Telephone and Data Systems Inc (TDS) 2002 Q3 法說會逐字稿

Good morning. My name is Brooke and I will be your conference facilitator at this time. I would like to welcome everyone to the results for Telephone Data Systems and U.S. Cellular corporation. All lines have been placed on mute to prevent background noise. After the speakers remarks, there will be a question-and-answer session. If you would like to ask a question during this time, press * and the number 1 on your telephone keypad. If you would like to withdraw the question, press the pound key. Mr. Steinkroff, you may begin your conference.

Thank you Brooke and than you everyone for joining us at the beginning of a busy earnings release season. With me this morning, as has been the case in the past, Sandy Helton, executive vice president and CFO of TDS, Jack Rooney, president and CEO of US Cellular, Ken Meyers, CFO at US Cellular and David Wittwer, CFO at TDS Telecom. Replay of the teleconference will be available starting at 1:00, Chicago time, and run through midnight Thursday October 17th. The replay number is 800-642-1687. The passcode is 6024734. The call is being webcast on the Investor Relations section of the TDS website at www.teldta.com. It will be available for the next two weeks and thereafter archived on the website. As always, it is important to know that some of discussion today, either in the prepared comments or during the Q&A period may represent some forward looking statements. While these statements are based on the very beast and most reliable data available at the time, any forward looking statement involves certain risks and uncertainties that could cause the actual results to differ materially from those in the forward looking statements. These risks and uncertainties are many and varied and can change from quarter to quarter and are noted in the press release. Investors and any other interested parties are firmly encouraged to read the company's annual report as well as filings with the Securities and Exchange Commission to get a better understanding of the company's operations and any changes thereto.

The call is been recorded by GDF and copyrighted material and cannot be recorded or re-broadcast without GDF's express permission. Your participation implies consent to our tapping, please drop off the line and get on an agree.

If you're not notification from us regarding teleconferences, and have changed your e-mail address, please give me a call or e-mail me at the e-mail address in all the press releases so that we can add you back to the list and get it correct.

TDS and US Cellular are speaking at several investment conferences latter this year. Roughly in the November 11th, through 13th, time period, TDS will be preventing at the UBS Warburg conference in New York City. And in early January in Palm Springs, both TDS and US Cellular will be participating in the Salomon Smith Barney conference.

Additionally, next week TDS will be touring Europe to meet with European investors and I'll be out of the office next week and back in again on the 28th. If you are in the Chicago area, or Madison, Wisconsin area and you have an interest in visiting our companies, just let me know and we would be glad to arrange a meeting with different members of our great management team. As much advance warning would be helpful as possible.

Both press releases were posted to the TDS internet home page this morning shortly after going out over the wire which was around 7:00 Chicago time, and US Cellular post their release on their website, as well. I'm now going to turn the phone call over to Sandra Helton.

Thank you and good morning. I'll quickly review the two highlights of the quarter for TDS and then turn the call over to Ken and Dave.

Our three business units had another successful quarter. We posted double-digit revenue growth in each business and overall revenues for TDS grew 19 percent to $802 million, based on internal growth and the benefits of acquisitions made earlier this year. We believed these positive results point to the effectiveness of our strategy of focusing on customer satisfaction and seeking out acquisitions that compliment our existing businesses and to the commitment and excellent performance of all of our 10,300 employees.

TDS's operating cash flow increased 2.4 percent to $239 million. Operating cash flow lagged the revenue growth due to higher cost associated with acquiring and retaining customers as well as bad debt expense due in great measures to the continuing weak economy.

At US Cellular service revenue grew 17.1 percent. Net adds for the quarter from existing market excluding Chicago were 91 thousand more than double the second quarter net adds and up from the comparable period a year ago. Additionally, retail ARPU increased over the comparable quarter of a year ago for the third quarter in a row. This is terrific performance and Ken will elaborate on US Cellular results in just a moment.

TDS Telecom's revenue also grew over 17 percent. ILEC revenue grew 10 percent, the combination of organic growth and the benefits of several acquisitions. TDS Metrocom grew revenue over 80 percent as it added more than 25 thousand axis line equivalence (ph) in the quarter and passed the 10 thousand mark in terms of DSL lines in service.

Dave Wittwer will review results shortly. During the third quarter, TDS monitized 45.5 million shares of Deutsche Telekom stock or a 35 percent of our position.

In our 10-Q for the second quarter, we had discussed the monitization of approximately 20 million shares, which occurred early in quarter three. As subsequently during the quarter, we monitized an additional 25 million shares. Net proceeds totaled approximately $502 million. We will use these proceeds to reduce outstanding debt at TDS and fund our operational needs over the next couple of quarters.

We have not chosen to repurchase TDS stock at this time despite its attractive valuation due to the unstable capital markets and the needs to maintain liquidity during these uncertain times.

As we noted in the releases we may choose to monetize more shares in the future, depending upon market conditions.

Finally, during the quarter, TDS recorded a pretax write down of $90 million of the value of certain notes receivable. The write down reflects the reduced value of assets securing these notes. This is discussed in more detail in our press releases. We are well positioned to bring to a successful close what has been a difficult year for the economy, the capital market, and in particular, our industry. We have the people, the loyal customers, financial resources and proven strategy to success and drive toward improved shareholder value. Now let me turn the call over to Ken Myers (ph).

Ken Myers (ph): Good morning and thank you for your time to day. I recognize how busy everyone is, so I'll keep my comments brief and focus on key drivers for the quarter.

Highlights for this quarter include, strong performance in our core cellular markets, the closing of the Primeco (ph) acquisition and the rollout of CDMA in Iowa. This quarter, we added 91 thousand customers in our cellular markets. This is 7 percent above the 85 thousand customers added the third quarter of last year, and surpasses by 23 percent, the number of customers added in both the first and second quarter of this year combined.

Further, all of this net growth was in our post-paid product line. This strong growth manifests itself in higher marketing expenses and reduces current period cash flow, but that's the nature of the investment cycle of this business. Average revenue per customer was up again, averaging $49.31, a 2.9 percent year-over-year increase driven by increasing retail revenue per customer. This is the third quarter in a row in which retail revenue per customer has grown on a year-over-year basis.

Finally, post-paid churn remained in control, averaging 1.9 percent in our cellular markets. This is up slightly over the past quarters, reflecting economic sensitivity. The increase was in the non-pay area which also effected bad debt expenses. After a weaker than anticipated start for this year, our core cellular market are now growing in line with our original plans.

On the expense side, the inclusion of Chicago changes some the metrics. Looking at just the cellular operations, systems operation's cost were in line with our expectations. Though running a second overlay network will add some fixed cost over the next couple of quarters. Marketing cost, while up on volumes, came in at an average of $340 per gross add, dropping from higher levels in the first, second quarter of this year. G&A was hirer than original expectations due to higher bad debts, which was around 3 percent this quarter. It averaged a full percentage point lower in the first half and we expect to bring it back down over the next couple of quarters. We also sign increased retention cost reflecting competitive conditions.

On August 7, the company closed the acquisition of the Chicago Primeco market. The consolidated results that we presented in this press release, include about a month and three quarters of the Chicago effect. We had originally estimated that they had 330,000 customers enclosed, it turns out that it was closer to 320 thousand. Since closing, we have successfully converted the billing system, started training customer service personal, started to implement 1X into the network and began expanding distribution.

Our plan is to complete the 1X rollout and launch the US Cellular brand by December 1st. The actual contributions to the financials for the sub-period from Chicago, included in this quarter's results were $24.4 million of service revenue, $1.6 million in operating cash flow and there was a net loss of 15 thousand customers primarily in the pre-paid product line. The average revenue per user in the acquired market was $46.38 on 705 minutes of use, and the cost for per gross add was $441. Post-paid churn in Chicago, was about 4.2 percent-I'm sorry-the post-paid was about 4.2 percent total insurance was 6 percent.

If all this is presented to allow you to calibrate your models, we expect to focus on total company results and drivers going forward.

Earlier this month, we turned on our CDMA network in Iowa. We spent much of last quarter overlaying a CDMA network on top of the existing key TDMA network in Iowa. This work went smoothly and was right on time and on budget. Today all our sales efforts are focused on selling CDMA in Iowa. Given the success of the Iowa overlay project, we are now working on implementing CDMA in eastern and southern Wisconsin before year-end.

This is a change to our original capital plans for this year, but it is consistent with our discussion on last quarter's call. The economics of converting the networks are compelling. Completing this project will give us CDMA 1X coverage in Chicago, northern Illinois, Iowa, and southern and eastern Wisconsin before year-end - providing our customers with a high quality network experience in speeding up our plans to capture as many minutes on our network as possible.

There were two one-time items in the quarter, both of which are address in the press release. First, is a write-down of a receivable related to the sale of some minority interest, and the second, the write-off of some fixed assets. As we continue to change technology and migrate our customers to CDMA, we'll continue to monitor asset lives.

Last year-last quarter when we reviewed our targets for the full year, we said that those targets did not yet include any of Chicago's effects. With the completion of the billing systems conversion, the current status of the 1X deployment, we expect to begin operations in Chicago as US Cellular by December 1st. The effect of this startup will change our previously discussed targets. Our targets affront net customer additions were 260 to 280,000 for the year.

Given the strength in our core markets this quarter, we remain comfortable with that range and our increasing the total range for the company to 280 to 300,000, given our plans to launch in Chicago. Our launch plans include broadening distribution and a media campaigning design to build brand new awareness around our customer service focus.

These launch cost in the higher net add target will reduce our operating cash flow target to 640 to $660 million for the year.

Finally, as a result of both our network plans in Chicago, which include the enhancement of coverage and the rollout of 1X, and our decision to move forward the deployment of 1X to most of our Wisconsin customers. We now expect to invest 720 to $740 million in capital this year. The Wisconsin rollout is just a retiming from early next year to later this year and saves significant future costs by ending our investment in TDMA capacity sooner. That investment includes network infrastructure and customer handsets. Given this pull-forward and our initial Chicago build-out, it appears this year will represent our peak in capital spending plans, with next year's spending dropping meaningfully.

Right now, the economy is still a bit of a wild card. Consumer confidence and overall retail spending will effect this current quarter. Given the success of last quarter, and our launch activity, we are comfortable with the ranges I have spoken about and the level of uncertainty which has been high over the last 12 to 15 months remains high by historic norms. Again, thank you for your interest today. Now, over to David Wittwer, TDS Telecom.

Thanks. Q3 produced solid growth both ILEC and CLEC businesses as Sandy had comment. Total ILEC revenues were up 10% for the quarter and operating cash flow grew 6.6%. ILEC active line equivalence grew 1.6% for the quarter, excluding effects of acquisitions. Good growth in light of difficult economic period. We supplement internal line growth with increased penetration in our key vertical services products and services, including dial-up and high-speed Internet access and long distance. ILEC bad debt write-off due to the Global Crossing and MCI bankruptcies were additional 2.6 million in the third quarter, bringing the total to 11.5 million dollars to date. We are monitoring new situation and post-petition accounts are staying current.

We have reported 3.3 million dollars in the quarter related to neck up (ph) pool recovery of bad debt, reducing to 8.2 million dollars. In the event these carriers are no longer able to provide service, their customers would move to another LD carrier including possibly our own, on a going forward basis. During the second quarter call, I commented correction of error in SEC calculation of Universal Service would create an increase in USF funding for ILEC business of a million dollars per quarter. We recognized 2 million in the quarter for the change.

We now understand the nationwide average cost per loop has increased more rapidly than our own cost per loop. Key driver in the computation of USF is the relationship of company's cost to nationwide average. Since, our costs are growing more slowly than the average, which is a good thing, our support doesn't grow as rapidly, therefore, we will receive about $2.6 million in additional USF in 2002, rather than the 4 million previously discussed. We made one-time adjustment in the third quarter of $750,000 to correct the funding level.

ILEC Internet customers dial-up and high speed increased by 2000 in the quarter. We have identified 10 additional markets where we will rollout DSL by the end of the year, which will bring the market up to 33 and more than 50% of ILEC access lines. Currently DSL serves 8100 ILEC customers. These ILEC DSL customers when added to the CLEC market brings our total to 18,400 customers. Our CLEC operations continue to provide solid growth and demonstrate successful execution of our business plan. CLEC equivalent lines increased 106,000 to 200 an increase of 64% over a year ago. Obviously, on a small basis start. Specifically, TDS MetroCom increased 80% for the quarter.

UNIP is in the regulatory spotlight. Our MetroCom business model is 100% on switch and therefore not dependent on the total UNIP pricing. We do have about 31,000 lines at USLink on a UNIP model and plan to continue moving customer to our facility and reduce dependency on UNIP. Integration of previously announced acquisitions in New Hampshire at Telecommunications System of New Hampshire and MCT are proceeding well.

With the complexity of Worldcom and Global Crossing bankruptcy and the current economy, it is prudent to update financial guidance. ILEC revenues for 2002 will be in the range of $620 to 630 million, with operating cash flow of $290 to $300 million. As a reminder, the bankruptcies impacted cash flow by over $8 million for the year.

CLEC revenue guidance remains at 125 to 135 million, with operating cash flow loss of 30 to 35 million. The impact of bankruptcies on CLEC business, coupled with economic impact of business contractions and aggressive stance on consumer bad debt, driving churn for nonpayment system is causing us to lower this slightly for the year. ILEC capex will remain in 125 to 135 million range. And CLEC capex will decline to 50 to 60 million dollars. Now, back to mark.

Brooke, we are ready for Q and A.

In order to ask a question, press * and the number 1 on your telephone keypad. First, Rick Prentiss with Raymond James.

Good morning, guys. Couple of questions for you on the U.S. Cellular side. First, just to get a little color from Ken on the guidance. On net adds, the old guidance, as you mentioned, 260 to 280, you will take it up to 280 to 300. Looks like if we are calculating U.S. Cellular for the first two quarters and U.S. Cellular, including the loss of 15,000 customers at Chicago in the third quarter, you would have added 150,000 net adds in the first three quarters? Thereby, implying 130 to 150,000 in the Q4. Am I doing the math right?

: Yes.

Obviously the launching of US Cellular on December 1, is a strong component of that to get the sales effort switched over to your high quality area?

That is correct.

On the capex, the old had been significantly less. It is higher capex number now for -- I think you said for this year, right? 720 to 740 this year?

That is correct, sir.

Implying large fourth quarter effort. Did you say handsets were included in that? I missed that?

No, Rick, what I was saying by doing Wisconsin sooner, moving up the CDMA, we stopped spending both on TDMA and stopped putting out TDMA handsets, which if we change the technology early next year, it's got almost a waste investment to it.

Makes sense. But 720-740 is true capex will be spent this calendar year. Does that include some of the $90 million previously said it would be spent in PrimeCo areas or --

Yes, it does.

Some of the 12 month PrimeCo number is in there. A large portion of the increase is advancing CDMA overbuild into fourth quarter of this year?

Almost 50/50.

Okay. Then the operating cash flow obviously, as we go is that one. Okay. CPGA, you mentioned marketing costs were around 349 to 350, that is not CPGA, right? That is just marketing cost or including the CP subsidy?

Cost per gross add number is all in number including both the equipment subsidy commission, advertising, everything, and it was 346 for the quarter.

All in number including handset subsidies?

Uh-huh.

You mentioned it is staying high. Can you talk about the trends going forward? Do you expect CPGA to stay up higher like that?

Well, when you talk about the fourth quarter, with just the launch costs that you will have, building the brand awareness in Chicago, you will see a higher number. Okay. Ignoring the fourth quarter, if you look out into the business right now, we are going to be selling more CDMA phones, but we are also down from 365, 390 in the first two quarters because of volume. Presuming volume stays where it is at and the economy continues to be a little more receptive, we should see improvement in cost per gross add. And if the economy should stay there, we will make changes to the fixed cost channels.

Okay. Final question, very good trend ARPU. Three quarters in a row, you saw growth in average revenue per user. What is your thoughts as far as what is drive it to go up? Is it particular plans you are selling? Is it people breaking the minutes and using more minutes? Minutes grew substantially this quarter versus last. What do you attribute it to? It's definitely not the roaming, it seems to be local retail revenue?

It's the retail revenue has increased three- quarters in a row. In the last quarter it was strong enough to increase total average revenue per customer. It is all around the actual plans that are being sold, the company's promotional strategy and where we are focusing our efforts.

Okay. And trends going forward? I mean, it is a nice trend to have, but maybe stabilize or are you feeling comfortable on the 1X and CDMA offerings?

At this point, the 1X is just rolling out. I wouldn't want to draw lines from that. I think that we have got a heck of a lot of good work around continuing to build our retail revenue base, which is both the customer side and average revenue per customer from those. I don't know that I am ready to draw lines off that. You can't have continually increasing average revenue, but will continue to focus on our strategy here, which is all built around profitable growth. We are not going to chase customers just to chase customers. We will put our marketing efforts behind those plans that can drive our profitable growth.

Glad to see things going so well. Good luck on rebranding launch on December 1.

Thank you.

Mike Rollins with Salomon Smith Barney.

Hi, just two questions for you. First, if you look at the CPGA 346 and all the marketing costs, it actually looks like churn is higher with the PrimeCo acquisition in the 2-3 range. Does that sound right? And, also, what percent of gross adds are prepaid in the third quarter and then what do you expect going forward?

: Okay. First of all, I don't know if I understood your question. A overall churn rate for the quarter, with PrimeCo rolled in would be 2.2 or 2.3.

Thank you.

: Can you repeat the second part?

On the prepaid, just seems like prepaid it changed from post-paid churn to aggregate churn, looks like pre-paid is representing bigger part of the base and bigger part of gross adds. Can you give us a sense of how that is segmented out in the third quarter and what you are expecting going forward?

Actually, excluding PrimeCo, pre-paid continues to fall as percent of business in our core markets.

Okay.

It has fallen, not only in percent of our business in the third quarter, but actually in absolute numbers, as the focus has been on the post-paid side.

If you look at the Chicago market, how does that affect the averages?

Well, Chicago comes in with a much heavier pre-paid base. Close to 40% of customers. Most of the net loss in customers this quarter was on the prepaid side. We will -- would expect to support both products, but like the strategy we are following everywhere else, strategy is on post-paid.

Thank you.

Next question comes from Frank Louthan with Raymond James.

Hi, guys. Couple of questions on the ILEC side. Can you give us color on the trends you are seeing there with second lines? Are you seeing deterioration there? As far as minutes of use for network access, can you comment on technological substitution and what the trends are on that front? Obviously in good shape from a switching standpoint with MetroCom, with more talk about changes in the review. Are there concerns with what they might change to UNIP that would have you making significant changes to the model? Any sense for the direction there? Thanks.

Let me make sure I cover them all for you. Generally in terms of the trend in second lines is that a key driver for second lines historically has been dial-up Internet, access to Internet, you know, Internet growth has slowed slightly. We have seen demand for that decline. You know, there are certainly customers as they go to our DSL product, you know, natural because of the technology causes customer to often times disconnect the second line. That particular piece of the business is not growing as rapidly as before. It is not a high growth area.

Minutes of use, a variety of different things impact it. E-mail is one, wireless substitution is one. Use of the Internet in general. So, our minutes of use trends have been actually improving a bit this quarter over where we were before. Those are probably the big ticket items that impact us. We see less of the impact than you typically find in some of the urban areas and rural areas in this particular regard. Regarding UNIP, we just had exposure we had at US Link for the entire platform. Generally what we have seen in a variety of different states has been continued pressure on loop rate and bringing it down. So, I think if anything, that helps our model, specifically a facilities model that says those lines continue to be available to us and continue to be available at the right price. But, it is absolutely a key driver, driving market selection. We are focused on it and spend a lot of time at federal and state levels to deal with that.

Any thoughts on additional edge out markets and maybe adjacent to other territories in other states? Is that a consideration at this point? Are you seeing loop rates getting attractive?

We always look at what the options might be. We pretty much committed to stay in the old Ameritech region. We are looking at markets that tend not to be on local measured service. Certainly going out beyond the markets that we have, we have plenty on our plate to manage the ones we have. But, we keep looking.

Great. Thanks a lot.

Your next question from Martin Dropkin at Credit Suisse First Boston .

Hi. Could you break out what the acquisitions, core from MTC and telecom contributed to the quarter to get a feel for the internal growth rate? I think I heard you say there were 1.6 or 1600 line equivalents added at the ILEC, but I want to make sure that is right. And when you think about UNIP, did I hear you correctly, do you see that as opportunity? That was my thought, loop rates are coming down, could that be a opportunity to start UNIP in the MetroCom territory? Are there any markets where you see EBITDA margins might be good it is economically viable margin?

Internal growth in equivalent access lines excluding acquisitions was 1.6%.

1.6%.

Yeah, organic growth. UDP has worked well for us at US Link because we started with an embedded group of customers there. We didn't have facilities, we said that would work the model. When we got to the right level, we said we would put them on our facilities and we are on that path. We looked at TDS MetroCom as an option. It gets complicated. The complication is you are restricted to read the services of the incumbent is offering. So it does add provisioning challenges that offers billing challenges and some of the creative plans that we can offer in terms of LD or even DSL, get complicated because you are at the mercy of the services and the feature sets that the incumbent has.

So, I think you have to make a bet on whether or not you believe UDP will be there long term. We believe there will be some grandfathering occur. Will the platform be around for a long time? Probably not. So, we will continue to operate in a facilities model. When we acquire a customer, we put them up on loop if they are a residential customer, but tie it into the facility from the beginning.

Okay. Any break-out on the revenue back to the internal growth rate? Can you talk about revenue and operating cash flow contributions were for the acquisitions?

Internal revenue growth, excluding effect of acquisitions was a little over 1%.

Okay. But, you don't know the EBITDA number?

Probably in the same range.

One quick question follow-up question on the Deutsche Telekom shares, has there been shares sold since the end of third quarter?

No, there hasn't. We would disclose that if there had been.

Great. Thank you, Sandy.

Next question from William V Power at Robert W. Baird & Co.

Good morning. Question or two for Ken on the U.S. Cellular. First, on the gross side, looks like strong numbers sequentially and compared to year-ago results. Is there more color around that? Is that a function of seasonality? Doesn't sound like the economy has picked up to help it. Is it introduction of rate plans or are there other drivers? Second question, with regard to the EBITDA guidance, looks like EBITDA guidance is $30 million lower if you look at midpoint for the full year, is that a function of the PrimeCo integration or is there some impact from higher marketing costs in the traditional markets? I wonder if there is granularity there? Thanks.

First of all, with regard to the third quarter. What we saw was a pick-up in activity really started late in the second quarter. Earlier this year, we had rolled out a different pricing scheme. That was really late first quarter. And, so, there haven't been any changes to pricing since late in the first quarter or early second quarter. I think that that takes time to take hold. But, generally, we just saw a pick-up across the board. In the past, we have seen slow downs sooner than other people. I can only hope this is sign of pick-up faster than in other places.

But, there wasn't any other pricing change, promotion strategy changes in terms of what specifically is offered on a 6-8 week basis. But, the focus, which has been to focus all of our promotional activity at higher rate plans has been something we have been doing for the better part of a year. So, not any real change there. Secondly, the question was on EBITDA guidance. And let me just check one item here.

When we last talked we were at the 660 to 680 range. So, it's a mid-point to mid-point, 20 million dollar change. And that is primarily around the launch cost of Chicago. It does have built-into it higher bad debt based upon what we saw in the third quarter. I said we expect to bring it down over the next couple of quarters. It carries little bit of that. Also, with the deployment of CDMA into Iowa and Wisconsin before the end of the year, what you do when you put a new network in there, you wind up with initial fixed cost that will affect us for next couple of quarters.

Okay. Great. Thank you.

Your next question comes from Michael J Balhoff at Legg Mason.

Couple of questions. You commented on how the minutes use was improving in the quarter, the year-over-year numbers, I assume. Could you give us quantification of what the minutes are? This is obviously important for a rural carrier, where you depend upon originating and terminating access.

: Sure Mike. What we saw, second quarter of '02, off the second quarter of 01 adjusted for all aquisitions were actually down 2%. This quarter, compare to third quarter adjusted for acquisitions was basically flat. Seeing improvement.

Dave, why do you think that is the case?

Couple of different issues. We do know we have constructed some different plans, specifically EAS plans earlier last year or earlier last year, which have taken time to get out of the base. You know, we probably did see some loss due to different factors, but, you know, is it increasing at rate greater than that? We pushed at the same time to get Internet and a variety of other things. I think we have got more of a stable base now in comparing to 2001, it is more of a loss in terms of last year.

I like to think a little bit is recover of the economy, too. We know businesses do layoffs and a variety of other things and it has impact on minutes of use.

Dave, access lines. Is it appears by our calculations, you are down 500 sequentially. Is that about right? If that is the case, I would appreciate quantification of what you are seeing as far as substitution for broadband and wireless.

Talking about equivalent access lines?

Trying to figure out actual access lines.

We give information on both, we believe equivalent access line is more reflective measure. We certainly have seen a trend, especially when we sell our own DSL product. Often times a customer disconnects a second line, that is part of the value equation for them. That is not uncommon at all. Some markets have cable modem competition. That is part of the play, as well. The other part, though, that impacts it is we see a trend away from Sintrex (ph) services to PBX (ph) services. It is important we stay in the business. We want to continue to sell to that customer. Look at absolute access line basis. A customer could convert many, many Sintrex line to one MRI (ph) and that would go from the number of Sintrex lines to 3 or 4 PRI (ph) lines.

We do see trend of customers moving to high capacity lines. Generally, the revenue might generally be a little less in absolute sense, if you count physical lines. That's why we believe the equivalent line calculation is more reflective in terms of it. Second lines are not as big a seller as we had before. That is probably one of the drivers, too.

I guess, Dave, what I want to quantify is how much of the access line decline is related to substitution factors? Do you have any way to model that?

We certainly know on our own, when we sell DSL probably half the time, the customer disconnects the second line. We know that from a modeling perspective. We had substitution, Mike, relative to more of our transient vacation properties that we have, seasonal homes. We have less reconnects for those than we historically have had. Those have not typically been high margin business for us. Those are pretty natural often times for cellular substitution. We don't believe we have significant amount of customers who are completely cutting the cord relative to land-line phones.

Final question relate to your Universal service funding, you indicated 3.3 million. Can you break that up more? Maybe you can't, but in terms of ILEC state and federal USF? And then I know you're getting ETC (ph) money related to U.S. Cellular offering in various place, can you give us quantification of that number? Final question, thank you.

Okay. Talking specifically for the quarter?

Yes, I am.

Yes, interstate USF for the quarter would be -

While you are figuring that, ILEC versus obviously the ETCs.

Inter state USF would be about 8.2 million, intrastate USF is much lower, about 3.5 million for the quarter.

What about ETC number?

Ken.

At U.S. Cellular, it is about $2 million a quarter.

Thank you.

Your next question comes from Greg Gorbatenko at Loop Capital Markets.

Good morning. My question is digging into the G&A number. Looks like it was about 30 million higher on a sequential basis. I believe the reason stated was higher customer retention and bad debt expense. I think you were running 2%. You said 3% this quarter. If I just take the incremental off your quarterly sales, that is about 6 million, I just want to be sure that is right. If that is the case, where did the rest of the 24 go, is that all retention?

Hi, Greg. It is Ken. You have PrimeCo in that number, okay? And that's, the PrimeCo expenses for the sub-period were about $10 million. Secondly, yes, you computed the bad debt piece correctly. That takes it up to 15, with the biggest piece of what is left in the retention area.

What do retention costs entail?

Most typical one is equipment subsidies to existing customers.

Okay. I'm sorry. That is not part of the CPGA, then?

CPGA is cost of acquiring new customers.

Got you, subsidies are to the existing not to the incoming.

Right.

Super. Thanks.

Next from Robert Sax of Café (ph) Financial.

Robert Sax (ph): U.S. Cellular, Ken, could you breakout how much G&A came from PrimeCo? Can you do the other expense items, as well?

Yes, I can. Little over $5 million in systems ops, just under 7 in the marketing and selling line and just under 4 in the cost of equipment line.

Sax (ph): Okay. Thanks.

10 in SG&A.

Sax (ph):Super. Thanks. I guess a question TDS Telecom, given the recent talk about changes to Universal service, I guess at the recent conferences and USDA conferences, is there any one particular plan to USF going forward that TDS endorses, whether revenue based or connectivity based?

Well, that could be discussion of its own. I think generally we support more of a connection base funding mechanism, or at least that's something that ought to be looked at. But, I mean, it has got to be a balance. But, generally that would be the case.

Sax (ph):Is it in your opinion that no matter which system is ultimately decided upon, it would be, I guess, a revenue neutral event?

We would certainly hope so.

Sax (ph): Okay. Terrific. Thank you.

Your next question comes from Dave Janazzo with Merrill Lynch.

David Janazzo (ph): Question for Ken regarding PrimeCo expenses. Sort of thinking about the numbers you gave us, how do we think about start-up costs versus run rate costs for some of those things? Thanks.

With respect to, you know, systems, operations, what we saw were typical costs, a month and three quarters of it. The G&A is going to be an area undergoing a lot of change and marketing is going to be heavily influenced on the launch. Which is why we gave different and new guidance around cash flow for the year. As we look beyond this quarter, what we will see is G&A kind of in line with what we have at the company level in terms of per customer, percent of revenue, that is something you can bring out pretty easily. You are going to see little bit higher cost per gross adds in next year, as you still launch this market. But, we aren't going to talk about specific investments at a market level.

Janazzo (ph): Okay. Thank you.

Your next question comes from Collette Flemming with UBS Warburg.

Flemming (ph): Ken, following up on retention cost, can you put a dollar amount on that? Last quarter was around $17 million. Were retention costs roughly $30 million for this quarter? Also had a question on interest expense. I know rates have really been low, but your interest expense was lower than we were projecting, was there any amount capitalized because PrimeCo hasn't officially been launched? Can you give us break out on the interest expense between affiliate and non-affiliate and that is it. Thanks.

No, there is nothing capitalized. We are expensing interest expense as we go. We own the company. It is an operation, whether launched under our brand or not.

Flemming (ph): Low rates, then, because a lot is in short-term debt, really?

That is correct. I don't have the break-out, as between affiliate and non-affiliate. I can get you that.

Flemming (ph): It is just a small piece.

Your math is close on retention.

Flemming (ph): Thanks a lot.

Next question from Mark McCarthy from Shapiro Capital Management.

Good morning. I am a novist for the accounting of acquiring a customer. Is any of that 346 capitalized at all? What I am trying to get out ultimately is what the impact to operating cash flow is of growing little quicker than the market or management may have expected in the quarter?

Hi, Mike, no, the company expenses everything related to the sales channels as they are incurred. So, in a quarter like this, where depending upon expectations, you know, 20 or 30,000 customers more than some expectations were actually added. You know, that is fundamentally 300 dollars per add, times 30,000 at $9 million of cash flow is the direct effect.

What about in a quarter where gross adds are higher because of a little bit of the bad debt expense? We are actually higher than $10 million, probably?

Yes, sir.

Thank you.

Next from Dmitri Catao (ph) at Gabelli and Company.

Catao (ph): Couple of questions for ken and maybe Dave, also and maybe one for Sandy. Pulling in CDMA certainly makes sense, assuming you guys have no liquidity issues. If I look at 2002 and remainder of 2002 and 2003, you haven't talked about capex for '03. But if it was a certain dollar amount, does it mean that the entire amount stayed flat and we spent more up front and a little less going forward? Or are we going just to spend more because it cost more than -- compared to what we expected.

Actually, we are seeing favorable pricing in the equipment side of the business right now. And it is actually running less than we thought, when we put together the original projection of 420 to 450 million dollars to convert our network to CDMA. We are running the rate under impact. What we are doing, we have moved dollars that otherwise would have been spent early next year into this year in order to get it done sooner, take advantage of discounts, as well as stop spending on TDMA technology.

Okay. Another question related to TDMA, also. Do you see differences in terms of the equipment subsidy on the CDMA handsets versus TDMA?

CDMA handsets cost little more than TDMA at this point in time, but nothing significant.

Okay. And Dave, a question for you. We used to talk about the model was, I guess, prior to this whole economic slow down, that the excess line growth of 2 to 3% and the capex that correlates with that is 150 to 160 per access line, which will translate into high teens as percentage of revenue on the ILEC side. Are we going into permanent state -- because of technology and wireless cable, DSL and so on, we should not expect 2, 3, 4% excess line growth anymore and therefore, the capex should be adjusted accordingly? If you look at RBOCs they are cutting capex and saying it should be in mid-teens and yours is still staying at 17,18 percent.

Well, there is a couple of different issues in there. I think that access line growth, we are in a little bit of uncertain period right now. But, it is unlikely it will probably get back up into the 3 or 4 range, but maybe in the 2% range is not unreasonable, in terms -- we are seeing decent household formations in our market. I don't know the changes that the RBOCs are making are in line with managing some level of customer service. You know, our trend continues to be about where it is. One of the phenomenas in rural America, we are continuing to deploy infrastructure for DSL and Internet and a variety of other things, which tends to be kind of shorter-lived assets and that somewhat reflected in our ARPU, too. So, I don't think I will see our trends dipping into the RBOC levels. We also don't have the scale or density they have, either.

So, 120 kind of range is probably a good run rate number?

Well, as percentage of revenues?

I thought you said the capex for ILEC is 120 for this year?

Yeah.

Okay. Another question for you, also, if I look at the ILEC operations, it seems like your network cost is up 16% for the quarter versus revenue of 10%, customer operations is up 21%. Can you maybe drill down on the specifics as to what the costs -- probably some is related to DSL rollout. I mean, customer operations, is it all bad debt or is there some other items?

Well, let me give you color relative to it. Certainly some of the growth is related to acquisitions or costs relative to that. That is where the majority of the people are in the field operations. What we tend to see is that part of the reason for the cost increases are things like DSL, as we continue to sell more and more Internet, our bandwidth costs continue to grow, which is reflected in network operations cost. So, those are the big drivers, as opposed to bad debt, per se. It is not a big driver in this category. Cost of goods is also included in network operations cost.

All right. Okay.

Our cost of LD minutes are (inaudible).

That shouldn't really be -- shouldn't be going up faster than revenue. Hopefully you are making money on LD. I am talking about in absolute terms, cost still growing faster than revenue, therefore EBITDA was growing lower than revenues?

And part is by the fact minutes are relatively flat in terms of the two.

All right. Sandy, one question for you. You guys are going to Europe. I just pulled up the top 10 list of shareholders and doesn't seem like there is anybody in Europe with significant stake. I am not saying nobody in Europe owns it. What are the plans and do you guys plans to meet with Deutsche Telekom management?

We don't have larger European shareholders right now. We would like to make sure key investors know about us and have the opportunity to buy our stock, so that is really the purpose of going to Europe. I think it is probably likely there will be a meeting with Deutsche Telekom. We certainly try to speak with them when they come to the U.S.. They are very gracious to receive us whenever we go to Europe.

What would be the objective of that meeting?

No real objective, except to just meet and converse about current issues.

Okay. And finally, last question for you. Is there a point at the -- you know, in dollar terms, TDS stock has to go below where it becomes more compelling to buy back your own stock as opposed to invest in the business? Where you guys will start buying. I understand there is capital markets issue and liquidity and everything else, although I think you guys are in better shape than a lot of other players.

Thank you. We appreciate that. We do want to make sure we are in a very solid financial position on an ongoing basis. We don't have a specific price trigger. As you know, we do always look at capital needs for the business are going to be and what the investment opportunities are and what the returns are likely to be and are making those trade-offs on an ongoing basis. As you point out, with the current capital market situation, it is even more important to make sure we have liquidity and flexibility for our business unit.

Thank you.

Your next question comes from Todd Rethemeier (ph) with Bear Stearns.

Avi Silver (ph): Hi, actually Avi Silver here for Todd. Couple of questions. First of all, you said 350,000 customers at the time of the acquisition. We know you lost15,000 this quarter, did you write any off at time of acquisition?

What we said was when we closed it, we estimated 330,000 on closing. And after we got in there, it turns out closer to 320.

Okay. With regard to the billing system conversion that you are doing. Should we expect that churn could spike next quarter from inactive or non-paying PrimeCo customers? I mean, with the substantial pre-paid exposure now, do churn rates remain stable with this quarter or come down in next quarter to 2003?

First of all, I am seeing nothing that indicates spike in churn as result of conversion. It went very smoothly. Secondly, when you talk about overall churn, okay, for the company, mathematically it would all other things being equal, increase over the next quarter, because of the higher proportion of prepaid that PrimeCo currently has. When we bring that into the business, that is going to churn out and bring the average up a little bit over the next quarter or two. That is just the cycling out of those customers. I said I would focus on post-paid business going forward.

One more brief questions. You said there were discounts on CDMA equipment, which was one of the drivers why you decided to launch the market earlier than expected in the Wisconsin market. Could equipment be priced higher next year, or will reduced pricing continue?

I don't have enough visibility into the manufacturers' order flow to answer that question.

Okay. Thank you.

Brooke, we will take one more question, the call is running over an hour. We will be available take calls the remainder of the day.

Next question from Greg Lundberg with Morgan Stanley.

Lundberg (ph): Good morning, Ken. Back on G&A for a second. This is the first time your EBITDA was down year-over-year. The PrimeCo numbers you gave look like 60 million of G&A annualized. I was wondering what you can take out of this? Is this the new level you are working with? What's one-time? That is a big layer to factor into the model?

At this point, I wouldn't want to characterize any of what they have in there as one-time. We are going to be making changes to the model over the next couple of quarters where they outsource certain processes today that we want to make sure are delivered differently to our own associates. But, there is not anything I want to call one-time in there.

Lundberg (ph): Okay. When you look at Chicago as stand alone financial model, when does it break even for you guys, assuming all this investment over the next 12 months on the marketing line?

I believe that our projection that we spoke about when we did the acquisition, we thought it was good cash flow break even within the first 24 months.

Lundberg (ph): Okay. Lastly, when you went through the PrimeCo subscriber base what was your criteria for determining churn? Did you take the U.S. Cellular and overlay it on subscriber base or nothing different?

Nothing different.

Thanks for joining us. Brooke, that will finish up the call.

Thank you. That concludes the conference. You may now disconnect.