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Executives

Steve Kunszabo - Director of Investor Relations

Michael Small – CEO

Tom Fitzpatrick – CFO

Phil Mayberry - President of US Wireless Operations

Analysts

David Sharret – Lehman Brothers

Brett Feldman – Lehman Brothers

Ric Prentiss – Raymond James

James Breen – Thomas Weisel

Ana Goshko – Banc of America

Susan Lee – Credit Suisse

Kevin Klein – Goldman Sachs

Phil Cusick – Bear Stearns

Randy Barron – SM Investors

Centennial Communications Corp. (CYCL) F3Q08 Earnings Call March 28, 2008 8:30 AM ET

Operator

Good day everyone and welcome to the Centennial Communications Third Quarter 2008 Earnings Conference Call. (Operator Instructions) At this time I will turn the call over to Director of Investor Relations, Mr. Steve Kunszabo for opening remarks.

Steve Kunszabo

Good morning and thanks for joining us. I’d like to welcome you to our fiscal third quarter 2008 earnings call. Joining me on the call this morning are CEO, Michael Small, our CFO Tom Fitzpatrick and our President of US Wireless Operations, Phil Mayberry. Today’s call will begin with a discussion of the 2008 third quarter results followed by Q&A.

Before I turn things over to Michael I’d like to caution all participants that our call this morning may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements which reflect management’s beliefs and expectations are subject to risks that may cause actual results to differ materially. Centennial undertakes no obligation to update or revise these forward looking statements to reflect events, developments or circumstances after the date hereof.

For a discussion of other risks and uncertainties that may affect Centennial’s future results please see Centennial’s 2007 Form 10-K including the risk factor section contained therein and Centennial’s other filing with the SEC. For your information please also note that Centennial expect to file its 10-Q later today. During the call we will also be referring to non-GAAP financial measures. Please refer to the investor relations section of our website for a discussion of these non-GAAP financial measures and reconciliation to comparable GAAP measures.

With that let me turn things over to Michael.

Michael Small

Good morning everyone thank you for joining us. Today Centennial delivered third quarter results that reflect strong execution and robust cash flow across all our business segments. We’ve really hit the sweet spot of our de-leveraging story where every additional quarters dollar cash flow growth meaningfully accelerates our progress and enhances the shareholder return. Today I’ll emphasize a few key points before Tom takes you through our results.

These points are our strong US Wireless ARPU including the ARPU associated with our non-subsidized customers. I’ll also reinforce our premium wireless brand in Puerto Rico and finally the planned new undersea capacity that we are going to bringing on between the United States and Puerto Rico.

Let’s first turn to the US. We have good momentum and we continue to be one of the best retail growth stories in the industry with our retail revenue having grown faster than the industry average for six consecutive quarters. Year to date our retail AOI has grown 36% and we are pleased with our post paid additions of 14,900 in churn of 2% during the quarter. This success is sustained by our local market strategy, the superior local network, associates that are well trained, relentlessly trained through Centennial University.

They are located in new and remodeled stores in small cities and rural communities and this all rigorously measured and managed at the store level utilizing many monitoring tools including our signature scoop report. The financial strength in the US has been driven by strong trends in retail ARPU we think they are sustainable and let me talk about a few of the drivers. First, we are now selling national rate plans in the vast majority of sales. Yes a majority of our customer base is still on our regional rate plan.

As the customer base moves towards national rate plans where we see higher ARPU’s we think that will continue to support the robust ARPU. Also we’ve had during the year tremendous success in selling feature packages. We are now selling post activation, post sales over 10,000 features per month through all customer points of contact, in our stores, customer care and collection. We expect that trend to continue.

Third, this is a trend that is recognized throughout the industry and as we’ve explained Centennial is behind some of the national players but on the same trend line is data ARPU. We expect that to keep growing. We reported $5.45 in the fiscal quarter just reported and just 9% of retail ARPU. Finally, perhaps surprisingly to some of you our non-subsidized customers which are our lower credit customers are actually showing the highest ARPU of any customer segment we have.

We are not particularly exposed to this segment but it’s a trend in the industry and we are having to deal with it. Our initial effort in dealing with that industry wide trend of lower credit customers coming into our stores was to focus on cost to acquire and we’ve done that very successfully in fact we make money at the time of sale on these customers. What has surprised us is our ability to generate great ARPU out of these customers.

We have a new plan called Talk Easy which is a $10 up charge from our standard rate plan that these customers take and they are voracious purchasers of features and even data. What we see out of this non-subsidized customer segment is great ARPU, very low cost to acquire and exchange for more bad debt and churn. When we look at it two years out 50% of these customers are sticking with us and we may have to sell a couple more to get them to stick in the long run but we spend nothing, in fact we make something each time we sell one of these non-subsidized customers. We’ve been very happy with this customer segment.

Turning to Puerto Rico where we posted adjusted operating income in the wireless side of 13% our best effort in two years and we’ve been doing this by consistently growing subscribers sustaining a healthy ARPU and keeping the churn in the mid twos. We are doing this in an environment as we’ve described where it’s competitive and the macro economic situation has been difficult. All our six competitors now offering unlimited rate plans so that’s not a clear differentiator for us any more although we still believe we have the best unlimited plan.

It’s an environment where handset promotions are even slightly more aggressive than we see in the mainland. What we see is a trend in the market place is that the competition is now moving back towards the low end of the market. They perceived and we think correctly that’s where the growth in customers is going to be. While they do that we will reinforce our premium brand by targeting customers who perceive themselves to be our most highly reliant on wireless service. We are going to do this in two new ways in addition to what we have traditionally done.

One is we are going to expand our geographic coverage. We’ve always had great coverage on the island and we still maintain the best coverage in Puerto Rico but now that we have new roaming rates we are going to include the US much more often in our service packages and emphasize that. With the additional of Blackberry we now make global roaming available. The best network in Puerto Rico is now available to our customers as they travel around the world.

The second area that we are going to focus on which extrapolates from what we’ve done over the last year is instead of just adding voice to the bundle we are going to increasingly add data to the bundle. As I’ll talk about in just a second we are best positioned to provide the most wireless data bandwidth on the islands. I’ll get back to that issue as we talk about the broadband segment which we’ll turn to now.

We returned to more the traditional levels of revenue and cash flow consistent with its historical profile. In this segment we’ve counted to you over the years the value of our broadband fiber network and in the voice world that was a nice benefit. It becomes dramatically more valuable to us in the data world and in Puerto Rico we are watching a bandwidth explosion as we speak here today. A couple years ago there was basically only dial up available on the islands and even when the appearance of DSL and cable modems most of the sales were done at 256kb.

We are now watching that begin to change in large part because of Centennial’s instant internet offering where customers get a megabyte and our partnership with the cable TV operations down there are starting to improve the quality of their plan and in partnership with us they are offering higher bandwidth. We are watching an exponential growth in bandwidth in Puerto Rico. To accommodate this new demand, this new explosion of internet capacity we expect to add 10 gigabytes of undersea capacity with the new undersea pipe before this summer.

Ten gigabytes is the largest available pipe you can buy in undersea capacity in today’s economics and we think this is really a seminal event for Centennial because the copper based networks can’t deal with capacity like this. When you marry the undersea capacity we are buying with Centennial’s unique fiber rings on the island we have an unparalleled ability to serve the voracious bandwidth demands of Puerto Rico going forward.

In closing we have a strong and sustainable competitive advantage, we are executing well and our results show strong cash flow growth across all business segments. I look forward to updating you on our momentum and sharing our outlook for fiscal 2009 in the months ahead. Tom, will you please take us through the financials.

Tom Fitzpatrick

Good morning everyone. As Michael discussed Centennial posted third quarter results that were characterized by healthy retail performance in our US markets and a marked return to solid cash flow growth in both our Puerto Rico wireless and broadband segments. This was our fourth consecutive quarter of consolidated adjusted operating income growth of more than 10% and one in which we benefited from sustained improvement in many of our operating and financial metrics.

We’ve made clear progress in growing cash flow despite facing external headwinds and really are in the sweet spot of our de-leveraging strategy where each incremental dollar of cash flow enhances shareholder returns. For comparison our fiscal 2007 financial results have been adjusted to reflect the universal service fund charge in the period to which it relates. Centennial reported quarterly consolidated revenue of $251.2 million and adjusted operating income of $99.1 million, representing growth of 8% and 11% respectively from the adjusted year ago period.

Our consolidated adjusted operating income margin was 39% in the third quarter. Third quarter income from continuing operations was $6.6 million or $0.06 per diluted share. This compared to income from continuing operations of $0.3 million or zero per diluted share for last years third quarter. On an operating segment basis US wireless delivered third quarter revenue of $137.8 million and adjusted operating income of $50.5 million yielding an adjusted operating income margin of 37%.

We boosted our local market by investing heavily in training our front line associates to lighting our customers at every touch point with innovative new features improving an already superior network where measured on cost and targeting our advertising within our footprint to showcase our strengths against the most relevant competitors. We continue to expect consistent customer revenue and cash flow growth in this business.

We generated roaming revenue of $12.5 million during the period a 12% year over year decline as we were impacted by a 20% fall in our rate per minute for roaming traffic. The decrease in our roaming yield was partially offset by a 10% increase in voice roaming traffic as we benefited from higher usage from our key roaming partners. We continue to forecast a long term decline in roaming revenue.

US Wireless retail ARPU reached another record during the third quarter growing 7% year over year to $64 while robust post paid customer additions of 14,900 were aided by stable post paid churn of 2%. Turning now to our Puerto Rico operation.

During the fiscal third quarter Puerto Rico Wireless reported revenue of $82.7 million and adjusted operating income of $31 million up 5% and 13% respectively from the year ago quarter, representing an adjusted operating income margin of 37%. Post paid ARPU rose slightly to $66 when compared to the fiscal second quarter reinforcing our ability to attract a high quality customer mix and capture a growing data revenue opportunity. Data revenue grew 31% year over year to $7.06.

As Michael noted we are increasingly bringing our full arsenal of assets to air and growing traditional and new revenue streams alike, addressing the enterprise wireless and residential markets in a way that most of our competitors will find difficult to match. Focusing next on Puerto Rico broadband which produced revenue of $33.9 million a 10% year over year increase and recorded adjusted operating income of $17.7 million representing an adjusted operating income margin of 52%.

Switched and dedicated revenue rose 12% during the quarter supported by strong growth in total access lines and equivalents partially offset by an ongoing decrease in average revenue per line. As I noted last quarter our access line growth has been in large part due to our cable partnerships and these lines have a lower ARPU. I’d also like to reinforce there are year over year comparisons for AOI for Puerto Rico broadband was again impacted by increased expense related to the deployment of network capacity in consideration of customer contracts for future service.

As Michael noted we expect our costs to more closely align with the historical benchmarks for this business as our new undersea capacity is lit in early fiscal 2009. Finally a brief update on our capital structure and liquidity position. We closed the third quarter with net debt of $1.92 billion and have reduced net leverage by approximately three quarters turn since our dividend recapitalization to four point nine times.

As I consider our financial position today its pretty clear that we are in good shape to weather the current turbulence in the financial market. We expect to generate approximately $50 million of free cash flow in fiscal 2008 when you consider our current outlook for adjusted operating income, capital expenditures, interest expense and cash taxes. Our balance sheet is solid and we have a favorable maturity profile. With the majority of our debt not coming due for another five years.

We had $234.2 million of total liquidity at the end of the third quarter consisting of $84.2 million in cash and $150 million available under the revolving credit facility. Lastly, I’d like to point out that our investment portfolio does not include any auction rate securities. With that I’ll turn things back to Steve for the Q&A portion of this mornings call.

Steve Kunszabo

Operator, would you please provide instructions for logging a questions.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll take our first question from David Sharret with Lehman Brothers.

David Sharret – Lehman Brothers

If I can ask first on the CapEx line it looked like your CapEx was pretty light in this quarter and you are trending maybe below your full year guidance which I think included Spectrum purchase as well. Maybe an update there if you think maybe you will come in a bit lower than expected on CapEx?

Michael Small

Yes, we think we will be real close. Its some projects, we actually been invoiced for late and we expect a big CapEx quarter in the fourth quarter, if we don’t get all the way to the guidance we’ll be darn close.

David Sharret – Lehman Brothers

Tom, on your free cash flow and your liquidity obviously $84 million in cash and the free cash you are generating give me your priorities now as far as using that free cash, obviously a lot of the debt is callable and you haven’t called some of it and some important dates are coming. Maybe given some of the discounts of where your debt is trading will you go through if you have debt repurchase on your mind and how you’d use the free cash flow.

Tom Fitzpatrick

We don’t have it on our mind currently. What occurs to us is that holding on to our cash feels good to us right now given the current state of the credit markets. We take a look at our senior credit facility with the rate of L+200 and regard that as a corporate asset. The first relevant maturity is our revolver in February 2010 so we would want to avoid early call of the senior credit facility if possible because we really like that rate. Sitting on cash in this short term until we see what happens with these credit markets feel right to us at this point.

Operator

We will go next to Brett Feldman with Lehman Brothers.

Brett Feldman – Lehman Brothers

I wanted to clarify what’s going on with the costs associated with the extra cable in Puerto Rico. I think I understand it where you’re currently leasing a third party undersea cable while you are waiting to complete the construction of your own is that correct?

Michael Small

Correct, that’s a good summary description. To give an idea of 10 gigabytes is coming on and we have currently between six and seven gigabytes of total capacity, Centennial owned off the islands. As we do our forecast we are going to go through the 10 gigabytes of capacity coming online very quickly and we’ll then use the next 10 gigabytes. We got caught short for a couple quarters here because of environmental issues in the construction of the new cable. The contractor hit some coral and the army core of engineers had to get involved and it took a long time to resolve it.

That’s been unfortunate for our last two quarters where we’ve had to rent some short term capacity. It also highlighted to us the value of the capacity coming on. We’ve been sitting for the last two quarters a little bit more than what our competitors position would be and its no fun. We are looking forward to this new capacity coming online and think it will make a real difference. We think right now we are the bandwidth leader and its going to go to the new level in Puerto Rico just as bandwidth is exploding in Puerto Rico.

Brett Feldman – Lehman Brothers

Is it just in the timing standpoint, as soon as you have your own capacity built out can you immediately begin using or are you obligated to use these third parties for a certain period of time?

Michael Small

These are month to month what we got from the third party. We will begin shutting down some of that expense. It certainly won’t add any more and we’ll probably shut down some of the expense.

Brett Feldman – Lehman Brothers

So the margin benefits will be right when you complete the cable.

Michael Small

Yes, it should be, if we are fortunate we will see a little bit of that health in the fourth quarter but it would take a real surprise in the projects where we don’t see it in the first quarter next year.

Brett Feldman – Lehman Brothers

On the top line in the same segment you guys gave pretty good color on what’s going on with the switched access lines and how you are benefiting from the cable relationships. What about the rest of the business, particularly the enterprise side. Last quarter you talked about a little bit of price competition particularly coming from America Mobile. I’m wondering if you could give a little more color on the demand patterns both in terms of access lines trends and ARPU trends.

Michael Small

We are seeing good demand we actually think since the government accounts became available to us more readily since the transactions, the government got out of owning a portion of Puerto Rico Telephone Company at the same time America Mobile came in. We are actually seeing pretty good growth but what we are seeing on price compression is on the enterprise is for two reasons. The combination of a tough economy that’s been going on for two years in Puerto Rico, it’s built into our numbers and how we operate there.

Customers are more price sensitive, at the same time the new technology, the new IP based networks give more cost effective solutions so we actually have a way to give them the services they want at a lower price. We think we are getting to be at the inflection point where the volume is going to start helping us. We figured out how to sell these new IP based services to more customers faster and we are going to start getting in front of the curve of making up in volume what we are having to give in price.

Even give in price because the technology is better the costs are lower. This is a cost turned business now increasingly as you are getting into the optical fiber world. You can deploy a lot of bandwidth at low cost. The long run trend of that is accrue to Centennial because we have the most bandwidth at the lowest cost. The transition point, which I would say we are largely through is a bit painful as you are coming off the prices you used to get for T1 isn’t the same as what you are getting for an equivalent amount of internet bandwidth but we are going to start selling a lot more bandwidth. I think we are at the inflection point where we start winning this trade off of volume versus price.

Brett Feldman – Lehman Brothers

One of the trends AT&T has been highlighting is that when you do migrate customers over to IP you do see revenue dip immediately because it’s an attractive price but then they tend to buy more services over time. Are you seeing the same dynamic or is it a little bit too early to see that yet?

Michael Small

Absolutely it’s the same dynamic. The issues of the new IP world is you get a lot more bandwidth and lower price with much greater flexibility because you are dealing with the soft switch and you can interface with any application server to deliver new services. That is absolutely happening in Puerto Rico and we have the sales force and the sales support team and the engineers to deliver those services to customers and we actually think by a wide margin the best people team to do that in Puerto Rico. That is the inflection point we are talking about.

Maybe another analogy out there is this is the IBM problem of 10 or 20 years ago where the computers weren’t expensive enough to live by just selling more computers and so you had to start selling services associated with it. We are seeing the same thing we need to be selling solutions to our customers, we need to be partners with our customers so we get the IP bandwidth in there in their location and then we find ways to make their businesses better by partnering with them and get paid for doing that.

Brett Feldman – Lehman Brothers

One last higher level question, the economic situation for the broad economy is a bit fluid right now. You clearly had solid top line operating trends in your fiscal third quarter. Now that we are into the fiscal fourth quarter have you seen anything materially change, have ARPU trends gone outside what seasonal patterns would be? I’m wondering whether there is something we should be anticipating for the last quarter of the year?

Michael Small

No, the two trends that have been pointed out for the economy that affect Centennial most directly, which is Puerto Rico and Michigan we’ve been living with for a long time. There has been no discontinuities in the last few weeks or months. As explained in the US we’ve even outperformed our own expectations for ARPU and its been for those reasons continuing to sell more of the higher value national plans, selling the features, that data ARPU trends as well as higher ARPU then average ARPU on our non-subsidized customers. Those trends aren’t changing.

Operator

We’ll take our next question from Ric Prentiss with Raymond James.

Ric Prentiss – Raymond James

A couple questions for you. Puerto Rico wireless up year over year do you think you guys have turned the corner and now have got that back on a nice growth trajectory given the economy that you just talked to and the competitive aspect down there?

Michael Small

We have visibility to consistent growth in Puerto Rico, highly competitive market. The key to our long run success in a maturing market is market segmentation is differentiation and we are going to reinforce the premium brand in Puerto Rico at a time when competitors will, we believe, go more towards the low end based on what we see them doing in the market place and based on their corporate cultures. The top end some of this will be brand positioning but some of it will be targeting specific customer segments where we are really looking to gain subs, its not going to be a mass market.

A big growth area for us will be leveraging off our business customer base. We are seeing business wireless growing and we will be working harder on a infinity plans to sell the employees of some of our larger customer or larger governmental or educational institutions that will be a growth area instant internet which gets included in our wireless will be a growth area. Our Blackberry customers, the global roamers where we were out of the market is a new growth area for us so we do not anticipate lighting up the mass market but we see enough avenues to sustain customer growth and customer profitability in Puerto Rico wireless.

Ric Prentiss – Raymond James

Picking up on that last point is it the expansion, the geographic coverage the new rates as far as getting roaming to the US. How does American Mobile handle that? Obviously Verizon was on the island previously they had a good rate packages back in the US does American Mobile really focus on that segment?

Michael Small

We don’t they will. Our assumption is they will see the growth in Puerto Rico at the low end. The real history in Puerto Rico, when we go there, there was heavily pre-paid market, Centennial spent big buckets and don’t be afraid to hit the send button and there’s low land line penetration and we can make them post paid business. That worked very well everybody ran our way after we showed that it was successful.

Now when you look at Puerto Rico compared to a lot of Latin America it’s under penetrated. Why is it under penetrated? Everybody has ignored the low end of the market. Rather than participating with our competitors on that now untapped opportunity at the low end we are going to let them go there and we are going to reinforce our premium brands.

Ric Prentiss – Raymond James

On the CapEx being light but you got some invoices ready. Is that related back to the fiber project that Michael was saying would be done before summer?

Tom Fitzpatrick

A little bit of it is that but in the US we have a fair number of invoice going projects that have been recently completed so think of it as timing.

Ric Prentiss – Raymond James

As we look starting already to think about fiscal ’09 is that when the bulk of the fiber build would come in? I’m trying to already get some sense.

Michael Small

The fiber build was not an expensive project in the grand scheme of our whole capital budget. It’s a difficult project because you have landing rights on each end and you need—it’s a big permitting process. They are harder to get the projects done but it’s not a material percentage of our capital.

Ric Prentiss – Raymond James

Final question, on the US data ARPU nice improvements there obviously helped drive some of the US beating internal expectations on ARPU where could this head, how fast can it ramp up and where do you see the biggest opportunity in moving data ARPU up?

Phil Mayberry

I don’t know how fast we are going to grow it as quickly as we can. The primary place that we are going now is we’ve picked up a Blackberry product line and we are selling a lot more of that at about close to $40 a subscriber and that’s where the growth that we anticipate will come from.

Michael Small

Phil always runs the business for profitability so he’s had a real emphasis on SMS because it’s the most profitable and the earliest adopted data service. Over time we will keep broadening the mix of data revenues.

Operator

We’ll take our next question from James Breen with Thomas Weisel.

James Breen – Thomas Weisel

A couple question, one in Puerto Rico it seems as though the margins stepped up quite a bit and I’m wondering how you feel about that from a sustainability standpoint going forward? In the US can you talk a little bit about the competitive dynamics here? What we know so far coming out of the most recent auction in terms of overlapping your territories?

Michael Small

In Puerto Rico a lot of the margin improvement in Puerto Rico was related to better management of phones. What subsidy we have based on what type of transaction including upgrades and exchanges and insurance as well as new sales. Some of that was based on the learning’s we had in the US and we think even though it’s a high subsidy market in Puerto Rico we’ve got more efficient in dealing in that market. It looks like that should hold.

On the new spectrum I think that five year out plus kind of issue from my perspective until it’s relevant in the market place. You will see trials and you will see stuff happening prior to that but before it reaches our territory on the new 700 MHz spectrum. Phil do you have any other comments on the competitive dynamics?

Phil Mayberry

We are studying the auction results and mostly people already have spectrum in our area. We will continue to study it and look at it and make some conclusions after we get through looking at who all bought.

James Breen – Thomas Weisel

Have you seen any impact in the US from any of the new pricing plans that have come out for Sprint or any other carriers?

Phil Mayberry

Not yet. The number of people that run over $100 is relatively small. It was a good price point from our perspective.

Michael Small

Summarized, as much ado about nothing.

Operator

We’ll go next to Ana Goshko with Banc of America.

Ana Goshko – Banc of America

I wanted to follow up again on the question on the margin improvement a pretty dramatic in wireless in Puerto Rico. I looked at it in round numbers on a sequential basis revenue increased by $2 million but EBITDA increased by $4 million so there was a $2 million cost reduction there for the quarter and my hunch is a lot of that was fiber acquisition costs or the handset subsidy both because your pace of growth at this end is starting to slow after the initial surge on the unlimited plan. Also I know you were incurring a lot of upgrade costs from existing customers. I wanted to test that hypothesis and to see if potential there is more of that coming up in the next quarter?

Michael Small

The phones and phone subsidy isn’t a big component of the entry and explains both to the improvement and the profitability but its not so much as a decline in selling rate as just getting more efficient. Some of its been adjusting our insurance programs some of its been coming up with different types of phones for different market segments. We varied the subsidy according to who is buying with more discrimination than in the past. It’s always a competitive market and to have to keep making decisions day by day but right now I think our phone management sophistication is better in Puerto Rico than it was.

Ana Goshko – Banc of America

Asked another way, is there any potential based on continued [inaudible] these efforts for you to actually have a continued absolute dollar decrease in costs and/or are you comfortable with the 37% margin range being sustainable?

Michael Small

We are not going to make new forecast on margins going forward but explaining how we made the improvements quarter over quarter which was phone management and that component looks sustainable as I sit here right now.

Ana Goshko – Banc of America

The second question, I wanted to touch back with Tom on the caution on using cash right now for any kind of debt reduction. It looks like you’ve got very strong comfort with free cash flow for the year and you don’t have any maturities coming up until 2011 are you concerned about potentially being able to refinance the credit facility of 2011 and that’s your caution?

Tom Fitzpatrick

I would call it caution as much as opportunism that the rate in our senior credit facility L+200 is a corporate asset and we want to protect that as long as we can. Sitting on cash makes us not even need a revolver which would otherwise make us call that facility earlier? There is no caution or no concern whatsoever about refinancing this facility rather we want to hold on to it for as long as we can because it’s a corporate asset.

Ana Goshko – Banc of America

The last debt that you actually repaid were then and three quarter bonds paid down at par and you’ve got bonds that are trading anywhere from five to fifteen discount right now.

Tom Fitzpatrick

We are aware of that.

Operator

We’ll go next to Susan Lee with Credit Suisse.

Susan Lee – Credit Suisse

A few quick questions on guidance, I’m assuming you are still reaffirming on that and on Puerto Rico the net outcome looked a little light the quarter to sight plus returns can you comment on the growth outcome and what you guys are seeing in the confederate environment there? I think you guys have been getting a lot of question on the Puerto Rico ARPU and I kind of want to see what you guys in terms of how this expansion in geographic coverage impact your ARPU going forward and when you’ll start seeing a benefit from that in the coming quarters?

Michael Small

Let me just affirm guidance. One of the implications of working on managing phone costs to improve margin is you are not chasing net ads as aggressively as you could be while you are doing that. It’s hard to be explicit about what the tradeoff was there but we’ve clearly focused on improving our phone costs during the quarter. We weren’t unhappy with the number it was pretty consistent with what we’ve been doing. That would be my expectation is consistent to subscriber growth in Puerto Rico we are not looking based on our premium brand strategy to see a big number in net ads.

On ARPU I think we’ve got to keep doing all these things to keep our ARPU in Puerto Rico by selling the premium brand, expanding the data usage, expanding the coverage. I would not expect an increase in the ARPU.

Susan Lee – Credit Suisse

Keeping it sustained with the additional roaming?

Michael Small

Correct.

Operator

We’ll take our next question from Kevin Klein with Goldman Sachs.

Kevin Klein – Goldman Sachs

A question on the footnote on wholesale subscribers. There was a termination of the agreement on 35,000 of those subscribers. I was wondering if you could say when that happened during the quarter and what type of ARPU you are generating from these subscribers.

Michael Small

There was no revenue from those subscribers during the quarter. As you see the results for the third quarter it’s effectively as if there were no wholesales customers for the entire quarter. There will be zero wholesale customers going forward.

Kevin Klein – Goldman Sachs

Were they receiving service during the quarter with no revenue?

Michael Small

There was very minimal service, based on the terms of the contract there was a minimum for 50,000 customers but the underlying provider was—the reseller did not have many customers under that contract. We ratified those contractually and in our reporting what was happening anyways. The customer base disappeared. They were always very low ARPU customers. They were never in our reported ARPU stats. We only reported the ARPU based on retail customers. It was a non-issue when we had them basically and it’s a non-issue now that they are gone.

Kevin Klein – Goldman Sachs

In terms of someone had mentioned before about the dynamics in your home US footprint obviously we know housing pressure, consumer slow down, etcetera. I was wondering in terms of some of your market checks, maybe you could elaborate a little bit could you be receiving a potential benefit from some of these pressures where a household is faced with potentially cutting the cord and going to one devise potentially cutting even their high speed access line and potentially using your devise as the only source of internet access. I’m wondering if you are seeing that at all and if its something maybe we could expect going forward if we think consumer slow down will continue?

Michael Small

Yes, I actually do think that the trend and we are going to capitalize on it in both the Puerto Rico and the US. We are selling home phone service. Phil you want to talk a little bit about your home phone products?

Phil Mayberry

We’ve picked up three products that work for a fixed wireless replacement through our network that ring the extensions in your house and act very much like a landline in your home. Two of those have data capability. We’ve got advertising campaigns that we are running to try to capitalize on that. The selling premise being that a family can save $200 to $300 a year by subscribing with us. We are having a great bit of success with it.

Michael Small

Our belief, this is based on what I observed in our family and others. No one wants to answer the home phone anymore because you assume it’s for someone else or it’s a telemarketer. There is a real reluctance to give up the home telephone number because it’s something you’ve had forever. If we can sell companion home phone service which will probably be a lower use line then the wireless line at companion pricing we tell people port your number to a wireless devise in your house. Everybody is happy; the customer saves $20 per month and a phone they don’t want to answer anyway.

Operator

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

Phil Cusick – Bear Stearns

A couple different subjects I want to hit quickly. One, as you talk about the low end can you help us think about your porting ratios where are a lot of those customers coming from? We see Sprint out there walking away from the low end business because they’ve losing money on those customers is that where a lot of those are coming from?

Michael Small

Phil you can comment on where they are coming from but low end is the wrong way to describe it…

Phil Cusick – Bear Stearns

How about low credit customers?

Michael Small

They are turning out to be very lucrative customers. They have great lifetime value for us. Most of the industry has not given as good a deal. We are giving a deal where the customer gets to use the phone like they want to use it and not pay per minute and stuff like that, very tight credit cap so they can’t get online and get a lot of money in front rather than after the fact to control it. This is in many ways a better value than a post paid type of plan available to the customer. Phil, talk about where you think they come from.

Phil Mayberry

They are landline replacement, they are people who some of them a fairly large fraction have never had wireless service on a post pay plan. They are coming from those customers that haven’t had a post pay plan they are coming from the traditional pre-pay product. They want all the advantages and capabilities that they get on a post pay plan. The porting definitely give you a good feel for where they are coming from but we do know that some of the research is saying that this is a high priority purchase for them and they want to pay for it because it is their only means of staying in touch. It is their only telecommunications product.

Phil Cusick – Bear Stearns

What do you think we should be looking for from the churn side going forward as you bring the customer online?

Phil Mayberry

It’s in the four point range right now.

Phil Cusick – Bear Stearns

That type sub-prime customer around the four.

Michael Small

What we’ve been seeing is the trend line on that customer it was in the upper and mid fours a few months ago and it’s fallen to just about four now. The low subsidized customers the trend line is improving. On our subsidized customers the trend line is holding to slightly improving but our overall churn is going up because the mix is moving towards the non-subsidized customers. Having said that at the end of the quarter we are up to 13% of total customers are these non-subsidized it’s still not a big percentage of our customer base.

Phil Cusick – Bear Stearns

What is that as a percentage of growth in the quarter?

Michael Small

We are not going to give you that number because we have been moving around a lot as we’ve been experimenting with different offers. Some months it’s a small percentage of our base of our growth and some months it’s a significant. When we settle in on more steady state we’ll apprise you on where we think that is.

Phil Cusick – Bear Stearns

Different topic, it seems like laptop cards are probably helping a lot your advertising it pretty heavily. Can you tell us how many of those you have on the books right now and also help me think about this as you think about these cards on a fully loaded basis assuming they are driving CapEx, they are driving network capacity needs? Do you think this is an accretive net income margin customer, accretive to margin percentage so the higher margin customer long term including all the usage?

Michael Small

Yes, first this is a bigger business for us in Puerto Rico than in the US. In the US we have an edge network everywhere and we are just trialing in Fort Wayne on a very limited not even a customer trail just an internal trial. The HSDPA network. In Puerto Rico we have the EBDO network and that network is to very satisfying customer experience we can all debate how fast this is ramping up but this is for things most people like to do. It works very well; we have been pleasantly surprised on how much through put you get on the EBDO network.

When you first launch a GPRS network the second person got on the cell site it degraded. It was slow and not great capacity. EBDO we are watching a bunch of customers get on the network. We think anybody who has a mobile devise or an air card is an extremely profitable customer and any level of reasonable usage. When we do the instant internet products where you have a PC in the home using the EBDO for your internet access some customers can have usage levels where it’s no longer a profitable for us.

That’s measured in 2% to 3% of the customers and we are about to take steps to deal with that. We recognize that issue for a while that you could get to that usage level where it becomes unprofitable but we wanted to see how the customer used and what they did with it was legitimate use or not legitimate use or are they reselling something, what are they doing. We are exploring this tool to inspect the traffic to understand it. On balance we are convinced this is a very profitable business for us particularly since we are getting $60 or on a bundled basis $50 if you have a wireless account to get instant access.

If you don’t have a wireless account with us $60. We are making good money comparable margins through the rest of our business if not better.

Phil Cusick – Bear Stearns

Do you anticipating putting a high end cap on those or something?

Michael Small

Yes, the cap is likely to be higher than five gigs it might be around 10 and it’s likely to be introduced around very shortly. Over 95% of our customers even on the instant internet products will be under the 10 gig cap. Its interesting also around that subject and why the bandwidth explosion is coming. We are seeing the average internet user is three gigabits per month. The average laser user is about three megabits a months.

I’ve heard industry PDA might be 10 or 15 megabits per user and some people burning 20, 30 meg an iPhone reports are people are using 100 megabytes so as you begin to be able to get video on a screen that’s useful the bandwidth goes through the roof and it is quite clear to me the devices on a wireless basis make video more accessible are rapidly coming. That’s why we love our position in Puerto Rico we have that fiber this incremental cost to us the backhaul is nothing to speak of that a wireless user level and yet we see our wireless competitors paying us a percentage of their revenue today that’s likely to double or triple as this wireless bandwidth explodes.

From a Centennial perspective we are going to start making money as this wireless bandwidth explosion because we have the broadband pipes in Puerto Rico.

Phil Cusick – Bear Stearns

Can you tell us how many of those subs are in Puerto Rico at this point?

Michael Small

We haven’t disclosed that but its getting to a meaningful number. We are going to debate disclosure on that for next year. Some of the issues of doing that is what are the appropriate new devises to put in the category and we have instant internet, we have the data cards, we have machine to machine sales we have the Blackberry. When you add all that up the new devices are important to the growth particularly in Puerto Rico they are going to be important to our growth as a premium provider and we are going to have to find the right way to communicate that to all of you. We are in transition and it’s hard to decide what’s the right way to communicate it.

Operator

We’ll take our next question from Randy Barron with SM Investors.

Randy Barron – SM Investors

I’m on the tail end here, a couple of housekeeping follow up questions, then some general theory ones. I curious on the undersea pipe that you are building, I know you said its kind of a small number but what percentage of CapEx is it and is in this years CapEx or next years number?

Michael Small

Right now what we are building, to be specific, is from San Juan to Saint Croix so a run from Puerto Rico over to the US Virgin Islands and where we can hop on to the mid-Atlantic crossing of cable of global crossing. We don’t really want to be in the business of, we aren’t building, and we are buying ARU on that new cable for a pair of dark fibers between those two locations. Our CapEx is likely to be consistent on undersea capacity year in, year out.

It’s likely to be 5% of our total CapEx give or take. It’s not a big number for us. Anybody can buy undersea pipe like we can at those kinds of numbers. The reason it’s a strategic asset for us is we can actually fill up 10 gigabit pipes, we had the share of traffic and secondly we also have the terrestrial network. Some advise the 10 gig pipe undersea they have to come talk to us and building a terrestrial network is expensive that’s multi $100 million initiative.

When you add it all up that we can fill up the pipes at the 10 gig increment and we have the terrestrial too that’s the competitive advantage for Centennial.

Randy Barron – SM Investors

I think another competitive advantage is going to be the roaming in Puerto Rico. I’m hoping you can expand a little bit more, what percent of the Puerto Rico based is going to roam to the US, what percent is going to take this global roaming option? When are you going to start offering it and what are the rates you are going to be paying for global roaming, for example?

Michael Small

We are offering it now and the reason it’s really important, it’s not a high percentage of the population but it’s a high percentage of our business customers who have been buying through business solutions from us for a long time. Particularly the decision makers on those accounts, we used to lose, the only reason we lost wireless business was to our biggest corporate customers is the decision maker was getting a Blackberry from someone else because we couldn’t provide and now we can do that. That’s why I was emphasizing we can see business wireless customers grow quickly it’s a small segment of the market but it’s a segment of the market where we dominate on the wire line side.

On our costs we can’t disclose those in the US but they are on roaming rates you see what’s happens in our effective rate per minute on our roaming revenue and its now down to the $0.06 range. I won’t comment but its now where for customers who live in Puerto Rico and they really live in Puerto Rico we can let them travel quite a bit when we are selling rates plans at $50 and above. The numbers work for us we are pretty confident.

Randy Barron – SM Investors

Let me ask two broader questions. One is related to the US non-subsidized customer amount you said its 13% of the base and the highest ARPU, what’s the differential, what’s the variance in the ARPU? Is it because data is higher, what’s the difference?

Michael Small

We won’t give you the variance yet but one is we are charging $10 more for the rate plan per month right up front. Secondly, we charge for behavior, you disconnect, reconnect, charges. Customers have not had an opportunity to buy wireless on this basis before so they were paying big bills for pre-paid and so now they are buying a lot of features and add on services in addition. We are not talking about $1 or $2 difference these customers are paying us…

Randy Barron – SM Investors

When you said, Michael, that some months that’s a small percentage of the base and some months its significant, are those months when you are subsidizing more and less is that the correlation? What makes it some months bigger than others?

Michael Small

We have been working on dealing with the increasing trend of lower credit customers coming in our door for a long time and one of the ways you learn is you keep trying different things and monitor or measure very carefully what happens. We’ve explored a bunch of different offers and its basically trading off how much money you get up front versus how much extra you charge on an ongoing basis and under what terms. Phil do you want to talk a little bit about some of the things we’ve tried.

Phil Mayberry

The primary driver of the volume is the advertising. You walk a fine line when you do mass media advertising on non-subsidized customers with having a negative impact on your base brand of trying to be a better higher end kind of company. The primary driver in the gross activation volume is advertising and a little bit on the offer but under no circumstances are we ever going to sell these where they leave our store that we have an investment in them.

That’s the critical differentiator of the two. When we sell one of those non-subsidized customers we either make a little money or worst case we are going to be break even on the variable costs to acquire that customer. It’s not really so much the promotion and amount of subsidy because we don’t subsidize it, it’s primarily driven by how much and where we are advertising the product.

Randy Barron – SM Investors

Let me discuss one last question. You had said you still want to go through the results of the auction and see the competitive landscape. Michael, maybe I can ask you a broad question which is strategically it seems to me having not participated, maybe to open the door, US [slyer] is a great example seems to have bought a lot of spectrum around your neighborhoods in the upper US. I curious if you can give a step back perspective on your take, understanding you haven’t gone through the specifics yet.

Michael Small

Seven hundred megahertz is great spectrum and LTD our fourth generation is going to be incredibly valuable technology. It’s a question of when you spend your money to get there. We’ve always been last and fast and technology in the US. We wait; we see exactly what’s happening with all our roaming partners in the industry and then spend our money then. Of all the issues out there the time frame to get to fourth generation solution is not foremost on our mind. We are wrestling with the flying 3G right now and we think that investment is going to be happening.

If we had $9 billion lying around the park for four or five years we would have bought that stuff too. More power to them that they get to do it. It’s a great strategic asset, absolutely. It is a period of time before that’s going to be relevant.

Thank you we are going to wrap this up.

Steve Kunszabo

That concludes the Q&A portion of our call, thanks for your participation.

Operator

That does conclude the conference call. We appreciate your participation. You may disconnect at this time.

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Source: Centennial Communications Corp. F3Q08 (Qtr End 02/29/08) Earnings Call Transcript
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