美國無線通訊 (USM) 2009 Q3 法說會逐字稿

Good morning.

I will be your conference operator today.

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

All lines have been placed on mute to prevent background noise.

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

(Operator Instructions) Thank you and Ms.

McCahon, you may begin your conference.

Good morning everyone.

For those of you I haven't met I'm the new Vice President of Corporate Relations taking over for Mark Steinkrauss.

I look forward to meeting and working with you all.

With me today and offering prepared comments are Ken Meyers, Executive Vice President and CFO with TDS, Steve Campbell, Executive Vice President Finance, CFO and Treasurer at US Cellular, Jay Ellison, Executive VP and COO at US Cellular, Bill Megan, Executive VP, Finance and CFO at TDS Telecom.

Also joining us today is Alan Ferber the VP Sales Operations and Chief Marketing Officer at US Cellular.

Please refer to our press releases this morning for replay information.

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

If you have other questions unrelated to the operating and financial results I would be pleased to respond them after the call and available for the remarried of the week in my office.

My contact information is on the release.

For many years, TDS has maintained an open door policy and I support it wholeheartedly.

If you are in the Chicago area and would like to meet with members of management from US Cellular, TDS or TDS Telecom in Madison, the investor relations team will try to accommodate you calendars permitting.

This call is being simultaneously web cast on the investor relations section of both the TDS and US Cellular web site.

We believe our websites are an efficient, effective way to provide information to the investment community and will continue to look for additional ways to take advantage of this powerful channel.

Some information during this 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 paragraph in our releases and the more extended versions on our web site as well as with our filings with the SEC.

Shortly after we released earnings results this morning and before this call, TDS and US Cellular filed 8k's including the press releases we issued this morning both companies plan to file their Form 10Q's later today.

We have posted on our web sites, on a separate page entitled guidance and reconciliation, additional information of non-GAAP financial measures that may be used by management when discussing operating results during today's conference call.

The Companies guidance for 2009 is posted as well as the reconciliations for net income diluted EPS, and operating cash flow.

Please note that comparisons made by speakers today in prepared remarks are third quarter year-to-year comparisons unless otherwise indicated.

For calendar purpose we will be visiting the following cities and attending several investment conferences over the next quarter or so, on November 18th through 20th Mark and I will be meeting with investors and analysts in New York and Boston .

On January 5th through 7th we will participating in (inaudible) 20th Annual Global Entertainment, Media and Telecommunication Conference in San Francisco.

For those planning to attend CTIA in Las Vegas in March, we will have management available to meet with investors and analysts on wednesday March 24th.

If you would like to meet with us in any of these cities or events, please let me know, we will try to accommodate you if at all possible.

With that I'll turn the call over to Ken

Thank you Jane.

Good morning.

For those of you who may joined late or were not paying attention at the very beginning of the call that was Jane McCahon, the Company's Vice President of Corporate Relations.

Mark Steinkrauss, who most of you know, has decided to spend more time on Cape Cod and less time traveling with me.

He is retiring at year end.

In the meantime, he will be working with Jane to ensure a smooth transition.

I want to take this opportunity to thank Mark for years of service at TDS.

Over the last 12 years I learned a great deal from Mark and benefited from his council.

He has served the Company and our investors well.

Since Mark will be around until year end I encourage his friends to drop him a line and join me in wishing mark the best in his retirement and to welcoming Jane.

Her contact information is on the press release for anyone with follow up questions after the call is over.

Turning back to the more formal business of the call, 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 prepared comments.

TDS operating revenues were $1.3 billion, down 3%, principally due to expected and previously discussed loss of inbound roaming revenue at US Cellular as well as continuation in the decline of physical access lines at TDS Telecom.

However, gross and net additions at US Cellular have improved markedly from last quarter and data revenues continue to grow rapidly at US Cellular and TDS Telecom despite considerable economic and competitive pressures.

As our guidance last quarter indicated operating income declined significantly to primarily two factors anticipated and some cases even initiated.

This is clearly not the level of financial performance we expect over time but we believe we are at a critical juncture and these investments today in programs, technologies and infrastructures, will enable the Company to generate acceptable levels of growth and returns in the future.

We asked both CFO's to address the factors impacting operating income with you this morning.

As a reminder in the third quarter of last year, the Company recorded a $31.7 million pretax gain on the exchange of RCC stock for cash.

In early October, TDS competed its second $250 million stock repurchase authorization.

Well ahead of schedule.

Since June 2007, or said differently over the last two and one quarter years, the Company has bought back over 14 million shares for $500 million and paid out another $118 million in dividends.

And as I will discuss shortly, still has a very strong investment grade balance sheet.

In the most recent quarterly alone the Company bought back over 2.6 million shares for $74 million.

As I said, the Company completed this last repurchase authorization well ahead of schedule faster than anticipated.

We do expect the Board of Directors to consider the possibility of another repurchase authorization when it meets later this month.

We ended the quarter with a very strong balance sheet including $778 million in cash and cash equivalents invested primarily in treasuries the company has another $136 million invested in certificates of deposit which are FDIC insured.

The CDs are listed on the balance sheet under short-term investments and are in addition to the $778 million of cash and cash equivalents.

A small note the affective tax rate for the quarter for TDS was 37% and about 35% for US Cellular.

Expect full year rates to be about 35% and 34% respectively.

Both US Cellular and TDS Telecom are continuing their efforts to generate long-term profitable growth by focusing on the customer.

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

As I stated earlier we are committed to investing in strategies designed to enable them to compete and succeed in the long-term and we have a strong and flexible financial foundation from which to do so.

Before I turn the call over to Jay Ellison, I expect you saw the announcement this morning that Jay is also retiring at the end of the year.

During his nine years with the Company, Jay has been one of the key architects of the companies culture and strategy.

He has built a strong organization focused on delivering uniquely high levels of customer satisfaction.

As a result of Jay's leadership and coaching, the Company has many strong leaders.

one of which is Alan Ferber.

Alan who has been the Company's Vice President , Sales Operations and Chief Marketing Officer is taking over for Jay providing a seemless transition for field operations.

Alan is with us this morning and is available to answer questions.

We wish Jay well in his retirement and thank him for all he has done to make US Cellular the Company it is today.

And now with that eulogy, let me turn the call over to

Wow.

Thanks Ken for such kind words.

Good morning everyone.

Let me begin by saying a few words about the overall business environment.

From our perspective competition in the wireless market during the third quarter was intense in the post pay and prepaid segments with battles being fought on both hand sets and service pricing.

The exclusive hand sets offered by some of the larger carriers remain very popular with consumers and we saw more aggressive pricing by the unlimited prepaid carriers in the third quarter.

However unlike in the second quarter, there were no major launches by the prepaid carriers in any of our markets.

On a sequential quarter basis saw decline in net port outs especially to the lower priced carriers.

The current state of the economy continues to impact our customers and our operations.

The economy seems to have stabilized to some extent during the third quarter was the recovery is expected to be slow and painful nonetheless.

Ongoing job losses and tight credit remain very real concerns for consumers.

Although they are willing to spend in these difficult economic times when there is perceived value they clearly are considering price more prominently in their decision making.

Despite the competitive and economic pressures, we achieved improved subscriber results compared to the second quarter.

On the last call, we discussed steps we were taking to respond competitively including several postpaid promotional plans and programs and new unlimited prepaid plans aimed at both adding and retaining customers.

In the third quarter, we had a very strong response to the new promotions and plans with almost 900,000 new and existing postpaid customers taking advantage of these offers.

Many of our existing customers have entered in to new contracts with us in connection with these offers and this will benefit us positively in the long run to reducing the risk of future churn.

In a moment Steve will discuss the third quarter financial results in more detail.

But let me mention a couple of the highlights, service revenues for the quarter were $985 million.

This is a increase of 1% sequentially and the essentially the same as last year after adjusting for decline in roaming revenues that resulted primarily from the Verizon also combination.

Retail service ARPU is up year-over-year as a result of continuing strong growth and data revenue.

Data revenues grew 34%, year-over-year, and now represent 18% of total service revenues.

Up from 13% in a year ago.

The keys to continuing growth in data are the ongoing expansion of our 3G coverage and an increased penetration of smart phones and other data intensive premium devices.

Operating cash flow for the quarter was $209 million down from $272 million a year ago due to lower roaming revenues and higher customer acquisition costs mostly if the form of equipment subsidies and operating expenses.

Turning now to customer activity.

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

Retail gross adds 351,000, up 23% sequentially and 8% year-over-year with increases in both post paid and prepaid segment.

Retail net additions improved sequentially each month in the quarter in fact over four consecutive months.

Overall gained 8,000 postpaid customers and lost 14,000 prepaid customers for a net loss of 6,000 retail customers in the quarter.

This is a dramatic improvement over the net loss of 59,000 retail customers in the second quarter and in line with the prior year quarter when we had a net loss of 3,000 retail customers.

Postpaid churn averaged 1.7% for the quarter, while total retail churn was 2.1%.

As I mentioned earlier we initiated a number of retention programs that we believe will help reduce turnover time.

We have launched new individual and family national plans which are being well received by both new and existing customers.

As mentioned earlier many of our existing customers have taken advantage of these offers and their popularity with new customers has helped us to achieve growth in postpaid growth additions of 20% sequentially and 9% year-over-year.

We rolled out new unlimited prepaid plans throughout all of our markets.

This rollout began in mid July and ended in mid August.

Early results indicate that the plans are being effective as prepaid growth additions are up 37%, sequentially, and 2% year-over-year.

During the quarter we introduced several new handsets and I want to take a moment to touch on those as well as upcoming launches in the fourth quarter.

At the end of August, we introduced the LG Bliss, an exclusive device that has a 3-inch full touch screen with [accelerometer] that enables the device to be used in portrait or land scape mode.

The virtual keyboard enables fast texting and the designed is fashion forward.

This premium device is packed with features and games.

We also relaunched the LG Banter around the same time which has a qwerty keyboard, a 1.3 mega-pixel camera, music player, changeable face plates and is blue toothed capable.

And in September we launched LG Helix, which is a clam shell device with the 1.3 mega- pixel camera and is blue tooth enabled.

We continue to see good traction with the LG Triton as we noted in the press release and the Blackberry flip during the third quarter.

We have already launched or will launch of total eight additional new devices in the Q4.

In the Smartphone category, we launched the Blackberry Tour which is the latest world phone device and very shortly we will be launching the next generation Curve device with optical navigation and enabled for Wi-Fi and two HTC windows mobile bases devices that snap in the Touch Pro 2.

For premium phone offerings, we launched the Samsung Caliber, which is a follow on to the Dell with a full touch, intuitive user interface.

We will also soon be launching the Motorola Crush, a lower priced full touch screen device by and as previously mentioned the Motorola Quantico, a full military spec device arriving by the end of the year.

With these introductions, we feel we have a robust selection of devices that will have strong appeal to our customer segments as we roll in to the important Holiday selling season.

Now I want to say a few words about some of our other initiatives beyond the service plans and handset offerings that I already mentioned to grow in strength in our business this year and for the longer term.

US Cellular's business is connecting people and our brand message is Believe in Something Better.

Our battery swap program, our most recent proved point in our customer centric strategy continues its success with letting our customers know that we are committed to their satisfaction by replacing a dead or dying battery with a fully charged battery, free of charge.

The buzz is spreading as hundreds of thousands of customers already have taken advantage of this program.

We are about to launch another proof point on how we go the extra distance to provide a unique experience to our customers.

With this new service that we call overage protection a customer will be able to opt in to receive an alert when they are coming close to reaching allowable plan minutes for text message for the month to avoid overage charges.

Customers are increasingly interested in ways to help manage wireless spending especially in these tougher economic times.

With our new overage protection offer, we will be demonstrating to our customers once again that we have their back by helping to protect them from costly overage charges.

As we did last year, we will be launching Calling All Communities this marketing program invited existing and potential customers to come in to any US Cellular store and vote for the school of their choice.

The 10 schools receiving the most votes at the conclusion of the contest in January 2010, each will win $100,000.

This year the program will be supported by national advertising.

The campaign will give people in our community a chance to be part of something bigger than themselves and our contributions will create educational opportunities for the children in the winning community.

Calling All Communities is delivering on the US Cellular's brand promise to be than just a phone company to customers and potential customers.

We have also accelerated the expansion of our 3G network and are now reaching approximately 75% of our customers.

We will continue this rollout in to 2010, which is important so that we can continue to enhance our customers data experience.

And later this year, we will begin the technical trials of LTE in order to start planning for the deployment of the next generation technology.

We continue to move forward with the multiyear initiatives that we told you about in previous calls.

These initiatives which will enable stronger customer relationships, make billing and operations more efficient and drive on line sales and accounts management are well in to the requirement definition and design phases.

We expect to make some key decisions related to vendor and solution selection within the next few months in order to begin implementation next year.

Now I will turn the call over to Steve Campbell to discuss the financial results for the quarter.

Thanks Jay.

Beginning with revenues, service revenues for the quarter were $985 million, up 1% sequentially, down 3% year-over-year.

However on that year-over-year comparison, after adjustment for decline in roaming revenues, resulting primarily from the Verizon Altell combination, service revenues were essentially flat.

Inbound roaming revenues were $69 million, down $25 million, or 26%.

Going forward we expect additional but less significant year-over-year reductions in the inbound roaming revenues from Verizon.

Retail service ARPU grew to $47.02, up $0.05 year-over-year, as continuing strong growth in data revenues offset a decline in voice revenues.

Data revenues were $174 million, up 34%, year-over-year.

ETC revenues for the quarter were $40 million, compared to $38 million last year.

As expected, operating income declined this quarter to $58 million.

The decline was due to the loss of high margin inbound roaming revenues, higher equipment and other costs acquiring and serving customers and spending on the multiyear initiatives that Jay mentioned earlier.

In a little more detail, the net loss on equipment for the quarter was $116 million, up from $108 million in the prior year.

This has increased reflected a 6% increase if the number of hand sets sold, which was driven by sold growth in retail customer additions and renewals and and increase in the net subsidy per units sold.

Sales of smart phones and other premium data intensive devices continue to increase, which ,in turn, will continue to drive growth in data revenues.

Sales of these units nearly quadrupled year-over-year and expect that trend to continue as we further expand our 3G network,

Other cash operating expenses consisting of system operations and selling general administrative increased $27 million or 4% year-over-year.

System operations expenses up $8 million-dollar or 4% driven in large part by and increase in the number of cell sites in service.

SG&A expenses also increased by about 4%, or $19 million, due to several factors.

First, we incurred higher cost to acquire customers, such as commissions related to the increased sales and renewal activity and higher bad debts expense.

We also incurred higher cost to service customers including those related to the battery swap program and increased staffing in our customer care centers to handle increased call volumes and handle times.

We've experienced record call volumes in response to our promotional offers as well as to the expanding sales and installed base of smart phones and premium devices.

Additionally, we incurred expenses related to the multi year initiatives.

Operating cash flow for the quarter was $209 million.

Operating cash flow margin was 21.2%.

Capital expenditures in the quarter were $129 million, and so we generated simple free cash flow of $80 million.

Investments and other income net for the quarter totaled $6 million including earnings of $15.5 million, related to our interest if the Los Angeles partnership.

Finally, net income attributable to US Cellular totaled $36 million, or $0.41 per share.

As we head in to the now four our balance sheet is sound, and we have significant liquidity and financial flexibility together we expected cash flow from operations to meet our financing needs.

During the third quarter, we repurchased 140,000 of our common shares, at a cost of about $5 million.

At September 30th, the cash balance at US Cellular was $405 million and we have borrowing capacity of about $300 million, under our revolving credit facility.

Our guidance for the full year 2009 is shown in today's press release, and it is unchanged from that published previously.

We continue to believe that we have an opportunity to grow our business over the longer term.

As Jay mentioned earlier, we continue to face difficult conditions which are likely to continue for sometime.

However, we believe the results of the third quarter in which we achieved strong improvement in both gross and net retail adds on a sequential quarter basis suggest that customers are responding well to our new programs.

We will continue to respond aggressively to market conditions in order to preserve our subscriber base and maintain our competitive position.

Beyond insuring we offer a competitive mix of products and services, we're continuing to offer customers increased value through innovative solutions such as the battery swap program, and the upcoming launch of overage protection.

The ongoing investments in our business infrastructure will provide opportunities for us to operate more efficiently, and further enhance our ability to deliver on our man promise.

Of course, we will continue to have a strong focus on cost control including both containment, and reduction.

We intend to grow our business and that means we will continue to invest and spend where it's necessary to achieve our goals.

However we will continue to look carefully at any opportunity to take out costs that are not critical to our success.

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

Bill?

Thank you Steve and Jay.

Good morning everyone.

Telecom results improved modestly from the second quarter, with trend in revenues and expenses improving and access line loss stabilizing.

In addition, as we have said broadband is a corner stone of our strategy and we continued to have strong growth in high speed data subscriber base.

For the quarter TDS Telecom combined ILEC and CLEC revenues declined 4.6%.

The decline was 2% in ILEC and 10% in the CLEC.

In the ILEC we had strong growth in data revenues though it has not been enough to offset the loss in voice and data, voice and network access revenues.

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

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

The decline in the CLEC is driven by our decision to limit investment in new residential customers and therefore, we expect that trend to continue.

As part of our efforts to mitigate the loss in physical access line, while at the same time responding to customers needs to economize, we rolled out voice packages called Star Packages, include additional features in long distance minutes giving customers a lot of flexibility in matching service head to their needs and budgets.

We began offering new packages in January, and had 86,000 customers on these plans at the end of September.

We now have 47% of our residential customers on voice packages, up 12% from September of 2008.

As I mentioned the strong positive in the quarter was the increase in ILEC data revenues which grew 14%.

Our promotional campaigns for high speed data added 5,000 net subscribers sequentially, gross adds remain strong at 15,400 for the quarter.

Our high speed data penetration over all access lines is now at 37%, Up 7 percentage points from last year.

We are also seeing a greater percentage of our customers using higher speed service, contributed to a year-over-year DSL ARPU increase of 4.5% to $37.

More than 90% of our customers are taking speeds of 1.5 mega grade or better and 60% are taking speeds greater than 3 meg.

However, given the current economy we see the near term competitive battle for data services turning on affordability rather than top end speed.

So we have introduced product offerings that emphasize speeds in the range of 1.5 to 10 Meg and they are being well received.

We have also armed our Saves and Win Back team, our version of naked DSL.

And our greatest emphasis on pulling all of these together, voice, data and video, with video offered through partner, DISH Network.

We have continued success in selling triple play, adding 3,900 net subscribers in the quarter bringing our penetration of residential lines to 19%.

We know the importance of bundling and reducing churn.

Churn on triple play customers is very low at roughly one-half of a percent per month.

Recently for our triple play, we introduced a promotion that extends 12 month credit offered by DISH for an additional year to lock in customer savings for a full 24 months.

Over the past year we have introduced a series of promotions in our markets that presented different value propositions and have kept the program fresh and customers responded favorably.

We have had measurable success with our bundled offerings ending the third quarter with 54% of our residential customers on the double or triple play bundle, up from 46% as of a year ago.

In the Commercial segment, we are leading with our hosted IP service, we call Managed IP.

Among many benefits the service provides very rich call management features, such as advanced call routing and one number capability.

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

For both ILEC and CLEC, we now have 11,000 stations installed with a third of them added in the third quarter.

We do not count these customers as physical access lines but do count the stations in equivalent access lines.

Cash expenses increased 0.4%, a 5% increase in the ILEC, and a 7% decrease in the CLEC operations.

Cost control efforts were offset by expense of approximately $1.6 million related to severance as we continue to adjust our cost structure.

We expect to incur similar severance costs in the fourth quarter as well.

Expense was also driven by initiatives to attract and retain customers such as our triple play pr motion, which included a free iPod Touch in exchange for a two year service commitment and costs associated with our increased circuit band width to support high speed data products.

We continue to invest in our network.

Capital expenditures were $29 million for the quarter, we 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 and by the end of this year about half of our lines will be capable of 10 meg or higher speed service.

We are investing in additional advanced service offerings including host IP based services and higher speed data over bonded copper facilities for our commercial customers.

We are expanding the capabilities of our network with 10 gig regional fiber transport initiative.

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

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

We continue to evaluate acquisition opportunities when there is a good strategic fit and price levels are attractive.

As we discussed last quarter, TDS Telecom entered in to a agreement to acquire Union Telephone Company located in New Hampshire.

The company serves 8,500 equivalent access lines, through a high quality network that is near several of our existing companies.

Subject to regulatory approval the transaction is expected to close in the first quarter of 2010.

Finally, our guidance has been updated as shown in the press release.

Now I will turn the call back to Jane McCahon.

Thanks, Bill.

Anika, we are ready for questions.

(Operator Instructions) We will pause to compile the Q&A roster.

The first question comes from Rick Prentiss with Raymond James.

Thanks.

First, Jane, welcome and enjoyed working with Mark all these years, hopefully we will have a great relationship as well.

First question, on the US Cellular side, I missed some of the comments on LTE, can you mention again the technical trial exactly when you would start and also what are your early indications on what the costs might be to roll out a LT network?

What exactly do you have to do to your network.

This is Jay, I'll give you a little flavor on some of that, then Steve can jump in.

We mentioned a trial beginning late this year.

Most likely based on timelines right now and evaluations we're doing relative to infrastructure providers, in the December time frame and pure technical trial, internal no customers or anything along those lines.

It's also probably way too early for us to start talking about cost on LTE, until we determine a number of things from the trial and then our rollout schedule and things along those lines as well as working with hand set provider.

The only thing that I would add is that we expect that technical trial to run through the middle of next year, or so.

And as Jay said, once that's completed we will have a better sense of cost to deploy.

Probably not-- not to put words in your mouth but as you look at 2010, probably not a lot of impact on the CapEx side from LT potential.

No, not in 2010.

I think we would be looking beyond that.

You mentioned several times the smart phones how important they are, the hand set line up, what percent of your base ask and third quarter gross adds were smart phones, air cards et cetera?

Hold on.

I don't think we have the smart card broken down.

I could give you that.

In the third quarter, Rick, this is Ken, smart phones and the premium phone, which is the a lot of the internet stuff that was almost 22% of gross adds.

With really significant quarter over quarter jump in that what we are calling our premium category.

Okay.

I think I mentioned, Rick, that sales of those smart phones and premium devices are up almost 4x, year-over-year.

Right, right.

Okay.

Then something else you mentioned Jay in your comments was the adds increased month to month to month, it wasn't just three months I think you said then four months is that to imply October or going back to June?

That was actually a trend beginning in June.

We saw an uptick in June and then each month there it continues.

Then the final question I've got for you as you look-- we've had a mixture of companies reporting so far this year--some giving guidance, some concerned on guidance, as you lookout to your normal practice of giving guidance given the uncertain economic environment and uncertain competitive environment, what are your thoughts as far as how good your visibility is and when you would be able to share 2010 thoughts with us?

This is Ken, Rick.

What we have done consistently over the last few years is talk about next year, 2010, when we release our year end numbers which is typically late January, early February.

At this point in time the Company doesn't have any plans to change its practice of giving annual guidance.

Though clearly that is one of the investor relations ongoing debates in terms of whether companies give guidance or not.

We think it -- or I think, -- given the complexity of our Company, TDS with our two businesses that giving annual guidance helps people understand where we are going, what our plans are.

And at this point in time I would expect to continue that.

Thanks, Ken.

Next question comes from Simon Flannery with Morgan Stanley.

This is Shawn on behalf of Simon.

I was curious if you can discuss more apout your hand set pipeline, do you have any android or Palm OS handsets coming in?

Not much.

I am going to introduce you to Alan Ferber because he has been working that part of our strategy.

Good morning.

We are currently working on our android strategy.

Probably will not be launching any android phones before the middle of next year.

Currently we do not have any plans for Palm OS device.

Okay.

Also can you discuss more about your roaming position and are you comfortable with where you are at today?

I'm not sure what you mean by are we comfortable.

As far as securing partners.

Yes, I think we are comfortable with that.

I think we have you know great roaming partners now.

We are obviously working to ensure that we have the kind of VVDO roaming capability that we are going to need going forward.

I think we are pretty happy with the relationships that we have.

Great, thank you, guys.

And just to clarify on that, we have long-term agreements in place that give us the capability for roaming for several years out in to the future.

Okay.

Thanks.

Next question comes from Phil Cusick with Macquarie.

On the gross outside you talked about being up sequentially, that's great to see.

I've got to ask you to help me, what do you think are the two drivers?

You had a new competitor come in to your market in the spring and you talked about that being a big issue early on.

Was it that falling away or really the impact of your new promotions and hand sets, how do you shift the mix there?

This is Jay.

I really think we have just seen very positive results from--significantly from the introduction of our rate plans both the national single and the family plans that we introduced starting the April, May time frame and continue to roll out.

Also we have also introduced, as I said, unlimited prepaid plans, not only in markets where we had those lower priced carriers come into marketplace, but across the enterprise and in all of our markets we have seen a response to.

That additionally we seen I mentioned in my comments, we seen our net portouts decline across the board as well as we have seen the return in some of our larger major metros from some of those lower priced carriers where the quality of coverage was not sufficient and satisfactory to consumer.

Additionally we seen, I mentioned in my comments, we seen our net port outs decline across the board as well as we have seen the return in some of our larger major metros from some of those lower priced carriers where the quality of coverage was not sufficient and satisfactory to consumer.

So its really all of those combined and again even our current customers taking advantage.

But on the gross side it was national promotion, hand sets were a part of it with the LG Bliss, the Triton, and relaunch of the Banter, but It think a lot was driven by the price plans we introduced on the prepaid and postpaid side.

I would just add, as Jay said, it's all of those factors , there is a very noticeable trend down in the port outs in this last quarter.

Phil, as we've talked we often seen when we get a competitor coming into a market like we had with [Leap] in February that you see an uptick as Jay said over time we see those customers actually coming

If I can -- I mean that's great to see.

If I can paraphrase here, it seems like you seen incremental competition both at the low end from [Leap] and high end with hand sets, and your strategy has been to respond both with national pricing and with better hand sets, makes a little since.

The net results seem to be margins have jumped all over the place over the last four quarters.

Can you give us an idea of should things start to settle out here in whether it's the low to mid-20s, or as gross adds come back you really need to be working for that, should we thinking about 21% EBITDA margin going forward or are there cost cuts and things like that, that can offset those costs.

I think our the guidance that we've confirmed today, gives you the best idea of our thinking about margins certainly for this year.

I mentioned and I reinforce it that we are going to stay competitive.

We are going to protect the base, we are going to continue to grow and that certainly carries costs with it.

Looking further out, as Ken said, we wouldn't be providing guidance on 2010 until next year.

The only other thing I would say, Phil, is we reinforced a number of times that we are investing in this business right now for the long haul.

I don't think that you should expect over the next couple of quarters to see any real significant expansion in the margin from what you are seeing in the current guidance.

So one more and I saved this for last because I don't know that I'm going to get much out of it, but you have a phenomenal balance sheet, you've got a ton of cash flow and there are some competitors who, if you wanted to own them, could make you bigger in the wireless space.

It would be a big change in your footprint but they're CDMA players.

Would it make sense to get bigger in this business if you are really in it for the long haul or do you think that being a regional player with roaming deals just makes more sense for your situation long-term?

This is Ken.

I'm going to lean in to that one a little bit.

Not that you didn't expect that.

The model that we operate under, in terms of the customer satisfaction strategy delivered through a rather unique culture, is something that would be much harder to do if we were to double the Company size overnight.

What would happen is we would run a huge risk of diluting that culture and therefore moving off of our strategy.

So while I never say never, I think if you look back at the Company's history and how we grown it we grown it by doing small and mid size acquisitions, not doing large public market deals.

That's pretty clear.

Thanks, Ken.

Next question comes from Kevin Roe with Roe Equity Research.

Thank you, good morning.

First wanted to echo Rick's comments to Jane and Mark.

Mark you got plenty of time in retirement to work on that accent.

It's Mark with a hard K.

A couple of questions, first the retention initiative you guys have talked about it looks like it's getting good traction.

Can you talk about the cost there and how much of the margin pressure we saw this quarter at US Cellular is from those retention initiatives, what is the customer getting now versus previously in those retention incentives?

And secondly, the overage protection, is that something customers have to proactively opt into?

Can you help us think about how that may impact ARPU going forward?

I'll start Kevin, this is Jay, and then Steve or Alan may jump in on it and I'll try to work backwards.

On overage protection it will be a customer will have to opt in for that program and they will-- it will protect them on voice and text packages on overage.

We think that the impact on ARPU is fairly neutral because we also have the opportunity if the customer historically is hitting that package we are going to have the opportunity to move them up in rate plan.

We've experienced very similar type of customer behaviors when we've introduced complete product and pricing portfolios.

So we think that that will be fairly revenue neutral on that particular program.

As it relates to the retention program themselves that you reference, we had a number of things.

As I've mentioned just the introduction of some of the national rate plans that we've put out there with the value that we built into them, approximately at the 900,000 I would say 75%, 80% of those were current customers renewing their contracts and getting on to those rate plans.

So we see some future churn benefits with those and those customers renewing their contracts as well.

We also had a number of wha we would call early upgrade programs for customers that wanted to move to a premium or smart phone device earlier in their contract than they normally would have been allowed.

That comes along with increased ARPU as well.

And we had very good response to those programs.

Alan, I don't know if we had any others beyond those two that were fairly majo but those tow were really the significant drivers in our retention program.

And we had other tools in the bags of our customer relations specialists, save tools, to help people get through rough economic times with some price off their bill.

And additionally what we had what we call a tripled airtime promotion on current customers could add, nights/weekend, mobile-to-mobile, incoming if one of those weren't on there they could add that third one as well.

Those are basically for the customer base.

That's helpful.

Lastly a question for Ken, thanks for comment on the M&A.

Sticking with that big picture.

How do you look at what's the latest thinking on the structure of TDS US Cellular?

Does it make sense to have them as separately traded stocks, separate companies just your latest thoughts would be helpful?

Unchanged from where the Company was two years ago when we started doing our repurchasing of TDS shares, when we said we that were not going forward with any buy in of US Cellular stuff.

It's a nice to have, does not drive compelling cost savings or anything else.

So the amount of consideration that would be required at the time was too great to get the deal done (inaudible).

It's not a strategic comparative.

Thank you.

(Operator Instructions) Your next question come from Rick Prentiss with Raymond James.

Feel like its old home week here with a bunch of guys on the call.

Circle back on some of Kevins comments there and Phils.

When you look at your balance sheet, obviously very strong balance sheet Ken that you created there, thanks for giving us the extra color on the extra $136 million tucked away in CD's, as you think about the Board possibly considering a stock buy back at the TDS level how do you think about leverage, how much cash you want to keep on hand on the balance sheet to run the business, just how you look at putting your balance sheet to work?

How you look at that putting your balance sheet to work.

Great question, Rick, one that we are quite frankly spending a lot of time on right now.

Two years ago we had looked at this and thinking of the consolidated entity we talked about a business that we thought should have $250 million of cash that was readily available.

That was our operating model.

That was before we all went through the complete meltdown over the last couple of years.

From a strategic standpoint as we think about our balance sheet, and we think about the lessens learned over the last year where we all thought we had revolvers that were immediately available until we heard bankers asking us not to use them, we probably we now think about running a business that has $400 million of cash that is available.

So that is our starting point.

Now we obviously aren't there yet.

We got, we are much richer than that at this point in time.

And we are looking at a lot of different opportunities.

Both within our business as well as doing different things by balance sheet.

We will talk about some of those with the Board later this month.

Great.

One ancient question that seems like we asked it for the last four or five years, Universal Service Fund, we have a new administration in power now, what are your thoughts as on the wireless and the land line side about what you guys are hearing in the corridors of Washington about USF?

What we are hearing, Rick, is that we expect that the new commission will take up that issue in earnest later probably sometime into 2010.

But frankly what we are hearing is that their primary area of focus right now is on the national broadband plan.

So while we are watchful and in fact it's a area of (inaudible) given the amount of DTC revenue that we get, we expect them to take it up but it doesn't seem to be the hottest issue on their list now.

Bill, do you have anything else to add?

I would say from the wireline perspective, we do not anticipate significant shifts in line with Steve, certainly not of magnitude that was under consideration with intercarrier compensation in USF reform last year.

This year, as Steve mentioned, the administration is focused on the broadband as net neutrality as policy priorities so we don't expect to see such potentially transformational changes implemented.

But as you look at our income, as we talked about in the past we do expect to see a downward trend in high cost loop as a component of USF, that's a function of how high cost loop is calculated and what the distribution is.

We expect that trend to continue.

Great, thanks, guys.

At this time there are no further questions.

Very good, thank you all for your participation today and we look forward to talking to you soon.

This concludes today's conference call you may now disconnect