with RBC Capital Markets

My question was already asked, actually.

Thank you.

Thanks, Jonathan.

Well, thank you all again for attending the call and for your continued interest in Dobson.

As I said earlier, we feel very good about the progress we've made and about the future that we have.

So we appreciate again your continued interest and support.

We'll talk to you again next quarter.

Thank you.

That does conclude today's audio conference.

Thank you for your participation and have a nice day.