威訊通訊 (VZ) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Rural Cellular Corporation second-quarter 2004 earnings conference call.

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

Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded today, Tuesday, August 10 of 2004.

I would now like to turn the conference over to Mr. Chris Boraas, Director of Investor Relations.

Please go ahead, sir.

Good morning, everyone, and thanks again for joining us for our second-quarter 2004 teleconference.

This teleconference was preceded by our second-quarter 2004 press release, which was released late yesterday.

Today's teleconference should be considered together with the press release and its related financial information.

As a reminder, this call is being broadcast live through our Web site, at www.

RCCwireless.com.

An archive will also be available in the Investor Relations section of our Web site.

This section of our Web site also contains comprehensive financial information about our company as well as our corporate governance information.

In addition, after completion of this call, a dial-in replay will be available through August 17, 2004.

With us this morning are Richard Ekstrand, RCC's President and CEO, Wesley Schultz, RCC's Chief Financial Officer, and Ann Newhall, RCC's Chief Operating Officer.

Please be mindful of this call's one-hour time allotment when asking your questions.

Before we begin, I want to remind you that any comments about RCC's future prospects are forward-looking and therefore involve certain risks and uncertainties.

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 and maintain favorable roaming agreements.

We also must be able to service our debts.

Additionally 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, 2003 and our other filings with the Securities and Exchange Commission.

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

For a reconciliation of non-GAAP financial measures to comparable GAAP measures, please refer to our Web site, where you will find the non-GAAP to GAAP reconciliation included in our press release.

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

Good morning, everyone.

RCC's second quarter reflects our long-held strategy of maximizing our presence in Mainstreet America while also taking steps that position the Company for the future.

These steps include continued next-generation network builds and our commercial launch in our Midwest service area, progress towards our new building system, transition of the AWE operations in our South region, wireless number portability compliance, ETC certification in Oregon, and additional repurchases of senior preferred stock.

Leading our financial performance this quarter was increased service revenue driven by strong LSR, postpaid and wholesale customer growth, and increased USF support.

I am pleased to announce RCC was recently awarded ETC certification in the state of Oregon, which positions us to receive additional support for the fourth quarter of this year.

As we've said in the past, we believe our network coverage is the biggest driver behind our strong ARPU, so that's why we continue to focus on improving our networks.

Currently, over one-third of all of our cell sites have next-generation technology.

As we said last quarter, we have a strong incentive to get these networks up and running as soon as possible.

As other carriers have already experienced, we believe these networks will pave the way for increased LSR and improved customer growth.

Next-generation service we expect to offer include picture phones, downloadable games and ring tones, and wireless Web services.

With that said, I am pleased to announce the market introduction last month of next-generation CDMA services in our Midwest region.

Since market launch, we've seen a lot of customer excitement for these new products and certainly look forward to giving you an update on our next call.

Our next-generation product introductions for the Northwest and Northeast regions and the planned availability of our new building system are still expected in the fourth quarter.

Next-generation technology is also important to our roaming customers.

For the quarter, roaming revenue totaled $26.5 million.

Impacting roaming revenue this quarter was a faster-than-anticipated transition to next-generation handsets by customers of our national roaming partners.

As metro area consumers use advanced services in their home area, they expect a similar experience as they travel to and through the areas we serve.

Our networks are currently providing these services in many areas that we serve.

Since our next-generation networks are not fully complete, we believe there is unmet roaming traffic demand.

We expect this unmet demand will be met as we complete the roaming -- remaining areas of our network.

We also look forward to a seasonal increase in roaming revenue during the third quarter.

Moving on to our balance sheet, we continue to make inroads towards improving our balance sheet and made open market purchases of approximately 43,000 shares of our senior exchangeable preferred securities this quarter.

These repurchases demonstrate our commitment toward reducing leverage.

On the legal front, you may recall a federal shareholder class action was commenced against RCC last year.

Recently, a final judgment was entered dismissing the action.

So in closing, we had a lot on our plate this year, and I can't thank our employees enough for their dedication for all they do.

We have a business that we expect will continue to bring solid financial results but just as importantly, will set the stage for 2005 and beyond.

Thanks again for your continuing interest in our company.

With that, I'll turn it over to Wes Schultz for our financial wrap-up.

I'd like to provide an overview of our financial performance this quarter, the progress we've made on our network builds and our repurchases of preferred securities in the open market.

Consolidated EBITDA of $57 million represents moderate growth for our company after taking into account the impact of the AWE property exchange.

Wireless Alliance EBITDA increased to $1.5 million this quarter.

Service revenue again contributed to EBITDA this quarter, increasing 4.5 percent to $95 million.

The service revenue increase would have been greater if not for the loss in revenue from the AWE property swap and the resulting 21,000 net-customer decrease.

LSR increased to $47 for the quarter as compared with $44 last year.

Switching gears to Outcollect Roaming Revenue, you will recall we expected lower roaming revenue this year because of the Oregon-4 property swap.

Roaming revenue for the second quarter was $26.3 million, as compared to $31.8 million in 2003.

During the second quarter last year, Oregon-4 provided approximately 4.3 million in roaming revenue, along with about $6 million in EBITDA.

Also impacting roaming revenues this quarter, as Rick mentioned earlier, is the push by Cingular and AWE to transition their customer base to GSM.

Since our next-generation networks are not yet fully completed, we undoubtedly missed opportunities for roaming minutes.

As we continue our next-generation buildouts, we expect to capture more and more of that unmet demand.

Also contributing to the decline in roaming revenue was Outcollect Roaming yield for the quarter at 16 cents, as compared to 21 cents last year.

In spite of Oregon-4 property swap, roaming minutes increased by about 8.5 percent this quarter as compared to last year's second quarter.

We now expect Outcollect Roaming yield for all of 2004 to be approximately 17 cents, instead of the 18 cents that we had previously stated, due to the mix of old and new minutes.

Onto the expense side of the equation, network costs as a percentage of total revenues increased to 20.4 percent for the quarter from 19.3 percent last year.

Although Incollect expense for the quarter declined $0.5 million to 11.4 million, the improvement was offset by costs related to our expanded network, together with additional costs from our next-generation networks.

SG&A was flat, coming in at 33.1 million compared to 32.9 million last year.

Again affecting year-over-year comparisons of interest expense this quarter was a 12.1 million gain resulting from our acquisition of senior exchangeable preferred securities in the open market.

I encourage you to look at the press release, which includes a detailed summary of the different components of interest expense for both years.

Cash interest for the quarter was $7.7 million.

Once again, I'd like to remind you that cash interest will be higher in the first and third quarters of the year, since the bulk of our debt has interest payments payable in those quarters.

As we discussed in our first-quarter call, our expectations for 2004 EBITDA were contingent on a number of variables.

One of those variables was the migration of AT&T and Cingular's customer bases to GSM at an accelerated pace.

This is challenging us to complete our GSM networks as quickly as we can so that we can capture the demand from their customers.

Given this and other factors that we've discussed, we expect Outcollect Roaming Revenues for 2004 to be in the $110 million range with EBITDA in the $225 million range this year.

Now, turning to Capital Expenditures, we are well underway with our next-generation networks, which comprise the bulk of the 23 million in spending this quarter.

We still expect Capital Expenditures this year to be approximately $100 million.

Switching gears, we are continuing to take action and also explore alternatives to improve our balance sheet.

During the quarter, we repurchased 42,750 shares of our 11 3/8 senior exchangeable preferred stock for $36 million.

These shares also had accrued 5.4 million in unpaid dividends, resulting in a $12.1 million gain on the redemption of these securities.

At the end of the quarter, our restricted payment basket is approximately $92 million.

With that, thank you and I will turn the conference back to the moderator, who will poll you for questions.

Thank you.

Ladies and gentlemen, at this time, we will begin the question-and-answer process. (OPERATOR INSTRUCTIONS).

Stephen Flynn with Morgan Stanley.

Good morning.

Can you talk a little bit about how you view your costs with migrating your retail subscribers over to either CDMA or GSM from TDMA?

Given what we've seen with some of the national carriers like AWE and Cingular and also some of the rural carriers like (indiscernible) Triton, it seems the costs to migrate these subscribers are much greater than people anticipated.

Can you give us your viewpoint on what you think those costs will be and when you will start to realize them?

Yes.

We've recently rolled out our next-generation network in one of our markets, and we are certainly seeing that there is a ready demand for existing subscribers to convert to the CDMA system we have in that region.

We've been watching with interest what has happened with each of the other carriers that have preceded us in this conversion.

So, I guess I would say that we continue to work to plan prudently as to how we both encourage the subscribers who are awaiting those new handsets while at the same time trying to put in the right financial controls in how we price the phones and how we deal with them, depending on whether they are currently under contract or not under contract, so that we can have a smooth transition in that regard.

It's difficult for us, given the short period of time we've had since our soft rollout in our first region, to understand exactly what it might be over time, but that is something that we will certainly be able to share more about in our next quarterly call.

With respect to the costs that we've experienced on the handsets support, maybe I will pass that one to Wes.

Just to put a little bit of perspective into this, our handset subsidy, if you will, for both migrated customers as well as new customers in the second quarter was in the $90 range.

So, we are already experiencing subsidy to migrate customers as well as bring on new customers.

We will continue to monitor that; that's something that we look at very carefully.

I'm sorry, so your costs are about $90 and handset subsidy migrate a sub (ph) from TDMA to CDMA or GSM?

No.

Since we really haven't had experience at this point in migrating to the next-generation technology, the $90 that I was talking about is if a new customer comes in today, gets a TDMA handset or an existing customer converts to a different TDMA handset, our average subsidy for those customers is approximately $90 and (indiscernible) included already in our operating performance.

I would add one correction to that.

We do have migration of customers in our Wireless Alliance market from time to time, which is a GSM market.

But again, there's not a substantial difference in the support level per unit that we experience.

So you would offer the same headset subsidy to an existing sub to migrate as you would a new sub so they would get a $90 subsidy most likely?

Well, there is, by the type of handset that they purchase, whether it's a low end or a high end, there is some difference in the range of handsets as to what we subsidize because, like all prudent marketing people, if there is a higher demand at a certain level, then we are able to price that phone a little higher to the customer.

But it's a complicated formula because, of course, it also depends on what handsets and what combination of pricing is in a particular market against us in our competitors' hands.

So we shoot for a certain average price and sometimes it's a little higher in one market than another or a little higher for one handset than another.

Could you maybe give a little color on what you think the pace of those migrations may be, or what your goal is?

It seems some of the other carriers have struggled here with trying to manage the process about how quickly subs move over and what sort of costs they incur.

Can you talk a little bit about your planning for that and any (inaudible) goals you have for moving subs over?

Since proportionately we have a relatively small portion of our customer base that we expect to migrate this year, because we really only have one market that we've recently rolled out that will experience the full impact of that migration this year, I would say that we've made some judgments about what we think is feasible in that region.

The results of that we will take into account as we do our budgeting and planning for next year.

So I guess, at this point, I would just say that we are watching it very closely to manage it as closely as we can, and as we have a better understanding of exactly how that works in our markets with the competitors that we have at a particular time, we will share that as appropriate.

Certainly, the price that we charge the customer to migrate will have an impact on how quickly or how we can pace the migration of customers to the next-generation technologies and we will certainly keep that in mind as we look at our pricing.

Great.

Just one last follow-up.

I guess it wouldn't (ph) be fair to say that most of the migrations we probably won't see until early 2005?

I think that's very fair to say but I'd also like to add one other point -- is that, while we do expect the migration to be at a higher rate as we are rolling out a new, attractive technology and attractive handsets and certainly we've talked about that before, you should realize that migration of existing customers to handsets, either to cement the relationship with an additional contract period with that customer or simply to go through the process with a customer's handsets wear out in the normal course of things is a day-to-day issue with us, even if we didn't have a new generation technology.

So although we expect it to be at a greater pace next year, it's not as though it's a whole new issue or a whole new number for us.

There's a percentage every year that migrates.

Ethan Schwartz with CRT Capital Group.

A couple of things -- first, from the numbers that you just gave, I came up with an estimate of something like 20,000 existing customers in the quarter requiring or requesting a handset upgrade.

Am I in sort of the right ballpark or --?

Actually, the number is probably a little bit more than that, more like 30,000 customers.

Okay.

That goes back to Ann's point that this is not necessarily a new phenomenon for us.

With the customer base that we have, you tend to have a certain portion that are looking for the next, nicer model with more features, functionality from time to time.

Certainly, phones do have a life span that needs to be replaced.

I know you commented a bit on the service revenue trends and stripping out the market's loss but can you just review that or unpack that a little bit more?

In other words, after one takes out the incremental USF subsidy year-over-year, what were the organic factors on the change in service revenue?

The ETC or the Universal Service Fund payments essentially were the bulk of the increase, going from $44 of what we call local service revenue to $47 local service revenue.

We also did see some of the seasonality increases that are typical that we see during this period of time, but we also have seen with what that LSR growth is.

On a year-over-year basis, if you go back to the first quarter of 2003, for instance, on local service revenue, we were looking at a total of $39.83 and we're now at $47.26.

So, we are seeing both some seasonality as well as some growth, but on the quarter-over-quarter second quarter to second quarter this year, the bulk of it was comprised of the USF payments.

Overage -- how is that doing year-over-year?

I think that, with respect to the overage, I think that we are not unlike other carriers -- that we're seeing a change in what the components are of LSR in the sense that, as we offer larger buckets and really move to get more secure, recurring revenue at higher levels, that that tends to reduce somewhat the overage that we're seeing.

So, I don't think we are a lot different than other carriers.

That's probably most pronounced for us in the second and third quarters typically, but what we benefit then oftentimes is in the first and fourth quarters, the fact that that higher access is a recurring revenue stream for us.

So what it has tended to do for us over the past year or so and I expect will continue going forward is that we will see less seasonality in our service revenues than what we have experienced in the past.

We've really found, through our customer research and just plain old talking to our customers and seeing what they react to as far as offers in the marketplace, that they are more concerned about a spike in the summer months, for example, when overage typically goes up, than they are about moving up their monthly access payments to us.

So we continue to work to give our customers the certainty that they require, even if that's at a higher monthly rate.

We think, overall, that's been a very positive move for us because of the greater predictability.

Thanks.

That's it for me.

Rahu Conwalker (ph) with Manning and Napier Advisors.

Hi.

Thank -- (technical difficulty) -- my question -- (technical difficulty).

We can't hear anything.

Can you hear me now?

Very faintly.

(OPERATOR INSTRUCTIONS).

Can you hear me now?

Much better.

My first question was about your subscriber numbers.

It seems that your (indiscernible) subscribers both have fallen somewhat, and growth has come entirely from wholesale subscribers.

So can you explain the dynamic operating there a bit more?

For the second quarter, we have postpaid adds of about 4400 in the second quarter this year; that compares to just under 1400 in the first quarter of this year.

Certainly, we've talked about this in the past, that we know we are somewhat challenged right now until we have our next-generation networks fully outfitted and operational so that we can launch those networks and the new phones and the services they bring with them to our existing customer base.

At this point in time, as we talked about, we have done that in our Midwest region here in Minnesota.

It happens to be one of our smaller regions, however, so it's still not impacting as big a percentage of the POPs as we will once we launch those services GSM-wide in the Northeast and in the northwest regions, which we expect later this year.

Okay, that helps.

My second question is about your CapEx guidance.

If I'm not mistaken, your earlier guidance was CapEx of 140 to 160 million for the next two years, but in this year, you plan to spend about 100 million.

So does it represent acceleration of CapEx, or do you plan to increase the overall CapEx for the next two years to something like 200 million?

Just I think point of clarification, just so we're working off the same set of numbers, we have been talking about, for quite some time, going back into the last year, that we expected CapEx for last year, 2003, 2004 and 2005, that three-year period, to be upwards of $230 million.

We did about, in rounded numbers last year, call it $55 million.

If we are expecting $100 million this year, the rest of that would be next year.

I think that's the math -- brings that to around 75 million.

One of the things, though, that I think people need to be aware of for us is that we talked about the unmet demand; we do believe that we are currently not able to provide for the Cingular and AT&T customers where they come into our networks, where we don't have GSM currently on our sites.

We certainly don't see this as a question of if we go to the next generation technology; it's when.

There's a lot of financial incentive from our perspective, not only from our own existing customer base and hopefully new customers that would come onto our service but the roaming customers that utilize our strong network.

So, it's possible that we would look to accelerate some of the CapEx that might be viewed out there two years from now into next year.

We are evaluating that and will be as a part of next year's budgeting process that Ann had talked about.

We are already in the early stages of that and we will give further guidance as that becomes clearer.

Thanks a lot.

That's about it.

(OPERATOR INSTRUCTIONS).

Management, there are no further questions at this time.

Please continue with any closing statements.

Just in wrapping it up, I'd just like to point out that our operating strategy continues to balance customer growth with retention, our average cost to acquire our customers, as well as LSR, and it has been for a long time and will continue to manage to that.

Again, thanks for your interest in our company and we look forward to discussing the third-quarter results in November with you.

Thank you, sir.

Ladies and gentlemen, this concludes the Rural Cellular Corporation 2004 second-quarter earnings conference call.

If you would like to listen to a replay of today's conference call, please dial 800-405-2236 with access code 11005068#. (Operator repeat instructions).

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