United States Cellular Corporation

My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the TDS U.S. Cellular Third Quarter 2024 Operating Results Conference Call. All lines have been placed on me to prevent any background noise. After the speakers are immersed, there will be a question and answer session. If you'd like to ask a question during this time, simply press star 1. on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Colleen Thompson, Vice President, Corporate Relations. You may begin.

Colleen Thompson Good morning and thank you for joining us. We want to make you all aware of the presentation we have prepared to accompany our comments this morning, which you can find on the investor relations sections of the TDS and U.S. cellular websites. With me today and offering prepared comments are from TDS, Vicky Villicret, Executive Vice President and Chief Financial Officer. From U.S. Cellular, LT Thuraville, 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 website. 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. As shown on slide two, the information set forth in the presentation and discussed during this call contains statements about expected future events, and financial results that are forward-looking and subject to risks and uncertainties. Please review the Safe Harbor paragraphs in our press releases and the extended version included in our SEC filings. And with that, I will now turn the call over to Vicki Villacruz. Vicki?

Okay. Thank you, Colleen, and good morning, everyone. Before we begin, I do want to acknowledge the devastating impact of the recent hurricanes and the fires that swept through Rio Dozo, New Mexico. Our hearts go out to all who were affected and suffered loss. And I want to thank our teams, especially, who came together to offer support and assistance in all our affected communities when our customers and our communities needed us most. Thank you. As I turn to the results, I want to highlight that we had another quarter of execution on the priorities that we set out during the year. As LT will cover in more detail, U.S. Cellular has made nice progress on monetizing portions of the spectrum that were not included in the proposed transaction with T-Mobile. These transactions really highlight the significant value and demand for these licenses. We have looked across our enterprise, entering into several other transactions that will help to focus our resources and further optimize our footprint. First, the sale of our One Neck IT solutions closed in early September. The sale of One Neck is accretive to free cash flow. We also reached agreements on divestitures of certain non-strategic assets at TDS Telcom expected to close later this year. Turning to results, I am pleased with our third quarter performance. Both business units are focused on meeting their financial objectives. resulting in U.S. Cellular increasing its profitability outlook for adjusted EBITDA and adjusted OIBDA, and TDS Telecom reaffirming its guidance. We ended the quarter in a solid cash and liquidity position. Sequentially, each quarter, our debt to EBITDA ratios have improved throughout 2024. Both businesses are continuing to generate positive free cash flow while continuing to invest in their networks. We are pleased to see the Fed cut interest rates in mid-September as this drives modestly lower interest costs for us. We'll continue to manage our balance sheet through a combination of primarily long-dated debt maturities issued at historically low interest rates. We'll continue to maintain reasonable leverage and sufficient liquidity, all of which provides flexibility as we go into the fourth quarter and look forward to execute on our operational objectives and longer-term strategic goals. Before turning the call over, we recently announced that Michelle Berkwicki will be leaving TDS in December after 17 years with the enterprise. On behalf of the organization, I want to thank her. for her leadership and wish her well in her next endeavors. With Michelle's upcoming departure, Chris Boffield, who is currently TDS Telecom's Vice President, Financial Analysis and Strategic Planning, will be stepping into the role of Vice President of Finance and CFO at TDS Telecom. Michelle and Chris will be transitioning over the next month. I'd also like to thank all of our associates for their hard work in these dynamic times. And now, LT, I'll turn it over to you.

Thanks, Vicki. Good morning, everyone. I want to just briefly echo Vicki's sentiments regarding Hurricane Helene. I also want to pass along my sincere thanks to our network and operations teams that have worked tirelessly to restore our network and support our customers. Our operations have recovered, but it's going to take a long time for that area to fully recover, and everyone that's affected is certainly in our thoughts. With that, let's pivot to the materials. I'm going to take us to page five, and that covers some recent highlights. First, following our announcement back in May, the process to sell our wireless operations and select spectrum to T-Mobile is proceeding as expected. As you may have seen, we filed our public interest statement with the FCC in September, and we believe we're on track for a mid-2025 closing. We remain confident that the transaction with T-Mobile is the best long-term solution for our customers as it gives them the long-term benefits of greater scale and a more competitive network. The T-Mobile transaction will also provide us with an additional long-term tower tenant and a strengthened tower business. If you recall, we began reporting separate wireless and tower segment information last quarter We plan to continue to provide this detail going forward up to the expected close of the T-Mobile transaction. Also, as we talked about in our May announcement, after the proposed T-Mobile transaction, we'll be left with approximately 70% of our spectrum. We've been running a process to opportunistically monetize that spectrum. In October, we entered into agreements with multiple carriers to sell certain portions of those retained licenses in exchange for aggregate proceeds of over $1 billion. Slide 6 shows our progress on the monetization, and it includes the sale of our 850 megahertz spectrum and a portion of our AWS and PCS spectrum to Verizon, as well as the sale of small portions of our CBRS, CBAND, and 700 megahertz spectrum to two other smaller network mobile operators. These license sale transactions are subject to regulatory approval, They're also contingent on the close of our proposed transaction with T-Mobile. We're really pleased that we worked with multiple buyers, large and small, and that we were able to enter into agreements to realize substantial value for these licenses, and that was well in excess of our book value. Doug will be providing more details on the expected gain and the tax impacts associated with these license transactions. Now, we continue to work on opportunities for monetization of the remaining spectrum. but as this is an ongoing process, I won't be able to share any additional details today, but I will provide more updates as they become available. Now let's talk about the quarter. The team remains highly focused on balancing improving subscriber momentum with delivering strong operational and financial performance, and you can see that in our results. As discussed last quarter, earlier this year we made promotional changes that have improved our subscriber trajectory while executing cost reduction initiatives that have enabled us to maintain strong profitability. We've continued to see the momentum from these changes in the third quarter, and we improved retail net losses by 20,000 subscribers year over year. In addition, we've been committed to caring for our existing customers, and that includes conducting us days multiple times throughout 2024. And as a reminder, us days are periods where highly attractive promotional offers are made available to our existing customers. We believe this focus on our existing customers through us days and through other promotional investments has contributed to improved post pay handset churn for each of the first three quarters of 2024. We plan on award our existing customers through us days, other promotional offers in the fourth quarter. For the industry as a whole, while the pool of available subscribers was down again in the quarter on a year over year basis, our share of gross ads increased, and that allowed us to keep post-paid handset gross ads flat. This is particularly noteworthy in the context of our deal announcement. Post-paid handset net losses improved by 10,000 year-over-year due to an improvement in churn, again, partially attributable to our focus on rewarding our existing customers with attractive promotions and continuing to deliver a strong network experience. We've also seen nice improvement in prepaid due to our competitive pricing and promotional strategies, including our compelling multi-line pricing, which began in May of this year. And I'm really pleased with our improved subscriber momentum, particularly given that we've seen no let up in competitive intensity. And that's from either the large mobile network operators or the cable wireless players. Our postpaid ARPU also increased 2%, partially due to customers realizing the value of our higher tier plans. We had 54% of our postpaid handset customers on the top two tier plans compared to 46% a year ago. And given the cost pressures associated with those continued promotional investments, as well as inflation and the ongoing deployment of 5G, the teams have been doing an excellent job managing costs with expenses down year over year in all major categories. And I'm really proud of our efforts to balance subscriber growth with financial discipline. And that's enabled us to raise our full year profitability guidance this quarter. Turning to the network, we currently have over 80% of our data traffic already handled by sites that have been upgraded with low band 5G. And that provides strong 5G coverage in our footprint. And so consistent with our 5G network investments in 2024, Future 5G network investments will predominantly be dedicated to the deployment of mid-band spectrum, and that's going to enhance 5G speed and capacity. And we noted previously that we expected capital expenditures for the full year to trend toward the lower end of our guidance range, and this quarter we lowered our capital guidance to reflect that. Before I turn the call over to Doug, I want to congratulate the team for U.S. Cellular being ranked number one in the North Central Region JV Power Study. reinforcing that our ongoing 5G network investments are resulting in a strong customer experience. And as all these results demonstrate, we're executing on the strategic initiatives that we've laid out for the business earlier this year, and I believe we're well-positioned heading into the busy holiday season. I want to thank the team for their hard work, and I'll now turn the call over to Doug.

Thanks, LT. Good morning. Before discussing quarterly results, I want to provide some additional details on the proposed licensed sales transaction that LT previously highlighted and some broader impacts to our license portfolio. Subject to closing the pending T-Mobile transaction and regulatory approvals of the license transactions, we expect proceeds at just over $0.0 billion on the license sale transactions announced in October and highlighted on slide six. These licenses have a net book value of approximately $590 million and after transaction fees and transaction accounting adjustments, we expect to recognize a gain on the license sales upon their respective close dates. Further, we expect total cash taxes related to these recently announced spectrum transactions to be in the range of $200 to $250 million for U.S. Cellular and $150 to $200 million for TDS. This is in addition to estimated cash taxes on the pending T-Mobile transaction, which we expect to be in the range of $225 to $325 million for U.S. cellular and $150 to $250 million for TDS. Additionally, as a result of our efforts to monetize Spectrum assets not subject to the securities purchase agreement with T-Mobile, U.S. Cellular was required to review and update the groupings of licenses or units of accounting for purposes of impairment testing. As a result of this review, our millimeter wave licenses in the 28, 37, and 39 gigahertz bands were identified as a separate unit of accounting. Due in part to industry-wide challenges related to operationalizing this millimeter wave spectrum, U.S. Cellular estimated the fair value of these licenses to be less than their corresponding carrying value, and this was the primary driver of U.S. Cellular recording a loss on impairment of licenses of $136 million or $102 million net of tax in the third quarter of 2024. After recognition of the loss on impairment of licenses, the carrying value of our millimeter wave spectrum not subject to the T-Mobile transaction is 161 million. Now let's review the financial results starting on slide 10. Service revenues declined 2% driven by declines in the average subscriber base, partially offset by a higher post-trade ARPU as LT discussed previously. System operations expense decreased 2% as cost optimization actions, including the shutdown of our CDMA network in the first quarter of 2024, more than offset increases that resulted from our ongoing mid-band 5G deployment. Further, selling general and administrative expenses decreased 3% and excluding the impact of strategic alternatives expenses included in this expense category decreased 5% due to decreases in sales-related expenses, bad debts expense, as well as decreases across various other general and administrative categories due to cost optimization initiatives. This led to an improvement in adjusted operating income before depreciation and amortization of 1%, and an improvement in adjusted EBITDA, which incorporates the earnings from our equity method investments, along with interest and dividend income of 3%. Slides 11 and 12 present the separate results for the wireless and tower segments. Tower revenue from third parties increased 1% in the third quarter as co-location growth has slowed relative to recent years and was also impacted by defections, including Sprint-related defections. As we have discussed on prior calls, the wireless industry has moderated capital expenditures beginning in 2023, and we experienced a corresponding slowdown in new tenant and amendment activity, which is impacting tower revenue growth rates in 2024. Again, we remain bullish on the long-term outlook for our towers business and the long-term capacity needs of the industry that will drive demand for towers. Further, the pending transaction with T-Mobile, which is subject to regulatory approval, and their commitment to lease 2015 incremental towers for an initial term of 15 years is expected to significantly increase third-party tower revenues. Briefly on free cash flow, On a year-to-date basis through September 30th, due to improved profitability and moderated capital expenditures, we generated free cash flow of $331 million, a $94 million increase over the prior year. This has allowed us to repay $163 million of debt in the first nine months of 2024 and an additional $40 million of debt in October, which has further improved our leverage ratios. Our 2024 financial guide is on slide 13. Given this late stage of the year, relative to the guidance we initially issued in February 2024, we are narrowing the ranges of our guidance for service revenues to 2.95 to 3.0 billion and capital expenditures from to 550 to 600 million. Further, we are narrowing and raising the ranges of our guidance for adjusted income before depreciation and amortization to $800 to $875 million, and adjusted EBITDA to $970 million to $1.045 billion, reflecting the successful cost management results that we expect to achieve in the full year 2024. I will now turn the call over to Michelle Barquecki.

Thank you, Doug, and good morning, everyone. Let's turn to slide 15 for our third quarter highlights. This quarter, we reached an important milestone in that 50% of our service addresses are now served by fiber. We continue to grow our footprint, expanding service addresses 9% year over year. The team delivered 32,000 new marketable fiber addresses in the quarter, bringing our year-to-date total to 87,000, making progress on our 125,000 marketable fiber service address goal for the year. Our fiber broadband strategy is continuing to deliver good results, contributing to a 2% increase in total operating revenue and a 21% increase in adjusted EBITDA for the quarter. We also grew total residential broadband connections 4% year over year. Our fiber strategy is extremely important. Fiber in our expansion and incumbent markets is providing growth, helping to overcome industry-wide competitive pressures facing our copper and cable markets. Moving to slide 16, you can see where we are on our longer term scorecard. We are targeting 1.2 million marketable fiber service addresses. We ended the quarter with 886,000. This reflects progress in growing fiber through our expansion markets as well as fibering up our incumbent markets. We are also targeting 60% of our total service addresses to be served by fiber. We ended the quarter with 50%. And finally, We are expecting to offer speeds of one gig or higher to at least 80% of our footprint. We finished the quarter with 74% at gig speeds. These goals do not include fiber deployments that will be completed through the enhanced ACAM program. Therefore, these goals will increase once we add in eACAM fiber addresses. We're working closely with the FCC to finalize our precise service address obligations. Our original offer required building to approximately 270,000 addresses, but we expect the final obligation to be lower. We will provide updated goals when we have more certainty on the final address reconciliation. On slide 17, you can see we are growing our footprint with a 9% increase in total service addresses year over year. As shown on the right side of the slide, we see increased demand for higher broadband speeds. with 79% of our customers taking 100 megabits per second or greater, up from 75% a year ago. We continue to increase the availability of gig plus speeds, and customer take rates of these speeds are growing, with 20% of our customer base on one gig or higher at the end of the quarter. Turning to slide 18, We had 2,700 residential broadband net ads in the quarter, which contributed to 4% growth in residential broadband connections year over year. As we deliver new fiber service addresses, our teams are marketing and selling into those addresses. This quarter, we added 7,600 residential broadband net ads in our expansion markets. While this is providing growth, the pace of net ads has been slower than expected. we remain focused on driving up penetrations in our new expansion markets. Specifically, we've been working to increase the number of door-to-door sales reps, including augmenting our internal staff with external resources. Leading indicators are showing improvement in our sales. Looking at the big picture, we are confident in the fundamentals of our fiber program and still targeting approximately 40% broadband penetration once markets hit a steady state. In addition, these markets are operating efficiently and contributing to both revenue and adjusted EBITDA growth. Our expansion markets are more cost effective than our business case is expected, and we're seeing that fiber markets are the most efficient networks to run. Now, moving on to our incumbent ILAC markets. Where we have upgraded our network from copper to fiber, we've been able to effectively defend and compete. We had positive fiber broadband net ads in the quarter, which did not fully offset net losses in our copper areas. With support from the enhanced ACAM program, we will get even more fiber into our ILEC over the next few years, which will help us defend these markets. In our cable markets, consistent with the industry, we experienced net broadband losses, primarily due to LEX upgrading and fiber overbuilders increasing their presence in our markets. To mitigate these impacts, we continue to promote our strong product, capable of delivering gig speeds using DOCSIS 3.1. We also strategically overbuild our networks with fiber in certain areas, and we put fiber in all new greenfield builds. In addition, we implement strategies to attract and save customers to mitigate market-specific competitive challenges. Now, a couple more comments on net ads. We continued to see impacts from two discrete items that we also mentioned in the second quarter. First, we experienced additional ACP disconnects this quarter, 600 in ILEC and 500 in cable. Second, we had an additional 1,000 cable net losses this quarter due to the wildfire in Rio Doso, New Mexico that occurred in June. Now turning to the middle graph, average residential revenue per connection increased 5% This was due primarily to price increases. With increases in broadband connections and revenue per user, we saw 5% growth in residential revenues. Specifically, expansion markets delivered $29 million of residential revenues in the quarter, compared to $20 million a year ago. As expected, commercial revenues decreased 4% in the quarter as we continued to decommission our CLEC markets. Lastly, wholesale revenues decreased 3% as customers migrate to lower cost products. On slide 19, you can see our quarterly performance. Operating revenues were up 2% in the quarter as the growth in residential revenues was partially offset by the decline in commercial and wholesale revenues. As our fiber connections and revenues grow, coupled with a 4% decrease in cash expenses for the quarter, we are seeing nice growth in adjusted EBITDA, up 21%. Capital expenditures were $78 million in the quarter, down 55% from last year, as planned. Slide 20 shows our 2024 guidance, which is unchanged from last quarter. In closing, I want to thank all of the TDS telecom associates for their energy and passion as they care for our customers and communities. As Vicki mentioned, this is my last earnings call at TDS. It has been my privilege to work with so many talented people during my time here. Thank you all. I'm proud of what we have accomplished, and I believe TDS Telecom has a bright future and is in good hands with Chris Vossfeld as CFO. I will now turn the call back over to Colleen.

Okay, operator, we are now ready for the first question.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad, raise your hand, and join the queue. If you'd like to withdraw your question, simply press star 1 again. You are called upon to ask your question and are listening via loudspeaker on your device. Please pick up your handset and ensure that your phone is not on mute when asking your question. Press star 1 to join the queue. Our first question comes from the line of Rick Prentice with Raymond James. Please go ahead. Thanks. Good morning, everybody.

Good morning, Rick. Good morning. Thanks.

A couple questions. Thanks for the color on some of the cash taxes impacts. Wanted to probe a little further on the T-Mobile sale and the Verizon Spectrum sale. are those fully using the net of NOLs and other tax yields, or is that kind of the gross liabilities that you might be applying more yields to them?

Yeah, Doug here on that question, that is net of what we expect to use for both NOLs and for interest carry forward. And that's the reason why the TDS cash taxes are estimated to be lower because they have more of those attributes, NOLs, and interest carry forwards than U.S. cellular does.

Makes sense. And on the Verizon spectrum sale, you mentioned that there also would be some fees and other items. For the non-cash tax items, is it probably a couple?