iPCS, Inc., Q4 2008 Earnings Call Transcript

iPCS, Inc. (IPCS)

Q4 2008 Earnings Call

March 03, 2009, 11:00 am ET

Executives

Nathan Elwell - Financial Dynamics

Tim Yager - President and CEO

Conrad Hunter - EVP and COO

Steb Chandor - EVP, CFO and Secretary

Analysts

Charlie Kesio - Raymond James

Ana Goshko - Banc of America/Merrill Lynch

Presentation

Operator

Good morning. My name is [Rommel], and I will be your conference operator today. At this time, I would like to welcome everyone to the iPCS Inc. Fourth Quarter and Year-End Result Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be questions-and-answers session. (Operator instructions). Thank you.

I would now like to turn the call over to Mr. Nathan Elwell, of Financial Dynamics. Please go ahead sir.

Nathan Elwell

Thank you, Rommel, and good morning to everyone. Thanks for joining us to discuss iPCS's results for the fourth quarter and full year ended December 31, 2008, which were announced in a press release issued yesterday afternoon.

Hopefully, all of you have had an opportunity to review that press release. If you do not have a copy, it can be found on the company's website at www.ipcswirelessinc.com. Please note that a replay of this call will be made available later today. The details are set forth in the press release.

With us this morning are Tim Yager, President and CEO of iPCS; Steb Chandor, the company's Chief Financial Officer; and Conrad Hunter, the company's Chief Operating Officer.

Let me quickly outline the agenda for today's call. Mr. Yager will begin with an overview of the company results, Mr. Hunter will give some operational perspective and Mr. Chandor will take you through the company's financial results, including the income statement and balance sheet and top of the company's business outlook for the full year 2009. Mr. Yager will then have few closing remarks before we take your questions.

Before I turn the call over to Mr. Yager, I would like to point out the certain statements on this conference call will be forward-looking. And you should keep in mind that such forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Please refer to the press release for more detailed information regarding forward-looking statements. Also in an effort to provide useful information to investors, the company's comments today include non-GAAP financial measures.

The details of these measures included and the reasons the company uses these measures on reconciliation to the most comparable GAAP measures. Please refer to the company’s press release on its website or to t8-K filing provided to the SEC.

We answer the questions on this call only from the current investors or analysts and that any media questions will be replied directly to the Financial Dynamics, the company’s Investor Relations firm.

Now, I would like to turn the call over to Mr. Tim Yager. Please go ahead.

Tim Yager

Thank you, Nathan, and thanks everyone for joining us this morning. As you can see from our financial results, we had a strong fourth quarter and entered 2008 with positive momentum.

Despite the economic uncertainty facing everyone, we were able to deliver year-over-year growth and improve many of our operating metrics. Here are some of the highlights from the quarter and the year.

We increased fourth quarter 2008 adjusted EBITDA after adding back Sprint Nextel-related litigation expense by 4% from the fourth quarter 2007 reporting $26.9 million. Included in the fourth quarter adjusted EBITDA is, approximately $2.5 million related to the resolution of certain operational issues, we formally disputed with Sprint.

As you all recall, we summarized these disputes in our third quarter earnings call and in our SEC filings. The disputed items were primarily related to customer care credits being charged to us by Sprint, low bad debt recoveries and reduced late fees being paid to us by Sprint.

In addition to 2008 impact of the resolution of these items, we will also record approximately a $4.3 million gain during the first quarter of 2009. For the full-year, we increased the adjusted EBITDA after adding back Sprint Nextel-related litigation expenses 15% to $95.1 million, compared to $83 million for 2007.

On a positive note for the company, we effectively broke even for the fourth quarter of 2008 compared to a net loss of $4.1 million, or $0.24 a share for the fourth quarter 2007. For the full year, we reported net loss of $9.8 million or $0.57 a share, down substantially from 2007's net loss of $69.3 million, or $4.08 a share.

Operation, we had approximately 66,000 gross additions during the fourth quarter compared to 64,000 for the prior year quarter despite a very difficult economy and a tightening in early November of our credit policies.

We had net subscriber additions of approximately 17,000 for the fourth quarter, more than twice the 7,800 net additions for the same period in 2007. And we are able to reduce net churn to 2.3% from 2.7% a year ago.

We are pleased that our year end subscriber base of over 691,000 improved in terms of overall credit quality at approximately 81% prime credit subscribers, up from 79% at the end of 2007. Showing the positive effect of credit tightening efforts we implemented at the end of '07 and again at the end of '08.

Our network continues to perform very well, and we invested significant capital in 2008 to further expand our coverage capacity and EV-DO Rev. A technology. We ended the year with over 7.2 million covered pops by EV-DO Rev. A, which is about 60% of our total covered population.

During the year, we surpassed both, the 6 million and 7 million. EV-DO Rev. A covered pop milestones in our affiliate agreements, which enabled us to receive a combined $0.30 reduction in our Sprint CCPU fee.

Our Sprint CCPU fee during 2009 is now $5.85 per subscriber versus the $6.15, we would have paid if we have not met those targets. The difference in the rate was about $2.5 million annually before factoring in any additional impact from increased subscribers.

We view 2008 as a successful year especially in light of many challenges we faced in 2008, including the deteriorating economic landscape during the second half of the year and continuing issues in our relationship with Sprint.

We simultaneously grew our subscriber base, improved overall subscriber credit quality and substantially increased our adjusted EBITDA, all while continuing to make a sizable investments in our network.

We believe the successful end of 2008 has positioned us well for 2009. We have over 50,000 more subscribers to start the New Year and improved network, a higher quality subscriber base and lower churn, all of which should lead to positive results for 2009. We expect to generate $15 million to $25 million in free cash flow in 2009, which is a clear sign, we have reached a new milestone for the company.

I would now like to turn the call over to Conrad to provide additional detail on the operations and the business.

Conrad Hunter

Thank you, Tim. I'm pleased to report that our sales initiatives and network operations continue to improve and we see growth opportunity in the markets we serve. During the fourth quarter, we completed several significant initiatives such as accelerate our planed 2009 capital expenditures of approximately $10 million into the fourth quarter of 2008.

Successfully opened 60 new doors of distribution, built 58 new cell sites for improved and expanded voice coverage in select markets, and now cover in excess of 12.5 million pops in our territory.

Add 43 new EV-DO Rev. A sites increasing coverage to 7.2 million pops, implemented a high-value contact program, which resulted in an average increase in ARPU of over $5 where subscribers have accepted the offer. And we achieved our best ever fourth quarter churn of 2.3%, versus 2.7% in the fourth quarter of 2007 was a result of our intense focus on improved customer service and point-of-sale interactions.

As Tim mentioned, we had a very strong fourth quarter in terms of both, gross and net subscriber additions, especially in light of the current macroeconomic conditions. Our local leadership and marketing presence in our territory is allowing us to take advantage of Sprint's economic stimulus value messaging as it resonates well with those wanting to reduce the overall monthly telecom expenses.

We tied our credit policies again in the fourth quarter of 2008 to improve the composition of our subscriber base to one that is more profitable and less likely to churn. This move, we believe, will mostly impact involuntary churn towards the second half of 2009.

We continue our focus on improving our channels of distribution during the fourth quarter by adding exclusively branded Sprint dealers that are customer-centric, and we rationalize our doors by eliminating non productive sales doors. These actions resulted in decrease in our total doors from 741 to 700 as of December 31, 2008. And at the same, time maintain overall gross sales productivity.

We ended the quarter with the 120 exclusive agent doors, a net increase of 13 from the third quarter, and expect to add 10 to 15 doors during the first half of 2009. We ended the year with 40 company-owned retail locations.

Our last two new Gemini stores were completed during the quarter, brining the year end total to 8, and we upgraded an additional 6 existing locations to this new retail format. This new store format allows us to better display and demonstrate the wireless broadband services Sprint has to offer, including data cards, EV-DO cable handsets and especially smart handset like the BlackBerry Curve, Instinct, Diamond Touch/Pro and the LG Lotus.

Turning to data products and services, we had a 118% growth in data card sales from the fourth quarter of 2007 to the fourth quarter of 2008. Data card sales represent about 7% of our gross adds in the fourth quarter of 2008, versus approximately 4% for the same period 2007.

We remain committed and focused on selling this broadband, wireless functionality as competitive advantage in markets we serve. Smart phones made up 12% of our handset sales in the fourth quarter, compared to 6% in the fourth quarter of 2007 with the BlackBerry Curve being the dominant handset.

We are also seeing significant ARPU associated with customers who purchase these devices and believe it bodes well for us going forward. Our launch of Nextel Direct Connect or NDC in Western Michigan is showing strong customer adoptions and these subscribers ARPU is trending well above our average.

We completed the Ready Now training in all of our company owned locations during the fourth quarter. And we are well underway to having our agent distribution training in this important program. This should allow us to better setup and improve the customer's handset use experience due to the improved point of sales, training and education.

We are also implementing additional improvements at the point of sales to further enhance the customer experience and drive sales.

Sprint Simply Everything rate plan portfolio remains highly successful for us, not only in terms of its simplicity for the customer to understand, but also a relatively certainty it gave the customer as to what their bill is going to be from month-to-month.

These new plans are improving the after sales carriage experience, while also reducing the number of customer escalations and overall call volume into Sprint care centers.

One of our most significant accomplishments for 2008 has been our voice and EV-DO build plan, which has not allowed us to dramatically improve the quality of the product and service we offer in our markets.

Early in 2008, we announced that we would build between 160 and 180 new cell sites and I'm pleased to report we got 185 which has allowed us to go from the 11.5 million covered pops to just over 12.5 million, and at the same time, dramatically improve coverage in many of our key markets.

We now have over 7.2 million covered EV-DO Rev. A pops which will allow us to more aggressively sell data centric devices along with high speed mobile broadband data cards. This aggressive built plan has allow us to greatly improve our overall network coverage and capacity in several markets and we believe it will allow us to continue to improve customer satisfaction, increase ARPU and reduce churn in the future.

As I mentioned earlier, we accelerated approximately $10 million in capital from 2009 built plan into 2008. The additional investment included equipment for future NDC launches and additional improvements on our overall voice and end building coverage in key markets.

Accelerating this capital has also allowed us to purchase equipment from Nortel at favorable discount and accelerate installation time line to earlier in this year.

The should permit us to start earning returns soon on this investments. Our current capital guidance for 2009 at $35 million to $45 million, which excludes the $10 million we accelerated to 2008 should enable us to make prudent and effective choices in terms of our capital investments for this year.

With that being said, we plan to build between a 120 and 140 new cell sites for 2009. Operationally we remain committed to pursuing profitable growth and maximizing our operational voice. We will continue to build a best-in-class network and improve the customers' network and service experience.

We are aggressively promoting Simply Everything rate plans, Ready Now services and our mobile broadband data devices and services. We will continue to improve the strength of our leadership team, the field level of our associates and our business processes and systems. These efforts should help us to continue to reduce churn, improve voice and data ARPU and drive shareholder value.

We continue to be excited about our process for the future and we are pleased with our progress to-date.

In fact first quarter '09 today our gross adds are matching our expectations.

I would like to now turn the call over to Steb for a discussion of our financial results.

Steb Chandor

Thanks, Conrad. We ended the quarter with 691,100 subscribers and a covered pop penetration rate of approximately 5.6%, representing a year-over-year growth of almost 10% in our ending subscriber base. We ended the fourth quarter with approximately 275,000 reseller subscribers in our territory, up 8% from the end of last year.

Total revenue for the quarter was $138.4 million compared to $141.9 million for the prior year quarter. However it is important to note that beginning January 1, of '08 we no longer receive 3G data roaming revenue from Sprint.

Adjusting fourth quarter 2007 results by removing this revenue yields pro-forma revenue of $126.2 million, resulting in year-over-year comparable growth of 10%. Total revenue for the year was $525.5 million, up 7% from $493.2 million in 2007 after eliminating $44.9 million in 3G data revenue from Sprint.

Adjusted EBITDA after adding back the Sprint-related litigation expenses for the quarter was $26.9 million, above the $25.8 million for the same period last year. Adjusted EBITDA excluding litigation expenses for the full year 2008 was $95.1 million, up from $83 million for 2007.

As Tim, mentioned during the fourth quarter we formally disputed various 2008 amounts which were actually or proposed to be charged or credited to us by Sprint. Including amounts for customer care credits, late fee revenue and bad debt recoveries.

Resolution with respect to certain of these matters totaling approximately $2.5 million are reflected in our 2008 results.

About one half of the $2.5 million favorably impacted revenue and the other one half favorably impacted expenses. The remaining formerly disputed items were resolved in January of 2009 and will result in a $4.3 million gain during the first quarter of 2009. This $4.3 million will be reflected as a separate line item above operating income on our income statement.

Unfortunately, we have now formally disputed several additional items with Sprint. Late fee revenue and bad debt recoveries among them. We continue to work with Sprint on these and other issues and are hopeful that we will be able to come to a satisfactory resolution of these issues going forward.

ARPU excluding roaming for the quarter was $49.62, up $1.00 from the year earlier quarter and up $1.31 from the third quarter. The increase from the prior year quarter is largely due to an increase in monthly recurring changes offset by reductions in overage, lower late fee revenue and higher customer care credits.

ARPU for the quarter was favorably impacted by about $0.50 as a result of the previously mentioned resolution of the 2008 disputed items.

Data ARPU for the quarter is estimated $14.49 compared to the prior year quarter of $13.50 in the prior year, the prior year quarter of $11.28.

Increase in data ARPU during '08 versus '07 is due primarily to a greater number of rate plans which now include data such as the Simply Everything plan.

Almost 60% of our subscribers now have some type of roaming inclusive plans. ARPU for the full year was $48.71 down $0.66 from '07 as increases in monthly recurring charges were more than offset by higher customer care credits and reduced late fee revenue.

For the December quarter, cash cost per users CCPU excluding roaming was $32.00. Excluding Sprint Nextel related litigation expenses it was $29.00. This was down about $2 compared to the prior year quarter due to lower per subscriber CCPU fees paid to Sprint and lower bad debt expense.

Bad debt expense for the quarter was $2.2 million down from $4.7 million in the prior year quarter and substantially lower than the $5.6 million incurring during the third quarter of this year.

The resolution of a 2008 formally disputed item, specifically bad debt recoveries, directly impacted the bad debt figure for the quarter by increasing our bad debt recoveries and lowering expense.

CCPU up $31 for the full year of 2008 excluding roaming and Sprint Nextel related litigation expenses declined $2.00 for full year 2007. The year-over-year improvement is largely due to lower per subscribers Sprint CCPU fees as well as lower per subscriber infrastructure and upgrade expenses.

Bad debt for the full-year 2008 was $18 million slightly a little less than the $19 million recorded in 2007.

Total CCPU, which includes roaming expense, was $42 for the quarter and the full year, down from $47 for the prior year quarter and the prior full year. The year-over-year decrease primarily reflects the elimination of data roaming expense we pay to Sprint, which contributed about $5 of the year ago CCPU.

Our roaming ratio with Sprint, which again no longer includes any 3G data roaming, was 1.5 to 1 for the quarter, equal to that of the prior year quarter.

Although the Sprint roaming ratio and the total roaming ratio were essentially unchanged year-over-year, our overall roaming margin was negatively impacted by the elimination of 3G data roaming revenue and expense with Sprint and by higher roaming expense with carriers other than Sprint.

As we pointed out on our last conference call we saw a substantial increase in roaming expense with carriers other than Sprint during the third quarter.

Our non-Sprint roaming expense declined modestly in the fourth quarter but remained high. We continue to work with Sprint and closely monitor our overall roaming trends to gauge outbound minutes of use in data usage and any impact from the worsening economic conditions.

Lastly we expect to see a sizeable reduction during the year in Alltel roaming revenue resulting from its recent merger with Verizon.

Our cost per subscriber acquisition or CPGA for the fourth quarter was $404 up $27 from the year-ago period of $377, while fixed cost per subscriber decreased due to higher gross adds compared to the year ago period, increases in variable costs, primarily equipment subsidy and commission expense during the quarter offset this decrease.

CPGA for the full year 2008 was $383, up $16 from 2007 due primarily to fewer gross adds versus a year ago period and higher commission expense due to a greater percentage of our additions coming through dealer channels during 2008.

Our reported net loss of $64,000 for the quarter improved from the $4.1 million net loss in the same quarter last year as increased operating leverage, lower depreciation, amortization expense and interest expense offset higher litigation expense.

A net loss of $9.8 million for the full year 2008 represents a significant improvement over 2007's loss of $69 million which did include a $31 million debt extinguishment charge.

Capital expenditures for the fourth quarter totaled $22 million compared to $14.2 million in the year ago quarter. And were $74.5 million for the full year, in line with our updated guidance of $65 million to $75 million.

The majority of the capital was invested in network including approximately $50 million from new cell sites and $19 million EV-DO Rev. A technology. This brings our total investment in EV-DO technology to over $32 million.

Turning to the balance sheet we ended the year with approximately $56 million in cash as previously disclosed.

Our long term debt obligation consists primarily of two high yield notes totaling $475 million. The $300 million first lean notes matured in 2013 and $175 million second lean notes matured in 2014.

We have notified the trustee of our second lean notes that we are exercising the payment in kind or pick feature for the quarterly interest payment due August 1st. At current rates the cash interest savings would be approximately $2 million each quarterly period. We have made no decisions regarding future elections.

Also as a reminder we announced in early February a $15 million share repurchase program. The program was adopted only weeks before this earnings call and accordingly we have not purchased any stock under the program to-date.

We expect to provide an update on the program each quarterly conference call during the year covering activity during that quarter beginning with our next earnings call.

Turning to our outlook of '09, we are cautiously optimistic about the year. We anticipate 2009 gross additions to be between $250,000 and $275,000 essentially flat from 2008. As for its full year adjusted EBITDA excluding Sprint Nextel related litigation expenses, we expect to end the year between $100 million and $120 million.

We expect our capital spending outlook, with respect to our capital spending outlook for 2009 we expect to invest between $35 million and $45 million during the year. Lastly and perhaps most importantly we anticipate having positive free cash flow during '09, with free cash flow ranging from $15 million to $25 million.

Now I will turn the call back over to, Tim.

Tim Yager

Thanks, Steb, before I turn the call over for the question-and-answer session, I would like to address our relationship with Sprint. As you are aware we issued a press release on February 4th updating status on our ongoing litigation with Sprint, the copy of that press release is available on our website.

As stated in that press release, the Circuit Court of Cook County, Illinois issued its final order in Sprint Nextel merger case, Sprint must seize selling, operating and managing the Nextel wireless network and iPCS wireless territory on or before January 25, 2010.

In addition the Circuit Court has also denied Sprint's petition to vacate the original judgment and Sprint has appealed that decision. We look forward to Sprint's ultimate compliance with the court's order and will continue to vigorously oppose Sprint's attempt to satisfy the original judgment.

Regarding the Sprint Clearwire case, we amended our original complaint on January 30th to include among other things the claimants Sprint is improperly devoting advanced technology through our competitor and further violation of our agreement. We also amended complaint to seek monetary relief.

Sprint has predictably opposed these additional claims and has asked the court to find that the Clearwire transaction does not violate our agreements. Discovery is ongoing in this matter; we expect the court to set a trial date following its ruling on various matters presently before it.

Given the nature of our ongoing litigation with Sprint we will not be answering questions regarding these cases. We appreciate the ongoing support we have received from our many stake holders over the year in particular over the past few months since we have addressed numerous operational and legal matters with Sprint.

We continue aggressively to defend our rights under the agreements with Sprint and seek timely resolutions of our operational disputes with Sprints. Despite our legal and operational challenges with Sprint we continue to focus on a long-term value of the company that shareholders look forward to a successful 2009.

I would now like to turn the call back over to the operator for any questions.

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question is from the line of Rick Prentiss from Raymond James

Charlie Kesio - Raymond James

Hey guys thanks for taking my question is actually, This is actually Charlie Kesio sitting in for Rick.

Tim Yager

Hey Charlie.

Charlie Kesio - Raymond James

I am just want to start with if you guys have noticed any impact, I do not know if you have really, but you have noticed any impact from the Sprint's launch of the boost limited product?

Conrad Hunter

This is Conrad. I mean, we have decision to monitor boost product we have, we think its definitely competitive products but we have not, we are watching it and so far we have not seen a huge impact but what you think it can be a strong competitor and we will continue to watch and monitor.

Charlie Kesio - Raymond James

And kind of following that threat, any updates on some types of prepaid products from yourself?

Conrad Hunter

Oh yeah, its one of those situations where we continue to do our best to get prepaid offerings rolled out. We have it seems like we continuing run into roadblocks as it relates to getting those systems implemented with Sprint.

We are continuing to work as diligently as we can with Sprint to breakthrough to launch them there. And we will continue to update you. Unfortunately, it's frustrating for us, we definitely want to have a prepaid offering out there. And I think, boost some limited and Sprints ability to offer that is only furthers our need to get a prepaid offering out there.

Charlie Kesio - Raymond James

Final question, if you could just repeat for me, I know, you said what the percentage of your subscriber base now has a roaming exclusive plan. If you could just repeat what it was?

Steb Chandor

Yeah. The number at the end of the year was approximately 60%.

Charlie Kesio - Raymond James

And that's up from like 50% in Q3, right?

Steb Chandor

That's correct.

Charlie Kesio - Raymond James

Okay. Thanks, guys.

Tim Yager

Thank you.

Operator

Thank you. Our next question is from the line of Ana Goshko with Banc of America/Merrill Lynch.

Ana Goshko - Banc of America/Merrill Lynch

Hi, thanks very much for taking the questions. I have a couple. So, first of all, on the Sprint dispute settlement, so to make sure I have these numbers correct. It was a total of 6.8 and 2.5 of that is reflected in the fourth quarter and 4.3 is reflected first?

Steb Chandor

That is correct.

Ana Goshko - Banc of America/Merrill Lynch

Okay. And that whole number was that all related to the issues in the third quarter, or is it more cumulative for prior periods in '08?

Tim Yager

They were disputed issues that we formally disputed in the fourth quarter, covering a longer period of time.

Ana Goshko - Banc of America/Merrill Lynch

Okay, so that was sort of a true up. There was no penalty or anything in there?

Tim Yager

Well, we won't disclose the specifics around the disputes and our conversations and resolutions. But that's what we agreed to.

Ana Goshko - Banc of America/Merrill Lynch

Okay, and then the $4 million that going to reflect in the first quarter that's part of the guidance that you have the 100 to 120 of EBITDA, that $4 million is part of that?

Steb Chandor

That's correct. It is not part of the guidance that we have given for the 100 to 120.

Ana Goshko - Banc of America/Merrill Lynch

It's not part of the guidance.

Steb Chandor

That's correct.

Ana Goshko - Banc of America/Merrill Lynch

Okay. And then the free cash flow guidance of 15 to 25 for the year, what are you assuming in term of notes, are you assuming that there is no more cash pay on those for rest of the year. What your assumption on cash paying those notes in terms of free cash flow guidance?

Steb Chandor

The definition of free cash flow that we are using that we did put in the press release would carve out any incremental cash from the picking of the bonds.

Ana Goshko - Banc of America/Merrill Lynch

Okay. And then what is the reason for picking on the bonds at this point?

Conrad Hunter

Well, I think, we raised the money in early 2000 in a very favorable financing environment. The debt provides us with some attractive flexibility, so we think it's a good corporate finance decision to pick the bonds. And even with the incremental 75 bips, our effective rate would be below 6% and that's an awfully attractive rate of financing in today's credit environment.

Steb Chandor

Yeah, Ana just correct, you said early 2000, we raised those bonds in 2007.

Ana Goshko - Banc of America/Merrill Lynch

Okay. But so you have good amount of cash, you are generating free cash flow and your share buyback is $15 million, which is really the low end of your free cash flow guidance. So what's going to be the use of the kind of found cash from picking the bond?

Steb Chandor

Well, just general corporate purposes. It's not specifically earmarked for anything.

Ana Goshko - Banc of America/Merrill Lynch

Okay. Are you considering increasing the amount of the share buyback?

Tim Yager

Ana, this is Tim, I think at the end of the day, we have announced to buyback it's out there and that's all we will comment on.

Ana Goshko - Banc of America/Merrill Lynch

Okay. Thanks very much.

Tim Yager

Thank you.

Operator

Thank you. (Operator Instructions)

Operator

(Operator Instructions). There are no further questions at this time.

Tim Yager

All right, I want to thank everyone for taking the time to join us on today's call, and we look forward to updating you on our first quarter results in couple of months. Thank you.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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