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NTELOS Holdings Corporation (NASDAQ:NTLS)

Q3 2008 Earnings Call Transcript

November 5, 2008, 10:30 am ET

Executives

Wes Wampler – Director, IR

Michael Moneymaker – EVP, CFO, Treasurer and Secretary

James Quarforth – Chairman, CEO and President

Analysts

Ric Prentiss – Raymond James & Associates

Phil Cusick – Macquarie

Mike McCormack – JPMorgan

Patrick Rien – Barclays

David Dixon – FBR Capital Markets

Batya Levi – UBS

Operator

Good day everyone and welcome to the NTELOS Holdings Corporation’s third quarter 2008 conference call. Today’s call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Wes Wampler.

Please go ahead, sir.

Wes Wampler

Good morning and welcome to the NTELOS third quarter 2008 earnings conference call. The topics for today’s call include an overview of business activities and financial highlights for the third quarter and an update to the Company’s guidance for 2008. Speaking on the call today will be James S. Quarforth, Chief Executive Officer of NTELOS and Michael B. Moneymaker, Executive Vice President and Chief Financial Officer.

We’ll begin with comments from Mike and Jim and then take any questions you may have. We ask that questions on this call be from current investors or analysts and that any media questions be later directed to Mike Minnis, our Director of Public Relations.

Before we continue, I would like to point out that certain of the statements contained in our earnings release and on this conference call are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Please refer to the earnings release for a special note regarding forward-looking statements.

Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details on these measures, including why we use them and reconciliations to the most comparable GAAP measures, please refer to our earnings release on our website at www.ntelos.com or to the 8-K filing provided to the SEC.

With that, I’ll now turn the call over to Mike Moneymaker, CFO of NTELOS.

Michael Moneymaker

Thank you, Wes, and good morning. We are pleased to announce third quarter 2008 operating revenues of $136 million, operating income of $31.8 million and net income of $13 million, or $0.31 per share.

We’re also pleased to announce the declaration of a quarterly cash dividend in the amount of $0.26 per share, an increase of 23.8% over the previous quarterly dividend of $0.21 per share, to be paid on January 12, 2009 to stockholders of record on December 19, 2008.

Operating revenues, operating income, net income, and earnings per share for the nine months ended September 30, 2008, were $399.2 million, $88 million, $40.8 million, and $0.96 per share on a diluted EPS basis, respectively.

Adjusted EBITDA was $57.3 million for the third quarter 2008 and $170.6 million for the first nine months of 2008, increases of 9.5% and 11.2%, respectively, over the comparable periods of 2007.

Operating income reflects accelerated depreciation charges of $3.6 million and $17.1 million for the third quarter and nine months of 2008 related to 3G equipment scheduled to be replaced or redeployed with the EV-DO upgrade. For the year 2008, accelerated depreciation charges are projected to be approximately $19.2 million.

Looking next at our key operating metrics for the third quarter, first, an overview of our wireless operating results and key metrics. For comparability purposes the following 2008 to 2007 comparisons will be based on the pro forma results and metrics for the periods prior to April 1, 2008, each adjusted to reflect the change in gross versus net reporting of handset insurance revenues and cost as a result of the previously disclosed new contract for such services that went into effect on April 1, 2008. Please refer to the earnings release and our Form 10-Q for actual results for the periods and further discussion on this change in gross versus net reporting.

Our pro forma year-over-year increase in wireless subscriber revenues was over 10% and 12% for the third quarter and nine months of 2008, respectively. This growth was achieved through year-over-year subscriber growth of 30,608 net adds, 20,233 of which were added in 2008 and pro forma total ARPU growth of $1.11 year-over-year.

We were pleased with the strength in postpay gross adds during the quarter of 23,595, an 11% increase over postpay gross adds of 21,231 in the third quarter of 2007.

Subscriber churn, historically the highest in the third quarter, was 3.1% for the third quarter 2008, a slight increase from churn of 3.0% for the third quarter 2007.

Our pro forma ARPU improved $1.04 for 3Q08 compared to 3Q07. The progress of our EV-DO network upgrade and its impact on data ARPU is beginning to be seen this quarter as overall ARPU increased $0.51 from the second quarter 2008 led by growth in data ARPU.

CPGA was $373 for the third quarter of 2008 as compared to $375 for the second quarter 2008 and $348 for the third quarter 2007. We continue to see strong growth in sales of smart phones and air cards, since our launch of EV-DO high-speed data offerings. The increased sales of smart phones and air cards have resulted in higher CPGA costs during the second and third quarters of 2008. However, the continued growth in the sales mix of these devices fueled the growth in ARPU during the third quarter 2008 and should continue to drive data ARPU growth in the future.

CCPU was $32.89 for 3Q08, an increase of 4.7% over pro forma CCPU for 3Q07. These increases reflect the success of our national no-roam product, which contributed to the higher incollect cost of $7.2 million for 3Q08, as compared to $5.9 million for 3Q07.

Retention costs, net of related equipment revenues from existing customers, were $2.2 million for 3Q08, which was lower than the 2Q08 cost of $2.6 million and 3Q07 cost of 3.0 million.

Wireless bad debt expense was 2.8% of wireless subscriber revenues for 3Q08, as compared to 3.2% for the year 2007.

CCPU increases also reflect the costs from the addition of 88 new cell sites in 2008 and higher network cost associated with the additional backhaul cost associated with new T1s added to cell sites upgraded to EV-DO Rev. A. We anticipate cost from new cell sites and higher cost from the monthly average number of EV-DO upgraded cell sites will increase our CCPU cost over the current levels, and have reflected these assumptions in our 2008 guidance.

Moving next to wireline. Our wireline segment recognized adjusted EBITDA of $17.1 million in 3Q08 versus $16.4 million in Q307. Wireline revenues grew 1% over the third quarter 2007 with competitive wireline strategic products growing 12% from Q307, offset by the rate driven declines in access related revenues.

We offered a voluntary early retirement plan to eligible employees within our wireline segment that resulted in the reduction of 22 employees effective June 30, 2008, for which we commenced recognizing the cost savings in the third quarter 2008.

Looking next at our liquidity and current financial condition. Adjusted EBITDA, less expenditures for property, plant, and equipment for 3Q08, was $15.9 million and our capital expenditures were $41.4 million for the third quarter 2008. Total incremental capital expenditures for the EV-DO upgrade drove the higher level of capital expenditures for the quarter.

Cash provided by operating activities was $142.4 million for the first nine months of 2008, reflective of record level adjusted EBITDA and positive working capital adjustments. This represents a 38% increase over cash provided by operating activities of $103.2 million for the first nine months of 2007.

Our ratio of total debt at September 30, 2008 to adjusted EBITDA for the last 12 months ending September 30, 2008 was 2.77 to 1, down from a ratio of 3.03 to 1 as of December 31, 2007.

I’m also pleased to report that total debt net of $67.4 million of cash on hand at September 30, 2008 was $542 million. At $542 million, this represents a ratio to adjusted EBITDA for the last 12 months ending September 30, 2008 of 2.46 to 1, down from 2.76 to 1 as of December 31, 2007.

With that, let me now turn the discussion over to Jim Quarforth, our CEO, who will provide an update on our latest business and operational developments and our guidance for 2008.

James Quarforth

Thank you, Mike. As Mike has pointed out, we had another solid quarter posting an adjusted EBITDA of $57.3 million. Mike also mentioned the Board’s action to increase our dividend by 24%. This is significant in the current economic environment and acknowledges our confidence in continued financial performance, the Company’s current cash position, its low debt ratio, and our ability to grow without the need to access the capital markets. I plan to give a brief regulatory update, discuss our EV-DO and new cell site deployment, activities in our retail stores, the Sprint wholesale revenue growth and the update to our annual guidance.

On Monday the FCC removed from its open meeting agenda two important issues impacting all parts of the telecom industry. These issues are inter-carrier compensation and Universal Service Fund Reform. Because these issues are so important, NTELOS share the view expressed by many others that the FCC must make any proposed plan public and allow comment before adopting it. It now appears that the FCC may act on a narrow order that addresses a federal court remand on ISP traffic.

Inter-carrier compensation and USF are technically complex issues and among the most difficult issues facing the FCC, state regulators, and telecommunications carriers. Even so, we’re confident that the members of the FCC know that inter-carrier compensation in the form of access charges and USF funding are vital to RLECs, including NTELOS. These revenue sources make it possible for RLECs to provide our rural customers with quality service at affordable prices. They also make it possible for the RLECs to deploy broadband services, so that our customers in rural areas have the same capabilities as are available in urban high-density markets. All members of the FCC continue to support a policy of universal service for voice communications. And further would like to see broadband availability promoted.

The FCC did vote on the conditions related to the Verizon acquisition of Alltel specifically as it pertains to roaming. The commission accepted Verizon’s commitment to honor the existing Alltel roaming agreement for four years from the date of the transition or transaction closing. This is a very positive condition for our Company as we will receive the benefits of the Alltel agreement across the new combined company’s network.

We introduced EV-DO in four markets during in the quarter, including Roanoke, Virginia; and Morgantown, Clarksburg and Fairmont, West Virginia. During the quarter we introduced EV-DO to an additional 229 cell sites bringing us to a 46% EV-DO capability across our network. We are currently at 54% EV-DO capability and project to be at 70% by the end of the year and 100% by the second quarter next year, excluding the redeployed Motorola cell sites. We also added 29 new cell sites during the quarter and are on schedule to complete the 160 cell sites we planned for the year. Approximately 83% of the 160 cell sites will be in the Virginia West and West Virginia markets, servicing both NTELOS customers and Sprint wholesale customers. The network expansion represents approximately a 16% growth in cell sites, which is twice our normal annual addition.

Looking at our wireless retail operations. During the quarter our Company-owned retail distribution channel was expanded by two new stores and one scheduled for the fourth quarter. We will end the year with nine new stores, representing a 12% growth in retail store distribution to a total of 84 stores. The growth in this channel will further strengthen our differentiated retail selling strategy. 22 of our existing stores have been remodeled to the fresh new look of the new stores with cash kiosks and live phone bars. In addition, six stores are planned for the balance of the year.

We continue to be pleased with the demand for EV-DO products in the markets we’ve launched. EV-DO capability has added strength to our postpay offerings and sales effectiveness. Our data take rates of gross postpay additions increased to 69% in the third quarter. Take rates for smart phones and data cards increased from 11% in the second quarter to 23% in the third quarter to 28% in September.

We also introduced five new handsets during the quarter and have six models planned for introduction in the fourth quarter. The new handset introductions have provided additional strength to our postpay offerings resulting in increased postpay sales quarter-over-quarter.

The first nine months represent a tremendous amount of progress in network capability and expansion, retail distribution and device introduction, and will provide significant momentum going into the fourth quarter and 2009.

Looking at our Sprint relationship, our revenue from the Sprint wholesale relationship grew by $2.9 million or over 12% compared to the second quarter. This was driven by an increase in travel voice usage and continued but substantial increase in travel data usage. Travel data revenue increased by $2.5 million or over 60% sequentially driven by more data usage and stimulated by the EV-DO launches.

As of October 29, we achieved the 98% EV-DO coverage requirement in our Sprint contract, which activates an increase in the monthly minimum billing from an $8 million per month minimum to a $9 million monthly minimum. By accelerating our EV-DO build to accomplish this we’ve seen dramatic increases in data usage taking us above the $9 million billing level. In fact, the October billing was approximately $10.3 million, suggesting continued growth in the fourth quarter.

We are encouraged by what we’re seeing and anticipate data to continue to be a catalyst for future growth. In addition to the EV-DO deployment, the substantial network expansion will be a catalyst for wholesale revenue growth, as evidenced by our October annualized revenue per cell site of $180,000 compared to the third quarter annualized revenue per cell site of $160,000.

Based on the solid financial results for the third quarter and our projections for the balance of the year, we’re very comfortable confirming both our revenue and EBITDA guidance. We believe our annual revenue will be in a range of $531 million to $540 million and our annual adjusted EBITDA will be in a range of $224 million to $228 million.

We are increasing our CapEx guidance from a range of $130 to $133 million to a new range of $133 to $135 million as a result of a fiber extension opportunity within our wireline wholesale carriers’ carrier business.

Given the economic outlook for a softer retail holiday season, we are refining our net addition guidance from greater than 30,000 to a new range of 28,000 to 30,000 for the year. Additionally, we are increasing both our postpay and blended churn by 0.1% to approximately 1.9% and 2.8%, respectively.

We are very pleased with the solid financial results in the third quarter and the continued prospects for growth throughout the balance of the year. These results are significant, as our growth has allowed us to absorb the increase in incremental expense associated with the EV-DO implementation. The fourth quarter will have the highest incremental operating expense associated with the EV-DO implementation as a result of the compounding effect of adding additional cell sites throughout the year. These deployments, however, will position the Company for significant growth in the future.

Our wireless business continues to demonstrate strong EBITDA growth with a 12% growth over the same quarter last year. The operating trends that are supporting this growth continue to be growth in customer additions, penetration of data services, and data ARPU. The investments made in our wireless network expansion and planned technological evolution to EV-DO this year will continue to be significant catalyst for growth for both voice and data revenues for both our retail and wholesale business segments. We anticipate significant future growth in data usage, ARPU, and revenues as a result of the implementation of EV-DO.

The wireline business also showed nice results in the quarter with a 5% growth in EBITDA quarter-over-quarter driven by exceptional growth in the competitive segment as a result of continued strong customer demand for high bandwidth products. Our continued fiber deployments including our fiber expansion in the West Virginia will be a catalyst for continued growth in our competitive segment, satisfying current demands from both our business and carrier customers for higher bandwidth services. The ILEC continues to show enviable DSL penetration, nearly 44%, with customers upgrading to higher bandwidth speeds. We believe the Company’s strong operating trends and momentum, along with its investments in key growth areas, position it for sustainable growth in the future.

At this point, we’d now take questions and ask the operator to open the lines. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) And we’ll go first to Ric Prentiss with Raymond James.

Ric Prentiss – Raymond James & Associates

Good morning guys.

James Quarforth

Hey, Ric.

Michael Moneymaker

Good morning, Ric.

Ric Prentiss – Raymond James & Associates

Couple of questions for you. First on the third quarter on the wireless side on net adds, post-paid adds came in pretty good, but total were a little light. Can you talk about what happened on the pre-paid side and also I think last quarter on the call you said July gross adds were going very well, was there kind of a softening in the rest of the quarter?

James Quarforth

Yes, good question, Ric. I think if you look at the gross adds, particularly postpay where we focus our attention, they were up about 10% quarter-over-quarter. So we were very pleased with that. The major driver for the reduction in net adds, I guess, the first and foremost, was we had a fairly significant contract last year with Marshall University, where we were part of their communications plan or offering to their students as part of their required technology package. And they elected this year not to include wireless in that package I think because a lot of the kids came to the university with phones. So it wasn’t a matter of losing business to somebody else, they just didn’t include the wireless. That was about 1,200 net adds that we lost and impacted churn by about 10 basis points. So, pretty significant one quarter because it’s a large customer for us, but certainly understand the logic there.

Secondly, I would probably say the – even though our EV-DO network build has been incredibly smooth, as you are aware when you turn up a market, it takes about 30 to 60 days to optimize that network, and so you do see some changes in the experience that customers have during that period of time and I think that contributed to a little bit of uptick in churn. Obviously, as we get through all these then we’ll see that level out to much better levels.

And then, finally I’d probably say there may be a touch of the economy in here. But I think that’s probably the third and most remote driver for the reduction in sales and the increase in churn. We’re seeing a little bit of pressure on ARPU and a little bit of pressure on churn, but really the main drivers were the Marshall University and the network.

Ric Prentiss – Raymond James & Associates

Okay. And then fourth quarter, how is that going so far, obviously a lot of the quarter comes in at the tail end with holiday season, but so far how is October and early November?

James Quarforth

Sure. We’re obviously expecting a softer holiday sales season. As you pointed out, that really doesn’t happen until the last six weeks of the year. Sales have continued to be consistent with what we’ve seen in the past and we’re certainly highly encouraged by a number of things that we’ve been working on this year with the network expansion, with the EV-DO capability has helped our postpay sales and postpay offerings. Our new stores, which take a little while to get turned up and get as productive as you want them are certainly helping and we’ve seen a nice shift in the handsets that people are taking. We – at the end of last year and the beginning of this year, we were shifting from Motorola to some other handset vendors like LG and Samsung and that shift is happening very quickly.

I touched in my comments, the productivity on smart phones is really picking up. We were at 11% of our postpay adds at the end of the – or for the second quarter, 23% for the third quarter, 28% for September. So, as we turn up markets and that product gets a lot more visible, it’s really helping the sales. It’s given us more consideration on the business channel. And so we’re very pleased with that. You’re starting to see a nice lift in data ARPU, up $0.84 on the postpay side. So, even though you’ve got a tough economy out there, we’re highly encouraged with what we’re seeing and all the things that we’ve put in place are working. So, we’re pretty excited.

Ric Prentiss – Raymond James & Associates

Okay, and then to piggyback on that air card and smart phone sales that you were talking about, what kind of rate plans are those people typically starting up on? We had iPCS, a Sprint affiliate yesterday was seeing similar kind of results on the smart phone and air cards and they were taking about I think a $59 kind of rate plan on those things and their data ARPU, just to compare, was over $13 for third quarter, so seeing some very strong data adoption. When you guys sell a data or an air card or a smart phone, what kind of rate plans are we looking at there?

James Quarforth

Yes, smart phone rate plan is $29.95 and an air card is $49.95, and a regular handset I believe is $9.95, non-smart phone handset. Interesting statistic, even though the numbers are small at this point, but I think gives you an idea of the trend. Prior to our EV-DO launches, you compared say the first quarter compared to where we are today and six months later, we’re seeing a ten-fold increase in Blackberry sales. So it really points to – this is what the customers want. They’re buying the product as we get all the markets launch we continue to see some compounding growth there. And obviously part of it too is training your employees to sell the product and promote that product and it seems to be working.

Michael Moneymaker

Yes. The $30 and $50 that was the cost of the equipment?

James Quarforth

That’s what we charge the customer for the actual data service.

Ric Prentiss – Raymond James & Associates

Yes, what’s kind of the monthly recurring charge? Or what kind of ARPU are they walking out the door when they’re signing up with a smart phone or an air card? On the ARPU side maybe I just suppose it’s just the cost side.

James Quarforth

Yes, so for the unlimited data plan it’s again $29.95 on top of the normal plan that they buy and then the air card is 49.95 on top of whatever it is that they buy.

Ric Prentiss – Raymond James & Associates

Okay, so that is the ARPU effect?

James Quarforth

So, when you think about the third quarter, and we’ve seen a few of the comments come through, we’ve been able to absorb that nice lift or the cost associated with the lift in the smart phone take rate. So if you think about the things that the additional expenses like CPGA in the third quarter, a lot of that’s driven by the smart phone introduction and the take rates. Then certainly we’re seeing a growth in – as expected in our EV-DO implementation expense in third quarter, and we’ll see some more in the fourth quarter.

Ric Prentiss – Raymond James & Associates

Got you. Thanks guys.

James Quarforth

Thank you.

Operator

We’ll take our next question from Phil Cusick with Macquarie.

Phil Cusick – Macquarie

Hi, guys, thanks for taking the call.

James Quarforth

Hey, Phil.

Michael Moneymaker

Good morning, Phil.

Phil Cusick – Macquarie

The smart phone and data card thing I think is really interesting. I wonder if you can help us break out between the two of them, any sort of split would be helpful. And then also on the data and the dollars coming in from Sprint on travel and roaming, can you remind us what happens in the spring as those rates resets and how we should look at those? It seems like that dollar revenue, $10 million in October is really ramping quickly. I just want to make sure that we don’t get too excited (inaudible).

James Quarforth

Let me take that one first, and – the Sprint agreement on the data side, there is two elements in data, there is home and there is travel. Home, we represent 60% of Sprint’s ARPU. So that will be consistent going forward and that gets reset every quarter. On the travel data, travel data is through the second quarter of 2009 is on a set schedule, which is actually – declines each quarter through that period and that’s actually, there is a chart that’s defined and scheduled to – which was a schedule that was provided back when we signed the agreement, so you should be able to see those. What happens in July 2009, the concept is that we’ll have all of our EV-DO implemented, which obviously we do now – we’re ahead of schedule. And so we’ll look at the revenue yield that Sprint has for the previous quarter and we’ll take 90% of that revenue yield and that will define what our rate is. And so that will float each quarter based on the revenue yield. So we would expect, as you continue to see a lot of data usage that you’re going to – you’ll continue to see a decline in that rate. So, if you think about each one of the quarters that have taken place this year, we’ve had, even though the rates have been somewhat artificial in nature, there has been a decline in rates, so we’ve seen an increase in our revenue trajectory in light of a declining rate. So we’re real pleased. Some of the stats are out there by Cisco and others; they’re talking about data usage on the mobile side doubling every year. And now I think as people start moving more and more to smart phones and air cards and get used to that product, we’re seeing the usage continue to increase.

Michael Moneymaker

Yes, on the smart phones and air cards looking over ‘08, generally I’d say about 75% to 80% of those sales are coming from smart phones with the remainder from the air cards. So probably I think third quarter was close to 80%.

James Quarforth

Couple of other stats on that, Phil, may be helpful for you. Our mix on the smart phones has increased – our mix of the installed base has increased from 5% to 7% from Q2 to Q3. And that compares to – I think the industry is at about 18%. So there’s a lot of headroom here for continued growth. So pretty excited about the lift in the installed base and where this thing is headed. Air cards, right now, we’re only at 1%, so it’s a pretty small penetration of the installed base. Industry is somewhere between 8% and 10%. So again a lot of headroom there that we’re pretty excited about.

Phil Cusick – Macquarie

That’s great. And just one other thing quickly, the wireline business seems very solid, can you give us an update on any sort of cable competition you’re seeing there? Thanks.

James Quarforth

Sure, yes. As you may recall, Comcast entered into one of our ILEC markets kind of the Waynesboro, Augusta County area back in mid – late May of this year. They had a pretty concentrated effort for the first few months and since then it’s somewhat tapered off. If you were to look at the activity during that period of time, the line loss we experienced relative to Comcast, about 88% of that happened in the first three months, say through August of this year and then the last two months about 12% of what’s been lost to them. It’s happened in the last two months. So I think the point is, it has peaked and then it’s back down now. What they do in the holiday season, we don’t know. We’re very comfortable with our guidance, I think our guidance is 4% to 6% right now and we’re very comfortable that we’ll be in that range.

Phil Cusick – Macquarie

Great. Thanks guys.

Operator

We’ll take our next question from Mike McCormick with JPMorgan.

Mike McCormack – JPMorgan

Hey, thank guys. Maybe just a couple of comments if you would on the economic pressures you are seeing. DSL was a little bit weaker than we’re anticipating, is there an impact on that as well as, on the wireless side, gross adds look pretty good but the churn was up versus our estimate. Maybe just walk us through what the actual dynamic is there, if it’s non-pay disconnects or something else you’ve been thinking about. And then just lastly on the guidance change for net adds for the year, I am assuming it’s prepaid weakness there, but if you can just clarify it would be great.

James Quarforth

Okay. Yes, on the – on DSL, I guess I would probably point you to the fact, we are at a 44% penetration in DSL in the ILEC area, which is very, very high relative to the industry. In fact, in our – the area where we have cable competition, we’re about 49% penetrated. One of the things we’re really excited about is, we’ve mentioned before that we have continued to build fiber, it’s a long-term modernization of our plan, but as part of that we’re introducing higher speed broadband capability, and we’ve been doing this for about a year now when we implemented IPTV. And so after the first year we have 24% penetration of homes passed and these are homes that are buying 16 and 20 megabit speeds. So, pretty exciting product there and coupled with that obviously we have IPTV we’ve been offering and during that same period 20% of the homes passed have taken our IPTV product. And if you look at the customers that have bought product, about 75% are taken to triple play or said another way 88% are taking either a double or triple play. So really great opportunity to expand bandwidth beyond DSL – which I think was your question – but also coupled with some other capabilities, which creates some stickiness and some ARPU growth for the ILEC.

Michael Moneymaker

Just to add to that, I think it’s important, Mike, that we tend to look at the competitive segment and provide you with relative growth and strategic product revenues. And the reason man, we really have seen a lift in customers upticking in terms of moving up, in terms of their type of broadband products, more of integrated access, more Metro Ethernet. And so when you count widgets at the DSL level, it’s not necessarily reflecting the true growth in the strategic products and the broadband services that we sell. It’s interesting that we’re really seeing a lot of demand and just increased throughput that are taking customers. And so you may not have an increase in raw counts, but the overall ARPU and that top line revenue is growing nicely which is obviously contributing to the improvement in the wireline and specifically the competitive EBITDA results.

Mike McCormack – JPMorgan

All right. Understood.

James Quarforth

Your question on churn and the economic impact, again going back to a previous question a little bit, we would say it’s probably the third driver for an uptick in churn this quarter. Now typically our churn goes up between second and third quarter. That’s a historical trend that we’ve seen over the years. It did uptick a little bit more than what we have experienced in the past. That was really driven mostly by this Marshall University contract and then by EV-DO implementation and really the last piece was economic. We have seen – if we break that down a little bit for you, our involuntary churn is pretty flat quarter-over-quarter. Our voluntary churn was up about 20 basis points. So little bit of a trend there. We are seeing a little bit of pressure on ARPU. You have folks that say in a $49 plan, say they want to keep their wireless service drawn upon a way to reduce their cost a bit. We’re seeing a little bit of pressure there. And if you look at the categories when people terminate service, the category of cannot afford has creeped up. So there is some impact, but I think we feel pretty positive that the impact is minimal and certainly it’s one that we feel very confident we can manage through and that’s really why we’ve kept our financial guidance where it is because we’ve done a lot of work to create the drivers to continue to grow this business.

On the fourth quarter guidance, on prepay, your question there, historically the fourth and the first quarter are our highest sales quarters for prepay. We would expect that trend to continue this year. We don’t see any reason why we would see a change there. From a churn perspective, typically again your churn goes down in prepay in those quarters and we would expect those trends would also be similar. Obviously, if you go back to the economic issue, there could be a minor impact there, but we don’t think it’s going to be significant at all.

Mike McCormack – JPMorgan

What’s – I mean voluntary churn issue for this quarter, what were you seeing there, was it sort of people that got in over their heads at higher price plans or was it more of a low-end subscriber issue?

James Quarforth

I think it was generally people and – whether it’s a $49 plan that want to reduce it by $10, that when they keep their service, they might have dropped a feature. The actual churn, I’m sorry, yes, inability to pay, if they had said, “hey, I can’t afford the service.”

Mike McCormack – JPMorgan

Right.

James Quarforth

Yes.

Mike McCormack – JPMorgan

Okay. Thanks guys.

James Quarforth

Yes.

Operator

We’ll take our next question from Patrick Rien with Barclays.

Patrick Rien – Barclays

Good morning. Thanks for taking the question.

James Quarforth

Patrick.

Patrick Rien – Barclays

Over the past couple of years, Sprint have been pushing its subscribers off their Nextel Network on to the CDMA network. And given your relationship with them is only for the CDMA that’s been benefiting you. Last week they announced they’ll do – be offering unlimited plan on the Nextel network next year. How strong is that network in your area and what are your expectations for the impact that plan will have on the wholesale deal with Sprint?

James Quarforth

Actually we’re pretty pleased that they’re not going to keep the iDEN network. They were shopping it for a while and it’s I think long-term, they ultimately want to get to one network and migrate those customers to CDMA, which we’re a big beneficiary of. Certainly their step right now is to go back and take advantage of the iDEN network that they have in place. I think it’s a different customer than really what they’re selling – when they sell to a Sprint customer. I don’t think we see or envision really any impact there at all for us. They clearly have a network that’s in place where we do. It hasn’t – they haven’t had a lot of customers on there, their penetration is very low. So we really don’t expect to see a lot of impact from that.

Michael Moneymaker

And baked into the results, again, we – Sprint really have not rolled out QChat, and had not been marketing that within this wholesale footprint. So there could be some impact of some travelers coming through that maybe had migrated to QChat, but at this point if you’ve already migrated, I’d be surprised if they’d be necessarily migrating back. So in the run rate and the improvements you’ve seen in the wholesale revenue, we think that’s just from their CDMA base, not – and really – is not really seeing that benefit coming from the migration.

Patrick Rien – Barclays

Got you. And then one other question. Regarding the Alltel Verizon planned divestitures, do you have a sense of the POPs or subs that are adjacent to your territory that you may look at and are you considering looking at those?

James Quarforth

If you look at the markets that they’re divesting, I think there are three rural markets in Virginia, kind of on the edge of our network. One market, Danville, is a market that we currently cover today. And then the other, one market is in Southwest Virginia and I think one market is South of Richmond on I-85. Very rural markets, I think the – I’m not sure what the – I think the POPs are about 350,000. It’s something we’re going to take a look at, something we need to have in those, something it will be nice to have, sure it helps fill in your footprint. I think in this capital environment it’s something that we’re going to be pretty cautious that when we look at. And if you can pick properties up at a really good value, then it makes sense, if you can’t then it probably doesn’t make sense.

Patrick Rien – Barclays

Great. Thanks a lot guys.

Operator

(Operator instructions) We’ll go next to David Dixon with FBR Capital Markets.

David Dixon – FBR Capital Markets

Thanks very much, gentlemen. A question on the CapEx, as we look forward to 2009, just as you’re looking at the work plan here, wondered if you could help us think through the dynamics there. You’ve obviously got some plans for new cell site deployments. And with the Verizon Alltel deal now confirmed, did you get some roaming rights certainty for the next four years? How does that play into the decision on the incremental build-out on CapEx there, just trying to get a sense of the year-over-year change that we could see there. And just also following up on the inter-carrier comp reform, Jim, I think you’d put a falling through that if we did see the shift from intrastate rights – and interstate rights, you would be looking at around a $10.72 impact per line. Clearly we’re going to see more moderate impact here going forward, but nonetheless the trends are there that we will see some reform there. Trying to get a sense of whether that’s the overall impact to the Company or whether that was just focused on the ILEC business?

James Quarforth

Sure. I guess on CapEx, David, 2009 obviously we haven’t given guidance, but certainly I think we have shared that in 2008, we’ve completed the lion’s share of our EV-DO deployment and we probably have about $3 million left in 2009 to complete that. So that’s a fairly significant amount of CapEx that’s occurring in ‘08, they won’t occur in ‘09. I think we’ve also said before that we feel like we have a tremendous amount of opportunities to continue to expand footprint with new cell site builds and particularly when you look at the Virginia West, West Virginia markets and the wholesale market area, we continue to garner an incredible revenue, annual revenue per cell site. I mentioned in my comments that the – in the third quarter the average revenue per cell site through the Sprint agreement is $160,000; it grew to $180,000 in October. And if you looked at it a year ago it was $151,000. So when you start thinking about investing in the business and generating returns from wholesale, from retail, and from reduced roaming we think there is a lot of opportunity, and we’re going to take advantage of that. This is a growth story, we’re going to spend our capital to grow the Company first and then obviously we’re able to generate cash beyond that that we’re now returning pretty nicely to our shareholders.

Michael Moneymaker

I mean just to reinforce, we added 88 cell sites since September in the wholesale footprint, since September of ’07, as Jim indicated. That average revenue per cell site within the wholesale territory has grown very nicely. So well, certainly 2009 CapEx we will be substantially completed with the incremental EV-DO spending in ‘08. But just as we have in ‘08, in ‘07 and ’06, we will clearly be looking at those cell site opportunities both for the wholesale benefit as well as the benefit to our retail and both from a cells and retention as well as the reduction of our roaming cost in market.

James Quarforth

So, on the comment, David, on Alltel, we’re a little bit different than some of the other carriers on roaming in that we don’t really look at roaming necessarily to eliminate any of our build requirements in our market area because our strategy is really to expand in the area where we have spectrum and give a more robust coverage. Where roaming is important to us is outside of our market area. And that’s why we benefit very nicely from this agreement because we not only get the lower Alltel rates, but we also get it on the combined company footprint. We also have accessed EV-DO to those Alltel rates, which gives us access to EV-DO on the combined company. We are also little different from other folks because we do have the Sprint relationship, which is a reciprocal relationship, and they are really our number one roaming partner.

On the filing you mentioned on – that did refer to the ILEC area. Now I think what’s – what I think is we’re seeing and, well no one knows what regulatory reform looks like, certainly in all the regulatory plans that have been introduced for review over the last couple of years and certainly the one that at least what we’ve seen are the one that the Chairman had introduced that has now been pulled and the agreements we understand that the FCC had with the Chairman, between the Chairman and OPASTCO was that the rate of return companies like NTELOS, meaning the more rural companies, that there was going to be an increase in USF funding to cover any reductions in access rates, minutes of use, or line losses.

And that’s very significant because what it means is – you mentioned a $10.72 of rate impact – what it really means is that to the extent there is a shortfall in access rates or access revenues from rates that’s going to be covered by a larger Universal Service Fund. Now nobody knows where this thing ends up, but certainly there appears to be a continuation of a policy for both voice, Universal Service for voice, and there also seems to be desire to have an incentive for continued broadband implementation in rural markets, which we are at a very enviable position today with about 97% of our lines DSL capable.

David Dixon – FBR Capital Markets

That’s very helpful, Jim. Just switching gears to the wholesale revenue line, you saw a very nice sequential increase on the travel voice side, as you mentioned there. I just wanted to confirm, we saw a modest rate increase that therefore suggests a significant increase in voice MOU trend there, which is little bit counter to the recent direction there on the travel voice side. And then on the travel data side, I wonder if you had any color on the throughput increase you’re seeing for travel data on those converted towers, whether you are able to delve into the specifics there.

James Quarforth

I think what was really unique this quarter on the travel voice was that, we, Mike, to be honest here, we did not see a reduction in the rate that we typically see in – during the third quarter. So, you had a little bit of a combination of rate and usage there. As far as throughputs, I guess by contract, that all we’re allowed to talk about is revenues – certainly I think you can make the comparisons of what we’ve experienced and what you’ve seen the industry experience when you go from 1x to EV-DO that you see a fairly dramatic increase in usage. In the Sprint contract, travel usage is paid on per megabyte or per minute and so we get the full benefit of that.

David Dixon – FBR Capital Markets

Are you seeing some throughput increase, Jim on your 1x towers that are yet to be converted?

James Quarforth

Yes, I think clearly what we’re seeing as we get more penetration in smart phones out there, your usage increases whether or not you are at 1x or EV-DO and then obviously if you have EV-DO it increases at a faster rate and also makes the experience a lot more acceptable and causes that customer to use more applications.

David Dixon – FBR Capital Markets

That’s very helpful in terms of trying to extrapolate this wholesale revenue stream, which you are fully tracking along quite nicely. Just lastly on the data ARPU, Jim, normalizing for the changes in – or the reclassifications that occurred in Q407 and Q108 on the prepaid billing platform introduction there, looks like the data ARPU is growing at a rate of around 20% year-over-year, is that the type of trend that you would expect to see going forward or you would like to see any variability there as a result of higher smart phone adoption as we look forward into 2009?

James Quarforth

Yes, I mean most of our smart phones are on the postpaid side. But clearly we did make some fairly major rate changes by more selling the voice side last year, which has impacted our ARPU. We would hope to see continued adoption of data by our customers on a prepay environment, certainly it’s going to lag postpay. Postpay is where you’re really seeing the growth. And if you look at other industry players, I think today they’re north of $12.

David Dixon – FBR Capital Markets

All right. Thanks very much.

Operator

(Operator instructions) We’ll go next to Batya Levi with UBS.

Batya Levi – UBS

Okay, thanks a lot.

James Quarforth

Good morning.

Batya Levi – UBS

I just had two questions. One, looking at the smart phone sales, I wanted to ask if the strength you saw in the third quarter continued in October, and if you expect that to hold out for the reminder of the year ad also given the economic environment and the existing worldwide recession that we’re seeing? And on the regulatory side, can you give us an update on how much CETC revenues you generate right now and on wireline roughly what percent of your revenues come from access and USF? Thanks a lot.

James Quarforth

What was the second question?

Michael Moneymaker

come from access.

Batya Levi – UBS

CETC and on wireline access and USF mix?

James Quarforth

Okay. On the smart phones, I think clearly we would expect to see the trends continue. If you think about it we’re really at the beginning of the infancy of our introduction of EV-DO. And so, as we turn out more markets and that product becomes more and more visible, we would expect that – and our ability to sell gets better, we would expect that trend to continue. We are at 28%, I think I mentioned in September, I think the industry is at a higher rate as far as their take rates than we are as you would expect, we’ve been doing it longer. So I think that combined – the product introduction combined with turning out more markets, with more effective selling and obviously we’re promoting it pretty heavily because we have spent a lot of capital to provide that technology. We would expect that to continue and really not be – it will be impacted, but not really impacted to the extent it would impact our trends. So we feel really good about that. The mix of the USF we get right now is about $5.5 million on an annual basis in the ILEC.

Michael Moneymaker

Yes, and about a couple of million dollars, about $1.5 million-$2 million in the wireless.

Batya Levi – UBS

And the percent of your revenue that’s been coming from access, just access revenues?

James Quarforth

Percentage of – about $43 million a year come from Access in total – in the ILEC.

Michael Moneymaker

ILEC and CLEC.

Batya Levi – UBS

Okay. But that doesn’t include the USF, right?

James Quarforth

That does include the USF.

Batya Levi – UBS

It does. Okay. Okay. Thanks a lot.

Operator

We’ll take a follow-up question from David Dixon with FBR Capital markets.

David Dixon – FBR Capital Markets

Thanks. Just very quickly, noticing the handset cost per gross add moving up, as we’re increasing the smart phone adoptions you’re increasing from around 168 in ‘07 as I calculated here to just over 200 in third quarter. How should we think about that going forward? We’re going to get to a normalized level; do you expect exceeding the quarter, 28% of gross adds from smart phones? Where would you expect to see the handset costs moving to in terms of a steady state?

James Quarforth

Per unit or per or –?

David Dixon – FBR Capital Markets

Per unit, yes. If we could do it on a per unit basis that will be great.

Michael Moneymaker

Yes, I think in terms of the smart phone cost obviously those have – tend to come down over time. And I think third quarter you’re probably looking at cost that range from the mid 300s to the, probably the upper 400s depending upon the type of model that you’re looking at; that was a gross number. And then depending upon the market and what promotions were being run net of any form of rebates, you’re probably looking at a range of revenue going from probably $29 to $79 during that period. So we would certainly expect that handsets or the smart phones probably would continue to come down over time. That’s kind of somewhat consistent with what you’ve seen historically for regular handsets and even for the smart phones. I think, David, we’re, as you know, we give our 2009 guidance in January and that’s the time that we will provide more specific color as to our outlook for 2009 at that time.

David Dixon – FBR Capital Markets

Sure. Mike, despite the increase there you seem to keep the cost per gross add steady at around $370, just to tick over $370, looks like your sales and marketing was down sequentially quite a bit, I just wondered if you had any color on what was happening there as you are managing that cost per gross add line?

James Quarforth

I mean typically, David, couple of things happened – your quarters are – your fourth and first quarter are higher sales quarters and when we have – we’re a little bit different than some of the other carriers out there where we have a very high fixed cost system and that 70% of our sales are sold through our retail store channel. So to the extent we have high sales quarters, we would expect that this – drives down your CPGA. When you have lower sales quarters like your second and third, it drives it up. Now, obviously, then you have to couple then the fact that if you have a higher mix of smart phones that’s going to keep the upward pressure on CPGA in every quarter. But as Mike pointed out, we should see that cost come down little bit over time and–

Michael Moneymaker

We’re already seeing in the outlook, just to add a little more color – we know that there are some smart phone models that already are sub $300 that we’re expecting to receive in the first quarter. So as we indicated, this has occurred historically with the handsets. We expect that to continue to come down. Just as historically your regular phones were probably in the mid-100s and today you see some lower end phones clearly sub-100 and more in the $70, $80 type range. So, you definitely see – we anticipate seeing a continued lowering of those price. One of the things, David, we have done over the years and where the consumer benefits is really somewhat of a passthrough, meaning as those prices do come down, you do tend to see further reductions. So instead of a $99 rate plan, our purchase price with a $50 rebate, I would expect that smart phones you’re going to see as the prices come down, you will see that cost that $99, $50 rebate will probably also be adjusted downwards as a promotional offer as well trying to sustain and kind of keep the CPGA margin in line, as you pointed out, trying to monitor and control that cost.

David Dixon – FBR Capital Markets

Okay, that’s great. Okay, well, thanks very much.

James Quarforth

Thank you.

Operator

It appears we have no further questions at this time. I’d like to turn the call back over to Mr. Wes Wampler for any additional or closing remarks.

Wes Wampler

Thank you. As a reminder, a replay of this call and an archive of the audio webcast will be available. Please refer to our Investor Relations website for details. Please also feel free to contact us any time with questions. Media should contact Mike Minnis at 540-946-7290. Investors should contact me, Wes Wampler, at 540-949-3447. Thank you again for joining us this morning and this concludes our call.

Operator

And once again that does conclude today’s call. We do appreciate your participation. You may disconnect at this time.

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