Q3 2021 Telephone and Data Systems Inc and United States Cellular Corp Earnings Call
$4 billion since the beginning of 2020 at an average cost of four 9%.
And redeemed six separate bond series, comprising $1 6 billion in debt with a weighted average cost of 7%.
The annual run rate savings on this call that is approximately $33 million.
The new capital is a mix of low cost preferred stock in very long term retail bonds, along with shorter term AIP securitization debt and bank term loan debt.
This fulfills our commitment we made at the beginning of the year to reduce the average cost of our balance sheet and diversify our funding sources.
Going forward, we believe that we will continue to have excellent access to the debt capital markets through a variety of instruments in order 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 and which we saw significant onetime benefits from the cares act, which have not recurred.
With that I will turn the call over to LTE LTE.
Everyone. If we turn to slide seven I'm really pleased with the progress that we're making against our strategic priorities.
We continue to see positive momentum in those growth areas of our business and we're making progress towards our return on capital goals.
I mean, let Doug cover the operational and the financial highlights of the third quarter, but first I thought I'd provide a few thoughts on some of these strategic priorities.
It's a top of mind for me continues to be the competitive environment. During the third quarter, we saw a continuation of aggressive promotions in the industry for both new and existing customers they've.
They've 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 that we've made towards regionalization, we've 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 with profitability.
A variety of offers in the marketplace in conjunction with the iPhone launch some much more aggressive than others.
And I'm pleased that we're now set up to effectively trial multiple approaches in the marketplace could be helped us it can help us be much more effective in optimizing our business.
I spoke to you last quarter about some of our new initiatives to drive growth in our business in government and our prepaid operations.
We reported another strong quarter of results for prepaid.
Seeing positive momentum in business sales, particularly in the Iot space and the private networking space.
We're also seeing some really terrific traction in our tower business applications are up substantially and operating metrics, particularly cycle times have improved meaningfully.
It's clear the industry that we're open for business and towers, and we're really seeing the benefit of that approach.
Well I can briefly about network our network modernization program in multi year five G deployment remains on track.
The majority of our traffic is now carried by sites that have <unk> deployed equally.
Equally important we're getting five G devices into our customers hands. So far we have about a quarter of our smartphone subscribers with <unk> capable devices.
I'll talk a bit about millimeter wave spectrum, we're optimistic on the use of the spectrum for fixed wireless access.
We're continuing trials to validate network performance and customer experience and recently launched commercial offers and a small set of markets.
We are more aggressive commercialization plan in 2022.
We're offering commercial millimeter wave fixed wireless access speeds of up to 300 Megabits per second.
And to date, we're seeing many customers experiencing speeds that far exceed that.
Given the speeds that we're seeing in our trials and the enthusiastic reception we've received from customers.
There's clearly demand for this type of home broadband service.
Okay. It comes to things like Onboarding and training costs.
Are you close by recognizing in thanking all of our associates, who work every day to improve our customer experience helping.
Help improve use cellular overall.
With that dog I'll turn it over to you to cover the details of the court.
Thanks LP 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 course, this was against the backdrop of industrywide promotional aggressiveness enhance assets.
We saw connected device gross additions declined 26000 year over year.
This was driven by lower sales of Internet products, such as hot spots in tablets compared to the prior year will be 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 sparked an ARP who is substantially higher than feature for an hour.
Moving to slide nine I also wanted to call. It the strong trends for prepaid, which are driven by enhancements to a prepaid offerings.
We saw prepaid gross additions approved by 9000 year over year.
Next let's turn to the postpaid churn rate shown on slide on time.
Postpaid handset churn depicted by the blue bars with 0.95%.
Up from 0.88% a year ago.
This is driven by voluntary churn, which continues to run higher year over year as a result of increased switching activity and aggressive industrywide competition.
This is driven by voluntary churn, which continues to run higher year over year as a result of increased switching activity and aggressive industrywide competition.
In voluntary churn also increased slightly in the quarter, but it is still below prepandemic levels.
Total postpaid churn combining handsets and connected devices was 1.15% for the third quarter of 2021 higher than a year ago. As we've also seen churn increasing connected devices due to certain business and government customers disconnecting devices that were activated during the peak period.
The pandemic in 2020.
Now, let's turn to the financial results on slide 11th.
Yeah.
This change in loss of equipment was the primary driver of our decline in profitability year over year.
We expect the aggressive promotional environment to persist for the remainder of 2021 and into 2022 and our full year guidance for 2021 reflects the corresponding financial impacts.
Now a few more comments about postpaid revenue shown on slide 12.
Average revenue per user or connection was $48 12 for the third.
Third quarter.
$1, two or approximately 2% year over year.
On a per account basis average revenue grew by $2 72, 2% year over year.
On a per account basis average revenue grew by $2 72, 2% year over year.
The increases were primarily driven by favorable plan and product offering mix and increase in regulatory revenues.
And an increase in device protection revenues.
Turning to slide 13, as we continue our multiyear network modernization and <unk> rollout control of our towers remains critical by owning our towers, we ensure that we maintain operational flexibility to add new equipment and make other changes to our cell sites without incurring additional costs.
As you can see on the slide with the assistance of our third party marketing agreement, we have seen steady growth in tower rental revenues third quarter tower rental revenues increased by 6% year over year, we are seeing positive momentum in tower Colocation applications and will continue to focus on growing revenues from.
These strategic assets.
Moving to slide 14, I want to comment on adjusted operating income before depreciation amortization and accretion and gains and losses, keeping simple I'll refer to this measure as adjusted operating income.
As shown at the bottom of the slide adjusted operating income was $213 million.
Decrease of 8% year over year.
As I commented earlier total operating revenues were 1.0, $1 6 billion, a 1% decrease year over year.
Total cash expenses were $803 million, an increase of $8 million or 1% year over year.
Total system operations expense increased 1% year over year.
Excluding roaming expense system operations expense increased by 7% due to higher circuit costs cell site rent and maintenance expense.
Roaming expense decreased $8 million or 17% year over year, driven by lower data rates and lower voice usage.
Cost of equipment sold decreased $5 million or 2% year over year due to a significant decline in connected device sales, partially offset by a slightly higher average cost per unit sold as a result of the mix shifting more heavily towards the smartphone sales.
Selling general and administrative expenses increased to $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.
Yeah.
Turning to slide 15, I will 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 want to cover our guidance for the full year 2021 for comparison, we're showing our 2020 actual results.
First we have narrowed our guidance for service revenues to a range of 3.053 point.
075 percent to $3 125 billion, maintaining the mid point.
We took priority as we move towards the end of the year.
Telecom grew its footprint, 6% from a year ago now serving one 4 million service addresses across gift market.
Based on the successes we have experienced to date, we are increasing our fiber deployment program substantially with the announcement of additional new communities in Wisconsin, Idaho, and North Carolina.
And we are entering into the state of Montana.
This significantly advances our goal to bring state of the art broadband capabilities and competition to more growing community.
In addition, we are now capable of delivering two gig internet speeds in our Spokane, Washington in Meridian, Idaho market and going forward, we'll watch two gig product and all of our new fiber expansion markets.
Two big provides an exceptional customer experience.
<unk>, our previous maximum speed offering and helping to further differentiate us from the cable competition.
Also in the quarter, we completed fiber to the home construction in our southern Wisconsin cluster, where we are seeing total broadband penetration of 38% in this fully launched cluster.
In total during the quarter, we added 20000 fiber service addresses surpassing 40% of our wireline service addresses.
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.
It's a dry growth and our combos market.
Overall higher value product mix 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 a fiber and doctor <unk> one market.
The one gig product along with her two gig product in certain expansion markets are important tools that will allow us to defend and to win new customers.
In areas, where we offer one gig service, we are now seeing 20% of our new customers, taking a 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 chair low.
We recently announced our expansion of fiber into several new communities.
Further expanding our existing clusters, we announced Napa Idaho.
And several communities in Wisconsin, including anchor markets Green Bay and Oshkosh.
In addition, we announced several communities that will plant the flag and new geography.
Players, Florida, and on Alaska, Wisconsin, creating a western cluster.
Billings, Montana the first in this state and several communities just southeast of Charlotte in North Carolina, where we operate 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.
Yeah.
Year to date, we completed construction of 51000 fiber addresses adding 20000 service addresses.
In the quarter.
It brought us 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 holds.
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 and 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 markets, which is not yet reflected in our revenue.
Future market costs include direct costs, such as sales marketing real estate.
And technicians in addition to shared service costs necessary to support new market growth.
As a result, adjusted EBITDA decreased 2% to $77 million as expected.
Capital expenditures were down 1% to $91 million 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 are closer to the end of the year, we are narrowing our ranges and slightly increasing the midpoint on revenue.
We expect revenues to be between $990 million and $1 billion $20 million and adjusted EBITDA to be between 295 and $315 million.
With the construction delays and 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 our associates that contributes to our company's success and for that I am grateful.
I look forward to sharing our final 2021 quarterly results with everyone in February.
Now I'll turn the call over to James.
Operator, we're ready to take questions.
You know.
When we.
For our promotions most of them are administered to trailing credits about half of that promotion expense hits loss in equipment in the quarter that we had mentioned the promotion. The rest is amortized the service revenue over the life of the contract. So that's really the main thing that we have in play that could.
Could flex and the range is the level of promotional activity and it takes that we have from our customers.
We think about Lafayette clinical with others, who are those who were still COVID-19 affected.
This year fourth quarter versus what we might have seen last year portfolio, where we have competitive activity in <unk>.
Success.
We're hoping this quarter will be a bit more robust, we're expecting a higher switcher pool this year and that's going to help on the customer acquisition side.
We're expecting to do fairly well on churn as well so.
I think we're going to have a little bit better fourth quarter as far as opportunity this quarter than we did last year.
We're more closely.
You talked a little bit about what's wrong with axa.
Hum.
Verizon talked about it on their calls and I will talk about on their call.
We'll walk you through a little bit it sounds like Europe might be a little more tied to.
Local state or federal support levels, but all of us on this forum.
Possibility as well with that.
We're still in the trial phase.
Yes, Rick this is Alan so I think that there is there is.
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 <unk>.
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 theres, a greater level of opportunity the media of your other competitors.
We've seen terrific results from our technical trials.
And so we've pivoted this now chief 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.
Things like.
How to can we get to a self install.
Sending a profitable product you can expect to see a scaling that scaling that kind of throughout 2022, and we will certainly certainly give updates as we do.
Seven so low.
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, we feel very good about our availability vis vis our competitors.
Provide a really high quality network experience, which is core to our value proposition.
<unk> <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 to be at in the future as well.
Great and just a follow up on the competitive environment. What are you seeing from T mobile.
Have just rolled out a new retail partnerships with Walmart and target and have been very focused on the railroad in smaller markets.
Sure.
Are you seeing a major change there or is it fairly incremental.
We are not seeing a major change there I think thus far we continue to compete well with T mobile.
I think from a from a distribution perspective, and I think theyre 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 more user friendly experience.
And and you are 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 upgrades.
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. It. Obviously helps you on the cost side also helps you on a customer satisfaction side dish.
[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 and 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 up selling 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 of it along with it comes plan mix requirements in our associates do a really good job Upselling. Those plan next is upselling accessories, and so on you've gotta be able to mirror that kind of up selling in the digital environment, that's going to take time, it's gonna take invest.
<unk> 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.
[noise] great. Another question on the wholesale from kind of if you could share your thoughts on hold.
Wholesale opportunities for yourself or for example, dish recently assigned.
And the argument is AT&T and a.
A primary and there are no partner, but I know that the menu of your markets coverage is prone to manage better than who was AT&T or T. Mobile coverages. So do you see an opportunity to the <unk> to do a wholesale deal with dish them more broadly what other wholesale opportunities to see downzone.
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 and network experienced perspective positions us very well for those kinds of deals.
I think that we can offer.
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 you try 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 for <unk> to the telecom side.
So you guys lowered capex.
For various reasons described.
For 2021, but.
And now the.
The number of facing that you're gonna do this here is gonna be laws in I think harmless 60000, but you are targeting before but as you look out in 2022, and assuming that to me move past Donald <unk> supply chain issues. What are what is the annual pay some bills.
That you will be targeting over the next few years, how much higher could you go over 150000.
Evil based on Yoko instead of Jay and your current capital location.
Good evening, Okay. Thank you for that question first class <unk>, Let me just say that you know a few carter's at a 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 could really translate into more service address is delivered in the first quarter of next year.
And you know that that that would have a delay of revenue coming into the financial set I I checked the mail continue to see topline brown definitely seen all year and that'll go into next year and of course I can provide more specific than our guidance in February but from the capital perspective.
You know, we lowered our guidance on the cap at all.
We don't count that five per survey addresses delivery until it's ready to market. So construction can be a lot farther along but a number of things have to happen before we can market. The new fiber household. So for example, a contractor has to complete fan.
The 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 think.
With the announcement of the new market and the increase in the substantial increase in our program I am signaling that we well uhm have increased capital spending that that's going into 2022.
And and do you think about it longer term I checked it will have <unk> 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 I mean.
Down starting to come down at the end of 2024, and then and then getting more largely completed in 2025 and 2020th six though.
Really excited about about planning to fly now and and and taking advantage of this opportunity that's been front enough.
Great. Thank you.
No further questions I would like to have a call back today.
Thank you very much and we really appreciate you joining us on a Thursday afternoon, and please get in touch with us with any additional to send comments.
Great night.
This concludes today's conference. Thank you for participating human now disconnect.
[noise].