United States Cellular Corporation

Good day. Thank you for standing by. Welcome to TBS and U.S. Cellular Third Quarter Earnings Results Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the call over to your speaker today, Ms. Jane McCann. Please go ahead.

Jane McCann Thank you, and good afternoon, everyone. We hope that you and your families are doing well. As many of you know, the TDS family of companies has a practice of long, orderly succession periods to ensure smooth and seamless transitions. And in that spirit, I will be transitioning the corporate relations role to Colleen Thompson over the next couple of quarters. Colleen brings significant knowledge of U.S. Cellular, where she has held leadership positions since 2012. I am excited to have you meet her. And after that transition, I'm remaining with the company in the role of corporate secretary for both TDS and U.S. Cellular. And as most of you know, we've historically held our calls at 9 a.m. on Fridays. But there was a calendar conflict this quarter, and we moved our call to accommodate that. But going forward, we do expect to move our call back to Fridays at 9 a.m. Central. We know it's a busy day, so thank you for being so flexible. I 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, Pete Cereta, Executive Vice President and Chief Financial Officer, From U.S. Cellular, L.T. Theravold, President and Chief Executive Officer, Doug Chambers, Executive Vice President and Chief Financial Officer, and from TDS Telecom, Vicki Villacrez, 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 OIDA, and adjusted earnings before interest taxes depreciation and amortization, or EBITDA, to highlight the contributions of U.S. Cellular's wireless partnerships. TDS and U.S. Cellular filed their SEC Forms 8K, including the press releases, and our Forms 10Q, 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 versions included in our SEC filings. In terms of our upcoming IR schedule, slide three, U.S. Cellular is attending the Wells Fargo Virtual TMT Summit on November 30th. And then in January, we are attending the Raymond James Deer Valley Summit in person on January 3 through 5, and Citi's Apps Economy Conference virtually on January 6. And as always, our open door policy can now be open door, open phone, open video. So please reach out if you're interested in speaking with us. Turning to slide four, we continue to make progress on our environmental, social, and governance, or ESG program. And most recently, we published TDS's very first ESG report. From our founding over 50 years ago, TDS believes that being a good corporate citizen is fundamental to our long-term success. This means serving as a good steward of the environment and enacting governance practices that align with our corporate values. and truly caring about our customers, our associates, and striving to enhance the lives of the people in the communities we serve. These responsible practices, which make up the F in ESG, are what we call our three Cs, customer, culture, and community. Going forward each quarter, we're going to briefly highlight a recent action that illustrates this commitment. Before turning the call over, I want to remind everyone that due to the FCC's anti-collusion rules related to the ongoing Auction 110, we will not be responding to any questions related to spectrum auctions. And now I'd like to turn the call over to Pete Cereda. Pete?

Pete Cereda Thanks, Jane, and good afternoon, everyone. Before speaking about the balance sheet, I want to recognize all the actions that both business units are taking. to lead to higher returns and stronger businesses over the next several years. As we've discussed on past calls, maintaining financial flexibility is one of the pillars of our corporate strategy. Over the years, we've worked to retain relatively low leverage levels, long-dated debt maturities, sufficient undrawn revolving credit facilities and term loans, and significant cash balances to make sure we have the financial resources we need to fund our businesses. On slide five, I want to call your attention to all the work that has been done to raise new capital to fund the growth in our businesses while at the same time lowering the average cost of our balance sheet. As you can see, we've raised $3.4 billion since the beginning of 2020 at an average cost of 4.9% and redeemed six separate bond series comprising $1.6 billion in debt with a weighted average cost of 7%. The annual run rate savings on this call debt is approximately $33 million. The new capital is a mix of low cost preferred stock and very long term retail bonds, along with shorter term EIP securitization debt and bank term loan debt. This fulfills a commitment we made at the beginning of the year to reduce the average cost of our balance sheet and diversify our funding sources. Going forward, we believe that we will continue to have excellent access to the debt capital markets through a variety of instruments in order to continue to fund our business. Finally, before turning the call over to LT, I want to point out that our income tax rate for the quarter was 29%. This is up significantly from the 2020 level, in which we saw significant one-time benefits from the CARES Act, which have not recurred. With that, I will turn the call over to LT. LT? LT GILMORE- Hey, everyone.

If we turn to slide seven, I'm really pleased with the progress that we're making against our strategic priorities. We continue to see positive momentum in those growth areas of our business, and we're making progress towards our return on capital goals. Later on, I'm going to let Doug cover the operational and the financial highlights of the third quarter. But first, I thought I'd provide a few thoughts on some of these strategic priorities. So top of mind for me continues to be the competitive environment. During the third quarter, we saw a continuation of aggressive promotions in the industry for both new and existing customers. They've had an impact on our post-paid subscriber results and on loss on equipment for the quarter. We expect the high level of promotional aggressiveness to continue through the holiday season and beyond. I'm really pleased with the operational pivot that we've made towards regionalization. We've effectively leveraged that regional strategy to test a variety of different offers and to help us hone in on an approach that properly balances subscriber growth with profitability. We had a variety of offers in the marketplace in conjunction with the iPhone launch, some much more aggressive than others. And I'm pleased that we're now set up to effectively trial multiple approaches in the marketplace. It's going to help us be much more effective in optimizing our business. I spoke to you last quarter about some of our new initiatives to drive growth in our business and government and our prepaid operations. We reported another strong quarter of results for prepaid operations. We're seeing positive momentum in business sales, particularly in the IoT space and the private networking space. We're also seeing some really terrific traction in our tower business. Applications are up substantially, and operating metrics, particularly cycle times, have improved meaningfully. It's clear to the industry that we're open for business in towers, and we're really seeing the benefit of that approach. Talking briefly about network, our network modernization program and multi-year 5G deployment remains on track. The majority of our traffic is now carried by sites that have 5G deployed. Equally important, we're getting 5G devices into our customers' hands. So far, we have about a quarter of our smartphone subscribers with 5G-capable devices. I'll talk a bit about millimeter wave spectrum. We're optimistic on the use of this spectrum for fixed wireless access. We're continuing trials to validate network performance and customer experience, and we recently launched commercial offers in a small set of markets. We have more aggressive commercialization planned in 2022. We're offering commercial millimeter-wave fixed wireless access speeds of up to 300 megabits per second. And to date, we're seeing many customers experiencing speeds that far exceed that. Given the speeds that we're seeing in our trials and the enthusiastic reception we've received from customers, there's clearly demand for this type of home broadband service. We also believe this product could be a game changer in conjunction with deeper fiber build-outs and helping to bridge the digital divide. I'm also optimistic that the House will be able to address their differences shortly and see their way clear to pass the infrastructure funding bill that's already been passed by the Senate on a bipartisan basis. I hope we can reach a satisfactory outcome so that we have the funding needed to get this technology deployed to those underserved areas that need it. Talk briefly about supply chain constraints. They've impacted us like everyone in the industry. We've continued to experience some constraints on certain devices. We think we're managing this pretty effectively. It has not had a material impact on our results to date. On the network side, we're seeing extended lead times for various network-related components from multiple suppliers. But today, we've been able to mitigate these risks in partnership with our suppliers. Like everyone, we continue to closely monitor ongoing global supply and logistics risks. I'd like to end with a comment about the people at U.S. Cellular. We recently completed our annual engagement survey. The results confirm what I've observed since joining this company. Engagement is incredibly high. We recently received a net promoter score of 40, which is an amazing loyalty score. This is especially important right now, given expectations about what you're hearing in the press around the great resignation. On that note, our current retention rates are actually higher than they were a year ago. That has a tangible impact on our financials when it comes to things like onboarding and training costs. I'd like to close by recognizing and thanking all of our associates who work every day to improve our customer experience, help improve U.S. cellular overall. With that, Doug, I'll turn it over to you to cover the details of the core.

Thanks, LT. Good afternoon. Let's start with a review of customer results on slide eight. Postpaid handset gross additions increased by 3,000 year-over-year, largely due to higher switching activity in combination with our strong promotional activity. Of course, this was against a backdrop of industry-wide promotional aggressiveness on handsets. We saw connected device gross additions decline 26,000 year over year. This was driven by lower sales of internet products such as hotspots and tablets compared to the prior year when we experienced an increase in demand due to the pandemic. Total smartphone connections increased by 8,000 during the quarter and by 65,000 over the course of the past 12 months. That helps to drive more service revenue given that smartphone ARPU is substantially higher than feature phone ARPU. Moving to slide nine, I also want to call out the strong trends for prepaid, which were driven by enhancements to our prepaid offerings. We saw prepaid gross additions improve by 9,000 year over year. Next, let's turn to the postpaid churn rate shown on slide 10. Postpaid handset churn, depicted by the blue bars, was 0.95%, up from 0.88% a year ago. This was driven by voluntary churn, which continues to run higher year over year as a result of increased switching activity and aggressive industry-wide competition. Involuntary churn also increased slightly in the quarter, but it's still below pre-pandemic levels. Total postpaid churn combining handsets and connected devices was 1.15% for the third quarter of 2021, higher than a year ago as we've also seen churn increase on connected devices due to certain business and government customers disconnecting devices that were activated during the peak periods of the pandemic in 2020. Now let's turn to the financial results on slide 11. Total operating revenues for the third quarter were $1.016 billion, a decrease of $11 million, or 1% year-over-year. Retail service revenues increased by $25 million to $699 million. The increase was driven in part by a higher average revenue per user, which I will discuss in a moment. Inbound roaming revenue was $30 million. That was a decrease of $12 million year-over-year driven by a decrease in data volume and rates. One of the factors contributing to this data volume decrease is the merger of Sprint and T-Mobile and the migration of Sprint roaming traffic to T-Mobile's network. Other service revenues were $59 million flat year-over-year. Finally, equipment sales revenues decreased by $24 million year-over-year due to a decrease in the average revenue per unit in large part as a result of an increase in promotional activity, as well as a decrease in overall sales volume. We continue to engage in aggressive promotional activity during the third quarter of 2021 to remain competitive with the industry. As LT mentioned earlier, our level of promotional aggressiveness differed by region as we looked to optimize our approach between subscriber gains and profitability. A portion of the resulting promotional costs reduce equipment sales revenues and increase loss on equipment, which represents equipment sales revenue plus costs for equipment sold. In addition, loss on equipment in the third quarter of 2020 was mitigated by the impacts of the pandemic, specifically lower switching activity and less aggressive promotional activity. As a result of the combined impact of these factors, loss on equipment increased 19 million year-over-year from 5 million in 2020 to 24 million in 2021. This change in loss on equipment was the primary driver of our decline in profitability year-over-year. We expect the aggressive promotional environment to persist for the remainder of 2021 and into 2022, and our full-year guidance for 2021 reflects the corresponding financial impact. Now, a few more comments about postpaid revenue shown on slide 12. Average revenue per user or connection was $48.12 for the third quarter, up $1.02 or approximately 2% year over year. On a per account basis, average revenue grew by 272 or 2% year over year. The increases were primarily driven by favorable plan and product offering mix, an increase in regulatory revenues, and an increase in device protection revenues. Turning to slide 13, as we continue our multi-year network modernization and 5G rollout, control of our towers remains critical. By owning our towers, we ensure that we maintain operational flexibility to add new equipment and make other changes to our cell sites without incurring additional costs. As you can see on the slide, with the assistance of our third-party marketing agreement, we have seen steady growth in tower rental revenues. Third quarter tower rental revenues increased by 6% year over year. We are seeing positive momentum in tower co-location applications and will continue to focus on growing revenues from these strategic assets. Moving to slide 14, I want to comment on adjusted operating income before depreciation, amortization, and accretion in gains and losses. To keep things simple, I'll refer to this measure as adjusted operating income. As shown at the bottom of the slide, adjusted operating income was $213 million, a decrease of 8% year-over-year. As I commented earlier, total operating revenues were $1.016 billion, a 1% decrease year over year. Total cash expenses were $803 million, an increase of $8 million, or 1% year over year. Total system operations expense increased 1% year over year. Excluding roaming expense, system operations expense increased by 7% due to higher circuit costs, cell site rent, and maintenance expense. Roaming expense decreased 8 million or 17% year-over-year driven by lower data rates and lower voice usage. Cost of equipment sold decreased 5 million or 2% year-over-year due to a significant decline in connected device sales, partially offset by a slightly higher average cost per unit sold as a result of the mix shifting more heavily towards smartphone sales. Selling general and administrative expenses increased 11 million or 3% year-over-year, driven primarily by an increase in bad debts expense and costs associated with supporting enterprise projects and billing system upgrades. Turning to slide 15, I'll touch on adjusted EBITDA, which starts with adjusted operating income and incorporates the earnings from our equity method investments along with interest and dividend income. Adjusted EBITDA for the quarter was $262 million, a decrease of $20 million or 7% year-over-year. Equity and earnings of unconsolidated entities remain flat year-over-year, and we expect the fourth quarter 2021 distribution from the LA Partnership to be in line with the distribution received in the fourth quarter of 2020. Next, I want to cover our guidance for the full year 2021. For comparison, we're showing our 2020 actual results. First, we have narrowed our guidance for service revenues to a range of 3.075 to 3.125 billion, maintaining the midpoint. For adjusted operating income and adjusted EBITDA, we are maintaining our guidance ranges of 850 to 950 million and 1.025 to 1.125 billion, respectively. Maintaining wider ranges reflects our expectation of a continued highly competitive environment for the remainder of the year, as well as uncertainty related to the amount of promotional expense that will be incurred during the holiday selling season. For capital expenditures, we are decreasing our guidance range to $700 to $800 million as we are moving certain equipment and project spend into 2022. This shift did not impact our 2021 build plan, and as LT mentioned, our multi-year 5G and network modernization program remains on track. We have also provided a breakdown of capital expenditures by major category. I will now turn the call over to Vicki Villacrez. Vicki?

All right. Thank you, Doug, and good afternoon, everyone. I'm pleased to report on our results and the progress we are making on our strategic priorities as we move towards the end of the year. TDS Telcom grew its footprint 6% from a year ago, now serving 1.4 million service addresses across its market. Based on the successes we have experienced to date, we are increasing our fiber deployment program substantially with the announcement of additional new communities in Wisconsin, Idaho, and North Carolina. And we are entering into the state of Montana. This significantly advances our goal to bring state-of-the-art broadband capabilities and competition to more growing communities. In addition, we are now capable of delivering two gig internet speeds in our Spokane, Washington, and Meridian, Idaho markets. And going forward, we'll launch two gig products in all of our new fiber expansion markets. 2GIG provides an exceptional customer experience, doubling our previous maximum speed offering and helping to further differentiate us from the cable competition. Also in the quarter, we completed fiber to the home construction in our Southern Wisconsin cluster, where we are seeing total broadband penetration of 38% in this fully launched cluster. In total, during the quarter, we added 20,000 fiber service addresses, surpassing 40% of our wireline service addresses, a key milestone for us. From a financial perspective, overall, we grew our top line 2% while planned investment spending on new market launches resulted in lower adjusted EBITDA as expected. Turning to slide 18, we remain committed to the strategic priorities we set out at the beginning of the year. As previously discussed, our primary objective is to generate growth by investing in our high-speed broadband services. We have a multi-faceted approach to this growth that includes leveraging existing networks and constructing greenfield fiber in new markets to expand our footprint. We are very pleased that where we have invested in fiber in our incumbent markets, we have achieved superior market share. And in our expansion markets, we are seeing strong customer preregistration. 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. We were recently awarded two broadband grants in Wisconsin to expand fiber services to two rural communities. Moving to slide 19, total residential connections increased 3% due to broadband growth in new and existing markets, partially offset by a decrease in voice connections. Total telecom broadband residential connections grew 7% in the quarter as we continue to fortify our network 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 market. Overall higher value product mix and price increases drove a 4% increase in average residential revenue per connection. On slide 20, you can see the broadband connection growth across all markets. Our focus on fast, reliable service has generated a 13% increase in total residential broadband revenue. We are offering one gig broadband speed to 57% of our total footprint, including both our fiber and DOCSIS 3.1 markets. The one gig product along with our two gig product in certain expansion markets are important tools that will allow us to defend and to win new customers. In areas where we offer one gig service, we are now seeing 20% of our new customers taking this superior product. Turning to slide 21, we have augmented our success growing broadband with our TDF TV offering. A majority of TDS Telecom's residential customers take advantage of bundling options, as 63% of customers subscribe to more than one service, which helps to keep our churn low. Residential video connections were nearly flat. Wireline growth of 6%, driven by our expansion market, nearly offsets losses in the cable market. Video continues to remain important to our customers. For example, we are experiencing a 38% video attachment rate to every broadband connection in our wireline markets where we offer IPTV services. Our strategy is to increase video connections through the offering of our cloud-based TDS TV Plus product. The rollout of this product currently covers 61% of our total operations, including cables. Moving to slide 22, we continue to be very bullish on our fiber strategy and how it will transform TDS Telcom in a very meaningful way over the next several years. As we discussed last quarter, given the attractiveness of this opportunity and the heightened level of participation by other overbuilders, our sense of urgency has increased. We have upsized the number of expansion markets we expect to build over the next several years. as well as increasing our fiber bills within our existing footprint. Fiber is the most economical long-term solution to deliver the best broadband experience. We continue to refine our market selection criteria and are highly confident in this process. So now let's turn to slide 23, which shows the progress we are making this year on our multi-year fiber program. which includes fiber into incumbent markets and also expansion into new markets. As a result of this strategy, 40% of our wireline service addresses are now served by fiber, which is up from 34% a year ago. This is driving revenue growth while also expanding the total wireline footprint 8% to 891,000 service addresses. On slide 24, we highlighted the total service addresses for the cluster, the clusters that are in construction and we are actively marketing. We recently announced our expansion of fiber into several new communities. Further expanding our existing clusters, we announced Napa, Idaho, and several communities in Wisconsin, including Anchor Market, Green Bay, and Oshkosh. In addition, we announced several communities that will plant the flag in new geography. Eau Claire, Sparta, and Onalaska, Wisconsin, creating a western cluster. Billings, Montana, the first in this state, and several communities just southeast of Charlotte in North Carolina, where we operate a cable market today. In total, these communities add more than 270,000 additional service addresses to our existing fiber deployment plan. Through the third quarter, we have 358,000 total fiber service addresses and are working to build out the footprint in these announced markets, growing to 929,000 service addresses over the next several years. Year to date, we completed construction of 51,000 fiber addresses, adding 20,000 service addresses in the quarter. This progress continues to be slower than planned due to permitting complexities and contractor scheduling delays. It is putting pressure on service address delivery targets in the fourth quarter. For example, in Meridian, Idaho, we experienced a temporary delay on more than 35,000 service addresses. and just recently have restarted construction. As a result, we expect to fall short of our construction goals this year, but still improve our delivery compared to last year. Therefore, we have lowered our guidance for capital expenditures to reflect these delays, but we still expect to be within the guidance range for revenue and adjusted EBITDA for the year. We also continue to proactively manage future construction and customer equipment inventory demand, where we are seeing lengthening lead times with our suppliers. As an example, some contractors have experienced staffing shortages and are unable to complete fiber builds in the desired timeframe. We will continue to monitor these challenges and update you on our progress going forward. On slide 25, total revenues increased 2% year-over-year to $252 million, driven by the strong growth in residential revenues, which increased 6% in total. The chart includes residential revenue mix, which highlights the increasing contribution of our expansion market. Incumbent wireline markets also showed solid residential growth of 3% due to increases in broadband connections, as well as increases from within the broadband product mix. partially offset by a 4% decrease in residential voice connections. Cable residential revenues grew 6%, also due to increases in broadband connections, as well as the product mix. Commercial revenues decreased 6% in the quarter, primarily driven by lower CLEC connections, partially offset by a 5% increase in broadband connections. Wholesale revenues decreased 5 percent due to certain state USF support timing. So let me sum up the combined financial results for the quarter as shown on slide 26. Total revenues increased 2 percent from the prior year as growth from our fiber expansions and increases in broadband subscribers exceeded the declines we experienced in our legacy business. Cash expenses increased 3 percent due to both supporting our current growth as well as spending related to future expansion into new markets, which is not yet reflected in our revenue. Future market costs include direct costs such as sales, marketing, real estate, and technicians in addition to shared service costs necessary to support new market growth. As a result, adjusted EBITDA decreased 2% to $77 million as expected. Capital expenditures were down 1% to $91 million as increased investment in fiber deployments were offset by decreased spend on core operations. And on slide 27, we provided our updated 2021 guidance. Our revenue and adjusted EBITDA are right in line with our expectations. And now that we are closer to the end of the year, we are narrowing our ranges and slightly increasing the midpoint on revenue. We expect revenues to be between $990 million and $1 billion, $20 million, and adjusted EBITDA to be between $295 and $315 million. With the construction delays and build challenges I mentioned earlier, we are lowering our expectations for capital expenditures to be between $400 and $450 million. It's the dedication and hard work of all our associates that contributes to our company's success. And for that, I am grateful. I look forward to sharing our final 2021 quarterly results with everyone in February. Now I'll turn the call over to Jane.

Thank you, Cindy. Operator, we're ready to take questions.

As a reminder, to ask a question, you will need to press power 1 on your telephone. To withdraw a question, press the PAN key. And please send iLALA compiled Q&A roster. Your first question is from Rick Prentice of Raymond James. Your line is open.

Thanks. Good afternoon, everyone. Hey, Rick. Hey. First question I've got is on the guidance. Obviously, a lot of the range is tightened across US cellular and TDS. And Doug, you called out how you did not tighten the US cellular orbital line. I just want to understand a little bit about what it would take in the competitive environment responses to head towards the midpoint, or is it the low end or the high end of this type of guidance? And if you think about how it compares to last year.

Yeah, hello, Rick. Thanks for the question. So you hit on it. It's really the promotional, the level of promotional activity that's going to going to dictate where we end up in the guidance. So to the extent that we are very successful with customer acquisition, have a lot of promotional takes, we're going to be to the lower end of the guidance. And to the extent that we don't quite meet our goals, it might be to the higher end of the guidance. As you know, when we – For our promotions, most of them are administered to trillion credits. About half of that promotion expense hits loss and equipment in the quarter that we administer the promotion. The rest is amortized to service revenue over the life of the contract. So that's really the main thing that we have in play that could flex in the range is the level of promotional activity and the takes that we have from our customers.

And as you think about last year, Christmas, obviously, holiday season is still COVID-affected. How are you thinking about this year, fourth quarter, this is what we might have seen last year, fourth quarter, then, in competitive activity and your success?

We're hoping this quarter will be a bit more robust. We're expecting a higher switcher pool this year, and that's going to help on the customer acquisition side. We're expecting to do fairly well in churn as well. So, you know, I think we're going to have a little bit better fourth quarter as far as opportunity this quarter than we did last year.

Okay. And my final question is you guys have talked a little bit about fixed wireless access. We've seen Verizon talk about it on their call. We know we'll talk about it on their call. Can you walk us through a little bit? It sounds like yours might be a little more tied to local, state, or federal support levels, but help us understand how you're at least viewing the possibility of this wireless access even though you're still in the trial phase.

Yeah, Rick, this is LT. So I think that there's one fundamental difference between what Verizon is doing and what we're doing is that we're running our fixed wireless access trials and the commercialization off of macrocellular. Verizon is primarily doing it off small cells. So if you think about where small cells reach, you're generally going to be deploying those in more dense environments. In our case, we're trying to reach more rural areas where, frankly, I think that there's a greater level of opportunity vis-a-vis the other competitors. We've seen terrific results from our technical trials. And so we've pivoted this now to commercial trials and testing customer demand. So far, we're very encouraged. Candidly, it's still very small volume trials. So we've got to work through operationalization, think things like how to, you know, can we get to a self-install? How do we manage distribution? So from a door-to-door and a digital perspective, we've got to develop that. So There's a fair amount of work from an operational perspective that has to go into operationalizing this technology, but we're very excited about the speeds that we were able to realize, and not just realize in the lab, but actually realize in real-world environments. Now, you mentioned the government subsidies. Certainly those will come into play in the sense that it costs anywhere between two to three times as much to connect the rural subscriber. It also connects between one and a half to two times as much to build a tower in rural America. And so it is an expensive proposition to reach everyone with this technology. We're excited. We think in the near term, we've got a pretty good momentum behind the business. Certainly, 22 will be a year of kind of testing and scaling. And I think there's a lot of upside I think there will be a lot more upside that could come with the government infrastructure bill in order to really, really utilize this technology to reach all the corners of America, all the un- and underserved areas. That's going to require subsidies. It's going to require subsidies behind infrastructure, and it's going to require subsidies behind affordability. So I've been spending a fair bit of time talking to folks in D.C. about that. I'm cautiously optimistic that we're going to get that across the goal line. But we don't require those subsidies to turn this into a profitable product. You can expect to see us scaling that kind of throughout 2022. And we'll certainly give updates as we do. Great. Thanks, everyone. So long.

Your next question is from Simon Flannery of Morgan Stanley. Your line is now open.

Great, thank you. If I could stay on that last theme, LT, maybe you can just give us your latest thoughts on how 5G is going to play out for your consumer and enterprise customers. What is the revenue, the ARPU opportunity there? And maybe update us on your rollout. We did see the news out of the FAA and FCC today on C-band. I know it doesn't directly affect you immediately, but I didn't know if you had any color on how that's going to be resolved. No.

I don't have any color. If I did, well, I don't is the simple answer. I mean, I think as we think about the impact of that ruling, you know, our C-band spectrum, which would be what is affected, we're not going to be firing that spectrum up until 2023, late 2023. And I have a lot of confidence that situation will get resolved by that point. And so I don't think that it necessarily affects our rollout one bit. In terms of 5G deployment, I'll let Mike talk just a little bit about some of the specifics behind where we're at. We continue to move forward well in our modernization plan. I'll let him cover the details, and then what I'll do is I'll come back and talk briefly about monetization. Mike, maybe you could just share a little bit more about how we're doing from a deployment perspective.

Sure. Thanks, LT. Good evening, Simon. All right. Good. As we shared before, the program is a multi-phase program. And we're well into phase three. So we've got about 35% of our sites upgraded and right on track with what we committed to do. And we're seeing nice traffic on the sites that have been upgraded, and customers are experiencing a better throughput on the network. So we're happy with the deployment, the progress, and full steam ahead.

And let me come back to monetization just a little bit. So, I mean, on the consumer side, we don't see an opportunity to, let's call it, incrementally monetize 5G via price plan premiums, where I do see an opportunity to monetize it via new products and services. And I think fixed wireless is a great example. So the speed that I was quoting and the deployment that I'm quoting is based on millimeter wave. you could certainly expect to see us to use c-band to serve those customers as well and i think that will be an attractive source of revenue and profitability for us and obviously i think providing a great 5g experience is going to be key to driving market share and if i think about our 5g availability we feel very good about our availability vis-a-vis our competitors we provide a really high quality network experience which is core to our value proposition I think 5G will be a key part of providing a quality network. It's always been a differentiation point for us, and I think you can expect that it will be that in the future as well.

Great. And just to follow up on the competitive environment, what are you seeing from T-Mobile? They have just rolled out new retail partnerships with Walmart and Target and have been very focused on the rural and smaller markets recently. So are you seeing a major change there, or is it fairly incremental?

We are not seeing a major change there. I think thus far we continue to compete well with T-Mobile. I think from a distribution perspective, I think they're trying to find a way to create distribution without necessarily having to build it themselves. And that's a difficult value proposition. We feel good about our network of distribution, company-owned stores, dealer stores, plus some of those same partnerships that you're talking about. We have good distribution coverage in rural America that supplements the strong network. And so thus far, at least, we haven't seen a meaningful increase in win share or in subscriber effect from what T-Mobile has been doing.

Great. All right. Thanks, Alty.

Thank you.

Your next question is from Sergei Lisevsky of Gamka Investors. Your line is open.

Good evening, guys. Thank you for taking the questions. My first question is for LT. I think you guys, as part of your growth initiatives, are trying to expand digital capabilities, focusing on customer lifecycle. Could you talk a little bit about your efforts there?

and where you are now and where would you like to be in a few years and how those expanded digital capabilities should help you both on the cost side and potentially on the revenue side certainly good to hear from you so digital if you think about digital pre-pandemic uh digital was a you know like a nice to have right it was it was an accompaniment to uh your physical store That's not the case anymore. Digital and a strong digital presence is absolutely a requirement. If you don't have a positive and constructive digital experience for your customers, you're quickly going to become irrelevant. I think the good news is that we've invested significantly in our digital experience, and we're seeing it in the numbers. So we crossed over an average of four in the App Store and our app. We've seen similar increases on the Android side from our app. So customers are enjoying the new capabilities we're providing, much more user-friendly experience. And you're seeing that just in terms of customer engagement. Obviously, the other places that you have to invest, and we're doing both, one is on the website. So you have to be able to create a positive exploration experience for your customers. We've invested there, and we're seeing higher customer experience scores. And you have to provide digital platforms for your partners to interact with you. And so we've pivoted a fair amount of investment towards digital. We're seeing the improvements in terms of customer engagement. And I expect in the long run, that's going to manifest itself in two areas. I think in the truly long run, you're going to see growth ads via digital. People will explore, purchase. get the product, fire it up, do all their service via digital. I think we're a long way away from that being the majority of the transactions in the industry. I think brick and mortar will still matter. But I do think that digital will play a role and a greater role on the gross ad side of the equation. I think where you're really going to see it is on upgrades. I think that upgrades will increasingly be done digitally. I think a good measure of performance over the long run is the percentage of upgrades that are managed digitally. It obviously helps you on the cost side. It also helps you on a customer satisfaction side. The trick there is are you able to create the same kind of ARPU expansion with your upgrades as you are in your physical stores? So one of the things that we've seen over the past couple of months is we've seen really good performance in ARPU expansion on Postpaid And we're seeing that because our plan mixes are getting better. That's happening because customers are walking into our stores and our associates are doing a really good job upselling plan mix. There have been some comments that I've read about our aggressive promotions. Those promotions vary by region, but the reason that we're able to do some of those aggressive promotions is that along with it comes plan mix requirements, and our associates do a really good job upselling those plan mixes, upselling accessories, and so on. You've got to be able to mirror that kind of upselling in the digital environment. That's going to take time. That's going to take investment. I think we're on a good path. I think we're making the good investments. I think we're seeing it in our experience scores, but certainly more to come.

great um and another question uh on the wholesale front kind of uh if you could share your thoughts on uh wholesale opportunities for us or for example dish recently signed a new mdno agreement with at&t and they're going to become their primary and they're not partner but i know that in many of your markets your coverage is probably much better than what at&t's or t-mobile coverage is so Do you see an opportunity to do a wholesale deal with DISH? And more broadly, what other wholesale opportunities do you see down the road?

So, I mean, I won't comment on any specific opportunities, but to say that, you know, we are open for business on wholesale. I agree with you. I think that the investment that we've made from a coverage perspective and network experience perspective positions us very well for those kinds of deals. I think that we can offer a very high-quality experience to a potential MD&O partner or a wholesale partner. We're certainly open to those discussions. It falls perfectly in line with some of the partnership conversations that we've had on previous calls. I do think it can be an area of growth for us. The obvious trade-off is you have to be smart about the competitive implications of opening up your high-quality network to a competitor. And so we always try to balance that. You try to make the economic equation work. It's certainly something that we're open to discussing. We've had conversations about it in the past. I'm sure we'll have more in the future. And it's something we'll keep looking at.

Great. And my last question is for Vicky on the TDS Telecom side. So you guys lowered CapEx for various reasons that you described for 2021, and now the number of passings that you're going to do this year is going to be lower than I think 150,000 that you were targeting before. But as you look out in 2022, and assuming that we move past some of the supply chain issues, what is the annual pace of build that you would be targeting over the next few years? How much higher could you go over $150,000 level based on your current strategy and your current capital allocation?

Sure. Good evening, Sergey. Thank you for that question. First of all, let me just say that, you know, a few quarters of slower than desired construction uh is not deterring us at all uh from from this market expansion program as you know this is a very long multi-year program an investment for the future uh and so i you know the market the new market announcements we've made to substantially expand this program i think underscores our confidence in what we're doing um the impact for 2022 uh could really translate into more service addresses delivered in the first quarter of next year. And, you know, that would have a delay of revenues coming into the financials. But I expect that we'll continue to see top line growth as we've seen all year. And that'll go into next year. And, of course, I can provide more specifics in our guidance in February. But from a capital perspective, you know, we lowered our guidance on the capitals. we don't count our fiber service addresses delivered until it's ready to market. So construction can be a lot farther along, but a number of things have to happen before we can market the new fiber household. So, for example, the contractor has to complete the entire construction end-to-end and light the fiber up all the way to the premise before turning it over to TDF. And then we have to inspect it for quality and then get that new location into our system. So we have a lot of construction complete along the way, which is really in our accounting for capital spending. But I think with the announcement of these new markets and the increase in, you know, the substantial increase in our program, I am signaling that we will have increased capital spending this going into 2022. And as you think about it longer term, I expect that we'll have elevated levels of capital spending taking us through 2022, 2023, and into 2024. And then we'll start to see the completion of these markets coming down, starting to come down at the end of 2024, and then getting more largely completed in 2025 and 2026. Really excited about planting the flags now and taking advantage of this opportunity that's in front of us.

Great. Thank you.

And no further questions. I would like to hand call back to James.

Thank you very much. And we really appreciate you joining us on a Thursday afternoon. And please get in touch with us with any additional questions or comments. Have a great night.

This concludes today's conference. Thank you for participating. You may now