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NTELOS Holdings Corp. (NASDAQ:NTLS)

Q1 2008 Earnings Call Transcript

May 1, 2008 10:00 am ET

Executives

Wes Wampler – Director of IR

Mike Moneymaker – EVP, CFO, Treasurer and Secretary

Jim Quarforth – CEO and President

Analysts

Phil Cusick – Bear Stearns

Gaurav Jaitly – UBS

Tom Seitz – Lehman Brothers

David Dixon – FBR Capital Markets

Ric Prentiss – Raymond James

Operator

Good day and welcome everyone to the NTELOS Holdings Corporation's first quarter 2008 conference call. This call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Wes Wampler. Please go ahead sir.

Wes Wampler

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

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

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

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

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

Mike Moneymaker

Thank you, Wes, and good morning. We are pleased to announce first quarter 2008 operating revenue of $132.2 million, a $10.7 million increase from first quarter 2007. The first quarter revenue increase was primarily driven by 14.1% increase in wireless subscriber revenues and a 7% growth in wireless wholesale revenues.

Wireline revenues also grew 1.3% over 1Q '07 reflecting continued strong double growth within our competitive wireline segment and broadband service revenues including integrated access or Voice-over-IP based services and Metro Ethernet revenues. This revenue base was $4.5 million for 1Q '08, an increase of 21% over 1Q '07. RLEC revenues were $0.9 million or 6.1% less than 1Q '07 due to the July 1, 2007 interstate access revenue rate decrease and access line losses.

We are also pleased to report operating income for the first quarter of 2008 of $26.1 million. Operating income reflects accelerated depreciation charges of $7.9 million for the first quarter of 2008 relating to the 3G 1x-RTT equipment scheduled to be replaced or redeployed with the EVDO upgrade.

For the year 2008, accelerated depreciation charges are projected to be approximately $20 million, with 2Q '08 projected at approximately $6 million and continued declines projected over the remaining quarters.

Net income for the first quarter of 2008 was $8.5 million or $0.20 per share on a diluted basis. Adjusted EBITDA was $55.5 million for the first quarter of 2008, a $5.6 million or 11.1% increase from first quarter 2007 adjusted EBITDA of $50 million. Adjusted EBITDA margin was 42% for first quarter of 2008 compared to 41.1% in first quarter 2007, with wireless adjusted EBITDA margins improving from 38.1% for the first quarter of 2007 to 39.2% for the first quarter of 2008. Wireless adjusted EBITDA grew by $5.1 million or 14.5% for 1Q '08 over 1Q '07. Wireline adjusted EBITDA increased $0.9 million or 5.5% for 1Q '08 over 1Q '07.

Looking next at our key operating metrics for the first quarter, first, an overview of our wireless operating results and key metrics. The aforementioned 14.1% growth in wireless subscriber revenue in the first quarter 2008 reflects the combination of favorable subscriber growth and year-over-year growth in ARPU and improvements in churn.

Net subscriber additions for the quarter were 14,470 compared to net adds of 10,375 for 4Q '07 and 15,946 for 1Q '07. These results reflect the seasonally high prepay sales activity during the first quarter and also reflect an improvement in total churn of 2.8% in 1Q '07 to 2.6% in 1Q '08. Our blended ARPU was $56.95 for 1Q '08, an increase of $1.47 over 1Q '07, driven by continued growth in data ARPU.

Total data ARPU was $7.08 in 1Q '08 compared to $3.44 for 1Q '07. As previously discussed, data ARPU growth reflects the benefit from prepay billing enhancements in 4Q '07 that enabled us to separately bill certain previously bundled data services that had been included in total ARPU but had been excluded from data ARPU.

In addition, beginning in 1Q '08, an allocation of certain post pay bundled package revenues representing the portion related to data were reclassified into data revenues. We are pleased with the growth to date in the ARPU and are excited about the catalysts for the growth opportunity ahead.

CCPU was $32.84 for 1Q '08, an increase of 5.3% over 1Q '07. These increases reflect the success of our national no roam product which contributed to the higher in-collect calls of $5.6 million for 1Q '08 as compared to $5.5 million for 4Q '07 and $4 million for 1Q '07.

Retention calls net of related equipment revenues from existing customers were $2.8 million for 1Q '08, which was in line with 1Q '07 calls for $2.7 million and represented a decline from 4Q '07 calls of $3.3 million. Wireless bad debt expense was 1.6% of wireless subscriber revenues for 1Q '08 as compared to 4.5% for 4Q '07 and 3.2% for the year 2007. We are pleased with the improvements in accounts receivable collections in aging during the first quarter that contributed to the decline of bad debts expense for the quarter.

CCPU increases also reflect the additional cost for the addition of 134 cell sites since January 1, 2006, a catalyst for our successful growth in gross adds, favorable churn results and strong growth in wholesale revenues. Wireless wholesale revenue and roaming revenues were $24.5 million in first quarter 2008, an increase of 7% from first quarter 2007 revenues of $22.9 million.

As previously disclosed, on July 31, 2008, we entered into a new strategic network alliance agreement with Sprint, which introduced revenue minimums of $8 million per month. First quarter revenues under this agreement were $24 million representing the minimums for each month during the quarter.

Let me go into wireline. Our RLEC again experienced favorable net growth in broadband customers over access line losses. Our broadband customer additions within the RLEC was 718 for 1Q '08 as compared to access line losses of 278, for a net gain of 440.

Moving next to liquidity, an overview of our liquidity in current financial condition is as follows. First, adjusted EBITDA less expenditures for property, plant and equipment for 1Q '08 was $30.1 million. Total incremental capital expenditures for the EVDO upgrade remain estimated at approximately $65 million, with approximately $25 million incurred in 2007 and $38 million expected to be incurred in 2008.

Cash provided by operating activities was $34.9 million for 1Q '08, an increase of 40% compared to $24.9 million for 1Q '07. A ratio of total debt at March 31, 2008 to adjusted EBITDA for the last 12 months ended March 31, 2008 was 2.94 to 1, down from a ratio of 3.03 to 1 as of December 31, 2007.

I'm also pleased to report that total debt net of $52.6 million of cash on hand at March 31, 2008 was $560 million. At $560 million, this represents a ratio to adjusted EBITDA for the last 12 months ended March 31, 2008 of 2.69 to 1.

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

Jim Quarforth

Thank you, Mike. As Mike pointed out, we're off to a very strong start to the year, posting adjusted EBITDA of $55.5 million and a 42% margin. I'd like to give you an update on our EVDO progress.

As we have previously reported, 2008 will be our most active year from a wireless network expansion and technology advancement standpoint. Today, we have successfully completed our two switch cutovers and turned up four markets with EVDO Rev-A capabilities including Huntington, West Virginia, Ashland, Kentucky and Staunton and Waynesboro Virginia. By the end of this quarter, we will have turned up three additional markets including Charleston, West Virginia, and Charlottesville and Lynchburg, Virginia.

The conversion to the Lucent EVDO platform has progressed very smoothly. As a result of the successful switch cutovers and the progress we are making, we have decided to accelerate our first quarter 2009 EVDO deployment into the fourth quarter of 2008. We anticipate installing approximately 768 Lucent EVDO Rev-A cell sites which will replace 613 Motorola 1x cell sites, upgrade 95 Lucent cell sites, and add 16 new EVDO cell sites to our network. In addition, we will be redeploying approximately 100 of the Motorola 1x cell sites to further expand our network footprint.

Of the 160 new cell sites, approximately 83% will be located in Virginia West in West Virginia servicing both NTELOS and Sprint customers under our wholesale contract, which will provide a strong catalyst for growth in voice and data revenues. The 160 new cell sites represent a network expansion of approximately 16%, which is twice our normal annual addition. 59 of the 160 new cell sites are scheduled to be in service by the end of this quarter.

The 768 EVDO cell sites projected to be in service by year end will more than satisfy the 98% coverage requirement in our Sprint wholesale contract, which activates an increase in monthly billing from an $8 million per month minimum to a $9 million per month minimum. Earlier results have seen improvements in network quality and significant increases in daily usage.

From a marketing perspective, we have seen an increase in smartphone and aircard take rates from 5% to 10% of growth additions in the first quarter as compared to the fourth quarter in anticipation of our EVDO deployment. This has increased our install days of higher bandwidth devices from 3.5% to 4.5% sequentially. We have seen that daily usage increased by over ten times within the Huntington and Ashland markets in the first 30 days of EVDO deployment.

The daily average data package revenue sold increase threefold in these markets. As we turn to markets throughout the year, we would anticipate a continued increase in data penetration, usage and increases in data ARPU.

Another key element to our network expansion plans will be the addition of nine new retail stores to a total of 84 stores or 12% growth, which will provide further strength to our differentiated retail selling strategy. Two stores were opened in the first quarter and six of the nine will be opened by the end of this quarter. The new stores have a fresh new look, they incorporate cash kiosks, and is designed to better show off our handset offerings with an emphasis on data capabilities.

In addition this year, we are updating approximately 20 of our stores with this new look and capability and putting in cash kiosks in 50 stores. We are very pleased with the improved handset smartphone and aircard lineup with EVDO capabilities. While we have previously reported a slowdown in the growth rate of voice minutes of use from our Sprint relationship, we continue to see growth in both voice and data usage. In fact, looking at Sprint's preliminary April bill, they have exceeded the $8 million monthly minimum with their bill exceeding $8.1 million driven by both voice and data usage.

As we turn to markets with EVDO capability, we expect to see an acceleration of data usage from Sprint customers. The substantial network expansion will also be a catalyst for wholesale revenue growth as we are averaging approximately $150,000 in annual wholesale revenue per cell site.

Looking at our guidance, we are making the following changes to our annual guidance. First, as mentioned earlier, we have accelerated our EVDO bill from the first quarter 2009 and the fourth quarter of 2008 resulting in a $3 million increase in CapEx to a new range of $121 million to $124 million.

Second, we are increasing our net income guidance by $2 million to a new range of $37 to $43 million. The primary drivers for this increase are, one, a reduction in depreciation expense of approximately $5.5 million resulting from Motorola equipment coming out of service due to the EVDO deployment and redeployment of certain 1x cell sites. And two, an increase in interest expense of approximately $2.5 million, primarily driven by an increase in the noncash fair value adjustment to the interest rate swap and a reduction in non-cash compensation expense of approximately $0.5 million.

Third, we made a minor reduction in our projected ILEC line losses to a new range of 4% to 6%. This range reflects a change in timing of when we expect voice competition from Comcast. We are reaffirming all of our guidance provided in our February 28 earnings release.

To summarize, we are very pleased with the strong financial and operating results in our first quarter and believe this will provide solid momentum for the balance of the year. We are particularly pleased with the $55.5 million EBIDTA result and the associated 42% EBITDA margins. It is very important to note that the first quarter did not reflect any incremental operating expense associated with EVDO, but then in the remaining quarters we will expect to see growing incremental operating expense for EVDO as the markets are turned up.

Our wireless business continues to demonstrate strong EBITDA growth with a 14.5% growth over the same quarter last year. The operating trends that are supporting this growth continue to be growth in customer additions, improved churn, and increases in data ARPU. The investments we have made in our wireless network expansions and planned technology evolution to EVDO this year will continue to be significant catalysts for growth for both voice and data revenues for both our retail and wholesale business segments.

We anticipate significant growth in data usage ARPU and revenues as a result of the implementation of EVDO. Wireline business also showed nice results in the quarter with a 5.5% growth in EBITDA, driven by exceptional growth in the competitive segment. And in particular, our revenue from the competitive strategic products including Metro Ethernet and integrated access grew 16%.

The ILEC has achieved an enviable DSL penetration at 40%, outpacing its access line decline and continues to enjoy double digit access minute to use growth and margins among the best in the industry. We believe the company's strong operating trends and momentum along with its investment in key growth areas position the company for sustainable growth well into the future.

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

Question-and-Answer Session

Operator

(Operator instructions) We will go first to Phil Cusick with Bear Stearns.

Phil Cusick – Bear Stearns

Hi guys, do you hear me?

Jim Quarforth

Yes, hi Phil.

Phil Cusick – Bear Stearns

Thank for taking my question. I guess a couple since I jumped in first. First of all, can you talk about little bit more on the Sprint usage versus the $8 million minimum and remind us when those rates come down and reset and is there – it could be higher in April, but then it could drop back down on a rate reset later.

Jim Quarforth

Sure. Let me break it down to the various elements, Phil. The home voice gets reset on July 1 of this year. It was flat for a year, and then after July 1, it will get reset every six months and to review that, that's based on the actual, it's 60% of the change of the Sprint revenue yield is the calculation. The travel voice is based on 90% of the Sprint revenue yield and that also will adjust on July 1 and adjust every six months. The data, there is two data elements, there is the travel data which is 90% of Sprint's data revenue yield and that gets adjusted every quarter. You may recall, to go back to schedule two of the agreement that we had filed, there was this set rate per megabyte every quarter through July of 2009. In 2009, then what happens is you actually go through the calculation of the 90% of their revenue yield, and then the home data again is on a different schedule that is 50% of Sprint data ARPU as defined by the contract, so that will adjust on a quarterly basis as well.

Phil Cusick – Bear Stearns

So, in April, it was above $8 million, nothing is going to reset again until July 1, so …

Jim Quarforth

No, you do have some seasonality, for example, probably the best example would be there are a lot of students, lot of universities in this market area, so typically because the students leave in mid-May, you will see a little bit of drop off in usage and then it picks up again probably in the latter part of August. And then, you have the same experience probably in the end of December time frame.

Phil Cusick – Bear Stearns

Got it. And so, we shouldn't get too crazy about this, but we should definitely be looking for more than the $24 million from Sprint this quarter.

Jim Quarforth

Yes, I would say that's a fair representation.

Mike Moneymaker

I think, Phil, if you look, we are very pleased to see the – I mean, if you look at the margin between the minimums and the actual usage in 3Q, 4Q, first quarter, you will notice a very nice improvement from – third and fourth quarter was roughly $1.5 million, $1.6 million short of the minimums to approximately $800,000 in the first quarter and as Jim indicated, going above in April. So, pretty good trend and as Jim indicated, we are seeing growth in – historically, we have seen a lot of growth in data, very strong data growth, but we are starting also to – we were seeing some growth in voice in April as well. So, we are pleased with that and again as a reminder, we just launched EVDO. And so, it's in Huntington market in early April, in the Staunton and Waynesboro markets here in late April. So really haven't even seen the full benefit of EVDO usage, but as Jim indicated in preliminary results, we are clearly seeing a ramp up of usage per customer.

Phil Cusick – Bear Stearns

And it seems like that really – that data ARPU really ramped up this quarter. Is there – I know you launched Blackberries recently, is that driving it or is it really just average use across the board?

Jim Quarforth

We launched Blackberries about a year ago and we have got about seven smartphones in the lineup. When we talked about the jump in the packaged data revenue, some of that can be skewed by the aircards and I suspect some of the data usage can also be skewed by the aircards. We don't have it broken down by the device at this point.

Phil Cusick – Bear Stearns

Okay. And last but not least, can you talk about the economy overall in your markets on the wireless and the wireline space, both consumer, SMB and what about their trends are? Thanks.

Mike Moneymaker

Again, I think in terms of – as I indicated I think we were real pleased to see in the first quarter that our receivables improved aging in all categories, improved from the third and the fourth quarter, particularly the fourth quarter of last year. As we reported on the year end call, we really did see some slippage in aging that started probably late in the third quarter and continued into the fourth quarter of last year. That prompted us to increase the bad debt reserve as we reported for the fourth quarter. And I would say that in the first quarter, we saw that trend start off with slow improvement and then continue to improve throughout the quarter. Like I said, in March 31, we were very pleased that March 31 receivables of their respective aging versus December. So all good signs there that we were seeing an improvement in the customers' payment behaviors, so good news there and that we came off of a high in the fourth quarter and improving. That's all good indication that at least from an economy standpoint, we are not – we really did not see any further erosion. In fact, we saw an improvement.

In terms of – in general, what's going on in the economy in the markets, again I think as we previously reported, we don't necessarily feel like our markets have had the same peaks when the economy in the real estate markets rose steeply in years past and certainly, they are not totally isolated. But I don't think we share the same values either in terms of the drop off that perhaps some of the more urban markets might be seeing in the nation. So, we certainly see some impact, I think that's why you saw the third and fourth quarter pick up, but I don't think we will see any further erosion and like I said, I think we saw improvements in our – from a receivable standpoint.

Jim Quarforth

My comment, Phil, too is our churn is another indicator of probably the economy and typically it's good to look at the same period of the previous year just because of the seasonality of churn. We had slight improvement in post pay year-over-year. And within that, voluntary improved by about 10 basis points and involuntary actually increased by about 8 basis points, which is somewhat consistent as a trailing metric from what Mike talked about on the AR and probably a good indication of impact by the economy. I would say that our prepay has dramatically improved here, particularly since we put in a new billing platform back in the fall, which is what we had expected to see improvement in, in both churn and also improvement in ARPU because of the data capability that we can provide the prepaid customer now. So, we've seen the results – positive results from both of those areas from that platform.

Phil Cusick – Bear Stearns

That's great. Thanks guys.

Operator

And our next question comes from Raymond James, Ric Prentiss.

Ric Prentiss – Raymond James

Hey guys. First, kudos to Phil for getting in that first question. A couple of questions, I want to keep probing on there too. Very pleased on the cost side. I want to probe a little deeper on the bad debt side. You talked about how that could be a nice indicator on the economy. 1.6% is pretty significant improvement from both a year ago and a quarter ago. Is this sustainable? Obviously, it's very impressive as far as how it helped the cost side and the EBITDA.

Mike Moneymaker

Yes, Ric, again – I think we're pleased with what we saw in improvements. I will say that the first half of last year, bad debt was lower than the second half of the year. Certainly, it's early to say if that's an indicator of what the trend for '08 would be. I guess I can say we're off to a good start. I'm not sure that other than the economy and a lot of pretty bad news out there in the banking world that started really in the third quarter, probably earlier in the third quarter of last year that that seemed to really push up our bad debt and our aging that we saw in the third and fourth.

All I can really report here is that, as of today and during the quarter and even within the quarter, we saw things improve month-over-month. And so, we're pleased with the momentum. We hope that it just continues to hold at the current level. As Jim indicated, churn is a good indicator. The fact that we saw churn improve and particularly improve in the prepay. But, those are all movement in the right direction, I think it is pretty mature and very highly speculative to what that could translate to, but hopefully we were over the worst that we saw in the first quarter of last year and hopefully that anomaly doesn't return.

Ric Prentiss – Raymond James

Good news. Another cost item that came in better than what we were looking for is the CPGA, $308 I think if I remember the number right. Your guidance for the year is much higher than that. What are your thoughts as far as – as we look at CPGA, what would cause it to go up in the latter part of the year? Is it Rev A related or just kind of, one, why the good numbers on CPGA versus kind of where your thoughts were for the year?

Jim Quarforth

Clearly, the biggest driver for that is, and you've seen it in previous years, is the fact that we have a high sales quarter, then we spread that across our fixed cost retail store distribution, it dramatically lowers the CPGA cost. So, you will see a spike in effect in the third quarter because those are seasonally lower gross add quarters. Certainly, with EVDO deployment and wanting to be (inaudible) the box, we'll be taking some additional subsidies as we turn these markets up, which could also drive that up.

Mike Moneymaker

I would just add to that again. As Jim said, I think with the EVDO launches, we do have some advertising costs. I think in addition, you've got – you do also have slightly higher handset that's being sold with that EVDO capability. I would also say that, for the year, again we felt very good with our guidance. We took a hard look at that. If you really go back and look at the first quarter of last year, it was 313 and went to 308. So it's pretty much in line with that seasonality that we experienced last year and throughout the year. So we feel really good about our guidance and we do think there's a seasonality coming into play there.

I think the one more thing, just to add to that, we did see a little bit of softness and a slight decline in our indirect channels. And in terms of CPGA calls, that's probably up from a pure variable basis. It's one of the higher variable costs in terms of the cost issue with the gross add. And I think as we add retail stores here, as Jim indicated, 6 in the second quarter and 9 for the year, our retail stores have a higher fixed cost. And so, as a result of that, when you have a higher sales quarter, I think you should see some favorable results. I'm pretty excited that with the addition of the retail stores that that should have overall favorable impact once those stores reach really their capacity and get established. You do have some – anytime you open a new store, you'll have some start-up costs as the foot traffic finds the store and gets up to speed.

Ric Prentiss – Raymond James

The guidance question maybe begs a bigger guidance question, very nice first quarter results. Jim, you cautioned us maybe to remember the DO costs haven't been reflected in there completely as we look towards the rest of the year. But, as you look at kind of where you're at today and what you are seeing in the economy feeling pretty comfortable it sounds like, how would you characterize your revenue EBITDA kind of guidance, since we're still a little bit early in the year, I guess?

Jim Quarforth

I thought you were going to ask me why we didn't increase it, Ric? I think you know our history. We put the guidance out 60 days ago and so really not a lot of time has passed. And so, from that perspective, we're uncomfortable with changing that guidance this early in the year. At the same time, as we pulled it out we're off to a great start. EVDO deployment is going extremely well. We are seeing the kind of results in usage and in revenue ramp and in sales of those EVDO devices, so all that feels really good to us. At the same time, we've had a lot of discussion about what we should do in guidance as we do each quarter and we just feel it's a little premature to make any changes at this point in time.

Ric Prentiss – Raymond James

Great. Well good luck guys. Thanks.

Operator

Our next question will come from Gaurav Jaitly with UBS.

Gaurav Jaitly – UBS

Great, thanks. Good morning guys. First, just a housekeeping question, Mike, I think you mentioned there was a benefit from a reclassification of post pay data ARPU this quarter. Just wondering what the sequential – I think had a $0.85 sequential improvement in post pay data ARPU, just wondering what the impact of that was?

Mike Moneymaker

Yes. Post pay I think in the quarter, it goes around $0.39 in post pay. I think the blended impact of that change was about $0.32 of the total ARPU.

Gaurav Jaitly – UBS

Okay, great. And then, I think you mentioned, which I thought was pretty impressive, ten times increase in the data usage already in the initial EVDO markets on the wholesale side. Just wanted to make sure I got that number right. And then also, have you seen any impact, it's probably too early, but have you seen any impact in the retail side in the markets in terms of your take rates for data handsets there?

Jim Quarforth

Gaurav, that was retail. We didn't give you wholesale. We don't have a way to break down there. We don't disclose our customers. But that was retail, it was over ten times on our retail in those markets in the first 30 days.

Gaurav Jaitly – UBS

And that's usage?

Jim Quarforth

That's usage.

Mike Moneymaker

Yes. And again, I think one thing that's key here is that, as Jim indicated, we saw in the first quarter and then continuing into April, we did see a pickup in aircards as well as smartphones, but in particular the air cards. Again, I think it is – we are pleased to see the growth. At the same time, it's extremely early and it's only in two markets, Huntington and Ashland, that we really have any results and it's not even a full month of results, but definitely pleased. Certainly, an indication that the consumer likes the product, likes the features and capabilities, and is out there using the product. So that's what we're wanting to see and early results are favorable.

Gaurav Jaitly – UBS

That's great. And have you been targeting business customers more now? Do you think you have a better chance of success on the air price [ph] side, given the EVDO rollouts in these markets?

Jim Quarforth

Yes. Short answer is yes. Certainly that's a channel that's relatively new for us. And it is continuing to develop. Those relationships take a longer time to develop and secure contracts for. I think last quarter we reported we had signed a five year contract with University of Virginia Medical, which we should enjoy some nice growth from that relationship. But clearly, the business customer wants the capabilities of EVDO and that's going to be a very significant product in our portfolio for those guys to sell.

Gaurav Jaitly – UBS

Great, thanks.

Jim Quarforth

Thank you.

Operator

Our next question comes from Lehman Brothers, Tom Seitz.

Tom Seitz – Lehman Brothers

Thanks for taking the question. How you doing?

Jim Quarforth

Good.

Tom Seitz – Lehman Brothers

I wanted to talk a bit more about the EBITDA strengths. I think you mentioned that you didn't have any OpEx from the EVDO build, which obviously we were modeling a little bit of pressure from. Can you tell us how you were able to avoid it? Was it just the timing of maybe the backhaul costs that you were going to achieve? Were you just able to start the contracts on April 1, or any color there? And can you talk about expectations to the impact for margins for the remainder of the year from this initiative?

And then, second question, any concern at all about post pay net ads down year-over-year, just wondering if that's maybe a sign of the economy or is it a sign that you are sort of keeping your powder dry for the EVDO launches?

Jim Quarforth

Let me give a shot at those answers, Tom. On the EVDO OpEx costs, I think what happens from an accounting perspective is that, what we try to do is we try to turn the T1s up a month in advance of the market launch, which allows us time to do the proper testing and get prepared for the launch. Prior to launch of that, that cost is capitalized. And then, once you launch, it becomes an expense item. So, if you think about the markets, we turned up Huntington. Ashland was turned up late March, but really wasn't …

Mike Moneymaker

Yes, Ashland was in April 1 (inaudible).

Jim Quarforth

So, it really wasn't any expense there. But then obviously in the second quarter, those particular markets you're going to see the T1 expense show up. So, as you think about the markets turning up throughout the year, you're going to have this increasing OpEx cost each quarter because you have more months with more cell sites, if you will, during the year. I think we have previously on our call talked about, it was a $6 million OpEx number in '08 over '07 related to the EVDO launch.

Mike Moneymaker

In addition to just EVDO and in addition to T1s, you also have the factors (inaudible) a 160 new cell sites. And '07 was a very light year in terms of new cell site adds. Reason being, once in the second quarter, once we realized that it looks extremely likely we're going to have a contract and that we were also going to be – going with the Lucent Technologies, we made a decision that it made sense not to be deploying base stations that we would have to replace. So, we cut back on that deployment in '07. And so, you've got a lower run rate there in '07 from new sites and you will see that ramp up in '08. But again most of those sites, as Jim indicated, 59 of those sites here coming in in the second quarter with the remainder very heavy in the third and some residual wrapping up in the fourth as well. So, again you'll see that ramping up, that element of the call structure also ramping up throughout the year. Very minor costs associated with that in the first quarter.

Jim Quarforth

On the margin question, Tom, I think previously we've said that we thought that margins would remain flat when we've had very nice margin growth in previous years, with the downward pressure from the OpEx costs during this ramp. We anticipated it will be flat and then it will give us an opportunity to accelerate that as we go into '09 and beyond.

Post pay net ads, it's probably a whole host of things as we think about the drop in net adds or gross adds I guess for the quarter. I think probably the two, certainly the largest one as Mike touched on earlier is that we were fairly disappointed I guess in our indirect channels productivity, they were down quite a bit for the quarter. That was probably the largest factor.

And then followed by that, we probably would say that we've been a big Motorola handset shop and we've ridden the Razor pretty hard for a long time and we think it's probably time to be moving to some other handset offerings. We've got seven new phones coming in the second quarter that we'll be promoting and including Samsung and LG products that we're pretty excited about. So, you'll see a little bit of broadening and shift in our handset offerings as we go throughout the balance of the year.

Tom Seitz – Lehman Brothers

Okay. So, just as a bit of a follow up, the EBITDA strength and the flow through on the guidance, you're asking us to be careful there just because of the OpEx pressure that you've warned us plenty in advance from the EVDO build out and it didn't hit in the first quarter?

Mike Moneymaker

That's correct.

Tom Seitz – Lehman Brothers

Okay, great. Thank you very much. Great quarter.

Jim Quarforth

Thank you.

Operator

(Operator instructions) We'll take a question from David Dixon with FBR Capital Markets.

David Dixon – FBR Capital Markets

Thanks very much gentlemen. Thanks for taking the call.

Jim Quarforth

Hi David.

David Dixon – FBR Capital Markets

Wanted just to touch on the churn for the quarter, which I thought was a great result, and wondered if you could talk to the progressive improvement that we could see in pre pay churn and the drivers of the churn going forward as well as if you could touch on just the profitability of pre pay versus post pay as you look at the mix?

Jim Quarforth

Sure. Certainly, we've seen some pretty dramatic improvement in prepay as I mentioned before since the fall, and the introduction of our new billing capabilities. One thing that has a lot to do is to do fractional billing where before we – a customer ran out of minutes partway through the month. They had to re-up for an entire month. And when you're talking about the general pre pay customer, that solution doesn't work very well. But they can come in and they can pay for a fractional month – it keeps them on the network and keeps them, which helps the churn but then it also obviously helps your usage and your revenue and your ARPU.

So I think we're seeing that as the driver for churn. We're also seeing, because we are able to now offer the full data capabilities that we offer on post pay to that pre pay customer, that also allows for one of the improvement in ARPU, but also enhances the value of that handset and therefore helps churn on the pre pay side. We've been real pleased with that result. We've got some pretty attractive pre pay churn when you compare it to other players in the industry. So the question is how much lower can it get and I'm not sure we know at this point. We're trying to gain a lot of experience from what we're seeing from that deployment in the fall.

Mike Moneymaker

On profitability of the prepay, and again I think we've discussed previously, in the pre pay customer, your traditional prepay or what we used to call in-advance customer, will walk out of a store with probably close to $150 outlay. So, you first ride on the front end. You reduce the amount of subsidy hit that you incur, typically a lower cost handset associated with that add. The protected class, which is something that we've had out now for closing in on a couple of years, the protected class customer, the customers, again as a reminder to everyone, is the customer who file for and try to get a post pay, put in an application, didn't score for the post pay yet scored high enough within the immediate band beneath post pay that we call the protected class band that we were willing based on the strength of that score to offer the post pay product in terms of whatever handset promotion we may be running and at that post pay pricing which means they are not walking out the door with a $150 outlay, but they are getting a post pay 999 or whatever the special maybe.

But, the difference there is, one, we do keep them on pre pay. So, monthly, we are not taking any credit risk and we – based on the limited packages that we offer, we have seen a $70 plus ARPU. So again, I think with kind of taking both of our pre pay products, we kind of have two things, one, those within pre pay that have a fairly strong credit score for that category were experiencing a very favorable ARPU as a result of the type of product and service that we offer. And for those that have a lower credit score or choose not to go through a credit review process again, we reduce our risk and enhance our profitability by simply putting enough skin upfront in terms of what has to be paid. We walk out the door to buy that product.

David Dixon – FBR Capital Markets

Just a quick follow up on the mix shift. Mike, if you could just help me with the trend that you are seeing perhaps in the second quarter perhaps just an issue that you have taken to address the indirect channel challenges that you are seeing there, to what extent are we seeing some sort of normalization, which we would normally see in the second quarter?

Mike Moneymaker

Jim may have some more to add. I mean, as Jim indicated, I think one of the things that we are doing is increasing our own retail stores. We are adding 9 in 2008, 6 of which are in the second quarter. So I think (inaudible) one of the things we are doing is increasing our own distribution channels. Part of this distribution channel certainly looked at not only new opportunities in terms of new markets that we are going into, but also look at what perhaps we might have had historically a high mix of indirect sales, certainly an indicator that our own retail distribution channel didn't have a point of presence there. And so, we think we are proactively through the addition of the retail stores positioning ourselves better in terms of our dependence on the distribution channel.

David Dixon – FBR Capital Markets

Okay. Thanks very much.

Operator

We do have a follow up question from Phil Cusick with Bear Stearns.

Phil Cusick – Bear Stearns

Just quickly on the IPTV product, you announced it last quarter and we didn't hear a lot about it on the call, and I thought maybe you could follow up?

Jim Quarforth

Sure. The reason we all thought about that because it was so small, Phil, and it doesn't really not going to move the needle. But I can share with you some interesting statistics that you may enjoy. Realize we only have homes available to service of about a little over 3,000, about 3,200. And so, if you think about that, you are not going to get a lot of customers that's really going to move the needle financially.

But interesting enough, we have in six months about a 15% penetration, so we're very pleased with that. Now that equates to about 405 customers. A small number but if you look at the percentage penetration in 6 months, we feel good about that. Of those customers, 76% are taking a triple play, which is very interesting and obviously one of the key things we focus on is not just the IPTV product, but we also focus on selling the higher bandwidth product either 610 at 20 megabit speed through the homes cause that really makes the customer differentiate ourselves from the competition and makes that customer stickier.

So, when you think about the fact that we've leapfrogged with those customers, the broadband product as well as the quality of the IPTV product, we feel like have really helped long-term the churn and stickiness of the customer. We have always characterized this as a long-term modernization network and we continue to think of it in those terms. We are enjoying about just under $62 ARPU and about a 50% margin on that business. So, pleased with the progress, it's small, yes, and that's why we don't really spend a lot of time talking about it. Thanks for asking.

Phil Cusick – Bear Stearns

Thanks.

Operator

We also do have an additional follow up question from Ric Prentiss with Raymond James.

Ric Prentiss – Raymond James

Hey guys. On the Rev A, I was curious as probably a lot of us are as far as Push-To-Talk. A lot of people are watching to see if Verizon is going to introduce a Push-To-Talk product on Rev A this summer or enhance the QChat and hopefully the process of potentially migrating iDEN costumers over on to CDMA and driving more users to you. Have your engineers been able to test it at all? Has Sprint brought it to you at all to see how does a CDMA Rev A Push-To-Talk product work? Have you guys been able to experiment with it at all?

Jim Quarforth

We don't have a Push-To-Talk product. Our current contract with Sprint is, it doesn't give us the capability or access to QChat. It doesn't mean that we won't have access to it in the future, but currently it's not part of the contract. We don't have any current plans today for Push-To-Talk, not to say that we wouldn't introduce it sometime in the future, but it's not a high priority for us right now.

Ric Prentiss – Raymond James

I just need more, Jim, more so maybe from the engineering side, I know it probably would be awkward on the marketing side, but have your engineers been able to test it at all as far as saying – from Sprint saying, we're going to rely on your network in the Virginia West or West Virginia areas. Let's make sure your building penetration is good, let's make sure the network is working well. I guess it sounds like probably (inaudible) devices either kind of test out as you've been really up the network yet.

Jim Quarforth

Yes. We don't have access to their – to the ability to test it.

Ric Prentiss – Raymond James

Okay, and then the final question from my side would be, obviously the leverage continues down, I think Mike, you said 2.69 in the quarter. iDEN plays out, you would be closer to probably 2.5 by the end of the year maybe or in that neighborhood. What are your thoughts as far as dividend, as far as capital, shareholder returns, et cetera?

Mike Moneymaker

I think we've pretty consistently said that our first priority for capital is going to be investing in the business, which we have done this year, $120 million CapEx for EVDO. We certainly believe that we will continue to have some low hanging fruit with additional footprint expansion in 2009/2010. But, will the CapEx drop substantially once you complete EVDO, I think the answer to that is yes. So then the second priority beyond growth is going to be returning capital to shareholders. We did increase the dividend last fall by 40%. We'll be taking another hard look at that again this year, and from a leverage perspective, we think our leverage is pretty low, particularly in relation to our peer group. But, at this point in time, with the debt markets being what they are, there is really not a whole I can do about it.

Ric Prentiss – Raymond James

Alright, so just keep monitoring the debt market if we do get a recovery in the debt market in the fall time frame or winter time frame, you are poised to at least take a look at it and see what you might do.

Mike Moneymaker

Yes, I think we're going to be looking at capital structure and what the optimum debt ratio should be, but until we get to that point, I'm not sure when the market is going to be back, whether it will be this fall or in 2009.

Ric Prentiss – Raymond James

Sure. Okay, thanks guys. Good luck.

Operator

And it appears we have no further questions at this time, Mr. Wampler, I'd like to turn the call back over to you for any additional or closing remarks.

Wes Wampler

Thank you. As a reminder, a replay of this call and an archive of the audio webcast will be available. Please refer to our Investor Relations Web site for details. Please also feel free to contact us anytime with questions. The media should contact Mike Minnis at 540- 946-7290. Investors should contact me at 540-949-3447. Thank you all again for joining us this morning and this concludes our call.

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Source: NTELOS Holdings Corp. Q1 2008 Earnings Call Transcript

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