威訊通訊 (VZ) 2003 Q3 法說會逐字稿

Good morning and thank you all for holding.

Your lines have been placed on a listen-only mode until the question and answer session of to the's conference.

This conference call is being recorded.

If you have any objections, you may disconnect at this time.

If you need assistance during the call today, please press star-0 and the coordinator will assist you.

I would now like to turn the call over to Mr. Chris Boraas, director of investor relations.

Thank you, Sir.

You may begin.

Good morning, every.

This conference is being broadcast live through our website at www.rccwireless.com.

An archive will also be made 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 November 20th, '03.

We plan to file our form 10-Q later today.

Presenting this morning will be RickEkstrand, RCC's President and CEO and Wes Schultz, our Chief Financial Officer.

Following opening remarks, Wes, Rick and Ann will be available to take your questions.

In the interest of time, please limit your questions to two.

So before we begin, I want to state that any comments about RCC's future prospects are forward looking and therefore involve certain risks and uncertainities.

These risks and uncertainties include but are not limited to competitive considerations, success of customer enrollments and retention initiatives and the successful integration of new service areas.

These risks and uncertainties also include our ability to increase wireless usage and reduce customer acquisition costs and to negotiate favorable roaming agreements.

We also must be able to service our depth.

In addition, we must meet the continuous demands of changing technologies.

For additional risks and uncertainties, please see RCC's report on form 10 K for the year ended December 31, 2002, and our other filings with the securities and exchange commission.

In the course of this conference call, we will be referencing non-GAAP financial measures.

For reconciliation of non-GAAP financial measures, to comparable GAAP measures, please refer to our website where you'll find the non-GAAP to GAAP reconciliation included in our November 13, 2003, press release.

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

Thanks, Chris.

Morning, everyone.

RCC continues to perform well, providing wireless coverage in main street America where agriculture, small business, and tourism are a way of life.

During the past decade, we've run our business using our balance growth strategy one day at a time.

We've grown to acquisition, grown through customer increases in our existing markets.

We've improved our operating efficiency, we successfully worked with the capital markets when needed and we've developed an experienced management team that knows how to navigate through the times.

Certainly we're pleased with our very strong financial performance this quarter.

And for that matter, the year.

But first I'd like to talk a little about our network technologies, the foundation for new wireless applications and interoperablity.

We chose to be fast followers which gave us the time to develop new network evolution plans, to begin provisioning our systems, to negotiate attractive equipment contracts, and to put new longer-term roaming agreements in place.

As you may recall in June of this year, we entered into roaming agreements with Cingular AT&T, and Verizon Wireless.

These agreements made it possible for us to move forward on the network front with the GSM/GPRS overlay in our northeast region and a CDMA 1X RTT overlay in our midwest region.

Last month we announced a property exchange with AT&T Wireless involving our Midwest, Northwest and south regions.

In conjunction with this transaction, we also entered into an expanded roaming agreement with AT&T Wireless that includes our GSMGPRS network under development in our northwest region.

So now three of our four regions have next generation technology paths along with long-term roaming agreemts in place.

Our next generation network construction efforts are in full swing and are on schedule.

In the first quarter of '04, we fully expect to start receiving GSM traffic in our Northeast region, and CDMA roaming traffic in our Midwest region.

Later next year, we look for GSM traffic in our Northwest region and expect to begin implementing new marketing initiatives in all of our regions for products and services next generation networks make available.

In anticipation of turning up our GSM networks in the northeast and northwest regions, I am very pleased to announce a signing of a roaming agreement with T-mobile.

To be clear, this agreement is in addition to our current wireless alliance roaming agreement.

These minutes will be new to RCC and give us continued confidence regarding our roaming revenue in 2004 and beyond.

We continue to evaluate our network operations on our network options for our south region as we gain a better understanding of the markets we're obtaining from AT&T Wireless.

Moving on to the regulatory front, we are very pleased with our recent GTC certification in Minnesota and Vermont.

This brings our total number of states in which we are certified to six.

These support payments will help us to improve service in our operating areas.

We currently expect to receive ETC support for the low to mid-$20 million range next year based on certification in these six states and the current reimbursement rates.

This compares to approximately $8 million that we expect this year.

With the improvement of our equity price, many of you have asked what our stock exchange listing plans are.

At this point we are evaluating our alternatives and expect resolution to this matter in the near future.

Moving on to the regulatory front and wireless number portability.

As you know, top 100 markets must comply with the FCC mandate later this month.

Within our markets, we have only one county affected by this deadline.

We expect to be WMP compliant in all of our regions by the applicable FCC deadlines.

Like all small carriers, we will be observing with interest the impact of this mandate in large markets and the impact the most recent wire line to wireless number portability mandate has in those markets as well.

Moving on to the financial front I can't help but steal some of the financial thunder from Wes.

As we projected in August, third quarter roaming and service revenues are solidly above last year.

Together with our continuing focus on cost control, this was the basis for our very strong financial performance.

During this quarter, we made strong EBITDA which increased 13% over last year to a record $69 million, together with a 50% EBITDA margin.

This has been the strongest EBITDA performance for any quarter in the history of the company.

While we are disappointed in our customer net additions this quarter, our continuing high levels of LSR give us confidence regarding their financial contribution to our operation.

Important to note, however, that gross postpaid customer additions for the quarter were approximately 43,000, the strongest quarter for customer additions so far this year.

We believe our increased churn reflects similar difficulties other carriers encountered prior to the availability of advanced services from new network technology.

For the next couple quarters, we expect modest customer growth until we complete networks and make new generation and hand set products available.

We also believe a contributing factor to our churn this quarter and probably into the fourth quarter is the noise in the marketplace over the November WMP mandate for large markets.

We will work through these transitions, keeping in mind the necessary balance between financial performance and customer growth.

I'd like to now provide some perspective regarding the south region market expansion in Dothan, Alabama,, Tupelo, Mississippi, and Columbus, Mississippi.

These strategic markets covering 702,000 pops include an overlap in our existing operations of 157,000 pops and include 98 cell sites and approximately 16,000 customers as of September 30th.

South region will also receive unbuilt PCS licenses covering approximately 1 million pops in portions of Alabama and Georgia and Mississippi.

Although it is purely to provide specific guidance regarding our plans for these licenses that expand our footprint in the south, it's safe to say that they present strategic value to us and we believe in time they'll play a meaningful role toward expanding our service areas and customer base.

As I said last month, it has been no secret our customer growth in our south region has been challenging due to a difficult footprint.

This property exchange improves our south region footprint and should bring new growth potential.

As an example, our penetration in these markets is approximately 2% compared to 7% in our existing south region.

Also important to understand the demographic opportunities our areas offer, offer greater highway and interstate traffic, media outlets including local TV stations.

They have commercial airports in a greater number of shopping malls and they include various new population centers.

We're really excited about this opportunity for both our customers and our employees, which is evident by our team's anticipation to grow our business in the south.

With that, I'll turn it over to Wes Schultz, our CFO, for a financial wrap up of our third quarter.

Thanks, Rick.

Once again, we are reporting strong EBITDA which increased 13% this quarter to $69 million.

Wireless alliance accounts were approximately $786,000 of this total.

In addition, net cash provided by operating activities continues to be strong, coming in at $46.5 million for the quarter, compared to $35 million last year.

An increase of 33%.

At quarter end, we also had $140 million in cash.

Contributing to the success of the quarter was strong service and roaming revenues.

LSR was ahead of last year by $3 which together with our customer increases, resulted in service revenue increasing by 11%.

Service revenue includes the amount we charge our customers for USF fees which in turn is offset by a corresponding increase in SG&A expenses.

For the three and nine-month period ended September 30th of this year, this amount was $2.7 million and $6.3 million respectively.

For the same three and nine-month periods last year, this amount was $1.4 million and $3.8 million respectively.

It should be noted, however, that this revenue is not included in our LSR and RPU calculations.

As we expected, outcollect minute increases continue to offset yield declines, resulting in very strong third-quarter roaming revenue, which increased 6.2% to $37.6 million.

We are confident that roaming revenue for the full year will be modestly above last year's level.

In spite of a $5.9 million non cash interest expense charge resulting from the early retirement of bank debt, we had positive net income prior to the loss on assets held for sale, which is related to the assets swap with AT&T Wireless.

As it stands, however, the accounting treatment for the asset swap required us to record a $42.2 million non cash charge in the third quarter which created the net loss that we are showing.

On the customer front, we continue to feel that quality postpaid customer growth represents our best opportunity for revenue enhancement.

We also believe that quality of service will eventually outweigh attractive promotions with little debt.

Although we are disappointed with our customer growth in quarter, we are pleased with our positive growth in LSR, which is driving the increase in service revenue.

We look for greater customer growth in the future, as we develop our new networks.

The cost of our -- the cost side of our operations continue to reflect efficiency improvement.

Network cost as a percentage of total revenues decreased to 18% compared with 19.6% last year.

In collect minutes continue to grow, yet average in-collect cost per minute dropped resulting in in-collect expense for the quarter declining to $11.3 million from $12.7 million last year.

Continuing the trend we have been seeing for a number of quarters.

Although SG&A is up this quarter a significant portion of the increase resulted from the more than doubling of USF pass-through costs for the quarter to $3.1 million compared to $1.4 million last year.

Now turning to our balance sheet.

A point of clarification.

As a result of adopting SFAS number 150, our 11 3/8 senior exchangeable and 12 1/4 junior exchangeable preferred securities are now included in the long-term liabilities section of our balance sheet this quarter.

They're corresponding dividend expense, which was previously reported as a component of preferred stock dividend in our statements of operation is now included in the interest expense.

We continue to explore alternatives to improve our balance sheet and capital structure.

Consistent with our past practice regarding cash dividends, on the senior exchangeable preferred stock, in October, we again indicated that we would not pay the cash dividend.

We had net capital expenditures of $13 million this quarter.

And we expect capital expenditures to be significantly higher during the fourth quarter of this year and next year as we incur the costs associated with our network buildouts.

However, we are, again, affirming our earlier guidance that capital expenditures will be approximately $190 to $230 million for the period of 2003 through 2005.

Thank you, and I will now turn the teleconference back to Elan who will poll you for questions.

If you'd like to ask a question, please press star-1.

You will be announced prior to asking your question.

To withdraw your question, you may press star-2.

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

Our first question is from Pat Dyson.

Good morning, guys, Pat Dyson, CSFB.

I'll restrict myself to two questions.

First, on churn, you provided a broad sketch to the churn increase in the quarter.

But could you provide a little bit more specificity as far as any market specific items that happened within the rural markets that you would attribute for the increase in the churn?

And also, as we think about the fourth quarter, should we think about the slower subscriber growth as being churn continuing to increase, or should we think about it as gross additions flattening out?

And then finally on the guidance for 2004, you talked about that on the conference call in relation to the market swap where you said that you would expect '04 EBITDA to be comparable to '03.

Are you still comfortable with that statement?

Thanks.

This is Ann Newhall.

I'll take your first two questions, leave the last one for Wes to address.

With respect to churn and retention rates within our company, we really haven't broken that out in the past by region.

And we don't really have the information to provide that today.

There was nothing that was a specific difficulty in a particular region that had a huge impact on the number.

Instead, what we're seeing is that during this time period, as we're building out our next-generation networks, we see a flattening of the customer growth because of the increase in churn, as customers are attracted to some of the new services that our competitors have in place ahead of us.

And we expect that to continue to be the case for the next several quarters.

In other words, a flattening of customer growth in the short term here.

We don't expect it to be a long-term problem, however.

And as always, we're focused on the dozens of daily things that we do to enhance retention and keep customers with us.

I would also say that we've found, over time, that when we've encountered issues like this, that it is not helpful in the long run to react drastically by lowering credit standards or increasing the price that we're willing to pay to acquire a customer.

But rather to continue to make reasonable business decisions as we go and keep the profitable customers and continue to focus on the increase of our LSR.

As we've done very successfully over the last couple of years.

And I'll pass the last question on to Wes.

Just quickly, to paraphrase there, so you would just say that you would expect the churn to remain at comparable levels on the postpaid side for the next quarter or two?

I would hope that we're able to increase -- increase our retention rate, decrease the churn rate in our performances in the next few quarters, but I expect it to continue to be a struggle.

Okay.

On your -- Pat, on your question as it relates to 2004 EBITDA and it being comparable to this year, certainly 2003 EBITDA performance is exceeding our earlier expectations as well as, I think, most of the markets.

Much of 2004's EBITDA will be dependent on the level of roaming minutes of use that we receive, which is certainly going to be difficult to predict as we transition into some of our next-generation technologies.

We talked earlier about the new roaming agreement with T-Mobile, for instance.

And that particular contract, how much that helps us collect roaming next year certainly is going to have a factor on what our 2004 EBITDA is.

But certainly we expect to continue to produce significant levels of EBITDA and have margins that are in the same kind of industry-leading standards that we have had this year.

Okay.

Thanks.

Thank you.

Our next question is from Mark Buckheim.

Please state your company name, Sir.

From Knickerbocker.

These are great results.

Thanks.

Thanks very much for all the hard work.

Could you talk a little bit about the reasons for the increase in LSR and RPU?

These look like 4, 5, 6% increases which is so different from what we were seeing a year or two ago.

It's a combination of reasons like most financial results are.

And let me highlight a couple of the major operations regions.

As we've talked about on these calls in previous quarters, we've had a very strong emphasis over the last 18 months of improving the LSR from our customers in two significant ways.

One is in the nature of the offerings that we have in the marketplace with our customers.

In other words, focusing on both profitable plans and also higher access plans, and that piece has been successful together with attractive features that we offer to our clients that they prefer customers that they purchase in addition to the access plan.

Secondly, we've had a very strong focus on marketing into our existing customer base and bringing a consistent set of services and features, newer features across the base and increasing the number of customers which take those features.

I think the combination of it has been successful.

And one other follow-up question, can you give me an idea of the average length of contract on the customer base at this point?

Are we signing a lot of people to two-year contracts at this point, or are we more focused on one-year contracts?

Until a few months ago, we were very focused on 18-month contracts.

Now we are largely doing two-year contracts, which has become somewhat more routine in the industry.

But I think like all carriers, we provide customers different options.

In other words, they basically can get a better deal up front either on the handset or on their services, like signing a two-year contract with us.

But we still have a significant number that go for one-year or 18-month contracts.

I'm sorry, but we do not -- we do not have an average contract length statistic to provide you.

Okay.

Thank you very much.

Thank you.

Our next question is from Anthony Clarman.

Please state your company name, Sir.

Thanks, Anthony Clarman from Deutsche Banc.

Couple quick questions.

Was wondering if you would provide either the actual minutes of use for roaming or perhaps the yield to give us a little better clarity on what those numbers look like.

Second, you know, 2.1% churn, I guess, on postpaid doesn't actually seem that bad in the grand scheme of things.

Yet the retail side looks like it, perhaps, lost subscribers during the quarter.

Given that wholesale looks like it added around 25 or 2600.

You know, and I'm wondering what your competitive response will be given that you probably won't have commercial next-gen launch until perhaps past the number portability date in May and might that expose you to poaching from the competition in your markets?

And then finally, Wes, if you could provide some color with respect to your preferred?

I'm assuming there were no preferred repurchases during the quarter.

And given that you're in arears on the 11 3/8, I would assume you wouldn't be able to purchase anything subordinate on that, but are you allowed to purchase any 11 3/8 and what all tern tif uses might you have in lieu of that cash?

Thanks.

Well, hopefully we got all your questions down here.

I think that was over the two-question limit.

I'll take the ones regarding customer.

Yes, I know that the churn rate of 2.1% isn't outlandish given the industry.

It just feels very uncomfortable to us because it is not what we are accustomed to.

And we've prided ourselves on our strong retention rates and low churn rates.

And so when we see any kind of bump in that, it's a matter of concern and becomes a tremendous matter of focus within the company.

That's why we talk about it in that way.

It is important to us.

Our gross numbers were the highest for this quarter that they have been for the year, our gross customer acquisitions.

And we hope to, you know, continue to increase that.

We are just seeing a lot of turmoil in the marketplace, first of all, the spillover from the advertising, the LNP advertising that has been incredibly stepped up by the carriers that serve the 100 largest metro markets, all of that spills over into our area.

We are simply finding that a lot of customers are thinking about their contract and thinking about moving, given the LNP advertising activity and focus in the newspapers.

And we are responding to that.

We do expect the situation to improve.

With respect to the rollout of our new networks and how that fits with LNP in the market, if we could predicted what was going to happen with LNP with ourselves or any other carriers, we'd be very excited today.

But like everyone, we're waiting to see both what the public response is and how it actually works between the carriers.

We're fortunate in that in all of our markets except for one county, we're going to get the opportunity to learn from what happens in the major markets in the next 60 days or so.

And respond to that in our markets before it's available to our customers.

And I think also, we expect to pick up our fair share or more from other carriers as we go forward.

But what is very exciting to us is the opportunity with the number portability issues for wire-line customers to move to our services.

As many of you know from our prior calls, we have had a significant focus both in support of getting the universal service funds and otherwise for moving some wire-line customers to our networks.

We expect with number portability for that opportunity to be increase for us.

Anthony, I'll try to address the other two topics that you were requesting information on.

As it relates to outcollect roaming revenues and minutes, as you know, we no longer give specific information on that for various reasons, some of which are competitive for us.

But we, in the past, have had information out there.

So I can give you some direction from where we've been.

If you look at -- and these statistics, as it relates to outcollect roaming minutes of use are based on our settlement cycle.

So they may be slightly different than what shows on our financial statements because they settle on a midmonth basis.

But for the three months that are in the third quarter, third quarter last year, we settled and had a yield of 27 cents.

I'm sure that was part of what we talked about last year in the third quarter.

This year we have had a pretty significant decline in that yield from that 27 cents.

And in spite of that, have grown our roaming revenues.

So that, I think, gives you an indication of what needs to be a pretty significant minutes of use increase.

I think it's also important to note that for the last four quarters now, including the fourth quarter of last year and the first three quarters of this year, we've had a relatively flat and a very narrow range of yields.

And if you recall last year in the fourth quarter, we talked about the yield being probably in the 20, 21-cent range.

And so I think that gives you some indication of where the yield probably is.

It's in that same relatively narrowbanded range.

And in order to have the roaming revenue increases we've had, obviously that means we've had pretty significant minutes of use increases that we continue to enjoy having.

It's one of those things we've talked about in the past, how much we can predict going into the future is always a difficult proposition for us.

But we certainly are encouraged by the continued strong roaming revenue minutes that we see coming our way.

As it relates to your question on the status of the preferred stock, you're right.

We did not -- we have not at this point done any buybacks of any of the preferred stocks or done any other transactions as it relates to the preferred stock.

Talked about the fact that we, again, have not declared the dividend and then senior preferred stock, we cannot buy back for cash any of the subordinated securities until we would pay the senior preferred dividend.

And I guess given that you have the sizeable cash balance that you have, do you imagine just keeping that on the balance sheet as a war chest, or do you imagine doing anything else to help, you know, reduce total debt or total leverage on the balance sheet?

Well, I don't think we've made a secret of the fact that we would certainly look to continue to improve our balance sheet.

One of the ways to do that would be to use some of the cash to buy back or to do something with some of these securities.

But we also will be prudent in how we use the cash and having the cash available as a strategic use of it in the future is certainly something that is beneficial for us.

We are in no hurry to spend the cash unless we think it's appropriate for the company.

Thanks very much.

Thank you.

Our next question is from Tom Freeberg.

Please state your company name.

Yes, Yam ko Partners.

I think a lot of cellular companies outside the major metropolitan regions probably are the biggest beneficiaries of wire line to wireless number portability.

But with that in mind, you know, and both you and Rick probably remember the days when -- and rural cellular's roots as a -- what was effectively a cooperative effort of the wire line -- rural wire line telephone companies in Minnesota pooling their wireless assets.

And you do have a number of board members who have their roots there.

How do you -- clearly you have to run the company for the benefit of wireless.

But doesn't that create an interesting tension within the company, especially with regard to the original properties in Northern Minnesota?

You know, interesting point, Tom.

Obviously, the areas we cover are searched by some of the original shareholders in the company.

On the other hand, you know, we serve, you know, over 45 markets around the country in our various regions.

And the Midwest region is one of several other regions.

We've taken other actions such as in 1995 when we built a microwave network for backhaul purposes in Minnesota that has been a very, very good decision for the company, very cost effective, created an extremely reliable network and has allowed us to grow our traffic and our minutes very, very nicely.

And at that time it was not the most popular action, you know, by nature of our original shareholders.

So we took action based on what was the most appropriate for the company, and we haven't looked back from that at all.

One other point of note, as we proceeded around the areas to achieve access to the ETC funding and universal service funds that are available to wireless carriers, not the least of which is in Minnesota, other carriers in Minnesota have done that prior to our activity.

And as a result, we, you know, saw that it's an opportunity for our company.

It's an opportunity for us to access, you know, funds and reinvest capital in our service area to improve our services and allow wireless customers in the areas we serve to have the latest, greatest, so to speak, in terms of network services and features of functionality.

So we think that we're taking a prudent course of action and being prudent with the resources that are entrusted with us.

And it results in the fact that we have to have a wireless strategy that's consistent with what other wireless competitors are doing as they compete with us, not only in Minnesota, but in other parts of the country.

No.

Rick, that makes sense.

And, you know, continue to put up the good numbers.

It looks like things are coming around nicely.

Thank you.

Thank you.

Our next question is from Steve Flynn.

Please state your company name, sir.

Good morning.

It's Steve Flynn from Morgan Stanley.

Two questions.

Number one, a clarification on the USF funds that you collect from -- or the USF charges that you collect from your subscribers, you're including that in revenues and G&A.

Is that a change for this period for the third quarter, that you're grossing that up?

No.

Actually, that became, in last quarter, we began doing that.

So this is the second quarter that we've done it.

Okay.

But all of the prior year information in this particular change also changed last year's reported numbers.

But one of the things that's affecting it is that the actual amounts have grown pretty significantly from last year.

I think in my prepared remarks, we were talking about in SG&A, for instance, which is essentially the same as the revenue.

There are some slight differences.

It went from $1.4 million, I believe, last year in the third quarter to $3.1 million in the quarter this year.

So there has been a pretty significant increase in the rates that we end up charging our customers.

But that actually started last quarter.

And what is the monthly charge that you charge your customers?

I think it varies, actually, and I couldn't answer that question, quite honestly.

But if you look on your bill, you'd probably get a pretty good indication.

Most every carrier charges this cost, and there is some range that you can charge within, but it's a pretty slight range, I believe.

So if you look on your own cellular pill, I think you'll get a pretty good sense of the cost per customer per month.

Okay.

Great.

Just an update on your restricted payments capacity.

I believe as of the second quarter, you had a restricted payments capacity of about 75 million based on the most restrictive indenture, which was the 9 3/4 subnotes?

Yeah, actually, it also now includes the 9 7/8 senior notes they're essentially the same basket.

That's grown to approximately $100 million, which is pretty much in line now with where the bank restricted payment basket is.

Okay.

So with all -- across all the indentures and with the bank, it's up to $100 million now, restricted payment capacity?

That is correct, including the -- there's a piece within the two indentures that separate add-on to the basket, with that, it gets it to $100 million.

So $100 million, okay, great.

Just my final question, can you talk about a little more color on roaming?

As of last quarter, you were talking about 2003 roaming being essentially flat with '02.

Looks like this was a very good quarter for roaming, given the yield, sounds like from your comments that it's been relatively flat with earlier in the year.

It sounds like the volumes have increased.

Can you give us a little more color about that and if you see that going forward in the fourth quarter into 2004, you know, what change in the volume side that was better than expected?

Well, I think -- we've talked about this before, and I know it's probably difficult to fully appreciate from our perspective, when we try to gauge what kind of minute increases that we're going to have and collect revenue, it's a very difficult forecast for us.

And certainly when we do forecast, we have always tended to try to be on the conservative side of outcollect roaming minutes growth, simply because it's literally impossible for us to make up for minutes that we might not have in other parts of our operations.

So any guidance, any forecasting that we do for internal purposes tends to be pretty conservative.

And we have been fortunate over the last many quarters to generally end up having actual minute volume going up at a greater percentage than what we're forecasting.

Third quarter would have been another similar quarter to that.

However, I would say this, that our year-over-year increases in minutes, actually, for the for the last couple quarters have been very consistent.

And for this year actually are all within a few percentage points of one another.

So I think the point I'm making there is we've continued to have strong minutes, increases year over year.

As we look forward into the fourth quarter, we also anticipate that continuing.

Okay.

Great.

Thank you.

Thanks.

Our next question is from Rich Bereirra.

Please state your company name, Sir.

Hi, Rich from Glenview Capital.

A follow-up question on the roaming.

Is it safe to assume there wasn't a significant stepdown from the second to third quarter or is that something that's going to be available on the Q?

There will probably be some additional information, but there was not a significant stepdown in the third quarter.

There was a pretty significant stepdown from the third quarter of last year.

But between second and third quarter of this year, there was very little difference in yield.

Got it.

And I know that generally around 85 to 90% of our minutes come from AT&T Cingular and Verizon.

Have you further broken down, you know, relative percentages among those three carriers?

We certainly have the information, but that's, again, information that we have chosen not to disclose for various reasons.

Was there any variability among the carriers that you're willing to discuss, like whether Verizon was particularly strong or AT&T was particularly weak, or Cingular was weak, anything like that?

Any additional color you'd be able to give us?

The one piece I will give you which is consistent with the trend we've been seeing and I think we've talked about is the past, Cingular has become a bigger part of our overall roaming picture.

That is really coming from past where they were a very small part of our roaming minutes of use.

So only from the extent that they've gone from, you know, a small player to a much more significant roaming partner.

That's why they look like they've made significant end roads over, say, the last year or so.

But between the AT&T and Verizon there are other patterns that are going on.

But nothing that stands out.

Okay.

Thanks a lot, guys.

Thank you.

Our next question is from Drew Hanson.

Please state your company name, sir.

Sure.

Chatham Asset Management.

I wonder if I could ask if maybe you could more specific in the context of your three-year cap ex number of what the fourth quarter may be, maybe a range what you think.

You mentioned it would probably be higher next year, which I assume you're talking about the four-year versus this year.

Hey, Drew, I'm sorry, but I'm having a hard time hearing the question.

I know it's related to cap ex, but I couldn't hear what your question was.

If you could give a little more specific, if you could, regarding the fourth quarter cap ex?

I think a comment was made related to cap ex, if I heard correctly, that it would be higher next year, though I assume that's referring to the full year versus 2003.

So I don't know if you'd be able to give a range for what you expect cash cap ex to be in the fourth quarter?

And then in relation to the kind of seasonal change or sequential change that you exhibited last year between the third and fourth quarter EBITDA, and obviously it looks like -- maybe I'm mistaken -- but a different profile in terms of mix of gross and net additions that you had last year in the fourth quarter versus what you may be expecting in this coming quarter.

Should we look at that sequential change last year?

I think you had a very significant large post paid net ad number.

Helping drive that.

But do we look at that sequential change from the third to fourth quarter last year in terms of EBITDA and see that as a fair guidance for where your EBITDA will come out in the fourth quarter this year?

Well, as it relates to your EBITDA question, obviously, the bigger factor on what the current quarter's EBITDA is going to be isn't necessarily the net customer gain that you have, but it's more related to the growth add that you have in the quarter that drives, you know, the up-front costs that typically are associated with adding a new customer.

And if you look back at least from a postpaid perspective last year, there was an increase between fourth quarter and third quarter gross adds of about -- call it 5,000.

5,000, yes.

Customers.

You know, that's been pretty typical that the fourth quarter has always been our strongest gross add quarter of the year.

I think what Ann had indicated earlier is that at this point in time, we probably are not expecting quite as much of an uptick in growth adds in the quarter, although we could certainly be pleasantly surprised, but that's not our anticipation at this point in time.

Okay.

So looking at that same incremental change of the third to fourth quarter last year, again, different market.

That might not be as large this year sequentially in terms of the gross postpaid.

Yeah, the issue, you know, isn't the gross adds as much as it is the churn factor that would end up influencing the ultimate number of net adds that we have in the quarter.

Sure, sure.

You indicated a comment about the churn.

And then I guess on cap ex?

On cap ex, we would certainly expect that fourth quarter is going to be substantially higher as far as cap ex than it has been the first three quarters of this year.

First three quarters, I think we showed in our press release something like in the low $30 million range for cap ex so far this year.

We anticipate that that number will grow significantly, $32.6 million so far through nine months.

We will likely have at least that much in the fourth quarter alone as we start receiving and paying for and booking as cap ex for the networks that are already being put in place in the northeast and in the Midwest.

And as we go into next year, the comment was made that we would expect to have continued increased cap ex going into next year.

Certainly for the year, we would anticipate, again, higher cap ex next year than what we've historically shown.

Typically, over the last three, four years we've seen our cap ex in the 40 to $50 million range.

Right.

And we would expect it to be higher than that in both this year and next year.

And as far as looking at it from the three-year point of view, that we really think is the only way that we can give good guidance at this point, the $190 million to $230 million over the three-year period this year, next year and in '05 is still something that we're committed towards.

And then sorry, one last question.

When to you expect to provide the investment community thoughts to the extent you will on 2004 related to the financial matrix, what you might provide?

I don't expect that we will be giving a lot of specific guidance on 2004.

Similarly, the same way we did 2003.

I don't expect that we'll be changing our guidance practices.

Okay.

Fair enough.

Thank you very much.

Thank you.

Our next question is from Mark Bishop.

Please state your company name, Sir.

The Boston Company.

A couple of things.

First of all, on the churn, a number of players have talked about churn being up seasonally.

And it looks like your churn was really up kind of roughly the same seasonally as it was last year, only slightly more.

I was wondering if you think there was a seasonality to it for your business, and if -- how that would typically change sequentially in Q4 seasonally.

And secondly, on roaming minutes of use, you didn't give the minutes, but I was wondering if those minutes are up a lot sequentially as other carriers are increasing their number of minutes in trying to keep people number portability, I was wondering if you think that could potentially -- that the increased number of minutes that are being offered by other carriers could help you more on the roaming side than you might lose ultimately from churn, seeing as, you know, on your service side, you don't have that many competitors.

Anyway out in the rural territories.

You know, whereas if the minutes of use go up, it helps your roaming.

Well, I'll -- this is Ann.

I'll address the seasonal component of churn and retention first.

There are some seasonal aspects to it.

And I think in the third quarter one thing that we always see is that more people move in anticipation of the school year.

And we certainly lose some customers who signed up as students in the fall of the year before at a particular college or educational institution within our network and then have moved on in their life by the end of the next year.

We do see those kinds of seasonal changes that are largely related to the school year and how people move with respect to that.

But we don't see that as a huge factor.

It's just one of many factors.

Certainly from a seasonality perspective, third quarter continues and remains our strongest quarter for the amount of outcollect roaming minutes that we have.

And this year was no exception.

I think if you look back from historical perspective, I would say that we probably saw the same kind of uptick in the third quarter as we've historically seen.

I think you introduced, you know a topic that is kind of an odd quirk that, you know, it does have some possibility for us, although it's not something that we focus on.

And that is if one of our competitors in our market ends up stealing one of our customers if you will, what can that do for our outcollect roaming revenue?

And I think you hit on a point that does have some applicablity to us, perhaps that if it is one of the carriers that doesn't have as extensive a footprint as we have, which is usually always the case other than maybe the other cellular provider, if it's one of the PCS competitors that would steal our customer, they may need to augment their footprint with our footprint, which is the case that we know is in many of our regions.

And so if one of our customers who has been using our network a lot, ends up going to one of these PCS competitors, chances are they're not going to change their calling patterns just because they have a new carrier.

If that carrier doesn't have a network that covers all of the places that ours does, we could, in an odd way, be a big benefactor in outcollect minutes.

I don't know that we have any substantial evidence of that, but it certainly stands to reason that if we're losing customers to those kind of competitors, they could actually have a positive impact on our roaming revenues.

That's interesting.

I also meant not only that if you would lose a customer, but also just in general, you know, people travel through your territory and roam.

And if they have more minutes available because, you know, they got a phone in some other region from a carrier that's offering more minutes in order to try to keep their customers, that should help you.

And I was wondering if you're seeing -- if you think that, you know, the efforts of other carriers to increase their minutes of use to try to keep customers is already having impact on your roaming, now, or if you really haven't seen more than a normal seasonal pickup?

I mean, your roaming revenue is up more sequentially than it was last year.

Or would you dispute that?

I think there's a couple of factors here, if we go back to sort of basics of roaming agreement life and roaming partner life.

First of all, we've talked a lot about our roaming agreements because there's a great deal of effort that we go into in our negotiations with roaming carriers.

To get a favorable combination of agreements with these carriers.

In order to give them a good reason to increase the number of minutes that they are sending in our direction.

And I think we're seeing the fruits of some of that, as Wes pointed out before, where we had a smaller relationship with Cingular in terms of the number of minutes and the amount of revenue we had.

It's now been enhanced over the last year or two because of the efforts that we've put in developing that relationship and that revenue stream with Cingular.

So I think that that's a very positive thing.

Another consequence that happens is, for example, with one carrier currently, part of the roaming agreement was simply that they would reflect part of our territory as home footprint to their customers with the larger buckets, just the way that you're pointing out.

And we haven't completely built out what we need to take advantage of those minutes, but it is an aspect of our negotiations when we are into this with the carriers, and we do expect that to be one of the things that sustains our roaming revenue in the future.

That's great.

Thanks.

I just wanted to verify something.

You said in your basket, your basket is $100 million now.

Is that available for buybacks?

That's what our restricted payment basket is.

The buybacks would be included within, yes.

Okay.

Thank you.

Thank you.

Our next question is from Steve Lawland.

Please state your company name, Sir.

Hi.

The company is Sankaty Advisers.

How you doing?

Quick question a lot of people have asked most of my questions on roaming.

I'm wondering if you could talk about the impact of both Cingular and AT&T having a fair percentage of their base on GSM now.

So in other words, you expect that once you start turning on your GSM network that you're going to see a fairly big spike in minutes from those customers, or are those customers not necessarily receiving plans that would kind of, you know, make them roaming customers that would end up on your network?

Oh and conversely, are they customers that are on your network today but roaming on to a different technology?

Well, as we look at our roaming agreements with Cingular AT&T and really any other roaming partner, we're concerned not only with the agreement on our current technology, but also the agreement addressing the new technology, which would be GSM in the case of AT&T and Cingular.

We try to look at the total number of minutes that we'll receive and the yield that we will receive on them.

As a combination of customers on both technologies.

What is difficult to forecast, but we hope will be positive for us in the future, is that both AT&T and Cingular, particularly AT&T have been putting customers on their GSM network that right now cannot roam with us.

As we have our GSM network up and available to them, which we believe will happen in farther by the end of this year and more next year, minutes from those customers that can currently are not roaming on our network will come to us and should be a benefit.

Of course, to a certain extent, they have sold gape phones to their customers, and they're GSM so we'd still be getting roaming revenue from those customers.

And just so I understand, there your perspective, for the ones that don't have gate phones do you think of those as customers that, I mean, because obviously you're then buying a plan where you not you roam outside of, you know, certain territories.

Do you understand those customers to be ones that bought a plan because they didn't care much about roaming, or do you think that they are just, you know, waiting for that network to be turned on and then will become active roamers like the rest of AT&T?

I think it's some of both.

If -- I believe the way that AWS has positioned things as they've been very open with their customers about their building plans and their roaming agreement plans by showing their customers maps and the period of time over which the area that they can travel in with their GSM phones will increase.

And so there's likely to be a combination of some people that could wanted the new features while they were at home and were willing to wait for that roaming service.

Or maybe had another TDMA phone in the family when they roamed.

And those who will learn to roam over time.

I think one thing that we're seeing with the increase in roaming is just a consequence of the fact that everyone, all of our customers and ourselves, are getting more use to using our phones in different areas.

So we believe if the networks are there, customers will continue to use them more and more over time as they seem to prefer.

Well, I think T-Mobile customers are a prime example of how things evolve, too.

In the past, certainly T-Mobile customers had a pretty -- had an area that was only able to be used if T-Mobile had, you know, service in those areas.

As they've evolved their customer base, they now have roaming agreements with the likes of AT&T and now ourselves so that their customers can use their phones in more areas than where they probably initially thought they were going to be able to.

So I think customers do evolve over time.

And they generally are seeking to be able to make calls in a broader footprint, if the technology is there to do it.

Great.

Thanks very much, guys.

And our final question is from John Campo.

Please state your company name, sir.

ES Management.

A couple questions and a clarification.

How should we think of roaming yields under TDMA versus GSM, and how do those, when you're working out those agreements, are you able to maintain your current pricing on TDMA minutes, while I know there's concessions to the GSM minutes, and the balance sheet, your total debt and your total preferred and finally, the ETC payment, on your press release you noted $2.2 million, on the call, you stated a couple other numbers, I think 3.1 and 2.7.

I'm just curious what the actual payment was.

Are you referring to the USF path?

Yes, what's included in the revenue.

Well, again, the revenue, I spoke specifically of the three-month and the nine-month numbers for this year.

And those were $2.7 million and $6.3 million for this year.

Okay.

That's the revenue piece.

I think I said the expense piece was $3.1 million this year for the quarter.

And there is a slight difference between -- well, there is a difference between what we have as revenue and what we turn around and represent to, you know, essentially the body that administers the USF funds.

And we are currently paying more than we're receiving from our customers.

And that's why there might have been a difference from your perspective and the numbers that were discussed.

Okay.

That is the support charge that we collect from our customers and remit to the USF funds.

I think the other number thaw referenced, the $2.2 million, is the actual support dollars we received from the USF funds, which is also component of our revenue, but it's separate from that past amount that we collect from our customers.

Yeah, that's a good point.

I think right now there may be some confusion because we use USF for a couple different purposes.

One is the amounts that we charge our customers, that we turn around and remit to the, you know, the body that administers these funds, just like every other carrier, every other long distance carrier, all like Rbox and ILECs do, but in addition to that we receive money back on certification in the states that were certified for the customers that we have in those particular states at varying subsidy levels depending on where they're at.

So in essence, there are two different kinds of revenue that we have and one expense that's associated in SG&A that offsets what we have to pay to that body.

Okay.

Great.

And then on the balance sheet items and the roaming prices?

As far as the preferreds in the liability section, the 11 3/8 are about $255 million, and the 12 1/4s are just over $213 million.

They'll actually be a full breakout within the que that should be filed yet today on all of our balance sheet items.

Okay.

And I guess, then, on the TDMA versus GSM roaming yields?

Well, we certainly take into account what those yields are on the respective contracts as we look at the total impact on our roaming revenue that we internally plan for in the future.

But I don't believe that we have specified any differences that there might be over time or segmented those yields out.

I think it's fair to say, though that, you know, we certainly do look at those and plan to balance them as we see the transfer of TDMA minutes into GSM or TDMA over time.

The reason I'm asking, yesterday Cingular had noted that their roaming yields -- roaming rates that they're paying on the GSM are less than half of that what they're paying on TDMA.

And I'm wondering --

Well, that's interesting to know.

But it's not information that we generally share.

Okay.

Thank you.

And this concludes the question and answer session of today's conference.

I would now like to turn the call back over to Mr. Richard Ekstrand for closing remarks.

Thanks again for your interest in Rural Cellular.

The wireless universe is expanding and RCC is clearly going to be part of this growth.

Our operations are strong and sustainable.

Our network and roaming strategy present a solid future.

Have a great holiday season.

Look forward to discussing our year-end results in February of next year.

And this concludes today's conference.

You may disconnect at this time.