美國無線通訊 (USM) 2008 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the first quarter operating results conference call for Telephone and Data Systems and US Cellular.

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) Thank you.

I will now turn the call over to Mr.

Mark Steinkrauss.

Thank you, Michael.

Good morning, everybody.

And thanks for joining us as we wind down the earnings release season.

With me today are Ken Meyers, Executive VP and CFO at TDS; Steve Campbell, Executive VP of Finance, CFO and Treasurer at US Cellular; Bill Megan, Executive VP of Finance and CFO at TDS Telecom; and also joining us are Jack Rooney, CEO at US Cellular and Jay Ellison, Executive VP and Chief Operating Officer.

A replay of the teleconference will be available today at 1:00 pm Chicago time.

It will run through midnight Thursday, May 8.

The replay number is 800-642-1687, conference ID, 45884257.

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

The call is being simultaneously web cast on the Investor Relations sections of both the TDS and US Cellular web sites.

The web casts will be available for the next two weeks after which it will be available in the conference call archive.

Please recall that archived calls are not updated.

Some information during this call in subsequent Q&A period contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties.

So, please review the Safe Harbor paragraph in our releases and the more extended versions on our web sites as well as in our filings with the SEC.

Shortly after we released our earnings results earlier this morning, and before this call, TDS and US Cellular filed 8-K's.

The 8-K's include both press releases we issued this morning and some additional information and I encourage you to take a look at these.

Both press releases have been posted to the TDS Internet home page and the US Cellular has posted their release to their web site as well.

You will also 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 teleconference.

As well as some of the company's guidance for 2008.

Two of the reconciliations are for net income and diluted earnings per share.

The reconciliation provides net income, EPS, less the effect of gains and losses on investments and financial investments.

All of this information is 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 web sites.

Please note that the comparisons made by the speakers today in their prepared remarks, are first quarter year to year compares unless otherwise indicated.

We have added a consolidated statement of cash flow to the press release to allow you to access some key information more quickly and will continue to provide this information going forward.

We will be presenting at the following investment conferences all within the next month or so.

Next week, May 13, at the Baird’s Growth Stock Conference in Chicago.

May 14, at the Morgan Stanley 13th Annual Communications Conference in Washington, D.C.

May 28, Lehman Brothers Worldwide Wireless and Wireline Conference in New York City.

June 9, the Deutsche Bank, the Annual Meeting and Telecommunications Conference in New York City.

And June 10, the Credit Suisse Convergence Conference in Dana point, California.

We'll also be meeting with investors in Toronto and Montreal on June 26 and 27.

If you would like to meet with any of us at these events, please let me know and we will work with the host to arrange a meeting time.

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

Good morning.

And thank you for joining us today.

I have a few comments to make before turning the call over to Steve and Bill, who will cover the operating results of their respective businesses.

Then we will all take questions at the end of the prepared remarks.

I'm pleased to report first quarter results for TDS with operating revenues and operating income each up 8%.

Quickly, we cover a few year-over-year non-operating comparisons on the income statement.

First, interest in dividend income is down about $6.5 million due to lower rates on interest bearing cash investments.

We made a decision in the fall of 2007 to move our cash investments into treasure,s knowing that while we were giving up some yields, we would be ensure that our cash was safe.

Interest expense is down over $16 million, principally due to the settlement of a number of variable prepaid forward contracts since last year.

This quarter, we delivered a substantial majority of the 30 million Deutsche telecom shares in settlement of the forward contracts which matured during the quarter and sold the remaining shares.

In the quarter, TDS adopted statement of accounting -- a financial accounting standards 159.

By adopting SFAS159, for both the Deutsche telecom stock and the related colors, gains and losses on both of these items are expected to largely offset each other which should reduce the large income statement swings that resulted from the application of SFAS133, the fair value adjustment of derivative instruments.

The impact on the balance sheet from the adoption of SFAS159 this quarter, was to reclassify approximately $500 million of unrecognized gains out of accumulated other comprehensive income and into beginning retained earnings.

As noted in our release, under TDS's current stock repurchase authorization, to date, the company has bought back 3.1 million special common shares for total consideration of $172 million.

As of the end of the quarter, there is $78.2 million remaining under that authorization.

US Cellular continues to purchase shares under its de minimus program purchasing 150,000 shares in the fist quarter.

Also during the quarter, the FCC auction spectrum in the 700 megahertz band known as auction 73, US Cellular participated in the auction indirectly through its interest in King Street Wireless LP.

King street wireless was a provisional winning bidder for, 152 licenses for an aggregate bid of $300.5 million, net of its designated entity discount which was recorded as licenses on US Cellular's balance sheet as of March 31.

US Cellular made a contribution in the first quarter to King Street of about $97 million and in April made an additional contribution of $203 million.

US Cellular financed these amounts with cash on hand and through its revolving credit agreements.

As you know, we remediated to two of three material weaknesses as of year, we continue to make progress on our vital material weakness, income tax accounting and we're working toward remediation of that on or before the filing of this year's 10-K.

For the year, we expect the effective tax rate for both companies to be approximately 40%.

Finally, we've ended the quarter with a very strong balance sheet of $1.2 billion in cash, all of which is invested in treasures.

Virtually all of the credit facilities are unused so we have a lot of financial flexibility.

With that, let me turn the call over to Steve Campbell to talk about the operations of US Cellular.

Steve?

Thanks, Ken.

And good morning, everyone.

I'll begin with a few general comments about the business and then I'll highlight some of the key results for the quarter.

The first, quarter was a challenging one for us.

Although our results in some areas were not as strong as we intended, on balance, we delivered pretty solid results.

Total customers increased to 6.2 million at March 31, up 4% from the prior year.

We added 85,000 net retail customers during the quarter.

This was down about 42% from the exceptionally strong quarter we had a year ago but on the positive side, it represents an increase of 33% on a sequential basis.

Also on the positive side, we're reporting double digit growth in service revenues and operating income and growth in operating cash flow.

Growth in data revenues was especially strong again this quarter.

However, competition in the industry continues to be intense and this is driving increased costs for customer acquisition and retention in a number of areas of our business in turn these increased costs have exerted some pressure on our operating margins..

To alleviate some of that pressure on margins, we're taking actions designed to reduce or limit growth in our discretionary spending over the balance of the year.

We're also taking steps to promote additional growth in revenues.

For example, over the past couple of quarters, we've seen increased demand for smart phones and the advanced data services that they enable.

As a result, we've decided to expand our deployment of EBDO technology and services to additional selected markets.

Work on this expansion has started and we expect to offer EBDO services in these additional markets in the fourth quarter.

As Ken mentioned, to strengthen our operating footprint as a foundation for future growth, we participated through our interest in King Street Wireless and the recent FCC auction of 700 megahertz spectrum.

King Street Wireless was the provisional winning bidder for 152 licenses covering 42 million pops in areas that primarily overlap or are approximate or contiguous to areas covered by licenses that we currently own.

Consistent with our objectives going into the auction, we were able to increase the depth of our footprint to meet future capacity and new technology requirements.

We didn't launch any new markets during the first quarter and don't have any plans along those lines at the present time.

But a balance of the year, we intend to focus on increasing customers, revenues, and profitability within our existing markets.

And of course, we continue our relentless focus on customer satisfaction including a commitment to ensuring that our customers have access to a high quality network.

During April 2008, we received our fifth consecutive JD Power and Associates award for highest call quality in the North Central region.

As you probably know on April 29, the FCC adopted an order placing an interim cap on disbursements from the universal service fun high cost programs.

US Cellular is disappointed by the FCC's action because we believe it will slow the expansion of affordable and dependable wireless services into rural and underserved areas.

Although we're still analyzing the order, we understand that the cap will have an indefinite duration.

Be imposed on a state by state basis, and limit funding to wireless CPC's to the amount being received in any given state in March of 2008.

Thus, while the cap is in effect, US Cellular likely will receive less support than it otherwise would have been eligible to receive.

During the first quarter, we received ETC funding of approximately $30 million.

The level of ETC funding that we'll receive in the future is somewhat uncertain but we don't expect much of a change over the next couple of quarters.

With that overview, now, I'll discuss some of the details of our first quarter results.

As I mentioned, retail net ads for the quarter were $85,000.

And the retail post pay segment, our primary area of focus, we added 72,000 net new customers.

Post pay customers represent approximately 95% of our total retail customer base.

Retail post paid churn remains low at approximately 1.4%.

This is up about 10 base points year over year but it is down by about 10 basis points sequentially.

Service revenues of $962 million increased 12% year over year and ARPU of $52.06 was up 7%.

We continue to see substantial growth in our data revenues which were up 49% to $116 million.

Data now represents about 12% of our total service revenues, up from 9% a year ago and with plenty of room still to grow.

Operating income for the quarter was $119 million, up about 10% year over year while operating cash flow was $265 million, up about 3%.

As I mentioned earlier, higher costs in a number of areas put some pressure on margins.

The net equipment subsidy for the quarter was $98 million, up 28%.

Factors here include a higher net subsidy per unit reflecting handsets with expanded capabilities including smart phones and very aggressive promotions across the industry.

We've experienced solid growth in service revenues and data revenues in particular and the equipment subsidy is a cost of getting those additional revenues.

We expect the expanded capabilities of the handsets to drive additional growth in data revenues in the future.

System operations expenses for the quarter were $191 million, up about 14%.

The increase reflected an increased number of cell sites and service, higher total customer minutes of use, and higher expenses incurred when customers used other carriers networks when roaming.

In the SG&A category, advertising expenses increased almost $16 million or 38% primarily due to media purchases.

This expenditure reflected efforts to stimulate higher gross ads following disappointing results in the fourth quarter.

Investment and other income totaled $3.1 million compared to $13.8 million in the prior year.

The decrease is related primarily to the gain on fair value adjustment of derivative instruments recorded in 2007.

As a reminder, US Cellular settled those derivatives in May of 2007.

Net income for the quarter was approximately $71 million or $0.80 per diluted share.

As I mentioned earlier, the company generated operating cash flow of $265 million during the quarter.

We used some of that cash to fund capital expenditures of $112 million, about the same amount as we spent in the prior year and to make a capital contribution of $97 million to King Street Wireless to allow it to participate in the 700 megahertz auction.

As Ken mentioned, we also repurchased 150,000 of our common shares at a cost of $10.8 million.

At March 31, the company's cash balance was $216 million and its revolving credit facility was unused.

Shortly after quarter end, we borrowed $100 million under the revolving credit facility.

These proceeds, together with cash on hand of $103.5 million, were contributed to King Street Wireless who, in turn, used them to pay the FCC for its remaining obligation incurred in the spectrum auction.

Finally, our updated guidance for the full year 2008 is contained in today's press release.

We're confirming our guidance for service revenues.

In light of our first quarter results and the uncertain economic and competitive outlooks, we're lowering our guidance for both retail net ads and operating income.

We also reduced the range of spending on capital expenditures.

As I indicated earlier, we're taking actions designed to reduce or limit growth in our discretionary spending over the balance of the year.

Our goal is to continue to drive for growth in revenues, operating income and cash flow while not compromising our customer satisfaction strategy and relative competitive position in the market.

Now, I'll turn the call over to Bill Megan for the discussion of TDS Telecom's results.

Bill?

Thank you, Steve.

Good morning, everyone.

The headline for the quarter at TDS telecom is that not withstanding a revenue decline, we reduced costs to hold cash flow even.

We increased DSL subscribers by 31% and we improved our quarterly access line loss rate to the levels of a year ago.

For the quarter, combined ILEC and CLEC revenues declined by $11.5 million or 5% with a decline split evenly between the segment.

The principal drivers on the ILEC side were access line losses which were 5.1% year on year but improved sequentially down from a loss of 9,500 lines in fourth quarter of 2007 to 6,400 lines in the current quarter.

We also received lower access revenues as interstate minutes of use declined 16%.

Revenues were also affected by our election to exit certain revenue pools in mid 2007.

The decision to withdraw from the pools for our DSL service was an economic one.

In exiting the pools, revenues were reduced by $2 million but the corresponding expense of contributing to the pools, was reduced by nearly twice that amount.

This will continue to affect revenue comparisons by a similar amount through the second quarter.

Clearly, a positive element in the quarter was the increase in ILEC data revenues which grew 29%.

We had good success with our promotional campaign selling DSL, adding 11,000 net subscribers sequentially and 37,000 year on year.

Our gross ads picked up in the quarter and at 18,000, were higher than they have been since first quarter of last year.

We also had success in selling our triple play, adding nearly 9,000 net subscribers in the quarter and we now have 42,000 in total.

We have a very strong partner in Dish Network for the video component and our experience has been that triple play customers have significantly lower churn.

Over the past nine months, we have introduced a series of promotions in key markets including free service for a limited period, a gift card to be used as the customer wishes, a guarantee lower price for a more extended period and so forth.

These each present different value propositions and have kept the program fresh and customers have responded favorably.

Also contributing to the increase in data revenues was the introduction of high capacity Ethernet services for commercial customers.

With specialized equipment, we can bond together copper or fiber facilities to expand bandwidth and the bandwidth is symmetric, often an important feature for commercial customers.

In our CLEC segment, the revenue decline was driven by our decision to improve profitability by focusing our marketing and sales efforts on small and medium businesses and limiting our investment in acquiring residential customers.

Another positive element in the quarter was expense control.

Cash expenses for our combined operations decreased by the same amount as revenues and thus we were able to keep operating cash flow even with last year.

Importantly, we have been able to combine support functions and make other process improvements permitting us to lower head count by 7% while still maintaining high levels of customer satisfaction.

We continue to invest in our network, capital expenditures were $18 million for the quarter on a consolidated basis.

Roughly flat with 2007.

We will continue to evolve our network and put the necessary infrastructure in place to offer broadband speeds that are very competitive.

87% of our ILEC lines are equipped for DSL service, with 82% of our customers taking speeds of greater or equal to 1.5 megabits and 42% at speeds from 3 to 6 megabit.

Currently, in key markets, we're beginning to launch ten megabit service over copper facilities and 15 and 25 megabit service where we have fiber facilities.

And finally, with respect to guidance, we're confirming the range for operating cash flow as cost control will continue to be a focus for us.

We are also confirming the range for CapEx.

We are reducing the range for revenues modestly to $810 to $840 million.

In summary, we have made good progress toward our goal of becoming the preferred broadband provider.

We have effectively managed costs and we have a good team of people moving in the same direction.

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

Thank you, Bill.

Michael, we're all ready to start the Q&A portion of the call, please.

(OPERATOR INSTRUCTIONS) Your first question comes from Simon Flannery with Morgan Stanley.

Ok, thank you very much.

Good morning.

I wonder if we could just talk about the guidance for a second.

In particular, the net (inaudible) guidance for wireless.

You had a solid result for the first quarter.

And if you annualize first quarter run rates, it certainly is well ahead of where the new guidance is.

So, can you talk about what you see happening in the rest of the year, that's caused you to pull that guidance down?

Is it that results in March and April have really started to slow?

Is it something else you're seeing on the economy or competition?

And you know, the (inaudible) stimulus package, how that plays into it.

And then just very quickly, if you could on the EBDO, if you could give us a sense of what percent of your pops you might cover by the end of the year with EBDO.

Thanks.

This is Jay.

I'll take your last part first and chime in a little with Steve on the first part.

On the EBDO deployment, we believe we'll have approximately 40% of our pops covered sometime in the fourth quarter.

At this point.

We've started our construction and our roll-out and everything is on or ahead of schedule.

So, we don't anticipate any delays or issues in the launch to cover that percentage of pops.

Relative to some of the changes that Steve mentioned, in some of our markets, we are paying close attention to some of the economic drivers, in particular, in some of those markets that I referred to like in the northeast and some of those markets that were hit very hard by winter and fuel costs, we have seen some -- a bit of slowdown.

We are paying very close attention to.

We've also seen some of those customers do -- not giving up wireless but really doing some consolidation relative to their accounts and fourth and fifth lines where they may have been single line accounts in the future.

So, I guess we're just playing -- watching those markets that we saw hard hit by the winter both from a length and the fuel cost and we've seen some activities in our call centers that would, you know -- accounts trying to really make sure they don't give up wireless but have smart spending.

With their cash flow.

Ok.

Ans so it more of a gross ad or a churn sort of change, or is it a bit of both?

If you look at the churn results, you'll see the churn on the post pay side still stays very, very strong.

So, you aren't seeing that at all.

Okay, great.

Thanks very much.

Your next question comes from Patrick Ryne with Lehman Brothers.

Good morning.

And thanks for taking the question.

Just a quick one on share repurchases.

Can you remind us when the TDS special program expires?

And then also just looking at that and the amount you purchased during the quarter, it seems just doing rough math, you purchased about 15% afloat on a daily average.

If you could, would you like to repurchase more and then also on the US Cellular side, is it possible for you to repurchase beyond the current minimus repurchase program?

Thanks.

Boy, a lot of questions there.

But the TDS plan started last May or June.

And it was a three year, $250 million authorization.

And as I'd said, since June of last year, we purchased all but $78 million of that $250 million authorization.

The only authorization at US cellular currently is this de minimus one.

Yes, the board has the ability to authorize something different if that's what they choose to do.

But with the current time, there's only the de minimus one out there, which is designed to offset the effect or eliminate the effect of any dilution caused by compensation plans.

Got you.

And then just on the amount of -- the repurchase with the TDS special, it looks like you guys are probably buying as much as you can given the restrictions but with the exchanges.

How do you guys set that up if possible?

If you had a higher volume, would you be repurchasing more?

Well, the -- there are limits in terms of what we can buy in the open market.

And yes, if there was more liquidity in the stock, that would be a higher number.

I don't know how else to answer that.

Great.

Thank you.

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

Yes, thanks for taking the question.

Good morning.

Maybe a couple of things.

You know, first on the ARPU front, you've had very nice growth really driven by data.

I wonder, moving forward, as you think about the earlier comments on the economy, what kind of impact in ARPU do you think you might see from the economy or are you already starting to see?

Does the ARPU growth start to flatten out.

And then my second question on the TDS side, and I may have missed this, but what are principal drivers behind the lower revenue guidance there?

Thanks.

I'll take the ARPU piece in Cellular.

This is Jay again.

We are obviously watching that ARPU as it relates to the economic conditions.

But I think what Steve's point is we have watched our data revenues continue to grow on top of our very healthy results and smart phone sales, which is driving a big chunk of that.

We think any kind of voice ARPU declined will be offset by ARPU growth on the data side of the house.

And that's kind of been what we've been seeing and saying for the last couple of reporting periods.

So -- and we have a pretty strong line-up of smart phones over the next three months.

So, we are -- we're pretty excited where we stand in that period.

On top of that, when we get those other 40% on top of the EBDO, that experience improves.

On our embedded base with smart phones.

So, we see some upside down the road with that as well.

Bill, I think that second part of will's question was directed to you.

Yes, I'm happy to answer that.

I think if you -- just to reflect on the comments of what drove revenues in the year on year comparison, it's more of the same.

Access line losses were at 5.1%.

And we expect that to continue.

We also talked about minutes of use and that effects our access revenues.

And we expect that to continue.

And then the third component, we talked about, it's a little bit technical.

But it has to do with our participation in the NECA pools.

On the interstate side we had participated in the NECA pool for our data service, our DSL service and in the first quarter, that was about $2 million worth of revenue.

We do that because it improves our profitability and it makes economic sense but it does impact our revenues.

And as I mentioned, that's going to continue through the second quarter here, so another two million we would anticipate in the second quarter.

So, we're going to see, effectively, continuation of those same three trends.

Ok, thank you.

So, you know in taking down the guidance, we mainly took down the top end.

It was a modest adjustment.

Right.

Ok.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from David Bove with Elk Partners.

Hello.

I just wanted to ask about the LA partnership you guys provide very good disclosure on that in the financials and you know, as I look at it, the equipment subsidy in the OA market is a fraction of what it is at US Cellular.

I'm just wondering about what the difference is in operations and may we some day at US Cellular get to the LA type of metrics?

First of all, I don't think that the company's (inaudible) to comment about the operations of the LA market at all.

There are significant differences in presentation as well as an actual operation.

The fact is that the equipment subsidy at US Cellular has been growing over the last year and a half as more and more data capable phones have been becoming part of the take rate of the customers.

I think we've seen that in other companies, too.

But I'm not going to comment on the LA financials.

Ok.

That was my only question.

Thanks.

There are no further questions at this time.

Gentlemen, are there any closing remarks?

No.

I think we're all set, Michael.

Thanks very much.

ladies and gentlemen, thank you so much for dialing in for today's conference call.

You may now disconnect.