威訊通訊 (VZ) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the RCC third quarter 2005 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, Monday, November 7, 2005.

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

Please go ahead, sir.

Good morning, everyone, and thanks for joining us for our 2005 third quarter call.

This call is also being broadcast live through our website at unicel.com.

After the completion of this call a dial-in replay will be available through November 15.

An archive will also be made available in the Investor Relations section of our website.

Comprehensive financial information about our Company is also included in this section of our website, as well as corporate governance information.

This teleconference, which was preceded by our third quarter 2005 press release, should be considered together with the press release and its related financial information.

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

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

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

We also must 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 & Exchange Commission.

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

Please refer to our website where you will find a non-GAAP to GAAP financial measure reconciliation included in our November 7, 2005, press release.

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.

Rick, Ann, and Wes will be available after the prepared remarks of this call for a question-and-answer session.

During this exchange, please be mindful of this call's one-hour time allotment.

Giving these concerns, investors should not place undue reliance on forward-looking statements, and with that I will turn it over to Rick Ekstrand.

Thanks, Chris.

Good morning everyone.

As we discussed for several quarters now, our revenue strategy has been to first focus on securing our roaming revenue with appropriate technology choices and relationships and then to leverage those technology investments with our customer base.

This strategy has allowed us to address the relationship with our national carrier customers.

In the second half of 2003, we signed new long-term roaming agreements with both Verizon and Cingular.

With those agreements and the related technology choices made, construction heated up and has continued through 2005.

Since the end of the first quarter 2004, our sales site count has increased by approximately a third with much of the final construction being completed in the first and second quarters of this year.

We had confidence that we're building networks for greater roaming potential.

As you know, the pace of national carrier next generation handset migration affected the ratio of TDMA to GSM and CDMA minutes we receive.

Now our outcollect minutes of use fully reflect that migration, resulting in strong roaming this quarter.

The 65% increase in outcollect minutes this quarter over last year resulted in $42 million in roaming revenue, an all-time record.

At this point in our implementation strategy, with our network substantially constructed and working well, our most important initiative is to leverage our networks for the benefit of our customers.

This means successfully bringing new products to market and improving customer retention.

As we discussed we've been dealing with billing issues and other pressures on our customer service centers which have resulted in a level of customer churn that is unacceptable to us.

We've taken many steps since these problems surfaced earlier in the year, but it takes time to see the results of these actions.

We are seeing improved key customer service metrics which we believe are leading indicators for improved customer retention.

Our continued improvement in customer LSR gives us confidence in the revenue generating capabilities of these new products.

Customers using our new services, including data capability, continued to generate over $5 more in LSR than our legacy customer base.

With roaming as strong as it is, we believe our customers will appreciate the value of our networks.

As we look to 2006, we anticipate improvement in our customer growth statistics, declining capital expenditures and continued strength in our roaming revenue.

I have been in this business now for 15 years, and I am very proud of what our employees accomplish every day at RCC.

This business has always presented fresh challenges and our team has always been up to them.

Our operations continue to improve due to our employees resilience, loyalty and a desire to do the right thing for our Company and customers.

With that I will turn the call over to Ann Newhall for an operations update.

Thanks, Rick, and good morning, everyone.

I would like to expand on the execution of the revenue strategies that Rick talked about earlier, including our network construction efforts, and additional color and roaming, billing system conversion and customer retention.

Let me start out by saying that the bulk of our network overlay is complete, including a completely new data network.

We have also expanded our coverage area significantly.

By expanding our cell sites by a third in the last year-and-a-half, we believe we have improved our competitive position and are well on our way to being the data carrier of choice.

Accordingly, our networks are capturing voice and data traffic from national customers at a record pace.

With the third quarter being our historically highest roaming quarter, we logged a 65% year-over-year increase in outcollect roaming minutes reaching 311 million.

About 85% of those minutes were CDMA/GSM minutes, an increase from 72% last quarter.

After all of the hard work getting our new voice and data networks in place we are excited to see that our GSM outcollect minutes literally doubled this quarter from the second quarter.

Last quarter we began a discussion regarding our opportunity in data and data roaming because data usage is a growing component of the overall wireless experience.

And, although data roaming is not yet material, it increased 126% over the second quarter.

We continue to complete arrangements with additional carriers to allow for data roaming on our networks.

Since the end of quarter, we began receiving data traffic from Verizon and our customers also have access to their networks.

Switching gears, our technology changes have brought additional opportunities and challenges.

Customer demand for these new technology products is strong.

Customer migrations for the quarter were approximately 46,000 and gross adds were approximately 41,000 as compared to 40,000 during the prior year.

At quarter end approximately 35% of our total customer base was using new technology products, increasing from 25% at the end of second quarter.

Local service revenue this quarter increased to $51 as compared to $48 last year, reflecting the new revenue generating capabilities of these products.

We are pleased that new technology, local service revenue continues to be over $5 more than local service revenue for our legacy customer base.

In short, our networks are performing well, and we are seeing good results from our marketing promotions and sales initiatives.

However, we continue to deal with an unacceptable level of customer churn.

One of the things that is challenging about managing customer churn is that it can take a difficult turn very quickly.

But the results of the actions we take to improve our churn rate can take months to be realized.

I will discuss a few of the significant changes we've made to address our higher levels of churn.

In the first half of the year we had billing technology and network issues that caused concern among our customers.

Their calls on these issues, many of which were longer and complex, saturated our service centers.

Additionally, legacy customers who may have had only minor questions became frustrated with us in a major way because of their inability to reach us in a timely fashion.

With that said, marked progress is being made in our overall customer service operations.

We talked about our reorganization in our August call which included the appointment of a new Vice President of Customer Operations.

The Customer Operations portion of the reorganization focused on specialization and functional optimization in each of our call centers.

For example, all collection efforts are being consolidated in one call center and all activations are being handled in another.

As a result of our efforts, through the third quarter and into October, we've seen improvements in our service metrics including lower call abandonment rates, fewer number port outs and more calls handled in the first sixty seconds.

Our networks have also become more mature.

We have substantially increased the number of cell sites, which has improved the quality of our existing footprint and expanded it.

We have also had additional time to optimize its performance.

Finally, as we talk about our churn during the third quarter, we also have to talk about billing.

We previously discussed the fact that we terminated our building arrangement with Amdocs and signed a new expanded agreement with VeriSign.

In October, we transferred our existing GSM customers over to VeriSign.

This transition has gone according to plan.

All of these factors, together with improving service metrics, give us confidence that the customer experience is better and we expect improvement in our retention during the fourth quarter and into 2006.

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

Thanks, Ann.

I am pleased with our financial progress this quarter, especially roaming.

In our first quarter call, we suggested that roaming would be choppy, but had confidence it would rebound during the second half of the year.

Certainly, the third quarter results show the success of our efforts and point to the strength of this revenue stream.

With that in mind, the 41% increase in roaming revenue over last year contributed to the increase in EBITDA, which was approximately $61 million this quarter.

Wireless alliance EBITDA was 1.8 million for the quarter.

Another indication of the strength of roaming was the 74% increase in roaming minutes of use over the second quarter.

Outcollect yield for the quarter held constant with the second quarter at $0.13 and compares to $0.16 last year.

Roaming MOUs have ramped up significantly this year.

We saw minutes actually decline 3% during the first quarter of the year while minutes were up 13% during the second quarter and now in the third quarter minutes are up 65%.

These increases in minutes reflect impact of where we are in our network transition.

We now have the capability and capacity to handle roaming demand.

We expect continued strong year-over-year roaming comparisons in the fourth quarter and also expect despite anticipated yield declines next year, that roaming revenue will grow in 2006.

Also contributing to EBITDA this quarter was strong local service revenue per customer, of $51 compared to $48 last year.

Increased LSR has helped to offset the effect of having fewer customers.

The LSR increase reflects additional billing to our customers and additional USF payments.

USF payments were 10.8 million this quarter and 7.6 million last year.

Moving on, equipment revenue increased 47% to 8.2 million for the quarter.

Contributing to this increase were pulse paid customer additions and migrations, which Ann and Rick already talked about.

Our subsidy per handset this quarter was $63 which shows our customer's willingness to pay a good portion of the cost to get new technology devices.

Network costs for the quarter increased to $32.9 million reflecting the additional costs of operating multiple networks and additional cell sites.

Incollect costs declined to 12.1 million this quarter compared to 12.3 million last year.

Incollect costs per minute this quarter declined to approximately $0.11 per minute compared with $0.13 last year.

Selling, general, and administrative costs increased to 41 million this quarter reflecting increases in customer service, sales and marketing costs, higher bad debt expense, additional costs to clear the increase in outcollect minutes, and severance costs related to the reorganization announced in August.

Sales and marketing costs increased this year compared to last year due to the market launch of next generation technology products this year.

The increase in customer churn impacted bad debt expense which increased to 3.9 million compared to 2.5 million last year.

Increase in depreciation expense, primarily, reflects our new networks and the acceleration of TDMA network equipment depreciation.

Interest expense for the quarter was $43.8 million.

We also issued 1.1 million shares of class A common stock in a series of transactions exchanged for 9,535 shares of senior exchangeable preferred stock.

These transactions resulted in a gain of $131,000, which reduced interest expense this quarter.

In October, we paid four quarterly dividends of 11-3/8 senior exchangeable preferred stock.

The payment of these dividends reduced the number of unpaid quarterly dividends to five and removed any uncertainty regarding our ability to incur indebtedness, including drying out our revolving credit facility.

Subsequent to the dividend payments, we drew $58 million on our revolving credit facility and completed a senior subordinated floating rate notes offering.

The proceeds from the notes offering will be used to repay our 9-5/8 senior subordinated notes.

By calling the 9-5/8 notes we are extending our nearest term maturity to 2010.

Also subsequent to quarter end, we converted 7,541 shares of Class D convertible preferred stock back into 43,000 shares of Class A common stock, and 105,940 shares of Class B common stock.

This transaction will result in a gain of approximately $7 million during the fourth quarter.

We will continue to explore our options to de-lever our balance sheet.

At quarter end giving pro forma effect for the recent senior exchangeable preferred stock dividend payment, our most restrictive financing terms provide for approximately $73 million in restricted payment capacity.

Cash interest payments during the quarter were $48 million compared to $46 million last year.

And as you know, cash interest payments are highest in the first and third quarters of the year since interest on the bulk of our debt is payable in those quarters.

Looking ahead, we expect capital expenditures for 2005 and 2006 to be approximately $150 million in total of which we have spent approximately 78 million as of September 30.

We expect capital expenditures to decline in 2006 from 2005 levels.

At the beginning of the year, we had indicated that 2005 EBITDA would be in the $205 million to $215 million range.

At this time we expect EBITDA to be in the middle of that range.

We look forward to providing top level financial guidance for 2006 during our fourth quarter call early next year.

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

Thank you.

Ladies and gentlemen, at this time we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Rick Prentiss with Raymond James.

Please go ahead.

Yes, good morning, everyone.

Good morning.

A couple questions for you.

On the RPU trend, nice movement up I mentioned the $5 higher in the LSR.

Can you break out for us how much of that is data?

You said a portion of it was data, and, also, what kind of growth rates you've seen in the data take rates on the new stuff?

The actual amount of data revenue is still pretty small in total on a per customer basis.

It is probably a little bit less than $1 of our local service revenue comes from data services.

These have primarily been still SMS messaging, some ring and game downloads, but I will let Ann talk more specifically about the trend that we're seeing in our customer take rate.

I would also like to add a comment to what we have been billing for at this time.

That is for the applications themselves such as the download of the ring tones or usage in the case of SMS, but we are only beginning with our billing transition to VeriSign to be able to bill for the kilobyte usage stream to the customer.

That's one aspect of data billing that we still have ahead of us and see what the trends are there.

I don't have a specific numbers in front of me regarding the take rates and I don't believe that we've shared that in great detail before.

I would just say as we now have all of our regions having the data capabilities that we are seeing a growing percentage of our customers that are taking and accepting the data processes and it appears to be on a good upward trend.

And then you mentioned that 35% of your base now is, customer base, is now in the new technologies handsets doing about 10% in the quarter.

Some of your comparable companies in the smaller market wireless operations thought it might take getting to about 75% to maybe 85% to turn positive on net adds.

What are your thoughts about when the return to positive net adds might be possible and how that relates to the migration process?

Well, I think that our crystal ball can be a little fuzzy about exactly when that turn may occur.

It is an interesting thought I had not thought of it in terms of the percentage of migration, although, certainly, migrating customers does take some time and attention of both the sales and the customer service staff as we move.

However, we really feel that from our standpoint the story on the positive net adds is in the retention side of the house, in other words, our gross adds have been growing year-over-year, did this quarter, and we believe that they are going forward in an acceptable fashion.

It is the retention side which is eating us up, and every person in our Company is focused to bring that retention back closer to our historic levels so that we can see the growth that we would all like to have.

Okay.

Great.

Good luck on the process.

Thank you.

Thank you.

Your next question comes from David Sharret with Lehman Brothers.

Please go ahead.

Good morning, guys.

If I could just follow up first on the churn question, if you have a break down of maybe what churn levels you're seeing on your CDMA/GSM subs versus your TDMA subs, if that gives any indication of where things can be heading as you continue to convert the base?

On the roaming side, you talked about how the roaming rate would, potentially, be lowered next year.

I was wondering if you could provide any specific levels of expected declines at the rate you're looking for, in terms of your roaming yield next year, and maybe just a little more detail on just the big spike in roaming traffic you did see in the third quarter as you exited the quarter maybe in the month of September or the month of October were you seeing traffic above or below that 65% rate?

Maybe I can address the spike question and defer the other questions to Wes.

I think it is helpful to remember that large chunks of our construction were completed in second quarter, and at the very beginning of third quarter, so we saw a fairly substantial number of cell sites in high traffic areas that came on at that time which contributed to, certainly, contributed to some of the growth that we saw.

Also again thinking historically a little bit, third quarter is really our highest quarter in terms of roaming revenue, and so that seems to have been the case as well this year, so, naturally, as we go into fourth quarter, we would expect the increases not to be as robust year-over-year.

But, Ann, just a follow up on that.

I guess the rate I was looking for was more the year-over-year rate when you were comparing this third quarter versus third quarter '04, and not 65%.

It, clearly, should, the roaming traffic will likely slow down in the fourth quarter.

As you look at 4Q '05 versus 4Q '04, the indications you have seen from September and October, you continue at the 65% rate or be in excess of it in terms of year-over-year growth in minutes?

David, let me try to help on that particular subject.

As far as the months within the third quarter on a year-over-year basis, they were all very strong and, although there is a little bit of variation between month-to-month, in general, they're pretty consistent and heading into from what we've seen so far for October we would anticipate very significant increases on a year-over-year basis.

I guess the point Ann might have been trying to say is whether or not we can anticipate having 65% increases will remain to be seen.

Certainly, we would expect very significant year-over-year increases based on the fact that in the fourth quarter last year, much of the same issue that we had the first part of this year, we had lesser amount of GSM network available and even by the fourth quarter of last year an increasing number of our national roaming partners customers had GSM handsets so they couldn't use our TMA networks.

That's why we indicated we think we will continue to have very strong roaming year-over-year minute increases in the fourth quarter and certainly would anticipate the same going into the first half of next year simply because our networks were at such different stages of availability for next generation technology customers of our roaming partners.

And then just, Wes, on your point about the roaming rates, what are you expecting in terms of a decline and to forecast growth in roaming revenue next year, what is sort of the implied expectation on growth in roaming minutes next year to continue to be positive given, if you could be specific around what roaming rate decline you're looking for?

We talked about earlier on the call the rate has $0.13 in the third quarter and that compared to $0.16 a year ago, based on there is a lot of things that you have to take into account when you start looking at what you think your roaming yield will be next year and the least of which is the mix of minutes that will still be there from a TDMA perspective, GSM perspective, and CDMA perspective, and the various roaming agreements with the roaming carriers for those respective technologies.

Having said all of that, we still anticipate that our roaming yield in 2006 will be at no less than the decline that we saw this year.

We will not see a decline of more than the $0.03 that we saw between the third quarter of last year and this year.

And, in fact, we would anticipate it would probably be slightly less than that.

You couple that with the fact that we expect to have significant increases in minutes, and although I don't have the exact kind of percentage that we're talking about, I think it is important to, again, remember the first half of this year of 2005 we did not have a lot of our networks complete.

Now that they are complete, we'll have again I think very strong year-over-year increases the first half of next year simply because we have the full amount of network availability.

Understood.

And thanks for walking through that.

The last point, just on churn, is there a meaningful difference in terms of the churn rate on your CDMA subs, your GSM subs versus your TDMA base?

There is a pretty significant difference between our next generation technology and our TDMA customers and analog customers, if you will, but it goes beyond even that.

There are some regional differences.

Our Midwest region has very strong retention, always has had very strong retention.

That would go for both their CDMA, as well as their TDMA/analog customer base.

Our highest churn level is in the South, continues to be, as it has been, really, since we've had the South region, and so there is some geographical differences, as well, where we have seen the biggest improvement in some of the leading indicators that both Rick and Ann had talked about is in our two other regions, which is where we had some of our most significant availability problems as far as access to customer care centers in the Northeast and the Northwest, those metrics are improving significantly.

And in those markets we do see a lower GSM churn rate pretty significantly from what we're experiencing in TDMA.

So those are also taken into account when Ann made the mention that we expect the churn will decrease in the fourth quarter and into 2006 simply as we get more and more customers on those new technologies we should benefit from their lower churn, as well.

All right.

Thanks a lot.

Thank you.

Our next question is from Pat Dyson with Credit Suisse First Boston.

Please go ahead.

Thanks.

Good morning.

Just three questions, I guess, to follow up on the churn issue.

You just mentioned that you expect to start to begin to see a decline in the churn as we get into the fourth and into the first quarter of '06.

I guess what's your sense as to where churn can get back to?

Is it fair for us to look back at where churn was in '01, '02, '03 area, and think that is a level you can get back to or has the world changed a bit and you're going to end up being, ultimately, a little bit higher than that ,and then two other questions on roaming?

Could you give us any sense as to what impact the Hurricane Katrina had as far as customers coming up into your networks in the South markets, and if you saw any kind of one-timish roaming traffic as a result of that, and, finally, on the balance sheet and the transaction that you just completed, obviously, puts you in some position here to go after the preferred and just wanted to get your sense as far as how you think about the preferreds, whether you would like to keep chipping away at them, and I am talking, specifically, about the seniors, you want to keep chipping away at them or if you'd like to do something a little bit bigger like what Dobson did, and any thoughts as to whether you would pay the next dividend on the seniors, as well?

Okay.

There is a number of questions here, Pat, and I will try to make sure I address them just in case I happen to overlook something, make sure you keep me on task here.

That's if I can remember, as well. [LAUGHTER]

Let me handle the balance sheet questions first.

First part of the answer to that question is that we did not declare the dividend on either the senior or the junior preferred for November 15.

We will continue to look at whether or not it makes sense for us on pay those dividends on a quarter-by-quarter basis, and, really, that's about all I can say on that right now.

As far as the preferreds themselves, clearly, if you look at the past we've tried to reduce our debt via the preferred stock to the tune of about $100 million of reduction in principle value, $90 million of it using cash, and in the third quarter we used 3A9 transactions to exchange common stock for preferred stock.

We'll continue to evaluate what we believe makes the most sense for us as far as reducing our debt, but the highest coupon debt that we have is the senior preferred stock.

We have to trade off liquidity, obviously, versus that debt reduction when you look at that particular security, but I think we'll look at both the chip away method, as you said, and we'll also look at, possibly, doing something a little bit bigger, but at this point we have not made any decisions.

I guess, Wes, just on that point, where is the, on a pro forma basis, where is the restricted payments basket now?

It's $73 million approximately.

That's pro forma for everything you did last week?

Yes.

Okay.

And then just the two others were the any one time issue on the hurricane and the churn targets?

I think there was a little bit of one time.

We saw an initial spike up right after Hurricane Katrina in roaming.

Again, it is a little bit difficult to exactly understand because we were also bringing up cell sites, GSM cell sites at the same time, so some of that could have been contributed to having just more additional cell sites.

We did see some initial increase.

It was not very -- it wasn't a big bubble that lasted very long, and also what we ended up having were some issues, however, on the other side, particularly, the TDMA side where because of some of the issues that our long distance carrier had in that they had moisture impairment in their switch in New Orleans where we funnel a lot of our long distance traffic.

Our customers, or our roaming customers, were unable to use, to complete calls that were long distance.

That actually hurt us negatively a little bit the other way.

So I think, in general, if you put all of that together, it had very minimal, probably, impact on a one-time basis from a hurricane.

As far as the decline in churn, we do anticipate that fourth quarter will be better.

What we're seeing in October is already a very nice improvement over the 3% post paid churn that we saw during the third quarter. ,Where we go I think, really depends a little bit on how far you want to go back.

Going back into the early years that you were talking about, we saw sub 2% churn as you know, RCC has, historically, been very strong in churn or in the way we like to talk about it, high retention.

We've all said in one shape, form, or another the levels we're at currently are unacceptable, and we're disappointed in those, and we fully expect to move back to more historical levels.

Whether we get below the 2% churn, I think, is something that we would certainly like to have, but I don't know that we're modeling for sub 2% churn, but we certainly expect to get to the much lower 2% levels than where we have been the last couple of quarters.

Okay.

Thanks, Wes.

Thank you.

Next question comes from Romeo Reyes with Jefferies & Company.

Please go ahead.

Yes, I want to ask a quick question -- high yield analyst.

Let's go through a couple questions here.

First on the roaming rates, can you give us a sense of what the new technology roaming rates are relative to the legacy technology if you can break that out for us, that would be great?

Secondly, in terms of the ARPU, the ARPU has been quite robust here.

Can you give us a sense of where you see that heading in terms of Q4 and maybe into 2006?

And, then lastly, again, I guess I have a couple of other questions.

With respect to decommissioning the legacy network, how much do you expect to see in savings once you do that and when would you expect to be able to decommission the network?

And then on the roaming side, how much of the roaming growth would you say was from, sort of, the same foot prints that you had last year, relative to, say a new footprint where you deployed new cell sites over the last twelve months?

Ann and I will try to answer these questions, but let me talk about the first one.

The rate differential on TDMA versus GSM.

We have not, specifically, talked about the rate differences.

It is clearly higher on the TDMA analog side as it compares to next generation technology, and as time goes along, that difference actually widens because, for the most part, the TDMA analog minutes do not have the same kind of yield declines built in going forward as the GSM and CDMA roaming agreements have, so we would anticipate that that spread will widen and there is a difference right now.

We do not disclose, for various reasons, the difference between those two technologies.

Can you give us a sense of what percentage of the revenue is coming, the roaming revenue, is coming from the legacy TDMA versus either GSM or CDMA?

I think we talked about the 85% of our minutes are next generation technology.

If I gave the percent, I guess we’d probably be able to come up with those rates.

Suffice it to say that there is a yield difference, but still the vast majority, the very vast majority, of our roaming revenue in the quarter is also coming from next generation technology.

It certainly wouldn't be necessarily at 85%, but it would be at a very high percent.

And in terms of roaming rates, you're pretty much guiding us to something less than $0.03 drop from '05 to '06, roughly, maybe $0.01.5 to $0.02 drop for this year, I mean, for next year versus this year?

I am sorry, I am having a really hard time hearing you.

Can you hear me?

Yes.

On the roaming rates, are you guiding us to about $0.02 drop for 2006 versus 2005?

I think what I said was that we would not expect to have the roaming rate decline as much as what we saw between '04 and '05's third quarter, which was $0.03.

So at this point all we're saying is that we don't anticipate it will be that much.

It will be somewhat less than that.

Okay.

As far as the -- I think your question related to where local service revenue goes going forward?

Correct.

Again, I don't know that we're in a position today to give guidance on what we expect going forward.

I think we'll have more that we'll be sharing after the fourth quarter call, but I think the point we're trying to drive home is that we are, certainly, seeing higher local service revenue from our next generation customers to the tune of more than $5.

That's been, actually, the same statistic I think we've given now three quarters in a row, simply, because I think there is the belief that over time that number will go down and although we anticipate that the last half of our customers may or may not have $5 higher local service revenue than they had when they were on TDMA or analog, it has held up at least to this point, and that's largely, I think, because our rate plans for our next generation technology offerings are not dramatically different from the amount of minutes and the price points that our older TDMA price points were at.

I think that we were, in many ways, conditioning our customer base for next generation pricing as the last couple of years with our TDMA promotions, as well.

So there hasn't been a dramatic change in what the customers pay for it.

So what we are experiencing is the additional data revenue opportunities that come as well as, certainly, the USF payments have had some impact on our LSR, and, in some cases, customers now trade up for bigger buckets of minutes simply because they tend to use the phones more, partly because we have much more complete networks today with GSM and CDMA than we did under the old TDMA networks of a year or so ago, so people have availability to use their phones a lot more in the areas we cover.

So all of those factors are driving higher LSR, but I think the important point is there isn't variegation in our cost per minute going to these new plans.

Much of the philosophy, or the concepts, behind the plans are a lot more similar than maybe some other carriers have had.

Is there any additional up side from getting ETC status in additional states on the USF side?

At this point, we probably received the ETC certifications in all of the states that make sense for us at this time.

The one thing that's important to point out is we received ETC certification in New Hampshire within the last few months, so we will begin receiving those moneys and including those in revenue starting next year.

That is not going to significantly change the USF payment profile because it was one of the smaller states left.

As it made sense for us we concentrated on the states that had the highest opportunity for us.

You asked about the decommissioning of the legacy network.

That process is going on on a daily basis right now.

As we look at the network, and we can, and we have higher usage on our new technology networks, we move capacity and spectrum usage wherever we can, as quickly as we can, to the new networks because they are more efficient, more cost effective and in handling a minute of use and back call and all the rest of it.

So that process is one that largely takes place over time.

In addition to that, there will be a point when we are able to turn off the analog and TDMA networks.

First of all, we're required by law to maintain the analog network into early 2008.

On the TDMA side, we are required to keep it as long as it makes economic sense for us.

In that respect, while we are harvesting as much of the spectrum usage as we can and reducing costs as we migrate our own customers, and as we see the roaming traffic migrate, we will continue to watch that closely and plan to decommission it as soon as it makes economic sense to do so.

I am sorry, I can't pinpoint that exact date for you today.

As far as the roaming growth, the old footprint versus the new footprint, there I would just say without getting into too much nitty-gritty detail, as we said in our remarks, we've increased our cell sites by about one-third over the last year and a half, and year-over-year our minutes went up 65%.

I think that's some indication that usage, both on a per customer and on a roaming basis, has increased pretty dramatically, so there is some increase from the new sites but there is also increase from new usage.

Great.

Thank you.

Thank you. [Operator Instructions] Our next question is a follow-up question from Rick Prentiss.

Please go ahead.

Yes, I wanted to toss a couple other questions in there, if I may.

You mentioned the significant increase in the roaming traffic for the new technologies.

Any requirements or desires to look at next generation technology, such as EVDO or UMTS, and when would you expect to see those capital expenditures impact your budgets?

Like every carrier, we're certainly looking at following those technologies and, fortunately, from some of our stronger roaming relationships we are able to understand from our roaming partners what some of their experiences are as they're dealing with these technologies.

We have not pinpointed a decision in those matters at this time, but the same way that we did for our transition to CDMA and GSM, we'll continue to follow it when it makes economic sense for us we'll move ahead.

Rick, it is important that we don't have any requirements in any of our roaming agreements to do that at this time.

So there is no requirement, just strictly an economic decision of when it makes sense to add that extra capacity to collect the revenue?

That's correct.

On number portability, one thing we've been trying to monitor lately is how many people are actually hoarding their numbers when they churn, in other words, two years ago, and a little bit less for the smaller markets, we were one of the ones that said we don't think number portability would drive churn.

I am wondering now if churn will drive number portability in the future?

In other words, will more and more people take their number with them when they churn?

Are you seeing 5%, 10%, 20% of people taking their numbers with them, or what are you seeing?

I am sorry, I don't have percentages on that for you.

Frankly, in the last several months that has not really been an issue for us except we've seen it swing more to the positive side in our favor and I just haven't followed it very closely.

A final question for you is valuations in the industry continue to be pretty decent, a little pull back lately, a lot of M&A discussion at the larger level, what are you seeing out there as far as M&A environment, as far as either adding extra edge out licenses to your footprint, or possibly, rationalizing the clusters?

We've had you know a lot of conversation going on about one off markets coming into play, some licenses are coming out, and we, as you recall, in a transaction with AT&T Wireless, we were able to garner some very nice, adjacent and overlapping spectrum that was helpful to us as we converted to next generation services, so we used it that way.

We also have used it in a number of markets to edge out particularly the lakes area of New Hampshire, and we've also used it to edge out markets in Alabama and it's being built as we speak.

Additionally, in the Midwest we expanded our long held cellular footprint to areas of Fargo and Grand Forks that we did not have CDMA in before.

We've used spectrum that we've had to press that edge out strategy.

We continue to look at opportunities to pick up some spectrum adjacent or to pick up operations that would be next to us that would be synergistic.

As we've kind of been on this page for the last couple of years with what we've had on our plate with our next generation build out, our conversion of billing systems, and appreciably our customer conversion and dealing with them, that we really felt we wanted to do what we could do to our current operations, do them well, get leverage, those activities to the best of our abilities, and really bring value to the assets we already hold, so we've been really been sticking to our knitting on that one and we'll continue to do that although it would be opportunistic if, particularly, spectrum came up.

I think Rick makes a good point on a couple of these areas.

These are opportunities yet for us this year and going into next year.

We call them the red box areas in eastern part of Alabama, which is really a corridor that, in conjunction with Cingular, that we've agreed to build out for them that we believe is going to be a really strong roaming area.

Another is the lakes area in New Hampshire.

Both of these are builds that are under way, as Rick talked about, but there is more left to build than what we probably already have built.

I think our opportunity, both from an edging out for a customer gain standpoint, but certainly, also from a roaming minutes standpoint, there is probably more opportunity ahead of us in those two areas than we already have captured.

But still, by and large, CapEx down '06 versus '05?

Definitely.

Great.

Good luck, guys.

Thank you.

Our next question comes from Robert Hopper with UBS.

Please go ahead.

Hi, guys.

A couple of quick questions just on the cost side.

I wonder if you can help us just bridge the sequential change on both the network and the SG&A?

Is there anything else on the network side, or can we just assume that getting up all these cell sites is for the incremental cost along with the minutes, therefore, leading us to think that would be a decent run rate going forward, as well as on the SG&A side you cite a number of higher bad debt expense, severance costs, and items, and I am just trying to get to a decent run rate and thinking through the customer service side of things.

How can we expect that to trend?

Both of these line items have spiked up a little bit in the past couple of quarters and I am trying on get a sense of what direction they're heading near term?

Thanks.

I think I heard most of your question.

Somehow it was breaking up pretty significantly, so I had a hard time understanding all of it.

I understand you wanted some color, I would categorize it, under both network and SG&A and where the trends would be.

From a network side, certainly you saw the impact in the third quarter of the cumulative effect of all of the builds that we have done over the last year or so.

We've added a number of cell sites.

Those cell sites have largely been leased sites, so they have the additional rents for those sites as well as all of the additional back call costs both fixed and variable related to having those sites up and running.

From a network perspective, I think you're seeing for the quarter the vast majority of the network to where it is today.

Obviously, we'll continue to add sites going into the fourth quarter of next year, but we also anticipate starting to be able to do a better job of economizing some of the back call facilities, in particular, that we have to make reductions in areas where we've seen a big enough transition to next generation technology minutes which are a lot more efficient from a back call perspective and so we would anticipate that we will get some economies going on the network side going forward to help offset, if not more than offset, the additional costs for new cell sites.

As far as SG&A, there were a number of things that are impacting us that I talked about in the third quarter, certainly we still are incurring higher expenses for customer service as we have geared up to handle the increased phone volume that we've had during the later stages of the quarter and now certainly into the fourth quarter we're starting to see some reduction there.

We've gotten rid of a lot of the contract help to answer our phones as we've gotten our arms around the call volumes in our call center, so I would anticipate that portion of the expenses that relate to SG&A to be coming down over time.

We also had higher bad debt expense in the quarter.

Our experience is that bad debt and churn go very much hand in hand as we see churn go down and we certainly anticipate that that will happen in the fourth quarter, I think I indicated earlier we've already seen a nice improvement in the month of October already.

We would expect that bad debt expense will go down as we move forward, as well.

On the other hand, we have had a big increase in the costs for us to clear the roaming traffic.

That's one cost, I guess, I will be happy to see increase because it means that we've seen roaming revenue volumes, or minute volumes, continue to increase and so I would anticipate that that number will continue to go up over this year since we anticipate year-over-year increases in minutes.

Certainly our focus as a Company, which it has been for a long time, is to have high EBITDA margins.

We're a Company that has prided itself for a long time on a couple of things.

One, retention, which we think is heading in the right direction, and, number two, having very strong EBITDA margins, and so we will continue to look at network costs, SG&A costs, all of these things to run our Company as efficiently as we can, and all I can say is if you look at our past, I think you will understand from looking at that that we look at expense leverage as a fundamental part of our business, so as a percentage of revenue we would anticipate both of those line items over time.

It may not be every quarter and it may not be immediate, but we would expect over time to start seeing expense leverage, again, in both of those line items.

How significant was the severance charge you cite in here?

I suppose of the increase it was relatively modest, it was less than $1 million, but I don't want to get any more specific than that at this point.

Thanks.

Thank you.

Our next question comes from David Walker with Pinewood Capital.

Please go ahead.

Good morning.

Thank you.

Just a couple of questions that haven't been addressed.

Actually, more of a clarification first, Wes, just to be clear, on the preferred dividends you have not and will not declare the November 15 preferred dividends?

We have not declared the dividends similar to what we had done for eight, or I should say nine dividends previously.

I can't say that we don't declare it because just like we declared dividends on the four that we recently paid we can do that at some time down into the future.

But at this point in time, we have not declared a dividend for the November 15 and we'll continue to evaluate, whether or not, it makes sense for us to do so.

Great.

More generally, obviously, you noted in a recent release the conversion of the class T preferreds.

Could you illuminate us a little bit on the class M preferreds, specifically, is there some way in which you could engineer a similar type of conversion, and just talk a little bit about what your intentions if any are with that preferred?

Well, there is a fundamental difference between a class T and the class M in that the class T stock was put in place back in 2000 when we completed an acquisition where, in a couple of the markets that we were acquiring, the other side owner was U.S. Cellular.

The class T represents ownership that was in common stock by U.S.

Cellular in our Company.

At that time, the FCC rules did not allow for having the other cellular carrier to own more than 5% of the voting rights of the stock in our Company, in this case, and so what we did was we put in place class T stock which was non-voting stock.

We always had the right to convert it back to the same amount of shares that they converted from either when they would drop below 5% or if the FCC rules changed to allow such an ownership position.

Earlier this year the FCC rules changed such that we could, in fact, have U.S.

Cellular own more than 5% of the voting stock of our Company, so we elected to help simplify our balance sheet, moved that stock back into the same number of shares that they had previously held before they were converted into class T.

We thought this made a lot of sense to help simplify our balance sheet and so that's what we did.

Class M does not have -- is not a similar situation.

This was an equity that was put in place, roughly the same time in 2000, I guess, but we have conversion rights within that, however, the conversion price is quite a bit higher than where our current stock price is, so for all intents and purposes, we have to view this as a debt instrument today, and so it would largely depend on whether or not we could ever come to some kind of agreement with class M for them to convert or do something in the common stock.

But as the world sits today, it is not something that would be encompassed within any of the agreements that we have.

That's very helpful.

And then a final clarification, does today's earnings release mark the end of the quiet period around your 3A9 exchanges, or will that period end some other time in the future, perhaps with the filing of the Q or something like that?

We really can't talk about quiet periods, per se.

Typically, as you know, we are not allowed to do things such as 3A9's, or do transactions as a Company when there isn't public information available.

Now that we've released information, we'd be more likely to be able to do transactions like that.

Per se, quiet period or not quiet period, I really can't comment to that, specifically.

Great.

Thank you.

Thank you.

Our next question is from Jeff Gavarkovs with CIBC World Markets.

Good morning.

Are dual band phones a very big opportunity for you going forward for roaming revenue?

By dual band phones you're talking about GSM 850 and 1900 phones, I do believe it is an opportunity for us.

T-Mobile, as most of you probably know, really had limited access for their customers off of their networks until really not that long ago, and then more importantly, they also were only selling 1900 phones, for the most part, and since the bulk of our GSM network is at 850, we do have some at 1900, but a vast amount of our network is at 850.

The more and more T-Mobile has 850, 1900 phones in their customers' hands, and the fact that they are also including off network capability for their customers, I think bodes really well for us, as far as having T-Mobile be an increasing number of minutes opportunity for us.

We have seen pretty significant increases from them already, but I think that the opportunity going forward is still a strong one for us.

And how is the ratio of dual band phones for Cingular?

Ann, you might know that better, but my understanding is that they've been, since they have both 850 and 1900 spectrum that encompasses their networks, I have to believe they've had dual band phones for the majority, if not almost all of their customers that they sell phones to.

I think that that would be a fair conclusion and I don't know what the percentages might be, I believe that they've been focused on giving their customers the broadest possible GSM experience, regardless of which band it is.

I think they've been focused on that for sometime.

What is the mix of roaming minutes from T-Mobile at this point?

We haven't given specific percentages, but it is certainly, of the big three as we call them, Cingular, Verizon and T-Mobile, T-Mobile is the third highest of those three.

Okay.

And you mention that you have to keep an analog network in place until 2008.

What percentage of minutes, roaming minutes, are analog at this point, and how many analog customers do you have?

Both of those numbers are relatively small, but, still contribute, in a very positive way, to what we're doing.

We would seek to convert the analog customers over the next year, or so.

The biggest number of analog roaming minutes probably comes from situations where a CDMA carrier customer comes into our area and does not have an adequate signal for us, for their customer to use, and so they come onto our network under analog, because the current GSM customer cannot use analog, as you know.

So really, for us, it would have to be a national carrier customer that has analog and there are probably few of them left.

So its more likely where a CDMA customer comes into any of our networks that still all have analog available, they could then use out networks, since we may have the only network available for them to use.

One of the --

Also, just a comment on the mechanical side.

To say that we still have a network in place is not to say that network is as robust as it was at a time when we relied on analog phones, or, in fact, relied on it to support our TDMA networks, even more strongly.

This is a matter of constantly mining those networks and we certainly do what we are required to do for the FCC.

But it is not a place where we are devoting capital, or broadening it, in fact, just the opposite.

It's a place where as usage shrinks, we shrink the capacity and move as much as possible to the more efficient technologies.

Okay, what do you feel the savings would be in decommissioning the analog network and, at some point, the TDMA network?

I think beyond what I've said at this point, we don't have specific numbers on that for you.

Thank you, and at this time I show no further questions.

I'd like to turn the conference back over for any concluding comments.

This is Ekstrand.

As we have re-invented our Company this year, we're proud that we met our earlier guidance on many fronts, such as roaming, network builds, and EBITDA, despite the challenges.

Appreciate the interest in our Company.

We'll talk to you early next year with our full year results.

Thank you, and ladies and gentlemen, this concludes the RCC third quarter 2005 earnings conference call.

Thank you for participating in today's conference and at this time you may now disconnect.