美國無線通訊 (USM) 2004 Q2 法說會逐字稿

Good morning.

My name is Carrie and I'll be your conference facilitator today.

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

Cellular second quarter operating results conference call.

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

After the speakers' remarks there will be a Q&A period.

I 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. Mark Steinkrauss, you may begin your conference.

Thank you, Carrie.

And thank you for joining us this morning on a particularly hectic day in the telecommunications sector.

With me today are Sandy Helton, Executive Vice President and CFO of TDS;

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

Dave Whitworth, Executive Vice President, Staff Operations and CFO at TDS Telecom, and also with us are Jack Rooney, President and CEO of U.S.

Cellular, and Jay Ellison, Executive Vice President Operations U.S. Cellular.

A replay of the teleconference will be available today at 12 noon Chicago time and will run through midnight Thursday, July 22.

The replay number is 800-642-1687, passcode 8675915.

For international callers the number is 706-645-9291, same passcode.

This call is being simultaneously webcast on the investor relations sections of both TDS' website at www.teldta.com, and the U.S.

Cellular website at www.USCellular.com.

The webcast will be available for the next two weeks, after which it will be available in the conference call archives.

We will be making some forward-looking statements today.

Please review the Safe Harbor paragraphs and our releases as well as our annual report and filings with the SEC in this regard.

If you are not getting notification from us regarding teleconferences or have changed your e-mail address, please e-mail me or one of my associates at the address on the press release.

Both TDS and U.S.

Cellular hosted their annual meetings of shareholders on June 29th.

Comments from the meetings as well as the power point presentations are available on the company's websites.

Regarding upcoming company events Ted Carlson and Jack Rooney will speak on September 8th at the Morgan Stanley global media and communications conference in Washington, D.C.

Jim Bobs and Dave Whitworth from TDS Telecom will be presenting at the Legg Mason [inaudible] conference in Las Vegas, October 11-13, and Jack and Ken Meyers will be presenting at the UBS conference in New York on November 16th through 18th.

Additionally, representatives of the companies are planning to visit with investors in Toronto, Denver, Chicago, Kansas City, Salt Lake City and several locations in Wisconsin between now and October.

If you are located in any of these areas and would like us to drop by and visit, please let me know.

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

Cellular filed 8-Ks.

As usual, the 8-Ks are simply wraparounds of the earnings releases we issued this morning, and put us in compliance with, the new rules set forth by the SEC.

Both press releases were posted to the TDS internet home page this morning shortly after going out over the wire.

U.S.

Cellular has posted their release to their website as well.

You will also find, posted on our websites, additional information and reconciliation of non-GAAP financial measures that may be used by management when discussing the operating data during today's conference call.

Any changes to the company's forward-looking guidance are posted as well.

This information can be accessed on the conference call page of the Investor Relations sections of our websites.

I will now turn the phone call over to Sandy Helton.

Thank you, Mark.

Good morning, everyone.

This morning I will highlight TDS' consolidated results for the second quarter and then turn the call over Ken and Dave who will discuss results for the business unit.

After that, we will take your questions.

The second quarter was another excellent quarter for TDS.

Consolidated operating revenues grew 9% year-over-year.

Due to strong customer growth and higher retail service ARPU at US Cellular, as well as continued steady results at TDS Telecom.

Affecting year to year revenue comparisons for the quarter is the fact that last year's second quarter results included operations from several U.S.

Cellular markets which have since been traded or sold to AT&T Wireless.

Specifically, the Georgia, Northern Florida and South Texas markets which generated $42.9 million of revenue in the second quarter of last year.

Consolidated operating income for the quarter was $110.5 million, compared to $42.5 million in the second quarter of 2003.

The increase in operating income reflects revenue growth and continued improved profitability at both business units.

Several additional factors affect the year-over-year comparisons.

First, the absence of those markets traded or sold to AT&T Wireless over the past year.

Secondly, in the second quarter of 2003, TDS recorded a noncash impairment charge of $49.6 million related to wireless licenses.

And finally, TDS recorded a $3.5 million loss in the second quarter of 2003 related to the difference between the book value of the Georgia and Northern Florida markets being traded to AT&T Wireless and the fair market value of the assets that U.S.

Cellular was to receive in the transaction.

And, of course, that transaction occurred during the third quarter of 2003.

TDS' effective tax rate for the quarter was 38.2%.

The tax rate was slightly lower due to favorable resolution of certain state income tax related matters.

We now expect the effective tax rate for the year to be between 40-41%.

We continue to repurchase TDS stock during the quarter, buying back 175,000 shares at an average price of $69 per share.

We plan to continue the stock repurchase program contingent upon market conditions as part of our commitment to improve shareholder return.

During the quarter, U.S.

Cellular issued $430 million of long-term bonds.

The proceeds of which appear on U.S.

Cellular's balance sheet at the quarter end.

The net proceeds of $413 million will be used to redeem U.S.

Cellular's lines which is a bond convertible into U.S.

Cellular stock, that redemption to take place July 26th and on August 16th to redeem $250 million of 7 1/4% notes that mature in 2007.

Because the bonds are about to be redeemed, they have been moved from long-term debt to current liabilities on the balance sheet.

Refinancing the lines and the 7 1/4% notes with new bonds enables us to take advantage of attractive rates in the bond market to lengthen maturity schedules and reduce potential dilutions.

The average maturity of the debt to be retired is 6.2 years while the new debt has an average maturity of 29.8 years.

Interest expense at TDS increased $4.4 million in the quarter, due principally to U.S.

Cellular's issuance of 6.7% bonds an amount of $444 million last December.

In summary, the quarter was another excellent one for TDS and its business units.

As Ted Carlson noted in the press release our employees are doing a great job and we have every confidence that the positive momentum of the first two quarters will continue through the remainder of the year.

Now, I will turn the call over to Ken Meyers who will discuss U.S.

Cellular's results.

Thank you, Sandy.

Good morning and welcome.

It is a pleasure to talk with you today about U.S.

Cellular's second quarter.

A quarter that saw significant year-over-year increases in net subscriber editions, service revenue and operating cash flow.

Margins increased nicely.

Earnings per share were strong.

And wireless number portability had minimal impact.

All in all, a strong set of results for the quarter.

During the quarter, the company added 137,000 net new customers.

Representing a 33% year-over-year increase in net adds.

This strong growth is very encouraging and as a result we are increasing our full-year targets in this area which I will discuss shortly.

Key drivers behind the growth in customers ranged 14% increase in gross customer additions combined with low and stable churn rates.

Post-paid churn was 1.5% this quarter, the same as a year ago.

Notwithstanding the rollout of wireless number portability across the remaining 70% of our markets in late May.

To date, WNP has had an insignificant effect on customer growth.

It has manifested itself operationally as we've had to train our associates, design, test and implement new processes and systems, and incur some additional costs, but has not yet had any significant effect on customer growth.

Service revenue was one of the big wins this quarter.

It's up 9% year-over-year despite the divestiture over the last year of markets in Florida, Georgia and Texas, as Sandy mentioned.

Those divested markets generated almost $43 million in service revenue in the second quarter of last year.

No service revenue was contributed from the same markets this quarter.

Adjusting for this divestiture service revenues grew 17% quarter to quarter.

Key contributors were strong growth in customers, especially during the last two quarters, and a 4.7% increase in retail service revenue per customer.

The increase in retail service revenue per customer reflects a continued focus on higher revenue rate plans as evidenced by the increasing average minutes of use per customer and growth in data revenues.

Minutes per use per customer averaged 542 this quarter compared to 424 a year ago.

As many or you know, a year ago our data offerings only consisted of short message services or SMS.

At the end of the third quarter 2003 we started rolling out our Easy Edge download services.

As the end of the first quarter of 2004 we started rolling out our picture messaging services.

Total data revenue for this quarter was over $14 million, representing about 2.2% of total service revenue.

Data now generates about $1 of revenue per customer.

At this time, these services are not yet available throughout our northwest or Mid-Atlantic operations since we are still installing CDMA1X (ph) in those markets.

That work is on schedule for completion this year and these exciting new services will be offered as soon as the network projects are completed.

On the expense side the year-over-year drop in system operations expenses reflects the previously discussed divestiture of two operating market groups.

Cost per gross add continues to trend up, about 4% year-over-year reflecting heavy industry wide discounting on expensive handsets.

However, given the company's low churn rate this level of cost per gross add is profitable, allowing us to continue to execute our strategy of driving profitable growth.

Operating cash flow increased to $187 million for the quarter, or 28.3% of service revenue.

Primarily on the strength of the revenue growth.

Operating income totaled $65.9 million for the quarter, it was $3.4 million a year ago, held down by the impairment charge Sandy mentioned, making comparisons less meaningful.

We also saw a sizeable increase in investment income which is our share of earnings in markets from which we have a minority position.

That was offset by an increase in interest expense.

As sandy mentioned we have turned our debt out over the last year and will soon eliminate the potential dilution from the lines.

Net income totaled $38 million or 44 cents a share, topping off an exceptional quarter.

Since the end of the quarter, we launched operations in Oklahoma City, Oklahoma and Lincoln, Nebraska.

Our final market launch for this year will be Portland, Maine, and we expect to launch that market before the end of the third quarter.

As I said, we are in track with our installations of CDMA1X (ph) in the northwest and Mid-Atlantic areas.

Associates delivered very good operating results for the first half of the year.

This is encouraging given the uncertainty around wireless number portability, economy and a competitive environment at the beginning of the year.

Momentum in the marketplace and strong churn results prompted us to increase our net add targets after the first quarter from an original range of 325-350,000 for the year to 475-500,000 net adds for the year.

Now, after another strong quarter, we are again increasing our target to a range of 560-610,000 net new customer additions for this year.

Also, faster growth translates into higher guidance around service revenue.

We start the year at $2.5 billion, we raised that once to $2.55 billion and are now raising that number by another $50 million to $2.6 billion of service revenue for 2004.

Typically, in this industry sector, faster growth in customers results in lower operating cash flow through the upfront marketing costs incurred in attracting the customer.

However, given the high number of customers we attracted early this year and the strong revenue growth to date, these new subscriber growth targets will not result in a change to our operating cash flow targets.

They remain fundamentally unchanged at $650 million to $690 million for the year.

I should note we've increased the low end of the range from 640 million up to $650 million reflecting the strong results to date.

Having raised our customer growth targets by a minimum of 210,000 for the year we will also be increasing our capital spending plans to ensure we have adequate capacity to meet the needs of our growing customer base.

Originally targeted at 610 million to $630 million it now looks like Cap Ex could climb to a range of 655 to $695 million.

However, if you look at the incremental investment on a per incremental customer basis you will see it is quite reasonable.

This higher level of spending will cause our estimates for depreciation to climb slightly from an earlier estimate of about $480 million to approximately $500 million with this change dropping straight through to operating income.

In summary, we're very pleased with results of the second quarter.

Good levels of customer growth, service revenue and cash flow, combined with strong growth in the first quarter positions us nicely for the year.

As a result, we have raised our guidance for revenue and customers for the second time this year.

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

Dave.

Thanks, Ken.

And good morning, everyone.

TDS Telecom is pleased to report strong results for the quarter with revenue growth of 5.1% and operating income growth of 14.1%.

ILEC revenues increased 2.3% primarily on strong DSL and LD demand and operating expenses were down slightly driving operating income up by 13%.

On a comparable basis physical access line losses were 1.4%.

These losses were primarily due to reductions in residential second lines.

Accounting for 5400 of the 9200 line decline.

The remaining decline was equally weighted to residential and business primary lines.

Sequentially we experienced a physical access line loss of only 500 lines.

The lowest we have experienced in the previous four quarters.

Sequentially residential primary lines grew slightly but were offset by declines in residential second lines.

Access line equivalents [inaudible] access lines adjusted to reflect voice grade equivalents grew 9/10% in the quarter.

Access minutes of use increased by 4.5% in the quarter as well.

CLEC revenues increased by nearly 14% on equivilant access line use increased 22%.

In the second quarter, the methodologies for calculating certain unbilled CLEC revenue pools were modified resulting in one-time revenues of $2.5 million.

Comparable quarters were also impacted by reductions in interstate and intrastate access rates occurring in 2003.

DSL sales continued to grow with a unit increase of 77% at the CLEC, 86% for the company overall.

On the regulatory front there are a number of issues facing the company that this point.

At this time that I wanted to bring you up to speed on.

We have filed an appeal of the Supreme Court decision relative to the [inaudible] that review order.

While that is in process we will be active in proceedings with the FCC as they work through the new rules.

On the unbundled network element pricing front, the Illinois commission recently voted to raise the UNI rates.

We were obviously disappointed with the decision and have requested reconsideration of the rate change and will consider legal action if necessary.

We are actively working in our other CLEC states to make sure the public, regulatory agencies and legislative bodies all understand the need to keep UNI rates at reasonable levels to allow for facility space competion to continue.

Recently another state commission outside of our area lowered their UNI rates which was a positive sign.

Regarding intercarrier compensation, the ICF, of intercarrier compensation form, has lost most of the support for its plan.

TDS was not part this form.

We are, however, actively working with various industry groups and associations to develop proposals and will advocate a viable solution to retaining some form of our access revenue streams from inner-exchange carriers.

Relative to USF the current rules are set to expire on June 30, 2006.

The federal state joint board has been ordered by the FCC to review the rules on high cost support.

We will work closely with all parties on this issue to continue to target support to rural telephone companies serving the highest cost areas while protecting the fund against the growth.

On the technology front, much is certainly in the news lately about alternate technologies different companies are deploying.

As I described in our first quarter call, we are currently deploying FTTP for larger sub -- for larger new sub divisions.

We also have a wireless data trial underway in Wisconsin and we will have two voice-over-IP trials underway this year.

We are currently too early in the trials to share any more details but will keep you posted as we move forward.

I'd like to reiterate our full year guidance with ILEC revenues of 640 to $650 million.

Operating cash flow of 305 to $315 million, and Cap Ex of $105 million, plus or my minus.

We are, however, lowering our CLEC revenue guidance to 230 to $240 million.

CLEC operating cash flow remains at 10 to $20 million and Cap Ex remains at $45 million, plus or minus.

The primary drivers for reducing the CLEC revenue guidance are an expectation for fewer lines due to a more focused sales force as the FCC has limited availability of UNI-P.

FCC mandated reductions in the access rate on 800 traffic.

Lower rates and Volumes subject to reciprocal compensation and less revenues from local measured service as a higher percentage of our customers opt for more flat rated packages.

Now, I'll turn the call back to Mark Steinkraus.

Thank you, Dave.

Carrie, we're ready to go into the q-and-a session. [Begin Q-And-A]

We will pause for a moment to compile the Q&A roster.

Your first question comes from Simon Flannery.

Thank you very much.

Good morning.

Couple of questions on TDS if I could.

First, well done on the access line numbers.

I don't remember carriers in the last couple years saying they had primary residential line growth.

We keep hearing seasonality from some of the other carriers who are experiencing significant losses.

What do you think is different with you?

Have you had some strong housing starts?

Is there to be a change in competition or anything else you could point to?

Also, if you could just quantify how many UNI lines you have in your CLEC business?

Thanks.

Sure.

I think there is some seasonality in our market as it relates to vacation homes and a variety of others.

That is an area though that we've seen a lot of wireless competition from in the past.

So, it tends to be less of an impact from that.

I think generally our rural markets tend to have a lot of undeveloped space and as the economy picks, et cetra. up we do see more housing starts and we are getting our share of those in housing starts.

I think that's fundamentally it as opposed to there is some number or some phenomena relative to seasonality.

Relative to the percentage that are on UNI-P, about 9% of our lines are UNI-P.

9% of the CLEC lines?

Yes.

Great, thank you.

Your next question comes from Rick Prentiss.

Yes, good morning.

A couple of questions for Ken, if I could.

Ken, encouraged to see the movement of the data revenue was actually very recently launched some of the products.

Can you share with us a little more tid bits about how many people are taking the different data products as far as percent of gross adds and what kind of trends you see going forward given that is already up to 2.2% of revenue?

And then a second question, with upcoming auctions next year, can you update us as far as whether you guys are more a buyer or seller of spectrum and what your interests might be?

Good morning, Rick.

First of all, I think I talked about this in the first quarter when we talked about our data.

We have a little bit different strategy around data in that we have built a billing system that allows us to not only allow data for customers that buy packages, but also allow customers to use the service on a pay-as-you-go basis so if you don't get the sale at the first instance they still have the opportunity.

So, as a result, we look at our gross adds, close to 70% of all of our customers have -- of our new customers, 30% of our gross adds, have access to the service.

Though the actual number that take it in different packages is very different.

Jay, do you have something you want to add?

Actually, the other side of that coin, this is Jay Ellison, that same rate that Ken just spoke about for our new customers is applicable as we renew customers' accounts.

When we go into retail environment not only do we have 65-70% attachment rate, as Ken just said, for new customers coming in to U.S.

Cellular but we have around the same attachment rate to our customer base that are renewing contracts.

We are trying to permeate our data products and services throughout our entire customer base.

The second question you had was plans around potential auctions in the future.

And I think, you know, in that area we have been pretty clear that our strategy is to strengthen the footprint where opportunities allow us to build value.

We'll continue to look at either auctions, acquisitions or trades in that area.

But at this point in time I don't have any specific comments to make.

Okay.

A follow-up question on the one -- on the existing contracts.

What is the average life of your contracts right now?

What we are selling is primarily two-year contracts.

At any point in time the percent of our customer base that is under contract is in the 70-80% range.

Okay.

So the churn rate should be able to stay down for awhile if you are getting that many people on two year contracts then.

Well, no, we've said that all year churn was one of the key both metrics for the business as well as points of ratification of our strategy.

We are real happy with where we are at.

We are, you know, still looking at the fourth quarter where it is your typical higher renewal period so, you know, we are real happy where it is at and would like to keep it under the 2% range like it has been for the last year and that is what our goal it.

Great, good luck, guys.

Your next question comes from Tom Seitz.

Good morning.

Ken, could you talk about any expenses that you may have had in this quarter for the market rollouts?

Were there any?

The margins were really terrific and I want to gage -- try and gage where that is going to go going forward?

Tom, we had some costs related to those new markets, Oklahoma City and Lincoln.

I would not call them significant.

I mean the cost of the networks were up and running.

So you know the cell site expenses.

There was minimal pre-launch marketing expenses.

And there were, you know, the cost of hiring people.

But, in total I would not -- it was not a significant number.

Okay.

Sandy, can you talk a little bit about the pre-paid forward contracts with where they are at right now?

You know, you can tender either cash or stock for those.

They're not due for quite some time, but given that they are outside of the collars, are there -- can you, you know, can you buy the stock back within the collar before the contract expires, you know, anything like that?

Well, as you know, the contracts expire in 2007 and 2008.

And the price is above the caps and we have the derivatives in place that appear on the balance sheet as a derivative liability reflecting the higher value of the stock above the caps.

In terms of the action that we did take place, we can always engage in renegotiation of the contract or, you know, we could negotiate to terminate and to take other action.

But at the current moment we are simply living with the contract.

Okay.

Thank you very much.

Um-h'm.

Your next question comes from Nigel Coe.

Thanks a lot.

I've got three questions.

First question was you gave some guidance on the revenue from the disposed markets in the second quarter.

Can you also give us the EBITDA from the markets so we can compete the like-for-like EBITDA growth.

Secondly, you said you were working on some proposals for the reform access charges.

Could you give us some essence of a long the lines of what you're thinking in terms of [inaudible] access charges?

And finally you gave a number for the number of POPs that rolled out on the 24th of May for number portability.

Could you repeat the number, please?

Thanks.

This is Ken Meyers.

I'll try and take the first and third one.

The first question dealt with what was the operating cash flow or EBITDA out of the disposed markets and I cannot give you that number.

The reason has to do with that are common costs that get allocated to the different operations so I just don't have that number in front of me.

The number I said has been about 70% of our markets were brought under the WNP rules at the end of May that were not previously under it.

I guess, Dave, the other someone for you.

Sure.

Nigel, I think that the proposals that have been on the table relative to access charges had a very strong bill and keep flavor to them, and then the thought was rural companies should simply just take any amount that is not covered through a bill and keep regimen and just recover through the universal service pool funding and we didn't feel that was a viable alternative because there is already a lot of stress on the universal service fund.

And so what we propose is something recognizes there is a need to make a change but we believe that the interexchange carriers who still have access to that network need to be responsible for a certain part of that.

That is the position that we are continuing to push forward.

Okay.

Thanks a lot.

Your next question comes from Marc Kanarney (ph).

Hi.

Could I just get the, number one the blended churn rate?

Number two the bad debt expense for the quarter?

And number three, the ETC revenues in the quarter?

Hi, Mark.

Hi, Ken.

Blended churn was 1.6%.

I don't have the bad debt right in front of me.

And ETC is about $6 million.

6 million.

Okay.

And just what was the - at the end of the quarter the percent of the base on pre-paid?

Stable about 3%.

Great.

Thanks, Ken.

Your next question comes from Frank Lucien (ph).

Good morning.

I was just wondering if you could comment a little bit on the M and A market for CLEC and ILEC assets?

Any current thoughts on that?

Obviously EBITDA did not exactly grow with revenue.

You said that the revenue has grown by long distance and DSL growth.

Can you comment on the profitability of those and where you expect that to go over the next 12 months?

Thanks.

Sure, Frank.

It did grow.

Those were the primary drivers.

I think that if you look at margin growth, you know, in the ILEC business it did expand.

It grew by 7.9% so there was some improvement in terms of that.

I think relative to, you know, CLEC and ILEC acquisitions, you know, obviously the company's position is, you know, we don't comment on those types of issues.

You know, we obviously are always looking for opportunities to continue to fill in our clusters at a reasonable price but really nothing imminent.

Okay.

Great.

And can you comment a little bit on what you say you are targeting fiber to the premises or -- fiber buildout.

Can you comment on that a little bit?

Exactly what technology you're using and what sort of architecture you're going to employ on that?

Thanks

Sure.

With the RBOCs firming up the standards on a passive optical network obviously that improves the economics in terms of driving down the costs, et cetra.

You know, the early deployments that we would expect could would become type of a bee pond type structure where we would take fiber directly into the customer's premises and [inaudible] at the customers home into voice and high-speed data.

Okay.

Great.

And how many, what percentage of our customers are you targeting with that?

It is small right now.

But the where we are at right now is that we believe that the costs for doing fiber installation in an open trench in the Greenfield is probably only about 20% higher than doing copper, so we think it is prudent right now on larger sub divisions to go ahead and put fiber in lieu of copper.

So is this a target to get new builds or is there any over build as well?

New build.

Thank you.

Yourer in question comes from Jim Moorman.

Good morning.

First, could you give a little more flavor on the net add number?

Was there that in any particular area where you saw significant strength?

I know you had been doing promotions again in Chicago and within any area in particular or just kind of all over that you saw that?

And also on USF, that $6 million, how does that compare, is that pretty much flat with what you saw in the first quarter?

Thank you.

The growth in customers was across the network.

There wasn't any one geography that performed substantially, you know, differently than the rest of them.

The $6 million in ETC revenue was similar to what it was a year ago as well as the first quarter.

Thank you.

Your next caller --

I'm sorry, excuse me.

I have been corrected.

There's 4 million in Q1.

I agree with Ken.

There was no market that did have good subscriber growth every one of our sub-market and major market pulled up to the region and then they actually all fell off pretty much equivalent growth over the previous quarter in last year.

Thank you.

Your next question comes from Christina Leonetti (ph).

Actually it's Rob from CSSB.

As you know, recently citizens announced a one-time large cash dividend and a reasonably large payout for annual dividends relative to free cash flow and as a result ratings went from investment grade to BA 3, bonds got killed.

Could you just talk a little bit about the importance of your balance sheet and why you wouldn't do something like that?

And then secondly, could you just reconcile at USM the cash to short-term debt balances.

You have about 350 in cash but 415 in short-term debt.

Give an indication of financing for that if the remainder will just come out of free cash flow.

Let me start with the question about the philosophy on the balance sheet.

We are very concerned about ensuring a very strong investment grade rating and specifically we're targeting an A-minus rating.

And so as we look at the allocation of our capital that is one of the considerations.

I think the other thing that you are really suggesting is, you know, are we doing something similar in terms of a major dividend payout and at the moment we are sticking with our consistent dividend policy.

This is Ken Meyers.

With respect to the second question, what you see on the balance sheet right now is the effect of the company prefunding some of the long-term debt that is being called right now.

So we raised $413 million during the second quarter.

We're using that to call the lines and the 7 1/4% of the 413 we went and paid down balances that were currently outstanding on the revolver.

The other 300 million is sitting on the balance sheet right now.

By the end of August, we will have eliminated, you know, $430 million of long-term debt and the cash will be down and there will be a little bit outstanding on the revolver.

Great, thank you.

Your next question comes from Bill Cram (ph).

Hi.

Thanks.

This question is for U.S. Cellular.

I had a question regarding gross margin on the equipment side.

It seems to come down quite nicely from 1Q '04 where it was very high.

I was wondering if you see this going forward as a more normalized rate on the phone subsidy side or kind of how that is going to shake out?

Thanks.

You have to be real careful looking at the gross margin on equipment in any quarter because it is affected by the timing of sales into the Asian channel.

It is affected by different rebate programs so the key metrics that we watch is the cost per gross add that kind of clears all that noise out of there.

As between, you know, different quarters if one channel is stronger than another, you may see difference in that gross margin or differences in commission costs which is a down SG&A.

So we run the business watching cost per gross add not the individual components that shifts in channel strategy could affect.

Thanks.

Your next question comes from Kevin Roe.

Thanks.

A couple of wireless questions.

Ken, the retail ARPU being up nicely year-over-year.

You mentioned both data and higher rate plans driving that.

Can you break that out at all as to the contribution of the increase year-over-year?

As I said, the data is about $1 of ARPU now.

I do not have the equivalent number for last year.

But that is a large driver of that number.

I think it retail revenue is up $1.89 year-over-year and, you know, the better part of that dollar is the data piece.

Okay.

On the improved guidance on net additions for the remainder of the year, is -- does any of that have to do with the timing of the launches of Oklahoma City and Lincoln and Portland and your expectations for that market?

Or is it purely the -- your core markets are doing much better than expected?

When we put out the guidance at the end of the first quarter, the increased adds and the new markets was one of the contributors and we expected those markets to come on in the third quarter.

They in fact are coming on in the third quarter.

There isn't a timing effect there.

This really reflects what we are seeing in our core operations.

Okay.

And I know it is early on in Oklahoma City I think it has only been up a couple of weeks.

Any early indications on store traffic, et cetera?

We are, you know, a week into the launch.

And to draw a lot of, you know, lines off of the week I think would be dangerous.

Okay.

Thanks.

Your next question comes from Tom Watts.

Good morning.

Could you give us a little more detail on the outlook for capital spending?

It looks like you pulled some Cap Ex in from next year to this year.

This is for U.S. Cellular.

Is this a change in timing or total capital spending?

I wouldn't want to call it a change in timing, Tom.

Because when you, you know, we are now at the point where we are looking at having to serve 200,000 more customers this year than we originally planned and that's got capacity implications for the year.

So if next year you grew just as much as you otherwise thought, you know, you may have moved this forward but then you moved next year's forward from the year after that and everything else.

I think it would be dangerous to think about it just moving something forward.

Rather it is the capacity for 210,000 more customers.

Great, thanks.

Once again, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad.

At this time there are no questions.

Okay.

Carrie, thank you very much.

Everybody thank you for joining us on the call.

We are available for additional questions later in the day and take care.

This concludes today's conference.