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Centennial Communications (CYCL) F1Q08 Earnings Call October 4, 2007 8:30 AM ET

Executives

Steve Kunszabo - IR

Michael Small - CEO

Tom Fitzpatrick - CFO

Phil Mayberry – President, U.S. Wireless

Tony L. Wolk - General Counsel

Analysts

Pat Dyson - Credit Suisse

Ric Prentiss - Raymond James

James Breen - Thomas Weisel

David Sharret - Lehman Brothers

Ana Goshko - Banc of America

Christopher Taylor - Evergreen Investments

Presentation

Operator

Good day, everyone and welcome to the Centennial Communications first quarter 2008 earnings conference call. Today's call is being recorded. At this time, I will turn the call over to the Director of Investor Relations, Mr. Steve Kunszabo. Please go ahead sir.

Steve Kunszabo

Good morning and thanks for joining us. I would like to welcome you to our fiscal first quarter 2008 earnings call. Joining me on the call this morning are CEO Michael Small; CFO Tom Fitzpatrick; and our President of U.S. Wireless Operations, Phil Mayberry.

Today's call will begin with a discussion of the 2008 first quarter results, followed by Q&A.

Before I turn things over to Michael, I would like to caution all participants that our call this morning may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which reflect management's beliefs and expectations, are subject to risks that may cause actual results to differ materially. Centennial undertakes no obligation to update or revise these forward-looking statements to reflect events, developments or circumstances after the date hereof.

For a discussion of the risks that may affect Centennial's future results, please see our 2007 Form 10-K, including the risk factors section contained therein, and Centennial's other filings with the SEC. For your information, please also note that Centennial expects to file its 10-Q later today.

During the call, we will also be referring to certain non-GAAP financial measures. Please refer to the Investor Relations section of our website for a discussion of these non-GAAP financial measures and a reconciliation to comparable GAAP measures.

With that, let me turn things over to Michael.

Michael Small

Thanks, Steve. Good morning, everyone. Thank you for joining us. This morning, Centennial announced solid first quarter results that showed we are on the right track in building our leading regional wireless and broadband franchises. We continue to give more value to our customers and are being rewarded for it. Our consolidated ARPU grew to a record $69. We are serving over 1.1 million high-value wireless customers, and they are sticking with us. We have kept our churn low and stable.

We are investing more than we ever have in training our front line associates at Centennial University, and have developed a reputation and brand that is well-regarded where we do business.

When we chose to compete with a local strategy many years ago, we weren’t entirely sure where it would take us; but we were sure that we operated in five and six player markets and couldn’t pursue a global scale strategy; we had to get better fast. Our strategy had to be about having the best network in our local markets, the strongest retail distribution presence through company-operated stores, and the best trained sales and customer care associates. Sponsoring events in our local communities is also important; it is where we live and work. We are proof that a local strategy can compete alongside a scale strategy and be successful.

In the U.S., we began fiscal 2008 much like we ended fiscal 2007; delivering one of the strongest quarters in our company’s history. We again produced quarterly adjusted operating income above $50 million, while posting total ARPU of $71. When you really break it down, the success of our retail business is best explained this way: we are adding high quality customers at a consistent pace by giving them more value for their money.

Why do our customers choose us? That is a straightforward answer too. We believe we have the best network where our customers live and most often use their phone. Our retail distribution is more than 90% company-operated and staffed by front line associates that are rigorously educated to follow a sales process that we have evaluated, tested, and based on customer feedback is proven to work.

Key initiatives we’ve launched, including extended hours for our retail locations and our new, “When You Want It” handset program, continue to be valuable differentiators for our subscribers. Our Blue Nation offering, which we introduced a few months ago as a natural evolution for our popular Blue Region plans, also continued to make steady progress. Also, we have just begun to offer Blackberry service throughout our footprint, a move that surely helped attract high value wireless customers and support a robust ARPU.

With strength in our core markets, good momentum in our under-penetrated Michigan footprint, a definitive agreement for new markets in Ohio and a strong local team, we continue to expect great things from our U.S. wireless business.

Moving now to our Puerto Rico operation, where our outlook continues to anticipate renewed revenue and AOI growth in the coming quarters. We continue to re-establish our leadership with high value wireless customers on the island, benefiting from a 25% increase in the ARPU of our new subscribers since we’ve launched our unlimited plan. The unlimited plan has helped protect our core subscriber segment, but we can’t stop here because the competitive environment in Puerto Rico is tough. Four out of our five competitors have since launched an unlimited plan, and our costs to add a customer has risen as many players are heavily subsidizing handsets to attract and retain customers.

Our aim, like in the U.S. wireless, is to give our customers more value for the dollars they spend with us. How do we keep our edge? We continue to expand our leading wireless and fiber network infrastructure. Our EVDO coverage reaches more than 85% of the island’s population, and we are deploying Rev-A to sustain our bandwidth leadership. With the acquisition of Islanet now closed, we have picked up a 2.5 gigahertz spectrum in Puerto Rico and will continue to evaluate an expanded deployment of wiMAX as the technology evolves. We stand ready as our customers move from the megabyte to the gigabyte world.

Bandwidth leadership is quickly becoming a decisive factor in Puerto Rico, and we are well-positioned to take advantage of this opportunity. As an example, we introduced new feature packages to stimulate data usage and continue to enjoy a meaningful contribution from our residential EVDO service called Instant Internet. Our sales of this popular, high speed wireless service remain brisk in this historically under-served broadband market, and we have an important opportunity to give our customers more value by bundling it with traditional wireless products.

We are getting the job done in key areas in our Puerto Rico wireless business. Our subscriber growth has been consistent for three quarters, our churn has improved and is on solid footing in the mid 2’s, and our ARPU is firm due to a strong improvement in the quality of our customer base. We are signing up more individual plans and fewer companions, and our companions are paying us nearly twice what they did one year ago.

We are on the right track, we are going after high ARPU customers by offering a superior network and customer care experience, and we continue to anticipate renewed cash flow growth in this segment during fiscal 2008.

Turning now to Puerto Rico broadband, where we have recently taken a number of steps to widen our target market beyond the large commercial and telecommunications carriers we have traditionally served. As we consider our overall approach to the Puerto Rico broadband market, we see a few key paths to support ongoing success.

(1) Continue to grow, share with the enterprise customers, often Fortune 500, by delivering an increasingly IP-centric portfolio of connectivity and networking solutions.

(2) Support telecommunications carriers as wireless data adoption increases their backhaul requirements and need for bandwidth.

(3) Expand our addressable market to serve small and medium-sized business, our Islanet acquisition, along with the versatility of our IP-based soft switch, are critical first steps in reaching these customers in a more efficient and profitable way.

(4) A growing opportunity to serve the government market now that the local incumbent is no longer government-owed.

(5) The residential market has largely been untapped by Centennial in Puerto Rico. Our cable partnerships are good first steps that allow us to compete in this $500 million segment and win share from the wireline incumbent.

We're now attacking Puerto Rico's telecom market from all sides-- large enterprise, small and medium business, and residential -- and see this comprehensive plan as a key to our future growth. Our strong track record in an industry dominated by scale players gives us confidence that our local market strategy continues to work. Although there are fewer regional wireless carriers as a result of rapid consolidation in our industry, we believe we're well-positioned to sustain our competitive advantage and grow organically by connecting with our local markets.

We look forward to updating you on our progress as we move through fiscal 2008. With that, I'll turn it over to Tom for a more detailed financial review.

Tom Fitzpatrick

Thanks, Michael and good morning, everyone. As Michael touched on, Centennial delivered results that were characterized by record operating performance in our U.S. wireless business and sustained progress on key metrics in our Puerto Rico wireless segment despite a difficult operating environment due to both the highly competitive market landscape and the soft economy.

We continue to win by having the best-performing networks in our operating territory; the most direct and accessible retail distribution, and a strong brand that is rooted in serving our local markets better than anyone else. This is the winning formula that we believe will support our organic growth and create shareholder returns through balanced deleveraging.

Centennial reported quarterly consolidated revenue of $248 million and adjusted operating income of $100 million, representing growth of 10% and 9% respectively from the year-ago period. Our consolidated adjusted operating income margin was 40% for the first quarter. First quarter income from continuing operations was $6.3 million or $0.06 per diluted share. This compares to a loss from continuing operations of $0.3 million or zero per diluted share for last year’s first quarter.

On an operating segment basis, U.S. wireless posted first quarter revenue of $137.6 million and adjusted operating income of $53.1 million, yielding an adjusted operating income margin of 39%.

The important steps we've taken to transform this business are really paying off, and we believe we're one of the best growth stories in this rapidly evolving industry. It's worth emphasizing that we've achieved record results despite a consistent decline in high margin roaming revenue. We have visibility to sustain customer growth, robust ARPU, and strong retail revenue and AOI growth in this segment.

We recorded roaming revenue of $18 million during the period, a 7% year-over-year decrease as roaming minutes fell 5% from the year-ago period. We continue to forecast a long-term decline in roaming revenue.

U.S. wireless retail ARPU and minutes of use both set new records during the first quarter as retail ARPU grew 11% year over year to $62, while minutes of use rose 21% to approximately 1,040 minutes reaching over 1,000 minutes for the first time.

Moving now to our Puerto Rico operation, during the fiscal first quarter, Puerto Rico wireless reported revenue of $81.3 million, up 5% from the year-ago quarter and posted adjusted operating income of $28.7 million, representing an adjusted operating income margin of 35%. While our first quarter AOI was down from last year, we continue to expect that our full year Puerto Rico wireless results will show growth from fiscal 2007.

Postpaid ARPU pushed up to $67 during the quarter, a sequential increase despite ongoing pressure on equipment revenue due to aggressive handset promotions that have become commonplace in the current competitive environment.

As Michael noted, perhaps the most significant benefit we've observed since launching our unlimited plan is the dramatic improvement in our customer profile. We're making more sales to our highest credit class and six out of ten gross additions are now individual plans. Five out of ten sales were individual plans before the unlimited launch. Our companion plans have twice the monthly recurring charge they had one year ago, with the unlimited companion remaining the most popular choice for our customers. It's worth sharing that most of our competitors do not offer companions with their unlimited offerings.

Data revenue again grew at a solid pace and remains a meaningful contributor to overall ARPU, reaching $6.15 or nearly 10% of total ARPU in the first quarter. A much-improved customer profile and healthy data revenue will help sustain our robust ARPU as we move through fiscal 2008.

Focusing next on Puerto Rico broadband, which generated revenue of $32 million, a 6% year-over-year increase and recorded adjusted operating income of $18.2 million representing an adjusted operating income margin of 57%. Switch and dedicated revenue also rose 6% during the quarter, supported by strong growth in total access lines and equivalents, partially offset by an ongoing decrease in average revenue per line. Our collaboration with the cable industry is beginning to show real progress, adding notably to our growth in access line equivalent and revenue during the first quarter.

Finally, a brief update on our capital structure and liquidity position. We closed the fourth quarter with net debt of $1.94 billion and have reduced net leverage by over one half turn since our dividend recapitalization, to 5.2 times. We also announced the final redemption of our 20 million outstanding 10.75% senior subordinated notes. This is an important milestone in our deleveraging progress as it allows us to look elsewhere in our capital structure to prepay debt and garner interest expense savings. We had $261.7 million of total liquidity at the end of the first quarter, consisting of $111.7 million in cash and $150 million available under the revolving credit facility.

With that, I'll turn things back to Steve for the Q&A portion of this morning’s call.

Steve Kunszabo

Thanks, Tom. Operator, would you please provide instructions for logging a question?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Pat Dyson - Credit Suisse.

Pat Dyson - Credit Suisse

With all of the consolidation that is going on in the sectors, and you guys have specifically seen some consolidation recently with SunCom and T-Mobile. Can you give us your sense as to how that particular transaction and what it will do to the Puerto Rico market will benefit you, or potentially if there could be a negative out of that as far as how T-Mobile can approach the market? Can you give us your sense there?

Michael Small

It is premature to predict exactly what T-Mobile will do, but in general, we make our living by being the local player against national players, and so the more national and consistent our competitors are, generally the better it is for us. National players are less likely to respond locally to what we do. Time will tell, but our initial reaction is, given our local market strategy, we would rather compete against the big guys.

Pat Dyson - Credit Suisse

Along that same line of questioning, could you provide any update as far as what you are seeing from American Mobile right now as far as their entrance into the market?

Michael Small

A few comments. One is, they have done nothing crazy as a new entrant and they spent a lot to advertise that they are the new guys on the block, and I think they have been steadily investing in their networks. I believe they are deploying with JSM. When that is ready, they may do something even more aggressive in the marketplace.

They have boosted the DSL offering, the fixed line side, so there is more speed and some price reduction, but mostly more speed for the dollar.

Pat Dyson - Credit Suisse

On roaming, roaming in the U.S. came in better than our expectation. How did the number come in versus your expectation? I know you commented that you expect roaming to decline over the long term. Is your guidance still in place for the $15 million to $20 million declines you are expecting for fiscal ’08?

Tom Fitzpatrick

Yes, that’s still our guidance. It was slightly stronger in the current quarter due to the data revenue which had been scribing, but we are standing by our guidance.

Pat Dyson - Credit Suisse

Okay, and I guess just final question and I’ll let someone else get on, along the lines of my first question; in all the consolidation that is going on, where does that position Centennial right now as you look the company, Michael, and thinking about your strategic options or maybe even from an operational perspective? What does that do? What changes does that provide for the company and how you think about it?

Michael Small

Well, as we indicated throughout the prepared script, we think our local market strategy’s resonating. There’s a large customer segment that likes the service and the treatment we provide our customers and so I don’t see that changing anytime soon. As we’ve always said, we’ll do what’s best for our shareholders and if we can, we’ll find the highest value for the shareholders, so we’re certainly open. But that statement has no bearing on our ability to compete. We are out there and we are winning in the marketplace every day.

Pat Dyson - Credit Suisse

Okay, great. Thank you.

Operator

We’ll go to Ric Prentiss of Raymond James.

Ric Prentiss - Raymond James

Good morning, guys. I wanted to touch first on the U.S. business. Can you talk to us a little bit about you mentioned the Blue Nation offer that you’ve had for several months. I think it was maybe there for almost the entire quarter and the Blue Region plan. Can you talk to us a little bit about what kind of gross adds share you saw for those fairly new plans that were introducing?

And then on the U.S. side, the data was a pretty impressive increase. You mentioned that you just started offering BlackBerries. Was that within the quarter just reported or in this quarter that just started?

Michael Small

I’ll turn these questions over to Phil Mayberry here, so take them away.

Phil Mayberry

Blue Nation was the only offer during the quarter, except for companion plans that we sold to existing Blue Regions, so basically every activation minus about 7% or 8% was on Blue Nation. BlackBerry rolled out about 10 days ago.

Ric Prentiss - Raymond James

Okay. If you look at your -- I’m traveling today so I don’t have my third quarter or my fiscal year-end number here, but wasn’t it like 3.40, 3.50 that you did in data ARPU last quarter and then this quarter just reported was 4.28?

Phil Mayberry

Quarter over quarter was 3.52 growing to 4.28, up 22%, and year over year, it’s up 78% from 2.40 to 4.28. We’ve still got some upside on it so it’s a real positive thing that we’ve grown it as much as we have and we’ve got -- still have some legs on it to help us with the overall ARPU.

Ric Prentiss - Raymond James

Yes, pretty exciting upside there. If you look at the $0.75 a quarter change, do you think that pace continues? Should we think $0.50 a quarter? Heading towards $6 seems to be a no-brainer over the next several quarters.

Michael Small

All right, Phil, we don’t go there. I think I’ll get Ric in our next budget session with our targets.

Ric Prentiss - Raymond James

All right, well, let me ask another question then. You guys mentioned the Highland Spectrum. I think that’s due, or the definitive agreement was announced back in mid-September, but time to close, you think maybe year-end. It’s kind of on the FCC, we’ve got a lot of deals in the pipeline for the FCC to look at. How do you think yours stacks in there and what makes you think you can get it done by year-end, calendar year-end?

Michael Small

Well, we’ll let our General Counsel comment on this.

Tony L. Wolk

I think that should close probably in the next 30 days, we would expect.

Ric Prentiss - Raymond James

And is it just spectrum, there’s no customers?

Tony L. Wolk

That’s correct.

Ric Prentiss - Raymond James

Okay, and is that why you think it closes pretty quick because that would be just a -- maybe like a 45, 60 day kind of closing, right?

Tony L. Wolk

That’s right, Ric. There’s no overlap.

Ric Prentiss - Raymond James

Great. Well, good luck, guys.

Michael Small

Yes, that acquisition of spectrum we think is pretty valuable to us because it is immediately adjacent to Fort Wayne and Lime, Ohio has clear community of interest with Fort Wayne and it’s one of our leading complaint areas that we don’t have coverage going that way into Ohio. In fact, no one has GSM coverage along some of those roads in that territory so it will be the first GSM coverage in some locations.

Ric Prentiss - Raymond James

Great, thanks, Michael.

Operator

We’ll go next to James Breen of Thomas Weisel Partners.

James Breen - Thomas Weisel

Great, thanks, guys. Just a couple of questions; one, on the competitive front in Puerto Rico, actually talked about other companies offering some handset subsidies. What are you seeing from a pricing standpoint in terms of some of the other plans that they are offering? Are they still sort of on par as they were last quarter when AMX launched there?

And then secondly, with respect to the capital structure, Tom, you paid off the $20 million this quarter. What can you do near-term or what other issues are out there near-term that you can pay off as we look over the next three or four quarters? Thanks.

Michael Small

First, on Puerto Rico and the competitive environment on wireless, the initial response was phones. Several months ago when we first launched U-plans, so bigger discounts on phones and we saw costs to acquire increase as a result, and we weren’t unhappy with that because, as we said in our script, the ARPU was up 25% for the new customers, so we are paying a little more to get a more valuable customer.

The second initiative, or competitive response, which are people that begin to match our unlimited, although we believe and we think that the marketplace believes no one matched fully our unlimited. It was kind of put a -- you know, they tried to stop some of the bleeding by saying they had it too but didn’t have all the features or benefits of ours, principally the unlimited companion. But we also had better rates for roaming and LD to the U.S. than the other unlimited plans.

Now, I think we are starting to see a little more of the marketplace starting, our competitors swing more towards the low-end and away from the unlimited offering, and I think that will be a trend in the marketplace. It seems like we are defending share, taking share among the high credit, heavy users of service on the island and I think most of the competitors, particularly if you analyze their traditional style of the marketplace, are focusing more low-end and that’s where most industry observers believe most of the growth is going to be going forward in Puerto Rico, so we’ve pretty well chosen to send the high-ends and we think there is going to be a steady shift of many of the competitors more towards the low-ends.

Tom Fitzpatrick

Jim, as where we would go next with the pay down, we can always take out bank. We note that the hold-co floaters are callable at 103, January 1st. So the way we look at this is we are going to go for the -- we’ll take out the instrument that has the highest net present value to us from taking it out and one we’re sure we get a payback on, kind of what we view as the relevant timeframe.

Operator

We’ll go next to David Sharret of Lehman Brothers.

David Sharret - Lehman Brothers

Good morning, guys. Can I just ask on churn, in the U.S., churn picked up a little bit. Just wondering if that’s just seasonal, up about 40 basis points, and if you could just remind us, should that then just come down in the next couple of quarters? Is there anything else you are seeing there?

And then in Puerto Rico as well, I know you are sort of comfortable on this, in this churn range. Do you think there is any chance for it to decline further, given where you are on unlimited? And just, if you could remind us, I don’t know if you’ve said what percentage of your subs are on unlimited as of today or at the end of the quarter.

Michael Small

We didn’t disclose a figure for unlimited percent but it continues to build. We said 50% and the migrations have slowed down but the net adds are all exclusively unlimited and there still is a steady pace on the migrations.

Churn in the U.S. -- well, first let me do Puerto Rico. We are sticking with the mid twos and that it’s going to stay in that range and are not forecasting anything differently, in light of the competitive response to the plan and due to the tough economy in Puerto Rico at the moment.

We think it was a good thing that we got over half our customer base on to the U-plan and churn would have been worse due to the general conditions in Puerto Rico, if we hadn’t done that.

In the U.S., the number one issue is seasonality and if you look year over year, we went from 1.9 to 2.0, so it is pretty much the same, but Phil, if you want to make a few additional comments on what you are seeing in the churn area.

Phil Mayberry

Sure, Michael. Most of it was seasonalization as you go into the back to school. You see people making choices on what they are going to spend their money on. There’s no single magic answer on it. A little bit of it was because we tightened up our collection efforts due to the macroeconomics. A little of it is to TDMA customer churn. We’ve still got 6%, 7% of the base out there has got TDMA and we’ve been looking at the profitability on the TDMA customers and choosing whether or not we want to lose them on almost an individual basis rather than invest in giving them a new GSM phone. A little of it was our testing on some more credit challenged that have high MPV and a little bit of it was due to the process that we have in place to control the number of customers that are converting from the Blue Region to the Blue Nation. The customers expect to be able to change to Blue Nation with the same rate plan and we’ve not been allowing that. You have to go to a higher priced plan and there are some small fees for converting and we’re using that to control how many people convert. So some of the regional coverage people have decided to leave rather than pay the higher price.

We are taking each of those single little things that all contribute to the change in the churn rate and we are working them based on keeping an eye on revenue and profitability. Sometimes churn is something that you look at and say I can’t make any money giving a TDMA customer a new phone so I choose to let them leave. So we are working all of those. We’re tweaking all of them.

David Sharret - Lehman Brothers

If I could just follow up on Puerto Rico; you mentioned in the release in terms of I think it was higher acquisition costs and retention efforts. Is that impacting EBITDA there and is that tied still to the unlimited plan offering or is that just increased competition? I’m just trying to figure out if that’s something that you will see some step back, and some of that spending you said also you’ve seen just slower migrations that can maybe help EBITDA in the next few quarters, or is that just competition and this is -- we’re going to see this for the next few quarters and potential medium term?

Michael Small

The slowdown of migrations helps us financially because -- well, certainly in the early days, some of the migrations were driven by people who had big overage charges migrating, so on balance we won that but at the beginning, the people with the most overage migrated. And then there is also just a lot of activity around the migrations. So that going away -- well, not going away but diminishing is a benefit to AOI.

The tougher competitive environment basically the people come into the market that re-energize competitors and they’ve had some time to at last partially match our unlimited plan and the fact that the economy is still pretty tough in Puerto Rico, that is going to persist for a while.

David Sharret - Lehman Brothers

Right. Okay, thanks.

Operator

We’ll go next to Ana Goshko at Banc of America.

Ana Goshko - Banc of America

Thank you. First, I know you’ve had a couple of questions on the competitive environment but I wanted to ask specifically about Open Mobile, which I believe launched in the early part of the summer and I believe it’s like a leap or metro-like all unlimited model. And they do have a couple of plans with the price points below your $49.99 plan, so wondering, you know, like in the U.S., is that very low-end targeted, are they subsidizing phones? Is there a heavy advertising blitz and are you feeling any impact from them yet?

Michael Small

The offer you described correctly. It’s very similar to the U.S. leap, metro offers. The main difference is they are depending on the plan but their $35 to $40-some dollars, but there’s no subsidy on the phone so we include the phone for $49.99. It is I think primarily they are going after a different segment. We are the very top-end. We are the Ritz Carlton or whatever, the Mercedes of the market. If you can afford Centennial, you want it. You know, the heavy user, so we’ve been seeing the credit profile of our customers improving since we launched u-plan. When we look at our net adds, they are almost exclusively coming out of the top credit class so that’s been a real positive change.

I think Open Mobile is gaining subs way more than it was when it was MobiStar. They have a much better network and they have a much clearer offering to the marketplace but it’s at the other end of the spectrum.

Now, is there some overlap and when we examine our porting ratios, do we see they are doing better than they used to be? Yeah, but are they anywhere near our most relevant competitor at this stage? No.

Ana Goshko - Banc of America

Okay, thanks and then in Puerto Rico on the wireless side on the ARPU side, I’m wondering if you can give us some sense or some anecdotal information on the $49.99 and the $30 price points, which -- the $30 being the companion plan. What are your actual incremental new ARPUs once you take into account the phone care and the data plan? So on average, if you have a companion plan for the $30 plan, what really is the effective ARPU that you are seeing on that gross add?

Michael Small

Every time we add a new customer, it’s accretive to ARPU by a little bit. The gross additions are exceeding the install base at the moment. We sell nearly 90% of all customers, each of the feature package that includes some data, as well as the traditional custom-calling features, and the phone care package, which is at a minimum insurance and may include an upgrade program. That’s virtually all customers are taking that. It’s why we get there, and then you throw in a little roaming, a little long distance, a little USF and then some of the regulatory charges, gets us to the overall answer.

Ana Goshko - Banc of America

Okay, that’s helpful. Thank you very much.

Operator

(Operator Instructions) We’ll go to Christopher Taylor of Evergreen Investments.

Christopher Taylor - Evergreen Investments

Thanks. Good execution but I’m trying to understand the underlying logic of the company. You are in Michigan, New Orleans, Puerto Rico, GSM, TDMA, wireless, broadband -- what’s your underlying theme here? What is the long-term logic of the company?

Michael Small

Good question. The geography is, to some degree, historical accident. We got the licenses where we get the licenses along the way. Over time, we’ve improved those geographies so they are all decent clusters but the underlying logic is we pay attention to those local markets and we do whatever it takes to be successful in the local market. We do not try to pursue a scale strategy. That becomes most relevant to the customer, in that we own our own stores in those areas. We don’t choose very many dealers at all and then we put a huge amount of training into our front-line associates.

So if you are in a little town somewhere, you can walk into our nice new store, nicely refurbished store, well-staffed with people who’ve had hundreds of hours of training, or you can go next store to someone who threw the dealer sign up for one of the national carriers and have someone who gets an e-mail every now and then on what they should be selling. That’s a real difference to a customer in a small town.

But we also make strategic decisions to the local marketplace and Puerto Rico, it made sense to run fiber. In the U.S., it doesn’t. In the U.S., it made sense to be GSM because that was the right roaming relationships. In Puerto Rico, the population density and the huge capacity requirements, it made sense to go CDMA. And we find if you really do the right things to the local markets, customers will pay you for it and you now see us having industry-leading ARPUs across the board as a result.

Christopher Taylor - Evergreen Investments

You cannot argue with execution and obviously you are doing a good job there, but I guess my concern is with this acquisition musical chairs going on, that the music stops pretty soon and you are too confusing to be of interest to anyone. Is that a reasonable concern?

Michael Small

We have always owned both businesses, the U.S. and Puerto Rico which is complicated as a strategy alternative, there is no doubt about that and it is probably the reason we own Centennial, that Blackstone was able to buy it nine years ago. Strategists generally want one piece or the other, and less likely both.

We think as we have discussed on several calls, we think our alternatives, the friction to pursuing alternatives declines as our capital structure becomes more callable at a lower cost. We’ve often cited June of next year as when the $500 million 10.125% become callable.

But having said that, the decisive issue to date has been the reason we haven’t participated in the consolidation, we believed in our future and we’ve been able to grow the business at a faster rate than so far anybody has been willing to pay us to own it. As soon as that calculus changes, we will figure out what we have to do for an exit strategy. But right now, we are creating value for shareholders by running the business.

Christopher Taylor - Evergreen Investments

You are. A quick question as far as the two new board members. Does that signal anything, especially the Hawaii Telecom member?

Michael Small

We believe we selected the two directors because they are well qualified and will be able to contribute, but what it signals is that well, Blackstone exited and the Blackstone board member resigned at the same board meeting, and we have been watching Wells Carsen distribute shares now and know that at some point we may have additional directors leaving and we didn’t want to be behind the curve. So instead of just adding one for one we decided to go a little in front of this issue to maintain continuity of the board.

Operator

Your next question comes from Ric Prentiss - Raymond James.

Ric Prentiss - Raymond James

On your CapEx, I just want to confirm, you are still looking at approximately $140 million for the fiscal year for both CapEx and spectrum? And if so, update us on what your thoughts are on the 700 megahertz auctions and also how much CapEx you might put to work to build up adjacent markets to Fort Wayne?

Tom Fitzpatrick

$140 million is our guidance, and that includes any spectrum that we need, including the 700 megahertz auction.

Michael Small

Highlands CapEx will all be within guidance for this year. We will not do an extensive build there, but we will do enough to at least solve the customer complaint issues about not having GSM coverage leading out of Fort Wayne into Ohio.

Ric Prentiss - Raymond James

How much CapEx do you think you will spend on that edge strategy there?

Michael Small

It is within the guidance, but it won’t be a big number, it will be a few million dollars.

Operator

At this time, I will turn the conference to Mr. Kunszabo for any additional remarks.

Steve Kunszabo

Thanks for your participation. Beginning later this morning, you can access a replay of the call on Centennial’s website or by dialing 888-203-1112. Thanks and have a great day.

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Source: Centennial Communications F1Q08 (Qtr End 8/31/07) Earnings Call Transcript
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