SureWest Communications Q4 2007 Earnings Call Transcript

SureWest Communications (SURW)

Q4 2007 Earnings Call

March 13, 2008 12:00 pm ET

Executives

Steven Oldham – CEO, President

Phillip Grybas – CFO, Senior Vice President

Dan Bessey – CFO, Vice President

Fred Arcuri – COO, Senior Vice President

Reed Cox

Analysts

Billy McEntire – Stifel Nicolaus & Company, Inc.

Jonathan Levine – Jeffries

Peter Reed – Mass Capital Managment

Presentation

Operator

Good day ladies and gentlemen and welcome to the fourth quarter and full year SureWest Communications Earnings Conference Call. My name is Serita and I will be your coordinator for today.

(Operator Instructions)

Reed Cox

Thank you Serita, good morning and welcome to SureWest’s fourth quarter and full year 2007 earning conference call and webcast.

SureWest reported financial results for the quarter and the year this morning, which are available under the Investor Relations section of our website at www.surewest.com. With us on today’s call are Steve Oldham, President and CEO, Fred Arcuri our COO, Phil Grybas, CFO and Dan Bessy, VP of Finance and newly announced CFO.

Before we begin, I would like to remind you that some of the statements, comments and discussions that occur during this call are forward looking in nature and relate to future events and/or performance. These statements should not be relied upon as historical or absolute fact as future performance and future events are subject to numerous risks and uncertainties that frequently cause actual results and actual events to change.

There are many such risks and uncertainties, which can affect the economy, our industry and our Company in particular, some, or all of which could affect future results. Before making any investment decisions about our Company, we encourage you to review our Company’s most recent filings with the Securities and Exchange Commission, which contain a description of many of these risks and uncertainties under the heading risk factors. These reports are available by accessing the Company’s website at surewest.com and following the Investor Link.

With that said, I would now like to turn the call over the SureWest’s CEO, Steve Oldham.

Steve Oldham

Thank you Reed, good morning everyone and thanks for joining us today on the call.

I am going to spend a few minutes talking about strategy, the current environment and business drivers. Then we will hand the call over to Fred Arcuri our Chief Operating Officer to discuss the operating accomplishments for the fourth quarter.

Our current Chief Financial Officer, Phil Grybas will then introduce our newly appointed CFO, Dan Bessey who will walk you through our financial performance. We will then open things up for your questions.

Over the past two years, we have implemented deliberate and strategic actions to transform SureWest from a regional voice provider to the most advance broadband voice, video and data provider in the markets we serve and I am pleased to say SureWest’s position in the marketplace today has improved.

We have upgraded and expanded our network and we have been successful in divesting non-corp assets.

In addition, SureWest has implemented a number of initiatives to align employee actions with shareholder interest including the outsourcing of several internal functions in order to streamline our operations.

As part of our transformation process, we started 2007 by selling our directory advertising business to GateHouse Media for 110 million. Less than a year later, we announce the sale of our SureWest Wireless to Verizon wireless for 69 million. By selling non-corp assets and maintain efficient operations, we are narrowing managements focus on growing broadband capabilities while effectively managing telecom assets and providing enhanced financial flexibility as part of our continued network growth.

In December, SureWest announced the acquisition of Kansas City based Everest Broadband. The transaction was closed in February and more than doubles our triple play customer and RPUs making broadband expansion the primary driver for SureWest growth.

Adding the greater Kansas City area service territory provides SureWest with a new and exciting opportunity to accelerate our growth strategy. Furthermore, this marks our first step in expanding and diversifying our geographic footprint. With the advance infrastructure in Kansas, we can take advantage of our interstate meeting, experience in building and operating networks. We continue to provide and enhance superior service to new and existing businesses and residential customers. We believe our infrastructure builds out plans will help us pass over 100,000 homes by the end of the year in the Kansas City region.

Several years ago, the Company had the foresight to begin this transformation due to the inevitable and continuing advances in technology in changes in our industry that have affected our business.

Today regulatory subsidies can protect it’s service territory are being phases out.

You all know about the telephone access line trend in our industry. Just five short years ago, we reported about 145,000 access lines. At the end of 2007, this had been reduced to less than 114, 000 a 21% decline in that period of time.. Ultimately, these initiatives to transform and focus on broadband are designed to grow our Company and increase shareholder value. Our goal is to be the bandwidth leader in the markets we serve resulting in greater penetration in marketable homes, increased take rates of our products and services and higher revenue per user attributable to our broadband customers.

In the first half of 2007, SureWest reported solid penetration and strong growth in our key broadband segment. Slower growth in the third quarter and the beginning of the fourth quarter prompted us to implement a number of initiatives to boost sales. Mid fourth quarter we put together special sales and marketing efforts that resulted in the highest level of sales, call volumes of the year and that helped elevate our take rate in December to levels we saw early in 2007.

Fred will discuss these initiatives in a few minutes but the end result was significant and met customer addition in the month of December.

Looking ahead, while SureWest’s business remains strong, we recognize potential consequences of a slowing housing market. Residential customers have to select a communication service provider whenever they change their resident.

Regional downturn in housing starts and existing home sales has negatively impacted the number of consumers actively seeking to change service providers as a result of a move.

Other catalyst for the change in provider is the customer’s experience, quality of the network service, types of services and pricing as consumers seek to improve value.

The declining real estate trends in our country especially Northern California is well documented. The foreclosures have impacted home sales prices which in turn affect us. According to recent (inaudible) the median sales price for all new and existing homes combined are returned to June 2003 levels in Sacramento County and December 2003 levels in Placard County. This mean less people are selling their homes to move into new ones, which subsequently means we need to create new marketing tactics to spur those buying decisions.

In the face of this, we have opportunities to continue growth for SureWest in 2008. We can target increase penetration as a method of getting more sales with minimal investment in infrastructure and we can adjust our capital expenditures, which we monitor closely for the Sacramento region.

The economic environment impacts our pay back targets; we have the ability to quickly scale back on our capital expansion plans. But, we will continue to press our competitive advantage by having what we think is a superior network when the market demographics point to penetration rates in excess of 35%.

In contrast to many of our competitors, we are not investing in new state of the art networks at all. Even though new home growth slowed, we continued to form alliances with homebuilders in 2007 to make us a communications-marketing partner. As part of these arrangements, SureWest’s products and services are promoted at the homebuilder’s subdivisions through displays and promotions in the community’s sales office. This slow housing market these agreements don’t offer a lot of benefit but once the market picks up, we have these deals in place and they offer many great advantages another marketing tactic to help us increase penetration number and reduce costs.

At the end of 2007, a total of 30 homebuilders had marketing arrangements with SureWest covering 12,000 home sites of which 3,000 are marketable homes today. In 2007, an average of driver penetration in those subdivisions reached as high as 62%.

These homebuilders are wiring their homes to meet our fibers specification help us reduce install times and decrease any repair expense.

We have entered into agreements with some homebuilders who are paying one full year’s worth of SureWest fiber based services for homebuyers in targeted new home communities. We expect these types of partnerships to increase as homebuilders continue to offer value proposition to potential homebuyers, which in turn increases our penetration rates and revenue generating units.

As I already stated, the expansion of our geographic reach will also be positive for SureWest in terms of housing market. In Kansas City region has not experienced the same slow down in housing growth as Northern California. According to a recent article in LA Times, the Kansas City market is one of just a few regions that haven’t experienced a significant decline in medium price of homes.

Diversification from regional economic cycles is a key for us and Kansas City provides significant economic diversification.

In terms of the competition, we made sure that price is not an end game for SureWest. The end game for us is a mixture of reliability, quality, relevant features and best in class customer service. We have been preparing for this competitive environment by routinely upgrading our network and expanding the services, we are able to provide our customers.

Today our network is the fastest in the country and we are able to offer superior products at competitive prices. We are working hard to remain number one in the region from a customer service standpoint.

It is important to note the differences between our dense fiber network and our legacy copper network. At the end of 2007, the average monthly revenue we were receiving from customers on fiber network was just over $108 a month. On the copper network, the number was just over $50. In Kansas City, the number is $107 on their hybrid fiber co-ax network. For this reason, as we move into 2008 in Northern California, SureWest continues to upgrade and expand the IP base for hybrid home network.

By leveraging the existing fiber ring in Kansas City, we will be able to expand services to a greater number of business customers and residential customers there.

As we noted in the release, approximately 1.3 million shares in the Company’s current share repurchase program as of December 31, 2007. Between January 23 and March 13, 2007, the Company purchased approximately 269,000 shares at an average price of about $14 per share.

We also noted at the the board of directors regularly evaluate the Company’s dividend policy and it’s strategic growth plan. The Board is currently reviewing the dividend policy to insure that use of available cash and providing the greatest long-term shareholder value.

We now turn the call over to Fred Arcuri our Chief Operating Officer who will discuss our operations in greater detail, Fred.

Fred Arcuri

Thank you, Steve; I am going to start by spotlighting the broadband segment, which we continue to emphasize in the strength and focus of our business.

Let me begin by reviewing the exciting month we had with broadband segments during December.

Steve discussed the slower growth we saw in the third quarter and the beginning of the fourth quarter of 2007 resulting from a slow economy and increased competition.

Without getting into too much detail in the strategic moves, we made, it is important to note that we acknowledged these external factors and made key adjustments across the Company as we aligned the increase sales numbers. By recognizing the changing needs of the customer and adjusting our strategy accordingly, we accomplished a number of things in December. We doubled sales call volume and far exceeded December’s sales and installation target. We increased the number of products sold per customer in each of our broadband segments; voice, video and data saw their largest growth spikes of the year in December. These efforts were combined with the right timing of the products as we launched an IP Based multi-stream HD DBR in December, which is a key driver of growth.

The DBR was a soft launch, we did not back it up with any marketing but instead utilized it reactively as a save tactic. Yet, it still exceeded our adoption rate expectation. That launch combined with our enhanced HD TV channel line up resulted in considerable increase and HD take rate in December over the average of the first eleven months of 2007. Additionally at year-end, SureWest HD customer’s average 1.3 HD receivers per home.

Let’s go on to a quick overview of broadband. Broadband segment revenues increased 13% for the fourth quarter of 2007 compared to the prior year quarter as a result of growth in both business and residential services. Broadband business revenue saw significant growth due to the continued roll out of business services.

The Company increased it’s marketable business footprint through the addition of our new integrated access services across lease transport throughout the Sacramento metropolitan region substantially increasing the number of marketable businesses in 2007 compared to previous years.

Broadband segment residential revenues increased this quarter, resulting from an 11% growth in subscribers and 10% growth in RGUs from the targeted expansion of the fiber network.

As steve already mentioned in the select triple play footprint, average revenue per user increased by $5.36 year over year to $108.91 as new features were added to SureWest’s superior fiber optic network resulting in an increase in the triple play subscribers.

Data was a significant growth driver in our December numbers with RGUs increasing 12% in the fourth quarter from the prior year. This strength in data underscores the continued strong demand we are seeing for high-speed services across our fiber and copper platform. The fiber network alone, we saw a 21% growth in data subscribers over 2006 results.

These fiber statics show that symmetrical hyper speed data products of up to 10, 20 and 50 megabits per second are growing in popularity and are extremely sticky. Once a customer receives these speeds, they do not want to go elsewhere.

As demand for our bandwidth increases, our 20 meg internet customer count has nearly doubled from the year end 2006 count. We serve nearly 1,020 meg customers at the end of 2007. This translates into a significant revenue stream. Most of these customers are at a bundle price of $91.99 for 20 meg product.

It is also worth noting again that our 50 meg symmetrical product is the fastest in the country and we have the ability to go higher than that if demand calls for it. As a high end product, it has not been discounted or used in promotions. We have been pleased with the consistent increase in 50 meg subscribers during the year.

What these kinds of speed provide us with is the ability to test the market to see what kind of bandwidth needs are out there.

Looking at other key broadband products, video and voice services both saw single digit growth in the fourth quarter from the previous year with video RGUs increasing 7% and voice RGU increasing 8%. These numbers reflect the growth in the strength of our triple play bundle as well as increased demand for premium digital features including video on demand, HD TV and HD DVR.

During the year, we also added a number of premium HD TV channels and currently stand at 50 most of which are added in the fourth quarter up from 17 at the beginning of the year. This is considerably more than our peers and very competitive with satellite TV products.

Importantly, because our video is delivered over an all fiber network, it greatly enhances quality and reliability. We have a better picture quality than the competition. Because the amount of broadband we have, we do not have the network constraint that others have.

Due to this virtually unlimited broadband capability, we expect to continue adding high quality HD channels as they become available.

We are excited about our position in the marketing place and our ability to continue our broadband growth and we look forward to building on this momentum in 2008.

We recently announced the launch of our new residential VoIP product, SureWest Digital Phone. This will be a competitively priced and highly reliable voice option to add to our premium broadband package. This provides us with a technologically advance voice product that allows us to be more flexible with our packages and offers. It also offers a more competitive triple play package in our incumbent phone territory so we can bundle a new voice product, lower the cost to customers and help reduce churn in the ileac.

Again our broadband fiber network, in total at the end of the fourth quarter of 2007, fiber to marketable homes increased by 15% to 114,200 from 98,900 at the end of the fourth quarter of 2006. This increase was comprised of 5,750 new homes and 9,550 homes upgraded from copper to fiber.

It is important to note that while we increased our total marketable homes by a considerable amount, we also increased our penetration over the year to 24.1%.

Going forward into 2008, we will continue to expand and upgrade our fiber footprint with the ultimate goal of achieving the greater than 35% penetration in the fiber markets we serve. We believe we can reach that goal by continuing to expand the fiber network in Greenfield areas where it makes sense to do so heeding the demographics indicated, demand for our products and services and the planned build within a reasonable timeframe.

We have maintained a strong focus in Elk Grove area where we have solid success competing with the local incumbent.

As per home passed in 2007, it stayed the same as 2006 despite the impact of inflation. We achieved this by outsourcing less and completing much of the splicing and cable work internally, which cut the cost of that portion of construction by 25%. We were able to do this in 2007 because our internal staff was very knowledgeable and comfortable with the fiber overbuild process. We will continue to maintain this process and cut costs in 2008.

Regarding our network build, we believe we picked the neighborhood. In the middle of the second quarter of this year, we will review the build and decide if we want to slow it down or continue with the plan.

The fiber system is less expensive to operate and provides better return. As we replace copper with fiber, we expect to see the economics come into the business.

If we choose to slow down the build, it will be due to the need to combat competition by focusing more on increasing the penetration of our current network and less on generating additional homes passed.

As Steve mentioned, because of the reliability of our network and the advance services we provide over it combined with our customer service levels, we have found that once we gain a broadband customer, they want to stay with us.

We also believe this creates a reason for a new customer to choose SureWest, which is key since many people aren’t moving into new homes due to the slowing housing market.

Today our network is the fastest in the country and we’re able to offer superior products over a highly reliable network at competitive prices. This year SureWest became the leading provider of customer service in the region as reported by independent third party firm, Better Research, Inc.

The telecom segment, I want to go into a little more detail on the effect of competition and access line losses. I know I discussed this a little bit last quarter, but as you know access line loss is not a new phenomenon. We and our competitors have seen it’s effects for at least the last seven years.

Until recently, however, we were not seeing the kind of access line losses that our competitors were seeing. Just because SureWest had been extremely successful at selling secondary access lines to our customers and have had little competition from other providers in our ILEC territory, however, as new technology proves, we are increasingly seeing primary and secondary access lines being replaced by cellular phones, VoIP and broadband. With the secondary access line replacement continuing to increase in our market, we are now seeing the kind of access line losses that others in our industry have been experiencing for a while.

Additionally, two other factors have played roles. One, as competition for voice in our ILEC grows; we are increasingly seeing access line attrition to competitor services. However, we believe the loss to competition peaked in the third quarter of 2007.

Secondly, on the business side, as businesses either upsize or downsize, we see a much higher revenue impact than we would on residential side because of the higher revenues we receive from business customers with multiple lines.

Due to recent current market conditions that have been discussed, we have seen an increase in business downsizing mainly in the mortgage industry due to the housing market. This has had an effect on our access line numbers and as they usually do, we expect to see these business revenues increase when the market picks back up.

To combat this trend, we have enhanced our focus on broadband services particularly in the broadband business segment for overall business subscriber counts have increased over the last two years. This supports our statement that we are not losing business customers but are in fact seeing a change in the market whose access line is decreasing due to the economy as well as technological substitution of lines. In response to these advances, we are seeing growth in data services and high capacity voice services such as PRIs.

Revenues in the telecom segment declined 4% in the fourth quarter of 2007 compared to the prior near quarter as a result of anticipated residential line decline.

In the wireless segment, revenues decreased 7% in the fourth quarter of 2007 compared to the prior year quarter.

During 2007, the Company was in negotiations to exit the wireless business and in January 2008 announced the sale of the wireless assets to Verizon Wireless for $69 million. We expect this transaction to close in the second quarter and we will continue through the third quarter to work with Verizon Wireless to transition customers and network service.

An anticipated 32 million in cash related expenses will be removed from the business with wireless transactions with 26 million exiting immediately upon close and the remaining common expenses of 6 million to be eliminated or allocated to growth initiatives over the next year.

To summarize, we are experiencing a down turn in the housing market and a general slow down in the economy but our differentiated products and services and our ability to effectively adapt our sales and marketing tactics has resulted in continued strong growth in broadband segments.

In addition, the geographic diversity in Kansas will lessen the impacts of trends in Northern California in the quarters ahead.

I will now turn the call over to Phil Grybas, the Chief Financial Officer.

Phil Grybas

Thank You Fred, as Steve mentioned, I will hand the 2007 performance discussion of this call over to Dan Bessey, who has been appointed to the position of Vice President and CFO effective next week.

Dan has been with SureWest for over 12 years, has been involved with and contributed to our strategic, financial and business position, and brings a very strong knowledge of the communication business to the position and his experience with SureWest will serve him well. Having worked closely with Dan over the past three years, I am impressed with the financial acumen he possesses and congratulate Dan on this appointment as CFO.

I will be staying on until the end of the month, to insure a smooth transition. I wish to express my thanks to my colleagues and the Board of Directors for their support and continued interest in this ongoing success in our Company. I will turn it over to Dan.

Dan Bessey

Thanks Phil, as we have mentioned on previous calls, our goals are to, one-grow revenues by selectively growing the network into areas with the greatest potential for selling multiple revenue generating units or RGUs. Two-achieve greater penetration in the areas we serve, which will increase revenues across existing network assets. Three-increase average revenue per user or RPU across our customer base and finally, four-pursue cost efficiencies while enhancing our customer’s experience.

Results in the fourth quarter 2007 compared to fourth quarter 2006 show we are making stead progress on these goals. For example, broadband revenues grew 13% and total RGUs increased 10% compared to the same quarter last year.

Marketable home penetration increased to 30% from 28% and in some areas, we are far exceeding this number in excess of 60% penetration.

Where we offer triple play services, RPU grew $5.36 to approximately $109. In ILEC, RPU grew $5.44 to approximately $51.

Total operating costs for the fourth quarter 2007, excluding depreciation, amortization and impairment increased 6% with increased expenses associated with strategic initiatives offsetting declines from cost containment measures. While at the same time, SureWest became the leader in customer service as reported by a third party survey.

As you know, we currently report revenues in three segments. The broadband segment primarily consists of residential voice, digital video and high-speed data services provided across an advanced fiber platform and DSL with the copper network.

In addition to residential services, the broadband segment also offers advanced services to business customers including voice, data and digital video services over our fiber platform as well as DSL and integrated access T1s to small and medium size enterprises.

Also included in broadband are enterprise and carrier services providing high staffing networking and voice connectivity over our metro fiber rings and data center services.

The telecom segment primarily includes residential services, small, medium enterprise services and network access services to commercial enterprises and other telecommunication areas.

The wireless segment includes digital wireless voice services, sales of handsets and related accessories.

In 2008, the Company will no longer report the wireless operations as a separate segment but rather will report this line of business as discontinued operation.

Let me go into segment overview looking at full year 2007 compared to full year 2006 starting with broadband.

We are very focused on a broadband segment as a primary growth engine of the Company. Broadband revenues grew 15% for full year 2007 as a result of a 10% increase in data, voice and video RGUs combined with increased RPU.

As Fred mentioned, we launched our long awaited HD DBR in December, which was a strong contributor to our RGU growth at year-end. Adding the HD DBR filled a gap in our product line.

We are very pleased to report strong improvement in broadband EBITDA with 2000 EBITDA improving by over $3 million from 2006 ending the year at a slightly negative $416,000. This continues to improving trend in broadband from a loss of $20 million in 2004 to approaching break even in 2007. broadband’s EBITDA will be impacted in the near term as common costs previously carried by the wireless operations will be temporarily reallocated to existing operating segments as we drive these costs out of the business, we will redeploy resources to support the Kansas City operation and future acquisition.

Let’s talk about telecom. Telecom segment can be broken into two revenue components, residential and non-residential. Residential services are those associated with providing voice and data services to residential customers within our ILEC territory and are most closely tied with declining access line trend discussed earlier by Steve and Fred. Non-residential revenues are those associated with varied business and carrier customers. Both groups have regulatory revenue streams associated with them in addition to direct billing to customers. These two segments, residential and non-residential were fairly even split in 2007.

Over all, telecom segment revenues for full year 2007, declined 5% due primarily to a $1.3 million annual reduction in the California high cost land D subsidies and an approximate $3 million revenue reduction associated with a decline in residential access lines.

Moving on to wireless, wireless revenues declined 4% in full year 2007 due to increased competition resulting in a 5% decrease in total subscribers and similar declines in RPU.

Full year 2007 EBITDA for wireless was negative 4 million, which declined by approximately one million from negative three million in 2006.

The Company, as previously disclosed that it was evaluating all alternatives to either sell or restructure wireless operations and ultimately now the sale of SureWest Wireless assets was 59 million to Verizon Wireless. This sale is anticipated to close by the end of the second quarter.

Consolidated operation revenues for full year 2007, increased 1% with strong broadband and non-residential telecom growth offsetting anticipated declines in residential telecom and wireless revenues.

We believe we are successfully diversifying our revenue streams across a wider variety of services and geography reducing revenue concentration risks and creating new growth opportunities.

Operating expenses, excluding depreciation and amortization and the impairment associated with (inaudible) in increased by 5% for the full year 2007 as a result of the incremental cost associated with growing our broadband customer base and network and expenses associated with strategic initiatives.

I would like to point out the benefits of these strategic initiatives. The sale of directory and wireless combined to generate an estimated 179 million pre-tax, which we used in part to acquire Everest broadband. This acquisition would have increased SureWest’s 2007 annual operating revenues by over 59 million and EBITDA by over 19 million.

Additionally, we are very pleased with our efforts to contain cost while going through this substantial effort of transforming a Company from a regional voice provider to a multi-state broadband triple play provider.

As a result of the 1% annual revenue increase and 5% annual expense increase, net of depreciation and amortization and the LMDS impairment, EBITDA declined by 7% to approximately 63 million in 2007 from 67 million in 2006.

It is worth repeating that over that same period, broadband EBITDA improved from negative 3 million to essentially break even and wireless, which we have announced the pending sale of produced negative EBITDA of 4 million in 2007.

Depreciation decreased by 8% in 2007 from 2006 primarily due to the extension of useful life of some of our broadband assets. This was partially offset by an increase associated with new network investment; we increased the size of our footprint and homes passed.

Net income for 2007 was 62.9 million compared to 5.7 million in 2006 primarily as a result of the $60.2 million gain on the sale of directory.

Turning to the balance sheet, cash and short-term investments were 52.3 million at year-end 2007 compared to 7.1 million at year-end 2006. This increase is primarily due to the proceeds of the sale of directories mentioned earlier.

Capital expenditures totaled 53 million in 2007, down 5% from 55 million in 2006.

Our annual CAPEX in 2008 a substantial portion of which is spread between expansion and upgrades of our network that serve new areas in our Sacramento region as well as expansion in Kansas City region is being scaled back in response to market conditions.

Responding to this slowing growth in new home purchases, we have slowed the growth of CAPEX and the creation of additional marketable homes and are focusing on areas with expectations for greater penetration and success.

We will continue to closely monitor these factors and increase or decrease our expansion plans accordingly. We believe we have a differentiated product from our competition and want to press this advantage but if economic conditions are not conducive, our business plan provides us the flexibility to modify our expansion plans to suit economic conditions.

In summary, we are pleased with the financial results and operating metrics of 2007. Revenue from continuing operations increased as growth in our four strategic broadband revenues replaced anticipated declines in telecom and wireless revenues.

In broadband EBITDA improved by over 3 million to approach, break even. We are making great progress in transforming (inaudible) with growth and diversification in broadband triple play services as well as business services.

I will now hand the call back to Steve.

Steve Oldham

Thanks Dan, we have been through many changes in the past two years and our progress is evident that we have delivered on all the key-in issues we have untaken.

Today SureWest has one of the most advanced reliable networks delivering impressive 100 megabits of band width to the premise of each of our fiber customers and offering the fastest symmetrical internet speed in the country of up to 50 megabits per second.

Furthermore, we accomplished all this while leaving all of our competitors and customer service levels. During the 12 month timeframe, we announced the divestiture of SureWest Directories and SureWest Wireless in the acquisition of Everest broadband. We completely realigned our compensation structure and announced the (inaudible) over the client benefit pension plan, in favor of benefits offering to our employees at more fairly rewarded them.

We met new competition headlong and in December had one of the best months in our history in terms of sales activity level.

It’s exciting times to be part of SureWest as we progress our strategic transformation and continue to find ways to grow and increase our value for our shareholders and our customers.

We now will open it up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first call is from the line of Jonathan Levine of Jeffries please proceed.

Jonathan Levine – Jeffries

I just wanted to ask a question in regards to dividend. I was hoping you could give us some more color there. Specifically in light of the significant amount of debt that matures in 2009. It looks like that’s probably about 75 million, which includes the 16 million and the term debt, obviously, keeping in mind that has a revolver as well. Would you give us a little bit more in terms of how you are thinking about all that would be greatly appreciated, thanks.

Steve Oldham

This is Steve Oldham, Jonathan. A couple of things, we can just consider very important to remind investors that the Board regularly reviews the dividend policy and they will continue to do so.

With regard to the maturities of various security and yes, we feel very comfortable with our ability to handle those maturities and have plans in place to do so.

Jonathan Levine – Jeffries

Could you talk a little bit more in terms of high-speed data, the net assets you picked up, I assume you mentioned it. Obvious, the first half of the year was a lot stronger than the second half. You talked about December being particularly strong. Can you talk a little bit more about than. Is that how we should think about 2008 or should we dial it back a bit and think a little bit more in the way you have second half of ’07, thanks.

Fred Arcuri

Jonathan, this is Fred Arcuri. December 2007 did have one rather unique factor and that was the release of the HD DVR and along with that release and the pent up demand for that service, we increased our video sales. Voice and data sales during the month, rode the coattail of the vast wave. December is a little bit unique with regards to that pent up demand and the fact that we got that DVR right at the beginning of the month.

Relative to what we expect in the rest of the year, data services have been increasing at a pretty consistent rate the last three or four years not just in new subscribers but also in increased and with the existing subscribers. In the ILEC for example, the number of customers that we constantly have on data speeds of above l meg on DSL is considerably greater than it was in the beginning of 2006. So we are seeing new customer add momentum as well as the increased in the data needs in the existing customer base. We expect to continue to see that trend through the rest of this year.

Steve Oldham

Jonathan, I want to add one other thing; this is Steve Oldham. One other thing to that, the primarily challenge for us and at a greatly reduced housing market and turnover of existing homes is to market to the existing homes we pass and increase our penetration. It is a different kind of marketing because you have to help the customer create a reason to change provider. Obviously, when somebody moves into a new home or even change to an existing home, they have to sign up with some provider and that’s one technique for marketing that group and a different technique to market to homes that have existing providers and you are simply trying to spin them away. That’s what we’ve been doing the last few months of the year and currently are engaged in and that’s the challenge.

The total volume of the use of our network like all telecom networks continues to grow. It’s how people use our network that is changing. We simply need to find ways and we are working on ways to capture that growth.

Jonathan Levine – Jeffries

Great, thank you.

Operator

Your next call is from the line of Billy McEntire of Stifel Nicolaus please proceed.

Billy McEntire – Stifel Nicolaus

Good morning, I wanted to ask you, you did say your Board is reviewing your dividend, is there a day or any timeframe you can talk about, when is the Board meeting and when can we expect any future updates?

Steve Oldham

The Board, as you know, regularly meets, and discuss a lot of things, growth policies and how we are doing with sales and attacking all the various aspects of the business. Typically, on an annual basis the Board will be making decisions on dividends in the May meeting. We are meeting on very many occasions to discuss the long term strategy of the Company between now and then.

Billy McEntire – Stifel Nicolaus

I want to ask about the depreciation; I saw in your press release, it said something about some of your are switching assets being fully depreciated and I wanted to see if you could give some sort of guidance for depreciating going forward especially as we try to layer in Everest as well as the full depreciation of your other switching assets.

Steve Oldham

We review our asset wise every three years in the normal course and as a result of some of the strategy we have employed in the ILEC, we have just maintained these assets and utilized them longer than the life that we have according to depreciation. Some of those did become fully depreciated at year-end ’07. We will continue to use those assets in the future.

I think as you look to future depreciation, you are going to see that decline in telecom as a result of that but that was more than offset by increases from Kansas City and our broadband operation.

Billy McEntire – Stifel Nicolaus

Okay.

Operator

(Operator Instructions)

Your next call is from the line of Peter Reed of Mass Capital Management please proceed.

Peter Reed – Mass Capital Management

Hello, I was hoping that you could review your total corporate overhead a little bit and how it is allocated among the divisions. There is a little discussion in the press release as it relates to the segment that had been allocated to the wireless.

Steve Oldham

This is Steve Oldham, Peter. Let me discuss it just briefly in theory.

There are a series of rules that are set up with telecom companies regulated dialects for many years that help design the allocation of corporate overheads across regulated and non regulated lines. As you move in and out of business and it takes a while to remove overheads from your business, those allocations will change and there is a little bit more of an abrupt change until you remove all the costs associated with the discontinue operation.

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In the case of our wireless business, we will have an immediate impact of the direct charges attributable to wireless on the day we close the sale. The remaining charges that are tangentially and overhead related to our wireless, it will take us a little bit of time to pull them out of the business and second, we have an agreement to provide some operating support to the buyer, Verizon, for a period of months following the close to make a smooth transition for our customers. So, all of those overhead costs once we have made that complete transition we will be working very hard to pull out of the business. But, until we have done that, in order to make sure we have a smooth transition for customers, some of the overhead cost may remain.

Peter Reed – Mass Capital Management

Then could you perhaps give us a head count by segment or division or even total headcount, you disclosed an approximate one for Everest but perhaps the rest of the Company?

Steve Oldham

Northern California had about 800 at the end of the year and Everest has about 182 currently. We may be adding some more sales folks in Kansas to try to take advantage of the growth opportunities there on our existing network. It fluctuates slightly from time to time on those headcounts but that’s a substantial reduction, by the way, over the prior years.

Peter Reed – Mass Capital Management

Thank you.

Operator

At this time, we have no further questions in Q.

Steve Oldham

We would like to thank you very much for attending our fourth quarter employer earnings call and we look forward to speaking to you all first quarter, thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation.

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