Telephone and Data Systems Inc (TDS) 2002 Q2 法說會逐字稿

Good morning. My name is Brooke. I will be your conference facilitator today. At this time I would like to welcome everyone to the Telephone and Data Systems and United Cellular second quarter operating results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a Q&A period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the star then the number two on your telephone keypad. At this time I will turn the call over to Mr. Steinkroff, Vice President of corporate relation at TDS. Thank you, Mr. Steinkroff. You may begin your conference.

Thank you, Brooke. Good morning everybody. Thanks for joining us once again this quarter. With me this morning, Sandy Helton, Executive Vice President and CFO with TDS; Jack Brunei, president and CEO of United States Cellular; Ken myers, Executive Vice President finance and CFO, United States Cellular; and David Whitwood, executive Vice President finance, staff operations and CFO with TDS Telecom. A replay of the teleconference will be available today starting at 1:00 Chicago time and run through Wednesday, July 17th. The replay number for those of you who don't have it is 800-642-1687. The pass code 4818052. This call is being simultaneously webcasted on the investor relations section on the TDS website at WWW.TELDTA.com, and will be available for the next two weeks and thereafter will be archived on the website. The information on the summary operating data pages of the press releases changes almost every quarter these days as we add new information. So be careful for the -- for that, and realize the format and some of the content might have changed. As always, it's important for you to note that some of the discussion today, either in our prepared comments or during the Q&A session may represent forward-looking statements. While these statements are based on the most reliable data available at the time, any forward-looking statement involves certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties are many and varied and can and do change from quarter-to-quarter and are noted in the press releases. Investors and any other interested parties are strongly encouraged to read the company's annual report, as well as the filings with the Securities and Exchange Commission to get a better understanding of the company's operations and any changes there to. This call is being recorded by TDS and is copyrighted material. It cannot be recorded or rebroadcast without Telephone and Data Systems express permission. Your participation implies consent to our taping. Please drop-off the line if you don't agree to these terms. If you are not getting notification from us about the teleconferences, have changed your e-mail address, please contact me and we'll get you all set up. Also, if you have some suggestions how we can more effectively get information to you, or you have some suggestions about additional information you would like to see in our press releases, please give me a call to discuss it. At this time, I usually try to remind people that TDS and U.S. Cellular will be speaking at several investment conferences later this fall. The two that are coming up immediately, TDS presenting at the Morgan Stanley conference in Florida September 9 and 10. I don't know which date we are presenting quite yet. And both TDS and United States Cellular are presenting at the UBS Warburg conference in New York in the period November 11 through 13. Also if you are in the Chicago area, or in the Madison area, and you would like to come by and meet with management of our business units, all of whom we make available to the investment community, just give me a call, and we'll make that happen. Both press releases were posted to the TDS internet home page this morning, shortly after going out over the wire, and U.S. Cellular will post their release to the website as well. I will turn the phone call over to Sandy Helton.

Thank you. Good morning. I'll quickly review the highlights of the quarter for TDS and turn the call over to Ken and Dave. All three of our business groups posted very solid operating results for the quarter, with results improving month-to-month as we move through the quarter. Some of this is typical seasonality. It's too early to say if the trend reflects on improvement in economic conditions, but hopefully that's the case. For the most part our operating results are at or slightly better than expectations. Fortunately, it was a business as usual quarter, the details of which Ken and Dave will cover momentarily. TDS's revenues totalled $724 million in the quarter, an increase of 12.7% from a year ago. U.S. Cellular posted solid revenue growth of 8.7% in service revenues, with significantly higher equipment sales which Ken will explain in his remarks. U.S. Cellular recorded improved year-over-year average revenue per unit or RPU, due entirely to higher retail service revenues. This is the second quarter in a row in which retail RPU improved year-to-year. TDS telecom revenues were up 17.4%, with growth in the established ILEC both stood by the acquisition of course communications and exceptional growth of 77% in the CLEC operation, TDS Metrocom. TDS's operating cash flow increased 6.1% to $246 million. Operating cash flow, like revenue growth, due to higher experience levels at US Cellular and the cost of funding TDS Metrocom's expansion into the state of Michigan.

Diluted earnings per share from continuing operations was $1.25, an increase of 40% when compared to 89 cents a year ago on a comparable accounting basis. Please keep in mind that TDS received a $45.3 million annual dividends in Deutsche Telecom in the quarter. During this quarter we monetized the majority of two of our equity positions. At TDS, 2 million 361 thousand shares of Verisign were monetized in a five-year, variable, prepaid forward transaction on May 7th. The floor and cap prices for this transaction were $8.82 and $11.47, respectively. Proceeds totalled $18.9 million. Taxes on any gain are deferred until maturity. At U.S. Cellular, 10 million 245 thousand shares of vota phone were monetized in a similar manner on May 16th. Floor and cap prices were $15.60 and $23.68, respectively. Proceeds of $160 million are anticipated to be used to partially fund the prime co acquisition. Again, a very solid quarter based on the hard work of their 9800 associates. Our ongoing focus on the very best customer service helped deliver excellent operating results in the first half of the year. We are confident it is the winning strategy for the second half of the year and for the years to come. Now, let me turn the call over to Ken Meyers.

Thank you, Sandy. Good morning. Thank you for your time today. The second quarter earnings release that U.S. Cellular issued this morning includes a whole page of key business metrics as well as the income statement for the second quarter and the balance sheet as of June 30th. Since you have all those numbers in front of you, I will spend a few minutes putting those results into perspective instead of just repeating the information you already have. First, this quarter we saw an increase in total average ref new per customer from $47.26 in the second quarter of last year to $47.48 this quarter. This improvement was driven by an increase in retail revenue per customer that averaged $37.93 this quarter. That's $1.28 increase on a year-over-year basis. This follows a concerted effort by the company to increase retail revenue by focusing our marketing initiatives on higher rate plans. This is the second quarter in a row that retail revenue has grown on a year-over-year basis, with the current quarter's increase large enough to offset the expected decline in roaming revenue. Second, we saw strengthening demand throughout the quarter. April was weak from a customer growth perspective. May improved, and June was even stronger and achieved internal targets that were set nearly 10 months ago. While it's too early to tell just where the economy goes next, the last month has been encouraging.

Third, as Sandy mentioned, equipment revenue is up sharply on both a year-over-year and sequential basis. This reflects a change in the company's distribution plan and is more reflective of what we would expect going forward. This quarter we implemented a program to insent our dealers to buy their phones directly from U.S. Cellular. This allows us to insure the quality of hand sets that our customers receive, and increases our purchasing power with our vendors. The effect of this program is to increase both equipment costs and equipment revenue. It has negligible effects on cost per gross ad. Cost per gross ad at $391 is above our targets. Clearly, lower ad volume affected us. While at the same time we did increase advertising the second quarter to support some new pricing plans. Also, this calculation includes all of our marketing costs, including amounts spent on future product offerings such as data. These more future-oriented costs added about $12 to cost of gross ad this quarter. We plan to test one X product offering this quarter in one of our existing CDMA markets. We are on schedule to roll roll out CDMA into our Iowa markets by year-end.

With respect to the Primeco acquisition, we continue to make progress. We have a team working on integration and launch plans. We have cleared Scott Rodino, closed a $250 million bank line, and monetized our vota phone holdings during this quarter. We still hope to place some long-term debt and close the acquisition during the third quarter.

Now, with one-half the year gone, there are three trends that have developed. First, while demand has strengthened each quarter, it has been weaker than originally expected. As such, we are now targeting to add 260 to 280,000 net new customers this year. This excludes the effect of any acquisitions, including the pending Primeco deal, and reflects the slower growth we have seen so far. Second, cash flow continues to grow nicely. However, lower than targeted customers in the second half will have a slight effect on revenue and cash flow. Based upon our revised targets for customer growth, we are targeting operating cash flow in the 670 to $690 million range versus the 680 to $710 million range we were looking for earlier this year.

Finally, we see little current effect on Cap-X. Since our CDMA conversion is a main driver, and this is on track. In fact, if we could, we would speed up this conversion process, giving its compelling economics. As I said last quarter, we will update our targets for the effect of the Primeco acquisition once it closes. At this time, due to the uncertain as to the closing date, it is just not possible to quantify the current calendar year effects.

Recapping, we saw respectable pick up in growth in the quarter, adding almost 30% more new customers this quarter than in the first quarter of this year. Second, total average revenue per customer increased slightly on a year-over-year basis, despite a decline in the absolute level of running revenue. An Increase in retail revenue per customer was the main driver behind this result. And this continues a trend we saw last quarter. Customer loyalty remained high as evidenced by our 1.7% post pay churn rate. These last two factors drove $176 million of operating cash flow. Finally, our CDMA conversion overlay program is on schedule. Thank you for your interest this morning. Now let me turn the call over to Dave Whitwood at TDS Telecom. Dave?

Thanks, Ken. Good morning, everyone. Q2 produced solid growth in both our ILEC and CLEC businesses. ILEC axis on equivilents grew 2.1% for the second quarter, excluding the effective acquisitions, which is solid growth in a difficult economic period. In addition to the internal line growth, we continued to increase penetration in our key vertical services and products including, dial up and high speed internet access and long distance. Specific to our LD product we continued to use global crossing for the provision of this service and are experiencing good service levels. However, we have contingency plans in place in case service becomes problematic in the future. Please recall we wrote off our exposure to global crossing of $3.4 million in the first quarter. MCI Worldcom represents one of the larger long distance providers for our customers, as well as to other ILECs. We would typically have 10 to $12 million in access revenue receivables. We had been monitoring the situation for some time and will continue to keep this account relatively current. In the event of bankruptcy, there would be some recourse in the pooling process. In the event that they are no longer able to provide service, their customers and these access revenues would simply move to another long distance carrier, including possibly our own on a going forward basis.

Revenues for the quarter included a $2 million increase in universal service funds. $1 million of which relating to the first quarter. These revenues are included in the network access and long distance revenue category. This resulted from the correction of an error reported by the FCC recently. We had contemplated this corrective level of funding in our business plans for 2002, and it has always been part of our ILEC guidance. Total ILEC revenues were up 11.8%, and operating cash flow grew 10.5%, basically right in line with our plan. ILEC internet customers, both dial up and high speed increased by 6,000 in the quarter. The markets in which DSL service is available covers 44% of our ILEC access lines, and they serve 6500 customers. These ILEC DSL customers, when added to those served in our CLEC markets, brings the total to 15,600 customers. Our CLEC operations continue to add market share and crisply execute sales and provisioning processes. CLEC equivilant lines increased 22,400, an increase of 72% over a year ago. TDS metrocom revenues increased nearly 77% for the quarter, while cash flow losses were on plan. We have seen slightly higher levels of churn during the last two quarters, primarily for nonpayment. We have adequately recognized these cost results and have put procedures in place to manage the collection process.

During 2002 we are continuing to roll out the service expansions in Michigan that we began last year, as well as deeper penetration in our other markets. Capital expenditures for 2002 are expected to total approximately 120 to $130 million in the ILEC business, excluding acquisitions, and 55 to 65 million in the CLEC businesses. We are scaling back the CLEC Cap-X projections slightly, as receiving very reasonable pricing from fiber and lower cost from construction contractors. Of our previously announced acquisitions in New Hampshire the MCT acquisition was finalized on May 31st, and contributed one month's results to operations with revenues of 1.3 million and operating cash flow of 600,000 in the quarter. The telecommunication systems of New Hampshire acquisition closed on July 1st, and therefore had no impact on the quarter. We expect revenues of 10 to $12 million in operating cash flow of 4 to $5 million in the second half of 2002 for these acquisitions, collectively. Cap-X associated with these acquisitions will be approximately 2 1/2 to $3 million for that same period. To date integration of these two operations is going well. Now I would like to turn it back to Mark.

Thanks, Dave. Brooke, we are ready to go into Q&A whenever you are.

At this time I would like to remind everyone if you would like to ask a question press the star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A rosters. The first question comes from Rick Prentice with Raymond James.

Good morning, guys. A couple questions for you. First, Ken, the renewed or the updated guidance on net adds of 260 to 280 thousand, does that include both internal and external customer adds?

I don't know what you mean by internal and external. Those are all internally generated through our marketing channels. It does not, as I said, include any effect of any pending acquisition. I talk about the acquisition effect at closing.

Okay. I think -- didn't you in the first quarter, didn't you have some acquisitions or some small markets that you acquired that increased customer count?

Um -- we did, but those are not in that number.

Okay. So this is true internal customer adds?

That's correct.

Okay. Next question is on the cost per gross add. You mentioned that about $12 in the quarter had to do with future data services. Had there been any of that type expenditure, say in the last quarter's [INAUDIBLE] also?

Very, very little. We really started building that group this quarter.

All right. Any hints you want to give us as far as the one X trial, how you will be pricing it?

Not at this point in time. It is strictly much more of a functionality test, looking at some Brew applications, as well as some other alternatives.

Not a marketing test, it's more just how the thing works and how the people adapt to it?

That's right. There's a lot around the customer on that that needs to be worked out.

All right. And then lots of other potential speculation of licenses coming onto the market, Quest has gotten their directory business sales kind of first indication of interest. Any interest in buying parts of Quest wireless business or any other wire licenses that might be out there? If so, how would that be approached given the current capital markets?

Um -- I think we have been clear that our strategy is to strengthen the footprint where we have presence, to look at markets where we aren't as strong, and move out of them. Speculation as to any individual transaction is something that I just can't engage in.

Sure. And then the raise in the long-term debt, just really waiting on market conditions, or what's --

We wanted to get the quarter behind us. And the market hasn't been the most favorable environment over the last 60 days.

All right. Good luck, guys.

Your next question comes from Kenyon Enright with MSF Investment Management.

Hi. Good morning. My question is for Sandy. Two questions. The first one is on Metrocom. It's my opinion since the deal has been announced about $10 of the value ascribed just to the debt portion of Metrocom has been, sort of, imputted in the deterioration of TDS stock and nothing ascribed to the asset ledger. In fact I would say additional deterioration has come from questions about, does this change your real strategy and what are the cash flow needs, etc. My question is this, can you put some parameters around what Metrocom will be in terms of financing need over the next couple of years? How much you are willing to spend in that area? What you won't spend in that area, and again is this a change in the strategy?

Are you referring to Primeco or Metrocom?

Primeco, I'm sorry. The whole question was about Primeco, not Metrocom.

All right. I think, as Ken has indicated, once we disclose the Primeco transaction, we'll be giving more definitive explanations as to what the near term revenue and cash flow needs are. But I can simply say that we have reviewed the acquisition, and we believe that it's returning greater than cost of capital return.

I just want to add one thing. We keep on talking about the rural strategy and as sort of one of the guys that are setting the strategy, I don't think we have ever defined the strategy for this company as a rural strategy. In fact, significant parts of our operating income and revenue come from metropolitan areas like Milwaukee, Madison. And, you know, the future of this company isn't tied to serving the -- necessarily serving only the rural areas of this country.

Okay. The second question is just in terms of closing the loop on the Deutsche-tell and the Voice Stream. By my estimation, it's still the Deutsche-tell after tax proceeds represent almost about 28% of the current market capitalization, an astounding number. I'm wondering can you talk about any progress of what's going on? I know you made the progress with the vota phone and the type of -- in terms of signing vota phone. Anything going on with the Deutsche-tell and what your thoughts are in terms of the strategy of closing the loop and bringing the proceeds back to the shareholder?

Well, I appreciate your recognition that we have acted on the strategy that we described before in terms of monetizing the votaphone stock for Primeco acquisition, which we believe is a very good operating investment. That will be the way we look at our marketable securities portfolio going forward in terms of rating the expected value and the securities for a higher value in operating expense.

So do you have any opinion on the prospects for Deutsche-tell that are different than the market seems to indicate?

Well, I think we have been very constructive on Deutsche Telecom and we have felt the stock is undervalued. But we clearly acknowledge that in the past there was a higher price than exists today. But we do have expectations that the price will go up for Deutsche Telecom.

Okay. Thank you.

Next question comes from Frank Lusay with Raymond James.

Great. A couple of questions on the TDS side. Can you characterize the access line growth, not necessarily just VGEs, but the access line growth. Then on the Metrocom side, the line add is a little bit lower than what we were looking for. Can you give us an idea what's going on on the competitive front, any reasoning for that? Maybe a little more color. You say you are actively looking at some of the adds and looking at bad debt expense and trying to control some of the churn there. What exactly are you doing to scrub the customer base? Thanks.

Sure. Well, internal line growth equivalent access line growth was about 2.1%. If you look at physical line count relative it was about 8/10ths of a percent. That relationship is pretty consistent. It looked a little stronger in the later part of the quarter than it did in the early part of the quarter. Relative to the Metrocom, part of it is due to nonpaid, primarily all of it. Although we have competitors in the markets that we are in, those tend not to be our biggest issues. You know it tends to be nonpay issues. It's primarily on the residential side. So what we are doing is working to make sure that our credit scoring techniques are, indeed correlated with our bad debt experience and making whatever corrections we need to do to make sure we are able to identify that early on in the process. And that's probably what's impacted the line growth a little bit in the month. We are not going to keep the customers around extended period of time. I think that's the other thing, too. We have really accelerated the process so we get to the customers quicker. If the churn would have been lower, we probably would have had a little higher line growth.

Do you think you completed the process, or is that something we should see for another quarter or two?

I think we have most of it under our belt. I think the economic conditions certainly have some impact in terms of it. But, you know, I think we are cracking down on it a little harder.

One last question on long distance pricing. Are you seeing any significant drops in pricing, are you getting from global crossing? How about bids from other carriers? Thanks.

We typically don't talk a lot about our pricing in terms of that, but, you know, I think our rates are very reasonable. I don't think there's been a lot of movement in that area.

Okay. Great. Thanks a lot.

Your next question comes from Will Power with Robert Beard.

Yeah, good morning. Couple questions for Ken. I guess first, with regard to the revised net addition guidance, I guess I'm trying to get some color what you expect the drivers to be in the second half of the year, I'm assuming in part it will be an economic recovery. But it still looks to me like the net addition guidance assumes that the second half of this year will be stronger than the second half of this year. So just interested in any additional color along those lines. Any color around the minutes of use trends. I assume that's part of the factor for the higher RPU. I'm just kind of curious where those nets were falling, whether they are increasingly peak, off-peak, any color would be helpful. Thanks.

With respect to the first question in terms of add growth, yes we are expecting the second half of this year to be stronger than the first half of this year. Last year was kind of an anomaly where that didn't happen. It's the first time we have seen that. We have always, you know, looked at this year and expected to see a second half that is stronger kind of economy underneath it. And that's still our expectation. In terms of minutes of use, minutes of use for our customers averaged 280 minutes in the quarter. That's up from 215 in the second quarter of last year. When we look at that, one -- minutes of use off network as a percent of totals are still running in the same 8% range that they have now for about the last two years. As minutes of use grow per customer, the total minutes off network grow. But as the percentage of total usage, it's not changed. The peak/off-peak really varies dramatically by market and the demographics underneath the market. There are markets that are more influenced by college populations that clearly have a much bigger off-peak usage than others. On average we are seeing more minutes off-peak in terms of the mix peak/off-peak than we have. That continues to evolve as people are using their phones more throughout the day instead of the relatively concentrated usage that used to happen right around certain peak hours.

Okay. Thank you.

Your next question comes from Ned Zacker with Thomas Weisel Partners.

Good afternoon. Good numbers, ladies and gentlemen. The primary question I have is on the CMA rollout, Ken, can you tell us how far along you are in the process? You say as a percentage of either the pots covered or the subscriber base at this point?

Well, where we are at right now is going into the decision approximately one-third of our markets are covered with CDMA and two-thirds by TDMA. Our target was to get the state of Iowa converted this year. Which would mean we would put an overlay system on top of the whole TDMA network throughout Iowa. That's what our plan is. We are on target to do that before the end of the year. In terms of the percentage of pots that would get us to, I don't have that number in front of me. I know I spoke about that before, especially when we made this decision, so I can big it up. I just don't have it in front of me.

That's fine. I would like to follow-up with you on that. The other question I had, the improvement in retail revenue, is that a change in plans, or just more usage on the part of customers? What's driving that? And also if you could comment on the current competitive environment within your territories, you know things are getting more promotional? Less promotional? What the trends have been across the quarter, et cetera, et cetera?

Clearly over the last year there are more minutes in the various packages that are available out there at any given price point. But, I think the big change over the last year has been the focus of our marketing promotions and all of our initiatives at rate plans at $35 and higher. So yes, minutes of use are up, but it's more a matter of where you focus your marketing efforts.

We are trying to put a maximum value in the higher rate plans to attract our customers, and competitive situation, you know it's hard to say that a business which is 100% promotional can get more than 100% promotional. [ LAUGHTER ].

Okay. As a -- are there any trends of late that are worth noting?

I don't know that I have seen any major trend. I guess the way I describe the sense of the market is that the -- [ INDISCERNIBLE ]. -- market, but the kind of rate of decline in some of the pricing packages has slowed.

Perfect. Thank you very much.

Your next question comes from Roger Sacks with Cafe Financial.

Thank you. Just have a few, I guess, housekeeping questions. On U.S. Cellular, Ken if you can mention what the churn rate was for the quarter? I hate to make you repeat it, but can you go through the VPDA the reason why it was a little bit above your plan? And then on the TDS side, the Cap-X mentioned for the acquisitions on the 2 1/2 and 3 1/2 million is that included in the total 120 to 130 for the ILEC operations? And also, if you can just tell us what the total U.S. figure was for the quarter? Thank you.

Let me start. Churn for the all in 1.8% is the number. Cost per gross ad, I said there were really three different things in there. One is -- one is higher, okay? There's no hiding the fact it's higher than we expected. Under that, we have one with lower volume, two, we did some more advertising to support some price plans that were rolled out early in the second quarter.

Okay.

Third, we are starting to invest in the marketing area around a data group. That's something we really hadn't been doing yet where we were with TDM A wasn't appropriate yet. Now we are doing that, that's driving some marketing dollars. It's all marketing dollars that are in cost per gross add. It was about $12 in this quarter.

Okay. Great.

The Cap-X relative to the new acquisitions is not included in that original amount.

Okay.

And USF all in from all different sources would be about 22 in the quarter.

Great. Thank you.

Next question comes from Todd Rosenblout with Standard and Poors Equities.

High, two quick questions. One, the roaming revenues, though they were down year-to-year, popped up sequentially. I was wondering if that's more of a seasonality thing or something is turning, but I doubt it. And then with the exposure to Worldcom, you mentioned the receivable that's out there about 10 to 12 million. Any thoughts of doing what general communications is doing, which is already writing off some of that as bad debt?

Um -- first question on roaming, that is definitely a seasonal trend. It's one that we have seen year in and year out. Second quarter picks up in terms of total minutes of use versus the first quarter.

okay.

You know, I think relative to the issue on Worldcom, it does represent a relatively large access provider for us. You know, probably the only solution is either to write it off or not. You know there's really not much in terms of going partway. We will keep watching it, Todd, as closely as we can.

Okay.

Next question comes from David with Stevens, Incorporated.

Hi, guys. You said your all in churn was about 1.8%. What do you think it will be going forward once you bring in all the Primeco customers? I know a big percentage of them have prepaid.

Um -- one, you know as we look at Primeco on the front end -- I'm not going to give you a number, okay?

Sure.

The reason I'm not is because it depends on when it comes in and what the mix is. Early on, we will have the prepaid customers that are there which have already been paid for that are generating revenue, generating margin. And we expect to continue to support them. Going forward, we would expect to support their product line, but focus more on traditional wireless offerings, so over time that mix will shift. And it will shift to a more post paid type of business. That's what our plan is. And with that shift in post paid business and the introduction of our level of service to this market, we would expect to see churn rate improve in terms of how it plays through the mix. It's really a matter of a number in terms of the number of customers when we get it. Based upon where we are at right now, that would be about 10% increase in our customers.

Okay. Thanks. On the CPGA going forward over the next couple of quarters, will we be seeing something similar to that $12 that you talked about earlier?

I think we'll see that $12 in there, but I would expect we would see some of the other components of that improve.

Okay. Just one final one on TDS. The CLEC operations, can you give us a better feel for the trend in EBITDA going forward? When you think it starts, you know trending down significantly towards EBITDA positive?

Well, our plan, you know, would be that TDS would be EBITDA positive next year for the full year. You know not in a significant way, but it would be EBITDA positive next year and it would be free cash flow positive the year after that.

In '04?

in '04, yes.

Thank you.

Your next question comes from Mike Balhoff with Legg Mason.

I have a couple of questions. The -- when you were indicating CPGA is going to show some improvement, can you give us some sort of bracketing on what's going to happen there? And also the RPU, which obviously was much better helped by inbound roaming. What do you expect to see with those two? If you can give us some numbers, that would be a great help to be specific.

I can't give you specific RPUs. It hasn't happened yet. But based upon the expected volume that we are looking at in the second half, you know, I would expect to see cost per gross add trend down closer to where it was in the first quarter than where it was in the second quarter. With respect to average revenue per customer, you are really talking about two separate components that go into that number. One is the roaming revenue side, which really has nothing to do with our customers, but it's divided by our customers against this number. The second one is the retail. With respect to the retail side of it, based upon what we are seeing in the current environment, I would expect to see year-over-year improvements in retail revenue, again in the next couple of quarters. Roaming, I think that we have talked about, you know, overall roaming that we expected total dollars to come down on a year-over-year basis. What we are seeing this quarter, it was down about $5 million on a year-over-year basis. Sequentially, though, you'll get into the seasonality where second and third quarters are your heaviest roaming traffic period. So we should see that seasonal trend continue.

Could we turn over to the ILEC operation and get some sort of sense of what the normalized numbers are? Could you give us a sense of what the EBITDA in the quarter was without course and without the new Hampshire acquisitions? And I have line growth right now -- let's see, I'm assuming New Hampshire was 19.2 in the quarter and 44 one for correspondence uses. It looks to me like I have 0.3 or 0.4% which is a little bit different than what you are indicating. Maybe my numbers are wrong. I would like a sense, also, as far as the line growth goes, if you have any sort of sense of what kind of information there is in the wire line operation for wireless or Brad band, or whatever it happens to be? Thanks.

Sure. We added in the quarter MCT represented about 19,200 equivalent lines. Represented about 18,800 traditional lines.

Okay. So the growth ends up being for the quarter about 2,000 on an internal growth basis which that is where the 8/10ths of one percent comes in. From a margin perspective, if you strip out the impacts of correspondence uses and strip out the impacts of MCT growth in EBITDA and growth in revenues the margin basically stayed almost exactly the same at 50.3% for those two quarters it grew about 3.7%, something like that.

What was growing 3. -- percent? Revenue and cash flow excluding cost of acquisitions.

Thank you.

Next question comes from Greg with Luke Capital Markets.

Thanks. Most of my questions have been answered. Are you guys on the CLECs side using UNI for anything? I know you are primarily facilities based but is there any UNI involvement.

At TDS met come we are 100% on switch. So there's no UNI Ps that are traditionally known. We do lease unbundled groups. I think you are talking with an UNI P?

Right we do just lease the line.

Okay. And that's from the incumbent there?

That's from SPC Ameritech.

Are you going to get any benefit?

I am hearing a lot of the states are lowering access charges is that planned at all S&P.

Not really. The rates are negotiated with the carrier in charge of it. I think generally all of that kind much factors into the general pricing. But I don't think there's anything on the horizon in terms of it.

Okay.

There's more discussion in the industry with UNEPs which is leasing the whole switching element. We do use some of that at U.S. link. That is our entry strategy. Over time we migrate those to a facilities based. That is obviously a much smaller component for us.

Great. Thanks.

Next question comes from Glenn Waldorf with UBS Warburg.

Hi. Just wanted a couple of additional questions for Dave following up on Michael's question. Are you seeing any institution at ILEC level in terms of technology or any other forces there?

It's difficult to put your finger directly on it. Certainly we know our own customers who take DSL, you know, oftentimes that is a institution in terms of a second line. We know that, in some cases, in some of the more remote and vacation type areas, you know, wireless certainly is a sub institution in many cases. It's awfully hard to predict exactly where it is. At the same time, though, I would say that our more rural focus does have a little different. We don't have the large apartment complexes and things like that. The more transient, you know, younger work force type that typically are more committed on the cellular side. So it's a little different composition of our customers; there's certainly some of it there.

Can you quantify for us what the penetration second line is line?

Penetrations of second line are running I think about 13 three right now.

Which is consistent.

Yes.

Just can you also touch on how your marketing features to your base? You have had some good penetration of. [ INAUDIBLE ] How much is organic versus acquired long distance adds?

You know, we have continued to be able to be successful in putting in long distance customers. Some of that is our good marketing. Some of it is, you know, some of the tactics that some of the other LD providers are doing to some of our customers and they become frustrate Jed. We have done the traditional consumer type stuff. Billboards and flyers and that type of stuff. We do offer a promotion if a customer does, indeed take our internet service and takes our long distance product, we give them a discount on their internet service. And that helps to kind of tie customers together. Features tend to be something that once customers understand how they can use them and make them part of their life, they are real receptive to it.

Great. And just a higher level question for Sandy. Sandy, just in terms of a's happening in Deutsche-tell, I want to follow-up on the prior question. Do you have any insight what's going on there? What are the circumstances which you look to eventually monetize that stake? What's your longer term perspective as to how long it will take the stock to go back up to a level where you consider monetization?

Glenn I'm afraid I'm just like you reading the papers about what's going on in Germany right now. I don't have added insight with regard to the current topics of discussion. And what we do, as I mentioned, is we do continue to look at what we think the expected appreciation in the stock is, and other investment opportunities, and we look at that on an ongoing basis.

Thanks very much. Good quarter.

Next question comes from Collette Flemming with UBS Warburg.

Hi, it's actually Mark Carney. Just a couple housekeeping items. Did you launch any further PCS pops? We calculated about a million nonoverlaps in PCS pops for launch as of last quarter. Were there any new markets?

No, sir.

Then the percentage of the hand sets that you guys sold, I know you said that you are starting some sell more of your own for the purchasing power and that type of thing. The numbers historically have been 55 to 60%. Did you give the percentage?

I'm sorry, I don't understand the question.

The percentage of the hand sets that U.S. cellular sold, typically through your stores is like 55 to 60%? Could you give me the percentage for this quarter?

Um -- are you talking about the channel adds or are you talking about actual hand sets going through?

Well, the channel adds, I guess is the number we usually track.

Right.

I think you also mentioned you are trying to also sell more hand sets to your retailers. So if you can help me out with each of them, actually?

Okay. Channel adds is the number you used to use. And the channels really haven't changed dramatically in the last quarter. The numbers that you are looking for in terms of total equipment sales is one I don't have in front of me that we well have to dig out, mark.

Okay. Great. Thanks.

Marty Dropkin with CSFB.

Hi. I wanted to dig in a little bit more on the ILEC line adds. Could you just, I realize you said it's starting to trend a little bit better throughout the quarter hand you saw an uptick in June. Are you seeing that same kind of steady pace or even an increase in the first couple of weeks that you have seen in July? And, are you seeing it across any particular customer bases? Is it more residential, business or any particular geographic areas?

Um -- I don't really have any insight in the first three weeks in July, Marty. In terms of it. You know, I think there is certainly some impact in the ILEC business, certainly one of the tools we have relative to collection is disconnect. I think in tougher economic times a customer, you know, will live with that disconnect for a longer period of time. So when you start, customers start recovering and start getting their phones react slated that might be a signal that things are coming back a little bit from an economic perspective.

You have seen customers that have turned lines off and turn it back on?

Businesses that maybe contracted a little bit, need to expand a little bit. We are primarily a residential focus. About 78% of our lines are residential. Everything that the consumer does certainly has an impact on us. There's nothing in one particular area or one particular geography or demographic segment that is any different than any other.

Okay. Um-shall on your Cap-X forecast, it looks like this is slight, but you raised your ILEC a little bit. Is there anything there? I guess kind of along those lines, $70 million for the first six months, you are on a trajectory to fall below the, I guess whatever the number is you gave for the quarter. Do you think there's a chance you might fall below that? Or is there going to be enough spending in the second half?

Well, you know the summer tends to be our higher spend period, especially in the second quarter where we tend to, you know, take on materials and things like that that are used for the summer construction season. I think there's always a little bit of room around the ILEC Cap-X. It's real broad. There's always a chance we could run a little bit under that. I think we are going to be in that area.

Could you break down the 42 million between ILEC and CLEC?

Of the 42 million we had for the quarter, about 25 million related to the ILEC business. About 15.7 related to metro come and the rest was U.S. link.

Okay. On DSL, with the big increase, did you create any new marketing initiatives? Or any kind of promotional activity there?

Well, obviously we continued to do that. You know, word of mouth helps a lot in terms of it. We have had a very aggressive program where we have captured information about customers who have expressed an interest prior to us launching the product and were able to work those. It is one that does sell well by word of mouth. Customers are seeing it. We do leverage off of advertising that is done in urban areas. So our customers that see T.V. spots, you know in their particular market comes to us and ask about that particular service. We are running kind of the normal, you know, promotions but nothing extreme in terms of, you know, significant. We are not giving away months of service or anything like that.

So nothing really different there, you think it's maybe word of mouth and catching on a little bit?

Yep.

okay. Finally, the 2 million increase in USF one million was from the first quarter I understand. The other million is that going to be on a recurring basis or is that --

No it will be recurring.

Next question comes from Bill Moore with Hamilton Investment Management.

Hi. Good morning. I want to follow-up on the financing status for Primeco. I know you sold the votaphone shares and have an in process arrangements with bank lines. I'm trying to find out where we stood in the whole purchase price?

We have entered into a new bank resolving credit agreement it's about $250 million. So if we look at the end of the quarter now, we have most of the $500 million resolving agreement the company had in place available, plus the additional 250. Our plans also had us going to the market for some long-term debt. We are waiting to let this news get out there and see what the market has available right now. As you know, it's been a relatively ugly market over the last couple months, especially in the telecom arena. But that's still part of our plans.

The back-up contingency plan is your existing credit facility?

Well, again, we have our existing one, as well as the new one. But we would like to see some long-term debt under that.

Okay. Have you had any discussions with the rating agencies? I know there was some contingencies on the new bank line and your ratings on those lines?

We talked to the rating agencies in connection with the original announcement of the deal. And, at that point in time, they both came out and affirmed.

Great. Thank you very much.

At this time there are no further questions.

Thanks everybody for joining us on the teleconference today. Ken and I will be available later today in our offices. Have a good week.