Telephone and Data Systems, Inc.

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the TDS and U.S. Cellular second quarter 2022 operating results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Colleen Thompson, Vice President, Corporate Relations. You may begin.

Good morning, and thank you for joining us. We want to make you all aware of the presentation we have prepared to accompany our comments this morning, which you can find on the Investor Relations section of the TDS and U.S. Cellular websites. With me today and offering prepared comments are from TDS, Vicki Villacrez, Executive Vice President and Chief Financial Officer, From U.S. Cellular, LT Theravold, President and Chief Executive Officer, Doug Chambers, Executive Vice President, Chief Financial Officer and Treasurer, and from TDS Telecom, Michelle Brokwicki, Senior Vice President of Finance and Chief Financial Officer. This call is being simultaneously webcast on the TDS and U.S. Cellular Investor Relations websites. Please see the websites for slides referred to on this call, including non-GAAP reconciliations. We provide guidance for both adjusted operating income before depreciation and amortization, or OIBDA, and adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, to highlight the contributions of U.S. Cellular's wireless partnerships. PBS and U.S. Cellular filed their SEC forms 8K, including the press releases and our 10Qs yesterday. As shown on slide two, the information set forth in the presentation and discussed during this call contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Please review the Safe Harbor paragraphs in our press releases and the extended version included in our FCC filings. And as always, our open-door policy can now be an open-door phone or video policy, so please reach out if you're interested in speaking with us. Before turning the call over, I do want to remind everyone that due to the FCC's anti-collusion rules related to Auction 108, We will not respond to any questions related to spectrum auctions. I will now turn the call over to Vicki Villacres. Vicki?

Okay. Thank you, Colleen, and good morning, everyone. Starting with slide three, you can see that both of our business units are executing on their strategic priorities and are well positioned to take advantage of growth opportunities to enhance their competitive positions. This includes investing back into the networks to drive future growth in revenues and returns.

U.S.

Cellular is continuing its network modernization and multi-year 5G deployment, and TDS Telcom is expanding into new markets and growing the number of fiber service addresses. Both businesses are effectively managing inflationary and supply chain pressures through a number of mitigating actions and expect to meet their financial commitments this year. We continue to be pleased with the strength of our balance sheet to support the investment needs of both businesses. Through significant long-dated maturities and relatively large cash balances, our balance sheet strength also positions us well to manage against the interest rate increases that we are currently seeing. I want to highlight that during the quarter, we repurchased a modest amount of stock at both companies. As a result, we have spent nearly $40 million in stock buybacks this year, $20 million and $19 million at TDS and U.S. Cellular, respectively. And now I'll turn the call over to LT.

Thanks, Vicki. Good morning, everybody. U.S. Cellular, our mission's always been to keep customers connected to the people and places that matters most. And as shown on slide five, you can see some of the strategic priorities that support that mission. Turning to slide six, you can see the strategies we've developed to drive revenue growth and increase return on capital. Let me start with postpaid, and I'm going to take you back to the first quarter. As I detailed during that first quarter earnings call, we identified some specific areas of subscriber pressure where we saw opportunities to improve. And that was noticeably Churn and Adeline. And this led to a series of regional tests and trials during the second quarter. And as a result of those trials, we launched our new promotion in late June. And that was any phone free for anyone, and that's for new and existing customers. Now because of the timing of when we launched this promotion, it had little impact on second quarter subscriber results. But we believe this will meaningfully address a number of the subscriber challenges that we identified earlier in the year. And while it's early, so far we're pleased with the results. We've seen significant increase in add-a-line and upgrade activity, and we expect that upgrade activity to result in improved churn downstream. And thanks to the trials that we ran, we're able to structure this offer in a way that we believe will drive positive subscriber results in the second half of the year, but with expense pressure that we believe is manageable. And that offer structure, coupled with our ongoing expense discipline, enables us to maintain our profitability outlook for the year, even with those aggressive promotions. In fact, we're going to be maintaining all of our guidance, which Doug will discuss further later in the presentation. We also showed our commitment to caring for our customers during tough economic times when we announced we wouldn't raise prices on existing rate plans through at least the end of 2023. Overall, we believe these actions will not only help us improve churn, but they also allow us to go on office. This differentiates us from several other carriers that have taken different actions in the quarter. It's still early in our marketing efforts, but we're seeing nearly 20% of new ads specifically cite that pricing guarantee as the reason for switching. And so overall, I'm quite encouraged with the financial results in the quarter. Postpaid ARPU grew 5% year over year, and that represents by far one of the highest increases in the industry this quarter, and that's despite the headwind of a highly promotional environment. We also continue to maintain expense discipline across the organization, which has allowed us to launch some aggressive promotions and make investments in key growth areas of the business while still maintaining our operating cash flow guidance. I mentioned investing in growth areas. And halfway through the year, we're seeing positive momentum in a number of those areas. Fixed wireless continues to grow. We've seen growth adds up 23% year over year. And importantly, we now offer unlimited fixed wireless across our entire footprint. And that provides us additional sales opportunities and it simplifies operations. Expansion of this product helps us build what I call distribution muscle in the space as we continue to expand 5G millimeter wave footprint. but we also plan to launch this product on mid-band in late 2023 or early 2024 when that spectrum clears. Tower has also produced another strong quarter of double-digit revenue growth, up 13%, and that's due principally to an 18% increase in the number of co-locators. Tower team's done a great job in streamlining our processes so that we can get more tenants on our towers more quickly. We also achieved a key milestone in our business and government segment, by signing our first two private networking deals. This is in addition to over 25 custom IoT deals that we've signed in the past 18 months, both of which are helping us to build a strong foundation for emerging revenue growth in this B2B segment. Briefly, I want to comment on the macro environment, because I think it's on many of our stakeholders' minds. I'm concerned about the economy and the risk of a recessionary environment, and I'm also concerned about inflation and the macroeconomic factors that will affect both our customers and our partners. However, I believe we're well positioned to manage in these challenging economic conditions. Many of our vendor contracts are long-term with set pricing, and our cost optimization program continues to deliver strong results. Additionally, just our broader sector has traditionally managed challenging economic environments very well. I don't see that changing. So to summarize, I'm pleased with our financial results. I'm encouraged by the momentum in our growth areas, but we still need to improve post-paid subscriber results. We're highly focused on this. We have a number of initiatives underway that we believe will improve that trajectory while also striking the right balance between financial outcomes and subscriber outcomes. So I'll now turn the call over to Doug, who's going to take you through the financial results in a bit more detail. Doug?

Thanks, LT. Good morning. Let's start with a review of customer results on slide 7. Postpaid handset gross additions decreased by 7,000, largely due to continued aggression in a competitive environment. Postpaid handset net additions were down 30,000, driven by lower gross additions and an increase in churn, which I will discuss in a moment. We saw connected device gross additions decline by 6,000, driven by lower watch additions and tablet sales, due in part to global supply constraints. This was partially offset by an increase in fixed wireless gross additions. As LT mentioned previously, we had another strong quarter in fixed wireless, and we now have a base of 57,000 customers with this product, up 36% from the prior year. Next, let's turn to the postpaid churn rate shown on slide eight. Postpaid handset churn increased from the prior year driven by higher voluntary churn as a result of increased switching activity and continued aggressive industry-wide competition. Involuntary churn also increased in the quarter as non-paid defections increased to pre-pandemic norms. Postpaid handset churn drove the increase in total postpaid churn as the churn rate for connected devices was essentially flat year over year. Moving to slide 9, prepaid gross additions declined $9,000 and net prepaid additions decreased $14,000. Both declines were due to continued aggression in the competitive environment, including an increased presence of competitive brands in the national retail channel. Now let's turn to the financial results starting on slide 10. Total operating revenues for the second quarter increased 1% from the prior year. Retail service revenues improved by 2% due primarily to a higher average revenue per user, which I will discuss in a moment. Inbound roaming revenue declined 36% due to lower rates and data volume. The largest driver of this rate decrease are renegotiations of terms with other carriers, which of course also benefits our roaming expense. Other service revenues were up 5% due to higher tower rental revenues. Finally, equipment sales revenues increased by 2% due to an increase in average price per unit sold of new smartphone sales, partially offset by higher promotional activity. Turning to slide 11, average revenue per user and average revenue per account were up 5% and 4% year over year. The increases were driven primarily by favorable plan and product offering mix, an increase in cost recovery surcharges, and an increase in device protection revenues. These were partially offset by an increase in promotional costs. Currently, 34% of our handset customers are on our two highest tiers of unlimited plans, and we are focused on continuing to grow this percentage to further improve ARPU and to provide our customers with the enhanced value of these plans. As you can see on slide 12, and as mentioned by LT earlier, we continue to see steady growth in tower rental revenues driven by an increase in our tower tenancy rate. Our overall financial results for the quarter are shown on slide 13. For this discussion, I will refer to adjusted operating income before depreciation and amortization and accretion as adjusted operating income. As I commented earlier, total operating revenues increased 1% year-over-year. LT mentioned our expense discipline cost optimization program and how we are managing relatively well through this highly inflationary environment. That is reflected in our cash expenses, which excluding the impact of cost of equipment sold, decreased by 1%. Total system operations expense decreased 6% due primarily to a decrease in roaming expense. While our off-net data usage increased year over year, our cost was down 35%. cost of equipment sold increased 7% driven by an increase in average cost per unit of new smartphone sales. Selling general and administrative expenses increased 2%, largely driven by an increase in bad debts expense due to an increase in write-offs related to higher non-paid defections, as well as a shift to higher priced devices driving higher write-offs per account. Our guidance includes our expectation that bad debts expense continues to increase for the remainder of 2022 relative to the prior year as inflation, increased device costs, and lack of government stimulus, among other factors, are negatively impacting customer payment behavior relative to 2021. Generally, the level of bad debts expense in 2022 is trending closer to pre-pandemic levels that we experienced in 2019. Adjusted operating income increased 2% in adjusted EBITDA, which incorporates the earnings from our equity method investments, along with interest and dividend income, decreased 2% largely due to decreases in earnings from our equity method investments, driven by higher network expenses in certain of the underlying operating businesses. Capital expenditures have increased mainly driven by timing of expenditures in 2022 relative to the prior year. Turning to slide 14, I will cover our guidance for the full year 2022. Our guidance range for total service revenues, adjusted operating income, and adjusted EBITDA remain unchanged. This reflects our estimates for low single digit growth in retail service revenue, continued decline of high margin roaming revenue, and the expectation of a continued highly competitive and promotionally focused environment. In addition, it also incorporates our near-term expectations related to inflationary pressure. For capital expenditures, we are also maintaining our guidance range as our investments in 5G and network modernization, targeted millimeter wave build-out, and initial preparation for our mid-band spectrum deployments remain on track. I will now turn the call over to Michelle Breckwicky. Michelle?

Thanks, Doug, and good morning, everyone. We are pleased with our results at TDS Telecom for the second quarter and through the first half of the year, and we are tracking to our financial guidance expectations. We remain committed to our primary strategic objectives to provide growth and improve returns by investing in our flagship product, high-speed broadband. We are directing our investments to expand our fiber footprint in new and existing markets and to enhance our product offerings. These investments are driving connection and revenue growth. This quarter, we added 17,000 marketable fiber service addresses to our footprint. Overall, we generated residential revenue growth of 5% this quarter, driven by an 11% increase in broadband revenues. We are very pleased that we have achieved superior market share in our incumbent markets where we have invested in fiber, and we are seeing strong broadband penetrations in our launched expansion markets. In addition, we continue to drive faster speeds in our more rural incumbent markets by building to meet our ACAM obligations and utilizing state broadband grants. In May, the FCC issued a notice seeking comment on a proposed extension of the ACAM program, which we fully support. We anticipate an extension program would provide additional years of revenue support in exchange for deploying higher broadband speeds. We look forward to working through the comment process with the FCC and hope to have a final rule later this year. Extending the current federal ACAM program first and then pursuing BEAD program funding would provide the best opportunities for TDS Telecom to take fiber deeper into our communities. Like LT, let me comment on the macroeconomic environment since that is top of mind for all of us. Inflation and supply chain challenges are concerning. However, we have been navigating these challenges successfully, and as a result, our strategic plans and guidance have not changed. Inflationary increases have been managed through a combination of price increases, process improvements, and cost discipline. And like US Cellular, many of TDS Telecom's contracts are long-term with fixed pricing. To mitigate longer supply chain lead times, We have placed orders early and work with vendors to ensure our needed allotment of key components at acceptable prices. Therefore, we continue to be well positioned to managing these challenging economic conditions. Turning to slide 17, we highlight the achievements we've made this quarter. Year to date, we completed construction of 39,000 marketable fiber service addresses, deploying 17,000 in the quarter. We currently serve 34% of our total footprint with fiber. And as we have previously shared, we expect to serve approximately 60% of our total footprint with fiber by 2026. In line with our growth objectives, service addresses grew 7% year over year. In the second quarter, we increased our availability of one gig speeds to 63% of our total service addresses, up from 56% a year ago. We also continue to see positive trends in our broadband penetration rates for markets that have been fully launched for more than 12 months and we still anticipate 40% to 50% consumer penetration in a steady state. Our service address delivery is close to what we had planned for mid year. We're still working hard to reach our goal of 160,000 service addresses in 2022 with the expectation of ramping up in the second half of the year. As we've previously mentioned, we continue to manage a variety of industry-wide headwinds, including inflation and supply chain, as well as a variety of localized challenges, such as permitting complexities and contractor labor shortages. We are pleased to have a broad pipeline of markets to give us flexibility in managing our bills. It's important to keep in mind that this is a long-term strategy, and although service address delivery might shift between years, we're still confident of meeting our goal of 1.2 million fiber service addresses by 2026. On slide 18, you can see the broadband connection growth across all markets. Total broadband residential connections grew 5% in the quarter as we continue to fortify our networks with fiber and expand into new markets. We are on track in our network construction under the ACAM program, also helping to drive growth in our incumbent markets. Shown on the graph on the right, we continue to see demand for greater broadband speeds, with 68% of our customers taking 100 megabits per second or greater, up from 63% a year ago. Our 1-gig product, along with our 2-gig product in certain markets, are important tools that will allow us to defend and win new customers. In areas where we offer 1-gig service, we are seeing 23% of our new customers taking this superior product. Our focus on fast, reliable service has generated an 11% increase in total residential broadband revenue, which includes a cost recovery fee implemented in the second quarter for broadband subscribers. On slide 19, total operating revenues increased 2% year over year, largely driven by growth in residential revenues, which increased 5% across all markets. As shown in the chart on the left, Expansion market revenues increased year-over-year following the timing of service address delivery. Residential wireline incumbent revenue increased 2% year-over-year due to price increases and growth in broadband connections, offset by a decline in video and voice connections. Likewise, cable residential revenues grew 3% due to a price increase and an increase in broadband connections, also partially offset by a decline in video connections. Commercial revenues decreased 6% in the quarter, primarily driven by lower SELEC connections, and wholesale revenues decreased 1%. Price increases and overall product mix changes drove a 3% increase in average residential revenue per connection. Now let me sum up the combined financial results for the quarter as shown on slide 20. As we just mentioned, revenues increased 2% from the prior year, as growth from our fiber expansions An increase in broadband subscribers and average residential revenue per connection exceeded the declines we experienced in our legacy business. Cash expenses increased 4% year-over-year due to increases to support current and future growth, which is not yet reflected in our revenues. And as a result, adjusted EBITDA declined 2%. Capital expenditures increased 21% from last year as we continue to increase our investment in fiber deployments and focus on broadband growth. Moving to slide 21, we have presented guidance, which is unchanged from what we previously shared. We expect capital expenditures and expenses to ramp up in the second half of the year as we continue to progress on our fiber deployment in new markets, and we expect to end the year within the guidance range. I want to thank all of our associates for their dedication to the success of TDS Telecom. Our positive quarterly results are a product of your hard work. And with that, I look forward to updating you in the third quarter. Now I'll turn the call back over to Colleen.

Thanks, Michelle. Chris, we are now ready for questions.

Thank you. And as a reminder for our participants, if you'd like to ask a question, please press star then 1 on your telephone keypad. Our first question today is from Rick Prentice with Raymond James. Your line is open.

Thanks. Good morning, everyone. Good morning, Rick. Hey.

Busy day with earnings, so I apologize. I've been on a couple of calls. LT, I think you talked to, obviously, the competitive environment, but can we probe a little bit deeper? Help us understand, is there the ability to get back to positive post-paid phone ads and And what does that take? Does it take larger switcher pool? Does it take lowering churn? Does it take more aggressive local offers? Just help us understand the path back to positive postpaid phone ads. And then also, how much room do you have on your ARPU level there, moving feature phones to smartphone? Is there a thought of any price increases coming?

Thanks, Rick. I guess it's cheating to just say yes, yes, yes, and yes, and move on to the next question. So I'll try and give you a bit more color. But in general, with everything you listed, do I see a path to positive consumer postpaid net ads? Yes, I do. What is it going to take? I think the biggest step it's going to take in the near term is churn improvement. I look at voluntary churn. That's where we saw the majority of our pressure in the first quarter. And the offer that we've launched here is specifically designed to address that. One of the things we saw over the past couple of years is we've seen a larger and larger percentage of customers that are out of contract. And out of contract customers churn at a substantially higher rate than in contract customers. And so the goal is how do we get customers back into contract? And that was one way is with the offer that we put forward. We think it specifically addresses that issue, and we're seeing really good results. So we're seeing upgrades up substantively. We're seeing the ratio of voluntary defections to gross ads improve substantively. The other way that you're going to get to positive net ads is on the gross side of the equation, and we were light on Adeline. And so this offer specifically addresses the Adeline opportunity, and we're seeing Adeline performance increase substantively. And so I think execution on this offer, continuation of the momentum that we're seeing, and then it has to translate into churn reduction, and that takes some time. You don't see churn immediately dive. What we expect to see is steady churn improvement throughout the second half of the year. So we should start to see some benefit from this in the third quarter, and we'll see more benefit hopefully in the fourth quarter. Second thing that you have to see is you have to see improvement in the growth areas of the business. And so for us, B2B rolls up into post-paid net ads. High-speed Internet, we count as a connected device that rolls up into net ads. And so we have to continue the momentum that we're seeing on high-speed Internet. Very optimistic about what we're seeing from that product so far. We're up to almost 60,000 customers on that product, and that's purely on LTE. We have a couple of millimeter wave cities that we fired up in the second quarter, but the vast majority of that growth that we're seeing in high-speed Internet is just on the low-band product that we carry on LTE. As we expand millimeter wave, and I would argue much more substantively when we fire up mid-band spectrum at the end of 2023, early 2024, that will contribute to our results. And finally, B2B. We're seeing good momentum on the business side of the equation. That's being held back a little bit by we're still seeing COVID-related disconnects. So thank the EDU hotspot disconnects. some government programs that were fired up during COVID, during the pandemic, that received subsidies. Those subsidies have gone away. One of the things we track really closely is, are customers switching to another provider, which means there's a problem with our value proposition in B2B, or are they just disconnecting because they don't receive a subsidy anymore? And it's much more the latter. And so it's really a combination of all those things that I think will contribute to momentum. Finally, as you know, I mean, we don't operate in a vacuum. It is an aggressive competitive environment out there, but I see some opportunity. AT&T and Verizon both raised prices in the second quarter. We committed to our customers we would not, and that is meaningful to them. And so we're seeing a lot of customers come into the store and specifically reference that price guarantee as a reason for coming in. And by the way, that's before we even put television advertising behind it, which we really didn't launch until July. So a lot of the momentum is positive. I'm optimistic that we're heading in the right direction. But what will it take to get to positive consumer net ads for the business as a whole? It's going to take all of that executing on all cylinders.

Great. And to ask a follow-up question on the high-speed Internet fixed wireless access, Can you start deploying and would you start deploying CBAN radios even before it's cleared so that you're able to hit the ground running once the satellite guys get their work done?

Simple answer is yes, Rick. I'll let Mike give a bit more detail on operationally how we're doing that.

Yeah, Rick. We're actually starting that work this year, creating the designs, the deployment designs, identifying needs at the sites, power, all that, issuing POs. so that we can start deployment next year. We're also working with the FAA to make sure we're ahead of any requirements that they have above and beyond what's already been identified. So we feel good about our plans and our prep for CBAN and to be able to activate it when we feel it's necessary.

Yeah, the goal, Rick, is to, once that spectrum clears, we want to be able to flip a switch and have meaningful mid-band spectrum availability across a large part of our footprint. Mike's Mike's rolling that out.

It sure seems Verizon, and particularly T-Mobile, have had great success with that early stage of mid-band fixed wireless access. Do you guys have any targets you'd like to share with us as far as where you think that market could go as far as sizing it for you?

I'm not ready to share targets yet, only because it's still early days on millimeter wave. I'd like to see more momentum behind the millimeter wave product before we get into targets. What I can tell you is We really have two sweet spots of markets that we're targeting because, again, we don't do this in a vacuum. The first sweet spot without infrastructure funding is going to be suburban or call it dense rural. I realize that may sound a bit more like an oxymoron, but there's non-dense rural and there's denser rural. Suburban or denser rural areas where fiber is not present. where you have enough customer density to make the economics of the product work, but you're not competing against fiber. That's the sweet spot, and we think we have a lot of room to run right now with geographies like that. With infrastructure funding, my goal is to cover every square inch of our footprint if we can. That's the promise of the IIJA coupled with fixed wireless. I've been spending a lot of time talking to folks in D.C., talking to governors, with the concept being that it's very difficult to roll out fixed wireless in an economical way to really sparse rural areas. But it's a heck of a lot more economical than trying to do it with fiber. And so if we're going to connect these rural areas, we've got to do it with IIJA funding. And if we can get that funding, now all of a sudden we can start to connect areas that have never been connected before or at best have satellite or at best have really, really poor DSL. And so that will open up, I think, a whole other universe for us to sell into. Obviously, because of the uncertainty about how that funding is going to come in, it also makes it difficult to set specific targets.

Makes sense. Appreciate it. Everyone stay well. Thank you. You as well.

The next question is from Sergey Duzlevsky with Ganko Investors. Your line is open.

Thank you. Good morning, guys. LT, my first question is on prepaid. Could you talk a little bit about your prepaid strategy over medium term? What types of moves you guys already implemented that seem to be working for you? What else you could do on prepaid? And in terms of market share, where you are in your markets and what kind of share you're targeting over medium term and prepaid.

Thanks Sergey. The prepaid strategy I would really break it up into a couple different categories. The first category is distribution. So two years ago we were not particularly focused on the prepaid business and we have pivoted that over time. assigned a leader specifically responsible for driving this. And one of the key things on our plate is driving increased distribution in the prepaid space. The most obvious is Walmart. We've expanded our footprint within Walmart, but so have many of our competitors. And so the Walmart competitive environment and Walmart is a key driver, obviously, of prepaid growth, particularly in the markets that we serve. But there's others as well. And so signing up A lot of places that are traditional prepaid distributors requires a very different operating model. Operating in pawn shops, gas stations, convenience stores, this is a very different model than we're used to, but it's one that we have to get good at. And so we are building out our distribution in a lot of these areas, signing up prepaid specific distribution partners. That growth happens over time. It doesn't happen overnight. But I'm pleased with how our leader there, Megan Corcoran, is driving an increase in prepaid distribution. Second piece is around the product. You have to have a competitive product. It has to be priced competitively. It has to be structured competitively. And it has to have increments that are compelling to customers. We've made continued tweaks to that prepaid product. And once again, this is an area where I think our regional structure benefits us. I talked about trialing different price and promotion levels in our different regions in my opening comments. At the time, I was referencing mostly PostPay, but we're doing exactly the same thing with PrePay. So we have the opportunity to test different structures, see what works for customers, see what works in different times. A big opportunity for us in our footprint is appealing to migrant workers. Those price points are very specific, and they're specific for a very specific period of time. And so we have to get good at the product piece of it. And the final piece, and this is where I think I see the biggest opportunity, is around customer lifecycle management. Reaching out to customers in a way that is compelling after they join us, when their eligibility expires, getting them to re-up, getting them to re-up at a higher dollar value, so expanding ARCU. I see a lot of benefit there. It's a highly data-driven portion of the business. That means that you have to put the systems in place, the structures in place to be able to consume that data and use it intelligently. We're investing in that. And so I see our customer lifecycle management improving over time as well. In terms of specifics around a target, we haven't published that. What I can tell you is a lot more than we have today. We've been growing our prepaid business. I still see a lot of opportunity there. But again, we're generally very back of the envelope. Our market share in that business is about half of postpaid, and so we see a lot of room to run on the prepaid side via those three mechanisms I described.

Got it. Great. In terms of the performance of the tower business, how would you characterize the tower business performance over the past year compared to your expectations. The number of collocators per tower increased slightly, but it's still around about 0.5 per tower. And I know that tower deals are somewhat lumpy, and you are going to see some revenues from this probably later this year. But I guess what needs to happen in order for you guys to see a step change in this business over the next two years? As you're running this business more as a standalone tower company, what is your view on putting this business in a separate segment under your seller umbrella?

Two things have to happen for us to see a step change in this business. The first is we have to continue to improve our co-location rate. I think the team has put a variety of call it operational streamlining mechanisms in place to just make it easier for people to work with us. We were not particularly open for business a few years ago, and now we are. And I'm very pleased with how that team has created a structure to make it easier for co-locators. Cycle times have generally improved consistently quarter after quarter after quarter. And so we just have to make it easier to work with us. I'm very encouraged. by the revenue growth that we've seen thus far this year. As you mentioned, this is lumpy. It's a lumpy business. You're going to see some quarters you'll see 13, some quarters you see nine. We're targeting continued low double-digit revenue growth in that business. That's the first piece. And the second piece is more towers. The best way to accomplish that, and sorry if I'm a broken record on this, is I'm going to take you back to that infrastructure funding opportunity. It costs a lot of money to put a tower in rural America. Back of the envelope, $600,000, $700,000 to build a tower. And we've been investing in rural America for a long time. This is not me. This is the business. The business is good at it. We've been focused on rural for a long, long time. And if there was an obviously economical positive place to put a tower, we would do it. I think we have an opportunity to build some new towers to improve our current tower rent profile. We have some really high rent towers, and we can build new towers to put in place there. We have the opportunity to put some towers in place to reduce our roaming exposure. But in general, the big opportunity is new towers to improve coverage, and that is very difficult to do without some subsidies. doing that on a standalone economic basis is challenging. And so the reason I'm encouraged by the fact that IIJ allows for wireless and allows for fixed wireless is if we can get states to move some of their infrastructure dollars towards fixed wireless, we can put new towers in place to cover those consumers and those businesses with fixed wireless connection, but we can triple dip on the revenue. We have a revenue opportunity with fixed wireless, but then we also, because of the infrastructure subsidy that comes with that tower, we have the opportunity to improve our wireless operating metrics, improve coverage, improve customer experience, improve NPS, improve growth ads, improve churn. Then there's a third component, which is we can also drive co-location revenue. Almost by definition, if we're putting a tower in rural America, it's because there isn't a tower there before. It'll also be attractive to our competitors to co-locate on that tower. And so that's why the infrastructure bill is so important, because that's another opportunity to kickstart that business and to kind of take it to the next level. We don't have to have it. I'm very encouraged by the momentum that we're seeing. And if we can just continue that co-location momentum, as you mentioned, our co-location rates are still substantively below some of the leaders in the business. And so we have an opportunity to grow that over time. But that IIJA opportunity can really put it into overdrive.

Great. And my last question is probably for Ricky, but also for LT as well. So you guys obviously have a large portfolio of various infrastructure and investment assets across both businesses. a lot of it is sitting within your cellular and you are not getting much credit for it. So one asset in particular or group of assets is the wireless partnerships that you're getting cash distributions from. Recently, another telco, Consolidated Communications, agreed to sell their wireless partnership stakes to Verizon at about 11.5 times last year's cash distributions. If I put that kind of multiple on cash distributions that USL received, we could get to $2 billion valuation for those partnership interests for you. So my question is, what are your thoughts on surfacing value from those wireless partnerships? And more broadly, what types of moves, maybe on the financial engineering front, would you be open to that would help highlight the value of those assets and other infrastructure assets that you have or investment assets and surface value without meaningful sacrifices to your strategic and operating priorities.

So I'm going to have Doug talk to the wireless partnership questions, and then, Vicky, maybe you can give your perspective on Sarah's broader question. Doug?

Yes, Sergey. So the investment partnerships, obviously, they spin off a nice cash flow for us every year in the neighborhood of about $180 million. One of the challenges we have with selling those interests is they have a very low tax basis. So there is the pre-tax proceeds and the post-tax proceeds, and those are significantly different based on the low tax basis of the investments. That's not to say we would never entertain the... an offer that was very attractive, but that is a barrier and we've looked at that in the past and there's more compelling reason for hanging on to the investments as opposed to selling them on an after-tax basis. With respect to both investments and other assets like towers and highlighting their We're trying to do that here through our earnings call, giving you insights into what's going on with the towers. In investments, we obviously report on adjusted EBITDA to highlight the value that they're providing to the business as well as the cash flow. We're doing a lot of that. Certainly, we'll explore more over time, but nothing planned right now.

Yeah. Sergey, thank you for that question. From a broader perspective, I'm almost 90 days in, and I have been spending a lot of time focused on the businesses and the business needs and their long-term strategies. And first and foremost right now, my first priority is to make sure that I'm able to fund the needs that LT and Michelle have for the 5G build-out. We've paid for our spectrum. We've got the 5G build-out in front of us. You've heard LT talk about a number of growth opportunities that we are funding for long-term growth. And at TDS Telecom, we have a window of opportunity right now to fund our fiber builds. And so my first priority is to make sure that we're able to take advantage of those. Second, I want to make sure that I've got enough flexibility across my balance sheet to be able to Karen Grove- on the business needs and leave enough capacity and leverage capability, so that we can take advantage of opportunities as they come down the road. Karen Grove- And through that i'm looking across our our assets you've talked about the towers. Would we consider reporting our tower separately? Today, right now, we are reporting our tower revenues to show the double digit, the low single, the low double digit growth that LT talked about. As that becomes greater and bigger part of our portfolio, we might consider providing additional information to show the value more clearly to investors as that becomes a more meaningful part of our revenue growth. On the partnerships, just to add on to what Doug has already said, we recognize that our Verizon partnerships are very valuable. All of our partnerships are very valuable. And I would have to have a specific need, a source of funding that is needed in the business before I would consider a transaction. And that transaction would require a very high multiple, as you said. And so always looking at our entire portfolio and possible sources of funding in the future. Okay.

Thanks.

Great. Thank you.

Chris, we're ready for the next question.

The next question is from Michael Rollins with Citi. Your line is open.

Hi. Thanks for taking the questions. First question, just furthering on the tower discussion, when you look at your tower direct expenses? Has the external revenue that you're reporting from towers exceed the direct tower expenses? So before even considering what the allocation of rent could be from you being the anchor tenant on that, is it break-even or better? And then changing gears a little bit to other possible needle-moving opportunities for U.S. Cellular and TDS. Just curious if there's an update more strategically on network sharing opportunities or other things or other ways that you could think about managing the business and the operations over time. Thanks.

Thanks, Mike. I'll have Doug talk about your tower question, and I'll tackle the network sharing afterwards.

Yeah, good morning, Mike. On the towers, the incremental direct costs that we incur from a co-location are very small. So our incremental margin on co-locations is in excess of 90%. So what you're seeing in the way of revenue growth cruise right to the bottom line in operating cash flow growth. So that's why we feel really good about that revenue, and that revenue growth is really important to our profitability.

And let me tackle... Oh, just sorry, just to follow up on that PowerPoint just for one more second. In a situation where you have these direct rent costs, maybe you own some of the land, you rent some of the land, you have utility costs, if you just add up all those costs, forgetting a moment, the incremental opportunity, does the third-party rent more than offset your costs? In other words, if this is a business that is already – break even or better on a direct profitability basis?

Yeah, the short answer is, Mike, it doesn't totally offset our costs. Obviously, these costs are being incurred for our operating business and for our mobility and fixed wireless and all of our products. So the short answer is no, it's not a level where it offsets all of those costs. Okay, I was just curious about that. Thank you.

Mike, let me tackle network sharing. I'll expand your question just a tiny bit. In the long run, what we're committed to doing is to have meaningful expansion of return on capital in this business. That's the financial metric of success we've established for ourselves. We have a mission of connecting people, and the only way to accomplish that mission is through a lot of investment. The only way to do a lot of investment is if we drive a healthy return. And so we have a goal of expanding return on capital. Most of the mechanisms that we've talked about thus far are expanding the return side of that equation, driving revenue, driving profitable revenue, expanding OCF, and thus improving return on capital. I do see opportunity to improve the capital efficiency side. I won't beat the IIJ or STED any further, but I do think that is a meaningful opportunity to improve capital efficiency over time. If we can get infrastructure dollars to support our capital spend, it means we can improve return on capital. Network sharing is another big one. I've talked about this in prior calls. I do not think it makes sense to build four or five duplicative 5G networks in rural America. And if you think about 6G or 7G, what that's mostly going to involve is denser network builds to get capacity and to get intelligence closer and closer to the user. That requires a lot of capital, and that requires a lot of capital that's difficult to justify when you have really low customer density. And so I do think that network sharing is going to be a necessity. in the long, long run. And we're pursuing conversations to that end. I feel very good about our ability to hit our financial projections and to continue to move towards doubling of return on capital without a deal like that. So we don't have to have a deal like that to continue to expand return on capital. But in terms of a needle mover on capital efficiency, I think network sharing is a big one. And I do think we have an opportunity. I think we're good. We're a We're a very realistic partner for others to work with, and we're having those conversations. I've talked about that in past calls. These things don't move quickly, but I do think there's a good opportunity there.

And one last question. On the subject of DISH, they've signed some deals with a couple of the other national wireless carriers. Historically, your company and the regions in which you operate, you've been able to sign deals with different national carriers to your point about the sensibility of how much construction there really should be in some of these rural markets. Have you already entered into an IMVNO or any sort of roaming deal with DISH? And maybe you can elaborate on maybe the opportunities beyond maybe just some of the tower commentary. of the past?

Yes, so we have, as I mentioned, our biggest opportunity with DISH that we've entered into thus far is our tower MLA. I can't talk in more specifics about that, but we're optimistic about the opportunity to support them. I think we have a good opportunity to work with DISH in the same way we have a good opportunity to work with anyone who wants to expand their connectivity in some of the areas in which we operate. But beyond that, I can't go into detail on any specific agreements, Mike.

Thanks.

The next question is from Simon Flannery with Morgan Stanley. Your line is open.

Thank you. Good morning. LT, could you just talk a little bit more about the new promotions? It sounds like they're having a good impact. Help us understand what the accounting is going to look like for those promotions. How much of the cost will you need to take up front and how long will you amortize most of it over? And then on the partnerships, just coming back to that, it did look like the equity and earnings dropped about 21% year over year. I don't know if there's any kind of one-timers driving that, or has there been any change that is likely to go forward from here?

Simon, I think in terms of the revenue opportunity of those promotions, I talked a little bit earlier about The increased upgrade momentum that we're seeing, the increased add-align momentum that we're seeing, one metric we track fairly closely is the ratio of gross adds to voluntary defects. We're seeing improvement there. And so I'm optimistic that it's going to have the long-term effect that we want to have on upgrades, on churn, on add-aligns. Let me let Doug talk about specifically how the expenses of that promotion are managed, and then he can answer your second question as well.

Good morning, Simon. With respect to accounting for the promotions, think about about 40% of the cost of the promotion is recognized upfront on day one, if you will, and then about 60% is recognized in service revenue over the contract period, which is 36 months. That's how to think about the spread of revenue. There's offsets for revenue pickups and gross ads and things that we're gaining from the promotion. So those are all offsets as well when you think about total operating cash flow. Then moving on to your question about equity earnings and those being down, the single largest item was in the LA partnership starting in January of this year. The Verizon holding company initiated a spectrum lease with the partnership. That's Our share of that lease is about $15 million per year, so we're incurring that beginning this year. That wasn't present last year. In addition to that charge for the quarter, just various operating items that are different partnerships, including increased debt expense and increased network costs, and kind of across the board. But the single largest item is that new Spectrum lease.

Okay, so this is probably a good run rate, is it?

It is, yes. That would be 20-year, $15 million per year.

Okay, and then the 60% over 36 months, is that a contra revenue?

Yes, contra service revenue, yes.

Okay, great. And then just one last one, cost of service in wireless was strong. You talked about some of the roaming reductions and usage and stuff. How should we think about that going forward? Is there more to come there?

Yeah, we're, I mean, Mike and team have been doing a great job of managing that. And when I talk, when we talk about our cost optimization program, that's been the area where we've made the most progress and have some great wins. That being said, you know, you know, going forward as we do our 5G rollout, we also have pressure there as we, you know, incur more cell site rent, backhaul, and so forth for, you know, putting millimeter wave and mid band onto our cell site. So, you know, I wouldn't look for a continued decrease. I would look, you know, it's going to increase over time, but we're certainly looking to mitigate that through our cost optimization program.

All right. Thank you. Yep.

You're welcome.

We have no further questions at this time. I'll turn it over to Colleen Thompson for any closing remarks.

All right. Great. Thanks, everyone, for your time today. Again, please reach out to IR if you have any additional questions, and have a great weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.