Virgin Mobile USA, Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript

Virgin Mobile USA, Inc. (VM)

Q1 2008 Earnings Call

May 5, 2008 5:00 pm ET

Executives

Erica Bolton – Director IR

Dan Schulman - CEO

John Feehan - CFO

Analysts

Phil Cusick – Bear Stearns

Richard Prentiss – Raymond James

Walter Piecyk – Pali Research

Will Milner – RT Research

Unidentified Analyst – Lehman Brothers

Presentation

Operator

Good afternoon, I would like to welcome everyone to the Virgin Mobile USA first quarter 2008 earnings teleconference. (Operator Instructions) I would now like to turn the call over to Ms. Erica Bolton, Director of Investor Relations. Ms. Bolton, please go ahead.

Erica Bolton

Hello everyone and welcome to Virgin Mobile USA first quarter 2008 results conference call. Joining me on the call today are Dan Schulman, Chief Executive Officer, John Feehan, Chief Financial Officer and Steve [Cophold], Vice President and Treasurer.

Our earnings release went out at 4:15 this afternoon and is available on our Investor website, www.investorrelations.virginmobileusa.com. Please note that this presentation of results will include forward-looking statements. These statements which reflect our current views with respect to future events are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further certain forward-looking statements are based upon assumptions about future events which may not prove to be accurate. We have provided a detailed discussion of various risk factors on our SEC filings and I strongly encourage you to thoroughly review these filings. We plan to file our 10-Q for the first quarter of [2007] on or before May, 15 and we encourage you to read this as well.

We will refer to several non-GAAP metrics in our call. Reconciliations of our non-GAAP measures to the appropriate GAAP measures for the first quarter 2008 can be found at the end of our earnings release and in our SEC filings.

Today Dan and John will give you an update on first quarter 2008 operating results and outlook for the remainder of 2008 and then take any questions you may have. And I’d now like to turn the call over to Dan Schulman.

Dan Schulman

Thanks Erica and thanks everyone for joining us today. Our first quarter provided a good start to the year with results coming in at the high end of our expectations across all metrics and we are pleased with the trajectory of our results. Within an environment where businesses across all industries are announcing profit warnings, even some of the biggest and most diversified, we are continuing on our track of producing profitable results and positive free cash flow and we remain confident in our estimates for the full year 2008.

Despite challenges from macroeconomic conditions we produced approximately 796,000 gross adds and 18,000 net adds which were at the top of our estimates. Gross adds as expected were down year-over-year in Q1 however I am pleased with the trend line throughout the quarter. This year we did experience some overhang in Q1 due to our pricing decisions in Q4 as many of the sales in Q4 tend to spill over into gross adds in the first quarter due to the pattern of gifting during the holiday season.

As a result of that gross adds were down substantially on a year-over-year basis in January however they rebounded in February and March gross adds were slightly up over March, 2007; an improving trend which we’re very pleased about. In the first quarter we produced $304 million in net service revenues and $28.7 million in adjusted EBITDA, both above our plan and expectations.

This resulted in net income of $4.7 million or a fully diluted $0.07 per share. We also produced $10.4 million of free cash flow which was accomplished despite spending an incremental $7.5 million of investment in marketing to introduce our new voice and data plans. ARPU for the first quarter was $19.93 which was down slightly from $20.14 in Q4 reflecting some stabilization of the usage declines we experienced in the fourth quarter and early Q1.

While we didn’t get the full benefit of what is typically a higher ARPU quarter we continued to see very good hybrid adoption with hybrid gross adds representing 32% of total gross adds in the quarter and ending the quarter at 22% of the base. We expect the rollout of our new value proposition to drive continued strong growth of these higher ARPU monthly plans.

Its very early days but we are cautiously optimistic about our new plans, the rollout of which was initiated at the end of the first quarter and has really begun in earnest in the past few weeks. These plans which will be completely rolled out through all of our retail channels by the end of Q2 represent an extremely compelling value for consumers and we think they are amongst the most competitive offers in the market.

These new plans make clear to consumers the competitiveness of our offers. Where we compete, which is in the 200 to 1,200 minute-per-month sweet spot of the market which encompasses some 80% of all consumers, our offers provide great value against almost any other offer. Not only that, but we are now offering post-paid-like features, for instance, on our new monthly minute packs we offer roll-forward minutes to customers who top-up within 30 days. And as we continue to add new features and benefits to our plans and with the great value we offer there are fewer and fewer reasons for customers to lock themselves into an annual contract.

Another important feature of the new plans is increased incentives for customers to register and use a credit card with us. These customers are 40% less likely to churn then the average customer and we are offering them increased value if they register their card with us because that benefits us both on churn and on savings related to commissions. As I mentioned we began rolling out these offers at the end of the first quarter and they should be fully deployed across our retail footprint at the end of this quarter.

Consequently, we don’t expect to see a meaningful benefit in our results until Q4. However we do want to provide you with some initial results. Early indications are encouraging, in particular adoption of our monthly plans is trending strong with gross adds onto our monthly plans at 38% of our gross adds in April. Its obviously a good sign to see the percentage of customers opting for monthly plans creeping up. Early ARPU averages for our new plans are about $40.00 which should imply a very strong return on investment for these customers.

Handsets are becoming more important to consumers and we are very pleased with the popularity and adoption of our higher end handsets. There is definitely an appetite for the mid and high end handsets in our customer base and as we’ve said before these are great customers. Their data usage is three to four times that of our average customer and the higher entry price points make them more sticky or more apt to stay with us. Their higher ARPU and longer tenure far outweighed the slight impact to CPGA. We see with the higher dollars we pay to our retailers on the commission.

We are just beginning to rollout a mid tier slider handset from Samsung, our first with that manufacturer. We recently launched the Flare which sells for $29.99 and is a thin, flip handset produced by LG with features such as an external ID, Bluetooth and web browsing. We have a powerful handset lineup for this year including our first EVDO phone at the end of the year which will address our customers’ appetites for both high quality and value. Gross adds are a critical factor in predicting future revenue and EBITDA growth. As we’ve said from the very beginning distribution is an essential part of success for [inaudible] and the scales we’ve achieved means we are able to continually expand and get primary placement with our top retail partners.

We reached several key agreements during Q1 to significantly expand our retail footprint. We’re expanding on three fronts. First we announced recently our partnership with American Wireless which is one of the premier third party distributors in wireless. We expect to rollout into about 600 stores by the end of this year and we’re very pleased with the new relationship as master agents tend to yield very high LTV, or lifetime value customers. We have also recently entered a nationwide agreement with Sears to enter into their stores, which is a great new particularly for us. Sears is new to wireless and is planning to launch aggressively into the space.

As we did with K-Mart, we have worked hand-in-hand with them to develop their wireless presentation for their launch. It’s a great new channel with some 900 stores where we’ll be getting significant shelf space. Lastly and most importantly we are substantially expanding our relationship with Wal-Mart and will be increasing distribution with them an additional 20%. Wal-Mart has been an excellent retail outlet for us and this expansion reflects the strength of our partnership. Not only are we expanding the absolute number of stores in which we will sell our handsets and top-up cards by another 20%, but we’ll be getting incremental shelf space in every Wal-Mart store that we sell in.

We believe this retail expansion along with the retail rollout of our new plans and new handsets will promote strong customer growth in the second half of 2008. While we are still comfortable with all of our estimates for the full year 2008 we will invest in incremental gross adds as we stock these new channels. We are very excited about the growth potential this presents for the second half of the year and its impact as we look into and towards 2009.

We’re making strong strategic progress on all fronts with our proposition, handsets and distribution. We’re constantly innovating and we think these initiatives will continue to set us apart from the pack and will provide us the opportunity to exit 2008 on a solid growth trajectory. To support these and other growth initiatives I have made some changes on the executive team. We promoted Bob Stohrer to Chief Marketing Officer. Bob has been with Virgin Mobile since just after our launch. He knows our brands and our customers inside and out and has been central to the development and launch of each of the new initiatives I have outlined. He is an excellent addition to the executive team and I couldn’t be more pleased to have him in this role.

We also recently announced a broader role for David Messenger who is not Chief Administrative and Corporate Development Officer. David has been instrumental in helping me think through our strategy and organization model, helping us to bring on the right people and develop to support our rapid growth over the past few years. He has a very strong background in both Telecom and corporate development and we are expanding his role to help us examine a number of potential opportunities.

While the current economic environment certainly presents challenges for everyone we also believe it provides us with opportunities. We believe we can continue to optimize our business model and we are currently looking at a few key initiatives to improve our cost structure throughout this year and next year. We expect to achieve an additional $15 million to $20 million of efficiencies this year even with the $10 million plus investment we are making in the first half of ’08 to support the rollout of our new plans.

We are maintaining our outlook for 2008 on all metrics even with the expectation of incremental customer growth. Our scale and the flexibility in our model allow us to maintain ongoing profitability and cash flow generation while continuing to both invest in and support growth. As I said upfront, the first quarter was better than our expectations and we’re executing more efficiently against multiple fronts. We are excited about the remainder of the year and believe the initiatives we have implemented will result in good growth potential in the second half of this year.

I’ll now turn it over to John Feehan to go through our financials in more detail and then we’ll return to take your questions.

John Feehan

Thanks Dan, our Q1 results reflect the strength and flexibility of our business model. We performed better than our expectations in the first quarter and produce profitability and strong free cash flow while we continued to invest in growth. In the first quarter we had 796,000 gross customer additions, produced total net services revenues of about $304 million, generated adjusted EBITDA of $28.7 million and produced $10.4 million of free cash flow.

Our ongoing ability to produce strong free cash flow put us in the position to repay $5 million of the outstanding revolver in April, putting the current undrawn portion at $35 million which we will continue to use as a source of funding as needed. Across all metrics Q1 results came in at the high end or better than our expectations. We are cautiously optimistic about the current customer behavior we’re observing in the base. Our monthly hybrid plans continue to perform well with 32% of total gross customer additions in the quarter coming from the hybrid plans resulting in 22% of our customer base on these monthly offers at the end of the quarter.

As Dan mentioned with the beginning of the launch of our value proposition early results of monthly plan adoption is even higher at 38% in April. We had approximately 18,000 net customer additions for the first quarter 2008, a decline from the first quarter of 2007 resulting from both the carryover from our Q4 decision not to participate in slashed price handsets and also to the strong benefit Q1 ‘07 saw from the launch of hybrid toward the end of 2006. Churn in the first quarter was 5.1%, right in line with our expectations. We are seeing some impact to churn due to the current economic environment with the percent of disconnects related to budget constraints, up 50% from a year ago.

In fact 57% of our surveyed disconnects in Q1, were telling us that they weren’t going to another carrier but were stopping wireless use for the time being. So the broader economy is definitely coming into play. This is consistent with our full year guidance for churn in the 5% to 5.5% range. Churn in the current quarter is expected to rise which is consistent with the normal seasonality of our business. Due to higher gross adds in Q4 and the nature of our churn rule, churn in the second quarter is typically the highest of the year. In addition in Q4 we began to see economic pressures in the base showing up partly in reduced usage and party through disengagement. This disengagement in Q4 does impact Q1 and Q2 churn however we are not seeing the same trend of inactivity carried forward into Q1. This will help us in Q3 and Q4 and give us confidence in our churn estimates for the year.

Total operating revenues for the quarter were $327 million, down by 3.7% year-over-year. This reflects the decline in customer usage experienced in the recent quarters offset by the growth of hybrid as well as increasing equipment revenues due to the popularity of our higher end handsets. ARPU for the quarter was $19.93 down slightly from fourth quarter ARPU as we realized the effect of decreased usage in a tough economy. As Dan discussed the positive impact of hybrid on our ARPU trend was offset somewhat by a slowing of traditional prepaid usage which we discussed on our last two calls and which we saw stabilizing in Q1.

We continue to get more efficient with this business which reflects the strength of our scale and we expect to continue to improve efficiencies on a per unit basis throughout the next three quarters. Cost of service was $83.5 million for the first quarter, a decline of 11% from the first quarter of 2007 which partially reflects our improving network economics. CCPU for the quarter was $12.01 compared to $13.46 in Q1 2007 also resulting from improved network costs.

This was offset by higher SMF fees with the continued growth of data usage in our customer base as well as by the impact of hybrid customers which while representing significantly ARPU than the traditional prepaid customer do provide a lower ARPU margin percent and so have an impact on gross margin percent. However the ARPU margin dollars contributed by a hybrid customer are much higher and with the CPGA for our hybrids the same as that of a prepaid customer we’re happy to make that tradeoff.

We also experienced more upgrades versus last year which increases CCPU but we believe this is positive because it shows that customers are staying with our service. CPGA for the first quarter was slightly above our expectations at $115.59 while still representing one of the lowest acquisition costs in the business. Let me walk you through the puts and takes on CPGA against our plan so that you can clearly see where the variance lies.

During the quarter we continued to have higher than expected sales of the Wild Card and other high end handsets which had about a $5.00 impact on CPGA overall. As we’ve said we love to see this because while it does mean we pay higher commission dollars to the retailers the economics of these customers is excellent. We also spent a little more than we expected on marketing and distribution during the quarter with the rollout of the new plans. We said on our last call we’d be spending about an incremental $10 million on marketing in the first half of the year to support the rollout evenly spread across the two quarters and we actually spent a little more in Q1, closer to about $7.5 million. So the additional $2.5 million on top of our expectations equates to about an additional $3.00 of CPGA.

Lastly we shipped about 45,000 incremental handsets at the end of the quarter to non-consignment partners in order to support the launch of new handsets and plans which approximately added another $2.00 to $3.00 to CPGA. Even with the incremental spend around our new plans and retail expansion we remain comfortable with our full year guidance for CPGA of around $110.00. Our CPGA is consistently one of the lowest in the industry and even with the terrific lineup of new handsets coming in 2008 that Dan mentioned we expect to continue to remain industry leaders in this metric.

Selling, general and administrative expenses for the first quarter were $113 million, an increase from the $110 million in the first quarter of 2007. This increase reflects a few incremental items offset by some of the planned OpEx efficiencies we discussed on last quarter’s call. Aside from our increased marketing spend we also had over $1.5 million in public company type expenses that we didn’t have a year ago. These costs were offset by an improvement of approximately $4.4 million in IT spending as we streamlined some of our vendor relationships as well as in customer care to support the base which improved by 24% over last year on a per unit basis as we began to see the benefits of offshoring and the improvements made to our interactive voice response system.

Even with the incremental marketing spend in the first half of the year we continue to expect to achieve $15 million to $20 million of improvement on an absolute dollar basis to our operating expenses in 2008. We produced adjusted EBITDA of $28.7 million for the quarter versus $41.7 million in the first quarter of 2007. While our lower Q4 customer acquisition was a factor Q1 2007 also had a number of one-time benefits, including $3.8 million due to an E911 tax refund and other favorable tax settlements, as well as a $4.9 million cost reduction due to the shift to consignment. Excluding these benefits as well as the incremental marketing spend we had during the quarter, adjusted EBITDA in Q1 2008 would have been slightly higher then the same period last year despite the impact to usage of the current economic environment.

Net income for the quarter was $4.7 million or fully diluted $0.07 per share compared to income of $19.2 million or pro forma $0.25 per share for the first quarter of 2007, again impacted by the factors I just outlined as well as an accrual in Q1 2008 for the tax receivable agreements and other tax expenses of $2.5 million which weren’t in effect last year. By the way, the pro forma EPS for 2007 just adjusts for share count which is a more relevant comparison.

Capital expenditures for the quarter were $6.2 million or just 2% of net service revenues. This was an increase from $5.3 million in CapEx for the first quarter 2007 reflecting increased expenditure on software to support the integration and launch of our new offers. Our consistently low level of capital expenditure is a hallmark of Virgin Mobile business model and this ongoing stable cost efficiency of the business means we will continue to produce strong free cash flow as we gain scale.

During the first quarter we generated $10.4 million of free cash flow. The strong free cash flow we achieved in Q1 was notable as the first quarter typically has the highest working capital demands on our business as we incur handsets’ spend for both the fourth and first quarters. With expectations for CapEx needs in the $30 million to $35 million range we remain comfortable with our free cash flow guidance for 2008.

Interest expense was $9.3 million compared to $13.6 million in the first quarter 2007 reflecting the benefits of our improved capital structure following our IPO. We have had some questions from the investment community regarding our ability to meet our debt service requirements and covenant requirements and I want to make it clear that even at the low end of our EBITDA and cash flow expectations we handily exceed both our debt service and covenant requirements. We remain comfortable in this regard.

In the second quarter we will continue to invest in the future growth of the business as we fully realize the rollout and launch of the new plans and ship additional handsets to support our expanding distribution. While the current economic environment is a challenge we are excited about the future growth prospects of the current initiatives we have in place and we continue to be comfortable with our guidance for 2008 even as we invest in incremental growth opportunities.

I’ll now turn it back to Dan for his closing remarks.

Dan Schulman

Thanks John, before turning it over to your questions, I’ll like to review our outlook for the second quarter and the remainder of 2008. The economy obviously remains a challenge with the impacts showing up across all industries and market [caps]. I think that the last consumer confidence report was something like the worst in the past 26 years and our customer base is without a doubt feeling that impact. However we remain confident in our 2008 guidance across all metrics.

Even with the number of incremental growth opportunities we are comfortable with our adjusted EBITDA guidance for the year. While the second quarter has both normal seasonal impact as well as some incremental expense with the launch of our new plans, the business is currently performing to our expectations. In the second half of the year the impact of our new voice and data plans as well as our expanded retail footprint is expected to produce positive year-over-year growth in our net customer additions versus the second half of 2007.

Second quarter net adds are expected to be in the range of negative 130,000 to 160,000 primarily due to an increase in Q4 of customers disengaging due to economic issues. This pattern has not continued into Q1 and we remain confident that our churn estimates for the full year 2008 will be within the low to mid 5% range consistent with our previous guidance. Gross adds for the second quarter are expected to be roughly comparable to the second quarter of 2007 gross adds. Second quarter net service revenues are expected to be in the range of $285 million to $295 million. Second quarter adjusted EBITDA is expected to be in the range of $19 million to $23 million and our second quarter EPS is expected to be in the range of negative $0.01 to positive $0.03.

I’d like to conclude our remarks by reiterating that the first quarter results were not only a good start to the year but perhaps more importantly we’ve put into place a host of initiatives that position us to grow in the second half of 2008 and position 2009 to be a solid year of growth. All of that provided of course that the overall economy does not worsen in the months ahead. We are confident in the strength of our business, the competitiveness of our offers and the resilience and growth potential of Virgin Mobile.

We continue to be EPS positive and we anticipate resuming our growth in the next several quarters. Our cost structure continues to improve and our free cash flow is expected to grow significantly this year. And all of us at Virgin Mobile are focused on executing against our plan, building value for our shareholders and we are excited and we’re energized by the opportunities in front of us.

And with that we are now ready to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Phil Cusick – Bear Stearns

Phil Cusick – Bear Stearns

I thought the churn commentary was interesting that this build up of non-pay customers in the fourth quarter is not continuing into the first quarter, can you talk about your visibility there and also do you think that the fact that you weren’t as competitive in December as you had been the year before is part of what’s driving that sort of bunch of customers through the system and why it’s eased off in the first quarter?

Dan Schulman

What we saw is the percentage of customers who are citing economic concerns up 50% from a year ago. A year ago is a little less than 20%, about 19% and the number of our disconnects citing economic concerns is up over 30% now. Interestingly what we’ve seen in terms of your competitive question is we’re seeing actually the lowest percentage of our disconnects that we’ve seen really in quite some time, if ever, going to competitors. What you’re seeing now is the overwhelming majority anywhere between 57% to two-thirds of our disconnects either temporarily or permanently leaving the wireless space more than citing temporarily.

Those people who have left temporarily are citing high satisfaction with us but they just can’t afford it to be in the industry and so in many ways we’re encouraged by that. Obviously we hate to see people falling upon difficult economic times but their satisfaction with us is high with our proposition, its just that they can’t afford it. Its not a competitive issue, in fact that is down year-over-year and so we saw this – as everything sort of begin to hit the economy and all of us in the fourth quarter we saw a decline in usage, we saw some disengagement. That disengagement for those who could not afford it seems to have worked its way through its system, it seems to have stabilized in Q1 and again we have a pretty good view of our churn out over the next couple of months.

We know how much of our base is actively engaged. We know how much of it is in our past current pipeline and so we’ve got a pretty good view of what churn will be in Q2 and we have a pretty good view of at least what we expect churn will be in the beginning parts of Q3. And so when we looked at all of this obviously there’s a bit more churn than we expected in Q2 due to that bubble of folks that we saw disengage in Q4 but we still feel quite comfortable and believe that we will be in our year end estimate between 5% and 5.5% for churn.

Phil Cusick – Bear Stearns

Just to make sure I understand, you’re expecting this year’s churn to be more like last year where you had a big churn number in the second quarter because of the new pricing structure than the previous years where you’re third quarter was typically the high point.

Dan Schulman

Yes, usually for us second quarter tends to be a high churn period because what you have is a high number of gross adds coming in during the Christmas period and if you remember our churn rules are, 90 days without any usage we turn somebody’s phone off. They can’t make any calls. They have a 60-day grace period in which if they top-up we reactivate their phone. So after five months if they haven’t used their phone then we systemically disconnect them. So what you see is disconnects coming up in June and July as people who either got that phone as a gift and really never used it beyond the first top-up that they got or only topped up once and then decided not to use it. So we see higher churn typically at the end of the second quarter and the beginning of the third quarter because of our churn rules and because we have a disproportionately high number of gross adds that happen in the fourth quarter due to gifting.

Phil Cusick – Bear Stearns

And then the other side of that on the gross adds side, have you seen any shift over the last six months as to where your customers are coming from? Is there a disproportionate number coming from Sprint and is that changing or is it pretty much spread across the industry?

Dan Schulman

A couple of things on that, one is I mentioned on the call one thing that we’re quite pleased with is that we are seeing an improving gross add trend through the quarter and in the early part of this quarter. So if you remember last year our gross adds were up 40% year-over-year and so it’s a tough comp even despite that in March our gross adds were up year-over-year versus March a year ago. And what we’re seeing is more and more of our gross adds come from switchers as opposed to new to the industry especially with the advent of our hybrid and our new offers out there. We are drawing more from the low end of post-paid but we do not see a disproportionate number of the people that switched to us coming from Sprint. It pretty much mirrors market shares out there.

Operator

Your next question comes from the line of Richard Prentiss – Raymond James

Richard Prentiss – Raymond James

First to go along the churn line a little bit further there, the 90 days inactive and then the 60-day grace period, when does the customer fall off then? So if you brought the customer on in December and they never topped up, did they drop off in March or are they dropping off in May type thing?

Dan Schulman

In May, the 151^st day.

Richard Prentiss – Raymond James

And from an ARPU standpoint do you leave those subscribers in even though they haven’t topped up or spent anything?

Dan Schulman

Yes we do.

Richard Prentiss – Raymond James

Okay so as we think about these really let’s call them deadbeats for now, dropping off, it effects your churn, it effects your appearance of net adds, but it could actually help ARPU then?

Dan Schulman

Yes, that’s right.

Richard Prentiss – Raymond James

If I’m doing the math right.

Dan Schulman

That’s right.

Richard Prentiss – Raymond James

Next question is on the efficiencies, the $15 million to $20 million in efficiencies you expect to get the rest of this year, and I think I heard John say that’s not a run rate, that’s an absolute dollar figure? Can you kind of lay out what line items you expect to get those in and as you look into ’09 are they the same line items where you’ll get additional efficiencies as you grow into ’09?

John Feehan

We do expect that $15 million to $20 million to be in pure dollars not just a run rate so this year we would expect to see incremental savings in our marketing line in Q3 and in Q4. If you remember we talked about this earlier. We did lose the MTV contract at the end of last year which required us to spend marketing dollars on their networks throughout the year. That contract is now done so we do expect to save incremental marketing dollars on the second half of this year. We also to expect to continue the trend that we just outlined in our IT savings. Our IT costs on a per unit basis have been much more efficient and continue to become efficient. In fact our IT costs dropped in the first quarter year-over-year significantly even though we serviced about 300,000 more customers each and every month. So we expect those IT savings to continue on a per-customer basis and on an absolute dollar basis for the rest of the year as well. Those are the two larger line items that we expect to see $15 million to $20 million in.

Richard Prentiss – Raymond James

Right and so the MTV thing wouldn’t roll off again in ’09 so as far as looking towards ’09 where efficiencies might come from would be IT and network then?

Dan Schulman

IT and network and probably a bit more on [chap].

Richard Prentiss – Raymond James

And then on the ARPU side I think you had talked a little bit about the economy and where you’re seeing some people scale back on usage and some scale back just on being customers as you look in your April result what was it that you said about usage trends in April?

Dan Schulman

What we said in April is that we had 38% of our gross adds came on our monthly plans as opposed to the trend before we launched our new value proposition, our new voice and data plans – we averaged about 32% of our gross adds coming on our monthly plans. And those monthly plans, again its early days but the ARPU associated with those new monthly plans is about $40.00.

Operator

Your next question comes from the line of Walter Piecyk – Pali Research

Walter Piecyk – Pali Research

First on ARPU I just went back a couple of years and it looks like there was a sequential decline in the second quarter, it was 6.5% last, 5% two years ago and 7% three years ago. I know there were times when the hybrid came along; shouldn’t I look at that as a seasonal pattern of a decline in usage in Q2 or what was odd about those past three years?

John Feehan

So let me go back a little bit, first of all prior to last year, in the quarters what we did see is you have to remember the first quarter when we have a large amount of customers coming on in fourth quarter their first couple of months are their peak usage. So you did see as both their peak usage came down at the new customers and as Rick just pointed out the customers who become inactive and get ready to churn are still counted in those ARPU calculations even though I think Rick called them deadbeats but the customers who aren’t using are counted in those ARPU numbers into Q2 as well when they do churn off.

Last year was a little bit of an anomaly as well because if you remember at the end of the first quarter we actually changed our value proposition on one of our hybrids where capped some of the minutes and we did it to the base so what we saw was a large portion, about 70,000 to 80,000 customers actually disengage from our hybrid offer which we then carried them through Q2 as well but their ARPU was higher in Q1 and actually disengaged in Q2. So that’s kind of the trends we’ve seen over the last number of years.

Walter Piecyk – Pali Research

Right so just so I’m understanding that from a modeling standpoint Q2 should be seasonally weaker to these issues that you identified on a sequential basis.

John Feehan

On a sequential basis Q2 should be slightly weaker than Q1 due to the disengagement and the churn of those customers that is correct.

Walter Piecyk – Pali Research

And then I missed the second half of the answer, I don’t know if you addressed this. Let me ask you in case it was, I know you mentioned that in April you saw this 30-whatever percent of the hybrid customers coming on, if you just looked at your pay-as-you-go guys, how did that usage, how did those top-ups trend in April relative to March because I know you had seen some strength in the top-ups I think, what was it toward the end of the first quarter so did that continue into April if you just look at those pay-as-you-go customers?

John Feehan

Yes, we saw our top-up stream consistent with our revenue stream that we produced in Q1 in fact, as Dan said we did see stabilization in our prepaid usage in Q1 after last year it had come down year-over-year about 11% but we did see that Q1 prepaid usage stabilize as Q1 continued. Just to reiterate, we have built in some declining usage in our prepaid throughout our plan for the rest of the year into the higher single-digit percentage of prepaids but we have built that in but we did see that stabilize in Q1 as the quarter went on.

Walter Piecyk – Pali Research

And then just on churn, when you kind of look at the landscape I mean American Mobile at least they claimed to have 3.5% churn but I guess Boost and T are at 7%, Verizon 6.5% plus in its prepaid segment so your churn is actually trending below at least the big boys, not necessarily AMX but why is that and is there any reason, like why should be expect that to continue as opposed to basically reverting to the type of churn rates that those guys say?

Dan Schulman

Well we think actually well with the rollout of our new offer set that we actually provide even more compelling value than we had before so we are obviously remaining comfortable between the 5% and 5.5% but I do want to say that just because we remain comfortable in that guidance doesn’t mean that we’re satisfied with those numbers and my challenge back to the team is how do we start to drive that number lower. I think we’re trying to put out a number that we feel comfortable with based on what we’re seeing in terms of engagement with our customers. What we’re seeing in terms of our value proposition versus both post paid players and other prepaid players but our goal is not to be satisfied with that 5% to 5.5% but to drive it down further.

Walter Piecyk – Pali Research

I was actually saying the 5.5% was pretty good given…

Dan Schulman

I know you were and I tell you we remain comfortable with that guidance piece of it but frankly at the end of the day our goal is to try and do better than that.

Walter Piecyk – Pali Research

I look back in history back to ’02, it doesn’t look like you ever had churn over 6%, should Q2 be any different, can you still keep this churn with a five handle on it in the second quarter?

Dan Schulman

The second quarter churn is always higher. What we are comfortable with and we’ll see how the second quarter plays out but we are very comfortable and believe that our churn for the year will be between 5% and 5.5%.

Operator

Your next question comes from the line of Will Milner – RT Research

Will Milner – RT Research

I just want to again get into the churn forecast you’ve given in the second quarter and just some confirmation of my math. If you’re saying gross adds are going to be roughly similar year-over-year in the second quarter and net adds are down 130 to 160, I mean churn on that basis must be slightly over 6%, is that – you’re going to struggle to keep it below 6% with those forecasts.

Dan Schulman

That’s the right way to think about it.

Will Milner – RT Research

The thing I’m struggling with, if you didn’t [inaudible] in the fourth quarter and the sort of aggressive handset pricing, I would expect some improvement in the churn year-over-year and the 5.8% you saw Q2 ’07 was I think – I guess you’d been overly aggressive with some of the handsets plans which weren’t repeated and I guess what you’re going to say is you know this is the economic impact and the disengagements that you’re seeing coming through. You have the issue in 4Q ’07 and that’s coming through the second quarter. It just seems, it just seems very hard to see how the economic impact is constrained to one quarter and things have improved significantly since then.

Dan Schulman

By the way, I think the way that you’re thinking about it exactly the right way of thinking about it just in terms of your analysis of the piece parts of it. I think what we’re seeing is that people who could not afford wireless for now have opted out and the economy is really starting to show its cracks in the late third quarter, fourth quarter timeframe. I think we saw people adjusting their usage and adjusting their level of engagement making assessments whether or not they could afford wireless. In the first quarter we’ve now seen stabilization in both the usage side of the business as well as the engagement side of the business. And so our feeling is as long as the economy doesn’t worsen going forward and stays at this level that we’ve put that into our forecast going forward.

Will Milner – RT Research

Okay and then on the new plans coming back to what you said that you won’t really see the impact of those until I think you said the fourth quarter is that about right?

Dan Schulman

Yes meaningful impact of those …

Will Milner – RT Research

…meaningful – I mean why is that? Why does it take three to see an impact? I guess the question is what sort of percentage of your sales coming through the website as opposed to the distribution channels?

Dan Schulman

Very little comes through out website versus our distribution. That vast majority of our sales, overwhelming majority come through our retail partners. Our rollout of our new proposition won’t be done through all of our retailers until the end of this quarter and then basically you’ve got 5.1 million base so each and every one of the gross adds that come on is only a small percentage of your overall base. However you start to feel that as the cumulative impact of the monthly offers plays out. In addition to that as I mentioned, because of the enhanced distribution we feel that Q2 is really a transitional quarter for us and that the back half of the year we believe that we will see year-over-year growth in gross adds, net adds, revenue and EBITDA. And so that comes from a combination of the trajectory we’re on. It comes from the enhancement in distribution and it comes from the new value proposition that we’re rolling out.

Will Milner – RT Research

On the economic impact, I think in previous calls you said you’d seen usage decline mid single-digits amongst the prepaid base, when you say its stabilized in the first quarter what exactly do you mean by that? Are you continuing to see a mid single-digit decline or has it improved?

John Feehan

No we’ve seen it level off at that mid single-digit decline however as I just stated before we have built into our plan for that to continue to decline into the high single-digits of percentage for the rest of the year through just for economic issues in case it gets worse and also as people constrain their budgets but in the first quarter we saw it level off after it dropped by that mid single-digit and level off at that run rate.

Dan Schulman

That’s part of the reason why overachieve versus our plan.

Operator

Your next question comes from the line of Unidentified Analyst – Lehman Brothers

Unidentified Analyst – Lehman Brothers

Can you just walk us through and I think I know what the answers are but compared to the prior years and I understand the trends aren’t all the same going forward but we are implying quite a bit of a jump in EBITDA and I was just wondering if you could walk us through why you’re so confident that even though you’re barely going to be at half the EBITDA guidance for the full year at the end of 2Q, you’re so confident that you can still make it given that third and fourth quarter generally were weaker than first and second quarter in EBITDA historically speaking.

John Feehan

First of all in the first quarter we typically have seen a strong EBITDA quarter in the first quarter due to the large amount of gross adds that have come on in Q4 and their first quarter spend. Obviously this year as we stated many times that we didn’t see that as much because of our decision in pricing in the Q4. At the same time we typically have not spent the marketing dollars in the first half of this year. We’ve normally spent them in the second half of the year so the $10 million of incremental dollars we’re spending this year as I also said earlier we expect to see significant savings in the marketing and advertising dollars we spend in the second half of the year and as we did last year, we spent most of those dollars in the second half of the year.

The third thing is we do expect as Dan said revenues to grow. We expect our year-over-year comps in gross adds to grow with our new distribution. With the launch of the gross adds and the launch of our new offers we expect revenues to continue to grow on a year-over-year comp basis and also the additional savings in the $15 million to $20 million of additional OpEx savings year-over-year that I outlined earlier in the IT cost and other expense items we expect to see those continue and improve in the second half of the year as well.

Dan Schulman

If you think about it, if your revenues are up in the back half of the year and our network costs are down approximately 10% think about it, that’s another $15 million to $20 million of savings versus last year on top of the $10 million to $20 million that John just referenced and so it’s a combination of we basically have guided for the year that our revenues are roughly equivalent to last year. We were negative in the first half of the year, we’ll be slightly positive in the back half of the year. That positive with a declining network on top of the efficiencies gives us a much greater EBITDA in the back half of the year versus what we did last year. Despite the fact that we are going to grow or our belief is that we’re going to grow our net adds on a year-over-year basis versus 2007. So we think we’ll see good growth in the back half, again I think this is a transitional quarter for us and we realize obviously some of this is we’ll believe it when we see you guys do that, but that’s kind of what the plan that we have in place right now, we’re executing against that plan. As I said it wasn’t just the fact that we started the year off better than our expectations, more importantly to me is that we implemented initiatives in the first quarter and are rolling out in the second quarter that help us in making this a transitional and having the second half of this year be growth year second half and lead us into ’09 on a good solid path towards growth. So all of those things are pretty important to put into your model and any other questions we look forward to talking to you about them.

Unidentified Analyst – Lehman Brothers

Okay and then can you size that Sears opportunity for us. How many Wal-Mart stores are you in, how many K-Mart stores are you in just by way of comparison?

Dan Schulman

There are a number of different things, there’s the Sears and there is the Wal-Mart expansion as well. So on the Sears side, it’ll probably, we don’t really give out sort of gross adds per retailer. It’s a pretty obviously sensitive for both the retailer and for us competitively. But Sears in our expectation should give us a meaningful amount. It’ll be a good solid, it won’t be one of our top four players that we have but it’ll be a good solid tier two player for us. Wal-Mart obviously, we’re in over 2,000 stores, we’re expanding by another 20% on top of that. Increasing shelf space in all of the stores including the 2,000 that we’re already in. That should give us a relatively nice uptick in our gross adds in the back half of this year, beginning of next year.

Operator

Your final question is a follow-up from the line of Rick Prentiss – Raymond James

Rick Prentiss – Raymond James

I was going to ask you on that Sears stuff as well trying to figure out, I’m just trying to imagine your target segment at Sears. Help me understand is it the youth segment, is it somebody older, I’m just trying to figure out who that is.

Dan Schulman

It’ll be your value shopper. As we’ve frequently spoken about, or maybe not so frequently, half of our customers are over the age of 35 and come to us because we offer great value on the prepaid side. On the Wal-Mart side by the way, very interestingly it is if you look at things like the [Cassandra] Report Wal-Mart is always in one of the top three retailers that teens and young adults go to. But if you think about our new proposition we’re expanding slightly now and really targeting not just the teen and young 20s, but really the 18 to 24, 18 to 30 year olds with our monthly plans and our hybrids. They really are a legitimate alternative to post paid.

Rick Prentiss – Raymond James

And from a standpoint of where will they put it in the store? I’m just trying to think of where people would go at Sears to shop for this sort of thing.

Dan Schulman

If you go, the best way that I would if you want to get a sense of it, is to go into a K-Mart and take a look at where they position this in K-Mart because K-Mart and Sears obviously are going to be quite similar in their presentation format. Its quite an impactful actually point of sale. We worked with them quite closely in designing this. So you’ve got good shelf space, good room to be able to articulate your offers. Not just us but a couple of others in there as well. And so you’ll see actually a pretty nice design and the best comp would be K-Mart on that in terms of how they presented it.

Rick Prentiss – Raymond James

And as you ramp up these number of Sears stores and as you ramp up the number of Wal-Mart stores and shelf space is there not going to be an associated kind of hit to the CPGA side or are they, the handsets you don’t bear the brunt of that, how should we think of the cost side ramping your distribution up this high, helping your GA but its not going to hurt the cost side I guess.

Dan Schulman

Well you are going to have incremental costs associated with the gross adds that come into it and that’s exactly what we were talking about that despite the incremental gross adds that will come on which will drive the second half year-over-year to the growth, that we still remain comfortable with our adjusted EBITDA targets.

Rick Prentiss – Raymond James

And the CPGA guidance was for the year, what was it 110 or something?

Dan Schulman

Yes.

Rick Prentiss – Raymond James

The stock has been very volatile of late, any thoughts on what’s been driving the volatility, things you’ve been hearing or thoughts you might share with us on kind of the swings in the stock of late?

Dan Schulman

No as we mentioned to the Stock Exchange when they called us as well we don’t comment on those movements in our stock prices because we really, we don’t know what drives them. They’re all sorts of different rumors that can drive different things but we wouldn’t comment specifically on any of them.

Rick Prentiss – Raymond James

Net net you really are kind of focused on just hunkering down and proving your distribution and trying to get the growth back.

Dan Schulman

Yes we look at both the organic part of our business which is executing against our basis plan which we’ve outlined for you and as I mentioned we are actually quite pleased about the initiatives that we put into place as well as the start to the year just from a number perspective but we also, as we’ve mentioned on calls, are examining a number of inorganic or different opportunities where we think that we might be able to use our scale, our functionality to be able to achieve more growth than we could do just organically. So we’re focused on both fronts. Nothing particular to announce. We’re always looking at different particular opportunities and when and if we have an announcement to make in that regard, we’ll make it.

Rick Prentiss – Raymond James

Just the broader role of a chief development officer fits into those comments you just made also then?

Dan Schulman

Obviously we do see a number of different opportunities out there and feel that we really need to put some senior attention on them.

Dan Schulman

Thanks everybody for your time and your questions.

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