美國無線通訊 (USM) 2009 Q2 法說會逐字稿

Good morning, my name is Marlene.

I will be your conference operator today.

At this time, I would like to welcome everyone to the second quarter operating results conference call.

All lines are placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you, Mr.

Steinkrauss, you may begin your conference.

Thank you, everybody.

Sorry for the slight delay.

With me this morning are, Ken Meyers, the Executive VP and CFO at TDS, Steve Campbell, Executive VP, Finance, CFO and Treasurer at US Cellular, and Jay Ellison, Executive VP, COO at US Cellular, and Bill Megan, Executive VP Finance and CFO at TDS Telecom, and also joining us is Jack Rooney, CEO of US Cellular.

A replay of the teleconference will be able at 1:00 PM Chicago time and run through midnight Friday, August 7.

The replay number is 800-642-1687.

Conference ID 22679990.

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

Please keep in mind that the purpose of today's call is to discuss the operating and financial results for our Companies and any other information contained in today's press releases.

If you have other questions unrelated to the operating and financial results, I would be pleased to respond to them after the call and I'm available for the remainder of the week at my office.

My contact information is on the press release.

For many on years, TDS maintained an open-door policy.

If you're in the Chicago area and would like to meet with members of the management team from US Cellular, TDS Telecom, or TDS Corporate, the investor relations team would be pleased to try to accommodate you, calendars permitting.

The call is being simultaneously webcast on the investor relations sections of both TDS and US Cellular websites.

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

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

Please review the Safe Harbor paragraph in our releases and the more extended versions on our website as well as in our filings with the SEC.

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

The 8K simply includes the press releases you already have in front of you.

We have posted on our website additional information and reconciliation of non-GAAP financial measures that may be used by management when discussing operating results during today's conference call.

The Company's updated guidance for 2009 is posted as well.

The reconciliations of net income, diluted earnings per share and operating cash flow.

All of the information is included on a separate page entitled guidance and reconciliation to make it easier to find.

Please note that the comparisons made by the speakers today and the prepared remarks for our second quarter, year-over-year compares unless otherwise indicated.

Both Companies have updated their guidance for the year and the details are in the press releases and on the websites and Steve and Bill will comment on that shortly.

We will be visiting the following cities and attending several investment conferences in the next month or so.

On August 11, meeting with investors in Minneapolis and on the following day in Kansas City.

On August 21, we'll be meeting with some investors in Boston.

On September 10, we'll be presenting at the Kaufman Brothers 12th annual investment conference in New York City.

And management will be meeting with investors in Europe from September 21-29.

If you would like to get together with us during any of these events or different cities we're visiting, please let me know and we'll try to make it happen.

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

Good morning.

I have a few comments to make about the quarter before turning the call over to the rest of the team who will cover the operating results.

We will then take questions at the end of the prepared remarks.

TDS's consolidated operating revenues were down slightly to $1.2 billion principally due to the expected and previously-discussed loss of inbound roaming revenue at US Cellular and a continuation of the decline in physical access lines at TDS Telecom.

Nonetheless, operating income grew 3%, $155 million while operating cash flow was $340.4 million down just 1% from Q2 last year.

Of note, data revenues continue to grow nicely at US Cellular and TDS Telecom.

Bucking the consumer economic pressures.

More on that from the team later.

TDS purchased nearly 2.7 million special common shares in the quarter for about $74 million.

Through June 30, the Company repurchased $86 million of Company stock this year, when combined with last year's purchases, leaves $88 million left on the $250 million stock repurchase authorization, which went into effect last November.

This authorization gives us a flexibility to purchase either TDS common or special common shares.

We attend to aggressively continue purchasing our shares as we believe that stock offer and attractive values at these levels.

We ended the quarter with $665 million in cash and cash equivalent invested primarily in treasury securities.

The Company also has $136 million invested in certificates of deposit, which are FDIC insured.

The CDs are listed in short-term investments on the balance sheet and are in addition to the $665 million of cash.

In terms of liquidity, we finalized our new revolving credit agreements in late June.

In aggregate, TDS and US Cellular now have $700 million in revolving credit expires, in revolving credit facilities which expire in three years.

The size of the new revolvers are smaller than in the past.

But given our cash balances and with both businesses generating free cash flow, we felt it unnecessary to pay the larger facility.

Also, borrowing spreads are high or the new facilities.

TDS's effective tax rate this quarter was 36.9%, we expect both TDS and US Cellular's effective tax rate for the year to be approximately 38%.

Of note on the income statement, under investment and other income, there is a line item item called equity in earnings and unconsolidated entities.

This line-item decreased by $4.5 million as a result of a $7 million decline in the fair value of a non-consolidated equity investment.

We had an impairment charge in one of our equity investments.

Interest and dividend income is down because we no longer own any of the prepaid forward contracts we had in the past, as well as the related stocks that had dividends paying out of them.

In summary, both Companies continue their efforts to generate long-term profitable growth by focusing on the customers.

Despite the economy in an intensely competitive environment, they are both profitable in generating free cash flow.

Combined with our very strong balance sheet, we have the financial strength and flexibility to improve and grow our Companies and are working hard to do so.

I would like to now turn the call over to Jay Ellison at US Cellular.

Jay?

Thanks, Ken.

Good morning to everyone.

Before we get into details, I will comment briefly on what we're seeing in the environment.

Clearly, we're still dealing with a very weak economy.

GDP continues to contract and unemployment continues to rise.

These economic trends are impacting our customers and our operations.

And are evident in our business results for the success quarter.

We see the impact in overall lower traffic in our retail stores.

Also, consumers are becoming more cautious in their purchasing behavior and more price sensitive.

As a result, some customers are opting for a no-contract, low-price offering provided by the unlimited prepaid carriers rather than the full-service offering with attractive plans at, high-quality network and excellent customer service such as we provide.

I would describe our business results for the quarter as mixed.

Our financial results were solid but our customer acquisition results were disappointing.

Steve will cover the financial results in more detail later in this presentation.

Let me mention a couple of the highlights.

Service revenues for the quarter were $975 million up 1% year-over-year after adjusting for a decline in roaming revenues that resulted primarily from the Verizon-Alltel combination.

Data continues to be an important driver of revenue growth for us.

Data revenues grew 31% year-over-year and now represent 17% of total service revenues.

Up from 13% a year ago.

Data ARPU increased just under $9.

One of the keys continuing growth of data is increased penetration of Smartphones and other data-intensive premium devices.

Over the past six months, our sales of these devices have increased more than 200% year-over-year.

Operating income for the quarter was $141 million up 20% reflecting lower costs for equipment and other major categories.

Turning now to customer activity.

We ended the quarter with just over 5.7 million retail customers, which was relatively flat year-over-year and sequentially.

During the second quarter, we lost 59,000 retail customers, including 32,000 post paid and 27,000 prepaid customers.

The post paid churn average, 1.7% for the quarter and total retail churn was 2%.

Obviously, given the guidance that we provided on May 6, these results were We believe that there were several manufacturers.

We believe that there were several manufacturers.

First, the continuing effect of the weak economy as I just discussed.

We're experiencing increased competition from the unlimited prepaid carriers in certain markets where they recurrently launched.

We believe the impact associated with recent entry of these carriers into certain of our markets has been exacerbated by the continuing weakness in the economy.

Consumers are relatively more price-sensitive at the present time and, therefore, more likely to be attracted to the low-priced offerings of unlimited prepaid carriers; however, we don't think that recent results are indicative of a long-term trend in these markets.

We have competed against the unlimited prepaid carriers for many years and we're confident our compiling value proposition, including our superior network and excellent customer service ultimately will be successful in these markets.

We have already started to see a decline in the number of defections to these carriers since the first couple of months after launch.

Other factors were the introduction of the latest iPhone and another major carrier's aggressive buy one-get one promotion on BlackBerry devices.

We weren't happy with our second quarter results and we're taking a number of actions to improve them.

Including steps to directly address the competitive threat from the unlimited prepaid carrier.

We have already rolled out new unlimited prepaid plans in the Chicago, Milwaukee, Oklahoma City and St.

Louis markets on July 17.

And we're in the process of rolling these out in our (inaudible) markets by the end of August.

These plans improve our unlimited calling plans by adding unlimited text messaging and expanding the calling area at no extra charge.

In addition, we have introduced several other new promotional plans and programs targeted at new and existing customers.

These offerings have various combinations of services that provide increased value to customers, including national coverage, unlimited usage component, additional bundled features, early and premium equipment upgrades among others.

We have not been able to see or judge the full impact of the actions yet because many were rolled out toward the end of the second quarter or are being rolled out in the third quarter.

This question about the impact of the new plans and promotions together with a significant uncertainty represented by the weak economy are the reasons we determined we could not provide guidance for the remainder of 2009 for net retail customer additions.

However, we do expect these actions as well as the additional adoption of the unlimited messaging and unlimited messaging and internet plans that we introduced in February to continue to improve results.

We also recently launched several new (inaudible) handsets in April.

We introduced the HT Touch Pro, a Windows mobile device that further expands our offering in the Smartphone category.

In mid-June we launched the LG Tritan, which provides a a QWERTY keyboard, full touch screen features and access to our entire suite of data products and services.

The Tritan like the Samsung Delve is a premium data center device.

At the end of June, we launched the BlackBerry Flip providing customers with BlackBerry functionality along with the convenience of a flip phone.

The early indications are that all of these devices have been well-received by customers and we expect to be good sellers for us.

Looking ahead, we're very excited about the great lineup of handsets we have planned for the introduction and the coming months.

I will mention a few examples.

Later this month, we'll launch the LG Bliss, a slim, full touch screen device with a full QWERTY keypad, an integrated full HTML browser, a music player, stereo Bluetooth capability and a 2.0 megapixel camera.

September and October, we'll be introducing several new Samsung devices, including the Trill, a stylish slider device optimized for music.

The Caliber, which is a follow-on to the Delve with a full touch intuitive user interface and the Code, a Windows mobile-based Smartphone.

Other planned Smartphone offerings including the BlackBerry Tour and two HTC Windows mobile based devices.

The Snap and the Touch Pro 2.

Another interesting handset coming is the Motorola [Foniko], a full military specification device that can be fully submerged in water for up to 30 minutes without damaging the phone.

Interestingly enough, we have had many requests from customers for a device of this type.

As you can see, we're working hard to keep our handset offerings fresh and the mix of devices optimized to meet the needs of our customers.

In total, we plan to launch 12 new devices during the second half of this year.

I want to say a few words of our other actions and plans.

Beyond the service plan, and handset offerings that I already mentioned to grow and strengthen our business for this year and for the longer-term.

US Cellular's business is connecting people and our brand message is believe in something better.

Our new battery swap program launched in May is another proof point of our commitment to delivering something better, namely the best customer satisfaction in the Wireless industry.

Under this program, a customer can now visit any US Cellular Company-owned retail store or exclusive agent location and swap a battery that is dead or dying for a battery that is fully charged.

Whatever the reason and free of charge.

Since the Wireless device is integral to the customers' daily lives, we want our customers to always be connected.

The program has been extremely well-received by our customers and the word of mouth buzz being generated around this industry first offering is exciting.

We expect battery swap to have a positive impact on our future results.

To capitalize on the continuing increase of demand for data services, certain of our other promotions are geared toward our penetration of Smartphones and other data center devices.

We're continuing the expansion of our 3G network by the end of 2009, the 3G network will cover over 70% of our customers.

This continuing expansion is important because it will allow us to offer our customers an enhanced data experience.

(Inaudible) our offerings in the prepaid segment of the market.

I want to be clear on this point.

We have always been and will remain focused predominantly on the post paid segment on the market; however, we view offering a competitive prepaid product as an important part of providing our customers with a complete range of options and prepay is part of our total value proposition.

As I mentioned last quarter, we are completing the conversion of our new platform.

The new platform will provide our existing prepaid customers with an improved user experience and will give us greater flexibility in designing our prepaid plan offering and give us the ability to offer prepaid data services.

We continue to move forward with the major operational initiatives that we told you about on our last call.

These multiyear initiatives will enable stronger customer relationships, make billing and operations more efficient and drive online sales and account management.

These initiatives are now fully staffed and have moved into the detailed requirement definition and design phase.

We expect the pace of work in progress on these initiatives to pick up over the balance of this year.

Now I'll turn the call over to Steve Campbell to discuss the results for the quarter.

Steve?

Thank you, Jay.

Good morning, everyone.

As Jay motioned, we achieved solid financial results for the quarter.

Service revenues were $975 million, up about 1% year-over-year after adjusting for a decline in roaming revenues that resulted primarily from the Verizon-Alltel combination.

Inbound roaming revenues were down $22 million or 26%.

Retail service ARPU grew to $46.85, up $0.32 year-over-year as continuing strong growth and data revenues more than offset the decline in voice revenues.

Data revenues were $162 million, up 31%.

ETC revenues for the quarter were $31 million, flat year-over-year.

Due to the possibility of changes to the Universal Service Fund program, the level of funding that we'll receive in the future is, of course, uncertain, but we don't expect material change over the next couple of quarters.

The operating income increased 20% year-over-year to $141 million.

The improvements reflect the lower equipment costs and SG&A expenses.

The net loss on equipment for the quarter was $88 million.

Down about $15 million or 14%.

The decrease reflects a reduction in the number of handsets sold, as well as a reduction in the overall net subsidy per unit.

Just to clarify, although equipment pricing remains aggressive overall in the industry, we saw a shift in the mix of the devices sold to lower-price models and we believe that mixed shift is a function of customer buying behavior in response to the weak economy.

At the same time, however, sales of Smartphones and other premium data intensive devices continue to increase.

Sales of these devices more than tripled year-over-year.

This is an important trend, of course, because these devices are important generators of data revenues.

The ARPU from Smartphone users is 1.5 to 2 times that from the average customer.

As we continue to expand our 3G network, we expect additional growth in sales and related revenues in this area.

Other cash operating expenses consisting of system operations and SG&A decreased $10 million or 2% year-over-year.

System operations expenses were down $2 million or 1% despite a 7% increase in average cell sites and service, primarily due to lower usage costs.

SG&A expenses were down about $8 million or 2%.

In part due to lower advertising and, remember, we had higher advertising costs in the 2008 quarter related to the launch of the new brand.

And lower commissions.

Due to the fewer new customer additions.

Operating cash flow for the quarter was $282 million up 5%.

The operating cash flow margin was 28.9%, compared to 27.3% a year ago.

Operating cash flow improved despite a significant decline in high margin roaming revenues due to the combined effects of higher data revenues, lower equipment costs and lower operating expenses.

Below the operating income line, investments and other income net for the quarter totaled $6 million including earnings of $17 million related to our interest in the Los Angeles partnership.

Net income totaled $83 million up 15% year-over-year to $0.96 per share.

As I just mentioned, the operating cash flow for the quarter was strong.

The capital expenditures were $91 million, including expenditures related to our 3G expansion and we repurchased 140,000 of our common shares at a cost of $6 million.

Our balance sheet is sound.

On June 30, the cash balance was $276 million and we have borrowing capacity of $300 million under the new revolving credit facility that Ken mentioned earlier.

Our guidance for the full-year 2009 is shown in today's press release.

At this time, we are not providing guidance for net retail customer additions due to the significant uncertainty related to economic conditions, consumer purchasing intentions and the potential impact of actions being taken by the Company to promote higher customer additions and lower churn.

Based on our results for the first half and the forecast for the remainder of the year, we have narrowed the range of our guidance for service revenues by reducing the upper end by $50 million we increased the range of our guidance for operating income by $25 million on both ends.

This guidance suggests lower operating income in the second half of the year.

Two factors contribute to the trend.

First, we expect costs and expenses to increase in the second half of the year as a result of the actions being taken by the Company to improve customer net additions.

Also as Jay discussed earlier, our major enablement initiatives are now fully staffed.

We expect the pace of work and spending on these initiatives to pick up over the balance of this year.

Our guidance for capital expenditures and depreciation is unchanged.

Before I conclude, I have a few summary comments.

First, we believe we have an opportunity to continue to grow our business over the long-term.

Our core strategy of delivering the highest level of customer satisfaction in the industry is sound and we offer a competitive mix of products and services, particularly to our key post pay segment.

Additionally, and importantly, our growing suite of unique offerings, such as free incoming and our new battery swap program demonstrates the high degree of innovation and differentiation that we're capable of bringing to the industry.

However, it's true we're facing very challenging conditions right now and probably will for the foreseeable future.

As a result, we must and will respond aggressively to market conditions in order to maintain our competitive position.

We'll continue to have a strong focus on cost control, including containment and reduction.

We intend to grow our business and that means we'll continue to invest and spend where it's necessary to achieve our goals; however, we'll continue to look carefully at any opportunity to take out costs not critical to our success.

Finally, we are investing in our business and infrastructure to be able to further enhance the customer experience and provide greater value to our customers and to be able to do so efficiently and cost effectively.

The major initiatives will make us a stronger Company operationally, better positioned to take advantage of the economic recovery when it occurs and to create momentum for growth for the longer-term.

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

Bill.

Thank you, Steve and Jay.

Good morning, everyone.

The cornerstone of our strategy is to be the premier broadband provider in the market.

To that end, we continue to have strong growth in our high-speed data subscriber base in the second quarter.

However, overall financial results for the quarter were impacted by the weak economy, as well as the initiatives we have undertaken to remain competitive against wireless and cable providers.

For the quarter, TDS Telecom combined ILEC and CLEC revenues declined 6%.

The decline was 3% in the ILEC and 10% in the CLEC.

In the ILEC, we had strong growth and data revenue, though it's not been enough to offset the loss and voice of network access revenues.

Voice revenues declined in line with our physical access line loss.

The decrease in network access revenues was driven by lower minutes of use on our network and lower access rates.

The decline in the CLEC continues to be driven by our decision to limit investment in new residential customers.

Cash expenses increased 2%.

7% increase in the ILEC and a 5% decrease in the CLEC operations.

Cost control efforts were offset by several discrete events.

In the quarter, we recorded expense of approximately $5 million related to severance as we continued to adjust our cost structure and also for reserves for pending litigation and excised tax payments.

Additional severance costs will impact results in the second half this year.

Expense is also driven by initiatives to attract and keep customers, such as our Triple Play promotion, including a free HD TV or iPod Touch in exchange for a two-year service commitment and our increased circuit bandwidth to support the growth in high-speed data products.

As I mentioned, the strong positive in the quarter was increased in ILEC data revenues, which grew 17%.

Our promotional campaigns for high-speed data added 9,000 net subscribers sequentially.

Gross adds remain strong at 17,500 for the quarter.

The high-speed data penetration over all access plans is at 36%, up eight percentage points from last year.

We are also seeing a greater percentage to our customers using higher-speed service, which is contributed to a year over year residental DSL ARPU increase of 5% to $36.

More than 85% of our customers are taking speeds at 1.5 meg or greater and 60% taking speeds from 3 to 25 megs.

We have had continued success in selling our Triple Play, adding 5400 new subscribers in the quarter, bringing our penetration of residential lines to 17%.

We know the importance of bundling in reducing churn.

Churn on our Triple Play customers is very low at roughly 0.5% per month.

We continue to invest in our network, capital expenditures were $32 million for the quarter on a consolidated basis and we will continue to evolve our network and put the necessary infrastructure in place to offer competitive broadband speeds.

93% of our ILEC lines are equipped for DSL service.

In 2009, half of our lines will be capable of 10 megs or higher-speed service.

We are also readying our network to provide 25 meg or faster service in our most competitive marks.

We're investing an additional advanced service offering, including our hosted IP services and higher-speed data over bonded copper facilities for our commercial customers and we're expanding the capabilities of our network with our 10-gig regional fiber transport initiative.

Let me provide an update on the initiatives we have underway this year.

We indicated last call that we were rolling out products to respond to the weak economic environment.

In the consumer segment, we have seen the near-term competitive battle for data services turning on affordability rather than top-end speeds and so we emphasize speeds in the range of 1.5 to 10 meg.

Similarly, we rolled our new voice packages, including additional features and long-distance minutes that give customers a lot of flexibility in matching the service to their needs and budget.

We begin offering the new packages in January and had 62,000 customers on the plans by June 30.

We now have 44% of our customers on voice packages and for the Triple Play, we introduced a promotion in tandem with DISH expanding the $9.99 for six-months offer to a full year.

We also offered an HDTV or iPod Touch in our program and the offer requires a two-year commitment from the customer.

We ended the quarter with 52% of our residential customers on a double or triple-play bundle.

And we have armed our saved and win-back team with additional tools, including our version of naked DSL.

In the commercial segment, we're leading with the hosted IP service we call managed IP.

Among many benefits, it provides rich call management features, such as advanced call routing and one-number capabilities.

Because it's hosted on our network, the service has carrier grade (Inaudible) over capability.

We believe this is an especially attractive offering since it allows businesses to avoid a large up front capital investment because the service is hosted on our network.

The service has been very well-received in this small and medium business space and to reduce the cost and let us manage the telecommunications.

In our press release, we provided a new data series showing performance in this new service and managed IP stations are the actual numbers that are install at our customers for ILEC and CLEC, we had 7600 stations installed with the end of the second quarter, nearly triple the count from 4Q 2008.

We don't count these customers as physical lines but do count the stations in equivalent to access line.

Our investment in the 10-gig transport network will work for us in several ways.

It will help us reduce cost by enabling more efficient lease cost routing and internet back haul to build in enhanced network reliability with expanded diversity and redundancy and allows us to roll out new services, like managed IP to more markets.

We also continue to act on a strategy of evaluating acquisition opportunities when there is good strategic fit and price levels are attractive.

On July 27, TDS Telecom entered into an agreement to acquire Union Telephone Company located in New Hampshire.

The Company serves 8500 equivalent access lines through a high-quality network and is near several of our existing Companies.

Subject to regulatory approval, the transaction is expected to close in the fourth quarter of this year.

And finally, reflecting on both our results in the first half of this year as well as our outlook for the second half, we modified our guidance as shown in the press release.

Lowering the revenue range to 775 to $800 million.

Operating cash flow to 250 to $270 million.

And capital expenditures to approximately $125 million.

We are increasing depreciation amortization to approximately $165 million to reflect the impacts of acquisitions and writedowns of equipment included in depreciation.

And now, I will turn the call back to Mark Steinkrauss.

Thank you, Bill.

Marlene, we can now start the question-and-answer period.

(Operator Instructions).

Your first question comes from the line of Philip Cusick.

Your line is open.

Phil, you got a question?

Marlene, why don't you move on to the next person.

Your next question comes from the line of Rick Prentiss.

Your line is open.

Yes, thanks.

Good morning, guys.

Good morning.

One of those days where we're all in three places at one time.

So, sure feels good to be back.

A couple of questions.

First, you mentioned on the wireless side still the focus on post paid but obviously, you want to be competitive in offering a pre-paid product.

As you look at the industry maturing on the voice side growing on data, what do you think the mix will be for the industry and may be for yourself as far as post-pays versus prepays as we look out into the future?

Rick, this is Jay.

I'll take a piece of that, anyway.

As I said in my comments, obviously, we still are focused on the post-paid segment of the marketplace and will continue to do so.

Albeit, you know, over time the market matures, prepay will be an important part of it and we will see some of our mix fee more laden in that area and not predominantly.

All the actions, a significant amount of the actions that we have taken in the second quarter that I mentioned and more to come in the third quarter, really, I would say are heavily weighed toward that post paid segment.

Both to keep our customers with a value proposition for this significant enhancement there.

In particular in the data arena and in the Smartphone arena, as well as, on the retail front with the introduction of some national rate plans targeted at post paid that early indications are being extremely well-received.

So, I think our mix and focus based on our strategy will continue to be very strongly laden towards post paid, but we are going continue to build our prepaid product and address that consumer that has that cost-conscious concern in this current economy.

Rick, it's Steve.

Let me add to what Jay said.

We think of this as something that is an important part of the portfolio.

But not something we see as a major component of the business.

You will remember that currently prepay represents about 5% of our total retail base.

We certainly want to and expect to grow that over time, you know, to some degree.

It will be a bigger share of the base.

But it's not going to be a very, very significant part of the base.

And so we separate the word prepaid with unlimited, how important is it to offer an unlimited plan in your marketplace, whether it's under a contract or not under a contract?

We are offering, you're right, various versions of unlimited prepaid plans both in the post paid world as well as by the end of August.

We will have a version of unlimited prepaid in our markets.

We have three flavors.

We have unlimited local plans in certain markets.

We have the national unlimited plans that we introduced last year and introducing in all of our markets, some version of unlimited prepay.

Next question kind of similar in lines.

Seems like you're suggesting a bifurcation of the handset market that you said a lot of people are moving down to the lower-priced handsets and at the same time, you have a tripling year-over-year of the Smartphone air card sales.

Does that -- is that kind of what you see?

The great middle ground of maybe going away and people are driving down and how low do you mean by lower-priced phones and if you had to set out the mix, how much are we heading towards lower-priced phones versus Smartphones?

I will try that again.

This is Jay.

We are definitely seeing an acceleration on the high end on the side.

I think, again, supporting part of our strategy around the human coverage that more and more people are finding as they utilize the device that the total connectivity and offering with some of these premium data center devices critically enhance their lifestyle.

IE, as we all know, whether it's access to e-mail or other information, the connectivity of today's current user is highly information sensitive and required to get that information and we have seen that.

I have also seen both on the low-ends, partially due to the economy but as well as even some of the low-end devices, are richer and functionality, we have seen movement there.

I will say in the middle ground area we probably saw, and I don't have the percentages for you, but we saw a small decline year-over-year and yet it's still a pretty healthy portion and we have seen action this year on both ends and I think part of that is the data center devices support our strategy tremendously relative to people who desire connectivity of real-time information in the current environment.

Great, the final question is just you guys still have some spectrum that you haven't built out.

There has been some MNA opportunities in the wireless base over the last couple of quarters.

Wondering what your thoughts are as far as buying or selling licenses to kind of update your clusterings.

Hi, Rick.

This is Ken.

I'll take that one.

When we look at our portfolio of spectrum, we have been actively looking and acquiring some spectrum that overlays our markets, which is as much about future capacity and a path to our technology evolution in the future.

That is where we have been focussing the last year, year and a half now.

And the other side, we have direct ownership or investments in a company that means spectrum that hasn't been built out yet and, quite frankly, in this economy, it's not a priority of ours.

We're holding that at this point and we'll address what we do with that as the economy improves.

Great, thanks, guys.

Your next question comes from the line of Kevin Roe.

Your line is open.

Thank you, Roe Equity Research.

Good morning, guys.

On US.

Cellular, can you talk about the post paid subprime segments.

Specifically, how it's trended as a percent of gross ads in this economy and where it stands as a percent of your post paid base and continuing on that theme, can you update us on your subprime deposit requirement policy and how it may have changed year-to-date.

I don't have here, this is Jay again.

Steve may be able to jump in with more specific results.

I mean tracking day-to-day what that subprime acquisition mix looks like.

We're currently, evaluating within our range and I believe our current bad debt numbers.

As the market further penetrates, we're seeing either some folks, as I mentioned in my opening comments, moving and value-conscious folk, which might be in that category to some of the unlimited offerings of which we're responding to and as well as, making sure that the products they are getting from us meets the economic environment.

Whether it's a combination of lines and products and services, I think, we mentioned it in previous calls we started to see some of that activity earlier in the economic downturn.

So, we're playing our post paid segments to all aspects or profiles, credit profiles in the marketplace and we're aggressively managing both.

From a trend perspective, the subprime segment, has they increased as a percent of your gross ads year-to-date?

First quarter to second quarter.

Hello.

This is Jack Rooney speaking.

I think there is a misconception on your part as to whether -- we don't really have a subprime program.

People who have to put down a deposit.

Some of those are subprime and some are moving into the, I guess you would call them subprime.

Let's forget the subprime title and call it deposit versus no deposit.

Curious how that's trending.

I don't think there is a significant trend in the positive customers over the last year, year and a half over what we have had before.

We don't have a program aimed at getting credit-deprived customers into our network.

If they come in, they have to pass a credit screen and I don't know of any significant increase or any increase in that matter, in that, the customers requiring deposits.

And as the deposit policy, the requirement the dollar amount, has that changed at all?

Relatively stable.

There has been some adjustments from here to there but nothing what I would call significant in terms of changing the credit profile of the Company.

Our credit profile, you look at the percentage of bad debt year-over-year and has been constant and will probably stay that way.

A quick followup on the net ad guidance, the withdrawal of it.

Do you attribute that more to a function of of it.

Do you attribute that more to a function of the economy or to competition, some more color there would be helpful.

What is having a greater impact in your view and when you look at the math for net gross ads versus churn, is it primarily the gross ad side of the equation or churn or both driving that uncertainty?

Thanks.

Jay.

A lot of questions.

I will try to see if I can remember them.

On the net ad question on what we have seen, driven by competitiveness or economy.

This is Jay, again.

I would say it's pretty well, both of those areas have, why they're making some of the action changes that we're making.

I wouldn't say it's one drives one any more than the other.

But the combination of the two is clearly causing us to take some of these actions and as I said earlier in the first part of the quarters, we saw slow traffic in stores.

We have interview introduced several of the plans and that the other reason why we can't feel comfortable with the net guidance because the plans are early out the door and we just, you know, early indications are they're being well-received and can't quantify those throughout the rest of the year.

So, we did see, as I mentioned in my opening comments, some impact on those customers, impacted by the economy and value conscious.

We saw some increase in defections of those customers starting to stabilize and again, we think we have introduced some programs within the organizations to try to send that.

As I said, with the introduction of multiple activities to generate sales and retention, we have soon early indications, some upside benefits in retail store traffic and all of those things combined are too early for us to put in mathematical numbers again.

That's helpful.

Kevin -- .

Yes.

On the guidance, we considered all of the things that you mentioned, certainly the weak economy plays a big part of that.

The presence and intensity is another factor and thought about the actions that were taken.

As jay mentioned, it's still early in the actions and it's difficult to assess the impact it might have.

We didn't necessarily weight them and I don't know that you could.

They part of management's assessment of the overall environment.

That is helpful.

Thanks, guys.

Your next question comes from the line of Steven Beckert.

Your line is open.

Hi, guys, I joined the call late.

Sorry, if this question's been asked.

Could you talk about the declining cost of equipment year-over-year and was that driven entirely by just shifts to lower-priced handsets or has there been a change in your subsidy strategy?

Let me take that one.

And Jay can comment further.

There has been no change in the subsidy strategy.

Certainly, as I motioned, as we go forward in the year, we will be gearing some of the promotions to stimulate Smartphones.

The general results in the second quarter over the comparable quarter of last year, unit sales were down about 5% and we saw a decline in the average revenue per unit and as we mentioned, we think there is a mixed shift as a result of consumer buying behavior in this economy.

All right, that makes sense.

Thanks a lot and was wondering if you could talk a little bit about the sequential growth in data ARPU seems to have slowed in Q2.

Is that due to the same factors you were talking about before, lower Smartphone adoption, that type of thing?

Actually, I think data ARPU grew 30% year-over-year, which was in line with what data revenues grew.

Right.

Looks like data ARPU grew a little over 3% sequentially, which seems low compared to other quarters.

We'll have to get back to you on that.

Okay.

I don't have anything on that at the moment.

All right, thank you.

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