美國無線通訊 (USM) 2005 Q1 法說會逐字稿

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

I'd like to welcome everyone to the TDS and U.S.

Cellular first quarter operating results conference call. [OPERATOR INSTRUCTIONS] I would like to turn the conference over to Mr. Mark Steinkrauss, Vice President of Corporate Relations for TDS.

Sir, you may begin.

Thank you, Marcus, and thank you, everybody, for joining us during this busy earnings release season.

With me this morning are Sandy Helton, Executive Vice President and CFO at TDS, Ken Meyers, Executive Vice President of Finance and CFO at U.S.

Cellular, Jack Rooney, President and CEO of U.S.

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

Cellular, Bill Megan, Vice President of Finance and Strategic Planning and CFO at TDS Telecom, and [Dave Wittwer], President of [IDOC] Operations at TDS Telecom.

As everybody on the call knows, [Dave Wittwer] has been hosting these calls for TDS Telecom for the past seven-plus years but he has recently taken on the responsibility of President of our [IDOC] operations and Bill has become the new CFO at TDS Telecom.

We welcome Bill and congratulate Dave on his new position.

Dave will assist Bill during the transition period but going forward you'll be hearing from Bill.

A replay of the conference will be available at 1:00 P.M.

Chicago time and will run through midnight, Thursday April 28.

The number is 800-642-1687, pass code 5585317.

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

This call is webcast on the Investor Relations sections of the TDS website, www.teldata.com and the U.S.

Cellular website at www.uscellular.com.

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

Remember archived calls are not updated.

We will be making some forward-looking statements today so please review the Safe Harbor paragraph in our releases and more extended versions on our website as well as our annual report and all filings with the Securities Exchange Commission in this regard.

If you're not getting notifications from us regarding teleconferences or have changed your e-mail address, please e-mail me or my associates at the address on the press release so we can update our list.

Regarding upcoming company events, Ted Carlson and Ken Meyers will speak on May 6 at the Morgan Stanley Tenth Annual Media and Communications Conference in Washington D.C.

On May 11, Sandy Helton, TDS, will speak at the Baird growth stock conference in Chicago.

On May 31, also in Chicago, Ted Carlson will speak at a luncheon hosted by [Janny Montgomery Scott].

Our June meetings include the Lehman Brothers worldwide wireline and wireless conference on June 2nd in New York City.

A [Janny Montgomery Scott] luncheon in Boston on June 3rd and June 7 Ted and Jack will speak before the 13th Annual Deusche Bank Media and Telecom Conference in New York City.

Also, U.S.

Cellular will hold its annual meeting of shareholders next week on Tuesday, May 3, and TDS will hold its annual meeting of shareholders on Thursday, May 5, both meetings in Chicago.

If you have an interest in our companies and would like to visit either TDS or U.S.

Cellular we would be pleased to have you do so.

We maintain an open-door policy and will set up meetings with our management teams, given reasonable lead times and circumstances permitting.

We have terrific folks at our companies, as many of you know, who are very knowledgeable about our operations in the industry and the various technologies, so please avail yourselves of the opportunity.

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

Cellular filed 8-Ks.

The 8-K's include the earning releases we issued this morning along with some other information 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, and shortly going out after the wire.

U.S.

Cellular has posted their release on the website as well.

Earlier this morning we had several communications with our specialist on the floor of the Exchange.

They are trying to open the stock in an orderly and thoughtful manner.

As many of you are aware, the TDS when-issued special common shares stock trading today on a when-issued basis.

It's our understanding the specialist will shortly post an indicated range on all three stocks and open the stocks accordingly shortly thereafter.

So that's the principle reason for the delay in trading this morning to the best of our knowledge.

With that I'm going to turn the call over to Sandy Helton.

Thank you, Mark.

Good morning and thanks for joining us.

I'll briefly highlight TDS's consolidated results for the quarter and then turn the call over to Ken Meyers, who will discuss US Cellular's results.

Following Ken will be Bill Meeghan, who will highlight TDS Telecom results, after which we will take your questions.

TDS's consolidated operating revenues grew 7% year-over-year driven primarily by strong customer growth at U.S.

Cellular as well as continued steady performance at TDS Telecom.

Affecting year-over-year comparisons were the divestitures of several U.S.

Cellular markets that contributed $11.5 million to revenues in the first quarter of 2004.

Operating cash flow, which excludes depreciation, amortization, and accretion, as well as the 2004 gain on assets held for sales, also grew 7% year-over-year to $244 million.

TDS's effective tax rate on operations for the quarter was 38.5%.

We expect the effective tax rate on operations for the year 2005 to be between 39-40%.

Moving to the balance sheet, during the quarter we continued the refinancing and debt-reduction activities we've been implementing over the last two years.

In February, we pre-paid an additional $7.2 million of TDS medium term notes, in March, TDS issued $116 million of 6.625% notes due in 2045.

TDS Telecom then repaid $105 million in government loans.

This refinancing activity allowed us to reduce the effective cost of TDS debt while lengthening its maturity from less than ten years to 40 years.

Market conditions permitting, we anticipate coming to market again this quarter to raise sufficient funds to pay off TDS Telecom's remaining government debt of $130 million.

These activities are in line with our commitment to strengthen the balance sheet and maintain TDS's strong financial position.

Before closing, I would like to bring up two additional items of note.

Our special common stock and the dividends we expect to receive on our Deutsche Telekom and [Voda phone] holdings.

While these items do not pertain to the first quarter results, I know many of you are updating your financial projections for TDS and U.S.

Cellular so I wanted to share this information with you.

Regarding the special common stock, on April 11, TDS shareholders approved our proposal to increase the number of authorized shares of TDS special common stock from 20 million shares to 165 million shares.

A portion of the increased shares will be distributed in the form of a stock dividend on May 13 to shareholders of record April 29.

Each share of TDS common stock or series A stock will receive one share of the special common stock.

This will double the number of TDS outstanding shares.

The special shares will begin trading today on the MX on a when-issued basis under the ticker TDS.s.wi.

From May 16 onward they will trade under the ticker symbol TDS.f.

Moving to the Deutsche Telekom and [Voda phone] dividends, Deutsche Telecom shareholders approved the company's annual dividend at yesterday's annual grand meeting in Hanover.

The dividend is payable tomorrow, April 28, in the amount of 62 Euro cents and all of the dividend accrues to TDS.

At yesterday's conversion rate, that would translate into $105.8 million pre-tax.

The dividend is subject to German withholding tax, after which it is subject to U.S. taxes.

For [Voda phone], U.S.

Cellular and TDS Telecom expected dividend in May in the estimated pre-tax amount of (US) $3.63 million for U.S.

Cellular and $956,000 for TDS Telecom.

This would be an increase of 78.5% over the May 2004 dividend as [ Voda phone] has substantially increased its dividend.

Because the [Voda phone] dividend is semi-annual, we anticipate receiving another dividend in November for U.S.

Cellular and TDS Telecom and these dividends are also subject to U.S. taxes.

In summary, the first quarter was a very good quarter for TDS.

Our business units continue to deliver on their strategies and we continue to strengthen our overall financial position.

We believe we are in an excellent position to build on the progress we've made so far this year and we look forward to updating you on our results again next quarter.

With that I'll turn the call over to Ken who will discuss U.S.

Cellular results.

Good morning and thank you for your time today.

Overall, we're pleased to report a very solid quarter at U.S. Cellular.

Good growth in customers and service revenue, solid results in the area of customer retention, as well as cash flow right in line with our expectations.

There are a few geography issues that affect some comparisons which I will discuss.

Let's start with net adds.

The Company produced 123,000 net retail customer additions in the quarter.

The labeling retail is meant to distinguish the adds that originate from our stores, dealers, and other channels from those that are through our wholesale or reseller additions.

It was retail net adds we gave guidance on earlier this year.

The reason for the change in terminology is we have seen above average growth in wholesale adds.

However, we do not have the same level of control over that channel as we do with our own stores and dealers.

As such, we've limited our guidance to net retail additions instead of trying to add in uncertain estimates for the wholesale channel.

Further, while wholesale customers have good incremental margins, they do not have the same economics as our company-served post-paid and pre-paid customers.

We will continue this break-out going forward.

A key driver to a strong growth in customers was the continuing outstanding performance in the area of churn.

Post-pay churn averaged 1.5% per month while all-in churn averaged 1.6% per month during the quarter.

Now let's look at average revenue per unit at $44.28, which is down 4% from a year ago.

There are two factors to consider when evaluating this number.

First, we changed the way we account for customer contract termination fees effective the first of the year.

Historically, we recorded the gross amount of these fees as revenue, and increased bad debt provisions to recognize the estimated net realizable amount.

Now we just record the estimated net realizable amount as revenue.

This change has no bottom line effect but it does reduce revenue by about $7.7 million, an average revenue per customer by about $0.51.

There is an off-setting reduction to bad debt, which is part of these G&A expenses.

Secondly, roaming revenue, as expected decreased primarily due to fourth quarter rate decreases in prior year divestitures.

It's down almost 30% year-over-year.

This $12.6 million revenue decline works out to be about $0.84 in monthly average revenue per customer.

However, before going further, please look at systems operations costs, which are up just 1.8% on a year-over-year basis, despite a 20% increase in cell space and service.

What's occurring is that this category of costs -- systems operations expenses -- includes all of our network costs like maintenance, utilities and customer usage.

Customer usage includes third party roaming costs, and in the quarter roaming costs fell about the same 30% that roaming revenue fell, and in fact they fell by a larger dollar amount.

So while inbound, or keeper roaming revenue, fell year-over-year and its very visible, related costs fell even more.

These two non-issues account for about 70% of the $1.88 decline in average revenue per customer.

Turning to a less confusing side, data revenues continued to grow nicely.

Data revenue was approximately $29 million for the quarter, representing about 4.3% of service revenue.

This is a 163% increase over the $11 million of data revenue generated in the first quarter of 2004.

We continue to see strong growth in both the short-message service product and our easy-edge services.

Eligible telecommunications revenue totalled about $16.8 million for the quarter, though about 5 million of this is one time in nature.

We are currently receiving funds based upon five service in five states -- Washington, Wisconsin, Iowa, Oklahoma, and Oregon.

On the expense side of the business, we already talked about systems operations, actual network costs grew in line with [cell side], customer usage costs are up but not as much as total minutes, showing continued economies in that area.

On a per customer basis, minutes of use increased 19% from an average of 491 minutes per customer a year ago to 584 minutes in the current quarter.

All in-cost per gross add averaged $394 a quarter, up about 6% from a year ago, and down 10% on a sequential basis.

With respect to G&A spending, we saw year-over-year decreases in bad debt and retention costs.

The bad debt reduction was primarily due to the aforementioned change in accounting per customer contract termination fees.

Operating cash flow for the quarter totalled $164 million, up over 15% on a year-over-year basis on an 8% increase in service revenue.

Operating cash flow was right in line with company expectations.

Depreciation, amortization, and accretion, all non-cash charges, grew $13 million reflecting ongoing capital spending programs.

Just for information purposes, the St. Louis network is being depreciated today and has been since it was turned on in October of last year.

It is currently carrying roaming traffic even though we have not yet started retail operations.

Operating income was up 28% or $8 million to $36 million for the quarter.

Looking below the operating income line, there's not too much new or different.

The slight drop in investment income reflects the sale of investment markets over last year, partially offset by increased profitability in the remaining portfolio.

The effective tax rate of 39.7 is more in line with normal operations, at least when compared to the 50% rate of a year ago.

Earnings per share at $0.20 is up 82% on a year-over-year basis.

With the first quarter behind us, we are leaving our guidance for the year unchanged from our last update on March 18th, when we rolled in the St. Louis numbers.

Just to remind everybody, our guidance for 2005 is as follows: net retail customer additions $475-$525,000 for the year.

Service revenues approximately $2.9 billion.

Operating cash flow $710-$750 million.

Capital spending of $570-$610 million.

As I said earlier, the St. Louis network is serving U.S.

Cellular customers roaming in the market today.

We are working on distribution now, and starting to hire and train associates for an expected third quarter retail launch.

Our launches in 2004, which included Portland, Maine;

Lincoln, Nebraska;

Oklahoma City, Oklahoma; all continue to perform very well.

We are seeing solid growth in customers above expected levels of revenue, and great network results.

Now let me turn the call over to Bill Meeghan at TDS Telecom.

Bill?

Good morning, everyone.

TDS Telecom is pleased to report its operating results for the quarter as well.

For the quarter, combined ILEC and CLEC revenues rose 3.2% while operating cash flows declined by 6.6% compared to the first quarter a year ago.

I will walk through the ILEC and CLEC results separately.

ILEC revenues increased modestly of 1.7% compared to the first quarter of 2004.

This is due primarily to continued growth in DSL and long distance sales, offset partly by physical access line losses.

Operating cash flow decreased 7.7% in the quarter, due mainly to increased costs associated with the growth in DSL and long distance.

Access line equivalents, those access lines adjusted to reflect voice grade equivalents, grew 1.6% from the first quarter a year ago.

On a sequential basis, access line equivalents grew one half of 1% compared to the fourth quarter of 2004, sequentially.

Physical access lines declined by 1.8% from the first quarter a year ago.

Sequentially, physical access lines declined by 3,000 lines or one half of one percent, an improvement from the sequential loss in the fourth quarter of 2004, roughly half the losses of the previous quarter.

Reduction in residential second lines accounted for 62% of the year-over-year access line decline, decreasing by 7,200 compared to the first quarter of 2004.

Telecom ended the first quarter 2005 with 43,600 second lines in service, and that represents less than 7% of total physical access lines.

DSL customers increased 81% to 49,300 and this is important to us as we drive to be the preferred broadband provider in our markets.

As of March 31, we enjoyed 54% share of the high-speed data markets in which we compete compared to cable providers.

This information is based on a third-party survey of our customers.

Many of our DSL customers migrate up from dial-up internet service and that accounts for a portion of the 14% decline in dial-up service we have reported.

Our experience over 12 months has been that about 2/3 of the net churn in dial-up customers are customers who in fact migrated up to DSL service.

We continue to invest in our network to offer broadband service.

As of March 31, about two-thirds of our physical lines were equipped for DSL service and we've invested to enable higher speed services as well.

A year ago less than one percent of our high-sped data customers had 1.5 megabit service, and now more than one-third are at 1.5 megabits.

Long distance customers increased 14% in the quarter to a penetration of 47%.

Access minutes of use reflecting utilization of our wire line network increased 3.1%.

Cash expenses rose 11.5%, driven primarily by increases of cost providing long distance and DSL services.

We expect to see these costs moderate as we implement new long distance networking arrangements, and a new interstate tariff for provisioning DSL, both of which will help lower our cost of goods sold.

Also I would note there was an item in the first quarter of 2004 that favorably impacted operating cash flow by $1.7 million.

In the first quarter of 2004 we adjusted our expense accruals, reducing cash expenses by $1.7 million.

Turning to the CLEC side.

Revenues increased by $4.5 million while operating cash flow increased by $600,000.

Equivalent access lines increased 16% to 438,000.

Revenue and operating cash flow lagged customer growth, primarily because of pressure on access rates, which has a direct effect on revenues and operating cash flow.

DSL sales continued to grow strongly -- 39% year-to-year.

High-end data products offering higher speeds allow us to be more competitive with cable providers, and provide growth in both consumer and commercial high-speed data.

In the wake of the SEC's tri-annual review order, we have negotiated a three-year contract with Qwest for our Minnesota operations that will allow us to extend [UNEP] service beyond the time limit set in the triannual review order, although at a higher cost.

This will allow us to continue to serve these customers though and transition into other types of service when appropriate.

We provided service to 32,000 customers in Minnesota via [UNEP] at March 31.

Although the regulatory landscape has changed, our CLEC operations remain committed and focused on executing a strategy to create value.

There are several areas where we continue to focus.

First, our customer service is critical and independent customer satisfaction surveys score us number one or number two in our market.

This is also supported by our low churn.

Secondly, we focus on second and third tier markets, and that's important to our future as recent rulings have been more extreme for large markets.

And lastly, we are striving for deep penetration in our CLEC markets which allows the Company to offer services in a cost-effective manner as we obtain sufficient local scale.

Data continues to be an important part of our strategy, and we continue to invest in our network so that we can offer competitive broadband services.

Besides our current video trial utilizing fiber [inaudible], we are also trialing wireless high-speed data and we intend to soon augment that trial with a voice-over-IP offering.

With respect to our 2005 guidance, we reaffirm the guidance that we issued with our year-end 2004 numbers.

The guidance is posted on our TDS website.

Now I'll turn the call over to Mark Steinkrauss.

Thank you Bill.

Marcus, we'd be glad to open the call to q-and-a.

[OPERATOR INSTRUCTIONS] Your first question from Rick Prentiss from Raymond James.

Good morning, guys.

A couple of quick questions for Ken.

On the net add side, the re-seller adds, some questions on that, you broke out this quarter how many there were in your adds.

Do you have the historicals as far as how many they accounted for on a quarterly basis last year?

Who are your primary re-seller providers and how do you account that in your churn calculations?

Three questions.

First of all, if you look at the press release, Rick, you'll see we broke out total customers and retail customers as well as net customer adds and retail customer adds for each of the last five quarters.

All that information is available.

Secondly, we have a few re-sellers, the largest one is tract phone and pre-paid arena.

And third, we take those disconnects as we get them and we roll them through our churn calculations, recognized that a pre-paid re-seller like that will tend to reuse the numbers over and over again so you don't see as much churn typically on those lines.

Second set of questions for you has to do with the data [RPU].

You've seen that growing.

Can you update us as far as the customer base, how much of your customer base is subscribing to data plans now?

How much percentage of your subscriber base has devices that are capable of doing data and what you're seeing as far as sales trends go when you're doing net adds or people taking the plans?

The first two I can't give you hard numbers on because, we talked about this before, the way we built our billing system.

When a customer walks out the door, he can, he is set up either for a data service on a monthly access plan, they are buying a certain amount of access, or they can do pay as you go.

So 70-80% of customers who walk out the door have access to it one way or another, and that's our way of making sure the customer can experience it even if they don't decide to make a purchase decision at that point in time.

So I can't give you a number in terms of how many are data customers because it varies month-to-month depending upon somebody whether someone wants to use it this month or not.

A very large percent of all the customers that walk out have it activated on their phone when they go and what we're seeing is that new customers are the ones that are primarily driving the growth right now.

The penetration in the poor markets, we've got to go back and do re-marketing to them, it is a slower pace given you've got a bigger base to reach out to.

And if you had to look at what you think the active usage of customers on the data network was, just on average, not month in month out, what do you think the average of customers actively using data would be?

It's not a number that I'll speculate right now, it's one that's tangible, I just don't have it in front of me.

Good luck, guys.

Thank you.

Your next question comes from Simon Flannery with Morgan Stanley.

Thank you.

Good morning.

Can you just spend a moment on the reasons behind the change in the authorized and issued shared capital and how that gives you flexibility going forward in terms of M&A transactions or re-combination of the two units, and then if you could spend a moment on the regulatory environment around the prospects for further ETC revenues, universal service reform, and so forth, thank you.

This is sandy.

I'll start out.

We authorized and will be issuing in our stock dividend these special common shares, and we do believe they will give us flexibility for a variety of M&A transactions for stock compensation.

And also we have indicated at some point in the future that we might consider buying the portion of U.S.

Cellular which is not now owned by TDS.

This does give us flexibility because these shares have the full economic interest, the other shares that TDS stock has, although they do have some different voting characteristics.

So the shares would be voting just for the Directors that today are elected by the common shares and for any other transactions that would be required by law to be voted on by all shareholders.

Simon, on the ETC front, we have applications pending and a new other states right now.

Our strategy is to apply for it wherever we can.

Until such time as we qualify and start getting funds out of any state, we don't try to build those into our numbers because of the political risk around it.

Our strategy is to continue to apply where possible.

We think that wireless clearly has a place at the table.

So the business model we're executing is not one that's built around relying on ETC revenue quite frankly.

It's clear that processes and calculations both to fund it as well as to allocate it out are going to change over time.

Exactly how they're going to change I really don't know.

I think it's going to be extraordinarily political process that will take probably a few years to straighten out.

So until then we will continue to attempt to qualify wherever we can so we can continue to upgrade the services we provide in the more rural parts of the country and provide even better services to the customers in those areas.

So we should be keeping a 11-12 million run rate for the next couple of quarters?

That's where it's at right now and if and when it changes we'll let you know.

Thank you.

Thank you.

Your next question comes from Frank Louthan from Raymond James.

Good morning.

A couple of things on the wireline side.

Just to clarify, you have the agreement with Qwest.

Does that cover all your [UNEP] lines you have, looks like you lost a few of those lines.

What are your plans going forward, do you think you will be able to grow that business, to kind of hold it study?

And can you comment on the RPU trends in the ILEC business.

Looks like they were down a bit.

What was driving that?

Hi, Frank.

First, with regard to UNEP, it does cover our UNEP lines in Minnesota which are all our UNEP lines, effectively.

And what we discovered is with this pricing program that Qwest has offered is that we can in fact make economic sense out of continuing on the UNEP provisioning method.

Our intent is to continue to use that and, where it makes sense, market to customers, we are not marketing to residential customers in Minnesota.

Though this will make sense for the current customer base, it will trim our margins a bit so we won't pursue it aggressively further than than in the residential side.

With regard to RPU on the ILEC side.

It does bounce around a bit, Frank.

I think an important thing to consider when you're comparing year-on-year here is the impact of USF.

We are experiencing a decline in USF, so year-on-year, that could make up about $1 million a quarter in that kind of range.

We also, when you look at RPU, you look at the growth equivalent line and that has grown substantially.

Thank you.

Your next question is from [Robert Shifman] with Credit Suisse First Boston.

Good morning.

Two items.

Maybe you could just walk through the particular benefits of why a potential roll-up of U.S.

Cellular would make sense right now.

Two, you emphasize strengthening the balance sheet, maintaining a strong financial position.

Is that also include a commitment to maintaining investment grade ratings if you're thinking about utilizing shares for acquisitions?

First of all, with regard to the potential benefit of rolling up the minority interest of U.S. Cellular.

One of the reasons that we had heard our investors suggested that might be advantageous is that the complicated capital structure that we have may be causing the shares of both U.S Cellular and TDS to be valued less fully in the market than they would be after a roll-up.

So we are certainly concerned about shareholder value at both companies, and that's a major consideration as we think about the potential.

The second question that you asked related to our commitment to an investment grade credit rating.

We are committed to an investment grade credit rating and certainly having the special common shares available for M&A transactions gives us more flexibility going forward.

Excellent.

Thank you very much.

Thank you.

Your next call comes from Phil Cusick with Bear Stearns.

Hi, it's Phil.

Thanks for taking my call.

I wonder if we can go first back to Rick's question and talk about, on the churn side for wholesale.

Can I confirm you guys will report zero churn from wholesale if the number of wholesale customers go down or is it really up to the numbers that are used by the wholesaler?

I'm sorry, Phil.

Let me try that again.

There have been times in the past where there's been net growth in the re-seller lines but there in fact has been churn.

Does that answer the question?

Yeah, that answers it.

And similarly on the RPU side, can you break out the wholesale RPU for us or give us a level of range where that might be?

I can't break it out for you.

Trying to get a representative level where your post-paid RPU might be.

I understand the genesis of the question.

I can't break that out at this point in time.

We will continue to look at it in the future and see if there's a way to provide more information but we're limited in that area right now.

And, finally, if you could talk about maybe a contribution from growth from your three new markets.

Were those a pretty significant level or addition to net adds in the first quarter?

All those markets are doing well.

We have to put it in perspective and that is that the total served population of those three marks is about 2 million or 5% of the populations or the populations of the markets that we serve.

So they are doing very, very well but they are not a primary driver to the net adds in the first quarter.

We saw continued strong growth across the whole portfolio.

Were there any promotions that would have been driving growth over and above or different than they were in the fourth quarter?

No, sir.

Thank you.

Thank you.

Your next question from David Janazzo with Merrill Lynch.

Good morning.

Another question on the special common shares, perhaps for sandy.

What type of seasoning period would you think might be appropriate for the shares, and if it does come down to a cellular roll-up -- obviously it's speculative -- but would you think of evaluation on a theoretical basis or in terms of some sort of market value or relative trading basis between the shares.

To answer your first question on seasoning, I think what you're saying is when would you expect to see the special common trading right on top of the regular common at the same price.

That's hard to predict.

You can look at examples of other companies who have issued similar kinds of stock and it can take a couple months or it can take longer.

I really hesitate to try to predict that.

As to your second question with regard to how we would look at pricing, we have to get over the first hurdle of deciding that that is something we really wanted to do before we got to the second question of how we value it.

Have you thought about that second part of it?

We think about a lot of things a lot of time.

It probably wouldn't be helpful to comment on that at the moment.

Thanks.

Thank you.

Your next question from Michael Rollins with Citigroup Smith Barney.

Just a question on pricing.

Are you seeing incremental changes in the pricing environment on the wireless side, and in terms of your strategy with respect to RPU, are there things you're trying to do or may do in the future to capture some higher RPU customers, especially as the percent on digital continues to deepen?

Thanks.

Good morning, Mike.

I think that as we look back over the first quarter, there were a couple of pricing moves we saw in the industry I would call favorable.

I don't think that there were any large-scale negative pricing moves that I can recall as I sit here now.

I can think about the environment as being pretty stable in the first quarter.

As the question about higher level RPU customers, I think we started changing our promotional strategy about two years ago.

We went through about 11 quarters of year-over-year increases and customer billings and were quite happy with that.

Your opportunity to raise RPU or to target different segments really is a function of how much market share or how deep your penetration is in different markets.

And some of our newer launch markets were clearly targeting the higher-end users, and other markets where we've got the lion's share of the market, we're doing market development, which typically would mean you're trying to expand the market and go after the next group of customers that aren't there, and they typically are a little bit lower, they will get a little bit less value out of the transaction, which is why they are late to the category.

One thing we do continue to push through our channels is different vertical features, ways to deliver different value to the customer at an incremental charge.

Thanks.

Your next question from Will Power with Robert W. Baird.

Thanks.

Good morning.

A couple of questions on the wireless side, for Ken again.

On the retail RPU front, it looks like retail is down a little bit year-over-year even with the activation adjustment, and I guess I'm just trying to think through the various drivers there, and I presume the resale component is probably part of that.

I guess the question really is, how should we think about Retail RPU for the rest of the year -- you have data contribution gaining, will retail RPU year-over-year comparisons still be challenging or do you think there's some elements from data and other areas that might help stabilize RPU on a year-over-year basis or maybe even increase it?

That line item, if you think about our average revenue per unit, we have it totalled.

We break out long distance.

We break out inbound roaming.

That other number includes all of our post-paid, our data, our pre-pay and our wholesale revenue, so right now as wholesale is growing rather quickly you're getting a diluted effect in that.

So the question becomes, as we look out to the rest of the year, how much is wholesale?

And that's the unanswerable question, which is why we did not include wholesale customers in our guidance for the year.

The way to think about it is to think about the guidance we put out there on customers and letting that drive the RPU, not letting the wholesale customers, in effect, change your calculations.

Okay.

That's helpful.

And let me just ask a second question.

On the roaming front, roaming revenue down, I know you indicated that at least part of that or a large part of that is due to pricing changes enacted in the latter part of last year.

I wonder it you could give us an more granularity as to roaming volumes, what those trends have looked like versus pricing?

Volumes remain very healthy.

We go back two years ago, two-thirds of all our roaming revenue was TDMA-based, and CDMA was only a third.

When we decide to put in our CDMA network, we knew we would lose the TDMA that was going to GSM.

While we still get a little bit of TDMA, the bulk of all of our traffic is now CDMA and it has grown, we continue to see very nice year-over-year growth in minutes of use there.

Thanks.

Thank you.

Your next question comes from Tom Seitz with Lehman Brothers

Thanks.

Ken, could you maybe drill down a bit more on the RPU levels, particularly with respect to retail.

I think you mentioned that in the newer more metropolitan markets you are targeting the higher RPU, higher value customers, in that perhaps some of the weakness along with the wholesale issues just described could be the fact that you're trying to deeper penetrate in some of the more mature markets.

And I want to confirm that there isn't anything going on with respect to promotions or whatever in the newer markets and I have a question for Sandy as well after that.

Let's look at it this way, or address it this way.

That's the wholesale dilution effect, I'll call it.

Our outlook for customer billings this year is relatively flat.

We've got the termination fee change, which has no bottom line effect but it has visibility because of where it sits.

When you think about retail billings, we're seeing very good growth in data.

We're seeing nice minutes of use.

The launch markets, while there's some promotional factoring the launch period, that is not anything that is having that dramatic of an effect on the numbers.

It's got a tiny effect but it's nothing big and it's one that isn't long-lived.

Okay, that helps.

And one quick follow-up.

Can you break out how much of the roaming revenue decline was caused by the rate reduction versus the loss of customers that you sold that were presumably pretty high roaming customers?

If it's not the loss of customers, it's the sale of the markets.

That's what I meant.

By lost customers, I meant sold customers.

I apologize.

That is noble.

It's not a number I have at my fingerprints as I sit there.

Sandy, back to the special common shares.

The proxy seemed to read that the Carlson trust was sort of "ho-hum" about the whole special common share distribution.

Was that legalese or should we read into that you are going to be very careful about the price you pay for whatever transaction you may undertake.

As a follow-up to that, is there going to be a special committee set up for the minority interest, do you know that?

As to the first question.

I think you know TDS pretty well and that we're very careful about pricing on any transaction that we enter into.

I think you shouldn't expect us to be changing our stripes on that standpoint.

With regards to a special committee, we haven't finalized a decision about proceeding with this.

Should we proceed with it, we would go through all of the normal processes and legal requirements, which I think in most cases does involve a special committee.

Thank you very much.

Thank you.

Your next question comes from [Philip Olson] with [UBS Security].

Just a follow-up, on the potential for a roll-up transaction.

As an alternative for maximizing shareholder value, did you consider a spin-out of TDS's existing stake in USM to then create two - [pure play] Telecom's name instead of a potential roll-up down the road.

We would consider all alternatives for increasing shareholder value.

I think that's certainly one alternative we would think about.

Thanks.

Thank you.

Your next question comes from Kevin Roe with Roe Equity Research.

Good morning.

Ken, on the wholesale wireless business, are there any anticipated step-downs in your wholesale rate with any of your customers like Tractphone this year or next.

Can you give us a sense when you look beyond the St. Louis market launch, how many pops you may be targeting for new market builds over the next year, beyond that.

Maybe give us some forward look at that?

Thanks.

With respect to the first part of the question, I won't talk about any individual contractual arrangement with any one customer.

I don't see any dramatic change with economics to that business at least on the short-term horizon.

With respect to future plans, what we've talked about is, the last couple of years if you look at St. Louis this year, look at the group of markets the year before that, and the year before that, our buildout plans have been around 3 million markets with about 3 million population in it.

We have not selected markets, we have not finalized the economic analysis around what we do next, if we do anything.

One of the Governors we'll use is probably keep it something in that range just from a managing risk standpoint as well as managerial focus.

When should we expect to hear from you guys as to the next phase of buildouts if that happened?

As we finalize them.

They aren't, my guess is, they won't finish that process much before year end with our normal budgeting cycle.

Thanks, Ken.

Thank you.

Your next question comes from [Steven Mead] with Anchor Capital Advisor.

Just a question on the equipment sales and the losses associated putting handsets in people's hands and stuff.

What do you see as the trends there in terms of how much money you lose from the sale of handsets?

Hi Steve, it's Ken.

Maybe Jay has some color he'd like to add to this one.

One of the key factors over the last year, year and a half, has been the combination of [one act] and some of the additional features in that camera -- data, color, all that.

You're starting to see prices on some stripped-down versions starting to fall nicely.

I think the biggest concern on the horizon right now is going to turn out to be a year from now -- what happens with the cost of any EEO-enabled type handsets.

This is Jay.

Ken pretty much hit it on the head.

We are seeing price reduction on entry level camera phones.

We're seeing movement across the portfolio, mid-tier as well and the real question would be variety, quantity of the VDO handsets that will be probably be toward the beginning of on a strong basis '06 and the functionality of those phones as well.

And the life cycle of the phones are becoming much shorter so you're seeing 12-15 month life cycles on handsets in the new generations and that also adds additional feature functionality.

So that's pretty much where we see it going.

Can you talk about, you talk about churn, but I was wondering if you tier your customer base, the kinds of what you're seeing from a retention standpoint and relative to the use of data, whether the services create greater retention or not.

When Ken mentioned to Jay again, mentioned the numbers relative to our data customers, it's a cross our interactions with customers relative to not just new but we have an opportunity to interact through retention or whatever, they are as well are getting data products so we're trying to penetrate our base with those customers.

And educate them as well so that's why we have seen such a significant pickup on our data revenues year-over-year not only with the addition of data markets but penetrating pent-up demand in any one of our markets that we launch data services as well as enhancements like picture messaging which we launched last year as well.

And another quick question.

As you look at the investment in new markets, what are some of the metrics you use in terms of returns and the payback period of going into a new market.

The work around the new markets decision whether to launch or not primarily focused around whether ten-year MPV models that look at whether or not we can generate an adequate return on those investments.

What do you consider adequate?

We use something that acts as a proxy for our cost of capital.

What's your calculation of what your cost of capital is?

We've got a series of numbers, Steve.

I'm not going to go through each one of them.

It is an equity-weighted cost of capital that pretty much represents our capital structure and what those costs are.

Thanks.

Thank you.

Your next question from Chris King with Legg Mason.

Just two quick questions to a follow-up on some of the issues regarding the recent Spectrum option and some Spectrum that you took down there.

Specifically, with Indianapolis, where you purchased some spectrum.

I believe you had some there.

Just wondering what the thought process was on acquiring some additional spectrum there.

Secondly, getting back to the possible timing of these buildouts if they are to come at some point with the 550 million or so cash tax liability in '07 and '08.

Does that enter into your thinking in terms of timing with respect to new market buildups to product your investment grade credit rating?

Let me try to take the first one, and that is that the spectrum that was acquired in option 58 was acquired by a company [Carol] wireless of which we are an investor.

We are not a managing partner of that.

I don't think I could do justice to all of their thinking in terms of different individual decisions that are made.

However, if I remember Indianapolis, I think they picked up ten megahertz and I think that's about what our current ownership position, or rights to an ownership position are in those markets.

So 20 MHz is not, for a market the size of Indianapolis, is not an overabundance spectrum.

Secondly, the cash tax question that you have is primarily the liability that primarily fits the TDS level so that may be a question more appropriate in terms of TDS and their fundings but it's not something that is a major factor in -- at the cellular level given the resources that we have available.

Thanks.

Thank you.

Your next question from [Sam Sabba] with Quattro Global Capital.

Hi, it's S.T. Telefrigatta.

Do you envision using any cash for the buy-in of USM shares or do you only envision using stock?

Again, there hasn't been a decision and I do think, though, in the proxy statement it was fairly clear that any significant use of cash for that transaction would not be viewed favorably because of the credit impact.

What are the rights for the special common shares with respect to voting on merger approvals and how does that compare to the rights on the common shares?

Basically it would only be those events under Delaware law that would require all shareholders to vote that would involve the vote of the special commons.

For all intents and purposes, the voting rights of the special common are limited to the Directors.

And generally, do you envision the special shares will be viewed as the acquisition currency of choice to the extent that you do future acquisitions as well?

That's hard to predict but it certainly provides a very good currency.

Great.

Thank you.

Marcus, we'll take one more question if there's someone else waiting.

At this time your final question comes from [Andrew Keoye] from Deutsche Banc.

I had a quick question about margins in the ILEC operations.

You talked about impact from DSL and LD growth.

It seems like that was kind of similar to levels of last quarter.

And you mentioned lower USF subsidies, I was wondering if there was any other pressure on the expense line there?

Thanks.

Well, we referenced the increased cost in LD and DSL and let me talk about that for a moment.

We talked about changing our network arrangement to reduce cost longer term.

Benefits of growth we've had in our LD business have been manifold in terms of strengthening our relationships with customers and gaining a greater share of the wallet.

However, we've seen an increase in cost especially as we move to big minute plans.

We understand that.

And we're taking steps to use that growth in customers to change our cost structure.

With sufficient scale, we anticipate that we can convert what is now variable cost to a fixed cost and improve those markets.

We are looking at using the -- we use switch circuits today and we are looking at as we add scale in certain instances we can move to direct trunking and thereby shave costs.

On the DSL side, a similar kind of initiative where we have pursued very aggressively the National Exchange Carrier Association, NECA, with whom we pool for recovery of DSL cost.

We participated in the NECA pool and as part of that participation we remit to the pool an amount for each DSL subscriber we have.

That amount is designed to reflect the actual cost of providing the service and NECA has now reduced the amount participants remit to mirror the productivity improvements and lower equipment costs that carriers are experiencing.

We were very active in pursuing that with NECA.

The tariff reduced was effective this month and reduces the monthly remittance from $18.95 per subscriber to $12.95 per subscriber for service at 1.5 megabits or less.

There are some other components to the tariff.

There's a sir charge for higher speed.

And then there's also a slight reduction associated with fixed charges in the tariff related to the number of wire centers you have.

But this is an important modification to the tarrif for us. for us and a way for us to reduce our cost of goods sold.

Thank you, Bill.

Thank you, everybody, for participating in the call today.

We are available when the call concludes should you have additional questions.

Thank you, Marcus.

This concludes today's TDS and U.S.

Cellular first quarter operating results conference call.

You may now disconnect.