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Executives

Steve Kunszabo - Director of IR

Michael Small - CEO

Tom Fitzpatrick - CFO

Phil Mayberry - President, U.S. Wireless

Carlos Blanco - President, Centennial de Puerto Rico

Analysts

Brett Feldman - Lehman Brothers.

James Breen - Thomas Weisel Partners

David Sharret - Lehman Brothers.

Chris Taylor - Evergreen Investments

Robert Bovo - Diamondback Capital

Ana Goshko - Banc of America Securities

Ric Prentiss - Raymond James

Andrew Morey - Cowen Asset Management

Centennial Communications Corp. (CYCL) F4Q08 (Qtr End 5/31/08) Earnings Call July 30, 2008 8:30 AM ET

Operator

Good day everyone and welcome to the Centennial Communications fourth quarter 2008 earnings conference call. Today's call is being recorded. At this time I'll turn the call over to the Director of Investor Relations, Mr. Steve Kunszabo for opening remarks. Please go ahead sir.

Steve Kunszabo

Good morning and thanks for joining us. I'd like to welcome you to our fiscal fourth quarter 2008 earnings call. Joining me on the call this morning, our CEO Michael Small, our CFO Tom Fitzpatrick, our President U.S. wireless Phil Mayberry and our President Centennial De Puerto Rico, Carlos Blanco. Today's call will begin with the discussion of the 2008 fourth quarter results followed by Q&A.

Before I turn things over to Michael, I'd like to caution all participants that our call this morning may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements, which reflect management's beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. And Centennial undertakes no obligation to update or revise these forward-looking statements to reflect events, developments, or circumstances after the date hereof. For discussion of the risks and uncertainties that may affect Centennial's future results, please see Centennial's 2008 Form-10K, which will be filed later today including the risk factor section contained therein at Centennial's other filings with the SEC.

During the call, we'll also be referring to certain non-GAAP financial measures. Please refer to the investor relation section of our website for discussion of these non-GAAP financial measures and reconciliation to comparable GAAP measures. With that let me turn things over to Michael.

Michael Small

Thanks Steve, good morning everyone. Thank you for joining us. This morning Centennial reported fourth quarter results to reflect our ability to grow cash flow and enhance equity returns through the leveraging with a strong collection of assets and good execution by our local team. We generated $1 billion of annual consolidated revenue and over $400 million of adjusted operating income for the first time in our 20 year history, important milestones along Centennial's de-leveraging past.

As I meet with our stakeholders throughout the year, the two most fundamental questions I'm asked time and again are first how do you win in the land of giants in the U.S. and second how will you continue to differentiate yourselves and seize the initiative in intensely competitive Puerto Rico market?

I'll answer these important questions before Tom takes you through our results and outlook for fiscal 2009. Firstly, when in the United States with a proven local market strategy; that features our blue shirt trusted advisors, and this has produced one of the industry's highest quality customer bases. In Puerto Rico, our strong and unique collection of assets allows us to comprehensibly approach the enterprise residential and wireless market and satisfy the demand for bandwidth in a way that our competitors find difficult to match.

First on the U.S., our well trained trusted advisors in great retail locations throughout our footprint have combined with an exceptional network attract high quality customers with solid ARPUs. The evidence supporting the effectiveness of our local market strategy and the quality of our customer base is strong. First, over 97% of our customer base is post paid, unlike much of the industry that has, we have very few prepaid customers and no reseller relationships.

All of our customer growth in fiscal 2008 came from the postpaid segment. Second, we are delighted that the quality of our new customer activation, retail ARPU of new activation in the fourth quarter of this completed year was 19% higher than the installed base.

We're also very effective in selling host activation to our customers. We do this at every touch point we have whether it's sales, customer care or collection. In fact we're now selling approximately 1,000 new feature package each and every day at this customer touch points. We also have a real opportunity continue to grow our ARPU through data opportunities.

As most of you know we by virtue of being a regional carrier choose to launch our new network technologies sometimes after the national players and we're sure that technology is the right one when we know, we have roaming that’s the new technology available to us when the cost curves have come down.

And as a result, we have opportunity to continue to grow our data revenues because we lag somewhat behind. We still only have 10% of our retail ARPU coming from data and we expect that to continue to grow, particularly as our customers begin the adoption of advanced services such as Blackberry, PDAs and Air Cards. Overall our retail ARPU reached $65 in the fourth quarter and 8% increase from a year ago and over a 30% rise from four years ago. We think this is one of the best retail ARPUs in the industry.

We have a solid track record of competing successfully against national players. Our local market strategy works when you remain passionate about our proven sales and customer care philosophy that emphasizes direct high quality interactions with our customers. One key initiative in fiscal 2009 to further improve our competitive position will be the launch of 3G technology in parts of our Midwest cluster. We also shut down our legacy TDMA network earlier this month. We're addressing technology upgrades in a measured ways to balance profitability against the needs of our customers.

Now turning to Puerto Rico wireless operation, where we generated adjusted operating income growth of 20% from the quarter, as our key performance indicators, customer growth, ARPU, stability and churn remains on track. We are seizing the initiative in differentiating ourselves from the market in a few ways. First, as we've often discussed, we have an unparallel set of network assets in Puerto Rico with the 3G wireless network that covers over 85% of the island with EVDO rev A, the fiber backbone terrestrially and the significant undersea capacity, and we believe no one else in Puerto Rico can match the quality and reach of our network.

And this allows us to position ourselves as a low cost provider with the best value proposition for the heavy users of telecommunications. In fact, just recently we once again capitalized on these network assets by, in early June launching a new set of unlimited plans little over a year and a half after we'd initially launched our first unlimited plan. This new set of unlimited plans goes from a 39, 99 plan all the way up to an 89, 99 plan at a low end, which we don’t sell very much of, and it's more there to establish a lower price point for us as rate plans that is only for individuals, no companions and only local calling at 39, 99.

49, 99 is traditional plan which includes [LD] to the states and some messaging capabilities and permits companion. At 59, 99 we include roaming to the United States. For 79, 99, it's unlimited voice and data and for 89, 99 it includes the Blackberry service. These plans have been very well received. They have positioned us again as a premier provider at a high-end of the market and the initial indications are that the $79 and the $89 plan are selling very well. That is in our expectations.

We're also migrating many of our existing customers to these new unlimited rate plans, as we near the two year anniversary of our inaugural unlimited offering. The other thing we're doing is, we're carefully matching cost to acquire with the expected ARPU benefits of these new plans, so we'll invest more in the phone subsidy as far as the higher ARPU plans with $79 and $89 plans then we will with $39 and $49 plan. Then we do expect ARPU benefit out of the new plans, and we believe that the migration to these new plans will also allow us to keep our churn in check.

We also successfully launched a program that we have used in the United States and Puerto Rico, and we call this "New When You Want It. It’s a handset program that allows customers to upgrade their phone when they want to -- when the price depends on how long it's been since they last got a phone.

Another new service in Puerto Rico that was launched on just this past, this current month is a home phone service and we reintroduced this as more a companion service for your wireless, and it gives our customers the quality alternative to their costly land line service.

When you put it all together, we're defending and reinforcing our position in the premium market as our competitors focus more on the lower end of the market in the wireless space. While we're also leveraging our strong collection of assets to attack the residential market with our instant internet product and grow in the business wireless base with our Blackberry service.

Now moving to Puerto Rico broadband, where we posted our best quarterly results of fiscal 2008 as we answer the call for strong bandwidth demand in Puerto Rico in a way that our competitors find difficult to match. As I shared with you last time our fiber network and undersea capacity becomes exponentially more valuable as we move from the narrow band voice world to the broadband internet world. This transition is happening very rapidly in Puerto Rico, as we speak for both the fixed and the wireless networks.

Our new 10 gigabits of undersea capacity was lit thankfully finally in July and we're ready to meet the voracious demand of our customers wherever it may come from, and it's coming from many different areas. One is our blossoming cable partnership where we backhaul their voice and data traffic and provide with soft switch services for the triple play offering. We're seeing it from the corporate segment, our fortune 500 customers are rapidly increasing the size, their price.

In fact, we just signed up Microsoft, who is opening a software distribution center in Puerto Rico. We no longer will buy software on disc, you'll just download it and they are capitalizing on that trend and Microsoft as in are using our services. Our wireless customers are continuing to increase demand for backhaul services both in the mobile and instant internet basis, and our wireless competitors are continuing to come to us seeking more capacity as there customers also begin to use our data service.

Adding these 10 gigabits of undersea capacity is a decisive step in widening our competitive advantage, because of our scale we can buy in the size, which was doubling of the capacity we previously had, and we're able to sell it quickly and profitably with traffic. Our principal competitors in Puerto Rico, would find the same proposition costly and would have less visibility to customer demand.

We could easily add another 10 gigabits, when it makes sense and that’s likely to occur well within the next 12 months. We had a strong finish to fiscal 2008 showing good cash flow growth across all our business segments for the first time in a few years. I want to thank our associates for their determination and focus and what is a rapidly, consolidating in highly competitive industry, you have to be at your best each day and I look forward to strong execution and continued momentum in fiscal 2009. With that I'll turn it over to Tom for more detailed review.

Thomas Fitzpatrick

Thanks Michael and Good morning everyone. As Michael noted Centennial announced fourth quarter in full year financial result, and that were at a high-end of our updated financial outlook. As we fortified our competitive position in both the U.S. and Puerto Rico by continuing investment in our network, retail distribution presence, and front-line associates. We also provided financial targets for our 2009 fiscal year, which I'll review with you in a moment.

Centennial reported quarterly consolidated revenue of $258.7 million and adjusted operating income of a $109 million representing growth of 9% and 11% respectively from the adjusted year ago period. Our consolidated adjusted operating income margin was 42% for the fourth quarter. For the 2008 fiscal year, we reported consolidated revenue of over $1 billion for the first time and adjusted operating income of $404.1 million, representing adjusted growth of 9% and 11% respectively from the year ago period.

Our consolidated adjusted operating income margin was 40% for fiscal 2008. As many of you may have noted in this morning's press release I'd like to address two items as they relate to the presentation of our financial results in fiscal 2009 outlook. First, we recorded a charge of $2 million in the fourth quarter related to expenses incurred in connection with our valuation of an efficient separation of our U.S. and Puerto Rico operations.

We've concluded that this transaction is feasible, primarily based on the fact that our U.S. and Puerto Rico operations are fundamentally different businesses with very limited operational entanglement. We're intrigued by the merits of a separation transaction and view the health of the credit market as an important variable governing how we proceed. These expenses have been excluded from our calculation of adjusted operating income.

Second, we discontinued our loan phones program in Puerto Rico with the end of our 2008 fiscal year. In the past, we both sold and loan phones to our Puerto Rico wireless customers. When we sell a phone to a customer, the cost of the phone is charged with the cost of the equipment sold. When we loan the phone to a customer, because we retain title to the customer handset, the cost of the phone is recorded as an asset and charged to depreciation expense over the life of the phone.

Due to a variety of competitive factors, our loan phones program no longer makes sense as a differentiator for our customers, and we discontinue this program effective June 1st 2008. Our fiscal 2009 outlook was prepared in consideration of the programs discontinuation and relevant comparisons to historical financial results have been adjusted to enable comparability.

On an operating segment level, U.S. wireless recorded fourth quarter revenue of a $142.5 million and adjusted operating income of $57.8 million representing adjusted operating income margin of 41%. Our success in the U.S. is sustained by our firm commitment to building a vibrant retail business that has been among the best growth stories in the industry for over two years. Simply put, we've maximized cash flow by attracting high value customers at a reasonable cost to acquire and by increasing our retail ARPU by selling innovative feature packages and capitalizing on a growing data opportunity. And finally by building a brand that is rooted in serving our local communities.

We generated roaming revenue of $13.6 million during the period, a 9% year-over-year decline as we observed a 14% drop in our rate per minute for roaming traffic. Decrease in our roaming yield was partially offset by a 5% increase in roaming traffic, as we benefited from higher usage from our key roaming partners. We continue to believe that roaming revenue will fall over the long-term and forecast to $10 million to $15 million decline in roaming revenue during fiscal 2009.

U.S. wireless retail ARPU and minutes of use again rose steadily during the fourth quarter, as retail ARPU grew 8% year-over-year to a record $65, while minutes of use peaked at nearly 1100 minutes. Moving now to our Puerto Rico operation, during the fiscal fourth quarter, Puerto Rico wireless generated revenue of $83.4 million, up 7% from the adjusted year ago quarter and posted adjusted operating income of $31.2 million, a 20% year-over-year increase yielded an adjusted operating income margin of 37%.

Our year-over-year comparison for Puerto Rico wireless AOI benefited from significant expenditures in the fourth quarter of fiscal 2007 to migrate our customer base to our inaugural unlimited rate plan that did not recur in the fourth quarter of fiscal 2008. As Michael discussed, we're reinforcing our premium brand by targeting customers who are intensive users of wireless service, while many of our competitors focus on the bottom-end of the market. We've expanded the menu of choices for our traditional unlimited offering and continue to target business wireless with the addition of Blackberry's to our handset portfolio and residential users of broadband data through our instant internet product with great success.

Focusing next on Puerto Rico broadband, which produced revenue of $35.9 million, a 14% increase from the adjusted year ago period and reported adjusted operating income of $20 million representing an adjusted operating income margin of 56%. Switched and Dedicated revenue rose 12% during the quarter supported by strong growth in total access lines and equivalent partially offset by an on-going decrease in average revenue per line. As we've highlighted in the past quarters, our access line growth was again due in large part to our cable partnerships and these lines have a lower ARPU.

I'd also like to reinforce that our year-over-year AOI comparison for Puerto Rico broadband was again impacted by increased expense related to the deployment of network capacity. Our new undersea capacity came online in July and we expect our cost to more closely align with historical benchmarks for this business beginning with the second quarter of 2009.

Moving now to our financial and operating outlook for our 2009 fiscal year, we expect consolidated adjusted operating income between $395 million and $415 million for fiscal 2009, as compared to $385.7 million in fiscal 2008, when adjusted for the discontinuation of our loan phones program in Puerto Rico. We anticipate our consolidated capital expenditures will be approximately $130 million for our current fiscal year including roughly $15 million to upgrade portions of our U.S. wireless networks to 3G technology.

This compares to a $118.7 million in fiscal 2008, when adjusted for the discontinuation of the loan phones program. It's worth emphasizing that there is no impact to our free cash flow by discontinuing the loan phones program. As a reduction our capital expenditures is offset by equal adjustment to our consolidated adjusted operating income.

Now I'd like to review the impact cash taxes will have on our results going forward. For the 2008 fiscal year, we paid cash taxes of approximately $12 million on a consolidated basis. In the U.S., our updated estimate continues to reflect negligible cash taxes for a couple of years. While in Puerto Rico, we expect cash taxes to move higher in future period. As a result, we project cash taxes to be approximately $15 million in fiscal 2009. And finally a brief update on de-leveraging progress and liquidity position.

We close the fourth quarter with net debt of just over $1.9 billion and have reduced our net leverage over one full turn since our dividend recapitalization to 4.7 times. We expect roughly a $170 million of cash interest expense in fiscal 2009, a $17 million savings from fiscal 2008 driven primarily by previous debt pay downs and a lower average interest rate on our outstanding debt. As we continue to evaluate our financial position in this choppy market, it's pretty clear that we have a solid balance sheet in favorable maturity profile with the majority of our debt not coming due for another five years.

It's worth noting that at the mid point of our AOI outlook, we expect to generate approximately $90 million of free cash flow in fiscal 2009, nearly a 35% increase from the free cash flow we produced in fiscal 2008. We had $255.2 million of total liquidity at the end of the fourth quarter consisting of a $105.2 million in cash and a $150 million available under the revolving credit facility. With that I'll turn things back to Steve for the Q&A.

Steve Kunszabo

Thanks Tom. Operator, would you please provide instructions for logging in questions.

Question-and-Answer session

Operator

(Operator instructions)

We'll go to Brett Feldman of Lehman Brothers.

Brett Feldman - Lehman Brothers

Thanks for taking the question guys. I was hoping, we could just talk about the strategic evaluation that you referenced a little bit in the press release and then elaborated under your comments, maybe talk a little bit more about why you think it could be accretive to your shareholders to separate the U.S. from Puerto Rico, and I think you said it was somewhat dependent on credit market conditions, maybe you could just walk us through that a bit?

Tom Fitzpatrick

That the -- the reason we think it's accretive to shareholders, because the two businesses are fundamentally different. I mean, if you look at Puerto Rico, it's a top 25 market. We have aspirations to be the market leader in that market. In the U.S., we're a niche operator and so the businesses are really going in two different directions and capital investments et cetera that are appropriate for one and not necessarily appropriate for the other. And so, that’s why we think that the transaction would be accretive, because they could go in an appropriate direction. And the credit markets, the current state of the credit markets, as most people on the call know are very choppy, and so and very uninviting frankly currently, and so we're keeping a close tabs on them and that why that’s an important variable in the account of our consideration.

Brett Feldman - Lehman Brothers

All right. So, I mean how far you're into this process, let's say next week the credit markets looked fantastic, would you be ready to go ahead and immediately start doing something, were there are other hurdles that you have to clear?

Tom Fitzpatrick

I would just say we've done the staff work Brett, and drawn the conclusion that I made in my prepared remarks, and I would characterize our valuation is thorough that’s as much as we will say at this point.

Brett Feldman - Lehman Brothers

Okay, that’s fair enough. Maybe we could just talk about a little about the guidance right now, and we will, what's baked into it, obviously there is a little bit of the CapEx component for the 3G upgrade, maybe we could start up by talking about approximately how much coverage you think you are going to get for $115 million?

Tom Fitzpatrick

We'll have Phil Mayberry expand on it, but again our general philosophy on going to the next generation of technology is to make sure it's fully entrenched with our roaming partners, and that the cost curve has come down and the availability of the phone is good. Phil give some general descriptions that what you think you are going to be able to deploy this year?

Phil Mayberry

Brett we're going to cover the middle part of the Midwest cluster and probably about 65% of the POPs in that area. It's where we have the most subscribers, where we have the most demand for.

Brett Feldman - Lehman Brothers

About how many POPs do you have in your Midwest Cluster?

Phil Mayberry

Tom, do you remember?

Tom Fitzpatrick

It's about six million.

Phil Mayberry

Six million or 5.9 or 6.1, something like that.

Brett Feldman - Lehman Brothers

Okay. And then, I know you've had some interesting charge backs in the past with your U.S. revenues? How is that accounted for in the guidance you've given for next year?

Tom Fitzpatrick

We've guided based on our current run rate. Brett we continue to receive more in cash in Puerto Rico then we're recognizing as revenue, because we believe there is a another true up coming in and are, and we make our best estimate of what that reserve should be in the latest true up our reserve almost exactly accommodated the true up. So, but next the guidance assumes kind of going rate.

Brett Feldman - Lehman Brothers

Great and then, there is one last one. Did you say that the expected cash tax here is 15 million, 15 million?

Tom Fitzpatrick

15, that’s right.

Brett Feldman - Lehman Brothers

Okay, great. Thank you very much.

Michael Small

Thanks Brett.

Operator

We will go next to James Breen of Thomas Weisel Partners.

James Breen - Thomas Weisel Partners

Great, thanks guys. A couple of questions mainly focusing the Puerto Rico, one can you talk about the competitive environment there. I know, it didn’t sound as though América Móvil had a very good quarter there either --- has the economy there gotten worse, better or stayed the same?

And then secondly the broadband operations had a very good quarter. You had a significant jump in the lines and EBITDA margins up in the 56% range. So, can you give some color on that and then I think we're expecting some margin expansion next quarter also as the under sea cable comes off and how that net potentially effects the margins there? Thanks.

Michael Small

Okay, James this is Michael. A few comments on the competitive situation in Puerto Rico, one is new pricing move and wireless was an attempt to really establish Centennial at the top-end of the market for people, where people has intensive use for telecommunication services by having only unlimited plans and starting at 39-99. But realistically, we're only selling the 49-99 and above.

And that’s been effective, and we did that because there are six players in a limited geography and a tough economic environment and differentiation in owning a segment of the market is important. We think that the other competitors are unlikely to match.

What we are doing, I mean they may selectively do things to counteract us, but they will not move to a complete set of unlimited plans here towards the top end. So, I think that’s going to be effective, then us navigating through what we've over many quarters now describe as the competitive environment within the industry, and the tough economy in Puerto Rico.

I'd say all those factors have really stayed pretty much status quo. What I don’t think AMX mentioned when they said that Puerto Rico results may attributes the economy, we would attribute it also to their competitive situation by our broadband assets being brought to bear in the market place, whether it's through our instant internet product or the new home phone we introduced or our cable TV partnerships.

People who want a phone in their home, now have many options they didn’t use to have. And that directly is attributing to the improved performance in our broadband segments that you asked about.

As we switch to the internet world from the circuit switched world, from the voice world to the broadband world, it put some pressure on our broadband business for a while, because the pricing is so much lower around, and it's so much more efficient, and we are offering better service at lower prices and as our customers migrated to that we were offering some price concessions.

We are now starting to see the elasticity work our way, where the volumes are starting to pick up sufficiently, where we are starting to win from this migration rather then the internet world, rather than incurring the cost of the transition. So, we think that was good for us in the quarter, and we think that’s going to be continued to be good in the future that we have the highest amount of bandwidth and that we're the most IP based as any network in Puerto Rico.

We will be shutting down the temporary facilities we own. Shortly Carlos want to talk a little bit about the benefits of the new undersea capacity and what we're going to be doing to get our network cost down.

Carlos Blanco

Yeah, sure, Michael. Yes, I think that we've reported in previous quarters that we have incurred additional operational expenses, because of the delay in coming into service of our GCN cables. That's the cable that goes from Puerto Rico to St. Croix and then on to Miami. And tomorrow we're going to be shutting down those temporary facilities, so we're going to have sequential savings in the hundreds of thousands of dollars based on that.

In addition to that now we can respond more quickly to demands in the market. That’s Michael was saying, we're seeing exponential growth in backhaul capacity demand in Puerto Rico from all fronts, not only across corporate customers and cable companies, but also university of Puerto Rico and our own EVDO customers and data customers. So, now our marginal additional cost to satisfy all those demands are going to be very low. So, we'll see a very efficient operation from the cost perspective based on the GCN cable.

James Breen - Thomas Weisel Partners

Great, thank you very much.

Operator

We will go to David Sharret of Lehman Brothers.

David Sharret - Lehman Brothers

Good morning, guys. I have the question for Tom, just following up about the separation analysis that you have done. I mean, now that you've concluded your analysis, you've talked about breakage cost involved in such a separation, due to calling and tendering for all of your existing debt. If you were to separate the two, the two businesses, is that still your view that doing that would require refinancing all the existing debt?

Tom Fitzpatrick

Yes, that’s our view.

David Sharret - Lehman Brothers

Okay, so and what is your estimate now in terms of the breakage costs involved?

Tom Fitzpatrick

As we speak, it's 80 million.

David Sharret - Lehman Brothers

Okay, okay. And if I could just, just fall back on just first on the cash side. I missed it, how much of cash did you say you ended the fiscal year with?

Tom Fitzpatrick

105.

David Sharret - Lehman Brothers

105. And, we have talked before about how to use that cash and you said basically given the, viewing the credit facilities in asset, you didn’t want to use that cash for taking out higher cost debt. I mean, just at a $105 million now, and expecting to build $90 million of cash in this fiscal year, I mean what is sort of that threshold of cash that you think you need to feel comfortable, may be above that level that would then give you some flexibility to go after some of your more expensive debt?

Tom Fitzpatrick

Well, we want to put ourselves in position, when the revolver expires in February of 2010 that we don’t need a revolver. And so the accumulation of cash would put us in that position. So, we don’t want the exploration of the revolver to cause us to have to refinance the senior credit facility. So, let me just reiterate that that’s our intentions, we'll just accumulate.

David Sharret - Lehman Brothers

Right. But, there is no sort of threshold above which you'd say you are at a comfort level, you are not at risk of having to refinance that revolver. You can just let it expire, because you have a certain level of cash flows in that that we're not close to that number yet?

Michael Small

David this is Michael. I mean, the answer to that question is the function, the condition of that capital of markets, and as choppy as they are now, where we've, we're going exactly as Tom just said. If they improve materially, we'll reconsider, but for now in choppy capital markets that’s our view of the world. We have a de-leveraging story that works well, base case, and produces nice returns for share holders, and we are not going to jeopardize that if we, if market conditions permit us to do something to make it even better, we will take advantage of it. But in the mean time, we are comfortable doing exactly as Tom said.

David Sharret - Lehman Brothers

All right. And I guess just lastly, I mean you talked about the conditions of the capital markets being key to potential separation, and you talked about the breakage costs as well. I mean, what, your goal in terms of where the credit markets have to go to, is it for the transaction to be NCV break even or NCV break even including the expected benefits to the businesses of being separated and there's several additional benefits assumed there rather then just a straight clearly beneficial NCV on a debt refinancing?

Tom Fitzpatrick

Yeah, David, what I would say is, you have done a good job of enumerating the various variables that we're considering in our valuation and that is as much as we'll comment on.

David Sharret - Lehman Brothers

All right, thanks, Tom. Thanks, guys.

Operator

We will go next to Chris Taylor of Evergreen Investments.

Chris Taylor - Evergreen Investments

Thanks. And this $80 million of breakage cost, could you elaborate on what's involved there, are we talking a spinoff here? And what includes that $80 million?

Tom Fitzpatrick

The 80 million is, that would be the cost to call the various tranches of our bond.

Chris Taylor - Evergreen Investments

Okay. And in addition to the call premiums, how much -- what other transaction costs are we talking about?

Tom Fitzpatrick

It would be the insurance costs.

Chris Taylor - Evergreen Investments

Are we talking about just a split of the shares, is that what you're talking about?

Tom Fitzpatrick

A spinoff of shares, yes.

Chris Taylor - Evergreen Investments

And does this is imply that you've not been successful at selling your U.S. operation, is that how we should read it or?

Tom Fitzpatrick

No, I think, you should read it as we said it, which is we concluded that we have two fundamentally different businesses with limited operational entanglement that we believe it could create shareholder value by separating them.

Chris Taylor - Evergreen Investments

And you don’t think, it's more straight forward to just sell it to one of the two logical buyers?

Tom Fitzpatrick

We believe this undertaking is intriguing and it would create shareholder value, we've said that pretty clearly.

Chris Taylor - Evergreen Investments

Can you break down this $80 million, how much of that is tender premium on the debt, and how much of that is other expenses?

Tom Fitzpatrick

The $80 million is the cost, is the tender premium on the various tranches of our bond.

Chris Taylor - Evergreen Investments

Okay. And, can you give us the time frame or is that too--?

Tom Fitzpatrick

We said that the condition of the capital markets is single, biggest variable we are considering.

Chris Taylor - Evergreen Investments

But it doesn’t sound like it's anything concrete or immediate?

Michael Small

Yeah. The only thing, we're making, as we concluded this transaction, it's feasible for us and it was intriguing enough to us as is apparent to have spent $2 million to figure that out. Beyond that there is no other announcement today.

Chris Taylor - Evergreen Investments

Thanks.

Operator

We will go next Robert Bovo of Diamondback Capital.

Robert Bovo - Diamondback Capital

Hey, good morning guys. Thanks for taking my call. Steve if you could just elaborate a little bit on -- this seems like a kind of a small issue, but in regards to this Microsoft transaction that you announced, I just had two quick questions. One, why did Microsoft located in Puerto Rico, and two do you expect it to be a meaningful contributor to your Puerto Rico broadband business overtime? Thanks.

Steve Kunszabo

Okay, well, Carlos can, Carlos our President of Puerto Rico operations, give your thoughts on Microsoft.

Carlos Blanco

Yeah, Microsoft has a very important software manufacturing I guess, plant in Puerto Rico. And they've been expended for the last several years. Puerto Rico is very attractive with a lot manufacturing and service industries. I mean, we all know that. We have pharmaceutical companies and biotechnology companies there so.

Microsoft, it is very active there and they have decided to distribute their products, as Michael mentioned electronically in the future and Puerto Rico is going to be one of those world distribution places. So, obviously for them the telecommunications part to have the big pipes, the big broadband pipes with reliability and prime performance, is very important.

The business for us is very important first it's Microsoft and second it gets us into the 10 gigabit kind of world where, as we were saying before to be able to have undersea capacity as well as on island capacity in big, big pipes makes it completely different to our competition. So, it is a very important business for us and is a great news for Puerto Rico that Microsoft is putting one of their worldwide distribution centers there.

Robert Bovo - Diamondback Capital

Thanks, I appreciate that.

Operator

We will go to Ana Goshko of Banc of America.

Ana Goshko - Banc of America Securities

Hi, thank you very much for taking the question. I had a few questions on the U.S. operations. First on U.S. roaming you continue to under promise over deliver on that front, and I know you said in the past that visibility is sort of tough but again it looks like your 2009 fiscal guidance looks conservative. If I'm doing the numbers right it looks like you had an 11% decline in ’08 and are guiding too anywhere from like 17% to 26%. So, wondering if you again really sort of just setting a conservative benchmark and hoping for better, or is there something in the dynamics with your roaming traffic that you actually felt that you have more precision on that outlook right now?

Michael Small

Ana, this is the case of having two main customers for our roaming business and we know we are susceptible to their decisions that are hard to predict. So, we, and we also know that both the two customers AT&T and T-Mobile, will overtime continue to build out their networks, which will lessen the needs for our roaming, the roaming services from us. At any given point, we can be right or wrong, but we were pretty confident about the long-term trends is down.

Ana Goshko - Banc of America Securities

Okay. Second question is last quarter on this call, we spoke a lot of about the non subsidized low credit quality customers in U.S. operations and how their ARPUs are very good and the churn was high as kind of in the camp of sort of like the Leap and Metro, type churn of 4% plus that you are making money and felt good about those customers. So, wondering what the latest churns has been with those both our ARPU and churn given the deteriorating economy and how important are they to your gross adds?

Michael Small

So, this quarter we spent more time focusing on the overall quality of our customer base, because we think we created some misimpression last time by talking about that customers segment, the impression that you articulated that we get high revenue and low cost to acquire on those customers, but some higher churn is absolutely accurate.

We think we sell no more of those customers than the industry trends at large, and we're very comfortable that they are profitable for us and it will be profitable for us. And we think on balance, when you look at our whole customer base with no prepaid to speak up in there and absolutely zero reseller business at this stage, we have one of the highest profitability customer basis in the business.

Ana Goshko - Banc of America Securities

Okay. And then final question on the U.S. business is, I just wanted to dig deeper on the better AOI margin that you had, because we don’t have full detail on all the cost buckets in the press release yet. So, looks like CPGA was down a little bit sequentially but the margin improved a lot more than that. So, wondering what the buckets have improved cost for and what the outlook is on continued improvement there?

Michael Small

In which segment, I am sorry.

Steve Kunszabo

U.S..

Michael Small

U.S.?

Ana Goshko - Banc of America Securities

In the U.S. AOI. And the margin, the margin was a lot better both sequentially and that versus executions.

Michael Small

Well, again the overall driver of profitability in the U.S. has been our ability to improve revenue per customer, and we are leveraging virtually all cost components except for phones at the moment. Because such is the ongoing trend that people are owing better phone.

Tom Fitzpatrick

I mean, sequentially retail revenues were up 3% and retail expenses were down 3%. So, we had lower advertising cost, we have lower activations, and that’s seasonality. We see that the fourth quarter is typically our strongest.

Ana Goshko - Banc of America Securities

Okay, great, thank you very much.

Operator

We will go next to Ric Prentiss of Raymond James.

Ric Prentiss - Raymond James

Hey, good morning guys.

Michael Small

Hey, Ric.

Ric Prentiss - Raymond James

Sorry for joining the call late have those be in two places of work days again here. I wanted to ask a little bit further on the roaming business. You mentioned on the last call there, two big customers, long-term trend has declined overtime. As your guys in the market keep an eye out for who is building what were, how long of a head start do you have in knowing that they are going to be overbuilding you and revenue might be at risk? Is it one quarter, is it a three quarter, I mean, how kind of how much visibility do you have of them coming into market? Is there anything contractually, where they have to say lets turn stuff off in market X or Y?

Michael Small

I will give one general comment, I’ll also give some color here, but we have great insight into, often, now always but often into where they are building their network, but just because they built the network it doesn’t mean bad things for roaming revenues. Bad things for roaming revenue is when they built they network and they choose to turn off roaming in a particular area and best judgment call on their part is when their network is strong enough to actually shutdown roaming, because if they build more cell sites initially they usually build the customer base, which in turn roams more in the area and it’s a second decision after the network is built, is when to shutdown roaming. Phil can you shed any more light on that.

Phil Mayberry

We all share the same tower, so we kind of have built in radar for what’s being built. As our technicians go round doing maintenance and repairs, they notice who is and they report that into us. So, we kind of have an idea of where the building, but Michael second point that geography is split into local areas, that they can choose to roam on and not roam and they give notice of when they want to turn off roaming in an area, and there is a period of time in terms of quarter or less when you know what’s actually going to happen.

Ric Prentiss - Raymond James

And, has there been any acceleration of the visibility at the same tower rental stuff or is it kind of just been a consistent build out there?

Phil Mayberry

It’s basically a consistent build, they do a dog bone to start with the interior of the metros and then along the highway and then they expand out after that. So it's a common build. You go where the traffic is and then when they reach a certain inflection point on the amount of traffic that they are giving us, that’s when they make their request to turn off.

Ric Prentiss - Raymond James

Make sense. On the 3G spend, the 15 million, possibly earlier questions might have touched on it a little bit, how many POPs do you think you will actually cover with that $15 million?

Michael Small

It will be three plus.

Ric Prentiss - Raymond James

Plus.

Michael Small

3 to 4.

Ric Prentiss - Raymond James

Three to four, okay. And is this, which version of 3G is this? In today's (inaudible)how many alphabets soup out there?

Michael Small

It's a, I am not sure that’s been definitively decided yet. It'll be a minimum of the HSDPA but we'll likely have a better generation when we finally decide.

Ric Prentiss - Raymond James

So, it could actually be one of the use out there, HSUPA, instead of HSDPA??

Michael Small

I think, we haven't made the final choice yet.

Ric Prentiss - Raymond James

Okay. And then the final question, data ARPU in the U.S. continues to grow nicely, any thoughts as far as inflection points there? Puerto Rico was a little slower growing, U.S. seems to have a lot of headroom versus where the national and other regional guys might be at? Just some thoughts on what the trends are for data revenue going forward?

Michael Small

The trend is we're, we will grow consistent with industry past, except we're about a two years back, so, if you overlay our data ARPU growth on the industry, just go back about two years and we will follow that path. And the inflection points are a wide variety of issues, whether it's burning to sell a little more estimates effectively through innovative packaging and post sales feature upgrade to when you deploy Blackberry, to when you deploy instant internet, but there is no shortage of opportunities. And the industry is rapidly un-tethering the internet, just as we did for voice, and video is not far behind. So I don’t know where all this stops, but it got a long, long run, before the wireless industry stops pulling data and video revenues it's way.

Ric Prentiss - Raymond James

I agree with you there have been a wireless pull for lot of years. Final question, I guess I am just thinking up on the $80 million breakage cost. Any kind of setup cost, also when they spun off wireline from wireless, there was some extra negative synergies, if you were as far as creating corporate finance, headquarters G&A type stuff? Any ballpark thoughts about what kind of dollar values might be involved, if and when a split were to occur?

Michael Small

You know, I mean Ric, as we said there is very limited operational entanglement and where two are tangled is our small corporate headquarters in New Jersey, and so there will be some very small inefficiency. It's too small to even comment on it at this point.

Ric Prentiss - Raymond James

Good news, all right. Good luck guys.

Operator

We will take our next question from Andrew Morey of Cowen Asset Management.

Andrew Morey - Cowen Asset Management

Yes, hi thanks for taking my question. The loan program discontinuation, I just want to make sure I understand it. It looks like that would have no impact on free cash flow, because I guess you are already spending money and know it's just going to be expensed instead of amortized, would that be a correct understanding?

Michael Small

Yeah, that’s correct.

Andrew Morey - Cowen Asset Management

And, within your fiscal ’09 guidance, would you expect any effect of that program changing from a loan program to outright selling those handsets, would you expect that to affect some of the net ads in Puerto Rico?

Michael Small

No, we don’t expect any operational effect.

Tom Fitzpatrick

We effective, our loan phone program was basically, replace it when you want it, kind of when it is broken and we own the phone, so we just gave you another one. Our "New When You Want It!" effectively is now the substitute for that. So, and the reason we had to do that is half of our customer base when they, who was buying their phones, didn’t have a really a good program to upgrade or change out or replace their phones. So, now we have one program, "New When You Want It!" that covers everybody and we think it’s a better plan than having the bifurcated customer base that we use to. Some people got an easy replacement, others didn't, it was going to cause to confusion in the marketplace.

Andrew Morey - Cowen Asset Management

And one follow on question on the data ARPU, would you see the data ARPU growth driven by your expansion with 3G services, or do you think there is upside to that kind of irrespective?

Tom Fitzpatrick

Well, if this is so, I think, it has to be our last question, but the answer is both as you get better 3G network out there, and higher quality 3G, there is more you can do with the network and our competitive position within Puerto Rico improves, but regardless there is a lots of news services. Like for example we will have one last story to conclude on. Carlos tell about the current promotion, we're running where you get to sing a song.

Carlos Blanco

Yes. Yeah, now we, last year we're very successful launching our plans with an artist in Puerto Rico with our version of American Idol. This year we have a promotion where you can call, sing a song and then executives from Sony Entertainment are going to screen the songs. We have already very like 2000 people that have called and on the 15th of August, we're going to select the ten best songs under them. Our customers are going to be able to vote for the winner. We are doing this with Sony Entertainment and it's been a great success in Puerto Rico. So that proves the quality of our network and the possibilities for entertainment on the cellular industry.

Andrew Morey - Cowen Asset Management

Okay, great, thanks for the color.

Michael Small

So, the ideas for wireless data will be endless. I will turn it back Steve Kunszabo to close.

Steve Kunszabo

Thanks. That concludes the Q&A portion of our call. Beginning later this morning you can access the replay of the call on Centennial's website. Thank you very much.

Operator

And that conclude today’s conference. We thank you for your participation. You may disconnect at this time.

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Source: Centennial Communications Corp. F4Q08 (Qtr End 5/31/08) Earnings Call Transcript
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