美國無線通訊 (USM) 2008 Q2 法說會逐字稿

Good day.

Welcome to the TDS and U.S.

Cellular second quarter conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mark Steinkrauss.

Mr.

Mark Steinkrauss, please go ahead, sir.

Thank you.

Good morning, everyone.

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

Cellular; Bill Megan, Executive VP-Finance and CFO at TDS Telecom; and also joining me are Jack Rooney, CEO; and Jay Ellison, Executive VP and COO at U.S.

Cellular.

A replay of this teleconference will be available today at 1:00 p.m.

Chicago time, and run through midnight, Friday August 8.

The replay number is 800-723-6498.

Conference ID, 9648709.

For International callers the number is 785-830-7989 same pass code.

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

Cellular's websites.

The webcast will be available the next two weeks, after which it will be available on the conference call archives.

Please recall that archived calls are not updated.

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

Please review the Safe Harbor paragraphs in the releases and the more extended versions on our websites 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 U.S.

Cellular filed 8-K's.

The 8-K's include the press releases we issued this morning and some additional information.

Both companies plan to file their SEC Forms 10-Q later today.

Both press releases have been posted to the TDS Internet home page and U.S.

Cellular has posted their release to their website as well.

You will also find posted on the website, 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 the Company's guidance for 2008.

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

All of the 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 Investor Relations sections of both our websites.

Please note that the comparisons made by the speakers today in the prepared comments are second quarter, year-to-year compares, unless otherwise noted.

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

We will be presenting at a couple of investment conferences in the next month or two, on September 4, we'regoing to be appearing at the 14 annual Kauffman Brothers investor conference in New York City.

Ted Carlson and I meeting will be meeting with investors in Europe from September 22, through October 2.

And October 3, we have a meeting with investors in Boston.

If you would like to meet with us at any of these events, please let me know and we'll try to accommodate you, if at all possible.

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

Thank you, Mark.

Good morning.

Thanks for joining us today.

I have just a few comments to make before turning the call over to Steve and Bill who will cover the operating results, and then we'll take questions at the end of the prepared comments.

Operating revenues for TDS were up 7% to nearly $1.3 billion.

Most of the increase coming out of U.S.

Cellular.

Operating income declines slightly, principally to U.S.

Cellulars investment in the new branding and add advertising campaign, and increases handset subsidies.

Quickly, let me cover some of the year-over-year nonoperating comparisons on the income statement.

One, under the TDS current stock repurchase authorization, the Company has bought back 4.1 million common shares for about $211 million to date.

About $38.7 million remaining under that authorization.

We've been buying the stock as aggressively as the exchange regulations allow.

U.S.

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

In the second quarter, the Company settled the last of the Deutsche Telekom variable prepaid forward contracts and sold the remaining DT shares.

This removes a lot of complexity from the balance sheet since we no longer have any prepaid forward contracts or derivative liabilities.

Of note, the Rural Cellular shares are listed as marketable securities on the balance sheet since the acquisition by Verizon had not closed as of the end of the quarter.

Also, going forward, interest expense will be reduced because we will no longer make quarterly interest payments on the prepaid forward contracts.

The interest in dividend income line is down sharply year-over-year.

The second quarter of 2007, the Deutsche Telekom dividend was $118 million, and that was only $11 million in second quarter of this year reflecting the change in the Company's holdings as it has unwound the various prepaid forward contracts.

For the quarter, the effective rate, effective tax rate was 33.4%, which was reduced due to state tax benefits related to the settlement of the DT prepaid forward contracts.

For the year, still expect the effective rate for both companies to be approximately, 40 or 41%.

The end of the quarter, with the great balance sheet, $1.1 billion in cash, all of which is still invested in treasuries, in virtually unused credit facilities.

We have a lot of financial flexibility.

Finally, you will note that we updated the guidance of U.S.

Cellular as disclosed in today's press releases.

While affirming the guidance of TDS Telecom.

The change to U.S.

Cellular's net add in operating income targets reflect our current best estimates in a rapidly changing marketplace.

While handset pricing has increasingly been one of the key areas of competition in the marketplace, the dynamics keep changing, especially around smartphones.

Everyone has reported that smartphone users have higher ARPU than regular phones, therefore, justifying the bigger discount to get these phones to users' hands quickly.

I believe that was the thinking behind AT&T's pricing on the iPhone and, now, Verizon's recent move.

These moves carry both a risk and a secondary effect.

The risk is if the new smartphone customers of tomorrow don't generate the same higher incremental revenue, thereby, failing to justify this higher level investment.

This is something we continue to watch.

The secondary effect is that this new pricing on smartphones can create a pricing ceiling for all phones.

In effect, there's value hierarchy with smartphones on tap.

Not only does this affect smartphone pricing but probably affects and lowers the pricing on all phones.

How these two recent changes play out over the next couple of quarters could significantly affect our results and could cause such results to vary from even our current guidance.

We'll continue to monitor and react to the competitive actions.

With that, let me turn the call over to Steve Campbell, U.S.

Cellular.

Thanks, Ken.

Good morning, everyone.

I'm going to begin with a few general comments about the business.

Then I'll highlight some of the key results for the quarter.

Overall, we found the second quarter to be challenging.

As we faced difficult economic conditions, strong industry competition, and weather-related flooding in some of our key markets.

Despite these challenges, U.S.

Cellular, again, delivered solid results for the second quarter of 2008.

First, we continue to grow our subscriber base.

We added 34,000 net retail customers and we ended the quarter with 6.2 million total customers up 3% from the prior year.

We're, also, reporting year-over-year growth in both service revenues at 9%, and ARPU at 6%.

Both of these trends reflect outstanding growth in our data revenues.

This is the 11th consecutive quarter in which we're reporting year-over-year growth in ARPU.

At the same time, we're experiencing increased costs in a number of areas of our business.

As a result, we're reporting operating cash flow that is essentially flat year-over-year.

In this tough competitive and uncertain economic environment, we believe that it is important to continue to invest in our business and customers for the long-term.

One of the significant steps that we're taking to further differentiate our customer satisfaction based business model is our new believe in something better branding campaign that was launched in June.

With this campaign, we're showing that we recognize that wireless plays an important part in our customers' lives, that goes well beyond just completing calls.

Along with the campaign, we are investing in training and other programs so that our associates can deliver the ideal customer experience.

The initial response for the campaign from our customers has been positive as they recognize our efforts to bring humanity to an industry that's often been devoid of it.

To capitalize on the growth and demand for data products and services, we continue to expand our smartphone and related offerings.

We recently introduced the Blackberry 8330 Curve, Motorola Q9C and HTC-6800 devices.

In addition, we launched several product enhancements, including an updated picture messaging online album, and new Blackberry plans designed to penetrate deeper into the consumer segment of the marketplace.

To help ensure that our data customers receive a high-quality service experience, we're expanding EVDO coverage in select service areas.

By the end of 2008, our EVDO coverage will reach 30% of our covered population.

We plan to continue the targeted expansion in 2009.

We also continue to strengthen our overall network with new cell sites and towers in selected areas.

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 (inaudible) that are contiguous to areas covered by licenses that we currently own.

These additional licenses will increase the depth of our footprint to meet future capacity and new technology requirements.

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

For the next few quarters, we intend to focus on adding customers and growing revenues and profitability within our existing market and of course we're maintaining our relentless focus on customer satisfaction including a commitment to ensuring that our customers have access to a high-quality network.

On July 1, the FCC published its order adopting an interim cap on the federal universal service fund high cost program.

As a result of the cap, which will be of indefinite duration, wireless, eligible telecommunication carriers such U.S.

Cellular likely will receive less support in the given state than they otherwise would have been eligible to receive because overall support will not increase as a carrier adds customers or as additional carriers are granted ETC status in the state.

The FCC, also is considering other changes in the universal service fund, under the heading of long-term reform, which could reduce the amount of support that wireless carriers such as U.S.

Cellular would be eligible to receive.

During the second quarter, we received ETC funding of $31 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.

Now, I'll cover some of the details of our second quarter results.

As I mentioned earlier, retail net ads for the quarter were 34,000.

In the post paid segment, which is the primary area of focus and represents, approximately, 95% of our total retail customer base, we added 33,000, net, new customers.

Retail post paid churn remains low, at 1.4%, about the same level as in the prior year quarter.

Service revenues of $987 million increased 9% year-over-year.

Driven primarily by customer growth and demand for our data products and services.

ARPU of $53.27 was up 6% year-over-year.

We continue to see substantial growth in data revenues, which were up 45% to $124 million.

Data now represents about 13% 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 $118 million.

Compared to $123 million in the prior year.

Operating cash flow was $269 million, essentially flat relative to last year's $272 million.

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

The net loss on equipment for the quarter was $99 million, up 20%.

Factors include a higher net subsidy per unit reflecting handsets with expanded capabilities, including smartphones and aggressive promotions across the industry.

Like others, we've experienced solid growth in service revenues and data revenues in particular, and the equipment subsidy is a cost of these additional revenues.

We expect that the expanded capabilities of the handsets that we're currently selling will continue to drive growth in data revenues in the future.

System operations expenses for the quarter were $197 million, up 11.5%.

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

Selling general, and administrative expenses were $422 million.

Up 12.7%.

Advertising expenses increased almost $11 million, or 20%, primarily due to media purchases and TV production expenses in the launch of our new Believe in Something Better branding campaign.

Investment and other income totaled $4.1 million, down from 1.

-- [18.2] million.

In 2007, the Company recorded a pretax gain of $132 million, on settlements of variable prepaid forward contracts related to Vodafone ADRs and sale of remaining Vodafone ADRs, and, also, a pretax loss of $18 million on fair value adjustments to the variable prepaid forward contracts, prior to settlement.

Net income for the quarter was approximately, $73 million or $0.83 per diluted share.

As I mentioned earlier, the Company generated operating cash flow $269 million during the quarter.

We also borrowed $50 million net under our revolving credit facility.

We used some of this cash to fund capital expenditures of $138 million, including expenditures related to the EVDO deployment and we contributed $203 million to King Street Wireless, which in turn, used these funds to pay the FCC for its remaining obligation incurred in the 700 megahertz spectrum auction.

In addition, we purchased 150,000 of our common shares, at a cost of about $8 million.

At June 30, pir balance sheet remains very sound.

The cash balance was $51 million, net of outstanding borrowings under the revolving credit facility and we have additional borrowing capacity of about $650 million under that facility.

Our updated guidance for expected full year 2008 results is contained in today's press release.

We're confirming our guidance for service revenues, but given our year-to-date results, and the uncertain economic and competitive outlooks, we're lowering our guidance for retail net ads and operating income.

Also, we're reducing our estimate for capital expenditures.

In his comments, Ken provided some important context for this guidance.

I won't repeat those comments but I will say that the revised guidance reflects a balanced approach to dealing with the challenges in the current environment.

We're taking the actions that we can to sensibly control costs, and to reduce capital expenditures in order to produce strong free cash flow, while continuing to invest in our business and customers for the long-term.

Our goal is to continue to drive for growth in customers, revenues, operating income and cash flows, but 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 a discussion of TDS Telecom's results.

Bill?

Thank you, Steve.

Good morning, everyone.

The headline for the quarter at TDS Telecom is that notwithstanding a weak economy, DSL subscribers increased by 29%.

Our access line loss rate held steady.

Also, the Company continues to actively manage and change its cost structure to offset revenue declines, thereby, holding cash flows steady.

For the quarter, combined ILEC and CLEC revenues declined by 4%, with the segments declining at approximately the same rate.

The principle drivers on the ILEC side were physical access line losses, which were 5% year-on-year, excluding acquisitions.

And lower access revenues.

With intrastate minutes of use declined 21%.

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

As we have mentioned in the past, the decision to withdraw from the pools for our DSL service was an economic one.

In exiting the pools, revenues were reduced by $2.1 million, but the corresponding expense of contributing to the pools was reduced by twice that amount.

Clearly a positive element to the quarter was the increase in ILEC data revenues which grew 24%.

We had good success with our promotional campaign selling DSL, adding bout 8,000 net subscribers sequentially and 36,000 year-on-year.

Our growth adds remain strong at 17,000.

These numbers exclude the effective acquisitions.

Residential DSL ARPU increased 8% to just shy of $35.

We also had success in selling our Triple Play adding nearly 6,600 net subscribers in the quarter and we now have nearly 49,000 in total.

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

Over the past year, 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 guaranteed lower price for a more extended period and so forth.

These 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 expansion of high capacity ethernet services for commercial customers.

As we mentioned on our last call we have rolled out a service that uses specialized equipment to bond together copper facilities to expand bandwidth and the bandwidth is symmetric, often an important feature for commercial customers.

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

Another positive element in the quarter was expense control.

We reduced cash expenses for our combined operations by $11.9 million and thus we were able to improve cash flow by 4% over last year.

Importantly, we have been able to combine support functions and make our other process improvements, permitting us to lower average headcount by 5%, while still maintaining high levels of customer satisfaction.

We continue to invest in our network, capital expenditures were $28 million for the quarter, on a consolidated bases and we'll continue to evolve our network and put the necessary infrastructure in place to offer broadband speeds that are very competitive.

89% of our ILEC lines are equipped for DSL service with 84% of our customers taking speeds of 1.5 megabit or greater, and 46% at speeds from 3 to 6 megabit.

In key markets, we're launching 10 megabit service over copper facilities and 15 to 25 megabit service where we have fiber facilities.

At the end of May, TDS Telecom acquired MOSINE Telephone Company which serves about 4,900 access lines in Central Wisconsin.

This acquisition is a good strategic fit for us, contiguous with our current operations, has a good residential and commercial customer mix, a network capable of higher data speeds, and presents a good opportunity for Synergies in our operations.

Finally, our guidance for the year is unchanged.

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

Thank you, Bill.

Before we go to the Q&A period, I'd like to give you some updated replay numbers.

We had a change.

So if you would cross out the old ones I gave you at the beginning, note the following.

The replay number, 888-203-1112.

That's domestic.

For International, 719-457-0820.

And the conference ID number is, 6948709.

Thank you.

Now, we'll turn the call back to you for question and answers.

Absolutely.

(OPERATOR INSTRUCTIONS) Or first question comes from the site of Simon Flannery.

Your line is open.

Please go ahead.

Thanks very much.

Good morning, everybody.

Wanted to come back to the wireless gross ads if I could for a second?

You referred in the release to consumer anxieties.

I think in the past you've talked about people trying to get their monthly recurring charge down as well.

But, not seen it so much in the number of actual gross adds.

So, can you give us a sense of how much of this is the economy versus increased competition?

Bigger handset subsidies versus just overall market maturity as wireless penetration starts to climb?

What is your sense that have?

And have you seen any change during the quarter, things getting progressively worse or fairly stable through the quarter?

Thanks.

Yes.

This is Jay Ellison.

A lot of questions in there, I think.

I'll try to summarize what I think I heard.

First of all, the first part of it, I think, you were talking, I think we had in previous calls we have talked about customers, consumers trying to adjust their wireless spending without disconnect.

I think our churn numbers continue to reflect very strong results.

We're keeping our customers.

But as customers do call in to the call centers or go into the store, we've seen them trying to work with their plans to get either better value overall, and some cases it actually may increase their level of spend a little bit, but it's delivering more value over time.

Or make some adjustments relative to the actual product or services or consolidation of those rate plans into more family plans versus single-line plans and things along those lines.

Some of our markets, like in the Northeast, Northwest, obviously, may see a little more significant impact in rural areas relative to some of the economic environment.

But that's also where we've seen some of this activity of getting value out of the rate plans themselves.

And I would argue that, we pretty much have seen kind of this environment of Ken and Steve both described, this competitiveness on handset subsidies really across all of the footprint.

Obviously, we're going to compete to provide our customers with the greatest value that we can.

It's pretty much been across the enterprise throughout, really, the first half of the year.

Okay.

Thank you.

Yes.

Thank you.

And our next question comes from the site of Will Power.

Your line is open.

Please go ahead.

Great, thanks.

Couple of questions.

I guess, first one, bit of a follow-up on the previous question, think being wireless competition, generally.

I know you talked about the handset pricing and it's been an ongoing phenomenon.

I am curious, are you actually seeing more advertising and marketing dollars spent by your competitors in your markets?

Is that also one of the contributing factors?

I guess, I'd also curious if you have any comment ons early impact from the iPhone in Q3?

Is that helping raise awareness?

What's capping on the porting front there?

Thanks.

Yes.

Will, this is Steve.

I'll start and Jay will build on it.

To your first question about the advertising, I think it is an unquestionable and unambiguous yes.

One of the real competitive factors that we're dealing with now are substantial increases in advertising.

From all of the competition.

And we ourselves are investing in that area I talked a little earlier about the increase we saw in the quarter.

Yes.

I agree with Steve.

Obviously, we launched our Believe in Something Better campaign there was some incremental media around that, to start that off.

Year-over-year, we continue to see the -- all of the wireless-base being a very-well-advertised area, in media.

Relative to the iPhone and its launch, clearly, a lot of -- in another area, of course, we see that increased spend in advertising.

We did see, some of our metro, our urban markets, we saw a little bit, very similar to the original introduction, we see a little bit of spike.

Then, it stabilizes relative to the activity around AT&T.

But I think, also, what it does is create additional awareness around those types of devices.

And we continue to add to our portfolio smartphone devices in all of our retail stores.

And so we can kind of feed off of that frenzy as well.

Yes.

The other competitive point there and relates to pricing and realization.

Ken talked earlier the secondary affect of what we've seen in smartphone pricing.

So, it is important to understand that when the pricing on the iPhone gets set at $199, that that has ripple effects, all of the way down through the handset hierarchy.

We expect to see a significant competition on pricing.

Up and down the handset line.

Not only for smartphones, but, -- on smartphones, but much more broadly than that.

Okay.

Thank you.

Thank you.

And our next question comes from the site of Greg Lundberg.

Your line is open.

Please go ahead.

Hey, gentlemen.

There was a footnote in your release that said you reviewed your customer reporting procedures?

And that appears to have brought down historical subs and changed the grossed as.

I was wondering if you could walk through what exactly that was.

Also, why, in the second quarter, if we do take the ending subscriber counts you report conduct our change of 19,000 net adds not 16,000 if you could describe that adjustment?

Thanks.

This is Steve.

I'll take both parts of that.

The adjustment that's referred to in that footnote is that we had a catch up of some of the reporting from our reseller vendor.

There were some disconnects that the reseller vendor had delayed in the reporting.

The effects were not significant.

Overall, we're talking round numbers, about 25,000 spread over several quarters.

So, we thought it was important to footnote it.

The impacts are not significant.

The other point or question that you raised has to do with reporting of acquisitions.

The net add activity does not include subscribers acquired through acquisitions.

That accounts for the difference.

During the second quarter, we purchased the remaining 50% interest in the North Carolina One Partnership.

You'll find expanded disclosure about that acquisition in the 10-Q report.

Perfect.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the site of [Chris Mancini].

Your line is open.

Please go ahead.

Mr.

Mancini, please check the mute function on your telephone or access your handset?

Hello?

Okay.

We can hear you, Chris.

Hi, hi, yes, sorry about that.

Could you just comment on whether TDS did, in fact, receive an offer from a strategic buyer in late 2007?

And if it did, could you comment on why this wasn't disclosed to shareholders in a public way?

Chris, this is Ken Meyers.

We've had questions like that at the annual meeting and other forums where we have reiterated the Company's policy is not to comment on any rumors like that.

Okay.

Even if -- okay.

So -- okay.

So, I guess the -- I guess the thing is, then, that the -- the letter that came out from the other shareholder, you would qualify that as rumor?

The Company has no comment on that matter at all, Chris.

Okay.

Okay.

Thanks.

Thank you.

And our next question comes from the site of Kevin Roe.

Your line is open, please go ahead.

Thank you, good morning.

The Verizon acquisition of Alltel as you know requires some pretty material divestures, can you talk a little bit about your appetite to enhance your footprint in any material way?

And whether that may or may not be of interest and what kind of balance sheet ability you have to significantly grow your footprint?

And on a smaller case, you've got Rural Cellular having to divest of small properties.

I don't know if that can be of interest there, any comments would be helpful.

Kevin, this is Ken.

It is hard to comment on an unknown set of facts right now, the unknown set being what does Verizon actually wind up divesting in the Alltel transaction?

The Company has a history of looking at both wireline and wireless acquisitions as they come across.

We will look at these, the Company does have a very strong balance sheet with a lot of financial flexibility.

But the Company also has a rather diligent M &A process, where we spend a lot of time making sure that any opportunities that we do pursue, are such that they fit with our strategy around our footprint, and fit our operating model.

So I can't -- I can't comment on any specifics at this time, we don't even know what that looks like.

Kevin, any follow-on to that?

No.

Thank you.

Okay.

Thank you.

We'll take the next question.

(OPERATOR INSTRUCTIONS) And it does appear we have no further questions in the queue at this time.

Okay.

Thank you.

Thank you, everybody, for join us on the call.

I'm available the rest of the day if you have follow-on questions.

Just give me a buzz.

Thank you, thank you.

Thank you.

This does conclude today's teleconference.

Thank you for your participation.

You may disconnect at any time.

And have a wonderful day.