威訊通訊 (VZ) 2005 Q1 法說會逐字稿

Ladies and gentlemen, welcome to RCC's first quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS).

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

Please go ahead.

Thanks, Mary.

Good morning, everyone.

And thanks for joining us for our 2005 first quarter teleconference.

This teleconference was preceded by our first quarter 2005 Press Release which was to be released late yesterday.

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 www.unicel.com.

An archive will also be made available in the Investor Relation 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 May 19, 2005.

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 call's one-hour time allotment when asking your questions.

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

These risks and uncertainties include, but are not limited to, competitive considerations, success of customer enrollments and the 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 network technologies.

For additional risks and uncertainties please see RCC's report on Form 10-K for the year ended December 31, 2004, and our other filings with the Securities and Exchange Commission.

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

For reconciliation of non-GAAP financial measures to comparable GAAP measures, please refer to our website where you will find the non-GAAP-to-GAAP reconciliation included in our May 9, 2005 Press Release.

And with that I'll turn it over to Rick Ekstrand.

Thanks, Chris.

And good morning, everyone.

As you know our network and billing teams have dedicated a great deal of time and energy toward the development and implementation of a comprehensive, next-generation network solution.

Our primary goals are to leverage the strategic advantage of our real service areas with our 850 megahertz spectrum, while maximizing roaming revenue and providing leading-edge wireless service to customers.

And today, we are well on our way to achieving those goals with a launch of next-generation networks in our Midwest region last summer, and our Northeast and Northwest regions earlier this year.

We're beginning to see the results of this reinvention, and we are encouraged by the demand for these new products and services.

Not since 2003 have we seen this kind of activity in a single quarter with 43,000 gross customer editions and 56,000 customer migrations.

As a point of reference, we had approximately 30,000 handset upgrades during the first quarter of last year.

This customer momentum is good news.

Benefiting from the new products and features we are selling, our LSR increased by approximately $4 over last year at this time.

And just to be clear about half of this increase is from service pricing.

Wes will talk more about that later.

Roaming has also been dramatically affected by next-generation technology.

Last year, we reported that less than half of our total roaming minutes were GSM or CDMA.

During the first quarter, this percentage has jumped to 57%.

This rate of increase has been consistently strong over the last four quarters.

And as we turn up our South region and complete our Northeast and Northwest region overlays, we are confident that we'll experience further growth in outcollect minutes.

Having been in the business as long as we have, we realize that a successful transition to new technology is an enormous undertaking.

With the scale, acceleration, and complexity of the Northeast and Northwest network launches, we experience great demands on our networks and customer service teams.

While, the GSM customer experience has been very good, we did not live up to our own TDMA customer service expectations in these region, which adversely affected our TDMA churn in our overall net customer growth.

On a positive note, we replaced many of our TDMA customers who turned with GSM customers who have higher LSR.

As we experienced in our recent Midwest region launch, it takes time for the advantage of these networks to really get to gear.

We continue to believe that these networks will positively impact customer growth LSR and increasing roaming minutes.

So we continue to stay focused on the task of converting capital and technology into revenue growth and improving our business.

With that, I'll turn the call over to Ann Newhall for an operations wrap-up.

Thanks, Rick.

And good morning, everyone.

I would like to start out today by providing some color on the status of our next-generation network construction.

Our Midwest region CDMA launch and our most recent GSM launches.

We ended the quarter with 72% of our 920 cell sites carrying next-generation technology, included in this were 104 new cell sites added since March 31, 2004.

We expanded our coverage to include the MSA of Lewiston/Auburn, Maine and several smaller adjacent service areas.

We continue to believe these and other [adjout] efforts, which are adjacent to our home service areas will provide nice synergistic opportunities.

Our transition to our new customer care and billing system continues to make progress.

We have been serving GSM customers on a transitional version of this system since February.

We expect the conversion of our existing Legacy customer base to take place over the balance of 2005.

We have been very pleased with the customer demand for our next-generation services and devices.

Overall at March 31, 2005, approximately 15% of our total customers are using next-generation handsets.

Nine months after we introduced next-gen products in our Midwest region, approximately a third of our customers there are using CDMA handsets at quarter end.

Less than two months into our launches in our Northeast and Northwest regions, approximately 11% of those regions' customers are on GSM handsets at quarter end.

And at the end of April, that number grew to approximately 15%.

We launched our GSM products in a portion of our South region with the rest of the region soon to follow.

Another indication of next-generation customer demand is our increasing LSR as compared to our TDMA customers.

During the quarter, LSR for next-generation customers continues to be approximately $5 greater than for our TDMA customers.

And on a roaming front, our expectation shared with you last quarter were confirmed this quarter with a continued increase in next-generation minutes and a decline in TDMA and analog minutes.

As we said, we expect roaming results to be uneven throughout the year.

A good example of this is what we have seen in our South region.

Our predominantly TDMA networks in this region incurred a 40% decline in roaming minutes compared to the previous year, which we believe is largely due to other carriers having fewer and fewer TDMA customers.

For example, one of our primary roaming partners, Cingular, recently reported that approximately 72% of its customer base is GSM equipped and approximately 84% of its customer minutes are now carried on GSM networks.

Accordingly, these customers could not use our network in the South until very recently.

We recently turned up a portion of our GSM network in our South region and now are receiving GSM roaming minutes on these sites.

We believe the completion of the South region GSM network, which is largely under way, together with our other regional efforts present a good opportunity for us.

With so much going on, it's safe to say that the accelerated pace of this technology change is testing our network operations and customer care personnel.

Although customer experience on our next-generation networks has gone very well and we are experiencing customer traction, we are also seeing elevated churn from our Legacy TDMA customers.

We believe the primary drivers for this churn have been technical issues on our TDMA network and the saturation of our call centers resulting from activations and migrations, and other calls dealing with billing and technical questions.

We continue to take steps to alleviate these speed bumps and work through the issues.

But more importantly, we look forward to improved churn throughout the year and the many opportunities next-generation technology provides.

Another aspect of our new technologies is a growth opportunity and data roaming.

We have one xRTT throughout our Midwest region and Edge throughout our GSM regions.

Although not yet significant in total revenue, our roaming megabytes of data are growing nicely.

In January, we saw 487 megabytes, that traffic has more than doubled every month and in April was over 12,000 megabytes.

Our customers are also using more and more data products.

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

Thanks, Ann.

I would like to provide some additional detail about our first quarter results.

EBITDA was $46.8 million, including Wireless Alliance EBITDA of $1.8 million.

Service revenues increased approximately 7% for the quarter to $94.7 million.

This increase primarily resulted from local service revenue per customer, increasing to $47 for the quarter, compared to $43 last year.

Contributing to the increase in LSR was approximately $2, an increased access in future revenue, in addition to increased USF payments.

USF payments increased to $8.4 million from $2.8 million last year.

Roaming revenue for the first quarter was $19.6 million.

Affecting roaming revenue this quarter were increased GSM and CDMA minutes, and outcollect yield for the quarter of $0.14, compared to $0.18 per minute in 2004.

The Oregon 4 property exchange last year, a reduction in TDMA minutes, and the transition stage of our networks.

In spite of all of these factors, minutes were flat year-over-year on a comparable basis.

Equipment revenue increased 64% to $9.1 million for the quarter.

Contributing to this increase were postpaid customer editions and customer migrations, which Ann and Rick both talked about earlier.

Our per-handset subsidy this quarter actually declined by 14%, which we believe is another indication of customers demand for next-generation handsets.

Network costs for the quarter increased 13.7% to $26.7 million, reflecting additional costs of operating multiple networks, increased incollect expense and the additional cell sites.

Per minute incollect costs for the quarter was approximately $0.12 per minute compared to $0.13 per minute last year.

Contributing to the increase in SG&A was an increase in regulatory pass-through fees to 3.4 million in the quarter, compared to 2.5 million last year.

Additionally, sales and marketing costs increased by 21% as a result of our CDMA and GSM product launches.

The 34% increase in depreciation expense reflects the turn-up of our new networks and the acceleration of TDMA equipment depreciation.

Interest expense for the current quarter decreased 22% to $42.7 million.

The decrease primarily reflects the 11.8 million write-off of debt issuance cost under our former credit agreement in March of 2004.

Cash interest payments during the quarter were $47.2 million, compared to 7.9 million during the first three -- excuse me, during the three months ended December 31st of 2004.

As you know, 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.

Now, turning to capital expenditures.

We continue to make significant progress toward the completion of our next-generation networks, which comprise the bulk of the $26 million in capital spending this quarter.

Consistent with our past practice, we indicated that we would not pay the cash dividend on our 11 3/8 Senior Exchangeable Preferred Stock or our 12 1/4 Junior Exchangeable Preferred Stock.

These dividends would have been payable in cash on May 15th of this year.

At quarter end, our most restrictive financing terms provided for approximately 89 million in restricted payment basket.

Looking ahead, we continue to believe EBITDA for 2005 will be in-line with our earlier guidance and we expect capital expenditures to be in the $100 million range, which includes the continued network buildout.

As Ann mentioned, we are currently in the process of installing a new customer care and billing system.

This process began during the first quarter of our -- based on management's assessment, there was no material impact on our internal controls during the first quarter.

However, we anticipate that as the implementation of the new billing system proceeds, that transition from our current systems to this new system will result in a change in internal controls over financial reporting.

Most likely beginning in the second quarter.

And with that, I would like to thank you, and I will turn the teleconference back to the moderator who will poll you for any questions.

Thank you. (OPERATOR INSTRUCTIONS).

Our first question comes from David Shearer with Lehman Brothers.

Please go ahead.

Hi, it's Dave [Schirett.] Good morning, guys.

Hi, Dave.

I guess firstly just on the roaming comments you had about the South region.

You talked about that declining 40% year-over-year.

What was the actual minute impact that you saw, sort of if you have the South region minutes in the first quarter of '04 versus the first quarter of '05?

I'm not sure that we have the exact number of minutes in that region.

It also varies between our Alabama and Mississippi markets and Kansas, which, of course, we include in our South region.

But to just give a little bit of color, I don't know that we're prepared at this time to talk in total amounts.

But the order of magnitude here, the South region is a pretty significant part of our overall roaming mix.

It's an area that in the past has generated minutes anywhere in the 35 to 45-million minute range in a particular quarter depending on seasonality.

So I think from that, you can gleam that it's a pretty significant part of our roaming mix.

So, I mean the first quarter being seasonably slower could be towards the 35-minute range, million-minute range and in the first quarter, maybe you lost 40% of that?

Well, I don't want to mislead people into believing that it's slower from a seasonality.

There are a lot of factors that have impacted the roaming minutes in the South, some of which already have been GSM customers not being able to use our networks over the past couple of quarters.

The transition has been going for probably the last year or more as there have been GSM customers undoubtedly in our area that haven't been able to use.

So I'm using those numbers as kind of general guide posts for you to understand the order of magnitude, not to get necessarily specific numbers for the quarter.

However, our GSM sites have been coming up there over the last 60 days and are bearing roaming traffic and we do have in the South region, as we have discussed in previous calls is one of the areas where we have very specific roaming arrangements with Cingular, for example, as well as a number of other carriers.

So we expect as we have the cell sites available to carry the traffic.

That we will be getting the traffic from those customers that are GSM equipped, whether it's Cingular or T-Mobile or whoever.

I guess looking at it differently if you exclude the South region, would you say that your roaming-minute trends and your Northeast and Northwest, as well as your Midwest markets are sort of in-line with where some of the other peers -- your peers are coming out, like Dobson and Western are reporting kind of mid-20s% growth year-over-year in minutes?

And at the South region kind of coming on that range now with -- since the GSM networks were turned on there?

I don't think that those kind of impacts are really known yet in the South region.

And it varies, even amongst our various regions for a host of factors.

But we certainly have seen increases in some of our regions that are certainly in-line with that.

If not significantly more.

Unfortunately in our case, there are probably a story for each one of the regions.

Also bear in mind that in both the Northeast and in the Northwest region, even though we've launched service to our customers during the first quarter, we have continued to bring up additional cell sites and a lot of the cell sites that we had at the end of March weren't necessarily there for the whole period of the first quarter.

And so there is some building throughout that first quarter that will get reflected now during the remainder of 2005 and beyond.

May be just one last roaming question.

Will the second quarter reflect, you think a full apples-to-apples quarter then?

No, I don't believe it will simply because, again, in the South region we are continuing to build and turn up sites there.

The predominance of our sites at this point have been done in the Alabama area.

We have continued sites that will be turned up in Mississippi early -- earlier in the second quarter, but we also have Kansas, which we have yet to turn up and we would expect that probably either very late in the second quarter or into the third quarter.

So, there will be additional roaming inventory is the way I like to talk about it, that will be continued to be created in the South region throughout the second quarter.

Really, the short answer to that question is that the third quarter is going to be much more like an apples-to-apples comparison.

And one other, just another different topic.

In terms of your cash use this quarter in addition to the seasonality and coupon payments, your working capital use picked up in the quarter.

What do you expect in terms of full-year working capital user or source of cash?

We have always looked at working capital essentially to be at a neutral number in a particular year.

It can very from quarter-to-quarter on timing of when CapEx and accounts payable end up getting paid, but from a longer perspective for the year, we have always looked at it as neutral.

So that should be a positive then for the rest of the year?

Yes.

Okay.

Great.

Thanks, guys.

Thank you.

Our next question comes from Phil Cusick with Bear Stearns.

Please go ahead.

Hi, guys.

Good morning.

Morning.

Good morning.

I wonder if we could talk a little bit about ARPU.

As we take USF out of ARPU, its still been growing pretty nicely over the last couple of years.

I wonder if we can talk about where new customers are coming on and where you might expect this to continue to go as new customers are generally moved over to GSM and CDMA plans?

Well, as we are converting customers to those plans we're finding, as other carriers have found, that customers really like the next-generation handsets and really tend to use their phones as somewhat more in terms of minutes.

But also in terms of features and different offerings that utilize the capabilities of those handsets and of our new networks.

So we continue to offer a smorgasbord so to speak of offerings to them and encourage them in various ways through our sales process and our transition process to try those features, to look for larger buckets of minutes and, therefore, higher access for us, and we continue to pursue those strategies.

We're a bit conservative about predicting exactly how much of that differential will remain as we get our entire customer base converted and we'll just have to see how that works out.

But we're very encouraged by the way it has worked to this point since our initial launch of CDMA in the Midwest last July.

And we'll just keep working to obtain those higher LSR and ARPU numbers.

Okay, so you can't give us any sort of guidance as to where those new customers are coming in at this point?

Are you looking for a particular LSR number or ARPU number for them?

Right, I mean on average new customers coming on GSM or CDMA plans have a certain ARPU --.

We haven't given guidance to that --.

Okay.

-- to that granularity in the past, but it has been higher than where our average start clearly. [multiple speakers].

Yes, I think it's safe to say, because we've said it's $5 higher than our TDMA that it's higher than our average at this point.

It's $5 higher than TDMA.

Great.

Thank you.

Yes.

Thank you.

Your next question comes from Anthony Klarman with Deutsche Bank.

Please go ahead.

Thank you.

Two questions.

First question is really one of a more competitive perspective.

I was wondering if you could talk about what you're seeing in your markets in terms of how your gross subscriber as on a postpaid basis are stacking up against some of the competitors in your market?

Is the market expanding?

And what do you assume in terms of your rate and pace going forward?

I guess now that you're kind of most of the way through the network, the hard part of the network migration.

What are your expectations in terms of subscriber productivity?

And then, I guess on the roaming side, I'm trying to go back to last quarter when it seemed like you were talking about revenue on the roaming basis being roughly flat year-over-year despite the decline in yield that I think you were projecting of roughly $0.03 or so per minute.

And just looking at the first quarter, I'm wondering if that's something that you're still comfortable with or if, in fact, the roaming may be a little short of that, but you wind up making that up in other areas, such as, the subscriber business or USF?

And finally on USF, you gave the absolute dollar amount.

I was wondering what that translated into in the LSR number?

Thank you.

Okay, well, that was a lot of questions.

So let me start with the competitive questions and we'll go to Wes for the roaming and the specifics on the USF.

As we reported in our Press Release and in our comments at the beginning of this call, we have -- we've seen a very satisfactory increase in our gross ads in our markets as we have rolled out the newer technologies.

And that trend seems to be holding steady as we speak now and look back over our rollouts in July and February and last week in the South.

As to how that compares to the competitors, I must say that in terms of our competitive analysis, we look less at the absolute numbers of competitors because that's -- all that is reported in the past, and we focus more on how our offerings and our traffic and all the rest of it compares to our competitors in our markets.

And we have been comfortable with the trends in that and what has been happening in our markets.

We do believe the markets are expanding, although, as always at the bulk of our customers, have been users with other carriers in the past.

But we do see expanding markets both on the younger end of the spectrum and the older end of the spectrum, and also on the data end of the spectrum as we add additional devices and as our competitors are putting additional devices in the market.

As to the rate in the pace, I don't believe that that is a factor that we have provided guidance or future thoughts on before, but we are following our plan and I guess our expectations about that have been taken into account in the EBITDA guidance that we have provided previously.

As far as the USF payments and what they contribute to our LSR, it's in the $4 range for the first quarter of this year.

As it related to your question, I think, on roaming, the point I guess I want to re-emphasize again is that we had expected roaming to be uneven throughout 2005, not only from a quarterly perspective for 2005, but certainly also as it relates to comparisons to 2004.

And that was going to be driven largely by the fact that we were going to have different amount of network available throughout 2005.

And what we have seen is certainly a deterioration in our TDMA minutes, a decline there is -- you would expect, I think Ann talked about the fact that Cingular had announced that 72% of all of their customers at this point in the first quarter are GSM customers and 84% of the minutes on their network are GSM.

Which tells me, that their biggest users, which are likely to be some of our roaming customers when they come into our areas, are GSM.

So, the fact that we have seen so much of the customer base move to GSM from the national carriers, doesn't surprise us that it would have an impact on our TDMA roaming minutes.

All of this said, we continue to be confident that there will be significant increases in roaming minutes as we get, not only into our prime time season -- remember that we're still highest in the third quarter and in the second quarter from a roaming minutes perspective, and this is happening at the same time that we're bringing more and more of our sites to GSM.

So we think that the unevenness that we had predicted at the beginning of the year is going to bear out.

And, Wes, what was the USF number in LSR in the 43 from the first quarter of last year?

It was probably in the $1.50 or so range.

Thank you very much.

Thank you.

Your next question comes from David Walker with Pinewood Capital.

Please go ahead.

Good morning.

Thanks for taking the question.

Two questions, actually.

Could you clarify what the subsidy is for handsets that you migrate from TDMA to GSM?

If you want to just do it into a broad percentages, that would be fine.

If you don't want to give the specific dollar amount.

And then also, Ann, you referenced roaming arrangements in the South and I was wondering if you could clarify that a little bit first by giving a little bit of background on who your competitors are, who you lost share to in that region in the first quarter, and whether we should expect that you have a decent shot at getting that share back when those GSM sites are activated.

And I guess what I'm looking for is commentary on the preference arrangements with some of the bigger carriers.

Sure, happy to do that.

Some of us we've talked about previously.

But let me address your first point of lost share.

Unfortunately here, it is a lost share not in the sense of customers being able to use someone else's network, so minutes are going to somewhere else.

It is lost share in the sense that there is not a competing GSM network in the South region, at least in Alabama and Mississippi for the customers to go to.

So any [indiscernible] customer, let's say a T-Mobile customer with a GSM-only phone, once it gets off the sites that Cingular has in portions of the region where they would overlap us and once they get off T-Mobile network, there is not another GSM network in large parts of that region, at least in the rural areas.

And so to a certain extent those minutes are just -- the demand for those minutes are just simply unmet.

As far as what our arrangements are with roaming partners down there, last year we worked very hard.

In fact, over the course of probably more than a year to get an arrangement with Cingular to be their preferred roaming partner in the South region, and we're that preferred roaming partner.

And, in fact, we have a very strong relationship there, which included some incentives in that arrangement for us to build out more strongly a GSM in that region than we would otherwise probably have done in an initial phase.

And also through the strong relationships that we have built with Cingular and the other smaller carriers that are in the GSM Alliance, which we have talked about previously, we have come to an agreement and have ruled out Edge across our entire network as we're rolling out GSM.

So that we not only have a broader GSM network, a deeper GSM network, so to speak, than we might have expected when we talked to you about this a year ago.

But it is also the fastest network.

And that is a real competitive advantage as we have it there.

So we very clearly expect on many of our cell sites, not all, because some of them are in a competitive area that might have been built out by Cingular or by T-Mobile, such as, Dothan, Alabama, for example.

But in much of our area, there is a high prospect of GSM roaming minutes, just as soon as the site is turned up.

Thank you.

That's very helpful in clarification.

And then on the handset migration subsidy?

The subsidy for migration is not unlike what it would be from a new customer's perspective.

We tend to do the same kind of pricing for customers that are willing to sign a new contract, for instance, as if they were a new customer.

From that perspective if you look at the amount of our overall subsidy from our revenue less our cost of equipment and take into account the fact that we had 43,000 gross ads and about 50,000 migrate, or 56,000 migrated customers and you see that net number, you see the math will get you into the $50 range probably.

Now, bear in mind that when a customer migrates, though, there are also some opportunities for us to minimize the subsidy, if you will, as they buy accessories, art kits in some cases, antenna, various kinds of other apparatus that go along with that new handset.

And because of that, that helps minimize our overall subsidy number.

That's great.

Thank you very much.

Your next question comes from Mark Boucher with Knickerbocker.

Please go ahead.

Thank you very much for taking my question.

Can I get a little more clarification, because I couldn't write it down as quickly as Ann was speaking on the differential in LSR between old-generation and new-generation clients?

The number $5 was thrown out.

So is that in comparison to last year's first quarter or is it in it an apples-to-apples this quarter?

That is an apples-to-apples this quarter number.

In other words, if you take the average of the 15% of our customers that are into the CDMA and GSM network, and average their LSR as compared to the LSR of all of our other customers, which would be TDMA customers, the next -generation customers are $5 higher.

Okay.

The next question has to do with what happened up in the Northeast.

It sounds like the problem was we didn't have enough people manning the phones to handle migrations and new customer activations.

We're six weeks into the second quarter now.

Can you give us a little bit of an update on what is happening to stem those problems?

Sure.

It's actually -- as most things are in this business -- one step more complicated than that.

We are rolling out -- we have rolled out a transitional billing system, which our GSM customers are being placed on as we acquire them.

The -- that billing system is not completely distributed out to our point-of-sale presences, either in our stores or our agents.

So we have some centralized processes, which are at interim step in our billing conversion process here, which have put a lot more pressure on our customer service.

Even though we had greatly staffed up our customer service to meet this, the overwhelming demand that we experienced from our customers for migration and also as you saw in our gross numbers for new customers coming in, simply overwhelmed what we had expected.

And there is a third factor in it besides the migration and the gross editions and, that is, that we found that there were many of the calls ran much longer than we expected because of technical and training questions for our customers as they had questions about the capabilities of their handsets and of their services.

In order to address that, we are in the process right now of rolling out the point-of-sale terminals all the way out through our distribution points that that process will take some time.

But it's going according to schedule right now, and we hope that that will alleviate a lot of the centralized pressure on customer service and as always, allow us to answer many of those questions right in our stores or right in our agent's offices.

I know we have talked with you before about the fact that we tend to have more than a third of our customers physically visit our stores every month to make payments to buy an antenna or some other kind of accessory or to ask questions or be trained.

And so, having them actually to be able to be serviced at that point-of-sale would be really important to us.

Another thing that we have done to take care of this problem is we have added an additional group of customer service people in our Midwest region where they do not have that same kind of centralized pressure on customer service.

And they have been providing assistance to both the Northwest and the Northeast customer service in terms of activations and taking care of customer calls and a lot of other things.

And I think lastly, something that has been a difficulty for us is that we have experienced some technical problems on our TDMA network where we have had some equipment issues where we have gotten some equipment that didn't work in the field the way it worked in our test environment and we have had to work with vendors to replace that and work through it.

And it has been a source of concern where it's affected our TDMA customers primarily.

And so that has driven more calls and more explanations and the combination has not been a happy one for us.

And we have taken probably another 20 steps that I could identify to try and release some of the pressure in our areas.

We're not the first carriers to have an unexpected bump like this in a rollout.

And the -- you plan as much as can you and then you adjust and plan some more as you see what the actual road bumps are.

And that's where we are right now.

I feel confident that we'll be able to work through these problems.

We have been -- customer service has been one of our great strengths and we think it will continue to be despite the rough few weeks we have had here.

Okay.

Focusing on sort of a more positive things, I see two aspects for the business that I don't think we have really talked about very much on the call or maybe we have, but I just haven't understood it.

The deployment of broadband capabilities on a wireless network seems to me like it could be a third leg on our stool here, roaming local service revenue and broadband.

Are you starting to see interest in people for broadband?

We definitely -- that is definitely a topic that we have talked about and discussed.

We've done research on and talked with our customers about.

I guess the proper thing to say at this time, since we haven't really addressed our thoughts about this in any kind of detail, is that we are very engrossed in our network rollouts that we have today and the services that we can most immediately offer on our networks.

And our plans for the future will develop over time and as it's appropriate, we will bring it to this forum and others to share our thoughts about it.

But we are -- we look at a lot of different alternatives just as our competitors do in the industry.

The other part of that it seems very clear to me that, I don't know if we have data on it yet, but landline replacement.

Do we have any kind of a sense of how many of our customers use their wireless phone as their only phone at this point?

Wes and I are looking at each other because we know we have talked about that in the past, and neither of us are pulling up the percentage of it.

But --.

It's less than 10% I know in our regions, though.

Well, it's less than 10% at the times that we have actually done research and asked that question.

I would say that we're seeing like many people are, on an anecdotal basis.

What we experience in our own families and what we see around us is that people under 30 are not necessarily getting a landline phone.

We see lots of those people that this is their only phone.

And, of course, that's one reason that customers are so fierce about getting good service and good coverage because this is it for them and we know that and that change has been coming rather rapidly in the last five years.

But we haven't quantified that particular number recently, which you really have to do by some very specific research with your customer base.

Are we selling the hardware, like I have seen these little cell sockets that you can buy that you plug your wireless phone into at night and it connects into your regular phone on your wall.

Are we selling those in the stores at this point?

Is that popular at all?

Yes, we have a variety of products like that, I would say it's not in our top-five of what we sell.

But there is a certain segment of the market that is appreciative of that and in our stores themselves, we use products like that.

Mark, this is Rick.

Just another thought in terms of how our customers are using our services.

Clearly as we have moved to the next-generation services, it allows us to have much greater capacity and our customers are certainly using that.

And as we have continued to look at utilizing that capacity, we offer larger minute bucket plans, if you will, and in many, many cases, those plans include long distance.

And one of the things that is really hard for us to measure other than just in discussing with customers on a one-to-one basis is how many of those customers don't use their landline service for traditional long distance services.

In almost every case, our calling areas are much, much more expansive in rural areas that we serve than the local exchange carriers that would be providing them with land-based service.

Because of that, and the communities of interest and where they call to, many, many of our customers are not using their landline services for long distance.

Rather, they're using our -- their service through a wireless company, such as, ours and we're excited to see that.

And it's hard to measure how that shift is occurring, but clearly, it's the nature of customer usage patterns.

Okay.

Listen, thank you very much also for the very hard work and the progress that's been reported here.

Thank you.

Thanks.

Thank you.

Your next question comes from Adam Moss with U.S. Trust.

Please go ahead.

Hi, good morning.

A question for Ann or Rick.

If you could please comment on the FCC order, I guess that was released?

And then, March regarding future minimum requirements for ETC carriers and how this order may impact your Company from an operational or financial perspective?

Thank you very much.

Well, of course we're aware of the order and have reviewed it.

I think this probably isn't the place to go through it point-by-point, but maybe I can say we're aware of it.

We think that it will continue to work for us and we will -- the USF support for our abilities to rule out and provide more depth in our networks in a broader range of services to our customers is very important to us.

So we are very attuned to the direction and the statements that they're taking.

And we express our voice through our various industry organizations with respect to it.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS).

Your next question is from Ned Zachar with [indiscernible].

Please go ahead.

Morning, everybody.

Definitely encouraged by some of the retail trends that were taking place.

But I'm trying to understand a little bit more about the roaming issues.

Were they (a) caused by the difficulty of the transition of your overlays or the slower-than-expected rollout there or did the minutes from AT&T/Cingular happen more quickly than expected?

Because at the end of the day, a key reason for the regional carrier's existence is to capture the roaming minutes from the national carriers.

And I don't think anybody on this call is surprised by the rapid transition of minutes from TDMA to GSM at AT&T and Cingular.

And it's not clear to me why management's not in front of this curve.

So if you could help us with that, that would be great?

The second question is who is the new billing system -- who are you using for the new billing system?

Thank you.

Okay, the second question is very simple to answer because it's Amdocs.

So that should answer that question.

Maybe it's appropriate to go back briefly through some history that we've shared on other calls in the past.

Because I do think it's helpful to place a -- to place us in the broad array of carriers that have faced these issues.

We have a different situation with respect to our strong roaming partners in each of our four regions.

Simply because of, and, again, we're thinking back over several years of time as these roaming relationships have developed.

But the different carriers we're stronger partners in terms of the minutes that they had available to us in different regions.

And we made our next-generation choices based on where we thought we could get the very best roaming relationship in terms of continued and predictable roaming revenue over time.

That is why we are a CDMA carrier in the Midwest because of our strong partnership there with the other CDMA carriers and that's why we are GSM in other areas.

We made our decisions, but we also could not be a leader in our decision-making.

As you might imagine roaming negotiation from multiple-year contracts for what are very significant dollars to our Company, took place over a period of time and we would have no leverage at all if we made a technology decision and installed GSM in the Midwest; for example, and then tried to make a roaming deal -- I'm sorry, put CDMA in the Midwest, and then tried to enter into a roaming deal with Verizon or Sprint or others.

You have to provide the carrot of going with their technology to provide their coverage in order to get the strongest and the best contract with them.

So, we could not be a leader and decide our technology first and protect our future revenue.

We had to negotiate the arrangements first and then build just as fast as we could.

And that, in fact, is what we did.

And we first had our arrangements in the Midwest and then in the Northeast and the Northwest.

It takes a period of time as we have talked about with you before for any changes that we make, particularly in the Northeast.

That is one reason that we have had a premier network there, is because we have been there a long time and we had a lot of sites.

But you must realize that if we change something in Vermont or New Hampshire, if we change an antenna, not even putting up a new site, if we change an antenna, we have to go through a full zoning and negotiation process with that, which takes generally up to a couple of years.

So the time to rule out that network, particularly is much more elongated than what we would -- what we did see in the Midwest, for example.

So essentially, we made the deals with the carriers, we secured our financial future, and then we worked like crazy to get the networks rolled out and in place.

The South has been the laggard because we had to -- we had a long time negotiations with both the GSM carriers and the CDMA carriers because we were not getting the right deals on the tables that we wanted -- that we needed.

So what is the time -- maybe it's helpful to understand the timeline of when you negotiated the deals versus just to understand how compressed this -- then workflow actually was?

Well, I believe -- we just concluded the Cingular deal at the end of last summer and --.

We didn't select GSM in the South region until late summer, early fall.

So really at this point to where we are with our network in the South and the fact that we have already launched service from a roaming perspective in Alabama and for portions of Alabama for our customers, frankly, has been on a very compressed time frame.

I think the good news from our perspective is that we actually have accelerated what we think -- what we had thought six months ago we would be able to do in Kansas.

We certainly expect to have that GSM network up and running, yet this summer, which in our thoughts last fall probably would have been much later than that.

So I think --.

We will have the whole network overlaid in about nine months from the day we had the agreement.

So, the performance that we're seeing in the first quarter from a roaming standpoint is on the mark relatively speaking -- relatively we were expecting three months ago?

Oh, yes.

I think the only thing we would say is probably the TDMA decrease is probably slightly more than what we were anticipating.

But as you know, predicting how many minutes on each cell site is a pretty complicated task to begin with, and I think we're seeing very encouraging things on the GSM side.

But if I heard your comments correctly, we should not expect, you know, sort of a normalized roaming environment until the third quarter of this year?

Yes.

I would say that's correct because the -- as each of the -- well, we're already through a portion of the second quarter and Mississippi and Kansas are not up yet.

So I would say that's clear even if the network were put up tomorrow and know that will be throughout this quarter.

Terrific.

Thanks for the help.

Thank you.

Your next question is from Sandy Liang with Bear Stearns.

Please go ahead.

Hi there.

Looking forward, can you talk about your capital spending priorities beyond 2005?

You know, can you talk about GSM versus CDMA?

And I guess what kind of capital efficiencies you're going to see compared to what you had on TDMA and how then your capital spending might compare to previous years?

And also just in terms of the third quarter, what proportion of your cell sites do you think you were going to have up and running with GSM and CDMA for the full quarter in the third quarter?

I would -- well, this is somewhat general answer to that last question, Sandy and perhaps Ann can fill in more specifics.

But it would really depend on the timing in which we bring up the Kansas network.

If we truly do get the Kansas network up by the end of the second quarter, we'll have virtually all of our network up and running with either CDMA or GSM for virtually all of the third quarter.

We're always going to be adding sites.

I think one of the things that we talked about was even in the first quarter amongst all of the overlay activity that we had in both the Northeast/Northwest and the beginning of the South region, we added a number of new sites as well, and so that won't disappear.

We continue to expect to add additional sites throughout 2005 and, frankly, in all of our operating regions.

But I think it's safe to say if we continue on schedule with our Kansas build, we should have the vast majority of our sites overlaid to -- with the new technology by the start of the third quarter.

So should I take that as basically 100% of minutes you can do in GSM or CDMA except for Kansas?

No, what I'm saying is that I think we should have Kansas for the third quarter as well.

At least two-thirds of the third quarter at worst case.

We're scheduled at this point to have that network up some time, I believe, in late June, early July, and so that would indicate that that would even be available for the vast majority of the third quarter.

I think there is probably 10% or less of the original sites that won't be fully overlaid and as you might imagine, those are largely in the more remote ends of our network.

But it gets a little complicated to talk about the numbers because of the additional sites that we have added.

But if you go back to our very beginning of before we started all the additional site builds a year ago, that is probably an accurate way to look at it.

There -- and those sites come not from a choice not to overlay them until later.

They are largely sites that were added to the plan or accelerated, but they're in an area where either going through a process with the landlord that is taking more time or we had to build a site because of capacity issues on a particular site and go through a full zoning and acquisition process or because we're dealing with some other local need that is taking time and there are always a percentage of those as we go through things.

Okay.

And capital spending priorities in 2006/2007?

Well, clearly we feel we have reached the peak of the CDMA minutes that are carried on our network, and we have already seen in this year that we have a much lower need for maintenance in that type of capital for the TDMA side of things.

I don't think that we have talked out into future years about the capital needs and I don't think I'm comfortable to put a number out there today.

But I would say that we're appreciative of the efficiencies that we're seeing on our GSM and CDMA networks and believe that that will have a positive impact on the future for us.

But you do need to remember that we are running, depending on how you count it, at least two networks in each area plus data networks and, as well as the analog coverage that we have.

It's really three or four networks did -- in each area depending on your counting on it.

So I don't talk off the top of my head about what the needs will be for growth or redundancy or additional capital input into it.

Okay.

Thank you.

Your next question is a follow-up from Anthony Klarman.

Please go ahead.

Thank you.

Just one quick follow-up, on the Amdocs billing conversion.

Have you guys modeled in any short-term blips in churn as you kind of sort through the conversion and re-evaluate some of the subscriber numbers in the data base?

Should we be thinking about any short-term spike in churn as you work your way through the billing conversion process?

I know that many carriers have had cleanup episodes that they have had of customer numbers as they have gone through billing and conversions.

We went through a very intensive process to address that kind of issue last year and so we have no indications now that we will have a particularly unusual problem in terms of what is reflected in our customer base.

Yes, we did plan for a spike in churn as anybody would as you're going -- you're changing something that touches the customer.

I think you're seeing part of the spike in churn right now as we're going through some of our transitional processes, and we hope that that will be lower later in the year.

But I would also say one other thing we did that is maybe different then what other carriers have done is that we did go through a process a year ago to standardize our billing and printing format that the customers see and our conversion -- billing conversion process is not changing the format that the customers sees.

It may change how things are, a particular service plan is reflected within that, but we found in the past that the format is something that really drives an awful lot of questions.

And so we tried to do that ahead of the curve before we actually got into the billing conversion itself.

Amdocs bills are going out today to our customers.

And although we have some questions, we're finding that the questions are much more based on the technology that -- the new technology that the customer is using as opposed to questions or issues about the format and the bills have been accurate at this point.

So that, of course is always helpful.

Thank you.

Our next question is a follow-up from Mark Boucher.

Please go ahead.

Thanks again.

Coming back to the ARPU on the new plans, traditionally, we have seen a little bit of seasonality in ARPU even when you strip out USF growing over time.

Given the way the new plans are designed, do you still expect to see some seasonality in ARPU on the next-generation networks going forward or will the billing be more level?

Mark, I think that's a good question.

I think the answer is pretty simple.

It will be flatter than it has been in the past, although, we will also I think continue to see some seasonality.

One of the things that we have seen is an increase in access.

That is probably the biggest component of the increase in the LSR that we were talking about throughout this call.

And that is based on the fact that you have more minutes in plans and so typically I think consumers today are looking for more protection.

They have the ability to have bigger bucketed plans and so they look for the higher access plans, and they're willing to pay for some of that certainty.

But, again, we still have a number of customers and in a lot of the areas that we serve, the nice warmer months are when people are out and about and so they tend to use more minutes in the summer months, and so that's when you will get some extra air amount.

But I think that the swings that we have seen in the past or the more of the bell-shaped curve will be a much flatter LSR going forward.

Okay, thanks.

Thank you.

Our last question is a follow-up from Phil Cusick.

Please go ahead.

Hi, guys, just a couple of quick follow-ups.

One is, did you say that the average cost of the subsidy on an upgraded handset was $50?

And, second, I'm wondering if you could talk about the cost of running the TDMA network and how much of that would go away if we were all doing GSM and CDMA?

Thanks.

I think I said that subsidy was in the mid-50 range.

And so depending on where you want to look at it.

That answer, I think, is accurate.

Okay.

As far as the TDMA network, one of the things you are going to have to understand is that we're going to need to have a TDMA network for some period of time.

We talked about that we've seen an erosion in our TDMA roaming minutes.

But I also don't want to have people believing that there aren't minutes out there and that we're not making good money off the TDMA network from providing roaming availability for a number of TDMA customers that come into our area.

So whether -- that number, I think, will shrink, but it's still going to be a pretty significant number for a while.

In addition to that, we will have a number of our customers continuing to use TDMA at least for some period of time going forward.

I think we had talked about on the last call that we anticipated about 50% of our customer base by the end of this year being on next-generation, and I think we're still in that general frame of mind.

We have seen probably a little ahead of expectations in that so far this year.

But we're still thinking that will be probably in the general ballpark.

So certainly into 2006, we will need a TDMA network that will continue on for those customers.

The good news is we should have spent the last of our CapEx necessary to really support additional traffic on TDMA network.

So we will be able to now earn out on an investment that we have with minimal amounts of additional CapEx.

I should probably never say never because we're always fixing or doing some things that may need to be done, but it should be pretty minimal and we should be able to earn out on that investment.

As far as operating the system, we will continue to look for efficiencies and economies in our network costs as we always have and where we could combine because of the greater efficiencies of CDMA and GSM and have fewer facilities.

At some point in time we will certainly take them out to try to reduce costs, but I don't anticipate that will happen in the real near future.

Because I think network stability both in our GSM, CDMA and/or TDMA is paramount for us because obviously we think that has a great deal of play on our retention, which is an area that we're Focusing very keenly on right now to get back to our normal levels.

Great.

Thank you.

Okay, management, at this time I will turn it back over to you for any closing statements you may have.

Thank you.

Thanks again for joining us this morning.

We look forward to bringing you up to speed on our progress over this quarter on our next call in August.

Ladies and gentlemen, that concludes today's teleconference.

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