Q4 2021 Telephone and Data Systems Inc and United States Cellular Corp Earnings Call
Okay.
Good morning, My name is Andre and I will be your conference operator today.
At this time I would like to welcome everyone to the Tds and U S cellular fourth quarter earnings results Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
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 press the star one again.
Jane Mccahon, you may begin your conference.
Thank you Andre and good morning, everyone and thank you for joining us today.
We announced last September Colleen Thompson will be taking over leadership of the IR function in may we've been working together to ensure smooth transition and I'll certainly be involved for the next few months so call it.
Thanks, Jane and good morning, everyone I've spoken to a number of you in the past couple of months, but for those that I haven't met yet I look forward to the opportunity.
Want to thank 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 Pizza radar executive Vice President and Chief Financial Officer from U S. Cellular L. P terrible President and Chief Executive Officer, Mike Irizarry, Executive Vice President and Chief Technology Officer.
Doug Chambers, Executive Vice President and Chief Financial Officer.
From Tds Telecom, Jim Butman, President and Chief Executive Officer, and Vicki <unk> 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.
Tds and U S cellular filed their SEC forms 8-K, including the press releases and our 10-K yesterday.
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.
In terms of our upcoming IR schedule on slide three the team was dividing and conquering and presenting at the Raymond James and the Morgan Stanley conferences on March 7th.
And then on March 14th we will be participating at the Deutsche Bank Conference.
And as always our open door policy cannot be an open door phone or video policy. So please reach out if you're interested in speaking with us.
Now I'll turn the call over to Pizzeria Pete.
Thanks, Colleen and good morning, everyone in December we announced that I will be retiring in may and Vicki Villa Kratz will be replacing me.
He has been CFO of Tds Telecom since 2012 and prior to that led financial at financial planning and strategic analysis for the enterprise. So this transition should be very seamless thinking it's been an important driver of Tds telecom success over the past 10 years and she will bring a wealth of experience to her new job I congratulate her on this new.
Challenge.
On slide four as we looked at 2022 I wanted to highlight all of the positive trends impacting our businesses demand for broadband continues to grow connectivity, whether mobile or fixed is a necessity to remote education health care and work the markets. We serve primarily suburban and rural are benefiting from people migrate.
So these areas out of major cities.
Additionally, <unk> offers high speed fixed wireless and with fiber available to only 30% of households in the U S. This represents a great opportunity for us.
<unk> was founded 50 years ago on a mission of bringing connectivity to unserved and underserved markets. So the introduction of the infrastructure Bill brings opportunities for both of our businesses.
And lastly over that time Tds has also held a multi stakeholder approach to good corporate citizenship at the forefront of its values as we expand our ESG program. We are essentially reinforcing the values that we have already had carrying about customers and associates striving to enhance the lives of people in our communities.
Well as serving as a good steward of the environment.
As we discussed on our past calls maintaining financial flexibility is one of the pillars of our corporate strategy.
Strong financial position and ready access to the debt capital markets enabled U S cellular to purchase valuable mid band spectrum, while also enabling Tds telecom to expand investments in our growing fiber program. This strong financial position and market access will be important as we continue to invest in our fiber program in the future.
As Jim will discuss later in the call.
Before the business unit's discuss their successes I want to briefly talk about the transformation of our balance sheet as illustrated on slide five.
First we have worked to diversify our funding sources through a variety of different types of financings, including preferred stock and export credit term loan a syndicated term loan new 10 year co bank term loans and an increase in our equipment installment receivable securitization facility. In addition, we had a goal to lower the average cost of our.
Financings since the beginning of 2020, we have raised $3 5 billion of new capital both debt and preferred equity at four 8% while at the same time redeeming $1 8 billion in debt carried a weighted average cost of $6, 9%, reducing our average cost from six 7% to 5% and resulting.
And $37 million in annual coupon savings.
Importantly, going forward, we believe that this that we will continue to have access to the debt capital markets through a variety of instruments to continue to finance our future growth.
Finally, I want to highlight that we have again increased our dividend rate. This represents a 48th consecutive year that we increased our dividend quite an accomplishment.
I will now turn the call over to L. T L T E.
Thanks, Pete if we can turn to slide seven I'm really pleased with all the team accomplished in our progress in 2021 and much of it was foundational for 2022.
We continue to see positive momentum in several focus areas of the business and that includes prepaid business in government and fixed wireless <unk>.
We've developed tactical plans to reach our return on capital goals over the next three years.
I will let Doug cover the operational and financial highlights as well as our guidance for 2022.
The first one I'll provide a few thoughts on these strategic priorities.
Last year, we launched our regionalization strategy, that's something our competitors can't replicate and that lets us test and optimize a wide range of action that includes pricing construct promotions media mix.
The renewed focus on prepaid led to some encouraging initial results and positive prepaid adds for the year as well as laying the foundation for future growth with expanded distribution and a new approach to lifecycle management.
Last year, we laid the foundational work to build the business and government side of the business and that includes segmentation and specialization of our internal sales team.
The addition of new distribution new partners new channels.
And this should position us to generate meaningful revenue growth.
As I've discussed in previous calls we've strengthened our market position as a tower company made numerous enhancements, which let the market know that we're open for business and you can see that in the results and I think we're just getting started here.
Turning to the network, we continue to pursue our network modernization program at our multi year five G deployment.
The majority of our traffic is now carried by sites that have <unk> deployed.
And equally important we're getting five G devices into our customers hands, so far nearly 30% of our smartphone subscribers have <unk> capable devices.
The biggest development on the network side in 2021 was our targeted acquisition of C band and D O D spectrum.
We now have a really solid mid band spectrum portfolio.
Even though the auctions were quite expensive when you compare them historically I'm really pleased with our outcome and I'm going to ask Mike <unk> to give you a bit more detail on this Mike.
Thanks, <unk> good morning, turning to slide eight we continue to advance our <unk> spectrum strategy and with the spectrum, we acquired in the C band in D. O D. Auctions, we will have mid band spectrum and substantial majority of our operating footprint covering over 80% of our subscribers with 100 megahertz of mid band.
This is in addition to our strong low band and millimeter wave spectrum positions.
Mid band serves as the bridge between our low band and our high band Holdings.
As a reminder, we have previously acquired millimeter wave spectrum with an aggregate of all spectrum depth of 530 megahertz across our footprint.
This gives us strong positions in all three spectrum bands low mid and high and provides us plenty of capacity to continue to deliver outstanding mobile and fixed wireless services to our customers and support future <unk> services and use cases.
In total including required incentives and relocation payments, we have invested slightly over $2 billion in mid band spectrum and have done so at efficient prices as our average price per megahertz pop that we paid in both auctions, one oh, southern and 110 was lower than the overall auction <unk>.
Averages.
As Pete mentioned earlier, we were able to successfully raise the capital to finance these purchases, while also reducing our cost of financing.
We are preparing to deploy mid band equipment on our network optimizing tower climbs and radio requirements for both D O D and C band as well as leveraging efficiencies with our ongoing five G modernization plan. These.
These efforts will begin prior to our C band spectrum being cleared which will allow us to turn on our mid band spectrum efficiently overall, our strong spectrum position in the network experience that enables will be key to enabling our 2022 goals, which L. T would discuss snacks over to U L T.
Thanks, Mike we turn to page nine our strategic priorities for 2022 will look familiar to you and they build on our progress in 2021.
Our mission remains the same.
Our company is dedicated to connecting our customers to the places and the people that matter most to them.
As you know executing that mission requires a lot of investment.
The investment we made in spectrum earlier, you're going to hear from Doug later, do we plan to maintain a steady pace of capital investment as we modernize our network rollout the mid band spectrum that we purchased.
Or to justify that investment we have to expand our return on capital and that's the key metric we use to set our long term plans for the business.
One key opportunity that we have in the next year or two that should help a lot with our return on capital goals.
As to take advantage of the funds being allocated through the recently passed infrastructure investment and jobs Act the Iga.
This is a potential game changer, not just for U S cellular but for finally connecting the earn in underserved, particularly in Rural America.
Put some context around it you got $46 billion allocated to broadband.
The specific allocations are still being worked out but you can think of about 20 billion likely flowing to the states that we operate in.
And at least 8 billion flowing to the areas, where we operate network now.
A lot of that will go to fiber and it should because.
As I mentioned in our last call I was encouraged the department of Commerce had committed to avoiding cemetery requirements metal out fixed wireless to potentially play a big role as well.
I've talked in previous calls about how encouraged I am by the results from our millimeter wave fixed wireless trials.
You see nearly one gig speeds across seven kilometers with line of sight.
We commercially launched our millimeter wave products 300 gigs.
Massive improvement over existing solutions.
But the challenges in the tower economics.
In order to provide comprehensive coverage, we need much denser towers.
Jay can provide the funding necessary to make the economics work.
A lot cheaper to build and run fiber to one tower covers hundreds of homes and businesses.
And it has to run fiber to each of those individual locations.
And the exciting part is that the benefit doesn't stop with fixed wireless.
We can use infrastructure funding to improve the economics for tower builds that focus on fixed wireless.
Can also improve the coverage profile of five G metal significantly improve our mobile network experience to our postpaid and prepaid base.
This is an extra benefit to provide funding to wireless carriers for broadband deployment that fiber can't match.
And just in case, you forgot and I know you didn't we're also the only mobile operator that owns our towers. So we can market those new towers to other carriers, which also creates positive economics.
That's going to take several years to execute this plan, but I'm enthusiastic about the prospects to work with state and local governments to really improve the experience for underserved areas.
Helping to bridge the digital divide in the communities in which we're invested significantly advancing our network and doing it all with positive economics for our stakeholders.
Now before I talk more about the growth levers for 2022, I do you want to talk about one other key strategic area.
Our talent.
We manage the great resignation incredibly well, thus far <unk>.
Our attrition was relatively stable year over year in 2021, we were recognized on Forbes' list of America's Best employers, where number 141 in the country.
That's up from number 413 last year and were ranked as the best employer in telecom.
That's ahead of talks at 180 ahead of Verizon at $2 44 ahead of T mobile with $3 36, and ahead of a lot of others that weren't even ranked.
And in my view, that's due to the tremendous culture of this place, but we're gonna have to keep investing in it.
You can expect to see an even increased emphasis on diversity equity and inclusion to ensure that we remain a fantastic place to work.
And if you'd like to witness our customer focused culture firsthand.
I encourage you to tune into undercover boss on CBS on March 4th just to see how powerful our culture our culture is.
And you can also laugh at my outrageous mustache.
Now, let's turn to slide 10.
A major strategic objective for us is growth and I want to cover that objective it a bit more detail.
It made a lot of investments in growth in 2021.
We started to see the benefits in many areas of the business prepaid is a really good example, as we pivoted the business to net add growth and I expect even better momentum in 2022.
But the one area and it's a big one that I was not satisfied with last year was our postpaid net additions and the lack of growth in our postpaid connections base.
The environment remains as competitive as ever particularly for upgrades.
And that carries challenging economics for the entire industry.
At the same time customers are holding devices for longer than ever and that's somewhat dilutes the impact of aggressive device promotions and that's a really challenging dynamic not just for U S. Cellular.
We have a variety of niche of initiatives underway to stabilize our postpaid market share through improvements on value proposition customer lifecycle management and the digital experience you.
You can also expect to see us continue to leverage our regional approach adjusting our go to market on a community by community basis, getting even closer to our customers.
We talked briefly on the business and government sector.
We laid the groundwork in this space in 2021 with new distribution, we're confident in our ability to expand revenues in this area in the long term, particularly in the Iot and the private networking space.
As a regional operator U S. Cellular has always been a part of the communities. We serve and we estimate there are over 3 million businesses and our operating footprint.
It provides a real opportunity to significantly expand our market share going forward.
Finally, we expect continued growth from our tower portfolio and we had a number of operational changes in 2021, including substantially reducing cycle time.
As a result of that work, we have a really strong sales momentum heading into this year.
Before I hand, it to Doug Let me just share a few thoughts on our 2022 guidance.
We expect to see expanded retail service revenue, where we're going to continue to see headwinds from roaming and that affects overall service revenue.
Additionally, our guidance assumes a continuation of aggressive ongoing promotional activities and that's on both upgrades and acquisitions.
I'm bullish on growth over the long term and we're making the necessary investments in distribution and in network to make it happen.
Our long term goal remains substantive expansion and return on capital will be pulling every lever at our disposal to improve return overtime.
You can expect to see revenue growth, coupled with expense discipline as well as Captisol op capital optimization.
It will hopefully be supported by meaningful participation in some of the government funding efforts that I mentioned earlier.
With that let me hand, it to Doug to cover some of the details on subscribers and financials.
Thanks, <unk> good morning, let's start with a review of customer results on slide 11, postpaid handset gross additions increased by 6000 year over year, largely due to higher switching activity in combination with our strong promotional activity.
Of course, this was against the backdrop of industry wide promotional aggressiveness on handsets.
We saw connected device gross additions declined 12000 year over year, driven by lower hotspot sales compared to the prior year when we experienced an increase in demand due to the pandemic.
Let's turn to the postpaid churn rate shown on slide 12.
Postpaid handset churn was 110% up from 1.01% a year ago.
This was driven primarily by voluntary churn, which continues to run at higher year over year.
Peugeot at higher year over year as a result of increased switching activity and aggressive industry wide competition.
Involuntary churn also increased slightly in the quarter.
Total postpaid churn combining handsets and connected devices was 135% for the fourth quarter of 2021 higher than a year ago due to the higher handset churn and certain business and government customers disconnecting connected devices that were activated during the peak periods of the pandemic in 2020.
Moving to slide 13, prepaid continued to improve compared to the prior year driven by enhancements to our prepaid offerings throughout the year.
We saw prepaid gross additions increased by 7000 year over year and saw an overall increase of 14000 to our prepaid base compared to prior year end.
Now, let's turn to the financial results on slide 14.
Total operating revenues for the fourth quarter were 1.068 billion essentially flat year over year.
Retail service revenues increased by 2% to $696 million, primarily due to a higher average revenue per user, which I'll discuss in a moment.
Inbound roaming revenue was 24 million decreasing 27% year over year due to lower data volume and rates.
What are the factors contributing to this data volume decrease is the merger of sprint and T mobile and the continuing migration of sprint roaming traffic to T Mobile's network.
Other service revenues were $62 million up 3% year over year.
Finally equipment sales revenues decreased by 4% year over year in large part as a result of an increase in promotional activity.
We continue to engage in aggressive promotional activity during the fourth quarter of 2021 to remain competitive with the industry.
A portion of the resulting promotional cost reduces equipment sales revenue and increases loss on equipment.
In addition, Washington equipment in the fourth quarter of 2020 was mitigated by the impacts of the pandemic, specifically lower switching activity and less aggressive promotional activity relative to 2021.
As a result of the combined impact of these factors Boston equipment increased $24 million year over year.
This change in loss on equipment, However was offset by a reduction in other operating costs as profitability increased slightly compared to the prior year.
We expect the aggressive promotional environment, including retention offers to persist throughout 2022, and our guidance for train train two reflects the corresponding financial impact.
Now a few more comments about postpaid revenue shown on slide 15.
Average revenue per user or connection was $48 62 for the fourth quarter up 2% year over year.
At a per account basis average revenue average revenue also grew 2% year over year.
The increases were driven primarily by favorable plan and product offering mix and an increased device protection revenues.
These increases were partially offset by an increase in promotional costs.
As you can see on slide 16, we have seen steady growth in tower rental revenues.
Quarter tower rental revenues increased by 9%.
We are seeing positive momentum in tower Colocation applications and will continue to focus on growing revenues from these strategic assets.
Moving to slide 17, I want to comment on adjusted operating income before depreciation amortization and accretion and gains and losses to keep things simple I'll refer to this measure as adjusted operating income.
As shown on the slide adjusted operating income was $181 million, an increase of 1% year over year.
As I commented earlier total operating revenues were 1.068 billion essentially flat.
Total cash expenses were $887 million, a decrease of 1% year over year.
Total system operations expense decreased 3% largely driven by lower roaming expense, resulting from lower data rates and lower voice usage combined with lower cell site maintenance.
Cost of equipment sold increased 4% due to an increase in units sold and a higher average cost per unit sold driven by a higher mix of smartphone sales.
Selling general and administrative expenses decreased 4% driven primarily by decreases in advertising and legal expenses.
Adjusted EBITDA, which incorporates the earnings from our equity method investments along with interest and dividend income was $225 million, an increase of 1% year over year.
Now, let's turn to slide 18, where we show our full year financial results total operating revenues were $4 1 billion, a 2% increase year over year. This was driven by an increase in retail service revenues due to higher average revenue per user and an increase in equipment sales.
Also contributing to the increase were higher tower rental revenues and miscellaneous other service revenues.
These increases were partially offset by a decrease in roaming revenues.
Total cash expenses were $3 3 billion, an increase of 3%.
This is due to this was due primarily to an increase in cost of equipment sold partially offset by a decrease in selling general and administrative expenses.
Excluding cost of equipment sold cash expenses decreased 1%.
Adjusted operating income and adjusted EBITDA, both declined 1% due primarily to an increase in loss on equipment, which increased $70 million from 41 million to $111 million, which is a result of the highly competitive and promotional environment that we experienced throughout 2021.
Next I want to cover our guidance for the full year 2022.
Again, our guidance assumes the aggressive promotional environment that we experienced in 2021 will persist throughout 2022.
We expect ranges of approximately three 1% to $3 $2 billion in service revenues.
752 $900 million in adjusted operating income.
And 925 million to 1.075 billion in adjusted EBITDA.
This guidance reflects our estimates for low single digit growth in retail service revenue continued decline of high margin roaming revenue.
<unk> elevated levels of promotional costs, including loss on equipment, given the anticipated aggressive promotional environment.
And modest growth in other cash expenses as we continued to invest in <unk> and the growth areas of our business.
For capital expenditures the estimate is in a range of $700 million to $800 million.
Our multiyear <unk> and network modernization program remains on track. We will also continue our targeted millimeter wave build out in 2022 and begin making investments to deploy the mid band spectrum, we acquired in auctions 107 in <unk>.
We have also provided a breakdown of capital expenditures by major category.
I will now turn the call over to Jim Butman, Jim.
Thank you Doug good morning, everyone.
I'm pleased to share that our transformation to become the preferred broadband provider in our markets is well underway.
I've never been more optimistic about Tds telecom's future.
We are in a strong position today due to a number of growth initiatives, we started executing on five years ago.
Fact, we surpassed $1 billion in operating revenues and we exceeded 500000 broadband connections for the first time in Tds telecoms history.
In 2021, we turned up 86000, new fiber market both service addresses bringing total fiber addresses to nearly 400000, it's critical to build these fiber networks and connect connect customers quickly to stay in front of potential competitors.
We have an active pipeline of identified markets and continuing to plant plagues in the most attractive new markets that will expand our footprint even further.
We continued to address the broadband needs and our most rural markets by upgrading their copper networks with federal a cam funding and state broadband grant programs. We've continued to transform our workforce and adapt to the opportunities and challenges brought on by the pandemic and labor shortages.
Move to a hybrid work environment. In addition, we have placed extra emphasis on strategic strategies to promote diversity equity and inclusion objectives throughout our organization.
Keep us in an attractive employer.
Our associates are our most powerful resource.
Moving to slide 22, we have five strategic pillars, enabling our robust transformation first we are growing our scale through fiber market expansions second we are growing our revenue through increased revenue per connection customer penetrations and through continued fiber expand.
<unk> in.
Our third pillar, we are continuously streamlining and automating our operations to reduce legacy costs and invest in new growth initiatives. Our first pillar is keeping the customer at the center of everything we do continuously investing in customer.
Experience improvements finally, the foundation of our entire business is our highly engaged resilient and dedicated workforce, we invest in our people to make sure we attract and retain top talent.
Moving to slide 23, let me share some specific data points that demonstrate the transformation happening within our business.
Have said bold goals for the team.
Each will require us to scale up more quickly plant more plagues and build relationships with our vendor partners as we execute our strategy over the next five years, we plan to reach approximately $2 2 million service addresses with about 60% of those addresses being fee.
Labor and 80%.
<unk>, a gig or faster speeds.
As Pete mentioned earlier, we have several strong underlying trends as tailwind to our broadband strategy.
There is increased bipartisan support for providing high quality affordable broadband services to Rural America.
With support from state and federal broadband programs, we intend to significantly reduce our expansion to upgraded copper and we will continue to see opportunities to improve broadband products.
For our most rural customers.
Our strategy is working.
For the past several years, we have ramped up our broadband strategy investing in our networks and we are positioning the business for faster growth over the next five years.
On slide 24, I'll describe our fiber program in more detail, we plan to triple our total fiber service addresses over the next five years to one 2 million with aspirations of increasing that target as we identify new opportunities.
Our sense of urgency has increased given the attractiveness of this opportunity and the heightened level of participation by other over builders specifically in 2022, we expect service address a lib delivery to outpace 2021 by one and a half to two times.
Along with the rest of the industry. We continue to face an actively managed broader economic supply chain labor challenges affecting our industry, including permitting complexities and contractor delays for example to increase our speed to market. We are accelerating our deployment schedules, we are adding more markets to increase.
Greece, our flexibility and we are strengthening our relationships with our vendors and strategic partners.
We have a rigorous process for selecting expansion markets. We focus on areas that have a favorable competitive environment such as areas that do that have fiber competition have potential for household growth and have customers with the propensity to adopt high broadband speeds.
We also look to partner with communities, who are eager to bring fiber into their cities and offer a welcoming regulatory environment. Finally, we look for the ability to create larger market clusters. So we can leverage our network and field resources.
For the markets. We have selected we expect to achieve broadband penetration rates between 40, and 50% in a steady state, making us the leader in our markets. Our experience to date is supporting the business case penetration assumptions and we are pleased with our fiber expansion results, so far and see even more.
Opportunities for part of their expansion.
Before I turn the call over to Vicki I want to acknowledge her tremendous efforts serving as CFO of Tds Telecom.
As we announced earlier Vicki will be replacing pizza Rita as CFO of Tds.
Vicki has been instrumental in dry by driving the successful transformation at Tds Telecom and we look forward to her contributions leading the finance teams across the Tds enterprise.
I also want to extend a warm welcome to Michelle Brook, wiki, who will be replacing Vicky <unk> CFO of Tds Telecom.
Shell's previous previously served as vice President of financial analysis, and strategic planning at Tds and I am confident she will excel in her new position and now I will turn it over to Vicky.
Thank you Jim and good morning, everyone.
Barry crowd.
At Tds Telecom CFO for the past 10 years.
Look forward to continued success in my new role at Tds.
I also want to welcome Michelle I've been working closely with Michelle over the last several years on Tds Telecom strategy and I'm looking forward to your continuing Tds Telecom's transformation.
With that said, let me begin by highlighting some of our operational accomplishments for the quarter.
Moving to slide 25, we grew our total service addresses 7% year over year.
Now offering one gig broadband speeds to 58% of our total footprint.
Total residential connections increased 2%.
Broadband growth in new and existing markets.
Actually offset by a decrease in voice and video connections.
Despite the connection market video continues to remain important to our customers and a key part of our bundling strategy and that helps to increase our broadband penetration and reduce churn.
Looking at the chart on the right overall higher value product mix and price increases drove a 4% increase in average residential revenue per connection.
Moving on to slide 26.
Can see the broadband connection growth across.
Yes.
Total telecom broadband residential connections grew 7% in the quarter as we continue to fortify our networks with fiber and expand into new market.
We are on track and our network construction under the ATM program also helping to drive growth in our incumbent market.
Our focus.
Reliable service has generated a 12% increase in total residential broadband revenue.
The one gig product along with our two gig product in certain markets are important tools that will allow us to defend into win new customers.
In areas, where we offer one gig service, we are now seeing 20% of our new customers, taking the superior product.
On slide 27, total revenues increased 2% year over year, driven by strong broadband growth residential revenues increased 6% across all markets.
Commercial revenues decreased 7% in the quarter on lower CLEC connections, partially offset by a 5% increase in broadband connection.
Wholesale revenues decreased 2%.
Let me sum up the combined financial results for the quarter.
And the year as shown on slide 28.
Total revenues increased 2% in the quarter and 3% for the year as growth from our fiber expansions and increases in broadband subscribers exceed.
The declines we experienced in our legacy business.
Cash expenses increased 2% in the quarter and 5% for the year 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 cost.
Marketing real estate and technician in addition to shared service costs necessary to support new market growth.
Adjusted EBITDA increased 2% for the quarter to $75 million, but decreased 2% for the full year due to planned investment spending on new market.
Capital expenditures increased 2% for the quarter and 12% for the year due to increased investment in fiber deployment.
On slide 29, we've provided guidance for 2022.
Our guidance factors in the foundational investments, we are making to support the fiber expansion program over the next several years.
We are forecasting total telecom revenues of 1.01 billion to 1.041 billion.
This reflects our goal of top line growth driven by continued improvements in residential revenues across all of our markets offsetting declines in the legacy parts of our business.
A key assumption in our guidance is how many marketable fiber service addresses we can deliver.
Our plans include address delivery of approximately 160000 fiber service addresses.
Given our construction delays last year, our conservative approach to financial guidance.
Factors in potential shortfalls in service address deliveries should we experienced similar challenges.
A reminder, that seasonality will impact the quarterly cadence of fiber service address delivery starting slowly in the first quarter and steadily building throughout the year.
Adjusted EBITDA is expected to be between $260 million to $290 million in 2022 compared to $310 million in 2021.
This increase in adjusted EBITDA is primarily due to our heightened market expansion plans that Jim just discussed.
Expect increases in front end loaded market expansion cost outpaced cost reductions made in other areas of the business.
Capital expenditures are expected to be between 500 and $550 million in 2022 compared to $411 million in 2021.
Nearly 90% of our capital spending.
Is allocated to broadband growth with more than 60% going directly into fiber investment.
With that I'd like to say, it's been my pleasure to serve as Tds Telecom CFO and to derive our shift in strategy to be the preferred broadband provider.
Look forward to updating you in my new role in the future.
Now I'll turn the call back to Kelly.
Operator, we're now ready for questions given that we're a little short on time, we want to make sure. Each analyst has an opportunity. This morning. So we ask that you. Please limit your questions to one and we will circle back for follow ups as time permits.
We're ready for the first question.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then number one on your telephone keypad.
We'll take our first question from Ric Prentiss at Raymond James.
Yes, good morning, everyone.
Good morning, Rick.
Okay.
First question is.
I'll tell you talked a lot about what's going on with the network steady pace and help us understand how you view the fixed wireless access opportunity.
Kind of what's the addressable market, what's the schedule to think about deploying it.
Who do you think the competitive environment is are you taking from copper DSL from cable, what's kind of the opportunity out there and we've been kind of a second question, but just what is the timing for government stimulus that that might help that return on capital both at the U S cellular side in the TV side.
Yes.
Hi, Rick.
<unk>.
Optimal opportunity without infrastructure subsidies from the government.
Is a think of it as a tower that has between a call. It a couple of hundred homes and businesses.
He then afford a five mile radius.
The way that we would serve those businesses initially is with millimeter wave and then over time as we bring D O D on.
Which will be at the very end of this year and certainly a lot more rhythm in 2023.
As well as once the C band clears, which will be at the end of 2023, we'll be able to serve those businesses and homes as well with mid band.
Right now the stock.
Is that market without infrastructure subsidies.
Rick I don't have a firm a firm size to give you.
I think we've got enough opportunities to keep us busy.
I'll tell you is the real opportunity is with the <unk> and the reason is is because if you.
If you think about let's call it a $1 million to put a tower in rural America, it's probably a little bit high, but but back of the envelope.
I can serve I can make that tower profitable on a fixed wireless access basis with a couple of hundred subscribers.
But if I can take the cost of that tower and make it 500000 or if I make it 100000.
Well then if I can even just makes the tower profitable with fixed wireless subscribers. Then the opportunity is I've been able to significantly subsidized my cost of rolling out five G to the area and by the way that's really attractive to the governors that we've spoken with because what they're viewing it as is frankly, a double dip for their constituents.
They get better broadband to their home and do they get a better <unk> mobile experience.
And the beautiful thing is is that we also then have a new tower in rural America, where by definition of tower wasn't before and so that will also be an attractive co location opportunity for my tower customers.
Theres really three revenue streams off of that individual infrastructure dollar.
We're rolling out that fixed wireless service without infrastructure subsidies, although we're doing so steadily gradually we've got we've got the service live in market.
In a couple of a couple of states you can expect to kind of see some gradual expansion there, but the thing thats really going to put it on steroids and I think that will make a meaningful difference in our financials as if we can take advantage of those infrastructure dollars.
In terms of timing.
According to the department of Commerce. The FCC has said, they're going to have maps out in the fall actually I think they may have said summer Ah My expectation is probably that's going to take a little bit longer than people think.
So my expectation is we'll probably have good maps for the states to use later this year.
They have access to a chunk of money.
Immediately to help them with planning efforts and so my expectations is that we'll start to see meaningful grants flowing from the states. In 2023, So 2022 will be a foundational year in order to in terms of building. The business 2023, we'll be taking advantage of those dollars and I think really really hitting the growth lever.
And when you think of who the addressable market is it somebody who doesn't have broadband is that somebody who has <unk>.
Copper broadband monopoly.
Are you seeing.
Target margins.
Yes. So so we're marketing at 300, where Rockiness 300 down. We're also seeing north of 100 off so we think it's a pretty terrific experience.
Certainly copper DSL non upgraded non upgraded cable plant.
When you get into upgraded cable plant starts to become a little bit trickier, but I still think we can play.
The dollars per gig are somewhat commensurate and we think we can provide a pretty good customer experience. We're good at this stuff where it doesn't play is where there is fiber and so where where fiber either has been or will be in the near term, let's call. It with the Iga a I don't think Thats a good I don't think thats.
A good economic calculation.
And so I don't see it being a compelling are compelling.
<unk> there now what is that how exactly that market size is up in our states well, that's kind of where we have to wait and see how those dollar start to flow in how many of those dollars go to fiber versus how many of those dollars go to alternate technology.
Okay, Operator, we'll take the next question.
Thank you we will go next to Phil Cusick at Jpmorgan.
Hi, guys. Thanks, Unlike Rick I'm going to follow the rules and I only have one question, but with two parts.
I guess, so congratulations Vicki maybe one more on Tds for you.
The guidance on Tds operating revenue.
But the EBITDA decrease maybe you can lay out for us the the opex or losses in those expansion markets.
And when you sort of.
Outline those through the year and then how should we think about those.
Over the next few years as the expansion continues and then for LTE clearly U S. Cellular churn is being pressured by more competition.
Do you assume that this continues and how do you hit your ROI estimates on this new spectrum and Capex in this kind of environment.
Okay.
Thank you and good morning.
The decline in EBIT.
All due to our market expansions.
We are increasing the number of new communities significantly in 2022 and each of those come with upfront spending.
Such as real estate engineering, where transport the hiring of the teams in the market sales marketing and field technicians that.
But we're highly confident in our plans to earn attractive returns on these investments.
And we're already seeing I've got a number of successes already.
We're into our fifth year of this program as we are seeing contribution margins from our earlier out of territory fiber market meeting or exceeding in some cases our expectation.
So with that said as you see the increase.
We did increased cash expenses in 2021, and the majority of that was all due to.
Our expansion markets.
But as we are now increasing significantly our total program.
Going to see more upfront spending.
2022, and that is the reason for the for.
The lower EBITDA guidance, Jim I don't know if you want to add anything more to that.
Vicki I think you did a great job.
Telling you here the opportunity we see is so great and the market is moving quickly that we just feel we gotta go a lot faster. Okay. So if you look at what we did over the past five years and what we're projecting.
We're more than doubling the service address delivery.
And the window for the best markets its going to go away, there's more and more activity in this market. So.
We just think this is the time to seize the opportunity. So we're going to put the metal or the pedal to the metal.
Yes.
So Phil when I think about how to hit those targets I talked about I'd point, you to a couple of levers.
First when you look at our post paid business postpaid consumer.
We have to continue to do better, but our share of gross adds has actually been quite strong last year and particularly in Q4. So it's really a churn story and.
N D.
The churn dynamic is going to be affected by the upgrade promotions.
We're going to be launching a new approach to upgrades in the second quarter driven by a personalization engine, we've been investing in and so.
Soon right Youll see what I would call mass upgrades and so that has more to do with simply having more aggressive upgrade promotions for the entire market.
I'll keep us in the game, but the financials are pretty challenging.
The interesting opportunity and on the postpaid side is to use our personalization engine to do much more targeted outreach so digital outreach to customers with upgrade promotions that are specifically targeted at them. You believe we can get the same upgrade results as with the mass approach, but do so with much better spend.
Second lever continued investment in the growth areas prepaid business and government towers you. If you see if we can continue the momentum that we have you will see significant revenue growth on a relatively manageable expense base.
We've already invested in business and government distribution, we've invested in a lot of our prepaid platforms and so I think we can drive growth on those platforms and on those distribution.
Capabilities without necessarily having to have commensurate expense expansion and following of the tower business I mean right now it's still.
It's not a huge piece of revenue for us and every co located there'll be get just dollar straight to the bottom line. So the return on capital profile that tower business has really attractive. So you put all that together and we have a we have what I believe is quite a tactical plan to reach those return on capital objectives.
The big wildcard is upgrade and upgrade promotions I tried to make that clear in the opening comments.
Okay next question.
We will go next to Simon Flannery at Morgan Stanley .
Great. Thank you very much and congrats on a terrific E&P best wishes for the future.
I Wonder if we could just talk about the capital structure on the balance sheet.
You've talked about the investments, you're making you've talked about.
Our cost of debt you raised the dividend how are you thinking about your leverage profile.
Sources and uses of funds over this.
On fiber cycle.
Are there specific goals that youre trying to achieve that we should be aware of.
Well, we've increased our leverage over the last couple of years in anticipation of.
The spectrum purchases that we made and we found that we had very good access to the capital markets were sort of in the mid mid twos in terms of debt to EBITDA and we think we can stay.
Our target is to stay.
Low to mid three times debt to EBITDA and maintain our current.
Our current ratings.
Where we're currently at mid mid double B.
So this is a measured program I mean, we're gonna be investing heavily but it's going to be spread out over time, and we think we can sort of thread the needle of of investing at these levels, while maintaining our leverage levels at acceptable levels.
Simon I would just add one note to that I talked a lot about the iga to potential funds that could come in which.
Will help return on capital, we don't have a whole bunch of assumptions in the current plan and kind of what I've the goals that we've laid forward.
A bunch of assumptions that we're going to get those dollars and so we're we're funded in a way to help us achieve the plan Pete and team have done a tremendous job in changing our cost of debt and actually changing our balance sheet the opportunities I talked about what the IHA, a or simply on top of that.
Okay, we're ready for the next question.
We'll go next to Michael Rollins with Citi.
Thanks.
I'll also stick with one question.
Just looking at the guidance slide.
For U S cellular.
What's interesting is the margin outlook for.
'twenty two is and I think if I'm calculating right in the mid Twenty's and.
And you've got the national incumbents.
Either at or above 50% or trying to get to that.
The level and so I'm just kind of curious as you look at the wireless business.
You can unpack what might be structurally different about the margins.
Versus may be temporary and where you see the opportunities.
Over a multiyear period to meaningfully improve the margins on the current revenue base.
Good morning, Mike let.
Let me address first where we're at with the 'twenty two 'twenty two guidance just the longer term so.
Going into 2022, we have an inbound roaming revenue headwind in that that is down significantly from 2020 'twenty 'twenty. One we continue to lose that really high margin revenue.
Next year, we're increasing our retail service revenues at a rate of.
3% and that's on <unk> increases so doing doing really well there.
And the promotional environment that we talked about.
Throughout the call.
Our cost running through promo went up substantially in 2021 and screw up a bit in 2022 provided the promotional environment persists through 2022, which is our current expectation that could change and that could that could help us.
2022 if it does.
On expenses, we're really highly focused regarding our six year of a cost optimization program.
Really made great progress there of great accomplishments.
And so were only increasing expenses modestly low single digit percent.
And by the way, while we're doing that we're investing in all the areas, we've talked about <unk> fixed wireless towers prepaid and so forth.
So.
That's 22 I mean.
To get.
From our margins.
Two where the competitors are.
It's really first of all it.
It's a slow path and we've said multiple times our focus is return on capital, but it's all of the growth areas, we've talked about throughout this call.
It's expanding.
Prepaid business and government fixed wireless towers.
Taking advantage of the infrastructure funding in our postpaid business needs to get better our customer growth isn't where it needs to be LTE distressed churn. We have to just that we also have to improve customer acquisition. So it's really all of those things.
We'll move next to Sergey just husky with CSA.
Hi, good morning, guys.
Couple of questions.
Two part question I guess, one on the tower side.
<unk> of the business. So power revenues were up 9% a diverse number of tenants are ex U S. Cellular is still only about <unk> five so L T.
Maybe if you could provide more color. What's your specific objectives are for the dollar business in 2022, and maybe O&M three or three year horizon, what would you view as a success and also considering that you're running this business more like a tower company what are the pros and cons in your opinion of the scepter.
That segment is in U S cellular and providing additional disclosures around profitability and other metrics and the second part of my question is related both to wireless and wireline I know that the overlap between U S and Tds Telecom footprints is somewhat limited but.
Within infrastructure Bill and <unk>.
Finding available could El Corte <unk> strategy of aging out a bite Tds telecom and five Jay build by U S sale or combines is this.
Infrastructure funding create new expanded potential partnership opportunities for both businesses.
It would allow us to grow them at a higher rate going forward.
Okay.
Thanks, Terry Geis, so let's start with towers. The near term objective is continued revenue expansion at the rate or faster than we've been doing it.
How are we going to accomplish that increased co location rates decreased cycle times marketing these towers.
To to potential co locators and being more aggressive on how we run that business. We've seen really good success, thus far and I expect that to continue.
Longer term I think the big opportunity frankly, not to be simplistic, but it's more towers.
Building more towers to support our wireless business and putting those towers in place to improve our expense profile whether it's.
Moving out of high rent areas, whether it's reducing our roaming exposure, whether its improving coverage and so we put those towers in place and then we're going to put those towers in places where we also think that we can market them too to the AT&T Verizon T mobiles and dishes of the world.
And then the final I think attractive growth opportunity to get more towers goes back to what I was talking about with the <unk>.
Right. If we have if we get the the economics to put a tower in place if we can make those more attractive by putting an infrastructure component in that.
It means I can take a plan to build a 100 towers and make it 300 towers or 500 towers and so.
Proving both the effectiveness of that business as well as just the total volume until scale of that business is where we're going with it.
In terms of overlap with Tds I, absolutely think there's an opportunity, but it completely depends on how the grant programs are structured.
So if the grant if theres a grant program that's structured from a state as.
Hey, Here's a geography that I want you to cover.
And I want you to cover it with fiber and whatever you can't cover with fiber I want you to cover with something else an hour or something else is fixed wireless and we think it's a tremendous service.
We absolutely will work with Tds telecom and those opportunities, where we have that footprint opportunity will also work with other players.
So we would absolutely take a partnership approach to serving that.
As an alternative approach, where a state can say look I'm going to allocate a certain amount of dollars to fiber.
Allocated another amount of dollars to other technologies like fixed wireless.
For something like that we would obviously bid independently and theres not as much opportunity to work together. So I think we have a huge benefit in terms of bidding because we have a fiber partner like Tds Telecom and I would argue they have a similar opportunity by having a fixed wireless provider that can fill in gaps in their footprint.
When they decide to bid for those grants as well so I think we're absolutely more powerful together.
And there are no further questions at this time, Colin I will turn the call back over to you.
Okay. Thanks, everyone for your time today and again, please feel free to reach out to Investor Relations. If you have any additional questions have a great weekend.
And that does conclude today's conference again. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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