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Executives

Wes Wampler – Director of IR

Mike Moneymaker – EVP, CFO, Treasurer and Secretary

Jim Quarforth – CEO and President

Analysts

Ric Prentiss – Raymond James

Gray Powell – Wachovia Securities

Patrick Ryan – Lehman Brothers

David Dixon – FBR Capital Markets

Dave Coleman – RBC Capital Markets

Rachel Ivy [ph] – UBS

NTELOS Holdings Corp. (NTLS) Q2 2008 Earnings Call Transcript August 8, 2008 10:30 AM ET

Operator

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

Wes Wampler

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

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

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

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

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

Mike Moneymaker

Thank you, Wes, and good morning. We are pleased to announce second quarter 2008 operating revenues of $131.0 million, operating income of $30 million, and net income of $19.3 million or $0.46 per share.

We are also pleased to announce the declaration of a quarterly cash dividend in the amount of $0.21 per share to be paid on October 10, 2008 to stockholders of record on September 19, 2008.

Operating revenues, operating income, net income, and earnings per share for the six months ended June 30, 2008 were $263.3 million, $56.2 million, $27.8 million, and $0.66 per share, respectively. Adjusted EBITDA was $57.8 million for the second quarter 2008 and $113.3 million for the fist six months of 2008, increases of 13% and 12%, respectively over the comparable periods of 2007.

Operating income and net income for the second quarter 2008 and first six months of 2008 represent record levels for the company. We are pleased with these results and are extremely pleased that these levels have led our record level of adjusted EBITDA results that were also achieved for the second quarter and six months of 2008, as both the wireless segment and wireline segment achieved record levels of adjusted EBITDA.

Operating income reflect accelerated depreciation charges of $5.6 million and $13.5 million for the second quarter and six months of 2008 related to 3G 1X-RTT equipment scheduled to be replaced or re-deployed with the EV-DO upgrade. For the year 2008, accelerated depreciation charges are projected to be approximately $20 million.

Looking next at our key operating performance metrics for the second quarter are as follows. First an overview of our wireless results. For comparability purposes, the following 2008 to 2007 comparisons will be based on pro forma results and metrics for the period prior to April 1, 2008. Each adjusted to reflect the change in gross versus net reporting of hindsight insurance revenues and costs as a result of a previously disclosed new contract for such services that went into effect on April 1, 2008.

Please refer to the earnings release and our Form 10-Q for actual results for the periods and further discussion on this change in gross versus net reporting.

Our pro forma year-over-year increase in wireless subscriber revenues was 12% and 13% for the second quarter and six months of 2008, respectively. This growth was achieved through year-over-year subscriber growth of nearly $35,000 net adds, $19,000 of which were added in 2008 and pro forma total ARPU growth of $1.13 per share – I'm sorry, growth of $1.13 year-over-year.

Our subscriber growth for the quarter reflected the seasonal pattern, with postpaid additions improving from the first quarter and net adds declining in the second quarter from the seasonally higher first quarter.

As Jim will comment on later, second quarter 2008 was a period of significant accomplishments as we made major investments for future growth by launching mobile broadband services using the EV-DO Rev-A platform in five markets. Our pro forma ARPU improved $0.80 for 2Q '08 compared to 2Q '07 led by growth in data ARPU.

Data ARPU benefited from the launch of EV-DO broadband capabilities. However, these launches were staggered throughout the quarter and our larger market turn-outs occurred late in the quarter. At the end of the second quarter, we'd completed 26% of our planned EV-DO cell site upgrades anticipate having 70% of our planned EV-DO cell site upgrades completed by yearend.

Partially offsetting this data growth was the declined calls by selected prepaid customers that repositioned to lower data rate and voice-only plans following the separate billing and re-pricing of data services in the second half of 2007.

Although difficult to precisely quantify, we believe some of this activity was prompted by the economy and its impact on pre-set pay subscribers looking for lower priced alternatives that we introduced in the second half of 2007.

Our prepaid data ARPU declined slightly in the quarter from these changes. The unbundled data offering and revised pricing plans introduced in late 2007 contributed to the lower prepaid churn which declined 66 basis points since 2Q '07.

CCPU was $31.34 for 2Q '08, an increase of 3.4% over pro forma CCPU for 2Q '07. These increases reflect the success of our national no roam product which contributed to the higher in-collect calls of $6.5 million for 2Q '08 as compared to $5.6 million for 1Q '08 and $5 million for 2Q '07.

Retention calls net of related equipment revenues from existing customers were $2.6 million for 2Q '08, which was lower than 1Q '08 calls of $2.9 million and 4Q '07 calls of $3.3 million.

We are pleased with the reduction in these calls while continuing to improve our churn results year-over-year. Wireless bad debt expense was 2.9% of wireless subscriber revenues for 2Q '08 as compared to 3.4% for the year 2007 and 2.8% for 2Q '07. CCPU increases also reflect the calls from the addition of 51 new cell sites in 2008 and higher network calls associated with additional backlog calls associated with the new T1s added to cell sites upgraded to EV-DO Rev-A during the second quarter of 2008.

The anticipated calls from these cell sites and higher calls from a monthly average number of EV-DO upgraded cell sites will increase our CCPU calls over the current levels and I have reflected these assumptions in our 2008 guidance.

Moving on to wireline, our wireline segment recognized record level adjusted EBITDA of $17.4 million in 2Q '08. While cable competition was introduced in late May 2008 in one of our three RLEC markets that increased our line losses during the quarter. Our broadband and video subscriber growth in the RLEC footprint continues to outpace these losses, and as evidenced by our record level adjusted EBITDA, our focus on calls containment and growth in strategic products and services in our competitive wireline segment resulted in our record achieved EBITDA levels in the quarter.

We also offered a voluntary early retirement plan to eligible employees within our wireline segment that resulted in the reduction of 22 employees effective June 30, 2008. We recognized 1 million of one-time calls associated with this plan during the second quarter, which has been excluded from adjusted EBITDA and will recognize call savings commencing July 1, 2008 from the headcount reductions.

An overview of our liquidity and current financial condition is as follows. Adjusted EBITDA less expenditures for property, plant, and equipment for 2Q '08 was $26.5 million. Total incremental capital expenditures for the EV-DO upgrade remain estimated at approximately $65 million with approximately $25 million incurred in 2007 and a total $38 million expected to be incurred in 2008.

Cash provided by operating activities was $105.4 million for the first six months of 2008 reflective of record level adjusted EBITDA and a collection of a tax refund during the second quarter. Our ratio of total debt at June 30, 2008 to adjusted EBITDA for the last 12 months ending June 30, 2008 was 2.84 to 1, down from a ratio of 2.94 to 1 as of March 31, 2008, and 3.03 to 1 as of December 31, 2007.

I am also pleased to report that total debt net of $82.2 million of cash on hand at June 30, 2008 was $528.9 million. At $528.9 million, this represents a ratio to adjusted EBITDA for the last 12 months ending June 30, 2008 of 2.46 to 1, down from 2.69 to 1 as of March 31, 2008.

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

Jim Quarforth

Thank you, Mike. As Mike pointed out, we have continued in momentum from the first quarter, posting an adjusted EBITDA of $57.8 million or 44% margin. I plan to talk briefly about our EV-DO and new cell site deployment, activities in our retail operations, the Sprint wholesale revenue growth, and the update in our annual guidance.

During the quarter, we converted three additional markets to EV-DO Rev-A, which includes Charlottesville and Lynchburg, Virginia and Charleston, West Virginia. Today we have launched five EV-DO Rev-A markets, converting 282 cell sites of the 768 sites planned for the year.

The EV-DO deployment continues to progress very smoothly. In our first quarter call, we announced the acceleration of our first quarter 2009 EV-DO deployments into the fourth quarter 2008.

This was significant because it satisfies our 98% coverage requirement in our Sprint wholesale contract, which activates an increase in the monthly billing from an $8 million per month minimum to a $9 million per month minimum. Due to the continued progress, we have decided to further accelerate our EV-DO deployment converting approximately 76 additional cell sites in our Virginia East markets from the first quarter 2009 to the fourth quarter 2008. This will shift approximately $4 million of capital from 2009 to 2008.

In addition to the EV-DO conversions, we have installed 51 new cell sites during the year out of 160 sites planned. Approximately 83% of the 160 cell sites will be in the Virginia West and West Virginia markets servicing both NTELOS and Sprint wholesale customers. The network expansion represents approximately 16% growth in cell sites which is twice our normal annual additions.

Also during the quarter, we launched PCS services in Clifton Forge and Covington, which is in our ILEC territory, Tazewell, Virginia and Lewisburg, West Virginia. Our retail distribution was expanded by opening four new stores and one kiosk in the second quarter. Our seventh of nine store openings planned for the year was completed in July. This will take our total retail store distribution to 84 stores at year end. This 12% growth in retail store distribution will provide further strength to our differentiated retail selling strategy.

11 of our existing stores have been remodeled to the fresh new look of the new stores. An additional 17 remodels are planned for the balance of the year. During the second quarter, 20 cash kiosks have been placed in our retail stores to better provide service to our customers while freeing up time for our employees to sell products. An additional 30 cash kiosks are planned for the remainder of the year.

We continue to be pleased with the demand for EV-DO products in the markets we have launched. Our take rates of gross sales for data products have increased to 64% in June. Since April, data handset revenue has increased 16%, BlackBerry sales have increased 41% of this period, and all data products including Air Cards have increased 22% since April. Usage in EV-DO markets launch has increased 15 times for EV-DO devices compared to 1X devices.

We introduced three new handsets and three new smart phones in our lineup at the end of the second quarter, including models from Samsung, LG, and HTC. The BlackBerry Pearl was introduced during the quarter and has been a very successful product for us. We have two additional handsets and one smart phone from LG and Samsung planned for the third quarter, and six additional handsets scheduled for the introduction in the fourth quarter.

The BlackBerry Curve was launched at the end of July and should be a further catalyst for smart phone sales. We believe these new handset introductions will provide significant strength to our product offerings.

Our July growth additions reflect the contributions from the new handset introductions and the additional retail stores and service. The first half of the year represents a tremendous amount of progress in network capability, and expansion, retail distribution, and device introduction that will provide significant momentum going into the second half of the year in 2009. We are very pleased with the progress we have made to date.

Briefly on Sprint, while the Sprint wholesale voice minutes and associated revenue were flat from the first quarter to the second quarter, we have seen very strong growth in daily usage and revenue over the same period. Their revenue grew $1.2 million or 21% sequentially driven by more data usage and stimulated by some of the EV-DO losses. Absent the additional wholesale revenues from the guaranteed monthly minimums, Sprint wholesale revenue would have been $22.4 million in the fourth quarter of ’07 growing to $23.2 million in the first quarter of ’08 as compared to $24.2 million in the second quarter of 2008.

The billing in July was over $8.5 million representing continued and accelerating growth in data usage as a result of EV-DO deployments. We are very encouraged by what we’re seeing and anticipate data to continue to be a catalyst for future revenue growth. In addition to EV-DO deployment, the substantial network expansion will also be a catalyst for wholesale revenue growth as we are averaging approximately $154,000 in annual revenue per cell site.

Based on our second quarter results, we are very pleased to make the following changes to our annual guidance. We are making a significant increase in our adjusted EBITDA guidance to a new range of $224 million to $228 million. This is an $8 million increase to the bottom end of the range and a $7 million increase to the top end of the range.

Wireless adjusted EBITDA have been increased to a new range of $163 million to $165 million, an increase of $5 million to the bottom end of the range and $4 million to the top end of the range. The wireline adjusted EBITDA has been increased $3 million to a new range of $66 million to $68 million.

We’re increasing our net income guidance by $12 million to a new range of $49 million to $55 million. This is the result of strong operating performance, a reduction in depreciation expense resulting from Motorola equipment coming out of service due to the EV-DO deployment and redeployment of certain 1X cell sites, a decrease in interest expense primarily driven by a noncash fair value adjustment relating to the interest rate swap, and increases in income taxes as a result of these favorable results.

We’re increasing our CapEx guidance by $10 million to a new range of $130 million to $133 million. The $10-million increase represents a $4 million acceleration of EV-DO deployment in our Virginia East market in the first quarter of 2009 to the fourth quarter of 2008 as I mentioned before.

The remaining $6 million is the result of strong customer demand for our high bandwidth products in our wireline competitive segment and the acceleration of a fiber build Clifton Forge, Virginia to Beckley, West Virginia that will allow us to take advantage of the accelerated depreciation from the economic stimulus legislation.

We’ve made a minor change in our CCPU guidance from approximately $33 to a new range of $32 to $33. Based on the continued growth opportunities in our competitive wireline business, we have increased our revenue guidance from approximately 5% to approximately 6%.

To summarize, we are very pleased with the strong financial and operating results in our second quarter and believe this will provide solid momentum for the balance of the year as evidenced by raising our guidance. We are particularly pleased with the nearly $58 million EBIDTA and the margin expansion to 44%.

It is important to note that the first half of the year had very little incremental operating expense associated with EV-DO. The significance of this is that we will be able to absorb the increasing EV-DO operating expense to the second half of the year as a result of our growth and still deliver better financial operating performance.

Our wireless business continues to demonstrate strong EBITDA growth with a 15% growth over the same quarter last year. The operating trends that are supporting this growth continue to be growth in customer additions, improved churn, and increases in data ARPU.

Investments made in our wireless network expansion and planned technological evolution to EV-DO this year will continue to be significant catalysts for growth for both voice and data revenues for both our retail and wholesale business segments.

We anticipate significant growth in data usage ARPU and revenues as a result of the implementation of EV-DO. The wireline business also showed nice results in the quarter with an 8% growth in EBITDA quarter-over-quarter driven by exceptional growth in the competitive segment. The competitive segment grew $1.3 million or 26% quarter-over-quarter as a result of strong customer demand for high bandwidth products. Our continued fiber deployments including our fiber expansion into West Virginia will be a catalyst for continuing growth in our competitive segment, satisfying current demands from both our business and carrier customers for higher bandwidth services.

The ILEC continues to show enviable DSL penetration at 42%, with customers upgrading to higher bandwidth speeds. We believe the company's strong operating trends and momentum along with its investments in key growth areas position it for sustainable growth into the future.

At this point, we'll now take questions and ask the operator to give instructions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We'll go first with Ric Prentiss with Raymond James.

Ric Prentiss – Raymond James

Hey, good morning guys.

Jim Quarforth

Hey Ric.

Mike Moneymaker

Good morning Ric.

Ric Prentiss – Raymond James

Hey. A couple of questions for you, on the Rev-A, like seeing that acceleration of that build out into this year, talk to me a little bit more about Air Card sales. I think you said 22% up just since April, are the supply of those in plentiful, and are they getting through the distribution channel, and what kind of price plans are you doing with the data cards?

Jim Quarforth

Sure. The 22% that we referred to, Ric, included all our data products, all data features which would include Air Cards and smart phones, and anything that would be an EV-DO-type feature. We realized, with the deployments we've done in the five markets, these are the more or less dense markets. It represents about 26% of our cell sites, but about 17% of our covered pops [ph] and half of which were launched in the middle of the second quarter. Seeing nice pickup in all of the products, Air Cards, smart phones, and real pleased with the package revenue growth we've seen post-launch versus pre-launch.

Ric Prentiss – Raymond James

And then, I think you mentioned that you've done 282 cells, you are looking to do 768 total, will that be by the end of '08 you'll have the 768 cells and what kind of percent of pops would that represent?

Jim Quarforth

Yes, the 768 represents EV-DO cell sites by yearend. That's about 70% of the cell sites and probably the best estimation I'd say is about 55% of the covered pops at that point.

Ric Prentiss – Raymond James

So, by the end of the year, you'll be kind of similar to where I think Shenandoah earlier this week announced they had 54% or so Rev-A percent pops, they were seeing data APUR over $12 a month, so it almost seems like –

Jim Quarforth

The plans, Ric, I'm not sure I answered that previously – the plans for an Air Card is I believe it's about $49.95 for Air Card plan.

Ric Prentiss – Raymond James

#

Got you. Okay, and then you talked about the Sprint minimum, on balance sheet, Mike made a good point about your leverages coming down, the net leverage dropping lower, as we look out into '09, looks like this leverage could be going to 2 or maybe below 2. What are your thoughts as far as the balance sheet, what's the right leverage level, would you (inaudible) do with the cash investment business or return to shareholders, what are your thoughts there?

Jim Quarforth

Yes, that's a popular question. We certainly, as you pointed out, the net debt is declining pretty rapidly and we're accumulating significant cash, even in light of heavy investments in the network. I think as we've said before, we think our first priority is to continue to invest in the growth opportunities of the business, we see a lot of investment opportunities in the business, where we can continue to accelerate our growth and sustain the levels of growth we've experienced in the past several years. So, that's really paramount to us. Secondly, we would then look at returning cash to shareholders, even in light of the very heavy kind of record level CapEx this year. We're still generating cash and so that would suggest that there are opportunities for the Board to evaluate the dividend.

Ric Prentiss – Raymond James

And final question, as you guys have made some very nice progress on postpaid churns, got it down to 1.6%, where do you think that can go? Can you ever get it down to a national guide level or is there more room for at least to squeeze a little bit more out of the churn side?

Jim Quarforth

Certainly that's an area that we focus on everyday and we believe there's probably some room for improvement. Clearly, when you look at that churn level relative to the other one dot non-players [ph] in the industry, it is probably close to if not the best result for one dot non-players, it won't – you'll never see it, we don't believe it'd get down to a level of an 850 player just because of the characteristics of the spectrum. And then there are a few advantages they have, because they – there are some customers we don't want to keep if they're spending a lot of the time off net. So, we think it can be improved but we would caution you and others as to how low that can go relative to national players.

Ric Prentiss – Raymond James

Okay. Thanks guys.

Jim Quarforth

Thank you.

Operator

And we'll go next to Gray Powell with Wachovia.

Gray Powell – Wachovia Securities

Good morning. Thanks for taking the question. I just have a few. So, on the EV-DO upgrade, where do you see your company getting the most lift? Is it from Sprint customers roaming on to the NTELOS network or is it more wholesale customers and NTELOS customers taking up the service?

Jim Quarforth

If you look at – Gray, thank you – if you look at the past couple of years, our growth in revenue is kind of about 75% from our retail business, and about 25% from the wholesale business. Clearly, we see an opportunity in the retail side for the smart phones and for the Air Cards. If you look at smart phones, I think the industry is at about a 15% take rate of growth sales. When we launched in Q2, we got up – I guess the quarter average was about 11% take rate and in July, we were up to 15%. So I think we're beginning to see sales levels comparable to the industry in a very short period of time after the launch of a few markets. We see some great opportunity there. I think on the Air Cards, there is some additional opportunity in our markets where we have areas that are not serviced with either cable modems or DSL that we can satisfy those customers. So, it's really a new market segment for us. The wholesale side, certainly we've seen very strong lift particularly in the data roaming side of the business as we have turned up these markets and added additional cell sites, quoted 21% growth in data revenue sequentially during the second and first quarters. So, we're very pleased with that, and we would expect as we continue to roll out additional EV-DO markets, we should see a compounding effect of that.

Gray Powell – Wachovia Securities

Okay. That makes sense. My next question is just – with data ARPU at just over $7 and I'm guessing that's mainly on the 2.5G service, nationals and other carriers with 3G are closer to $12. Where do you think that the metric can go in your market's longer term, and then with the expansion of the service throughout your network this year, how should we look at the run rate of data ARPU for the next couple of quarters?

Jim Quarforth

Yes, certainly. I'll give you some comments and Mike may have some. If you look at what happened with 1X, we started light, and we were complete with 1X as far as network wide on the second quarter of '06. We've ramped that up pretty quick since '06 and so, as you pointed out, most of these results are coming from 1X. A very small portion, at this point, is coming from the EV-DO because we only have 17% of the pops covered and not even for a full quarter. And historically, we have whether it's been in the wireline or wireless side of the business, we have seen similar demands from our customers. And as the products become available, we have been able to achieve similar levels of ARPUs and penetrations. The only caution I would give you would be that certainly if you look at a national player, they may have a higher business or enterprise segment than we would have that might drive a little higher ARPU, but certainly we think what we've seen so far is achievable.

Gray Powell – Wachovia Securities

Okay. And then my last question, just switching topics a little bit, so with the new handsets that you have coming to market, how should we think about that impacting the run rate of gross adds in the second half of the year? And I mean, maybe I misunderstood, but it sounds like momentum improved a little bit in July based on your earlier comments? So, are you guys just seeing anything in the economy, in the competitive landscape that gives you reason to think that the new handsets would not have a positive impact on the second half of the year?

Jim Quarforth

Yes, I guess there's a number of puts and takes here. Gray. One of the things we've said in the first quarter call and would probably also be applicable to the second quarter is that, we probably rode the Motorola handsets too long and in both the first and second, we might have suffered a bit with that. And so we made a pretty dramatic push to expand our product line with Samsung, LG, HTC handsets. Now, the ones that I mentioned were introduced late in the second quarter. We did see a nice lift in July which is probably coming from handsets to some degree from the retail stores. Retail stores typically lag. They take four to six months to really start getting the benefit of a new retail store. So we think both of those are certainly catalysts. There's probably a little weakness this quarter from the economy perhaps, and it's always difficult to quantify that. Looking out at the balance of the year, typically your third quarter is your weakest sales and highest churn quarter. That's just a seasonal phenomenon. And then your fourth quarter is typically a very strong quarter. So we've kept our guidance at the greater than 30,000 net adds and we think that's achievable and we certainly think we're positioned to go into 2009 with a strong network and strong product offerings.

Gray Powell – Wachovia Securities

Okay. Well, great! Thank you very much.

Jim Quarforth

Thank you, Gray.

Operator

And we'll go next to Patrick Ryan with Lehman Brothers.

Patrick Ryan – Lehman Brothers

Good morning. Thanks for taking the question. I just had two real quick ones, the first on CapEx. If you back out kind of the one-time CapEx for the EV-DO and some of the build on the competitive wireline side, I calculated as a percent of revenue around 17%, is that a level you're looking at for maintenance going forward or how do you think about CapEx after 2008? And then also, what are your expectations for cash taxes next year?

Mike Moneymaker

First, on the CapEx, as you point out, we have the incremental EV-DO spend, which we'll have substantially completed. There is about $3 million left in 2009. So, the bulk of that would be behind us at the end of '08. We do have, as we've indicated, a significant amount of cell site build in 2008 and I'll come back to that in '09. And also in wireline, we got the strategic – I guess the West Virginia fiber build we call it that really goes from Virginia out through Berkeley and into Charleston, West Virginia, providing diversity, which is something that is being sought from our customers. We've been very successful adding customers at the same time. Part of that has been a commitment on our behalf to provide diversity. And so, that's about probably $7 million build in '08 and probably residual is about $4 million in '09 for total of 11 for that one particular project.

If you take those unique items out of 2008, I think our – I'll call it maintenance and growth, because I do think the remaining number includes growth CapEx to support the growth, both wireline and wireless, both retail and wholesale. You're probably talking about a number that runs $65 million to $70 million. And if you were to go to our PowerPoint presentations on the Web that shows our CapEx over the last several years and you pull out the discretionary and the incremental EV-DO spend, I think you'll find that number has been run fairly true to that over the last several years.

There has been some marginal increase, if you went back five years ago – five to six years ago, that number was probably closer to $60 million, and over time that number has crept up slightly and part of that is just simply the growth of the company. But I think that’s a fairly good run rate there of maintenance and growth CapEx excluding the unique and discretionally items.

Having given guidance for '09, but I will tell you that we are working hard at the moment. The engineering team is doing a great job of pulling together some analysis as to the opportunities to enhance the network, not only to capitalize on our retail opportunities and wholesale opportunities, but also to groom the network and eliminate in-market roaming cost. As you can imagine, that's a very bottoms-up and very comprehensive process, which we are still in the midst of, so quite frankly, I don't have that number here today, as to what that incremental '09 new cell sites will be.

But frankly, we are pretty bullish that it can be a healthy number. We are encouraged by the growth in the wholesale by a virtue of we have added a fair number of cell sites within the wholesale footprint again this year already. More to come in the second half of the year, yet we are still seeing strong growth in the wholesale revenues and still showing very strong average wholesale revenue per cell site.

As long as those opportunities prove out in our roll-off of the numbers, we are going to continue to look for those opportunities to fuel the growth and fuel the EBITDA. From my perspective, I think that number could be something close to this year in terms of cell site. That is a good sign because I mean as we found the opportunities and to the comment of the question earlier about, what would you use your cash for, I think that first and foremost is to look for those opportunities.

In terms of cash taxes for 2009, I will tell you that we get to a more normalized cash tax as a percentage of pre-tax income in 2009. We have about $9 million of available NOLs in ’09. And again, I will refer you to our 10-Q for a by-year NOL availability for purposes of your modeling.

But aside from that, there are some minor permanent differences, but for the most part, you are down to timing differences for tax depreciation mostly pertaining to property, plant, and equipment. We are getting ahead at benefit in 2008 due to the economic stimulus package for asset price and service in LA that causes our cash taxes to the abnormally low in '08 due to the acceleration or really the acceleration of the tax deductibility of the tax depreciation in it.

But what that does mean is you will have less in ’09 and beyond for those relative assets due to the amounts you have taken in ’08. So, net-net, you are back to a more normalized, probably pre-tax income. And aside from the NOL amount and the tax will be fairly much in line to statutory rate.

Patrick Ryan – Lehman Brothers

All right. Thank you very much.

Mike Moneymaker

And really, I cannot give you what these cash taxes is, we have not given guidance on EBITDA and obviously, I don't know what, in each of your models, as to what your pre-tax income is. But again, aside from the NOLs, probably put something close to the statutory rate.

Patrick Ryan – Lehman Brothers

All right. Thanks Mike.

Mike Moneymaker

Okay.

Operator

And we'll move next to David Dixon with FBR Capital Markets.

David Dixon – FBR Capital Markets

Good morning gentlemen. Congratulations on the quarter.

Jim Quarforth

Good morning David.

David Dixon – FBR Capital Markets

Hi, just a couple of questions. The first one, just looking at the recovering gross adds for the third quarter here, is there any way to doing it between the benefits you are getting from the retail store refurbishment process and the improved handset lineup? And also, just a quick follow up there, I wanted to get a sense of what were the biggest drivers, or the best traction you’re getting as far as those new handsets coming into the mix a concern. And a question on the wholesale revenue side, we saw a nice pickup on the travel data side in the quarter, and as we have talked about this in seasonality in there, so still a good number. Wanted to get a sense of whether you have a sense of what the throughput mix was between 1X and EV-DO? And then, I just had a quick follow up, thanks.

Jim Quarforth

Thanks David. Yes, we got the handsets in the stores going into Q3 up, I think it is probably a little difficult to say what that means relative to the total sales in Q3. Certainly, we think – but we know historically reported out – if you go back in time, Q3 is typically lower sale and higher churn. And so certainly by introducing the more robust selection of handsets and broadening your distribution, even though stores take a little while to reach their full potential, it will help mitigate those two variables, so we are pretty excited about that. I don't have any specific data today as far as what we would project as a result to that. We just think it makes the model a whole lot stronger. We think it gives NTELOS a lot more consideration as the customers make their selection of who they want to do business with and what not.

On 1X versus EV-DO, I know what we are seeing on the retail side is a 15 to 1 increase between EV-DO devices and 1X devices. As far as usage in those markets, I do not have with me the wholesale element of that. Now, most of it is coming from – the increased wholesale is coming from the roaming element. You may recall that the home element is built differently. It is built based on – we represent their cost structures, so it is based on 60% of their data revenue yields. So, as they grow data customers, we enjoy 60% of that revenue stream.

Jim Quarforth

And to add to that, maybe some color David – additional color, keep in mind that while 26% of the cell sites were covered at the end of the quarter, that is as of the end of the quarter and keep in mind that we turned up a number of those markets in late May and even into late June. The next market that we have turned up some cell sites already this past week has been – we just turned up the areas kind of the doughnut of it, if Roanoke was the center of the doughnut and the doughnut hole around Roanoke a number of markets ranging from Lexington down to Blacksburg, Wytheville and other areas outside of Roanoke.

We turned up this past week with Roanoke scheduled to be turned up over the next couple of weeks and which is our single largest market in the wholesale territory. So, those are good catalysts, I think, for growth. Clearly, the growth that you have seen in travel data usage clearly was from EV-DO. We do not have sub-count information broken down. We cannot provide sub-count information pursuant to our contract. But clearly, the growth and travel data was from EV-DO.

To give you a little color on some historical trends from – to give you an appreciation of what goes on in the third quarter when the students come back from the colleges and universities. Last year, total Sprint wholesale revenue, again this is absent the adjustment for the guaranteed minimums, was approximately $7.2 million for July. It went to $7.6 million in August and $7.4 million in September.

Now, you can see in August the pickup from the student body returning, you might say, well why did it drop in September? Do not forget the difference there simply is 31 days versus 30 is 3% and 3% on roughly $8 million is quite close to $0.25 million, so that 30 versus 31 days can cause a little bit of an anomaly in a month to month. But the point being, we saw very nice growth last year from July to August. Obviously, we do not know what that will translate to this year but historically, it gives you some perspective there as to the impact when the students come back to school.

David Dixon – FBR Capital Market

Mike, one of the interesting things that I am honing in on here is that the usage has gone from 10 times in your first market with perhaps a weaker demographic there relative to your newer markets where you have seen 15 times. Does that imply then that we are seeing around 20 times from the newer markets, so on average we are getting the 15, but certainly these new markets with better demographics, do they all go well for the Roanoke rollout?

Jim Quarforth

The 15 would be looking at all the EV-DO markets that we’ve launched on the retail side, so – and that seems to be pretty comparable with what we are seeing in the industry. Obviously, you may have usage grow as people get more familiar with our devices over time.

Dave, going back to one of Mike’s points about the comparison of Q2 to Q3 and what the wholesale revenue, historically, we have seen a little bit of downward pressure in Q3 because of rate reductions and we do know that in Q3 of this year on the voice side there is – we are not going to experience a rate reduction, in fact, it's a very small increase in rate, which is obviously a very positive thing.

David Dixon – FBR Capital Market

And that's on the home voice and travel voice?

Jim Quarforth

Yes.

David Dixon – FBR Capital Market

They both increased sequentially?

Jim Quarforth

Yes. That's correct.

David Dixon – FBR Capital Market

And modestly?

Jim Quarforth

Modestly.

David Dixon – FBR Capital Market

Great! Thank you very much.

Operator

And we'll move next to Dave Coleman with RBC Capital Markets.

Dave Coleman – RBC Capital Markets

Great. Thank you very much, just a couple of questions, but first just a clarification on the sort of ongoing maintenance CapEx guidance, you mentioned I think it was $65 million, is that just for the wireless business or does that also include wireline?

Jim Quarforth

Yes, Dave, this is Jim Quarforth, the $65 million really represents kind of total company maintenance and that includes kind of your normal growth, as your customers increase usage and also new customers that you would expect to add during the year. And then historically, beyond that we've had this category called discretionary capital or opportunity capital where we may have added upward to $20 million of capital for expansion of cell sites and on the wireless site, maybe some small fiber extensions. And then of course this year, beyond that we've had the big EV-DO CapEx cost. So, if you were to take the $65 million, that might represent 13% of revenue and then $20 million is another 4%, that will get you up to around 17% to 18% with that expansion capital.

Dave Coleman – RBC Capital Markets

Okay, great. And then, is there any difference between subsidies that you're incurring on EV-DO and the 1X handsets?

Jim Quarforth

To the extent you are selling smart phones, certainly they're more expensive so there is more subsidies there.

Dave Coleman – RBC Capital Markets

Can you quantify how much that is, is it 10% more, can you put a dollar amount?

Jim Quarforth

Hold on a second, Dave.

Mike Moneymaker

We have that information, I don't know if I have that in my fingertips here. There's definitely a premium, I'll pop ahead [ph], that could be a 10% or 20% premium on probably the lower side of that range, but we can certainly look into that.

Dave Coleman – RBC Capital Markets

Okay, and then final question, I think you have about 700, 800 cell sites that you plan on overlaying with the EV-DO, by the end of the year. Are those fully provisioned for backhaul, are there T1s running to all those sites now, or do you provision T1s as you go along?

Jim Quarforth

They already have one T1. We'll be adding a second T1 dedicated to EV-DO.

Dave Coleman – RBC Capital Markets

So, you'll add the second T1 for EV-DO as you go along?

Jim Quarforth

Yes, so what we referred to in our first quarter call was – and also this call was – we have an OpEx associated with EV-DO ramp and we probably incurred about $0.5 million of that expense in Q2 and there's probably, I'm going to say, $4 million to $4.5 million of additional expense associated with that ramp up in the second half of the year.

Dave Coleman – RBC Capital Markets

Okay, I’m trying to understand whether the CCPU number is sort of fully loaded with all the backhaul, but it sounds like there's going to be additional cost.

Jim Quarforth

The whole ramp up is kind of back-end loaded.

Dave Coleman – RBC Capital Markets

Okay.

Jim Quarforth

If you think about – you've done 262 out of 768 in the first half of the year and probably half of 262 or maybe a little more than half wasn't down until the middle or latter part of the second quarter.

Dave Coleman – RBC Capital Markets

Okay, great. Thanks a lot.

Operator

And we will go next to Ric Prentiss with Raymond James.

Ric Prentiss – Raymond James

As my good friend Phil is not here, I have to take his question. When you look at discretionary capital, what kind of return on capital are you looking for? What kind of return on invested capital, what kind of payback rates are you looking for?

Jim Quarforth

When you talk about cell site, Ric, we talk about capital in general around here. The minimum requirement is a 20% IRR, but I would tell you that the wireless easily beats that mark. And you take a typical cell site that costs you $250,000 and if you deploy that particularly in the Virginia West or West Virginia markets, and you're enjoying really three kinds of revenue streams. Certainly, the Sprint revenue stream we are averaging 154,000 per cell site per year. That quickly gives you a pretty quick payback just on that alone. And then we also enjoy the revenue from the retail side and also a reduced roaming cost in the operation as we turn those sites up. So if it's an expansion site, we would experience something dramatically north for that 20% IRR. If it's a core site where you're trying to improve quality or capacity, it's going to be in the lower end of that IRR range.

Ric Prentiss – Raymond James

And the landline guys, I mean they've always have I think a hard time kind of competing for capital?

Jim Quarforth

They have to meet the 20% IRR in their projects. And one of the things that you've seen particularly shown up pretty strong in this quarter is particularly on the competitive side, which includes our carrier business and also includes our business we are going to go after – kind of the four big sectors, healthcare, education, government and now banking, they experienced about 26.5% growth rate in their EBITDA year-over-year. And a lot of that is coming from extensions of fiber into some of these larger customers. If we look at our top 25 customers, we've seen dramatic increases in revenue from that subset as they've increased bandwidth that has an incremental cost to us. And then we have spent some capital to build fiber into major switch sites for Verizon Wireless and US Cellular, which is really starting to pay off nicely for us. The build – the additional capital of this from the balance for the year we referred to, part of that is for these customer demands. The other part of it is for fiber build. It's a two year build going from Clifton Forest to Charleston, West Virginia.

This year we'll complete the build of Beckley and the next year, we'll go on to Charleston. That does a number of things for us as it opens up the Beckley market for the competitive side of the business because we will have diversity at that point. It gives us diversity in Charleston for the competitive segment. We have a lot of demand request for capacity for major carriers coming out of West Virginia into Virginia. So it helps that and then it also helps our wireless business where they currently don't have diversity out of it, but have to buy diversity from somebody else out of the South Atlanta, West Virginia, so they'll be able to – we'll be able to bring all that money in house. So, we're expecting a pretty nice return on that investment.

Ric Prentiss – Raymond James

The expected landline gets more money and has to be a 20% hurdle gets pretty interesting items there?

Jim Quarforth

Yes.

Ric Prentiss – Raymond James

And then final question, QChat Sprint's starting to ramp up the rollout of the QChat phones. We've used that and it seems to be pretty good service as far as low latency. Are you aware of any QChat launches in markets around you and have you noticed anything or could you notice anything as far as volume starting to come to you from Sprint's QChat project?

Jim Quarforth

We haven't noticed anything around this, Ric. We know Shentel is saying that they're going to be launching that at the end of the year and we understand from Sprint that they really look for a 95% coverage of the IDEN network with EV-DO before they would introduce that product and we'll be obviously at 98% in the fourth quarter. So, we would expect to start seeing some of that happen in the first quarter of '09.

Ric Prentiss – Raymond James

We haven't even seen that yet, so it could be some added benefits as we look into '09.

Jim Quarforth

That's right.

Ric Prentiss – Raymond James

Great. Thanks guys.

Mike Moneymaker

Just to add, I want to circle back to the one question about the premium on EV-DO handsets. It's probably running about – normal handsets run $25 to $50 premium, it is probably at 25% to 35% premium on handset and smart phones might be slightly higher, slightly greater on dollar amount, but again it's typically smart phone having a higher revenue stream – data revenue stream associated with it as well, so I just wanted to circle back on that question earlier.

Ric Prentiss – Raymond James

Okay.

Operator

(Operator instructions) We'll go next to Pateya Laidney [ph] with UBS.

Rachel Ivy – UBS

Thanks. This is Rachel Ivy [ph]. I just had a follow-up question on that subsidy. Can you remind us what percent of the base upgraded handsets in the quarter and given the higher mix of handset smart phones sales in the future, would you expect to add subsidies to throw in absolute dollar number quarter-after-quarter, or do you expect equipment revenues to catch up with that? And the second question on the prepaid side, do you think that the prepaid ARPU pressure that we saw in the quarter will continue in the second half or are there any measures you've taken to slow that down? Thank you.

Mike Moneymaker

I need to make sure I cover all the – get all the various pieces here, some of which I may have information available, and some I may not. I think in terms of the take rates on smart phones, we’ve seen a pickup on the smart phones from first quarter, second quarter. Second quarter was running around 11% as a percentage of our phones. I think that number was about a little over 8% back in the first quarter, so we’ve seen a – yes, so we’ve seen a nice lift to it, like 15% in July. So again, I think we’ve seen an increased percentages of smart phones come – obviously, they come at a higher cost which is impacting the – will impact the blended handset cost.

Now at the same time, you’re seeing the comment earlier about other players in the industry having $12 or better data ARPU. I think one of the ways that we should see a lift in our data ARPU is the fact that we’ve seen nearly a doubling of our sales component consisting of smart phones. And I think to see that kind of shift from first quarter to July, again and we still haven’t launched. But only 26% at the end of June of our cell site phones upgraded to EV-DO, I think we’re pleased with the migration of the smart phones. We think they do come at a higher cost. We do think that that’s the catalyst that will drive the data ARPU increases. Likewise, Air Cards – promotional Air Cards, iBL [ph] Air Cards are probably at $0.99, but again you’re talking about plans that are either $29.99 for a 50 megabit (inaudible) or $49.99 unlimited. So all those things are again I think catalysts to drive the data ARPU.

In terms of the prepaid data ARPU that we saw a decline here in the second quarter, it’s difficult one to assess. Again, we made changes in the plans in the second half of ’07. We introduced effectively some lower prices. What we were seeing from competition and really in preparedness for competition, we really try to unbundle some things that we thought would make sense. We thought it would improve churn and we – that was really the driver. We said prepaid churn was high. We felt like we wanted to drive it down and we were successful in doing so, knocking it by the 66 basis points.

We did feel by changing our service offering and offering some – to the prepaid customers some different packaging and different pricing that it might have some downward pressure. And I think again we saw that – we saw a little bit of it in the first quarter but probably nominal and we saw it pick up some in the second quarter. It really is somewhat a question on the economy as to how much more – I think you could see some pressure there, but again I think the difference will be one of – with the EV-DO markets that we are turning up, with the momentum that we’re seeing on smart phone and Air Card take rates, we think those are catalysts that should offset that downside and net-net should continue to see data ARPU grow as a result.

Rachel Ivy – UBS

Okay, thanks so much.

Operator

And that will conclude our question and answer session. I’d like to turn the conference back over to Mr. Wampler for any additional or closing remarks.

Wes Wampler

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

Operator

Thank you. Once again, ladies and gentlemen that will conclude today’s conference. We do thank you for your participation and you may disconnect at this time.

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Source: NTELOS Holdings Corp. Q2 2008 Earnings Call Transcript
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