United States Cellular Corporation

Thank you for standing by. At this time, I would like to welcome everyone to the TDS and U.S. Cellular first quarter 2023 offering results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Colleen Thompson, Vice President of Corporate Relations, you may begin your conference.

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 in the investor relations sections of the TDS and U.S. cellular websites. With me today and offering prepared comments are from TDS, Vicki Villacres, Executive Vice President and Chief Financial Officer. From U.S. Cellular, LT Theravold, President and Chief Executive Officer. Doug Chambers, Executive Vice President, Chief Financial Officer and Treasurer. And from TDS Telecom, Michelle Brokwicki, Senior Vice President of Finance and Chief Financial Officer. This call is being simultaneously webcast on the TDS and U.S. Cellular Investor Relations websites. Please see the websites for slides referred to on this call, including non-GAAP reconciliations. We provide guidance for both adjusted operating income before depreciation and amortization, or OIBDA, and adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, to highlight the contributions of U.S. Cellular's wireless partnerships. PDS and U.S. Cellular filed their SEC Forms 8 , including the press releases and our 10-Qs yesterday. As shown on slide 2, the information set forth in the presentation and discussed during this call contain 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. In terms of our upcoming IR schedule on slide three, on May 23rd, we will be attending JPMorgan's 51st Annual TMT Conference in Boston. And in late June, we will be virtually attending the New York Stock Exchange Investor Access Conference. And as always, we have an open door or video call policy, so please reach out if you're interested in speaking with us. I will now turn the call over to Vicki Villacruz. Vicki?

Okay, thank you, Colleen, and good morning, everyone. Both of our business units reaffirmed their guidance shared with you in February. U.S. Cellular is making significant investments in advancing its network and TDS Telcom is executing its strategy to deploy fiber in approximately 100 new markets. We continue to ensure we have the balance sheet strength to support the investments the enterprise needs and are managing within our planned levels of leverage for 2023. We ended the quarter with approximately 1.1 billion in available sources of liquidity, including cash, revolvers, and asset securitization facilities to choose from to help fund our investments as needed. And we continue to have access to the debt capital market. And now I'll turn over the call to LT to update you on U.S. Cellular's results. LT?

Thanks, Vicki. Morning, everybody. Hope everyone's doing well. We turn to slide six. Our top priority continues to be improving customer results. And although we still have plenty of work to do, I'm pleased with the progress that I've seen. As you can see on slide eight, we've driven both improved post-paid gross ads on a year-over-year basis. We've improved post-paid churn on both the year-over-year and sequential basis. And we hope to see those trends continue moving forward. And I want to talk for just a second about the drivers of some of the results that you're seeing. To take you back, Mid-22, we launched several pricing and promotional efforts in order to address subscriber challenges, and specifically, we were looking to address churn reduction. And based on the testing we'd done in our regional trials, we knew it would take about six to nine months to see the consumer churn benefit, and we're now starting to see that in the consumer channel. Our voluntary churn improved about 10% year over year. At the same time, we also launched our flat rate plans in order to improve the gross ad trajectory. And we continue to see steady adoption of those plans. And on average, nearly 27% of our flat rate customers have selected the higher tier unlimited plans. As a quick reminder, while flat rate pricing generates lower ARPU than our traditional postpaid pricing, customers that are on those flat rate plans are not eligible for higher levels of device promotional discounts. And so those plans have similar economics over their contract terms. And I'm pleased with the balance that we're striking between subscriber and financial aggressiveness. You'll see Postpaid ARPU is also up 2% for the quarter. I also want to take a second and highlight our continued strong momentum in fixed wireless. With gross ads up 130% year over year, we finished the quarter with 87,000 subscribers, and we expect to reach 100,000 subscribers later this year. We expect another solid quarter of year over year growth in the second quarter, as we did not expand fixed wireless to our entire footprint until June of last year. And additionally, as we start to deploy our mid-band spectrum, that'll provide additional growth momentum for fixed wireless in the coming quarters. Our tower business produced another strong quarter of results, with revenues growing 11% year over year. And also to further highlight our performance, we've expanded our presentation to include some additional metrics, as you see on slide 11 of the presentation. We also rolled out our master brand campaign in the quarter, built for us, and that included an initiative called Phones Down for Five. The challenge was built on a pretty simple action, taking a break from your phone for five days, five hours, or even just five minutes in order to reset your relationship with technology. The response to the campaign has been very encouraging. We believe it's positively affected our net promoter score, which is up meaningfully in the past few months. On the network side, about 80% of our traffic is carried by sites supporting 5G. We've continued our mid-band deployment, which includes beginning to light up markets with DoD spectrum and further building out C-band so that we'll be ready to light it up in portions of our network when the spectrum clears. And we expect that to be in late 2023. As I wrap up my comments, I want to spend just a moment discussing a recent decision we've made as we continue to prioritize our investments and our focus on growing the revenues and the returns of our business. Earlier this week, we announced a reduction in staffing at U.S. Cellular, and that spans across numerous areas of operations. And while this decision was carefully considered and it was a difficult one, this action allows us to sharpen our focus and our alignment, as well as improve our operational efficiency and effectiveness. Doug will provide some additional context in terms of the impacts to our financials in the quarter. And consistent with our culture, we'll care for our team during this transition with empathy and respect. And I want to thank all of our associates for their continued focus and dedication as we focus on serving our customers with excellence. And with that, I'm going to hand it over to Doug.

Thanks, LT. Good morning. Let's start with a review of our customer results on slide eight. Postpaid handset net loss has improved 11,000 on a year-over-year basis. due primarily to lower voluntary defections as voluntary churn improved both year-over-year and sequentially, in large part due to the increase in percentage of customers in contract as a result of our attractive upgrade offers in the second half of 2022 and first quarter of 2023. We saw connected device gross and net additions increased by 9,000 on a year-over-year basis, driven by fixed wireless customer growth. As LT mentioned, we continue to see strong momentum in fixed wireless with a base of customers up 63% from the prior year and up 11% from the end of 2022. Moving to slide 9, prepaid gross additions declined $12,000 and net prepaid additions decreased $5,000. In terms of gross additions, the overall pool of available customers declined, and we believe the year-over-year decrease in income tax refunds contributed to this. In addition, given the relative pricing parity between our flat rate postpaid offering and our prepaid plans, we are seeing our customers choosing to take our flat rate postpaid offer instead of prepaid. And that's a good trend, as our flat rate plans provide better economics. Lastly, we saw a decline in our prepaid churn rate. Now let's turn to the financial results starting on slide 10. Total operating revenues for the first quarter decreased 2% from the prior year, with service revenue declining 3%. The primary drivers of lower service revenue are declines in the average postpaid subscriber base and roaming revenue. Though I'll note the decline in roaming revenue is due to decreasing reciprocal roaming rates with our carrier partners, and this roaming revenue decline is more than offset by the decline we see in our off-net roaming expense. And therefore, the overall decrease in roaming rates is accretive to our profitability. On the positive side, LT mentioned the increase in postpaid ARPU. And this increase, along with the increase in ARPA, was driven primarily by a favorable plan and product offering mix as a result of customer adoption of our higher value, higher tier plans, and an increase in device protection revenues. These increases were partially offset by an increase in promotional costs. We continue to see growth in our highest tiers of unlimited plans, and 42% of our postpaid handset customers are on these higher tier plans at the end of the quarter. Equipment revenues decreased by 2% due primarily to a decline in volume, partially offset by an increase in the average revenue per device. These same dynamics played out on the cost of equipment sold side, resulting in loss on equipment being flat year over year. Next, let's turn to our quarterly financial results shown on slide 12. 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 2% year over year, while total cash expenses increased 2%. Cash operating expenses in the first quarter of 2023 include $10 million of severance and related costs attributable to our reduction in staffing previously mentioned by LT. This reduction will become effective in the second quarter, and both the severance impact and the 2023 in-year savings impact are incorporated in our guidance. This action is in addition to our ongoing cost optimization program as we continue to effectively manage costs through our ongoing 5G deployment and inflationary pressures. This program has delivered outstanding results with respect to controlling our cash expenses. Specifically, during the period 2017 through 2022, excluding the impacts of loss on equipment and bad debts expense, which have been impacted by the aggressive promotional environment and payment behavior during the pandemic, we have held cash expenses essentially flat and expect to do the same in 2023. Selling general and administrative expenses were also impacted by an increase in advertising expense in the first quarter related to timing, primarily media costs associated with the launch of our new master brand campaign, which LT highlighted in his opening remarks. Capital expenditures have increased 52% driven by timing of expenditures. As our guidance indicates, we expect our full year 2023 capital expenditures to be less than the prior year as we invest in our multi-year 5G mid-band deployment while prudently managing our free cash flow. As shown on slide 13, our 2023 financial guidance remains unchanged from the guidance we issued in February of this year as we remain on track to our financial plan. I will now turn the call over to Michelle Berkwicki. Michelle?

Thank you, Doug, and good morning, everyone. I'm pleased to report on TDS Telecom's first quarter results and to confirm that we are on track to meet both our operational and financial goals set out earlier this year. Here are the key messages. First quarter fiber service address delivery and financial results came in as expected. This sets the foundation for us to meet our fiber service address target and financial guidance that we set out at the beginning of the year. We delivered 25,000 marketable fiber service addresses during the quarter. Our full year goal is 175,000 addresses. So we will be significantly ramping up deployment as we move out of winter months and construction activity can accelerate. On the financial side, broadband penetration in our new expansion markets continues to grow at the pace expected in our business cases. This is translating into revenue growth. Since we are still in the early phases of market launches in the majority of our markets, we continue to see pressure on adjusted EBITDA. This is a result of incurring startup costs before the revenues from the market start coming in. This is all part of our 2023 guidance. As these new markets start generating revenue, which follows our service address delivery, adjusted EBITDA will start to improve in future years. I'll give more detail on our fiber program and financials as we go through the slides, but I wanted everyone to have this context up front. So let's move to slide 15. Here you can see our strategic areas of focus that will help us achieve our goal to be the preferred broadband provider in the markets we serve. Investments in these strategic priorities will drive profitability and improved returns over time, ultimately strengthening TDS Telecom's financial and market position. Moving to slide 16, let me update you on our progress towards achieving our longer-term goals. At year end, I shared three metrics that we will consistently monitor and report on each quarter so you can follow the progress we're making towards these goals. The headline is that based on first quarter results and our expectations for 2023, we remain on track. As previously mentioned, we deployed 25,000 marketable service addresses in the quarter, and we remain confident that we're on track to reach 175,000 by year end. As a reminder, most of our expansion markets are in the Pacific Northwest in Wisconsin, where weather slows down delivery during winter months. So our expectations are that service addresses will build steadily throughout the year. So let me share where we're at on our fiber program metrics. We're targeting 1.2 million marketable fiber service addresses by 2026. We ended the quarter with 607,000, so we are over the halfway mark. We're also targeting 60% of our total service addresses to be served by fiber by 2026, and we ended the quarter with 40%. This reflects progress in growing fiber through our expansion market, as well as fibering up our incumbent market. Specifically, by 2026, we plan to serve half our ILAC addresses with fiber. And at the end of the quarter, 37% of our ILAC was fibered up. And finally, we're expecting to offer speeds of one gig or higher to at least 80% of our footprint by 2026. We finished the quarter with 67% at gig speeds. We're pleased with the pace of our fiber builds and with our fiber expansion results so far. We continue to successfully navigate challenges in getting our builds completed. We've been scaling up our service address deployment since we launched this program and have a repeatable process in place as we expand it. Based on our experience, we still see positive contributions from our market launches starting around the three-year mark, and we still expect to achieve broadband penetration rates of at least 40% in a steady state. The success that we've seen in our early markets validates our business cases and our expectation of low to mid double-digit returns. On slide 17, you can see that our fiber program is a multi-year journey. We have about 100 communities that are in various stages of development, with most of these in or about to begin construction. We've seen an 8% growth in total service addresses year over year. Successfully ramping up construction this year is key towards hitting our longer-term 2026 goals. We also continue to address the broadband needs in our most rural markets, by upgrading our copper networks with support from state broadband grant programs and by meeting our obligations under the federal ACAM program. It is our understanding that the FCC is moving toward adopting an extension of the ACAM program, hopefully by third quarter. The ACAM extension would provide an additional six years of support for speeds of 100 down and 20 up, the same speeds as Bede. For us, this means getting fiber to almost all of our 160,000 ACAM addresses. We are very enthusiastic about an ACAM extension because we believe that extending the current federal ACAM program first and then pursuing BEAD program funding would be the fastest path for TDF Telecom to take fiber deeper into our communities. Our broadband investments are driving positive results. As shown on slide 18, we experienced a 4% increase year-over-year in total broadband residential connections. Shown on the graph on the right, we see demand for greater broadband speeds, with 72% of our customers taking 100 megabits per second or greater, up from 67% a year ago. TDS Telecom can now offer at least 1 gig service to 67% of its footprint. In some markets, we're now even offering 8 gig speeds. In areas where we offer gig plus service, we're seeing 24% of our new customers taking this product. And finally, our focus on fast, reliable service has generated an 8% increase in total residential broadband revenue. On slides 19 and 20, I'll share some financial highlights which were in line with our expectations. Total revenues increased 1% for the quarter. This 1% increase is made up of an increase in residential revenues offset by a decrease in commercial and wholesale. Residential revenues across all of our markets increased 4% for the quarter. Average residential revenue per connection was also up 4% due to price increases and overall product mix partially offset by promotions. As shown in the chart on the left, expansion market residential revenues were up to 15 million in the quarter. This aligns with our expectations of steady revenue growth following the timing of service address delivery as penetrations in these new markets build. Residential wireline incumbent and cable revenues increased year-over-year due to price increases in growth in broadband connections, partially offset by promotional activity and a decline in video and voice connections. Commercial revenues decreased 7% in the quarter, primarily driven by lower CLEC connections. And lastly, wholesale revenues decreased 4% for the quarter, primarily due to lower special access revenue. Cash expenses increased 10% in the quarter, mainly due to our growing fiber program. As a reminder, costs to support launching our fiber expansion markets include direct costs such as sales, marketing, real estate, and technicians, in addition to shared services. These costs are incurred upfront and prior to generating revenues. As we expected, the increased cash expenses resulted in a decline in adjusted EBITDA of 17% for the quarter. Capital expenditures of $130 million were up from the prior year due to increased investment in fiber deployment. 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. On slide 21 is our 2023 guidance, which is unchanged. as we are tracking to our plans. We are forecasting total telecom revenues of $1.03 billion to $1.06 billion. This reflects our goal of top-line growth driven by continued improvements in residential revenues across all of our markets, offsetting declines in commercial and wholesale revenues. Adjusted EBITDA is expected to be between $260 to $290 million in 2023. Adjusted EBITDA reflects our continued fiber expansion, which requires upfront spending. At the end of 2023, almost all of our 100 communities will have been launched. As our market builds mature and we increase our penetration, we expect the pressure on adjusted EBITDA to lessen over time. Capital expenditures are expected to be between $500 and $550 million in 2023. This reflects increased spend on fiber service delivery. and nearly 90% of our capital spending is allocated to broadband growth. Before turning over the call, I want to thank the team for all of their hard work and continued dedication to our mission. It takes alignment across the entire organization to execute on our strategy, so each one of our associates is contributing to TDF Telecom's success. I'll now turn the call back to Colleen. Okay, operator, we're ready for the first question.

Thank you. To ask a question, please press star 1. Your first question is from Rick Prentice of Raymond James. Please go ahead. Your line is open.

Thanks. Good morning, everyone.

Can you hear me okay?

Hey, Rick, it's a little hard to hear you. Okay.

Hang on a second. Yeah, hey, a couple questions. Can you hear me better now?

Yeah, much better.

Okay, cool. Yeah, first I want to focus on the balance sheet and capital allocation maybe. Vicki, as you look at investment years at both U.S. Cellular and TDS Telecom, help us understand, you mentioned the level of leverage you want to see in 23. Where is that at? How are you viewing the dividend as far as that capital allocation goes? And any consideration of looking at possibly securitizing the tower business, which seems to still be doing very well?

Okay, thanks, Rick. A couple of questions there. Let me start first with, you know, capital allocation strategy. Just broadly, as we are looking across our businesses, you know, we've talked significantly about last year, the last couple of years, this year, we are in a heavy investment cycle, both with the 5G modernization and C-band deployment at U.S. Cellular, and the expansion of our footprint and into approximately 100 new markets at TDS Telcom. But I have to balance the needs and the pacing and the timing of those investments with our leverage and with dividends that we feel are important to our shareholders. So it's a balance. And as I look at our leverage, we are working to manage really manage well under our debt covenants with significant safety nets. And we are looking to manage within our credit rating requirements. And so we're balancing that with the pacing of our investments back into the business. And then let's see, you had a second question on towers. If I think more broadly about our non-core assets and towers, that gives our balance sheet strength. And it also gives and contributes strength to the business. So we've talked a lot about the towers and the importance to U.S. Cellular as a core part of its operations. But it gives us balance sheet strength. So I will tell you that we have sufficient liquidity for 2023. and we have sufficient sources. But I would not, you know, I would have those if I needed them, but for 2023, I'm not needing to monetize anything on the balance sheet.

Okay. And the dividend was increased not that long ago, I think, what, 49th year in a row or so, so still a strong commitment to paying the dividends.

We have a very strong commitment to paying the dividend. We have a long track record that we're very proud of, and we are focused on modestly increasing it, which we did this year.

Okay. Second question for me. LT, when you joined, you mentioned that there could be opportunities for partnerships in the business to help return on capital. It's been several years. Obviously, it's been a difficult environment out there. But update us as far as what potential partnerships are out there, where you're at as far as maybe bringing them to fruition.

Eric, good morning. I remain that the concept of partnerships and the opportunity for partnerships is is founded on two concepts. The first concept is that the capital intensity for the industry as a whole is in a challenging place. It's the case for us. It's also the case for our competitors. And the second concept that it's founded upon is it simply does not make sense, in my perspective, if you think about network density, site density required to support 5G, let alone 6G, which is starting to be talked about. Building multiple duplicative, four or five duplicative networks in rural America, given the capital intensity challenges, to me doesn't make sense. And so we continue to have conversations with players in the industry. Obviously, I can't get into specifics. I think there's general agreement upon those two founding principles. One interesting example, it's a very micro example, Rick, but it gives you a sense about how people are thinking about this. In our tower business, one of the interesting things that we can do is we don't just market real estate on the tower because we're a operator, and we also have assets at that tower that other people can use, we can market those as well. And so those are shelters and generators and those sorts of things that you would expect. The interesting one is backhaul. So we've had some conversations with people about sharing backhaul. And in the past, you know, that concept would have been no thank you, right? That means that there's a piece of my network that I have to share with someone else. And we're actually seeing a lot of interest in some of those backhaul sharing conversations. So I believe the momentum behind those partnerships remains, you know, reasonable. I think it's still a good strategic concept. To your point, we haven't seen meaningful progress that I can report out on a call like this. But I do think that the underlying strategic reaction now remains sound, and we continue to have those conversations with folks in the industry.

Great. Thanks. Everyone stay well.

Thanks very much. Your next question is from Sergey Dolhevsky of Gameco Investors. Please go ahead. Your line is open.

Good morning, guys. Thank you for taking the questions. My first question is for LT. You mentioned that the promotions and offers that you have in the market in the second half of last year and first quarter of this year, are having positive impact on churn with a six to nine months lag effect, as you expected. My question is, as you look at the magnitude of churn improvement, is that what you expected? Is the tracking better or worse compared to your kind of initial expectation based on some of the trials that you did in your regional markets before? And also, besides getting more customers in contract, which is obviously what you're working on, What additional steps do you see that are working for you or have been working for you recently in terms of improving churn and what else could be done?

Hi, Sergey. Thank you for the question. I am pleased with the progress that we've made on churn. Clearly still have a lot of room to go. But more broadly, as I think about trends in the business, we've had, if I look at 2022, Every quarter had better net ad momentum than the quarter before it. In the first quarter of this year, we have better net ad results than the first quarter of last year. Q1 is generally going to be down from Q4 for net ads in our industry, as you well know. And so the momentum in the business, the direction that the business is heading from a net ad perspective, I'm pleased with. It's not fast enough. We have to continue to improve the momentum. And the reason I share that with you is because it's somewhat similar to the results that we saw on churn. So the net impact of the promotions has been about what we expected. It took a bit longer than we had seen in our test market. And so the improvements took a few more months to drive the benefits that we hoped to see in terms of churn improvement than we had seen in our test markets. But the overall impact of the improvement is consistent, and we remain optimistic that we can continue to drive those kinds of improvements in churn as long as we can keep people in contract. Our in-contract rate right now is about 64%. It's as high as it's been in a long time. We're going to have to maintain that type of in-contract rate if we want to continue to see positive churn momentum, and so that's going to be a key driver of it. The other pieces of it are we have to be targeted and smart with our upgrade offers. We continue to pulse in and out between mass upgrade offers and targeted upgrade offers. And by targeted, I mean digital outreach to customers. The results we see from those targeted offers are considerably better than our test cohort. And so I'm optimistic about the results that we get from those targeted efforts. You don't get the same bang as you do with mass upgrade offers, but you get better bang for your buck with those targeted upgrade offers. And that brings me to my last piece of the equation, which is the balance between subscriber and economic results that we try to strike. Yes, there is an easier way to continue to drive churn down, which is just to be super aggressive on upgrade offers, do mass upgrade offers, and throw more money at it. We've tried to be very disciplined in this market. It's a highly competitive market. And in a highly competitive market, what you don't necessarily want to do is continue to lead a charge to the bottom. And so what we've tried to do is be disciplined in the balance between the financial results and the subscriber results. And I think you see that in ARPU. You see that in our continued improvement in ARPU in the face of some pretty intense competitive pressures and in the face of rolling out flat rate. which, as we talked about earlier, has a net dilutive effect on ARPU. So hopefully that gives you some sense, Sergey, about how we're thinking about it and some of the levers that we're trying to pull and how those are affecting the results that we're seeing. Good momentum. We've got to make sure we keep it going.

Got it. Thanks. My second question is on the growth ad front. Handset growth ads were up 2% year-over-year, but it was largely driven by, I think, 5,000 increase in feature phone growth ads, the smartphone growth ads down 3%. Maybe a two-part question. First, what is the reason for increasing number of feature phone growth ads over the past few quarters? more broadly, if you look across different geographies and different markets that you have, what are some of the common characteristics of markets where you tend to do better in terms of gross ads over the past few quarters? And are there any lessons learned that could be applied to other markets that are underperforming right now?

Yes, Sergey, on the first part of your question with respect to the feature phone success, One thing we see occurring is that customers that have been on our prepaid plans, some are migrating over to our flat rate plan. So in the first quarter of this year, 3,500 prepaid customers migrated to our postpaid flat rate plans. That counts as a postpaid gross add. And that's why you're seeing that dynamic between feature phones and smartphones in the first quarter.

And, Sergey, I'll tackle your second question in terms of market characteristics. You won't find this shocking, right? Markets where we have a strong network, we generally do well from a subscriber performance perspective. When we roll out 5G, we see improvements in customer perception. We don't just see improvements in perception. We see actual demonstrated improvements in performance. And so where we have upgraded our network, we tend to see better subscriber results. By upgraded our network, you can think of that in two ways. The first way is modernizing to 5G. As I mentioned in my earlier comments, we have 80% now of our traffic rides over a tower that has been upgraded to 5G. I mention that only because as customers move to 5G handsets, That's that key metric that we're following is not what's the total percentage of traffic on 5G. It's what's the total percentage of traffic that rides over a 5G-enabled tower. Because as you know, getting a 5G signal requires you to upgrade the tower, but it also requires you to upgrade your handset. We feel good about how we've invested, how we've made those investments, and how we've upgraded our network to 5G. The next pivot in terms of continuing to improve our network is with mid-band. And so we've begun deployment of that mid-band spectrum. Right now, we can only light up the 3.45 spectrum that we purchased from the Department of Defense, but we are deploying the C-band spectrum as well that we expect to be able to light up at the end of this year. As we reported, I think we've been able to clear any interference concerns we had with the FAA, and so we feel good about our ability to deploy that spectrum for the benefit of our customers. And as we light that up, we believe we'll have an even more compelling network offering. And so that helps us drive subscriber performance, both on the churn side and the growth set side.

Great.

Go ahead, Sergey. You got one more?

Yeah, one more question for Vicky. Last question. Basically, TDS and USM stocks obviously have been under pressure for some time and operational turnaround at USLR is taking longer than expected. I mean, obviously we see green shoots, but it's taking longer than expected while competitors obviously don't sit still. So given all that, what moves around capital allocation or financial engineering would TDS and USLR consider to surface value from a significant collection of underappreciated assets that you have in your portfolio that potentially could provide you with additional capital to invest for growth and also just in general broaden strategic flexibility.

Yeah. Thank you, Sergey, for the question. You know, as I had answered before, we have a balanced approach to our resource allocation, and we're constantly weighing the returns that we're getting on our investments. And as we are allocating our capital, we're very focused, as LT has outlined and Michelle and Doug have outlined, the strategic objectives at both businesses. Having said that, our stock is under pressure, as we saw a decline in that, and we are making heavy investments right now, and that is pressuring our profitability and our free cash flow in the near term. However, we are very focused on these investments trying to position both businesses for future growth and improved returns over time. And that is our goal. As I've talked about, we've got a strong balance sheet. We have strong assets on our balance sheet and non-core assets. If we should need to do something with those from a financial engineering perspective, that would always be an option. But right now, that is not our plans for 2023. Thanks, Sergey. Thanks, Sergey. Next question.

Your next question is from Simon Flannery of Morgan Stanley. Please go ahead. Your line is open.

Great. Thank you. Good morning. I don't think you really referenced macro much on the call, which I guess is a good thing. But Some companies have talked a little bit about slower payments or higher involuntary churn. I wonder if you could just talk across both the consumer and the enterprise wireline and wireless, anything you're seeing or you're monitoring on the macro side of things or enterprise decision-making. And then LT, you talked a lot about fixed wireless. Nice to see the momentum there. Help us a little bit with this scaling as you bring on the mid-band spectrum. How should we think about your go-to-market across your footprint with that mid-band 5G footprint? We're obviously seeing a lot of traction at Verizon and T-Mobile. So how will that flow into 2024 for the company? And how do you address the concerns or the kind of pushback by some about the inability of wireless to handle broadband traffic beyond a certain point? Thanks.

Thanks, Simon. A lot there. I'll have Doug tackle the macro from the U.S. cellular perspective. You mentioned wireline, so I'll have Michelle tackle macro from the telecom perspective, and then I'll answer your question about fixed wireless. Doug?

Yeah, good morning, Simon. So on the macro side, I mean, yeah, there's continued pressure with, you know, generally higher inflation rates and, you know, potential recession later this year. What I would say is we're managing our payments and bad debt quite well. If you look at our bad debt expense, it's just effectively flat year over year at $26 billion for this quarter. Our involuntary churn went up very slightly and the rate per involuntary defect went up slightly. So there is some pressure there. We're spending a lot of time monitoring it and taking action specifically. We've tightened credit twice in the fourth quarter of last year. taking some anti-fraud measures, including enhanced ID scanners in our stores, as well as extending the device locking period. All of those are going to help us in 2023 as it relates to bad debt. Certainly a watch point given the macro environment, but we continue to manage it well and feel good about where we're at right now.

Thank you, Doug.

Hi, Simon. It's Michelle. So I'll take it from the telecom side. Yeah, so from our perspective on the customer payments, bad debt expense, we're operating at the pre-pandemic levels. We had gotten back to that already most of last year. So things are trending just normally for us. So not really any concerns there. Last year, you did hear us talk about supply chain concerns and some actions we were taking with that. We did a lot of pre-buying in 2022 to make sure that we had the materials that we needed in order to make sure to not delay any of our fiber builds. We were very successful in doing that, and that's a shout out to our supply chain management team. So at this point, we're seeing some of the supply chain constraints loosen a little bit. So we don't see the same risk in supply chain this year going forward. We were positioned really well coming into 2023 and in fact hope to be able to just start utilizing some of that pre-buying that we had done. In terms of inflation, we do see some higher costs in certain areas of our business. As it relates to our fiber bills, there are some higher costs related to labor and materials, but we have consistently worked, and I think I've talked about this before, to find ways to mitigate some of those cost increases with implementing process improvements and figuring out ways to design our network builds more efficiently, more effectively, making sure we're targeting the lowest cost areas to build. So far, even though there's been some cost increases in certain areas related to our business case on fiber, we're able to maintain the overall business case expectations and the returns we expect to get out of those projects because of the mitigating initiatives that we put to offset some of those higher costs. So I'm not sure, Vicki, if you want to talk at all about interest rates from the macro perspective.

Yeah. I mean, certainly we saw an increase, another increase modestly by the Fed. I think I've shared with you, you know, for every 1% increase in the rates, it's about 20 million more in interest expense. But I think I'm very comfortable with the balance between our fixed and our variable portions of debt. And, you know, we've got that built into our projections.

And Simon, let me tackle fixed wireless based on your question. We are very pleased with the momentum we've seen in that product. Like I mentioned before in the comments, but I'll just reiterate it briefly. You know, we do have two interesting continued catalysts. One, we didn't expand that product footprint wide until June of last year. And so as you're looking at year over year, We still feel good about Q2 in terms of our ability to grow meaningfully because we have it across our entire footprint. And additionally, as we start to bring on mid-band spectrum, we have an ability to satisfy not only capacity, which is certainly an issue that we're paying attention to, but also deliver a far higher speed experience. And so we have the ability to compete in areas and effectively compete in areas that maybe we're not really touching right now. The interesting thing about our rollout is it's a little bit different than our competitors. And I think it creates a more sustained opportunity. And it also creates an opportunity to manage our network differently. And that's that we're focusing more on rural areas and rural customers. First, it's a very different competitive dynamic. Right now, our low-band product competes primarily with satellite, with DSL, and you can see the growth that we've been driving in it. When we roll out mid-band, we'll be competing not only against those technologies, but against unupgraded cable plant, even upgraded cable plant, where people aren't happy with their cable provider. The one place, and I've been trying to be pretty clear about this in the past, that we don't view the product as being particularly competitive against is where there's existing fibers. We do not plan. You asked about go to market, right? We don't plan on aggressively distributing or going to market or marketing the product in areas where there is fiber. But we do plan on aggressively marketing it everywhere else. And the other nice thing about doing this in rural areas is it's more manageable from a capacity perspective. Capacity is certainly something we're still going to have to pay attention to. Fixed wireless subscribers use a lot. But when you have a less dense subscriber base utilizing fixed wireless off of a tower, you then also have less competition with your mobility product. And so you can manage those capacity demands in a bit more of a targeted and elegant fashion. And so right now, our plan is we continue to be full speed ahead with the product. We continue to expect to distribute it across our entire footprint. And we remain really bullish on what we're seeing.

So that's really helpful, both on the macro and the fixed wireless. So just, I think you would have 30 million pops or something. So maybe is that fair to think that that's, you know, 12, 15 million households and will you have 5G to, you know, half of those, more than half of those with fixed wireless next year?

I'm trying to follow the bouncing ball on the math, Doug.

You've got Yeah, so, I mean, right now, Simon, over our low band, it covers our entire footprint. That's about 13 million homes. With respect to, you know, mid-band, that's going to be multi-year rollouts. We're going to get to more homes. We're going to get to those 13 million homes over time, and probably, frankly, not all of them over time based on the way mid-band propagates. But we will continue to expand that coverage, you know, starting this year with our build-out. And, again, it's multi-year. Great.

All right. Very helpful. Thank you.

Thanks for the question. Thanks, Simon. Next question? Your next question is from Tom Lidke of Citadel. Please go ahead. Your line is open.

Thank you. I appreciate you taking the call. I've been a shareholder for 32 years, and I purchased the stock at $14.34. And 32 years later, I've lost half my money. And I've listened to this... presentation of enthusiastic future results, and they don't seem to come. And I'm wondering at some point if it makes sense to put the company up for sale and let these assets be more efficiently run in a larger system, because I don't know where we're headed here. The stock's at a 32-year low. I wonder if someone could explain this to me.

Hey, Tom, it's LT. We certainly appreciate you sticking with us. Appreciate you being a shareholder for so long. Certainly questions that you're asking are questions we've been asked before, and they continue to be things that we evaluate in terms of strategic options for the business. We believe in this business. We believe in the long-term future of the business. It's the wireless industry as a whole is in an interesting place right now. Lots of people have invested a lot of capital to produce and to deliver 5G. And those use cases have been slow to manifest themselves. And I think that's created capital intensity pressures, not just for us, but for our competitors. And I do think you see that reflected in the performance of the equity. That being said, I believe we have a very strong set of assets in this business. We have strong spectrum holdings. We've reset our debt over the last few years so that we have a better positioned balance sheet. I think Vicki went through that. And I believe that we're well positioned to support that 5G demand as it begins to emerge in the coming years. And so I understand your frustration. I share it. Obviously, I'm a shareholder as well. I appreciate the question. We think we're well-positioned to take advantage of that growth, and we're staying in the course with our strategy because we believe in it.

Thanks, Tom. Operator, next question?

There are no further questions at this time. I will now turn the call over to Colleen Thompson for closing remarks.

Okay. Thanks, everyone, for your time today. Again, please reach out to IR if you have any additional questions. Have a great weekend.

This concludes today's conference call. Thank you for your participation. You may now disconnect.