美國無線通訊 (USM) 2003 Q2 法說會逐字稿

Good morning.

My name is Latricia, and I will be your conference facilitator.

At this time I would like to welcome everyone to the TDS and U.S.

Cellular second quarter results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Steinkrauss, you may begin your conference.

Thank you, Latricia and good morning everyone and thank you for joining us.

With us this morning Sandy Helton, Executive Vice President and CFO of TDS.

Ken Meyers, Executive Vice President of Finance and CFO at U.S. Cellular.

Dave Wittwer, Executive Vice President Staff Operations and CFO at TDS Telecom.

All of those folks will be offering prepared remarks.

Also with me are Jack Rooney, President and CEO of United States cellular, and Jay Ellison Executive Vice President Operations, U.S. Cellular.

And they're available during the Q & A period.

A replay of the teleconference will be available today at 1.00 Chicago time and run through midnight Thursday, July 24th.

The replay number is 800-642-1687.

And the pass code, 1621715.

For international callers the number is 706-645-9291.

Same pass code.

This call is being simultaneously web cast on the investor relations sections of both the TDS Website at www.teldta.com and U.S.

Cellular Website at www.uscellular.com.

The web cast will be available for the next two weeks after which it will be available in the conference call archive.

As always, it's important for you to know that some of the discussions today during the prepared comments or the Q & a section may and does represent forward-looking statements.

While the statements are based on the most reliable data available at the time any forward-looking statements, there are certain uncertainties that could cause the results to differ.

The risks and uncertainties are many and varied, it 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 SEC 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, it cannot be recorded or rebroadcast without TDS' express permission.

Your participation implies consent to our terms.

Please drop off the line if you do not agree to these terms.

If you're not getting notification from us regarding the teleconferences or you've changed your e-mail address or would like to be placed on the list, please e-mail me at the address on the press release.

Regarding upcoming company events, TDS and U.S.

Cellular are pleased to be presenting at the eighth annual Morgan Stanley annual global media and communications conference held in Boston this year.

I think the conference is held September 8, 9, 10, and both companies will be presenting on the 8th.

We're also pleased to be present at the Goldman Sachs Communicopia conference in New York City, which commences on or about September 30th, and we will be meeting with investors and doing one on one.

So please let me know if you'd like to meet with management during that time.

Shortly after we released our earnings results earlier this morning and before this call both TDS and U.S.

Cellular filed 8 Ks.

They're simply wraparounds of the earnings releases and put us in compliance with the new rules set forth by the SEC.

Also I think it's important to refresh everybody's memory.

So let me call out two line items that appeared on the P & L in the second quarter of last year that makes for some unusual compares.

They are a $1.7 billion loss on the value of marketable securities, 244.7 of that is also on the U.S.

Cellular release, and on the TDS P & L only a year ago we received a $45.3 million dividend from Deutsche Telecom.

And as much as Deutsche Telecom is not currently paying a dividend there's no corresponding entry this year.

Both press releases were posted to the TDS Internet home page this morning shortly after going out over the wire and U.S.

Cellular posted their release to their Website as well.

You will also find posted to our Websites additional information on reconciliation of non-GAAP financial measures that may be used by management when discussing the company's results during today's conference call.

The information can be accessed on the conference call page of the investor relations section of both Websites.

And now I'm going to turn the phone call over to Sandy Helton.

Good morning and thank you for joining us this morning.

In the interests of time I'll briefly discuss TDS' consolidated results and then turn the call over to Ken and Dave, who will go over the results of the business unit.

We will then take your questions.

TDS' consolidated revenues grew 18% year over year, a result of strong revenue performance at U.S.

Cellular both from the markets in place in the second quarter of last year and also from the new Chicago market.

TDS Telecom's growth was also solid with CLAC(ph) revenue growth of 26%.

Operating income decreased 24% for the quarter.

Much of the decrease related to U.S.

Cellular continued fast pace of growth, which drove up operating expenses in a number of areas.

Also affecting expenses was a short-term initiative involving conversion of the billing system in the Chicago market.

Ken Meyers will be discussing U.S.

Cellular results in greater depth shortly.

We are pleased to say that our combined CLAC’s were operating cash flow positive for the second quarter in a row, and Dave will expand on this during his comments.

In line with their commitments to improve shareholder returns, we continue to repurchase TDS stock during the quarter.

Repurchasing 628,600 shares during the quarter at an average price of $43.15 per share.

To date we have bought back 1,378,900 shares at an average price of $40.95 per share for a total of $56.5 million of cash.

We hope to continue the stock repurchase program, but that will depend on market conditions during the second half of the year.

We also took action during the quarter at TDS to redeem $65.5 million of our medium term notes at par, which will be effective on July 28th.

There are several things included in this redemption with $26 million at an 8.4% interest rate, $25 million at an 8.2% interest rate.

And $14.5 million at 8% interest rate.

Also earlier in the quarter we redeemed another $5 million of medium-term notes with a 10% coupon and a cost of approximately $5.8 million.

The annual interest saved on these bonds totals approximately $6 million before tax.

As you may recall, we have said that it is the company's intention to reduce debt levels prior to year end, and this is the first step in doing so.

To conclude, TDS had a very good second quarter, especially in light of the protracted weak economic climate.

We expect that operating efficiencies will drive improved second half results, reflecting the strength of the customer-centered strategies at both business units and the efforts of our terrific people.

I'll now turn the call over to Ken Meyers, who will discuss U.S.

Cellular results for the quarter.

Thanks, Sandy.

Good morning and thank you for your time today.

As we review the results of the second quarter, it's important to note that the consolidated revenues and expenses include all the company's operations. -- operations which are part of the trade with AT&T announced on March 10th.

Will remain in our operating results until that transaction closes, which should happen during the next 30 days.

Turning to the quarter, we continued to see solid growth in customers across our markets as a result of both marketing successes and strong customer retention results.

During the quarter we added 103,000 net new customers.

This compares to 43,000 in the second quarter of 2002.

As in the first quarter, this substantial increase in customer growth was not specific to any one area.

It reflects continuation of what we saw in the third and fourth quarters of last year, which was a somewhat stronger demand than experienced in the first half of 2002 and improving results.

This growth continued to the 21% year over year increase in customers.

At June 30th the company served over 4.3 million customers.

Key to achieving this high level of growth was an outstanding churn performance.

Post-pay churn across the company rounds up to a 1.5% monthly average.

That is the best post-pay churn rate going all the way back to at least 1999.

The 21% increase in service revenues I said was really driven by 21% increase in customers, the total average revenue per customer was down 10 cents on a year-over-year basis as increases in retail and other revenue per customer offset declines in roaming revenue.

Total keeper roaming revenue was down about $5 million, or 8% on a year-over-year basis.

Partially offsetting this was a little over $4.5 million of new eligible telecommunications carrier-related revenue.

With operating expenses a 21% increase in customers combined with a 51% increase in average minutes of use and a 30% increase in cell sites and service, pushed system operations expense up almost 25% on a year-over-year basis.

Marketing and selling expenses plus net equipment subsidies up 39% year over year on the 139% increase in net customer additions.

Marketing costs per gross add averaged $378.

In the most recent quarter, down slightly from a year ago.

Despite the slight improvement, equipment discounting remains high, with significant discounts offered even on the very latest in technology.

G&A expenses were up 55% driven by a 21% larger customer base, the substantial costs of the Chicago operation and its integration, as well as retention and bad debt.

The Chicago operation is being transitioned from an outsource billing and store operation system to our in-house system, which is used in all of our other markets.

Similar to the first quarter, we incurred costs of both operating two systems and the cost of moving to one system.

The transition is going very well and should be done within a month.

These higher costs will start going away in August, and the transition should be completed by the end of the quarter.

Retention expenses were affected by the higher equipment discounting I mentioned earlier as well as the overall level of our retention activity.

Bad debt experience, while still up year over year, is continuing to show signs of improvement as non-paid are declining and bad debt as a percent of total revenue continues to fall.

Also, within the category of G&A rates charges to our customers -- I'm sorry.

Rates charged to the company for the company's mandatory contribution to the USF fund increased effective April 1st.

These new rates increased both revenue and G&A expenses by approximately $9 million.

Below the line investment income posted a $66.2 million increase across the board in our investment market while interest expense was up almost $7.8 million due to higher debt levels, primarily related to last year's acquisition activity.

Overall, net income totaled $29.1 million, or 34 cents a share.

These results fall in the range of the average estimates on stronger than expected revenues and customer additions.

Looking forward, while we were awfully pleased with our 1.5 monthly post-paid churn rate for the quarter, I caution people not to draw lines off that one data point, especially given the uncertainty around the potential effects of local number portability, which comes into play later this year.

However, given the good results in churn, we are raising our full-year targets for customer growth to 475 -- up to a range of 475,000 to 500,000 net customer additions for the full year.

We are still targeting service revenues in the $2.35 billion to $2.4 billion dollar level for the year.

This reflects our expectation that the transactions to the Florida, Georgia markets will close in the next 30 days.

Under that same assumption, along with our higher customer growth targets, we are full-year income to be in the $170 million to $190 million range.

Our CAPEX guidance for the year is now being revised to $650 million to $670 million, reflecting two items.

First, capital spending in our existing markets is being reduced by approximately $30 million due to the successful CDMA conversions to date, the efficiencies in that technology, and a favorable pricing environment for network equipment.

Secondly, we expect to immediately begin building out some of the new licenses we are acquiring from AT&T.

The spending, primarily in Oklahoma City and St. Louis, could total $80 million just this year.

Thus the $50 million net increase for the year.

The initial build-outs of these markets is projected to take approximately 18 months.

In summary, we're continuing to move forward even in a weak economy.

There's a lot of change going on.

The CDMA overlays are on track.

We have launched in Omaha, Nebraska.

The Chicago transition is almost complete.

And we are in the testing phase for local number portability and near completion of our data filling platform.

Even in this changing environment we are committed to continuing to drive customer satisfaction as measured by both our customer surveys and our post-pay churn rate.

Thank you for your time today.

Now let me turn the call over to Dave Wittwer at TDS Telecom.

Thanks, Ken, and good morning everyone.

TDS Telecorn's results for the quarter were in line with the full-year guidance we'd previously provided.

Focusing on our ILEC business revenues were up 3.1% for the quarter with a 10.4% improvement in operating income.

Revenues and operating income excluding the effects of acquisitions grew 8/10 of a percent and 9.7% respectively.

Excluding the effects of acquisitions, physical access lines declined 1 1/2%.

Declines in residential second lines, primarily due to DSL and cable modems, and business centric lines for higher capacity circuits continued to be primary drivers for the small decline.

Again, excluding acquisitions, access line equivalents grew slightly and access minutes of use declined 8/10 of a percent, primarily the result of wireless substitution, greater use of the Internet for Internet and e-commerce, and general economic condition.

We continued to do well with increased penetration in our key products in vertical services, however, including Internet access, long distance and advance caller services like caller I.D.

Long-distance customers increased to 212,000, a 20% increase year to year.

And we've begun offering larger minute bundle plans in some states that are showing early success.

Our DSL customers increased to 16,200 accounts, nearly 150% improvement.

DSL services available in 40 markets representing over 54% of our ILEC access lines.

And we plan to offer service to approximately 25 additional markets during the year.

Dial-up Internet accounts declined slightly as customers shifted to broadband services.

Our DSL strategy continues to focus on markets where cable modem competition exists or is imminent.

Caller ID penetration increased 31.8% in the quarter.

Our CLEC operations continued to provide solid growth and movement to profitability.

Although we continued to provide CLEC services through our two established brands, TDS Metrocom and USLink, we continued to intergraded them together to improve efficiencies and provide higher levels of customer service.

Consistent with this we only present total CLEC results in our financial releases.

CLEC equivalent lines increased 80,000, an increase 33%.

CLEC revenues increased 26% for the quarter.

And operating cash flow improved by $14 million in the quarter to $4 million.

Although we are still waiting on an order from the FCC relative to UDP through the review, our exposure is relatively modest with only 40,000 lines using UDP from Qwest in our Minnesota-based CLEC market USLink.

Good progress was made by USLink this quarter to move customers to our own facilities with 23.1% of their lines on switch.

None of our ILECs are providing UDP services to other CLEC.

Our CLEC numbers for the quarter do include a $1.7 million one-time expense reduction relative to Auer Bach payments for unsatisfactory service level performance.

These credits are not expected to continue.

Despite a difficult economy we remain confident in our total year guidance for our ILEC operations.

Guidance, as previously stated, is for total year revenues in the range of $635 million to $645 million and operating cash flow in the range of $305 million to $315 million.

CAPEX remains at $130 million, plus or minus.

In our faster growing CLEC operation we're modifying our guidance to reflect a $10 million improvement in operating cash flow and a $5 million reduction in CAPEX.

Revenues remain unchanged in the range of $210 million to $220 million dollars with an operating cash flow of break even to $10 million positive.

CAPEX guidance has been reduced to $35 million plus or minus.

These changes are the results of stronger cost controls, lower bad debt expense, and better capital utilization.

We are very focused on continuing to provide value to our shareholders through improved profitability and better cap utilization.

Our marketing programs -- in our marketing programs we target increased penetration of new services as well as new calling plans that are going to boost access and long-distance minutes of use.

Providing high level of customer satisfaction to our customers while constantly focusing on controlling costs helps us to improve those returns.

And I'll turn the call back over to Mark Steinkrauss.

Thank you, Dave.

Latricia, we're ready to take questions.

At this time I would like to remind everyone in order to ask a question please press star, then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q & A roster.

Your first question comes from Tom Watts of S.G. Cowen.

Good morning, everyone.

On U.S.

Cellular results, can you give us gross adds across the business?

Yeah, Tom, I can.

Gross adds in the quarter were about 319.

319?

Okay.

And also retention costs.

We don't break out retention costs separately.

Okay.

On prepay can you give us any sense of what portion prepaid is of business and how you're focusing on that?

Is that shifted since last quarter?

No, it hasn't.

In fact, as we have said, that our strategy is to really focus on the post-pay customer.

That's the segment that gets the most value out of our customer satisfaction focus.

And over the last couple of years, you know, prepaid has been under 4% of the business.

When we acquired Chicago, it had a larger base, larger percentage of their business.

So first quarter that included Chicago last year was the third quarter, and our post-pay as a percent of total, it jumped up to 5.6% just because of the inclusion of their base.

And we continued to stress the post pay, and as a result now post-pay is under 4 1/2% of our total customer base.

It has come down each quarter since the third quarter of last year.

And at this point I don't see a dramatic change in that.

Now, in terms of the Chicago market you've noted that you've been spending a lot there.

Can you give us a sense of how the market's developing?

Are we in sort of the second inning, do you think?

Or the fourth inning?

I know you're going to be integrating the billing system shortly.

When do you think we'll see payoffs for the investment in Chicago, and how should we think about that?

Well, when we acquired the Chicago market, we acquired it based upon a long-term business plan that had us building name recognition, building distribution, and then capturing just our share of the market activity but using our customer-focused strategy to retain them and drive value over time.

At this point I think everything that we see suggests that we're doing just that.

It is not a market that, you know, we wanted to come in and be extraordinarily disruptive to or anything else, and so we are being measured in our steps here.

Yes, one of the big challenges was that when we acquired the market it was in the midst of a billing system that needed to be completed and that we had to go through a second billing conversion to get it on our own systems and that's wrapping up as we speak.

And just a final question.

By taking G&A out of your operating guidance, it looked like the EBITDA guidance was substantially lower.

I believe about $55 million.

Could you comment on that, what's driving that?

No.

It doesn't turn out to be substantially lower.

It is lowered by the effect of increasing our customer add totals for the year.

Okay.

The other thing that you've got to add back, though, you look at the footnote in the financial statements, we talk about what used to be the operating cash flow number.

That excludes the non-cash loss on assets held for sale that sits right above the operating income number on the financial statements.

Okay.

Thanks very much, and good progress there.

Thank you.

Your next question comes from Rick Prentiss of Raymond James.

Good morning, guys.

Hi, Rick.

First Ken.

You cut out a little bit.

I don't know if it cut out on other people.

When you were starting your opening remarks and you were talking about the Georgia Florida market that you swapped.

What I'd said was that they are included in the consolidated results of the company and they will stay in the consolidated results and that we expect that that transaction will close within the next 30 days and then we would not have them in the consolidated results going forward and that when we made our -- when we talked about what our targets were for the full year those were predicated on the assumption that that does in fact close within the next 30 days.

How much revenue the AT&T properties had on a basis.

But you didn't talk about the EBITDA.

Should we assume a typical 25%, 30% margin on those revenues as going away from the AT&T swaps?

Well, as I said, the targets that we've put out for the year are predicated on those going away.

So they reflect what we believe we will see in the consolidated financials for the year.

You talked about the new ETC revenue.

Missed that number when you said it.

During the quarter we received a little bit over $4 1/2 million of new eligible telecommunications carrier-related revenue.

That is, related to services being provided in the state of Wisconsin and Iowa.

So there are now three states, Wisconsin, Iowa, and Washington, through which we are getting ETC-related revenue.

Thank you.

Our next question comes from Frank Laupin (ph)of Raymond James.

Good morning.

On the ILEC side it talks a little about the access outlook.

Where do you see that going?

Maybe you can give us some more color on the decline, some of the mix of your second line penetration.

And then maybe on the M & A front give us what you're seeing out there, seeing some activity, and possibly would you consider expanding your CLEC operations through M & A?

Thanks.

Good morning, Frank.

You know, the company's policy is typically not to talk about M & A activities, but we continue to be opportunistic in terms of looking at opportunities like always.

So you know, I think from a CLEC perspective, you know, it's really the same issue in terms of acquisitions.

You know, it would need to be something that would meet our business case criteria and we'd need to meet the expectations we have on a discounted cash flow.

So you know, we don't have anything to comment on there, but it's something we would always consider as well.

But it would have to fit into our strategy in that upper Midwest.

You know, primarily the line loss is probably equally rated between second lines and business centric.

Those are the two primary contributors.

We do see a very modest decline in residential single party service, primarily in seasonal homes, vacation homes, things like that.

But the majority of it is related to second lines and business centric.

And the second lines are primarily a function of customers moving to broadband, whether it's cable modems or taking their own DSL or just generally scaling back in some cases because of increases in the flick charge, and business cent rex is primarily the functionality that's available in PBXs as well as the flick charges that's increasing.

But we've kind of said in the past that we expect access lines to be relatively flat for the year.

And any color on your second line penetration currently and how much of that 1 1/2% was second lines versus the other?

yeah.

About half of it roughly would have been second lines.

I think, you know, right now our second line penetration's around just under 12%.

Okay.

Great.

Thanks.

Our next question comes from Zachar of Thomas Weisel Partners.

Good morning.

Thanks very much.

Couple of questions, mostly on G&A.

It was a pretty substantial increase, and Ken, you alluded to some of the reasons why.

Can you explain from a cost allocation standpoint what items are actually in G&A that may be accounted for and cost of operations for some of the other carriers that we're seeing?

Well, I don't know what's in cost of operations for the different companies.

But when I look at the first to second quarter changes, year over year I've got kind of a change in the business.

When I look first to second quarter, 10 million of it is the increase in the USS contribution rate that goes right to G&A and goes right to revenue.

Okay?

No bottom line effects that increase both of them by 10.

Okay.

That leaves you 8.

And that $8 million increase is fundamentally all costs related to the transition off the billing system.

Some of the other companies we're covering, you're seeing ratios, you know, more like in the low double digits as opposed to where you're at.

Are there call centers or some other kinds of the -- not necessarily network operations but you know, the basic operations of the firm that are being included in G&A?

Customer service is definitely part of G&A.

Customer service is.

Retention costs are.

Your billing costs are in there.

Again, I don't know what everybody else puts in specific line items, but we take fundamentally our network-related costs in systems operations.

The cost of running the network, interconnecting the customers, the customer usage charges.

We put all of our marketing and selling operations in the marketing and selling line along with advertising.

And then we put almost everything else, the high level goes into G&A.

Terrific.

Thank you very much.

Your next question comes from Roger Sachs of Cathay Financial.

Thanks.

A few questions, one for Sandy, then a couple follow-ups for Ken and for Dave.

Sandy, on the consolidated balance sheet, I noticed at least quarter over quarter the line item derivative liability went from about $11 million to $303 million.

This -- just not sure what is going on with that.

And secondly on the balance sheet.

Out of the taxes how much is related to the deutsche tell (inaudible)?

It was around $700 million last quarter.

And then I have some follow-ups.

Okay.

I'll start with the derivative line.

As you recall, the accounting for those monetization transactions is rather complicated.

So what happens is when the stock price goes up, that is fully reflected in the line marketable equity securities, but essentially to the extent that the increase in stock prices go beyond the caller then there can be derivative liabilities that are created.

So we saw some very strong increases in the stock price of both Deutsche Telecom and Vodafone in the second quarter.

And that's why you see the derivative liability going up.

If you do the little reconciliation where you look at marketable securities, derivative assets, and derivative liabilities taken together, what you essentially see is a net increase that reflects the benefit of the stock price increase that will accrue to TDS.

With regard to the deferred taxes, let me just confirm my number here.

The total net deferred taxes for monetization transaction which includes the impact of the derivatives is about $751 million.

Okay.

Thanks.

And a couple questions for Ken, a little more housekeeping.

But the all in churn rate for the quarter and secondly, once the billing systems are fully transitions what sort of savings would you expect to see in the G&A line?

First of all, all in churn rate rounds to a 1.7% number.

Rounds up to 1.7.

And once we get everything transitioned, as an example, that $8 million I talked about between first and second quarter we'll see savings at least at that level.

On a per quarter?

Yes.

Okay.

Terrific.

And the question is for Dave.

I know in the release you don't break out the CLEC between the two entities, but can you just do that verbally, the revenues, EBITDA depreciation and amortization lines?

No, we're not breaking that out, Roger.

Can you at least just tell us that one-time I guess revenue increase, was that for Metrocom or the other one, or USLink?

I think it would be safe to assume that you could kind of gauge it based on the line growth.

Okay.

Terrific.

Thank you very much.

Your next question comes from David Janazzo of Merrill Lynch.

Good morning.

Thanks.

Sandy, I was just wondering if you could give us an update sort of on the latest priorities with regard to the cash on the TDS balance sheet, and then Ken, you mentioned Oklahoma City and St. Louis.

Any further details in terms of markets that you may be launching over the next 18-month period?

Thank you.

Sure.

I'll start.

Our priorities continue to be really threefold.

One is to pay down debt.

As you know, we place a high value on maintaining our current debt rating at both U.S.

Cellular and TDS.

And as you saw, we've initiated that debt pay-down, but there is more to be done.

Second is certainly a stock repurchase program.

And we're in the process of that.

And thirdly, just general corporate purposes, which has to do with maintaining a modest cash cushion but also being able to invest in the growth of the business.

With respect to the market launches, we brought up Omaha last quarter and, you know, at this point Oklahoma City and St. Louis are really where our focus will turn to.

And that's probably, you know, about an 18-month project.

David Janazzo Nothing to talk about beyond that?

Well, not in terms of new licenses at this point, no.

Okay.

Thank you.

Your next question comes from Craig Mallard of Legg Mason.

Thank you.

Good morning.

A couple questions.

First as a follow-up to one of your comments regarding number portability.

I just wanted to see if you guys have built in any expectations for number portability in terms of churn into your own guidance in the fourth quarter and if you might want to share that with us.

And secondly, a number of the other carriers have obviously begun the process of implementing charges associated with number portability, e 911, et cetera, and I want to see if that's something you guys have also considered or you're currently doing.

In fact, when I talked about churn and the rate results both this quarter as well as year to date, I did caution that there is a potential for increase there given the risks associated with number portability and those -- our estimates of those risks are baked into the guidance that we provided for the full year.

With respect to our customer billing processes, there is a charge on our bill related to recovering the costs of number portability as well as E-911 and other things.

What is that amount?

I don't have that amount in front of me.

It's something we've been doing for, you know, the better part of the year already.

I think late last year we started it.

And one follow-up.

You had also mentioned that the distribution of adds was fairly even amongst your various markets.

Could you give us a little bit of color in terms of maybe how that's trended over the last quarter or two in, you know, giving a few examples of some of your bigger markets?

Well, I won't talk about adds in any one specific market.

But what I did in both the first and second quarter is I said that the growth was coming across the board.

It wasn't just the effect of adding a new market to through an acquisition or anything else but that the core market as well as the new markets were all adding customers.

Okay.

Thank you.

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

Hi.

It's Loop Capital Markets.

My question is, well, first, it looked like some pretty good numbers, very strong on the sub base improvement for wireless.

My question is really is that a function -- because Cingular had some good numbers, Nextel had some good numbers, even western putting out some good numbers.

Is the overall market growing for the second quarter, or do you think you guys are taking market share?

And I've got one follow-up.

I don't think I can answer that question right now in terms of whether or not we're taking market share.

The numbers -- you know, our own market share numbers aren't out yet for the quarter, and we won't know until we see everybody else's.

Do you have a sense?

I don't think I can answer that question.

I'll just follow up, then.

What about what percentage of your markets are going to be subject to local number portability?

From the get-go Chicago, Tulsa, and Nashville I believe are -- oh, and sorry, Milwaukee.

There are four from the very beginning that hit that number.

One might be on the cost.

But that's only a November effect.

You know, my expectation is that within six months they'll all be affected by it.

Okay.

Thank you very much.

Your next question comes from Mike Rawlins of Smith Barney.

Yes, hello.

This is actually Mike Nelson for mike Rawlins.

Question on the impact and impact for USS subsidies.

Can you talk a little bit for about what you expect for USF subsidies going forward and if you expect the treatment of subsidies for wireless carriers to change?

I think that the visibility around U.S. -- we're talking about ETC-related payments going forward.

Yes.

Is uncertain.

The whole area is one that's under constant review.

The way we think about it as a business is that we will attempt to qualify and provide those services wherever we can, but it's not something that we're going to build a -- a key part of our business model going forward.

I think there's some volatility around it.

And a follow -- are there any plans to apply for ETC status in any additional markets?

We continue to apply for ETC status.

We're working through every state that we do business in.

Great.

And one other question.

Can you talk about your distribution mix, direct versus your indirect?

Our distribution mix has not changed dramatically over the last three years.

We have three primary channels.

Our -- what we call our dealer network, our own store network, and then a all other, which includes both our direct sales force, Internet, telesales, everything else is in there.

And over the last few years the all other category, direct and everything else, runs about 10% plus or minus that in any quarter, with the other 90% being pretty closely split between the companies, stores, and companies dealers.

Any single quarter that number may move -- you know, between those two may move up or down a couple of percent, but it stays pretty close, pretty well balanced.

Thank you.

Thank you.

Your next question comes from Avi Silver of Bear Stearns.

Hi, it's Avi Silver.

Just a couple of questions.

First of all, can you give us the percentage of customers upgraded during the quarter?

What do you mean percentage of customers upgraded?

Percentage of your base upgraded.

Or number of customers that upgraded their handsets, existing customers.

No, I can't.

Okay.

Or total units -- or total unit sales.

Well, there were, again, 319,000 gross adds.

I don't know what number you're looking for, Avi.

Total unit sales during the quarter.

Sales would have been the 319,000.

Right.

Okay.

And what was your bad debt expense or bad debt ratio during the quarter?

Bad debt expense as a percent of total revenue, right around 2 1/2%.

Okay.

And do you have any sort of pro forma comp, you know, with Chicago last year or this quarter without Chicago in terms of EBITDA?

Was that a bad word you used?

I can't -- I'm not even allowed to say that word.

No.

We are not breaking out Chicago or any other stand-alone market from our financials.

Okay.

That's all.

Thanks.

Your next question comes from Michael Ballast of Legg Mason.

A couple questions for Ken and then two questions for Dave.

Ken, on the subject of the etc, the return to that, obviously that's helpful and drops straight through to your operating income line.

What are your expectations for the remainder of the year as far as approvals go for maybe the current quarter and for the next quarter as far as approvals, and what might be the revenue impact there?

That's fundamentally my question about ETC applications, how many there are out there and when you might begin to get those and what are the revenue issues associated with that.

And then for Dave my question is how much USF did you receive in the current quarter, both state -- individually state and federal.

And are there any shifts going on as far as USF monies that are being received.

And the final question for you is about is there any kind of shift in the competition you're seeing in the ILEC region?

Thanks.

This is Ken Meyers.

Let me try to answer the questions first.

First, as you, I'm sure, know, there is almost a one-year gap between the time that one may receive ETC status and when any funds might flow.

So, you know, the visibility around that has always been limited, limited because of both changes to the program and risk to changes.

We have had, you know, calls where people have looked at certain Websites and said, gee, this is what different government organizations are suggesting that you're going to get, and those Websites, quite frankly, aren't built for that.

And they're -- the level of accuracy is not very high because of a lot of risks to the program.

The approach that we have taken is that we have said that when we receive additional ETC funds we will talk about it but the certainty about any filings or any payments even after filing is so uncertain that I don't want to mislead people by talking about a number that we don't -- we don't control and we can't commit to deliver.

So our processes are unchanged.

As things change in that area and actually we receive funds, we'll talk about it.

But to talk about potentials where we don't have control over it is problematic.

Ken, can you give me the ETC number in total for the quarter?

Something just north of $7 million.

Okay.

Thank you.

Your next --

I need to follow up with Mike.

Mike, on the federal side TDS Telecom gets about $24 million in the quarter, on the state's about $3 1/2 million.

And I don't think we've really seen any significant shift on the state side.

You know, what typically happens is that in some states as access rates are changed on the intrastate side a state USF program is oftentimes put in place, but we don't see any fundamental shifts there and really no fundamental shifts in the ILEC competition front.

Okay.

Thank you.

Your next question comes from Tom Nelson of Raymond James.

Hi.

Actually, it's Rick Prentiss.

I got cut off earlier.

I'll hold my question to Larry.

I want to talk about the CDMA technology.

Can you talk a little bit about what success you're seeing with it, what kind of data adoption rates, and what phones do you see as kind of the best sellers as you've been shifting your emphasis to CDMA in many of the markets now?

First of all, we haven't launched our data product.

So to talk about data adoption is premature at this point.

When we went from TDMA to CDMA, we saw almost a doubling of capacity, fundamentally three voice path to six.

As we're going to 1x we expect it to get at least a 50% increase, and from what we're seeing it's actually running better than that.

And that's somewhat dependent on the number of handsets you have deployed I guess with the 1x.

Where are you at in your base as far as having 1x phones out there?

With respect to having 1x, I don't have that number in front of me.

When we think about our total customer base, we've got about 85% of all of our customers are on digital plans now.

I don't have the breakout between, you know, 1x versus regular CDMA or TDMA.

Final question for you, Ken.

The MNA environment, obviously the AT&T wireless swap going to close here expected in the next 30 days or so.

The market's improved for wireless stocks quite significantly.

What is the appetite out there for buying or selling and further rationalizing the -- what's kind of the tone out there in the deal marketplace?

As we've said, our strategy around footprint is unchanged.

We'll continue to do that as opportunities to get a deal done exist.

I don't know if there's been a rate change in tone at all, though, over the last three to five months.

Okay.

Great.

Thanks, guys.

Your next question comes from Mark Anarni of UBS.

Colette M. Fleming Just a quick question, Ken.

On the USF I'm just clarifying that's both in long-distance and other revenues?

And also I had a question on G&A expense.

I guess actually your guidance.

That you lowered guidance for depreciation and amortization but yet CAPEX numbers you're going up.

It seems a little counterintuitive.

Was there a change in life?

Or what accounted for that?

And if you could give us any increase year over year as far as retention costs that's booked in G&A, just the magnitude of how much it might have increased.

Thanks.

Okay, Collette.

First of all, we think about D & A, one of the things that's going on is you are starting to build out new markets that won't be in service for, you know, 18 months.

Okay?

So some of that that's going out there isn't going to be depreciated right away.

And on the other side you've got the expectation that within the next 30 days the AT&T deal closes, which in fact takes D & A out of the current rate.

Second question was the year over year increase and retention.

I don't talk about specific dollar amounts related to retention.

They are up.

And you know, ballpark year over year, in the $5 million to $10 million dollar range.

Was there another question in there?

No, it was just a clarification where the USF increases, where that's both in long distance and other revenues.

The USF increase that impacts both G&A and revenue sits in the other category.

Okay.

Thanks.

Your next question comes from Will Power of Robert Baird.

Good morning.

I have a question for Ken.

With the plan I guess the St. Louis launches over the -- or builds over the next 12 to 1 months, can you give us any general range for what you think '04 cap ex will look like, I guess perhaps on a l consolidated basis and perhaps for those markets in addition to the cap ex intended for those markets in '03.

Then also just a quick question for Dave.

As you look at the CLEC business are there any other additional markets that you're still planning to build or are you really now complete on the market build outside?

Thanks.

Okay.

I'll go first.

It's Ken.

No, I'm not prepared to talk about 2004 at this point.

You know, what we've said is that in starting to build out those markets we are looking at potentially as much as $80 million this year, of which only 50 is incremental to our plan.

But to talk about it at any deeper level at this point is premature.

I mean, the point is that we expect to close that transaction within the next 30 days, we're going to immediately build out, that's going to have some impact on this year's numbers, and I want to make sure people are aware of that potential impact.

Dave?

Well, we don't have any plans imminent in terms of additional markets from a CLEC perspective, but certainly as we continue to think about, you know, the clusters that we've developed, you know, expanding our CLEC business modestly in some of those is certainly an option as we grow, but we don't have any plans right now.

Okay.

Thanks.

At this time there are no further questions.

Are there any closing remarks?

I think we're right on schedule, Latricia.

So we'll end the call now.

I'm available the rest of the afternoon and tomorrow.

So please, if you've got follow-up calls, give me a ring, and otherwise, thank you very much for joining us today.

Thank you for participating in today's TDS and U.S.

Cellular second quarter results conference call.

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