iPCS, Inc. Q1 2009 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 Chief Executive Officer

Conrad Hunter - Chief Operating Officer

Steb Chandor – Chief Financial Officer

Analysts

Todd Rethemeier - Hudson Square Research

Richard Prentiss - Raymond James

Ana Goshko - Banc of America-Merrill Lynch

Leah Pila – Knight Capital

Jonathan Schildkraut - Jefferies & Co.

Presentation

Operator

Good morning. At this time, I would like to welcome everyone to the first quarter earnings conference call. (Operator instructions).

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

Nathan Elwell

Good morning everyone. Thanks for joining us to discuss iPCS's results for the first quarter ended March 31, 2009, which were announced in a press release issued earlier this morning.

Hopefully, all of you have had an opportunity to review that press release. If you do not have a copy, a copy 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 financial details, including the state of operations, the balance sheet and cash flow statement, as well as cover 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 of the 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, including the reasons the company uses these measures on reconciliations to the most comparable GAAP measures. Please refer to the company’s press release on its website or 8-K filing provided to the SEC.

We ask that questions on this call be from the current investors or analysts and that any media questions will be routed 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

Thanks to everyone for joining us this morning. As you can see from our financial results for the first quarter, we are off to a strong start in 2009. Despite the difficult economic and competitive climate, we were able to deliver year-over-year improvements in key areas of our business.

We grew our subscriber base to over 700,000, we simultaneously increased ARPU and lowered CCPU. We increased adjusted EBITDA and generated positive free cash flow, and for the first time ever, we reported positive earnings per share for the quarter.

Additionally, we have repurchased nearly $3.0 million of our stock of our $15.0 million share repurchase program.

Here are some additional highlights for the first quarter. We reported adjusted EBITDA of $27.1 million, after adding back $3.7 million in Sprint-Nextel-related litigation expense, which was an 18% increase over the first quarter of 2008, on a similarly adjusted basis.

Including the Sprint settlement discussed on our last earnings call, our adjusted EBITDA after adding back Sprint-Nextel litigation expense was $31.4 million. Improvements in ARPU and CCPU were significant contributors to our EBITDA improvement.

ARPU for the first quarter increased $1.40 for the first quarter of [2009] to approximately $50 due to higher per subscriber MRC and moderating customer care credits. MRC has shown steady increases over the past five quarters, driven by an increasing concentration of high end break plans in our mix, such as the $99 Simply Everything plan.

Complementing the increase in ARPU during the first quarter was a sizeable reduction in our CCPU. CCPU, excluding roaming and Sprint-Nextel-related litigation expenses $29 for the quarter compared to $31 in Q1 2008. This $2 improvement is the result of greater leveraging of our network costs, reduced bad debt expense, and lower per subscriber Sprint fees.

We generated over $16.0 million positive free cash flow during the first quarter compared to reporting negative free cash flow during the same quarter last year.

I am particularly proud that we reported our first ever EPS this quarter of $0.34 a share. This compares with a net loss of $0.09 per share for the first quarter of 2008.

We are pleased with our subscriber growth during the first quarter. Despite a tough economic environment, increased competition from prepaid providers and tighter credit policies we implemented at the end of last year, we were still able to increase our gross additions year-over-year. The 9,000 net adds are even more impressive when you consider they are all post-paid subscribers added in an environment where Sprint CDMA business has continued to lose market share.

Our network continues to perform very well. We invested significant amounts of capital in 2008 to further expand our coverage, capacity, and Ev-Do Rev. A technology. We currently have over 7.2 million POPs covered by Ev-Do Rev. A technology which is about 60% of our covered population.

As we look forward to the balance of 2009, we are encouraged by our strong start in the first quarter and remain optimistic about the balance of the year. We will continue to focus on EBITDA growth and free cash flow by continuing to leverage our network, increase ARPU, and lower churn.

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

Conrad Hunter

As Tim mentioned, we had a strong quarter operationally and we had a number of successes including the fact that we built 35 new cell sites during the first quarter, continued our into the last year, and accelerated coverage improvement in several of our core markets and expanded coverage where needed.

We began adding new Ev-Do Rev. A sites in Michigan in preparation for an expanded launch at NVC in the Saginaw markets which we still expect to launch sometime in the second quarter.

We increased our exclusive dealer locations by four since the fourth quarter of 2008, bringing our total exclusive dealer locations to 124 at the end of the first quarter. we equipped all of our company-owned retail stores with data capability display areas that allow us to effective demonstrate the speed and value of our data card and Smart Phone offerings.

We also completed several other back office support and sales effectiveness technology projects, like electronic sensor pad devices and inventory enhancements to improve productivity and overall customer service.

As Tim mentioned, we had a solid first quarter in terms of both gross and net subscriber additions, especially given the current macroeconomic conditions and competition from prepaid offerings like Bruce Mobile, Metro PCS, and other providers.

Our churn during the first quarter is slightly down from the first quarter of last year as our credit-related [inaudible] voluntary churn has improved. We continue to focus on improving churn and are devoting more resources to ready-now training and other customer service techniques to improve the overall customer experience in all channels of distribution.

Our Ev-Do Rev. A network is strong and performing at best-in-class service levels. Our increased coverage of Ev-Do Rev. A has allowed us to increase the sale of data cards. During the first quarter, data card sales were approximately 10% of our gross activation and were 20% higher than the fourth quarter of 2008. Data card gross activations have increased 110% through the first quarter of this year compared to the first quarter of 2008. ARPU associated with these devices is in the mid-$50 range.

Data cards are not the only devices where we are seeing the benefit of investing in Ev-Do Rev. A technology. Activation of Smart Phone have significantly increased. During the first quarter Smart Phone made up approximately 26% of our total device activation mix, up from 12% in the year-ago quarter.

ARPU for customers who select these smart devices is in the high $80 range and we continue to see strong demand for the Blackberry Curve, the Samsung Instinct, and the Tom Trio devices.

We are looking forward to the launch of the Pre, planned for sometime during the second quarter and we have already received numerous inquiries about the device from subscribers and prospective customers. Overall, we believe Sprint has a strong handset line up for the year, which will position us well for success with text and data users as well as those who still want a traditional voice-centric product.

In terms of rate plan, the Simply Everything rate plan portfolio, which includes the flagship $99 plan, continues to grow and is becoming a customer favorite. Rate subscribers are seeing the benefit and the value of the inclusive data service option as a demand for Internet access increases.

The Simply Everything plans have grown to over 10% of our subscriber base, up from 8% during the fourth quarter of 2008. We expect these plans to continue to grow, which should bode well for growth of our voice and data MRC.

I mentioned earlier we completed the construction of 35 new cell sites during the first quarter and this takes us well with our strategy to complete construction on our tower build earlier in the year so we can start generating revenues and reap the return on our investment sooner. We have completed most of the site preparation from the launch of NVC service in Saginaw, Michigan, scheduled for some time for the second quarter.

After almost 9 months since the launch of NVC in the large market of Grand Rapids, Michigan, we have seen significantly higher ARPU with NVC subscribers than the company average.

Going forward, we remain committed to pursuing profitable growth and maximizing benefits of our operational issue with Sprint. We will continue building a best-in-class network to improve our customers' experience. We are aggressively promoting Sprint's Simply Everything value message along with the ready now and mobile broadband services.

We will also continue to attract and hire talented candidates to improve our retail, back office support, and network personnel teams. Having top quality teams should help us continue to reduce churn, drive higher plan activation, and increased shareholder value.

We continue to be excited about the fact that we have consistently delivered strong post haste CDMA subscriber growth and look forward to a solid growth in the future. In short, we are optimistic of our prospects for the balance of 2009.

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

Steb Chandor

As Tim and Conrad mentioned, we were able to grow our subscriber base during the quarter ending the first quarter with a little over 700,000 subscribers and a covered POP penetration rate of approximately 5.6%. This represents year-over-year growth of about 9% in our ending subscriber base. We also have a little over 275,000 reseller subscribers in our territory, up 12% for the same quarter last year.

Total revenue for the quarter was $136.2 million compared to $125.7 million for the prior-year quarter. The approximate 8% increase from the prior-year quarter is due largely to higher service revenue from a larger subscriber base, partially offset by lower roaming revenue from Sprint subscribers outside our territory.

With respect to adjusted EBITDA, as Tim mentioned earlier, if you add back the Sprint-Nextel-related litigation expenses and exclude the $4.3 million settlement gain, adjusted EBITDA would have been $27.1 million for the quarter. This compares to $23.0 million for on a similarly adjusted basis in the year-ago quarter, an approximately 18% year-over-year improvement.

As we previously disclosed, we recorded a $4.3 million gain in the first quarter related to a settlement with Sprint covering certain disputed items for 2008. During the first quarter and subsequent to the quarter end, we formally disputed additional items with Sprint. We continue to work with Sprint on these on and other issues and are hopeful that we will be able to come to satisfactory resolutions.

ARPU, excluding roaming, was $49.84 for the quarter, up $1.40 from the year-earlier quarter and $0.22 higher than the fourth quarter of 2008. The increase from the prior-year quarter is due primarily to higher MRC, offset by reductions in overage and late fee revenue.

Data ARPU for the quarter was $16 compared to the prior-year quarter of $11. The increase in data ARPU is due primarily to a greater number of rate plans which now include data service such as the Simply Everything plans.

Cash cost per user, or CCPU, excluding roaming, was $31 for the quarter and excluding the Sprint-Nextel litigation expense, it was $29. This $29 is improvement of about $2 compared to the prior-year quarter due to lower per subscriber CCPU fees paid to Sprint, reduced bad debt expense, and improved leverage of our infrastructure costs over a larger subscriber base.

Bad debt expense for the quarter was $3.2 million, down from $5.4 million in the prior-year quarter, due to an overall improvement in subscriber credit quality from the prior-year quarter, resulting in fewer write-offs.

Our roaming ratio, which includes roaming revenue and expense from all carriers, including Sprint, was 1.3 to 1 for the first quarter, down seasonally as expected from the 1.4 to 1 ratio in the fourth quarter and down from 1.6 to 1 from the first quarter of 2008.

The year-over-year reduction in the ratio reflected both a reduction in revenue from Sprint subscribers that use our network and the increase in roaming expense of our subscribers on carrier networks other than Sprint.

We believe that the reduction in Spring roaming revenue from the very strong 2008 first quarter may be the result of the current weak economic environment, bad weather in the upper Midwest, the reduction in Sprint's CDMA subscribers available to roam our territory, and other issues we are currently working with Sprint to better understand.

Roaming expense on carrier networks other than Sprint continue to increase during the quarter, largely as a result of our increased overall subscriber base and greater concentration of all inclusive plans, many of which include unlimited roaming.

Roaming expense growth in the quarter moderated compared to prior quarters and was partially offset by increased roaming income from carriers other than Sprint.

Our costs of subscriber acquisition, or CPGA, of $402 for the quarter, was up slightly from the $399 of the year-ago quarter. While variable costs increased $18, reflecting higher commissions and increased handset subsidy, fixed costs for gross add declined $15 due largely to fewer company-owned stores and lower advertising expense.

As Tim mentioned, we reported net income for the quarter of $5.8 million, or $0.34 a share, which was up from a net loss of $1.6 million, or $0.09 per share, for the prior-year quarter.

Net income, which includes the $4.3 million gain from the Sprint settlement, benefitted from increased ARPU, lower CCPU, which more than offset a reduction in roaming margin and higher Sprint-Nextel-related litigation expense.

We reported free cash flow of $16.4 million for the first quarter compared to a deficit free cash flow during the first quarter of 2008. Cash flow during the first quarter of 2009, compared to the first quarter of 2008, benefitted from improved operating performance, the cash impact of the Sprint settlement, improved working capital, and lower capital expenditures.

Capital expenditures for the quarter totaled $5.4 million compared to $14.4 million in the year-ago quarter.

Our balance sheet at the end of March showed a cash balance of approximately $71.0 million, up from $56.0 million at year end.

Our long term obligations consist primarily of two high-yield notes totaling $475.0 million. We have no repayments due in respect of long-term debt prior to 2013.

We have notified the trustee of our second-lien notes that we are exercising the payment in kind, or PIK feature, for the quarterly interest payment due November 3. This is the second interest period during 2009 where we have exercised the PIK feature on the second lien notes. At current rates, cash interest savings are approximately $1.9 million each quarterly period. We have made no decisions regarding future elections beyond this period.

We announced in early February a $15.0 million one year share repurchase program under which we have purchased approximately 281,000 shares totaling $2.9 million to date. A little over 167,000 shares totaling $1.6 million were purchased prior to the end of the first quarter. We plan to provide updates on share repurchase activity under this program quarterly.

We are optimistic in our outlook for the remainder of 2009. As such, we are reaffirming our full year 2009 guidance, specifically gross additions of between 250,000 and 275,000; adjusted EBITDA of $100.0 million to $120.0 million, excluding expense related to Sprint-Nextel litigation and the impact of the $4.3 million gain; capital expenditures of between $35.0 million to $45.0 million; and free cash flow of between $15.0 million and $25.0 million.

Now I will turn the call back over to Tim.

Tim Yager

Before I turn the call over for the Q&A session, I would like to update you on our ongoing litigation with Sprint. As we announced last week, we were pleased that the Illinois Circuit Court in the litigation regarding the Sprint Clearwater transaction, has allowed our 4G claim against Sprint to move forward, together with our claims to enforce our exclusivity rights in our territories.

Although the court limited to certain types of monetary leads that we may seek, injunctive relief, as well as monetary relief for actual or direct damages, continue to be permitted revenues. As a result of the new 4G claim moving forward, the date for the trial will be delayed until at least late in the year as new discovery takes place on that claim.

Additionally, we are looking forward to Sprint's compliance with the Illinois Circuit Courts ruling that Sprint must cease owning, operating, and managing the Nextel wireless network in iPCS wireless's territory.

As a reminder, this ruling requires Sprint to comply with the order on or before January 25, 2010. While Sprint may seek an extension, we will continue to be proactive with the courts and Sprint to help ensure that they comply by the January 2010 date.

As these and other disputes with Sprint are ongoing, I will not comment further on the status of our litigation and disputes with Sprint.

Finally, I would like to make a closing comment about our first quarter. As I stated in my previous remarks, we are very pleased with our results for the first quarter of 2009. On a similarly adjusted basis, our EBITDA improved 18% year-over-year, but compared to other regional wireless carriers our EBITDA growth has been and continues to be best-in-class. We believe that our growth in subscribers, revenues, and EBITDA are unique within the wireless space and look forward to continuing the trend throughout 2009 and beyond.

With that I'd now like to turn the call over for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Todd Rethemeier - Hudson Square Research.

Todd Rethemeier - Hudson Square Research

First, could you give us an update on where you stand with the pre-paid offer, including the wireless industry moving that way, and I think you would probably agree you need to be there.

Second, on the billing credits, it seems that with ARPU pretty strong again, is the billing credit issue behind us now completely?

And finally, can you give us the wholesale revenue and the roaming minutes for the quarter.

Tim Yager

In terms of the billing credits, we are certainly please that those numbers have improved from our high point last year. We certainly hope that it continues to improve from here. Whether we can say they're permanently behind us, that's hard to know for sure, but certainly we are pleased with the trends that we've experienced and are hopeful that those trends will not only stay where they are but actually continue to improve going forward. I know Sprint has put a lot and changed the way they are dealing with the credits and so hopefully that will continue to benefit us.

In terms of prepaid, I will let Conrad spend a second or two on them.

Conrad Hunter

We have been saying we would have a prepaid product and we are frustrated it's not a reality yet. If it were in our own control we would have a product now. And just so you know, we are still diligently working with Spring and other resources to make prepaid within iPCS reality sooner versus later.

Steb Chandor

And as it relates to wholesale revenues, if you are referring to the NPO customers, revenue was a little over $3.2 million for the first quarter. The second question about minutes on total roaming minutes on our network for the first quarter were about $460.0 million.

Todd Rethemeier - Hudson Square Research

And if I could just follow-up on the prepaid. What is your best guess as to when that will be in the marketplace?

Tim Yager

We are not going to comment on that. We certainly are working diligently to be in a position to launch it sooner rather than later but we certainly don't want to tip our hand in terms of when that may be.

Operator

Your next question comes from Richard Prentiss - Raymond James.

Richard Prentiss - Raymond James

On the Smart Phone data cards, I heard the 10% GA, 26% gross adds for Smart Phone, what percent of your base are data cards and Smart Phones?

Tim Yager

In terms of ending base, I think we'll have to get back to you on that. I think we have the numbers in terms of what it was here for the quarter, but we'll have to follow up with you in terms of what our ending base is.

Richard Prentiss - Raymond James

Okay. It's been several quarters where it's been building up and I'm just trying to see if we're seeing it make a full effect into the base yet.

On the Pre, I think I heard sometime in the second quarter. Are you on tap to get the phones similar time to when Sprint does, and how did that work when the Samsung Instinct came out? Were you able to get them at a similar time frame or were there supply issues back then?

Tim Yager

In terms of the Samsung Instinct, we did have the Instinct when Sprint had the Instinct. We had some supply issues that I believe were the same supply issues that Sprint had on the Instinct. So hopefully, as it relates to Pre, because of the market enthusiasm for the product, that we obviously are hopeful that Sprint's going to have ample supplies of the product and we certainly will expect to have the Pre in our stores at their nationwide launch of the product and look forward to having that phone in our lineup.

Richard Prentiss - Raymond James

And on the data ARPU side, I think I heard you say you are up to $16 now. But only 60% of our POPs are covered with it. One of your brethren there, Shenandoah, had $18 ARPU, so a little bit higher but not dramatically higher, but is closer to almost 90% of their POPs covered. I'm just trying to balance those two thoughts together. If you're able to get ARPU across your entire subscriber base up to $16 but only 60% covered, is there more opportunity if you were to cover more, or is it that most of your subscribers are actually in the area that you've already covered maybe.

Tim Yager

We certainly think there is additional opportunity for the data side. One of the things we're working on in terms of our capex plan for 2009 is in fact to launch additional Ev-Do coverage. We haven't announced where that's going to be but we think it's going to be in markets where it will make a meaningful difference. And so certainly we don't think we're anywhere near the peak of where we can go in terms of the data ARPU component.

Richard Prentiss - Raymond James

And Boost, I'm not going to get into the core growings and the court prophecies but is Sprint actively marketing the Boost unlimited plan within your markets then?

Tim Yager

They are. Certainly they are obviously advertising on a national level and that's been the bulk of the stuff that we've noticed that they certainly offering it and selling it, in their distribution points.

Richard Prentiss - Raymond James

So it's not like they're trying to separate that out, it's just kind of going with the national flow and they are salvaging, I would assume, some dealers even within the territory then.

Tim Yager

I can't comment on whether or not. I'm not sure if they've launched any new dealers in our territory but certainly they already have an embedded base of Nextel stores in our territory as well as third parties.

Richard Prentiss - Raymond James

And have you mystery shopped it to see if they are carrying the Boost product within those existing stores that were inside your territory?

Tim Yager

They are.

Operator

Your next question comes from Ana Goshko - Banc of America-Merrill Lynch.

Ana Goshko - Banc of America-Merrill Lynch

Just a final question on prepaid. I think Metro launched in Grand Rapids probably close to quarter end. I wanted to know any early impact you're seeing from them in that market, or elsewhere in any of your markets that have maybe launced.

Tim Yager

They did launch, I believe it was just last week in the Grand Rapids market. They certainly spent a fair amount of money promoting the launch of the product and territory. They've been in the Saginaw markets, I think, since closer to the first of the year in Michigan.

The good news for us is we've got a substantially larger network than they do in the Michigan markets. We have the Ev-Do Rev. A and the data products and those types of things. So I'm not going to say we've seen no impact from it but I think when it comes to coverage in the quota of networks and those types of networks, we stack up incredibly well.

And on top of that, it's just a little too early to tell. I mean with them having not even been up in the Grand Rapids market for a full week at this point I don't believe, it's tough to know exactly what the impact would be. But we certainly think that our network and quality will make a big difference there.

Ana Goshko - Banc of America-Merrill Lynch

And second question is on roaming. I know you said that your year-over-year decline was largely from Sprint. What is the potential impact of losing Alltel roaming revenue, how big a factor might that be and have you seen anything to date there?

Steb Chandor

The Alltel roaming revenue on our network, I think for all of 2008 it was $12.0 million or $12.5 million. We did continue to see revenue in the first quarter. In fact, it was a little stronger than we initially expected. However, we do expect it to tail off during the year. The timing and the expense of that, at this point, we don't know.

Ana Goshko - Banc of America-Merrill Lynch

Just capex being so low in the quarter, just some more anecdotal color on that. And when can we see it spike up? What should be the trend for the rest of the year on that spending?

Tim Yager

I think the first quarter, some of that was timing. I think we made some capital expenditures perhaps in the fourth quarter that we were deploying in the first quarter is certainly a component of that. We are certainly not behind on our capex build. I think as Conrad said, we launched 35 new cell sites in the first quarter, which is a tremendous start for the year for us. And as Steb said, we reaffirmed our guidance on the capex, which is $35.0 million to $45.0 million and at this point we certainly feel that we are going to be within that range for the full year.

Ana Goshko - Banc of America-Merrill Lynch

I know that last quarter you said that on some of that operational disputes with Sprint there were still some outstanding items on late revenue fees and bad debt recoveries. Are those disputes still ongoing?

Conrad Hunter

Yes, as we mentioned in our prepared comments, there are a number of items that we are still disputing with Sprint and requesting additional information. At this point I don't think we're going to go into specific details about the nature and the progress of those disputes.

Operator

Your next question comes from Leah Pila – Knight Capital.

Leah Pila – Knight Capital

I just would like to better understand what factors are contributing to iPCS being able to grow subscribers while Sprint continues to lose subscribers on the CDMA base?

Tim Yager

I think it comes down to our local market focus. I think that we take the Sprint national branding and the message that they do on a national level and we really bring it to the local market. Conrad and his sales team do a tremendous job of really tailoring the local messages through sponsorships and local advertising and radio and stuff and really call to action to get people off their seats and into our stores to buy the Sprint products in our territory. And then on top of that I think we had one of our biggest years ever in terms of capital deployment and really improving our network and expanding our coverage. So I think that our network is very competitive in our footprint. So I think it's really the combination of those. Just the day-in-day-out executing in our markest.

Leah Pila – Knight Capital

Is there any difference in terms of the competitive landscape. Are ATT and Verizon as strong in your markets as they are in some of the other markets?

Tim Yager

I certainly think that AT&T and Verizon are equally strong in our markets as they are on a national level. They've got very large footprints in our territory so I certainly don't it's there. Now, as it relates to competition, one advantage we do have is we do not have leads in any of our markets today and it's we only have Metro in just two markets. Granted they are two or our larger markets, in Grand Rapids and Saginaw, but from a prepaid perspective, they're out there.

Leah Pila – Knight Capital

And percentage of the customer base are prime customers.

Steb Chandor

Approximately 81% at the end of the first quarter.

Operator

Your next question comes from Jonathan Schildkraut - Jefferies & Co.

Jonathan Schildkraut - Jefferies & Co.

Still working on this prepaid side, it seems like in the quarter you had some fairly good flow through at the top end and I'm wondering, do you believe that you've got a broad enough handset selection to continue to appeal at the top end, and then as we look into the prepaid product, first, do you anticipate that you will have to add a broader range of handsets at the low end in order to attack that segment and secondly, with even Metro only in two of your markets currently, how much of a priority or how much of a pressure do you feel to get your prepaid product out? Do you feel like there's a time to market issue first move for advantage?

Tim Yager

In terms of the handsets, overall handset mix, I think we feel pretty good about it. I'll let Conrad spend maybe just a second on that.

Conrad Hunter

We feel real good about our handset line. I think I mentioned in my comments, we think that the handset line that Sprint has for the remainder of the year is very, very solid and we're very excited about that. On the prepaid side, once we're ready to launch that product, we don't actually see an issue with the handset on that end, so we feel really good about that.

Tim Yager

And in terms of your last comment on the first over advantage, I mean, obviously we would rather have been the first prepaid offering in our entire footprint. That's obviously not going to happen in some percentage of our market.

Having said that, I think when we get our prepaid offering rolled out it's going to be a compelling offering and it's going to have a footprint that's significantly larger than the prepaid providers that are out there. And so I think it will be when people look at the value of the network and the scope of the network in those types of things in the technology of the network, it will be a huge competitive advantage over any prepaid offering in our territory.

Operator

Your next question is a follow-up from Rick Prentiss – Raymond James.

Rick Prentiss – Raymond James

You mentioned nationwide Q-chat. Can you update us what you're seeing as far as one, the product working, how satisfied you are with it, and two, just kind of customer acceptance. We don't hear a lot about it from Sprint these days.

Tim Yager

I take the first one in terms of how it's working and Conrad can take the acceptance of it. In terms of how it's working, we feel it's working incredibly well. When we talk to our network guys, I think to the naked eye or ear, depending on how you look at it, you're not going to notice any difference in the cost set up time versus the IN network. It's been performing incredibly well for us.

Conrad Hunter

In terms of the acceptance, from our perspective I think the acceptance has been very, very positive. The product is somewhat different from the Iden, but our distribution channels have been trained very well and if you walked into any of our stores or one of our third-party dealers they would tell you that the product is working very, very well and the handsets are very strong.

Tim Yager

We're looking forward to getting that launched in the Saginaw markets. Michigan has been a strong push to talk type market and so we think that should be a good market for us just like Grand Rapids has been.

Rick Prentiss – Raymond James

And on CPGA trends. Do you know what percent of your base did an upgrade within the quarter? Just trying to gauge how often people are coming in and wanting to do an upgrade. I think Sprint said they saw about 9% of the base in the quarter ask for an upgrade. Just trying to gauge what this means going forward as the industry maybe slows down on some of the gross and net adds percentage-wise, what's the retention cost be looking like?

Steb Chandor

Just to answer the specific question, during the quarter we had just a little less than 10% of our subscribers upgrade.

Tim Yager

And one thing I want to add to that is a lot of those customers are upgrading to the smart devices who are significantly higher ARPU. So that's a tradeoff that we're certainly willing to accept.

Rick Prentiss – Raymond James

Any evidence on what churn does when they sign up for the higher rate plan or put out more money to buy the Smart Phone?

Conrad Hunter

The trends are that you churn is less on the Smart Phone device than with the attachments that go with that. So it's a really sticky customer for us.

Rick Prentiss – Raymond James

And then some companies, as they get the percent of Smart Phone up higher, which is why I was asking the earlier question, kind of back off of the cycle time as far as somebody saying hey, once we get "x" number into our base of Smart Phones we can kind of maybe back off the need to constantly replace them. What do you think the cycle time is? Its it two years, is it three years? Once we get Smart Phones out there, what should we be thinking about?

Tim Yager

We haven't done anything to change our upgrade policies and so I think for the most part we don't anticipate making any changes there. I think currently we allow customers to upgrade their handsets not before 18 months and I think we tend to offer bigger promotions after two years type thing. And so we have been proactively reaching out to our embedded base to encourage them to upgrade.

I don't really see a situation where we're going to discourage that behavior. I think when that starts to happen, you just have to worry about them going to your competitors. And I think as long as we're having strong success in those upgrades going towards more smart device handsets and the higher ARPU and the likes, I think that's certainly a tradeoff were are willing to continue.

Rick Prentiss – Raymond James

And you stripped that out of your CPGA cost right? So that CPGA is truly for new gross adds. The retention cost would be over in CCPU?

Tim Yager

That's exactly right.

Operator

There are no further questions in the queue.

Tim Yager

I just would like to thank everyone for taking the time to join us on our first quarter earnings call. We look forward to providing you some updates in the future.

Operator

This concludes today’s conference call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!