威訊通訊 (VZ) 2004 Q4 法說會逐字稿

Welcome to the Rural Cellular Corp. fourth-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, Wednesday, February 23, 2005.

I'd now like to turn the conference over to Mr. Chris Borass, Director of Investor Relations.

Thanks again for joining us for our 2004 fourth-quarter and year-end teleconference.

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

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

And as a reminder, this call is being broadcast live to 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 March 1.

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 1 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 cost and to negotiate and maintain favorable roaming agreements.

We also must be able to service our debt.

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

For additional risks and uncertainties please see RCC's reports 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 financial performance measures.

For a reconciliation of non-GAAP financial measures to comparable GAAP measures please prefer to our website where you will fine the non-GAAP to GAAP reconciliation included in our February 22, 2005 press release.

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

Good morning, everyone.

I know that many of you are interested in the status of our next generation networks.

Before we address that subject, let's take a look at 2004 and the fourth quarter. 2004 was a year of technology changes, customer transition and solid LSR performance.

In March we refinanced our credit facility through a secured note offering which gave us greater flexibility.

Also in March we completed a property swap with AT&T Wireless exchanging our Oregon 4 property for additional strategic licenses and operations in areas adjacent to our South region.

We added PCS licenses that are already playing a strategic role in our development of voice and data network applications.

We signed a significant roaming and network agreement with the new Cingular and are also part of the national GSM alliance.

But most importantly throughout the entire year we dedicated time, energy and financial resources to developing next generation networks in all of our regions.

Ann will speak about that later.

Service revenue for the fourth quarter increased 6.5 percent despite the swap of Oregon 4 and the transition stage of our networks.

As we said last quarter, until we complete our network transitions customer growth will be difficult.

In our TDMA regions customer growth was particularly disappointing during the fourth quarter, but today much of our network buildout is complete in three of our four regions.

As you may recall, our Midwest region launched CDMA services in the middle of last year; this launch has gone well.

We are just a month into the GSM launch in our Northeast and Northwest regions and are encouraged by the customer excitement we've seen so far.

These new networks are providing much improved coverage to our customers and also to the customers of national carriers.

Giving effect to the AWE property exchange, out-collect minutes for the quarter increased approximately 11 percent.

With the push by national carriers to next generation technology handsets, we continue to experience accelerated next generation out-collect minute growth.

In the first quarter of 2004 about 22 percent of our roaming minutes and from next generation technologies.

In the second and third quarters that number jumped to 30 percent and 40 percent and in the fourth quarter it was about half of our total minutes.

These trends give us confidence that our networks are meeting a growing demand and that we can expect stability in roaming revenue going forward from 2004.

Operating expenses for the year increased reflecting the added costs of running multiple networks.

As you've seen with other carriers going through similar transitions, we expect increased cost for handset migration, billing conversion and running multiple networks to affect our financial performance in 2005.

We anticipate maintaining our existing TDMA networks as long as it makes financial sense.

We expect that most of our customers will be using next generation handsets within the next couple of years.

Moving on to our balance sheet.

During the year we repurchased a total of 80,500 shares of senior exchangeable securities.

Reflecting these efforts I am pleased to say that we ended this year with $30 million less debt and other obligations than at the end of 2003.

In closing we remain on task to convert capital expenditures and technology upgrades into revenue growth.

We believe that we have the strategies in place to achieve measurable success towards this goal.

We'll continue to operate our business efficiently in all of our service areas.

We'll continue to affectively deploy our next generation network expansion and we look forward to the future benefits data services will bring to our financial performance.

2004 was full of milestones with our network activities and progress on our billing system conversions on the top of the list.

For myself, shareholders and the Board, we want to thank our dedicated employees teems who have stepped up to the challenge.

With that I'll turn it over to Ann Newhall, our Chief Operating Officer.

Good morning, everyone.

I'd like to start out today by providing some color on our Midwest region CDMA launch which we commenced in August of 2004.

The Midwest launch has gone well and the new products and services have broadened our appeal in the market.

We don't usually provide detailed information by region and do not plan to provide this type of detail on an ongoing basis; however, we are in the midst of our next generation rollout and felt that some initial facts might be helpful for you to understand that our expectations are being met as we go through this process.

We are pleased that our Midwest region posted strong growth and net adds in the fourth quarter and in January the Midwest region posted an all-time record number of gross adds for any month.

Currently 30 percent of our Midwest customers are using CDMA handsets.

Over 40 percent of our Midwest total minutes were CDMA in January, reflecting strong roaming and broad acceptance by our customers.

Our early adopting CDMA customers are generating increased levels of LSR.

Excluding the impact of increased USF payments, our Midwest region CDMA LSR for January 2005 was approximately $5 higher than our Midwest region TDMA LSR during the first 6 months of 2004.

With all of that said, I'm pleased with our Northeast and Northwest region commercial launches of GSM services which occurred at the end of January.

As part of the launches we are adding GSM customers to our new Amdocs billing system.

As we previously said, we will be converting our existing customer base to that system over the course of the year.

Since the introduction of these new networks we've seen real traction in gross adds.

At this point our South region launch is on schedule and on budget.

Our Alabama/Mississippi GSM network should be carrying roaming traffic early in the second quarter and we expect commercial launch of GSM services for our customers soon thereafter.

Our network expansion efforts that we discussed last quarter are also proceeding nicely.

For example, we've recently completed our network in Lewiston Auburn, Maine, eliminating a hole in our service area and have established distribution there.

We believe these edge-out efforts, which are adjacent to our home service areas, will provide synergistic opportunities for us.

We expect our total cell sites to increase in number from approximately 860 at the 2004 year-end to about 1,000 by the end of 2005 reflecting the completion of the edge out strategy and other network improvements.

We've been steadfast in our belief that 850 MHz spectrum is highly desirable to service rural America because of the degree of coverage it provides.

Because of this effective degree of coverage we believe we will become the carrier of choice in our region for mobile Web applications.

We are committed in the GSM alliance to have EDGE capability and we have deployed GPRS EDGE technology in our GSM regions.

EDGE capability differentiates our service from many of our competitors and will provide approximately double the speed of dial up initially.

Although very early and with a relatively small number of mobile Web customers, we are optimistic about the revenue possibilities which include roaming revenue.

Although not yet significant in revenue, data roaming increased 6-fold from December to January.

We anticipate additional enhancements to increase network performance as consumer demand for higher data mobile -- data speed mobile Web applications develop.

All of these network tools are bringing products and services to our customer under the Unicell brand.

And we are extremely happy to be operating with only one brand which we own.

And with that I'll turn it over to Wes Schultz for our financial wrap up.

I'd like to provide some additional detail about our fourth-quarter and 2004 financial results.

For the year EBITDA was 225 million including Wireless Alliance EBITDA of 7.2 million, meeting our midyear guidance.

Service revenues increased 6.5 percent for the quarter to 96.5 million despite the AWE property swap which involved the loss of approximately 21,000 net customers and the challenges we faced having only TDMA networks through much of 2004.

Contributing to our improved service revenue this quarter was USF payments which increased to $9.1 million compared to $3.8 million for the fourth quarter last year.

For the year we received $28.1 million, an increase of approximately 220 percent over the prior year.

LSR increased to $48 for the quarter as compared to $44 last year largely reflecting the increase in USF payments.

Roaming revenue for the fourth quarter was $23.8 million compared to $33.4 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.

Also impacting roaming revenue this quarter was the strong push by Cingular to transition its customer base to GSM.

Since our Northeast and Northwest GSM networks were not yet completed and we had not yet begun network upgrades in our South region, we undoubtedly missed opportunities for roaming minutes.

In spite of this, total out-collect minutes for the fourth quarter increased approximately 3 percent over last year.

We are pleased with this increase given the status of our network transition and the loss of roaming minute in Oregon 4.

On a pro forma basis, taking into account the AWE property swap, roaming minutes for the quarter actually increased approximately 11 percent.

As we continue our next generation networks and footprint EDGE (indiscernible), we expect to capture more of this unmet demand.

On to expenses.

We have taken a disciplined approach regarding TDMA handset replacements because we know that during our network transition we will face an accelerating demand for next generation handsets which is reflected in cost of equipment for the quarter declining by 8.9 percent to $9.7 million.

Network cost increased 19.2 percent to 27 million dollars for the quarter reflecting increased in-collect cost and the cost of operating multiple technology networks.

In-collect expense was $11.6 million this quarter.

SG&A increased to 36.6 million compared to 35.3 million last year primarily reflecting USF regulatory fees which increased 23 percent to $3.2 million for the quarter.

Interest expense was 42.1 million this quarter and cash interest expense was 7.9 million for the quarter and $101.4 million for all of 2004.

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

Under SFAS 144 "accounting for impairment for disposal of long-lived assets", and FAS 142 "goodwill and other intangible assets", we performed the annual impairment test for various long-lived assets, goodwill and licenses.

Based in this analysis we determined that certain of these assets were impaired and that a $47.1 million non-cash impairment charge should be recognized in the fourth quarter.

Now turning to capital expenditures.

We made significant progress toward the completion of our next generation networks in the Northeast and Northwest which comprise the bulk of the $32.8 million in capital spending this quarter.

Regarding our capital structure, consistent with our past practice we again indicated that we would not pay the cash dividend on our senior exchangeable preferred stock.

At the end of the quarter our most restrictive financing terms provided for approximately 90 million in restricted payments.

Looking ahead, we do not anticipate a decline in roaming revenue as we expected and experienced in 2004.

Roaming yield declined 5 cents during 2004 from 2003 and was approximately 15 cents in the fourth quarter.

In 2005 we expect roaming yield to be approximately 13 cents per minute, reflecting a variety of contracts and an expected mix of minutes of use.

We expect USF payments to be in the $30 million range for 2005.

Taking into account our anticipated level of customer migration, the cost of operating our multiple networks including additional billing costs, we believe EBITDA for 2005 will be in line with analyst expectations -- $205 million to $215 million range.

We expect capital expenditures to be in the 100 million range which includes the continued buildout of next generation networks together with network edge-out effort and added network coverage.

With that, thank you and I will turn the teleconference back to John who will poll you for any questions you may have.

(OPERATOR INSTRUCTIONS) Sandy Liang, Bear Stearns.

I'm just wondering if you can elaborate on the increased equipment expense through '05 as you migrate TDMA customers.

In the past I guess we've talked about a natural migration rate through churn and average phone life.

Do you plan on accelerating the rate at which you migrate customers to the new technologies?

We believe that by the year-end approximately half of our customers will have migrated through churn and through our plans to migrate customers.

At this point in time we're very early in the process with only a month into the migrations in two of our regions.

And so at this point we do not anticipate accelerating that rate.

Perhaps just a point of clarification here.

The 50 percent that Ann's talking about would be what our customer base would be -- about 50 percent of our customer base would be on next generation.

That would come from both migrations as well as, of course, new customers that are coming on board that come on those technologies.

To some extent we can control the amount of migration through what we price our phones for our migrated customers and we will certainly be paying attention to that.

But the 50 percent that we're talking about takes into account the kind of pricing that we think makes sense for us but also makes sense for our customers.

And as we talked about, there certainly could be some advantage for us in having our customers on the new technology because we are experiencing higher LSR from those customers in a very early -- statistics that we have been able to (inaudible) TDMA world that we have in the Midwest.

So do you plan on -- I mean compared to the outlook you had at the end of the third quarter say with your higher ARPU and the new technology do you plan on accelerating the rate?

I.e., giving customers more incentive to get the new technology because you're finding you're making more money off those same customers?

Well, as always we have a balanced approach in looking at both what we anticipate to get in revenue and the cost of the migration that we incurred by way of subsidy.

But I think that although we've given you a glimpse of comparative information between our TDMA base in the Midwest and the CDMA revenue, I would caution you a bit in saying that we anticipate that the first people to move are going to be early adopters and heavy users and so that it may not be representative of what we see over time.

But I assure you that this is something that we are looking at monthly and watching very closely.

And as it makes financial sense we will accelerate it if that's appropriate for us and contributes in a positive way to the bottom line.

Just one last quick question.

The $5 higher ARPU end CDMA, are you finding that you're getting the same customers to pay you more money or do you think it's because the CDMA customers are early adopters and they were higher ARPU customers to begin with?

It's a combination.

We've looked at samples of customers that were on existing plans and went to new handsets but stayed on the same plans and many of them seem to just simply like their phones and like the products better and use them more.

Whether or not that's a trend that we'll see as we have -- our complete base moved is something that we're watching very closely.

But it certainly seems to be encouraging right now.

Okay, great.

Thank you.

Rick Prentiss, Raymond James.

A question on the path beyond GSM GPRS.

Are you putting in any EDGE capable equipment as you're spending the CapEx on those GSM next generation technologies?

And have you been approached at all yet by Cingular as far as thinking about UMTS in your region?

I think as we mentioned in the script, we are rolling out EDGE and GPRS throughout our GSM networks.

Part of that is a result of both our extensive roaming agreements with Cingular and our participation in the GSM alliance with Cingular and other GSM carriers.

And in fact, we have extremely fast networks as compared to our competitors in those regions at this point in time.

One of the advantages of our strong relationship with Cingular and our participation in the GSM alliance is our ability to work with them looking at UMTS and other services to come to make the most appropriate financial and business decisions in that regard.

But it's clearly something that is on the table to look at and consider the best way of implementation and moving forward.

We do not intend -- I should say we do intend to continue to have the high-speed networks as the demand is present in our regions.

Any idea as far as time frames for UMTS would go in your areas?

We don't have that at this point in time.

It's developing.

Okay.

And then which markets are in your Midwest region, how many pops are in that area?

Our Midwest region encompasses our Minnesota and North Dakota cellular licenses as well as the Wireless Alliance.

That information I know is in our publicly filed documents.

I don't have it right at hand, but we'll give you a call and let you know.

But it's part of our last year's 10-K certainly.

Okay.

And final question, there's been a lot of M&A activity in the space.

Can you update us as far as what your thoughts are about either getting bigger in the license areas or divesting some of the different license areas that you have in your different clusters?

As we did last year in the AWE property swap in the Northeast and the expansion of contiguous footprint in the South as well as licenses in a number of our regions, we'll continue to look at those kind of opportunities to strengthen our footprint and gain additional efficiencies in each of our regional operating areas.

As we've invested heavily in both our networks as well as our customer efforts in those regions we rather like the regions we're in and we think that as we continue to grow we look for ways to edge out not unlike we did in the South and to a degree in the Midwest.

Ric, just to finish your question on the pops; we have about 767,000 pops in our Wireless Alliance markets and about 600,000 pops in the Midwest.

What we also have is some overlap of licenses where we have both CDMA and GSM now in the Fargo Grand Forks markets on the western portion of that region.

So we're not double counting those pops in those numbers.

They're not double counting them, just to make that clear.

Thanks.

Ethan Schwartz, CRT Capital Group.

Just want to drill down on some of the roaming numbers which were really impressive.

First of all, of the 11 percent same market up, what proportion of that growth was attributable to new GSM coverage that you've turned on?

And similarly what proportion of your roaming minutes in Q4 were in markets in which you may have TDMA and are moving to GSM, but your roaming partners, particularly Cingular, already has GSM and therefore you won't replace the TDMA minutes necessarily with GSM minutes?

We had talked about -- in our prepared comments that we had 50 percent roughly if our minutes in the fourth quarter were on next generation technology.

For us that means (indiscernible) TDMA in the Midwest, or they were at GSM in our Wireless Alliance or Northeast or Northwest markets.

So from that standpoint about half of our minutes are now coming from those technologies versus analog or TDMA legacy systems in all of our regions.

I'm not sure I quite understood your last question, Ethan, could you --?

Sure, some of the other rural roaming carriers have broken out minutes that they're currently -- roaming minutes that they're currently earning on TDMA but which are in markets or regions where their roaming partners have GSM coverage but not TDMA coverage.

And therefore as those roaming partners subscriber base migrates increasingly to GSM, those roaming minutes might just be lost because they're going to migrate onto the roaming partners own GSM network.

But when another carrier, for example, said that that was roughly 10 percent of their minutes in this quarter.

I wonder if you have a comparable statistic that you can break out.

We don't have comparable statistics that we've broken out or that we've disclosed previously.

I guess what we can say generally and this has been true over the last year and will be true in the future is that we do have areas in our regions where other carriers do have next generation networks or portions of networks but as we're looking forward and in the guidance that we've provided today we've taken that into account because we also have areas where through our roaming agreements and otherwise we have newly gained preferences in GSM which we did not have previously and newly built out areas that we did not have previously.

So, from our standpoint, as always, it's a balancing act.

Okay.

And then onto in-collect issues.

I just wanted to ask you if you'd give us the in-collect deal for the quarter and what your outlook is for the coming year -- the in-collect price and what your outlook is for the coming year.

Our in-collect cost in 2004 has been very stable; it's been in the 12 to 13 cent range in each of the quarters and we anticipate that going slightly in 2005 probably by a penny or so.

Okay, thanks.

And then I wanted to ask you about the Midwest.

Verizon is buying a market in St. Cloud.

I know that doesn't overlap with you, but they also acquired a bunch of markets in Auction 58.

And if you combine those markets with markets that Western Wireless has and might go to ALLTEL, and if one assumes that ALLTEL becomes the preferred roaming partner for Verizon that might -- (indiscernible) Verizon builds out all those options at (indiscernible) that would cover a lot of your territory.

Are you looking at or is there a risk that you might lose Verizon as a roaming partner in a bunch of your Midwest markets?

And can you give us a sense of what proportion of your overall roaming comes from Verizon and whether there are other CDMA carriers that roam significantly on you in the Midwest?

Well, that was about 25 questions that we'll try and pick that apart a little bit.

First of all, it's true.

Verizon has acquired some licenses that overlap our area and by the way we do have licenses in St. Cloud, that's a network that we've operating in conjunction with AWS in the past.

I mean when AWS was a separate company.

But let me address your overall question because from our point of view the situation really hasn't changed.

With the carriers who are our significant roaming partners, they often have licenses that overlap where we are.

And sometimes they are operating parts of those licenses as the previous question about some overlap of networks.

Sometimes we maintain those licenses for them and do what's necessary to preserve the licenses where they're not actively building them out or using them or sometimes they do that.

There's a whole combination of things going on.

And as we've said before, if any particular carrier wants to put the capital into acquiring the licenses and to actually building out in our areas they can always do so if they choose to focus on one of our areas.

And so as always, we focus on the relationships that we have, the reasons that it is better for them to utilize our networks rather than building their own, and we have been primarily successful in this and will continue with the new generation.

Because of our 850 spectrum it is simply more economical and stronger to buildout the network in 850 MHz spectrum.

And we can provide a service to those roaming customers as we integrate our networks and have features and data services available to their customers in a way that it would be difficult for other carriers to do at the same degree in a different range of spectrum.

Bur can they do it?

Yes, of course they can do it.

Do we contemplate it?

Of course we do, we have to take that into account in our negotiation and our other activities and, in fact, where we build our networks out.

In fact, you may now noticed that in some of our cell site numbers that we have strengthened our network considerably by our rollout of next generation services.

We are not just doing a one for one overlay even though in many situations that would be quite adequate at the 850 MHz spectrum that we're operating in.

Instead we are deepening our network and have an increased number of our cell sites in the coverage areas and in part to discourage those kinds of overbuilds because we're already providing broad and high-quality services to our roaming partners.

I hope that addresses the bulk of the 25 questions.

That does.

And also, thanks a lot for breaking out the information on the Midwest.

That was very helpful at the beginning of the call.

Just as a note, maybe a bit of a detail there.

We do not overlap with Western Wireless -- and soon to be ALLTEL after that deal is completed -- except in a couple of markets in the Midwest in the very northwestern portion of our area.

It's not a significant overlap, just to clarify that part of it.

Thanks a lot.

David Shear, Lehman Brothers.

I wanted as a follow up on the -- well, to just touch on the churn issue, your lower retention rate really in the quarter dropping to 97.6 percent.

I was wondering if you could just touch on what some of the drivers were as this has kind of weakened up over the last couple of quarters and how much you think GSM alone in '05 is going to improve that.

Do you look to see that rate coming back down?

And then kind of more broadly in terms of postpaid subs, as you look into '05 do you think the launch of GSM -- commercial launch will see that number stabilize or maybe even start growing postpaid subs again?

That's my first question.

Sure.

Well, we like to talk about retention rather than churn because we like to think of keeping our customers.

But certainly, retention did not meet our expectations in the fourth quarter.

But, like many aspects of our business there are many pieces to what makes retention.

But I think I can answer you most directly by saying where we did not -- in our three regions that we did not have next generation services, we did not have picture phones for people to buy for Christmas.

And if I had to pick any one factor, that is a factor that was just very difficult for us in fourth quarter.

And I wish I could say otherwise, but that is the way it was.

And so we regret that, but it's one reason that we felt that the strong reaction in our GSM regions in the last month has been encouraging to us that it's not a prospect that will continue for us.

So we hope that -- and believe that our retention will be more in line with what we've been used to in the past as we move forward.

Is it too early to say that you could stabilize the recent declines in postpaid subs that you've seen year-over-year in '05 with that full arsenal of products?

Well, I think it's too early to say that we're there, but to say that we're planning for an increase in post paid subs as we work forward through the year is certainly -- would certainly be accurate.

We have a plan for that, we regret it, what we faced is a lack of tool in fourth quarter, but we believe we have those tools in place except in the South, as we mentioned, which will be built out in the second quarter.

And so having those tools in place and given our initial encouragement we certainly believe we're working our plan in the proper way to reach that goal.

Another question is on the preferred side and, Wes, I forget if you mentioned if you had bought back any preferred in the most recent quarter?

We did not buy any senior preferred in the fourth quarter.

And it's been obviously declining over the last couple quarters and obviously nothing now in the most recent quarter.

Just kind of your thought process on why those repurchases have stopped and maybe kind of more broadly as you look at what some of your peers are doing and the recently amended Dobson structure which I'm sure you've seen in terms of the cash and new preferred.

Any thoughts there on maybe something comprehensive with your preferred balance?

As far as buying back the senior preferreds in the fourth quarter, we elected not to.

Simply to maintain liquidity and to evaluate our options is a part of really a lead into I think where you're going with the second question.

We continue to evaluate our capital structure.

I don't think it's any secret that we would like to be able to improve our capital structure.

We do have a number of preferred stock that make it complicated, to say the least.

To be able to do a comprehensive kind of improvement to our capital structure, but we continue to evaluate those and look for ways to perhaps do that.

And that's about all I can really say at this point in time.

Thanks, Wes.

Pat Dyson, Credit Suisse First Boston.

Wes, just first a quick clarification.

Did to state that you expect roaming revenue to be flat or I guess you said that it's not going to decline in 2005?

I think that's what we said, Pat.

Okay, I just wanted to make sure that I was clear on that.

And then secondly, on USF.

USF has obviously been a big piece of your '04 cash flow and is expected to be so for '05 as well.

Two questions.

First, where do you stand with your applications for New Hampshire and South Dakota whether those have been completed or not?

And then secondly, do you feel in anyway that those monies are at risk?

Obviously the USF issue is on the docket with the SEC and just wanted to get your sense.

We've heard from wireline companies and some other wireless companies; we just wanted to your sense as far as thought on the risk of USF going forward for Rural Cellular.

As far as the applications in New Hampshire and South Dakota, the applications are there, they're still pending (indiscernible) certification.

However, we continue to make progress in those areas and we would anticipate that we would have a successful outcome sometime during 2005.

The timing of those things are very difficult to predict and so we tend to take a pretty conservative view on that.

And so we're not necessarily planning for significant amounts of USF payments from those states in 2005.

As far as the stability of that revenue stream, I'll lead Rick handle that.

Obviously we're continuing to watch the various commentary and what plays out in Washington whether it be at the SEC let alone in Congress.

And we're convinced that it's probably not going to look the same in the future as it does today.

Do we think it's going to go away?

No, I really don't think it's going to go away.

I'm confident that some of those USF proceeds will continue to go the way it has been in the past to wireless carriers as well as others.

We contribute a significant amount of funds to those pools and we've devoted a great deal of energy and capital towards serving areas in the -- rural areas where we serve providing very valuable services to constituents of rural America.

So we believe that it will continue to play out.

Obviously what goes on in Washington is of great interest, but on this particular matter it's pretty much established in the Telecom Act of '96 that USF will be there and there's a lot of strong sponsors in Congress that believe this is an important part of providing reliable service and even expanding it into broadband applications.

And we think that we will continue to be able to provide those services and be eligible for the funding that is in the pools.

The $30 million guidance that we'd given for this particular revenue stream we certainly don't think is at risk with anything in 2005.

I appreciate your comments.

Anthony Klarman, Deutsche Bank.

I wanted to drill in on a couple of topics that are already kind of raised.

If you look at the EBITDA guidance of 205 to 215 you're also guiding roughly to flat -- actually call it slightly higher USF by a couple of million dollars and flat -- or I guess not declining -- roaming which I guess would seem to imply that where some of the weakness may be may be actually in the subscriber business.

I'm just wondering if you could talk about the trends.

Is there a change in between the first half of the year and the second half of the year in the subscriber business and might the first half of the '05 results be weaker than the second half as you continue to finish the migration and the upgrades and might we see a better actual run rate EBITDA trend in the second half of '05 than we do in the first half?

Then I have a couple follow-ups.

Well, Anthony, I think I want to try to make sure I clarify one part of what you're talking about there.

I do believe that there are a number of forces that can make the second half of the year EBITDA perhaps on a run rate basis stronger than the first half.

The first half isn't so much driven by -- when you say subscribers I'm believing you're indicating that because the subscriber numbers are down on a year-over-year basis postpaid let's say because of where we were in the first quarter taking into account the Oregon 4 exchange that that's what's going to be driving it.

In spite of that we saw service revenues increasing on a year-over-year business because of higher LSR.

Certainly the new technologies, we do have a strong belief that they will produce more LSR.

But the real issue for us in 2005 is going to be the additional cost of maintaining dual networks, certainly having migration of customers from TDMA handsets to GSM handsets where we had worked pretty hard in 2004 to limit the amount of TDMA to TDMA handset upgrades because of the looming next generation technology.

We will have more migration certainly in 2005.

That will impact it.

We also are in the transition phase of our billing networks to migrate our existing customers onto Amdocs, so we need to maintain dual billing networks for some period of time throughout 2005.

Those are the kinds of things that are adding to the costs that are impacting EBITDA, not necessarily impacting a stress on the top line.

I guess if we look at the roaming side, you reported a full-year yield of 16 cents and I guess the guidance is around 13 which implies a decline of 18.75 percent.

To keep roaming unchanged that would imply minute growth of something around 23 percent or so.

I'm just wondering if you guys can provide some clarity.

Is there the effect of the swap in here that's impacting some of this or is that guidance on a pro forma basis adjusted for the swap -- that minute of use growth would seem to be large against a backdrop of what others have been reporting in the space?

First of all, we did not give that percentage growth so that's your math.

But one of the things that we've tried to stress throughout several of the calls this year and again today was we have seen a significant migration of customers from the likes of Cingular from their TDMA to GSM and throughout much of 2004 we didn't have inventory of minutes to provide those customers when they roamed into our service area.

We believe that now in both the Northeast and the Northwest we've got the bulk of the networks available for their customers to use.

We would expect in the South that we'll have networks available relatively early in this year and we also have the edge-outs where we are expanding our network where we didn't have network in 2004, in some pretty important areas from a roaming perspective for some of the national carriers to utilize our network.

So a combination of all of those factors, we believe, gives us confidence that there will perhaps be minute-of-use growth that is different per se than maybe some of the other carriers.

We look at it from our perspective.

I guess that's what I am getting at.

How much did you -- is it possible to quantify how much you left on the table by not having the network migrations and upgrades completed at various points during the year?

I think that is a pretty much impossible number to calculate, because you don't know how many people are out there trying to use your network, and you said, no thanks.

You would have to guess as to how long they would have kept those calls and how many calls they would have made.

I think it is fair to say it's probably a pretty significant number, just based on how fast the minutes increased when we did have networks available.

I think Rick had talked about we were at 22 percent in the first quarter; 30, 40, 50, essentially over the second, third and fourth quarter.

That was really, I think, a direct result of two things.

Number one, us having network, and number two, the rapid migration of the likes of Cingular to their next generation.

So we really have not been able to ascertain how much lost opportunity there was.

I think it is fair to say that it is probably a pretty significant number, though.

Final question, I was wondering from a governance perspective if the company was considering any changes to the Board make-up.

In advance, I guess the preferred holders would have the opportunity to elect a couple of additional members to the Board upon an additional missed dividend payment and how you were kind of looking at that outcome, I guess excluding the possibility of any potential refinancing or other things that you're considering doing with the preferred.

To that point, at the Board level we are always looking at the make-up of our Board and how we want to think of it going forward, but we don't have any immediate plans to make any changes.

Thank you very much.

Romeo Reyes, Jefferies and Co.

My question was on the preferred as well.

Longer-term, you are looking at roughly 500 million of preferred right now.

How do you fix that capital structure?

You have a small market cap, less than $100 million right now, and 500 million of preferred.

And obviously, you have Madison Dearborn that is in there in the class and deeply subordinated preferred.

Where are your thoughts; where are the Board's thoughts on recapping and fixing those preferreds?

I think your point is one that is valid, and it is what makes this very complicated.

It is not a very simple, easy solution, so to speak, to change the make-up of our capital structure.

It is something that we constantly are talking about at the Board level, and I don't know that it is something that we would specifically get into detail on a call like this as to what our intentions are.

But I think it is important that you understand that we are looking at how we can improve it.

It is not a simple fix.

It requires a number of different investors and groups of investors to look at this probably together, and certainly we are looking at what one of our peers is going through in a tender right now and trying to learn from that as to what the investors might be willing to do.

Kevin Roe, Roe Equity Research.

Just a quick clarification regarding the trend of EBITDA margin pressure through '05.

Are we to assume from your previous comments that you are expecting peak margin pressure in the first half of the year and then more recovery in the second half?

Well, part of that is there is some seasonality impact too.

So in our business, you still can't look and assume that EBITDA margins would otherwise be flat throughout the year, all other things being equal.

Third quarter has historically been our strongest EBITDA and EBITDA margin producing quarter, and because of the areas that we serve, roaming is still going to be probably highest, I would guess, in the third quarter.

And because of that, third quarter should have higher EBITDA margins that go along with it.

I think the EBITDA margin that we have in 2005 is going to largely be predicated on how quickly people migrate and the amount of migrations in a particular quarter.

When we migrate a customer, we typically are going to incur a handset subsidy to migrate that customer from TDMA to either GSM or CDMA.

And although we think that that can be a prudent financial move on our part from a longer-term perspective, because that customer, number one, it's likely to help retain that customer which will drive our retention rates higher, which is certainly one of our goals; also we believe it will help increase our LSR from that particular customer.

Given both of those things in a particular quarter, certainly if they do it at the end of the quarter, we have got all of that subsidy cost that has impact on margin, and we don't have enough time to earn out much on that particular transaction.

So the timing even within the quarter of when we do migrations is going to impact our margins.

We look at it from a longer-term perspective when we look at migrating customers, either incenting them or trying to balance the number of migrations; it's based on a longer-term view than just one quarter.

I guess another way of asking it is that particular cost for migrations, are you internally budgeting migrations to ramp through the year to be flattish?

What are you anticipating?

Certainly we would expect it to ramp if for no other reason that we have the South region, which is a pretty significant part of our company, going to be commercially launching their GSM networks in the mid -- or early, mid part of this year.

And because of those numbers, we would anticipate migrations being the highest in the second half of the year, simply because all of our company will be on next generation by that point.

Okay, thanks.

Rob Hopper with UBS.

Can you first just give us a sense within the EBITDA, how much are you actually expecting of an increase for running the dual networks and the billing costs?

Can you quantify that in some way for us?

In addition, can you give us any sort of sense of how the subgrowth has been over the first two months of the year?

At this point, we are not giving guidance specifically as to the additional costs of running the dual networks.

I think you can get some of that certainly from looking at what our network costs have done over the last couple of quarters, because much of the cost of running dual networks is actually in anticipation of being able to put customers onto those networks.

Much of the cost relates to having, for instance, a second T1 that might need to be brought in to a cell site to have the transport back to our switch.

You need to have that in place before you can even start doing test calls in some cases, or certainly having roaming and then ultimately your customers using that network.

So we have experienced that already to some degree in the second half -- for that matter, all of 2004; some of it in the Midwest region even earlier.

We will now see an additional buildup in the South region as we are preparing for that launch later this year.

The tail-end of the fourth quarter and certainly now in full force in the first quarter, we're starting to see the impact of some of those additional expenses for our South region.

So those are the kinds of expenses that we are talking about and running multiple networks.

I guess that is one part of it, but certainly that is a big component of it.

What about on the billing side, if you can give us some (indiscernible), and on sub numbers as well?

Again, we aren't giving specific guidance on the billing.

I think it is fair to say that as we are migrating customers over, we have two billing systems essentially in each of our regions until that is finalized, and there are costs associated with having both billing systems running.

The good news is in that particular case, we would expect that we will start to see some real economies of scale after those conversions are complete.

And heading into 2006, it gives us a nice platform for economies of scale, not only in that we don't have dual networks but there are a lot of efficiencies that the new network will provide for us; things like customers being able to have visibility in their bills, for instance, online rather than having to call in or get information off of their phone.

So those are things that we are excited about that give us confidence that we can grow our customer base and not have to necessarily increase cost proportionally with the customer base growth.

(OPERATOR INSTRUCTIONS) Rick Prentiss, please go ahead.

I hate to kind of beat this horse.

I just want to make sure I'm clear on the time frames.

In the Northeast and Northwest regions, you had GSM available for roaming in what time frame, and the commercial was January of '05; is that what I heard?

Yes, the commercial availability to our customer base was the last part of January '05.

The roaming accessibility began at the end of 2003, in late December, and has continued throughout the year.

But it is important to note that with each month of 2004, we added cell sites to that.

In fact, we had close to 400 cell sites that were built in 2004, so you can see that that grew very strongly throughout the year.

So it was not a steady progression, so to speak, there.

There has been a significant number of additional sites that have been moved onto GSM even in 2005, just because as Dan talked about, we had roaming availability in 2003.

That was on a small portion of our network, and it has continued to grow throughout this period of time.

When you talked about you ended with 860 cell sites at the end of '04 and hope to be about 1000 by the end of '05, you lost I guess a chunk of sites when you swapped out Oregon 4.

When you're talking cell sites, if you have a TDMA site and a GSM site, are you counting that as two sites for us now, or is it still just one site, if they're collocated?

It is still one site if they're collocated.

Bear in mind also, we did lose some sites in Oregon 4, but we also gained actually more sites in our South region than we lost.

We got bigger geography, a lot less customers in that swap.

And then the CDMA in the Midwest, what was the time frame on that one for roaming availability?

That would have been all year availability again, but some of the same phenomenon that took place.

And there was an added piece of complexity there because throughout the year we started gaining more and more minutes from our major roaming partner in that region.

There were really two things that happened there.

About two-thirds of the cellular network was covered at midyear 2004 -- by end of July and the rest of the overlay and buildout and the overlay into portions of the law markets occurred towards the very end of 2004.

Very similar pattern in the ramp up and acceleration of minutes from Verizon happened as well over that time period.

So it does look like the ramp you gave us as far as the roaming minutes increasing on the next generation technologies in your rollout and cell sites, that all hangs on what you're suggesting and where we could see the trend head next year?

Yes.

And one thing that's a little bit different about the Midwest -- this is really kind of a side note -- that is CDMA with analog coverage.

So many of our roaming minutes there from Verizon were analog as well.

So that was not as dependent upon the cell site build as it was on the move of the preference -- Verizon's ability to move its customer’s handsets to focus on our networks.

Have you noticed any changes from Verizon on the PRL as far as trying to shift that around at all?

Well, not since they granted us a preference I should hope.

Certainly to get that into place, that is what I was referring to.

It does take time to actually effectuate a preference move which is what the process that Verizon underwent mid last year with us.

Great, thanks for the follow-up.

Sandy Liang.

Can you just tell me what proportion of your sites on which you've built out 1.9 GHz cell sites for availability and do you expect a pickup in T-Mobile roaming in '05 aside from what's in Wireless Alliance already?

I'm afraid I don't have at my fingertips the difference between our 1.9 sites or 1900 sites and our 850 sites.

I think one of the noteworthy item there is that we have been putting in the GSM, particularly in the Northeast where some of our initial plans were to put the GSM at the 1900 level, we are now putting it and have in most cases brought it to the 850 level as well.

We have found that the coverage of the 850 is just much stronger.

I was going to mention that -- we've mentioned on these calls before that it was helpful to us to have 1900 licenses which overlay our 850 license because there were some more cost effective and time effective transitions where we could build out some areas in 1900 MHz and have it available and then transition those sites to 850.

We have done that in areas particularly in the Northeast and that's part of the reason that it's difficult to talk about the transition.

But overall, outside of our Wireless Alliance market, the vast majority of our cell sites will be at 850.

You also asked about T-Mobile minutes.

I think as many of you are aware, T-Mobile only really recently in the last year, other than our Wireless Alliance market, permitted or encouraged roaming onto other carriers' networks.

And we have certain arrangements for them for providing service at 1900 in various portions of our network and they are now selling handsets that both at 850 and 1900.

And so we do expect those minutes to increase over time.

Thanks.

Romeo Reyes.

Going back to the preferreds.

I'm trying to figure out I guess -- you have basically three options here, you can either give the preferred holders debt -- new debt, you can give them equity, you can give them cash -- that's pretty much the options here.

It seems to me that based on some of these covenants that you have, at least on some of the more restrictive total debt to EBITDA covenants, that you have room for about 1.5 turns of incremental debt that you could potentially distribute to the preferred holders.

And if memory serves me right, I think you had a little over $80 million of restricted payments availability on your various baskets of cash that you could potentially distribute or use to buyback preferred or to distribute I guess.

So that gives me a little bit over $400 million of total capacity excluding any new shares that you could potentially issue to the preferreds.

Can you perhaps just run through -- is my math correct, number one?

And then number two, can you just give us a sense as to whether or not you would be considering issuing preferred for debt exchange, preferred for debt plus cash or preferred for debt plus equity and whether or not you'd be issuing more debt at the 9 5/8 and 9 3/4 level?

Well, first off I want to correct -- it's not 80 million.

We said earlier that our most restrictive covenant is a 90 million roughly restricted payment basket.

And you are right; there is some availability particularly under the senior unsecured level that we could incur debt.

I don't know if it's the 1.5 turns specifically that you're alluding to, but if there is a significant amount of debt capacity there that under the right situation we may consider looking at using strategically to help improve our capital structure.

Beyond that I think for us to use this forum to sit and talk about what our strategies might be and how we might go about doing it is just probably not appropriate for this call.

I'm just trying to figure out what you can do, not what you're going to do.

I know what the covenants of your various credit agreement or various bond indentures allow you to do.

That's it.

I don't know that we have enough time to grow through each one of our bond indentures or our certificates of designation specifically.

They're filed and obviously that's a call that you guys need to look at.

We look at them and, as I said, there is availability under the senior unsecured that we could use.

That's probably the area where there's the most room within our indentures.

And I'm showing we have no further questions at this time.

Please continue.

Wrapping up, 2005 may be one of the most exciting years in our Company's history.

Our networks are now much better positioned to compete in an increasingly competitive environment.

Although it is difficult to fully anticipate what role data will bring, we look forward to its potential and its utilization of our networks.

With that, thanks again for your interest in RCC and I look forward to discussing our first-quarter results in May.

Ladies and gentlemen, this concludes Rural Cellular Corporation fourth-quarter 2004 conference call.

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