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General Communications Inc. (NASDAQ:GNCMA)

Q4 2007 Earnings Conference Call

March 7, 2008 2:00 pm ET


John Lowber - SVP, CFO

Ronald Duncan - President, CEO


[Ian Sophini] - Unidentified Firm

[Mike Grundel] - Unidentified Firm

[Liam Burke] - Unidentified Firm

Jonathan Schildkraut - Jefferies & Co.

Jonathan Atkin - RBC Capital Markets


(Operator Instructions) Now I'll turn over the meeting to your host for today's call, Mr. John Lowber, Chief Financial Officer. Sir, you may begin.

John Lowber - SVP, CFO

Okay. Thank you very much, and thank you all for taking the time to participate in our call today. We appreciate it. I'm John Lowber, the company's Chief Financial Officer. We've also got Ron Duncan, our CEO, with us, and our usual supporting cast. We've got [Peter Pounds] and Bruce Broquet, [Linda Tarbeth], and Greg Chapados, and we will all be available to participate in the Q&A session, which will follow my initial comments.

A copy of our detailed press release can be found on our web site. The conference call is being recorded and will be available for playback for 72 hours, beginning at 4:00 p.m. Eastern Time today. The playback number is 8665056378, with an access code of 7461.

In addition to the conference call, you may access the conference through the Internet. To access the call via net conferencing, log on to our web site at and follow the instructions. The webcast will be available for replay for the next two weeks.

I will now read the usual cautionary statement about forward-looking comments, and then we'll get started.

Some of the statements made by GCI in this presentation are forward-looking in nature. Actual results may differ from those projected in forward-looking statements due to a number of factors. Additional information concerning such factors can be found in GCI's filings with the Securities and Exchange Commission.

2007 was another interesting and challenging year. Unexpected pressures in the network access business and the transition of a large commercial customer off of our facilities for the most part overshadowed the dramatic progress we're making in the consumer segment and kept us from attaining our internal financial goals.

We are continuing, however, to make good, steady progress on our strategic and operational goals. Some of our key initiatives for the year included the continued deployment of what we refer to as DLPS or digital local phone service, which is the provision of local services using our own facilities.

During 2007 we rolled out local service in 12 new markets, and we now have a statewide market share of 28%. We added almost 9,000 local access lines during the year, and we began providing service on 23,400 additional lines using our own facilities.

We now have clarity with respect to our wireless strategy. With our acquisition of Alaska DigiTel and through our own efforts we now serve 77,300 wireless subscribers, an increase of 48,300 subscribers since the first of the year.

We entered into a strategic roaming agreement with Sprint and negotiated an agreement with AT&T Mobility which will facilitate an orderly transition of our customers off of the AT&T network and onto our own network over the next four years. We expect to greatly expand our wireless presence in the state over the next few years.

We announced the planned acquisitions of the United Companies, Alaska Wireless and the remaining approximately 20% of Alaska DigiTel and have made the necessary regulatory filings to accommodate closing those transactions during 2008.

In addition to making investments in network infrastructure to accommodate the statewide rollout of local service and the provision of wireless service in rural Alaska, we're also expanding our fiber backbone by building a geographically diverse backup route to Fairbanks, and we're expanding our fiber network in Southeast Alaska. We're also expanding our HFC plant in order to reach more video subscribers and are continuing to deploy high-definition dual tuner DVRs and cable modems at an impressive rate.

On the financial front, we were able to generate $38.8 million in fourth quarter EBITDAS, which you may recall is the term that we use to describe EBITDA excluding non-cash stock-based compensation expense. Fourth quarter EBITDAS was up just under $1.7 million or 4.6% over the same quarter of the prior year.

For the year, our revenues were up 9% to a record $520.3 million and our EBITDAS totalled $153.7 million, a decrease of $2.6 million or 1.6% from the prior year. Net income and earnings per share were down 27% and 33% respectively.

Fourth quarter revenues totalled $131.3 million, representing an increase of 8.2% over the prior year quarter.

On a sequential basis, revenues were down approximately 2.1% while EBITDAS was essentially unchanged. We normally expect to see sequential decreases in the fourth quarter due to seasonality, but EBITDAS margin actually increased over the prior quarter, reflecting our strong consumer metrics and giving us some pretty nice momentum going into the new year.

Consumer. Our fourth quarter financial results avoided the usual seasonal slowdown due to the stellar performance of our Consumer segment. Revenues were up 23.8% over the prior year and 2.1% on a sequential basis. Revenues increased in all four major service areas on a year-over-year basis and in two out of four categories sequentially.

The gross margin percentage improved by 365 basis points compared to the prior year quarter and 398 basis points sequentially.

A few of the more significant metrics for the consumer segment for the quarter included an increase of 3,900 cable modems, an increase of 4,900 local access lines and service, 4,800 local service lines provisioned on our own facilities, 3,900 new wireless subscribers, 2,400 new basic video subscribers and an additional 6,600 HD DVR converter boxes deployed. These metrics represent some of the best results we've seen in recent memory. These and other related metrics are detailed in the attachment to the press release.

Consumer EBITDA, excluding stock-based compensation expense, totalled $14.95 million for the quarter, almost double the $8.12 million we reported a year ago, and up from $11.3 million in the prior quarter. The increases are a result of the trends in the underlying customer metrics that we've been discussing over the prior few quarters. The extension of our local service into new markets allows us to extend our successful bundled products into those new markets as well.

Commercial. Fourth quarter revenues finally showed some year-over-year growth. Increases in data and wireless revenues overcame decreases in voice and video revenues, resulting in a 6.8% increase as compared to the prior year. Commercial revenues were down slightly on a sequential basis. Our margins were negatively affected, however, as commercial margin percentages declined 489 basis points compared to the prior year quarter and 315 basis points sequentially. The margin decline is due in part to the substitution of lower-margin revenues for higher-margin revenues. The Commercial segment has had to deal with the fairly significant decline in revenues from a large customer that occurred over a period of several quarters. That transition is now behind us.

Selling, general and administrative costs as a percentage of revenues improved as compared to the prior year and were pretty much unchanged as compared to the prior quarter.

The increase in revenues and the improvement in G&A costs in the current period overcame the decrease in the gross margin percentage and led to an increase in EBITDAS when compared to last year. The decline in revenues and gross margin percentage on a sequential basis led to a sequential decrease in commercial EBITDAS of $900,000 or 19.7%.

Commercial metrics have also been on an upswing and include an increase of 400 access lines, 600 local access lines provisioned on our own facilities, 200 cable modem subscribers, and 100 commercial wireless subscribers during the quarter. We saw our usual decline in commercial video subscribers as our wholesale customers scaled back operations for the seasonally slower winter season.

Network Access Services. The Network Access business experienced a pretty weak quarter, but pretty much stabilized by the end of the year. Revenues were down $3.6 million or 8.5% as compared to the prior year quarter and were down $3.9 million or just over 9% sequentially.

The gross margin percentage was down 477 basis points versus the prior year quarter due in part to scheduled rate reductions, and was down 87 basis points from the third quarter. We carried $296 million network access minutes during the fourth quarter, representing a decrease of 8.6% versus the prior year quarter and 8% on a sequential basis.

EBITDAS decreased by approximately $4.7 million or 21.3% versus the prior year quarter and decreased by $3.6 million or 17.1% on a sequential basis. Our average rate per minute for all of our long distance traffic totalled $0.0822 per minute compared to $0.0864 per minute a year ago and $0.0873 per minute in the prior quarter. The decrease from the prior year is largely due to a rate decrease effective the first of 2007 and the sequential decrease is due to the usual seasonal change in the traffic mix.

Managed Broadband. Managed Broadband revenues were up 9.6% compared to the year ago quarter and 2.4% on a sequential basis. Revenues for the fourth quarter totalled $7.5 million as compared to $6.9 million in the same quarter of the prior year and just under $7.4 million in the prior quarter.

Quarterly EBITDAS was down $560,000 as compared to the year ago quarter and was up approximately $650,000 on a sequential basis. The decrease from the prior year was primarily due to a bad debt recovery that was recorded in the prior year.

The Managed Broadband segment has been successful in retaining existing and attracting new clients during its most recent renewal cycle.

Other Items of Interest.

Legal and regulatory. Our regulatory folks continue to be focused on negotiations for local service interconnection with incumbent carriers. Today we have interconnection agreements in place to cover 90% of the access lines in the state, and as a result we've initiated service in 25 communities.

Since our last call we've received regulatory approval for two additional interconnection agreements with Interior Telephone Company and Mukluk Telephone Company. We recently completed negotiations of agreement terms with Alaska Telephone Company and will be submitting the agreement for approval from the Regulatory Commission.

We have new negotiations underway in some of the remaining areas. These efforts will allow us to provision local services in these new markets, five of which we expect to expand to during 2008.

Since our last call the FCC granted our undersea cable application for the Southeast Alaska fiber, and we have applications pending for the required FCC approval of the United Utilities, Alaska DigiTel, and Alaska Wireless transactions. We have filed for approval of the United Utilities transaction with the Regulatory Commission of Alaska. We expect an answer from them by no later than midMay.

The regulatory team is also continuing to monitor the efforts of the Joint Board on Universal Service and the FCC to curb growth in the Universal Service Fund.

Share Repurchase Program. We continued our share repurchase program during the fourth quarter. For the full calendar year we acquired approximately 1.252 million shares at an average cost of approximately $12.04 per share for a total of $15.1 million.

Since our last conference call, we acquired 310,000 shares at an average cost of $8.77 per share, for a total of approximately $2.72 million.

We have not purchased any shares since early December, and we're currently not in the market as we will likely want to preserve our liquidity until we complete this year's expansion plans and we're back to generating free cash flow.

Transponder Update. As we've discussed in the past, the satellite on which we own transponder capacity is expected to reach its end of life during the second quarter of this year. A replacement satellite is expected to be launched and placed in position in time to accomplish an orderly transition to the new satellite. Once the new satellite is in its assigned orbital location and is operating within its performance specifications and made available for our use we will record the present value of the minimum lease payments on our books as a capital lease in the approximate amount of $98.6 million. Once delivered, we expect to use this capacity for the next 14 years.

Our financial guidance assumes that the new transponder capacity will be launched and delivered on schedule and that the transition to the replacement satellite occurs prior to the existing satellite reaching its end of life.

Guidance and Economic Prospects. Last quarter we adjusted our year end EBITDAS guidance to a range of $152 to $154 million and our revenue guidance to $514 to $534 million. We approached the high end of our adjusted EBITDAS guidance and the low end - and we exceeded the low end of our revenue guidance.

The Alaska economy appears to be holding up quite well, and we expect it will remain counter cyclical to what happens in the lower 48 states. High energy prices have historically had a favorable effect on the Alaska economy.

We expect to generate record revenues and EBITDAS in 2008 in spite of the uncertainty regarding the closing dates of our pending acquisitions. We expect our consolidated revenues will total $550 to $560 million, and our EBITDAS is expected to exceed $165 million. Our first quarter revenues are expected to total $130 to $133 million and we expect to generate cash flows in excess of $37 million.

Liquidity and Capital Expenditures. We ended the year with approximately $13 million in cash on hand and approximately $86 million available to draw under our revolving facility. Our senior facility will require approximately $2.15 million in principal amortization during the next 12 months.

We expect to continue to draw down the facility to fund our 2008 capital expenditures and pending acquisitions. We think our existing facility will be about $70 million short of our requirements, which we expect will peak late this year.

In order to fund this shortfall and in order to provide additional working capital, we expect to increase the size of our senior credit facility by as much as $125 million or more, depending on market conditions during the first half of this year. If we're unable to arrange the financing necessary to fund our expansion plans, we would likely delay certain of our infrastructure investments.

We invested approximately $47.6 million in capital expenditures during the fourth quarter and approximately $158.1 million, including capitalized software, for the full year. Our capital expenditures for the year exceeded our most recent guidance by approximately $8.1 million as we ramped up late in the year in order to meet our goals for 2008.

Investments during the fourth quarter were made in the following areas:

For our business lines, primarily cable modems, set top boxes and enhancements to our rural broadband facilities, $9.1 million.

For IT projects, $4.3 million.

For support of our network, $6.6 million.

For product management, including local services initiatives, $25.6 million.

For our wireless subsidiary, $1.8 million.

And for other administrative support, approximately $200,000.

We estimate that our maintenance capital expenditures requirements are no more than $25 million per year, and expenditures beyond that are largely discretionary and success driven. We expect we will invest as much as $220 to $230 million in capital expenditures during 2008, excluding the capital lease of satellite transponder capacity that we'll be taking down during the second quarter of this year.

Our major capital expenditures initiatives during 2008 include approximately $62 million for expansion of our wireless facilities, $46 million for long-haul network capacity, and $36 million for our statewide rollout of local services, and $26 million for growth.

To recap, our cash sources and uses for the year on a very simplified basis, we generated approximately $154 million in EBITDAS and we increased our borrowings by $49 million, for total sources of $203 million.

Out of that, we spent $158.1 million in capital expenditures and software, $35 million in net interest expense, $15.1 million for stock repurchases, and $34.7 million related to the acquisition of Alaska DigiTel, implying a net use of $39.9 million, which is within $10 million of the decrease in the cash balance during the year.

The interest rate on approximately $320 million of our $541 million in debt at year end is fixed. Our cash interest expense at current rates on our year end balances is now running at approximately $35 million per year compared to the last two quarters' annualized cash flow of approximately $155.4 million. Our cash interest coverage is approximately 4.44 times and our leverage at quarter's end on net debt is 3.4 times cash flow. On gross debt, our leverage is 3.48 times.

In conclusion, 2007 was a challenging year in light of the pressures experienced by our Network Access segment, but the success we are having in the other areas of our business helped to mitigate weakness in that area. Our consistently strong customer metrics indicate that we are carrying a lot of favorable momentum into the new year.

With all the initiatives we have underway, 2008 will be a very busy year, but by year end we should be well-positioned to be Alaska's only truly statewide integrated telecommunication company and we will have further diversified our sources of operating cash flow.

We will now be happy to answer your questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of [Ian Sophini]. Your line is open.

Ian Sophini - Unidentified Firm

Great. Thank you very much. A couple quick questions here. John, you referred to the $26 million of growth Capex. What is that specifically? You know, I figured that the $62 million of wireless is growth and $36 in local is growth, but what does that extra 26 there for?

John Lowber - SVP, CFO

That accommodates just additional items used to provide additional services on our existing facilities. Examples might be, you know, set top boxes, probably new vehicles to replace vehicles that were reaching end of life, new ports for adding capacity to switches, cable modems, new DVR recorders. Just, I think as it implies, Ian, just items to fund the growth in the core business.

Ian Sophini - Unidentified Firm

Okay. And at what point of stock price does it become more attractive to just repurchase your shares as opposed to keep spending all this money on Capex?

John Lowber - SVP, CFO

Well, that's a tough one. Ron, I guess - do you want to address that one, or do you want me to take a shot at that one?

Ronald Duncan - President, CEO

I'll take it on, since I've been defending it.

I think at this point we need to complete the capital program that we've got underway. We are committed to building out on the wireless and transitioning off of the AT&T network onto our own network. We see substantial growth upside on the wireless side of the fence. This is a year where I don't think there's a lot of tradeoff between the ability to repurchase the stock and the alternative of making the Capex because to diversify the sources of the cash flow and to strengthen the competitive position, there's certain significant investments that are required.

We don't have a choice about putting a satellite up there. That's got to go. We really don't have a choice. We can change by a year or two what we do on the wireless, but we really don't have a choice on that.

And in the current financial market conditions, I don't think we can split the baby. I don't think we can go out there and say, "Okay, we're going to cut the Capex program in half and use some of the money for share repurchases." I think the nature of the capital markets today are that we can either borrow money to spend it on assets or we can not borrow any incremental money if we're going to do share repurchases, so we no longer have the opportunity to lever up and fund share repurchases; we can lever up and fund asset investments. So that adds an additional significant constraint that wasn't there a year ago.

So I think we have to accept the fact that for this year we're in investment mode and next year with the return of free cash flow we'll be back in a repurchase mode.

Ian Sophini - Unidentified Firm

Okay. It's just that I know you've always used the multiples your competitors were trading at and, you know, I've got to believe you guys are trading under five times even the current year EBITDA, it's an attractive specimen.

Ronald Duncan - President, CEO

I lust after stock at the current price. I just don't think the company has the opportunity to - I mean, I don't think we can go out and borrow $50 million to buy stock back in because that market simply isn't available to us in the current environment because of the way the credit markets are running. They're going to fund Capex because they understand the growth that comes from the Capex. They're not going to fund share repurchases.

We need to make the wireless transition. We need to put the satellite up. We need to grow the diversity of the core business.

I think it's crazy where we're trading. I agree there's a four multiple - either there's a four multiple in front of the current stock or the market has assumed that we're going to borrow an additional $150 million and burn it in the parking lot and that we're not going to get the return from it.

So there is no logic in my mind to the stock price, but I don't think it's an option for the company right now.

Ian Sophini - Unidentified Firm

Okay. Thank you very much.


Our next question comes from [Mike Grundel]. Your line is open.

Mike Grundel - Unidentified Firm

Hey, guys, one question and then a follow up.

But you guys are investing heavily in both wireless, which is growing more competitive, and wireline, which is sort of, at least in the lower 48, a shrinking business. Could you talk a little bit about the returns you're seeing or expect to get from those two big investments that you're making with that Capex?

Ronald Duncan - President, CEO

Sure, Mike. I think that's a good question, certainly the second half of that, about why would you be investing in wireline when everybody else seems to think that's a dying technology.

We're in a little different environment for a couple of reasons. The first element of that is the fact that we're very significantly positioned as a bundled player, and while wireline usage is dropping, wireline usage is not evaporating. There's still 75% of the homes out there that have a wireline service, and we've said for several years that adding wireline to the mix where it wasn't part of our platform was important because that tended to drive core market share in other products.

If you look at the rather significant results that we had in the last quarter, look at what we did last year with video subs. We increased video subs by 3% in a market where everybody else's video subs are probably 3% to the negative. A big piece of that is what happens to core market share when you're able to add the wireline to the bundle. The package pricing for the bundle is attractive enough that it increases your core market share for video and data. You saw the same thing with good, strong adds on the data side, and if you look at the fourth quarter numbers you see very strong adds on the wireline side.

We continue to add wireline subs even in our mature markets because it's an area that we're driving hard as part of the package, and our competitors don't have a package to respond with. So even in a mature market like Anchorage, where we're above 50% of the market, we continue to drive wireline subs. And we deployed 12 new markets last year. We'll be at 25 new markets by the end of this year where we start with a zero percent share of wireline. And while wireline may shrink from 100% household penetration to 75% household penetration, if we take half of the new market, that's still the opportunity to add, you know, 35% of household penetration on the wireline side to our business.

So we see it as a logical part of the overall pattern for us. I think the very strong results you see in Consumer last year reflect that. I think you'll see continued advancement. We expect Consumer to eclipse Network Access in EBITDA this year and become our most important single business segment, and that's a combination of what's happening with wireline.

And then as we add wireless, it gets even stronger. You really haven't seen the growth push from the wireless yet, particularly not on the margin side, because most of our wireless is still on the AT&T resale structure. But that'll shift over the next 12 months.

Mike Grundel - Unidentified Firm

What type of payback or breakeven or return on invested capital do you expect in wireline versus, say, wireless?

Ronald Duncan - President, CEO

We think generally we're getting better than a four-year payback, so you'd see a 25% cash-on-cash return probably within 18 months of deployment. It takes a little while to ramp up, although we're growing share very rapidly. We've got markets that we've been in barely a year, and we're pushing 25% market share on the wireline side.

Mike Grundel - Unidentified Firm

Okay. Okay. And then just the follow-up question, it really is sort of echoing what the first question was about. I mean, in 2007, if my numbers are right, you spent about $15 million on the stock buyback and the average price of the stock was a little over $12. I think what investors are just saying is, "You don't have to go out and borrow $50 million and do a buyback, but isn't there a way in this very large capital plan to squeeze or save a little bit here and be able to do something, whether that's $10 or $20 million, just to take advantage of where the stock's sitting and, you know, shrink that share count a little bit?"

Ronald Duncan - President, CEO

I think that'll come down to the final terms and conditions that we negotiate with our lenders. Right now the lenders refer to, quote, "shareholder-friendly actions" as toxic things. We have the rating agencies who go into a cold sweat if you even mention stock buybacks. There's a perception in the lending community that gives us a great deal of pause, and I think we have to complete our restructured financing agreement before we can opine on whether or not there's an opportunity to buy stock at the margin.

I can only reinforce that I think the stock in incredibly cheap right now, but I think if - you only have to look at your front page today to understand that in the current market environment, the lenders are not necessarily rational. It's not clear they were rational a year ago either, but they're probably at the other side of irrational right now.

Mike Grundel - Unidentified Firm

Got you. Well I guess all I'm saying is, you know, anything you can do to take advantage of where it's sitting. The returns on that stock must be significant and maybe even better than what you're doing on the Capex.

Ronald Duncan - President, CEO

I understand your frustration, Mike.

Mike Grundel - Unidentified Firm

Ron, hey, thank you.


Our next question comes from [Liam Burke]. Your line is open.

Liam Burke - Unidentified Firm

Thank you. Ron, there are a couple of revenue items. On the Commercial side, I know you lost that one customer, but on fourth quarter data revenue stepped up significantly. Now again, I assume it's a couple of things, A) you're through that period, one-year period, of the lost customer, but is there any initiative there that's made the revenue grow so steeply?

Ronald Duncan - President, CEO

I think there's a little volatility in Commercial data revenues because some of the time and material services that go with those revenues involving turning up services for the customers and managing their network.

We run, as you know, a body shop operation for the oil companies on the slow [end]. Some of the services that go with turning up some of those revenues and sometimes some of the products end up in there, and I think there's a little bit of volatility. I think there was a little spike in the fourth quarter in time and materials and product revenue in there is part of what you're seeing.

You are definitely seeing an underlying growth in data. We are done now with the transition off of that large customer. Basically, 2007 had $6 million less in data revenues from that large customer than the prior year did, so we outgrew that loss in the 2007 period and you're seeing a little bit of growth. But we would expect to see better growth on the data line in Commercial going forward now that we're past the large customer effect.

Liam Burke - Unidentified Firm

Okay. And on the Consumer side, voice revenues were flat year-over-year. Now, if you took a look at your traffic volumes, those are pretty good revenue numbers. What's allowing you to keep revenues flat in that space?

Ronald Duncan - President, CEO

The voice revenues include local access.

Liam Burke - Unidentified Firm


Ronald Duncan - President, CEO

For wireless - for wireline - and we're not going to cover up the ball on the wireline. So, I mean, yeah, you're right. People look at that and yawn when they see a flat revenue, but go look at everybody else's voice revenues and look at what's happening to them, and we're adding very significantly to the line count and to the market share.

We're also, if you look down from the revenue line to the margin line, you'll see voice margins are expanding, not decreasing, which is, again, counter cyclical to the industry, and that's a result of substituting a large number of the lines that we were renting from the competitor, the copper loops that we were renting, and replacing them with our own facilities. The numbers are in the chart back there, but we're also on a very rapid ramp for the substitution of our own facilities.

So once again, we're a little out of sync with the industry, where we've got both voice revenues and voice margins expanding, but it's a logical part of the business base when you understand the plan of expanding the wired footprint.

Liam Burke - Unidentified Firm

Thank you.

Ronald Duncan - President, CEO

Thanks, Liam.


Our next question comes from Jonathan Schildkraut. Your line is open.

Jonathan Schildkraut - Jefferies & Co.

Thank you for taking the questions. A couple here.

First, in terms of your Consumer business, it looks like this quarter there was a substantial uptick in gross margins or a downtick in cost of revenue which kind of flowed through the [inaudible] margin side. Was this due to the just transitions of access lines into own facilities, or did something else happen in the fourth quarter?

John Lowber - SVP, CFO

No, it's an acceleration of more lines and more lines on our own facilities. If you look at the year-over-year comparison for 2006, I think we had 36% of the lines, the local access lines, on our own facility. And on average in 2007 we had 60some odd percent of access lines on our own facilities.

If you look at the number of access lines added on our own facilities, twothirds of the access lines that we added on our own facilities were in the fourth quarter, so you're seeing a rapid ramp which comes from the new markets being built out and available for sale, and the plant being completely built out in the existing market so all existing lines are really up for grabs for that transition.

And while it'll still take several years to reach 100% on our own facilities, you should look for the fourth quarter type rates of growth and conversion to continue.

Jonathan Schildkraut - Jefferies & Co.

All right. Great. You know, looking at the mid points of your guidance for next year, you know, it implies limited margin expansion. I know that this year was a challenging year where margins contracted a little bit. Is it just the investments you're making into the network and bringing on some of those costs which will prevent the margin expansion being more significant next year?

John Lowber - SVP, CFO

I think you've got to be a little careful with the guidance. What we've put out there is we've stated above 165. There are some uncertainties that we simply don't have answers for yet. We don't know when the pending acquisitions are going to close, and the pending acquisitions of United Utilities and Alaska Wireless will add to the EBITDA for the year, but we don't know whether to tell you it's a May 1 or an October 1 closing date so there's some fudge in there.

We're also still making a trade off between two alternate methods of converting the AT&T wireless subs to our network. One of those would cost capital. The other one we believe would result in a one-time expense which would hit the EBITDAS in a multiple millions of dollars way, so we don't know how to factor that at this point into the guidance.

And then the other thing that's not in there, in the guidance that we've offered but certainly is on the cash flow side is we believe there's $10 to $15 million in IRU sales that will close this year that don't fall under EBITDAS the way we currently define it but would be additive to the $165 number that we've put out there when looking at the cash generated by the business.

So there's a number of things that really aren't reflected in what's put on the piece of paper as guidance that would be all improving of the cash flow condition of the company and some of it dependant on where we end up with a couple of transition items.

Jonathan Schildkraut - Jefferies & Co.

Okay, great. Just two more questions around the announcement that you guys had put out in the beginning in January and the deals with AT&T. The first, you know, Capex was about $5 million higher in the quarter than we had expected. Was there any pull forward of 2008 Capex or are we still looking in the $220 million range?

And then, second question, if we could just spend a couple of minutes going through how some of the revenues may transition, you know, where the AT&T/Dobson revenues are coming through now.

And I guess where I'm getting confused is that if you are getting revenues from reselling Dobson, Dobson's are now AT&T service, you know, that I would imagine would come through, you know, a wireless item in either your commercial or your consumer segments.

Alternatively, it was my impression that you also got revenues from the former Dobson for doing their long distance transport, and I'm wondering, you know, what the potential impact is and if we would pull that out of Carrier or Network Access and where we might move it to?

John Lowber - SVP, CFO

First question first, $5 million will be in the rounding error in the capital budget, so I don't think you should look at it as pull through. The guidance is still 220 for '08, but there's enough slop over at either end of the year that you have to give us, you know, 10% leeway either side of that capital just to reflect the timing of capital expenditures.

On the Dobson deal, conceptually the best way to look at it is that today for 2007 in approximate terms, we paid Dobson about as much as they paid us for - we paid them for the underlying carriage on our wireless customers something in the $20 to $25 million range, and they paid us an approximately equivalent amount for the use of our network to carry backbone services for them.

Their requirement to leave the backbone on us goes away as a legal requirement on the 1st of July. We believe that most but not all of that traffic will tail off fairly quickly. We believe that some of that traffic, including terrestrial tails and terrestrial connectivity to places that AT&T doesn't have its own facilities will stay on our network.

But basically what you should view is that for the current number of subscribers that we had to wireless on the Dobson network, that essentially that revenue stays in Consumer and Commercial wireless, but the underlying costs associated with it go away. And EBITDA - which we believe is about $17 to $20 million from the Dobson Network Access carriage of traffic - transitions over into Consumer and Commercial wireless, mostly into Consumer wireless, and that the EBITDA associated with the Network Access business goes down by a proportionate amount.

Growth, then, occurs in Consumer and Commercial wireless from new cell phones sold on top of the number that were outstanding on average over last year, and that drives wireless margin and wireless growth through a combination of using our own network and in places where we're not built out, the AT&T network with the free carriage that is provisioned as part of the transition.

Does that help?

Jonathan Schildkraut - Jefferies & Co.

That's very helpful. Thank you.


Our next question comes from Jonathan Atkin. Your line is open.

Jonathan Atkin - RBC Capital Markets

Yes. Thanks for taking the question. To clarify a little bit where things actually stand in terms of building out the statewide wireless footprints?

Ronald Duncan - President, CEO

Sure. Right now we're in the process of turning up the CDMA Rev. A throughout the vast majority of the terrestrial footprint, the wireless footprint - the fiber footprint within the state - and simultaneously overbuilding a GSM technology with the rebuild of the CDMA technology.

We believe that by the end of this year 75% of the terrestrial cell sites representing about 85% of the terrestrially served population will be complete on our own network with both the CDMA Rev. A, which is required for our Sprint contract compliance through Alaska DigiTel and for our GSM network.

We also will build out this year about one-quarter of the rural footprint, the satellite-served areas, with our GSM wireless, leaving three-quarters of that footprint to be built out in the subsequent two years. That one-quarter will be a little bit front end loaded on pops, but that's probably another 25 or 30,000 of a remaining 100,000 pops that are approximately in the satellite-served areas.

Jonathan Atkin - RBC Capital Markets

And then the Capex that you have kind of budgeted for this or set aside, did that already contemplate a migration to LTE or when that migration comes will you have to pay incremental to what you've already kind of talked about.

Ronald Duncan - President, CEO

We will be - the Capex that's there covers the full deployment of the CDMA Rev. A. We'll use that for the high end data product until we get a little more clarity on exactly what the GSM LTE transition will be.

But no, current Capex wouldn't include transitioning the GSM side to LTE, although we'll have an adequate data footprint through the CDMA Rev. A for the next 24 to 36 months, I'm sure.

Jonathan Atkin - RBC Capital Markets

And then briefly on the various kind of Consumer focused line items, whether it's, you know, video, broadband, wireless, voice, this year have you seen any changes in kind of the competitive environment or are things relatively static?

Ronald Duncan - President, CEO

Well, it's hard to say you didn't have a good year on that front when you look at increased video subs, increased wireline subs, increased wireless subs and increased modems, and average revenue going up on many of those products.

Great take on the DVR side and great takes on HD. We're most of the way through our conversation to all digital on the cable plan. There was a little bit of a benefit in the all-digital conversion in that some people who had been availing themselves of free service discovered they couldn't get it without a digital box and we drove down the piracy issues a little bit there, so that's helping a little bit on the video side.

But we're very aggressive in the Consumer businesses, and I think it reflects in the numbers. We haven't seen anybody come at us with a significantly aggressive thrust in those businesses, but they're still quite competitive.

Jonathan Atkin - RBC Capital Markets

Okay. Yeah, that latter part is what I was getting at. Thanks very much.


(Operator Instructions) At this time, there are no further questions.

John Lowber - SVP, CFO

Well, then I guess there will be no further answers. So we'll see you all again in not too long a time for the first quarter results. Thanks for joining us today. Take care.


Thank you. This concludes today's presentation.

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