美國無線通訊 (USM) 2004 Q3 法說會逐字稿

Good morning, my name is Taylor, and I will be your conference facilitator today.

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

Cellular third 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 question-and-answer period.

If you would like to ask a question during this time, simply press star then the number one 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.

Okay.

Thank you, Taylor, and good morning, everybody.

With me today Sandy Helton, Executive Vice President and CFO at TDS, Ken Meyers, Executive Vice President Finance and CFO at U.S.

Cellular, Dave Wittwer, Executive Vice President Staff Operations and CFO at TDS Telecom, Jack Rooney, President and CEO at U.S.

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

A replay will be available at 12 noon Chicago time and will run through midnight, tomorrow, Thursday, October 21st.

The replay number is 800-642-1687, pass code 1398163.

For international callers the number is 706-645-9291 same pass code.

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

Cellular website at www.uscellular.com.

The webcast will be available for the next 2 weeks after which it will be available in the conference call archive.

And remember, archived calls are not updated.

We'll be making some forward-looking statements today, so please review the Safe Harbor paragraphs in our releases and the more extended versions of our Safe Harbor that are located on our websites as well as reading our annual report and all of our filings with the Securities and Exchange Commission in this regard.

If you are not getting notification from us regarding the teleconferences or have changed your e-mail address please e-mail me or one of my associates at the address on the press releases so we can update our list.

Regarding upcoming company events, Jack Rooney and Ken Meyers will speak on November 16th at the UBS Communication Conference in New York City.

And Ted Carlson, Jack Rooney and others will be presenting in January at the Smith Barney Citigroup conference in Phoenix, Arizona.

Additionally, representatives of the company are planning visits with investors in Ohio, Minnesota, New York and Boston between now and December.

If you are located in any of these cities and would like to meet with us, 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 8K's.

The 8Ks are simply wrap arounds 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 homepage 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 of reconciliation of non-GAAP financial measures that may be used by management when discussing the operating data during today's conference call as well as any changes to the Company's forward looking guidance.

All of this information is now included on a separate page to make it easier to find.

This information can be accessed on the conference call page of the investor relations sections of our website.

I will now turn the call over to Sandy Helton.

Thank you, Mark.

Good morning, everyone.

This morning I'll highlight TDS's consolidated results for the third quarter after which I'll turn the call over to Ken and Dave who will discuss results for the business units.

We'll then take your questions.

The third quarter was a strong quarter for TDS.

Consolidated operating revenues grew 10% year-over-year mainly reflecting the effects of excellent customer growth at U.S.

Cellular since the beginning of the year.

Effecting year-to-year revenue comparisons for the quarter was the absence of certain U.S.

Cellular markets.

Last year's third quarter results included operations from Georgia and northern Florida markets which U.S.

Cellular traded to AT&T Wireless in August of last year and the south Texas markets which it sold to AT&T Wireless earlier this year.

Together these markets generated $24 million of revenue in the third quarter of last year.

Consolidated operating income for the quarter was $75 million compared to $134 million in the third quarter of 2003.

The decline in operating income mainly reflects the impact of three factors.

The cost to build out and launch 3 new markets at U.S.

Cellular, the continued aggressive pace of handset subsidies in the wireless industry and increased marketing sales in advertising cost at U.S.

Cellular which generated 144,000 net adds.

During the quarter we recorded $4.4 million in income from discontinued operations or 8 cents per share, relating to a reduction in accrual requirement primarily tax related associated with the 2000 merger of Aerial Communications and VoiceStream Wireless.

You may recall that during the third quarter last year TDS recorded a diluted loss per share of 3 cents for discontinued operations which also related to the Aerial merger obligation.

TDS's effective tax rate for the quarter was 40.4%.

As anticipated when we announced the pending sale of certain assets to ALLTEL, we recorded a tax expense for that transaction which was offset by favorable results from recent tax audit.

We continue to expect the effective tax rate on operations for the year to be between 40% and 41%.

In terms of financing activities for the quarter, U.S.

Cellular redeemed its LYONs, which was a convertible bond into U.S.

Cellular stock, for $163 million.

It also redeemed $250 million of 7.25% notes that were due to mature in 2007.

U.S.

Cellular financed these redemptions using the net proceeds it received from issuing $430 million of long-term debt in the second quarter.

In summary, TDS had another solid quarter of operating results.

Our business units continue to deliver on their strategies and we look forward to another quarter of fine results to cap off what has, so far, been a very good year for the company.

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

Cellular's results.

Thank you, Sandy.

Welcome and thank you for your time this morning.

There was a lot going on in the third quarter this year.

The company launched service in Oklahoma City, Lincoln, Nebraska and Portland, Maine as planned.

The first 2 launches were in July and Portland was in August.

In connection with these launches the company incurred launch related marketing cost that you will see in cost per gross add.

Also, the company announced an agreement to sell to ALLTEL operations in Ohio and Florida, which served 37,000 customers and investments in some entities controlled by ALLTEL for approximately $81.2 million and the company reached an agreement to sell a license in the Daytona Beach TA for another $8.5 million.

These 2 transactions, when closed, will complete our exit from Florida, an area which did not fit with our regional footprint strategy.

Both the launch of these new markets and the 2 sales represent steps on our path to continue to strengthen our regional operations.

The proceeds from these sales will offset some of our investments in our new markets.

During the quarter the company completed the overlay of CDMA1X in it's northwest markets of California, Oregon and Washington and rolled out it's easyedge data services to those markets at the same time.

Finally, the third quarter represented the first full quarter of operations since the rollout of wireless number portability requirements to all of our markets.

And we're happy to report that this requirement has had minimal impact on our existing customers or on our ability to attract new customers as evidenced by our 1.6% post pay churn rate for the quarter and strong net customer additions.

Speaking of customer growth, the company added 144,000 net new customers this quarter, more than doubling the 66,000 customers added in the third quarter of last year.

This increase was primarily driven by increases in gross additions as postpay churn was 1.6% both in this quarter and during last year's third quarter.

In the past we've seen sequential declines in customer growth between the second and third quarters of the year.

The seasonal trend still exists, it's simply mitigated this quarter by the new market launches which occurred in July and August..

We're very excited about the new market launches, each one was well received by the local communities and they are running in line with our expectations.

We also produced another quarterly increase in retail revenue per customer, which climbed another 2% from $40.68 a year ago to $41.51in the current quarter.

One of the drivers to this is the continuing growth of data or services which averaged over 2.5% of total service revenue for the quarter.

Total average revenue per customer decreased about 1% on a year-over-year basis due to declines in roaming revenue.

Roaming declined about $11 million as a result of mix shifts, sales of certain markets, and rate changes.

The lower revenue rates are tied to lower costs for the company's usage of other networks which favorably impact systems operations expenses which I'll cover in a moment.

The combination of a year-over-year 13% increase in customers and modest decline in total average revenue per customer produced a reported 10% increase in service revenues.

However, this calculation starts with reported revenues from last year, including revenue from the south Texas markets which were subsequently told to AT&T.

Adjusting for that market sale the revenue growth rate works out to about 14% year-over-year right in line with our customer growth.

Systems operation expenses were fundamentally flat year-over-year, reflecting absolute declines in third party roaming costs due to lower rates mentioned before and savings related to moving our customers traffic to our new systems in Oklahoma City, Lincoln and Portland.

At the same time network related cost, such as maintenance and customer usage, increased as the network grew from 4082 cell sites a year ago to just over 4700 cell cites in operation at September 30th.

Also, average minutes of use per customer increased 27% from 435 minutes per customer per month a year ago to 553 minutes per customer per month in the most recent quarter.

The cell site number I referred to includes almost 200 new cell sites in St. Louis that will allow our Illinois, Iowa and Missouri customers to now use our network as they travel to and through St. Louis.

This is the first phase of our buildout toward a full retail launch later in 2005.

Cost per gross add averaged $410 in the quarter, a slight increase over the $405 average of a year ago.

Included in this value are the launch costs, primarily introductory advertising, in the new markets and the effects of the equipment promotions on high-end phones in all markets.

At this point, we do not see much chance for improvement in equipment pricing given the competitive intensity in the marketplace.

Operating cash flow, which is operating income plus depreciation and amortization, totaled $169.4 million for the quarter in line with our plans, given the somewhat higher growth.

This year the year-over-year comparison is significantly effected by the 118% increase in net adds on a year-over-year basis.

Just to put this year's growth into perspective.

In the first 9 months of 2004 the company added 477,000 customers.

That's 30,000 more net adds than the company generated in all 12 months of 2003.

Below the line, investment income continues to grow nicely, up $7.9 million over last year.

Offsetting this is interest expense which increased about $8 million as a result of higher interest rates from the term debt we placed earlier this year, which replaced both convertible securities and short-term bank financing that was in place last year.

Net income totaled $21.3 million or 25 cents a share down from last year's 60 cents per share, representing the effects of a much stronger customer growth, the sale of certain more mature properties plus the cost of starting up 3 new markets.

These 3 new markets are off to good starts.

They represent natural extensions of our regional footprints and we're receiving a warm welcome from consumers in those markets.

Given the successes to date we are making a few adjustments to our full year guidance.

We are again raising our net customer addition guidance from the 560,000 to 610,000 range discussed in July to a new range of 615,000 to 645,000 for the year.

This new range is twice the level we started the year when WNP and the economy were looming concerns .

There remains concern about how deep the market may be this quarter since many carriers offered attractive deals a year ago to induce customers to sign 2 year contracts before the onset of wireless number portability.

However, with the strong start in the new markets and the low churn rates to date we are comfortable increasing these figures.

As a result of the growth in customers, and revenue to date, we are also bumping up our revenue guidance for the year from the revised $2.6 billion discussed in July to 2.65 billion for the full year.

Operating cash flow guidance had been 640 to 690 million for the year, and as customer growth exceeded expectations, we have left that unchanged despite the additional marketing cost associated with higher growth.

Last quarter we raised the bottom end of the guidance from 640 million up to 650 million.

As we now have 3 quarters of the year completed and are again increasing our customer growth numbers, we are tightening the range to 650 million to 675 million for the year.

Depreciation and amortization guidance is unchanged at $500 million for the year.

Finally we are also tightening our guidance on CapEx.

Due to above target customer growth, we raised our original annual guidance from a range of 610 to $630 million up to 655 to $695 million last quarter.

Based on the current status of our programs we now expect to invest between 655 and $670 million this year.

This final figure includes amounts for the 3 new markets already in service, the completion of our CDMA1X rollout to our Mid-Atlantic markets which is the final phase of that network upgrade and a substantial buildout in St. Louis.

In summary, a big quarter for the company.

We launched 3 new markets, completed our 1 X launch in the northwest and continue to grow customers in data revenue across the board.

Customer growth remains strong, churn is under control and data revenue is growing nicely.

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

Dave.

Thanks, Ken, and good morning, everyone.

TDS Telecom is pleased to report solid financial results for the quarter.

ILEC revenues increased slightly primarily on continued growth in DSL and LD demand offset by access line losses.

Operating cash flow declined 3.4% in the quarter primarily as a result of 2 one time items that I will speak to in a moment.

On a comparable basis, physical access line losses were modest , consistent with second quarter performance.

These losses were primarily due to reductions in residential second lines, accounting for approximately 60% of the decline.

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

Access line equivalents, those access lines adjusted to reflect voice grade equivalents, grew 0.5 of 1% in the quarter.

Access minutes of use reflecting utilization of our wireline network increased by 5.3%.

DSL customers increased 71% and LD customers increased 32% in the quarter.

Dial up Internet accounts declined by 9.3%.

During the quarter we have implemented tighter credit policies regarding both dial up and DSL services.

This caused involuntary churn in the quarter of 7300 dial up customers and 1900 DSL customers.

This event was specific to this quarter.

There were 2 unusual items in the quarter that effected ILEC operating cash flow as I mentioned earlier.

First, the company wrote down the value of its construction material inventory in plant and service by $2.2 million as a result of lower fiber optic and copper cable pricing.

This impact is reflected on the network operations expense line.

The company was also notified in the quarter that USAC, the body that manages the Universal Service Fund, had made an error in its calculation of the 2002 and 2003 USF payments.

This was an industrywide issue and we have reduced our revenues in the quarter by $1.7 million.

Both of these items are one time.

CLEC revenues increased by nearly 6% on an equivalent access line increases of 19%.

In December of 2003 our CLEC experienced an intrastate access rate reduction and in June, 2004 and interstate access rate reduction.

These 2 events impacts comparisons of this quarter to third quarter of 2003.

DSL sales continue to grow with the unit increase of 53%.

On the technology front, we currently have 3 fiber to the premise trials underway.

First is a complete fiber buildout of a large subdivision in one of our ILEC markets, representing approximately 4,000 new homes.

Second, is a combination fiber to the premise over build and ADSL 2 plus deployment in 1 of our existing ILEC markets and lastly a fiber to the premise over build in an RBOC market where we are currently a CLEC.

Each of these trials will allow us to understand this technology and operational implications as a way to protect, grow, reduce RBOC dependency and expand our market presence.

We will be offering voice, data and video services in all 3 of these markets beginning in 2005.

We also have a wireless data trial underway in one of our CLEC markets to assess how this technology could be utilized to bypass the last mile access from the RBOC.

In contemplation of these trials and current industry conditions, we too are updating our full year guidance and as Mark commented this guidance is posted on the company's website.

ILEC CapEx guidance is increasing to 115 to $120 million.

This change is driven primarily by costs of implementing wireless number portability and the capital costs of the video trials.

ILEC revenue guidance is increasing by $5 million to 645 to 655 million and operating cash flow is increasing $5 million to 310 to 320 million, Relative to the CLEC business we are lowering our CLEC revenue guidance by $5 million to 225 to $235 million, operating cash flow by $5 million to 5 to $15 million and also reducing CapEx guidance by $5 million to $40 million.

The primary drivers for reducing the CLEC guidance is an expectation for fewer lines due to a more focused sales force as the FCC has limited availability of UNEP, FCC mandated reductions on the access rates on 800 traffic, lower rates and volume subject to reciprocal compensation and higher unbundled loop pricing from the RBOC.

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

Taylor, we're ready to take questions and answers now.

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 Rick Prentiss.

Yes, good morning, guys.

A question for Ken, if I could, a couple of them.

First, Ken, can you talk to us a little bit about what USF was for you guys in the quarter as far as not what you've billed from a collections standpoint but what you received in disbursements.

And then also can you talk to us a little bit about your thoughts on needs for more spectrum either in your existing markets or new markets as we look out to next wave talking about spectrum and the FCC getting ready to auction some spectrum in January.

Good morning, Rick.

ETC, eligable telecommunications carrier revenue, that's what we receive out of the pool, was $11 million for the quarter -- 11.8 -- but about 4 million of that was catch-up revenue.

So, you know, in terms of our plans going forward we're thinking more at the $7 million level.

Two, with, you know, respect to spectrum, it's something that our engineering team keeps looking at and it is a combination of how do you meet the capacity demands, it could be cell sites, it could be spectrum, spectrum at the right price may be a cheaper alternative.

So, it's something that we keep looking at.

We are evaluating, you know, what might be available through either the auction or anything else.

We've got no -- no firm decisions have been made at this point.

But, it's something we continue to look at.

Then just a little update on what you see as far as in the pricing environment out there.

Couple of the operators that are going from TDMay to GSM have shown some declining ARPUs in the numbers we've looked at over the last day.

Can you talk a little bit about what the pricing competition looks like in the wireless world?

Well, I think, some of the things that we've seen may reflect as much marketing shifts in terms of different segments that they're going after than anything else.

You know, we have a strategy where we've been trying to move upstream a little bit with, you know, focusing our promotional activities on certain rate plans, we've also been rolling out our data services, which has added nicely to revenue.

So, I think it is as much about marketing segments that you are attacking as it is anything else at this point in time.

It is nice to hear that data is making up for any degradation on the voice side, too.

Great.

Good luck, guys.

Thank you, Rick.

Your next question comes from Frank Louthan.

Good morning.

Maybe a little more color on the one time items in the ILEC.

If the USAC came back to 1.7 million what was the impact that he wrote down some things by 2.2 million.

Was it a $2.2 million impact in the quarter?

What was the actual impact on the income statement.

Morning Frank.

This is Dave.

It was $2.2 million and it reflected standard pricing adjustments primarily as it relates to fiber optic cable pricing.

Okay, great.

And then can you comment a little bit -- you said your MOU's have increased what is the characteristics of those.

How much of that increase is coming from wireless and what have been the trends on terminating minutes from wireline carriers?

Well, what we're -- the minutes of use, Frank, that we're commenting on are access minutes of use.

So, it has to be a termination on a wireline set.

And, you know, really in the quarter the rate of increase on originating was about the same as the rate on terminating.

So, we saw growth on both sides.

I think it is a combination of factors.

It is our own larger minute plans and unlimited plans as well as larger minute and unlimited plans offered by RBOCs in many of our exchanges -- or in our market.

Okay.

And what is your current second line penetration.

We are about 10%.

10%.

Okay, great.

Thank you.

Uh-huh.

Your next question comes from Jim Moorman.

Thank you, two quick questions, one on the wireless side and then one in the wireline side.

On the wireless side sounds like your new market launches did pretty well especially, I guess, from what I've heard, Oklahoma City and Portland.

Did you see any other uptake in any other of the markets in Chicago or was this more of the new market launches.

And then question for Dave, there's been a lot of talk, I guess, coming out of Wisconsin with the wholesale rates.

Could you just give us an update on what is going on there, what kind of negotiations could take place or how long -- what could we see in that process?

Thank you.

Okay, I'll go first.

This is Ken Meyers.

The year-over-year growth in net adds is across the board.

The new markets clearly are incremental to what we had a year ago but quite frankly a year ago we had some south Texas properties in there that we don't have this year.

But, the new markets do not in and by themselves account for the whole increase in net customer additions for the quarter.

It was a contribution across the board.

Okay.

And this is Dave.

Relative to Wisconsin, there were some deliberations that went on associated with unbundled loop pricing.

In October, about the 12th, 13th, something like that, the commission did present some preliminary pricing relative to unbundled loops.

Some of the prices on unbundled loop went up.

Some of the prices on T1s came down.

There is still some unanswered questions about that but it was a modest price increase.

Okay.

Thank you.

Your next question comes from Simon Flannery.

Okay, thank you, good morning.

On the wireless side can you just talk about your plans, the timing for future market launches, please.

And also on the CLEC I just wanted to understand a little bit more about the wireless video trial, is that so YMax or OFDM, how are you thinking about that and are you potentially looking at some restructuring given some of the regulatory changes and the impact on profitability in the CLEC?

Thank you.

Hey, Dave, you want to go first.

You got the longer question.

Sure.

You know, the plan on the wireless data trial is, I guess I would describe it as somewhat of a pre-YMax standard.

It is not a video trial.

It is for high speed data and then potentially voice-over IP on that.

You know, we've always said in our CLEC markets it was important for us to have deep penetration so that it gave us some alternative method of getting to that customer other than relying on last mile access from the RBOC.

So that's really what we are looking at it for as a potential opportunity to give us greater DSL reach as well as, you know, basically bypassing the RBOC last mile.

You know, obviously, as the, you know, the CLEC business we continue to look at different models and different structures relative to pricing and a variety of other things, you know, and certainly there's been a lot of regulatory issues, you know, that we've continued to adjust for.

So, you know, I think that's just going to continue for the next yeat or 2.

Okay, Simon, this is Ken.

Our market launch process is a very deliberate plan process that we have to meet certain thresholds of service delivery and other things before we'll turn it loose to customers.

So that we only get 1 shot to really do the job and do the job right.

So we don't have anymore planned for this year.

We are building out St Louis and our plan is to launch St. Louis later next year.

And at this point in time those are the only launches on the table.

When you say later next year you mean in the second half of '05?

I am not in a position to give a specific date, yet, but it'll probably be later in the year.

Great.

And in terms of the 3 markets you launched this quarter, they were fully covered in July or August so there is no sort of extra segments you are launching there over the next couple of months?

They were fully covered.

I mean, you're always making some tweaks to your network but when we go in with a customer satisfaction promise, you've got to be able to deliver on that from day one.

Thank you.

Your next question comes from Tom Seitz.

Yeah, good morning.

Couple of questions on the wireless side first.

The local revenue per subscriber, it is going up pretty nicely.

You mentioned data as a contributing factor.

Are you selling rate plans that are more lucrative to you, is there a better mix of those, could you just expound on that a little bit.

What we've been doing, Tom, for now almost 2 years is we changed our promotional strategy to aim at higher revenue rate plans, you know, going forward.

And you've got 2 natural curves that you're dealing with.

One is you are promoting those but as you get new customers, especially probably younger kids that are a little bit less usage intensive or more price sensitive, so you are seeing higher rate plans being sold on kind of a baseline but you also have more family plans, second lines in the family, that aren't quite the same revenue and so the, you know, the net effect of it is that the base revenue hasn't changed too dramatically though on all other cases you expect it actually to be coming down.

And then on top of that we have the growth and data revenue which is actually incremental to our base revenues.

So the big driver is data then?

Data's good for -- this is Jay Ellison -- data's clearly one of the drivers.

Additionally, we are very focused in our retail channels, our dealers, our stores, on some additional vertical feature sales like our nights and weekend packages that we sell on those higher targeted rate plans that Ken mentioned.

So it is a combination of the data and vertical feature sales on promotional strategy at a higher price point.

Okay, great.

On the expense side.

You know, I mean, I guess I expected that the CPGA would go up with the market launches, the operational expenses were, you know, a bit higher, like I expected.

I thought G&A was a little bit higher than I anticipated.

Any comments on, you know, G&A was it market launch related, was it, you know -- should we expect it to go back down next quarter a little bit, any comments there would be helpful.

Well, there isn't a lot of market launch related costs that sit in G&A.

Right.

They are primarily marketing cost that are in there.

What is in G&A is the cost of retaining our customers and, you know, when we have a 1.6% churn rate there are definitely costs incurred to maintain that.

Okay, great.

Now quickly on the wireline side, Dave, the -- is the -- USAC revenue is that a reduction in access revenue or was that a payment back to USAC so that expenses were higher.

It's a reduction in revenues, Tom.

And then last question, is the ARPU at the CLEC now at a run rate that we can be comfortable with for the rest of the year.

Is that solely the function of interstate access revenues going down.

You know, you added a fair number of customers and revenues declined sequentially, is it all related to the interstate access.

It is primarily the interstate access.

And so those are all behind us now for the rest of the year.

Okay.

Thanks.

Your next question comes from Kevin Roe.

Thank you, good morning.

A few wireless questions.

First, Ken, can you give us an proximate dollar amount of non recurring costs in the quarter that was related to the new market launches?

We're going to give you all your questions at one time, Kevin.

Pardon.

The answer to that one is no, I can't break that out separately.

Okay.

For -- looking at CapEx going forward, what is a good sort of maintenance CapEx now that you've completed the bulk of the launches.

I know you have St. Louis next year but ex-St Louis, what would be an appropriate maintenance CapEx.

St. Louis isn't done yet.

The first phase of St. Louis is done.

And at this point I am not in a position to throw out kind of a percentage of sales that is a nice maintenance number.

And the reason that you -- I am not able to do that is that what you're seeing is a -- still an increase in minutes of use.

And the end of the day the biggest driver in capital is going to be your capacity increases.

And, you know, this year we've seen a 27% year-over-year increase in minutes of use per customer and a 13% increase in customers.

As that number of minutes of use per customer either starts to slow down or quite frankly if it increases with more wireline migration, that number is going to change.

So as a result of that big unknown I am not comfortable just throwing a percentage out yet.

So, in terms of absolute dollars, assuming we see a continued similar growth in MOU's, stripping out the cost of these new market launches, in terms of absolute dollars, should CapEx -- should it be sort of flattish or directionally should it be up or down or flat for next year?

Boy, you know, about 19 different components to that question.

I am not in a position to talk about next year's numbers yet as we are still developing our plans.

If minutes of use behaved just the same way this year -- next year as this year there are certain things in this year, like the rollout of CDMA in markets that didn't have it and the build out of both -- of all 3 new launch markets as well as St. Louis that clearly wouldn't be at the same level next year just in terms of macro things to think about.

But at this point I'm not ready to throw a number out for next year.

Okay.

Or talk about it directionally.

You are saying it could even be above this year's level?

No, I don't think I said that.

Just no comment at all.

Not going to discussion this year's CapEx at this point without a basis to do it.

Okay.

Can you discuss for us the handset subsidy in the quarter.

You've got some free phone offer on line, is that very popular and is it directionally changing the absolute gross subsidy that you are seeing.

This is Jay Ellison.

There are -- obviously, some of our Internet offers are a little different that our retail offers.

But the vast majority of what those lines -- the net line growth that we talked about this year, did come through our retail channel probably close to 92, 93% of it comes through that retail channel.

As in any Internet offering we have less costs so that's why we are able to increase the subsidization on that.

But the vast majority of our adds are still coming through the basic retail channels and we are not at -- we are very aggressive and very competitive against -- in the markets that we're -- against those competitors so I'd say we are at the same level as any other competitor out there relative to the subsidy and the offerings out on the street.

Given the cost of the new higher end phones, you know, the actual subsidy per phone is at a higher level than it was a year ago.

Your next question comes from Jonathan Schildkraut.

Hi, guys.

Actually, most of my questions have been answered.

Just 2 quick once.

One on the data revenue.

You said it was 25% of total service revenues.

I am wondering if that's of the local service revenue or if you're also including the LD and roaming in that 25% of total service revenues number.

And the second is just on retention spending.

It looks like you guys are spending, you know, call it 40, 45 million a quarter on retention spending, it was down a little bit last quarter, but this quarter looks to be in line with Q1.

And I'm wondering if that's a good run rate going forward?

Jonathan, the data revenue represents 2.5% of total service revenue.

Thank you, sorry.

Not 25.

Though, I mean, wish it were true, but not yet. 2, we don't specifically breakout retention costs but the level in this quarter probably wasn't too different than the first quarter.

Thank you.

Your next question comes from Bill Cram.

Thanks.

Just had one housekeeping questions.

Most of my questions been answered.

Had a question just all in churn looks like it came in about 1.7%.

Wanted to check to see if that was correct.

And also kind of going back to the subsidy, wanted to see, you've mentioned you don't see much improvement on that going forward at least here in the near-term.

Do you kind of see anything on a proactive basis that can be done to kind of curb some of the subsidies there or is it just kind of you are looking at, you know, kind of at the whim of some of these larger competitors that are using some of the large subsidies.

Thanks.

Hi, Bill, it's Ken.

Yes, all in churn for the quarter was 1.7% down from 1.8% in the third quarter of last year.

With respect to subsidies, second quarter last year we actually tried to raise pricing on equipment, which was one of the contributors to the slower growth in the third quarter of last year.

We were hoping to kind of take a stand in some of the markets where we've got larger share and we didn't see any positive reaction.

We just saw it going the other way.

So we, you know, we are not in a position to be a price leader in this area.

We are going to be a price taker and so until someone else starts changing their behavior in this area, we can do nothing but follow.

Thank you.

Your next question comes from David Janazzo.

Good morning.

Sandy, can you provide an update on thoughts on cash and the balance sheet and TDS balance sheet.

I know in the past you've talked about cash draw in the business and the prepaid forward contracts unwinding in the future but any current thoughts on that topic.

Thanks.

Sure.

Well, as you mentioned, we've talked about wanting to have a safety net of cash that we keep on hand at all times.

And I think sort of a round number of what that might be would be $250 million plus or minus.

And what we do is we look at the uses of the remainder of that cash in terms of investing in the current business, in terms of potential debt repayments which we have done some of in the past year or so, and stock repurchases.

And it appears that -- I didn't see any mention of stock repurchase in this release.

That's correct.

That's correct.

We did not enter the market in the third quarter and among other reasons, you know, the continuing strengthening of the price was an environment that we didn't want to be in the market buying back the shares.

And what of the potential unwinding of the prepaid forward contracts, what does that look like, I believe, in the '07, '08 period.

They do mature in '07and '08 and the tax obligations associated with delivering the shares to satisfy the maturing of the monetization would be about $0.5 billion.

Okay.

Thank you.

Your next question comes from Robert Shifman.

Hi.

If I could just actually followup on that.

Both balance sheets remain very strong.

But the rating agencies are looking for a free cash flow generation and I think are clearly concerned that some of your cash cold be used for stock buybacks.

Fitch recently took you down, you've got a negative outlook at Moody's, could you just talk about your -- as much as you can your specific credit goals, your leverage targets, as well as your rating targets and just also as a followup, I know you don't want to talk about next year but could you give any sense of just whether or not you are telling people U.S.

Cellular itself will be free cash flow positive next year?

Thanks.

Okay.

I'll try to answer all those questions.

And if I miss one will you bring me back on track.

First of all, on the cash flow question for U.S. Cellular.

As Ken indicated, we are still in the process of developing our plans for next year.

So I think it is premature to be talking about that.

With regard to basically our financial policy and our financial strategies We are still targeting A minus rating from all 3 of the credit rating agencies.

We were obviously disappointed with the action which Fitch took and I think what they were looking for was either some further debt repayment or indications of more positive free cash flow in the coming year.

So we're hoping that, you know, as Fitch and Mood's see the development of our financial results that they'll reconsider the ratings.

In terms of the internal financial targets that we look at, we certainly do look at our debt to capital ratios and frankly they are representative of an A minus company right now.

So, I think, you know, the key question is the ongoing cash flow and we are continuing to strengthen the footprint at U.S.

Cellular and to make sure that we are building strong markets and growing the business in a way that's going to create value for the firm and for investors.

So, you know, we'll be looking at those opportunities as we review our plans for the coming years.

Did I miss anything?

No, I think you got it.

Thanks so much.

Okay.

Your next question comes from Ed McCormick.

Hi, it is Mike Rollins.

Just wanted to ask you a couple questions also on the new market.

The first was can you describe the license or covered pops that represent the new markets that you've launched to date over the last few months and then maybe what you are looking to do next year just to understand the size implications relative to your existing footprints.

And the second question is whether you can go through just a competitive landscape as you're evolving your market portfolio, what percent of your market or your pops are now covered by a Verizon versus a Singular.

So, you know, as the landscape continues to shift we understand how you are positioned.

Okay, Mike, it is Ken.

I can followup on the population that's been brought online.

I don't have a firm number in front of me.

It is between 2 and 3 million is the cumulative effect of Oak City, Portland and Lincoln.

But I can get you a more precise number.

With respect to the competitive environment, when we look at, you know, Chicago, Milwaukee, Des Moines, Tulsa, Knoxville, whatever, we have almost everybody in almost every one of those markets.

Off the top of my head, the only one of those, I think AT&T is in everyone of those.

Singular is in everyone of those, Sprint is in everyone of those.

T-Mobile is in probably most of them.

And the only one I can think of off the top of my head where Verizon is not would be in Tulsa.

We see everybody in all of our major markets and even in the more rural markets we are still looking at ourselves, the other cellular company and 2 or 3 others.

If I could just follow up on that.

As Singular and AT&T Wireless, assume it closes, you know, sometime, you know, this quarter, in the '05 time frame, how do you see the competitive landscape shifting as penetration continues to deepen and you have 1 less but 1 potentially larger competitor in that market?

I don't have any idea what strategy AT&T, Singular combined goes after and to speculate on what they may or may not do would just be a wild goose chase at that point.

Okay, thanks, Ken.

Your next question comes from Chris King.

Morning, gentlemen.

Just a quick question, actually, getting back to the free cash flow numbers.

With respect to the deferred tax liability and the expiration of the bonus depreciation benefit this year, have you guys quantified or could you quantify what the impact of both your deferred tax liability and your free cash flow numbers in '05versus '04 may look like as a result of that accounting change?

I think we really can't quantify what that change may be for next year.

I think what we can say is that bonus depreciation probably contributed to about $75 million of the increase in deferred tax liability between the end of last year and the end of the third quarter this year.

Okay.

Thank you very much.

Uh-huh.

You have a followup question from Rick Prentiss.

Couple more quick ones for you, Ken.

St. Louis, do you know how many covered pops you're going after there, I think the total market is about 3 million, would we assume you'd have most of that, like 70 - 80% covered before you would launch then?

That's probably a good percentage, Rick, but until we get closer to launch I can't put a lot of precision around it.

Second question is as you were launching those new markets, how do you guys account for stocking of the inventory in the stores, does that get just on the assets side into inventory, are you having to expense it as you are stocking some of the stores and I guess it probably varies whether it is your store or an agent store?

It exactly does vary depending upon it is our store or an agent store.

Our stores it is inventory, it sits on the balance sheet.

With an agent, you wind up selling him or selling that company the inventory and recognizing the rebate at that point in time.

Given the timing of these launches, I don't think that there is a dramatic effect from that because they launched kind of mid quarter so there wasn't a lot of stocking at the end of last quarter and at the end of this quarter you had already sold through a lot.

Final one, we keep hearing about Sprint looking to sell their towers.

I would be remiss if I didn't ask you.

Have you guys reviewed, as all these questions about what you are going to do with your cash and what you do with your debt ratings, have you thought at all about monetizing your tower assets as Sprint is out there working a book right now and Dobson is?

We think about monetizing them all the time.

This is Jack Rooney.

And we basically have declined to do so.

We don't need the cash.

I guess, if the right strategic opportunity opened up where selling a strategic assets like our towers would make sense so that we could acquire something that would be of much higher value, then we would think about it.

I am listening to all this stuff about free cash flow and debt posture and everything else in this company and we basically have stretched out our debt so that we don't have anything due for a long -- or anything significant due for a long, long time.

We have no desire to generate massive amounts or even large amounts of free cash flow in the business.

We have ample opportunity to reinvest that money into capital assets that generate growth and improve shareholder returns.

That's what we are up against, that's what we are going to do.

What am I going to do with free cash flow.

I don't have any debt to buyback.

The stock that we have outstanding doesn't have enough float in it now.

So going out and buying back shares of stock don't do the shareholders any good.

So from our standpoint, our job is if we have places to invest that money, and that's very key, if we have places to invest that money, that return greater than our cost to capital, that's what we're going to do.

So -- and from a credit standpoint which is where free cash flow really comes into play, when you've got lots of debt to pay back, lots of places where you can reduce the risk associated with the business, then you go ahead and generate free cash flow so you can reduce the risk of the business.

We are not in that particular position.

Growth side of the business is a good place to be.

Good luck, Jack.

Thank you.

Your next question comes from Donna Jagers.

Hi.

Just to build on that last question.

It seems like some of AT&T or Singular's properties may come up for grabs given the things that they to spill off to win DOJ or FCC approval.

Would you be interested in some of those assets?

We're following the situation.

Okay.

Good luck.

There are no further questions at this time.

Okay.

Taylor, thank you and thank you everybody for joining us on the call.

I am available the rest of the day should you have any followup questions.

Thank you, this concludes today's conference call.

You may now disconnect.