Telephone and Data Systems, Inc.

Please stand by. We're about to begin. Good morning, ladies and gentlemen, and welcome to the TDS and U.S. Cellular Third Quarter 2023 Operating Results Conference Call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone. And if you would like to withdraw your question, simply press star one again. Now at this time, I'll turn things over to Ms. Colleen Thompson, Vice President, Corporate Relations. Please go ahead, ma'am.

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 sections of the TDS and U.S. cellular websites. With me today and offering prepared comments, are from TDS, Vicky Villacres, Executive Vice President and Chief Financial Officer. From U.S. Cellular, LT Theraville, 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. PDS and U.S. Cellular filed their SEC Forms 8 , including the press releases, and our 10Qs earlier this morning. 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 SEC filings. And with that, I will now turn the call over to Vicki Villaprez.

Vicki? Okay. Thank you, Colleen, and good morning, everyone. Before we get into the details for the quarter, I want to reiterate that, as we announced, in connection with last quarter's earnings call, the Board of Directors of TDS and U.S. Cellular have each decided to initiate a process to explore strategic alternatives for U.S. Cellular. We are not going to comment on that process at this time, however, to say that it is active and ongoing. With that, let's get into the details for the quarter. I am pleased that both business units delivered year-over-year improvements in adjusted EBITDA due to cost optimization programs and efforts to streamline expenses across almost every part of the enterprise. At the same time, we continue to make key network investments in order to take advantage of growth opportunities that can enhance our competitive positions. Year to date through September, U.S. Cellular made steady progress de-levering, reducing short and long-term debt by approximately $340 million while generating free cash flow. We also renewed the EIP facility for another two years at a very attractive rate. TDS was also opportunistic and entered into a $300 million secured term loan in order to fund our fiber expansion program. And while investing back into both our businesses is a priority, the current interest rate environment and access to capital remain a challenge. Going forward, we will pace and size our capital expenditures in order to remain within our funding capacity and leverage ratio threshold, even if it means moderating our spend in the near term. As you can see on slide three, at the end of the quarter, TDS and U.S. Cellular combined have available sources of liquidity, including cash and other sources. We have long-dated debt extending any sizable maturities until well into the future. This helps us to manage the balance sheet effectively by keeping short-term maturities to a minimum while we are investing to deploy fiber in new communities and continuing our multi-year mid-band deployment. With that, I'll now turn it over to LT.

Thanks, Vicki. Good morning, everybody. If we turn to slide five, even with the August 4th announcement of the review of strategic alternatives for U.S. Cellular, it's important that we remain focused on operating the business to produce the best operational and financial results possible. And I'm pleased to update you on our progress this morning. First and foremost, our top priority remains improving our customer trajectory. while balancing subscriber growth with financial discipline. And while financial results are on track, driving subscriber growth additions remains our primary challenge amidst a very challenging competitive environment. Postpaid ARPU was a highlight again this quarter, increasing 2% as the team has done an excellent job in helping our customers realize the value of our premium plans and services. And this ARPU growth was particularly impressive given the significant number of flat rate customers that we added to the base. These flat rate plans were designed to compete against the wireless offers that cable companies have been flooding the market with. And we're seeing strong adoption, almost 40% of postpaid handset gross ads in the quarter on those flat rate plans. We remain pleased with our flat rate plan performance, and I'll remind you that these plans deliver similar lifetime economics as our other offerings, since the cost of the device is borne by the customer. Another accomplishment in the quarter was that adjusted OIBDA and adjusted EBITDA improved significantly, up 35% and 28% respectively over the past year. We were free cash flow positive in the quarter and for the nine months ended in 2023, and we expect to be for the full year. I'm really pleased with the cost efficiency that our team has driven, particularly in that challenging competitive environment. And speaking of the competitive environment, as it relates to driving subscriber growth, we're being very targeted and deliberate with our promotional spend. We're pulsing campaigns from time to time based on various factors in a given market. As we head into the busy holiday selling season, you'll see us running a number of aggressive promotions designed to target new subscribers as well as incent upgrades for our existing customers and thus increase the percentage of customers in contract. Those aggressive promotions are needed because the market for wireless customers is certainly what I would characterize as fiercely competitive. That competition includes our traditional competitors, AT&T, Verizon, T-Mobile, but also increasing in significant pressure from the cable companies that resell wireless. Those now compete with us in about 60% of our footprint. This year's Apple launch is a good example. You saw hyper-aggressive offers in the market, It's important to note that cables combine pricing and promotional tactics for pressuring industry ARPU. These competitive dynamics result in ARPU and margin pressure, and that subsequently challenges the ability to invest in network capacity and future technology developments. This is a really important shift in dynamics for our industry. While I think our results show that we're striking a balance between subscriber growth and financial results, As an industry, we should be focusing on the actions required to balance competitive pricing with the investment capacity required to effectively keep the US globally competitive. Turning to growth initiatives, our third-party tower revenues had another strong quarter, revenues up almost 8%. As the wireless industry's moderated capital expenditures in 23, we've experienced a slowdown in new tenant and amendment activity in the second and third quarters. And I do expect that will impact tower revenue growth rates in 2024. That being said, we still believe we're uniquely positioned in the tower space, and I think we have a lot of opportunity to grow. Fixed wireless continues to be a bright spot for us. Fixed wireless revenues were up 35%. We finished the quarter with 106,000 customers. To date, the vast majority of those subscribers are running entirely on low band spectrum. We expect strong subscriber growth to continue with the launch of our mid-band spectrum. I'm pleased that we received access to C-band spectrum a few months earlier than planned, and we're consequently able to further improve our 5G network experience faster than initially anticipated. As mentioned earlier this year, we've been upgrading a number of sites so they can be deployed as soon as we receive mid-band clearance. So those sites are now operational, and they allow us to bring faster speeds and more capacity to mobile and to our fixed wireless customers, and we're doing that earlier than we expected. Our mid-band deployment is multi-year, like all of our deployments. By the end of 2024, almost 50% of our data traffic will be carried on sites that are equipped with mid-band. And where we've enabled mid-band, we're marketing a 300 megabit fixed wireless product, and that's really competitive in the marketplace. And briefly, on average, our fixed wireless subscribers are using about 170 gigabits per month this year. That's significantly lower than our peers. However, I do expect that our customers' usage is going to grow as they get access to the upgraded mid-band experience. And one other note on network initiatives, we will be shutting down our CDMA network at the beginning of 2024. The team has done a great job migrating the base away from CDMA-dependent devices. Less than 42,000 customers or less, and that's down from 386,000 just 18 months ago. We believe we're going to continue to see more customers migrate over the next several months. We intend to re-farm that spectrum to support our LTE network, and we expect to see additional systems operation savings once that CDMA network is fully shut down in 2024. As always, I want to thank the team for all their hard work and continued dedication. I'll now turn the call over to Doug Chambers to provide more details on our financial results. Doug? Thanks, LT. Good morning.

Let's start with the review of customer results on slide six. Postpaid handset gross additions decreased year-over-year by 23,000, largely due to the intense competitive environment from traditional carriers and MVNOs, as well as a decline in the pool of available customers. Correspondingly, postpaid handset net additions were down 16,000. Connected device gross and net additions include fixed wireless subscribers, and as LT mentioned, we continue to see great momentum in fixed wireless, with our base of customers up 57% in the prior year and up 10% sequentially. Postpaid handset churn decreased year-over-year and increased sequentially. The sequential increase is partially due to seasonality and a decrease in our in-contract customer base. Also, we have been experiencing a positive trend in postpaid handset churn over the past year due in part to the aggressive device offers to new and existing customers that we maintained from mid-June 2022 through February 2023. Moving to slide 7, prepaid gross additions declined $10,000. and net prepaid additions decreased to 2,000. In terms of gross additions, the overall pool of available customers declined year-over-year, which we believe is partially driven by competitively priced postpaid offerings. Now let's turn to the financial results starting on slide 8. Total operating revenues for the third quarter decreased 11%. Consistent with the industry, we saw a decline in upgrade rates contributing to the lower equipment sales. Service revenue declined 2% due to a decrease in our average retail subscriber base and roaming revenue. Inbound roaming revenue declined 53% as a result of negotiating lower rates with other carriers. Note that this decrease in inbound roaming revenue was almost entirely offset by a corresponding decrease in our outbound roaming expense despite a 58% increase in our off-net data traffic. On the positive side, LT mentioned the increase in post-paid hour proof. This increase is partially driven by increased device protection revenues and favorable plan and product offering mix as a result of customer adoption of our higher value, higher tier plans. We continue to see consistent growth in our highest tiers of unlimited plans, and as of the end of the quarter, 46% of our post-paid handset customers are now on these higher tier plans, and that's up from 38% just one year ago. Now let's turn to tower results on slides nine and 10. As you can see, the business delivered another strong quarter with 8% revenue growth. Including U.S. cellular sites, our tower tenancy ratio is currently 1.54, up from 1.46 just two years ago. We've also added a couple of additional disclosures this quarter to provide you with insight into both the geographical diversity and carrier composition of our tower portfolio. As we noted last quarter, our towers are well positioned geographically, with about 30% of them not having a competing tower within a two-mile radius. And you can see that our tower revenue is well distributed among the large wireless carriers. Next, let's turn to our quarterly operating performance shown on slide 11. For this discussion, I will refer to adjusted operating income before depreciation and amortization as adjusted operating income. As I noted, total operating revenues declined 11%. However, with lower device sales, lower promotional costs, lower bad debts expense, and a steadfast focus on controlling costs, cash expenses decreased, and this declined more than offset the decline in revenue. System operations expense declined 6% due primarily to the previously mentioned decrease in off-net roaming expense. In 2024, we will begin to realize net savings associated with the shutdown of our CDMA network that LT previously mentioned, offset partially by decommissioning costs. Starting in 2025, we expect annual run rate savings of approximately $30 million related to the CDMA shutdown. These expected savings will help mitigate expense increases associated with our ongoing 5G mid-band deployment. Loss on equipment or equipment sales less cost of equipment sold decreased $25 million as a result of lower device sales and promotional costs. As previously mentioned, we ran an aggressive new and existing promotion for the entire duration of the third quarter of 2022 and did not execute this level of promotional intensity in 2023. Selling general and administrative expenses decreased 10%, driven primarily by decreases in bad debts expense. and the favorable impact from the reduction of workforce that was executed in the second quarter of 2023. As we indicated last quarter, we estimate full-year run rate savings related to the reduction in workforce of approximately $45 million, which we expect to fully realize in 2024. Wrapping up this slide, adjusted operating income increased 35% in adjusted EBITDA, which incorporates the earnings from our equity method investments along with interest and dividend income increased 28%. Both of these amounts have been adjusted to exclude the $3 million of expenses incurred in the third quarter related to our strategic alternatives review. Capital expenditures decreased 18%, mainly driven by the timing of expenditures in 2023 relative to the prior year. Free cash flow was $237 million the nine months ended September 30, 2023, and we expect healthy positive free cash flow for the full year 2023 as we continue to invest in our multi-year 5G mid-band deployment while prudently managing our free cash flow. As shown in slide 12, service revenue and capital expenditure guidance remains unchanged. Further, we have retained the midpoints of our adjusted operating income and adjusted EBITDA guidance and tightened the ranges of these measures reflecting reduced uncertainty given we are in the beta stages of the year. I will now turn the call over to Michelle Berkwiecki. Michelle?

Thank you, Doug, and good morning, everyone. Turning to slide 14, I'll share third quarter highlights for TDS Telecom. Our team delivered 61,000 fiber service addresses in the quarter, our highest quarter to date, bringing our year-to-date total to 127,000 at the end of September. Given where we are in the year and the strong momentum we've had, we are raising our 2023 goal to 200,000 fiber service addresses, up from 175,000. Another important milestone for our fiber program is that we expect all of our expansion markets will be launched by the end of 2023. These markets are primarily in Wisconsin and the Pacific Northwest. And a few of our recently announced markets are Missoula, Butte, Helena, and Great Falls, Montana, Twin Falls in Caldwell, Idaho, and Fond du Lac in Sheboygan, Wisconsin. Another important highlight this quarter is that TDS Telecom elected to participate in the Federal Enhanced ACAM Program in 24 states. This program will provide us with revenue support through 2038 in return for us delivering increased speeds of 100 megabits down and 20 up to about 270,000 locations. As a reminder, the existing ACAM program provided $82 million a year through 2028. The new program increases the revenue amount to approximately $90 million per year beginning in 2024 and extends through 2038. Therefore, we expect to receive a total of about $1.3 billion of eACAM revenue support over the next 15 years. We anticipate this program will help to accelerate the delivery of higher-speed broadband to various rural, high-cost areas that we serve. This is a fantastic outcome for TDS Telecom and our customers. Now let's jump into our quarterly results, starting on slide 15. As you just heard, with our successful fiber service address results, we have increased our fiber service address goal to 200,000 this year. We are really proud that we have developed a strong competency in managing builds and navigating challenges. Longer term, you can see where we are in our scorecard. We are targeting 1.2 million marketable fiber service addresses by 2026. We ended the quarter with 709,000, so we're making good progress. We are also targeting 60% of our total service addresses to be served by fiber by 2026. We ended the quarter with 44%. This reflects progress in growing fiber through our expansion markets, as well as fibering up our incumbent markets. Specifically, by 2026, we plan to serve half of our ILEC addresses with fiber. At the end of the quarter, 40% of our ILEC was fibered up. And finally, we are expecting to offer speeds of one gig or higher to at least 80% of our footprint by 2026. We finished the quarter with 69% at gig speeds. We continue to believe these long-term targets are achievable. Although our address delivery numbers may fluctuate from year to year, depending on a number of factors, our 2026 goals remain front and center throughout the organization. And we are pleased with the results of our fiber builds to date. We continue to achieve the broadband penetrations that are projected in our business cases. On slide 16, you can see that we are growing our footprint with an 11% double digit growth in total service addresses year over year. Shown on the graph on the right, we see increasing demand for higher broadband speeds, with 75% of our customers taking 100 megabits per second or greater, up from 69% a year ago. We continue to increase the availability of gig plus speeds, and we're now even offering eight gig speeds in certain markets. Customer take rates of these feeds are growing with 14% of our customer base on one gig or higher at the end of the quarter. Our broadband investments are driving positive results, including a 10% increase in total residential broadband revenue. As shown on slide 17, we experienced a 5% increase year over year in total broadband residential connections. Average residential revenue per connection was up 3% due to price increases in product mix partially offset by promotions. As shown in the chart on the right, we had another quarter of 4% growth in residential revenues, with expansion market residential revenues increasing to $20 million in the quarter. This aligns with our expectation of steady revenue growth following the timing of service address delivery as penetration ramps in these new markets. Residential wireline incumbent and cable revenues were flat as a decline in video and voice connections was offset by price increases in growth and broadband connections. Our wireline incumbent, which includes our ILAC markets, is facing increasing competitive pressures. We consider capital prioritization and expected economic returns as we respond to competition in select ILAC markets with fiber builds. The EACAM program will provide funding to help us defend these markets. As expected, commercial revenues decreased 12% in the quarter, primarily driven by lower CLEC connections. And lastly, wholesale revenues decreased 3% for the quarter, primarily due to lower special access revenue. On slide 18, you can see our quarterly performance. Operating revenues were flat in the quarter as the growth in residential revenues was offset by the decline in commercial and wholesale. Cash expenses decreased modestly in the quarter. This decrease is a result of our intense focus on cost efficiencies and discipline spending. As a reminder, the expense results shown here include the cost to initially launch our fiber markets, which are incurred upfront and prior to generating revenues. Adjusted EBITDA was up 3% in the quarter as a result of the decrease in cash expenses. Capital expenditures of $172 million were up modestly from the prior year due to our investments in fiber. Keep in mind that these investments support our multi-year strategy and our goal of increasing free cash flow and return on capital over the long run. Slide 19 shows our 2023 guidance. We are keeping our revenue guidance range unchanged from last quarter, although we expect to be towards the low end of our range of $1.03 to $1.06 billion. Even though we are expecting to deliver more fiber addresses than originally planned this year, the majority will be launched in late 2023, and it will take time for penetrations and revenues to build. Adjusted EBITDA is expected to remain between $270 and $300 million in 2023. As we look forward, we are still on track to have our expansion communities launched this year. This means we can begin serving customers and generating revenues. Starting next year and over the next several years, we expect our broadband penetrations, revenues, and adjusted EBITDA to grow. Moving on to CapEx. Consistent with our uptick in expected fiber service address delivery and our investments to establish internal construction crews, We are now expecting capital expenditures for this year to be approximately 550 million. As Vicki mentioned earlier, going forward, we will continue to size and pace the timing of our capital expenditures to be commensurate with our financial capacity. Due to the pull forward of service addresses and corresponding higher CapEx in 2023, Next year, we plan to slow our spending and focus on driving broadband penetration and revenues in our new fiber markets. Service addresses in 2024 will likely be closer to what we delivered in 2022. In summary, we remain on track to achieve our 2026 fiber program goals, recognizing the number of service addresses may fluctuate from year to year. We will give more specific guidance for 2024 during our year end call, However, we wanted to provide directional insight on next year's fiber program in the context of our expected address and CapEx results for 2023. In closing, I want to acknowledge all of the TDS telecom associates. It is taking a tremendous amount of engagement and adaptability to execute on our strategy, and I want to thank the entire organization for pulling together to make that happen. I'll now turn the call back over to Colleen.

Okay, we will now open up the call to questions. As a reminder, our focus today is on the quarter, and we will not be taking questions on the Strategic Alternatives Review for U.S. Cellular. Operator, we are ready for the first question.

Thank you, Ms. Thompson. Just a reminder, ladies and gentlemen, any questions this morning, please press star 1. And if you find your question has already been addressed, you can remove yourself from the queue by pressing star 1 again. We'll go first this morning to Rick Prentice at Raymond James.

Thanks. Good morning, everybody.

Morning, Rick.

First question, thanks for the extra color on the tower revenue distribution pie chart. Have you had a chance to think through of the T-Mobile 29%, I think it shows, how much is Sprint or potential Sprint churn that might be out there? LT, I think you mentioned that you expect the industry CapEx low now will affect the 24-hour leasing revenue, but just also worried about kind of a churn effect.

Yeah, good morning, Brett. We don't, so the sprint TMO disconnects. A lot of that activity occurred in the fourth quarter of last year and the first quarter of this year. We've had about 100 cumulative lease terminations as a result of the merger. That's slowed way down in the second and third quarter, so we think we're through most of it. So the short answer is We don't think there's a lot left with respect to additional terminations. And you can see sequentially our tenancy rate went down a little bit because of that exact reason.

Okay, that's what I was going to say. Okay. And then on fixed wireless, obviously you've got the C-band now earlier than originally planned. Can you help us understand where you think the addressable market is as far as households for the fixed wireless product? How many houses do you cover now? How many households would you like to cover over the next couple of years, just so we can kind of size that opportunity?

Yeah, sure, Rick. So let me talk a little bit about the dynamics there. I mean, the first dynamic is, I mentioned it in the prepared remarks, but as we turn on our mid-band spectrum, that allows us to both provide better speed experience to our customers. It also allows us to handle more capacity. One of the things I pay a lot of attention to is, you know, do we need to stop selling anywhere because of the impact that fixed wireless subs are putting onto the mobile network? And thus far, we've been able to restrict any stop sales to a truly very, very small number of towers. And so, The impact on the mobile network has been manageable thus far, and we expect that to continue because we are going to be targeted in how we roll out mid-band. Part of the rationale for which towers we choose to put mid-band on is the demands placed on it by fixed wireless. And so at a high level, if you look at the growth rate that we've experienced in the past over the last, let's call it 18, 24 months, I expect that growth rate to continue The final full potential of that product, it's a little bit difficult to predict. You have to think through both how the product plays competitively, and certainly if I just look at how well it matches up against cable products and upgraded fiber footprint and so on, I could see that product growing to 400,000 or more households. The challenge, though, will come as those households come on board, as they start using mid-band spectrum. Obviously, the usage per household increases as well. And so you have to scale that back a little bit based on demands on mobile capacity. I don't know what that looks like yet because we're in the very early days of rolling that product out. Thus far, we're very bullish. We haven't had to, like I said, shut down any sites or stop selling on any sites. But I think probably $400,000 is the absolute top of the addressable market range, simply because you're going to have to dial it back based on capacity needs. Hopefully that answers your question.

It does. And the final one, it's a theoretical question. I'll try and slip that in there. When you think about the difference between oil budget and EBITDA, the large part is the minority interest. You guys receive dividends from those minority interests. So if you think about one of the strategic alternatives might be to do something with the minority interest, how should we think about, theoretically, why sell something where you get a dividend? Is there some tax-efficient means? Would you consider stock? Just try to think through the logics of that minority interest line item of what might be interesting to do and why.

Yeah, so I mean, as you mentioned, I mean, we do see healthy cash flow distributions from those partnerships. We're happy with how those partnerships operate. How those partnerships interact and influence the strategic assessment, I'm not going to comment on today.

One thing that maybe is safe zone is would stock be a consideration instead of cash if things were looked at as kind of when you think about tax efficiency methods?

Yeah, yeah, Rick, we're not going to comment on any questions that relate, you know, in that area. So, we're just not going to comment on any outcome, implications. We're not even going to speculate today. But thank you.

Can't blame you.

Thanks, Rick. Operator, next question.

Thank you. We'll go next now to Phil Cusick at JPMorgan.

So you said no outcome or implications, but is there anything you can say about timing in terms of where we are and when we might hear something?

Yeah, thanks, Phil. Thanks for the question to both of you. It is an opportunity for us to reiterate our comments. You know, our announcement on August 4th, we are focused on all strategic options. you know, that are in the best interest of the company and its shareholders. And this process is active and ongoing. That's all I can comment on right now. And I'm not going to comment on the timing or speculate on the timing either. But thank you.

I fear it's worth a shot. Okay. So, you know, LT, you're pretty clearly paying back on mobile spending, accepting the slower growth as it comes with that. Does it make sense to pull back further on sales and marketing, especially in a quarter where the noise volume will be high from here to save even more money given the strategic review? And also, are you paring back on CapEx as well near term because of the review as well?

So what we try to do is we think about balancing our promotional spend is matching the volume of that spend to the available volume in the marketplace. Fourth quarter, because of holiday, is when we see the highest level, certainly, of switching activity, and we need to match that available switching activity with as much volume as we can put in the marketplace. I'm not adjusting our promotional spend or our capital spend based on any potential outcomes of this strategic review. What we're doing is we're adjusting that spend based on what we see as dynamics in the marketplace. In the third quarter, we saw an opportunity to pull back a little bit in terms of spending, and you see that in our strong financial performance. We see there's going to be an opportunity in the fourth quarter, particularly on the upgrade side, to ramp up our volumes, and so we plan on aggressively pursuing those. As far as capital goes, the capital moves have really been driven by two factors. The first factor is we're very comfortable with the results of our 5G modernization program. We now have 5G active on sites that carry 80% of our traffic, and Mike and team have done a really nice job of rolling that out. And so what we're able to do is we're able to slow our capital spending associated with 5G, while at the same time, we're replacing some of that spending with mid-band. We mentioned it on the call. We got early access to that C-band spectrum. Where we roll that out, we see really strong mobile performance, and it helps us sell a better fixed wireless product. And so much of that slowdown in CapEx that's associated with 5G is being replaced by acceleration of mid-band and the net of it is what you see in our both in our numbers for this year and and thinking about next year uh fairly similar capital uh capital spend as well um so so capex and promotional approach really driven by Marketplace Dynamics not being influenced by the strategic assessment okay thank you and then one for Michelle if I can

Can you dig more into the competition in the ILAC markets? Is that cable footprint expansion you're alluding to, or maybe fixed wireless? I'm a little surprised that ACAM funding can be used to defend yourself against cable incursion. Is that what's going on?

Hi, Phil. Thanks a lot for the question. Yeah, so in our ILAC, we are facing a little bit more of a competitive pressure than we had in prior years. And it's not primarily coming from fixed wireless Cable's always a tough competitor for us, but it's starting to be some of the smaller fiber overbuilders are starting to come into some of our ILAC markets. And so we have been very focused on our ILAC for the last decade. We've been building fiber in our ILAC, and so we've got 40% of our ILAC fibered up right now. We have goals to continue that, and that's a really great way to defend and compete in those markets. And we do see that the EACAM program, once we get those builds going, those are going to be fiber builds. And that will also be a way that helps us defend those ILF markets from those fiber overbuilders from potentially coming any farther or entering in the first place.

Okay, thank you.

Thanks, Bill. Next question.

Thank you.

We go next now to Simon Flannery at Morgan Stanley. Great. Thank you very much. Good morning. LT, just following on on the FWA, good results continue there. Could you just give us a little bit on the profile of these customers, where they're coming from? Is this in kind of more suburbia? Are you seeing them in more rural areas? What's the kind of the sweet spot here for that customer base? And then just coming back to the point you were making about the competitiveness in wireless, cable's been aggressive for some time. Their ads have sort of leveled out here for a few quarters. Were you seeing something new? Was it more players in your markets? Or what was the delta here in the last few months that you were kind of trying to highlight? And then maybe just one last one on the fiber side. The slower build, so you're going to concentrate more your builds next year on in or out of region on the fiber side.

Thanks, Simon, and kudos to you for not trying to slip in a strategic assessment question. We appreciate it.

I give up.

Yeah, I know. It was appreciated. Yeah, let me start with fixed wireless. Interestingly enough, we actually see a fairly decent blend of customers. So, I mean, I'll remind again, right, this is a low-band product, almost exclusively we've been selling on thus far. which would lead you to believe that it would skew heavily rural, where the primary competition is satellite or DSL. And interestingly enough, we've seen a really good blend of customers. There's no switching information out there, so we don't know. It's not like they're switching a number over. So we don't know exactly who they're coming from or if they're necessarily adding you know, maybe a backup connection. So we don't know where they're coming from. But the geographical mix would indicate that we're taking from cable and we're primarily, and in many cases, we're even taking where cable has upgraded their plant. And so that's also what gives me a lot of optimism about the mid-band fixed wireless as we roll out that 300 meg product. It isn't purely just a speed game. There's a simplicity of installation There's a positive customer experience associated with this product. Our churn continues to go down on the product. We continue to see really good churn performance. And so it isn't just a rural-oriented product as, frankly, I had initially assumed it might be. We're seeing really good performance even in places where cable is quite active. The one place I can tell you where we have not seen significant progress is places where you've got fiber. So if you've got a dense fiber build, the economics of the product, it's pretty difficult to compete against those, against the physics that fiber provides. We see a really robust blend. Let me switch to the cable, your question about cable, what's different. Really two things are different for us. The first is you've seen just a steady expansion of their footprint. So early on, U.S. Cellular was a bit insulated from cable competition because they started in large cities. And so our competitors saw a larger competitive impact from cable than we did. I think a few quarters ago, I mentioned that we saw cable competition in 50 percent of our footprint. As of today, it's 60 percent of our footprint. And so we've simply seen an expansion of that cable competition. The other dynamic that I expect to see that I would just highlight is, up until now, we've had the large cable companies providing an MVNO and providing that wireless service, and I expect that we'll see smaller cable players do that. I expect to see smaller cable players roll out a wireless service, and that will create a little bit of increased competition. And the final dynamic that I think is kind of interesting is that we're seeing a larger amount of the cable players start to subsidize devices. I think that's going to be a really interesting dynamic to track because in the early days, it's quite easy to offer wireless service and see really positive net ad performance because one, you obviously don't have to deal with churn dynamics of customers rolling off of your service. And two, you can cherry pick in the sense that you can take customers who maybe aren't ready to upgrade their device and that's who you offer service to. And I think that's what cable's done. Now I believe that business is mature enough inside some of the larger cable players that they're having to deal with customers who now want to upgrade their device. And where they don't provide some form of subsidy, they'll start to have to deal with churn dynamics And so I think that that subsidy, and we saw that in the iPhone launch, by the way, the subsidies that cable is providing is a third dynamic that I'm tracking pretty carefully. And for the third question, Michelle, I'll hand it to you.

Thanks, LT.

Yeah, thank you.

Yeah, thanks, LT. And thanks for the question, Simon. So you asked about next year whether we're going to prioritize fiber in or out of region. I can tell you the short answer is it's going to be prioritized on out of region. But let me give you a little bit more context as to why that's our focus. So as I mentioned, in 2023, given our momentum, we have allowed ourselves to spend more this year and to deliver more addresses in 2023. And then we can start selling into those addresses. But next year, we do plan to slow our spending. And we do expect addresses to come in lower. And we expect CapEx to be lower next year than it has been in the 2022 and 2023 levels. And we're able to do that by prioritizing our spending for a number of reasons. So one of the reasons is because of the eACAM program. In 2023, we're going to wrap up our existing ACAM obligations and milestones and spending. And then we're going to pivot and shift our focus to planning and engineering and getting contractors lined up so that we can start delivering the higher speeds and doing those builds to more addresses that are now going to be in that program starting in 2024. So there's going to be a period where we're not spending quite as much on ACAM while we're doing that spending. And then that will ramp up more significantly at the end of 2024 and going into 2025. But because of that EACAM program, that also is going to allow us to not spend as much in our base business, because we know that that EACAM funding is coming and will help fortify those markets through that program. So we're able to back off a little bit on some of our incumbent spending of CapEx and in-builds next year, sort of waiting for that EACAM funding to be able It's not necessarily that we're waiting for the funding, but waiting for that EACAM work to begin to be able to really start giving a lot more attention into those ILEC markets. So that's why we're able to then focus and prioritize a little bit more on our out-of-territory, our expansion market regions next year. So hopefully that helps.

Yeah, helpful. Thank you.

Okay, next question.

Thank you. We'll go next now to Michael Rollins at Citi.

Thanks, and good morning.

Just a couple follow-ups. First, on the wireline side, just curious, as you look at the goals for 2026, can you give us an update in terms of the total spend to get to those goals, whether it's on a gross basis of just capital investment needed to get to that point, on a net basis, so what the net funding need for the business is over the next few years. And then on the wireless business, you commented a little bit earlier on the churn dynamics. And I'm curious, when you look at your churn versus maybe where some of the national carriers are, is this the obvious opportunity to try to push that down 20, 30, 40 basis points?

and improve the total subscriber postpaid phone trajectory for the business thanks hi mike this is michelle i'll start and then let let lt jump in um so in terms of fiber funding and our 2026 goals you know i'm not going to give guidance or specific numbers you know beyond 2023 right now but i can give you some some context um you know we we do still believe that those 2026 goals are achievable we still have a plan in place to get to those 2026 goals it will take you know additional capex versus where telecom had historically been you've seen the elevated capex in 2022 2023 but what i can tell you is that for 2024 directionally i can tell you anyhow that capex is going to be lower next year And that's for a couple of reasons I just mentioned about ACAM. We're going to be spending a little bit less on that as we get our planning going for the new program. And in our incumbent and in our cable markets, we are being very prudent with CapEx. We are identifying anything that can be reduced or deferred, especially knowing that that eACAM program work is coming and can address some of the needs that we have in our ILEC markets. And then third, another reason that CapEx will be lower next year is on our expansion markets, you've seen very elevated CapEx the last couple years. But a lot of that has been to get that upfront spending in in order to get those markets launched. And by the time we get done with this year, all those markets will be launched, which means that that upfront spending will largely be behind us. And that's things like, you know, getting the hub sites, cabinets placed, transport routes, things like that. So going forward, we're going to be able to deliver addresses at an incrementally lower cost than what we've had in the last couple of years. So that's also going to be able to bring our CapEx down slightly next year, or not slightly, but just bring it down commensurate with the addresses that we're expecting to deliver next year. So we've been really disciplined with CapEx, OpEx, We're focusing on growing our EBITDA and managing our CapEx so that we can self-fund this fiber program as much as possible. And that's really important to us as we manage within our leverage that we're comfortable with and considering capital markets today and the high cost of capital. So CapEx will continue to be elevated, but just know that our Our focus is to try to drive profitability and manage CapEx such that we're able to self-fund as much as we possibly can.

Mike, let me tackle the churn question. I mean, the simple answer to your question is yes, but you probably want a little bit more color than just yes. So talking briefly about churn, I mean, what you've identified as the opportunity, which is how do we continue to drive that churn number down? But we do see that as the biggest opportunity to improve our net ad performance. Doug mentioned in his prepared comments about the positive trend that we've seen in post-paid handset churn over the past year. And the thing that's driving that is the aggressive offers that we had in the marketplace around new and existing. New and existing basically means, hey, we're going to provide attractive upgrade offers. We saw a lot of customers adopt those, and that's helped us with year-over-year churn. We plan on doing something very similar through the holiday period. So we're focused very carefully on upgrades, improving our in-contract rate. It's something, it's spend that we see as efficient. So the money that you spend on those upgrade offers is not cheap, right? It's an aggressive offer you have to put in the marketplace. But it works, and the reason it works is you get customers in contract, and in contract, customers churn at a much lower rate. So yes, we do see that as the biggest opportunity in front of us in the next couple of months.

Thank you. Next question.

Thank you. We'll go next now to Sergei Dujevsky at Gabelli Funds.

Good morning. Thank you for taking the questions. Good morning, Sergei. My first question is for LT on the tower business. Could you talk a little bit more about the progress that you're making in increasing the number of collocators? But more broadly, I guess if you could talk a little bit about the medium-term strategy for the tower business. What has been working well so far? What do you still need to improve in order to gain a much larger scale and have a more pronounced revenue growth in this business.

Hi, Sergey. The improvement in co-location, the numbers on the slide, we're up 2% year over year, but to speak a little bit more about that, the growth itself in terms of new tenants and in terms of amendments on existing towers has slowed. But we think that's slowed because of, let's call it macro industry dynamics, not because of anything that we are or aren't doing well in terms of marketing the towers. We've mentioned it. We've slowed our capital spend. If you look at our competitors and their announcements, they're doing the same thing. And we're seeing the impact of that as we see new amendments and new co-locators in the tower businesses. By the way, that's entirely consistent with our tower competitors as well. They're seeing and reporting exactly the same thing. Midterm, we remain optimistic. And the reason for that optimism is there's several. The first, let me just start from a macro industry demand perspective. The FCC does not have spectrum authority right now. By the way, I think that's a travesty. But nonetheless, there's no spectrum auctions on the horizon. And even though we haven't seen the spectrum plan from the NTIA, there's no obvious near-term mid-band spectrum that they're talking about releasing, notwithstanding my best efforts to try to convince them otherwise. What does that mean? It means that as we get into 6G, the way that you're going to be able to support the increased demand from wireless customers, whether it's consumer, whether it's enterprise, is going to be with a denser grid. You either have to put more spectrum on the existing grid. We don't currently have a roadmap towards that. And so if wireless companies are going to support that need, they're going to have to densify their grid. And a denser grid in the long run is good for a tower business, and it's particularly good for our tower business. And the reason I say it's particularly good for our tower business is that I think that our towers are particularly differentiated in terms of their proximity to other competitive towers. Doug mentioned in his prepared remarks, 30% of our tower portfolio doesn't have another tower within two miles. And what that means is as we move towards 6G and as the needs of the network get towards higher and higher bandwidth, those towers are going to be particularly differentiated. And so you couple that with the fact that our existing co-location rate is already significantly below our competitors. I view that as only upside. Couple that with wireless companies are going to have to densify, and our tower portfolio is really well positioned to support that densification. That's why we remain really optimistic about the long-term growth in this segment. And while I say segment, it's not formally a segment. The long-term growth in this portion of the business and notwithstanding some of the kind of more near-term slowdowns that we're seeing as folks pull back on capital. Hopefully that gives you a sense about how we're thinking about it.

Yeah, thank you. And my second question is both for LT and Michelle. So I think earlier this year, management of both companies talked about kind of stepping up collaboration efforts, including an NMVNO relationship, reselling each other products, potentially applying for government funding together. So I was wondering, we're close to the end of the year, where you are in this collaboration process and looking into 2024, I guess, to what degree does it make sense to apply for bid funding or other government funding together or roll out fiber services in some of the U.S. cellular markets, if it makes sense to explore possibilities for a bundled offering. And any other thoughts you have on kind of broader collaboration?

So, Sergei, I'll let Michelle talk about MVNO and how she and TDS are thinking about that. In terms of collaboration opportunities, you keyed on two of them. I think we continue to explore opportunities where we can co-sell. We have multiple pilots running where our footprints overlap. It's a relatively small overlap as far as, you know, U.S. Cellular's overall footprint. But where we do, we continue to see if there's opportunities for us to market and sell and serve TDS's wire line products, particularly fiber. You keyed on bead. I think that could be a really interesting opportunity. But we have to wait and see how the states are going to define the bid parameters. Let me just explain what I mean. It's not clear to me if states are going to create a set geography and then put that, so let's call it, you know, one quarter of a state or a tenth of a state or a county. And they're going to say, please bid on this geography. and what it would cost to connect all the homes in that geography, un- and underserved, with whatever the best technology is that you have. If that's the way states should choose to approach it, I think fiber companies of any sort, including TDS, are going to have to partner with wireless players because there's almost certainly going to be homes in that geography that's not cost effective and it's not time effective to connect with fiber. Beautiful thing about this is obviously we already have an existing, you know, solid partnership and solid connections with TDS. So we think we'll be particularly well positioned to bid for those areas where states choose that approach. But there's a different approach they could take. The second approach they could take is instead they could define a geography and they could say, okay, fiber players. please bid for whichever connections, whichever homes you think you can connect in this area with fiber. And then they could come back with a second round and say, okay, whether it's wireless players, fixed wireless with, I don't think satellites particularly going to play very well, but they might try to. Can you now, what would it take for you to cover the rest of those homes? In that situation, there wouldn't be as much opportunity to bid jointly. I personally think, based on my conversations with state officials, they're going to be leaning more towards the former approach, which would lead for some really good collaboration opportunities. But it's a little bit early to tell. We're still only seeing the first state plan start to trickle out. We're going to have to see more before we can really define the full potential of what that partnership might look like. I'll let Michelle talk, whatever she'd like to, about the MVNO options at Telecom.

Yep, thanks LT. Yeah, so for MVNO, we are currently making great progress on getting an MVNO product launched for TDS Telecom. It's going to be called TDS Mobile. We're in the final stages of contract negotiations and integrations with our partners. We are an NCTC member, and so we have chosen to participate in the NCTC MVNO program and sign up with the partners that they have selected to support that program. However, we will also be working with U.S. Cellular. As we've mentioned in the past, U.S. Cellular does overlap with TDS Telecom's footprint in about 40% of our geographies could be served by US Cellular. And where that overlap happens, we do expect US Cellular to be our partner to offer TDS Mobile. Where that does not overlap, then we will have to leverage a different wireless carrier, and that's the partner that NCTC has chosen. So we're very excited about this new TDS Mobile product. We're getting very close, and we expect to have it launched here within the next few months.

Got it. Thank you. Okay. Thank you. And Ms. Thompson, I'll turn things back to you for any closing comments at this time.

Okay. Thanks, everyone, for your time today. Have a good weekend.

Thank you, Ms. Thompson. Ladies and gentlemen, that does conclude the TDS and U.S. Cellular Record 2023 Operating Results Call. Rebecca, thank you all so much for joining us, and wish you all a great day. Goodbye.