Q3 2021 Telephone and Data Systems Inc and United States Cellular Corp Earnings Call
Busy day, so thank you for being so flexible.
I wanted to make you all aware of the presentation. We are prepared to accompany our comments. This morning, which you can find on the Investor Relations section of the Tds and use cellular websites.
With me today and offering prepared comments are from Tds Pizza, <unk> Executive Vice President and Chief Financial Officer from U S. Cellular LT terrible President and Chief Executive Officer, Doug Chambers, Executive Vice President and Chief Financial Officer, and from Tds Telecom Vicky Villa crabs.
Senior Vice President of Finance and Chief Financial Officer.
This call is being simultaneously webcast on the Tds and to use cellular investor relations websites. So you'd see the website for slides referred to on this call, including non-GAAP reconciliations.
We provide guidance for both adjusted operating income before depreciation and amortization OIBDA and adjusted earnings before interest taxes, depreciation and amortization or EBITDA to highlight the contributions of U S Cellular's wireless partnerships.
Tds and use cellular filed their SEC form 8-K, including the press releases and art Form 10-Q.
As shown on slide to 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 use cellular is attending the wells Fargo virtual Tmt's summit on November 30th.
And then in January we are attending the Raymond James Deer Valley Summit in person on January three through five and cities apps economy conference virtually on January six.
And as always our open door policy can now be open door open phone of video. So please reach out if you're interested in speaking with us.
Been done to raise new capital to fund the growth in our business as well at the same time lowering the average cost of our balance sheet is.
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%.
Annual run rate savings on this call that 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 AIP securitization debt and bank term loan debt.
This fulfils a commitment we made at the beginning of the year to reduce the average cost of our balance sheet and diversify or funding sources.
Going forward, we believe that we will continue to have excellent access to the capital markets through a variety of instruments in order in order to continue to fund our business.
Finally, before turning the call over to L. T 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 L. T L T.
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 and those growth areas of our business and we're making progress towards our return on capital goals.
Right I'm in web Doug cover the operational in the financial highlights of the third quarter, but first I thought I'd provide a few thoughts on some of these strategic priorities.
To top of mind for me can take continues to be the competitive environment.
The third corps, we saw continuation of aggressive promotions in the industry for both new and existing customers.
Had an impact on our postpaid subscriber results and on loss on equipment for the quarter.
And we expect a high level of promotional aggressiveness to continue through the holiday season and beyond.
I'm really pleased with the operational pivot we've made towards regionalization.
Effectively leverage that regional strategy to test a variety of different offers and.
And to help us hone in on an approach to properly balances subscriber growth and profitability wait.
Wait 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 setup to effectively trial multiple approaches in the marketplace going to help us it's gonna help us be much more effective than optimizing our business.
I spoke to you last quarter about some of our new initiatives to drive growth in our business and government in our prepaid operations.
We reported another strong quarter of results for prepaid.
And we're seeing positive momentum and business sales, particularly iot's space in the private networking space.
We needed to get this technology deployed to those on in this underserved areas that need it.
Talk briefly about supply chain constraints that have impacted us like everyone in the industry continue 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.
Today, we've been able to mitigate these risks and partnership with our suppliers.
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 and we recently completed our annual engagement survey and the results confirm what I've observed since joining the company.
Engagements incredibly high we recently received a net promoter score of <unk>, which is an amazing loyalty score.
This is especially important right now given expectations about what youre hearing in the press around the great resignation.
On that note our current retention rates are actually higher than they were a year ago.
It 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 to.
To help improve U S cellular overall.
With that Doug I'll turn it over to you to cover the details of the quarter.
Thanks, <unk> good afternoon, let's start with a review of customer results on slide eight.
Postpaid handset gross additions increased by 3000 year over year, largely due to higher switching activity in combination with our strong promotional activity of.
Of course, this was against the backdrop of industry wide promotional aggressiveness on handsets.
We saw connected device gross additions declined 26000 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 8000 during the quarter and by 65000 over the course of the past 12 months.
That helps to drive more service revenue given that smartphone <unk> is substantially higher than feature phones.
Moving to slide nine I also wanted to call. It the strong trends for prepaid which were driven by enhancements to our prepaid offerings.
It's about $25 billion to $699 million. The increase was driven in part by a higher average revenue per user, which I will discuss in a moment.
Inbound Romijn revenue was $30 million that was a decrease of 12 million year over year, driven by a decrease in data volume and rates whenever 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.
<unk>, you mentioned earlier or level of promotional aggressiveness different by region as we look to optimize our approach creates 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 bus cost for equipment soul.
In addition lots of 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 lots of equipment increased 19 million year over year from $5 million in 2022 $24 million in 2021.
This change and lastly equipment was the primary driver of our declining profitability year over year.
We expect the aggressive promotional environment to persist for the remainder of 2021 and into 2022 and a full year guidance for 2021 reflects the corresponding financial impact.
Now a few more comments about postpaid revenue shown on slide 12.
The average revenue per user or connection was $48.12 for the third quarter up one dollar and <unk> are approximately 2% year over year.
2% year over year due to a significant decline in connected device sales, partially offset by 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.
Okay.
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 remained flat year over year, and we expect the fourth quarter 2021 distribution from the la partnership to be aligned with the distribution received in the fourth quarter of 2020.
Next I wanted 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 3.053 point.
075 percent to $3 125 billion, maintaining the mid point.
For adjusted operating income and adjusted EBITDA, we are maintaining our guidance ranges of 852 $950 million and 1.0 to five to 1.15 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 million to $800 million as we're moving certain equipment and project spend into 2022. This shift did not impact our 2000.
2021 build plan and as <unk> mentioned, our multiyear <unk> 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 <unk> Vicki.
Alright, Thank you, Doug and good afternoon, everyone.
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 Telecom grew its footprint, 6% from a year ago, now serving $1 4 million service addresses across the 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 Robin capability and competition and more growing community.
In addition, we are now capable of delivering two gig internet speed in our Spokane, Washington in Meridian, Idaho market and going forward, we will launch two gig product and all of our new fiber expansion market.
Two gig 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.
We are seeing total broadband penetration of 38% in this fully launched cluster.
In total during the quarter, we added 20000 fiber service addresses surpassing 40% of our wireline service addresses a key milestone for us.
From a financial perspective overall, we grew our topline 2% while planned investment spending on new market launches resulted in lower adjusted EBITDA as expected.
Hoping to drive growth in our combos market.
Overall higher value product next in price increases drove a 4% increase in average residential revenue for 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 speeds to 57% of our total footprint, including both are fiber and DOCSIS three dot one market.
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 and.
In areas, where we offer one gig service, we are now seeing 20% of our new customers, taking the superior product.
Turning to slide 21, we have augmented our success growing broadband with our T V. S. T V offering.
A majority of tedious telecoms residential customers take advantage of bundling options at 63% of customers subscribe to more than one service, which helps to keep our churn low.
We recently announced our expansion of fiber into several new communities.
Further expanding our existing clusters, we announce Napa Idaho.
And several communities in Wisconsin, including anchor markets Green Bay and Oshkosh.
In addition, we announced several communities that will plant the flag and new geographies.
Players, Florida, and on Alaska, Wisconsin, creating a western cluster.
Billings, Montana the first in this state and several communities just southeast of Charlotte, North Carolina, where we operate and cable market today.
In total these communities add more than 270000 additional service addresses to our existing fiber deployment plan.
Through the third quarter, we had 358000 total fiber service addresses and are working to build out the footprint and these announced market.
<unk> 929000 service addresses over the next several years.
Year to date, we completed construction of 51000 fiber addresses adding 20000 service addresses.
In the quarter.
In the broader broadband product mix.
Partially offset by a 4% decrease in residential voice connection.
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% 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% from the prior year as growth from our fiber expansions that increases in broadband subscribers exceeded the declines we experienced in our legacy business.
Cash expenses increased 3% due to both supporting our current growth as well as spending related to future expansion into new market, 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 has 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're 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 bill 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 of our associates that contribute to our company's success and for that I am grateful.
Look forward to sharing our final 2021 quarterly results with everyone in February.
Now I will turn the call over to Jim.
Operator, we're ready to take questions.
And it takes that we have from our customers.
We think about last year Christmas obviously holiday season will still cover the fact that how you're thinking about this year fourth quarter versus what we might have seen last year portfolio than competitive activity.
If you have success.
We are 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 on churn as well.
I think we're going to have a little bit better fourth quarter as far as opportunities this quarter than we did last year.
Both of those.
Talk a little bit about this wireless access.
<unk>.
Verizon talked about it on their calls through normal talking about on their call.
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 youre doing.
<unk> ability as well with that.
The cafes.
Yes, Rick this is Alan so I think that there is there is a.
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 macro cellular.
Horizon, 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 is a greater level of opportunity these immediately or other competitors.
We've seen terrific results from our technical trials.
And so we've pivoted this now to commercial trials.
In and testing customer demand.
So far we're very encouraged candidly, it's still very small volume trials. So we got to work through Operationalization, thanks things like.
How to can we get to a self install.
I'm going to send him a profitable product.
You can expect to see a scaling that scaling that kind of throughout 20 twenty-two.
I will certainly certainly give updates as we do.
Suddenly single.
Your next question is from the timing Finery Morgan Stanley. Your line is now open.
Great. Thank you if if I could stay on that last cream L. T. Maybe.
Maybe you can just give us your latest thoughts on.
And if I think about our <unk> availability and we feel very good about our availability vis vis our competitors.
We provide a really high quality network experience, which is core to our value proposition.
<unk> will be a key part of providing a quality network.
It's been a differentiation point for us and I think you can expect that there'll be at in the future as well.
Great and just a follow up on the competitive environment. What are you seeing from T. Mobile they have just rolled out a new retail partnerships with Walmart and target and.
Have been very focused on the railroad in smaller markets recently.
Are you seeing a major change there or is it fairly incremental.
We are not seeing a major change there I think thus far and we continue to compete well with T mobile.
I think from a from a distribution perspective, I think they are trying to find a way to <unk>.
Distribution without necessarily having to build it themselves and that's a difficult value proposition.
Store in our App.
We received we've seen similar increases on the Android side from our App. So customers are enjoying the new capabilities were providing much.
A much more user friendly experience and and you're you're seeing that just in terms of customer engagement.
Obviously, the other places that you have to invest in 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 their 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.
And I expect in the long run that's going to manifest itself into areas.
I think in the in the truly long run you're going to see gross adds via digital like 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 the digital will play a role in a greater role in the growth that side of the equation.
I think where you are really going to see it as an upgrade.
Think that upgrades will increasingly be done digitally.
I think a good measure of performance over the long run is the percentage of upgrades and or manage digitally but obviously helps you on the cost side also helps you on a customer satisfaction side.
[noise] trick there is are you able to create the same kind of <unk> expansion.
With your upgrades as you are in the physical stores.
So one of the things that we've seen over the past couple of months as we've seen really good performance <unk> expansion on postpaid.
We're seeing that because our plan mix since are getting better.
That's happening because customers or walk into our stores in our associates are doing a really good job Upselling plan next.
There have been some comments that I've read about our aggressive promotions was promotions vary by region, but the reason that we are able to do some of those aggressive promotions moving along with it comes planned mix requirements in our associates do a really good job upselling those plan mixes up selling accessories, and so on you've gotta be able to mirror that kind of up cells.
In the digital environment, that's going to take time, it's gonna take investment I think we're on a good path I think we're making a good investments I think we're seeing in our experienced scores, but certainly more to come.
Great and another question on the wholesale from kind of if you could share your thoughts on hold.
Wholesale opportunities for yourself or for example dishes in his time.
A game on says AT&T and a criminal.
The primary and they'll know posner, but I know that the menu of your markets coverage is probably much better than who are painting teams or two mobile coverage is so do you see an opportunity to the <unk> to do a wholesale Dale volition more broadly what other wholesale opportunities to see down girl.
So I mean, I won't comment on a specific opportunities, but to say that we are open for business on wholesale I agree with you I think that the investment that we've made from a coverage perspective.
In network experienced perspective positions us very well for those kinds of deals.
I think that we can offer.
Very high quality experience to a potential MBNA partner wholesale partner, we're certainly open to those discussions it's false perfectly in line with some of the partnership conversations that we've had on previous calls.
I do think it's it can be an area of growth for us.
The obvious tradeoff is 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 he tried to make the the economic equation work. That's certainly something that we are 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.
Right.
And my last question is four Vicky on what to do with telecom side.
So you guys lowered capex.
For various reasons that lets you described.
For 2021, but here and now.
The number of things that you're gonna do this here is gonna be laws and I think Congress thousands of people were targeting before but as you look out in 2022 and I'm assuming that to me move past some of the supply chain issues. What are what is the annual pace of build.
That you would be targeting over the next few years, how much higher could you go over 150000, a level based on local instead of J at your current capital location.
Sir.
Good evening, Okay. Thank you for that question first class <unk>, Let me just say that you know a few carter's that ah slower than desire construction.
If not the carrying at that off from from this market expansion program is you know this is a very long multiyear program and that's it for the future and so I you know the market and you have market announcements. We've made substantial expand this program I think underscores or confidence in what we're doing.
The anthrax for 2022.
I could really translate into more service address is delivered in the first quarter of next year and that that that that would have a delay of revenue coming into the financial set I I expect it will continue to see topline brown definitely see all year and that'll go into next year.
And of course, I can provide more specific than our guidance in February that's on the capital perspective, you know we lowered our guidance on the capital we don't have five or survey addresses delivery until it's ready to market.
<unk> 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, a contractor has to complete fan you know the <unk>.
Entire uhm.
The entire construction and the N and light the fire up all the way to practice before turning it over to T. D. S. And then we have been affected for quality and then get that new location and for our system. So we have a lot of construction complete along the way it it which is which is really in our accounting for capital spending but I.
Thanks for the announcement of these new market and the increase in the substantial increase in our program I am signaling that we will have increased capital spending that that's going into 2022.
And and do you think about it longer term I checked it will have heavily elevated levels of capital spending taking us through 2022 2023, and then to 2024 and then we'll start to see the completion of the market.
And anything else coming down starting to come down at the end of 2024, and then and then getting more largely completed in 2025 and 2026, so really excited about about planning to fly now and and and taking advantage of this opportunity.
That's in front of me.
Great. Thank you.
And then further questions I would like to have to call back to Jane.
Thank you very not can we really appreciate you joining us on a Thursday afternoon, and please get in touch with us with any additional can I just have a great night.
This concludes today's conference. Thank you for participating jimenez disconnect.
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