AT&T Inc (T) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Dobson Communications first quarter 2007 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.

Good morning.

Today's call will contain forward-looking statements within the meaning of the Private Securities Litigation and 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 our annual report on Form 10-K and our 10-Q, which we plan to file soon.

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

With that, I'll turn the call over to Steve Dussek, CEO and President of Dobson Communications.

Thank you, Warren.

Good morning to all of you that have joined us for today's call.

Joining me today are our Chairman, Everett Dobson, and our Chief Financial Officer, Bruce Knooihuizen.

All of us will be available for Q&A after our brief remarks.

Yesterday afternoon, we announced another solid quarter of operating results.

The highlights of the first quarter of 2007 were strong revenue growth, record-setting ARPU and continued growth in both EBITDA and EBITDA margins.

We also produced strong subscriber base growth in what is typically a seasonally slower quarter.

Our subscriber base grew by 9,900 net adds, with the very important post-paid portion achieving even stronger growth, with 12,900 net adds.

As we stated in our press release, our first quarter results were an excellent start toward achieving our operating goals in 2007 and further enhancing the value of our shareholders investment in Dobson.

I'd like to spend a few moments looking at the numbers in more detail.

Service revenue increased 17.5% to $253.9 million in the first quarter of 2007, compared with $216.1 million in the first quarter of 2006.

Roaming revenue was $62 million in the first quarter of 2007, an increase of 13.1% over roaming revenues of $54.8 million during the first quarter of 2006.

Roaming minutes of use totaled 670 million for the first quarter or 2007, an 18.3% increase over roaming minutes in the first quarter of 2006.

The roaming yield was $0.09.3 for the first quarter of 2007, which includes the expected contractual step-down in rates at the beginning of January.

Average revenue per unit, or ARPU, was $50.73 for the first quarter of 2007, and increase of almost $4 from the ARPU in the first quarter of 2006.

This performance represents the first quarter of $50 plus ARPU in our history.

To put this ARPU growth into clear context, we only need to look at the second quarter of 2004 when we launched the GSM network.

In that very first quarter of selling GSM calling plans, we generated ARPU of $40.03.

Since that time, we have grown ARPU by $10.70, a gain of 27%.

We believe this points to a successful execution of our growth plan during that timeframe.

We have transitioned our customer base to higher value GSM calling plans that are generating strong growth in subscriber revenue, and bother EBITDA and EBITDA margins.

Data was once again a primary driver in growing our ARPU during the quarter.

Data revenue contributed $5.73 in ARPU, compared with $5.11 in the fourth quarter of 2006 and $3.16 in the first quarter of last year.

We expect data ARPU to continue growing as we strengthen our data platform, add new services and sell more data-capable smart phones.

The universal [service-on] portion of our ARPU remained relatively unchanged from the preceding quarter.

Obviously, the recent recommended decision from the Joint Board of account being imposed on wireless and [cellec] carriers has raised questions regarding the impact to our funding levels.

While there are many points of clarification needed, we do know the following; one, this is an interim proposal; two, it established funding caps by state; and three, new applications will be accepted during this interim period.

Our initial review suggests that there would be minimal impact on us and this recommended decision does not cause us to change our previously released 2007 guidance.

Bruce will talk in greater length about the expense side of the Business, but I want to highlight the increasingly significant operating efficiencies that we are generating in our Business.

Along with the strong revenue growth, we saw strong growth in EBITDA in the quarter and a 250 basis point increase in EBITDA margin over the same period last year.

EBITDA was $116 million for the first quarter of 2007, which represents a 25.4% increase over EBITDA for the first quarter of 2006.

EBITDA margin was 34.7% in the quarter, compared with 32.2% for the first quarter of 2006.

We believe that the strong operating performance in the first quarter is a clear result of our teams consistently executing our well-designed growth plan.

Our goal is to produce strong, sustained, profitable growth based on four competitive strengths; first, the best-in-market network performance; second, high quality, responsive customer service at all touch points with our customers; third, clearly differentiated plans and products that generate traffic to our stores and provide value to our customers; and fourth, strong channels of distribution.

Let's talk about the network performance for just a moment.

In 2006, we added 287 cell sites to the Dobson network, apart from any of our acquisitions.

The resulting improvements in coverage, capacity, and quality of service contributed directly to higher service levels and customer loyalty.

Customer satisfaction scores at year-end 2006 were significantly higher across the board.

And during the past year, we have reduced post-paid churn to the sub 2% level and it has remained there.

In 2007, we are stepping up our network focus to another level, accelerating the deployment of new cell sites with our Network Fast Track Initiative.

This initiative is designed to deploy 70% of our annual build plan within the first half of the year to help maximize the customer benefits as early in the year as possible.

I'm happy to say that in the first quarter of 2007, we added 92 cell sites and we are scheduled to add another 122 in the second quarter.

Strengthening our network immediately impacts the user experience and helps us achieve some of the best network performance statistics in the industry.

While the industry standards for blocked calls and dropped calls are in the 2% range, our customers have been experiencing less than 1% blocked and dropped calls.

This is one way that we define best-in-market network performance and we believe that the resulting positive customer experience is the most critical factor in reducing post-paid churn.

Aside from the positive impact network quality has on customer satisfaction, it also creates a high level of confidence and enthusiasm throughout our marketing, sales and customer care teams.

They find it much easier to compete effectively when they have such high confidence in our excellent network performance.

We produced 132,700 gross adds during the first quarter of 2007, which is almost a 6% increase over gross adds in the first quarter of 2006.

As was highlighted in our press release, our post-paid gross adds were even stronger, as we generated 94,300 post-paid gross add.

This represents an increase of 11.2% from the first quarter of 2006, and was just slightly below the 95,000 post-paid gross adds generated in the strong fourth quarter of last year.

State-wide unlimited plans continue to drive store traffic and create selling opportunities.

These plans represented approximately 30% of our gross adds in the quarter.

Customer traffic is also being driven by the introduction of new handsets, such as the Blackberry Pearl, which we launched in late March.

Our handset management team is doing a great job of bringing new handsets into our lineup, that until recently, were exclusive to larger urban markets.

The higher customer satisfaction levels also translated into low churn in the quarter.

Post-paid churn was 1.86%, compared with 1.84% in the fourth quarter and 2.08% in the first quarter of 2006.

As we noted, we kept churn low despite terminating the accounts of 4,350 unprofitable customers whose off-net roaming usage was excessive.

These disconnects were split roughly 50/50 between statewide unlimited and nationwide post-paid accounts.

As we discussed several times on previous conference calls, our contract stipulates that customers with abnormal off-network usage are subject to pricing changes or service termination.

With the new calling plans that we have implemented in the past year, we wanted to see their impact on incollect over an extended period.

We will continue monitoring usage at the customer level to minimize the impact of off-network usage and we don't expect terminations of this magnitude to be routine.

We are very pleased with our customer growth of 9,900 net adds in what is typically the slowest quarter from a seasonal perspective.

Without the 4,350 disconnects that we initiated, we actually would have generated over 14,000 net subscriber additions in the first quarter.

Adding that same 4,350 to our post-paid net adds would have resulted in more than 17,000 post-paid net adds.

To put this all in perspective on the post-paid side, we generated a comparative 15,100 post-paid net adds in the very strong fourth quarter of 2006.

We are very pleased with the continued strong growth in our high value post-paid business.

Pre-paid subscribers increased by 1,200 in the first quarter of 2007, compared with 6,300 in the first quarter of 2006.

We again saw a reduction in our reseller base in the first quarter of 2007, but we expect the Trac Phone will begin selling GSM handsets in our markets in the next week under the new agreement we signed late last year.

The transition of our subscriber base to GSM continued in the first quarter.

This transition is now largely driven by GSM sales, but we did see 14,900 TDMA customers migrate to GSM during the quarter.

As of March 31st, 91.5% of our total base and 95.2% of our post-paid paid base were on GSM calling plans.

Finally, the first quarter of 2007 was marked by another significant achievement.

We completed the refinancing of the majority of American Cellular's debt, which substantially lowers our cost of debt going forward.

Bruce will provide more color in his comments.

With that, let me now turn the call over to Bruce.

Thank you, Steve.

Trying not to repeat comments that Steve has already touched upon, I will not reiterate our gains in revenue and subscriber generation and will instead focus on our continued success in controlling expenses.

I will also briefly talk about our refinancing of the American Cellular debt, as well as capital expenditures and our liquidity position.

Steve mentioned our improvements in our EBITDA margin.

Those certainly can be partly attributed to our increasing ARPU and our growing subscriber base.

But taking advantage of opportunities to reduce unit costs also had a positive impact on our EBITDA.

On a reported basis, cost of service increased from $76.1 million in the first quarter of 2006 to $93.2 million in the most recent quarter.

Yet sequentially, cost of service actually declined from $94.6 million in the fourth quarter.

The current quarter includes $4.5 million associated with the four acquisitions we made last year that would not be reflected in the Q1 number from last year.

Thus, excluding these costs, our cost of service increased $12.6 million or approximately 16.5%, at a time when usage in our network increased by over 18%.

Sequentially from the fourth quarter of 2006, we actually saw a decline in the cost of service of $1.4 million.

The incollect portion of cost of service increased slightly to $25.7 million from $24.2 million in the fourth quarter 2006, as our customers averaged about 88 minutes of off-network usage as compared to 86 minutes in the fourth quarter.

We continued to see the rate of growth in Dobson customers off-network usage slowing on a year-over-year basis, as we near the end of the GSM transition.

The growth in incollect cost was more than offset by the reduction in the costs of operating our own network.

Despite the total network usage increasing slightly between these two quarters, network operating costs fell from $67.5 million -- or fell to $67.5 million, from $70.4 million in the fourth quarter.

This reduction was achieved through a variety of efforts, including lower negotiated toll rates, TDMA network optimization and other network costs control initiatives.

Marketing and selling expense was $42.8 million for the first quarter of 2007, a decrease of $1 million from the fourth quarter of 2006, but $3.7 million higher than the first quarter of 2006.

In both cases, this correlates to changes in post-paid gross adds.

Post-paid gross adds in the first quarter of 2007 were slightly lower than in the fourth quarter last year, but 11.2% higher than the post-paid gross adds in the first quarter of 2006.

At $452, our cost per gross add was in line with the first quarter of 2006, and up slightly from the fourth quarter.

If it one were to look at costs as a function of just the pre and the post-paid gross additions, excluding reseller lines, we actually saw a decline of almost $50 per gross add as compared to Q1 of 2006.

Our handset subsidy continues to run in the low $80 range, on average.

General and administrative costs were $48.6 million in the first quarter this year, which was $1.2 million more than the same period last year, but down $800,000 from the fourth quarter.

As with cost of service, the first quarter of 2007 -- or, I'm sorry, the first quarter G&A last year did not include the incremental costs associated with our acquisitions, which by itself accounted for more than the year-over-year increase in G&A.

As compared to the fourth quarter, the $800,000 savings is primarily due to our continued reductions in bad debt.

Summarizing, our revenue increased year-over-year by approximately $46.8 million, while over the same period, our costs increased by $23.3 million.

So roughly 50% of our incremental revenue flowed through to EBITDA.

Backing out the impact in the first quarter 2007 of our acquisitions, our revenue increased by $34.6 million, versus an increase in operating expenses of only $13.2 million.

This results in us delivering $21.4 million, or over 61% of our incremental revenue ex-acquisitions, to EBITDA.

For the first quarter of 2007, our income statement is reflecting the loss applicable to common stock holders of $32.6 million, which calculates to a $0.19 loss applicable to common shareholders.

Included in our loss is a cost of $57.5 million associated with the refinancing of most of our debt at our American Cellular subsidiary.

Without that transaction, we would have shown a small amount of income and positive earnings per share of a few cents.

In March, we refinanced $900 million of debt at American Cellular with the new bank facility, which priced at LIBOR plus 200 basis points.

Today that rate is approximately 7.3%.

We took out all the previous bank debt that was priced at LIBOR plus 225 basis points and $714 million of our 10% senior notes.

All in, we expect to see roughly $16 million in annualized interest savings.

Our overall cost of debt declined from approximately 8.8% to 8.1% as a result of the refinancing.

In the first quarter, we spent $35.8 million in capital expenditures.

Of this, $21.6 million was spent at Dobson Cellular Systems and $14.2 million was spent at American Cellular.

We were ontrack and continue to believe we will spend approximately $155 million on capital expenditures for the year, consistent with our guidance from our last conference call.

Our guidance in all other areas also remains intact.

We reiterate the 2000 guidance that we've provided on our February earnings conference call.

Finally, from a liquidity perspective, we ended the first quarter with $148.4 million in cash.

In addition to that, we still have the full $75 million revolver at Dobson Cellular System and both the $75 million revolver and the $75 million delayed draw term loan available at American Cellular.

Including the cash on hand at the end of the quarter, our net debt leverage ratio was 5.4 times.

Including our series of preferred stock, our net leverage ratio was 5.7 times at the end of the first quarter.

We are pleased with our success in reducing both our net leverage and cost of debt and remain focused on achieving further reductions in both.

On a more personal note, we were deeply saddened by the recent and unexpected death of our treasurer, Richard Sewell.

Those of you who had a chance to meet and work with Richard knew him to be a very hard-working, principled person -- just a terrific person.

All of us will miss him dearly.

We here at Dobson are very thankful for your condolences these past two weeks and appreciate your keeping Richard's family in your thoughts and prayers.

In the interim, I, with the help of my organization, will assume Richard's responsibilities.

I would now like to turn the call back to Steve for some brief closing comments.

Thanks, Bruce.

We were very pleased with our results for the first quarter of 2007 and with the continued progress that we made in key areas of the business and our operating metrics.

As I said earlier, we believe the first quarter's results position us very well to achieve our goals for the year, but beyond that, to capitalize on our strategic growth potential over the next several years.

Dobson now has strategic assets and capabilities in place to increase market penetration, to grow EBITDA margins, free cash flow and to build significant additional shareholder value in the years ahead.

As pleased as we are with our progress to date, our focus is on the long-term growth opportunities that we now have ahead of us.

With these capabilities in place, Dobson expects to generate consistent quarterly subscriber growth in all our markets in customer segments.

While wireless customer penetration in the United States is about 75%, Dobson's markets are closer to 55 to 70% penetrated.

Our overall market penetration was 13.2% at the end of the first quarter, so we have an excellent base from which to grow.

We are typically number one or number two in market share in underpenetrated markets that have substantial growth potential, especially as new data services and products are introduced.

Finally, instead of the five to six competitors you find in a typical urban market, we generally have, on average, four providers in most of our markets, including Dobson.

In Alaska, we are the wireless leader in a what is, in essence, a two competitor market.

We believe that our competitive environment, coupled with our operating streams, positions us well for consistent customer growth.

Aside from improving sales, we are confident that we can continue to improve the customer's overall experience with us, and as a result, see some improvement in today's sub 2% post-paid churn.

As I said earlier, with best-in-market networks, strong leadership and improved customer care processes in place, we have every reason to expect further improvement in churn.

We have strong complimentary relationships with our national GSM counterparts; AT&T and T-Mobile U.S.A.

Dobson is the third largest GSM provider in the United States, thus we are positioned today to be a long term, strategically relevant GSM operator nationwide.

Our networks are strategic to our GSM roaming partners, in terms of geography, technology and the positive quality experience Dobson networks provide to our roaming partners customers.

Because of the foundation that we have laid, we are confident that we could expand into new markets in the future and operate with greater scale.

We made several key acquisitions last year that have been integrated very efficiently.

We continue to look at attractive acquisition candidates, but also at markets where we bought AWS spectrum.

We own at least 20 megahertz of AWS spectrum over 10.8 million adjacent pops in our markets -- adjacent to our current footprint.

We think this spectrum is best suited for a 3G build that would be very complimentary to others on the same technology path, including AT&T and T-Mobile.

We will continue to evaluate the growth of 3G in the United States and expect that our deployment would begin no earlier than sometime next year.

We believe there's room for improvement in our operating margins, as pleased as we are with the gains made on the recent quarters.

We expect revenue to continue to grow, based on our expanding customer base and additional increases in ARPU.

We expect to see higher margins as we decommission our TDMA and analog networks and concentrate on growing our core GSM business as efficiently as possible.

Over the next several years, we believe we can move EBITDA margins closer to the 40% mark.

Finally, while we have consistently reduced our average cost of debt to 8.1% at the end of the first quarter, we are looking to strengthen our balance sheet further to generate additional cash free growth.

If capital markets remain fairly stable over the next several years, we expect to continue reducing our average cost of debt.

In summary, our vision for Dobson Communications is very positive and bright as we capitalize on our growth potential and as additional opportunities flow from the growth of the U.S.

wireless industry.

We are very thankful for the confidence demonstrated by our investors and we are focused on generating additional value as we move forward.

Thank you.

And with that, I would like to turn the call back to the Operator for questions.

Thank you, Sir.

(OPERATOR INSTRUCTIONS) And we'll take our first question from Ric Prentiss with Raymond James.

Please go ahead.

Yes, good morning, guys.

Good morning.

I guess a couple of years ago, people would have thought that ringtone, Mission Impossible, was what you were looking forward to with improving your business, but not so.

Thank you, Ric.

Thanks for the update on margins and churn -- EBITDA margins, as far as where they might head.

If we look at the first quarter results, can you talk to us a little bit about the post-paid adds?

You mentioned how you don't think it will continue -- the high-roaming customers to churn off at the rate you saw.

Do you think you will always have a slight hit from that, though, as you look forward?

Or should we expect that to get back to neutral?

And on the pre-paid side, obviously we like post-paid better, but the pre-paid side is very light for the first quarter, which is seasonally strong.

Update us a little bit about what happened there.

And the reseller count, I think you said Trac Phone next week?

Yes.

That's what we have found.

It's going hit the post-paid adds -- and it's relative to the -- I think it was around the profitable disconnect question.

Yes, that process -- Ric, quite frankly, we have always looked at our customers and looked for abusive high-usage roamers and have taken those off periodically through the course of time.

When we launched our statewide plans back in early '06, we wanted to have a period of time where we could look at what the impact was going to be from those customers relative to roaming.

So we gave them roughly a six to eight-month burn-in period, which takes -- about the time it takes to determine what their usage pattern is going to be.

So we did the -- this start of the year reconciliation, if you will.

And quite frankly, the important aspect of this to remember is that these are unprofitable customers.

They are people that, quite frankly, we -- they cost us money.

That's why we take them off.

Going forward, we will continue our process of looking at these on a regular basis.

We are taking off the high-end abusers, but not to this extent on a regular basis.

I would expect that every year we will take a good, hard look on it.

The rest of the year, we will be looking at primarily on a regular monthly basis, pulling out the one-offs that are abusers.

We don't look at this as a quarterly number that you should extract.

The other thing that Bruce pointed out is, we haven't changed our guidance as a result of this.

So we obviously don't expect this to impact our -- at least 90,000 net adds for the quarter -- or for the year, excuse me.

In terms of pre-paid being light -- I look at pre-paid a couple of ways, Ric.

Number one, our pre-paid gross adds were up 30% year-over-year for the quarter that -- while you say it's typically strong for us, the first quarter is -- is generally, seasonally softer.

Our pre-paid base grew from January of last year to January of this year by 82%, albeit a small number.

The absolute numbers grew by 82% and with churn rate relatively flat year-over-year, you are thinking that churn rate on a much larger base -- almost a double base.

So the combination of a seasonally slower quarter for us, combined with the rising customer base and the churn rate applied, gave us that yield.

In going forward, obviously the first quarter for us is typically the lightest, in terms of the seasonality.

We don't look at it as a light order, in terms of pre-paid.

We were happy that the pre-paid gross adds were up 30% year-over-year.

And in terms of the reseller, yes, as I mentioned in my comments, Trac Phone should begin selling GSM handsets sometime next week.

Okay.

And then from kind of a strategic standpoint, with the 700 auctions coming up, can you update us on what your thoughts are, as far what the impact -- or the interest on your side might be?

Well, I think we said all along that -- certainly we'll pay very chose attention to what others are doing, primarily AT&T and T-Mobile, in how they may participate.

And if they do, there's a chance that we could as well.

Now obviously, the -- I guess the rules around the auction have -- obviously have to change and I suspect that they will.

It would look more like an AWS auction, so there could be opportunistic options available to us.

But we will be paying very close attention to what AT&T and T-Mobile do and then decide from there.

Final question is on guidance.

You mentioned that you are reiterating all of your '07 numbers that were previously provided.

How often do you guys review your guidance?

And should we think of any typical timeframe -- if there was an update to come.

Well, we constantly look at our earnings and look at what our projections are.

And any time we feel that there's a material change in our guidance, we will make that change.

So there's not a typical time period.

I think last year we made a couple small tweaks in the first quarter and then updated more extensively in the second quarter.

But we'll continue to look at how trends are going and how it might affect our outlook.

Okay.

Great.

Good luck, guys.

Thank you.

And we'll take our next question from Phil Cusick with Bear Stearns.

Hi, guys.

Can you hear me?

Yes.

Great.

Thanks for your time.

I wonder if we could start with talking about post-paid gross adds, which seem to be growing pretty strong year-to-year.

How does that keep going up?

Is there more distribution channels coming online?

Do you think it is a wider variety of plans?

What should I be thinking about there?

If you go back to to some of the comments that I closed with, and you look at our -- the way that we are executing on our plan today, the fact that we have very strong distribution in place today, that our rate plans are continuing to do what we expect them to do and drive more traffic to our stores, and as a result, we are putting more folks into the post-pais bucket with good value.

And there's -- so I look at this as a continuation of the execution of our current strategy.

On top of that, if you look at our markets -- as I said, we are in what we believe are favorable markets and positions in our markets with typically fewer competitors and underpenetrated markets as a whole.

So we look at all of those factors and as we improve our network performance, as we improve all of the customer touch point processes that we have, we continue to build an increased loyalty and an increased satisfaction level with our customer base.

So we see growth from that.

So I'd look at all of those factors as being very positive in our ability to continue to grow our base.

And on the churn side, you mentioned that you think it could come down.

It sort of has been trending -- post-paid has been trending toward what we have been seeing as GSM churn for a while, in the high ones.

Come that come down as far as like the mid ones or even low ones over time, or is it too aggressive to look at?

Well, yes -- we wouldn't hazard a number out there.

But I will tell you that we are very intensely focused on all of the things that contribute to lower churn.

As I mentioned, we examine, on a regular basis, all the processes that we have in place to drive customer satisfaction.

We look at the network and constantly are striving to improve that.

An example of that is our Network Fast Track Initiative, where we are trying to pull in the majority of our build -- a high percentage of our build early in the year to continue to deliver high quality network services to our customers.

So it's all of those factors that yield the number and we are just continually focused on improving those processes.

So where it can go, it's hard to say, Phil.

I just know that we are focused on continuing to perform at the highest levels, improve customer satisfaction and the corresponding loyalty to us, and continue to push that as low as we can.

Last one and I will get off.

Thoughts on the ETC Joint Board recommendation?

How should we be looking at this over the next couple of years?

Would the right way to look at it is that comes down over time?

Or do you think you can really hold (inaudible) for awhile?

Well, there's so much hair on the dog, so to speak, that things still remain to be clarified that it would be -- it is tough for to us sit here and tell us how this might play out and how it might impact us.

But I will tell you that, obviously, they recommend the decision.

There seems to be a lot of dissent among the commissioners over this approach to controlling the funding, while at the same time encouraging deployment of services -- telecom services to rural markets.

Who knows how Congress may play this.

We have -- we are in the process with analyzing a number of scenarios to estimate that -- how this recommended decision might affect the reimbursements.

Again, there are so many variables, it would be probably not real responsible for us to comment on that, other than we have done enough, and -- to look at how it would potentially impact us in the current calendar year.

And it would not change our guidance for 2007 in revenue, EBITDA and free cash flow.

So a lot is left to be decided.

A lot left to be clarified.

As we get more of that clarification, we certainly can provide a little bit more clarity on how it may impact us.

If I can squeeze one more in -- I will make it an easy one.

What's data as a percentage of roaming revenue?

It seems like that rate is really holding up.

And I've got to assume that data is a big part of that.

Well, data continues to grow as part of our roaming revenue channel.

Last time we spoke, we had mentioned that it was under 10% of our total.

It's still running under 10%.

But it is growing.

Good.

Good.

Thanks a lot, guys.

And we'll take our next question from David Sharret with Lehman Brothers.

Good morning, guys.

Good morning, David.

I have first just on -- in terms of the data ARPU.

Obviously, impressive growth in the last couple quarters, just about $0.50 to $0.75 improvement in data ARPU.

I was just wondering if you can comment if that's a good run rate to continue to expect in upcoming quarters?

And maybe just some more detail.

I think you mentioned some new products you were -- recently launched or were going to be launching soon.

Maybe you could touch on those and how that may impact that growth rate in data ARPU?

And then on the voice ARPU side, that seems like that's holding relatively firm.

If you could just confirm that you are seeing that as well.

Basically, as we think about your comments about ARPU improvement over the year, it basically should be a proxy for what data ARPU growth you see.

Yes, David, let's start on the data ARPU.

Suffice it to say that there's still a large percentage of our data ARPU that's driven from SMS and [edscard] revenue.

So we are beginning to make progress on other items; ring tones, games, graphics, short codes, et cetera.

Which is beginning to contribute meaningful percentage of our data ARPU.

Our Blackberry data revenue is, we still feel is relatively low, in that the Pearl introduction is really been met with a lot of enthusiasm, both internally and through our customer base.

We think that could help.

We have, in terms of the new data products, we will be launching ring back tones sometime in the third quarter.

And we're also creating what's called a new store front in our access -- web access process.

So that should also improve.

It will deliver more content in -- primarily in the area of games and graphics and make our search capabilities much more efficient for people.

Today it's a tad bit cumbersome.

And this new store front is coming also in the third quarter timeframe, should help us immensely.

So we -- we look at data as having additional opportunities.

And we have said all along that while we lag a number of larger carriers in terms of absolute data ARPU, our progression is solid and we don't see any impediments that would cause us not to be able to reach some of those levels as well.

From a data ARPU -- those are the current status of what's driving the data ARPU.

Some of the -- a couple of products that we will be introducing in the -- in the third quarter and where we think it can go trajectory-wise.

In terms of voice ARPU, you're right, it's been relatively stable.

And in fact, I think from the first quarter of last year to first quarter of this year, it actually grew a bit.

So we have seen a very -- we classify a very rational market place from a competitive standpoint.

And our voice ARPU has been pretty constant over the last four, five quarters.

So where it goes from there, I'm not sure, but it certainly -- as long as the competitive environment stays as rational as it is, we see no indication otherwise, we think that our -- that our overall ARPU can see some additional growth.

That's helpful.

And if I could just ask on your question -- or your comment about EBITDA margin improvement.

If you could maybe just specify maybe some of the key drivers on the cost side, or actions you are taking there?

Where we should see that in terms of maybe CCP or CPJ, where you think those opportunities are for margin improvement or maybe just in terms of scale in the sub growth we're seeing?

David, this is Bruce.

On the expense side, there are a number of initiatives that will affect margins.

Obviously, I think you mentioned the biggest one, and that's the scale.

And that scale, both in terms of us increasing our subscriber base, beginning last year and through this year, and hopefully on into the future.

Secondly, as we add cell sites and other things to our network each year, each year from a percentage standpoint, it becomes a smaller percent of the total.

And so the incremental increase in some of the recurring costs on those things is a little bit lower.

We have a lot of opportunities.

We had mentioned that, for instance in the first quarter, we have lower toll rates that we negotiated.

There are other opportunities for us to get lower rates, again, as our volume increases.

We talked a little bit about how, as we've transitioned from GSM to -- or from TDMA to GSM, that we periodically take some of the TDMA costs out of the process.

So that helps us.

When you look at areas like G&A -- a big part of our G&A, for instance, is customer service and customer care.

Steve mentioned how we look at all the processes and try to make improvement on the processes.

Making those improvements not only make the experience from the customer better but also, it turns out, it reduces your costs as well.

As we streamline the processes, as we increase the customer satisfaction and find we don't need as much in some areas to support our customers, that all helps our margins.

So all of those factors will get us to the kinds of margins that Steve talked about.

What percentage of your base was on unlimited plans at quarter end?

It's below 15%.

It's in the -- 12 to 15%, 12 to 14% range.

Okay.

Great.

Thanks, guys.

We will go next to Pat Dyson with Credit Suisse.

Thanks, good morning.

Just to follow-up a little bit on David's previous question about the margins.

Your G&A for the quarter came in at a relatively low level, as a percentage of revenue, at around 14.5%.

Bruce, is that a reasonable jumping off point to think about the balance of the year?

As a percent of revenue?

Yes.

When I look at G&A, most of the costs that we have associated with G&A that would cause it to grow are variable type things like billing costs.

But as you would expect revenue to -- if those increase, we would expect the revenue to increase as well.

And so we don't really see -- I don't see a lot of other no-customer, non-variable type costs occurring through the rest of the year.

Bad debt -- first quarter and certainly the second quarter, usually are some of the best quarters in bad debt.

But I don't really see those increasing significantly.

So I guess that's a long-winded way of saying that that's probably a reasonable assumption, because I don't see a lot of unique items that cause that cost item to go up.

Okay.

And then two other relatively quick ones.

Can I get the breakdown of roaming minutes between DCS and Am Cell?

And then, I'll give you the softball on the balance sheet, as far as what your thoughts are in refinancing the remaining [stub] on that that you didn't take out previously.

Well, in terms of the split of our roaming minutes between the two --

367.

367 million were in Dobson cellular and the balance were in American.

And in it terms of our plans on our -- not only on our [stub] amount of the 10% notes but any of our balance sheet -- it is going to be consistent with what we said before.

We look at a lot of our opportunities where we can spend our cash, which could include acquisitions, it could include paying down debt.

We look at all of those and try to balance what brings the biggest shareholder value to us.

And we'll continue looking at that.

And when we've got something specific, we'll certainly announce it.

Okay.

Great.

Thank you.

And we'll go next to Anna Goshko with Banc of America Securities.

Hi, thanks very much.

I know you are reluctant to pinpoint a number on the churn outlook, but I'll give it another try.

On the -- if I back out the intentional disconnects from this quarter, I get a post-paid churn of about 1.6%.

I just want to make sure that's sort of -- is that a baseline that I can kind of hang my hat on going forward in any improvement, barring any more blips and disconnects, which are intentional?

Any improvement should be off the baseline of the 1.6%?

And then my second question is on -- on the reseller kind of momentum going forward this year, I know you don't want to also break out exactly what your gross and net adds guidance is by segment; but how should we think about with Trac Phone launching these GSM phones, do you expect to see a spike on the launch?

Or is that going to be more of a gradual build, in terms of the gross adds over the year?

Well, let me address the second question first.

In terms of how the -- the impact of Track Phone may be felt on us, we've always said it's a second half -- we believe it to be more of a second half impact.

And that as they launch, it will be more of a gradual build-in than a big spike up front.

In terms of the churn, you're right, it's good to take another run at it but we don't -- we probably won't break out over how far we think that can go.

But I would just, again, go back to all the things that we focus on on a daily basis to help our customers have a better experience with us, and as a result, stay with us longer.

So I think your math gets you to 1.6%.

I mean, we closer to 1.7%, in terms of what that adjusted number would be.

And again, we are very focused on delivering the highest level of service to our customers and -- and creating an environment and a reputation as a terrific service provider, so people come to us and stick with us.

And where it can go -- we'll continue to push on it and see where it takes us.

But we are pleased with the progress and we are focused on continuing that -- the processes that got us there and see what we can do.

Okay.

If I could follow-up on two things.

Just on the Trac Phone -- or the reseller question again; as you set your guidance for the year-on-year additions, is it fair to assume that in the second half of the year, you are assuming that you would get kind of the old, steady state -- kind of quarterly additions?

Before you had sort of the down draft last year, you were generally adding about 20,000 plus gross adds per quarter.

Do you expect to sort of get back to that former pace?

And then finally, I couldn't figure out free cash flow for the quarter from the press release, and I apologize if you mentioned it and I missed it.

I just wanted to see how you are tracking up free cash flow for the quarter versus your guidance of $90 million for the year?

With respect to the guidance and potentially Trac Phone's impact on that; we had said earlier -- we reiterated our guidance, it's at least 90,000 net adds.

And again, ours is -- we look at our business as seasonal; a little softer in the first quarter, building in the second quarter, the third quarter is typically very much the high point of the year in many respects, and fourth quarter strong as well.

So the virtue of our seasonality -- we would expect -- we don't see any reason to think that that seasonality would change at all this year.

So I think that whether we get back to what you said is 20,000, we have seen in the last four quarters, five quarters, in the 14, 15, 18 range.

So again, where it goes, I'm not -- I'm not certain with respect to Trac Phone, other than we know that what they are very focused on the launch and getting those GSM handsets into their locations.

So we will see how that plays out.

In terms of the free cash flow, I will let Bruce address that.

On free cash flow, the first quarter came in right where we expected and so we're on track.

The cash portion of our CapEx was a little bit lighter, but that's just a timing difference in the first quarter versus the rest of the year.

But generally, we feel very confident with our guidance.

I'm sorry, what was the number for the quarter?

We didn't really give a number.

But we did $116 million of EBITDA, we did about $36 million of CapEx and we've got about $57 million of interest costs.

Okay.

Thank you very much.

Thank you.

You and we'll take our next question from Thomas Lee with JPMorgan.

Hi, guys.

Thanks.

I will just ask one question.

I'm really curious about your customer optimization process.

I think it makes a lot of sense to make sure you don't have customers that are causing you guys to lose money.

Because as you guys -- I mean, you are clearly showing you're not chasing market share at all.

But my question is really, how do you identify these customers?

I know that off-net or incollect roaming is about 14% of total minutes.

Is it some sort of standard deviation away from that level that causes you to rethink these customers?

And how are they reacting when you call them?

Are they saying, I didn't see in my contract and they are getting upset?

Or are these -- are you basically going back to them and saying, we are not disconnecting you, but from now on, we will put you on a $500 plan, and that's what you are doing?

Or are you just finding some way to kind of cancel their service?

Thanks.

One question only -- multiple parts.

I will answer the first part of that one question; how do we go about looking at customers and determining which one are unprofitable?

And we take this down to a customer level basis.

You can't do it any other way but by an individual customer basis.

And the biggest variable cost in the customer is their off-network.

And we look at the amount of minutes that they are using over a rolling time period and look at that trend.

And if it's a trend that causes their minutes to be excessive and net revenue to be negative, they are a strong candidate for us to disconnect from our plans.

Now the reaction, Steve -- ?

Yes, we do -- we do a couple of things up front.

As Bruce said, we look at it on an account level, and we make sure that there's one unit within an account with multiple units that are very profitable, we obviously treat that differently than we would a one-off user.

But we all -- in all cases we try to move them to another plan, explain the situation, explain that our contractual -- the things that contractually allow to us do this.

And then if they won't move or they won't go to another plan, we politely tell them thank you for their business and we, as s of this date, we will not be providing service to you any longer.

So the overall reaction is -- the real heavy users is -- I wouldn't say they jump up and down and say thanks for calling.

But in many cases, we are able to move them to other plans.

That's how we go about it.

And I think you hit the nail on the head.

Our first priority is that we have problem customers in the customer base.

And so that's -- that's how we go about it.

That's the reaction we have seen and that's it.

Well, great, guys.

Thank you and congratulations on not chasing market share but keeping a profitable business model.

Thanks, Tom.

We'll go next to Michael Nelson with the Stanford Group.

Yes, thank you.

I have a follow-up question on USS subsidies.

In light of the Joint Board recommendation to cap subsidies at the state level; are you aware of other carriers seeking ETC status in any of the states that you are currently receiving subsidies?

Thanks.

I think there are others in Alaska and in Oklahoma.

And other than that, we're not aware of any.

Thanks.

You're welcome.

And we'll take our next question from David Janazzo with Merrill Lynch.

Good morning.

Hi, David.

Bruce, I will try another one on the margin topic.

Thanks for walking through all that.

In light of the incremental margin discussion and looking at the ARPU trends, how does that square with your guidance of the 400 -- the at least $485 million in EBITDA for the year?

Are there some other pressures that are going to come on throughout the year?

Well, I will know, I guess, at the of the year if there were other pressures.

But from our Business standpoint, I think the first -- this is first quarter we have seen, directionally, things going where we want them to go in the first quarter.

Certainly from a cost standpoint, we talked about how the vast majority of our cell sites will come in in the first and second quarter.

And we don't anticipate anything beyond that.

And so I think that our discussion squares right in the middle of our guidance, that we think we will do at least $485 million of EBITDA this year.

And I think that -- that's still a solid statement, that we'll do at least $485 million.

Okay.

Thanks.

And we'll go next to Kevin Roe with Roe Equity Research.

Thanks, good morning.

I would first like to extend my sympathy to the Richard Sewell's family and the whole Dobson team for Richard's loss.

Thanks, Kevin.

A couple of quick questions.

Bruce, on cell sites, what is your anticipation for cell site builds this quarter versus first quarter?

And do you think that will move the needle much on cost of services as a percentage of service revenue?

And on the voice ARPU side, were there any new fees instituted previous quarter, in Q1?

Or any price that may have moved the needle on voice ARPU at all?

Thanks.

On the cell site standpoint; we'll probably do close to 120 more cell sites in the second quarter.

Certainly, that will have an increased cost associated with those cell sites.

But --

And what was it in Q1?

92, Kevin.

Okay.

And on the voice ARPU side?

Did we increase any fees?

Yes, were there any fees instituted or material price increases in your voice plan?

Just to see if there's anything material that's new in the quarter that may have moved voice ARPU at all.

We really haven't changed much.

I mean, we always make tweaks.

We make tweaks to late fees, increased that a little bit.

But generally, no.

Most of the strength we are seeing in voice is coming from the types of plans we are selling on GSM.

Terrific.

Great quarter, everyone.

Thank you.

And we'll go next to [George Mueller] with Barclays.

Hi, guys.

My question has been asked already.

Thanks.

Thank you.

We'll go next to Todd Rethemeier with Soleil Securities.

Thanks, just a follow-up on Tom Lee's question from earlier.

You said that a lot of customers -- you asked them to go to another plan, and I guess the 4,300 are the ones that refused to go to another plan.

So how many did move?

How many did you approach to begin with?

Well, it's -- the majority of them have decided to leave our Company.

It's probably close to 90% of those we asked to move end up leaving.

Okay.

So maybe I misheard that earlier then, so 90% of the customers you approach do leave and go to different companies then?

Yes, in this case they leave us.

Okay.

Thanks.

And with no further questions left in the queue, I would like to turn the conference back to your presenters for any additional or closing remarks.

Well, just again, we were very excited about the performance that our teams turned in in the first quarter.

We are excited about the year.

We feel very good about the -- all the pieces we put in place over the past to get to us this point.

And we look forward to -- to the future and to getting back to you and reporting our continued progress.

And thanks again for your confidence in our Company.

Thank you.

This does conclude today's conference.

We thank everyone for their participation.

You may disconnect your lines at any time.