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NTELOS Holdings Corp. (NASDAQ:NTLS)

Q4 2007 Earnings Call

February 29, 2008 10:30 am ET

Executives

Wes Wampler - Director of IR

Jim Quarforth - CEO

Mike Moneymaker - EVP and CFO

Analysts

Gaurav Jaitly – UBS

Ric Prentiss - Raymond James

Phil Cusick - Bear Stearns

Pat Rien - Lehman Brothers

Barry Kaplan - Maple Tree Capital

Operator

Good day and welcome everyone to the NTELOS Holding Corporation's fourth quarter 2007 conference call. This call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Wes Wampler. Please go ahead, sir.

Wes Wampler

Thank you. Good morning and welcome to the NTELOS fourth quarter 2007 earnings conference call. The topics for today's call include an overview of business activities and financial highlights for the fourth quarter and year 2007 and an update to the Company's guidance for 2008.

Speaking on the call today will be James S. Quarforth, Chief Executive Officer of NTELOS, and Michael B. Moneymaker, Executive Vice President and Chief Financial Officer. We'll begin with comments from Mike and Jim, and then take any questions you may have. We ask that questions on this call be from current investors or analysts and that any media questions be later directed to Mike Minnis, our Director of Public Relations.

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

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

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

Mike Moneymaker

Thank you, Wes, and good morning. We are pleased to announce fourth quarter 2007 operating revenues of $127.9 million, a $14.1 million or 12.4% increase from fourth quarter 2006. Operating revenues for the year ended December 31, 2007 were $500.4 million, up $60.3 million or 13.7% over the comparable period in 2006. The fourth quarter revenue increase of $14.1 million was primarily driven by growth in wireless subscriber revenues of $8.9 million or a 15.5% increase over 4Q'06 and growth in wireless wholesale and roaming revenues of $3.4 million or a 16.5% increase over 4Q'06.

As in the fourth quarter, wireless accounted for $55.4 million of the annual revenue increase, a 17.2% over 2006, with subscriber revenues growing $35.8 million or 16.0% over the prior year. We are pleased with this strong year-over-year growth in subscriber revenues and are particularly pleased that all of our key operating metrics; gross adds, churn and ARPU improved year-over-year.

Wireline revenues grew $1.5 million or 5.1% over 4Q'06 and $5.0 million or 4.3% for the year, reflecting continued strong double-digit growth within our Competitive wireline segment and broadband service revenues, including integrated access or Voice-over-IP based services and Metro Ethernet revenues. This revenue base was $4.3 million for 4Q'07, an increase of 23.6% over 4Q'06 and $16.0 million for the year of 2007, an increase of 28.5%.

RLEC revenues grew by 1.1% for the year reflecting access revenue growth partially offset by declining access lines. Competitive wireline revenues include dial-up Internet revenues of $0.8 million for 4Q'07 and $3.8 million for the year 2007, a decline of $0.3 million and $1.2 million respectively over the comparable periods in 2006. Absent the impact of the dollar for revenue declines Competitive wireline revenues grew nearly 10% year-over-year.

We're also pleased to report operating income of the year 2007 of $102 million, a 65% increase over operating income $60.6 million for the year of 2006. Operating income for the fourth quarter 2007 was $18.8 million as compared to $22.1 million for 4Q'06. The substantial growth in operating income of the year was attributable to wireless operating income of $71.4 million for 2007, an increase of 35.2% or $18.6 million from 2006.

Wireless operating income reflects accelerated depreciation charges of $15.9 million for the five-month period end of December 31, 2007 and $9.6 million for the fourth quarter of 2007, relating to 3G 1XRGT equipment scheduled to be replaced or redeployed with our recently announced EV-DO upgrade. These charges accounted for the decline in operating income from 4Q'06 to 4Q'07.

Net income for the year and fourth quarter end of December 31, 2007 was $32.5 million or [$0.37] per share on a diluted basis and $4.3 million or $0.10 per share on diluted basis respectively, as compared to the net loss of $7.2 million for the year 2006 and net income of $6.2 million for 4Q'06.

Adjusted EBITDA was $49.6 million for the fourth quarter 2007, a $5.2 million or 11.8% increase from fourth quarter '06 adjusted EBITDA of $44.3 million. Adjusted EBITDA was $203.0 million for the year of 2007, an increase of 17.7% or $30.5 million as compared to a $172.5 million for the year of 2006. Adjusted EBITDA margin was over 40.6% for the year ending December 31, 2007 as compared to 39.2% for 2006.

With Wireless adjusted EBITDA improving from 34.8% for the year of 2006 to 37.6% for the year of 2007. Wireless adjusted EBITDA accounted for $5.1 million and $30.1 million of a period-over-period growth in 4Q in 2007. While our adjusted EBITDA remained consistent with prior year with slight increases in each of coupled period in 2007 over 2006.

Looking next at our key operating metrics for the fourth quarter and year 2007, there are as follows; first, an overview of our Wireless operating results and key metrics. The aforementioned 15.5% growth in wireless subscriber revenue in the fourth quarter 2007 and 16% growth for the year, reflects the combination of favorable subscriber growth in year-over-year growth in ARPU, and improvements in both post pay and total churn.

2007 was an outstanding year for Wireless subscriber revenues. Net subscriber editions for the year were 10,375 compared to net adds for 4Q'06 of 9,773. Net subscriber additions for the year 2007 were 39,598, a 28.2% growth of net adds of 30,891 for the year 2006. For the year, net adds of high ARPU and lower churn postpaid subscribers were 21,669, a 92.8% increase over the comparable post pay net adds of 11,241 for the year of 2006. National no-roam products continues to sell well representing 60% of our post pay sales for the fourth quarter of 2007 and over 54% for the year.

Our blended ARPU was $55.94 cents for the 4Q'07 and $55.98 for the year of 2007, representing increases of $2.30 and $2.39 over the comparable amounts for 2006. This was driven by continued growth in data ARPU and increased mix of our protected class prepaid product, which garners a higher ARPU than our traditional prepaid products. Data ARPU for the year of 2007 was $4.67 as compared to $2.71 for the year of 2006.

The fourth quarter data ARPU growth reflected the benefit from billing enhancements that enabled us to commence separately billing, certain previously bundled data services that had been included in total ARPU but yet had been excluded from data ARPU. Absent the impact of including this now unbundled data services and data ARPU, we still do data ARPU in the fourth quarter 2007 over 4Q'06 due to continued growth and usage of data services. We are pleased with the growth to date in data ARPU and are excited about the catalyst for the growth opportunity ahead.

During fourth quarter 2007, we continued to experience year-over-year improvements in our churn results. Post pay churn was 1.9% for 4Q'07, 30 basis points favorable over 4Q'06. Blended churn was 2.8% for 4Q'07 favorable to the blended churn of 3.2% for 4Q'06. For 2007 post pay and blended churn was 1.8% and 2.8% respectively, both favorable to 2006 post pay and blended churn results of 2.3% and 3.2% respectively. CPGA costs were at $356 for 4Q'07 and $349 for the year 2007, which was in line with 4Q'06 and year 2006 cost of $334 and $337 respectively.

We anticipate incremental sales and marketing costs in 2008, in connection with promotion of our retail launch of high speed data services when we turn up our EV-DO capabilities. CCPU was $34.43 for 4Q'07 and $33.02 for the year 2007, increases of 9.6% and 5.7% respectively over the comparable periods of 2006. These increases reflect the success of our national no-roam product which contributed to higher in-collect cost of $20.4 million, an increase of $5.4 million over 2006.

Higher spending on retention cost, net of related equipment revenues from existing customers, which contributed to the favorable improvements in customer churns noted above, accounted for $1.5 million of the growth to total CCPU costs. In addition, wireless bad debt expense was 3.2% of wireless subscriber revenues for the year 2007, as compared to 2.7% for the year 2006.

Also in these increases was a favorable reduction in operating taxes for the year of $1.3 million, which benefited from a favorable fourth quarter 2007 adjustment of $1.2 million, due to a ruling from taxing authorities on the disputed operating tax matter.

CCPU increases also reflect the additional cost from the addition of 126 cell sites since January 1, 2006. A catalyst for a successful growth in gross adds, favorable churn results and strong growth in wholesale revenues.

Wireless wholesale and roaming revenues were $24.4 million in the fourth quarter of 2007, an increase of 16.5% from fourth quarter 2006 revenues of $20.9 million. As previously disclosed on July 31, 2007, we entered into a new strategic network alliance agreement with Sprint, which introduced revenue minimums of $8 million per month.

Fourth quarter revenues under this agreement were $24 million representing the minimums for each month during the quarter. Absent this minimum revenue guarantee revenues based on actual usage during the quarter would have been$22.4 million.

Moving onto Wireline, our RLEC again experienced favorable net growth in broadband customers over access line losses. Our broadband customers additions within the RLEC was 2,680 for the year 2007 compared to access line losses of 1,743 for a net gain of 937. And with our recently launched IPTV based video services and enhanced broadband offerings in portions of our to the RLEC areas. We anticipate growth in RLEC video and broadband customers, we should continue to mitigate line losses from wireless and anticipated cable competition.

Looking next at liquidity, an overview of our liquidity and current financial condition is as follows. First adjusted EBIDTA less expenditures from property, plant and equipment for the year 2007 was $93.4 as compared to $85.9 million for 2006. In 2007 we incurred incremental EV-DO expenditures of approximately $25 million with a substantial portion of this amount being incurred in the fourth quarter 2007. As a reminder we signed the new Sprint wholesale agreement on July 31, 2007 and in August 2007 entered into a contract with Lucent to purchase EV-DO equipment.

Cash provided by operating activities was $143.9 million for the year 2007, an increase of 48% compared to $97 million for the year 2006. Cash provided by operating activities for the fourth quarter 2007 was $40.7 million compared to $35.9 million for the fourth quarter 2006. Cash used to purchase property, plant and equipment was $109.6 million for the year and $54.3 million for the fourth quarter 2007 reflecting the incremental EV-DO expenditures noted above.

As of December 31 2007 we have outstanding $614.2 million of debt, including $612.8 million of first lien indebtedness, with a blended interest rate of 6.5% at December 31, 2007. Our ratio of total debt at December 31, 2007 to adjusted EBITDA for the year ending December 31, 2007 of $203 million was 3.03 to 1, down from a ratio of 3.63 to 1 as of December 31, 2006.

I'm also pleased to report that total debt net of $53.5 million of cash on hand at December 31, 2007 was $560.7 million. At $560.7 million, this represents a ratio to adjusted EBITDA for the year ending December 31, 2007 of 2.76 to 1.

We are also pleased to announce today that we just entered into a new interest rate swap agreement in the notional amount of $600 million that will commence on September 1, 2008 and will run through March 1, 2010. This swap agreement will result in our paying an all-in fixed rate of 4.91% for this period, on the $600 million notional amount.

Our 2008 interest expense, including bank administrative charges, interest on non-bank interest bearing obligations of the company and amortization costs related to previously incurred debt origination cost, is projected at $34 million, a $9 million reduction from our 2007 interest expense of $43 million.

As indicated about our 2007 guidance, we project our cash flows from operations will continue to grow and exceed our planned capital spending for the year, including covering our anticipated spending on growth, capital opportunities and incremental capital expenditures relating to our planned EV-DO network upgrades.

In our guidance issued yesterday, based on the mid points of our guidance ranges, we increased our previous guidance on projected cash flows for 2008 by $17 million to a projected $9 million reduction in interest costs. Through locking in on favorable LIBOR renewal rates and execution of the aforementioned new interest rates swap agreement, and lowered our projected cash income taxes by approximately $9 million to reflect a benefit of bonus depreciation provided by the recently enacted economic stimulus package.

Based on our mid points or updated guidance ranges for 2008, projected net cash generated from adjusted EBITDA less CapEx inclusive of a planned incremental EV-DO spending in 2008 is $99 million and net of cash interest expense, cash taxes, cash dividends and regularly scheduled 2008 debt repayments. Net cash generated is projected at $2 million for 2008 before adjustments for changes in working capital.

We also have recognized an income tax receivable of $11.8 million as of December 31, 2007 as a result of excess estimated tax payments resulting after a favorable resolution of certain NOL limitation calculations, I anticipate this amount will be refunded or offset against estimated tax payments in 2008 further adding to our cash position.

With that I may now turn the discussion over to Jim Quarforth, our CEO who will provide an update on our latest business and operational developments and our updated financial guidance for 2008.

Jim Quarforth

Thank you, Mike. As Mike has pointed out we've continued to build a strong liquidity position as a result of our growth even in light of investing heavily in the future of our business. Early last year the board introduced a regular quarterly cash dividend to return capital to shareholders. In the fall the dividend was increased by 40% to a new quarterly dividend rate of $0.21 per share. Yesterday the board declared a dividend of $0.21 per share to be paid to April 11th, 2008 to shareholders on record on March 20th, 2008.

The Board continues to evaluate the current and projected liquidity position of the company in an effort to determine the best use of this capital. We continue to believe that the first priority will be to invest in the growth of our business followed by returning capital to shareholders to increasing regular quarterly dividends.

I would like to take a few minutes to give an update on our EV-DO deployment and its implications, customer insight in the first quarter 2008 and provide an update on our guidance.

As we have previously indicated, 2008 will be most active year from the wireless network deployment standpoint. We anticipate installing approximately 650 Lucent EV-DO Rev-A cell sites which will replace 495 Motorola 1x cell sites upgrade 95 Lucent cell sites and add 60 new EV-DO cell sites to our network footprint. In addition, we will be redeploying approximately 100 of the Motorola 1x cell sites to further expand our network’s footprint.

The approximate, 160 addition cell sites which is double our normal annual additions, represent a network expansion of 16% taking our total cell sites to over 1,200. Of the 150 new cell sites, approximately 83% will be located in Virginia West, in West Virginia market servicing both NTELOS and Sprint customers under our wholesale contract, which will provide a strong catalyst for growth in voice and data revenues. The 650 EV-DO cell sites project being serviced by year-end will cover approximately 70% of our total customers at approximately 80% of our cell sites within the Sprint contract area.

Another key element to our network expansion plans will be the addition of nine new retail stores or 12% growth, which will further strengthen our differentiated retail selling strategy. Six of the nine stores will be opened by the end of second quarter. We expect the introduction of EV-DO broadband capability will dramatically increase usage by existing customers, allow us to provide new services and devices to the market, strengthen our retail and business channels, and be a further catalyst for continuing ARPU growth.

While we're seeing some slowdown in the voice minutes of use growth from our Sprint relationship, we continue to see a strong data usage growth. Sprint's data usage growth has more than doubled in the fourth quarter 2007 compared to the fourth quarter of 2006. As we turn up markets with EV-DO capability, we expect to see an acceleration of daily usage growth from Sprint customers. The substantial network expansion will also be a catalyst for wholesale revenue growth as we are averaging $160,000 in annual wholesale revenue per sell site.

Under our new amended Sprint agreement, the first EV-DO market deployment is scheduled to be in service by the end of the second quarter. The first market deployment is key to the overall EV-DO upgrade plan as it require the installation of two new Lucent switches. We are very pleased with the progress to-date and believe we are two months ahead of schedule and should commence service in April.

Based on the good progress to-date, we are evaluating the acceleration of our first quarter 2009 EV-DO market deployment into the fourth quarter 2008. If we elect to accelerate our deployment, it will do a number of things for us. First, it satisfies the 98% EV-DO build-out requirement under the Sprint wholesale agreement, which activates an increase in the monthly revenue minimums from $8 million to $9 million and second, it provides our retail and business channels broadband capability earlier to market to our customers. The cost for this acceleration would be approximately $3 million in capital and $300,000 in operating expense.

As we've indicated in the past, we expect to incur approximately $6 million of additional operating expenses in 2008 to support the deployment of EV-DO and the network expansion. While its increase in operating expense will put short-term pressure on margins, it will be a significant catalyst for future growth in data ARPU expansion.

We are pleased with the projected free cash flow growth, which continues to grow after absorbing a $6 million additional operating expense, the $35 million incremental EV-DO capital spend, and the additional capital for the 160 new cell sites. Last year, we experienced strong operating trends including good growth in customer additions, reductions in churn and growing ARPU supported primarily from data.

Importantly, the momentum from these trends has given us a good start to the beginning of 2008. As a result, we anticipate net customer addition in the first quarter should be similar to last year, which was an exceptional quarter at approximately 15,000 net customer additions. The Company has been positively impacted by recent interest rate reductions and has recently locked in rates through an interest rate swap. As a result, we anticipate a savings in interest expense this year of approximately $9 million.

Based on these savings, we are updating our guidance as follows. We're increasing our net income guidance by $5.5 million or 17% to a new range of $35 million to $41 million. We are reducing our interest expense by $9 million to $34 million. We're increasing our income tax expense by $3.5 million to a new range of $24 million to $27 million. We're also reaffirming all other annual guidance as outlined in the January 24th Annual guidance release.

As I mentioned earlier, we had a strong finish to an exceptional year. Our financial results and key operating metrics continued to demonstrate positive trends and solid momentum. We are particularly pleased with the strength of our adjusted EBITDA of $50 million in the fourth quarter in light of strong growth additions and the associated CPGA.

We're also pleased with the growth in free cash flow, which has allowed us to continue to invest in the growth of the business and also increase our dividend level last year. Our financial results last year are confirmation of the catalyst we have to grow into the future. Our past investments in network expansion have provided growth in both retail and wholesale wireless business, a significant investment in our wireless expansion and technology evolution of EV-DO this year will provide significant catalyst for growth for both voice and data revenues across numerous market segments.

Our retail wireless business continues to see strength in customer additions, growth in data penetration, ARPU and improvement in churn. In addition, our wholesale agreement continues to demonstrate growth, particularly in data, which we would expect to accelerate with the EV-DO deployment. The Wireline business is well positioned to continue its double-digit growth in it's compared to strategic broadband products such as Metro Ethernet, integrated access and carrier to carrier services.

The ILEC has achieved an enviable DSL penetration currently at 38%, outpacing its access line decline and continues to enjoy a double-digit access minute of used growth and EBITDA margins among the best in the industry. We believe these catalysts and operating trends position the company for sustainable growth into the future.

At this point, we'd like to take questions and would ask the operator to give instructions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we'll first go to Gaurav Jaitly from UBS.

Gaurav Jaitly – UBS

Great. Thanks. Good morning, guys. Nice to hear, you're having a very solid first quarter on the Wireless business. Just a couple of questions, first on the guidance. I think you mentioned your bad debt expense for the year was 3.2% versus 2.7%, just wondering what it was third quarter versus fourth quarter and what you're assuming your bad debt is for 2008.

And then, secondly, on the Sprint side and the wholesale side, obviously Sprint's having a lot of issues and just based on your voice side, total revenue side you have been pretty flat on the wholesale revenue side for the past two, three quarters here. Just wondering what your initial thoughts are on Sprint's new plans. They could obviously have a tough time for the first half of next year as well. When do you expect to exceed that $8 million minimum at this point?

And then, I am just curious why you would not be announcing that you're accelerating the $3 million additional expense to get to the 98% threshold for the EV-DO build. I am just curious why you would not be going ahead with that or what’s holding you back from announcing that today? Thank you.

Jim Quarforth

Okay. I'll start with the Sprint questions and then Michael will give you comments on the bad debt. Soon I have got all the questions written down here. I guess from our perspective, the reason Sprint has been flat the last two quarters has just been because the actual change in billing rates in July of '07, in both voice and data calculate to a billed amount less than the $8 million a month minimum, and the concepts there in the contract was to incent one, give Sprint competitive rates, where they can achieve the margin and be incented to grow the business but at the same time, set a $8 million minimum or a minimum higher than the current build rate to incent them to grow the business, so they can effectively reduce our cost structure.

So they have been growing into that $8 million minimum. I think on a previous call, we had projected that they would pass over, cross over the $8 million minimum in March of this year. I think based on the slowdown that we've seen on the voice side, in particular that we're now projecting that to be in July of this year.

A lot of that growth we expect is going to come out of data. We've had strong data growth over the course of '07 through that relationship. We expect that to accelerate as we turn up markets with EV-DO. The catalyst, as we think about the Sprint relationship even in light of some of the struggles is that I guess one, we're very encouraged by some of the things that the new leadership has done there. We expect that they're going to be very aggressive in the marketplace and that's going to result in positive growth and gains in revenue for us through the wholesale relationship.

Secondly, the EV-DO build as we turn up markets, they will be adding EV-DO capability to their customers, which will add growth to the data business. And then, finally, the 160 million new cell sites that we're adding, about 144 of those are in the contract area. We've been averaging about $150,000 per year in revenue through their wholesale relationship. We see that as a catalyst as well.

Regarding the $3 million acceleration, we do have the authority from the Board to accelerate that. Right now, I think the guys are focused on getting the first market out which includes that in two new switches, Lucent switches to the network. Once we turn those markets up in the April time frame, we'll be making a definite decision as to, whether we are going to accelerate the first quarter '09 build and the fourth quarter '08; it's really a resource issue. We feel very positive that the way things are going now on the build-out, we are ahead of schedule and we would anticipate, it's likely that we would accelerate that but no final decision has been made at this point.

Mike Moneymaker

The question regarding bad debt expense, bad debt expense was about 4.5% of lot of subscriber again, bad debt, wireless bad debt expense was about 4.5% of wireless subscriber revenues in the fourth quarter. That was an increase, we did strengthen our reserves slightly in the fourth quarter based on our assessment of the aging, the receivable balances as well as just a view towards the economy and we adjusted its reserves equipment.

Operator

Ric Prentiss of Raymond James has our next question.

Ric Prentiss - Raymond James

Hey, good morning guys.

Jim Quarforth

Good morning.

Ric Prentiss - Raymond James

Couple of follow up questions thereto. With the Sprint contract the rates on the voice side. Aren't they set to kind at the average price or the average yield at Sprint and when are those set, are those set in July each year?

Jim Quarforth

Ric, they were fixed in July '07 for a year and then what happens in July of '08 although reset and they're reset based on Sprint's average revenue yield and then they'll reset each six month's after that.

Ric Prentiss - Raymond James

Okay. And the July '08 reset, is that based on '07 results then?

Jim Quarforth

It's actually based on, I think the previous six months. The preceding six months, and prior to the rate reset.

Ric Prentiss - Raymond James

Got you. Okay. And as you think about Sprint's announcement yesterday, did you guy's anticipate an unlimited plan, kind of coming into the arena? Look at your guidance that you have now and your thoughts about accelerating the build into fourth quarter?

Jim Quarforth

We already contemplated accelerating the build in the fourth quarter prior to any of the unlimited announcements, and in fact we saw the Verizon announcement as really one of setting the price for the industry for unlimited, which we thought was a positive sign. We quite frankly liked the attention to unlimited plans, because we offered unlimited plans and we think we're priced very well, and when you get a lot of attention on something like this, what it does is broadens the enthusiasm and knowledge within the marketplace, which we think will help us from a marketing perspective.

We've had regional unlimited plans for sometime that range from $39 to $69, including roaming. And that really fits the majority of our market segment. When you start talking about $100 plan, it is a small percentage of our market, certainly, and I think its, when you hear industry folks talk about an 8% to 12% of the market segment out there may have a desire for those plans. That’s across the entire US and we suspect, you’ll see some take rates in the more urban markets, the concentration being in those markets.

I think the other key points when you think about these plans is a second line is pretty much equivalent to cost to the first line and in our particular and unlimited plans, our second line is $39. So its a totally different product and it appeals to a much larger market segment than the nationwide unlimited plan that are out there.

Ric Prentiss - Raymond James

Also on the taxes item, I appreciate the update on the interest savings. Tax line, the $24 million to $27 million guidance, how much of that is cash taxes. Is it all cash tax or is it combination of that?

Mike Moneymaker

It's combination obviously of both our guidance I think its $13 million to $17 million, based on the range of operating results that we have provided.

Ric Prentiss - Raymond James

That helps. And maybe just kind of an update on the economy to go with the requisite, how is the economy affecting you guys, what are you seeing in your nick of the woods and how does that get reflected into your guidance?

Mike Moneymaker

We have not changed our guidance from the January, the initial guidance we gave in January. We'd probably say the economy hasn't changed, from the last time we reported at the end of the third quarter. We continued as you saw in the fourth quarter we had equivalent gross net adds than we did a year ago.

We reported today, gave you some insight into the first quarter, which we believe is going to be a net addition of about 15,000 which is comparable with what we had last year and that was an exceptional quarter for us last year. And I think one of the things that we’re excited about is if you can get out of the box early in the first quarter, you enjoy those revenues for the balance of year.

Our churn has continued to trend well. So we feel consistent with what we've said in the past. The value play works very well in both the wireline and wireless businesses when you have some downturns in the economy and we're able to continue to add a strong book of business on the post-pay side and push prepay, doesn't have the bad debt associated with it.

Ric Prentiss - Raymond James

And the last question is on prepaid side. Do you get a lot of questions on your protected class. Can you just kind of update us on how the protected class adds are going. That class has a pretty strong ARPU, surprisingly to a lot people. May be just update us on are people still signing on for those higher end plans there in protected class.

Mike Moneymaker

Ric, once second, let me get my hands on that number. I don’t have that on my fingertips. Let me get my hands on that number. I'll be right. Why don’t we go on, Ric did you have another question?

Ric Prentiss - Raymond James

No, that's okay just if you could answer that.

Mike Moneymaker

I'll throw that in at some point in one of the future questions here.

Ric Prentiss - Raymond James

Okay.

Operator

And Phil Cusick with Bear Stearns has our next question.

Phil Cusick - Bear Stearns

Hey guys, thanks for taking my call.

Jim Quarforth

Hey Phil.

Phil Cusick - Bear Stearns

Ric as usual picked up a bunch of the questions, but no offense Ric. But I wanted to follow up a little bit, it seems like the quarter has gone really very well and we are seeing Sprint sort of falling off even worse than in the 4Q. Do you have any information you can share on porting ratios either from them or Nextel or just in general.

And then second if also you could give us an update on how you see the unlimited usage going through, whether that's on the voice minutes or on megabytes of data or something like that. That would help us think about the industry overall. Thanks.

Jim Quarforth

Phil when you talk about the unlimited minutes you mean the new plans out there.

Phil Cusick - Bear Stearns

No, from your standpoint what sort of usage did you see for your unlimited customers? Thank you.

Jim Quarforth

Sure. On the porting, I am not sure we had the here with us.

Mike Moneymaker

Let me handle that. We will look into that one, Phil, but let me give an answer to the earlier question unanswered from Ric and that's on the protected class. Previously we reported that that was running right at $70 and that continues to hold it at that level on ARPUs. So it is continued to be a very strong product with a very strong ARPU level.

On the porting I don’t have that information in front of information, we'll have to look into that, and hope to get that answer before we're off the call.

Jim Quarforth

Then on the minutes, we do have that information. We technically have been seeing, I think, on an average about 1,500 minutes per month on an unlimited plan. Total minutes is about 1,325, post-pay is about 1,260 and prepay about 1,580 and actually I don’t have that in front of me broken down by plan type, we can get that for the year.

Phil Cusick - Bear Stearns

Okay.

Mike Moneymaker

Which, Phil, in particular plan hikes you were looking for? I mean for unlimited.

Phil Cusick - Bear Stearns

We're just trying to figure out. There's a lot of people putting out unlimited plans today, and I think a lot of people would like to know what's the sort of usage pattern that you see.

Mike Moneymaker

I think it's probably in the 1,700 range for a post pay unlimited.

Phil Cusick - Bear Stearns

And that's about average. And as you think about where those minutes terminate, do those tend to be landline of your network where you're paying a decent termination fee or is that really not a consideration? Thanks.

Jim Quarforth

Typically the usage on unlimited is designed as a Wireline replacement product. And so it's -- there is question here, is it terminating the landline or is it terminating to other wireless?

Phil Cusick - Bear Stearns

Is it terminating somewhere where it's creating additional OpEx for you that you worry about where it terminates?

Jim Quarforth

So that be a Wireless..

Mike Moneymaker

There is a type 2 incremental access charge. That's a variable type charge, but so, yes there is an incremental cost, but it is extremely low rate as far as per minute cost making it still a profitable product.

Phil Cusick - Bear Stearns

Okay. Thanks a lot guys.

Operator

(Operator Instructions). And our next question comes from Pat Rien with Lehman Brothers.

Pat Rien - Lehman Brothers

Good morning, and thanks for taking the question. Just a couple of quick ones. The first one, in terms of leverage, you guys are at 28 now and I calculate about 23 by the end of the year. Is there any certain level you guys are targeting time over long-term basis?

And then in terms of your payout ratio on your dividend is there target there as well? And then one final question, in regards to the punitive corporate tax you would take if you split up the business, I think it's in 2010. Do you face a similar tax, if you were to be an acquirer of another business or how does that work? Thanks.

Jim Quarforth

I guess the first question on leverage. We've previously commented that we've been very comfortable with the leverage in the 3 to 3.5 times range. As you point out, our gross leverage is getting down to the very low end of that and our net leverage is, as you say is, at 12/31/07 was beneath that range. So, to your question, whether we're comfortable, we've been very comfortable with 3 and 3.5, obviously to increase that leverage would require going out to the debt markets, which I think right now, if you were to look at the debt markets, they are somewhat costly in terms of rates from what we hear in the marketplace.

So, really, I think all of that would be subject to the market conditions and certainly changes in the current marketing conditions before we would ever considered looking at that further in terms of optimizing capital structure. In terms of the payout ratio, I think we announced in the, when we did the yearend increase it was a 40% increase. I think that it was, we had a 50 to

Mike Moneymaker

We are looking at kind of being in the range of a 50% to 60% of pro forma free cash flow. So in the case of '08, you wouldn't include some one-time cost of, for example, EV-DO. That's not a normal CapEx number for us. You know regarding 2010, I think the issue on the punitive tax is if you were to separate those businesses prior to 2010, then you impose that punitive tax. After 2010, you could separate the business. As far as acquiring other businesses, there is really no punitive tax there, if you acquired another business.

Pat Rien - Lehman Brothers

Great. Thanks, guys

Mike Moneymaker

Yeah.

Operator

(Operator Instructions). And we do have a question from Barry Kaplan with Maple Tree Capital.

Barry Kaplan - Maple Tree Capital

Hi. Good morning. I just had a couple of quick things on the capital spending, so whether it's $35 million or $38 million for the EV-DO in 2008. It's included in the $120 million or so guidance, so I guess question is, is there any reason why that should go back down to the mid-80's in '09, similar to way you were in '06? And then, my second question is just on the guidance for the first quarter, sub adds, have you said anything about how you expect that to break down between prepay and post pay?

Mike Moneymaker

I guess in the first part of your question, again, the incremental EV-DO spend over roughly a 2.5 year period is $65 million. We incurred about 25 of that in 2007 and as you point out either 35 or 38, if we would accelerate some of '09 into '08 would be incurred leaving either depending upon acceleration or not, about six to three. So would we expect the 35 of the EV-DO spending to go down? Yes. Would it, would we still have some remaining either $3 million or $6 million? Yes, we would in 2009.

I think the other component you need to look at is we're adding, as Jim indicated about 160 cell sites 2008. That also is a very high number compared to our traditional build. We're going to continue to evaluate our redeployment and new cell site opportunities. We'll be monitoring how what the performance and take rate is in the marketplace for our EV-DO product and frankly hope that there are growth opportunities to yet further continue to expand the network.

As we have pointed out we've exclusivity within the wholesale foot print. So if any white space within our foot print that we do not cover to the extent we build we get a benefit both from enhancing our network for retailers as well as the wholesale revenues. So as we have done every year we always monitor them and look for those investment opportunities. So but to your question; yes the EV-DO, the large amount of EV-DO capital spend is in 2007 and larger amount in 2008.

Jim Quarforth

Regarding the net additions, we did not break that down as far as the insight for the Q1. I think if you look at some of the historical quarters, what you'll see is that the fourth quarter and the first quarter are already higher mix prepay quarters and then your second quarter and your third quarter are higher mix post-pay quarters. So, you can probably go back and look at history and get some insight as to what that mix would be.

Regarding the question earlier about the porting, specifically relative to Sprint. We under our contract are not able to discuss customer numbers. I guess total generically, we think we're doing very well on the porting as far as against most of the national carriers. I think Verizon probably is certainly one of the toughest in terms of the competition in where they match up, throughout the entire territory with us, particularly in the eastern markets. The remaining carrier I think we do well on in terms of our porting experience.

Operator

And we do have a follow up question from Ric Prentiss with Raymond James.

Ric Prentiss - Raymond James

I'll get to be a little bit more loquacious to help Phil out with that comment.

Mike Moneymaker

I was going to say you only used up eight of your questions and you still got one or two more, I am sure.

Ric Prentiss - Raymond James

Exactly, and Phil didn’t have enough I guess. I'm sure we will hear about that later. Just want to talk to you about a couple of things quick. On the data side, you mentioned how you recalculated your data revenue, because of the change on your billing systems. What would have been the fourth quarter '07 number without, I think you kind of touched on but you didn’t give us the actual number?

Mike Moneymaker

Ric, and frankly because when you look at activity that gets blended together its difficult to get a perfect allocation. We believe that the growth was probably in line with the other quarters after that change.

Ric Prentiss - Raymond James

Okay. And then the other probably more pertinent question is, being on the Leap conference call yesterday, clearly they are going to be coming into the Virginia area. How do you prepare for the entrance of an expanded entrance of a guy like Leap, into your Virginia East side?

Jim Quarforth

That would be giving you a lot of competitive information and sharing it with the world. We are obviously very conscious of Leap's operations and their products and how their positioned on the size of networks that they build. We think that we've made some changes last year. Quite frankly part of that as a step towards positioning ourselves against a Leap or a Metro coming in to the marketplace, we think that, when you look at the pricing and the coverage in the products that we offer, we think that we're pretty competitive today.

There will be some additional changes that we'll be making over the next year, which we think will probably bring us, may be a little closer to where they are and certainly more competitive, but as far as what we're specifically going to do, I'm not sure, we're going to share that on this call.

Mike Moneymaker

Yeah. Just to add to it, Ric. One of the things that was very important in our billing system enhancement was it allowed us more flexibility to bundle or unbundled data services. We think, that billing enhancement is very important for what it enabled us to do competitively, to the extent we need to adjust our product offerings. We are, from a back office standpoint, much more flexible in terms of what we can do, in terms of that. Those changes to the plans as well as a result of the billing enhancement.

Ric Prentiss - Raymond James

Okay. Pretty good. Thanks guys, have a great day.

Jim Quarforth

Thanks.

Operator

It appears there are no further questions at this time I would like to turn the conference back over to Mr. Wampler, for any additional or closing remarks.

Wes Wampler

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

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