iPCS Q3 2007 Earnings Call Transcript

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 - SoleilSecurities

iPCS, Inc. (IPCS) Q3 2007 Earnings Call November 7, 2007 5:00 PM ET

Operator

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

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

Peter Schmidt

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

Please note that a replay of thiscall will be made available later today. The details are set forth in the pressrelease.

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

Let me remind everyone thatmanagement's discussion this afternoon will likely contain forward-lookingstatements, 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 Harborprovisions of the Private Securities Litigation Reform Act of 1995 and are madebased on management's current expectations or beliefs as well as assumptionsmade by the information currently available to management.

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

Investors and analysts should notplace undue reliance on forward-looking statements. In addition, managementwill discuss certain non-GAAP financial measures. Please refer to the iPCSpress release for a reconciliation of these non-GAAP financial measures, the figuresderived using GAAP.

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

Tim Yager

Thank you, Peter. I would like towelcome everyone to our earnings call this afternoon and thank you for takingthe time to join us. I am joined on the call today by Steb Chandor, ourExecutive 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 Presidentand Chief Operating Officer. We are pleased to have him on our seniormanagement team and his contributions have already begun to have a positiveimpact on our business. Conrad will be joining us on our year-end call earlynext year to enhance our operational discussion going forward.

I am pleased to report thatdespite higher churn, iPCS reported its best ever financial results. During thethird quarter, we achieved record revenue and adjusted EBITDA reflectingincreasing operating margins and seasonal improvements in our roaming margin.Our execution of key corporate strategies which focus on driving subscriberadds to improve distribution and our strong network allowed us to post continuedpositive results.

Conrad has extensively reviewedour operations and I am happy to report that we've already begun implementingseveral new initiatives focused on the customer experience that will continueto drive the business forward. Some of the initiatives already implemented aresales leadership development within our stores, establishing a long-termmarketing and network plan and most importantly pursuing profitable growth.

Turning back to results, totalrevenues for the quarter were $142 million, compared with a $127 million in theyear-ago period. Our adjusted EBITDA of $28 million reflected a 27%year-over-year growth and improvement in margins from 15% in the prior quarterto 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 yearquarter.

iPCS had approximately 68,400gross 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 previousyear, our churn of 2.8% resulted in net adds of 10,100, which was down from the16,800 from last year.

Although, I am pleased with ourpositive financial results, the increase in churn is certainly an item we havebeen focusing on, and we are actively managing the situation and ensure that itis a near-term issue, and not a long-term trend. We believe that the increasein 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 aslight increase in voluntary churn, which we believe stems from the issuesrelated 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 feelthis issue will continue to negatively impact our subscriber growth. We alsoanticipate selectively tightening our credit policies in voluntary churn.

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

During the quarter, we launched18 new cell sites, bringing our total to 1,674, and our total new cell siteslaunched to date to 74, on pace to meet our target of approximately 100 by theend of the year. These new sites are focusing crucial markets to greaterimprove our capacity and enhance in-building coverage, as well as capitalize onfavorable roaming trends. As we noted previously, we have also completed theupgrade of our Grand Rapids, Quad Cities,and Fort Waynemarket EVDO Rev A, and increased our high-speed coverage to 2.5 million pops.

We continue to see strong grossadds in our controlled distribution channels, which consists of our retailstores, Sprint-branded dealers and independent dealers. We are seeing animprovement in sales and efficiency across our 40 retail stores and 90 Sprint-branded dealers. We are also updating these stores to reflect the latestdesigns and functionality offerings, so that each location is using the bestpossible sales and customer care method. We want to create the best customerexperience at the point of sale in the market to ensure a sticky customer.Additionally, we are focusing on taking more control of the customer serviceexperience by using our distribution network in the point of time to act forservice issues.

While we are pleased with theperformance of our controlled distribution channels, we are concerned about ournational distributors, such as RadioShack. Because our customers have not beenmoved to unified billing platform, we believe it is difficult for customers tobe 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 temporarysolution to the problem, while we wait it to be converted to the new billingsystem. Until we are on the new billing platform, the problem may persistputting pressure on our gross sales during the fourth quarter and into early2008.

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

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

Steb Chandor

Thanks, Tim. iPCS ended thequarter with 622,100 subscribers and a covered pop penetration rate ofapproximately 5.2%, representing a year-over-year growth of 16% in our endingsubscriber base. As Tim mentioned, gross additions for the third quarter of '07were 68,400, up 12% from the prior year, and net additions for the quarter were10,100, down from the 16,800 in 2006, due to the increase in churn.

Our overall churn, net of 30-daydeactivations 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 sharpincrease in our involuntary churn, which increased to 1.5% in the quarter, upfrom 1.2% in the prior year quarter and 1.1% in the prior quarter.

This increase in voluntary churnrelates primarily to our subprime subscriber base, which we feel has beenimpacted by the weakening economic environment.

In addition, late in 2006, wemigrated from one credit platform to another. We believe this migration had theunintended net effect of expanding our subprime credit categories to includemore marginal subscribers which also contributed to the increase in involuntarychurn. We are in process of examining our credit policy decisions and we willbe making selective changes to tighten some markets to manage this exposuregoing forward.

However, we expect thatinvoluntary churn will remain above year earlier levels into 2008. Totalrevenue for the quarter was $142.1 million compared to a $126.6 million for theprior year period, representing a 12% increase. Service revenue for the quarterwas $92 million, an increase of 16% over the prior year period. Roamingrevenue, which includes reseller revenue, was $46 million up from $43 millionin the prior year period. Reseller revenue for the quarter totaled $4 millionup from $2 million in the prior year period. And we ended September withapproximately 249,000 reseller subscribers in our territory up 30% from the192,000 at the end of September of '06.

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

For the September quarter, cashcost per user or CCPU excluding roaming and litigation expense was $33.Compared to the prior year quarter, CCPU was up slightly as efficienciesgained, as we scaled a fixed cost portions of our business, we are all set withincreases in bad debt and back office expenses, the latter item due to theincrease 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 careand billing. The rate of $7.50 was re-elected to submit to arbitration for theterms of our management agreement with Sprint is up from the $6.75 we were chargedin 2006.

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

A large percentage of theincrease in bad debt can be attributed to the marginal subprime subscribers weadded, as we previously discussed. Higher levels of bad debt are likely tocontinue into 2008. At a minimum, we intend to selectively revise our creditpolicies to reduce our exposures to these marginal subprime subscribers, andmanage 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 primarilyreflects the decrease in roaming rates we pay Sprint. Our overall roaming ratiowith Sprint was 1.6/1 for the quarter, and this is a substantial increase fromthe 1.4 in the prior quarter, consistent with the seasonal trends, but is upfrom the 1.5 to 1 in the prior-year quarter.

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

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

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

Our on-network Sprint voiceroaming revenue totaled $26 million, which is comprised of airtime revenue andtoll 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 voiceroaming expense totaled $16 million for the quarter, including toll charges,down from $20 million in the prior year quarter. Again, this is consistent withthe decrease in the reciprocal roaming rate.

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

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

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

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

Although we disagree withSprint's position, we have suspended our efforts with respect to this issue. Weare currently engaged in discussions with Sprint, but we have not yet come to aresolution with respect to our activities or with respect to a mutuallyagreeable process to address this issues going forward. Although we remainhopeful that we can come to a resolution with Sprint, we intend to vigorouslydefend our ability to manage subscribers in our territory.

For the September quarter,average minutes used per month per subscriber were approximately 710, excludingroaming, down from about 730 in the prior year quarter. Average roaming minutesper use of use per subscriber were approximately 190 per month, down slightly from200 in the prior year quarter.

Total system minutes of use wereapproximately 2 billion for the September quarter, compared to 1.6 billion forthe prior year period. Total on-network roaming minutes for the quarter wereapproximately 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 duringthe quarter, more than double the prior year quarter reflecting a substantialgrowth in minutes from Alltel subscribers.

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

Our adjusted EBITDA for thequarter was $28 million after adding back $400,000 in Sprint Nextel litigationexpenses, and the $1.2 million charge non-cash write-down of the value of anSCC 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. AsTim mentioned, this is the best EBITDA in the company's history and we feelthat we can continue to achieve increased scalar business by leveraging ourfixed network and G&A cost. Although we remain concerned about the bad debtwe have shown, we will continue to work with Sprint and do what is necessary toprove these metrics.

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

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

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

Tim Yager

Thanks, Steb. Before we turn thecall over for the question-and-answer session, I would like to make a fewclosing comments. First of all, I would like to say that on an operationallevel, our dialogue with Sprint has increased and improved over the past fewmonths.

One of Conrad's primarily goalsis to work closer with Sprint to align ourselves with their initiatives asclosely as possible. He brings a high level of wireless experience enthusiasmto 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, wecontinue to have operational and other conflicts with Sprint, which make itdifficult to truly optimize our business. First, as previously discussed,Sprint is in the process of migrating its subscribers to new billing platformcalled ENSEMBLE. Because subscribers based in our territory have not yet beenmigrated to ENSEMBLE, we believe it is more difficult and time consuming forthird-party national retailers and Sprint-controlled distribution channels toactivate or upgrade subscribers in our market.

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

At this point, we do not believethat 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, Sprinthas disputed the amount settled between the two companies for data roaming. Weare engaged in discussions with Sprint regarding the issue, but we have not yetcome to resolution with respect to our past activities or with respect tomutually agreeable process to address this issue going forward.

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

As it relates to Sprint's pendingappeal of the Illinois court ruling, as we have previously stated, we concludedthe briefing phase of the Illinois appeal in March. We are disappointed, andsomewhat 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 expectingto take in Q1 of 2008, although the timing is in the court's control and thedate can be set at anytime.

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

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

With regards to guidance--inlight of our third quarter subscriber metrics and current trends in ourbusiness, we expect the gross adds for the full year 2007 will be at the lowend of the guidance range we announced in August 1, 2007, and an adjustedEBITDA for 2007 will be at or above the high end of our previously announcedguidance.

We also expect the full yearcapital expenditures for 2007 will be at, or below, the low end of thepreviously announced guidance. Despite higher 2007 adjusted EBITDA, anyuncertainty of our 2008 roaming rates and trends, we continue to believe thatwe have strong adjusted EBITDA growth in '08 exceeding 20%. We plan to provideformal 2008 adjusted EBITDA guidance early next year when we report our fullyear 2007 results.

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

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

Question-and-Answer Session

Operator

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

Ana Goshko - Banc of America

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

So, on those two topics, this isthe 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 exacerbatedrecently?

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

Tim Yager

Sure Ana. This is Tim. I'll takethe first one, as it relates to billing issue. We obviously knew that Sprint was going to bemigrating our customers over the ENSEMBLE billing platform. I think as Davemoved more and more customers over to that platform, it has created an issuemore. And I think as (inaudible) said on its own earnings call, the majority ofthe Sprint's new customers are going on the ENSEMBLE billing platform. But yetnone of our new customers are going on the ENSEMBLE billing platform. So, Ithink as they move further in that process, and we haven't been migrated, theissue has been exacerbated over the last couple of months, and we expect it to continueinto the fourth quarter.

Steb Chandor

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

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

Ana Goshko - Banc of America

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

Tim Yager

Ana, this is Tim. We are notgoing to comment much further. I think, as I said, Sprint has started a formaldispute 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 havetaken. We think they are appropriate, and we are going to work with Sprint totry 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 ofthat to the increased Sprint CDMA customer base. And I know we have asked youthis before, but you had any sense of how much of the Sprint hybrid phones arecontributing to the higher roaming minutes that you are getting?

Tim Yager

Yeah. Ana, this is Tim. We don'tknow, specifically. We think that our increased pure voice travel roamingminutes we are getting from Sprint are a combination of the hybrid phone aswell as just the fact that they have been migrating iDEN subscribers to theCDMA 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 ableto get to the actual data to understand how much is that, or how much of thatspecifically is coming from the hybrid phone.

Ana Goshko - Banc of America

Okay. And then, if I can stretchto one or two. So, on the same topic, so Sprint is going to start rolling out itsQChat phone possibly in the first quarter of the year. Are you taking that intoany of your expectations on your roaming and then, in the discussions that youhad 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 thatquestion, 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 theQChat product outside of our territory, that's going to be a favorableexperience for us to the extent they roam under our network., and in terms ofthe other part of it, Conrad did have the opportunity to talk to Sprint a littlebit about the QChat product, but I think, at this point, that's Sprint'sproduct 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 rightnow to get a final timing on that. So, we don't have any firm. And I think we'lljust 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 yourchurns. So, congrats.

Tim Yager

Thanks, Ana.

Operator

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