威訊通訊 (VZ) 2002 Q4 法說會逐字稿

Good morning and thank you for standing by.

Your lines have been placed on a listen-only mode until today's question and answer segment.

Today's conference call is being recorded.

If you have any objection, please disconnect at this time.

I would now like to turn your call over to Mr. Chris Boraas.

Thank you sir, you may begin.

Good morning everyone.

As a reminder, this call is being broadcast live through our website at www.rccwireless.com.

An archive will also be available on the investor relations section of our Website.

In addition, after the completion of this call a dial in replay will be available through March 6th, 2003.

Form 8-K will also be filed today including as exhibits the text from today's teleconference and press release.

Presenting this morning will be Richard Ekstrand, RCC’s President and CEO and Wesley Schultz, RCC’s Chief Financial Officer.

Following the open remarks, Rick, Wes and Ann Newhall, RCC’s Chief Operating Officer will be available to take your questions.

In the interest of time, please limit your questions to the results of operations for the fourth quarter 2002.

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 enrollment and retention initiatives, the ability to increase wireless usage and reduce customer acquisition cost, the ability to negotiate favorable roaming agreements, the ability to service debt, the ability to resolve certain technology issues and other factors discussed from time to time in RCC's report on form 10-K-A for the year ended December 31, 2001 and other filings with the Securities & Exchange Commission and with that I'll turn it over to Richard Ekstrand.

Thanks Chris and good morning everyone.

Wireless technology allows us to fundamentally change and improve how we communicate.

It is about providing accessibility to an increasingly mobile group of people.

It is about changing and transforming a culture that was tethered to a wire.

So for over a dozen years we've taken on the task of advancing this technology and building a successful company.

We like many others have faced issues.

We are in a competitive business.

Our network technologies require capital, regulation brings complexity and the economy is challenging.

Yet because there is no substitute for mobility, America's appetite for wireless continues to grow.

Our industry now boasts over 140 million users in our nation and over 1 billion worldwide.

So how does RCC fit into this developing landscape?

Our foundation continues to be a solid customer base, as we leverage our rural network and broad spectrum through a mix of wireless opportunities.

But just as importantly, we are also the link for national players using our networks.

We believe their focus continues to be on expanding coverage in the densely populated metropolitan service areas.

We do not believe they will be focusing on overbuilding rural America.

A continuing business driver for us is to maintain our high quality networks that national roaming partners likely could not build and maintain as cost effectively as we can.

Historically we have succeeded in this area by leveraging our spectrum to the carefully planned improvement of our networks.

As an example of this our networks experienced a 40% increase in total minutes last year.

On a financial front and from a balance sheet perspective we fully appreciate that we are more leveraged than many other domestic players in the industry.

We know that we have to be absolutely efficient in everything we do.

For us new network strategies cannot be an experiment but must be implemented with proven technology paths.

Our cost centers must constantly review their spending strategies keeping in mind maximization return for every dollar spent.

We cannot and do not pursue customer growth at any cost, rather we look to quality customer growth, as a basis for revenue improvement.

Our operating results speak decisively to a very successful year, contradicting much of what the experts are saying about our sector.

Our 47% EBITDA margin last year is one of the best if not the best in the business.

Our free cash flow of $71 million for the year distinguishes our position in the industry.

Our quality customer growth was solid but more importantly, our retention rate of 98.2% is one of the best in the industry.

Although many analysts discuss the slowing of roaming revenue we continue to manage our long standing relationships with our national partners.

Our network construction efforts throughout the year have substantially contributed to roaming revenue growth and also position us for growth in service revenues.

This expansion continues to present attractive ROIs while positioning us for the expedited transition to advance services.

From an operating perspective we continue to demonstrate our ability to control costs and help us produce strong operating results.

For example, network costs and SG&A expenses were both less last year than they were in 2001.

When you stand back, take a breath and objectively look at our business, not just for a quarter, but over the long haul, you have to appreciate our ability to work through difficult times while producing solid financial results.

Going forward, we fully expect 2003 to present its share of challenges, but also, its share of opportunities.

Rural service areas lag in wireless penetration compared to metro areas.

We see this as an opportunity.

Many wire line companies acknowledge they are losing customers to wireless.

We believe that wire line substitution was initially related to our industry's ability to provide long distance more cost effectively.

And now convenience and reliability because of our improving networks are major factors driving this trend.

New and added services including the growing acceptance of SMS messaging and other content services will position us for stable and perhaps increasing ARPUs.

Switching gears, during the fourth quarter we received ETC approval in Mississippi and Alabama.

As you may recall in July we received ETC approval in the state of Washington.

With ETC status in a growing number of states we will be eligible as many land line companies are for per-customer subsidies in service areas that are low-income and high cost to serve.

This year we expect to receive a significant benefit from our existing ETC qualified customers and plan to improve our distribution systems and networks in these areas.

We also have applications pending in Minnesota, Oregon, Kansas, Maine and Vermont and expect to file in a couple more states this year.

While being fully attentive to excellent customer service, together with the maximization of roaming revenues, we continue to evaluate next generation network alternatives.

As this year unfolds we will further discuss our plans regarding these alternatives.

To wrap things up, our operating results during 2002 give us confidence regarding the future of our business.

Once again, with much going on outside of our control, we continue to stay focused on running our business, including bringing continued efficiency to operations, building and positioning networks for the future, growing and keeping the right customers, and generating free cash flow through these actions.

And on that note, I would again like to thank our employees who keep adding to their list of challenges and they keep stepping up to the task. [inaudible], but once again we have a dedicated group that delivers solid results.

With that I'll turn it over to Wesley Schultz our CFO for a financial wrap up of fourth quarter and year.

Thanks, Rick.

This year, EBITDA grew 12% over last year, coming in at a record $218 million.

But more importantly, RCC produced free cash flow in all four quarters totaling $71.4 million, 134% increase over last year.

This is another record and with approximately double the guidance we gave at the beginning of the year. $19 million of our free cash flow was used to permanently pay down our credit facility during the first half of the year with the remainder building cash on our balance sheet.

We have now been free cash flow positive in 10 out of the last 12 quarters.

Contributing to our excellent financial results for the fourth quarter was growth in both service and roaming revenues.

At the same time, network costs and SG&A expenses were both less than in the fourth quarter of '01.

As we anticipated in our last teleconference we began receiving the benefit of our recently signed agreements with AT&T, Verizon, Cingular and T-Mobile through increased out collect minutes of use during the fourth quarter.

During the fourth quarter roaming revenues increased 1.5% to approximately $27 million while out collect yield, consistent with our expectations, dropped by approximately 30%.

Year over year roaming revenue increased 5% to approximately $123 million while out collect yield decreased 26%, again pretty much as we had planned.

We expect roaming revenues this year to increase slightly although quarterly comparisons might be affected by the timing of new contracts.

On the service revenue front we are reporting a 5% increase for the fourth quarter over last year.

This increase reflects our sustained high-quality customer growth, strong retention, and relatively stable ARPUs.

Our net ARPU remained unchanged at $49 when compared to the previous year.

Net ARPU, as you may recall, included a cost we incur when our customers travel outside of our network.

Net ARPU reflects a good apples to apples comparison regarding what our customers are contributing to our operations.

On the customer front, we feel that quality post paid customer growth represents our greatest opportunity to expand our revenue base, but a solid fourth quarter with 12,475 net postpaid customer adds compared with 11,744 last year.

This improvement is significant because it was accomplished with retention during the quarter of 98.1% compared to 97.8% in '01.

As of year end, digital customers account for approximately 75% of our total customer base.

Going forward, we believe we will gain our share of new customers as the industry continues to grow.

As for the overall success of our operations, we continue to develop efficiency in our cost structure.

Network cost as a percentage of total revenues decreased to 21% compared with 23% last year.

In-collect minutes continue to grow yet average in-collect cost per minute dropped 28% resulting in in-collect expense for the year declining a little more than 5% to $47.1 million.

SG&A continues to decline as it has throughout each quarter during 2002.

For the fourth quarter SG&A declined by 3% reflecting lower bad debt expense and the effects of various cost reduction initiatives.

Bad debt expense for the year decreased 42% to $8 million, compared to $13.9 million in '01.

SG&A as a percentage of total revenues also decreased to 25% compared to 27% last year.

So when you add it all up the bottom line is, we spent less and yet had greater revenues, which is great combination.

Turning to our balance sheet, 2002 net capital expenditures total $59.3 million.

We added 20 sites during the fourth quarter, and expect to turn up another 20 sites during the early stages of '03.

We continue to have $794 million outstanding under our credit facility with an additional $259 million available [inaudible] the revolver.

We are in compliance with all of our bank covenants as of the end of the year.

There have been questions raised whether or not we'll be able to meet the total debt leverage covenant in our bank agreement for the fourth quarter of '03.

We continue to believe that we'll be in compliance with this covenant, however, it is no secret that at five times this covenant will be tight.

Keep in mind that our senior debt covenant is four times and we believe that we will faithfully be in compliance with that covenant.

Thank you, and now I'll turn the teleconference back to Darcy who will poll you for any questions.

Thank you.

At this time if you would like to ask a question please press star 1 on your telephone.

You will be announced by name prior to asking your question.

Once again if you would like to ask a question, please press star 1.

Pat Dyson (ph), you may ask your question, please state your company name.

Pat Dyson with Credit Suisse First Boston.

Three questions.

First, could you provide any update as far as present thoughts regarding the preferred which goes cash pay in August the 11-3/8, secondly, could you quantify, in any respect, the expected benefit foresee as far as the ETC status in 2003 and finally if you broke this out, could you give the roaming cost per minute and roaming yield for the fourth quarter?

Yeah, this is Rick, I'll take the first question.

We are aware of the fact that the preferred go cash cash-pay later this year and we'll be reviewing that and making a decision at the appropriate time.

But that's really our position at this time.

In terms of ETC benefit--

The ETC benefit we've talked about over the last several quarters, and certainly with the addition of both Alabama and Mississippi during the fourth quarter, we're pretty optimistic that we're going to have revenues in 2003 from all three of the states that we now have ETC eligibility in.

We really haven't given any specific or detailed guidance as to the amounts here, but I think as we'd indicated in the previous calls, it's a pretty significant opportunity for us.

And it's in the millions of dollars, not in the hundreds of thousands of dollars.

But beyond that, we're really not in a position at this point in time to give more specific guidance, because there still are a lot of factors that determine how much we'll end up receiving.

And do you have any thoughts as far as when you'll be able to provide specific guidance, because one of your competitors obviously out there with some fairly specific guidance as far as what they expect to see in '03 from ETC.

We're aware that they have given that guidance.

I think what we'll end up doing is once we know we start receiving the moneys, perhaps as early as in the first quarter, we can give some better information on what we receive during that quarter which would be an indication of what we have opportunity for.

We're taking a pretty conservative stance on what we're giving as far as guidance from ETC until we know we've got it in the bank, so to speak.

But is it fair to cuff it and say the, you know, $5 to $10 million range potentially for the year or going up from there or is that too aggressive or too conservative?

I think that's certainly realistic, I think you're in the ballpark for what the opportunity is for us.

Okay.

Adam Tuckman (ph), you may ask your question and please state your company name.

Adam from Golden Tree.

Could you provide a little bit of guidance for `03, in terms of EBITDA, CAPEX, cash interest, etc.

Adam, this is Wes.

We are really not, at this time, intending to give guidance for 2003, other than what we'd talked about within the strip.

Probably the thing that you can take away from our comment about being at five times leverage at the end of the year, and needing to satisfy that in order to be compliant with our bank covenants, you can back in from that your expectations for EBITDA in order for us to meet that leverage threshold.

Okay.

Is there any guidance you can give us as to free cash flow?

At this point in time, we're really not giving any additional guidance for 2003.

Okay.

If the company is anticipating looking at buying back securities at any point in the future to benefit equity holders, will information be provided to bondholders, bank debt holders, preferred holders, et cetera, to put them on the same level playing field?

I'd certainly anticipate that would be the case.

I think it is important for you to know and I’m sure you're aware of this Adam that our current bank credit facility does not allow us to do that.

Have you guys been in discussions with the bank group recently?

We're in discussions with the banks about a number of things a lot of the time but we haven't had any specific conversations in that regard, no.

Okay.

I guess the last thing is just while we're still in the preferred, what's the philosophy behind the decision right now?

We don't have any further comment on it.

We're weighing various options, and we'll be making a decision at a later date.

Okay.

Michael Weiner (ph) you may ask your question and please state your company name.

Hi, it's Bank of America Securities.

I wonder if you could comment as it relates directly to you or just to rural carriers in general about prospects for overbuilds by national carriers.

AT&T has laid out some plans recently that suggest more of an overbuild strategy than they had talked about previously and I wonder if you can talk about how that will impact rural carriers in general and of course you in specific.

This is Ann Newhall.

As we've said before on these calls, we are in regular conversations with the major carriers, such as AT&T, Cingular and Verizon about the status of their overbuilds an our relationships and, in fact, our build outs in those areas.

Without getting into the specifics of those discussions, I think it's been clear from the announcements made by the major carriers in the last several months that they have significantly revised a number of their plans for capital usage in 2003 that would indicate that their builds, in many ways, are likely to be less aggressive in the rural areas in this next year.

We certainly are in the conversations with them to coordinate our builds with theirs, wherever possible, and therefore carry forward our stable relationships on roaming agreements and roaming revenue from them.

Are you aware of any plans in the next 12 months to overbuild any of your markets?

I think that we're certainly aware of the -- any public announcements that have been made.

As we've talked about in these calls before, there are pieces of each of our markets that have other carriers such as Sprint affiliates, VoiceStream, small sections of AT&T in our markets, but we have no awareness of no blanket overbuilds in any of our markets.

Thank you.

As a reminder, if you would like to ask a question, please press star 1 on your touch tone phone.

Bill Hefron (ph), you may ask your question and please state your company name.

Regiment capital.

Getting back to your comments on figuring out `03 numbers from your leverage guidance, should we assume that none of the free cash flow is going to pay down debt during the year?

That's the only way you could back into a number from that leverage.

Well, certainly as we showed on our balance sheet, we have some flexibility in order to pay down our debt.

We have over $50 million of cash at the end of the year.

That would be one of the available means that we would have to be in compliance with our bank covenants at any of the quarters, including fourth quarter of this coming year, 2003.

So a combination of cash that we have on hand, the cash that we expect to generate, I'm not skirting the issue that we certainly expect to create free cash flow in 2003, as well.

And with our scheduled repayment of debt as part of our bank facility for this year, and the EBITDA that we do produce, all of those factors are contributing to our belief that we'll be at less than five times at the end of this year.

Perry Walter (ph), you may ask your question, please state your company name.

Hi, guys, long time no talk to.

Hi Perry, how are you?

These calls are very different than a year ago, different answers, different questions.

One other questions for you guys.

Seems like you've had a pretty significant turn around in the operations in the old Triton areas.

What was the kind of key thing that moved you over the hump and got those territories it seems up and running again?

This is Ann again.

Well, I don't think they ever stopped running.

But they've been very active in all the time since they've owned them.

But I guess like all of our regions they've experienced up and downs.

Perry, I don't think there's a magic bullet that we have for any particular operational issue that might arise in one of our regions, whether it's customer sales, retention churn issues, network issues, whatever it might be, it is a daily series of a thousand different processes and practices that we have in place, and we just -- just continue to work to improve our execution on it, of every point, while watching the expenses, and doing the best to train our people.

So as far as magic, we don't have it.

We just have the diligent pursuit of improving our execution every day.

Hey, Perry, it's Rick.

To amplify on Ann's comments as we've stated to the market over the last year and a half, there's a lot of things outside RCC's four walls that we can't control.

But what we can control is our operations.

And we've got a management team that's been around for a long time.

We've got a lot of experience and dedication and enthusiasm.

And because of those things we look for ways to improve ourselves and we don't sit back on our laurels and say what we did three years ago is adequate anymore.

As we work through our processes and continue to find synergies and effectiveness, it's showing up in our financial results but to characterize it is the fact that it's a company that has focused internally on our operations and our customers and keeping them and doing it as efficiently as we can.

And I think it just shows with what we produced for 2002 on how effective that can be accomplished.

All right.

Thanks a lot, guys.

Keep up the good work.

Thanks Perry.

Good to talk to you again.

Once again if you would like to ask a question please press star 1 on your touch tone phone.

Pat Dyson you may ask your question.

Hello, yeah, I just wanted a couple follow-ups.

The first on the roaming cost per minute and roaming yield for the quarter, I don't think I got that when I asked that initial question.

As far as the net postpaid adds in the quarter, can you break out what they were as far as net postpaid adds and also postpaid alliance adds, looks like those are now blended together.

I'm not sure I follow the -- I didn't hear I don't think all of your last question.

Yes, it just -- it looks and maybe you gave this earlier and I missed it but it looks like now that the alliance is blended into postpaid?

That is correct.

And I guess I was wondering if you could just given the historical background where you used to break it out, if you could break out non-alliance postpaid adds for the quarter.

I don't have the specific number right at hand but we had a total of about 17,200 wireless alliance customers at the end of the year that showed up in our press release.

You'd have to back from that our previous third quarter number I suppose from wireless alliance in order to know how much of this was coming from wireless alliance but just as we don't disclose specific numbers for any of our other cellular areas, we felt that wireless alliance now becoming more in line with operating those regions that there is less need for us to specifically break that out.

As far as the roaming question that you had asked, we had talked about in the conference call that for the fourth quarter, our roaming yield was down about 30% from last year and for the year it was down about 26%.

From that I think you can make your calculation.

In-collect yield was down about 28% for the year in total which was very similar to what it was for the fourth quarter as well.

Okay, great, thanks.

Avi Silver you may ask your question and please state your company name.

Avi Silver from Bear, Stearns.

I was wondering where is this 40% plus roaming minutes growth?

Industry minutes are growing about 20%, clearly not as quickly as you're growing your roaming minutes and how sustainable is that?

I think where the roaming minutes are coming from are largely from our traditional roaming partners that we've had over the year and we're experiencing growth from our partners, which we attribute to really two things, the growth in their customer base, but also growth in the acceptance of many customers in the metropolitan areas of being accustomed to using their phones wherever they are.

And as they have larger buckets of minutes as offered by the major carriers with larger regional footprints which include our territory, customers feel more comfortable using their phones in our territory and do, just the same way that they use them at home.

And of course part of their ability to do that comes from the arrangements that we have reached with our roaming partners to provide them with good and effective rates that permit them to include more minutes in those buckets of plans in a wider geographic footprint for their customers.

And I think both of those trends really contribute to the growth of minutes.

As to whether the trend is sustainable, and will it continue, I guess we can say that in our own planning, we always plan for a more conservative rate of growth than we seem to experience each year, and so we are learning with the industry how much those buckets may increase over the years.

But I would say it's been a fairly constant trend over the last few years.

Just as an add-on to that, you indicated that there was a 40% increase in minutes.

I want to just make sure that you understand that the 40% that we talked about in prepared comments were total minutes increased on our network, weren't specifically related to out-collect roaming minutes.

However if you have done the math and perhaps you did the math, that is roughly close percentage wise as to what our increase in minutes were in 2002 from an out-collect basis as well.

And the only other point I'd make on that is the sustainability, obviously, at those kind of percentages it is hard to keep those kind of percentages going forward.

But so far through the first two settlement cycles in 2003 we are very encouraged that the growth in minutes is continuing.

That was my next question.

One more thing, can you talk about just subscriber trends that you're seeing in the first quarter, I understand you're not giving guidance but any specifics you're seeing in the marketplace.

I think that it's too early in the quarter to give an indication of trends, and we have not typically done that before.

I guess what we'd say is, things are proceeding according to our plans for the year.

Okay, thank you.

Sandy Leang (ph), you may ask your question and please state your company name.

Sandy Leang Bear, Stearns.

Question for you regarding EBITDA growth over the next couple years, the major opportunities look like some growth in roaming revenues, some ETC subsidies and obviously your local business growth.

I'm wondering if you could just talk about the relative importance of those three components of your EBITDA growth over the next couple of years, do you think, you know, that say ETC subsidies are going to be proportionally, you know, is that a third of the -- would I break that down being maybe a third for each component or how does that look over the next couple of years?

I think, and certainly the most immediate opportunities for us are both ETC and perhaps some additional roaming.

The guidance that we gave in my prepared comments were that we expect out collect roaming to increase slightly in 2003.

That always has been one of the areas that, you know, we try to plan conservatively.

And I think if you go back in time just to put it in perspective, we said the same thing last year about this time, that we expect out collect roaming to be at or near what 2001 was.

As it turned out we had an increase of 5% year over year.

But that tends to be the way we'd like it to come out.

The ETC, I think it's important to understand that our opportunity is already in many of the customers we have once we gain eligible status.

And so a combination of that with the fact that it is very high margin kind of revenue from the way we look at it because most of the costs have already been incurred in producing the revenue at least from our customer base.

So that is a very high margin opportunity for us.

Both of those, being our two highest margin probably revenue streams, certainly can contribute disproportionately to bottom-line cash flow, as you look at it from a revenue production basis.

So I think that understanding that, you have a quite a bit of opportunity that can come from relatively smaller revenue streams than you might otherwise think of if you're looking at it only from what our customers can traditionally produce on their mold.

If I can build on that a little bit, if we shift the focus to looking at our existing customer base and the revenues that we can expect from that regard as well as from new products and services, as well as new services we can offer to new customers, we feel we're laying the basis in 2003 with some new content services, increased SMS usage and some specialized products for our markets that will roll out a little later in the year to set the stage for more significant contributions to revenue in 2004 and the years beyond from those type of content and data services.

Okay.

Couple of other quick ones.

On the ETC subsidy, I guess you have approval in three states now, and you're waiting for another five.

Would that be, I guess, proportionately the growth rate in that subsidy revenue you think between, say, 2004 and '03, are you looking for more than a doubling in '04 compared to '03?

Sandy, it's really very difficult for us at this time to make estimates on how quickly we are going to be able to get status in those states.

We've applied in eight states now.

We've received eligibility status in three of them.

Quite frankly, a couple of them happened much quicker than we anticipated.

But I think it's a law of averages, you have to keep in mind we might not be as quick in some of the state as we also think we would be at this moment of time.

We are hearing very encouraging signs in several of these states but for us to know precisely when we'll get status I think is a very difficult proposition for us.

Having said that, if we were successful in getting eligibility in a couple, three or four of these states that we've already applied for in 2004, certainly it would have a meaningful increase in our revenues for 2004.

Bear in mind also that you have some of the full-year impact that we may not receive subsidies for the full year of 2003 from the three states that we've already gotten eligibility in.

But you would assume you'd get the universal service fund payments for all of next year in those states.

So you have some of the apples and oranges comparisons from a revenue perspective also.

So I think the answer to your question is, yes.

Okay.

Last question, quickly.

CAPEX in 2003, is it up, down or flat?

We haven't really given any specific guidance on that.

But I think in relative range, we're probably talking in the same ballpark as what we had in 2002.

Okay.

Thanks.

That's helpful.

Thanks.

At this time, we're showing no further questions.

Thanks again for your interest in Rural Cellular.

We're determined to bring increased value to all of our stakeholders.

Our management is strong.

Our customer growth solid and we believe our networks are the best in our service areas.

Because of these qualities together with our strong operations we have staying power to capitalize on the future opportunities that wireless technology presents.

Thanks again, look forward to discussing first quarter with you in May.