Shawn E. Endsley - Chief Financial Officer and Chief Accounting Officer Vincent D. Kelly - Chief Executive Officer, President and Director

Good morning, and welcome to the USA Mobility's Third Quarter Investor Call. Today's call is being recorded. On line today, we have Vince Kelly, President and Chief Executive Officer; Shawn Endsley, Chief Financial Officer; and MyLe Chang, Controller of USA Mobility. Also from the company's software subsidiary, Amcom Software, we have Colin Balmforth, President; Kate Bolseth, Chief Operating Officer; Lynn Danko, Chief Financial Officer; and Sean Collins, Executive Vice President, Selling and Marketing. At this time, for opening comments, I will turn the call over to Mr. Endsley. Please go ahead, sir.

Good morning. Thank you for joining us for our Third Quarter Investor Update. Before we discuss our operating results, I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to USA Mobility's future financial and business performance. Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans which are dependent upon future events or conditions. These statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results. USA Mobility's actual results could differ materially from these anticipated -- those anticipated in these forward-looking statements. Although these statements are based upon assumptions that the company believes to be reasonable, they are subject to risks and uncertainties. Please review the Risk Factors section relating to our operations and the business environment in which we compete contained in our 2011 Form 10-K, our third quarter Form 10-Q and related company documents filed with the Securities and Exchange Commission. Please note that USA Mobility assumes no obligation to update any forward-looking statements from past or present filings and conference calls. With that, I'll turn the call over to Vince.

Thanks, Shawn, and good morning. Before I begin reviewing what we believe was a fantastic quarter for both our software company and our wireless company, I want to take a minute to comment on the impact of Hurricane Sandy on USA Mobility. As you know, we are headquartered in the Washington DC, Northern Virginia area but have significant operations and customers throughout the Northeast. The storm caused us to delay our earnings release and investor call by one day. On the Wireless side, our network and operations have held up very well. Like all wireless carriers in areas impacted by the storm, we experienced a few downed sites. However, we've been working diligently to restore them over the past few days. Fortunately, none of these outages caused major disruption of our service to our customers because of the redundant nature of our simulcast networks which allow for continuous coverage and network operation from other area sites when one site becomes disabled. In short, we never lost the ability to process messaging and our paging networks remained operational throughout the storm and its aftermath. We also kept in close contact with our key accounts on the East Coast that may have been affected by the storm. Our teams have not only been fielding and resolving customer-reported issues but have proactively contacted all key accounts in the affected region. At this time, we have no significant customer issues related to the storm. The majority of our wireless customer service and back office operations are located outside of this region and thus were not impacted by the storm. Locally, we did lose power for a couple days and many others have had power and connectivity issues with cellular, telco and Internet service. But as of today, all of our team members have been…

Thanks, Vince. Before I review our quarterly results, I wanted to let you know that we expect to file our third quarter Form 10-Q later today. I encourage you to review the Form 10-Q since it contains many aspects of our business operations and financial performance that we will not have time to cover on this call. As Vince noted, we were pleased with our third quarter results which were largely consistent with the financial guidance for 2012 we provided in July. Record-low subscriber churn, reduced operating expenses and a relatively stable ARPU again resulted in strong cash flows and high margins in our Wireless business, while the Software business reported an increase in revenue, record bookings and a higher backlog at September 30 and a solid pipeline of future sales leads. Looking first at our Wireless business. We were again pleased with the steady improvement in both subscriber and revenue trends during the quarter. With respect to our customer base, we ended the quarter with 1,546,000 units in service, a net decrease of 37,000 units compared to a decline of 58,000 units in the third quarter of 2011. The quarterly rate of subscriber loss improved to 2.3% from 3.3% in the year-earlier quarter, while our annual rate of net unit lost reached an 8-year low of 10.2% versus 11.7% a year ago. Gross placements for Wireless totaled 49,000 units in the third quarter compared to 55,000 units in the second quarter and 58,000 units in the third quarter of 2011. Gross disconnects totaled 86,000 units versus 116,000 units in the year-earlier quarter. As a result, the gross disconnect rate improved to 5.5% in the third quarter from 6.5% a year earlier. Healthcare again was our most stable market segment, with the highest rate of gross placements and lowest rate…

Thanks, Shawn. Before we take your questions, I want to comment briefly on a few other items that may be of interest. First, I'll provide a quick update on our recent sales and marketing activities. Second, I'll briefly review our current capital allocation strategy. And third, I'll briefly comment on our business outlook. With respect to our sales and marketing activities, both our Wireless and Software teams continued to aggressively pursue new business during the quarter. On the Wireless side, we continued to sell wireless messaging solutions to our target market segments of healthcare, government and large enterprise. These core segments represented approximately 91% of our direct subscriber base at September 30 compared to 90% a year ago. They also accounted for approximately 87% of our direct paging revenue in the third quarter compared to 85% a year ago. During the quarter, our Wireless sales team continued to pursue its 4 primary goals of developing new account relationships, adding business to existing accounts, retaining key customers and generating sales opportunities for our Software sales team. As a result, our Wireless team again exceeded its third quarter targets for subscribers, gross additions, retention and revenue. In fact, our net unit loss for the quarter of 2.3% was the second lowest in the company's recent history, with healthcare again contributing the highest number of gross placements and fewest disconnects. In addition, our Wireless sales force added 3 new hospital accounts during the quarter, while their ongoing efforts to create sales opportunities for Amcom sales team resulted in 4 new Software accounts. I would add that our Wireless team's continued strong performance is especially impressive given the challenging and changing nature of the paging industry and availability of alternative wireless products. Jim Boso, President of USA Mobility Wireless, and his entire team have…

[Operator Instructions] Our first question today comes from Jeff Tuck. [ph]

I would just like to go review the Amcom purchase and to see what you've learned from it and what sort of faith existing shareholders can have in the company in determining the appropriate use of their cash. Since the purchase, your stock price is down approximately 45%. Based on the most current quarter, it looks like the annualized -- in annualizing EBITDA, it looks like the Amcom purchase was approximately 27x cash flow. What confidence should your shareholders have that the cash that you're generating from your balance sheet is appropriately being used to purchase new companies instead of returning that cash to the shareholders?

Okay. A couple of things there in your analysis. The company has actually done extremely well in terms of total return to shareholders. We looked at it since the last time we changed our dividend, going back to the beginning of May in 2008, and we're up about 146%. And that's relative to other 2% to 4% dividend payers, which we think is the right range for a company like this. They were up about 32.5% over that same time period. And telecom, in general, that is down significantly over that same time period. So I think, from a total return standpoint, we've been very good stewards of our shareholders' capital. That's point number one. Point number two, you should not be looking at Amcom as a multiple on cash flow because we bought Amcom to tradition that -- to transition a declining paging business into a growing software business. And as part of that transition, as we said on prior conference calls, we made the affirmative decision to actually increase our spend and lower our cash flow on the Software side for future growth. And that -- there is a delay when you do that. Some of these software solutions have a 12-month to 18-month lead time. We just now set a record operations bookings number in the third quarter. We went from $7 million in the first quarter to $7.25 million in the second quarter then $9.5 million in the third quarter. There's a delay on that in terms of seeing it in revenue because, once you sell the software, you have to install it and we use a completed contract method to recognize that revenue. So you will see a pretty big spike in revenue in the fourth quarter relative to the second quarter and third quarter…

Okay. I'll ask you one follow-up question, then: Can you project out a year or 2 ahead on where you think the Amcom's contribution will be?

We do project that -- yes, yes. The answer is yes, and we're going to share the number for 2013 with you when we report our fourth quarter results in early February.

[Operator Instructions]

Operator, I don't see any other questions in the queue. And we're painfully aware of what's happening in the Northeast this past week, and we have a lot of our callers that have dialed in from the Northeast, so perhaps we'll go ahead and conclude the call today. And I want to thank everybody for joining us. We look forward to speaking with you after we release our fourth quarter and our -- and year-end results early next year. Thanks again. And everyone, have a great day.

Thank you. And again, that does conclude today's conference. We thank you all for joining us.