iPCS Q3 2007 Earnings Call Transcript

iPCS, Inc. (IPCS)

Q3 2007 Earnings Call

November 7, 2007 5:00 pm ET

Executives

Peter Schmidt - IR

Tim Yager - President and CEO

Steb Chandor - EVP and CFO

Analysts

Ana Goshko - Banc of America

Rich Prentiss - Raymond James

Todd Rethemeier - Soleil Securities

Presentation

Operator

Good afternoon. My name is Holly and I'll be your conference operator today. At this time, I would like to welcome everyone to the iPCS Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

Thank you. It is now my pleasure to turn the floor over to your host, Mr. Peter Schmidt of FD, the company's Investor Relations firm. Sir, you may begin.

Peter Schmidt

Thank you, Holly, and good afternoon, everyone. Thanks for joining to us to discuss iPCS' results for the quarter ended September 30, 2007, which were announced in our press release issued this afternoon. If you do not receive a copy of iPCS' press release, one can be found on the company's website at www.ipcswirelessinc.com.

Please note that a replay of this call will be made available later today. The details are set forth in the press release.

Before I turn the call over to Tim Yager, the President and CEO, I have a few housekeeping matters to go over.

Let me remind everyone that management's discussion this afternoon will likely contain forward-looking statements, which statements often include words like believes, expects, plans, anticipates, intends, projects, estimates, may, might, would, or similar words. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are made based on management's current expectations or beliefs as well as assumptions made by the information currently available to management.

A variety of factors could cause actual results to differ materially from those anticipated in iPCS' forward-looking statements. For detailed discussion of these factors and other cautionary statements that could cause actual results to differ from those described in management's discussion, please refer to iPCS' filings with the SEC, particularly the Risk Factor section of iPCS' Annual Report on Form 10-K and such sections has been updated in subsequent filings with the SEC.

Investors and analysts should not place undue reliance on forward-looking statements. In addition, management will discuss certain non-GAAP financial measures. Please refer to the iPCS press release for a reconciliation of these non-GAAP financial measures, the figures derived using GAAP.

Now, I would like to turn the call over to Tim Yager, President and CEO of iPCS. Tim?

Tim Yager

Thank you, Peter. I would like to welcome everyone to our earnings call this afternoon and thank you for taking the time to join us. I am joined on the call today by Steb Chandor, our Executive Vice President and Chief Financial Officer.

As we mentioned in our last call, Conrad Hunter joined the iPCS team in August as our Executive Vice President and Chief Operating Officer. We are pleased to have him on our senior management team and his contributions have already begun to have a positive impact on our business. Conrad will be joining us on our year-end call early next year to enhance our operational discussion going forward.

I am pleased to report that despite higher churn, iPCS reported its best ever financial results. During the third quarter, we achieved record revenue and adjusted EBITDA reflecting increasing operating margins and seasonal improvements in our roaming margin. Our execution of key corporate strategies which focus on driving subscriber adds to improve distribution and our strong network allowed us to post continued positive results.

Conrad has extensively reviewed our operations and I am happy to report that we've already begun implementing several new initiatives focused on the customer experience that will continue to drive the business forward. Some of the initiatives already implemented are sales leadership development within our stores, establishing a long-term marketing and network plan and most importantly pursuing profitable growth.

Turning back to results, total revenues for the quarter were $142 million, compared with a $127 million in the year-ago period. Our adjusted EBITDA of $28 million reflected a 27% year-over-year growth and improvement in margins from 15% in the prior quarter to 21%. Our net loss for the quarter stood at $2.4 million, or $0.14 per share, compared to a net loss of $6.7 million, or $0.40 per share in the prior year quarter.

iPCS had approximately 68,400 gross adds during the quarter compared to 61,200 for the prior year quarter. However, we were negatively impacted by increasing churn during the quarter. While gross adds for the quarter represented a 12% increase over the previous year, our churn of 2.8% resulted in net adds of 10,100, which was down from the 16,800 from last year.

Although, I am pleased with our positive financial results, the increase in churn is certainly an item we have been focusing on, and we are actively managing the situation and ensure that it is a near-term issue, and not a long-term trend. We believe that the increase in churns from the prior quarter is due primarily through involuntary churn, consistent with seasonal trends and a weakening economic environment, particularly, as it relates to subprime subscribers.

Additionally, we experienced a slight increase in voluntary churn, which we believe stems from the issues related to customer care, and Sprint's migration to a unified billing platform. Because we do not anticipate moving to the new platform until 2008, we feel this issue will continue to negatively impact our subscriber growth. We also anticipate selectively tightening our credit policies in voluntary churn.

We continue to take steps to offset this increase churn level by improving the point of sale experience and by continuing to provide the most effective network possible to our subscribers. For the quarter, we again recorded blocks and drops below 1% at all of our switches. A direct result of the investment we have made and continue to make in our network.

During the quarter, we launched 18 new cell sites, bringing our total to 1,674, and our total new cell sites launched to date to 74, on pace to meet our target of approximately 100 by the end of the year. These new sites are focusing crucial markets to greater improve our capacity and enhance in-building coverage, as well as capitalize on favorable roaming trends. As we noted previously, we have also completed the upgrade of our Grand Rapids, Quad Cities, and Fort Wayne market EVDO Rev A, and increased our high-speed coverage to 2.5 million pops.

We continue to see strong gross adds in our controlled distribution channels, which consists of our retail stores, Sprint-branded dealers and independent dealers. We are seeing an improvement in sales and efficiency across our 40 retail stores and 90 Sprint- branded dealers. We are also updating these stores to reflect the latest designs and functionality offerings, so that each location is using the best possible sales and customer care method. We want to create the best customer experience at the point of sale in the market to ensure a sticky customer. Additionally, we are focusing on taking more control of the customer service experience by using our distribution network in the point of time to act for service issues.

While we are pleased with the performance of our controlled distribution channels, we are concerned about our national distributors, such as RadioShack. Because our customers have not been moved to unified billing platform, we believe it is difficult for customers to be added to the legacy billing system through Sprint's customer care organization. We have raised the issue with Sprint and are working to create a temporary solution to the problem, while we wait it to be converted to the new billing system. Until we are on the new billing platform, the problem may persist putting pressure on our gross sales during the fourth quarter and into early 2008.

As a part of Conrad's initiatives, we have developed a new focus on sales leadership, to ensure the customers have the best possible experience in our locations, which we believe will lead to increased satisfaction in sales. We are committed to building relationship with our customers with the end result of reduced churn and we believe this evolution is an important aspect to a profitable growth.

I would now like to turn the call over to Steb to look at our financials.

Steb Chandor

Thanks, Tim. iPCS ended the quarter with 622,100 subscribers and a covered pop penetration rate of approximately 5.2%, representing a year-over-year growth of 16% in our ending subscriber base. As Tim mentioned, gross additions for the third quarter of '07 were 68,400, up 12% from the prior year, and net additions for the quarter were 10,100, down from the 16,800 in 2006, due to the increase in churn.

Our overall churn, net of 30-day deactivations for the quarter, was 2.8%, up from 2.5% from the year-ago period, and 2.2% in the prior quarter. The increase in overall churn reflects a sharp increase in our involuntary churn, which increased to 1.5% in the quarter, up from 1.2% in the prior year quarter and 1.1% in the prior quarter.

This increase in voluntary churn relates primarily to our subprime subscriber base, which we feel has been impacted by the weakening economic environment.

In addition, late in 2006, we migrated from one credit platform to another. We believe this migration had the unintended net effect of expanding our subprime credit categories to include more marginal subscribers which also contributed to the increase in involuntary churn. We are in process of examining our credit policy decisions and we will be making selective changes to tighten some markets to manage this exposure going forward.

However, we expect that involuntary churn will remain above year earlier levels into 2008. Total revenue for the quarter was $142.1 million compared to a $126.6 million for the prior year period, representing a 12% increase. Service revenue for the quarter was $92 million, an increase of 16% over the prior year period. Roaming revenue, which includes reseller revenue, was $46 million up from $43 million in the prior year period. Reseller revenue for the quarter totaled $4 million up from $2 million in the prior year period. And we ended September with approximately 249,000 reseller subscribers in our territory up 30% from the 192,000 at the end of September of '06.

ARPU excluding roaming for the quarter was $50 flat from the prior year quarter and last quarter. Data ARPU was $10 for the quarter, essentially flat with the prior year and down $1 from the prior quarter. Total ARPU, which includes roaming, was $75 for the quarter, compared to $78 from the prior year period reflecting the reduction in the roaming rates we received from Sprint.

For the September quarter, cash cost per user or CCPU excluding roaming and litigation expense was $33. Compared to the prior year quarter, CCPU was up slightly as efficiencies gained, as we scaled a fixed cost portions of our business, we are all set with increases in bad debt and back office expenses, the latter item due to the increase in the rate we pay Sprint.

As a reminder, we pay Sprint $7.50 per subscriber per month for back office services such as customer care and billing. The rate of $7.50 was re-elected to submit to arbitration for the terms of our management agreement with Sprint is up from the $6.75 we were charged in 2006.

The balance of the CCPU increase is tied to bad debt of $7.8 million for the quarter, increasing from $2.7 million for the prior year quarter. We believe this increase in bad debt has been driven primarily by an increase in average write-offs per subscriber, the decrease in recoveries as a percent of write-offs, a general deterioration of our customer aging, and an increase in the number of subprime customers.

A large percentage of the increase in bad debt can be attributed to the marginal subprime subscribers we added, as we previously discussed. Higher levels of bad debt are likely to continue into 2008. At a minimum, we intend to selectively revise our credit policies to reduce our exposures to these marginal subprime subscribers, and manage down our bad debt expense in the future.

Total CCPU included roaming was $47 for the quarter, down from $50 for the prior year quarter. This primarily reflects the decrease in roaming rates we pay Sprint. Our overall roaming ratio with Sprint was 1.6/1 for the quarter, and this is a substantial increase from the 1.4 in the prior quarter, consistent with the seasonal trends, but is up from the 1.5 to 1 in the prior-year quarter.

We have seen improvements in both the voice and data ratios. We believe the improving voice ratio is driven by the increasing CDMA customer base in Sprint's territory. In fact, roaming minutes of use by Sprint on our network increased 13% compared to the year ago period, the largest year-over-year increase in several years.

On the data side, have seen a dramatic increase in Sprint roaming revenue with the launch of our EVDO Rev A markets, which allows higher data speeds and therefore, a better customer experience, as well as Sprint's success in its sales of aircards.

Historically, the third quarter is our best roaming quarter, and we expect to see the seasonal decrease in the fourth quarter.

Our on-network Sprint voice roaming revenue totaled $26 million, which is comprised of airtime revenue and toll revenue, and was down from $30 million in the prior year quarter, consistent with the decrease in our rate from $0.058 a minute to $0.04 a minute.

Our off-network Sprint voice roaming expense totaled $16 million for the quarter, including toll charges, down from $20 million in the prior year quarter. Again, this is consistent with the decrease in the reciprocal roaming rate.

On-network Sprint data revenue totaled approximately $13 million up over 44% from $9 million in the prior year quarter, despite the decrease in rates from $0.002 a kilobyte to $0.001 per kilobyte, and up from $10 million in prior quarter.

Off-network Sprint data expenses totaled approximately $9 million, up from $7 million in the prior year.

Sprint has, however, notified us that it disputes the amount we pay to Sprint for data roaming expense for April- July of 2007.

That is disputes the amounts we paid as Sprint for data roaming expense for April-July of 2007. Based on Sprint's calculation, the aggregate amount formally disputed is $4.9 million relating to those four months. The amount Sprint calculates to September totaled $7.6 million. Sprint's position, that our efforts to reduce our data roaming expense by managing the data subscribers having mobile numbers based in our territory is not permissible under our Sprint agreements.

Although we disagree with Sprint's position, we have suspended our efforts with respect to this issue. We are currently engaged in discussions with Sprint, but we have not yet come to a resolution with respect to our activities or with respect to a mutually agreeable process to address this issues going forward. Although we remain hopeful that we can come to a resolution with Sprint, we intend to vigorously defend our ability to manage subscribers in our territory.

For the September quarter, average minutes used per month per subscriber were approximately 710, excluding roaming, down from about 730 in the prior year quarter. Average roaming minutes per use of use per subscriber were approximately 190 per month, down slightly from 200 in the prior year quarter.

Total system minutes of use were approximately 2 billion for the September quarter, compared to 1.6 billion for the prior year period. Total on-network roaming minutes for the quarter were approximately 0.5 billion, up from the 0.4 billion in the prior year quarter. Roaming minutes of use for carriers other than Sprint totaled 67 million during the quarter, more than double the prior year quarter reflecting a substantial growth in minutes from Alltel subscribers.

Alltel, US Cellular and Bell Mobility were our top-three roaming partners for the quarter. Our cost of subscriber acquisitions or CPGA for the September quarter was $358 down from the prior year period of $362 and inline with our expectations.

Our adjusted EBITDA for the quarter was $28 million after adding back $400,000 in Sprint Nextel litigation expenses, and the $1.2 million charge non-cash write-down of the value of an SCC license we own in Southern Ohio.

This EBITDA figure compares to $22.3 million on a similarly adjusted basis for the third quarter of 2006. As Tim mentioned, this is the best EBITDA in the company's history and we feel that we can continue to achieve increased scalar business by leveraging our fixed network and G&A cost. Although we remain concerned about the bad debt we have shown, we will continue to work with Sprint and do what is necessary to prove these metrics.

Our net loss for the quarter was $2.4 million, which equates to $0.14 per share. Capital expenditures for the September quarter totaled $5.7 million, and we expect that full year CapEx will be at or below the low end of our previously announced guidance of $38 million-$42 million.

Turning quickly to the balance sheet, we had approximately $72 million in cash at the end of September. Our long-term obligation consists of $300 million first lien secured floating rate notes, at an all-in swapped rate of 7.5%,and $175 million second lien secured floating rate notes, with interest of three months LIBOR plus 3.25%. These notes mature in 2013 and 2014, respectively.

Now, I'll turn the call back over to Tim for few additional comments. Tim?

Tim Yager

Thanks, Steb. Before we turn the call over for the question-and-answer session, I would like to make a few closing comments. First of all, I would like to say that on an operational level, our dialogue with Sprint has increased and improved over the past few months.

One of Conrad's primarily goals is to work closer with Sprint to align ourselves with their initiatives as closely as possible. He brings a high level of wireless experience enthusiasm to the discussion and recently returned from of a couple days of meetings in [Kansas] City. He is excited about Sprint's offerings and approach.

At the same time, however, we continue to have operational and other conflicts with Sprint, which make it difficult to truly optimize our business. First, as previously discussed, Sprint is in the process of migrating its subscribers to new billing platform called ENSEMBLE. Because subscribers based in our territory have not yet been migrated to ENSEMBLE, we believe it is more difficult and time consuming for third-party national retailers and Sprint-controlled distribution channels to activate or upgrade subscribers in our market.

Additionally, we believe that Sprint subscribers based in our territory are not receiving the same level of customer support and care as Sprint subscribers who have been migrated on ENSEMBLE. Consequently, we believe that use of these two platforms has led to a decline in our customer additions and an increase in our churn.

At this point, we do not believe that we will be migrated to the new billing system until 2008, and until then, we will continue to be impacted by this.

As previously mentioned, Sprint has disputed the amount settled between the two companies for data roaming. We are engaged in discussions with Sprint regarding the issue, but we have not yet come to resolution with respect to our past activities or with respect to mutually agreeable process to address this issue going forward.

Although we remain hopeful that we can come to resolution with Sprint, we intend to vigorously defend our position in our ability to manage subscribers in our territory.

As it relates to Sprint's pending appeal of the Illinois court ruling, as we have previously stated, we concluded the briefing phase of the Illinois appeal in March. We are disappointed, and somewhat surprised, that we have still not received the date for oral arguments. At this point, it is unlikely we will have oral arguments this year, and are expecting to take in Q1 of 2008, although the timing is in the court's control and the date can be set at anytime.

As you know, we are also arbitrating Sprint's back office rates for 2007 and beyond. We are currently in the discovery process and believe it will be next year before we have a decision from that panel as well. Although we are continuing to aggressively pursue this dispute with Sprint, we will continue negotiating towards the settlement with Sprint that is in the best interest of our shareholders.

In light of the many disputes that we currently have pending with Sprint, we are limited to what we can say during the Q&A session beyond what has already been said.

With regards to guidance--in light of our third quarter subscriber metrics and current trends in our business, we expect the gross adds for the full year 2007 will be at the low end of the guidance range we announced in August 1, 2007, and an adjusted EBITDA for 2007 will be at or above the high end of our previously announced guidance.

We also expect the full year capital expenditures for 2007 will be at, or below, the low end of the previously announced guidance. Despite higher 2007 adjusted EBITDA, any uncertainty of our 2008 roaming rates and trends, we continue to believe that we have strong adjusted EBITDA growth in '08 exceeding 20%. We plan to provide formal 2008 adjusted EBITDA guidance early next year when we report our full year 2007 results.

In closing, we are pleased with our financial results for the quarter as we continue to grow our revenues and earnings. At the same time, we are focusing on achieving a stable or increasing ARPU and managing our expenses as we strive to increase our overall operating margin. We also think that we are well positioned to compete affectively in our markets. We will continue to actively manage and selectively increase our subscriber base. While relationship with Sprint continues to present challenge, we are encouraged by recent conversations with Sprint about improving our operational relationship as we approach the opportunities ahead of us in 2008.

Our commitment remains to create value for our shareholders. I look forward to updating you on our progress early next year. I would now like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Thank you. Our first question is coming from Ana Goshko of Banc of America.

Ana Goshko - Banc of America

Hi. Thank you very much. Couple of different questions. First, on the gross addition guidance, which is now at the low end of the range, but I think it's really [take] for the year. Does that really mean sequentially flat gross adds, which you're going into the strong fourth quarter? So, I'm assuming part of that is because of the issues you are having with the billing system, and the growth that's there. The other part is, that you're tightening credit standards.

So, on those two topics, this is the first time that I've really heard about these billing issues with RadioShack. Is it something that's just come up recently or that's been exacerbated recently?

And then on second part, on the credit standards, can you give us just a more insight on the increased involuntary churn in the quarter? You have said that you haven't changed your credit standards at all. Is it a case that there is something going on at Sprint that's impacting you?

Tim Yager

Sure Ana. This is Tim. I'll take the first one, as it relates to billing issue. We obviously knew that Sprint was going to be migrating our customers over the ENSEMBLE billing platform. I think as Dave moved more and more customers over to that platform, it has created an issue more. And I think as (inaudible) said on its own earnings call, the majority of the Sprint's new customers are going on the ENSEMBLE billing platform. But yet none of our new customers are going on the ENSEMBLE billing platform. So, I think as they move further in that process, and we haven't been migrated, the issue has been exacerbated over the last couple of months, and we expect it to continue into the fourth quarter.

Steb Chandor

As it relates to the involuntary churn, I mean clearly the churn is higher than we like. The economy obviously is negatively impacting our subs. But as we did mention earlier, part of the increase is due to the increased subprime activations. In late '06, Sprint requested that we migrate to a new credit platform, which they implement, manage and monitor for us and what we desire to do is map across to the new platform, they need to maintain the same general credit profile of our activations.

That didn't happen, and we ended up adding more marginal subprime subscribers than we wanted to. As Tim mentioned, we are taking steps, including tighten our credit policies that we have already mentioned to reduce our exposure on a relatively quick basis.

Ana Goshko - Banc of America

Okay. Second question, just on this issue of the dispute on the data roaming expense--when you say that you are managing your data customers and Sprint says you don't have the contractual rights to do so, what do you mean by managing your data customers?

Tim Yager

Ana, this is Tim. We are not going to comment much further. I think, as I said, Sprint has started a formal dispute there, and so we, obviously, have to be very cautious about what we say. But needless to say, we are very comfortable with the actions that we have taken. We think they are appropriate, and we are going to work with Sprint to try to come up with a solution that is satisfactory to both sides.

Ana Goshko - Banc of America

Okay. And then, on the roaming, it's obviously a very good roaming quarter-end, and you have attributed part of that to the increased Sprint CDMA customer base. And I know we have asked you this before, but you had any sense of how much of the Sprint hybrid phones are contributing to the higher roaming minutes that you are getting?

Tim Yager

Yeah. Ana, this is Tim. We don't know, specifically. We think that our increased pure voice travel roaming minutes we are getting from Sprint are a combination of the hybrid phone as well as just the fact that they have been migrating iDEN subscribers to the CDMA network, which is again, more customers that can roam on to our network. So, we think there's some combination to those, but we just have not been able to get to the actual data to understand how much is that, or how much of that specifically is coming from the hybrid phone.

Ana Goshko - Banc of America

Okay. And then, if I can stretch to one or two. So, on the same topic, so Sprint is going to start rolling out its QChat phone possibly in the first quarter of the year. Are you taking that into any of your expectations on your roaming and then, in the discussions that you had I think you said, the CEO was there for a couple of days talking to Sprint. Any sense of when QChat would make it into your territory?

Tim Yager

To answer the first part of that question, we haven't based in anything specifically as it relates to QChat. Obviously, to the extent Sprint is successful in migrating their Nextel customers to the QChat product outside of our territory, that's going to be a favorable experience for us to the extent they roam under our network., and in terms of the other part of it, Conrad did have the opportunity to talk to Sprint a little bit about the QChat product, but I think, at this point, that's Sprint's product and it would be inappropriate for us comment further on that.

Ana Goshko - Banc of America

And a quick, final one. You said, the conversion to the billing for you would be in '08. What is that, early, late '08?

Tim Yager

We're working with Sprint right now to get a final timing on that. So, we don't have any firm. And I think we'll just leave it there. But certainly, we want it as soon as possible in our way.

Ana Goshko - Banc of America

Okay. Well, great, thank you. Congratulations. It is just a really strong quarter on all metrics despite your churns. So, congrats.

Tim Yager

Thanks, Ana.

Operator

Thank you. Our next question is coming from Rich Prentiss of Raymond James.

Rich Prentiss - Raymond James

Hey, good afternoon, guys.

Tim Yager

Hey, Rich. Good morning. Good afternoon.

Rich Prentiss - Raymond James

It seems like morning, as it's been a long day.

Tim Yager

That's right.

Rich Prentiss - Raymond James

Couple of questions for you. First, on the data, down sequentially quarter-over-quarter by a buck, talks to us what happened there. It's the first time I have seen that happen in the industry.

Steb Chandor

Hey, this is Steb. I think, as we look at the data, what happened was that the over [speed], the casual data use actually declined year-over-year sequentially and the MRC component of the data plan went actually up. So, what we summarize is going on is that text messaging is happening more and more under unlimited plans and MRC is supposed to basically be in net on a per-message basis and that appears to be driving the difference here. Tim knows rounded numbers, $10 to $11.

Tim Yager

And Rich, this is Tim. We've also been very aggressive in promoting the texting messaging because of the profile of the customer would lower churn in those things. So, we've been pursuing those customers with casual usage. And so, it was not completely unexpected to us. And we think that as we get more of those moved on and then we start growing that from there, the data should go up in the future.

Rich Prentiss - Raymond James

Make sense. Having a teenager who blows through his buckets, he will definitely like to get on the unlimited plan?

Tim Yager

Absolutely.

Steb Chandor

Absolutely

Rich Prentiss - Raymond James

And on the Rev A, I think you said you're up to 2.5 million, is it 11 million in total pops? You have 2.5 million on rev A?

Steb Chandor

Yes. So, we have about 12 million. So, $11.9 million covered pops.

Tim Yager

And we have 2.5 covered with Rev A.

Rich Prentiss - Raymond James

But what are your thoughts as far as taking Rev A beyond the 2.5?

Tim Yager

We're looking at that right now. Obviously, we haven't had Rev A deployed for an extensive period of time. So, we're continuing to analyze our success to date. We're obviously encouraged initially. It's the probe potential of the data cards in terms of the minutes that are going through our network right now, both our customer and Sprint's customer. And so certainly, I think as we think about '08 and beyond, we've planned to continue to evaluate EVDO Rev A and I think it's fair to say that over a reasonable period of time, we'll probably continue to deploy additional Rev A.

Rich Prentiss - Raymond James

It also safe to say that that should fit in your discussion with Sprint on kind of all the issues?

Tim Yager

I think it's fair to say that we talked about all topics when we talk to Sprint.

Rich Prentiss - Raymond James

Okay. The roaming rate…when does that reset? Is it January? Is it July?

Steb Chandor

The actual roaming rate is effective this January 1, based on the prior year's average retail yield and data yield. So, we will probably know a definitive number sometime in February for what it was, for what it will be in 2008, based on what it was in 2007.

Rich Prentiss - Raymond James

Is it 90%, or what's the formula?

Steb Chandor

The calculation is actually outlined in our management agreement and the concept is 90% of the average retail voice yield and 90% of the average retail data yield.

Rich Prentiss - Raymond James

Okay. CPGA, which you will allow, hopefully, a fast one. CPGA is still staying in below $400 level. It was really blow it away on the US cellular call, they are spending over $500 on CPGA they are in the Midwest region, while you are seeing the amount that is it creating havoc on an advertising or on a handset subsidy base? That seems really hot.

Tim Yager

Yeah. I think we've noticed a slight uptick in terms of their advertising, and we typically spend a little bit more in the fourth quarter, just because we want to capture those Christmas type sales things, but obviously, we don't anticipate spending anywhere near that level and we feel we are going to able to compete effectively.

Rich Prentiss - Raymond James

Okay. And push-to-talk. You guys will get Qchat in your areas where you have rev A when this becomes available?

Tim Yager

In our discussions we have had with Sprint, that's our understanding and we are certainly moving forward with that expectation and we are excited about the prospects.

Rich Prentiss - Raymond James

That's not tied up in the whole litigation, maybe not migrating existing iDEN customers to your network, but selling new ones on?

Tim Yager

We certainly don't feel that it's at this point tied up in litigation and we plan to able to launch it.

Rich Prentiss - Raymond James

Okay. And then one final question. Bad debts and cost to service then?

Steb Chandor

Yes. Bad debt is part of cost to service in roaming.

Rich Prentiss - Raymond James

Okay. And the 7.8 million I think you said, is going to stay high in '08, but obviously overtime I would see that come down probably pretty significantly. What percent of revenue do you think bad debt looks like its going to hang in for this quarter or coming up fourth quarter and into '08?

Tim Yager

Yes, at this point I guess we're uncomfortable providing a little bit more insight into that, although, as we said we do expect to see higher levels of bad debt as compared to the prior year into 2008.

Rich Prentiss - Raymond James

Okay. Good luck, guys.

Tim Yager

Thanks, Rich.

Operator

(Operator Instructions). Thank you, our next question is coming from Todd Rethemeier of Soleil Securities.

Todd Rethemeier - Soleil Securities

Thanks. Good afternoon, guys.

Tim Yager

Hey, Todd. How are doing?

Todd Rethemeier - Soleil Securities

Good. Just wanted to clarify one thing--the disputed rates on the data roaming expense. As far as your financials this quarter, you reported it under what we you believe is the right number, is that correct?

Steb Chandor

That is correct.

Todd Rethemeier - Soleil Securities

Okay, thanks.

Tim Yager

Thanks, Todd.

Operator

Gentlemen, there are no further questions. I would like to turn the call back over to you for any closing comments.

Tim Yager

All right. Well, I just want to thank everyone for taking the time to join us this afternoon, and we look forward to updating you early next year on our year end 2007 results. Thank you.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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