美國無線通訊 (USM) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Greetings, and welcome to the TDS and US Cellular third quarter operating results conference call.

and US Cellular third quarter operating results conference call.

At this time, all participants are in a listen-only mode.

A brief Question-and-Answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jane McCahon, Vice President of Corporate Relations for TDS.

Thank you, Ms.

McCahon, you may begin.

Thank you, Christine, and good morning, everyone.

Thanks for joining us.

With me today, and offering prepared comments, are Ken Meyers, Executive Vice President and CFO at TDS; Mary Dillon, President and Chief Executive Officer at US Cellular; Steve Campbell, Executive Vice President - Finance, CFO and Treasurer at US Cellular; Alan Ferber, Executive VP - Operations at US Cellular; and Bill Megan, Executive VP - Finance, and CFO at TDS Telecom.

This call is being simultaneously webcast on the Investor Relations section of both the TDS and US Cellular websites.

We believe our websites are an efficient and effective way to provide information to the investment community, and we'll continue to look for additional ways to use them.

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

Please review the Safe Harbor paragraphs in our releases, and the more extended versions that will be included in our SEC filings.

Shortly after we released our earnings results this morning, and before the call, TDS and US Cellular filed 8-Ks, including press releases that we issued this morning.

Both companies plan to file their SEC Form 10-Qs later today.

In the past, we have posted reconciliations of any non-GAAP financial measures used on our conference call on the guidance and reconciliations page of our website.

Given the introduction of adjusted operating income before depreciation and amortization and free cash flow in our press releases, you will now find the required reconciliations contained in those releases.

We will be attending the following conferences over the next quarter or so.

On November 10, Steve Campbell and I are presenting at the Wells Fargo Technology, Media and Telecom Conference in New York.

On November 18, John Coyle and I are presenting at the Deutsche Bank Media and Telecommunications Conference in West Palm Beach.

On December 7, Ted Carlson, Doug Shuma, and I are presenting at the UBS Annual Global Media and Communications Conference in New York, and in January, we are presenting at Citi's Entertainment Media and Telecommunications Conference in Phoenix.

And, in February, we'll be at the Stifel Nicolaus Telecom and Technology Conference in San Francisco.

If you'd like meet with us at any of these conferences, let me know, and we will try to accommodate you if at all possible.

And, keep in mind that we have an open door policy, so if you are ever in the Chicago area and would like to meet with members of management at US Cellular, TDS Corporate or TDS Telecom in Madison, Wisconsin, the Investor Relations team will try to accommodate you, calendars permitting.

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

Thank you, Jane, and good morning.

I have just a few comments before I turn the call over to Mary and the rest of team.

We'll then take questions at the end of the prepared remarks.

In the quarter, TDS' consolidated operating revenues and operating cash flow both improved from last year, as a real solid quarter in telecom boosted results.

Interest expense was down 8%, principally due to last year's redemption of the US Cellular 8.75% senior notes, and diluted shares outstanding at TDS were down 3%, due to our ongoing stock repurchases.

As a result, net income available to common and diluted earnings per share were up 10% and 12%, respectively.

As you all know, bonus depreciation was enacted in late September.

We expect this will now reduce income taxes payable per 2010 by approximately $105 million at the TDS level, and approximately $82 million at the US Cellular level.

On the balance sheet, you will see this late change in the tax rules resulted in a prepaid income taxes at both companies.

While affecting cash taxes, it is no effect on the income statement.

We are still planning a full year effective tax rate of approximately 37.2% at TDS and 38% at US Cellular.

For both businesses, however, competition remains as intense as ever, and we continue to look for ways to differentiate ourselves in the marketplace and stimulate growth.

Data revenue growth and contributions from acquisitions, combined with continuing cost controls, led to TDS Telecoms gains.

Bill Megan will have more details to share.

US Cellular's financial results were steady in the quarter, which, given all the work that was being done behind the scenes to prepare for the launch of the Belief Project, was notable.

Also, it's nice to see roaming revenue growing again.

At the enterprise level, we continue to maintain a strong balance sheet that provides us with a significant financial flexibility, which will be increasingly important as we evaluate our Spectra requirements and finalize our 4G plans at US Cellular, and evaluate additional acquisition candidates at TDS Telecom.

Given the current interest rate environment, we continue to look at our current debt structure and revolving credit facilities to ensure that we have the most favorable terms possible.

During the quarter, TDS bought back 705,000 special common shares for about $19.5 million.

As we said before, we plan to be measured in this three-year authorization.

US Cellular repurchased approximately 447,000 shares for about $19.1 million.

We don't have much to provide in terms of our regulatory update today, especially given the recent election results, which will sure muddy the waters.

Regardless of the politics, we'll continue our ongoing advocacy efforts.

In October, the SFC adopted a notice of proposed rule making to establish a Universal Service Mobility Fund, and in the next few months, we expect the SFC to issue additional notices of proposed rule makings on other aspects of universal service and intercarrier compensation reform.

As you would expect, US Cellular and TDS telecom will be filing comments and engaging policy makers throughout all of these processes.

Finally, I would like to take a moment to recognize Roy Carlson, TDS' Founder and Chairman Americas, who was recently inducted into the Wireless History Foundation Hall of Fame.

This honor is a testament to Roy's vision for TDS and US Cellular, and to his considerable contributions to the wireless industry.

Now, we turn the call over to Mary Dillon.

Mary?

Thank you, Ken, and good morning to everyone.

I'm going to begin our prepared comments with an overview of the business environment and provide an update on the early results of the Belief Project, which we launched on October 1.

Steve and Alan will then review our financial and operating results for the third quarter and plans for the rest of the year.

From our perspective, business conditions continue to be very challenging.

Over the past five months that I've been at US Cellular, we really haven't seen any signs of meaningful recovery in the economy.

Overall growth remains sluggish, unemployment remains high, and consumer confidence fell more than expected in September.

As a result, we see consumers continuing to be cautious with their spending and, in fact, seeking the greatest value for their money.

Within the wireless industry, competition remains intense.

Carriers are doing quite a bit of experimentation with voice and data pricing, and we expect that to continue into the future, probably with some downward pressure on overall pricing.

Our new bundled Belief plans are designed to compete by offering great value, while at the same time providing customers with compelling reasons to move to higher ARPU plans.

We also see continuing aggressive competition related to handset selection and subsidies.

We significantly broadened and strengthened our handset portfolio with the launch of Android-powered devices during the third quarter, and we have several other exciting new devices already in our stores or planned for introduction this quarter.

Alan will talk more about those later.

But, right now, I'd like to say just a few words about our recent launch of the Belief Project.

As you know, our strategy is based on differentiating US Cellular in the marketplace through providing consumers with an exceptional customer experience.

The Belief Project delivers on that strategy, and provides a strong platform that we can use to continuously bring new products and services to our customers.

The Belief Project doesn't focus only on price plans and handsets, rather it also focuses on providing a compelling high-value portfolio of products and services that address consumers most common frustrations.

We're offering several innovative services such as One and Done contracts; a robust loyalty rewards program; simplified bundled national rate plans; protection against bill shock with overage protection, caps, and forgiveness; the industry's only phone replacement program; and savings of up to 5% on monthly bills for setting-up autopay and paperless billing.

Although, only about a month into the Belief Project, it's off to a good start, and we're very pleased with the initial response.

The word is getting out that we're doing something very unique, and our customers are responding.

The number of existing customers migrating to the new plans has exceeded our expectations, and these customers are choosing higher-priced plans on average than we expected.

Over time, we also expect to attract meaningful numbers of new customers, and as we said on our launch call last month, we expect that attracting new customers will follow as we build awareness of the Belief Project in the marketplace, and as customers and other carriers come off-contract.

In terms of building awareness, we've received a tremendous response through the media and trade press, and we're also taking full advantage of many social media outlets such as Facebook and targeted bloggers, who spread word-of-mouth about the tremendous value and industry-changing aspects of the Belief Project.

The early results are encouraging, and we're focused on strengthening the impact of the new benefits even further, especially with prospective customers.

We believe that the Belief Project positions us to grow revenues as we attract new customers and reduce customer churn.

We also expect incremental ARPU growth as we attract higher ARPU customers, and our existing customers recognize the value in the higher ARPU plans and migrate to them over time.

At this point, I'll turn the call over to Steve to discuss our results for the quarter.

Steve?

Thank you, Mary, and good morning to everyone.

As Mary said earlier, business conditions were very challenging in the third quarter, and this certainly impacted our customer activity.

Retail gross adds fell 50,000, from 351,000 last year to 301,000 this year.

This was partially offset by improved churn rates for both postpaid and prepaid customers.

Postpaid churn improved 1.7% in the third quarter of 2009, to 1.6% this year.

We're seeing the benefits from a number of actions taken in 2009, to provide customers with exceptional value, such as bundled and unlimited service plans, early upgrades to smartphones, and innovative programs like battery swap and overage protection.

We also believe that our expanded handset portfolio, which now includes a variety of Android-powered devices, has contributed.

And, going forward the Belief Project, with its innovative service offerings and unmatched value gives our customers even more reasons to stay with us.

Prepaid churn improved from 9.7% to 7.0%.

Customers in this segment value our data service offerings that were launched earlier this year, as well as our unlimited calling plans and the quality of our award-winning network.

About 55% of new prepaid customers during the third quarter chose the $69 price point, which includes voice, text, and data.

The result is a positive impact to ARPU over time.

The net effect in the postpaid segment was a loss of 25,000 customers, compared to a net gain of 8,000 customers last year.

In the prepaid segment, our customer account was unchanged during the quarter, that is no net editions, compared to a loss of 14,000 customers last year.

So, in total, we lost 25,000 net retail customers in the quarter this year, compared to a loss of 6,000 net retail customers last year.

The competitive factors that Mary mentioned earlier, namely aggressive pricing, service promotions, and handset offerings and promotions, all had an impact on our results.

In addition, we believe that some of our postpaid losses are actually customers taking advantage of our prepaid offerings, as they continue to look for opportunities to manage their budgets, and our prepaid offering has become more robust.

According to the Yankee Group, this has been an industry trend over the past year.

Overall, our financial results for the third quarter were fairly stable, with service revenues and operating cash flow varying by less than 1% from the amounts reported a year ago.

We were able to maintain comparable levels of revenues and profitability despite the continued pressures on voice revenues, the added cost to attract and retain our customer base in the current economic and competitive environment, and the investments that we are making in future capabilities.

Service revenues for the quarter were $984 million, the same amount reported in the prior year.

Within the retail service component, data revenues continued to grow very well and helped offset the continuing decline in voice revenues.

As a result, retail service ARPU for the quarter of $47.12, was up slightly from $46.97 a year ago despite the significant downward pressure on pricing that we continue to experience.

Data revenues were $229 million, a 31% increase year-over-year, and now represent 26% of our retail service revenues, up from 20% a year ago.

A key factor in this growth is the increasing penetration of smartphones and other devices requiring to purchase data plans.

These devices were 31% of all devices sold in the quarter.

We remain optimistic about continued growth in data revenues for a number of reasons.

First, during the quarter, we sold over 127,000 Android-powered phones.

This is impressive given that we launched our first Android phone in July.

We have many more exciting Android phones on the way.

Second, only 20% of our postpaid customers currently have smartphones and other devices that require data plans, so we still have plenty of room to grow in this area, and remember, these are high-quality customers who tend to have higher ARPU.

Another factor is the expansion of our 3G network, and the positive impact that the resulting improved customer experience is having on data usage.

The 3G network now covers approximately 98% of our customers, and this year's expansion was completed by the end of June; in fact, sooner than we expected.

And finally, the introduction of data services on our prepaid plans at the end of March is producing incremental data wins.

At this time, I want to make you aware that effective for the fourth quarter 2010, we'll no longer separately disclose revenues from data products and services.

This is because the determination of such revenues is increasingly dependent on allocations of bundled service prices for multiple-bundle dollars.

Of course, we will attempt to disclose other metrics designed to provide insight into data growth, such as the penetration of smartphones and the percentage of customers who have data-inclusive plans.

As anticipated, now that we've cycled through the impact of the Verizon-Alltel merger, in-bound roaming revenues increased 6% year-over-year to $73 million.

The increase is primarily a result of increased data roaming transit.

Over the remainder of this year, we expect in-bound roaming revenues to continue to grow on a year-over-year basis, due to higher data roaming usage.

ETC revenues were $31 million, compared to $40 million a year ago.

The decline here was principally the result of a retroactive adjustment to prior-period revenues, which was related to an FCC decision in August 2010, to modify the interim cap that was established in August 2008.

Subject to any other changes that the FCC might adopt with in connection with the National Broadband Plan or otherwise, we expect ETC revenues to be about $35 million over the next couple of quarters.

Moving on now to cost and expenses.

The net loss on equipment for the quarter was $112 million, down $4 million from last year.

This was principally due to a 7% decrease in the number of units sold.

The impact of lower unit sales was somewhat offset by a 4% increase in the average cost per handset sold, which reflected a shift in mix to devices with expanded capabilities, such as smartphones.

System operation expenses of $218 million were up $12 million, or 6% year-over-year.

This was due in part to a 5% increase in the average number of cell sites and service, as well as higher expenses related to increases in customer data usage.

Over the past year, total data network usage increased 300%.

Selling, general and administrative expenses of $447 million decreased about $8 million, or 2% year-over-year.

Although, we incurred higher costs related to the multi-year initiatives that were launched in 2009, we achieved reductions in a number of other areas that, in aggregate, were more than offsetting.

So, as I mentioned earlier, operating cash flow for the third quarter of $207 million was essentially flat to last year's $208 million.

Operating cash flow margin was 21.0%, compared to 21.1%.

Below the operating income line, investment and other income net for the quarter totaled $8.5 million, including earnings of about $16 million related to our investment in the Los Angeles Partnership.

Interest expense was $16 million, down $3.8 million year-over-year, reflecting the redemption of our 8.75% senior notes in December of 2009.

Net income attributable to US Cellular shareholders totaled $37 million, or $0.43 per diluted share, versus $34 million, or $0.39 per diluted share in 2009.

The increase reflects higher pre-tax income, as well as a lower effective tax rate.

The tax rate for the third quarter this year was 36.7%, compared to 38.8% last year.

With the reduction primarily due to favorable settlements of certain state income tax audits.

For the full year 2010, as Ken mentioned in his remarks, we expect the effective tax rate to be about 38% at US Cellular.

As shown in the press release, this quarter we generated cash flow from operating activities of $180 million, and net of capital expenditures of $125 million, free cash flow of $56 million.

Our balance sheet remains sound, and we have significant liquidity and financial flexibility, together with expected cash flow from operations to meet all of our financings.

At September 30, cash and short-term investments totaled $390 million, and we have about $300 million of unused borrowing capacity under our revolving credit agreement.

Our guidance for the full year 2010 is contained in today's press release and has been updated to reflect Management's current expectations.

As shown, we're tightening our estimate for service revenues a bit to the new range of $3.925 billion to $3.975 billion, so that's bringing in the upper-end of the range about $25 million.

The previous guidance for operating cash flow, that is a range of $800 million to $850 million, is unchanged.

Also, the previous guidance for operating income, depreciation, amortization and accretion, and capital expenditures also is unchanged.

Now, I'll turn the call over to Alan to discuss some of our key initiatives and our plans for the remainder of this year.

Alan?

Thank you, Steve, and good morning, everyone.

I'm going to just begin with a few comments about our handset offerings, which we have enhanced greatly over the past several months in support of our customer satisfaction strategy.

In July, we launched our first Android-powered device, the Samsung Acclaim.

Since launch, we've sold over 90,000 units, making it our second most popular phone in the quarter.

We launched our second Android, the HTC Desire, at the end of August and sold almost 40,000 units during the remainder of the quarter.

And, just last week we launched the US Cellular exclusive Samsung Mesmerize, a Galaxy S phone.

We believe this device will be well received in the market, as Galaxy models offered by other carriers are getting rave reviews.

In addition, we expect to introduce two additional Android-powered devices by the end of the year; the LG Apex in November, and LG Optimus U in December.

Along with two new Blackberry's launching this quarter, the Blackberry Curve 9330, and a Blackberry Style 9670, we believe we have the strongest handset line-up in our history.

In total, by year-end, we expect to have 14 smartphones in our line-up, compared to eight at this time last year.

As important, with the addition of these new Android phones, we will have smartphones available across the entire range of price points.

When combined with our nationwide EVDO offering and the Belief Project, we believe we are well positioned to expand our smartphone penetration.

In addition, we announced last week that we will be launching our first mobile tablet, the Samsung Galaxy Tab, in time for the upcoming holiday season.

We also made progress on several of our major enablement initiatives, to enable deeper customer relationships, make product development point-of-sale and billing operations more efficient, and drive online sales and account management.

As we have said previously, we expect work and spending on these major programs to continue over the next couple of years, but let me mention some of the progress that we've made recently.

We have redesigned our website to support the launch of the Belief Project, and have enhanced the shopping experience with an improved shopping cart, making navigation more intuitive, and improving the site's overall look and feel.

This new website and launch of the overall Belief Project has resulted in a 50% increase in unique visits to our website, versus prior months.

I encourage all of you to visit www.UScellular.com to see our new website and learn more about the Belief Project.

Website also describes each of the components of the program in detail, and includes several of our commercials.

One more example of our progress is a marketing tool called Value Recommendations, that we launched in July.

This tool enables front line associates to serve customers better by automatically providing tailored recommendations, which are actually driven by the customer's needs and usage patterns.

We also achieved a major milestone related to our efforts to launch a new billing point-of-sale and customer relationship management system, by far, the largest project included in our enablement initiatives.

After conducting a thorough evaluation and negotiation process, we have chosen Amdocs as our vendor to provide the new system.

Also, we have selected IBM to be our system integration partner for this multi-year effort.

This new system will enhance the customer experience by improving overall transaction times, and enabling faster time to market and increased flexibility for new products, pricing, and promotions.

Now, turning to our network.

I am pleased to share with you that for the tenth time in a row, US Cellular has received the JD Power award for overall call quality in the North Central region, which includes Illinois, Indiana, Wisconsin, Michigan, and Ohio.

Also, US Cellular made the Forbes list of the Most Trusted Companies for 2010.

This award is based on an independent audit of more than 100 factors rating corporate accounting and management practices.

In closing, I'd like to expand our excitement about US Cellular's future.

We introduced the Belief Project at a very critical time.

The early reaction has been strong, as customers recognize that US Cellular is the only wireless carrier that is changing the rules of the wireless industry by rewarding loyalty.

We are also proud to announce that the Belief Project has won Frost and Sullivan's 2010 North American, Customer Value Enhancement of the Year Award.

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

Bill?

Thank you, Alan.

Good morning, everyone.

Telecom results continued to be quite positive reflecting the impact of continued high-speed data growth, initiatives to stabilize revenues and line losses, and cost-control efforts.

Actions we have taken over time to build attractive service bundles and position them with competitive pricing, to introduce new Commercial service offerings, and to control costs, are reflected in the quarter's numbers.

We have strong growth in data revenues, driven by high-speed data subscriber editions, and also by our acquisition earlier this year of VISI, our hosted and managed services company.

Our access line losses did increase in the quarter, so this was in-part driven by the seasonal losses we typically experience in the third quarter.

We do remain cautious on the economic recovery, however, as overall growth has been modest and job creation in particular has been limited.

In our Commercial segment, we still see customers more focused on price and still hesitant to make buying decisions.

For the quarter, TDS Telecom's combined ILEC and CLEC revenues increased 2.8% from last year.

ILEC revenue grew 5.2%, with high-speed data contributing half of the increase, and VISI the other half.

Voice revenues declined modestly, offset by an increase in network access revenues.

CLEC revenue declined 4.3%, in-line with our plan to limit investment in new Residential customers.

Growth in ILEC data revenues was strong at 24%.

High-speed data subscribers grew 12% year-on-year.

We continued to attract healthy levels of new customers, and they are taking higher speeds, which is helping to support ARPU.

As our penetration builds, however, we are seeing our growth begin to slow somewhat.

We had 13,900 gross adds in the quarter, and added 2,100 net subscribers sequentially.

Our high-speed data penetration over all access lines is now at 43%, up six percentage points from last year.

Residential DSL ARPU was $37, as migration to higher-speed services offsets competitive pricing pressures.

74% of our customers are taking speed of three megabyte or greater, up from 59% a year ago.

The decline in ILEC voice revenues was due to physical access line loss of 4.2%, and lower ARPU driven by bundling discounts.

We continue our efforts to reduce the loss in physical access lines.

Since the beginning of 2009, we've been aggressively marketing new voice packages, called Star Packages, which include additional features and long distance minutes, giving consumers a lot of flexibility in matching a service set to their needs and budget.

At the end of September, we had almost 160,000 customers on these plans, which is 42% of our Residential customer base, up from 22% at this time last year.

We now have 56% of our Residential customers on some type of voice package.

We continue to emphasize our triple play bundles; voice, data, and video, with video offered through our partner, Dish Network.

Growth in triple play continued as we added 4,300 net subscribers in the quarter, bringing our penetration of residential lines to 24%.

We know the importance of bundling and reducing churn.

Churn on our triple play customers is very low at roughly 0.5% per month.

Our promotional strategy continues to evolve with different value propositions.

Our current offerings include both double and triple play Price for Life promotions, a range of price discounts, as well as free HDTV sets, depending on the service set ordered and the length of the service agreement.

We have had measurable success with our bundled offerings with 61% of our Residential customers on the double or triple play bundle, up from 54% last year.

Our dedicated save team continues to have an impact as they leverage contact with the customer to show them the value of our services, including the bundled offerings, service packages, and promotions that can save them money.

Among the tools this team has is our version of naked DSL, which includes a basic voice line that provides value as a safety feature, for consumers who might otherwise just cut the cord.

In the Commercial segment, we continue to lead with our hosted IP service we call Managed IP.

The service is hosted on our network and provides very rich call management features, such as advanced call routing and one number capability.

For both ILEC and CLEC, we now are have 23,400 stations installed, an increase of 19% sequentially, and double over this time last year.

Consolidated cash expenses were up 1.5% for the period.

We have executed on cost control initiatives, and average head count is 5% lower than last year.

Lower expense in the CLEC is in-line with fewer Residential customers.

We continue to invest in our network.

Capital expenditures were $38.5 million for the quarter, as we evolve our network and put the necessary infrastructure in place to offer faster broadband speeds.

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

About half of our lines are capable of ten megabit or higher speed service.

Capital spending also supports our advance service offerings, including our hosted IP services, and higher speed data over copper bonded facilities for our Commercial customers.

As part of our commitment to bringing critical high-speed data services to our rural communities, we submitted applications to the RUS for Broadband Stimulus Funding under the Recovery Act.

The RUS approved 44 of the applications, for a total of $136 million.

We will receive $105 million in federal grants, and we will provide $31 million of our own funding.

We expect these projects to be built-in over the next 24 to 36 months.

We continue to evaluate acquisition opportunities when there is good strategic fit and price levels are attractive, both in managed services, as well as in our more traditional small RLEC markets.

And finally, reflecting both our year-to-date results as wells our outlook for the quarter, we have modified our guidance as shown in the press release, tightening and raising the revenue range to $785 million to $800 million, and operating cash flow to $265 million to $280 million.

Capital expenditures stays at approximately $155 million.

We are increasing depreciation and amortization to approximately $175 million, to reflect the impact of acquisitions.

And, now, I will turn the call back to Jane McCahon.

Thanks, Bill.

Christine, we're ready for questions.

Thank you.

We will now be conducting a question and answer session.

(Operator Instructions) One moment please while we poll for questions.

Thank you.

Our first question is from Ric Prentiss with Raymond James.

Please proceed with your questions.

Thanks good morning.

Good morning, Ric.

It seems like the over arching theme from all the earnings call, particularly today, but through the whole season has been data.

Whether it's wireless or wireline.

Within wireless, SmartPhones is a key topic, you touched on it pretty strongly there.

As we look at SmartPhones becoming more and more important, maybe almost table stakes in the game, how do you look at retention costs, margins and ability to grow revenue?

Just kind of walk us through that new kind of model logical.

Well, Ric I'll start with that one.

When we're looking at SmartPhones, clearly over time, SmartPhones are going to probably represent a higher cost phone, a high subsidy phone, but as we've mentioned a number of times, those phones are sold with data plans and they tend to have ARPUs that are twice the, twice the ARPU of a typical non-SmartPhone customer.

So, yes, there will be higher costs, but we believe that they will be correspondingly higher data revenue over time and SmartPhones will represent a very profitable segment of the base.

So, when you say 2x the ARPU, is that the experience with the recent Android phones, when they're talking about the 90,000 adds and 40,000 adds, what kind of ARPU are you seeing on Android phones as they're coming in?

I think that rule of thumb, generally, is holding up with the Android phones as well.

That's similar to what we saw with our Blackberry and (Inaudible) mobile --

So, should we think of $80 ARPUs, $90.

I'm trying to get a sense when we might see ARPU trends up to demonstrate SmartPhones are selling.

Hi, Ric, this is Alan.

The average ARPU of SmartPhone customer is right around $80 or so.

I think the other thing that is important to also recognize, particularly on the Android platform is that the devices are coming down in costs, so I think we'll see a wider spread from sort of low end Android phones to the more premium Android phones that you're seeing right now.

So, probably the way we should look at it is maybe some margin pressure in the short-term as you have to subsidize these, even with the lower cost, but that the ARPU then pays off in the longer term?

I think that's a good way to look at it.

The another thing that's been pretty over arching on the earnings call this season has been not just SmartPhones, but a lot of talk about LTE.

Metro PCS, had their call this morning, seeing some early success on launching their LTE product.

Verizon getting ready to launch their LTE pops.

AT&T talking about launching $75 million pops next year on LTE.

What are your thoughts on spending for LTE, could that be the next table stakes and when would you follow suit?

Yes, well, first of all, I'll say that certainly as you know, we're in a trial right now on LTE's, so we're deep into figuring out our technology there and that's going very well.

Our plans are that we're going to be rolling out LTE over time.

But right now we're looking at late 2011 to begin to roll that out, and I can't give you specifics about scale of the roll out right now because we're figuring that out, but that's in process.

Okay.

Thanks.

(Operator Instructions) Our next question comes from the Kevin Roe with Roe Equity Research.

Please proceed with your question.

Thank you, good morning.

Following up on, on Ric's retention question, specifically to SmartPhones, what was the cost impact in the quarter from SmartPhone upgrades?

And I assume that, that cost should increase in the coming quarters as a greater percent of your base migrates.

And my second question is, post paid net editions third quarter of a slight drop of post paid subs, when do you hope that your belief project and the new initiatives around that will, will drive positive post paid net additions?

Let me start with the positive post paid net addition question, which is that it's our expectation that over time we'll see that start to turn positive.

Certainly it's a combination of new customers, perspective customers I should say, coming off of contract, being in the window of time that they're thinking about a new carrier and being aware of the belief project benefits.

So, that will happen over time.

And in terms of current customers, we do see that the migration to the belief plan has been better than we expected at higher ARPU plans, which is all very good.

And that will of course, we believe have an impact -- continue positive impact on churn.

Over time we'll see that start to happen and I expect we'll see that over multiple quarters.

Yes.

Kevin, on your question about handset costs.

As I mentioned in my prepared remarks, the cost of handset was up about 4% year over year.

So, that definitely reflected a shift of mix to more SmartPhones and higher end prices in the mix sold.

Okay.

And on the subscriber commentary, over time could we see that number turn positive as soon as the fourth quarter or is that being overly optimistic?

Yes.

I don't really want to commit right now on that.

We're expecting to see it happen over time and we're looking for the belief project to help get us there.

Great.

Thank you

Our next question comes from Daniel Gaviria with Morgan Stanley.

Please proceed with your question.

Hi, good morning everyone.

I had a quick question on the guidance that you have for US Cellular right now.

So, if I'm doing the math correctly, fourth quarter service revenue growth, using the mid point of the guidance, should be around 4.5%.

It seems a little bit aggressive and I just want to hear your thoughts on it.

Thank you.

Well, I think as Mary eluded to earlier -- well, there's a couple things.

I'll say probably the biggest driver there is that, in the migrations that we've seen in our belief plan, we're actually seeing customers migrate to higher price points than we expected in our plan.

And I think in our add mix, we expect that the, the enhancements that we're making in the device line with driving more SmartPhone sales is also driving higher average customers, and then I think the other thing is we've seen a nice improvement in our pre-paid ARPU based on the price points that customers are selecting in that area as well.

Okay.

Thank you.

Our next question is from Michael Rollins with Citi Investment Research.

Please proceed with your question.

Hi, good morning.

I was wondering if you could talk a little bit more about how you see the margin profile in (Inaudible).

Is there a big difference in your regions?

So, if you look at some of your more urban areas versus rural areas, can you talk a little bit more of what you see maybe regionally what that opportunity might be?

Thanks.

Yes, Michael, this is Ken Meyers.

Let me try this one for a moment.

Clearly the margins in different areas, areas could be geography, it could be markets within geographies vary, and they are primarily driven by the level of penetration with any, within any measured area.

So, to the extent that we have differing penetration as between two geographies or two markets, we'll have very, very different margins.

That reflects a combination of the fixed cost of putting the network in, especially when you have a high quality network underpinning to your strategy, as well as distribution cost.

So, across the married markets we have, you'll see different margins there primarily based upon penetration, which is why we continue to focus on driving growth.

Thanks very much.

Our next question is a follow-up question from Ric Prentiss with Raymond James.

Please proceed with your question.

Thanks.

I wanted to get in a couple extra ones.

Can you tell us what percent of your post paid base upgraded in the quarter?

I'm not sure I understand the question Ric.

Could you say more.

So, you think about that retention effort and the belief project when people are migrating up.

We've heard varying numbers from 9% to 12% of people's customer bases have upgraded in the quarter, meaning they've taken on a new handset, maybe extended their contract.

I don't think we have that statistic available.

Okay.

Are you, just asking about renewals in general?

Yes, but it's also just a way of trying to get at retention cost to say X% of your subscriber base is upgrading every quarter.

Okay.

So, if you're asking, probably the only way to answer that is to talk about renewals and that's probably running about 8% to 10% of base in any given quarter and that would have been true in the third quarter.

Third quarter as well as second quarter or third quarter going forward or -- ?

Well, again, it's running about 8% to 10% of the base.

Okay.

And then as you've gotten the Androids on the system, have you been able to measure how much usage is coming across those devices per month, per subscriber?

We've been hearing varying numbers of 200 megs, 400 megabits a second.

Android obviously has multiple screens open typically, any thought on what the usage your seeing on these devices is?

Yes, it's still going to take some time for that to stabilize once we get a large enough base.

We're running about 350 to 400 meg right now on, on Android, which is about three to four times Blackberry.

Okay.

And then as you think, as you think about the belief project, and you mentioned you'd like to get some new subs coming over to you as their contracts expire, as you rank order the different components of the project, what do you think are the top one or two reasons why somebody would leave another carrier and come to you?

Well, our research would tell us that a few things.

One is the notion of signing one contract and never having to sign another is really quite attractive, and we've offset that notion with the addition of belief and reward points, so this notion of having incentives to stay versus penalties to leave.

That concept is the most -- it's the center piece and the piece we know is the most important.

Now in addition, what we, what we clarify with customers is that, they'll still have access to upgrading to new phones at great promotional prices and, in fact, they can do that more rapidly by accruing the reward points.

So, the combination of not feeling locked in, but having incentives to stay, and still having access to new phones, which is what everybody wants, right, is those two things in particular seem really compelling.

Overage protection is also a really big one, that people are pretty worried about bill shock and the fact that we've capped overages, that we're ready, providing information to them when they're reaching close to their caps already, that also is something that really gets at some of the frustrations that people have about wireless.

Okay.

A then in the final question I've got, we've talked about SmartPhones being maybe $80 sells on the Android migration, people taking SmartPhones, but we've also heard commentary about the economy really not growing yet.

Kind a sluggish economy, no job growth, I'm just trying to figure out how do people sign on for a higher rate plan if consumer confidence is low?

What's driving that behavior?

Handsets I think we understand, people want the new handset, it's an aspirational.

It's style, it's all this stuff that gets people saying I've got to have that handset, what's causing them to sign on in where are he taking it out of their wallet, who's losing share, if you will?

This is one of the things that is so neat about our Company, I think is that when our associates have the opportunity to really explain to customers what this is all about, they see the value in the higher, in the higher ARPU plans because when you step back, a lot of times people don't know how much their spending when they think about it unbundled.

But, when you put those numbers together and then you compare it to what they'll get on the belief project, including things like phone replacement which are perceived to be highly valuable, right.

Really it's the value and not the total amount that people are understanding, and that's why we're having success in migrating them there.

Now, over time, as people continue to spend more in the mobile space, they -- who knows where that money will come from in other things they're buying and bringing into their households, but we know that within this space of what people are currently needing in terms of voice and text and data, we're able to put together a very compelling story for them with the combination of benefits and the belief plan enhance that migration.

Okay.

Because we're also trying to figure out hopefully when the economy improves, we'll still open up that wallet and even more upward movement in ARPU possible.

Let's hope so.

Okay.

Thanks.

I think consumers are loving the access to data on things like Android phones and what not, so I think they'll continue to want to do more.

Okay.

Thank you .

There are no further questions in the queue at this time.

I would now like to turn the floor back over to management for closing comments.

Thanks for joining us today.

Please contact us with any further questions and we'll see you out on the road.

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