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Executives

Wesley Wampler – Director, IR

Michael Moneymaker – EVP, CFO, Treasurer and Secretary

James Hyde – President and COO

James Quarforth – CEO

Analysts

Ric Prentiss – Raymond James

David Coleman – RBC Capital Markets

Michael McCormick – JPMorgan Chase & Co.

Robert Dezego – SunTrust Investment Services

David Dixon – FBR Capital Markets

Gregory Burns – Sidoti & Co.

Phil Cusick – Macquarie

Alex Heidbreder – Millennium Management

NTELOS Holdings Corp. (NTLS) Q2 2009 Earnings Call Transcript August 6, 2009 10:00 AM ET

Operator

Greetings and welcome to the NTELOS second quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Wes Wampler, Investor Relations Director for NTELOS. Thank you. Mr. Wampler, you may begin.

Wesley Wampler

Thank you. Good morning and welcome to the NTELOS second quarter 2009 earnings conference call. The topics for today's call include an overview of business activities and financial highlights for the quarter and the first half of this year. Here in NTELOS today, we have James S. Quarforth, the company's Chief Executive Officer; James A. Hyde, President and Chief Operating Officer; and Michael B. Moneymaker, Executive Vice President and Chief Financial Officer.

We'll begin with comments from Mr. Moneymaker, followed by comments from Mr. Hyde and Mr. Quarforth and then we'll take any questions you may have. We ask that questions on this call be from current investors or analysts and that any media questions be later directed to Mike Minnis, our Director of Public Relations.

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

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

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

Michael Moneymaker

Thank you, Wes, and good morning. Operating revenues were 140 million for the second quarter of 2009, a 7% increase over second quarter 2008 led by a 9% increase in wireless revenues and a 1% increase in wireline revenues.

Operating income was another record level of 35.4 million for the second quarter of 2009. We also realized an exceptional level of net income attributable to NTELOS Holdings Corp of 17.3 million or $0.41 per share for the second quarter of 2009.

Adjusted EBITDA was another quarterly record high of 60.3 million for the second quarter of 2009, a 5% increase over the comparable period of 2008.

We are again pleased to report that this record level was led by record level of adjusted EBITDA in our wireless segment, which topped 44 million for the quarter.

Looking next at our key operating performance metrics, first for wireless. For comparability purposes, the following 2009 to 2008 comparisons will be based on the pro forma results and metrics for the periods prior to April 1, 2008, each adjusted to reflect the change in gross versus net reporting of handset insurance revenues and cost as a result of previously disclosed new contracts for services, that went into effect on April 1, 2008.

Please refer to the earnings release and Form 10-K and previously filed Form 10-Qs for actual results for the periods and further discussion on this change in gross versus net reporting.

Our year-over-year increase in wireless subscriber revenues was 3.2% for the second quarter of 2009. Postpay subscriber revenues were up 8.3% over the second quarter of 2008 driven by year-over-year increase in postpay subscribers, continued growth at sales of smart phones and data cards, and growth in postpay data ARPU of nearly 40% since the second quarter of 2008.

A decline in prepay ARPU driven by competitive pricing and economic conditions contributed to a decline in prepay subscriber revenues year-over-year.

CPGA was $397 for the second quarter of 2009, as compared to $375 for the second quarter of 2008, reflective of increased sales of smart phones and data cards, since our launch of EVDO high speed data offerings, which as expected has resulted in higher CPGA cost.

The continued growth in the sales mix of these devices fuelled the growth in gross additions in data ARPU and should continue to drive data ARPU growth in the future. Incremental advertising costs associated with our late second-quarter launch of a new prepay unlimited service offering, subbranded FRAWG in the Richmond and Hampton Roads markets also contributed to the higher CPGA levels, although subsidies and commissions for these plans but significantly less than those of conventional prepay plans.

CCPU was $33.23 for 2Q09, an increase of 3.5% from 1Q09 CCPU of $32.10. The increase reflects seasonal increase in collect cost, which was 5.8 million up from 5.2 million in 1Q09 and down from $6.5 million in 2Q08. Retention cost net of related equipment revenues from existing customers was 2.5 million down from 2.7 million in the first quarter and 2.6 million in the second quarter of 2008. Wireless bad debt expense was 3.7 million as compared to 2.3 million for 1Q09 reflecting the impact of continued economic conditions, which contributed to higher churn and higher past due balances at June 30. As we previously discussed throughout 2008, our EVDO upgrade and cell site expansion contributed to an upward trend in CCPU during 2008.

We are pleased to see network access and cell site expenses level off at 11.7 million in 2Q09 as compared to 11.6 million in 1Q09 and 11.9 million in 4Q08.

Moving next to wireline, our wireline segment recognized adjusted EBITDA of 17.5 million in second quarter of 2009, an slight increase over 2Q08 driven by 0.5 million or 28% growth over 2Q08 in wireline revenues from dedicated Internet and metro Ethernet connections in the competitive segment. Our wireline adjusted EBITDA continues to exhibit strength as revenues from data services offset decreases from access line losses.

Looking next at liquidity, capital expenditures for property, plant and equipment for the second quarter and for the six months of 2009 were 36.9 million and 69.5 million respectively.

We are pleased to have completed our EVDO upgrades in the Virginia East markets in the second quarter. Spending in the first half of 2009 also included a significant portion of our costs associated with new prepay billing platform and Web portal, which were on schedule to go into service in the third quarter.

Based on the midpoint of our capital expenditure guidance for 2009, we have incurred approximately 62% of our spending in the first half of 2009 and accordingly expect a decline in capital spending in the second half of 2009 from the level experienced year-to-date.

Cash provided by operating activities was 49.8 million in the second quarter 2009, up from 44.3 million in the first quarter of 2009. Adjusted EBITDA for the last 12 months ended June 30, 2009 was 228.5 million, which results in a ratio of total debt at June 30, 2009 to adjusted EBITDA for the last 12 months ended June 30, 2009, of 2.64:1.

I'm also pleased to report that total debt net of 65.1 million of cash on hand at June 30, 2009, was 539.9 million. At 539.9 million this represents a ratio to adjusted EBITDA for the last 12 months ended June 30, 2009, of 2.36:1.

With that let me now turn the discussion over to Jim Hyde, our president and COO, who will provide an update on our latest business and operational developments.

James Hyde

Thanks Mike and good morning. I will walk through the business unit update for both the wireless and the wireline segments and then hand the call over to Jim Quarforth for a guidance update and summary.

We are very pleased with our record second-quarter financial results and feel the company is well positioned to continue that solid performance going forward. Along with the record adjusted EBITDA and operating income at the consolidated level, we also reported a record adjusted EBITDA in our wireless business and consistent record or near record high operating margins within our wireline business segments.

This strong operating performance demonstrates the quality of our strategic investments and our ability to execute efficiently despite the difficult economic environment. I will start with a look of the wireless business. During the second quarter, we completed our EVDO network upgrade on time and as promised with 166 new cell site upgrades bringing our new total EVDO Rev A cell site count to 1047 across our entire footprint.

The completion of our network upgrade marks a significant milestone for the company, and one that is already yielding positive returns. For the second quarter, NTELOS continued to deliver excellent data ARPU growth along with strong sales of smart phones and data cards. Smart phones and data cards represented 31% of total postpay gross additions in the quarter, up from 27% in Q1 and up from 11% in Q2 of 2008.

Postpay data ARPU grew by nearly 40% year-on-year to $9.88 and that is up $0.51 sequentially from the first quarter in 2009. Wireless retail sales were strong during the second quarter with nearly 38,000 new gross additions and that is up 4% from second-quarter 2008. These positive results were driven by two exciting new product launches during the quarter. First, we were delighted to introduce our My World calling plans in early May. These plans allow customers unlimited calling to a defined group of friends and family of 2, 5, 10 and even 20 people regardless of which wireless or wireline network those people happen to use.

Monthly price ranges for these plans are from $39 to $99 and we have already seen a positive customer response in the market. Equally exciting with the launch at the end of the quarter of our subbranded FRAWG unlimited wireless service in the Richmond and Hampton Roads markets. Starting for as low as $30 per month, these prepaid plans allow value seeking customers unlimited calls, texts, and even Internet access for one low fixed price with no contract, credit check, or activation fee. While these plans feature a competitive price, they also allow for NTELOS to attack this important market segment with substantially lower acquisition costs and handset subsidies.

So the resulting margin from these plans are comparable to our more traditional prepay products. Customer churn for the second quarter was up year-on-year to 3% in total churn and 2.1% in postpay churn. These results are expected and are consistent with the continued difficulties some customers are having during this recessionary period. This increase in churn has resulted in a net customer loss for the quarter of 2386. We are encouraged however by total churn and postpay churn have improved sequentially from the first quarter of 2009 indicating the potential start to a reversal of the trend we have seen over the previous three quarters.

Wireless ARPU for the second quarter was $53.49, down from $54.58 during the same period last year. The drop in APRU however, was totally attributable to the prepaid business as our postpay APRU was up sharply year-over-year to $57.28 versus $56.19 in the second quarter of 2008. The drop in prepaid ARPU is tied to higher churn within our prepay base combined with the prepay customers controlling their monthly spend more tightly due to the difficult economy.

We are delighted with the continued strength of our postpay ARPU driven by our compelling data offerings, and the best handset line-up in the history of the company. In fact, we recently launched two new smart phones, the Samsung Freedom and the LG Spyder.

Wireless wholesale revenues from our Sprint contract were up 25% year-over-year and up 4% from the previous quarter, driven primarily by an increase in data traffic. Non-Sprint roaming revenues were also up sharply, growing by 76% from the second quarter of 2008 to $1.4 million this quarter.

As a reminder, effective July 1 our price reset for the Sprint wholesale agreement went into effect allowing for our 90% share of Sprint national data revenue yield. This price reset will bring the monthly revenue derived from Sprint in line with the $9 million monthly minimum for the reminder of 2009. This change has been included in our internal planning and has also been incorporated into our guidance.

As we look to the second half of the year, we expect continued churn improvement taking into account usual seasonal impacts and sales remain strong particularly as a result of our valid position in the market, our focus on our quality direct distribution channels, and with continued data growth driven by the completion of our network upgrade.

Mike alluded earlier to a couple of large capital IT projects that are scheduled to be completed during 2009. I'm excited to report that both our Web portal and our greatly improved prepaid billing platform will both be launched during this quarter providing us the ability to attract more customers at a lower cost, provide a greatly enhanced service capability, as well as deliver a suite of new prepaid product offerings.

Switching gears now to the wireline business, NTELOS posted another stellar quarter in terms of operating performance. We continue to outperform the overall wireline industry in both the RLEC and CLEC units. These results are a reflection of our disciplined expansion strategy within the competitive segment and our focus on data penetration and video products within the RLEC.

Specifically within the RLEC, operating revenues totaled $14.5 million versus $14.9 million a year ago, and adjusted EBITDA came in at $10.7 million for the quarter and that is versus $11 million in Q2 2008. We continue to reposition the RLEC asset around data and video products and are quite pleased with our performance in these critical areas. DSL customer penetration rates are now up to 50%, and that is up from 42% last year. IPTV penetration of homes passed is 21% with our legacy or first neighborhood built [ph] joint penetration rate of 32%.

The competitive or CLEC business also continues to perform well with second-quarter revenues up 5% from previous year to $16.6 million, and demand for data connectivity and increased broadband has fuelled our growth with our four core vertical customer segments of healthcare, education, government and banking.

Adjusted EBITDA was $6.7 million, that is up 6% from 6.4 million last year and what is perhaps even more exciting is that the CLEC business is now delivering EBITDA margins of 41%, which we think is near best in class. During the quarter, we completed the critical fiver swap deal [ph] that provides us an important traverse route into the Internet cloud in Ashburn, Virginia. This network enhancement will allow us to improve the quality and cost of service we provide to our existing customers, and is already provided us with additional sales opportunities.

As I said earlier, we're quite pleased with the second-quarter results and the progress in both our wireless and wireline businesses, despite the difficult current economic climate. Furthermore, we feel we are well positioned to continue strong performances as we look forward.

With that I will turn the call over to Jim Quarforth, our CEO.

James Quarforth

Thanks Jim and good morning. As Mike and Jim have pointed out, we had very good financial results in the quarter setting new record levels of consolidated adjusted EBITDA and operating income. In addition to the record financial results, we were able to improve our consolidated EBITDA margins sequentially to over 43%. We are particularly pleased with these results in light of the challenging economic climate. Based on these results, we're reaffirming our current guidance.

Today the company declared a quarterly cash dividend on its common stock in the amount of $0.26 per share to be paid on October 12 to shareholders of record on September 14. Two weeks ago, the company announced its efforts to raise a new $635 million term loan facility and a $35 million revolver for the purpose of refinancing its existing debt, which begins to mature at the end of 2010. The offering was heavily oversubscribed as a result of the quality of the credit and the performance of the company. The pricing on the facility is L plus 375 [ph] with a 2% LIBOR floor and a 1% OIB [ph].

The facility has a six-year term and provides the company with more strategic flexibility and improvement in its restricted payment basket. Closing should occur very soon and is subject to market and other customary conditions. After closing the company will update its guidance to reflect changes in interest expense, taxes and net income. As we look into the future, the company is clearly focused on data as a key driver for growth in both our wireless and wireline businesses. Both businesses offer our customers today with best in class broadband products such as EVDO Rev A in wireless, Ethernet for our wireline enterprise and carrier customers, and up to 20 meg speeds over fiber to our residential customers within the ILEC.

Our wireless business unit continues to demonstrate continued year-over-year sales growth as a result of many catalysts including our EVDO Rev A data network, expanded retail distribution, enhanced handset lineup, and other new products such as My World and FRAWG. While these catalysts have assisted us in offsetting the economic pressures on APRU and churn, they will be equally important in driving growth as the economy rebounds. Our focus on data in the wireline business has also proven to be a winning strategy. Our competitive segment continues to post consistent EBITDA and strong margins, which exceeded 40% this quarter.

The competitive segment has built a formidable franchise addressing the business and carrier customers’ needs for high bandwidth data products. The repositioning of the ILEC from a voice business to a data focus business is progressing very well with impressive results. In particular, the achievement of 50% broadband penetration and 32% video penetration of homes passed in original neighborhoods in less than two years outpaces our peers in the industry.

The company is clearly focused on the future growth of the business, and expects to come out of this recessionary period a stronger company than we were when the recession began. Our focus on data investments and cell sites, EVDO, fiber networks, retail distribution, and improvements in operating systems and processes will provide solid catalysts for growth in the future. The team is very excited about its position in the market and the future growth potential of the company.

We will now take questions and ask the operator to give instructions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Ric Prentiss with Raymond James and Associates. Please proceed with your question.

Ric Prentiss - Raymond James and Associates

Thanks. Good morning guys.

Michael Moneymaker

Hi Ric.

Ric Prentiss - Raymond James and Associates

Hi. A couple questions. First, obviously emphasizing data pretty significantly there, we've noticed that Sprint from the Sprint affiliates are seeing data ARPU north of $18. Part of that how they I think describe the Simple Everything plan between data and voice. As you looked at your, excuse me, postpay data ARPU on the wireless side of around 10 bucks, what do you see as the progression to move that up? Is it continuing so of smart phones and data cards? Are people in this economy may be buying the phones but not signing up with the higher rate plans. What should we look for as catalyst and milestones to see that the progress of -- and bucks kind of moves up and where could it move to?

James Hyde

Well, Hi Ric. Jim Hyde here. Thanks for the question. Well, a couple of things. One, I think we see a tremendous amount of upside as you point out in terms of where we think data ARPU can go for our business. Certainly, one of the reasons why our number is maybe south of what's some of the Sprint affiliates and some of the other national players are even reporting is the fact that there are these all inclusive plans out there and maybe how they allocate the data portion of those excess fees. It's a little different than how we price our products, but secondarily remember we've just recently completed you know, our network upgrade in our -- one of our largest markets, which is Richmond and Hampton Roads and as we see these data cards and smart phone percentages continue to increase on the back of that network upgrade, I think we'll see that data ARPU number continue to close the gap on those national averages.

Ric Prentiss - Raymond James and Associates

And, on the FRAWG launch, any update as far as when you expect Leap to be coming to town in the Virginia East markets and just any early indications on how of that new product offering is being received and distributed?

Michael Moneymaker

Sure. Thanks for that one too. We are really excited about how FRAWG is going. Let me address the Leap part of the question first and on two fronts. First, we're not sure you know when Leap is going to come. Right now it's kind of all quiet, on what we call the Eastern front really in our Virginia East market. No sign of Leap.

We are hearing that there are out, you know, kind of sniffing around for some cell sites and so forth. Obviously, Leap went out and raised, you know, a substantial amount of money. So they certainly got cash to build but as you know, that is a 12 or 18 month, you know process once they really start to go out there and seriously consider a new market. Having said that they have recently launched Washington DC and Baltimore as you well know and that's providing us a benefit as their preferred roaming partner in Virginia East.

You know, we are hoping they are really successful up there in DC and Baltimore because that's going to drive increased roaming revenues over our way. So, you know, in terms of Leap, you know, I think we are in pretty good shape there. Having said that we think we've got a pretty long run way with the FRAWG product out there in Richmond and Hampton Roads. In fact it's early days it's only been out there a couple of months, but we're exceeding our sales, our gross additions. The migrations in terms of our internal planning were overplanned in terms of new sales. Of those, the number of customers that are migrating from our existing base is below what we expected.

In ARPU on those plans is above what we expected. In fact, you know, we've got three price points, $30, $40, and $50 on FRAWG and 87% of our new customers signing up on FRAWG are going for the $40 or $50 price point. So early days of course, but we are very encouraged.

Ric Prentiss - Raymond James and Associates

Great, thanks guys.

Operator

Thank you. Our next question comes from the line of David Coleman with RBC Capital Markets. Please proceed with your question.

David Coleman - RBC Capital Markets

Thank you. Can you just talk about, a little more about FRAWG? Just trying to find out what the take rates on those plans are during the -- since you launched those, and sort of the percentage of the prepaid base that are FRAWG wireless subscribers what the ARPU is for that for FRAWG versus the legacy prepay, and then on the credit facility that you have out there -- that you are putting into place now, Jim you mentioned increased flexibility with regard to a restricted payment basket. Does the new facility have a restricted payment basket at all, and if not you know, what would be your intention what the free cash flow that you guys are generating? Thanks.

James Hyde

Hi Dave, Jim Hyde, I want to take the first part of that question and then turn over the credit facility part to Mike and Jim Quarforth. On FRAWG, as I just mentioned a moment ago, very, very encouraged with the early results there. FRAWG has become our prepaid products in our Virginia East markets. Having said that we are continuing to service our traditional NTELOS up, you know, prepay products and services. We are a little reluctant to report ARPU right now because it's only a couple of months in on FRAWG. I can tell you that only 13% of our FRAWG base as it exists today is signing up for the $30 price point with 87% going for the $40 and $50 price points, which is driving ARPU, which is significantly above our original internal business plan, but over the course of the next quarter or two, you know, we'll see you know, if that continues or how that things settles up and we will be I think able to report, you know, specific FRAWG ARPUs.

In terms of your question about the base, we are getting some migration of our existing base, but it is, you know, we expected a significant portion of our customers to immediately convert to FRAWG and we're just not seeing that hike of conversion rate. So again, very encouraging but we do expect migrations to continue into the future.

James Quarforth

Yes Dave, this is Jim. On the RP basket, there is an RP provision for an RP basket in the new facility. It's a larger basket. The basket initially starts at $50 million and has a $10 million per quarter builder to that comparable to 6.5 million on the previous facility, and then also has a similar excess cash flow builder as well by quarter. So you know, I think the company has demonstrated that it has a growing free cash flow attribute and that the expectation would be that as we continue to grow free cash flow then we would continue to look at the regular quarterly dividend and returning capital back to our shareholders.

David Coleman - RBC Capital Markets

Thank you for that and just back to the FRAWG, you know, FRAWG wireless plants. What is built into your business plan as far as what the ARPU would be from that versus the legacy prepay. You know, would it bring down prepay ARPU over time or what would sort of be the impact from FRAWG on prepay ARPU? Thanks.

James Hyde

You know, obviously for you know for competitive reasons we're not going to really share what our kind of internal expectations around ARPU are in that thing. I will tell you that we are quite pleased with the take rates. We expected in excess of 50% of FRAWG customers to be signing up for the $30 rate and we are seeing that coming at 13%. So that's very encouraging. The second part of the question, we just really can't kind of talk about what our internal plans were around ARPU.

Michael Moneymaker

Yes Dave, I think another important attribute about this product is the fact that the cost structure is dramatically lower than the current prepay product we offer, which really allows the company to garner the same margin that we have on our existing products.

David Coleman - RBC Capital Markets

That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Michael McCormick with JPMorgan Chase & Co. Please proceed with your question.

Michael McCormick - JPMorgan Chase & Co.

Hi, thanks. Couple of things, first on your expectations for churn improvement on the postpay side. Can you just give us a sense for what do you think the key drivers are for that and then secondly there has been some discussion about Sprint potentially rolling out you know, boost type products on the CDMA side. It is not something that you guys taking a benefit from.

James Hyde

Sure. Hi Mike. Jim Hyde here. Thanks for the questions. Sure. We have seen a sequential improvement in churn quarter-on-quarter, which is encouraging for us. That I think signals the start of a recovery. Additionally, particularly we in our Virginia East markets with the completion of our EVDO network upgrade, we are able now to provide a robust selection of smart phone options. Many customers as you know are switching to data capable devices nationally, and now we think we are in a very good position to offer our customers that are doing upgrade or coming up for contract renewal, a great selection of smart phone options and so we are beginning to see those take rates improve, you know, significantly on the back of that network upgrade.

So that's a big piece of it, not an option. You know, a customer retention delivers -- customer retention programs continue to ramp up. I'll also add that our new Web portal provides greater customer service capabilities, self-care options for our customers. That's something that our customers have been telling us for quite some time they would benefit from, and so with the launch of our Web portal, we think that that's going to continue to drive some churn out of the business. On Sprint, yes you know, we're excited about the announcement of Boost rolling over on CDMA networks. Obviously, we think that's an opportunity for them to, you know, drive some growth here in our wholesale footprint and with that relationship so far they haven't launched it on CDMA here, but we'll be ready for them when they do.

Michael McCormick - JPMorgan Chase & Co.

Hi Jim, I know you have been beating the FRAWG thing a bit, but just your thoughts on timing. You know, what was -- why did you guys decided this is the right time to try to come out with that?

James Hyde

That's a great question, you know. For us, what we saw happening is really a reset of prepay pricing nationally, you know, and you're seeing that, I mean we are seeing some price changes just in the last week from the metros and the (inaudible) and even the track phones out there. And in Virginia East particularly where we've got the most competition on the prepay front with Boost. Virgin you know, obviously is there, certainly Leap is talking about coming there but you know, they are a good year, 18 months away. We felt that it was, you know, a good time to go out there and respond to the reset that we've seen in prepaid nationally, but at the same time drive costs out of the business and as you can see we are continuing to drive you know, what our near best in class operating margins for a wireless company even when you compare to our larger competitors.

Michael McCormick - JPMorgan Chase & Co.

Great. Thanks guys.

James Hyde

Sure.

Operator

Thank you. Our next question comes from the line of Robert Dezego with SunTrust Investment Services. Please proceed with your question.

Robert Dezego - SunTrust Investment Services

Good morning guys. Good quarter. Just two quick questions on the expectations for the third-quarter for Sprint, given your expectations of how far below that $27 million, the actual billing would be without the minimum, and I guess ultimately you plan on breaking out in the future that way you have in the past?

James Quarforth

Yes, we will break that out as we have in the past. We would tell you that the billing for July was approximately $7.4 million. So similar to --

James Hyde

Before the true up.

James Quarforth

Yes, the actual billing would be $9 million.

James Hyde

Right.

James Quarforth

Similar to a couple of years ago when we established the $8 million minimum. You know, I think this provides Sprint an incentive to grow the business and as they do that and they will lower their cost structure. So, we will as Jim pointed out, I think in his comments we will continue to build a $9 million minimum for the balance of this year.

Robert Dezego - SunTrust Investment Services

And is your expectation that $7.4 million is that kind of low bar expectation for the year or can that continue to drip downward until you get more data growth from Sprint.

James Quarforth

I think the expectation is that data is going to continue to drive the wireless business. So our expectation would be that Sprint like all the other carriers are going to continue to see strong growth in both home data and travel data, which will drive that wholesale revenue component.

Robert Dezego - SunTrust Investment Services

Okay, so you think the volume growth will be great enough to offset the continuing declining rate that you're going to be getting from this -- from them?

James Quarforth

Well, it is not a continuing decline. We had to decline to a -- from a kind of artificial contract rate to 90% of their revenue yield. So we are getting 90% of the revenue yield. That does reset every quarter based on the revenue yield, but for example, the voice rates actually went up July 1st as a result of this, you know, floating mechanism on revenue yield. So we don't, you know, I think the key point here is that we have a very nice margin on those rates, both voice and data and that they will fluctuate up and down but clearly that fluctuation is tied to volume. So to the extent that you have higher volume you may have a little lower rate, but you have a little lower volume then you'll have a higher rate.

Robert Dezego - SunTrust Investment Services

Got it, and on the postpay ARPU, you know, including both voice and data, it had been growing it you know, over 4% for the last several quarters on a year-over-year basis. In this quarter it came in at around 2% and also most of the decline is on the voice side. It looks like the voice part of that ARPU declined, you know, at more than twice the rate of last quarter. Can you talk a little bit of what's happening on the voice side of your post paid plans and what's driving that ARPU down and kind of what your expectations are, you know, in the next few quarters?

James Hyde

Sure. You know, I think similar to what I think we've seen internationally in the space, we are seeing voice pricing you know, come off just a little bit. We're seeing increased take rates in our unlimited plans. The other thing that's driving you know, the total postpaid ARPU number is, you know the percentage, you know, that's coming in off of the data ARPU and you know, those smartcards coming at a lower access rate. Specific to voice, I would expect as we look to the second half of the year. There'll be a more of a leveling off than a decline, but a pickup on the data side.

Robert Dezego - SunTrust Investment Services

Okay, and then finally when you guys gave your guidance initially was FRAWG part of that guidance?

James Hyde

Yes.

Robert Dezego - SunTrust Investment Services

Okay, thank you very much.

Operator

(Operator instructions). Our next question comes from the line of David Dixon with FBR Capital Markets. Please proceed with your question.

David Dixon - FBR Capital Markets

Thank you. Good morning gentlemen. First of Mike, wondered if you could give us some more details on any potential benefits that you may get from the continued orders that is underway at Sprint estimated processing arrangement. I think you had highlighted that there were some opportunities, some callback there. An update there would be helpful, and perhaps just some update on your expectation for when we will track above the $9 million run rate on wholesale. Clearly the focus is back on the retail side of the business, which is fine, but I wanted to perhaps understand a better profile I think for the outlook there, particularly as we see some of the transition of Sprint data volumes going on the 4G Clearwire network. I'm wondering if they will be included in the formula for travel data going forward. Obviously, some very high volumes moving off the 3G network there, I wondered if that's incorporated into the formula, thanks very much.

Michael Moneymaker

This is Mike. I will start with I guess on the 2008. Again we, again as a reminder for some participants that are new on the call, we did announce back in the first quarter that we had a revision of 2008 results on a matter that we uncovered in our billing process back in the first quarter. We continue to have discussions with Sprint. They also are auditing and verifying their results in terms of you know, trying to misvalidate you know, their findings and compared against ours. That process is still ongoing. It's a very complex process as evidenced by how long it has taken for everyone to -- for them to go through and do a reverification on their end as well.

So that is ongoing as we said previously. We think the amount that we adjusted in 2008 represents the maximum amount and, you know, we remain you know, optimistic and look forward to settling this with them in the future. In terms of the 2009 or the July 1, 2009 reset, as Jim said, July, again it is one month the July came in at some point for compared to the $9 million minimum. David, quite honestly there are so many variables involved here. As someone earlier indicated, you know, is Sprint going to rule out Boost on CDMA.

How successful will they be? How much of a dramatic change will that be in traffic not only in home but in data? Hoping that travelers coming to the network. I guess we can only tell you as Jim indicated, you know, everyone tends to assume that it's a pricing resets or declines. In this case we saw on July 1 increase. It is in the voice range. Therefore, you know, there are a lot of variables involved. Again we are seeing good strong growth there.

We think, you know, they continue to perform well, and with the beneficiary of that in this wholesale footprint. You can look over the last several years, data clearly is explosive and continues to be explosive in the throughput, and now that we have reset that rate while there will be, as Jim indicated, quarterly resets, we don't believe in fact you know, they would not be of the magnitude as you've seen before, and if you do look at our quarterly growth in travel data over the last two years since they entering into the amended contract, you know, four fold increase in travel data revenues.

And along the way we went from $0.99 per megabyte down to $0.59 for the second quarter. So, substantial rate resets occurred during that period, yet the net travel data grew fourfold over that period. That reset occurred in July 1. We should not experience anything of that magnitude going forward in terms of reset. We think that the throughput should be a catalyst that will close that gap. How quick, how long? A lot of unknown variables at this point.

James Hyde

David, to your question on Clearwater, if you had a customer that moved over to a Clearwater product, clearly that's not covered on our agreement but I think the way the mechanism works is presumably our customers are going to be high bandwidth customer, high usage customer and so that comes out of the, in that example that comes out of the denominator and would have a propensity to actually increase rate. If something -- if you have large users move off and your rates stay the same, then our rate will effectively go up.

James Quarforth

I think the way to really think about the Sprint wholesale agreement as we look to the future is really kind of look at Sprint themselves and say, you know, as they, if you think that they are you know continuing to kind of move round the bend, and improve their own operating results with the introduction of things like the Palm Pre and Boost, you know, maybe getting some traction on CDMA and driving some volume there. Just, you know, overall kind of recovery on the Sprint side, I think that's obviously where they got the opportunity to close the gap against that minimum and then we have the opportunity to benefit you know, as we break through that minimum albeit with a very healthy $9 million monthly minimum, you know, through July 2015. So I think we are in pretty good shape.

David Dixon - FBR Capital Markets

That's very helpful and just to be clear there, as the Sprint customer and the data customer moves off is still the Sprint customer moves on to the Clearway network, the usage there comes out of that denominator?

James Hyde

That's right, because they're not on our network.

David Dixon - FBR Capital Markets

Terrific. All right, thanks very much.

Operator

Thank you ladies and gentlemen. Our next question comes from the line of Gregory Burns with Sidoti & Co. Please proceed with your question.

Gregory Burns – Sidoti & Co.

Hi guys.

Michael Moneymaker

Hi Greg.

Gregory Burns – Sidoti & Co.

In regards to the Rapid cable assets, I believe (inaudible) completed the upgrade of those assets in a few of your markets. Are you seeing increased competition there and do you offer the IPTV option in those networks -- in those areas?

James Hyde

Hi Greg. Thanks for the question. Yes, you know, we've seen a little bit of activity from Shentel [ph], you know, in those areas but in terms of you know, impact on our business, it is -- we really haven’t seen anything. It's been negligible you know, to point. On the IPTV, we don't offer that product in those markets currently, but again so far we haven't really seen much pressure from those guys with their cable offering.

Michael Moneymaker

As a reminder, Comcast introduced voice competition in the Waynesboro, Augusta County area in our ILEC, back in May of 2008, and as you've seen, you know, our wireline business in the first and second quarter posted the highest level of adjusted EBITDA results in the history. So, we performed very well and as we've said before while churn is up, the component of the churn driven by cable competition is a very small component of that churn.

Gregory Burns – Sidoti & Co.

Okay, thanks and one more. The mix of gross adds, prepay, postpay has kind of been trending towards the postpay side this quarter. Prepays were more prominent, I guess given the early success of the FRAWG initiative and what you're seeing there should -- going forward, what should we expect to see there more prepay additions or how should we think about it?

James Hyde

Yes, good question. Yes, I think the mix is very much so tied to the FRAWG launch in the second quarter obviously and, you know, as we look to the future, we certainly you know, plan for FRAWG that continue to be very successful in our Virginia East markets. Having said that with the completion of the EVDO network upgrade in the East, we also expect an improvement in our top line postpaid sales. So in terms of how that's going to kind of come out over the next couple of quarters, I think all signs point to north in terms of gross ads and in terms of the mix, it will be tied to really how much FRAWG we bring in. But we think that's an underserved segment there that we're now providing a great solution for. So we'll take as much of that business as we can get.

Gregory Burns – Sidoti & Co.

All right, sounds good. Thanks guys.

James Hyde

You bet.

Operator

Thank you. Our next question comes from the line of Phil Cusick with Macquarie. Please proceed with your question.

Phil Cusick - Macquarie

Hi guys. Can we shift back to the postpay business a little bit. Can you talk about the mix of data devices in the gross adds in terms of blackberries, laptop cards, things like that. Is that where the growth is coming in from the market, and then overall in your region, do you feel like the growth in the industry has really come down or you're losing share to the other competitors out there? Thanks.

James Hyde

Hi, thanks for the question Phil. In terms of the mix, you know, we are seeing -- in terms of smart phones right now, you know, the suite of blackberries is the lead dog by a large margin, but we are -- with the introduction of some of the HTC devices, the LG devices, we are beginning to see an increased take rate in those areas, you know, the touch screens are gaining in popularity. So you know and we are happy that we've got you know, we've got to see those devices in the line of this well, but right now Blackberry is still a lead dog.

In terms of losing share, we're not seeing them. Remember, our sales continue to -- our top line sales continue to you know, increase on a year-over-year basis. So, you know, we are pleased with that growth, and, you know, we see -- on a market by market basis you know, kind of fluctuates, you know, quarterly you know, for instance we saw a little bit of increase in West Virginia to AT&T when they introduced the 3G you know, iPhone there, but again that's, you know, those are nominal changes. They fluctuate a little bit quarter-to-quarter, but no real kind of wholesale share changes in the markets that we can see.

Phil Cusick - Macquarie

Great, thanks guys.

James Hyde

You bet.

Operator

Thank you. Our next question comes from the line of Alex Heidbreder with Millennium Management. Please proceed with your question.

Alex Heidbreder - Millennium Management

Hi, good morning guys.

Michael Moneymaker

Good morning.

Alex Heidbreder - Millennium Management

Can you remind us what happens to the wholesale agreement with Sprint if Spring were to change of control?

James Quarforth

Sure. Whether Sprint has a change of control or NTELOS has a change of control the acquiring party has to honor the agreement. So the agreement survives in either case.

Alex Heidbreder - Millennium Management

And, like what's the shortest amount of time if sometime decides to opt out. How they like the two-year, three-year lag.

James Quarforth

They are require to honor the agreement through July 2015, and if they want to overbuild, they can begin an overbuild a year and a half prior, but they cannot migrate traffic until July of 2015. We have always viewed this is for Sprint and probably any acquiring company as buy versus lease as opposed to a build versus lease.

Alex Heidbreder - Millennium Management

Excellent, and then last question I guess is on wireless net adds. I guess what's your process going forward this year to get (inaudible).

James Hyde

Right. Thanks for that Alex. Jim Hyde, I will take that one. In terms of the net add development, obviously we were slightly negative in Q2 as reported and that's really kind of a function of the seasonal drop from Q1 to Q2 that we see annually in gross adds. And we saw that drop from Q1 to Q2 as well. Yet, on the back of good solid subscriber, you know, growth in 2008, obviously when you're running sort of a consistent churn number you know, it's more DX off of a larger base against, you know, fewer gross adds, even though our gross adds were up 4% year-over-year, which we think you know, represented solid growth. Having said that we -- if you kind of look at where we are coming in, in the first half of the year with positive subscriber development, and while we don't give you net add guidance, we expect to be positive in the second half of the year as well as churn improves in our top line sales stay strong.

Alex Heidbreder - Millennium Management

And last question is I saw that you guys had built in flexibility in regards to the wireline operations in the new credit facility. Can you just about that a little bit and if there any intention of doing anything there?

James Quarforth

Sure, I guess we get that question pretty often relative to the May 2010 date where the company could separate the businesses, and the board are prone [ph] corporate tax. You know, clearly as we have stated before the board actively looks at various strategic alternatives available to the company, and so when we went through the refinancing, we wanted to be sure that all of the alternatives that the board has or will consider can be accommodated by that credit facility. So no actions or decisions has made by the board as to how any strategic direction by the company, but clearly we have the flexibility to what we would like to do, which we think is very helpful. As you see these industries mature and you see consolidation. It is important that the company has the flexibility and be able to maintain the credit facility in place through its term.

Alex Heidbreder - Millennium Management

No, actually sorry, one follow-up to that, what do you guys see as the regulatory environment in Virginia for the RLEC, do you see any threats on the horizon, and if you guys were to decide to do something with that in the future, is that subject to sort of regulatory risk since it is such a well-run RLEC right now?

James Quarforth

Well, rarely if you do something with a RLEC, it requires approval from the State Corporation Commission. We have seen other transactions within the state be approved by the State Corporation Commission, and we don't view that as anything that would be problematic at all. But certainly something that I hope that you to go through if you go down that path.

Alex Heidbreder - Millennium Management

But just in terms of the current regulatory environment for your guys?

James Quarforth

Yes, we're currently what is referred to lightly regulated under the Virginia statute, which is different than the larger companies like Verizon and (inaudible) and effectively what it means is that while we are still regulated, we have the ability to impact rates without going through the commission, provided that we don't have a large number of customers react in a negative manner. In fact in this last quarter, we actually had a rate increase in the ILEC that was put in place, and effectively, automatically approved. We had only one customer that complained. So a lot of flexibility. I think the smaller companies in the State of Virginia are viewed very positively by the State Corporation Commission, predominantly because of the very high-quality service levels and the fact that we are continuing to invest in our business and we are providing best in class services in our market areas.

For example, 97% of our customers have DSL capability at 6 meg speed, and as we have talked about, we are continuing to invest in fiber directly to the premise, and offering our customers very high-quality both data and video services. So the commission obviously has a very favorable view on the company.

Alex Heidbreder - Millennium Management

Good work guys. Thanks.

Operator

Thank you. Our next question comes from the line of Ric Prentiss with Raymond James. Please proceed with your question.

Ric Prentiss - Raymond James

Thanks. Two quick follow-up guys. First with the sprinter rate reset going back July 1, what are your thoughts as far as return on capital as far as putting in more cell sites as we look into the second half of this year and into the next year. Any updates as far as what you are kind of seeing as far as the volume on a per cell site basis?

James Quarforth

You know Ric on the cell sites, typically whether it is cell sites or any of the capital project and that we have in the company, wireless or wireline, it requires a minimum 20% IRR. Obviously you may have a couple of cell sites in the core network you would do from a quality standpoint, but -- so I think the expectation there is that we would be doing that same evaluation, but predominantly your capital and the return on capital is probably going to come more from the retail side and more from the reducing roaming expense.

At this point, Sprint continues to turn around and start growing all four of those billing elements and break into the 9 million minimum. Then certainly that component will build back into the calculation. I think Mike talked about earlier that we kind of front-end loaded our capital this year. Some of that started in EVDO build in Richmond, and so the capital spend for the balance of the year will be less and should fall in line with our guidance that we provided.

Michael Moneymaker

As a reminder, Ric back in the first quarter after assessing the impact of the revised rates and the billing correction, we did a forecast. We updated guidance, we did lower our CapEx, and part of that was reassessing indeed the return. We did take some cell sites out in that revised forecast, but still have a number of cell sites as Jim indicated that we think our retail and our in terms of roaming cost will benefit from the addition. So we still have probably in the zone of 50 to 60 cell sites in the plan for 2009, and that is just really to continue to improve upon the quality and the network, cut the roaming cost, and also address, you know, Sprint still paying us on a go forward basis here, that is 108 million a year. And as such they are very important customer, and we will work with them as we have in the past, and continue to work with them for areas where they have demands, and historically that acts very well with our own retail demand. But we definitely do recalculate the return on capital and done so for this year.

Ric Prentiss - Raymond James

(inaudible) think of 2010 versus 2009, CapEx, you would expect it to come down a little bit given that the Rev A project is done, given the Sprint return on invested capital kind of review that you did earlier this year. That kind of safe assumption to think just macro level?

James Quarforth

Yes, Ric, I think those were fairly good assumptions. I would also say that this year we had about $10 million CapEx project within our Web portal, and our prepaid billing platform that we won't have next year. So you know those were kind of one time expense.

Michael Moneymaker

Yes, I think within the wireline segment, I think it is important to note that we did have in 2009 the completion of two very important, very strategic fiber builds, long haul fiber routes that cut some of our internal cost as well as create new opportunities. We're pretty excited about the opportunities in the fiber build that we are going to Ashburn (inaudible). We probably have several new markets have already had demand, have already had services lined up in that new corridor in right out of the gate, and are having active dialog on other customers.

We got a great reputation in the sectors that we focus on, and frankly that reputation kind of feeds upon itself. It is a great resume of the service quality that we provide to hospitals, universities, governments, banking et cetera. And as a result of that we have been successful there. I think in terms of capital, 2009 is one where we want to build upon that success. It is pretty exciting that we kind of lead this, what I call the cornerstone. If you think about it, EVDO upgrades and the long haul fiber routes, those are cornerstones to build from. And we look forward to leveraging that embedded one-time cost that we incur to put those in place.

Ric Prentiss - Raymond James

One follow up also, U.S. Cellular today (inaudible) had some weak net adds, pointing to the economy, introductions of more prepaid competition, but also through a little shot as some of the larger guys saying the exclusivity contracts with handsets, particularly the iPhone and then (inaudible) noticed others. By just saying that they had felt an impact, they felt in the quarter, any thoughts from your side as far as what you are seeing from the regulatory front about exclusivities and what it might mean? Sorry, I give the cold [ph] for you guys?

James Hyde

Yes, sure. Hi Ric. On the US cellular, specifically I think there is a number of things that they are talking about and pointed to that are impacting their results, and some of which I don't think you know, I would paint NTELOS sort of with the same brush. We took a look of those results to and said, while we're not seeing that, but let us be smart about this and kind of look to the future. For instance, we kind of took a look at their pricing in some of their coal markets and to us it seems like they have been a little slow to respond in terms of some of the competitive pricing that they are seeing in their own markets.

We think we have done may be a -- we have taken a slightly different approach in our markets, and remain maybe a little bit more competitive, and I think that is probably impacting them a little bit. I don't want to necessarily speak for them, but it seems to me that that is evident. On the handset exclusivity, you know that is something that I would say NTELOS has been dealing with for ever, whether they're very explicit exclusive deals like the iPhone or the Blackberry Storm or even the Palm Pre or whether they were the big guys just gobbling up all the capacity of the handset manufacturers on a great new device.

Any relaxation from a regulatory perspective on these exclusive deals, certainly we think we will be able to profit from, but up to this point hadn't really impacted our sales. In Q1, we had a record sales quarter in terms of new gross adds, in Q2 we are up 4% versus last year. So while those deals, certainly we are not real happy with them. We have had to compete with those deals with that type of environment forever, and I think we are in pretty good shape in terms of our handset line up right now.

Ric Prentiss - Raymond James

Great. Thanks guys.

James Hyde

You bet.

Operator

Thank you. Ladies and gentlemen, we have no further questions. At this time, I would like the floor back to Mr. Wes Wampler.

Wesley Wampler

Thank you. As a reminder, a replay of this call and an archive of the audio web cast will be available. Please refer to our investor relations website for details. Please also feel free to contact us anytime with questions. The media should contact Mike Minnis at 540-946-7290. Investors please contact me at 540-949-3447. Thank you again for joining us this morning and this concludes our call.

Operator

Once again ladies and gentlemen this concludes today’s teleconference and you may disconnect your lines at this time. Thank you for your participation.

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Source: NTELOS Holdings Corp. Q2 2009 Earnings Call Transcript
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