General Communications Inc. Q4 2008 Earnings Call Transcript

 |  About: General Communication, Inc. (GNCMA)
by: SA Transcripts


Welcome and thank you for standing by. At this time all participants are in a listen-only mode. (Operator Instructions)

Now I’ll turn the meeting over to Mr. John Lowber, Chief Financial Officer. Thank you sir, you may begin.

John Lowber

Okay. Thank you very much and thank you all for taking the time to participate in our call today. I’m John Lowber, the company’s Chief Financial Officer. We’ve got Ron Duncan here, our President and CEO; we’ve got Dana Tindall who handles our Legal and Regulatory items; Peter Pounds; Greg Chapados; Bruce Broquet and our Chief Accounting Officer, Lynda Tarbath. We will all be available to participate in the question-and-answer session which will follow my initial comments.

A copy of our detailed press release can be found on our website. The conference call is being recorded and will be available for playback for 72 hours beginning at 4:00 pm Eastern Time today. The playback number is 888-568-0043, with an access code of 7461. In addition to the conference call, you may access the conference through the internet. To access the call via net conferencing, log onto our website at and follow the instructions. The webcast will be available for replay for the next two weeks.

I will now read our usual cautionary statement about forward-looking comments and then we’ll get underway. Some of the statements made by GCI in this presentation are forward-looking in nature. Actual results may differ from those projected in forward-looking statements due to a number of factors. Additional information concerning such factors can be found in GCI’s filings with the Securities and Exchange Commission.

We are very pleased with what we accomplished during 2008 from both an operational and the financial perspective. On the operational side some of our more significant accomplishments during the year included the transition, the new satellite capacity, the acquisition and integration of several companies in Alaska, the construction and turn up fiber facilities in Southeast and interior Alaska, construction and turn up of our own CDMA and GSM wireless facilities in the terrestrially served portions of Alaska and GCM facilities in 50 communities in rural Alaska.

In addition, we expanded our local services footprint into several more Alaska communities and we moved more of our local customers onto our own facilities. We began moving our GSM wireless customers onto our GSM platform and began providing 3G data services on our own facilities.

We successfully negotiated several large fiber capacity agreements, which generated $46 million in cash receipts during the year. Our customer metrics were strong as evidenced by the increase in our customer relationships of 48,800 during the year.

On the financial front we were able to generate $39.9 million in fourth quarter adjusted EBITDA, which is a term we will use prospectively to describe EBITDA, excluding non cash share based compensation expense and excluding the non cash charge for the value of our fiber capacity contribution to the University of Alaska.

Third quarter adjusted EBITDA was up just over $1.1 million or 2.9% over the same quarter of the prior year. For the year our revenues were up 10.6% of $55 million to a record $575.4 million and our adjusted EBITDA totaled a $171.1 million, also a record, and an increase of $17.4 million or 11.3% from the prior year.

Net income and earnings per share were down appreciably as expected, largely due to increases in non cash depreciation and amortization expenses resulting from our facilities investments and the removal from service of certain wireless equipment due to a change in the equipment vendors. Fourth quarter revenues totaled $146.6 million, representing an increase of 11.7% over the prior year quarter.

On a sequential basis revenues were down approximately 3.3% and adjusted EBITDA decreased by $7.9 million. We normally expect to see sequential decreases in the fourth quarter due to seasonality, but this year the decline in EBITDA was exacerbated by the effects of a few and frequently occurring items, including approximately $1.3 million of instrumental costs incurred in converting a significant percentage of our GSM wireless customer base to our own newly constructed facilities.

Consumer; the consumer segment has consistently delivered strong results and the fourth quarter was no exception. Revenues were up 13.2% over the prior year and we’re down 1.3% on a sequential basis. Revenues increased in three of the four major service areas on a year-over-year basis and in two out of four categories sequentially. Long-distance voice traffic has been in decline as a result of wireless substitution and the increase in the use of email.

The gross margin percentage improved by 490 basis points compared to the prior year quarter, as more services are being delivered on our own facilities. We added 18,000 local access lines to our own facilities during the last year, and as of year end we had converted approximately 21,500 of our wireless customers from leasehold status to our own wireless facilities.

We currently have converted approximately 80% of our customers that have been served using facilities owned by others, to our newly constructed wireless facilities. We expect to have the remaining conversions completed by the end of the second quarter of this year, with less customer attrition and at less cost then we had previously anticipated. We originally expected our transition costs to total $6 million to $ 8 million, but we now expect the cost to total approximately $4 million, of which $2 million had been incurred at year end.

During the fourth quarter, the consumer segment added 7500 wireless customers and so far this year we’ve added just over 10,000 more wireless customers, including both commercial and consumer segments. Our wireless offering has been particularly well received in rural Alaska. Almost 18,000 new wireless customers during the last six months translate into about 1 million per month in new wireless revenue.

A few of the more significant remaining metrics for the consumer segment for the quarter included an increase of 2300 cable modems, an increase of 1500 local access lines and service, 4400 local service lines provisioned on our own facilities, 1300 new basic video subscribers and an additional 49000 HD/DVR converter boxes deployed. These and other related metrics are detailed in the attachment to the press release.

Our statewide local service market share has increased from approximately 28% to 33% over the past year, and 71% of our access lines are now being served using our own facilities.

Consumer adjusted EBITDA totaled just under $15 million for the quarter and increased to $12.1 million or 26% over the full year. The increase follows the trends and the underlying customer metrics, which have been enhanced by our statewide local services expansion efforts and more recently by completion of the initial phases of our statewide wireless platform.

Consumer EBITDA was down approximately $3.3 million on a sequential basis as were revenues, primarily due to receipt in the prior quarter of approximately $2.5 million in out of period catch-up ICLS, USF receipts, and due to other USF related reserves and the application of an increasingly large cap factor which served to reduce USF revenue support approvals.

Commercial; commercial revenues were up $3.46 million or 12.8% as compared to the prior year quarter and were up 1% on a sequential basis. Revenues increased $10 million or 9.6% for the full year. The gross margin percentage was up 178 basis points compared to the prior year quarter, but was down 76 basis points for the full year.

Commercial adjusted EBITDA was up over $1 million or 29.2%, compared to the prior year quarter and was up more than $4.5 million or just over 28% for the full year; but for an expected decrease in long distance customers and a slight decline in basic subscribers, commercial metrics have also been trending upward and include an increase during the year of 3,100 access lines, 6,200 local access lines provision on our own facilities, 400 cable modem subscribers, and 300 commercial wireless subscribers. We saw our usual sequential decline in commercial video subscribers as our hotel customers scale back operations for the seasonally slower winter months.

Network access services; all things considered to network access segment performed pretty much as expected. Revenues were down due in large part to the planned transition of the AT&T Mobility traffic off of our network. Revenues were down 12.4%, both as compared to the prior year quarter and on a sequential basis. For the full year network access revenues were down 5.85%.

Although margins improved slightly due in part to increases in data revenues, the decrease in total revenues, along with the increase in the allocation of G&A expenses served to drive EBITDA lower. EBITDA was down more than $3.8 million, both as compared to the prior year quarter and on a sequential basis. For the full year EBITDA dropped $8.8 million or approximately 10.7%.

We carried 194 million network access minutes during the fourth quarter, representing a decrease of more than 34% versus the prior year quarter and 24% on a sequential basis. For the full year, minutes were down 12.5%. Although voice traffic is on the decline, data revenues were actually up almost 17% for the full year. Part of the growth and data results from a substitution of data circuits for switched voice services.

Our average rate per minute for all of our long distance traffic for the quarter totaled $0.0821 per minute, compared to $0.0822 per minute a year ago and $0.0837 per minute in the prior quarter. The decrease from the prior quarter is due in part to a rate decrease effect the first of 2008 and the sequential decrease is due to the usual seasonal change and the traffic mix.

Managed broadband; the managed broadband segment enjoyed a very strong quarter and year. Managed broadband revenues were up 33.7% compared to the year ago quarter, but were down 1.9% on a sequential basis; but for a $800,000 revenues reversal during the quarter due to a USF support eligibility issue with one of our customers, revenues would have been up just under 6% on a sequential basis.

Revenues for the fourth quarter totaled $10.1 million as compared to $7.5 million in the same quarter of the prior year and approximately $10.3 million in the prior quarter. Quarterly EBITDA was up $1.7 million or 65% as compared to the year ago quarter and was up slightly in spite of the revenue reversal on a sequential basis.

The managed broadband segment has once again been very successful in retaining existing clients and attracting new business during its most recent renewal cycle. The managed broadband segment has also benefited from United Companies acquisition and that most of the United’s unregulated activity is recorded in the managed broadband segment.

Regulated operations; our new regulated operation segment generated $6.5 million in revenues during the quarter and $1.9 million in EBITDA, as compared to $5.9 million of revenues and $1.3 million of EBITDA recorded during the third quarter.

Other items of interest, wireless expansion and transition; we’ve made dramatic progress in this challenging area during the year. During the last year we replaced our core CDMA platform with NorTel equipment and built-out an urban network consisting of 144 sites, of which more than half are EV-DO Rev A capable.

On top of that, we built-out GSM urban network to facilitate the transition of our former Dobson reseller customers on to our own facilities and as I mentioned earlier, we now have swapped out SIM cards for more than 80% of those customers. We expect to have the remaining card swapped out by the end of the second quarter of this year, with less attrition than previously contemplated.

We also completed the first phase of our rural wireless network and we found that customer acceptance in rural Alaska has exceeded our expectations. Our wireless customer accounts are increasing rapidly and our new wireless data card is doing well.

Other risk mitigation; during the year we mitigated risk in a number of areas. We took financing and liquidity risk off the table for the reasonably foreseeable future, with our amended credit facility last May. We moved traffic off the satellite that was nearing end of life with a successful transition to the then newly launched Galaxy 18 Spacecraft.

We built two new fiber facilities on schedule and on budget and began reaping immediate financial benefits in the form of new revenues and avoided costs. We completed the acquisitions of several companies and have made steady progress towards integrating them into our operations.

We were successful in negotiating several large fiber capacity agreements that kept the traffic on our network and helped to generate a return on our investment and fiber facilities and finally, the wireless transition has served to replace revenues and cash flows from a large network access customer, with a diversified portfolio of retailed and commercial wireless revenues.

Local service expansion, we are continuing to expand our local service offerings into additional markets in Alaska. The next market we plan to serve is the Prudhoe Bay area, which we expect we’ll be in service in the third quarter. We plan to provide service in one additional market in 2009, with five more scheduled for 2010.

Legal and regulatory; our regulatory folks continue to be focused on negotiations for wireless service interconnection with incumbent carriers. We are currently negotiating with five local exchange carriers serving the Matanuska-Susitna Valley, Valdez and Copper River Valley, The Bristol Bay Area and the Conserve Region. Our wireline contract extension with Matanuska telephone association was recently approved by the RCA. These efforts will allow us to turn up our own wireless facilities in these new markets.

In addition the RCA granted us USF eligibility for our wireless operations in EDIC study areas and has recently approved our request to transfer Alaska DigiTel’s wireless USF eligibility designations or six study areas to GCI effective in a date that we merge DigiTel and the GCI. These designations include Anchorage, Fairbanks, Juneau, the Matanuska Valley and the Glacier State and Greatland Study Areas.

In recent news, the FCC released an order last week, waving the limitation on the availability of uncapped high cost universal service support for eligible competitive carriers, serving tribal lands or Alaska native regions. This order will allow GCI to receive uncapped high cost support for all of its eligible lines. This waver is effective as of August 1, 2008.

Guidance and economic prospects; last quarter we adjusted our year end EBITDA guidance to something in excess of $170 million and our revenue guidance to $560 million to $570 million. We met our EBITDA guidance and exceeded the high end of our revenue guidance.

Although the Alaska economy will not be unaffected by the current economic turmoil, on a relative basis it remains in pretty good shape. Notwithstanding the current economic environment, we continue to expect to generate record revenues and adjusted EBITDA in 2009.

We expect our consolidated revenues will total $615 million to $625 million and our goal is to reach $200 million in adjusted EBITDA. As I have noted in previous quarters, we are no longer going to provide quarterly guidance, instead following each quarter, we will let you know if we think we’re on track to meet our annual financial goals.

Liquidity and capital expenditures; we ended the year with approximately $31.5 million in cash and investment securities on hand and approximately $86 million available to draw under our revolving facility. In addition our United properties have additional $21.8 million or un-drawn commitments available to them. Our credit facilities and capital leases will require approximately $12.9 million in principal amortization during the next 12 months.

As I mentioned in last quarter, we are fortunate to have a very supportive and what we think is a financially sound bank group, and we have a credit facility in place that we expect will meet the reasonably foreseeable requirements of our business plan.

Our senior facility doesn’t require any significant principal payments until December 31, 2011 and the senior notes don’t mature until February of 2014. We believe our leverage is pretty much peaked at the present time, as 2008 was the heaviest year of our facilities expansion plans. We expect to be generating free cash flow during the last half of this year.

We invested approximately, $40.9 million in capital expenditures on a consolidated basis during the fourth quarter and approximately $328.6 million, including capitalized software and the satellite capital lease for the full year. Our capital expenditures for the year were $10 million short of our most recent guidance.

The investments during the fourth quarter were made in the following areas: For our business lines, primarily set-top boxes and item supporting our statewide rollout of local service, $11.5 million; for IT projects $4.5 million; for support of our network $1.6 million; for product management primarily focused on our digital cable plant conversion, our video on-demand offering and expansion of our passive optical network facilities, $2.2 million; for expansion of our wireless facilities, $13.7 million; for construction of our new fiber facilities including those to Fairbanks in Southeast Alaska, $6.8 million and for the United Companies network enhancements $0.6 million.

We estimate that our maintenance capital expenditure requirements for 2009 will total approximately $18.5 million. Expenditures beyond that are largely discretionary and are success driven. Including maintenance capital, we are currently planning to invest $115 million to $120 million in capital expenditures during 2009.

Some of our major capital expenditures initiatives for 2009 include approximately $29 million for expansion of our wireless facilities, $6 million for long haul network capacity, $3 million for our continued statewide rollout of local services, $8 million for IT projects, and $22 million for growth.

To recap our cash sources and uses for the year on a simplified basis, we generated approximately $171.1 million EBITDA, raised a $139.7 million net of principle payments through our senior credit facility, and received $46 million in cash from fiber capacity agreements for it’s total sources of $356.8 million.

Out of that we spend $230 million for capital expenditures and software, excluding the satellite capital lease, $48 million in net interest expense, $34.6 million net for the purchase of the United Companies, and $24.7 million to acquire Alaska wireless and the remaining 20% of Alaska DigiTel, for total uses of $337.3 million, implying a net increase in cash of $19.5 million, which is within $1.1 million of the actual increase in cash balances during the year.

To summarize the increase in debt since the first of 2008, we raised a $139.7 million net of principle payments through our senior credit facility, recorded a capital lease with a current balance of $96.1 million related to the new satellite and assumed the current balance of $38.9 million as part of the United Companies acquisition. These items account for $274.7 million, of the $275.9 million increase in debt during 2008.

At year end, the interest rate on approximately $452 million of our $817 million in debt is fixed. We purchased an interest rate cap that limits the LIBOR element to 4.5% on $180 million of the variable rate debt. Our cash interest expense at current rates on our year end balances is now running at approximately $50.6 million per year.

Compared to the last two quarter annualized cash flow of approximately $175.3 million, our cash interest coverage is approximately 3.46 times and our leverage at year end, our net debt is 4.8 times cash flow. On gross debt our leverage is 4.66 times.

In conclusion, 2008 was a very challenging year in light all of the things that we attempted to accomplish. Concerns about various business and execution risks seem to be a recurring theme early in the year, but we are able to mitigate those risk and pretty much accomplish all the things that we set out to do.

Such execution in 2008 was necessary to position us to meet our goals for 2009 and to become Alaska’s only truly state-wide integrated telecommunication company. Credit has to be given to all of our employees for the focus, hard work and dedication that was required with them to accomplish what we did during 2008.

The New Year is off to a good start in spite of the uncertain economy and we hope to leverage our assets and the talents of our employees to continue to strength our competitive position in the markets we serve.

We will now be happy to answer your questions.

Question-and-Answer session


(Operator Instructions) Your first question comes from James Crumm - Regiment Capital.

James Crumm - Regiment Capital

The first question I wanted to ask is just to kind run through your guidance to make sure I understand; you used $200 million of adjusted EBITDA, I assume in round numbers $50 million of interest expense, $120 million of CapEx and just to make the numbers easy, you say $13 million or $15 million of principal payments; that would apply kind of $15 million to $17 million of free cash flow. Are you seeing other IRU payments in there or anything else we should be aware of?

John Lowber

Yes, there are and the math I uses is starting out with $200 million; use about $175 million for CapEx, $13 million for principal payments; use the $50.6 million, that’s the current rate on the interest and that gives you about $18.9 million and then add another $7.1 million in cash receipts from fiber sales; that’s money that we’ve already received and you end up with about $26 million on that basis.

James Crumm - Regiment Capital

Okay and then what sort of a plan you use for that free cash flow?

John Lowber

I don’t think we’ve identified anything specifically at this point.

James Crumm - Regiment Capital

Okay and then if you could talk about just on the margin side; I’m assuming there are some savings coming through as you consolidate you wireless business. Can you just sort of walk us through how we should think about that with management running down network? How much of your EBITDA improvement is from cost savings versus revenue improvement?

John Lowber

Well I think, if you did the math, if we hit our revenue targets and that generated $200 million in cash flow that would imply a pretty significant growth in the EBITDA margins, which implies really that we are going to see some efficiency on consolidating the wireless operations.

You’ll recall that at least through; I think it was the middle of August this year; DigiTel, we owned 80% of them and we consolidated them, but we weren’t allowed to control them because of the conditions of the FCC put on our ownership and so it was run really as a separate company through a good portion of 2008.

Subsequent to acquiring control in August, we have been working diligently towards integrating the DigiTel operations with those of GCI. Basically, turning what was two companies back into one and we do expect to see some fairly significant savings in the SG&A categories here going forward. So, I’m not going to give you and can’t give you of top of my head what we expect in the savings there, but we expect them to be fairly significant.

James Crumm - Regiment Capital

Would you say that’s the largest portion of the EBITDA improvement; is this, the wireless business or there are other areas?

John Lowber

I think there’s a number of things that play; certainly wirelesses is going to be a big part of it, but the continued movement of traffic onto to our own network, the deployment of a lot of the asset that we put in place this year are going to result in not necessarily revenue growth, but certainly avoided costs. So we’ll see it coming from really a number of different sources.


Your next question comes from Anthony Klarman - Deutsche Bank.

Anthony Klarman - Deutsche Bank

A couple of questions; first, I wanted to try to dig into the commentary that was provided in the press release with regard to exposure to the economy up in Alaska. Obviously the second and the third quarter are very important quarters for you guys, they are seasonally strong quarters and big tourism, hunting and fishing season up there. Has the Tourism Board or any of the government bodies that kind of track that, given indications yet what they think like advanced bookings or what the advanced picture looks like for you up there?

If we were to sort of spot light two of the businesses, I imagine one of the areas where you might see some impact to be on Network Access, just with obviously fewer minutes flowing through their network, but I was wondering if you could talk about what the economic impact might be on wireless as well?

John Lowber

I think it will be hard for us to assess the economic impact on wireless, because our wireless is in such a strong growth mode and we really don’t have a good base line for wireless roaming traffic, which really would be the primary category impacted by a reduction in tourism. So, hard for us to asses that and probably hard to see in our numbers. I would expect it to be completely overshadowed by continued growth year-over-year in the wireless business.

Clearly, the rational expectation is the tourism will be down. I think if you look around you’ll see that the cruise industry has been reported to be having trouble filing the Cruise ships and certainly the depth of the price discounting would suggest the cruise lines and visitor registrations are not running what they were last year.

I think from our perspective its good news that we’re seeing relatively the price discounting to fill the books and fill the hotels that probably means we’ll get to salvage some of the tourism business.

Clearly we should expect revenues and margins from tourism to be down somewhat; and you’re right, the bulk of that would be seen in the NAS business although, you may see some retailers cutting back and you may see some impact in the commercial business as well; although, I’m not sure that will be big enough to be noticeable.

While tourism is important, it’s not a tremendously large component of the Alaska economy, just because everything up here is so completely overshadowed by resource and government.

Anthony Klarman - Deutsche Bank

What is the progress to-date of the cable telephony rollout? I think you guys had talked about where you were in terms of transitioning over to your own network. How much of a cost improvement is there left in the numbers still, when you finish cutting off the loops that you’re getting from Alaska communications?

John Lowber

Well, as I mentioned we’re 71% converted, which leaves about 40,000 or so lines left to convert at what savings per line; maybe $20 or there about, $25.

Anthony Klarman - Deutsche Bank

That kind of get to my question; I wasn’t sure if that number was of the lines that you were intending to convert and haven’t done yet or if that was up of total lines, because I though at some point there were some that it just was never going to make sense for you to convert given maybe their geographic location?

John Lowber

Yes, that’s definitely true that we won’t ever get to 100%, but Ron, do you have an idea what the ultimate…

Ron Duncan

I think it’s somewhere in the 90s that were ultimately converted and to some extent the 40,000 off network lines includes lines on companies other than ACS at this point, because it includes lines that have been provisioned on a wholesale basis on some of the other elects where we have entered into the new service areas and some of those will be converted overtime, some of them will just be residual.

Right now of the 40,000, the majority our commercial lines, although we’re converting those at a reasonable clip as we continue to rollout our passive optical fiber strategy throughout the business areas as well. So, I’d say probably in the long run you should look for less than 10% of total lines to be off net and 90% to be on net.

Anthony Klarman - Deutsche Bank

Final question for me; Alaska talked about completing some of their network expansion that they were doing and obviously with the Crest acquisition and the other things that they have there, they’re at least trying to make a fairly big push into the enterprise side.

Can you just sort of remind us where you are in terms of the contract point you have left with your big large enterprise telecom carrier customers and have you been proactively going out and trying to figure out what pricing might look like on the new contracts there?

John Lowber

Our largest carrier customer’s contract expires at the end of the year. The second largest carrier contract is up here in the relatively near future. We expect to keep both of those carries on our network. I think we said probably two year ago we may announce that fiber cable, that we expect to see 30% to 40% price compression in the enterprise and carrier market and it’s fair to say we haven’t been disappointed in that expectation.


Your next question comes from Liam Burke - Janney Montgomery Scott.

Liam Burke - Janney Montgomery Scott

Ron, you had some nice top line growth on the commercial side, but you had some even better EBITDA growth and I know more traffic is facilities based. Is there anything else in there that drove EBITDA growth?

Ron Duncan

I think the EBITDA improvements for the last year are principally in the conversion to our own facilities and the economies to scale in the wireless business. I mean we’ve added a huge number of wireless customers, not just converted to our own network, but we also drove new customer growth in the fourth quarter and as John mentioned, continuing into the first quarter of this year.

There is probably a little bit of savings from consolidation, but I don’t think you’ll see the bulk of that show up in the EBITDA until this year, but you’ve got strong proportional growth across all the business units and as you continue to growth the revenues, you don’t really grow the cost proportionally, other than the increases in SG&A that we’ve added to the acquisitions that we completed this year.

Liam Burke - Janney Montgomery Scott

On the consumer side, the wireless ARPU was down about 10%, is something different in there?

John Lowber

I think you have to expect our wireless ARPU to drop as our market share grows, because we had an unusually high wireless ARPU as a result of the fact that our customers were concentrated at the high end of the market under the original resale arrangement. We now made a much broader push, much more deeply into the market and we have product in all three price points in the marketplace.

So, absence some offsets from universal services funding, which will help support the average revenue a little bit, I think its only rational to expect that our ARPU will trend more back to the market average as the market share goes.


Your next question comes from Frank Louthan - Raymond James

Frank Louthan - Raymond James

Can you give us an idea of where the AT&T Mobility revenue, where does that show up, in what line item and what is the total amount of IRU amortization that you recognized on an annual basis, right now? What’s the current run rate?

John Lowber

I’ll take the second one first. I think run rate in ’09 is going to be about $3.6 million and I think it was probably less than half of that in ’08 and that’s probably represented going forward. I guess whereas the decline and the AT&T Mobility traffic that shows up directly in the network access business.

Essentially, we’re substituting wireless EBITDA for what had been network access EBITDA and I think the trade off really, I think it’s going to pretty close to one-to-one; at least based on the customer base that we talked about transitioning.

Now as the customer base rose, obviously we’ll benefit from that improved performance, but you’ll see a decline in network access offset by the performance you’re seeing in the consumer business.

Frank Louthan - Raymond James

As far as the wireless ads, that’s some good success there. Is most of that coming from some of the newer territories or is that in some of your more legacy urban markets. How should we think about the split there?

Ron Duncan

It’s about evenly split. I think John announced that we’ve already added 10,000 wireless ads for the first quarter of this year. If you look at that it’s about evenly split between new markets and legacy markets. If you look at the last quarter of last year, it’s probably tilted in favor of legacy markets, because we really weren’t turning up in new markets until the last half of the last quarter, last year.

The response in new markets has been phenomenal; we can’t get the phones in fast enough, but the growth is very, very strong and very solid in legacy markets as well. The product, the number of people coming into our stores is up significantly and we are sending them all home with wireless phones.

Frank Louthan - Raymond James

Is the ARPU similar in the new markets to the legacy markets?

Ron Duncan

Yes, the pricing is pretty consistent across the state and I haven’t looked that exactly what the week to week trend is in terms of which plans they are taking, but I think the guidance I gave in response to the prior question is relevant in both, that as we push a broader consumer base out there, we’ll see a gradual trending down in ARPU, but we don’t see a huge difference in product mix.


Your next question comes from Mike Grondahl - Key Colony Fund.

Mike Grondahl - Key Colony Fund

Hey, guys could you just extrapolate a little bit more on the wireless ads, kind of what you are doing there. I mean 10,000 in the first quarter it seems like a very large number. Then secondly, could you also talk a little bit about your cable ad and the high-speed Internet ads. It just seems like additions in the fourth quarter were very strong; just kind of comment how you are winning there? What your strategy is?

Ron Duncan

We think 10,000 as quarter-to-date is strong for the first quarter as well. We thought 8500 was pretty good for the fourth quarter. I think it’s the depth of the bundle that makes the difference. We have a lot of products to sell. We drive a lot of customers into our stores. Unlike the competitor, we don’t charge customers to visit us at our store. We welcome them with coffee and cookies and invite them to come in and we get tremendous up sell activity from the interest that all of our products have generated.

I think its no accident, but you see growth across all of the product lines, because we are generating a lot of interest in the products and while not everything that walks out the door walks out on an express bundle, our experience is the more you have to sell, the more people visit you and the more they buy.

Mike Grondahl - Key Colony Fund

Then in terms of cable and high-speed?

Ron Duncan

I think it’s the same thing; it’s the product buzz; it’s the amount of interest in the cable product. If there’s a good product out there we’ve consistently added high definition channels over the course of the last 12 months in all of our markets. HP is a hot seller; we’re selling lots of DVRs and lots of HP packages.

We’ve been consistently turning the speed up on our high-speed service and offering more value for the dollar and benefiting I think from the increasing utilization of the net. We look at our consumer stats and look at how much average bid per customer has gone up over the last three of four years. It’s clear people need to consume larger bandwidths and that’s what we are seeing them do.

Michael Grondahl - Key Colony Fund

Okay great, and then lastly, I think I missed earlier, you were talking a little bit upon SG&A expenses, can you give us a sense of what you’re doing to manage those or what that run rate looks like in ’09 on a quarterly basis? I kind of missed it when you were talking about it earlier.

John Lowber

Well I think it’s a bit high, because it’s still got the unconsolidated or I should say unintegrated DigiTel over ahead, so we’re going to be eliminating that going forward. If you look at costs as a percentage of revenues, I think you would see that they stepped up fairly dramatically in probably the last half of the last quarter and we’re hopping that’s a inebriation. We’re going to try to get the G&A costs back down to more historical levels.

Primarily through integrating the acquisitions and trying to economize on the scale, they eliminate one complete set of overheads for example; and then of course it’s burdened right now with the transition of the wireless from the reseller platform onto our own platform and you will see that go the other way once we finish that process.

Ron Duncan

So, nothing real magic to it Mike, but I can tell you that in this economy, we like everybody else are going to be looking real hard on what we’re spending money on and trying to control the growth in the SG&A cost.


Your next question comes from Jonathan Schildkraut - Jefferies.

Jonathan Schildkraut - Jefferies

First on the United Technologies, are you still running that as like a separate entity or is there some effort to integrate that and then on the wireless side; if you give us a sense as to how much of AT&T is kind of long distance traffic or the traffic from AT&T, their wireless customers is left or are we seeing the large majority of that transition of your network?

On the flip side as I understand, the agreement, GNCMA got a handful of free wireless minutes for period of time. I was wondering how long that period of time extents and weather that was just for customers that were still being served under the resell agreement or if it even applied to maybe some of the roaming minute that might be occurring from the transitioned GSM subscribers. Thanks.

John Lowber

I’ll take the first and you can take the last several Ron. I guess the first question dealing with the United Companies. The United Companies really consisted of some regulated operations and some unregulated operations and they also came with separate financing, very favorable financing I might add, through the RUS and when we acquired and we wanted to preserve that financing (1) so we didn’t have to raise debt at that point to replace it, and (2) we like the terms of that debt.

So, they are separate from a financing standpoint and so there’s a limit to how much we can do to integrate them into our operation. So, I would say that the regulated side will continue to operate fairly separately as regulated entities and the unregulated piece of that, although we keep it separate from a financial standpoint, we are going to do as much as we can, to try to integrate those operations into those with our main operating subsidiary.

So, they will continue to be have limitations on how much efficiency we can get there, but fortunately the numbers aren’t huge. Ron.

Ron Duncan

I think the second and third and fourth and fifth question is related to the AT&T wireless transition. The transition of the voice traffic that was on the network from AT&T is virtually fully complete. There is a little bit of scatter shot, it looks like maybe overflow traffic left on the network, but almost the entirety of the voice revenues that were expected to transition or have transitioned off, there is some fixed circuit revenue that we expect to disappear over the immediate future here, but it’s not a really material amount of the total component.

You are correct; in our resolution of our former reseller agreement we did receive a large bucket of minutes. The minutes have a four year life on them and they are available to offset our roaming costs throughout the AT&T network for all of the customers we have on GSM that are able to roam on the AT&T network.

Obviously, we burned up a larger portion of those minutes in the first few months of the transition as we were turning up our Alaska network. Our Alaska network is now, more than 60% turned up on our own facilities and the rate of burn on those minutes has gone down very dramatically over the last three or four months.

We at this point expect the minutes to last pretty much the life of the contract and we are trying time it, so that we don’t end up with any leftover expiring at the end of four years, but that we don’t burn through a whole bunch of extra minutes that we pay for either. It should keep our roaming costs at a pretty low level for another three and a half years.

Jonathan Schildkraut – Jefferies

Just as a follow-up, is there an opportunity either through RUS or through some of the other kind of stimulus incentives for GCI to take advantage of either lower cost financing or grants; and then one more follow-up after that, thanks.

Ron Duncan

Thank you for asking the questions one at a time.

Jonathan Schildkraut – Jefferies

I am learning, I am learning.

John Lowber

We don’t know what opportunities there are in the stimulus program yet. I think the rules are pretty undefined at this point. There’s obviously the opportunity for a large amount of money to rain down from the sky. We don’t know how much of that will fall over Alaska and until we see the terms and conditions under which both our U.S. and NCIA are going to offer those funds.

We are really not in a potion to predict how they’d integrate with our operations. Obviously there are financial considerations in the year as well. We expect a portion of the money from RUS to be loan money. We have both capital expenditure and leverage covenants under our existing financial facilities.

So, at this point while we’re following it very closely, it’s very difficult to say how much if any benefit will derive from the money that would be available under this stimulus plan.


Your last question comes from Ana Goshko - Banc of America.

Ana Goshko - Banc of America

My remaining question is just a follow-up still on the transition of the Dobson AT&T customers or your customers from that network. So, let me just clarify this and then if I have this correct I have some follow-ups on it. You had 35,000 customers on that network and as of today you’ve got 80% or 28,000 migrated, is that correct?

Ron Duncan

That’s 80 times 35,000, yes.

Ana Goshko - Banc of America

So, that means there’s 7,000 left and are those customers’ just people that have not responded, that you’ve reached out them and called them and are just not coming into your stores. So I guess what you’re expectation for actually getting those customers migrated?

Ron Duncan

Originally, we had expected to loose probably 10% or 15% of the total customers in the transition. We now think the attrition will be substantially less than that. Somewhat to our surprise, the rate of conversions has not slowdown appreciably; in fact in some recent weeks it’s actually picked up.

It’s taking a little more outreach effort to get those customers, but we had anticipated that the conversion rate would fall down appreciably by now and that we think the end of the base of those really hard to reach customers, but the combination of the promotions and other things that we’ve been doing has pleasantly surprised us.

Overall conversion costs are lower than we anticipated. I think we said $6 million to $8 million was our potential range of conversion costs. It looks like that number is going to come in sub four. We spent about $2 million of it the last year and we anticipate another $2 million during the first half of this year and while I won’t forecast a 100% conversion, I’d say that we are going to be in the mid-to-low single digits percentages of customers that actually fall off the network at the end of the conversions.

So very, very pleased with the process and pleased with how well our consumer group has done at getting customers into the stores and getting them converted.

Ana Goshko - Banc of America

Okay and then what’s your drop dead date? Do the remaining customers just stay with AT&T?

Ron Duncan

The drop dead date has been a little bit flexible. It depends on how long we are willing to pay to keep a certain billing platform alive and at some point it becomes a cost benefit feasibility trade off, but at this point we don’t believe that there’s a drop dead date until sometime in the third quarter and that may or may not be flexible from there. We would expect to voluntarily terminate the transition, rather than keep that platform alive at a certain point once the remaining customers get down to a small enough level.


At this time I show no other questions.

John Lowber

Okay no more questions, then we will wrap it up and we thank you all for your participation.


Thank you at this time. That concludes today’s conference call. We would like to thank you for your participation. You may disconnect at this time.

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