Centennial Communications F2Q08 (Qtr End 12/01/07) Earnings Call Transcript

Centennial Communications (CYCL) F2Q08 Earnings Call January 8, 2008 8:30 AM ET

Executives

Steve Kunszabo – Executive Director, Investor Relations

Michael J. Small – Chief Executive Officer

Thomas J. Fitzpatrick – Executive Vice President and Chief Financial Officer

Phillip H. Mayberry – President, U.S. Wireless Operations

Carlos T. Blanco – President, Centennial de Puerto Rico

Tony L. Wolk – General Counsel

Analysts

Patrick Dyson – Credit Suisse

Ric Prentiss – Raymond James & Associates

Brett Feldman – Lehman Brothers

Phil Cusick – Bear Stearns

Ana Goshko – Banc of America Securities

James Breen – Thomas Weisel Partners

David Sharret - Lehman Brothers

Operator

Welcome to the Centennial Communications second quarter 2008 earnings conference call. Today’s call is being recorded. At this time I will turn the call over to Director of Investor Relations, Mr. Steve Kunszabo for opening remarks, please go ahead, sir.

Steve Kunszabo

Good morning and thanks for joining us. I’d like to welcome you to our fiscal second quarter 2008 earnings call. Joining me on the call this morning are CEO, Michael Small; our CFO, Tom Fitzpatrick; our President of U. S. Wireless, Phil Mayberry; and our President of Centennial de Puerto Rico, Carlos Blanco.

This call will begin with the discussion of the 2008 second quarter results followed by Q&A. Before I turn things over to Michael, I’d 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 and uncertainties 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 and uncertainties that may affect Centennial’s future results please see Centennial’s 2007 Form 10-K including the risk factor section contained therein and Centennial’s other filings with the SEC. For your information please also note that Centennial expects to file it’s10-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 reconciliation to comparable GAAP measures. With that let me turn things over to Michael.

Michael J. Small

Thanks Steve, good morning everyone and happy New Year, and thank you for joining us. This morning Centennial reported second quarter results that were characterized by on-going success in our U. S. Wireless business and the challenges of a tough economy and highly competitive market landscape in our Puerto Rico operations.

Despite these external challenges our strong consolidated results include quarterly adjusted AOI revenue growth of 11% demonstrate that we are able to organically grow cash flow and create share-holder returns through balanced leveraging. We believe that we will continue to win by having the best performing networks in our territory, the most direct successful retail distribution, and an established brand that is rooted in serving our local markets better than anyone else. We are committed to this winning formula because ithas served us so well.

Inthe United States we are making real progress by challenging our associates to take our local market strategies to the next level. As many of you saw during our recent Fort Wayne analyst day we invest heavily in training our front-line associates atCentennial University to engender a competitive spirit that keeps everyone focused on the bottom line.

Our feature-of-the-month sales program is just one important example. We chose a feature like, phone insurance, or $5 for unlimited calling that begins at 5:00 pm, and collectively put our efforts behind these packages to our customers. Our front-line sales teams aren’t the only ones selling features. Our customer care and collections associates also doa fantastic job at every customer touch point. We are now selling 6000 to 8000 features a month from these non-traditional sources as a result of this intensive effort.

We also recently launched a new advertising and branding campaign that highlights what it really means to have a local market strategy. Our adsare now tailored to 18 different sub-regions in our footprint that allow us to showcase our strengths against the most relevant competitor in each area.

For example, a forgetful customer in one ad is left wondering how she will remember who is in her in-calling plan. A trusted advisor quickly comes to the rescue and points out that with Centennial you don’t have to remember because every call you get is free. In this sub-region we believe free in-coming minutes for all customers is more important than free calling for only five friends.

Our Blue Nation offerings which we introduced a few months ago was a natural evolution from our popular Blue Region plan are making steady progress. We are also seeing good adoption of our recently launched BlackBerry service, a move that will surely attract high-value, high-list customers, and a robust ARPU. In addition, we’ve launched a limited 3G trial inKey West and will continue to evaluate how we proceed with a comprehensive next generation deployment.

Our intense focus on the needs of our customers who live, work, and play where we do business continues to pay off. We grew retail revenue 13%, and retail AOI 46% during the fiscal second quarter from our on-going success from our U.S. Wireless business.

Turning now to our Puerto Rico operations, where we are showing progress in growing wireless customers, keeping our churn on solid footing in the mid-two’s, sustaining a robust ARPU, and renewing revenue inAOI growth despite a tough economy and difficult competitive environment.

Last year’s considerable sales tax increase and the elimination of long established customer subsidies, like electricity, continue to pull spending and depress the business climate. In short, our customers both consumer and enterprise are being careful with the dollars they spend.

All of our competitors have now launched an unlimited plan since we first introduced it to the market over a year ago, and aggressive handset promotions are being common place inthe current environment. In the face of these external pressures we continue to take and explore steps that will help us keep our edge.

Most recently we began offering BlackBerry service on the island, a move that like inthe US will attract high-value customers and allow us to capture a growing data revenue opportunity. We are also including unlimited long-distance inthe United States and unlimited in-network SMS in our unlimited rate plan. While our competitors increasingly focus on the lower-end of the market we continue to reinforce our position that the best value for heavy-users of wireless service.

Lastly we are building market-share leveraging our assets to attract non-traditional wireless revenue opportunities. Our residential EVDO service called Instant Internet continues to sell briskly and we are also benefiting from good adoption of laptop cards, and machines, and machine applications. We expect to see a meaningful contribution from these new device categories as we move forward.

We have stayed on the right track. We are going after high ARPU customers by offering a superior network in customer care experience and we continue to anticipate renewed growth despite a demanding operating environment.

Moving now to Puerto Rico broadband, where strong growth from our cable partnership that has been tempered by a sluggish business climate and the resulting pressure on recurring revenue per line in our traditional enterprise segment, as you would expect our sales to commercial customers have slowed and some enterprises have become more price sensitive as they renew and extend their contracts with Centennial. We are standing by these customers and building lasting relationships in a difficult economic environment by bringing them innovative solutions that provide more value and flexibility. We are sustaining our leadership position in Puerto Rico by meeting our customers changing needs.

As we consider our comprehensive approach to Puerto Rico broadband market its worth reinforcing several important courses of action that I have shared with you before that will support our on-going success.

One, we continue to attack Puerto Rico’s $3 billion telecom market from all sides, large enterprise, small and medium business, and residential.

Two, we will continue to grow with the Fortune 500 by delivering an increasingly IP-centric suite of products.

Three, we will continue to support telecommunications carriers as wireless data adoption increases backhaul requirements and hunger for bandwidth.

Four, we will continue to expand our addressable markets to serve small and medium sized businesses. Our Islanet acquisition along with the versatility of our IP-based soft switch are critical first steps in reaching these customers ina more efficient and profitable way.

And five, the residential market has been largely untapped by Centennial inPuerto Rico. Our cable partnerships now meaningfully contribute to our access line and revenue growth and we are competing well in this $500 million segment winning share from thewire line incumbent.

We are focused on executing as we meet the challenges of competing ina rapidly changing industry and respond to difficult external pressures. We believe that a strong collection of assets and a seasoned local teams position us well to meet our objectives and I look forward to updating you on our achievements inthe second half of fiscal 2008. With that I will turn it over to Tom for a more detailed financial review.

Thomas J. Fitzpatrick

Thanks, Michael, and good morning everyone. As Michael shared Centennial announced second quarter results that reflect continued momentum in our U.S. Wireless segment and tempered progress on key indicators in our Puerto Rico wireless business due to a weak operating environment.

As we noted several times inthe last year, we face difficult economic circumstances in Puerto Rico along with an intense and rapidly changing competitive landscape. We have a strong collection of assets run by great teams and will continue to execute our business plan and connect with our local markets. Our energy remains centered on attracting high-value customers and translating this into healthy retail cash flow growth.

We also provided updated financial targets for our current fiscal year including an improved outlook for consolidated adjusted operating income, and roaming revenue which I will review with you in a moment. For comparison our fiscal 2007 financial results have been adjusted to reflect the Universal Service Fund charge in the period to which it relates.

Centennial delivered quarterly consolidated revenue of $243.6 million and adjusted operating income of $96 million, representing growth of 7% and 11% respectively from the year ago period. Our consolidated adjusted operating income margin was 39% for the second quarter.

Second quarter income from continuing operations were $1.5 million, or $0.01 per diluted share. This compares to income from continuing operations of $1 million, or $0.01 per diluted share for last year’s second quarter.

The fiscal second quarter of 2008 included $3 million in litigation settlement expense related to a proposed settlement of a nine-year old billing practices lawsuit. On an operating segment basis, U.S. Wireless reported second quarter revenue of $132.8 million, and adjusted operating income of $51.4 million reflecting an adjusted operating income margin of 39%.

We continue to benefit from consistent subscriber growth and firm ARPU in theUS, both of which have been vital drivers of our strong operating performance during the last several quarters. We are working hard to out localize our competitors with a targeted advertising effort, the most well trained front-line associates inthe industry, and a comprehensive data strategy that now includes BlackBerry service.

We recorded roaming revenue of $14.2 million during the period, or 16% year-over-year decrease as we absorbed a 21% decline in our rate per minute for total voice roaming traffic under our agreement with our chief roaming partner. The decline in our roaming yield was partially offset by 5% increase in total voice roaming traffic, and we continue to benefit from data roaming throughout our operating territories. We continue to forecast a long-term decline in roaming revenue and now expect an approximately $10 million decrease during fiscal 2008.

U.S. Wireless retail ARPU and minutes of use again rose steadily during the second quarter as retail ARPU grew 7% year-over-year to $61 while minutes of use rose 17% to approximately 1050 minutes.

Moving now to our Puerto Rico operations, during the fiscal second quarter Puerto Rico wireless generated revenue of $80.8 million, up 4% from the year ago quarter, and posted adjusted operating income of $27.2 million, giving an adjusted operating income margin of 34%.

Post-paid ARPU slipped to $65 during the quarter as declines in airtime and equipment revenue pressured an otherwise solid customer profile. We have now absorbed the majority of the decline in overage revenue that we expected when we launched the unlimited plan over one year ago, but still anticipate weak equipment revenue as the market continues to heavily subsidize handsets to attract and retain customers.

We deployed EVDO Rev-A widely on the island to sustain our bandwidth leadership and continue to evaluate and expand a deployment of wiMAX technology now that we own 2.5 gigahertz spectrum from our Islanet acquisition. We are taking these steps to operate from a position of strength as our customers move from the megabyte world to the gigabyte world.

Focusing next on Puerto Rico broadband, which produced revenue of $33 million, a 4% year-over-year increase, and recorded adjusted operating income of $17.4 million, representing an adjusted operating income margin of 53%, it should be noted that our year-over-year comparisons for Puerto Rico broadband were pressured by lower inter-carrier compensation revenue due to a favorable adjust in the prior year quarter and increased expense related to the deployment of network capacity in consideration of customer contracts for future service.

Switch and dedicated revenue rose 8% during the quarter supported by solid growth in total access lines and equivalents partially offset by an on-going decrease in average revenue per line. Our increase in access lines this quarter came primarily from our cable partnerships and these lines have lower ARPU.

As Michael discussed we are seeing softness in traditional revenue for enterprise customers as they seek contracts with more favorable pricing and restructure their operations in Puerto Rico to address the same economic factors that we confront.

Turning now to our revised financial and operating outlook for our 2008 fiscal year, we expect consolidated adjusted operating income between $395 million and $405 million for fiscal 2008, excluding stock-based compensation expense. Our consolidated adjusted operating income from continuing operations for fiscal 2007 was $365.1 million.

Our projection for the sum of our consolidated capital expenditures and spectrum acquisition cost remain unchanged at $140 million. As we have already announced we won’t be participating in the upcoming 700 megahertz auction.

And finally a brief update on our capital structure and liquidity position, we closed the second quarter with net debt of $1.93 billion and have reduced net leverage by over one-half turn since our dividend recapitalization to 5.2 times. We had $223 million of total liquidity at the end of the second quarter consisting of $73 million in cash and $150 million available under the revolving credit facility. With that I will turn things back to Steve for the Q&A portion of this morning’s call.

Steve Kunszabo

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

Question-and-Answer Session

Operator

Yes sir. (Operator instructions) And we will go first to Pat Dyson with Credit Suisse.

Patrick Dyson – Credit Suisse

Hi guys.

Thomas J. Fitzpatrick

Good morning Pat.

Patrick Dyson – Credit Suisse

I guess the first question on Puerto Rico you talked about in a previous call Puerto Rico EBIDA growing in 2008 as compared to fiscal year 2007. Is that still a fair expectation for us to have?

Thomas J. Fitzpatrick

Yes, Pat, this is Tom. Our updated guidance assumes that we will growin the second half in the full year-over-year basis for Puerto Rico wireless as well as Puerto Rico broadband.

Patrick Dyson – Credit Suisse

Okay and I guess maybe looking a little bit more specifically atPuerto Rico wireless what should we expect in the next couple of quarters? Your gross adds and net adds were okay this quarter but should we expect to see continued subscriber growth or are there any areas of particular softness that we should expect inthe second half of this year?

Michael J. Small

We still believe that we can continue to grow subscribers and we are continuing to doit in more innovative ways as we described the new devices component whether it is Instant Internet at home, air cards for the computer, or machine-to-machine applications will bea big piece of it.

We are being pretty true to our traditional market segment of the top end. We are not going to try and go downstream. We believe that the brand equity that we have that if you are willing to pay $49.99 or more, you are going to getthe best value in Puerto Rico. As we assess the competitive landscape there is a tendency to go downstream right now because that’s where (A.) the heritage of some of our competitors, and (B.) that’s where the projected growth and subs of the marketplace is. Our forecast is for consistent growth like you have seen inthe last few quarters and we are not going to try to accelerate growth by getting off our main market segment.

Patrick Dyson – Credit Suisse

Okay and then final question on thePuerto Rico wireless, your churn was up sequentially on the post paid side from 2.3 to 2.6. You have historically talked about churn being inthe mid-two’s range, is that still something that we should again still look to see going forward?

Michael J. Small

That’s still our belief that we will keep itin the mid-two’s.

Patrick Dyson – Credit Suisse

And then final question for you, Tom, on the balance sheet with your floaters are now callable, any comment that you want to provide there as far as if or when you would look to take those out?

Thomas J. Fitzpatrick

Yes, we are not going to give specific indication, Pat. We are focused and we are well aware of the callability of the floaters and the impending callability of the 10’s and 8’s. And we will just say that we are spending a lot of time right now thinking about our capital structure and with a view towards maintaining our flexibility.

Patrick Dyson – Credit Suisse

Okay, fair enough, I figure that I had to ask that.

Michael J. Small

All right, thanks Pat.

Patrick Dyson – Credit Suisse

Thank you.

Operator

Our next question comes from Ric Prentiss with Raymond James.

Michael J. Small

Hello Ric and happy New Year.

Ric Prentiss – Raymond James & Associates

Thank you.

Thomas J. Fitzpatrick

Thanks Ric.

Ric Prentiss – Raymond James & Associates

A question to start off on roaming, significant improvement at least on your thoughts on what the roaming decline would be this year. I think that you mentioned 21% decline in rates. When did the 21% decline in rates occur and what allowed you to kind of get more comfortable that the volumes will come in only to see a $10 million drop in roaming revenue this fiscal year?

Thomas J. Fitzpatrick

You want to take that Michael?

Michael J. Small

Give the effective date.

Thomas J. Fitzpatrick

I think that the step-down was effective 09/01.

Michael J. Small

And going in for the year this is always an uncertain forecast for us because so much of our revenue in roaming comes from principally one but two partners and a lot depends on their decision making during the course of the year which is not predictable with precision by us. We are confident in our long-term trend that because we are between major metropolitan areas that nation-wide providers will want their own network in our territories. We don’t believe that their network will ever be as robust as ours, so we will always maintain some roaming revenue but less over time.

And so the main reason that we can true up the forecast is when we have six months under our belts and two is we have completed the renegotiation of the contracts so that we know precisely those terms. There is still some potential volatility in our forecast but greatly reduced from what it was at the start of the year.

Ric Prentiss – Raymond James & Associates

Yes, okay, you talked a little bit about the Puerto Rican economy. Can you talk a little bit about the US economy up in your Midwest and Southeast regions? What you are seeing as far as any economic impacts?

Michael J. Small

Phil, you want to take that?

Phillip H. Mayberry

Sure, Michael, there’s some unemployment issues that you might guess in the auto industry inthe Michigan area and that also translates down into Indiana and the front of Ohio that we work in. But we are responding to it with products that appeal to people who don’t have a lot of money. In the Southeast we are not having that problem inthe oil industry and government medical that we have down there are all very strong so far.

Ric Prentiss – Raymond James & Associates

And then I think, Tom, you mentioned $3 million litigation item. Can you give me a little more detail on that, I was writing through that and didn’t catch all of the details?

Thomas J. Fitzpatrick

Yes, our general counsel is here with us and I will have him take you through it.

Tony L. Wolk – General Counsel

Sure, this stems from a 1990’s litigation that plans that alleged that folks rounded up or billed in full minute increments rather than seconds and much of the industry has been through these similar cases and resolved them over the past several years. So we are just getting around to resolving it ourselves and are pleased with the settlement that we have reached.

Ric Prentiss – Raymond James & Associates

And so the settlement impact financially was exactly what?

Tony L. Wolk – General Counsel

Just under $3 million.

Ric Prentiss – Raymond James & Associates

And that was expense?

Thomas J. Fitzpatrick

Yes, we put that up this quarter Ric.

Ric Prentiss – Raymond James & Associates

Right so that reduced the operating income within the second quarter?

Tony L. Wolk – General Counsel

It did not [sacrament] adjusted income and that’s included if you look at the reconciliation schedule that’s attached to the release.

Ric Prentiss – Raymond James & Associates

Okay so it is kind of an out of period item that you have excluded from the adjusted operating.

Tony L. Wolk – General Counsel

That’s right.

Ric Prentiss – Raymond James & Associates

Okay, great, good luck guys.

Thomas J. Fitzpatrick

Thanks Ric.

Operator

Our next question comes from Brett Feldman with Lehman Brothers.

Brett Feldman – Lehman Brothers

Yes, thanks for taking the question. Mainly just to stay on the topic of cost, it looks like your G&A was up sequentially by around $9 million at least on the full income statement. Does that include the $3 million expense that we just talked about which you have normalized in your adjusted numbers, and then just maybe generally speaking can we just break down where that increase came from?

Thomas J. Fitzpatrick

The answer to the first question is yes, the $3 million increase in G&A is partially due to the billing litigation settlement.

Brett Feldman – Lehman Brothers

Okay, then what about the rest of the increase?

Thomas J. Fitzpatrick

Bad debt was up slightly inthe US as we focused on the more credit challenged. We really like that customer segment from an economic perspective but they come with a higher bad debt and lower CPGA, so you see some upward movement in G&A notwithstanding the fact that it is a really good economic trade for us.

Michael J. Small

The other area that increased inthe US, we invested in customer care expense and we have increasingly been making customer care our profit center. We have been averaging 6000 to 8000 feature sales per month out of our customer care organization and that’s been trending upward and we actually think that investment both inthe lower credit class customers as well as in making customer care more of a sales organization was one of the contributors to the 46% retail AOI growth. So whether they are adding to expense both decisions is adding profitability.

Brett Feldman – Lehman Brothers

Okay and then you also talked about expenditures in your wire line business inPuerto Rico related to future customer contracts. Is that part of the reported G&A number and can you give us a little bit more color on what that expenditure is related to?

Thomas J. Fitzpatrick

Yes, that wouldn’t bein G&A, that would bein operating expense, but let me just describe that. And the reason that we call that out is you see that the broadband segment grew its top line by 4% but the adjusted operating income comp shows down 2%. So we felt the need to explain that apparent anomaly and there were two drivers there. First we had basically a true up to inter-compensation, inter-carrier compensation revenue inthe prior year quarter that benefited that quarter and that was the reason for the decline, and then the expenses cut it out in the front of the revenues.

We are growing our relationships with principally the cable providers and they are taking on more and more capacity and soin this quarter we added capacity before we had the contract addenda executed with them. We have a very fluid relationship with them and didn’t getthe contract addenda executed until this quarter and so we saw the expense and not the revenue.

And similarly we arein the process of lighting some new under sea capacity that’s been delayed a bit and so we took on kind of an operating lease for some capacity to get our needs inthe short term that represent essentially a short term operating inefficiency that burdened the quarter and caused the apparent anomaly in the year-over-year comp in AOI.

Brett Feldman – Lehman Brothers

Okay, but you are anticipating revenues to come in that will offset these expenses inthe future quarters.

Thomas J. Fitzpatrick

Yes, we are.

Brett Feldman – Lehman Brothers

Okay, that’s great, and then one other question going back to the US. I know that the holiday season is not really captured inthe quarter that you have just reported but you have obviously gone through it and we seem to be getting some mixed signals from the various carriers. You have given us some indications of what happened during the holiday season. How would you characterize the demand for wireless services in your region during the season that we just concluded?

Michael J. Small

We don’t want to doa lot of forecasting but I would say that it was kind of an average holiday season, nothing in either extreme.

Brett Feldman – Lehman Brothers

All right, that’s fair enough, thank you very much for the color and I think that is all my questions for now.

Operator

We will take our next question from Phil Cusick with Bear Stearns.

Phil Cusick – Bear Stearns

Hi guys, can you hear me?

Michael J. Small

Yes.

Phil Cusick – Bear Stearns

You first talked about…

Thomas J. Fitzpatrick

Phil, we are having trouble hearing you.

Phil Cusick – Bear Stearns

Sorry, the new market that you just bought, 400,000 people, when would you plan to launch that and how many could you cover atthe time?

Michael J. Small

We are talking about the property we just bought inOhio just east of our Fort Wayne property and there is 400,000 pop covering Lima and Findlay, Ohio. We basically within one month of taking control of the spectrum, we’ve build the road to Lima from Fort Wayne which has been an area where there has been no GSM coverage by any carrier or spotty at best. At this stage we have no definitive plans for significant further builds. We will evaluate that with next year’s budget. Phil any color on how it has gone or what impact that ithas had on the market.

Phillip H. Mayberry

Anecdotally I’ve gotten a number of letters from Fort Wayne area people saying “thank you”, and we have very solid coverage on the highways so it should help up both in terms of gross activation and churn.

Phil Cusick – Bear Stearns

But it sounds like no plan to build out and compete in that extra market?

Michael Small

We are not saying we won’t do that, but we have no plans at this stage. We are going to stay within our CapEx guidance for this year for sure.

Phil Mayberry

Michael, we did open up some limited distribution in [Lima] just because we put some coverage there, but it wasn’t any major event; no advertising support, nothing like that.

Phil Cusick – Bear Stearns

Secondly, can we talk about data ARPU inthe U.S. and Puerto Rico? It is still fairly low, although ithas been growing pretty well in both markets. Can this get to industry levels? Any reason, since you are not offering 3G or something like that, that we couldn’t get to $9 or $10 over time?

Michael Small

We believe we are going to be in the industry trend lines and we’ve just always described that we’ve been late to market in the U.S. for a variety of reasons; first and foremost, it is cheaper to buy the equipment if you wait later, and we think that is a good economic trade, it wouldn’t have made up the difference in revenue versus the CapEx saved. We need our roaming partners to come to the edge of our territory with data offerings so we get a good roaming hand-off. We usually don’t like to put our [inaudible] on the handset upgrade issue; we think that is extensive so we wait until the handsets are naturally out there before we deploy the data services, at least relative to a lot of the other people inthe industry. So we think we will be on the same trend line, just a little behind the rest of the industry.

InPuerto Rico we are actually doing some exciting things; Carlos, do you want to update about the EV-DO Rev A deployment?

Carlos Blanco

Thank you, Michael. We just finished upgrading our EV-DO network. We have today around 84%, 85% of the population covered inRev A and we are seeing a great movement from customers that don’t want to wait for cable solutions or DSL solutions and want to be able to move around with the upgrade. We have brought them the service in the island.

We have what we call an umbrella of broadband that we have deployed and the feedback and sales so far have been great. We are very excited about it and we are going to continue expanding the coverage on the EV-DO.

Phil Cusick – Bear Stearns

That brings me to your 3G trial inthe U.S. How longdo you plan to run it, and what arethe hurdles that we will need to hit to actually build that out? Or is this just a question of timing and figuring out the technologies and things like that?

Michael Small

The trial is for our understanding of the technology. The decision to deploy will be based on market pressures and economics. So we are going to go at the last possible minute and do it really quickly. We think that probably next fiscal year we will have to start wrestling with that issue and we have no idea at this stage whether that will be a limited deployment or a fairly widespread deployment.

But it is strictly us getting familiar with the technology is the reason we are doing the test right now.

Phil Cusick – Bear Stearns

Finally, it seems like 5% of customers are still on the TDMA network. What is the plan for this with AT&T turning it off fairly soon?

Phil Mayberry

We are segmenting by revenue produced. We took 9,000 recently and sent them a direct mail piece offering them an upgrade phone to GSM. We have about one-third of them who have responded already. We are just taking it revenue by revenue, as we always do, trying to manage to anAOI contribution as opposed to a subscriber growth. We’ve had good success in moving them, but we are taking it slow and easy.

Michael Small

We are down to two TDMA switches; we had five at one time and we are recapturing some of the spectrum as we need it. We do geta little bit of -- TDMA and analog are joined at the hip, to some degree, at least from the switching platform. We are still seeing some analog roaming; way smaller than it was a year ago, but that is factoring into the equation.

We probably won’t shut it down the day we are allowed which is next month, but it won’t be too, too long after that.

Phil Cusick – Bear Stearns

Given that you’ve already phased out those switches, and I have to think you have been pulling costs off of this thing for along time, is there significant cost savings to be had by taking this out, or are we just not going to notice when it happens?

Michael Small

Not going to notice. The bigger issue is going to be spectrum flexibility. We will have more for 3G when we shut this down, and even that is not a huge issue, but it is the larger issues than the costs.

Operator

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

Ana Goshko - Banc of America Securities

I wanted to follow up first on theU.S. economic impact that you may be feeling and your U.S. clusters. A couple of things. First, I think you said you are designing product to meet those who are feeling the pinch. I am wondering if we should expect downward pressure on ARPU as a result?

Secondly, I noticed that you actually lost prepaid subscribers. It is a small part of your total U.S. base, but it was a notable loss. Usually in tougher economic times you will actually seea resurgence of prepaid, so I am wondering if you are seeing competition on that front? Has that resulted inthe loss? Is that an area where you are going to be focusing, given the environment?

Michael Small

We have made the choice to service thelow end of the market with postpaid or at least what we classify as postpaid, where you have a recurring monthly bill; prepaid but monthly bill, they get billed monthly.

We have been working on this for along time, our decision to go down market. We actually are seeing higher ARPU for the customers down market because we are giving them a great deal. They are willing to pay us more upfront for the phone and they are willing to pay us timely for their monthly bill. They are getting a lot more minutes than they could from a prepaid product for their dollar. That is working well.

Sothe economics of us going down market is lower cost to acquire – zero – higher ARPU but with that, higher bad debt and higher churn. When we dothe lifetime value analysis, these are very profitable customers; in fact, among our most profitable.

Ana Goshko - Banc of America Securities

On CapEx, the Ohio wireless spectrum, is that included in your reported CapEx?

Michael Small

Yes.

Ana Goshko - Banc of America Securities

If I am doing the math correctly, you are tracking behind your guidance for the year.

Michael Small

Are you talking about the spectrum acquisition? Oh no, that is not included; the CapEx we put in there is.

Ana Goshko - Banc of America Securities

Sothe $140 million per year includes that spectrum. I still –

Michael Small

Wait a second. Go ahead, Fitz.

Tom Fitzpatrick

Our $140 million included all spectrum acquisitions sothe Ohio spectrum would fall into that but when you look at capital expenditures, spectrum doesn’t go in there.

Ana Goshko - Banc of America Securities

Can you update us, for your $140 million of guidance which is both CapEx and spectrum, where are you at year-to-date on that?

Michael Small

Our CapEx is – I saw your note yesterday, like we did last year Ana, we think we are going to spend the $140 million, that is our current estimate. We won’t spend more than that, but we will be about that. We are admittedly slow out of the gate here. But if you look at last year, we spent about the same as a percentage of our guidance through six months as we did last year.

The total CapEx number year-to-date is 45.4, which doesn’t include the spectrum, and the spectrum would be 3.6 million on top of that.

Ana Goshko - Banc of America Securities

So my point, generally, is that you are tracking behind the full year guidance. I am wondering, what arethe big buckets of spend for the second half? Is it wireless 3G or is it related to Ethernet or is it just spread across your different areas?

Tom Fitzpatrick

It is pretty much spread across the areas. There is no one big number that is driving it.

Ana Goshko - Banc of America Securities

Soit is just more seasonal that you tend to outspend inthe second half?

Michael Small

I mean, if you just look at it, I think we have spent about the same through six months this year as we were last year.

Operator

Your next question comes from James Breen – Thomas Weisel Partners.

James Breen – Thomas Weisel Partners

Inthe U.S., back to Ric’s question on the roaming side, the permitted rates were down 21%, overall down 16%. This implies that the traffic was up. Is that just a normal increase in traffic as your customers come up? Are you seeing proportionally more of a larger increase there?

Also with that in mind, are you seeing less of an overbuild in your territory over the course of the last quarter?

Michael Small

Phil, any comments on the latest rate of overbuild?

Phil Mayberry

James, we have always tried to lower rates to try to slow down the overbuild of the major carriers. We did that again and we think that we’ve slowed them down some. It is inevitable that they are going to build out. How far out into the hinterland, we don’t know but they have pretty good coverage on the freeways and expressways and in the major towns, but ithas slowed down some.

Michael Small

If you were to look atthe coverage map for roaming partners, they would say they cover our territory. When you get off the main roads, their coverage would be significantly inferior to ours in some locations. The number of those locations will decline steadily over time, but there has been no major burst in building activity and at this stage, I really would be surprised if there is a major concerted effort to build a lot in our territories; it is just going to happen steadily.

They can still make a decision, our roaming partners, at any point in time to say coverage is good enough, we don’t need roaming in a territory and we are just shutting it off. That is the unexpected decision that is hard for us to anticipate. Sometimes they make the decision to pull the roaming in a particular territory and then they regret ita little later and add it back; other times they stick with it. Soit is really a tough competitive decision for our roaming partners to make, because if they pull roaming in an area it does affect quality for them.

James Breen – Thomas Weisel Partners

InPuerto Rico, any comment on the competition there? Has itchanged at all with T Mobile’s purchase? HasAMX changed how they are pricing relative to you guys? I know they matched your plans in the summer. Has that changed at all?

Finally, given some of your commentary about the economic conditions inPuerto Rico, you’ve raised the lower end of your EBITDA guidance. What gives you confidence that overall the total number still remains intact? Thanks.

Michael Small

Puerto Rico remains intensely competitive because there aresix players in a common geography, and I think that at this stage most of our competitors are performing pretty well. There have been no dramatic changes out of Claro since they came and took over for Verizon, except for an intense advertising campaign to introduce the new name, which persists. We’ve seen all of the competitors, because they have had to match our unlimited plan, but most of the emphasis has been going down market. They are increasingly advertising lower price points than we are with considerably less value on the plans than we do.

We are really trying to segment the market and defend our position in light of the tough competitive situation. We believe we have a great network inPuerto Rico that has now gotten even better on the data side with the EV-DO Rev A which really does perform nicely. The response time is significantly better than EV-DO Rev 0 which itself was a pretty good product.

We have a local brand and ithas been consistent for ten years. We have the strongest sales organization and we are starting to see traction. This quarter, despite all of the challenges, we were up year over year in Puerto Rico Wireless in revenue and just barely inAOI and we see the trends that give us confidence that it might not have been quite as strong as we had hoped going into the year because of the weak economy, but we have still turned the corner and we have begun to grow again.

Operator

Your next question comes from David Sharret - Lehman Brothers.

David Sharret - Lehman Brothers

I wanted to follow up on the last question about Puerto Rico competition, specifically on your unlimited plans; your price points versus others in the markets. You have said they have matched an offering on the unlimited plans. Have they pretty much matched your price point as well?

Michael Small

Everybody is either at $49.99 or $39.99 for unlimited. No one hasthe same value in the plan. Companions generally aren’t allowed and we have an unlimited Companion. We have unlimited calling to the United States in there. We have in-network, Centennial SMS included and unlimited phases.

Also, when we do charge for roaming, it is at by far the lowest rate inthe marketplace. So if you really want an unlimited plan with a predictable bill, we arethe best value in the marketplace.

Carlos, any other comments? I don’t think we are losing a lot to the other unlimited plans.

Carlos Blanco

I think, Michael, as you said we have the best value at $49.99. A lot of the competitors advertise $49.99 but they make it mandatory to get $5 of features or $10 of features, so customers really learned that very quickly. We are by far the best value both in the quality of the network and what we give the customers for what they pay.

Just one clarification. TheT Mobile deal has not closed yet. It was announced, but ithas not been closed yet.

David Sharret - Lehman Brothers

On the U.S. side in terms of roaming, when you were talking about therate permit step down, was that a contracted basis step down, or was that a separate negotiation? Should we expect on September 1, 2008 that there will be a similar step down inthe rate, or was this a one-off event?

Michael Small

This was a new negotiation. One of our longstanding beliefs has been if it is inevitable that we are going to get overbuilt steadily, and particularly if we leave high rates out there we will get overbuilt faster, that we would rather defend our retail business. We like the lower rate too, to the extent our customers can now use our partners networks at a lower rate. That improves our retail economics and also lets us begin selling in more locations in our territories.

Soan area where we believe customers would drive out of our service area fairly often, a couple of years ago we might have said that it doesn’t make any sense, but now it looks attractive to us.

I think you will see continued downward trend inthe rate per minute, but we are getting closer to thecost of production. When they used to bea dollar a minute in the old days for roaming, it was hard to know where the bottom was on economics and there was more negotiation than cost of production. I think now there will be concern on taking therate down too much more because it will look pretty good to resell someone else’s network rather than produce your own minutes, and no one is going to want to go there.

David Sharret - Lehman Brothers

The full impact of therate decline was seen in this quarter, and the full impact of your cost of roaming benefit was seen in this quarter as well?

Michael Small

Yes, it was in effect the full quarter.

Operator

With no further questions, I would like to turn the conference back over to Mr. Kunszabo for any additional or closing comments.

Steve Kunszabo

Thanks. That concludes the Q&A portion of our call. Beginning later this morning you can access a replay of the call on Centennial’s website or by dialing the phone numbers noted in our press release. Thank you.

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