威訊通訊 (VZ) 2002 Q1 法說會逐字稿

Good morning and thank you for standing by and welcome to the 2002 first quarter release teleconference. I would like to remind all parties, your lines have been placed on a listen only mode until we open up for questions and answers. And also that today's call is being recorded. If you should have objections, you may disconnect at this time.

I would now like to turn the call over to Chris Boraas, Director of Investor Relations. Thank you Sir, you may begin.

Thank you, everyone. I'd like to start out this call with a few housekeeping items. As always, this call is being broadcast live through our website at www.rccwireless.com. An archive will also be available in our investor relations' section. In addition, a dial-in replay will be available through May 14th, shortly after the completion of this call. The required information to login to this replay is included in our press release issued last night. A Form 8-K will also be filed including, as exhibits, the text from today's teleconference and our first quarter earnings press release. Presenting this morning will be Richard Ekstrand, RCC's President and CEO, Wesley Schultz RCC's Chief Financial Officer. Following the opening remarks, Rick, Wes and Ann Newhall, RCC's Chief Operating Officer will be available to take your questions. Before we begin, I want to state that any comments about RCC's future prospects are forward-looking and therefore involve certain risks and uncertainties, included but not limited to, competitive considerations, success of customer enrollments and the retention initiative, the ability to increase wireless usage and reduce customer acquisition costs, the successful integration of required properties with RCC's existing operations, the ability to negotiate favorable roaming arrangements, the ability to service debt, the resolution of certain network technology issues and other factors discussed from time to time in RCC's report on Form 10-K for the year ended December 31, 2001, and other filings with the Securities and Exchange Commission.

With that, I'll turn it over to Rick Ekstrand.

Hi everyone. We had a strong first quarter with record EBITDA and free cash flow. This record setting performance gives us confidence that we will achieve our initial 2002 guidance. In fact, we believe more than ever, that the industry is poised for new growth opportunities.

The wireless business has only begun to penetrate traditional telephone service. We now look to the estimated 240 billion in consumer spending for long distance and primary and secondary line local service. With only 17 percent of monthly household minutes made with wireless devices today, we believe there exists a significant opportunity for growth. In rural America, local calling areas are often small compared to urban areas. Wireless networks are not constrained by the regulated boundaries of wireline providers. Customers with our local calling plans can eliminate typical rural long-distance charges on much of their day-to-day calling activity.

For example, a consolidated school or hospital district may draw on students or patients from several local calling areas. As a result, calling patterns often result in long distance charges in a wireline environment, but not in a wireless environment.

Eligibility for universal service fund payments enhances this strategy for us. We capitalize on this opportunity because we have a strong operation that focuses on the fundamentals of the wireless business, which include the addition of high quality customers that will contribute to growth in EBITDA and free cash flow, industry leading retention, a strong liquidity position and constructive relationships with our roaming partners. Roaming is a strategic component of our EBITDA. We have been proactive in seeking mutually beneficial roaming arrangements. We continue to believe other carriers will use our networks due to the superior quality of service coupled with the basic economics of our competitive rates.

And based on these trends, we continue to be optimistic regarding roaming revenues. Driven by our expectations regarding industry growth, we are improving and expanding our network coverage by adding approximately 70 new cell sites this year.

Network superiority has long been a competitive advantage for us against both incumbents and new entrants. These new cell sites add to the usability of digital handsets, add capacity and provide service in additional areas.

During this quarter, we have satisfied the initial FCC build-out requirements for our Northeast PCS-POT properties. Our 75 million capital budget includes the cost for these projects. We've always laid claim to a balance growth strategy as opposed to allowing any one operating metric to dictate our focus. A key component of our balance growth strategy is retention. We continue to successfully reduce churn, as reflected in our 98 percent customer retention rate for the first quarter. And by the way, in April we saw retention improve again from first quarter levels. As a matter of perspective, retention in the third and fourth quarters of 2001 was 97.2 percent and 97.8 percent, respectively.

Now, let's talk about gross adds. Admittedly our gross adds of 49,000 were lower than our internal expectations, which in spite of strong retention produced approximately 8200 post and pre-paid net adds. To this point however, based on April results, we are confident that second quarter net post and prepaid adds will be much improved over first quarter's. Although we still had customer growth challenges in the South region during the first quarter, we are encouraged by the positive trends in our business.

There's nothing unique about what it will take to succeed in our South region. It's just like any of our other service areas. It is about out-performing our competition. Our distribution points of presence have dramatically increased in the last six months, including a recently expanded agent distribution program. We have also completed a comprehensive training program for all of our direct sales personnel, and we have instituted a brand change to Unicell [phonetic], recognizing a need for a fresh look. Using a balanced growth strategy, just like in our other regions, we are absolutely convinced that we will be successful in this region.

Switching gears, we continue to see positive developments for the wireless alliance this year. We fully expect wireless alliance to rebound from its negative 875,000 EBITDA performance last year, to positive EBITDA status this year, due to a significant increase in roaming revenue, together with an upward trend in customer growth.

[Indiscernible] handsets available later this year, we see welcome opportunity for wireless alliance and RCC. With gate [phonetic] Wireless Alliance customers will have a handset that works on both their home GSM network, as well as RCC's adjacent TDMA network. With only 2 percent penetration in Wireless Alliance service areas, gate will eventually position RCC to provide a new level of service plans to 732,000 POPS. Secondly, segments of our adjacent cellular base that frequent Wireless Alliance service areas will be able to utilize our already built-out GSM networks, rather than roaming on another carriers' network. Moving on, improvements were also made to reduce operating expenses. Last year we focused on our operations, identified areas where redundancy exits and took action. We are pleased to see the results. Network costs continue to benefit from improved in collect roaming agreements together with pricing improvements with many of our service providers. [Technical difficulty] consolidation: Dramatic improvements in bad debt expense and decreases in our cost to bill a customer are improving SG&A. Our record first quarter EBITDA of 50.4 million demonstrates the success of these efforts. Our EBITDA margin of 49 percent for the first quarter is one of the best in the business. Free cash flow was strong and allowed us to continue paying down our debt. We fully appreciate that every dollar of debt repaid can bring appreciation to our equity. We continue to work through and narrow the development plans for our 2 ½ G, and 3G build-outs for each region. We believe the strategy of building out each region with the technology is best supported by our roaming business in that region, is the prudent course.

We also believe that for those regions adopting the GSM technology path, gate handsets will have a strategic and long-term role.

So, now to wrap things up, we look forward to the continuation of our national economic recovery. We're excited about the next wave of organic rural customer growth. We fully appreciate the importance of roaming revenue to our operations, and will continue our proactive approach to managing our roaming business.

We are having discussions with our larger partners that will have a direct impact on next generation network services. The continued growth of national players has a positive impact on RCC's roaming revenue. We are open to strategic alternatives that make sense for our properties. With that, I'll turn it over to Wesley Schultz, our CFO for the financial wrap-up of our quarter.

Thanks Rick. Our EBITDA and positive free cash flow were very strong this quarter beating analysts' estimates. We generated EBITDA of 50.4 million, a record for any first quarter. This quarter's 49 percent EBITDA margin ranks second only to the all-time record EBITDA margin of 51 percent in the third quarter of 1999. Free cash flow increased significantly from last year to 14.6 million. And although I'm not suggesting we adjust our practice regarding the calculation of free cash flow, even after factoring in our preferred stock dividends, we had positive free cash flow. Once again, our net roaming position or the net amount RCC received after subtracting in collect cost from roaming revenue, continued to its string of improvements, increasing 33 percent during the first quarter of '02, as compared to last year. The average roaming yield for the quarter remained unchanged when compared to the fourth quarter of '01 at 29 cents. Roaming revenue increased 13 percent in the first quarter, to 26.2 million, in spite of yield decline. We expect roaming revenue growth in 2002 from continued increases in minute volumes, together with modest, roaming yield reductions. Our net [indiscernible] the revenue we receive from our customers, less the cost of their off network usage is one of the strongest of our [indiscernible] and improved to 47 dollars per customer, as compared to 46 dollars in the first quarter of last year.

Going back to what Rick mentioned earlier regarding increased wireless usage, we see evidence of this. Average monthly customer minutes have increased by more than 40 percent from last year at this time. In collect minutes have also grown as we have offered larger local service areas to many of our customers. However, this increase in minutes was more than offset by declines in cost per minute, resulting in in-collect expense for the first quarter of 2002, declining 6 percent to 11.8 million as compared to last year.

For the first quarter of '02 in collect cost per minute was 21 cents, as compared to 30 cents in the first quarter of last year. Also contributing to network costs decline as a percentage of revenue, were rate reductions in O&T and long distance. Because of these improvements, network costs for the quarter, as a percentage of revenue, decreased at 22 percent, as compared to 23 percent in 2001. With virtually all of our new customers receiving digital handsets, digital customers now account for approximately 67 percent of our total customer base, as compared to 62 percent at year-end, and 45 percent a year ago.

We used our phone service program capitalizing 6.7 million in handsets [technical difficulty], which is comparable to the first quarter of '01. Selling, general and administrative expense declined as a percentage of revenue to 26 percent, as compared to 27 percent last year, due to the consolidation of service centers, lower bad debt trends, declining cost for bill, efficiencies in our sales and marketing organization and other cost reduction initiatives. As a result of our efforts over the last couple of quarters, RCC decreased its bad debt expense in the first quarter of 2002, by 45 percent to 2.5 million, as compared to 4.5 million during the fourth quarter of 2001. Sales and marketing expense for the quarter were 11.9 million as compared to 12.7 million in the prior year. Depreciation and amortization expense for 2002 decreased 29 percent from 26.9 million to $19 million. This decrease primarily reflects the January 1st, 2002 partial adoption of statements of financial accounting standards No. 142, and the corresponding discontinuance of amortization of goodwill and licenses in RCC's statements of operations. Upon full adoption of this statement, RCC is required to initiate a transitional impairment test related to goodwill and other indefinite, lived intangible assets. This evaluation will be completed in the second quarter of this year. Another opportunity to improve EBITDA in 2002 is our expectation for Wireless Alliance. As Rick mentioned earlier, we expect Wireless Alliance to have positive EBITDA in 2002. Because of our strong financial performance our positive free cash flow increased 249 percent to 14.6 million for the quarter. Interest expense for 2002 decreased 14 percent to 27 million as compared to 31 million in the first quarter of last year. The decrease primarily reflects lower debt levels and interest rates. We continue to be in a good position to pay-down debt, which we did, paying down 27 million on our credit facility including permanent reductions of 18 million of our term loans. The additional 6 million was permanently reduced in April.

At the end of the first quarter, total borrowings on our credit facility were 795 million with 264 million of additional availability under the facility. The availability under our current credit facility together with our expected continued positive free cash flow, positions us to be fully funded in all aspects of our operations. In light of events surrounding Arthur Anderson, RCC's currently evaluating proposals relating to the engagement of a new, independent public accountant for 2002 and in subsequent years. It is not expected that Arthur Anderson will be engaged to audit the 2002 financial statements. This action is not being undertaken due to any disagreements with Arthur Anderson.

Thank you. Now, I will turn the teleconference back to Michelle who will poll you for any questions.

Thank you. At this time, if you would like to ask a question, you may press star* followed by one. Again, it's *1 to ask a question.

Our first question comes from Greg Lunburg [phonetic]. You may ask your question and please state your company name.

Morgan Stanley. Good morning, Rick, Wes. Could you break down the balances of the three pieces of bank debt, first of all?

Greg, bear with me just one second as I pull up that information. The [multiple speakers] has just over 11 million. There's actually four different term loans. The term loan A has roughly 349 million; B and C both have approximately 190 million, and term loan D has about 55 million. These were all as of the end of March.

Okay. And then did I hear you right that 11.9 million was sales and marketing expense?

Well, as you know, we've said for a long time that our cost per growth add is an all-inclusive number. The number that we showed at 11.9 million is just a portion--That's the majority, but it is not going to tie out exactly to the cost per growth add numbers.

Thank you.

We have been asked in the past to give sales and marketing numbers so that's the value.

I noticed that it was a new number. Then what percent of add [indiscernible] phone rental this quarter?

It would've been a pretty significant number but quite honestly, that is not a number that I have or that we track specifically, so I can't really give you any specific guidance other than, I think you can base on the amount that we put into phone service. I think you can calculate that it would've been a pretty significant portion of our [indiscernible] growth adds for the quarter.

Okay. Thank you, guys.

Thank you. Our next question comes from Todd Rethemeir. You may ask your question and please state your company name.

Good morning, congratulations on good numbers. It's Todd Rethemeir with Bear Stearns. Technical difficulty] questions for you. One is, we saw a big increase in roaming minutes of use. Was there a specific roaming partner that was responsible for that, or are there any trends there you could talk about? And second, you said minutes of use were up 40 percent. Could you be a little more specific and tell us what the roam-- What the total of local customer minutes of use is?

This is Ann Newhall, Todd. We don't usually break out the total local minutes of use. With respect to what we attribute the increase in roaming minutes to, part of it is seasonal, but a great deal of it appears to be simply the expansion of the customer base and customer usage of minutes by our roaming partners as they use it in our territory.

Was there any roaming partner specifically that was causing it?

No, it appeared to be pretty much across the board for us.

Okay, thanks.

Thank you. Our next question comes from David Janazzo. You may ask your question and please state your company name.

Hi, thanks, Dave Janazzo, Merrill Lynch. You had commented on the gross add growth being fairly soft and we've seen that with some of the rural carriers as well, versus the national carriers which has shown a little bit stronger performance there. Can you comment on what some of the attributes might be differentiating the rural and or the metropolitan markets? And secondly, could you comment on what the run rate might be for phone capitalization, going-forward? Thank you.

This is Ann. I'll take the first part of your question, David. The-- It's difficult for me to comment upon or contrast to what may be happening in the metropolitan markets, since that's not where we focus or operate. We simply seem to be seeing in some of our areas, continued softness from the economy that we had highlighted in the fourth quarter. I would say two comments about the customer growth, however.

First of all, it is not true across the board in our areas, in other words, we saw some great variations from customer adds that were well over budget to customer adds that were less than what our internal expectations were. And secondly, we've seen a steady and positive increase in net customers each month this year, with it being much-- reflecting our expectations in April, very well and much better than it did in the first quarter of the year. So, we're seeing a positive trend in that regard. I'll defer to Wes on your second question.

David, your, the second question, I believe was, the trend line for phone service. We would anticipate that in the second quarter, you will continue to see us using phone service, probably close to the same extent that we had in the first quarter. Second half of the year, we intend at this time to start ramping down or discontinuing phone service, but again, that as it always has been, is somewhat dependent on competitive forces in our market place. But, that's our current intention.

Thank you.

CALLER INSTRUCTIONS] Thank you. Our next question comes from Saba Heckley [phonetic] with Met Life. You may ask your question.

Thank you. First of all, congratulations on good numbers. Rick, on your opening statement you mentioned that you guys are going after the long-distance market and to some degree, the local second line market. I was wondering if you could give us some examples of what type of plans you use to go after this type of market and what the success rate has been? Are these coming mostly from second lines and also what the reaction of the local incumbent LECs are?

In terms of the first one, you know, in terms of our approach for the long-distance business, as most, you know, wireless carriers have been for quite some time, you know, we have packaged long-distance with our wireless minutes in many of our service pricing plans and actually, we see, you know, our ability to continue to offer that as part of our package. Really, not differing much from what we've done historically, you know. We see that, you know, it's again, it's our version of being able to bundle the different services and we are also finding our customers using their wireless phones with the long-distance packages that are included in them, taking and using them for long-distance services, as opposed to using their, you know, traditional wire-based telephone services that they've used in the past. So, we do see that trend continuing and we think it is a sticky-type service. We think it allows a customer of ours to gain more value from our services and we just see that, you know, this approach towards wireline replacement or displacement, our packaging of long-distance is, you know, just another big part of the package.

Are you seeing any kind of a reaction from the LECs? I mean, clearly we see the impact on the long-distance companies and we are beginning to see some impact, I think, of the RBOCs and other LECs, but I'm just wondering at what point do you expect some competitive reaction from the LECs?

This is Ann. I think that that's a difficult question to answer in the sense that we focus on obtaining our own customers and our positioning against the-- all the competitors in the market, wireless and wireline. We don't expect to substantially change our business plan based on how we see the LECs reacting and competing in our markets today. We are-- have had local packages in place in some of our markets as long as 18 months and have tried various different products with unlimited calling or large bucket calling over that period of time. We have found success with them and we have pursued them where appropriate in our region.

Saba, I want to make sure a point of clarification here, though, because the term long-distance, I think can be used a couple of different ways here. And I think the point that we were trying to make that Rick talked about in his opening remarks was the fact that, where on a landline phone today in a lot of our areas in rural America, where you may call the town that is 15 miles away, that you end up sharing a school district or a hospital district with, under landline service that could very well be a long-distance phone call. In our [indiscernible], since that was part of our network all along, we have never treated that as a long-distance phone call. However now, as we have increased our capacity, increased our coverage and are more of a potential landline replacement, one of the additional benefits of that is, that call which might be long-distance from a landline phone, would not be long-distance using our cellular or wireless phone. That's different from one of our customers calling somebody in New York City, which obviously would be a long-distance phone call.

Okay, thank you. And my second question was-- is, regarding the debt. You guys have successfully reduced that with your cash flow. I'm wondering, as you continue to increase your pre-cash flow and generate some cash flow, what's the target that's a level for year-end?

Our hope and our actions will be to continue to just pay down debt as much as we can from free cash flow. It's going to be dependent on the amount of free cash flow that we generate over the rest of the year, but, as we have said for a long time, we are committed to debt reduction. Specific numbers at this point in time, you know, the guidance that we'd given earlier this year was that we would have free cash flow in the mid-30 range. We continue to believe that's the case. And so we'll have debt reduction of 40 million. There's some variances within free cash flow that make the amount of debt that is repaid different perhaps than the amount of free cash flow, but we're still on target to be able to generate the amount of free cash flow that we had said.

Thank you.

Thank you. Our next question comes from Mark Buckite [phonetic]. Your line is open and please state your company name.

Thanks. I'm from Knickerbocker. My questions have been answered.

Thank you. Our next question comes from Drew Hanson [phonetic]. Your line is open and please state your company name.

Sure, Morgan Stanley. Two quick questions on the 18 and I guess the 6 you mentioned on [indiscernible] in April on the bank debt. I see that's done under your cash [indiscernible] if that's the case, under your bank debt facilities. Did that affect the amortization that you have under your current facilities? I.e., would that pay down a backend amortization? I think you talked about this in the last call. Then secondly, on the margin you gave, or you obtained this quarter, is that what you believe is sustainable at least through 2002? Or improvable upon, in terms of the 49 percent?

Drew, this is Wes. I'm going to try to answer your first question. I think what you were asking was whether or not the debt reduction payments were part of an amortization schedule. These were all voluntary payments. Our first required amortization repayments aren't until next year, so these were all voluntary. And what we have done is paid off various portions of the term loans that I gave out the amounts for, on an earlier question. All those repayments will do is reduce the amount of amortization payments that would be needed [technical difficulty]. So, it's essentially coming off the backend, but it's also reducing the amount because the amount of amortization payment is determined by the amount of the term loan debt that remains prior to that amortization repayment.

Sure, okay, so it reduces the backend in amortization, right?

Yes.

Okay. Great.

Technical difficulty] as far as the margin is concerned, obviously the 49 percent margin that we had in the first quarter is-- it was outstanding. It was the second highest we've ever had as a company, only to the third quarter back in 1999. Whether or not we can sustain that level, depends on a few factors, but certainly we do anticipate that we will have year-over-year EBITDA margin improvement in each of the quarters, as we go forward. That's been pretty much a hallmark for our Company. We continue to believe that's our potential.

Just a follow-up. The CapEx, I think I heard mentioned earlier, is that, I think I heard it correctly, that 80's that's the 2002 figure?

We have 75 million that we've given guidance for CapEx for 2002.

Okay, great. Thank you very much.

Thank you. Our next question comes from Vincent Flanagan [phonetic]. Your line is open and please state your company name.

Sure, it's TD Securities. I was wondering if you guys would expand on the sharing agreements with AT&T on building-out some of your networks? I think you may have started this in the latter part of last year and some part of this year.

Vincent, this is Ann. We have in one area, in our Midwest region, we have a cooperative arrangement with AT&T where some of our cell sites and some of their cell sites are tied together in a particular market area and coordinated. We have had discussions with them about trying that same process elsewhere, and those discussions are ongoing. But, nothing else is in operation in that same way, at this time.

Okay. And at this point, are you guys prepared to give some guidance for the second quarter? In terms of net adds and what not?

We're not expecting to give guidance at this time.

Very good, thanks a lot, guys.

CALLER INSTRUCTIONS] Our next question comes from Martin Rorey [phonetic]. Your line is open and please state your company name.

Thank you, operator. It's MSR Capital Management. I just wanted to see whether you could give us any guidance on CapEx beyond this year? Is it too early to get a preliminary leaning for 2003?

The simple answer to that is probably it is. We haven't really gone through the process of finalizing some our network evolution strategy, which will have a big say at how much ends up being next year versus spread out over perhaps more than a one-year period of time. Until we really know where we stand in that regard, it's going to be very difficult for us to give any meaningful guidance as far as where CapEx is going to be for next year. Suffice to say though, we do think that the $75 million that we have budgeted for this year is probably at the high end of where we would expect to be next year, as well. In fact, it probably would be less than that, unless we have a more aggressive upgrade path for next year.

Thank you very much and thank you for your very excellent disclosures in all your reports. I appreciate it.

Thank you.

Welcome.

Thank you. There are no further questions. I'd like to turn the call back over to Mr. Ekstrand for any closing comments.

Thanks again for your interest in our Company. Throughout our call today, we have emphasized our confidence in RCC's wireless strategy. As we talked about at the beginning of the call, it's about the basics; distribution, networks, sound financial management, quality customer service and quality customer growth.

With that, I look forward to discussing our second quarter progress with you in August.