威訊通訊 (VZ) 2006 Q1 法說會逐字稿

Welcome to the RCC first quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

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

Please go ahead, sir.

Good afternoon, everyone, and thanks for joining us for 2006 first quarter teleconference.

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

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

An archive will also be available on our 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 first quarter 2006 press release, should be considered together with this 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 initiative.

These risks and uncertainties also include our ability to increase wireless 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 further discussion of these and other risks and uncertainties, please see our detailed report on Form 10-K for the year ended December 31, 2005, and other filings with the Securities and Exchange Commission.

Given these concerns, investors should not place undue reliance on forward-looking statements.

In the course of this teleconference, we will discuss financial metrics that do not conform to Generally Accepted Accounting Principles.

Any non-GAAP financial measure presented by RCC during today's call should be considered in addition to, but not as a substitute, for the information prepared in accordance with GAAP.

With us this afternoon 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.

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

Thanks, Chris, and good afternoon, everyone.

Over the last couple of years, our teams have basically re-invented our company.

Customer operations, sales, marketing, network, billing, and many other support teams have dedicated a great deal of time and energy toward the implementation of comprehensive wireless solutions for our customers.

We continue to leverage the strategic advantages of our 850-megahertz spectrum, while providing quality wireless services to our customers.

We are now focused on our migration of existing customers to new technology devices, with the intent of improving the customer experience and our revenue stream.

As our customers gain experience with these new devices, we expect they will increase their usage, and we will experience increased data revenue.

Additionally, we anticipate new applications that will leverage our technology platform.

With that said, and still into the process, overall data LSR has increased 128% to $1.73 this quarter compared to a year ago.

Driving this trend were increased SMS messaging, ring tones, grain graphics, gaming, and Pictures-to-go services.

Our customers' use of SMS messaging has increased 132% compared to a year ago and is a leading contributor to our data LSR.

Pictures-To-Go has turned into a very popular service with the always-improving camera phones.

Just recently, we launched Mail-To-Go service in our GSM territories, giving our customers access to e-mail, calendar, and is task-list information through their PDA devices.

Our operating performance has significantly improved this quarter, reflecting our increased service revenue, increased roaming revenue, and controlled spending.

Moving on -- we're obviously not pleased with our continued customer losses.

We continue to rework, rebuild, and refine all elements of our operations to provide our customers the best possible overall wireless solution.

We are building on our individual customer success stories, creating customer advocates of Unicell one-by-one, and we look for customer growth in the second half of this year.

Now, I'll turn it over to Ann Newhall for an operations discussion.

Thanks, Rick, and good afternoon, everyone.

We've been providing new technology coverage in all of our territories for the last nine months, and are pleased that we've been able to continue to maintain our customer migration pace.

At the quarter-end, 57% of our customers were using new technology handsets, compared with 47% at December 31, 2005, and 35% at September 30.

It's a win/win outcome each time we migrate a customer from TDMA.

Not only do customers receive enhanced services, we receive better revenue opportunities as our new technologIEs continues to produce higher LSRs and decreased churn.

Our TDMA churn was 3.5% for the quarter as compared to 1.8% for our technology customers.

Additionally, we are getting closer to achieving critical mass in our new technology customer base, which we believe is an important step towards growth in post-paid customer.

As you might imagine, each new segment of customers that we migrate is a little harder to reach in an economically effective way.

We are providing attractive incentives for our Legacy customers, communicated through email, direct mail, telesales, and our traditional media outlets.

One example is Unicells Most-Wanted program.

We portray outdated phones on a Most-Wanted poster and outline the rewards for Legacy handset customers who migrate to the the latest we have to offer.

Our migration is going well.

We were disappointed in our lack of customer growth this quarter.

However, we made a conscious decision at the beginning of this quarter to tighten our credit standards in order to seek higher-quality customers and address our bad-debt concerns.

At this time, we are experiencing the worst of both worlds because our tightened credit policies have affected our growth ads, and it will still be a few months until we see the full positive impact on bad-debt and improvement in involuntary churn.

We are, however, already seeing improvement in our voluntary churn, which means that fewer of our customers are choosing to leave us.

We also expect to have a GSM prepaid product deployed in the third quarter, which will provide a solution for some of our credit-challenged customers, and we expect to use it to tap a market segment other carriers have relied on heavily in recent quarters.

We believe our increased LSR, improved retention, new GSM prepaid plans, and appropriate credit policies are the proper tools to build a strong customer foundation.

Moving on the network development -- we are in the peak months of our construction season and like all carriers, focused on the optimization of our networks, including adding a modest number of cell sites and increasing network capacity.

As we look beyond 2007, we continue to evaluation and understand our 3-G technology choices.

We currently have no requirements from our reeming partners to put any particular 3-G technologies in place.

As a reminder, these advanced technologies are backward compatible with our existing networks.

We are often asked how soon we will be able to eliminate the cost of operating our TDMA network.

During the first quarter, we still had 10% of our roaming traffic and 43% of our customers using a TDMA network.

In addition, we are required to maintain analog service until early-2008, and the analog service is part of the TDMA network.

We expect to maintain our TDMA network so long as it is economically to do so, and in the meantime, we continue to prune TDMA capacity, transfer spectrum usage to the new technologies, and reduce the operational cost of the TDMA network.

With that, I'll turn the call over to Wes for his financial wrap-up.

Thanks, Ann.

Our first quarter results reflect year-over-year increases in service and roaming revenues, together with discreet spending.

Operating income, without giving effect to depreciation, amortization, and stock-based compensation, was $53.6 million, an increase of 14.5% over last year.

Orose Alliance accounted for 1.9 million of this amount.

In the past, we've discussed the impact of a $1 increase in Local Service Revenue per customer, or "LSR," has on our service revenue this.

This quarter is a good example to illustrate that point.

For the quarter, we recorded an increase in service revenue, despite losing 40,000 post-paid customers from a year ago because local service revenue increased by $4 over last year.

The LSR increase is a result of additional voice and data revenue from our customers, as well as additional USF payments.

LSR from new technology customers continues to be $5 more than Legacy customers.

As Rick mentioned, data LSR also continues to climb.

Data revenue for the quarter was $1.73 per customer per month and now, represents approximately 3.4% of total local service revenue.

USF payments for the first quarter increased to $11.3 million, compared to -- excuse me -- compared to $8.4 million last year, reflecting ETC certifications we have in 10 states.

Roaming revenue continues to be very strong.

The 57% increase in roaming revenue during the quarter resulted from a 92% increase in out-collect minutes, offset by a decline in roaming yield.

Out-click yield for the quarter was $0.11 per minute this year, compared with $0.14 per minute last year.

Our GSM networks were largely being completed during the first half of last year, yet a significant portion of our GSM roaming partners' customers had already migrated to the new technology by that point in time.

During the first and second quarters of 2005, we undoubtedly missed some roaming revenue opportunities, which is impact the year-over-year roaming revenue comparisons this year.

As we move to the second half of this year, we expect roaming comparisons to be more apples-to-apples.

Equipment revenue was 6.4 million for the quarter, reflecting the impact of fewer gross additions this year.

Moving on the the expense side--.

Network costs for the quarter increased to $32 million, reflecting costs of operating 1,100 cell sites at quarter-end, a 20% increase since the end of the first quarter last year, together with costs of operating multiple technologies.

In-collect costs declined to 10.8 million this quarter, reflecting increased minutes that were more than offset by the declines in per-minute cost.

In-collect costs per minute this quarter declined to approximately $0.09 compared to $0.12 last year.

One of the hallmarks of our company for many years has been year-over-year expense leverage.

During the first quarter, we not only leveraged selling, general, and administration expenses, but they actually decreased to $34.3 million.

Contributing factors were a decline in sales and marketing costs for the quarter, to $12.7 million compared to $14.9 million last year, resulting from lower sales commissions and various efficiencies from organizational changes we made during the second half of 2005, resulting from lower sales commissions and various efficiencies from organizational changes we made during the second half of 2005.

Regulatory pass-through fees decreased slightly to $3.2 million this quarter.

This increase in depreciation and amortization reflects the impact of accelerated depreciation of our TDMA networks and the additional depreciation resulting from our new network.

Increased interest expense for the quarter reflects the higher level of debt resulting from the November issuance of 175 million of Senior-Subordinated floating-rate notes and borrowing $58 million from the revolving credit facilities.

Cash interest expense was 53.8 million for the quarter, as compared to $47.2 million last year, and 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 due in those quarters.

During the quarter, we also repurchased 4,560 shares of our Senior-Exchangeable Preferred stock for $5.5 million.

The corresponding gain of $173,000 is recorded in the reduction in interest expense.

Subsequent to the end of the quarter, we paid two cash dividends on our Senior-Exchangeable Preferred stock.

They were the quarterly dividends payable for November 15 of 2005, and February 15 of 2006, and totalled approximately $8.3 million including accrued interest and were paid on may 3.

Also since the end of the quarter, we completed the offering of 160 million of 8.25 Senior-Secured notes that will be due in 2012.

The proceeds of this offering will be used to redeem all the outstanding Senior-Secured floating rate notes due 2010.

Looking head, we are on target to meet the guidance we provided earlier in the year.

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

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Phil Cusick with Bear, Stearns.

Please go ahead.

Hi, guys.

Thanks for taking my call.

How are you?

Good.

It seems like other carriers, as they've done this transition, as they hit the 60%-level, you're halfway done, you talked about getting most of the way there by the end of the year -- should we start to see churn coming down, and also, what's it going to take the gross ads moving and start to ramp this business again?

Well, we'll take those one at a time.

Okay

With respect to the churn and what it means to hit 60% -- as we've looked at the track that other carriers have taken, it seems that there is more positive momentum in net ads as you hit somewhere around the two-thirds mark, and that's certainly what we're approaching now.

We also think that with respect to the churn, we've continued to see improvement just not as quickly as we had hoped for, and we believe that we have a lot of things in place to continue to accelerate that growth.

Our positive trends continuing, just at not such a rapid pace.

One thing that has been encouraging to us, as I noted, was that the voluntary churn is going down.

In other words, the customers that might voluntarily choose to leave because they're dissatisfied with something is improving for us.

Whereas the involuntary churn, which is linked with bad-debt, those people that we turn off the system because of a failure to pay, is not moving as quickly.

But also, just in the last month, post the end of the quarter, we've deployed predictive dialers htat we had been planning for and some best services routing, both things, which leverage our customer call centers and allow us to have more touchpoints, more contacts with our customers, both in terms of answering questions and solving problems, but also, in terms of working to work with our customers as early in the collection process as possible because we have -- we know we have more success there.

As far as on the customer side, we're simply not happy with where that customer growth is.

Again, we think we've put the right things into place, as we talked about with the credit policy and other steps, in order to have the right kind of customers, as well as the accelerated emphasis we have put on in our company to keep the migrations at a strong pace, to get as quickly as we can through that process.

Since the end of the quarter, we've rolled out new data products on our b2b side, a new family plan on the family side, and taken several other steps that we believe will continue to move us forward on this.

But we believe we have the right things in place, and we'll just continue to watch and adjust our plan to make that happen.

Now, you mentioned a GSM prepaid product.

As prepaid becomes more and more common among the major carriers, carriers are looking at the low-end or at a higher usage product.

Can you talk about how you're going to target that one?

I think, at this point, we're still developing exactly how we want to target that, Phil, but I would say that we are -- we are looking at both low-end product and something that also replicates, as closely as possible, the experience of a customer with our postpaid product.

We find that, at times, from what we've seen, there are customers that are looking for some of the conveniences of prepaid, but they still want the services of a postpaid-type product.

Having said that, however, the place where we had been most successful with our TDMA process -- prepaid in the past, was in our Southern region, where we really had a very strong demand for the lower-end product, and we believe that that's where our first emphasis will be.

Okay.

And then, finally, on CPJ, seems like it continues to crank up here -- is it just a function of fewer gross ads?

You're spending a lot of marketing dollars getting people turning over their phones, or is it getting harder and harder to add a customer out there, and competing against the national networks?

Can you talk about that a little?

I'll let Wes talk about the components of that, but just let me say that, as well as the costs of acquiring the customer there, and the somewhat higher costs of more sophisticated devices, we do have a migration cost for all of our customers, which are included in that number.

Okay.

And with that, I'll turn it to Wes.

That is probably one of the bigger components, but then, the other is, just as you have said, Phil, we have fewer gross ads this quarter than we do have that calculation based on postpaid ads -- gross ads for the quarter, and the fixed component is being spread over fewer customers.

So, a combination of that and the additional migration costs are what's driving that.

I would anticipate, as we move through the customer migration base and are also, I think, at the same time increasing our gross ads, that we'll start to see that number go down, certainly in the future quarters.

Great.

Okay, guys.

Thanks a lot.

Thank you.

Thank you, our next question comes from Pat Dyson with Credit Suisse.

Please go ahead.

Thanks, good afternoon.

Just to start off -- on the subscriber growth issue, just to make sure I have a clear sense of things.

What should our expectations be as we look out to the second quarter, the third quarter, as far as postpaid subscriber growth, and within that vein, could you give us any update on what trends you've seen so far, if not -- yes, any update on say, gross ad trends through the first part of the second quarter here on the postpaid side?

I think as we look to future quarters this year, we certainly expect to experience some of the same phenomena that other peer carriers in our space have encountered when they reach certain points in their migration lives.

I know there have been a couple carriers, particularly, that are -- appears to us -- that reported positive necessary ads in the first quarter, and in both cases, they were at migration levels with the predominance of their customer base is moving to GSM from TDMA, and they were in the 70%-range, or thereabouts, in migration.

You can clearly see FROM the statistics that we talked about, where retention, or churn, is at 3.5% for, say, TDMA analog customers and 1.8% for TDMA GSM customers, that once we hit the threshold of two-thirds of our customers being on new technology, the churn remains at -- as close to constant level, that's going to have a pretty significant impact on our retention, which will then, have a real positive as it goes to the net ad side of things.

I think the other thing to remember here is -- and I appreciate that this is not always simple to quantify, but -- we've said for years that somewhere in the area of 40% of our customers come from references from other customers, or connected to various accounts, and so, naturally, we feel as you move into the deeper penetration of the new technologies that that will continue to improve and come along with those technologies, because certainly we've seen some people who resist change now because of the number of handsets that they may have to move or whatever.

But we're working through those particular situations.

And the other thing that I'd like to note here is that we have only had our GSM and TDMA technologies in all of our regions for about 9 months.

So, where some carriers had a little slower start as they were doing their conversion and their migrations, we have caught up -- or we have pushed to catch-up as quickly as we could with our percent of migrations, but there is still a certain amount of time that needs to occur in the marketplace as customers become aware of it.

And also, we've really found what a number of the attractions of our new services, that is, a number of the data products and such that are available.

They are products where customers are most likely to buy when they've seen it, they've seen their neighbor have it, they're seen someone in their family or business group have it, and that is the process that we're experiencing now, and we believe will grow

Okay.

And then, can I get a few other questions on the migration?

You've run it at approximately, say, 10% per quarter.

You're now at 57% of postpaid customers are now in the new technology.

Should we expect that to continue at around that 10% level, or, Wes, is there any thought about trying to accelerate that into the second quarter, given the positive metrics that you are experiencing?

And then, finally, just on the guidance, I believe on the first quarter call, you said that you expect to see positive postpaid sub-growth for the full-year 2006.

Is that still a fair thought for us to have in our models for the full-year?

Well, I will always let Wes address anything that's related to guidance.

You can speak to that, but I just wanted to point out one thing with the migration.

We really are pushing to keep that at a strong pace as we get through the remaining base of our customers, but we also do believe, from observing other carriers and from our own experience, that different segments are harder to penetrate as others as we move to the end of this process.

So, when you hear the word accelerate, although it is not necessarily a full acceleration of percentages, as much as it is accelerating through some of those harder, or working more effectively through some of the harder segments and trying to maintain our pace.

We also have just regular old limitations of the needs that we have to service customers in our stores and in customer service that we can't totally devote those to migration purposes.

We need to keep the routine customer-answer times and all of that, in place.

With that, I'll move it to Wes.

We are still expecting, though, that we'll have new generation of technology handsets or devices in the low to mid-80% range, as we had talked about earlier this year.

So, simply, the three-quarters left, and you need roughly 30% in order to get to the mid-80% range.

That would indicate that we would need to be, on average, close to 10% in each of those quarters.

So, it is still our expectation that we'll get to that level by the end of the year.

As it relates to net ads in particular, it's our belief, as it was, that we be positive in the second half of the year.

Whether or not the positives in the second half of the year are enough to outweigh the negatives in the first half of the year, will remain to be seen, but our guidance is more from the standpoint that we expect positive net ads in the second half of the year.

Okay.

Great.

Appreciate it.

And your next question comes from Anna Goshko with Banc of America Securities.

Please go ahead.

Hi.

Thanks very much.

I just wanted to verify -- or clarify -- a few points on the prior question.

When you say positive net ads in the second half, do you mean positive postpaid, or is that going to be the impact of the new-gen prepaid subscribers that will be introduced?

And then, also, I had a question on -- on the timing of the introduction of the prepaid.

You said third quarter, I was wondering whether that is going to be July.

So, then, I think in response to the previous question, you're said you're still pretty much in the a development stage for some of those products.

So, am I right to think that it's probably more the September time-frame?

I think it would be right to be third quarter.

Okay.

I'm sorry.

It's just that these kind of projects are somewhat complex.

Okay.

And then, just to repeat my first question, it was in--?

I've got it.

Post paid versus prepaid -- we'd expect both of them to be positive as we look at the second half of the year, but our primary comments that we have been making are related, specifically, to postpaid customers.

But certainly, as we bring on our new prepaid offering, we would expect that to have positive-number impacts as well.

Okay.

And then, also, I know it's difficult for you to get inside all the time, into the wholesale channel, but wondering what -- if you have any expectations on that front in the remainder of the year, or how that's going to trend in the coming quarters?

Well, we've had -- I mean, if you look at the history, it's been a -- a customer source for us that's had positive net ads for a number of quarters.

Like you say, the visibility from our perspective, is pretty limited because we're relying completely on others to come up and meet those numbers going forward.

So, from our perspective, it's hard to give a lot of guidance as to what these partners of ours might produce from a customer perspective.

Okay.

Then, Wes, if I can, one more on your outlook.

Both on the roaming yield and on the in-collect costs, they both seem to be down about a penny sequentially.

I know there's rounding probably in there, but how do you see those trending by the end of this year?

Well, we've had the largest impacts already to our all-collect roaming yield.

As we sit today, our largest roaming carrier has an annual contract that had price reductions in it, and those were effective in the first quarter.

Although there may be fractions of cent reductions, as we sit here today, by and large, these are the kind of roaming yields that is we should expect, I would think, for the rest of the year, subject to any other modifications or changes we might make within our contracts.

Okay.

And then, flat on the in-collect as well in terms of the expense?

Likewise, we've had our reductions, So, the thing that can impact, perhaps, a little bit more, from an in-collect perspective as compared to the out-collectives, as we convert our customer base more, to say, GSM technology, from current TDMA, we tend to have a pretty nice -- we have a lower in-collect rate on GSM as we did on TDMA.

And so, we have a bigger percentage of our customer base to convert yet, versus, probably, what the nationals have to convert from their TDMA base and GSM.

So, it's potential to have a little more of an impact for in-collect, but, I think, in either case, we're talking fractions of a cent that may round it one cent, but that's about it.

Okay.

Great.

Thanks very much.

Thank you.

[OPERATOR INSTRUCTIONS]

And our next question comes from [Ariel Rockman] from Bear, Stearns.

Please go ahead.

Hi.

Actually,y it's Sandy Liang here.

How are you?

Hi, Sandy.

A couple -- just on the data side -- you gave the data LSR as $1.73.

How much different is that between TDMA and new technology?

I don't know that we have specific numbers in front of us right now, but I would hazard to say that certainly the new technology would be at a higher level than the TDMA, but we also talked about the fact that SMS is still the biggest component of our data revenue.

Right.

And that is capable on most, if not all, of our TDMA handsets as well as our GSM or TDMA handsets.

It sounds like you haven't really even gotten close to potential on that front.

Is that a fair statement?

I mean, give than the Sprint guys are doing $7 or so.

I think that that's correct.

I mean -- we just ruled out our email services, and we're just rolling out more sophisticated content services for our handset devices.

I'd say we're much close the other the beginning than Sprint and others would be.

Okay.

And just to change the subject a little bit -- can you just go over your philosophy on the preferred?

I mean -- obviously you bought back $4.5 million in the quarter, and then, you made a couple of interest payments, but now that your senior-preferred is trading close to claim, is it reasonable to assume that you'll be paying coupons fairly regularly, given that your free cash flow positive?

Well, I don't know that we've made a decision from a Company's perspective, if we will do that or not.

The fact that we are free cash flow is great, but one of the things that also impacts our ability to pay these dividends is the amount of our restrictive payment basket, and the growth in our restricted-payment basket, and it's also the flexibility that every restrictive-payment basket gives us to look at our balance sheet in total, not just specifically that one issue.

So, having said all of that, we will continue, I think, as we have really on a quarter-by-quarter basis for a number of years, deciding whether or not that's the best use of that capacity and cash on a go-forward basis.

I wouldn't say necessarily we will.

I wouldn't necessarily say we won't.

We'll look at it each quarter.

And that basket, right now, is about $70 million?

Actually, that basket -- when you take into account that 80 -- that 8.3 million of dividends after the end of the quarter, it's about $60 million.

Okay.

Pro forma basis for both that, and the repurchase, you're in the 60 million range.

Great.

Thank you very much.

Thanks, Sandy.

Thank you, management.

I'm showing there are no further questions.

I'll turn the conference back to you for any closing comments you may have.

Thank you.

Thanks to all who participated in the call.

We appreciate your interest in the Company.

We look forward to talking to you in August about our second quarter results and giving you an update.

Thank you.

Ladies and gentlemen, that concludes the RCC first quarter 2006 earnings conference call.