美國無線通訊 (USM) 2007 Q1 法說會逐字稿

Good morning.

My name is Stephanie and I will be your conference operator today.

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

Cellular first-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 session.

(OPERATOR INSTRUCTIONS).

Mr.

Steinkrauss, you may begin your conference.

Thank you, Stephanie, and good morning, everybody, and thank you for joining us for this morning's call.

With me today on the call are Ken Meyers, Executive VP and CFO of TDS, Steve Campbell, Executive VP of Finance, CFO and Treasurer at U.S.

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

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

Cellular.

A replay of this teleconference will be available today at 1 PM Chicago time and run through midnight, Tuesday, May 15.

The replay number is 800-642-1687, passcode 5793984.

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

This call is being simultaneously webcast on the Investor Relations sections of both the TDS Web site and the U.S.

Cellular Web site.

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

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 or Web site (technical difficulty) the filings with the SEC in this regard.

Shortly after we released our earnings results this morning and before this call, U.S.

Cellular filed an 8-K.

The 8-K is essentially a wrap of the U.S.

Cellular press release along with some additional information.

Ken Meyers is going to lead off the call today and briefly update you on TDS' filing status.

Then I'm going to turn it over to Steve Campbell, who will then discuss U.S.

Cellular's first-quarter results.

As I mentioned on April 23 during our last conference call, the delay at the parent company does not impact the financials or operating statistics of TDS Telecom.

However, TDS Telecom's results cannot be released until we correct the accounting at the parent, and as you all know, TDS Telecom is a 100% owned subsidiary of TDS.

Bill Megan, TDS Telecom's CFO, normally joins us for this call but due to other commitments, he isn't with us today.

As of today, however, we are reaffirming TDS Telecom's guidance for 2007, last dated April 23, and this will be noted on our Web site later this morning.

Both press releases were posted to the TDS Internet home page this morning shortly after going out over the wire, and Cellular has posted their release to their Web site as well.

You will find posted on our Web sites additional information and reconciliation of non-GAAP financial measures that may be used by management when discussing the operating data during today's conference call, as well as any changes to the Company's forward-looking guidance.

All of this information is now included on a separate page entitled "Guidance and Reconciliation" to make it easier to find.

The information can also be accessed on the conference call page of the Investor Relations sections of both our Web sites.

The TDS and U.S.

Cellular will be participating in two upcoming conferences, tomorrow morning, late morning at Morgan Stanley's 12th Annual Communications Conference in Washington, DC, and later this month on the 30th at the Lehman Brothers Worldwide Wireless and Wireline Conference on May 30 in New York City.

With that, I'm going to turn the call over to Ken Meyers.

Ken?

Thank you, Mark.

Good morning and thank you for joining us today.

As Mark pointed out, today's call is focused on U.S.

Cellular's first-quarter results.

As we said on April 23 when we announced the filing of the U.S.

Cellular 10-K, we expect to finalize and file the TDS 10-K in mid to late-June and quickly follow, within a week or two, with its first-quarter 10-Q.

We expect to have both companies going back to our historic practice of simultaneous filings and joint calls with our timely filings of our second-quarter 10-Qs.

In the meantime, while TDS continues to push with all deliberate speed to finalize a few items around its 10-K, none of which affect U.S.

Cellular's financials, we want to get as much information as possible into the marketplace.

So we're re-leasing U.S.

Cellular's first-quarter results today, results which were strong across the board.

So let me turn the call over to Steve Campbell, the Executive Vice President and CFO of U.S.

Cellular, to lead the discussion of those results.

Steve?

Thank you, Ken.

Good morning, everyone, and thank you again for joining us.

As you will hear this morning, the first quarter of 2007 was an excellent one for U.S.

Cellular.

During the quarter, retail net additions were 146,000, up 20% on a year-over-year basis, driven by higher gross additions and continued strong results in the area of churn.

These new retail customers included 130,000 postpaid customers, representing about 89% of the net additions.

At March 31, postpaid customers were approximately 94% of total retail customers.

Total net additions for the quarter, including wholesale customers, were 152,000, up about 1% year-over-year.

As a result, we ended the quarter with nearly 6 million total customers, up 6% over the past 12 months.

The postpaid churn rate for the first quarter of 2007 was again very strong at 1.5%, consistent with the prior-year quarter.

We achieved these strong results across the majority of our markets due to a number of factors.

First, strong customer acceptance of our new suite of national wide area and family service plans introduced in the second half of 2006 -- customers appreciate the value inherent in these plans, combined with our excellent local networks, and have migrated to them faster than we anticipated.

By March 31, more than 40% of our postpaid customers were on these plans.

Second, our expanded offerings of handsets and products -- during 2006, we introduced 27 new handsets, many of these in the second half of the year, including the red MOTO RAZR V3m and the MOTO CRAZR K1m.

Also, we increased our easyedge data service offerings, including new games and mobile information applications, and our BlackBerry solutions offerings.

The third factor was our relentless focus on customer satisfaction and on delivering the ideal customer experience.

During the first quarter of 2007, the Company received recognition in this regard from the prestigious J.D.

Power & Associates organization.

For the third consecutive year, U.S.

Cellular received the award for highest call quality in the north-central region.

Also, in our own quarterly internal survey of customers, the Company received its highest-ever net promoter score, which measures customers' likelihood to recommend U.S.

Cellular to others and provides a leading indicator of customer loyalty and churn.

U.S.

Cellular's focus on customer satisfaction means that we continue to listen to customers and modify and expand our offerings to meet their needs.

For example, customers have told us that our ability to provide efficient phone service and repair is important to them.

Accordingly, in the first quarter of 2007, we implemented new processes designed to streamline and simplify the handling of in-warranty repairs for our customers.

Although this may seem like a relatively small change for us, it provides a good example of listening to customers and addressing issues that are big for them.

Also, we know, from our surveys and other customer-related research, that overall network quality remains the number one criterion that drives customer satisfaction.

U.S.

Cellular is committed to ensuring that our customers have access to the best wireless network in the country.

In the first quarter of 2007, we added 79 new sell sites to our network, which now has more than 6000 total sites in service.

We will add about 375 more sites during the remainder of the year.

Our financial performance during the first quarter of 2007 was very strong, reflecting higher revenues and improved profitability.

Total service revenues for the first quarter were $861 million, up 12% from the prior year.

The increase in service revenues was driven in part by growth in the subscriber base, which I mentioned earlier.

Another major factor in the increase was higher average revenue per customer.

ARPU grew 5.5% year-over-year, more than $2.50, to $48.69 per customer, per month.

In fact, this was the fifth consecutive quarter of growth in ARPU.

Key factors in this growth were strong customer acceptance of our new service plans and higher data revenues related to our easyedge, Short Messaging Service, and BlackBerry offerings.

Data revenues grew 71% year-over-year to $78 million and represented 9% of total service revenues for the quarter.

Inbound roaming revenues for the quarter were $41 million, up from 35 million in 2006, reflecting higher minutes of use.

Service revenues for the quarter also reflected an increase of $6 million in the amount of funds that U.S.

Cellular receives us at eligible telecommunications carrier.

The level of ETC funding that the Company will receive in the future is uncertain, particularly in light of the recent recommendation by the federal/state joint board on universal service that the FCC take immediate action to place an interim cap on funding to wireless carriers.

Although we can't predict what the FCC might ultimately do here, over the short-term, we expect ETC funding to continue at about the current level.

System operations costs were 167 million for the quarter, up 9% year-over-year, driven by a 10% increase in the number of sell sites in service, and a 19% increase in average minutes of use per customer.

Factors which helped to hold down costs in this category were a lower cost per minute of use on our own network and a decrease in outbound roaming costs per minute as we benefited from lower negotiated rates.

Selling, general and administrative expenses were $355 million, up 8% year-over-year.

Major components of this increase were higher selling expenses associated with growth in customers and revenues and higher G&A expenses related to USF contributions.

Remember that USF contributions are largely offset in revenues.

Advertising expenses during the quarter were about $5 million lower than the prior year, but this was due largely to timing.

We expect spending to be somewhat higher in the next few quarters.

Operating income in the first quarter of 2007 was $109 million, up 55% from the prior year due to the combination of higher revenues and effective management of costs.

Operating cash flow totaled $258 million or 30% of service revenues.

The dollar amount is up 22% year-over-year, and the margin increased by 2.4 percentage points.

Below the line, investment and other income for the first quarter was $14 million, up from 2 million in 2006.

Equity in earnings of unconsolidated entities was $23 million, including 18 million from the Company's investment in the Los Angeles Partnership, which continues to perform very strongly.

Investment and other income also included a gain of $12.5 million, representing the fair-value adjustment on derivative instruments.

In the first quarter of 2006, the fair value adjustment was a gain of 4.8 million.

Thus, there's a favorable variance of 7.6 million, year-over-year.

As previously disclosed, changes in the fair value of derivative instruments are recognized in the statement of operations on a current basis, contributing to volatility in reported earnings.

As a reminder, though, the impact of the fair-value adjustment of derivative instruments is both non-cash and non-operating.

Net income for the first quarter of 2007 was $74 million or $0.84 per diluted share.

Capital expenditures for the quarter totaled $110 million.

In addition, the Company expended 18 million to acquire the Iowa RSA 15 market in northwestern Iowa.

The Company did not launch any significant new markets in the first quarter of 2007 and has no current plans to do so over the next year.

Instead, we remain focused on increasing customers, revenues and profitability within our existing markets.

We will of course continue to consider attractive opportunities to expand our footprint, as we did with the acquisition of Iowa 15 in the first quarter and the purchase of the remaining ownership in the Tennessee RSA3 market in 2006.

So all in all, it was a very strong quarter for U.S.

Cellular due to the significant efforts of our 8000 associates who are dedicated to providing the best in service and network quality to our valued customers.

Looking ahead to the fully year 2007, our existing guidance continues to represent our best estimate of the reasonable outcomes.

Thus, it remains unchanged at this time.

As a reminder, the guidance is as follows -- net retail additions, 375,000 to 425,000; service revenues, approximately $3.5 billion; operating income, $375 million to $425 million; depreciation, amortization and accretion, approximately $615 million; and capital expenditures, a range of $600 million to $615 million.

That concludes our prepared remarks this morning.

Now, I will turn the call back to Mark Steinkrauss and we will take some questions.

Okay, thanks, Steve.

Stephanie, we would be pleased to take any questions at this time.

(OPERATOR INSTRUCTIONS).

Philip Olesen.

Two quick ones -- first, could you provide maybe an update on kind of current discussions you've had with the rating agencies, realizing that one has already downgraded you guys below investment grade, just where you stand with the remaining two and what would be the prospect of seeing the S&P decision reversed?

Okay, Ken, do you want to respond to that question?

Yes, Ken Meyers here.

We've been in constant communication with the rating agencies throughout the whole process, don't currently expect any further action by the rating agencies and wouldn't expect any action from S&P until such time as the Company gets current with its filings, the parent company.

Okay.

A second question -- ALLTEL has announced plans or they announced the fact that it is kind of undergoing a strategic review.

One of the options would include a sale of the company.

Given the fact that USM is now current on its financials, is there some sort of transaction that you think you could ever envision between ALLTEL and U.S.

Cellular, either on individual markets or a broader transaction?

Well, I'm going to take that one, too.

First of all, we don't -- we won't comment on speculative transactions or anything else.

I think, if you look at the Company, we have grown the Company by doing a lot of strategic and smaller acquisitions, things that are adjacent to our footprint where we get to expand and leverage what's already in place.

I don't think anything would change our kind of core development practices.

Thank you.

Michael Rollins.

Just a couple of questions.

First, I was wondering if you could talk about the competitive landscape in terms of how it's evolving with these unlimited local plans and the potential opportunity or risk for you to go after some of those customer segments.

The other thing I was just curious about -- it looked like, in the quarter, for every dollar year-over-year of service revenue you added, you brought about $0.50 of that to the OIBITDA line.

I'm curious how we should think about operating leverage for your business, given where margins are.

Do you see some step-function opportunities to cut costs and significantly improve that operating leverage on a one to two year view?

Thanks.

This is Jay Allison.

I will take the first part of that question.

As far as the unlimited plans that have been introduced in some of the marketplaces, as a matter of fact, we even have an unlimited rate plan that we've offered in Chicago and St.

Louis, quite frankly, that are one of the lowest-percentage sales, the distribution of our rate plans, because back to Steve's earlier point -- and we really haven't seen this personify itself across a lot of markets.

Our new portfolio of rate plans really address our competitiveness and got us very well positioned in the markets we operate in across the enterprise.

Those were based on listening to our customers and answering the needs of those customers.

So we feel very strong the portfolio of national and wide-area plans that we introduced late last year have been very strong contributors to our growth and our ARPU, and are quite well-positioned against those -- some niches of markets where we have seen those unlimited rate plans.

So right now, we're very satisfied with our current product portfolio.

I will give it to Steve (multiple speakers).

Okay, so I will take the second question.

I think, as you saw, we were able to grow revenues this quarter faster than expenses, and so consequently, a good share of the revenue growth does drop to the operating income and pretax income line.

We would expect that to continue.

That would be our goal, to grow revenues faster than expenses.

I commented previously on the growth in operating income margin during the quarter.

We had a very nice quarter in that regard.

I think, if you look at the guidance that we've provided, you can infer from the guidance what we expect in terms of margins over the next few quarters.

David Janazzo.

Steve, falling up on those comments, sort of the first-quarter margins, which I think hit 30% for the first time in a while and looking at the incremental margins, you didn't change your guidance.

Are you reflecting some conservatism there, or are there additional cost pressures?

You mentioned higher advertising expenditures.

Are there some other things coming up in the next few quarters that could influence that?

Well, I think you actually touched on the key points in your question.

I think we had a very strong quarter in revenue.

As I said in my comments, I think we see some uncertainty as to what might happen in ETC revenues.

We know it's a very competitive market, and our ability to continue to grow the business the way we have is subject to some uncertainty.

Also, as we mentioned, advertising expense was down a little bit year-over-year, and we would expect to see some ramp in that over the course of the year.

So, I don't know that I would characterize it necessarily as conservatism, as much as I would say we are only one quarter into the year, and I think it's prudent to see how things develop.

Thank you.

Kevin Lo.

Thank you.

Good morning.

A few questions -- first, on the advertising side.

I've heard some of your new radio adverts without Joan; I miss Joan.

But how is the new advertising campaign going?

Secondly, 700 MHz auction -- any update there on your potential participation?

I know, last call, you said you were waiting for rules and license (inaudible), etc.

Lastly, EV-DO in Milwaukee -- you've been watching that closely.

Any update there on the initial results?

I guess I will throw in one more.

Could you give us your data revenue as a percent of service revenue for the quarter?

Okay, this is Jay Ellison again.

I will take a couple of those and then I will bounce it back over to Steve to answer a few things.

Our new advertising strategy, or kind of our into a brand strategy actually launched in the last 30 days or so, kind of region-by-region.

The major thrust now has been some new TV creative.

It actually does currently (inaudible) Joan at the end of that on the TV component.

I haven't seen that one.

Yes, so there's a number of print out of home and TV, and it is along the brand promise of where you matter most.

That's probably what you are referring to.

Initial feedback has been extremely positive on that.

Again, it's 30 days or less across the enterprise and TV is only 10 days old.

So we are pretty excited about it.

I think we came up with that based on customer research and the capability of taking our promise to the next level to deliver on customer satisfaction.

I will also touch a little bit on EV-DO in Milwaukee.

We have -- our results in that market launch have been extremely positive.

We are exceeding kind of our objective relative to (technical difficulty) we thought on subscriber counts, and the take of those products on the use of video and music on EV-DO.

We are just in the process right now of doing some comparison against some of our core data markets, relative to their revenues, as well as stick rates and things along those lines.

So we actually don't have those concrete results on specifics around that, but our customer take rate has been extremely solid since its launch and very positive feedback on the back end relative to the satisfaction levels on the EV-DO product.

Okay, let me take your question about the 700 MHz auction.

I think, as you know, U.S.

Cellular participated in both Auctions 58 and 66, and it's our intention to do so in the upcoming auction as well at this time.

In the auction, we would be principally interested to ensure that we have spectrum needed to meet the growth in customers and to ready ourselves for ultimate 3G and 4G technology deployments.

However (multiple speakers).

Yes, I'm sorry, so existing market focus?

Correct.

But as you probably know, the FCC just last week published a notice of proposed rule-making concerning the auction and has asked for comments.

There are still many specifics about that auction that are unsettled at this point, including license areas, build-out commitments for license awards, and the potential use of package and blind bidding.

So there's still a lot of uncertainties and we will need to see how the shakes out to determine our level of participation in the auction.

You also asked about data revenues.

They were 9% of service revenue in this quarter.

Terrific.

Thanks, guys.

(OPERATOR INSTRUCTIONS).

Stephen Mead.

Just following up on the data revenue, as you look at what services people are using, do you have some sort measurement of people who are actually falling off of sort of data services, and sort of talk about sort of data over the next couple of years, in terms of the -- what is the prospect for data at this point?

Well, as Steve mentioned -- this is Jay again -- this past -- we reported 9% of our service revenues and we've seen significant growth there.

You know, when you look at the data services on our easyedge portfolio, we clearly see ring tones being one of our lead downloads and continues to be that.

We actually internally are working on some initiatives to make that even easier for our customers to acquire.

So, we see some very good potential growth in that area as well.

We are working on a few other data applications that, based on feedback from our sales organization and customers, that we hope to introduce at the latter part of the year.

We think very much that data will continue to have very solid growth in our footprints, in particular around some of our youth demographics.

And of course two other areas that are -- SMS has just been comic in its takeoff.

It just continues to grow.

We actually saw through some system changes we did to make it easier for our customers to utilize our picture messaging service that we are now starting to see some uptake and good usage in the first three months of this year on picture messaging.

So, we see some very good upside there as well; that's starting to take off.

So those three things combined, we feel very positive about that future growth in the data arena continuing.

Okay.

Then on the cash flow standpoint this year, how much of the cash flow is geared around sort of sell sites and sort of the more physical aspects of your infrastructure?

How much of it is more kind of, say, technology-based?

So, Steve, you are putting that question in the context of CapEx and how we are allocating it around the Company.

Is that what you meant?

Yes.

I'm not sure I totally understand question, but the majority of the CapEx expense would go towards sell sites as opposed to other areas.

Sell sites and switching.

Cell sites and switching infrastructure.

Just how does it break out sort of roughly?

If you are talking about whether we are investing in new technologies -- this is Jack Rooney -- investing in new technology in the network, we are not expanding our DO footprint at this point, which would be the next major surge in technology investment.

What we are doing is expanding our coverage and increasing our capacity in certain areas to accommodate new customers.

We have a small amount of our CapEx that goes into retail stores, etc., but the bulk of that expected (multiple speakers) 615 million is going into the network.

Then, the EV-DO, you know, the Milwaukee kind of test, say, if you roll that out further, what kind of implications does that have on CapEx?

Well, we really don't know.

It depends on the nature of the roll-out.

If we roll it out uniformly across the network, our current estimate is at probably around 200 million to 250 million.

Even that is sort of speculative, because the rate at which the price of that equipment is coming down, we've already saved a couple of hundred million from what we would have put into the network if we had to do it a year ago.

So I mean, it's coming down nicely.

The other thing is whether we're going to make it a uniform across-the-board roll-out or whether we're going to go into our population centers like Chicago or St.

Louis or Oklahoma City or whatever and deploy it there.

So really, it's -- our planning is not formulated enough that we really even know exactly what we're going to do.

Then in terms of market-share gains, as you look at sort of your larger cities, how are you doing at this point in terms of just the share of the business in those markets?

Well, obviously, the new markets, as we categorize them, are doing very well.

That's part of the margin improvement you're seeing in the results.

We really are very, very pleased with the results of our new markets and we expect them to continue to grow.

We see very solid leading indicators that we measure in every one of our markets.

To Jack's point, our new markets are doing extremely well on those same indicators as well as the growth really this quarter came across all of our markets.

Okay, thanks.

There are no further questions at this time.

Do you have any closing remarks?

No, Stephanie, if there are no other questions, we will go ahead and end the call.

We thank everybody for participating this morning.

If you have any additional questions, you can always reach me in my office.

Thank you all.

This concludes today's conference call.

You may now disconnect.