美國無線通訊 (USM) 2002 Q3 法說會逐字稿

My name is [Brooke] and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the third quarter operating results for Telephone Data Systems and United States Cellular Corporation. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during that time simply press '*' then the number '1' on your telephone keypad. If you would like to withdraw your question, press the '#' key. Thank you, Mr. Steinkrauss you may begin your conference

Okay, thank you [Brooke] and now thanks everybody for joining us at the beginning of what I am sure will be a busy earnings release season. With me this morning, as has been the case in the past, are Sandy Helton, the Executive Vice President and CFO of TDS; Jack Rooney, the President and CEO United States Cellular; Ken Meyers, the Executive Vice President of Finance and CFO at United States Cellular; and Dave Whitwood, Executive Vice President Staff operations and CFO at TDS Telecom. A replay of the teleconference will be available today starting at 1 o'clock Chicago time and run through midnight Thursday October 17th. The replay number is 800-642-1687 and the pass code 6024734. The call is being simultaneously webcasted on the investor relations section of the TDS website at www.teldta.com and it will be available for the next two weeks and thereafter will be archived on the website. As always, it's important for you to know that some of the discussions 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 best and most reliable data available at that time, any forward-looking statement involves certain risk 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 strongly 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 being recorded by TDS and is copyrighted material, cannot be recorded or rebroadcast without TDS's expressed permission. Your participation implies consent to our taping; please drop off the line if you don't agree. If you're not getting any 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 later this year. Roughly ending November 11th through 13 time period, TDS will be presenting at the UBS Warburg conference in New York City. In the early January in [Palm Springs], both TDS and United States 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. So as much advanced 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 o'clock Chicago time. And U.S. Cellular will post their release to their web site as well. I am now going to turn the phone call over to Sandy Helton.

Thank you and good morning. I'll quickly review a few 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% to $802 million, based on internal growth and the benefits of acquisitions made earlier this year. We believe these positive results point to the effectiveness of our strategy of focusing on customer satisfaction and seeking out acquisitions that complement our existing businesses and through the commitment and excellent performance of all of our 10,300 employees. TDS's operating cash flow increased 2.4% to $239 million. Operating cash flow lags the revenue growth, due to higher cost associated with acquiring and retaining customers as well as bad debt expense, due to great measure to the continuing week economy. At U.S. Cellular, service revenue grew 17.1%. Net adds for the quarter from existing markets, excluding Chicago, were 91,000, more than double the second quarter net adds and up from the comparable period a year ago. Additionally, retail also 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 U.S. Cellular results in just a moment. TDS Telecom's revenue also grew over 17%. ILEC revenue grew 10%, a combination of organic growth and the benefits of several acquisitions. TDS Metrocom grew revenue over 80%, as it added more than 25,000 access line equivalents in the quarter and passed the 10,000 mark in terms of DSL lines in service. Dave Whitwood will review telecom results shortly. During the third quarter, TDS monetized 45.5 million shares of Deutsche Telecom stock or 35% of acquisition. In our 10-Q for the second quarter, we had discussed the monetization of approximately 20 million shares, which occurred early in quarter 3. And subsequently during the quarter, we monetized an additional 25 million shares. Net proceeds totaled approximately $502 million. We will use these proceeds to reduce outstanding debt at TDS and to fund their 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 market and the need 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 receivables. 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 markets and in particular, our industry. We have the people, the loyal customers, financial resources and proven strategies to succeed and drive towards improved shareholder values. Now, let me turn the call over to Ken Meyers.

Good morning and thank you for your time today. I recognize how busy everyone is, so I'll keep my comments brief and focus on key drivers of the quarter. Highlights of this quarter include strong performance in our core cellular markets, the closing of the PrimeCo acquisition, and the rollout of CDMA and ILEC. This quarter, we added 91,000 customers at our cellular markets. This is 7% above the 85,000 customers added in the third quarter of last year and surpasses by 23%, 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 postpaid product line. The 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% 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 pay churn remained in control, averaging 1.9% in cellular markets. This is up slightly over the past quarters, reflecting economic sensitivity. The increase was in the non-pay area, which also affected bad debt expenses. After a weaker than anticipated start for this year, our core cellular markets are now growing in line with our original plan. On the expense side, the inclusion of Chicago changes some of the matrix. Looking at the cellular -- looking at just the cellular operations, systems operations cost were in line with our expectation -- though running a second overlaid 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 growth ad, dropping from higher levels in the first and second quarter of this year. G&A was higher than original expectations due to higher bad debt, which was around 3% this quarter. It averaged full percentage point lower in the first half. We expect to bring it back down over the next couple of quarters. We also saw an increased retention cost reflecting competitive condition. On August 7th, the company closed the acquisition of the Chicago PrimeCo Market. The consolidated results that we presented in this press release included about a month and three quarters of the Chicago effect. It originally estimated that 330,000 customers [have] closed; it turns out it is closer to 320,000. Since closing, we have successfully converted the billing system. Started training customers service personnel, started to implement One X into the network and began expanding distribution. Our plan is to complete the One X roll out and launch the U.S. cellular brand by December 1st. The extra contributions to the financials was a stub period from Chicago. Included in this quarter's results were $24.4 million of service revenue, $1.6 million of operating cash flow, and a net loss 15,000 customers, primarily in the prepaid product line. The average revenue per user in the acquired market was $46.38 on 705 minutes of use and cost per gross ad was $441. Post paid churn in Chicago was about 4.2% -- I am sorry, the post paid was about 4.2%, total churn was about 6%. The above is presented to allow you to calibrate your models, the expected focus, and total company results and drivers going forward. Earlier this month, we turned down our CDMA network in ILEC. We spent much of our quarter overlaying a CDMA network on top of existing CDMA network in ILEC. This work went smoothly, was right on time and on budget. Today, all of our sales efforts are focused on selling CDMA and ILEC. Given the success of the ILEC overlay project, we're 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 for discussion on last quarters call. The economics of converting the network are compelling. Completing this project will give us CDMA One X 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 which are addressed in the press release, first is a write down of the receivable related to the sale of some minority interest, the second the write off of some fixed asset. As we continue to change technology and migrate our customers to CDMA, we'll continue to monitor asset line. Last year -- last quarter we reviewed our targets for the full year. We said that those targets did not yet include any of Chicago effects. With the completion of the billing system conversion, the current status of the One X deployment, as I said we expect to begin operations in Chicago as US cellular by December 1st. The effect of this start up will change our previously discussed target. Our targets support net customer additions worth 260,000-280,000 for the year. Given the strength in our core markets this quarter, we remain comfortable with that range and our increasing the total range of the company to 280,000-300,000 given our plans to launch in Chicago. Our launch plans include broadening distribution and immediate campaigning design to build brand awareness around our customer service focus. These launch costs and the higher net ad target will reduce our operating cash-flow target to $640-660 million for the year. Finally, as a result of both our network plans in Chicago, which includes the enhancement of coverage and the roll out of One X and our decision to move forward the deployment of One X to most of our Wisconsin customers. We now expect to invest $720-740 million in capital this year. The Wisconsin roll out is just a retaining from early next year to later this year and see a significant future cost by ending our investment in CDMA capacity sooner. That investment includes both network infrastructure and customer handsets. Given this pull forward, in our initial Chicago build up, it appears this year will represent our peak in capital spending plans with next years spending dropping [minimal]. Right now the economy is still a bit of a wild card. Consumer confidence and overall retail spending will affect this current quarter. Given the success of last quarter and our launch activity we are comfortable with the ranges that I've spoken about, though the level of uncertainty which has been high over the last twelve to fifteen months remains high by historic norms. Again thank you for your interest today and now let me turn the call over to Dave Whitwood over TDS Telecom. Dave.

Thanks Ken. Good morning everyone. Q3 produced solid growth both our ILEC and CLEC businesses that Sandy had commented. Total ILEC revenues were up 10% for the quarter and operating cash flow grew 6.6%. ILEC access line equivalence grew 1.6% for the third quarter excluding the effects of acquisition. Certainly good growth in light of this difficult economic period. We supplement the internal line growth with increased penetration in our key vertical services and products including dial-ups and high-speed Internet access long distance. ILEC bad debt write off due to the global crossing and MCI WorldCom bankruptcies were an additional $2.6 million in the third quarter bringing the total to $11.5 million to date. We're monitoring new situations and post petition accounts are staying current. We have recorded $3.3 million in the quarter related to neck-up pool recovery of these bad debts, thereby reducing the net write-off to $8.2 million. In the events these carriers are no longer able to provide service to their customers in these access revenues would simply move to another [LD] carrier including possibly our own on a going forward basis. During the second quarter call I commented that the correction of an error in the FCC's calculation of universal service would create an increase in USF funding for the ILEC business of a million dollars per quarter. We've recognized $2 million in the second quarter for this change. We now understand that the nationwide average cost per loop has increased more rapidly than our own costs per loop. A key driver in the computation of USF is the relationship of a company's cost to the 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 be receiving approximately $2.6 million in additional USF in 2002 rather than the $4 million previously discussed. We made a one-time adjustment in the third quarter of $750,000 to correct this funding level. ILEC Internet customers both dial-up and high speed increased by 2,000 in the quarter. We have identified ten additional markets where we will roll out DSL by the end of the year, which will bring the markets in which DSL service is available up to 33 in more than 50% of our ILEC access line. Currently DSL serves 8100 ILEC customers. These ILEC DSL customers when added to those served in our CLEC markets 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 to 106,200, an increase of 64% over a year ago, obviously on a small base of start. Specifically TDS Metrocom revenues increased 80% for the quarter. [UNIP] continues to be in the regulatory spotlight. Our Metrocom business model is a 100% on switch, therefore not dependent on the total [UNIP] pricing. We do have approximately 31,000 above lines at US link under [UNIP] model and plan to continue moving customers to our facilities and reduce dependices on [UNIP]. Integration of our previously announced acquisitions in New Hampshire, the Telecommunication Systems of New Hampshire and MCT are proceeding well. With the complexity of the WorldCom and Global Crossing bankruptcies, acquisition impacts in the current economy, it is prudent to update our financial guidance. ILEC revenues for 2002 will be in the range of approximately $620-630 million with operating cash flow of $290-300 million. As a remainder the bankruptcies impacted our cash flow by over $8 million for the year. CLEC revenue guidance remains at a $125-135 million with an operating cash flow loss of $30-35 million. The impact of the bankruptcies on our CLEC business coupled with the economic impact of business contractions and our aggressive stance on consumer bad debt, [driving churn] for nonpayment's is causing us to lower this slightly for the year. ILEC CAPEX will remain in the $125-135 million range and CLEC CPAEX will decline to $50-60 million. And now I will turn it back to Mark.

Thank you Dave. [Brooke] we are ready to go into Q&A.

At this time, I would like to remind everyone in order to ask a question please press the '*' then the number '1' on your telephone keypad. Your first question comes from Rick Prentiss with Raymond James.

Good morning, guys.

Good morning.

A couple questions for you on the US Cellular side. First, just to get a little color from Ken may be on the guidance on net [adds]. The old guidance, as you mentioned 260-280, you are going to take it up including PrimeCo now it is 280-300. Looks like if we were calculating US Cellular for the first two quarters and US Cellular including the, I guess loss of 15,000 customers at Chicago in the third quarter, you would have added about 150,000 net [adds] in the first three quarters thereby implying a 130-150,000 in the fourth quarter? If I am doing the math right.

Yes.

Okay. So -- obviously the launching of US Cellular in December 1, I would guess a pretty strong component of that -- get that network, and branding, and sales efforts switched over to your high quality area?

That's correct.

On the CAPEX, the old had been significantly less. It's a much higher CAPEX number now for and I think you said that's for this year right? 720-740 million this year?

That's correct, sir.

That implies a very large fourth quarter effort. Did you say handsets were included in that? I missed that.

No. What I was saying was that by doing Wisconsin [sooner] like, we are moving up to CDMA, we stopped spending both on CDMA capacity, but also stopped putting out CDMA handsets, which if we change the technology early next year [for us its] got a kind of mistake, a waste [that go on investment] [inaudible].

No. Okay that make sense. But 720-740 is the true CAPEX will be spent this calendar year. Is that include some of the 90 million previously said that that would be spent in PrimeCo areas or?

Yes, it does.

Okay. So, some of that 12-month PrimeCo numbers included in there, but when we get the large portion of that increases truly advancing the CDMA over billed into the fourth quarter of this year?

Its almost 50-50.

50-50, okay. So, that answers -- I mean the operating cash flow obviously is going that way. Okay. CPGA, you mentioned your marketing cost were around 349-350, that's not the CPGA, right? That's not including the handset subsidy, that's just marketing cost? Or does it include the marketing or the [CP] subsidy?

The cost for gross head number that I quoted is an all in number that includes both the equipment subsidy, commission to advertising, everything that was 346 for the quarter.

Okay. That's all within number including handset subsidies. Okay. You mentioned how it's staying kind of high. You guys are focusing on post-pay customers. Can you talk a little about the trends going forward, you expect them and CPGA to stay up higher like that?

Well, I think that's in -- when you talk about the fourth quarter was just the launch cost that you will have building the brand awareness and [recall]. You are going to see a higher number. Okay. Ignoring the fourth quarter, if you look out, you know, into the business right now, we are going to be selling more CDMA phones, but we are also -- now we were down from 365, 390 the first two quarters because of volumes. And presuming that volume stays where it's at and the economy continues to be a little bit more receptive, we should see some improvement in cost per gross head. And if, you know, the economy should stay they will also make some changes to some of the fixed cost channels.

And the final question, very good trend on ARPU obviously. You guys talked about how three quarters in a row you have seen a growth on the average revenue per user. What's your thought as far as what's driving it to go up? Is it the particular plans you are selling? Is it people breaking the minutes and using more minutes because minute certainly grew quite substantially this quarter versus last. What do you attribute it to? Because it is stepping up the roaming side, really seems to be the [logo] as you call it retail revenue.

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

Okay. And the trends going forward and its certainly a nice trend to have, but you know it may be stabilized or are you feeling pretty comfortable on the 1x from the CDMA offerings?

At this point the [level] One X is just growing up. I wouldn't want to draw any lines from that. I think that that we've done a heck of a lot of good work around, continuing to build our retail revenue base, which is both the customer side and the average revenue per customer from those. I don't know that I am ready to draw a lines up [because] you can't have a continually increasing average revenue. But we will continue to focus on our strategy here which is all built around profitable growth. We are going to chase customers, just to chase customers we are going to put all of our marketing efforts behind those plans that can drive our profitable growth.

All right. I am glad that the things are going so well. Good luck on the rebranding launch on the December 1st.

Thank you,

Your next question comes from Mike Rollins with Salomon Smith Barney

Hi. Just had two questions for you. First if you look at the [CPGA 346] and all of the marketing costs, it actually looks like churn is a little higher with the PrimeCo acquisition in the Q3 range. Does that sound right? And also what percentage of growth [inaudible] are prepaid in the third quarter? And then what you expect going forward?

Ok first of all, I don't know if I understood your question. A overall churn rate over the quarter with PrimeCo rolled in it would be about 2.2-2.3.

Ok, thank you

Second question, can you repeat that Mike?

On the prepaid. It just seems like prepaid, if you just look at the change in churn from postpaid churn to aggregate churn, its looks like prepaid is representing a bigger part of a base, a bigger part of a gross ads, and I am just wondering if you can give us a sense of how that segmented out in the third quarter and what you are expecting going forward?

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

Okay.

And it has fallen not only in percent of our business in third quarter but actually in absolute numbers as all the focuses have been on the post-paid side.

And if you look at the Chicago market how does that affect the averages?

Well Chicago comes in, we had a much heavier pre-paid base close to 40% customers, most of the net loss in customers, this quarter was on the pre-paid side and we will -- would expect to support those products, but like the strategy we are following everywhere else, our focus will be on post-paid

Fine, thank you.

Okay, Mike.

Your next question comes from Frank Lusay with Raymond James.

Hi Guys, couple of question on the ILEC side. Can you give us some color on some of the trends you are seeing there with second lines. Are you seeing deteriorations there? Are you seeing,-- and then as far as minutes of use for network access, you can comment on [tell about your] substitution what sought of the trends are on that front and then obviously in good shape from a switching stand point with Metrocom, -- with some of the more talked about changes in the [inaudible] [review], but are there any concerns there with what they might change in [EDP] that would be an issue that would-- what have you, you'd have make any significance changes to your model and any sense for direction there, thanks?

Alright. Let me make sure I cover all of them, for you Frank, if not let me know. I think generally when we see in terms of the trend in second lines is that key driver for second lines historically has been dial-up internet, accessed internet, you know internet growth has slowed slightly so we've seen some demand for that decline. You know there are certainly customers as they go to our DSL product, you know, [natural] because with technology causes customers to off times disconnect their second line so, that particular piece of the business isn't growing as rapidly as it did before. We're kind of holding our own, but it means it's not high growth area for us. Minutes of use, I mean there's obviously a variety of different things that are impacting it, certainly emails is one of them, wireless substitution is one of them, you know, use of the internet in general so, you know, our minutes of use trends, you know, have been actually improving a little bit this quarter over where we where before, but those are probably the big ticket items that impact us and, you know, we see less of the impact, I think that you typically find in some of the urban areas then are more rural areas, and some of the particular regards. And regarding specifically [EDP], [I'm again] we just have the exposure that we have at US Links for the entire platform. I think generally what we've seen in the variety of different states has been continued pressure on the unbundled [group] rates and actually bringing it down and so I think if anything that helps the model specifically [after so to say] models [so as that] both lines continued to be available to us and they continue to be available to us on the right price. But it is absolute key driver I mean that drives market collection, so will really focused on it we spend a time at the Federal and state level to deal with them.

Any thoughts on additional [inaudible] market and may be [update] some of the other territories in other states, is that a consideration at this point, or are you seeing any of those [group] rates get to this level where that's attractive.

I think we always look Frank at what those options might be. You know we're pretty much committed as we said before to stay within the what was the old [Ameritec] region and you know we are looking at markets that tend not to be on local measured service and you know certainly going out beyond the markets that we have. We have got plenty on our plate to demand as the ones we have, but we keep looking.

Okay, great. Thanks a lot.

Your next question comes from Marty Dropkin with CSFB.

Hi, Did you break out with the acquisition [of course] and the [NTT], and the telecom systems contributed to the quarter so that we can get a feel for the internal growth rate. I think I heard you say that there were 1.6 -- 1600 [inaudible] [equivalent] added during the quarter at the [inaudible], but I just want to make sure that that's right. When you think about [EDP] did I hear you say -- I think you do not have any in the Metrocom territories but do you see that as an opportunity that was my thought that [group rates] are coming down. Could that be an opportunity for you to start [EDP] in the Metrocom territory? Does it become in any other markets where you see that is or your EBITDA margins might be good enough that it's an economically viable option?

Okay, Marty the comments that I made was that our internal growth and equivalent [inaudible] excluding acquisitions was 1.6%.

A 1.6%

Yeah 1.6% is the organic growth. You know [EDP] has worked well for us at US [Links] because we started with an embedded base of customers there and we didn't have the facility there and we felt that we would work that model and then when we got, you know to the right level we would put them on our facility [from a stone at half], we certainly looked at TDS Metrocom as an option. It gets complicated and the complications becomes that you are restricted to [really] the services of the [incumbent] is offering and so it does add some provisioning challenges that offer some billing challenges and you know some of the more creative plans that we can offer, you know, in terms of [LD] or even simple things like DSL get very complicated because, you know, we are at the mercy of the services in the [feature sets of the incumbent has]. So you know, I think you really have to make a bet on whether not to believe [EDP] will be there long-term. You know, we do believe that there will be some grand [inaudible] that may occur but you know, will the platform as we know will continue around for a very long time, you know, probably not so we are going to continue to operate our facilities model when we acquire a customer, we put them [on -- unbundled group] if they are residential customer but we [time writing] our facilities we do it right from the beginning.

Okay, any -- break out on the revenue back to the internal growth rates. Can you talk about what's your revenue and your operating cash flow contributions were for the acquisition.

I know the revenue number Marty, I think that internal revenue growth excluding the affect of acquisitions was little over 1%.

Okay, but nothing on; you don't have EBITDA number of...

No, it will probably be in the same range.

In the same range. Just -- one kind of follow up question on the Deutsche Telecom shares, [to their infinity] shares that were sold since the end of third quarter.

No, there haven't. We would be disclosing that if there had been.

Okay, great, thank you Sandy.

Your next question comes from Will Power with Robert Baird.

Yeah, good morning. A question or two for Ken on U.S. Cellular side. I guess -- first on the [gross net addition] side looks like pretty strong numbers, I guess, sequentially and compared to the year ago results and I just wondered if there is any more color around that I mean so the function is, the seasonality, [inaudible] economies picked up to help [inaudible] [with the] function of introduction of new rate plans. I just kind of want to see if there is -- if there were other drivers to that and then the second question is with regard to the EBITDA guidance. Looks like EBITDA guidance is about 30 million [lower to] look at the midpoint for the full year. I just wanted is that the function is entirely of the Primeco integration or it there some impact from, you know, higher market costs, etc. just in the traditional markets as well. Wonder if there is any granularity there. Thanks.

Okay Will, I'll first of all with regard to the third quarter what we saw was a pickup 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 hasn't been any changes to our pricing since late in the first quarter or early second quarter. I think that takes a little time to take hold but generally we just saw a pickup across the board. You know, In the past we have seen some slowdown sooner than other people. I can only hope that this is -- signs of pickup a little bit faster than we've seen in other places. But there hasn't -- wasn't any other, you know, pricing change, promotion strategy changes, you know, 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've been doing for the better part of the year. So there is not any real change there.

Okay.

Secondly, the question was on EBITDA guidance and we just checked one item here. When we last talked, we were at the 660-680 range, so if it's a, you know, midpoint-to-midpoint, a $20 million change.

Right, the upside [inaudible].

And that is primarily around the launch cost of Chicago. It does have built into it a little bit higher bad debt based than what we saw in the third quarter. Actually, we thought that will be down over the next couple of quarter. If curious, a little bit of that. Also, with the deployment of CDMA into [I1]and was [inaudible] before the end of the year, what you do when you put a brand new network in there, you windup with some initial fixed cost that will affect us for the next couple of quarters.

Okay.

Okay.

Great. Thank you.

Your next question comes from Mike Balhoff with Legg Mason.

A couple of questions, you commented on how the minutes of use were improving in the quarter, the year-over-year numbers I assume -- could you give us some quantification of what those minutes are because this is obviously important for a [real carrier], where you depend upon originated and terminated access?

Sure, Mike. What we saw this quarter or let's put it this way, second quarter of '02 after the second quarter '01 adjusted for all acquisitions were actually down about 2%. This quarter compared to third quarter adjusted for acquisitions were basically flat. But we're seeing an improvement.

Dave, why do you think that that is the case?

Well, I think there is a couple of different issues -- I mean we do know that we have constructed some different plans; specifically [EAF] type plans etc. earlier last year or later last year, which I think, you know, taken a little while to get out of the base. You know, we probably did see, you know, some loss due to, you know, different factors, but you know, is it increasing at a rate greater than that? You know we pushed the same time to get, you know, internet and a variety of other things and, you know, so I think we got more. I guess what I say Mike is I think we have bred more of a better more stable base now and comparing it to 200, and probably little bit more of the loss, in terms of last year. I'd like to think a little bit is recovery on the economy too. But we'd certainly know as, you know, businesses do layoffs and a variety of other things. And so it certainly has an impact on minutes of use.

Dave, second issue in on access lines -- it appears as if -- by our calculations, you are down about 500 sequentially, is that about right? And if that's the case, I'd appreciate some quantification of which you're seeing as far as substitution goes for broadband and also wireless?

Mike you're talking about equivalent access lines?

I was just trying to figure out actual access lines.

Okay, well we consistently -- we give information on both. We believe that equivalent access lines is a more reflective measure. We certainly have seen the trend, especially when we sell our own DSL product Mike, that you know, often times the customer will disconnect the second line. You know, that's part of the value equation for them. So that's not uncommon at all. Some of our markets do have cable more than competition and certainly, you know, that's part of that play as well. The other part though, that impact that is we see generally a trend somewhat away from Centrex services to PBX types services. That's why we believe its important we stay in that business. I mean we want to, you know, continue to serve to that customer. But if you look at the access line basis, you know, a customer could convert you know, many, many Centrex lines to one PRI. And that would go from the number of Centrex lines to, you know, 3 or 4 PRI lines. So we do generally see a trend of customers moving to more high capacity lines. And generally the revenue might be a little less in an absolute sense, you know, if you count just physical lines. That's why we believe that the equivalent line calculation is more reflective in terms of it. But, you know second line [first time] is bigger seller as we've had before. That's probably one of the drivers too.

I guess Dave what I am really trying to quantify is how much of the access line decline is related to substitution factors, do you have any ways to model that?

Well we certainly know on our own, you know, when we sell DSL you know quite often, probably half the time, you know, the customer disconnects the second line. So we know it from a modeling perspective. We know we have some substitution Mike relative to more of a transient, the kind of vacation properties that we have seasonal homes, you know we have less reconnects for those than historically have had. But those have not typically been high margins business for us. You know, those are pretty natural often times for slighter substitution. We don't believe we have a significant amount of customers who are, you know, completely cutting the chord relative to [layman] phones.

Okay, thank you. One final question and that's related to universal service money, she had indicated, I guess, about 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 monies related to your U.S. Cellular offerings in various places, can you give us some quantification of what number is? And that's the follow-up question, thank you.

Okay. Well, you [inaudible] is specifically for the quarter?

Yes I am.

Okay. USF -- interstate USF for the quarter would be...

While you're figuring that -- it's ILEC versus obviously, you know, ETCs.

Right. Interstate USF would be about 8.2 million, something like that. Intrastate USF is much lower; it's about 3.5 million for the quarter.

And what about the ETC number?

That Ken

At US Cellular, it's about 2 million a quarter.

Thank you.

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

Yes, good morning. My question is just taking into the G&A number a little bit, it looks like it was about 30 million higher on a sequential basis, and I believe the reason stated was that it was higher customer retention and some bad debt expense, I think [he has] the runup for about 2% and you said it was 3% this quarter. If I just take the incremental of your quarterly sales, that's about 6 million -- and it's going to be some compute in that rate, and if that is the case what is the rest of the 24 go, is that all retention? Thanks.

Hi Greg, it's Ken. You know, first of all you've got PrimeCo in that number, okay. And that's the PrimeCo expenses for the stub period, I believe we're about 10 million, okay. Secondly, you -- yes you computed the bad debt fees correctly. That takes it up to 15 with the biggest piece of what's left in the retention area.

And what are the retention costs really entail?

The most typical one is equipment subsidies to existing customers.

Okay. I am sorry, that's not part of the CPGA then.

CPGA is your cost of acquiring new customers.

Got you. But on the subsidiary industry, the existing not to income?

Right.

And super thanks.

Your next question comes from Roger Sacks with Cafe Financial.

Hi. Couple of questions, I guess on US cellular accounts since you just gave us the breakout of how much of the G&A came from PrimeCo's EPS and the other expense items as well?

Yes, I can. A little of over 5 million systems up, just under 7 in the systems in the marketing and selling line and just under 4 in the cost of equipments line.

Okay. Thanks.

It's over 10 in G&A.

Superb. Thanks. And I guess a question, our TDS telecom, given some of these, I guess recent talk about changes in universal service that I guess their recent [inaudible] conference in the [USDA] conferences, is there any one particular plan to USF going forward that TDS endorses whether its revenue based or connectivity based?

Well. That can be a discussion on its own, I think generally we support more of the connections based funding mechanism or [inaudible] something that ought to be looked at. But I mean there's got to be a balance, that's got to be brought through completely, but generally I guess I would say that would be the case Roger.

And is it your opinion that no matter really which, which system is openly decided with the client would be I guess a revenue neutral event?

We would certainly hope so.

Okay. Okay terrific. Thank you.

Your next question come from David [Junazo] with Merrill Lynch.

Hi. A question for Ken again regarding kind of some of the PrimeCo expenses. Sort of thinking about those numbers you gave us, how would we think about sort of spurred up costs versus run rate cost for some of those things? Thanks.

With respect to, you know, systems operations, what we saw were typical cost with month in 3 quarters of it. The G&A is going to be near and still be undergoing a lot of change and marketing is going to be heavily influenced on the launch.

Okay.

In July we gave, you know, different and new guidance around cash flow for the year. As we look beyond this quarter what I, what we will see is G&A kind of inline with what we have at the company level in terms of third customer in percent of revenue, that's something that you can bring out pretty easily. You're going to see a little bit higher cost per gross ad in next year as you still launch this market, but we aren't going to talk about, you know, specific investments at a market level.

Okay. Thank you.

Your next question comes from Collette Flemming with UBS Warburg.

Yes, a couple of questions for Ken, just following up on the retention cost. Can you put a dollar amount on that, I believe last quarter was around 17 million, so can we say that retention cost were roughly in a 13 million for this quarter. I also had a question on interest expense, I know rates have really been low, but your interest expense is lower than we were projecting, was there any amount that was capitalized because PrimeCo has unofficially been launched and could you give us a breakout on the interest expense between affiliate and non-affiliate? And that's it.

Thanks. Collette no, there is nothing capitalized.

Okay.

We are expensing interest expense as we go. We own the company it is an operation whether its launched under our brand or not?

Okay, its just low rates then because a lot of it is still in short-term debt really.

That is correct.

Okay.

Okay. I don't have the break out between affiliates and non-affiliates. I couldn't get you that.

Okay. Yes, its just a small piece.

And your math is closed on the retention.

Okay. Thanks a lot.

Your next question comes from Mike [McCarty] with [Superior Capital Management].

Good morning. My questions for Ken, also I am just curious, I'm somewhat of a novice at the accounting of acquiring a customer. Is any of that 346 capitalized at all and what I'm trying to get out ultimately is what the impact to operating cash flow is of growing a little quicker than market, you know, or imagine we 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, 20,000 or 30,000 customers more than some expectation were actually added, lets fundamentally $300 may at times, you know, 30,000 of $9 million of cash flow that is [inaudible].

What about in a quarter where gross ads are actually even higher because of little bit of the bad debt expenses. So, actually higher than 10 million probably?

Yes, sir.

Okay. Thank you very much.

Certainly.

Your next question comes from [Cemetric Cager] with [Gaballion] company.

Good morning. A couple of questions for Ken and probably Dave also and maybe one for Sandy. We've proven in CDMA, which certainly seems to make sense assuming that you guys have no, you know liquidity issues. If I look at lets say 2002, remainder of the 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 has stayed flat and we just spend a little bit more upfront and a little less going forward, or are we going just to spend more because it just cost us more than we compared to whatever we expected?

Okay. We actually we're seeing very favorable pricing in the equipment side of the business right now. And it's actually running us little bit less than we talked. When we put together the original projection of $420-450 million to convert our network to CDMA. We're running at a rate underneath that. So what we've done, we've simply have moved dollars that otherwise would have been spent early next year into this year in order to get them sooner take advantage from discounts as well as stop spending on TDMA technology.

Okay, and another question related to I guess CDMA also. Do you see any differences in terms of the equipment subsidy on the CDMA handsets versus TDMA?

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

Okay, and Dave a question for you. We used to talk about, you know, the model was, I guess prior to, you know, this whole economic slowdown that the access line growth of lets say 2-3% and the CAPEX that correlates with that is 150-160 per access line, which would translate into, you know, high teens as percentage of revenue on the ILEC side. Are we going into, you know, a permanent state of -- because of technology and wireless cable, DSL and so on, we should not expect, you know, 2-3-4% access line growth any more and therefore, you know, the CAPEX should be adjusted accordingly. But if you look at the [inaudible] they are cutting CAPEX and they are saying that it should be in mid-teens, while yours for this year at least they're still staying at 17-18%.

Yeah. Well, I mean there is couple of different issues in that [inaudible]. You know, I think that access line growth, you know, we are in a little bit of an uncertain period right now, but it's always unlikely that they will probably get backup into the 3-4 range, but, you know, may be in the, you know, in the 2% range not unreasonable in terms. We're still seeing decent helpful formation in our markets. You know, I don't know that, you know, some of the changes at the [RBOC's] are making are, you know, necessarily align with, you know, managing some level of customer service. You know we -- our trend continues to be about where it is; one of the, you know, the phenomenas in -- well America, I mean we are continuing to deploy infrastructure for DSL and internet and lot of other things, you know, which tends to be you kind of short-lived assets and that is somewhat, you know, reflected in our ARPU too. So, I don't think -- I mean in the CR trends dipping to the [RBAC] levels. We don't - we also don't have the scale they have and the density they have been selling either.

So one [pointing] kind of range is probably good run rate number.

Well - in that as a percentage of revenues.

Well I thought you said the CAPEX for ILEC as 120 for this year.

Yeah 120, yeah.

Right so that's okay. Another question for you also, if I look at the ILEC Corporations, it seems like your network cost is up 16% for the quarter versus revenue up 10%, custom operation is up 21%. Can you maybe drill down a little bit on the specifics as to what this course, I mean some of it is probably related to DSL rollout, but I mean custom operations, is it all bad debt or there is some other items?

No -- Well let me give you a little bit of color related to it. You know certainly some of the growth is related to acquisitions. There are certain cost relative to that, but you know that's where the majority of the people are that are in the field operations. What we tend to see is that, you know, part of the reason for the cost increases are things like DSL, as we continue to sell more and more internet, you know, our bandwidth costs continue to grow, which is reflected in our network operations cost. You know so those are the big drivers as opposed to bad debt per se. It's not a big -- I mean uptick a category. Our cost to [inaudible] is also included in that network operations cost.

Okay, alright and ...

On this [LD], you know our cost of [LD] minutes is also included.

But that sure shouldn't be really --I mean it shouldn't be going up faster than the revenue because hopefully you're making some money on LG.

Right. But as I -- yeah I .

Right, so I'm talking about in absolute terms cost were growing faster than revenues and therefore you EBITDA was going lower than revenues mathematically.

Well and part of it is -- in fact a little bit by the fact that you know are minutes are relatively flat in terms of two.

Okay alright. Sandy one question for you, I mean you guys are going to Europe. I just pulled up the top ten list of your shareholders and doesn't seem like there is anybody in Europe that has significant stake. I am not saying that nobody in Europe owns you, I mean what are the plans and do you guys have any plans to meet with Deutsche Tel Management.

Well first of all I think you are right that we don't have any larger ten shareholders right now and we would like to make sure that key investors know about us and have the opportunity to buy our stock. So that's really the purpose of going to Europe. I think it's probably likely that there will be a meeting with Deutsche Telecom. We certainly try to speak with them when they come to the US and you know they're very gracious to receive us whenever we go to Europe.

And what could be their objective of the region?

No real objective except that just maybe converse about current issues.

Okay. And finally now the last question for you. Is there a point at the -- you know in dollar terms that TDS stock has to go, you know, below where it becomes so much more compelling to buy back your own stock as opposed to invest in the business where you guys are going to say well we've gotta stop buying and as I understand that there is, you know, a capital markets issue and liquidity and everything else, although I think you guys are in much better shape than a lot of other players.

Well thank you, we appreciate that. And we do want to make sure that we're in a very solid financial position on an ongoing basis. We don't have a specific price trigger, but as you know we do always look at what the 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 tradeoffs on an ongoing basis. But as you pointed out with the current capital market situation it's even more important to make sure that we have liquidity and flexibility for our business channel.

Alright thank you.

Your next question comes from Todd Rethemeier with Bear Stearns.

Hi. It's actually [Ivy] Silver here for Todd. Just had a couple of questions. First of all you said that there were 350,000 customers at the time of the acquisition. We know you lost 15,000 this quarter. Did you write any off at the time of the acquisition?

No we said that when we closed it we estimated that there were 330,000 of those and closed and when we got in there turns out that it was closer to 320.

Okay and with regard to the billing system conversion that your doing, should we expect that churn could spike next quarter from either inactive or maybe non-paying PrimeCo customers. And I mean with a substantial prepaid exposure now, do you think that churn rates remain stable with this quarter or come down some in the next quarter in 2003?

Okay. First of all I've seen nothing that indicates spike in churn that's resulted in conversion of [inaudible].Secondly, when we talk about an overall churn okay for the company, mathematically it would always been a [growth] increase over the next quarter because of the higher proportion of prepaid that PrimeCo currently has. We bring that in June -- that is going to be the churn out, it is going to bring the average up a little bit over the next quarter in June, but that is just, you know, the cycling out of those customers. Again as I said are going focus really on the post-paid business going forward.

Okay one more question. You said that there were -- this will come from the CDMA equipment, which is one of the drivers, so why you decided to launch in market earlier than expected, the Wisconsin market. Do you think the equipment could be priced a lot higher next year or do you think that this pricing on that equipment will continue?

I don't have the feasibility to kind of the manufacture order to go into that question.

Okay. Thank you.

We are going to take one more question because the call is now running over an hour. We will be available to take calls the remainder of the day, so lets take one more and finish it off.

Your next question comes from Greg Lindberg with Morgan Stanley.

Good morning Ken. Back on G&A for a second because this was the first time your EBITDA was down year-over-year and the PrimeCo numbers you gave look like 69 of G&A annualized. I was wondering what you can pick out of this or is this the new level you are working with at what's one-time because that's a big layer that could factor into this model?

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

Okay. When you look at Chicago as the stand alone financial model, when does it breakeven for you guys assuming all this investment over the next twelve months on the marketing line?

I believe that our projection that we spoke about when we did the acquisitions, we thought it was big cash flow breakeven within the first 24 months.

Okay. And lastly, when you went through the PrimeCo's subscriber base what were your criteria for determining churn? Did you take the US Cellular policies and just overlaid on the subscriber base or is there is anything different?

There is nothing different.

Okay. Thanks, you guys.

Thanks everybody for joining us in Brooke will finish off the call.

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