美國無線通訊 (USM) 2014 Q1 法說會逐字稿

Greetings and welcome to the TDS and U.S. Cellular's first quarter 2014 operating results conference call.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jane McCain.

Thank you.

You may begin.

Thank you, Kevin.

Good morning, everyone.

Thanks for joining us.

I want to make you all aware of the presentation we prepared to accompany our comments this morning, which you can find on the Investor Relations sections of the TDS and U.S. Cellular websites.

With me today, and offering prepared comments, are, from TDS, Doug Shuma, Senior Vice President and Controller; from U.S. Cellular, Ken Meyers, President and Chief Executive Officer; Steve Campbell, Executive Vice President and Chief Financial Officer; and from TDS Telecom, Vickie Villacrez, Vice President, Finance, and Chief Financial Officer.

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

Please see the websites for slides referred to on the call, including non-GAAP reconciliations.

The information set forth in the presentation and discussed during this contain statements about expected results and future events and financial results that are forward-looking and subject to risks and uncertainties.

Please review the Safe Harbor paragraphs in our release and the more extended version included in our SEC filings.

Shortly after we released our earnings, and before the call, TDS and U.S. Cellular filed SEC Forms 8-K, including today's press releases, as well as form the SEC Forms 10-Q.

We invite you to join us or listen to the webcast of our annual meetings.

U.S. Cellular's meeting is on May 20; and TDS's is on May 22.

We also ask that our shareholders support our extremely qualified slate of Directors, Director nominees, both at TDS and U.S. Cellular.

Please keep in mind that TDS has an open door policy, so if you are in the Chicago area and would like to meet members of Management, the IR Team will try to accommodate you, calendars permitting.

Before we turn the call over to Ken Meyers, Doug Shuma will spend a few moments on the TDS Enterprise level.

Doug?

Thanks, Jane.

Turning to slide 3, TDS continues to execute on its share repurchase authorization, purchasing nearly $4 million of shares this quarter.

Given we are in our earnings blackout until the end of February, this represents only about one month of active repurchase.

This is in addition to our, nearly, $15 million quarterly dividend.

As we have already announced, U.S. Cellular sold over $400 million of nonstrategic spectrum.

We have said that this represented about 75% of the licenses we identified as noncore that was related to our divestiture markets.

Given the significant current valuation of spectrum, U.S. Cellular is continuing to evaluation additional spectrum outside of its operating footprint, that could possibly monetize beyond that remaining 25%.

Lastly, we continue to move forward on the sale of noncore towers and hope to complete the sale this year.

As we have said, we want to complete this transaction before we would consider the sale of any noncore towers.

And now I will turn the call over to Ken.

Thanks, Doug.

Good morning.

I'd like the talk to you this morning about the progress we're making against a 2014 strategic priorities that we set forth on the last call.

As we discussed, and as shown on slide 6, rising subscriber growth is our top priority.

This is a function of, both, increasing growth ads and managing charm.

We are having real success attracting new customers to U.S. Cellular.

Core postpaid gross additions for the fist quarter increased 12% over last year, despite a slower March.

Competitively, it was an intense quarter.

We ransom aggressive promotions, as you can see in our loss of equipment, but these results give us confidence our device portfolio and service plans will enable us to compete in our footprint.

In fact, at this time last year, before the introduction of the iPhone, [ARPU section's] research told us that device selection was a second most important reason given when customers left us.

With the iPhone, and other iconic 4G devices now in the portfolio, the percentage of customers citing device selection is a reason that they leave us, has dropped 75%.

While the sales time had success filling the top of the funnel, other parts of the organizations were intensely focused on addressing churn, and we are making progress.

Voluntarily churn looks to have peeked in the fourth quarter.

Customer service levels are, now, actually above the levels experienced before we started the building conversion.

While billing concerns still remain with some customers, voluntary churn fell above the levels of a year ago, has dropped significantly;as expected to continue to improve .

As we discussed in our year-end call, involuntary churn customers we are shutting off for not paying their bills increased late in 2013 and early in 2014.

As Steve will discuss, it has recently started to move back towards more normalized levels.

In the aftermath of the billing implementation, we have been extending payment terms to allow time for customers to clear up any questions about their bills,but we are now starting to catch up on those nonpayers.

But we believe that we worked through the majority of the collections backlog and have begun to see involuntary churn and, thus, total churn improve.

Improved churn, combined with the success we're having attracting new customers, will allow stabilized, and begin to grow, our customer base again.

In addition to improved customer service levels, we have also made significant progress improving all operational aspects of the billing system, though more work still continues.

The key is making that work invisible to our customers.

As previously discussed, and shown on slide 7, our value proposition evolves around the network.

The quality of our network is core to our strategy and we are continuing to invest in rolling out 4G/LTE to more and more of our network, to allow us to deliver the data products and services, like shared data plans and connected devices that our customers want.

Notwithstanding our loss in customers over recent quarters, the number of smartphone users on our network has actually grown.

In fact, on a year-over-year basis, we have 16% more smartphone users at the end of the quarter . Another facet of our strategy is to really leverage our local market presence and knowledge to create a differentiated experience for our customers.

We're working to make U.S. Cellular even more relevant to wireless consumers and businesses in Wisconsin, Iowa, Maine, and Nebraska, for example.

One small manifestation of this is some new advertising that is customized market-by-market to drive our local network quality message.

We're confident all of these components together, with a network at the core, will make the U.S. Cellular proposition resonate with our current customers and be attractive to new customers.

Looking to slide 8, in order to improve margins over time, we must turn around our subscriber results, we also must drive additional revenue growth on top of that.

Adding the iPhone and other 4G devices to our smartphone portfolio has accelerated smartphone penetration.

Now at 53%.

Our shared connect data plans are being well-received by our customers, and should allow us to capitalize on skyrocketing data consumption.

Connected devices provide an opportunity to increase data usage and, thus, revenue per count without significant subsidies.

All of these activities are translating into additional data usage and average revenue per unit, with core post-date ARPU up 6% over last year, despite the recently-volatile pricing environment.

We will continue to adjust the pricing environment to ensure our customers get not only the best network experience in all of our markets, but also receive a very competitive value.

And finally, slide 9, we will look to offset the increase in subsidy amounts caused by the costly 4G devices, through programs such as the recently-introduced device installment plans.

All in all, we believe we have all the pieces in place to stabilize and begin to grow our customer base in 2014.

As expected, headwinds related to the 4G smartphone subsidies, including the full-year impact in the iPhone, will impact profitability.

Part of the impact, though, on free cash flow, will be mitigated by lower capital spending, as our build up of 4G/LTE nears completion.

Before I turn the call over to Steve, I would like to share our current thinking on providing guidance for revenues and profitability for 2014.

We continue to navigate significant factors that affected our ability to forecast with confidence, including the unprecedented number of pricing moves that have occurred so far this year.

Looking ahead, we continue to believe there's a high degree of uncertainty around future pricing moves.

Compounding that, uncertainty isthe elevated churn we currently experiencing .

We have aggressive plans in place to bring churn down, but cannot predict, with accuracy, how quickly we will achieve our desired results.

Therefore, while we are getting additional clarity, we still do not have the level of confidence to publicly disclose a reasonable range at this time, but as we continue to stabilize our customer base, we get closer to a point to be able to reinstitute our past practices.

Now let me turn the call over to Steve Campbell.

Thank you, Ken.

And good morning.

As stated in today's press release, the year-to-year comparabilityof our first quarter financial statements is impacted by two significant transactions that occurred in 2013.

The deconsolidation of the New York one-in-two partnerships in April, and the divestiture of the St.

Louis, Chicago, and other Midwestern markets in May.

Given the timing of those transactions, we will have one more additional quarter, the second quarter of this year, for which the year-to-year comparability of our reported results will be a challenge .

To facilitate your understanding of our business performance for the first quarter, we're including in today's presentation, comparative operating and financial results for the core markets where we're now focused.

A majority of my comments will be related to these core market results.

So, beginning with customer results, shown on slide 10, in the core markets postpaid gross additions for the first quarter of 2014 were [197,000], an increase of 21,000, or 12% compared to a year ago.

Postpaid churn for the quarter was 2.3%, up from 1.6% last year, resulting in a postpaid net loss of 93,000 customers for the quarter.

I'll talk more about postpaid churn in a minute.

Prepaid net additions were 13,000, down from 31,000 last year.

And the decline here resulted from lower net additions in the national retail channel.

For retail customers in total, there was a net loss of 80,000 customers this year, compared to a net loss of 2,000 last year.

Now, I want to say a few more words about postpaid churn in the core markets.

Although it's hard to see in the reported numbers, which show churn increasing, both, sequentially and year-over-year, the fact is that we're making good progress.

The chart on slide 11 shows the trends in, both, voluntary churn and involuntary churn, over the period beginning in January of last year through April 25th of this year.

As Ken, said earlier what we experienced in the first quarter was something of a shift from voluntary churn, customers leaving us on their own accord, to involuntary churn, customers we are shutting off for not paying their bills.

As this chart shows, voluntary churn appears to have peaked in the fourth quarter, and although it's still higher than we want, it has trended lower since that time.

On the other hand, involuntary churn, as expected and discussed in our last call, spiked up in the first couple months of the first quarter, as we returned to enforcing our normal collections practices and began to catch up on the nonpaying customers.

However, just as with the voluntary churn, we believe that we now worked through the majority of the collections backlog, and have begun to see involuntary churn steadily decline from its peak in February.

Slide 12 shows the trends in smartphone sells and penetration in the core markets.

During the first quarter, we sold 467,000 smartphones, which represented 73% of total devices sold.

A year ago, smartphones were 62% of the total units sold.

Smartphone penetration increased to 53% of our postpaid subscriber base, up from 43% a year ago.

So, we still have a substantial number of postpaid customers with basic phones, which provides us with a good opportunity to upgrade these customers to smartphones and drive additional data usage revenues.

We're also seeing good progress in the adoption of 4G technology.

In the first quarter, 4G smartphones represented 85% of all smartphones sold, increasing the percentage of smartphones on our network that are 4G capable to 82%.

This is an important point.

It means that 82% of our smartphones are providing our customers with a high speed 4G experience on a best-in-class network.

We expect that the higher smartphone penetration, when combined with our Shared Connect Data plans, will allow us to capitalize on the continuing growth in data consumption.

The penetration on these plans is now 13%, up from 6% at year-end, and we're pleased with the results that we're seeing with respect to the mix of shared data packages being selected by our customers.

These activities are translating into increased ARPU.

As shown on slide 13, postpaid ARPU grew by 6% year-over-year to $57.59, despite the recently-volatile pricing market.

When looking at the increase from the fourth quarter, remember that ARPU for the fourth quarter was impacted by the special reward points loyalty bonus that we gave customers in December.

Looking ahead, we believe that there is a high degree of uncertainty about future pricing moves.

As we've done so far this year, we'll condition to adjust to the pricing environment to ensure that our customers get not only the best overall experience, but also very competitive value.

Turning now to our financial performance, service revenues in the core markets for the first quarter of 2014 were, approximately, $854 million, down $7 million, or less than 1% from last year, as the growth in ARPU offset the impact of the smaller customer base.

Retail service and rooming revenues were relatively flat, whereas other revenues declined by, approximately, $5 million, reflecting lower EPC revenues, due to the FCC's phase down of Universal Service Funds Support.

In a recent announcement with importance for U.S. Cellular, the FCC indicated at its open meeting in April, that it intends to delay the next step in the previously-announced phase down of USF Support, which is scheduled for July 1 of this year, while it completes its work on the phase two mobility funds.

We don't, yet, know any of the particulars of the FCC plans, so we can't predict either, how long the delay will last, or how the FCC will structure and administer the mobility . Slide 15 shows additional financial information for the core markets.

In summary, adjusted income, before income taxes, for the first quarter of 2014 was $115 million, down $58 million, or 34% from last year.

As I mentioned a minute ago, service revenues reduced by about $7 million year-to-year.

The other major factor in the year-over-year change was loss on equipment, which at $198 million, increased $50 million or 33%.

[LOE] was driven by the continuing shift in mix to sales of smartphones overall, and sales of higher cost 4G devices and, of course, industry competition.

As a result, the average loss per unit sold increased by 43%, from $206 to $295.

We expect that equipment pricing will continue to be very aggressive across the industry in the coming months and that our costs will be impacted by the continuing shift in mix to smartphones overall and to 4G devices.

However, we expect to offset the high subsidies through programs, such as the device installment plans that we launched in early April.

Slide 16 shows total company financial performance on an as-reported basis, and does not reflect the adjustments to the 2013 figures, to give affect to the deconsolidation and divestiture transactions.

The first quarter's operating income was impacted by certain costs and expenses related to the divestiture transaction.

As shown on slide 17, the impact was a reduction to income of $6 million, consisting, largely, of $13 million of accelerated depreciation, amortization and a accretion related to network assets.

The period for the recording accelerated depreciation, amortization and depreciation ended with the first quarter, so this expense will not be recurring in the future.

Continuing on slide 18, total company consolidated net income was $19.5 million, or $0.23 per diluted share, versus [$4.9 million], or $0.06 per share last year.

The effective tax rate was 40.6% in the quarter, pretty consistent with last year's rate of 40.8%.

For the quarter, cash flow from operating activities was $64 million, down from $224 million last year.

This was affected by lower operating income, excluding the gains recognized on license sales and exchanges.

Cash used for additions to property, plant, and equipment in the quarter was $109 million, reflecting significant expenditures related to our 4G/LTE network, as well as for additional billing system enhancements.

Free cash flow for the quarter was negative $46 million.

I want to make just a couple of additional comments about U.S. Cellular's balance sheet and financial resources.

The balance sheet is sound, and we have significant liquidity and financial flexibility, together with expected cash flows from operations, to meet our anticipated financing needs.

Cash collections improved during the first quarter, and customer accounts receivable are down, nearly, $80 million, or 20% from the year-end level.

At March 31, cash and short-term investments totaled $439 million, and we have about $280 million of unused borrowing capacity under our revolving credit agreement.

And now I'll turn the call over to Vickie Villacrez.

Vickie?

Thank you, Steve.

Good morning, everyone.

On slide 20, we continue to execute on our strategic priorities at TDS Telecom.

During the first quarter, we launched two new IPTV fiber markets, bringing total TDF TV markets to 13.

The integration of Baja has been very productive.

We continue to increase broadband penetration and identify synergy opportunities, giving us confidence in our overall cable strategy.

We are furthering this strategy by our acquisition of BendBroadband, which was announced yesterday.

Our hosted and managed services business has been combined under the OneNeck IT solutions brand, and we have realigned our sales force and many other operational functions.

If you turn to slide 21, yesterday's announcement of our agreement to acquire substantially all of the assets of BendBroadband is another significant step in pursuing our cable growth strategy, aimed at creating value for the long-term.

This strategy is a natural extension of our core wireline business, and built on last year's investments in Baja broadband.

BendBroadband is a provider of connectivity solutions in central Oregon, with 2013 revenues of $70 million, and over 79,000 homes passed and businesses passed, serving one of the most desirable and vibrant regions in the US.

BendBroadband is a full-service communications company with strong market share and penetration rates that exceed industry averages .

BendBroadband has consistently invested in technology with fully upgraded DOCSIS 3.0 plant and fiber connectivity,which it leverages to serve, both, residential and commercial customers.

Additionally the acquisition includes a Tier III data center, which will be operated by our OneNeck Leadership Team, to further grow the sales pipeline in presence in the Western US and allow us to leverage our reputation as a trusted adviser to businesses and our extensive commercial product portfolio.

We are purchasing, substantially, all of the assets of BendBroadband for $261 million in cash, and believe we can create significant value from the transaction.

If you turn to slide 22, similar to Baja, these markets have attractive demographics, above national average household growth forecast, and strong economic development.

We believe the markets served by BendBroadband will not face significant fiber competition and, therefore, we will have the best pipe to the home in these markets.

BendBroadband has high penetration overall than Baja, yet, we believe the high quality of the services provided will allow us to capture additional market share, especially for data.

Given the investments the Company has made over the years, we see relatively low capital requirements, and similar to Baja, we believe we can create meaningful synergies through marketing many of our current product sets, deploying existing platforms, tools and processes, and leveraging central resources in vendor relationships.

We are excited about the opportunity to leverage BendBroadband's talent and expertise to continue to expand and further build our cable operations.

We expect to close in the third quarter of this year and will update guidance at that time.

Now, before I cover the results in the quarter, I wanted to call your attention to a change in revenue reporting in the Telecom financials.

We are now breaking out equipment sales in the related cost of goods sold for the consolidated Telecom statement in each segment.

Equipment revenues are significant in the HMS segment, for which a large component of the business is the sales of technology solutions and hardware.

These sales can be uneven and have significantly lower margins.

Segregating equipment sales from services will provide better visibility into the ongoing HMS operations.

For the wireline and cable segments, equipment sales are, primarily, for managed IP equipment and are relatively small.

Okay.

Moving to the first quarter, the results on slide 23.

We had a very solid quarter, with excellent results from our wireline cost control initiatives, as expense reductions more than offset declines in wholesale and regulatory revenues.

Cable operations continuing steady growth, and HMS producing 8% organic growth in services revenues and equipment sales.

On a consolidated basis, TDS Telecom revenues increased 21% driven from, both, the Baja Cable acquisition and the MSN acquisition.

Adjusting for the impacts of these acquisitions, revenues were down 1% year-over-year, as organic growth in our HMS business nearly offset the revenue declines in the wireline operations.

Adjusted income before income taxes, which is essentially operating cash flow for TDS Telecom, grew 26% year-over-year, or $14.9 millionto $72.6 million in the quarter.

Primarily driven by $9.5 million of increased contributions from the wireline operations, and the $5.1 million contribution from the Baja acquisition.

Without the effects of acquisitions, the business grew its adjusted income, before income taxes, 16%, or $9.3 million.

Looking at wireline results on slide 24, growth in data and IPTV on the residential side, and managed IP on the commercial side, offset the decline in legacy voice services.

Wholesale revenues declined 8%, primarily, as the result of changes in regulatory recovery, due to the Reform Order and lower wholesale rates, as well as continued declines in access lines and minutes of use.

However, due to cost control initiatives, SG&A declined 19%, or $10.9 million, and costs of services declined 3%, or $2 million from the same period last year.

As a result, operating cash flow margins improved 600-basis points, which drove a 17% increase in adjusted income, before income taxes.

This is the fourth consecutive quarter in which the wireline reported growth and adjusted income, before income taxes, as the entire organization continues to stay focused on cost improvement initiatives.

In the quarter, despite our very high ILEC residential broadband penetration of almost 70%, we added 2,400 broadband net adds.

This growth was driven by triple play sales and IPTV markets, as well as new data services launched in our stimulus markets.

We are nearly complete on our broadband stimulus projects, providing service in 37 of the 44 markets.

As shown on slide 25, residential broadband customers are increasingly choosing higher speeds in our ILEC, with 36% choosing speeds of ten megabits or greater, which is up from 29% last year, driving increases in average revenue per connection.

As previously mentioned, we launched two new IPTV markets during the quarter.

We have been very pleased with the overall IPTV uptake and ARPU results to date.

IPTV connections grew over 75%, adding 6,900 subscribers, compared to the prior period.

In our newer fiber markets, we are offering up to 300 megabit data speeds.

97% of our IPTV customers are taking a triple play bundle.

In the table on the right, average revenue per residential connection increased 2%, primarily reflecting increases from the IPTV rollout and price increases for data services.

On the next page, our commercial voice and data communications solution managedIP increased connections 27% year-over-year, resulting in commercial revenue growth of 1.5%.

As you look at the cable segment on slide 27, these results reflect Baja's second full quarter operations, which was acquired on August 1, 2013.

We are pleased with the results to date.

In the eight months, we've owned Baja, we've seen annualized growth exceeding 10% in, both, voice and broadband connections, more than offsetting the decline in video connections.

Additionally, we seen household growth in the market of 3%.

As a result of the customer growth, revenues increased to $22.5 million, from $21.5 million in the fourth quarter.

That's in the fourth quarter of [2014].

Expenses includes one-time costs associated with cost reductions, resulting in adjusted income, before income taxes, of $5.1 million, which is on plan.

Turning to the HMS segment on slide 28.

We are pleased with the 8% organic growth in our services revenue, which includes [co-location], cloud, application management, and managed hosting services.

Organic growth in equipment revenues also increased 8% in the quarter.

The acquisition of MSN, our Denver based solutions provider, acquired on October 4, 2013, increased revenues by $25 million and expenses by $24 million.

As slide 29 shows, 2014 guidance is unchanged from our year-end call.

As a reminder, we will update 2014 guidance for the BendBroadband acquisition when it closes .

I would like to close by reiterating how confident we are in the portfolio companies we are operating today at TDS Telecom.

We believe our wireline business can generate consistent cash flow and provide expertise and infrastructure to build our cable business.

We are thrilled to be adding BendBroadband to our family of companies.

We look forward to continuing to grow BendBroadband business and executing on our strategy to expand our cable operations . Our HMS segment is positioned to capitalize on the successful integration of the five companies we have acquired to generate strong revenue growth and increasing profitability.

I will now turn the call back over to Jane.

Thanks, Vickie.

Kevin, we're ready for questions now.

Thank you.

(Operator Instructions).

Our first question today is coming from Simon Flannery from Morgan Stanley.

Please proceed with your question.

Hi, this is Dan (indiscernible) in for Simon Flannery.

Just had a quick question around the iPhone.

Can you give some additional color around the impact underlying trends, such as churn, gross ads, and what you're seeing on ARPU, as well?

Thank you.

Hi, Dan.

Ken Meyers here.

I'm not going to break out ARPU by phone, or churn by phone, but what I'll tell you is that that was one of the components that is significantly, both, changed the churn profile, as I said about this time of year ago, before we introduced it, device selection was the second biggest reason given when we were doing our churn analysis.

And that has fallen by 75% over the last year.

And that, along with the other 4G/LTE devices that we added to the portfolio, all the different smartphones that are out there, clearly, the driver to the 6% year-over-year increase in ARPU.

So, we're very happy with its position in the portfolio.

It's about 30% of our smartphone ads right now, and that's a very nice place for it to fit; neither so big nor insignificant, it's just one of quite a few very good products in that area.

Great.

Thank you.

Our next question today is coming from Phil Cusick from JPMorgan.

Please proceed with your question.

Hey, guys, thanks.

Two things.

I guess first.

on the Bend deal, can you tell us if it was a competitive deal?

And is it reasonable to assume sort of a 30% to 40% margin, given the penetration in the business mix?

Pre-synergies?

Yes, Phil, this is Doug.

On the Bend deal, yes, it was competitive, and it's reasonable to assume 30% to 40%.

Okay.

And there should be some level of synergies over and above that?

Yes.

Great.

And, then, on the churn side, a little bit about Slide 11, is it fair to say churn continues down from here?

That is the expectation.

That's what everybody is absolutely working on, and if we continue to bring that down, along with the very nice uptake we've seen in gross add, that's the formula to change the trajectory on customer growth.

If you look at the involuntary churn, at what point do you feel like you're through that cutting people off who aren't paying bills?

Is Q2, more or less, the end of that?

Yes, pretty much the stuff that we looked at is about the end of it.

And if it weren't for that high-end voluntary churn, would adds have been positive this quarter?

I didn't do the math, Phil, I would have to take a look at it.

I don't want to speculate.

Okay.

And last, I guess, what are you seeing in terms of competitive pressure?

There's a lot of pricing actions out there.

That gross add trajectory seems very good, but are you starting to see any weakness there, given the overall competitive environment?

You're right, it's very competitive.

And, in fact, what we saw was we started off the year hot and we, actually, pulled back some promotional activity in March, to really see how hungry was the market?

How much is it promotional?

The answer is, it's all promotional.

We pulled back and, as I said, we were really fat, we were above the 12% in January and February.

We're at 12% for the quarter, after a slower March.

Going forward, what we've said is, we will make sure that we stay competitive with our pricing and promotions, but what you've got going on right now is, you got a unique market where the actual switcher pull looks to have opened up more.

So, we're going to be active in it.

Good.

Thanks, guys.

Thank you.

(Operator Instructions).

Our next question today is coming from Sergey Dluzhevskiy from Gabelli & Co.

Please proceed with your question.

Good morning, guys.

Couple questions, if I could?

On the buyback, you mentioned, basically, it represents only one [mounds of] buybacks, especially because of the blackout period.

Could you let us know what the average length of the blackout period is; and whether it was longer in 1Q; and, also, in general, is this a good level of quarterly buybacks or is it going to be somewhat higher?

Because I remember last quarter you indicated your buyback was somewhat modest in this quarter; it was about the same level.

Yes, Sergey, typically, when we get to a quarter, we'll have what's called a 10-B5 in place, that allows us to continue to purchase through the blackout.

That has not been placed at year-end for various reasons.

So, typically, we'll buy throughout a quarter.

As far as what we can expect in the future, we're going to continue to be in the market at the right times.

I don't know if I can give you a number as to how much that will be, just given I don't know what the market conditions are going to be.

Right.

Well, 10-B5 is not in place because, let's say, you were looking at BendBroadband, or was there any other legal reasons that prevented you from --

I'm not going to answer that question, Sergey.

Okay.

Okay.

One question for Ken on the wireless side.

Would you share your thoughts and expectations for the upcoming [AWS3] and broadcast spectrum [motions, particularly in light of Chairman Wheeler's recent proposal of a two-phase broadcast spectrum auction, or a sound spectrum, is going to be reserved for players for this low, low band spectrum holdings; and, also, given your current holdings in [that road map], which spectrum do you think is a better fit for you?

Good morning, Sergey.

Complex question.

We try it a couple different levels.

One, I fully anticipate that we will be at both options.

What, exactly, the outcome will be is a function of structure, which, quite frankly, is still moving.

It was a pretty thoughtful proposal that went out there.

A lot of people got a lot of different oars in the water on this one.

I think there is still movement on it.

It's really difficult right now, while the rules are still evolving to have any specificity around, exactly, where we'll play and how, much like other options.

Certain part of this is definitely a make versus buy decision.

It's about how do we deliver to meet the future demands in our markets.

In some cases, we can do it with network assets, as opposed to spectrum.

At the right price, the spectrum assets may be a more effective delivery mechanism.

So, right now, I can't give you much more than that.

Yes, we like the combination of having low-band spectrum and high-band in each market, in order to aggregate those going forward and get the most out of the speeds.

But when we made a lot of progress in that area, that's about as far as we can go right now.

Okay.

And I have a couple quick questions for Vickie.

First, on the BendBroad side.

Part of the business is, essentially, data center business and, also, there is a broadcast business as well.

Could you share with us what percentage of revenues is from data center services or from noncable services out of those [$70 million] ?

Yes.

So, yes, the purchase price did include value for data center, and cable advertising, and broadband business.

Cable is the majority of it.

We're not breaking out the components of that at this time.

Okay.

And on the HMS side, obviously you broke out (indiscernible) revenues and expenses, starting from this quarter, to highlight service component, but still even if you look at the service, as the margins are, probably, still below the levels you would like them to be,could you talk a little bit, at what point do you think there's going to be inflection point in margins on HMS?

And what are the steps that you are taking to improve those margins over time?

Okay.

Good question.

As you know, we've been -- we've acquired our five companies.

We have rebranded under one banner, OneNeck IT Solutions.

And we have been in the process of integrating the five companies and working to achieve synergies, both, from a top line and an expense standpoint.

I do expect profitability to improve over the latter half of the year, and we're looking to grow that substantially from where we're at now.

And we are looking for higher margins in our service revenues as, we achieve these synergies.

Okay.

Great.

Thank you.

Thank you.

Our next question today is coming from Rick Prentiss from Raymond James.

Please proceed with your question.

Thanks, guys; apologize, it's been a busy earnings day.

I have a couple questions for you.

Ken, first, appreciate the color on the churn chart.

I agree with Phil that's a very important chart you're watching and we are.

Were there any tablet sales in the quarter?

Obviously, as we watched all the other carriers in the market report it, a lot of carriers relied on tablets to get to positive adds.

Do you tablets in your mix; and what do you think the future of tablets might be for you?

We do have tablets in the mix.

Quite frankly, there are relatively small part of our business, right now.

That's because they really got introduced late in the fourth quarter with the iPad, but that was very constrained in terms of inventory.

If I think about it, we're talking about measuring it in the thousands of units, single digit.

Okay.

One of the other macro trends in the industry, and you guys have launched it now, the device installment plans, what have you seen in the first several weeks?

I know it's early.

But when you listen to the other carriers out there, I think they were quite shocked with the initial thought of how much people would go to the equipment plans, and how much they seen a few months later.

So, maybe just an early indication from you what you're seeing, and is it kind of surprising so far?

I really hate, two weeks into something, trying to draw a lot of lines off of it.

The way that we're approaching it is, we think of ourselves, on the distribution side, as being a retailer, and making sure that we got all the different products consumers wants, and work with them to make sure they get the right product.

So, we will continue with the subsidized model, and we're offering the device financing at the same time, and you know, we get to the second quarter, we'll have three months of data that we can really talk about.

I mean, there's nothing that I see that is worrisome at this point in time; it's just too early to try to give you a whole bunch of color on it.

Just to help us think through it going forward, I think it's one of the more complicated accounting issues we cell-side folks have faced, how should we think about modeling this going forward?

It's helping most people's EBITDA because of the way you get the revenue, but you don't have the subsidy.

Maybe I'm silly, but it seems pretty complicated.

I think it is pretty complicated, and as we're working through our close for April, we're trying to nail down all the specifics with our auditors to make sure we're all aligned.

But the current expectation is that on a 24-month device installment contract, that we would recognize about half of that, or about 12 months of revenue upfront, along with an estimate of trade-in value, if the customer elects a trade-in program.

Of course, you got on the cost side, the full cost of the device at that time.

Great.

And how -- I guess, one of the things we get a lot of questions on, is how are the carriers going to get smart on trade-in value, assumptions, uncollectible assumptions, there is a lot of moving pieces in becoming the financier of equipment.

It helps EBITDA, it stresses cash, from the working capital standpoint, have you guys got enough intel, do you think, on trade-in value, allowance, et cetera?

Well, I think going in, we will, obviously, make estimates around all that.

My expectation is that our estimates will be conservative, and that we will actively manage the risk on both sides of it.

But that little question right there, that's the big issue, 12 months from now, that we're going to see a lot more visibility to, and we will wind up, probably, taking a little bit more of that cost upfront, so to make sure that we don't have surprise on the backend, but that's one of the things the Finance Team has to manage going forward.

Great.

And a quick question on the auctions.

What is your understanding, as far as when you would be "applying to participate"?

You mentioned you fully participate participating, the rules are kind of in flux, but when do you anticipate you would turn in, yes, an application, we're going to participate in ASW3, and when would you turn in an application for the broadcast auction?

Are there firm enough dates to see when those are?

I'll give you my estimate on the first, which is summer, for AWS.

And I'm not going to make an estimate on the other one, because I think there are not only questions around the complexity of that auction and everything else, but there's, also, an increasingly crowded, or at least sounds like, an increasingly crowded Regulatory agenda that's getting built.

And how all that stuff moves over the next couple months is anybody's guess.

Sounds like some good progress on the operational front, so look forward to seeing as you move forward.

Thanks.

Thanks, Rick.

Appreciate it.

Thank you.

We have reached the end of our question-and-answer session.

I would like to turn the floor back over to Management at this time.

I would like to thank everybody for their participation today, and please call us with any follow-up questions.

Have a good one.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful time.

We thank you for your participation today.