Telephone and Data Systems, Inc.
Q1 2010 Earnings Call Transcript

Published: 10 May 2010

[Operator:]

Good morning. My name is Mason and I will be your conference operator today. At this time, I would like to welcome everyone to the TDS and U.S. Cellular first quarter 2010 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I would now like to turn the call over to Ms. Jane McCahon. You may begin.

[Jane McCahon:]

Thank you, Mason. Good morning and thank you all for joining us today. With me and offering prepared comments are Kenneth Meyers, Executive Vice President and CFO at TDS; Steven Campbell, Executive Vice President of Finance, CFO and Treasurer at U.S. Cellular; Alan Ferber, Executive VP, Operations at U.S. Cellular; and Bill Megan, Executive Vice President, Finance and CFO at TDS Telecom. This call is being simultaneously webcast on the Investor Relations section of both the TDS and U.S. Cellular websites. We believe our website are an effective and efficient way to provide information to the investment community and will continue to look for additional ways to use them. Some information during this call and subsequent Q&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 paragraphs in our releases and the more extended versions that will be included in our SEC filings. Shortly after we released our earnings this morning and before this call, TDS and U.S. Cellular filed 8-Ks, including press releases we issued this morning. Both companies have also filed their Form 10-Qs with the SEC this morning. In the past, we have posted reconciliations of any non-GAAP financial measures used in our conference call on the guidance and reconciliations page of our website. Given our introduction this quarter of adjusted OIBDA and free cash flow in our press releases, you will now find the required reconciliations contained within the releases and not that web page. We will be visiting the following cities over the next quarter or so. In May, I plan on visiting investors in Baltimore, Philadelphia and Delaware. And in June, Ken Meyers and I will be in New York and Boston. If you’d like to meet with us in any of these cities, please let me know and we will try to accommodate you if at all possible. Please keep in mind that TDS has an open door policy. So if you are in the Chicago area and would like to meet with members of management from U.S. Cellular, TDS Corporate, or TDS Telecom up in Madison, Wisconsin, the Investor Relations team will try to accommodate you calendars permitting. With that, I’ll turn the call over to Ken Meyers.

[Kenneth Meyers:]

Thank you, Jane, and good morning. I’ll make a few comments about the quarter, then turn the call over to the rest of the team who will cover the operating results. We will then take questions at the end of the prepared comments. Just a note. All comparisons unless otherwise noted are to results for the same quarter a year ago. Those amounts have been slightly revised for an immaterial error affecting revenue and current liabilities. We will be updating other quarters for 2009 shortly. In the first quarter, TDS operating revenues totaled $1.2 billion, down 3% from last year. Both business units continued to face intense competition, which ultimately affected revenues. However, both businesses continued on their data strategies and saw healthy data revenue gains. We continued to see a lot of opportunity around data and data revenues. Additionally, both business units continued on their customer service strategies and executed well as evidenced by reduced churn in each business. I’d like to take this opportunity to provide our thoughts on the SEC’s national broadband plan released on March 16th, establishing goals and making recommendations across a broad range of policy issues. While the plan is wide ranging, we believe it marks only the beginning of a long-term process of rule-making and in some cases, possible legislation. Shortly after the release of the plan itself, the SEC published a document laying out a rough schedule of more than 60 rule-makings and other proceedings expected to come out over the next 12 months. Many of these will address policy issues of importance to U.S. Cellular and TDS Telecom. And our policy teams will be actively engaged, working on our own and in concert with our industry associations where appropriate. We strongly support the SEC’s efforts to make more spectrum available for the industry and will be involved in proceedings to define and auction such spectrum in a timely manner. We also support the SEC’s initiative to address data roaming, special access rates, public safety broadband, and other objectives. We recognize the importance of evolving the Universal Service Program to support broadband services. But we have concerns about some of the specific ideas defined in the plan and the SEC’s recent notice proposed rule-making. Different programs have enabled U.S. Cellular and TDS Telecom to establish and improve service in many rural markets. They would otherwise lack access to quality telecommunication services. As the debate continues, we will promote solutions that include continued investment in high-cost areas, funding for both mobile and fixed services, competitive choice for rural mobile services, and a reasonable and equitable transition process to any new system. Moving on, as part of our financing strategy, U.S. Cellular and TDS like to have active shelf registration statements on file at both companies to maximize our financial flexibility. As such, we plan to file a conventional Form S-3 registration statement for U.S. Cellular in the near-term. At this time, we have no plans for the use of the shelf but just part of our ongoing financing strategy. In the quarter, TDS bought back 511,000 special common shares for $14.8 million. As we have said before, we continue to be very measured in this latest three-year stock repurchase authorization. Additionally, during the quarter, U.S. Cellular repurchased 127,500 of its common shares for $5.2 million. The company ended the quarter with a very strong balance sheet, including $645.5 million in cash and cash equivalents, and still invest primarily in treasuries. The company has another $98 million invested in certificates of deposit, which are FDIC insured. The CDs are listed in short-term investments on the balance sheet in addition to the $645.5 million of cash. Both U.S. Cellular and TDS Telecom are continuing their efforts to generate long-term profitable growth by focusing on the customer and investing in their businesses. Despite the economy and the intensely competitive environment, we are both profitable and generating free cash flow. And finally, as I hope you saw this morning, U.S. Cellular has selected a new President and CEO, Mary N. Dillon, who will join the company on June 1st. The company conducted a thorough search to find an outstanding leader who shares U.S. Cellular’s values, beliefs and vision for the future. Mary’s extensive experience leading large organizations with a proven track record of driving business results through customer understanding. For the past five years, she was the Global Chief Marketing Officer for McDonald’s where she developed global brand strategy in aligned retail environments and employees around innovative marketing and sales strategies. We look forward to introducing her to all of you once she gets on board. And now I’ll turn the call over to Alan Ferber at U.S. Cellular. Alan?

[Alan Ferber:]

Thanks, Ken. And good morning to everyone. In terms of the overall business environment, the first quarter definitely was challenging. We have begun to see some positive economic trends, including improved employment numbers. But the recovery continues to be slow and consumers continue to be cautious with their telecom spending. Within the industry, competition and pricing pressure remain intact. January brought more competitive pricing actions by competitors, and we acted quickly to ensure our customers receive similar benefits. Competition on price has become more prevalent across the industry, and we will continue to respond to stay competitive and protect our customer base. However, we remain focused on ourselves and extending our brand awareness by providing a better overall customer experience. In times like these, we believe that the wide variety of our service plans, including unlimited and bundles options together with innovative programs like Battery Swap and Overage Protection offer customers improved value and meet their needs very effectively. During the quarter, we added 24,000 net retail customers. And important driver of these results was improved churn rates for both postpaid and prepaid customers. Our postpaid churn was 1.4%, down from 1.6% from last quarter and down year-over-year from 1.5%. Prepaid churn of 6% was also down from 7.2% in the fourth quarter of 2009 and from 7.3% a year ago. These results indicate that our customer satisfaction strategy is really resonating with customers. In fact, our customer satisfaction measures and that promoter scores reached all-time highs in the first quarter. This is important and something we can leverage because building brand awareness and customer loyalty will be an even more critical component of our competitive strategy in the future. Like other carriers in the industry, we experienced weak postpaid results for the quarter. On a net basis, we lost almost 9,000 postpaid customers. Although we are unable to track it specifically, we believe that some of our postpaid losses are actually customers taking advantage of our prepaid offerings. As we’re trading down, if you will, but still staying with U.S. Cellular, as they continue to look for opportunities to manage their budgets. In fact, we achieved very strong results in the prepaid segment during the quarter with 33,000 net additions. This represents significant growth over the 13,000 prepaid customers added in the previous quarter and 3,000 in the prior year. Near the end of the quarter, we introduced data services on prepaid and offered new versions of our unlimited prepaid plans. We are very pleased by the very strong initial response to these offerings, with a large majority of customers choosing an option with data at either the $59 or $69 price point. And we expect to see continuing solid results going forward. We believe we now offer a very competitive prepaid products, including a variety of data services that customers can experience on our award-winning network. Data continues to be a great story for us. Data revenue was $201 million in the quarter, up 28% over last year, which is in part driven by increased sales of smartphone and other data-centric devices, including wireless modems. These data-centric devices were 28% of all devices sold for the quarter as compared to only 12% a year ago. Now I’ll turn the call over to Steve for comments on our financial results. Steve?

[Steven Campbell:]

Thank you, Alan. And good morning, everyone. As Ken mentioned earlier, U.S. Cellular delivered solid financial results and cash flow for the quarter. To begin, service revenues for the quarter were $965 million, down $18 million or about 2% year-over-year, primarily due to declines in retail service revenues and inbound roaming revenues. Within the retail service component, we are very pleased by the continuing strong growth in our data revenues that Alan just mentioned. That has helped us to offset the expected decline in voice revenues. Data revenues for the quarter were $201 million, up 28% year-over-year. As a result of this strong growth in data as well as high regulatory recovery revenues, retail service ARPU for the quarter was up by $0.12 year-over-year to $46.99 despite the significant downward pressure on pricing that we’ve seen across the industry for the past several quarters. Data now represents 21% of service revenues, up from 16% a year ago. One of the key factors in the continuing growth in data is the increasing penetration in our customer base of smartphones and other data-intensive devices, including wireless modems. Sales of smartphones and other data-intensive handsets nearly doubled year-over-year while sales of wireless modems increased five-fold. As we look ahead, we are excited about the prospects for additional future growth in data revenues for a number of reasons. First, at this point, only 17% of our postpaid subs had smartphones and other data-centric devices. So we have plenty of room to grow in this area. And importantly, these are high quality customers who tend to have higher ARPU. Another factor is the ongoing expansion of our 3G network and the impact that the improved customer experience will have on data usage. As we announced previously, our 3G network will cover approximately 98% of our customers by the end of this summer. In addition, as Alan mentioned, we introduced data services on our prepaid plans at the end of March. To date, we are pleased by the market reaction to the introduction and fully expect that it will drive incremental growth in prepaid customers and related revenues down the road. Our inbound roaming revenues were $52 million, down $8 million or 14% year-over-year. This declined was expected as a result of Verizon’s acquisition of Alltel. Over the next few quarters, we expect that roaming revenues will stabilize and that they will be flat to slightly up on a year-over-year basis. ETC revenues were $35 million for the quarter compared to $38 million a year ago, which included the favorable catch-up receipt of $3 million in one of our states. Subject to any changes to the Universal Service Fund Program that the SEC might adopt in connection with the National Broadband Plan or otherwise, we really don’t expect much change in the level of ETC revenues over the next couple of quarters. Moving on now to costs and expenses, the net loss on equipment for the quarter was $102 million, which was down $13 million from the prior year. This was primarily due to a reduction in the number of units sold, reflecting lower gross additions. However, it’s important to note that despite a shift in the mix of devices through more sophisticated and expensive devices, we’ve been able to control and drive down the cost per unit to more effective purchasing and promotion strategies. Other cash operating expenses in total increased about $28 million or 5% year-over-year. And within that, system operations expenses of $207 million were up $7 million or 4% year-over-year. This was due to a 6% increase in the average number of cell sites in service and higher expenses related to the increases in customer data usage. Couple of stats. Over the past year, the number of outgoing text messages increased by nearly 20% while total data usage increased by 316%. SG&A expenses of $429 million increased by about $21 million or 5%. One of the major factors here was higher USF expense due to a change in the contribution factor. As I said earlier, this change also drove an increase in regulatory recovery revenues. We also incurred higher costs related to serving our customers such as those related to the Battery Swap program and staffing levels in our customer care centers. We continue to experience high call volumes and handle times related to our expanding base of smartphones and other premium data devices. And as planned, we incurred significant incremental expenses related to our multi-year initiatives that were launched in 2009. Operating cash flow for the quarter was $227 million compared to $261 million in the prior year, and the operating cash flow margin was 23.5% compared to 26.5%. On a sequential basis, operating cash flow was up $54 million or 32%, and the margin grew 6 percentage points from 17.5% in the previous quarter. Below the operating income line, our investment and other income net for the quarter totaled $9.4 million, including earnings of approximately $17 million related to our interest in the Los Angeles partnership. Interest expense was $16 million, which was down $3 million year-over-year, reflecting the redemption of our 8.75% senior notes in December of 2009. Net income attributable to U.S. Cellular shareholders totaled $48 million or $0.55 per share versus the $85 million or $0.97 per share in 2009. The decrease reflects lower operating income, but also a higher effective tax rate. This year’s rate was 38.8% compared to last year’s rate of 28%, which reflected a one-time tax benefit resulting from a state tax law change. The difference in tax rates accounts for about $10 million of the change in net income. And for the full year 2010, we expect the effective tax rate to be in line with the first quarter results. As you can see in the release, we generated nice cash flow from operating activities of $152 million in the quarter and we generated almost $31 million of free cash flow net of capital expenditures of $122 million. Our balance sheet remains sound, and we have significant liquidity and financial flexibility together with expected cash flow from operations to meet our financing needs. At March 31st, cash and short-term investments at U.S. Cellular totaled $315 million, and we have about $300 million of unused borrowing capacity under our revolving credit agreement. Our guidance for the full year 2010 is contained in today’s press release and it’s unchanged. As you can see, we are projecting service revenues of $3.975 billion to $4.075 billion; operating cash flow of $850 million to $950 million; and capital expenditures of approximately $600 million. Factors influencing our current thinking about 2010 results include the ongoing uncertainty in the general economy; ongoing risks related to service plan, pricing and equipment subsidies; and the investments that we are making in the business to ensure our long-term success. We will continue to respond to market conditions to preserve our customer base and maintain our competitive position. And we will continue our emphasis on cost control and removing costs that are not critical to our success while at the same time we invest in our infrastructure to further enhance our customer experience and provide value to our customers, both cost effectively and efficiently. Now I’ll turn the call back to Alan for a couple of wrap-up comments.

[Alan Ferber:]

Thanks, Steve. I’d like to wrap up the wireless discussions by saying a few words about some of our key initiatives and plans for the remainder of this year. Our business is connecting people, and our brand message is Believe in Something Better. Our Battery Swap program continues to be a strong proof point for our customer-centric strategy. For example, the East Coast was hit repeatedly with severe weather this winter, leaving customers without power, and Battery Swap helped many of our customers actually stay connected. By the end of the first quarter, we swapped 1.5 million since the program launched in May 2009. Another proof point supporting our brand messaging is our Overage Protection program launched in November. Customers really appreciate the value of this service and have been quick to opt in. As of the end of March, we had almost 1.5 million customers signed up. We expect to launch additional new and innovative proof points later this year as we continue to differentiate U.S. Cellular in the marketplace as the company that has the customers back. We are also excited about the coming launch of Android phones in the third quarter. Our initial launch will include the HTC Desire and the Samsung Acclaim, a U.S. Cellular exclusive. The HTC Desire is a sleek, high-end, full touchscreen device running Android 2.1 with a vibrant 3.7 in screen, 1 gigahertz Snapdragon processor, 5 megapixel camera, and WiFi. The Samsung Acclaim is a touchscreen with a slide-out QWERTY keyboard running Android 2.1 with a 3.2-inch AMOLED screen, 3 megapixel camera, and WiFi. Both devices will give customers access to the Android market and various Google applications and will be preloaded with U.S. Cellular applications such as My Contacts Backup, City ID, Tone Room, and Your Navigator. We expect to introduce additional Android devices throughout the remainder of 2010. So as you can see, we continue to focus on ensuring that we have a strong handset lineup, with an emphasis on smartphones and data-optimized premium devices. As we have previously discussed, we are finishing up our 3G network deployment over the next two quarters. This is important because we continue to see an increase in data revenue and a reduction in churn in the areas where we provide 3G service. At the same time, we work through our LTE technical trial and plan for future deployment of LTE. We also continue to make progress on several major initiatives to enable stronger customer relationships, make product development, point of sale and building operations more efficient, and drive online sales and account management. During the quarter, we replaced our web platform infrastructure, which will enable future capabilities around account management and ecommerce. Also, we upgraded our campaign management system to automate workflow in the campaign planning and execution process. This will help us be more efficient and targeted with our marketing and mail campaigns. As we have said previously, we expect spending on these major initiatives to continue over the next several years. Now, I’ll turn the call over to Bill Megan from TDS Telecom.

[Bill Megan:]

Thank you, Steve and Alan. Good morning, everyone. Telecom results showed improvement in the quarter. Actions we have taken over time to build attractive service bundles and position them with competitive pricing, to introduce new commercial service offerings, and to control costs are having positive effects. The trends in revenue, cash expense, and excess line walks have all improved. Growth in our high-speed data subscriber base has also continued to be strong. We are still cautious on the impact of the economy, however, as our employment remains high and commercial customers remain hesitant to make buying decisions. For the quarter, TDS Telecom’s combined ILEC and CLEC revenues declined 1.9%. Revenue was flat in the ILEC, while CLEC revenue declined 6.7%. In the ILEC, we had strong growth in data revenues, offsetting the loss in voice revenues. The decline in voice revenues was due both to physical access line losses and lower ARPU driven by increased usage of bundling discounts. Network access revenue was flat with lower minutes of use, offset by some improvement in regulatory recovery. The decline in the CLEC is driven by the execution of our plan to limit investment in new residential customers, and therefore we expect that trend to continue. We continue our efforts to reduce the loss in physical access lines. Since beginning of 2009, we have been aggressively marketing new voice packages called Star packages, which include additional features and long distance minutes giving consumers a lot of flexibility in matching the service set to their needs in budget. At the end of March, we had 122,000 customers on these plans, which is approximately one-third of our customer base. We now have 51% of our residential customers on some type of voice package, up 11% from the previous March. As I mentioned, the strong positive in the quarter will be increase in ILEC data revenues, which grew 13%. Our promotional campaigns for high-speed data added 9,100 net subscribers sequentially, and net subscribers grew 16% year-on-year. Gross adds were strong at 17,800 for the quarter, while monthly churn was down slightly at 1.4%. Our high-speed data penetration over all access lines is now at 41%, up 7 percentage points from last year. Residential DSL ARPU was flat at $37. 67% of our customers are taking speed of 3 meg or greater. We continue to emphasize our Triple Play bundles; voice, data and video, with video offered to our partner DISH Network. Growth in Triple Play continued, as we added 4,400 net subscribers in the quarter, bringing our penetration of residential lines to 21%. We know the importance of bundling and reducing churn. Churn in our Triple Play customers is very low at roughly one-half a percent per month. Over the past year, we have introduced a series of promotions in our market that have presented different value propositions and have kept the program fresh, and customers have responded favorably. Our current offerings include both double and triple-play price for life promotion as well as awarding gift cards for bundling services. We have had measurable success with our bundled offering, with 58% of our residential customers on the double or triple-play bundle, up from 50% last year. We have redoubled our efforts to keep customers, building a dedicated sales team and augmenting the set of tools they have to retain customers who have indicated the intent to leave. We leveraged that contact as an opportunity to show customers the value of our services, the bundled offerings and service packages that can save them money, and also describe our current promotion. Among the tools this team has is our version of Naked DSL, which we have now begun to promote. It includes the basic voice line, which provides value as a safety feature for consumers who might otherwise just cut the cord. In the commercial segment, we continue to lead with our hosted IP service, we call it Managed IP, which provides very rich call management features such as advanced call routing and one number capability. We believe this is an especially attractive offering since it allows customers to avoid a large upfront capital investment because the service is hosted on our network. For both ILEC and CLEC we now have 16,600 stations installed. We do not count these customers as physical access lines, but do count the stations in equivalent access lines. Consolidated cash expenses were down $4.9 million or 3.7% for the period, a 1% decrease in the ILEC and a 9.2% decrease in the CLEC operations. Expense reductions directly related to our cost control efforts were offset by advisory fees of $1 million incurred with our acquisition of VISI, which I will talk about in a moment. Employee headcount was down 8.5% from last year. Expense decreased at the CLEC, in line with fewer residential customers. We continue to invest in our network. Capital expenditures were $23.4 million for the quarter, as we evolve our network and put the necessary infrastructure in place to offer faster broadband speeds. 93% of our ILEC lines are equipped for DSL service. About half of our lines are capable of 10 meg or higher speed service. Capital spending also supports our advanced service offerings, including our hosted IP based services and higher speed data over bonded copper facilities for our commercial customers. We are expanding the capabilities of our network with our 10 gig regional fiber transport initiative. This investment works for us in several ways. It will help us reduce cost by enabling more efficient least cost routing and Internet backhaul. It builds in enhanced network reliability with expanded route diversity and redundancy, and it 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. On March 19, we closed on the acquisition of VISI Incorporated, which provides a wide range of information, technology solutions, including collocation, dedicated hosting, and cloud computing services to businesses of all sizes. VISI presents us with a strong set of complementary network and IT-based services that we can offer to both current as well as new telecom customers. And we will continue to evaluate additional acquisition opportunities both in the managed services segment as well as our more traditional small RLEC market. As part of our commitment to bringing critical broadband services to rural communities, we submitted 46 applications to the RUS in the second round of broadband stimulus funding. As a reminder, the funding in the second round is targeted at grant loan combinations of 75% and 25% as compared with simply grants, unless a waiver granted. We were awarded grants in two locations in round one, totaling $12.5 million, and we expect the funding procedures to be finalized in the near-term so that we can begin work. As Ken discussed, we will be active participants in the complex process of implementing the SEC’s National Broadband Plan. And finally, let me note that we have modified our guidance, as shown in the press release. Results in the first quarter showed improvement, with access line losses tempering, sales of data products continuing to show strength, and cash expenses reflecting our ongoing cost control initiatives. With these results, we are tightening the range for revenues and operating cash flow by moving up the lower end of the range. In addition, we acquired VISI, which will add approximately $10 million in revenues, $3 million in operating cash flow, $4 million in depreciation and amortization, and $15 million in capital expenditures. We are adjusting our ranges for this acquisition as well. Results of VISI will be incorporated in our ILEC segment. Our CapEx guidance does not include amounts awarded to telecom under the broadband stimulus program. Our view is that these brands will be treated as a reduction in our investments and have no net effect on our balance sheet. And now I will turn the call back to Jane McCahon.

[Jane McCahon:]

Mason, we’re ready for questions please.

[Operator:]

All right. (Operator instructions) Your first question comes from the line of Ric Prentiss from Raymond James. Your line is now open.

[Ric Prentiss:]

Thanks. Good morning, guys.

[Kenneth Meyers:]

Good morning.

[Ric Prentiss:]

Couple questions if I may on sort of the wireless side. First, can you just give us a little more color maybe on ARPU trend, both postpaid and prepaid, now that you have data on both platforms? Just what are you seeing in the competitive world? You just say you saw some pressure, but just kind of thoughts on ARPU trends. And the second question is on postpaid particularly, obviously is a very live quarter for most in the postpaid space, is the game over in postpaid as far as subscribers? Is it all just getting upsold the data, and what are your thoughts as far as postpaid?

[Alan Ferber:]

Hey, Ric, this is Alan. I’ll start. On the ARPU side, what we are really seeing on the postpaid side of ARPU is really the effect of many of the pricing moves that were made in mid-2009. I think as we spend much more time right-sizing customers, we’re seeing a decline in voice ARPU over the past two or three or four months or so. We’re also seeing an expansion of family plan growth, and that has the effect of lowering churn, but also lowering ARPU. On the prepaid side, there is a lot of movement going around. As you know, our base is relatively small there and our growth is strong. But we are encouraged by our new set of rate plans and the high take rate we’re getting on the $59 and $69 voice and data rate plans. We’re seeing sort of a very large majority of our prepaid customers choosing those plans. On the postpaid side of the business, on the churn side, it’s a very favorable quarter. Our churn and our absolute number of (inaudible) is down year-over-year. What we really have is a growth issue in the first quarter as had everybody else in this industry as you indicated. I think there is probably three or four factors there. One, I think there was a pull-forward into the fourth quarter as a number of wireless carriers had aggressive smartphone activations. I think also we’re still seeing the effects of a relatively weak economy combined with lower tax refunds that usually provide a stimulus in the first quarter and use the results in the Valentine’s Day (inaudible) being a victory for us. And then lastly, I think we have seen reduced churn at our competitors. And so that a shrumpy available full of postpaid gross adds in the first quarter. I think looking forward, as we continue to execute on our strategy, we expect improvement there.

[Ric Prentiss:]

And as you look at, now we have April and little bit of May in the books, any thoughts on industry trends, either economy or post versus pre kind of growth rates, just kind of what you’re seeing in the marketplace?

[Alan Ferber:]

Yes. It’s pretty much the same.

[Ric Prentiss:]

Okay. Thanks, guys.

[Operator:]

Your next question comes from the line of Simon Flannery from Morgan Stanley. Your line is now open.

[Simon Flannery:]

Hi, thanks very much. Good morning. You mentioned interest in (inaudible) stock But stock at 318% data growth and I think your modems had grown something like five-told in terms of sales. Can you just talk about sort of stresses that’s put on the network if at all and how are you positioned regarding backhaul, and also to what extent you are sort of open to considering teeter [ph], usage base, data pricing or I think the industry may go there over the course of the year.

[Alan Ferber:]

Sure. This is Alan again. So, on the wireless modem side, we’ve obviously experienced impressive growth area, especially as we introduced the expanded EVDO networks. At this point, we don’t have any issues on our network. It’s still a relatively small part of our overall customer base, but it’s certainly something that we watch very, very closely, because the best network is very core to our overall experience. With regard to LTE, no new news there. The trial is ongoing and going well. No real surprises there.

[Kenneth Meyers:]

And as we said, we expect that trial to really continue until later this year, probably the September-October timeframe and we really don’t anticipate any kind of, what I would say, large-scale commercial deployment until sometime later in 2011.

[Alan Ferber:]

And in terms of various forms of tiered pricing, certainly we are watching as the other wireless carriers experiment on that front. I think every carrier agrees that going forward we need some improved alignment between pricing and usage. But at this point we don’t have any plans to introduce any form of tier pricing or speed throttling or things along those lines.

[Simon Flannery:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Phil Cusick from Macquarie Capital. Your line is now open.

[Phil Cusick:]

Yes. Thanks for taking the call. I wonder if you can expand, first of all, on the cannibalization comment. One, is it something that’s acceptable and just the cost of doing business as you get more into the prepaid space? Do you think that it accelerates as you sort of do more of the prepaid side and promote that a little more? And then secondly, following up on Ric’s question, it seems like postpaid was weak for everybody, but 2Q tends to be weaker for you sequentially. Prepaid, the same thing. Should we expect that that typical seasonality holds or are you responding someway? Thanks.

[Alan Ferber:]

This is Alan again, Phil. On the overall cannibalization side, I would say it’s not material at this point, but it’s definitely going on. I think as consumers out there continue to respond to a difficult economy and are looking for options to manage their budgets, certainly prepaid becomes a palatable option for a sub-segment of them. I don’t see that accelerating into the future. With regard to second quarter versus first quarter, we don’t really talk about mid-quarter results. But in the marketplace, we’re not seeing anything that would indicate the market is changing a lot in the second quarter versus the first quarter. And of course, we’ll always continue to respond accordingly to any kind of moves out there in the marketplace.

[Phil Cusick:]

Okay. And then second of all, you started with a pretty long sort of regulatory picture. I assume that that’s a message to the SEC. Are you considering pulling back on CapEx in either of the businesses given the uncertainty in the regulatory environment?

[Kenneth Meyers:]

Okay. So first of all, Phil, that was not a message to the SEC. We would use this vehicle for that rather. We’re just making sure everybody understood where we were at. Right now, because the funding mechanisms that our employees are still in place, we have made commitments to communities as well as to states to fund certain projects, and we certainly would never walk away from those commitments if the rules change going forward. And that affects the economics. We’ll have to readjust that then. But at this point in time, it was just – there is a lot of things in that proposed area. We just want to make sure we understood what we’re doing on it and where we see some challenges as well as some opportunities.

[Phil Cusick:]

Great. Thanks, guys.

[Operator:]

Your next question comes from the line of Robert Dezego from SunTrust Robinson Humphrey. Your line is now open.

[Robert Dezego:]

Hi, thanks for taking the questions today. A question on roaming revenue, a little bit weaker than we had thought. And I think now that you are through, I think, the anniversary of the Verizon-Alltel roaming coming off the year-over-year comps, how do you see wireless roaming revenue trending over the course, in a couple of quarters? Are we going to probably get that back to a period of growth or is it just going to continue to decline?

[Kenneth Meyers:]

Well, I think we expect that the majority of year-over-year declines are behind us. As I mentioned earlier, we actually see that stabilizing and would expect to see small uptick later in the year. So I would say stabilization occur in second and third quarter and then a modest increase later in the year.

[Robert Dezego:]

Okay. And then could you talk about the CEO search? Was the plan initially to go outside the sector to find the new CEO to lead the business? Do you think that was the direction you need to go? And could you talk about perhaps why you didn’t choose someone with an extensive wireless background here in the US?

[Kenneth Meyers:]

Yes. It was an extensive search that was done across the industries. I think about our company, our strategy, which is all around the customer. We want to further strengthen that area by getting a leader that shares that to you and the world. So while we look inside the industry and outside the industry, we are excited to be able to identify someone of Mary Dillon’s background.

[Robert Dezego:]

Okay. Thank you.

[Operator:]

(Operator instructions) Your next question comes from the line of Michael Rollins from Citi. Your line is now open.

[Michael Rollins:]

Hi, good morning. Just curious, if you guys could talk about the margins on the wireless business, and I guess structurally if you look at some of the more mature wireless companies historically, what are the opportunities to take those margins higher and how should investors think about that over time?

[Steven Campbell:]

Mike, it’s Steve. I’d begin by saying, as you know, we’ve got guidance in the release, and that reflects our best thinking about margins in the short-term. Over the long-term, our goals are really focused on delivering an overall return, return on capital that exceeds our weighted average cost of capital. So, to do that, clearly we are going to have to increase margins. Probably our major focus there on how we do that is with our enablement initiatives that we’ve been talking about, which strongly support our customer satisfaction strategy and are going to help to differentiate us and drive growth on the ad side as well as helping us to drive efficiencies in the way we operate and to drive cost at. So over time, we are focused on margins. We fully expect that we will increase them. All that said, as you know, we’ve got a lot of uncertainty right now with the economy. Very intensive competition in the industry. And the investments that we’re making in those enablement initiatives. So right now, the guidance that you’re looking at is what kind of margins you should expect in the near-term. Beyond that, looking at the longer term, I wouldn’t really say the degree to which it could move or the timeframe that it could move.

[Michael Rollins:]

Thanks very much.

[Operator:]

There are no further questions at this time. I’ll turn the call back over to Jane McCahon for any further closing comments.

[Jane McCahon:]

Just wanted to thank everybody for their time today. Please contact us if you have any additional questions, and we’ll look forward to reporting back to you on our progress over the coming months. Thanks again.

[Operator:]

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