美國無線通訊 (USM) 2007 Q2 法說會逐字稿

Good morning.

My name is Cheryl Lynn, and I will be your conference operator today.

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

Cellular second quarter earnings 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) I would like to turn the conference over to Mark Steinkrauss.

Sir, you may begin.

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

We have a lot of cover today so we're going to move along quickly.

With me on the all are Ken Myers, Executive Vice President and CFO at TDS, Steve Campbell, Executive VP, Finance, CFO and Treasurer, U.S.

Cellular, Bill Megan Executive VP, Finance and CFO at TDS Telecom, all of whom will offer some prepared comments and with us as well is Jay Ellison, Executive Vice President, Operations at U.S.

Cellular.

Several of our speakers are at remote locations today, so bear with us should we have any transmission issues.

A replay of this teleconference will be available at 1 p.m.

Chicago time today and will run through midnight, Wednesday, August 8th.

The replay number is (800)642-1687 pass code 11759028.

For international calls the number (706)645-9291, same passcode.

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

Cellular website at uscellular.com.

The webcast will be available for the next two weeks, after which it will be made available in the conference call archives and remember archived calls are not updated.

We will be making some forward-looking statements today, so please review the Safe Harbor paragraphs in our releases, and the more extended versions on our websites, and in our filings with the SEC.

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

Cellular filed 8Ks.

The 8Ks include the press releases we issued this morning and some additional information and I encourage you to take a look at these documents.

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

U.S.

Cellular has posted their release to their website as well.

You will also find posted on our website additional information, a reconciliation of non-GAAP financial measures that may be used by management when discussing 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 section of both our websites.

Ted Carlson and I will be meeting with investors in Europe September 17th through the 26th and with investors in Boston on Thursday, September 27th.

If you have an interest with meeting with us, call me or send me an e-mail.

Before I turn it over the Ken, let me remind you of a couple of items so that you may update your models.

A week or two ago Verizon made a offer for the shares of Rural Cellular Corporation, and said that pending various approvals, it expected the transaction to close in the first half of 2008.

Please recall that U.S.

Cellular owns approximately 371,000 shares of Rural Cellular and TDS owns approximately 349,000 shares.

U.S.

Cellular and TDS' Rural Cellular shares were never monetized and just to remind you our tax cost basis is quite low for these shares.

Also, in the quarter just ended, TDS received a dividend of 128.5 million from Deutsche Telecom, versus 120.3 in Q2 a year ago.

For your models for 2008, the amount of DT dividends will depend on how many shares we hold at record date, the amount of the dividend declared, and the euro conversion rate at that time.

There's a very good maturity schedule for the forward contracts in the 10Q, under Note 12 and notes the consolidated financial statements.

This is always a confusing statement, so I encourage you to look at the that note in the 10Q, I think it will help you out quite a bit.

That being said, I'm going to turn the call over to Ken Myers.

Thank you, Mark.

Good morning.

And thank you for joining us today.

We are pleased to report another quarter of strong operating results at TDS.

These operating results drove a 12% increase in revenues and produced a 43.5% increase in operating income.

U.S.

Cellular's results, which Steve Campbell will discuss in more detail, were the primary driver to the revenue increase and a substantial driver to the increase in operating income.

While TDS Telecom, through excellent cost control programs, increased operating income despite a small decline in revenues.

Bill Megan will discuss those results.

Before getting into the business unit results, there are a few items below the operating income line that I would like to review.

First, interest expense at $55.2 million was actually down 6.8%, despite higher interest rates, reflecting the effect of retirement of $200 million of debt a year ago and the repayment of all amounts outstanding on U.S.

Cellular's revolver, which totaled $35 million at the beginning of the year.

Second, the Company reported $137.9 million gains on investments.

During the quarter, U.S.

Cellular delivered shares to settle the prepaid forward contracts entered into five years ago and then sold its remaining Vodafone shares.

Those transactions generated $131.7 million of recorded gains.

Additionally, TDS sold its holdings of VeraSign, which produced another $6.2 million of gains.

To date, we have settled all the maturing prepaid forward contracts by delivering shares and will continue to evaluate our options as each tranch of contracts approach maturity.

Our current expectation is that we'll continue to deliver the shares.

During the quarter, we recognized a $358 million loss on the fair value adjustment, primarily on the derivatives on the Deutsche Telecom stock held by TDS.

As you may recall, the change in fair value of the derivatives goes right to the income statement each quarter, while the change in the value of the related marketable securities does not go through the income statement until the contracts are settled or the shares are sold.

As a result of the gains and the fair value adjustments, the effective tax rate was just over 55% in the quarter, compared to 39.6% a year ago.

However, the effective tax rate on operations, that is excluding the gains in the fair value adjustment, was a more normal 40.4%.

Last year the equivalent rate was 40.9%.

For the quarter, TDS reported a net loss of $8.6 million or $0.08 per fully diluted share, due primarily to the fair value adjustment.

Excluding the gains on marketable securities and the fair value adjustment, the Company generated $142 million or $1.21 per share of net income from operations, up over 22% from similarly computed amounts a year ago.

Over the last year, the combined TDS companies have continued to grow operating profitability and generate increasing cash flows.

The Companies ended the quarter with $1.3 billion of cash and cash equivalents after repaying $235 million of debt over the last year and repurchasing $12.6 million of TDS special common shares in $49.1 million of U.S.

Cellular common shares.

I should point out TDS was not eligible to repurchase until just before the end of the quarter.

Recapping, the Company continues to produce strong operating results, is increasing its profitability and has substantial financial flexibility.

Over the last year, we have reduced debt levels in order to repurchase shares.

TDS still has almost $237 million of authorization remaining on its current repurchase program which we'll use to capture the value inherent in the discount we see in the special common shares.

Let me turn the call over to Steve Campbell, CFO at U.S.

Cellular, to talk about the operations.

Steve.

Thank you, Ken.

Good morning, everyone and thank you for joining us.

As Ken mentioned, and as I'll describe in more detail, U.S.

Cellular had an excellent second quarter.

Please note the comparisons made in my comments generally will refer to the results for the second quarter of 2007 versus the second quarter of 2006 unless I indicate otherwise.

U.S.

Cellular's total subscriber count reach 6.010 million as of June 30th, up 5% year over year.

Retail net activations for the second quarter were 71,000, up 45% year-over-year, driven by higher gross additions and continued strong results in the area of churn.

Retail net activations included 78,000 post-paid customers where we focus, offset by a net reduction of 7000 prepaid customers.

At June 30th, post-paid customers were approximately 94% of total retail customers.

Total net activations for the second quarter, including both retail and reseller customers, were 37,000 compared to 48,000 in the prior year.

As we've said before, the reseller market is not an area of focus for us.

The post-paid churn rate results for the second quarter were again very strong.

The retail post-paid churn rate was 1.4% and the total postpaid churn rate, including reseller customers was 1.9%.

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

First, continuing 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 June 30th, roughly 50% of our postpaid customer base was on these plans.

The second factor in our strong results is our continually expanding offerings of handsets and services.

During the first half of 2007, we introduced six new handsets and expanded our Easy Edge data service offerings, and just last month U.S.

Cellular introduced Tone Room, a new application that provides customers with one stop shopping for browsing and purchasing ring tones, either on their phones or on the web, and Your Navigator, a new application that provides customers with both visual and audible, turn by turn directions whether in a car or on foot, at a fraction of the cost traditional in car GPS navigation systems.

The third factor is our relentless focus on customer satisfaction.

We know from our surveys and other customer related research that overall network quality remains the Number One criteria that drives customer satisfaction, and so we are committed to ensuring that our customers have access to the best wireless network in the country.

In the first half of 2007, U.S.

Cellular received the prestigious J.D.

Power and Associates Award for highest call quality in the North Central Region for the third consecutive year.

And so far we've added 215 new cell sites to our network which now has more than 6,100 total sites in service.

U.S.

Cellular's financial performance during the second quarter was very strong, reflecting higher revenues and improved profitability.

Total service revenues for the quarter were 906 million, up 14.5% 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 was higher ARPU, average revenue per customer, which grew more than 8% year over year, to $50.42.

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

Data revenues for the quarter grew 77% to 85 million and represents a 9% total service revenue.

Inbound roaming revenues for the quarter were 48 million, up 24%, reflecting higher minutes used.

Service revenues for the quarter also reflected an increase of $5 million to $21 million in the amount of funds that U.S.

Cellular receives as an eligible telecommunications carrier.

The level of ETC funding that the Company will receive in the future somewhat uncertain, particularly in light of the recent recommendations 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 cannot predict what the FCC might ultimately do here, over the short term we expect ETC fundings to continue at about the current level.

System operations costs of 176 million, up 17% driven by a 10% increase in the number of cell sites in service and a 19% increase in the average minutes of use per customer.

Factors which helped to hold down costs in the 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 372 million, up 8%.

Major components of this increase were higher selling expenses associated with growth in customers and revenues and high G&A expense [displayed at the Universal Service Fund Contribution].

Remember that USF contributions are largely offset [by] revenue.

Operating income in the second quarter was 123 million, up 56% due to the combination of higher revenues and effective management of cost.

Service revenues increased by 14.5% while total operating expenses increased by only 10.6%.

Note that operating income reflected a $5 million gain on sales of accounts receivable written off in previous periods which is included in SG&A and a $2.1 million loss on impairment of intangible assets which is included depreciation, amortization, and accretion.

Operating cash flow totaled 272 million or 30.1% of service revenue.

Dollar amount is up 24% year over year and the margin increased by 2.4 percentage points.

Below the line, total investment and other income for the second quarter 118 million, up from 8 million in 2006.

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

Investment in other income also included a loss of approximately 18 million related to the fair value adjustment on derivative instruments.

In the prior year quarter the loss on the fair value adjustment was only $1 million.

As we've disclosed previously and as Ken mentioned in his comments, changes in the fair value of the derivative instruments are recognized in statement of operations on a current basis contributing to volatility and reported earnings.

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

Forward contracts related to the Vodafone ADRs held by U.S.

Cellular matured on May 7th.

As Ken mentioned, at that time, U.S.

Cellular delivered Vodafone ADRs in settlement of the forward contract and then sold remaining share.

As a result, at June 30th, U.S.

Cellular no longer owns any shares and had no remaining obligations under the related forward contract.

The Company recorded a $131.7 million pretax gain of the settlement of the forward contracts and a sale of the remaining shares.

This gain is reflected in investment and other income.

Net income for the second quarter was approximately 148 million or $1.67 per diluted share.

As I stated earlier, the Company is generating strong cash flow from operations.

For the second quarter, operating cash flow was $272 million.

The Company used this strong cash flow to fund capital expenditures of 137 million, fully pay down its revolving credit facility borrowings of $60 million, and repurchased 670,000 common shares for $49 million.

The cash balance at the end of the quarter, $146 million.

The Company did not launch any significant new markets in the first half of 2007, and we have no current plans to do so for the remainder of this year or next.

Instead, we expect to remain focused on increasing customers, revenues, and profitability within our existing market.

However, we will of course continue to consider attractive opportunities to expand our footprint as we did with the acquisition of the Iowa 15 market earlier this year.

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 ideal customer experience to our customers.

Looking ahead, the remainder of this year, we expect strong trends in revenue and profitability that we've seen in the first six months of the year to continue.

Accordingly, we are raising our guidance for full year 2007 revenues and operating income at this time.

The updated guidance, which is contained in today's press release, is as follows.

For service revenues approximately $3.6 billion and for operating income, 395 to $445 million.

Previous guidance remains unchanged for net retail activations at 375 to 425,000 or depreciation, amortization, and accretion at approximately $615 million, and for capital expenditures at $615 million.

That concludes my prepared remarks this morning.

I'll turn the call over to Bill Megan, who will discuss second quarter results for TDS Telecom.

Thank you and good morning, everyone.

I'd like to begin with a discussion of Telecom's operating results for the second quarter and then discuss the status of several key initiatives we have underway in support of our strategy to be the preferred broadband provider in our market.

For the quarter, combined ILEC and CLEC declined 1% while operating cash flow increased by 2% compared to second quarter results a year ago.

I'll walk through the ILEC and CLEC results separately now.

ILEC revenues decreased 2% compared to the second quarter of 2006.

The decline is due primarily to lower compensation for network access, including compensation from state and national revenue pools and decreased local service.

This decline was mostly offset by the goods and revenues related to DSL and long distance customers.

Operating cash flow decreased 4% Due to the decline in revenue as well as increased costs associated with the growth in DSL and long distance customers.

ILEC access line equivalents, access lines adjusted to reflect voice grade equivalents, grew 2%.

Physical lines, on the other hand declined by 27,000, that's about 4.3% from the second quarter.

Reductions in residential second lines accounted for 23% of the year over year decline, driven in part by conversions to DSL.

Telecom ended the quarter with 29,800 second lines of service, that represents approximately 5% of our total physical access lines.

Let me add a little bit of color to the discussion of access line losses.

Fundamentally, the question is, where do our market stand, vis avis cable and wireless competition?

We've been fortunate that competition has come more slowly to our markets than others.

We operate a portfolio of suburban, small town, and quite rural properties, and because of demographic densities, some of the competitive intensity has been deferred until recently.

It's here now and we feel it in the residential segment.

Consumers have significant alternatives available in wireless for voice service, as Steve described additional services on the wireless side.

Cable competitors have been strong in offering high speed data and now are picking up strength offering a triple play with telephony.

There are a lot of ways to measure this, but we estimate that cable companies cover approximately half of our ILEC residential lines currently.

As a result, we've seen an increase in physical line loss.

As I mentioned, year on year line loss in the ILEC was 4.3%.

That's an acceleration for us.

The full year 2006, we ran about 3% line loss.

However, it remains better than the industry is experiencing generally, and in addition there are a few things that should temper how we think about that percentage.

Let me mention a couple.

A portion of our line loss is due to customers taking DSL service and removing their second line.

Line 2 losses over the past year have been 6200 of the 27,000 physical line loss year on year.

That transition, though, for our customers to move to high speed data service is a very good development, though it does adversely affect this line metric.

That decline is roughly 100 basis points of the total line loss.

Another element, also included in our current line figures is a reduction of 2900 physical lines that translates into 7100 equivalent lines.

Those are due to unusual events.

We've remove lines that TDS itself used to provide dial-up internet access and business office connectivity.

The capacity related dial-up was removed in line with the decline in customers using dialup service.

And also we removed lines in accordance with our decision to close certain of our local business office and move to a customer service process.

These events are an additional 50 basis points of the physical line loss.

Let me turn to talking about DSL.

DSL customers increased 52% to 127,400.

This is important as we drive to be the preferred broadband provider.

Many of our DSL customers migrate up from dial-up service and that accounts for a portion of the 24% decline in dial-up service that we reported.

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

At June 30th, 84% of our physical lines were equipped for DSL service and we have invested to enable higher speed services as well.

A year ago, 49% of our high speed data customers had 1.5 megabit service with only a few customers at higher speeds.

Currently, 68% of DSL customers have 1.5 or faster and 31% are at speeds between 3 and 15 megabits service.

Long distance lines increased 5%.

LD had a penetration of 58%, that's up from 53% a year ago.

Cash expenses held at the same level as June in June 2006.

This is a result of increases in the cost of providing DSL and long distance services, offset by the cost control efforts that Ken alluded to, particularly focused on our back office operations.

In the case of long distance, costs increased both through the growth in number customers using our service as well as increased usage stimulated by our calling plans.

While our long distance usage has gone up, we have taken action to drive costs down with changes to our network configuration and with new wholesale agreements.

Turning to the CLEC side, revenues increased by 2% primarily due to improved realization of net access revenues.

Equivalent access lines declined 1%.

This is as expected as we execute strategy to emphasize small and medium sized businesses and significantly lessen our marketing to the residential segment.

Operating cash flow increased by 4.6 million.

Margin expansion has been driven by cost reduction initiatives, including combining the support functions of our ILEC and CLEC operations.

As we've integrated these functions, we've been able to lower support headcount by 9% over the past year while maintaining high levels of customer service and customer satisfaction.

For both our ILEC and CLEC, we continue to emphasize providing our customers with exceptional customer service, as well as access to advanced services.

Let me update you briefly on several of our key strategic initiatives.

First, with respect to our deployment of video, we are continuing development of our terrestrial based trials in two markets in Tennessee.

These markets, one near Nashville and the other near Knoxville, have attractive demographics and good growth.

Right now, we have about 300 customers trialing the service.

A broader commercial rollout is awaiting delivery of a set top box that will have both HD and DVR capability.

We are awaiting that from our vendors.

We do have another video initiative and more broadly impactful than the terrestrial video trials.

We are redoubling our efforts as an agent for Dish Network.

In July, in most of our competitive markets, we are offering free Dish for one year to customers agreeing to take our voice and data to complete the triple play under a two year contract.

Our experience has been that when customers sign up for the triple play, churn is lowered significantly, we expect that to continue with this promotion.

With respect to our fixed wireless initiative, our technical trial over in (inaudible) in Madison continues, Madison, Wisconsin, continues to produce encouraging results.

We have two towers operational and several more towers will be brought online in the third quarter.

Commercial availability of wireless service in Madison for both consumers and business is expected in the fourth quarter of this year.

Concurrently we continue to operate data service over unlicensed spectrum in our Fox Valley, Wisconsin market on a commercial basis and intend to add Voice Over I P service in this quarter.

Let me also update you on our guidance.

We are modifying guidance with respect to revenues and capital expenditures.

We expect combined Telecom revenues to be between 850 and 880 million.

This is a decrease at the top end of 20 million.

Notwithstanding this change to revenues, we expect combined Telecom operating cash flow to remain unchanged at 285 to 305 million.

We are revising our expected range for telecom capital expenditures upward by 10 million to a range of 120 to 140 million.

This increase in investment is driven by our belief that a competitive network and a robust service offering is essential and we can win as customers choose their high speed data provider.

Our increased capital expenditures are targeted, ensuring we have a competitive network, that we have an efficient and highly automated back office, and that we have a robust set of IP based services to offer both commercial and residential customers.

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

Thank you, Bill.

Before I turn it over to you for a Q&A session, please let me remind you that both companies expect to file their 10Qs with the SEC later today.

Cheryl Lynn, you can start the Q&A session.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Bill [Cusaid].

Can you hear me?

We can hear you.

I wonder if we could talk about Rural Cellular.

Did you look at this transaction because it's sort of in your territory or a good part of it and why or why not take a run at it?

I didn't quite hear the last half of it.

I was wondering if you had looked at Rural?

Mark, let me try this one.

We've looked at various different companies out there and as we've said in the past, the challenge for us is that many of the companies had some properties that were attractive to us.

But those parts that are attractive to us were typically less than 50% of all the operations and so for us to buy a company public market value where only 50% is strategic wouldn't really be our kind of deal.

That helps.

And second of all on the wide area plan seems like you're seeing a lot of uptick there.

Can you talk about how much off-net roaming you're seeing.

Is it staying pretty much within the 30 minutes or is that becoming a driver of revenue over and above and is this a higher margin product as well as higher ARPU?

I'll try to tackle some of that.

We haven't seen a tremendous change in both our national rate plans and with the introduction of the wide area plan which has those small roamer packages attached to it.

A very large change in our customers' roaming patterns since we've launched this and we're analyzing this pretty closely every month.

The margins on both of those plans -- there's probably a little better on those wide area plans because the balance between the national kind of wide are is kind of what we're looking at on those roaming minutes, when we look at them the wide areas stand alone is probably a little better margin plan for us.

Okay and you talked about the roaming patterns changing by a lot.

I said they have not.

That's great.

Thank you.

Your next question comes from the line of Simon Flannery.

Thanks very much.

Good morning.

Could we get into wireless data in a little bit more detail.

Can you give us a sense of what were the key drivers behind the 77% increase, ex blackberries?

How many customers are now (inaudible) and any comments on the 700 megahertz option?

I think as we said, data revenues for the quarter were $85 million.

Up 77%.

It's grown to about 9% of service revenue.

I think there's a couple of factors there.

One is wireless companies in general are doing very well with data.

In fact we think there's even more room.

Our data as total service revenue really is at the low end (inaudible) many of the competitors are doing.

So we see some additional growth there.

The big factor is we have a growing suite of applications.

Aimed applications.

I think as well, Jay commented earlier on this, our sales associates are getting increasingly comfortable with selling data and I think our [attachment rates are increased.] I think the last thing I'd tell you the text messaging, or our short messaging service, is you know, enormously popular with many of our [customers] and in fact, (inaudible).

I'll put a little more color commentary around it.

Text message is clearly (inaudible) -- big chunk of that is revenue growth.

Ring tones, wallpapers, follow that in second and third place and we are seeing continued growth there.

We are seeing very great results out of the box with our Tone Room that Steve mentioned, which is the consolidation into one store front of all our ring tone vendors and mutual capabilities of customers to either do it from from the website or from their handset and that's just launched, and I think Steve's point about our associates getting extremely comfortable with the product has clearly shown -- or helped us with some of that increase.

As an example earlier this year we introduced a free application My Contacts Back-up which is what we encourage our associates to show customers, which allows customers to take their entire phone's phone book and put it on a site and if they lose their phone they can then download the contacts back up and that's one of the tools we're encouraging our associates to use in the store to demonstrate the value of our data product portfolio.

700 megahertz.

As you know, from our previous discussions we've said it's our intention to participate in the auction and that's still our intention.

However, that said, the Company needs to complete a thorough review and analysis of the auction rules that were announced by the FCC last week.

Based on some of the summaries and early commentaries that we've read, a significant portion of that spectrum could be encumbered with mandates that might significantly reduce its attractiveness to us and other interested bidders.

Currently our intention but more analysis to determine at what level.

Further as we've indicated before, we're principally interested in the auction to ensure that we've got the spectrum we may need to meet growth in customers, voice and data usage going forward, and to ready ourselves for 3G and 4G technology deployments.

Before we go to the next question, Bill, I don't know if you can adjust your handset.

We believe some of the transmission problems are with your handset.

So if you could pick it up, that would be helpful.

Your next question comes from the line of Will Power.

Thanks for taking the question.

A couple of questions on the wireless side of the equation.

It looks like EBITDA margins were close to 30%, which is up year over year, pretty flat sequentially.

Very nice ARPU growth year-over-year.

How should we think about margins progressing over the next couple of years?

Can you get to a mid-30% margin?

On the cost side, what are the principal levers to get you there?

As far as margin improvements in terms of what you can expect, I think the guidance we would give you the what's in the guidance.

As we said, we've had very nice growth in operating cash flow margin during the first half of the year.

You're right, it's right about 30%.

It's up almost 2.5 percentage points year-over-year.

As we currently see things, we expect the margin for the full year to be within the range that's established by the updated guidance.

So at the midpoint of that guidance, the margin for the full year would be about 29%.

At the higher end obviously, it would be a little higher than that.

We think we're off to a very good start for this year.

But there are still a number of uncertainties in this market.

Competitor pricing actions, new products, and in fact advertising spend, could have a big impact on our results in the second half of the year.

So you know, we're not providing guidance beyond the full year.

But we're looking at something in the range of 29, maybe a tad higher than that for the year.

And then maybe a clarification or housekeeping question.

I think in the release, you had alluded to a change in reseller accounting.

Reseller churn accounting and I wonder if I could give us a little bit more color on that.

What would the churn rate have been on the old methodology?

Just so I have apples to apples.

Let me say first that we think the better metric to focus on the the retail post-paid churn rate.

Because that is really our strong focus market.

Reseller is not a big area of focus for us.

That said, I'll try to describe the change succinctly.

As we've disclosed in our SEC filings for a number of years, reseller disconnects were previously reported only when the customer number was disconnected from U.S.

Cellular's network.

And the reason for that is that the reseller oftentimes could disconnect a customer but then hang on to the number and reuse it.

So only net disconnects when the numbers were disconnected from the network were reported.

The current operating practice that we have with our reseller partner is that they will disconnect a customer after the account is -- I'll call it in suspension for 90 days, and that disconnect is reported to U.S.

Cellular and it's reported as a disconnect in that period.

So that's essentially the change in reporting.

We're now reporting at reseller activations and disconnects in the period in which they occur.

There won't be disconnects that are in effect deferred in their reporting because the reseller hangs on to and reuses the number.

You know, on a comparable basis, it's difficult to get a precise number given the change in the underlying operating practice and data.

But we think that the comparable number for last year would have been about 2.2%.

Consistent with the decline in churn for the retail post-paid, there would have been a decline on a comparable base for total post-paid churn as well.

Great.

Thank you.

Your next question comes from the line of Michael Rollins.

Hi.

Was wondering if you could give us some generalizations around DCPU and GPGA, just in terms of how the competitive environment is going to influence those measures over the next 12 months in your view.

And within that context, if you could talk a little bit about, on the voice ARPU side what you think if you fast forward a couple years from now, how do you think that will work relative to minutes of use?

Do you think there's significant upside to voice ARPU over time, or is it a situation that you just start giving away more minutes to keep voice ARPU where it is.

Which, until recently, has been more of the industry practice.

Thanks.

Let me -- this is Jay and I'll try to take a little bit of the back half of it.

Over the next several years, we think there will be some voice revenue decline, but offset by some data ARPU increases.

I think this year, as Steve reported, we've seen actually a little kind of finger in the dike activity, from the fact that our acceleration of sale of our portfolio of rate plans have really kind of been much better than we had anticipated at a faster pace and that's helped us on the voice side.

But we've also seen very good acceleration on the data side as well.

And I think we probably see a little bit of maybe shift in that over time.

I'll give you my $0.02 on the CPGA and then turn it back to Steve.

I think Steve also alluded to in his comments relative to some uncertainty of the back half of the year relative to, that always impacts CPGA, pricing, promotion, advertising levels, clearly every one of us can turn on the television and there's a tremendous amount of spend in this category going on.

And we are in the process of recalibrating our advertising as we speak to be -- to get our fair share out there of voice.

And I think that front won't discontinue.

But that is one of the biggest drivers out there today of CPGA is your share of voice and your advertising that you've got going on.

Coupled with the other two things that I've mentioned.

And finally, we are clearly seeing in the handset arena as Steve mentioned we introduced six new handsets first half of this year.

I think back half of '06 there was something like 20-some handsets introduced.

We have seen a shift in customers buying patterns up to what we call better and best categories, which carry a higher price out there in general because of the increased feature functionality.

That all gets driven through on the promotional pricing side.

That's what I thought would be two seconds of windage, going on longer.

I think those are the two key factors that we would have cited.

Advertising, I think as we look out second half of the year we're expecting a bit of an uptick in our advertising spend from what we had in the first half and also the handsets.

When you look at the statement of operations, you can see that the subsidy on handsets is up a little bit sequentially about 6%.

And it's up year-over-year about 8%.

So as Jay said, I think handset competitiveness related to handset pricing and promotions will continue to be a driver of CPGA.

And just one quick follow-up.

Thank you for all that help.

Do you think -- I think, CPGA, if I'm looking at the reconciliations correctly from last year, I think the peak was in that low $500 range.

Do you think that you could retest that type of range as you look at some of the second half impacts and you focus on taking the share that you want to take.

I'm sorry.

Do you think that you'll retest $500 level last year in terms of CPGA as you look out over the next 6 to 12 months.

I think that's very possible that we could.

Good help.

Your next question comes from the line of Ric Prentiss.

Good morning, guys.

Couple of questions for you.

First, following up on the 700 megahertz auction.

Can you speak up a little bit?

We can't hear you too well.

I'll try, Mark.

Still fighting a summer cold here.

On the 700 megahertz auction.

Can you talk a little bit about, I think you alluded to focusing in your existing markets as opposed to expanding outside the markets and if that's the case, what are your thoughts about availability of the equipment?

Not just clearing the spectrum and the mandates that might be on them, but just as far as what type of frequencies would your need in your infrastructure and your handsets?

I think I'll let Ken maybe comment on that first part.

I'll talk a little bit about hearing about the handsets.

In terms of the I'll just do the handset thing.

We are in the middle of our annual planning process with all of our OEMs and we just finished one up yesterday with one of the major ones.

We are dialoguing very similar to the comments Steve made about our position on the 700 megahertz we are in dialogue with the OEMs about the availability of equipment and we're hearing at this point that by the time that the spectrum is available and build can take off, that there will be handset availability.

But at this point, I would argue that we're at about 35 to 50,000-foot of discussion with the OEMs at this point.

Okay.

And the open access requirements on a part of the spectrum, what are you thoughts as far as open access coming to wireless?

It seems like the Commission is trying to encourage unlocking the networks a little more.

Longer term, do you think we'll see the subsidies of handsets maybe drop down over time, to where if people want to change networks you're not going to give them 100 bucks or 120 bucks off the handset.

It's just too hard to say.

This is getting a tremendous amount of press in the last two to three weeks and we have to sit in our strategy meetings and have some further dialogue on it.

It's just too hazy for any of us to put an answer to that one.

And then, on the M&A front, you mentioned how you owned a bunch of Rural, at both TDF and USM.

Ken, maybe you can update us as far as what you see going on in the M&A environment.

Are you guys a buyer, a seller, on the sidelines or what are your thoughts about the M&A environment in particular as the 700 megahertz auctions come up?

I think we have looked at both wire line, and wireless opportunities.

As I said before, Iowa 15 is a great example of things that stay within our wheel house, that is something that is immediately adjacent to our footprint.

When we talk about an RCC that has a large part of its properties overlay where we already operate such as new England, it's not kind of in keeping with our risk profile to buy 100% of a company public record value only to have to divest some large portion of it.

That kind of fits with our description of most of the transactions that have been done recently.

But we'll continue to look and see if there's opportunities as a result of those deals or other ones to strengthen the footprints we already have.

Great.

Good luck, guys.

Your next question comes from the line of David Janazzo.

Good morning.

We've had the iPhone out there for a couple of weeks now.

Any thoughts or observations in how it's playing in your markets and how it may be impacting you?

This is Jay again.

Obviously, I think everybody saw the initial reports on the initial week in sales.

But I have to say that in the latter weeks, in talking to our retail store leaders, the steak still isn't walking out of the butcher shop so to speak.

As we ask for reasons customers are leaving, I haven't heard a lot of screaming relative to the iPhone.

As we've all read in the press, it still has some gaps in it, both its speed on the network side and some things along those lines.

So at this point we're keeping our eye on the activity around it.

But again back to o our strategy, I've encouraged our associates, if there's issues relative to what's going on with iPhone customers or wanting of iPhone versus (inaudible), do it from is customer perspective, not from the general perspective or what we think is going on.

Let's keep focused on our customers and that's still reflective of our strong churn results etc.

We're keeping our eye on it.

But at this point I haven't seen a big implosion so to speak.

Thank you.

Your next question comes from the line of Kevin Roe.

Thank you, good morning.

Sticking on the U.S.

Cellular side.

With Verizon Wireless buying Rural, as you know, they will be over-building Rural's GSM footprint in the Northeast with CDMA.

Can you give us a sense of how much roaming revenue is at risk there when that CDMA network is overbuilt?

And secondly, on roaming, for the quarter you mentioned it was up 24% year-over-year.

I think that's the biggest increase you've recorded.

Besides just straight minutes of use, is data a big driver in the quarter of that increase year-over-year?

And lastly on resell or subs, would you expect that number to continue or decline in the second half?

Thanks.

Let me take the first part of the question on Rural Cellular.

I think that the short answer is I think there's still a lot of uncertainty about in a.

As you know, the acquisition as its announced is expected to close in the first half of 2008.

In fact, there was a report from a Verizon Wireless spokesperson yesterday who said that they haven't decided yet how they're actually going to handle putting together the two networks.

And that if the company does in fact close the transaction in the first half of 2008, it could be another 18 months beyond that before a network transition is completed.

So I think there's a question of what might happen there.

We do have some inbound roaming revenue from Verizon Wireless in states where RCC operates.

But remember that for us our total inbound roaming revenue is a fairly small percentage of our total service revenues.

I think for the first half of this year it was around 5%.

In any case, we wouldn't expect that this acquisition would have a very significant impact on our business.

Roaming revenue I think you asked or you noted the increase and asked about the driver there.

I think minutes of use is by far the larger driver there.

Data is a component, but a small element to that.

The third was about the trend in resellers.

Do we expect them to continue to decline?

I think we do.

I don't have a prediction on rate of decline.

But I think net we would expect there to be continuing defections in the reseller business.

Very good.

(OPERATOR INSTRUCTIONS)

If there are no other listeners queued up with questions, we'll end the call.

You do have a question from Stephen Mead.

We'll take that question.

Mark, thanks.

We never forget you Steve.

I disconnected myself by mistake and stuff.

Just the populations that went from 56 million to 81 million.

What caused that?

And then looking at the balance sheet there's no sort of change in the balance sheet associated with that.

Is that a significant thing or what is that?

What that is is that in the second quarter of 2007, the FCC awarded 17 licenses for which Carroll Wireless, our limited partner, was the winning bidder in Auction 66, and so that increases the Pops addressed by owned licenses from that a $55 million to the $81 million.

There's a lengthy paragraph in the Q that addresses that with more detail.

That was the principle issue.

And then the other question is, when you look at the guidance, in terms of adds, customer adds in the second half of the year versus the second half of last year.

It's a significant bump up.

From just a market by market or generally, what's going on in terms of what was going on last year gives you the confidence this year?

I think a couple of things.

This is Jay again.

In the earlier comments that really we see carrying forward for the back half of the year.

Actually, about a year ago we introduced a new pricing portfolio.

And that has, as I said in some earlier comments, had faster base and new customer add rates for us.

So I think that's a big component.

Our pricing is very competitive.

The vertical features that we offer on our pricing is extremely competitive.

And our family pricing strategy has also become an extremely aggressive and competitive opportunity for us.

We also see that our handset selection has become much more robust.

We've, as I mentioned, between the back half of last year and probably by the end of this year, all said and done, we'll have somewhere introduced close to maybe 40, 50 brand new handsets.

Something line those lines.

A very robust product portfolio coming in as we speak for the back half of the year and some accelerated activity in the marketing and product area that we've actually pulled forward that will we feel very strongly will have some implications on that to contribute overnight 27% year-over-year or increase in subscriber adds.

That's all the variables that add up to it for us.

Jay -- There was one other point and that was last year the third quarter is when we integrated the Kansas and Nebraska markets and we did that billing conversion and we actually had lost some of those customers, and so that's a one time event that we won't have this year.

That's correct.

Thank you, Ken.

And then the minutes of use growth.

How much of that 585 minutes of use -- what is data doing in terms of the minutes of use number?

We can't put it in context of 585.

The 858 minutes of use versus a year ago?

Right.

If you look at minutes of use year-over-year growth, is data growing -- is data really driving that number at this point or what's happening just regular voice use?

I think it's mostly voice, Steve.

I think data is a small contributor but it's principally voice.

Cheryl Lynn, are you all done, Steve?

Okay.

Cheryl Lynn, the call has now run over an hour so we're going to end it here.

And I'm available in my office the rest of the day should anybody else have additional questions.

Thank you, so much, for joining us on the call.

That concludes today's TDS and U.S.

Cellular's second quarter earnings conference call.

You may now disconnect.