威訊通訊 (VZ) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Rural Cellular Corporation third-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 Monday, November 15, 2004.

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

Please go ahead, sir.

Good morning everyone and thanks for joining us for our third-quarter 2004 teleconference.

This teleconference wars preceded by our third-quarter 2004 press release which was released late Friday.

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

As a reminder this call is being broadcast live through our website at RCCwireless.com.

An archive will also be made available in the investor relations section of our website.

This section of our website also contains comprehensive financial information about our Company as well as corporate governance information.

In addition, after the completion of this call a dial-in replay will be made available through November 23, 2004.

With us this morning are Richard Ekstrand, RCC's President and Chief Executive Officer;

Wesley Schultz, RCC's Chief Financial Officer and Ann Newhall, RCC's Chief Operating Officer.

Please be mindful of this calls 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 enrollment 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 must also be able to service our debt.

Additionally, we must meet the continuous demands of changing technologies.

For additional risks and uncertainties, please see RCC's report on Form 10K 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 website where you will find a non-GAAP to GAAP reconciliation included in the November 12, 2004 press release.

And with that, I will turn the call over to Richard Ekstrand.

Thanks Chris.

Good morning everyone.

This quarter's overall financial performance reflects the results of our business strategy outlined last quarter as we deploy our next generation technology, step downs and roaming yields and the property swap with AWE.

The results are in line with our expectation expressed last quarter.

I am particularly pleased to announce that we have recently signed a roaming and network agreement with the new Cingular effective through December 2009.

This amendment extends our existing agreement with Cingular and replaces agreements with AT&T Wireless.

Key components in the agreement include, Outcollect and Incollect rates companywide including data roaming; expanded network interoperability; rapid deployment of EDGE technology; and expanded footprint and the coordination of future technology transitions.

In addition, we've agreed to overlay GSM technology in our Alabama, Mississippi and Kansas markets.

We've begun this overlay and expect GSM roaming traffic in our south region early next year.

Our GSM Commercial launch in the south region is expected during the middle of next year.

This agreement positions us to be more competitive with other carriers by providing a better product for our customers.

Now, let's talk about our quarter.

As we realized early on 2004 was going to be a transition year for us.

And our customer performance this quarter reflects that expectation.

We believe the reasons for the decline in customers this quarter include the transition stage of our networks products and services, transition to a unified brand-name across all regions, and the first full quarter of wireless local number portability.

As we discussed with you previously, TDMA technology is not as attractive to customers as newer technologies.

Until we complete our network transitions, customer growth will be difficult.

So the most critical initiative we have under way is a well-executed network and customer transition in all of our regions.

In August we successfully launched CDMA next generation of products and services in our Midwest region.

This launch has gone well and has broadened our appeal in the market.

With 3 months under our belts since product launch, today we have 16,000 CDMA customers which is approximately 13 percent of our Midwest customer base.

Are GSM product launch in the northeast to northwest regions is scheduled for the first quarter of next year.

We are confident that our new networks and new billing systems will successfully support next generation services at the level of quality our customers deserve and expect.

We continue to believe roaming revenue is being impacted by the new Cingular's accelerated transition of customers to GSM and are optimistic regarding the potential growth in next generation minutes.

With the progress of our network overlay efforts to date we've seen an increase of approximately 9.5 million outcollect minutes this quarter over last year, on an apples-to-apples basis given the effect of the AWE property swap.

Going forward we look to improve customer growth and increased roaming minutes of us with the introduction of next generation services in all of our regions.

Additionally we've added licenses which will allow us to etch out and pursue customer growth by leveraging our traditional footprint and operations into adjacent popular centers.

For example, we've recently expanded our Midwest CDMA network into the markets of Fargo and Grand Forks which are immediately adjacent to our existing cellular operating area.

We are currently expanding our footprint in our Northwest region through a GSA build in Lewiston and Auburn, Maine, which had previously been a hole in our footprint.

In the northeast region we are edging out into the popular lakes area in East Central New Hampshire.

In our Northwest region we plan to build out in the 2005 the adjacent Idaho market of Lewiston, Moscow, not to be confused with Lewiston, Maine and the small but significant market of Madras, Oregon, a gateway to central Oregon.

These and other EDGE out efforts are adjacent to our home service areas which we believe provide nice synergistic opportunities for us.

Switching gears, an important contributor to service revenue is USF support and we continue to work toward additional ETC certification in states we serve.

In this vein, we recently received ETC certification for a portion of Kansas and in the remaining rural counties of Vermont.

Revenues from these recent certifications should begin in 2005.

Moving on to our balance sheet, we continue to make inroads toward improving our balance sheet to welcome market purchases of senior exchangeable preferred securities.

This quarter we purchased an additional 22,750 shares which brings our year-to-date total to 80,500 shares.

These repurchases demonstrate our commitment to reducing leverage.

In closing, we continue to differentiate ourselves from other rural players.

We understand we have challenges ahead and remain on path to convert capital expenditures and technology upgrades into revenue growth.

We believe we have strategies in place to achieve measurable successes toward these goals.

We will continue to operate our business efficiently in our low population and density service areas.

We will deploy our network expansion and next generation overlays, and we look forward to the introduction of EDGE data services as we launch our GSM networks.

Also thanks to our employees for all that they do every day and thanks again for your continuing interest in our Company.

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

Thanks, Rick.

I would like to provide additional detail about our financial performance this quarter, the progress we've made on our networks and our purchase of preferred securities in the open market.

This quarter's results reflect the impact of the AWE property exchange, lower outcollect roaming yields and the cost associated with our new networks.

EBITDA at 59.6 million including wireless alliance EBITDA of 2 million was in line with the expectations we shared with you last quarter.

Service revenues increased 5 percent to 97.1 million, in spite of the loss of 21,000 net customers resulting from the AWE property swap.

USF Support, a growing component of service revenue increased to $7.6 million compared to $2.2 million for the third quarter last year.

LSR increased to $48 for the quarter as compared to $45 last year reflecting the increase in USF support.

Switching gears to Outcollect Roaming Revenue, roaming revenue for the third quarter was $29.7 million, compared to $37.6 million in 2003.

As you may recall we expected lower roaming revenue this year because of the loss of our Oregon 4 property in the AWE property swap and anticipated yield declines.

During the third quarter last year, Oregon 4 provided approximately 3.4 million of roaming revenue along with 5.3 million of EBITDA.

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

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

In spite of this missed opportunity, roaming minutes increased approximately 6 percent on a pro forma basis taking into account the property swap with AWE.

As we continue our next generation overlay and footprint EDGE outs, we expect to capture more of this unmet demand.

During the third quarter, approximately 40 percent of our outcollect minutes were on our GSM and CDMA networks compared to 30 percent during the second quarter and 20 percent during the first quarter of this year.

Outcollect roaming yield for the quarter was 16 cents compared to 21 cents last year.

Onto expenses.

We are taking a disciplined approach regarding TDMA handset replacements because we know that during our network transitions we will face an accelerating need for next generation handset migration.

Given this, cost of equipment increased only 2 percent to $10 million for the quarter.

Network costs as a percentage of total revenues increased to 21 percent for the quarter from 18 percent last year reflecting increased incollect costs and the cost of operating multiple technology networks.

Incollect expense increased 9 percent to $12.3 million this quarter.

Contributing to the incollect expense increase were certain extended footprint service plans that came with our newly acquired AWE customers.

We are working to rationalize these plans and to focus on bringing incollect costs as a percentage of revenues more in line with historical performance.

These efforts have likely caused an increase in churn in the South regions.

SG&A increased to 35 million, compared to 33.5 million last year primarily reflecting increased costs related to the market launch of next generation technology products and costs related to our brand name change activities in two of our regions.

Although these brand changes will bring long-term synergies to the business, this change, as Rick mentioned, may also have contributed to our lower-than-expected customer performance this quarter.

Interest expense declined 22 percent this quarter to $35.1 million.

Affecting year-over-year comparisons of interest expense again this quarter was 7.3 million in gains resulting from our purchase 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 a $46.3 million.

And once again I'd like to remind you that cash interest payments are higher in the first and third quarters of the year since the bulk of our debt is payable in these quarters.

Now turning to capital expenditures, we are well underway with the build-out of our next generation networks which comprise the bulk of the 25 million in capital spending this quarter.

We still expect capital spending this year to be approximately $100 million.

Moving on to the capital structure.

Consistent with our past practice in October we indicated we would not pay the November cash dividend on our senior exchangeable preferred stock because we have not paid 6 quarterly dividends to holders of a majority of the outstanding shares of senior exchangeable preferred stock voting as a class will be entitled to elect 2 directors if they so choose by following the procedures outlined in the certificate of designation.

During the quarter we purchased 22,750 shares of our 11 3/8 senior exchangeable preferred stock for $19 million.

These shares had accrued $3.5 million in unpaid dividends resulting in a $7.3 million gain on the redemption of these securities.

At quarter end our most restrictive financing terms provided approximately 84.5 million in restricted payments.

With that, thank you and I will turn the teleconference back to the moderator who will begin polling for questions.

(OPERATOR INSTRUCTIONS) Pat Dyson with Credit Suisse First Boston.

Good morning.

A couple of quick questions.

First on the roaming agreement with Cingular.

Could you elaborate and provide some detail for us as we look forward to next year and think about outcollect yield, what should our expectation be relative to prior expectations on that trend?

And then secondly on the roaming agreement, you talk about these incentives to overlay the GSM technology in the respective states, could you also elaborate on those as well as far as what actual incentives are in place for those overlays?

I'll answer the first question and Ann will help address the second part of your question.

As it relates to the yields for next year, I don't know that this is going to have a significant impact on our yields for next year.

Although it might be affecting them slightly downward from where we had previously projected, maybe at the beginning of this year.

I don't know if this agreement in and of itself changes as much as the overall changes in the mix of our minutes being accelerated more to GSM probably and CDMA as we look at next and where we thought we might have been at the beginning of this year.

We talked about the fact that our yield was 16 cents during the third quarter of this year.

I would anticipate yields for 2005 will be down about a penny and a half to 2 cents from that level.

With respect to the incentives, our incentives to build GSM in our South region.

I think Rick covered some of the major areas of the contract such as outcollect and incollect rates that we have between our companies and our expanded network interoperability.

As we negotiated these factors and as we consolidated the AT&T Wireless agreement with our Cingular contract, there were various choices that were made that we believed were incentives to us to increase the amount of our network which was subject to these agreements.

In other words, building more GSM in which we could operate with Cingular as they move forward.

Obviously an important piece of the mix as well is how preferences for traffic are handled and without being specific about the exact locations of our preferences, we improved our position quite well as part of this agreement.

We are expecting more traffic, more GSM traffic; we are also expecting a much closer relationship with Cingular in terms of contact and interoperability among our networks which we believe will be more favorable for our customers in the regions that have GSM as they roam and use Cingular's networks.

One final question on that.

Are there any prohibitions on overbuilding or exclusivity provisions that are in these agreements?

Well, we have a variety of terms in the agreements.

We don't make all of the terms public obviously because of confidentiality and other competitive concerns that we have.

Let's just say that the combination of rights that we have under the agreement and obligations that Cingular has makes us feel comfortable that this will be a long-term stable relationship with them.

Wes, this is the final question.

On -- I appreciate your comment on the yield for next year.

As far as your sense of what that implies, the mix next year whether it be GSM or TDMA?

Actually it goes a little bit beyond that and I'm glad I had a chance to add more to this.

When I give the yield that I talked about before going down somewhere between a penny and a half to 2 cents, that still takes a number of assumptions into account.

And I think it's important for you to understand those are based on some of our preliminary assumptions of mix not only of TDMA, GSM and CDMA but also a mix of where those minutes are going to come from within our various regions.

Although we have talked in the past about a rather complicated set of agreements number-wise between AT&T and Cingular, we now have an amendment that is for the New Cingular.

But we still have various rates in different parts of our regions and so it's not as simple as saying we have one rate and that's going to be the entire rate for all minutes on all of our networks.

And so we have to take into account some estimates as to how successful we will be in our EDGE outs of garnering minutes in those areas because again they have different rates in different parts of our country.

Suffice it to say the GSM as at a lower rate than what are TDMA is but we do anticipate having more than -- certainly well more than 50 percent of our minutes on our next generation networks as we go into next year.

We were at 40 percent I think as I said earlier in the third quarter we anticipate that number going up as Cingular as more and more of their customers utilizing GSM and as we bring more and more of our network on GSM.

Bear in mind that a significant part of our network, the south, both Alabama, Mississippi and Kansas, there has been no GSM in any of those markets.

And so therefore, that will have a significant impact next year as we start bringing those networks up on GSM.

Okay, great.

Thanks.

Ethan Schwartz with CRT Capital Group.

That actually covered most of my questions on the roaming agreement.

Let me ask you a couple of things.

First of all, on incollect expenses, is there any shift in the symmetry between incollect and outcollect?

Are you getting any kind of better rate or worse rate on incollect?

As Wes has often talked about, there are two sides of the equation and to us incollect is a very important part of our network costs and the costs of providing service to our customers.

We think that as part of this agreement that we've made some very significant progress in reducing our incollect rates.

It was a very satisfactory outcome from our standpoint in that regard.

Particularly as it addressed the GSM which is now with our customer base in the Mississippi, Alabama and Kansas going to be migrating over to GSM as well as our Northeast and Northwest regions, that became particularly attractive for us.

Can you give us some sense to quantify that?

In other words are you down in sort of the mid- to high-single digits per minute range like some of the other regional carriers, or a little bit higher than that?

I don't think we're going to be giving any additional flavor today on today's call as to the terms of the agreement.

Certainly we do see that it will be at a lesser rate than where we have been at this point.

Will that change your plan mix at all?

Will you start to offer more super regional plans or plan to do offer some of the roam (inaudible) in the quarter than just on the network?

Actually we have plans in all of our regions that allow people to roam nationally or regionally on a multistate basis anywhere from 3 states to 11 states depending on the region and the geographic area surrounding it.

We don't expect to really substantially change the mix of plans for this agreement because we have found them to be affective.

I think what it clearly does is provide a further incentive for us to move our customers to GSM as quickly as possible because to the extent that they are roaming in other areas it will reduce our incollect cost on their minutes.

It's sort of part and parcel of the whole idea of our agreements here and our plans which is to move our customers as quickly as possible to the new technology.

Bear in mind also, Rick had talked about this in his comments earlier, but maybe it got lost a little bit in the shuffle.

One of the important things for us, for our customers as well as for additional roaming opportunities are these EDGE out into the new markets that are adjacent to our existing footprints.

In virtually all of our regions we do see the opportunity for us to expand our current footprint into some adjacent areas.

These are adjacent areas often times that our customers go into that we're now paying incollect costs as they go into these regions as part of a regional footprint perhaps.

For those folks that know the Upper Midwest and particularly the Western portion of our Upper Midwest region, the cities of Fargo and Grand Forks are certainly attractive areas for many of our customers to go to school and shopping and so forth.

By adding those footprints to our existing cellular footprint I think really helps reduce incollect costs in those markets as will Lewiston, Auburn in Maine; the Lakes area in New Hampshire;

Lewiston, Moscow in the Northwest; and there are areas in our South region that are similar to that as well.

That will also help reduce incollect costs over time as well.

Should we expect to see the retention costs or upgrade costs increase to some moderate degree over the next few quarters as try to incentivize people to move to GSM?

I think that's fair to say because we do have to -- we do have to help our customers in that transition.

In terms of the number of phones that we will use in those migrations will increase over the next few quarters and hopefully over the next 2 years we will accomplish the migration.

I would say that we are -- have very close attention on and are working to understand better how we might limit it as we've seen with other carriers.

Just like the Company has talked about a balanced growth strategy for a long time, we do a lot of things where we try to balance a number of different priorities.

I think the migration of our customer base from TDMA to either CDMA or GSM is going to be a real balancing act for us.

On one hand we would like to get our customers to the newest and greatest technologies as quickly as possible and depending on the usage pattern and LSR that we receive from those new plans, there may be even more incentive for us to move customers as quickly as possible.

But we will try to balance that like we do many, many other priorities in our Company as best we can.

Just a couple of final questions on the current quarter.

Can you give some sense of the scale of minutes that you may have missed because you were not in areas where you were not able to receive potential Cingular GSM roaming minutes?

In other words whether by pops or percentage of minutes, how much of areas were Cingular does not cover GSM do you also not offer GSM and therefore, what might you pick up in quarters going forward as you bring that on?

It's a very complicated equation and that's difficult for us to do.

If I might give you a couple factors to demonstrate the complexity of it.

In some areas, such as the South, Cingular had used to date phones which had both TDMA and GSM in their phones and so we may have missed fewer TDMA minutes there because their customers had the capability to roam.

In the Northeast there is a broad difference between the percentage of customers that AT&T had converted to GSM and the number of customers that Cingular had converted to GSM.

Again, in that we only have information which we gained in informal discussions with them and so we don't have better information than that.

I could go on with each region in that there is just a difference geographically about how the other carriers have addressed their technology issues there and that all goes into make it a very complicated scene as far as trying to gauge that.

The 10-Q which will be filing today, there will be some additional information that I'm sure you will want to look at.

But we talk about the fact that approximately 40 percent of our cell sites at the end of the quarter had next generation technology on them.

And so I think it stands to reason if 60 percent don't have that, there was a pretty significant opportunity that we missed but trying to measure how much that might ultimately be would be pretty difficult to ascertain at this point.

Thanks very much.

I would just like to add one thought to that, the 60-40 percent.

You should keep in mind that as we built the order in which we chose to build sites did address priority as far as number of roaming minutes.

So even though 40 percent of the sites may be built, they were built with roamers in mind and so they do tend to cover the major highways and the major destination areas, the primary cell sites there first.

So minutes of use are not necessarily proportional across all sites.

Steve Flynn with Morgan Stanley.

Good morning.

Just a follow-up to the last question.

Can we expect to roam MOUs to soften maybe over the next couple of quarters as you continue to bring down some of those GSM minutes from Cingular and AWE before maybe growing significantly in '05 as you are set to capture some of those MOUs?

Although I think we will continue to see an erosion if you will, of our TDMA minutes that are on our network, I do anticipate that the GSM and CDMA minutes will increase.

Now bear in mind we're heading into some of our seasonally slower quarters as far as roaming is concerned, certainly fourth quarter and first quarter are 2 of our slowest roaming quarters.

But having said that, we are continue to bring up new sites literally every day in both the Northeast and in the Northwest region to GSM.

We will be as rapidly deploying GSM as we can probably starting in the first quarter of next year which is frankly not that far away anymore in the Mississippi and Alabama regions which should start to generate GSM traffic there.

The question really ultimately ends up being will those GSM minutes more than offset the TDMA minutes?

We believe that is likely to happen.

But certainly some this is dependent on how well Cingular and T-Mobile at least from the standpoint of their customers being able to utilize our networks -- I'm talking T-Mobile specifically there -- and how well Cingular does in bringing and attracting and keeping customers that are customers that come to our regions to utilize our service.

Great, thanks.

I just wanted to ask a little bit about capital expenditures.

It looks like for some time you've been talking about an '03 through '05 CapEx of 190 to 230.

Given your guidance today of 100 million in '04 and like amount in '05 it sounds like you will be near 250 or 260.

Can you talk about what was the drivers behind the delta in CapEx?

Is it the new EDGE out market?

Is it the new agreement with Cingular that gives you reason to upgrade your Southern cluster or is increasing volumes?

Can you talk about what's driving the delta in the new CapEx forecast?

I think all those factors are important factors plus one more.

First of all we are building out in several areas of additional cell sites.

Also we are providing greater depth in our existing systems as we're building out we are adding cell sites in local areas within our existing footprint.

And certainly situations such as the addition of the AWE properties in the South where we added -- well, we just about doubled the number of cell sites in Alabama and Mississippi, all things which occurred after we provided some of those original thoughts about our 3 years of 2003 to 2005.

Additionally, when we started this, we really looked at this as a 4-year process of overlying our networks, 2003 through 2006.

And what we've really ended up doing through our process, both with Cingular but also as we looked at the rollouts with our own customers is we have largely accelerated the tail end of the build that we would have done in 2006 into 2005.

And so all of that combination we still believe that we've got a very cost-effective buildout plan and strong pricing that we're receiving from our vendors on that work.

But it has moved some of the capital from 2006 into 2005 and extended it somewhat to (technical difficulty)

When you talk about the end market, how many incremental pops do you think that will be with all those markets in aggregates?

I'm not sure that we have that calculated at this moment.

To be honest with you, they come in areas that we may or may not completely cover the areas so any of the data that would be specifically out there for that particular licensed area, we may not initially build out that entire area.

It's not as simple as going in and adding up the pops that are a part of the licensed footprint.

Our focus here though would be to edge out, have a marketing presence in some of these locations, also have it available for reducing incollect costs but also have it available for roaming opportunities as we go forward.

Mark Buckheidt with Knickerbocker Partners.

If we can shift gears a little bit from roaming to customer growth, you gave us a number of a loss of 1900 customers company-wide in the third quarter.

Could you talk a little bit about the experience in the different regions?

Particularly in the Midwest where CDMA system was turned on for the quarter?

You gave us a number that we added 16,000 CDMA customers, obviously many of those could be migrations.

Could you break it down a little bit more and tell us about the experience of the Midwest; where the new systems were installed, versus the rest of the Company?

I don't think that we have really broken down customers to any great extent by the regions or within the regions as you are asking.

Maybe I can provide some quantitative comments that might be helpful to you.

I think what we've seen in the Midwest is that we've seen steady performance in line with our expectations this year including some uptick as we rolled out to new technologies.

We did not expect to have wild growth of any sort, remembering that we do have other competitors with Next Generation technology in that particular region so we weren't offering something that was necessarily brand new to the area nor will we in many of our markets.

So what we are looking for is steady increase.

We're looking for sustainable growth and penetration of some new areas, meaning new areas of customer growth not necessarily new geographic areas and we're working successfully on that in the Midwest.

We don't expect this to be wild increases everywhere just as we roll out our networks; we expect it to be probably comparable to what other carriers are experiencing as we have a strong competitive tool to bring to our customers in a region.

Bear in mind we also had a brand name change in the Midwest and although we think that will have long-term benefits for us, there is some confusion that that creates in the initial stages of a brand name change in a region.

Couple that with the technology change which is the primary reason why we did them both at the same time, it causes excitement certainly in the market but it also causes some confusion.

I will say that we are seeing performance now in October and early into November that I believe shows we are gaining some traction in the marketplace here and the Midwest with both the technology and the brand name changes probably having some of the clutter, if you will, dissipate a little bit.

We also did a brand name change just so that you know we talked about 2 regions; the Northwest region during the third quarter so the entire Company at this point is branded under our Unicell brand name which we own.

Thank you very much.

Anthony Klarman with Deutsche Bank.

I have a few questions.

First if you could talk a little bit about the ARPU growth, I guess the LSR in terms of the year-over-year comparison versus the '03 period?

How much of that growth has come from additional USF and perhaps additional fees that may have been passed on to the subscribers over the past year for some of E911 and some of the other fees that may have been implemented?

On the balance sheet and liquidity, I'm just trying to get a sense as to how you guys are managing this process going forward?

You've spend a lot over the past few quarters retiring some preferred but you are now down to about 63 million or so in cash and you've got another 60 million in available credit but there is still quite a bit preferred on the balance sheet that on a market basis is valued well in excess of what your liquidity would be and I'm just kind of wondering how you approach the preferred situation going forward given that you're obviously in a much different liquidity position now and how you might manage the balance sheet going forward?

Thank you.

The bulk of the increase from $45 to $48 on LSR for the quarter was related to the increases in the universal service fund.

It's important to understand is that were able to maintain primarily with our older technology, TDMA technology, the LSR at that level on an apples-to-apples basis.

And that's on a top of if you go back a year ago pretty significant increases in LSR getting to that level that we had in the third quarter of last year.

As it relates to the balance sheet, I don't know that a whole lot probably, Anthony, has changed from where we have been.

We'll continue to look at our options.

We do believe we still are certainly producing cash.

I indicated earlier that the first and third quarters are our most heavily weighted cash quarters from a cash interest perspective so the fourth quarter will generate pretty significant cash all other things considered.

And so we will continue to look at what makes sense for us.

Our goal of reducing leverage is unwavering.

We certainly will continue to look at what makes the most sense for us in accomplishing that and whether it's continued senior preferred purchases or something else we'll look at that on a case-by-case basis.

We do recognize, as you indicate, that we do not have the cash and the liquidity in our 60 million to wipe out a full issue of what's remaining of the senior preferred.

We were never in a position to be able to do that.

We've been long of the belief that we'll keep nicking away at it the best we can until a more obvious situation becomes apparent.

Two follow-up questions.

First, on the preferred, if all of the preferred holders exercise their rights under their certificate of designation, is there any difference on the voting rights or the ranking of the directors that those senior preferred holders might nominate to the Board as opposed to any of the existing directors?

No, not that we are aware of.

They would be able to be directors.

Right, they would participate --

They would participate just as any other director would.

The same same standing as all the other Company Directors on the Board?

Yes.

There is one difference I guess and that is that if we went back and paid the cash dividends, their term would end at that point.

But otherwise, they would be like the other directors.

On the ARPU side, maybe as it relates to churn, I was wondering if as you guys continue to roll out the Next Generation network in various regions over the next year if we might see a repricing of some of your calling plans associated with that as you kind of true people up to perhaps more what the national averages are for some of the Next Generation calling plans?

And might that factor into some higher churn rates over the next couple of quarters as we see you guys mark some folk's calling plans to market as you upgrade these networks?

I think that's a process that is not caused by the change to our technology.

That is an ongoing process for us at any point in time.

We're always looking at the lower tiered plans and looking to see what we can do to provide more value to the customers that are worth their higher payments.

And also we do review our plans regularly for areas where we might have a plan that is particularly out of kilter with the marketplace because if we're out of kilter with the marketplace, that leads to churn.

And so we like to address that before it hits us and I think our track record has shown that we can do that.

I just think that's part of doing business as usual and this might be a little bigger piece of it.

But the same principles and the same practical approach to it would apply in our eyes.

Thank you.

David Shear (ph) with Lehman Brothers.

Just a follow-up on the CapEx side first.

You talked about pulling some of the '06 CapEx into '05.

Once you're through as you look out with this upgrade program, where do you see CapEx even if you looked at '04, '05 excluding these upgrade costs?

Where is a good run rate for CapEx as you get out of this upgrade cycle?

Are you kind of back to where you were in '02, '03 kind of at 50 60 million or is it still -- certainly a little bit higher than that but please some direction versus the hundred?

And then on the USF side you talked about Kansas and Vermont, I was wondering if you could put any sort of numbers are materiality around what that could represent next year and any other states that you are still looking for ETC status on?

And then finally on the roaming deal with Cingular, I was wondering if you could comment on when the next significant step down is on the roaming rate and if that sort of changes at all versus your previous deal with them?

Thanks.

We're still writing down all of those questions, David.

Got the last two.

I'll start with the CapEx one.

I'd say at this point we have not spent a lot of time on the CapEx budgets or plans for 2007 and beyond, even 2006 at this point.

We're just beginning to develop.

So it's difficult for us to sit back and say what will it cost to maintain those networks.

As a little color on it, we have been looking at how quickly we would expect to transition customers from our existing TDMA networks to the Next Generation technologies.

And judging how that impact may be for maintenance and other items as we move, as we load one network and reduce the load on another network so that we can understand that better but that process obviously still isn't completed.

I'd say your reference to the $60 million range as opposed to the $50 million range before my instincts would tell me that that would be correct because we will be maintaining 2 networks yet in 2006 and 2007 and probably beginning to retire a lot of TDMA by that time.

The ECT, as we look at how much the Vermont and Kansas adds to our ETC numbers for the next year, I think you're talking in the magnitude certainly a lot less than what we see from Minnesota and some of our other states.

Collectively the two of them probably are certainly less than a couple of million dollars.

They are not huge additional increments but every little bit certainly is adding to it.

As we look forward, we're still -- there are still opportunities not only -- the bulk of our opportunities really are in states where we already have some certification like in Kansas where we've received certification for a portion of the state and not all of the state.

We do have South Dakota that we have an application pending in that we're awaiting word on.

But beyond that our opportunities become a lot less, or are more limited because we have really focused on the states where the biggest opportunities are for us at this point.

As far as the roaming rate step down, I'm not -- I don't believe there are significant changes in what the otherwise the step downs would have been.

This has primarily been a focus on extending the terms but also talking about clarifying and putting into one contract rather than having separate contracts things.

But as far as the step downs themselves, I don't think they've changed certainly significantly from what would have otherwise been the case.

Thank you.

(OPERATOR INSTRUCTIONS) Shuping Lee (ph) with Tenor Capital Management (ph).

My question has been answered.

Sam Martini (ph) with Cobalt Capital (ph).

Just a follow-up to David's question.

Could you remind me when the step downs in the prior agreement, prior to recutting it just so we can chart them going forward?

We just don't have all of that detail in front of us here.

Nor have we really talked about it specifically in the past.

Is it annual?

There are different step downs in different parts.

I mean that's what makes this much more complicated and I think people can understand is as we have different regions and they are treated in some cases differently, there are different step downs at different times.

But typically a step down is on an annual basis, yes.

We should assume just going forward year end we will start at a new rate but you can't give us any color as to what it is but it shouldn't be meaningfully different from what it was?

Basically consolidated agreements, is that a fair way to look at it?

Yes.

Natal Shah (ph) with Duquesne Capital.

As the GSM migration occurs do you expect to lose high ARPU TDMA customers first as they will be the likely ones to transfer GSM?

Thank you.

There's a couple ways to look at that.

Some of our high ARPU TDMA customers are what we put in early adopter type categories who really just use their phones to a great extent and they would be likely to go to our new plans fairly quickly.

But we are finding that people are attracted to high usage plans and high feature plans, meaning quite a number of features that they are using and so that doesn't necessarily mean that ARPU is going to be lower on the plans at all.

I think the question you are really trying to drive at here is I know some others have lost high ARPU customers and they became lower ARPU yielding GSM customers.

Our plans aren't at this stage at least, aren't being significantly modified just because of the change in technology.

If they were a high ARPU customers in TDMA and they elected to go to GSM, let's say, they're likely going to be a high GSM ARPU customer as well.

There are not going to have an automatic drop off because the number of minutes in the GSM plan are significantly higher for the same price point as they were in TDMA.

That is not the way we are expecting our plan design to be done at this point.

And one of the things you may keep in mind is we have had competitors with Next Generation plans for maybe a year or year and half depending on what part of our market set we are looking out, and of course we have to meet competitively how their plans are shaped.

I think you would find our TDMA plans are not significantly different in shape than a lot of our other competitors are.

I hope that is helpful.

Management, we have no further question at this time.

Please continue with any closing comments.

Thanks again for your interest in RCC.

We look forward to discussing our year-end results with you in February of 2005.

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

You may now disconnect and thank you for using AT&T Teleconference.