威訊通訊 (VZ) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the RCC third quarter 2006 earning conference call. [OPERATOR INSTRUCTIONS]

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

Please go ahead, sir.

Good morning, everyone, and thanks for joining us for our 2006 third quarter teleconference.

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.

Rich, Ann and Wes will be available after the prepared remarks for question and answer session.

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

To accommodate subsequent calls today, this call will not exceed one hour this morning.

After the completion of this call, a dial-in replay will be available through November 17, 2006.

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

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

Today's call is preceded by our third quarter financial press release and the filing of our Form 10-Q with the Securities and Exchange Commission.

This teleconference should be considered together with our Form 10-Q and its related financial information.

Before we begin today's teleconference, 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.

These risks and uncertainties also include our ability to increase wireless usage and reduce customer acquisition costs and to 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 a further discussion of these and other risks and uncertainties, please see RCC's report on Form 10-K for the year ended December 31, 2005, and our other filings with the Securities and Exchange Commission.

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

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

Thanks, Chris.

It's good to talk with you this morning.

Serving rural America with relevant wireless solutions has been our focus since we began the Company 16 years ago.

Coverage continues to be king to our customers because of the quality of our networks and spectrum.

Our distribution system is built upon our own retail efforts, complemented by strong local businesses who sell our services in their stores.

We maintain a local presence and place a high value on involvement in the communities we serve.

While we won't outspend national carriers on advertising, we differentiate ourselves with our customer service and sales teams.

Meanwhile, covering 9% of the lower 48 states, we help fulfill a promise made by national players of nationwide coverage, and receive substantial roaming revenues due to these arrangements.

Today with our national upgrade substantially completed and a significant portion of the migration process behind us, the strategies we embarked on three years ago are demonstrating their potential on the customer front.

Total minutes of use for the quarter grew by approximately 17% over last year, and 90% of these minutes were being driven by our new networks and devices.

We are seeing consistent improvement in billing and customer service, with new technology churn at 1.8% together with promising increases in gross postpaid adds.

LSR continues to be strong, driven by increases in data usage, and we are pleased to see that working our plan resulted in the expected customer growth this quarter.

This quarters customer growth and our strong expectations for the holiday selling season reflect a steady overall improvement in customer metrics this year.

We achieved these results the right way, through relevant and profit minded offerings.

Going forward we are focused on continuous improvement in all facets of our operation and achieving excellence in all we do.

We must continue to strive to earn our customers loyalty by exceeding their expectations.

To accomplish this we will continue to offer relevant telecommunications solutions to rural America.

We'll continue to migrate the remaining legacy customers to new technology handsets that better meet the growing hunger for data.

We'll improve our ability to penetrate the prepaid market, addressing another group of potential customers.

We'll look to enhancing the capabilities of our billing systems, and we will continue to emphasize customer focused training for our customer service and sales teams.

Concluding, our strategies of the last three years have been affirmed with very positive customer trends and we look forward to continuing this momentum through the fourth quarter and on into 2007.

Thanks for your time today and I'll pass the call to Ann.

Thanks, Rick, and good morning everyone.

Customer growth this quarter reflects the countless hours dedicated toward meeting the demand and challenges of equipping our Company for the next-generation of wireless services.

Since our low water mark in April of this year, consistent measured and sustainable progress has been made on many of the critical aspects of the customer front.

Last quarter we talked about selling relevant regional service offerings, together with popular handsets including RAZR's, Treo's, and Sony Ericsson Walkman.

This also has been the case during the third quarter.

So you might ask, what is different this quarter?

The answer is the traction that we gained in the second quarter has continued to reflect improved results in the third.

Accordingly, gross postpaid customer additions for the quarter increased to 47,000 compared to 35,000 during the second quarter of this year.

Over the past six months we've seen continuous improvement in our postpaid net adds, and in September had positive net adds in every region.

For the quarter net postpaid customer additions were approximately 2,500 as compared to a loss of 13,000 during the third quarter last year and a loss of 11,000 during the second quarter of this year.

The net gain in total customers, including prepaid and wholesale, during the third quarter was approximately 4,200, as compared to a loss of 12,000 last year.

We've talked often about our balanced growth strategy, where we do not favor any one key operating metric while sacrificing another.

Our LSR this quarter increased to $52 compared to $51 last year, reflecting gains made in data revenue and the overall quality our increasing customer base.

An essential ingredient to turning this quarter on a customer front has been the consistent progress in our migration efforts.

Since these efforts began in the second quarter of '05, the various teams involved have increased the proportion of new technology customers by 9% to 10% a quarter.

At September 30, approximately 75% of our postpaid customer base were using new technology handsets.

Although we expect this pace to slow as we pursue the last remaining tiers of legacy customers, we are very determined to complete our migration efforts as soon as possible.

While legacy churn exceeded 4% this quarter and TDMA roaming activity continues to decline, about two-thirds of our cell sites still have TDMA and analog equipment.

We use the same switches for both our TDMA and analog networks, and are required by the FCC to provide some level of analog service through early 2008.

However, we have a continuing opportunity to prune capacity, transfer spectrum usage to the new technologies and minimize the operational costs of the TDMA network.

We see this as a process that will continue over the next several quarters, leading to the eventual turn off of these networks.

With that said, we have challenges and opportunities ahead.

Data revenue per customer improved this quarter to $2.47, compared to $2.08 in the second quarter and $1.73 in the first -- excuse me -- Given that many carriers are reporting data revenue over $5 per customer, we feel an opportunity exists to improve our current level.

With our new prepaid product offering, we can better address customers who have difficulty qualifying for credit.

These offerings are gaining traction and are helping customers control their spending.

On the wholesale customer front, we are, and will be through 2007, working with our partners to migrate the customer base to GSM and CDMA products.

Looking ahead just as we saw significant improvement in the gross adds in the third quarter, we fully expect significant improvement in retention in the fourth quarter.

This step up reflects stronger retention and new technology customers, the continued improvement in coverage, the net benefits of improved WMP performance, together with recent customer service tools including a recently activated IVR and predictive dialer system.

With the improvement we've seen in gross adds, together with improving retention, we feel well-positioned for customer growth.

As we look beyond 2007 we continue evaluate and understand which advanced technologies will make economic sense for us, and at what time frame we might deploy them.

Although we currently have no requirements from our roaming partners to put additional technologies in place, we believe these advanced technologies will be compatible with our existing networks.

In conclusion, improvements in our overall operation, as highlighted by the customer growth you see this quarter, reflect the continued execution of a multi-year plan, together with the basic blocking and tackling of running the business.

Improvement at every customer experience point reflects increasing excellence in what we do and our current marketing theme, the way wireless should be from the customers point of view.

And with that I'll turn the call over to Wes.

Thanks, Ann.

Our financial performance was very strong again this quarter, reflecting record roaming revenue, increased local service revenue per customer, or LSR., and controlled spending.

Operating income, without giving effect to depreciation, amortization and stock-based compensation, increased to $62.3 million, marking the second highest quarterly amount in the Company's history.

Wireless Alliance accounted for $1.1 million of this amount.

This quarter's roaming revenue reflects more of an apples-to-apples comparison to the prior year than any other quarter this year. [Out] collect minutes increased 30% from last year, resulting in a 12% increase in roaming revenue.

The increase in out minutes is driven from the overall growth of customers of our national roaming partners, together with our increased network coverage.

Offsetting some of the gain in minute growth was a decline in per minute yield to #0.11 compared with $0.13 per minute last year.

Another contributing factor to the out collect roaming revenue growth this quarter was the increase in data roaming revenue, which increased 405% to $3.4 million for the quarter compared to $673,000 last year.

During the third quarter 95% of roaming traffic was GSM or CDMA.

The 2% decline in service revenue this quarter is a result of our earlier customer losses.

Despite these customer losses increases in LSR have helped us sustain our services revenue.

The primary reason for the increase in LSR has been the growth in data revenue.

For the third quarter, data revenue per customer increased 152% from last year to $2.47 per customer, and total ARPU for the third quarter increased to $80 compared with $74 last year.

USF payments were flat at $10.8 million this quarter.

Equipment revenue was $5.8 million for the quarter, reflecting lower handset prices for both new and migrating customers.

Partially offsetting lower handset prices was the 15% increase in gross postpaid customer additions this quarter compared to last year.

Despite higher gross postpaid adds this quarter, cost per gross add was $494 compared to $490 last year, reflecting an increased level of customer migrations and handset upgrades compared to last year.

Now moving on to other expenses.

Although we are operating 17% more cell sites this quarter compared with a year ago, network costs for the quarter increased by only 7% to $35.2 million.

At the end of September we now have 1,138 cell sites.

In collect costs declined slight to the $12 million this quarter, reflecting increased minutes that were more than offset by a decline in cost per minute.

In collect cost per minute declined to approximately $0.09 compared to $0.11 per minute last year.

As we look forward, we expect to realize more efficiencies within our network costs, as we reduce the capacity of our older networks.

Currently, legacy networks carry about 10% of our total network minutes, yet carry a greater proportion of our total network costs.

Despite higher gross customer additions this quarter, we, again, leveraged SG&A expenses in the third quarter.

SG&A expenses decreased 10% to $37.2 million this quarter compared to last year.

Contributing factor was a reduction of $845,000 in bad debt expenses in the quarter, together with efficiencies from organizational changes made in the second half of 2005, and a decline in billing system contract labor compared to last year.

The increase in depreciation and amortization reflects the impact of accel -- accelerated depreciation of our TDMA networks and additional depreciation from our new networks.

TDMA depreciation for the quarter was about $12.4 million.

We expect our TDMA equipment to be fully depreciated by the end of this year.

Increased interest expense for the quarter reflects the higher level of debt resulting from the November 2005 issuance of 175 million senior subordinated floating rate notes and borrowing $58 million from our revolving credit facility.

Cash interest payments were $56.3 million for the quarter.

During the quarter we repurchased 5,000 shares of our senior exchangeable preferred stock for $6.1 million.

The resulting gain of $147,000 was recorded as a reduction to interest expense.

After the end of the quarter we repurchased an additional 10,661 shares of our senior exchangeable preferred stock for $13 million, resulting in a $537,000 gain, which will be reflected as an offset to interest expense in the fourth quarter.

At the end of September, pro forma for this repurchase, we have restricted payment capacity of approximately $51 million.

We anticipate capital expenditures this year to be in the $50 million range, reflecting less than expected expenditures for network capacity growth and billing system development.

We expect to have positive free cash flow again in 2006.

And with that I'll turn the call back to the moderator.who will poll you for any questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Rich Prentiss with Raymond James.

Please go ahead.

Hi.

Good morning, everyone.

Morning.

A couple questions for you guys.

First, the add trends, obviously very positive seeing back to positive net adds.

Can you talk to us a little bit about what you've seen, maybe, through October and what the competitive environment's looking like, because you sounded pretty optimistic on some of your comments, Ann.

The second question is on the data side.

I agree, I think you've got a lot of nice upside there.

Can you talk to us about what explicitly you're doing to try and market the data plans in your areas?

The then the third question is on roaming.

How much has T-Mobile become of your roaming minutes?

Is it still fairly small?

Is it growing?

What kind of color could you add to that?

Okay.

Well, I'lI take the first couple of those questions.

If I sounded optimistic in my comments, it's because we are feeling optimistic.

The trends on our major key metrics are all working the right way.

And, in particular, with the retention and gross adds, we're feeling comfortable that things are working right and going in the right direction.

We are definitely seeing the same trending in October and we just feel that we'll remain strong.

As far as our data plan, we are -- I believe your question was specifically directed towards marketing.

We do have some specific marketing that is in the marketplace in communications to our customers and otherwise in our advertising, which emphasizes the data offerings that we have available to people.

Of course, we look at how we bundle things and how we find the correct place, in light of what our competitors are doing, to encourage those choices as well by our customers and, in fact, to attract them to us because of it.

It's also an ongoing process of adding content and improving our ways of delivering that content to our customers through our websites and other aspects of delivery, just to make it easier and more natural for the customers to use it and when they like something to find more.

I guess that's it in a nutshell.

With that I'll tell it to Wes for the question about T-Mobile roaming.

We've -- excuse me -- we've long had three large roaming partners;

Cingular, Verizon and T-Mobile.

In the past T-Mobile has the third largest of those three.

They continue to be the third largest of our three.

Clearly, we're seeing increases in minutes coming from T-Mobile, but we're also seeing increases from Cingular and Verizon, such that the percentage of the total roaming mix really hasn't changed appreciably, I don't think, over the last period of time.

We're seeing all of those arising. so to speak.

On the data, one follow-up back to Ann, maybe.

On the data you mentioned bundling.

What kind of take rate are you seeing on your gross adds as far as people taking data plans, or is it really just kind of ad hoc usage as opposed to a bundled plan people are taking?

We do have bundled plans that people are taking and we also have ad hoc usage.

I think we haven't been quite that granular in what we've disclosed before.

I think you can assume, from the level of data usage as compared to other carriers, that we feel very strongly that the take rate and the usage rate isn't high enough yet, and so we are work to go improve both of those factors.

Great.

Good luck.

Thank you.

Thank you.

Our next question comes from David Sharret from Lehman Brothers.

Good morning.

I wanted to follow-up just on the CapEx side first.

In terms of the levels you're looking at for this year, lower than before.

Just wondering, Wes, how much of that is due to just timing and some of that'll shift into '07 or is this a good maintenance level for CapEx for the Company?

And then just a follow on in terms of potential upgrade spending on [HSPPA] or other data upgrades, should we expect to start seeing some of that in 2007?

CapEx, I'll try and answer the first question for you, Dave.

It's probably a little early to say what is a CapEx maintenance level for us.

Clearly, the numbers that we're seeing in 2006 have been reduced from our earlier expectations for two primary reasons.

We had anticipated having more billing-related CapEx that would have been in 2006.

That likely will get moved into 2007, 2008, so there is some timing difference there.

The second piece that has contributed to lesser amounts of CapEx than what we had anticipated was the fact that we haven't need to do add growth capacity at the level that we had anticipated.

Somewhat because of lesser minutes, but also, clearly, the customer numbers being lower than anticipated in the first part of the year have impacted that somewhat.

I think that that amount of CapEx, though, clearly is a level that people should anticipate going forward.

I don't anticipate that we'll go down below $50 million in the next couple of years.

Conversely, just in terms of a pick up in spending for data upgrades, should we expect to see some of that in 2007?

Is that in your planning?

Well, what we're looking at right now ,as we work through our business plan and budget for '07, is the degree to which we will be trying some different systems.

We certainly are looking at the introduction of some of those elements in order to understand them better and to do some testing and some test marketing and that sort of thing.

But we don't -- at this point we don't expect that to be a substantial amount in 2007.

Okay.

And then just back on the gross add side, again just very impressive improvement quarter-over-quarter and the trends looking forward, it's great to see.

I'm just wondering if there was any more details you can get around what really was the spark, you think, this quarter that resulted in this gross add improvement?

Maybe it was a particular region that really picked up that you saw or a particular plan at a specific MRC that really -- you know, that really was successful this quarter?

Well, I think the one thing that's very encouraging to me is that it was not any one thing.

We've talked before about all of the steps that we had taken to improve on both our consistency and execution.

And so, everything that I've mentioned in the last several quarters' calls, the training consistency, strong networks.

Obviously we've increased our cell site count and in the course of that, fine tuned and improved what we're doing, as well as the improvements in our customer service and point-of-sale.

All of those things contributed to it.

We have not substantially changed our plan offering in the last six months in the marketplace.

In other words, we think that the consistency and the word of mouth from customers has been very strong.

We are pleased with the plans that we have in the marketplace in terms of margins and usage being what we predicted.

Having said that, there are some things that have been particularly helpful in the south.

We have a plan which we call Community Connections, which is an on-network plan, with no roaming and restricted data offering, which has been part of our ETC plans.

In other words, the kinds of plans that we are required to offer in the marketplace, but with a little different twist.

We've made them work well for customers in the south, and that has been very helpful in bringing them along with the rest of the regions.

But overall, I would say it's -- and I hate to be repetitive, but it is a lot of different things, which have been reflected in our consistency, our focus on regional plans, our just consistent approach with the customer in the marketplace and executing to give them a good experience.

I think it's important to note that in all of our territories the gross adds were greater than they were in the second quarter and were also greater than what they were last year in the third quarter.

So, to reaffirm the point that Ann was talking about, we've seen improvements in all of our service territories.

That's great, thanks.

Thanks for the color.

Thanks.

Thank you.

Our next question comes from Pat Dyson from Credit Suisse.

Thanks, good morning.

Just three questions.

First on ARPU, or LSR, LSR was solid on a year-over-year basis, but was down sequentially 53 to 52 this quarter.

May be you just give us a sense as to where you expect that number to go over the next quarter and maybe into '07?

And then two other questions.

You talked about the impact of minimizing or reducing capacity on the TDMA network.

Would you care just to give us any type of sense as to what the dollar amounts would be as far as bringing the cost down on that network?

And then, finally, you guys talked about the new prepaid product and your thoughts that that's going to fuel some growth.

Maybe I missed it, but if you could provide some color around what those offerings are and how soon we should expect to see some growth there, I'd appreciate it.

Let me answer your last couple of questions first and then turn it back to Wes for the LSR question.

As far as reducing our network expenses, I know that that is a question that's often asked in this area.

I think rather than providing specific numbers on it, I could share how we think about it.

We've talked about improving capacity in the network, which to us means moving as many channels to the spectrum on the new technologies so that we get more efficient and effective usage.

That is reflected in a couple of places, but probably the biggest place is in our T-1's and our other network connection expenses, just because of the efficiency and the expense of that channel.

We continue to do that but at this point, at least in the near future, we aren't expecting an abrupt drop of a real sizeable amount.

Again, it'll be steady improvement in that expense line and further contribution to our margins.

With respect to some color about the prepaid, as is clear from our history, we haven't been a Company that has primarily emphasized prepaid.

We've used it as a product in our mix and we're somewhat slowed down in the last couple of years, just because of getting a GSM product in place as opposed to a TDMA.

We don't expect that to change dramatically in the future.

In other words, there are seg -- there is a segment of the marketplace which we believe that it's important and appropriate to reach; that is, lower credit or for other reasons, they would like to have a prepaid phone or a second phone that's a prepaid phone.

And we intend to meet that need and meet it strongly, but we do not expect it to be the pivotal point of what we are selling or what we are placing in the market.

I hope that color is helpful.

Just to follow up quick on that, so we should expect then into the fourth and the first just that the growth you're talking about is primarily postpaid growth?

Yes.

We're not talking about dramatic shift in that, no.

Okay.

One of the things that when we show our LSR, we show those in whole numbers and it probably skewed this comparison between second quarter and third quarter a little bit.

The reality is that our LSR for postpaid customers dropped by $0.12 from the second quarter to the third quarter, so it's actually flat.

It ends up looking like it dropped $1 because of the way it rounds, but it's really only a $0.12 drop.

If you go back and look over the last six quarters, our postpaid LSR has been in the $51 to $52 range, essentially, so it's been pretty consistent.

I would anticipate that, as we go forward, it will probably continue to be pretty consistent.

I think we'll have some downward pressure, perhaps, on the voice side of things.

But as we talked about a couple of times already. we certainly anticipate data revenue growing and we think that will largely offset some of the price constraints that we might have from the voice perspective.

So, we don't anticipate a big increase or a big drop, but more stability in that line item going forward.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from Michael Nelson from Stanford Group.

Yes, thank you.

Congrats on the return to positive sub growth.

A couple of questions.

The first is, is there one, I guess, most popular rate plan across your footprint?

And I guess, what is the message that you feel like you've been delivering that has resonated with the customers?

It's the first question.

The second is were there any changes to credit standards during the quarter?

And finally, in terms of data ARPU, nice trends, and the question is are there any restrictions, I guess, within your billing systems that may prevent more widespread bundling of data services?

Thanks.

Okay, that was a lot of questions in a short time.

I'll see if I can get them all, Michael, and you can remind me if I missed something.

Most popular rate plan.

Fortunately we seem to have a mix of plans that are attractive right now.

But, frankly, what we are really targeting is the regional plans that we have, which we sometimes term local plans when we're calling to our -- when we're talking to our customers, which are three to seven-state area plans.

So they tend to cover very well the regional area that our customers are likely to the travel in, or believe that they're going to travel in, and that has been very attractive.

If you put that together with the -- that combination of coverage together with different family plan mixes and add-a-line mixes, that's very strong.

And another element of that type of local plan is the on-network plans that I talked about, Community Connections being one.

But we've had various other plans that we still have customers using in the marketplace that are restricted to the network and are very local, meaning just our network.

I think that that makes up the vast majority of our plan types and continues to be attractive and competitive in the marketplace.

Message to our customer.

Our message, the way wireless should be from the customers' point of view is simply to make it the friendliest, most direct experience that we can and to constantly convey the message that we are working to do the right thing every single day.

We might make a mistake.

If we make a mistake, we'll make it right with you.

And that is the message that we are pounding home again and again.

Whether it's coming from the aspect of explaining our networks and the advanced technologies that we have available for people through data or just through our GSM CMA technology, or whether we're just talking about the ability to call and ask a question about your bill or get your minutes used or whatever it might be.

So that's the message that internally and externally that we are just pounding home.

As far as changes in credit standards, we've talked about before about the significant change that we made in January of this year.

Since then I'd say we tinker every quarter with different pieces of our credit structure to get it right, make sure we're not leaving anything on the table that we shouldn't be with our customers, and that we're not taking -- getting taken advantage of.

I think by the improvement in our bad debt, as well as the improvement in gross sales, you can see that we're making the right choices in that regard, but we haven't made any abrupt changes in the third quarter.

And the last question with respect to data revenue --

Billing system.

Oh, billing system limitations.

Well, billing systems always provide us with some parameters that we have to work in, but right now and for the immediate future from what we are seeing, we don't feel that we have any limitations that are preventing us from competing the way we want to.

Great.

Thanks a lot, Good luck.

Thank you.

Thank you.

Our next question comes from [Anna Goshko] from Banc of America Securities.

Hi, thanks very much.

Two follow-ups, sort of.

First on the postpaid churn side, it was nice to see some sequential improvement in what is usually a high churn quarter.

So I realize a lot of that appears to be from the bigger base of your customers on the new technology plans.

But one thing had you talked about in the past was the involuntary churn from the higher credit standard applied earlier this year.

So I'm wondering if some of that is cycling off and should we continue to see a step down going forward?

And have a big picture question on churn is what's your time frame for getting back to levels like you saw in 2004, which is 2% or better range?

And then secondly I just wanted to kind of ask the prepaid question a little more directly.

I was surprised to see continued net losses of customers there, and it looks line the gross adds were pretty flat and churn hasn't spiked.

With the new plan, can we expect to see some additions going forward versus the continued losses?

Okay, with re --

I can comment at least on the involuntary churn portion of her first question.

We did see a pretty significant drop in the involuntary churn in the third quarter as compared to the second quarter, and also as compared to the third quarter last year.

And certainly I think that gets reflected in the bad debt expense being down in the third quarter on a year-over-year basis, as well.

I think that right now, if you looked at almost any segment of our churn or our retention, it has just been improving steadily in the right direction monthly since earlier this year.

And that is true for both the involuntary and the voluntary, as well, with an occasional blip here and there.

But from my standpoint, the fundamentals that are in place, our ability to see what's happening in those segments and to address the issues as they come up, I think we've talked before on the involuntary side about we started a high usage retention team that looks into the billing system before the bills even reach the customer, and call a segment of our customers where we see unusually high usage to talk with them, make sure they're getting on the right plan, to warn them that it's coming, to work through payment plans, and help them understand their plan better to get to the right level of usage for what they are doing.

That has been very positive for us and very positive from the customers, as well.

So, we feel that those aspects will continue to be strong.

As far as predicting when we will be sub 2%.

I think we've commented before that our new technology churn is already there and even the legacy churn has been improving in recent months, and so we are looking forward to that happening in the near future.

As far as prepaid question, yes, you're correct that we continue to have losses in the third quarter.

It's really two segments, of course.

It's the TDMA customers that we still have on and are still there, but which we are not adding to that system.

And so, although they continue to replenish and they continue to be valuable to us in terms of the revenues that that generates, as well as the USF support we get with respect to those customers, we do expect those TDMA customers to continue to decline, as we seek to move them to our GSM plans and move them into the new space.

Are we there yet? o, we are not., and we're continuing to work on that.

We do expect those customers to increase, but it's a migration process just as we've gone through with our postpaid customer base, and also just a matter of constantly improving both our distribution and our approach there.

So Ann if I can just paraphrase it, does that mean that the TDMA losses will, at least for the near future, still offset the GSM adds?

I wouldn't say that.

I think we are seeing steady growth in our GSM base and our GSM additions.

I wouldn't expect that, but I'm also not going to predict exactly how nd how much it'll across over.

At this point, that's more granular.

Thank you very much.

I think it's worth repeating one of the comments that Ann talked about, though, in her earlier remarks.

We talked at length about the improvement in gross adds in the third quarter and. clearly. the numbers support that.

She also made the comment that we fully expect significant improvement in retention in the fourth quarter, and I think that, without giving specifics as to what we've seen so far in October, clearly we wouldn't be making that statement if we didn't see improvement in October.

Okay, great.

Thanks very much again.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Sandy Liang from Bear Stearns.

Hi, good morning.

I was wondering if you could comment on gross add seasonality?

I think your seasonality has been all over the place historically.

I'm wondering, do you foresee a return to normal seasonality this year due to any new promotions or handsets or do you think it's more of a steady improvement from the last couple of quarters?

And then I have another question just regarding capital structure.

It looks like you're annualizing $70 to $80 million in free cash flow now, and yet you have $144 million cash on hand and, obviously, that's even lower because of the working capital factors.

I'm just wondering why do you think you need $150 million plus cash on hand and do you have any thoughts about how you can reduce the cost of your debt?

You want to talk about the customer seasonality first?

Sure.

I think that across the industry we've seen a couple of trends that continue.

One clearly is that the back to school and August excitement that we've seen and other carriers have seen as a second holiday season almost, probably will continue over time.

Traditionally for us the fall months of September, October and November have been less strong with a very strong December, at least that was true for the last two years.

We seem to be working against that trend this year and, in fact, seeing steady improvement now and we foresee that through the end of the year.

I guess overall I would just feel that it would continue to be steady improvement and positive results in that regard.

On the capital structure front, Sandy, as you know, there are some constraints within our various indentures that essentially have -- we have decided it made sense for to us draw on our revolver so we that had availability to our revolver.

And because of that, clearly we have $58 million of revolver debt that in an ideal situation we wouldn't have, but feel we have to have from a liquidity a perspective -- or had felt we needed from a liquidity perspective.

We continue to evaluate that and I think we have some decisions that we're going to need to make as we've continued to increase our free cash flow, as you pointed out.

Perhaps that need isn't as strong going forward, as we felt we needed to have some cushion as we've added to our networks with new technology.

We were in a period of losing customers.

We have come out of that period and are now adding customers and I think it's certainly something that we need to look at more closely than where we had to be positioned in the past.

Okay.

Thanks.

Thank you.

Our next question is a follow-up from Rick Prentiss.

Yes, hi.

Actually I also wanted to talk on that a little bit on the balance sheet side.

You guys have done some addressing of your preferred, post the quarter.

How do you look at that for the rest of the year?

What helps you make the decision of when to buy back some of that preferred?

And then the other question is, as you move down the migration path to the next-generation technologies, what do you think kind of a normalized upgrade percent would be for your base of customers?

Is it kind of 5%, 6% a quarter, as far as looking at retention costs.

How much handset subs did you have to put in place?

Well, I will answer the first question that relates to the preferred stock and how do we decide to -- and when we buy them back.

I'd like to be less glib than this, but there really hasn't been many transactions, if at all, in the senior preferred, so its availability as much as anything that ends up queueing our look at whether or not we would repurchase some of those.

There really haven't been many offered for sale.

Clearly what will we have is a restricted payment basket that does not allow for to us take out all of the senior preferreds, so we are using a balanced approach as using our cash and our restricted payment basket and being opportunistic when those securities are available.

I think we'll continue to look at it from that perspective.

With respect towards the handset upgrades and how that'll continue in the future as new technologies come into our network, first of all the advanced technologies that we're considering looking at and that other carriers are implementing are backwards compatible with the networks we have.

So in and of themselves they don't require, from what we know today, a wholesale change of the handsets of all of our customers.

Obviously, if you have new services available that you want customers to use and new efficiencies that you want in your network, you do want to make measured and regular progress towards getting new handsets and devices throughout your customer base.

And that is something that we would pursue, but it's not the same kind of end of life compelling change that we had with TDMA.

As far as how we address that or think about it with our customers, certainly even today we're seeing that we're replacing and upgrading a certain percentage of handsets for our GSM and CDMA customers, which has become the norm in this business.

There is a difference in how you position your handset replacement strategy with customers, which is a point of decision that you have as you look at what your retention plan is and what your loyalty plan is with your customer base.

And clearly, we've seen some carriers of that made that a huge point of what they are presenting to their customers and other carriers that have made it a lesser point.

Right now we've been in the midst of a migration and other retention issues that we've been dealing with as we've worked the [inaudible] process of upgrade and migration.

We are working now and will work over the next few months to develop our ultimate strategy on that, and I think we don't have percentages -- even if we did share that kind of granularity -- to share with you today on it.

But it's certainly something that's an important question that we are addressing.

Okay, thanks.

Thank you.

And there are no further audio questions at this time.

I'd like to turn it back to management for further comments.

Just as a reminder to all on the call, it's election day so don't forget to vote.

It's your right and please do so.

Again, I would like to congratulate our employees and our teams out there for a job well done.

Products of hard work are noticed and appreciated.

Our customers are using that.

With that we'll talk in February with our year-end results.

Thanks.

Thank you.

Ladies and gentlemen, this does conclude the Rural Cellular Corporation 2006 third quarter conference call.

You may now disconnect and please have a pleasant day.