Telephone and Data Systems, Inc.
Q3 2009 Earnings Call Transcript

Published: 6 Nov 2009

[Operator:]

Good morning. My name is Arnica and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter results for Telephone & Data Systems and US Cellar conference call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Ms. McCahon, you may begin you conference.

[Jane McCahon:]

Thank you Arnica and good morning everyone. For those of you I haven’t met yet. I’m the new Vice President of Corporate Relations taking over for Mark Steinkrauss. I look forward to meeting and working with you all. With me today in offering prepared comments are Ken Meyers, Executive Vice President and CFO at TDS; Steve Campbell, Executive Vice President, Finance, CFO and Treasurer at U.S. Cellular; Jay Ellison, Executive VP and COO at U.S. Cellular; and Bill Megan, Executive VP, Finance and CFO, TDS Telecom also joining us today is Alan Ferber the VP Sales Operations and Chief Marketing Officer at U.S. Cellular. Please refer to our press releases this morning for replay information. Also keep in mind that the purpose of today’s call is to discuss the operating and financial results for companies any other information contained in today’s press release, if you have other questions unrelated to the operating and financial results I’d be pleased to respond after the call and available for the reminder of the week in my office. My contact information is on the release. For many years TDS as maintained an open door policy and I support it wholeheartedly. If you are the Chicago area and would like to meet with members of management from U.S. Cellular, TDS or TDS telecom Mattson the Investor Relations team will try to accommodate you calendars permitting. This call is being simultaneously webcast on the Investor Relations section about the TDA and U.S. Cellular website. We believe our website affective way to provide information to the investment community and will continue to look for addition ways to take advantage of this powerful channel. Some information during this call and subsequent Q-and-A period contain statements about expected future events and financial results that are forward looking and subject to risks and uncertainties. Please review the Safe Harbor paragraph in our releases and the more extended versions on our website as well as in our filings with the SEC. Shortly after we released earnings results this morning and before this call, TDS and U.S. Cellular filed 8-Ks including press release we issued this morning both companies plan to file the Form 10-Qs later today. We have posted on our websites on a separate page entitled guidance and reconciliation additional information of reconciliation of non-GAAP financial measures that maybe used by management when discussing operating results during today’s conference call. The company’s guidance for 2009 is posted as well as the reconciliations for net income diluted EPS and operating cash flow. Please not that comparisons made by speakers today in prepared remarks are third quarter year-to-year comparisons unless other wise indicated. For calendar purpose we will be visiting the following cities and attending several investment conferences over the next quarter or so on November 18 through 20 Mark and I will be meeting with investor and analyst in New York and Boston. On January 5 will be participating in 20 annual global entertainment media and telecommunication conference in San Francisco and for those planning to attend CTIA in Las Vegas in March we will have management available to meet with investors and analysts on Wednesday, March 24. If you would like to meet with us, and any of these series or events, please let me know, we will try to accommodate you if at all possible. With that, I turn the call over to Ken Meyers.

[Ken Meyers:]

Thank you, Jane. Good morning. For those of you who have may joined a little late or were not paying attention that beginning of the call that was Jane McCahon, the company’s Vice President of Corporate relations. Mark Steinkrauss who most of you know, has decided to spend more time on Cape Cod and less time traveling with me. He is retiring at year end. In the meantime, he will be working with Jane to ensure a smooth transition. I want to take this opportunity to thank Mark for years of service at TDS. Over the last 12 years, I learned a great deal from Mark and benefited from his council. He served the company and our investors well. Since Mark will be around until year end I encourage his friends to drop him a line and join me in wishing Mark all the best in his retirement and welcoming Jane. Her contact information is on the press release for anyone with follow up questions after the call is over. Turning back to the more formal business of the call I have a few comments to make about the quarter before turning the call over to the rest of the team who will cover the operating results. We will then take questions at the end of prepared comments. TDA operating revenues were $1.3 billion, down 3%, principally due to expected and previously discussed loss of inbound roaming revenue at U.S. Cellular as well as continuation in the decline of physical access lines at TDS telecom. However gross and net additions at U.S. Cellular have improved market lead from last quarter and data revenues continue to grow rapidly at both U.S. Cellular and TDS telecom to select despite considerable economic and competitive pressures. As our guidance last quarter indicated operating income declined significantly to primarily two factors we anticipated and some cases even initiated. This clearly not the level of financial performance we expect overtime, but we believe we are at a critical juncture and these investments today in programs technologies and infrastructures, will enable to company to generate acceptable levels of growth and return in the future. We’ve asked both CFOs to address the factors impacting operating income with you this morning. As a reminder in the third quarter of last year, the company recorded a $31.7 million pre-tax gain on the exchange of RCC stock for cash. In early October, TDS competed its second $250 million stock repurchase authorization. Well ahead of schedule. Since June 2007 or said differently over the last two and one quarter years, the company has bought back over 14 million shares for $500 million and paid out another $118 million in dividends and as I will discuss shortly, still has a very strong investment grade balance sheet. In the most recent quarterly alone the company bought back over 2.6 million shares for $74 million. As I said the company completed this last repurchase authorization well ahead of schedule faster than anticipated. We do expect the Board of Directors to consider the possibility of another repurchase authorization when it meets later this month. We ended the quarter with a very strong balance sheet including $778 million in cash and cash equivalents invested primarily in treasuries. The company also has another $136 million invested in certificates of deposit which are FDIC insured. The CDs are listed on the balance sheet under short term investments and are in addition to the $778 million of cash and cash equivalents. A small note the affective tax rate for the quarter for TDS was 37%, 35% for U.S. Cellular. We expect full year rates to be about 35% and 34% respectively. Both U.S. Cellular and TDS telecom are continuing their efforts to generate a long term profitable growth by focusing on the customer. Despite the economy and intensely competitive environment, they are both profitable and generating free cash flow. As I stated earlier we are committed to investing in strategies designed to enable them to compete and succeed in the long term and have a strong and flexible financial foundation from which to do so. Before I turn the call over to Jay Ellison, I expect you saw the announcement this morning that Jay is also retiring at the end of the year. During his nine years with the company Jay has been one of the key architects of the companies culture and strategy, he built a strong organization focused on delivering uniquely high levels of customer satisfaction. As a result of Jay’s leadership and coaching the company has many strong leaders. One of which is Alan Ferber. Alan who has been the company’s Vice President Sales Operations and Chief Marketing Officer is taking over for Jay providing a seamless transition for field operations. Alan is with us this morning and is available to answer questions. We wish Jay well in his retirement and thank him for all he has done to make U.S. Cellular the company it is today. Let me turn the call over to Jay.

[Jay Ellison:]

Thanks Ken for such kind word. Good morning everyone. Let me begin by saying a few words about the overall business environment. From our perspective, competition in the wireless market during the third quarter was intense in both the post pay and prepaid segments with battles fought on handsets and service pricing. The exclusive handsets offered by some of the larger carriers remained very popular with consumers. We saw more aggressive pricing by the unlimited prepaid carriers in the third quarter. However, unlike in the second quarter, there were no major launches by the prepaid carriers in any of our markets. On a sequential quarter basis, we saw a decline in net poured out especially to lower price carriers. The current state of the economy, continue to impact our customers and our operations. The economy seems to have stabilized to some extend during the third quarter, but the recovery is expected to be slow and painful nonetheless. Ongoing job losses and tight credit remained very real concerns for consumers. Although they are willing to spend in these difficult economic times when there is perceived value they clearly are considering price much more prominently in their decision-making. Despite the competitive and economic pressures, we achieved improved subscriber results compared to the second quarter. On the last call, we discussed steps we were taking to respond competitively, including several postpaid promotional plans and programs and new unlimited prepaid plans aimed at both adding and retaining customers. In the third quarter, we had a very strong response to new promotions and plans with almost 900,000 new and existing postpaid customers taking advantage of these offers. Many of our existing customers have entered into new contracts with us in connection with these offers and this will benefit us positively in the long run to reducing the risk of future charge. In a moment, Steve will discuss the third quarter financial results in more detail, but let me mention a couple of the highlights. Service revenues for the quarter were $985 million, this is an increase of 1% sequentially and essentially the same as last year after adjusting for decline in roaming revenues that resulted primarily from the Verizon also combination. Resale service ARPU is up year-over-year as a result of continuing strong growth in data revenue. Data revenues grew 34%, year-over-year, and now represent 18% of total service revenues, up from 13% in a year ago. The keys to continuing growth in data are the on going expansion of our 3G coverage and increased penetration of smartphones and other data intensive premium devices. Operating cash flow for the quarter was $209 million, down from $272 million a year ago. Due to lower roaming revenues and higher customer acquisition cost mostly in the form of equipment subsidies in operating expenses. Turn u now to customer activity, we ended the quarter with about 5.7 million retail customers, which was relatively flat sequentially and year-over-year. Retail gross ads were 351,000 up 23% sequentially and 8% year-over-year with increases in both the post pay and prepaid segment. Retail net additions improved sequentially each month in the quarter in fact over four consecutive months. Overall, gained 8,000 postpaid customers and lost 14,000 prepaid customers for a net loss of 6,000 retail customers in the quarter. This is a dramatic improvement over the net loss of 59,000 retail customers in the second quarter and in line with the prior year quarter, when we had a net loss of 3,000 retail customers. Postpaid churn averaged 1.7% for the quarter, while total retail churn was 2.1%. As I mentioned earlier, we initiated a number of retention program that we believe will help reduce churn overtime. We have launched new individual and family national plans which are well received by both new and existing customers. As mentioned earlier many of our existing customers have taken advantage of these offers and the popularity with new customers has helped us to achieve growth in postpaid growth additions of 20% sequentially and 9% year-over-year. We rolled out new unlimited prepaid plans throughout all of our end markets. This roll out began in mid-July and ended in mid-July and ended in mid-August. Early results indicate that the new plans are being effective as prepaid growth additions are up 37%, sequentially, and 2% year-over-year. During the quarter, we introduced several new handsets and I want to take a moment to touch on those as well as upcoming launches in the four quarter. At the end of August, we introduced the LG Bliss and exclusive device that has a 3-inch full touch screen with accelerometer then enables the device to be used in portrait or landscape mode. The virtual keyboard enables fast testing and the designed is fashion forward. This premium device is packed with features and games. We also re-launched the LG Banter around the same time, which as the QWERTY keyboard, 1.3-megapixel camera, music players, changeable faceplates and its Bluetooth capable and in September we launched LG HELiX, which is a clamshell device with the 1.3-megapixel camera and its Bluetooth enabled. We continue to see good traction with the LG Tritan, as we noted in the press release and the Blackberry clip during the third quarter. We have launched a real launch of totaling eight additional new devices in the fourth quarter. In the smartphone category, we just launched the Blackberry Tours, which is the latest world fund device in very shortly, we’ll be launching the next generation curve device with its optical navigation and enabled for Wi-Fi and to HTC Windows Mobile based devices that snap in the Touch Pro 2. For premium phone offerings, we launched the Samsung Caliber, which is follow-on to the Dell with a full touch and intuitive user interface. We will also soon be launching the Motorola Crush, a lower priced full touch screen device and as previously mentioned the Motorola Quantico, from military aspect device will be arriving by the end of the year. With these introductions, we feel that we have a robust selection of devices that will have strong appeal to our customer segments as we roll into the important holiday selling season. Now I want to say a few words about some of our other initiatives beyond the service plans, enhance that offerings that I already mentioned to grow in strengthen our business this year and for the longer term. U.S. Cellular business is connecting people and our brand message is believe in something better. Our battery swap program are most recent proved point and our customer centric strategy continues its success with letting, our customers know we are committed to their satisfaction by replacing a dead or dying battery with a fully charged battery, free of charge. The buzz is spreading as hundreds of thousands of customers already taken advantage of this program. We are about to launch in other proved point on how we go the extra distance to provide a unique experience to our customers. With this new service that we call overage projection, a customer will be able to opt in to receive an alert, when they are coming close to reaching their allowable plan minute or text message for the month in order to avoid overage charging. Customers are increasingly interested in ways to manage wireless spending, especially in these tougher economic times. With our new overage protection offering, we will be demonstrating to our customers once again that we have their backs by helping to protect them from costly overage charges. As we did last year, we will be launching calling all communities. This marketing program invited existing and potential customers to come in to any U.S. Cellular store and vote for the school of their choice. The 10 schools receiving the most votes at the conclusion of the contest in January 2010, each will win $100,000 and this year the program will be supported by national advertising. The campaign will give people in our community as chance to be part of something bigger than themselves and our contributions will create educational opportunity for the children in the winning community. Calling all communities is delivering on the U.S. Cellular’s brand promise to be more than just a phone company to our customers and potential customers. We have also accelerated expansion of our 3G network and now reaching approximately 75% of our customers. We will continue this rollout in to 2010, which is important, so that we can continue to enhance our customers’ data experience and layer this year, we will begin the technical trials of LTE in order to start planning for the deployment of the next generation technology. We continue to move forward with the multiyear initiatives that we told you about in previous calls. These initiatives, which will enable stronger customer relationships, make billing and operations more efficient and drive online sales and accounts management well into the requirement definition and design phases. We expect to make some key decisions related to vender and solution selection within the next few months in order to begin implementation next year. Now, I’ll turn the call over to Steve Campbell, to discuss the financial results for the quarter. Steve.

[Steve Campbell:]

Thanks Jay. Beginning with revenues, service revenues for the quarter were $985 million up 1% sequentially and down 3% year-over-year. However on the year-over-year comparison, after adjustment for decline in roaming revenues, resulting primarily from the Verizon-Alltel combination service revenues were essentially flat. Inbound roaming revenues were $69 million down $25 million or 26%. Going forward we expect additional but less significant year-over-year reductions in the inbound roaming revenues from Verizon. Our retail service ARPU grew $47.02 up $0.05 year-over-year, as continuing strong growth in data revenues offset decline in voice revenues. Data revenues were $174 million, up 34% year-over-year and ETC revenues for the quarter were $40 million, compared to $38 million last year. As expected, operating income declined this quarter to $58 million. The decline was due to the loss of high margin inbound roaming revenues, higher equipment and other costs acquiring and serving customers and spending on the multiyear initiatives that Jay mentioned earlier. In a little more detail, the net loss on equipment for the quarter was $116 million up from $108 million in the prior year. This has increase reflected a 6% increase if the number of hand sets sold, which was driven by solid growth in retail customer additions and renewals and increase in the net subsidy per units sold. Sales of smartphones and other premium data intensive devices continue to increase, which in turn will continue to drive growth in data revenues. Sales of these units nearly quadrupled year-over-year and expect that trend to continue as we further expand our 3G network, other cash operating expenses consisting of system operations and selling general administrative increased $27 million or 4% year-over-year. System operations expenses were up about $8 million or 4% driven in large part by an increase in the number sell sites and service. SG&A expenses were also increased by about 4% or $19 million due to several factors. First, we incurred higher cost to acquire customers, such as commissions related to the increase sales and renewal activity and higher bad debts expense. We also incurred higher cost to service customers including those related to the Battery Swap Program and increased staffing in our customer care centers to handle increased call volumes and handle times. We’ve experienced record call volumes in response to our promotional offers as well as to the expanding sales and installed base of smartphones and premium devices and additional we incurred expenses related to the multiyear initiatives. Operating cash flow for the quarter was $209 million and operating cash flow margin was 21.2%. Capital expenditures in the quarter were $129 million and so we generated simple free cash flow of $80 million. Investments in other income net for the quarter totaled $6 million including earnings of $15.5 million, related to our interest in the Los Angeles partnership and finally net income attributable to U.S. Cellular totaled $36 million or $0.41 per share. As we head into the four our balance sheet is sound, and we have significant liquidity and financial flexibility together with expected cash flow from operations to meet our financing needs. During the Q3, we repurchased 140,000 of our common shares, at a cost of about $5 million. At September 30, the cash balance at U.S. Cellular was $405 million, and we have borrowing capacity of about $300 million, under our revolving credit facility. Our guidance for the full year 2009 shown in today’s press release and it is unchanged from that published previously. We continue to believe that we have an opportunity to grow our business over the longer term. As Jay mentioned earlier, we continue to face difficult conditions which are likely to continue for sometime. However we believe the results of the third quarter and which we achieve strong improvement in both gross and net retail ads on a sequential quarter basis suggest that customers are responding well to our new programs. We’ll continue to respond aggressively to market conditions in order to preserve our subscriber base and maintain our competitive position, beyond insuring we offer a competitive mix of products and services where continuing to offer customers increased value through innovative solutions such as the Battery Swap Program, and the upcoming launch of overage protection. In ongoing investments in our business infrastructure will provide opportunities for us to operate more efficiently and further enhance our ability to deliver on our man promise and of course we’ll continue to have strong focus on cost control, including both containment and reduction. We intend to grow our business and that means we will continue to invest and spend where it’s necessary to achieve our goals. However we’ll to look carefully at any opportunity to takeout costs that are not critical to our success. Now I’ll turn the call over to Bill Megan for a discussion of TDS telecom’s results. Bill?

[Bill Megan:]

Thank you, Steve and Jay. Good morning everyone. Telecom results improved modestly from the second quarter with the trend in revenues and expenses improving in excess line loss stabilizing. In addition as we have said broadband is a cornerstone of our strategy and continued to have strong growth in our high speed data subscriber base. For the quarter TDS telecom combined ILEC and CLEC revenues declined 4.6%. The decline was 2% in the ILEC and 10% in the CLEC. In the ILEC we had strong growth in data revenues that would as not been enough to offset the loss in voice and data, voice and network access revenues. Voice revenues declined inline with our physical access line loss. The decrease in networking access revenues is driven by lower minutes of use on our network and lower access rates. The decline in the CLEC is driven by decision to limit investment in new residential customers and therefore we expect that trend to continue. As part of our efforts to mitigate the loss in physical access line, while at the same time responding to customers needs to economize we rolled out new voice packages called star packages, which include additional features in long distance minutes giving customers a lot of flexibility and matching service head to their needs and budget. We began offering these new packages in January and had 86,000 customers on these plans at the end of September. We now have 47% of our residential customers on voice packages up 12% from September of 2008. As I mentioned the strong positive in the quarter was the increase in ILEC data revenues which grew 14%. Our promotional campaigns for high speed data added 5000 net subscribers sequentially; gross ads remain strong at 15,400 for the quarter. Our high speed data penetration overall access lines is now at 37% as up 7 percentage points from last year. We are also seeing a greater percentage of customers using higher speed service, which is contributed to a year-over-year residential DSL ARPU increase of 4.5% to $37. More than 90% of our customers are taking speeds of 1.5 mega data and 60% taking speeds greater than 3 mega. However given the current economy we see the near term competitive battle for data services turning on affordability rather than top end speed. So we have introduced product offerings that emphasis speeds in the range of 1.5 to 10 Meg and their being well received. We’ve also armed our phase and wind back team with additional tools, including our version of make it DSL and greatest emphasis on pulling all of these together, voice data and video, with video offered through our partner, dish network. We’d have continued success in selling our triple play, adding 3900 net subscribers in the quarter bringing our penetration of residential lines to 19%. We know the importance of bundling and reducing churn. Churn on triple play customers is very low at roughly one half of a percent per month. Recently for our triple play we introduced a promotion that extends 12 month credit offered by dish for additional year to lock in customer savings for a full 24 months. Over the past year, we have introduced a series of promotions in our market that represented different value propositions and if kept the program fresh and customers have responded favorably. We’ve had measurable success with our bundled offerings and the third quarter with 54% of our residential customers on a double or triple play bundle, which is up from 46% as of a year ago. In the commercial segment, we are leading with our hosted IP service we call managed IP. Among many benefits the service provides rich call management features, such as advanced call routing and one number capability. We believe this is an especially attractive offering since it allows businesses to avoid a large upfront capital investment, because the service is hosted on our network. For ILEC and CLEC we now have 11,000 stations installed with us third of them added in the third quarter. We do not count these customers as physical access lines, but do count the stations in equivalent access lines. Cash expenses increased 0.4%. A 5% increase in the ILEC, and 7% decrease in the CLEC operations. Cost control efforts were offset by expense of approximately $1.6 million related to severance as we continued to adjust our cost structure. We expect to incur a similar severance cost in the fourth quarter as well. Expense was also driven by initiatives to attract and retain customers such as triple play promotion, which included a free iPod touch in exchange for a two year service commitment and costs associated with our increased circuit bandwidth to support growth in high speed data products. We continued to invest in our network. Capital expenditures were $29 million for the quarter, we continue to evolve our network and put the necessary infrastructure in place to offer competitive broadband speeds. 93% of our ILEC lines are equipped for DSL service. By the end of this year, about half of our lines will be capable of 10 Meg or higher speed service. We are investing in additional advance service offerings, including our hosted IP based services in higher speed data over bonded copper facilities for our commercial customers. We are expanding the capabilities of our network with 10 gig regional fiber transport initiative. Our investment in the 10 gig transport network will work for us in several ways. They will help us reduce cost by enabling more efficient lease cost routing in internet backhaul, and it builds in enhanced network reliability with expanded route diversity and redundancy and allows us to roll out new services like managed IP to more markets. We continue to evaluate acquisition opportunities, when there is a good strategic fit and price levels are attractive. As we discussed last quarter, TDS Telecom entered into an agreement to acquire a Union Telephone company located in New Hampshire. The company serves 8,500 equivalent access lines, through a high quality network that is near several of our existing companies subject to regulatory approval, the transaction is expected to close in the first quarter of 2010. Finally, our guidance has been updated as shown in the press release. Now, I’ll turn the call back to Jane McCahon.

[Jane McCahon:]

Thanks, Bill. Arnica, we are ready for questions.

[Operator:]

(Operator Instructions) Your first question comes from Rick Prentiss - Raymond James.

[Rick Prentiss:]

First question, on the U.S. Cellular side, I missed some of the comments on LTE, can you mention again the technical trial exactly when you would start and also what are your early indications on what kind of the costs might be to roll out in LTE network. What do you have to do to your network?

[Jay Ellison:]

I’ll give you a little flavor some of that, then Steve can jump in on. We mentioned a trial beginning late this year. So most likely based on timelines right now and evaluations we’re doing relative to infrastructure providers will be in the December timeframe and pure technical trial internal no customers or anything along those lines. It’s also probably way too early for us to start talking about cost on LTE, until we determine a number of things from the trial and then our rollout schedule and things along those lines as well as working with handset provider. The only think I’d add is I think that we would expect that technical trial to run probably through middle of next year. So I think once that’s complete we’ll have a much better sense of cost to deploy.

[Rick Prentiss:]

Probably not to put words in your mouth, but as you look at 2010, probably not a lot of impact on the CapEx side from a LTE potential?

[Ken Meyers:]

No, I have not in 2010. I think we’d be looking beyond that.

[Rick Prentiss:]

Then you mentioned several times obviously, the smartphones, how important they are the handset lineup, what percent of your base and of your third quarter gross ads were smartphone Air Cards etc.?

[Jay Ellison:]

I don’t think we have the smartcard broken down. I could give you that…

[Ken Meyers:]

In the Q3, smartphones and the premium phone, a lot of the internet stuff that almost 22% of gross ads. With really significant quarter-over-quarter jump in that what we’re calling our premium category.

[Jay Ellison:]

I think I mentioned, Rick that sales of those smartphones and premium devices are up almost 4X year-over-year.

[Rick Prentiss:]

Then something else you mentioned, I think Jay, in your comments was the ads increased month-to-month, it wasn’t just three months. I think you said than four months, is that to imply October or going back to June?

[Jay Ellison:]

That was actually a trend beginning in June. We saw an up tick in June and each from out there continues.

[Rick Prentiss:]

Then the final question I’ve got for you, as you look we had a mixture of companies reporting so far this year, some giving guidance, some concerned on guidance. As you lookout to your kind of normal practice of giving guidance, given uncertain economic environment, the uncertain competitive environment, what are your thoughts as far as how good your visibility is and when you would be able to share 2010 thoughts with us?

[Ken Meyers:]

What we have done consistently over the last few years is talk about next year 2010, when we release our year end numbers, which is typically late January, early February. At this point in time the company doesn’t have any plans to change its practice of giving annual guidance. Though clearly, that is one of the investor relations on going debates in terms of whether companies give guidance on not, it is we think or I think. That’s given the complexity of our company TDS with our two businesses that giving annual guidance helps people understand, where we’re going, what our plans are and at this point in time expect to continue that.

[Operator:]

Your next question comes from Shawn - Morgan Stanley.

[Shawn:]

I was just curious, if you can discuss more about your handset pipe line, do you have Android or Palm OS handset coming in?

[Ken Meyers:]

I want to introduce you Alan Ferber, he’s been working that part of our strategy.

[Alan Ferber:]

We have currently working on our Android strategy. Probably, we’ll not be launching any Android phones before the middle of next year. Currently, we not have any plans for our Palm OS device.

[Shawn:]

Also can you discuss a little bit more about your roaming position and are you comfortable with where you are at today?

[Ken Meyers:]

I’m not sure what you mean by, “Are we comfortable?”

[Shawn:]

As far as securing partners?

[Ken Meyers:]

Yes, I think we’re comfortable with that. I think we have great roaming partners now. We’re obviously working to ensure that we have the kind of EVDO roaming capability that we’re going to need going forward, but I think we’re pretty happy with the relationships that we have.

[Jay Ellison:]

Just to clarify on that, we have long term agreements in place that give us the capability for roaming for several years out in to the future.

[Operator:]

Your next question comes from Phil Cusick - Macquarie.

[Phil Cusick:]

First of all, on the gross outside you talked about being up sequentially, that’s great to see. Ask you to help me, what you think is the sort of two drivers their you had a new competitor come in to your market in the spring and you talked about that being a big issue early on was it really that falling away or do you think its the impact of your new promotions and handsets, how do sort of shift the mix there?

[Jay Ellison:]

I really think we’ve just seen very positive results significantly from the introduction of our rate plans both the national single and the family plans that we introduced starting in the April, May timeframe and then continue to rollout. We have also introduced as I said, unlimited prepaid plan not only in markets where we had those lower priced carriers come in to marketplace. Across the enterprise and all of our markets we have seen a response to that and then additionally we’ve seen I mentioned in my comments, we’ve seen our net port outs decline across the board as well as we have seen the return in some of our larger major metros from some of those lower priced carriers where the quality of coverage was not sufficient and satisfactory to consumer. So, it’s really all of those combined and again even our current customers taking advantage, but on the gross side was national promotion, handsets were a part of it with the LG Bliss, the Tritan and re-launch of the Banter, but I think a lot was driven by the price plans we introduced both on the prepaid and postpaid side.

[Ken Meyers:]

I would say as Jay said it’s all of those factors, and there is a noticeable trend down in the port outs in this last quarter. Phil as we talked we often seen when he we get a competitor coming in to market like we have leap in February that you see an up tick, but then as Jay said overtime we see those customers actually coming back.

[Phil Cusick:]

I mean that’s great to see. If I can sort of paraphrase here, it seems like you seen incremental competition at the low end and high end with handsets and your strategy has been to respond both with national pricing and with better handsets, makes a little since. The net results seem to be margins jumped really all over the place over the last sort of four quarters. Can you give us an idea of should things start to settle out here in whether it’s the low to mid 20s, or as gross ads come back you need to be working for that, should we thinking about 21% EBITDA margin going forward or are there cost cuts and things like that, that can offset maybe those costs.

[Steve Campbell:]

I think the guidance that we’ve firmed today, I think gives you the best idea of our thinking about margins certainly for this year. I mentioned and I re-enforce it that we are going to stay competitive. We’re going to protect the base, we’re going to continue to grow and that certainly carries costs with it. Looking, further out as Ken said we wouldn’t be providing guidance on ‘10 until next year. The only other thing I would say, Phil is we re-enforced a number of times that we are investing in this business right now for the long haul. So, I don’t think that you should expect over the next couple of quarters to see any real significant expansion in the margin from what you are seeing in the current guidance.

[Phil Cusick:]

So one more and I saved this for last because I don’t know that I’m going to get much out of it, but you have a phenomenal balance sheet and you got a cash flow and there are some competitors out there who if you wanted own them could make you much bigger in the wireless space, it would be a big of course a big change in your footprint, but their CDMA players would it make sense to get bigger in this business if you are really in it for the long haul or do you think being a regional player with roaming deals makes more sense for your situation long term?

[Ken Meyers:]

I’m going to lean in to that one a little bit. You probably didn’t expect that. The model that we operate under in terms of the customer satisfaction strategy delivered through a rather unique culture is something that would be much harder to do if we were to double the company size overnight. What would happen is, we’d run a huge risk of diluting that culture and therefore moving off of our strategy. So, while I never say, never, I think if you look back at the company’s history and how we’ve grown it. We grown it by doing small and mid size acquisitions, not doing large public market deals.

[Operator:]

Next question comes from Kevin Roe - Roe Equity Research.

[Kevin Roe:]

A couple of questions, first the retention initiative you guys have talked about that looks like it’s getting good traction. Can you talk about the cost there and how much of the margin pressure we saw this quarter at U.S. Cellular from those retention initiatives? Maybe give some color on, what is the customer getting now versus previously in those retention incentives. Secondly, the overage protection, is that something that customers have to proactively opt into? Can you help us think about how that may impact ARPU going forward?

[Jay Ellison:]

I’ll start Kevin and then Steve or Alan may jump in on it. On overage protection, it will have to opt in for that program and it will protect them on both voice and text packages on overage. We think that the impact ARPU is fairly neutral, because we also have the opportunity, if the customer historically is hitting that package we’re going to have the opportunity to move them up in rate plan. We’ve experienced very similar type of customer behaviors when we introduced complete product and pricing portfolios. So we think that will be fairly revenue neutral on that particular program. As it relates to the retention program themselves that you referenced, we had a number of things. As I mentioned, it’s just the introduction of some of the national rate plans that we put there with the value that we build into them, probably as $900,000, I would say 75% to 80% of those were current customers renewing our contracting getting on to those rate plans. So would see some future churn benefit with those and those customers are renewing their contracts as well. We also had a number of what we would call, early upgrade programs with that wanted to move to a premium or smartphone device. Earlier in the contract and they normally may have been aloud that comes also with increased ARPU as well. We had very good response to those programs, so those two were really the significant drivers within our retention program. We had a few other tools in the bags of customer relations specialist say tools to help people give rough economic times with some temporary price of their bill. In additionally, we have what we call the triple area time promotion on current customers could ask nice mobile to mobile income if one of those were on, they could add that third quarter one as well. Those were basically for the customer base.

[Kevin Roe:]

Lastly a question for ken, thanks for comment on the M&A. Since sticking with that big picture, how do you look at, what’s the latest thinking on the structure of TDS U.S. Cellular? Does it still makes sense to have them as separately traded stocks, separate companies just your latest thoughts would be helpful.

[Ken Meyers:]

Unchanged from where the company was two years ago when we started doing our repurchasing of TDS shares, when we said we were not going forward with any buy in of U.S. Cellular stuff. It’s a nice to have does not drive compelling cost savings or anything else and so of the amount of consideration that would be required at the time was too great to get the deal done was picked up. It’s not a strategic comparative.

[Operator:]

Your final question comes from Rick Prentiss - Raymond James

[Rick Prentiss:]

On the circle back on Kevin comments there and Phil when you look at your balance sheet, obviously very strong balance sheet Ken that you created there, thanks for giving us the extra color on the $136 million under tuck-way in CD’s as you think about the board possibly considering another stock buy back at the TDS level how do you think about leverage, how much cash you want to keep on hand on the balance sheet to run the business. Just kind of held you look at that putting your balance sheet to work.

[Ken Meyers:]

Rick one that we are quite frankly spending a lot of time on right now. Two years ago we had looked at this and thinking of the consolidated entity we talked about a business that we thought should have $250 million of cash that was readily available its kind of our operating model and that was before we all went through the complete meltdown over the last couple of years. From a strategic standpoint as we think about our balance sheet, and we think about the lessens learned over the last year where we all thought we had revolvers that were immediately available until we heard bankers asking us not to use them, we probably think about running a business that has $400 million of cash that is available. So that kind of our starting point. Now we obviously aren’t there yet. We got, we are much richer than that at this point in time and we are looking at a lot of different opportunities both within our business as well as doing different things by balance sheet. As I said we’ll talk about some of those with the board later this month.

[Rick Prentiss:]

That seems like we asked it for the last four or five years, universal service fund, new administration and power now what are your thoughts as on both the wireless and the land line side about what you guys are hearing in the corridors of Washington about USF.

[Steve Campbell:]

What we are hearing, Rick, is that we expect that the new commission will take up that issue earnest later probably sometime in to 2010, but frankly what we are hearing is that their primary area focus is on the national broadband plan. So while we are watchful and in fact it’s area given the amount of DTC revenue that we get, we expect them to take it up but it doesn’t seem to be the hottest issue on their list now.

[Ken Meyers:]

I would say from the wire line perspective we do not anticipate significant shifts inline with Steve, certainly not of magnitude that was under consideration with intercarrier compensation in US reform last year. This year as Steve mentioned administration is focused on the broadband as net neutrality as policy priorities so we don’t expect to see such potentially transformational changes implemented, but as you look at our income, as we talked about in the past we do expect to see a downward trend in high cost loop as a component of USF and that’s a function of how high cost loop is calculated and what the distribution is so we expect that trend to continue.

[Operator:]

At this time there are no further questions.

[Jane McCahon:]

Thank you all for your participation today and look forward to talking to you soon.

[Operator:]

This concludes today’s conference call you may now disconnect.