Q2 2022 Telephone and Data Systems Inc and United States Cellular Corp Earnings Call
discussed further later in the presentation.
We also showed our commitment to caring for our customers during tough economic times when we announced the wouldn't raise prices on existing rate plans through at least the end of 2023.
Overall, we believe these actions will not only help us improve churn, but they also allow us to go one office. This differentiates us from several other carriers that have taken different actions in the core.
It's still early in our marketing efforts, but we're seeing nearly 20% of new ads specifically site that pricing guarantee is the reason for switching. The
And so overall, I'm quite encouraged with the financial results in the court. Post-Paid R2 grew 5% year over year, and that represents by far one of the highest increases in the industry this quarter. And that's despite the headwind of a highly promotional environment.
We also continue to maintain expense discipline across the organization, which has allowed us to launch some aggressive promotions, and make investments in key growth areas of the business, while still maintaining our operating cash load guidance.
I mention investing in growth areas.
And halfway through the year, we're seeing positive momentum in a number of those areas.
Fixed wireless continues to grow. We've seen growth adds up 23% year over year.
And importantly, we now offer unlimited fixed wireless across our entire footprint. And that provides us additional sales opportunities and it simplifies operations.
Expansion of this product helps us build what I call distribution muscle in the space. As we continue to expand 5G millimeter wave footprint, but we also plan to launch this product on midband in late 2023 or early 2024 when that spectrum clears.
Towers also produced another strong quarter of double-digit revenue growth, up 13%, and that's due principally to an 18% increase in the number of co-locators.
Tower teams got a great job in streamlining our processes so that we can get more tenants on our towers more quickly.
We also achieved a key milestone in our business and government segment by signing our first two private networking deals.
This is in addition to over 25 custom IOT tools that we've signed in the past 18 months.
Both of which are helping us to build a strong foundation for emerging revenue growth in this B2B segment. The foundation is a foundation for emerging revenue growth in this B2B segment.
Recently I want to comment on the macro environment because I think it's on many of our stakeholders' minds.
I'm concerned about the economy and the risk of a recessionary environment and I'm also concerned about inflation and the macroeconomic factors that will affect both our customers and our partners.
However, I believe we're well positioned to manage these challenging economic conditions.
Many of our vendor contracts are long term with set pricing, and our cost optimization program continues to deliver strong results.
Additionally, just our broader sector has traditionally managed challenging economic environments very well. I don't see that changing.
So to summarize, I'm pleased with our financial results. I'm encouraged by the momentum in our growth areas, but we still need to improve post-page subscribers.
We're highly focused on this. We have a number of initiatives underway that we believe will improve that trajectory while also striking the right balance between financial outcomes and subscriber outcomes.
So I'll now turn the call over to Doug who's going to take you through the financial results in a bit more detail. Doug?
Thanks, healthy, good morning. Let's start with a review of customer results on slide seven. Post-pain handsets, growth submissions, decreased by 7,000, largely due to continued aggression in the competitive environment.
Post-paid handset net additions were down 30,000 driven by lower gross additions and an increase in churn, which I will discuss in a moment.
We saw connected device gross additions decline by 6,000, driven by lower watch additions and tablet sales due in part to global supply constraints.
This is partially offset by an increase in fixed wireless growth conditions.
As LT mentioned previously, we have another strong quarter in fixed wireless and we now have a base of 57,000 customers with this product, up 36% from the prior year.
Next, let's turn the post page, the post page turn rate shown on slide 8.
Post-date handset churn increased from the prior year, driven by higher voluntary churn as a result of increased switching activity and continued aggressive industry-wide competition.
In voluntary turn also increased in the quarter as non-paid defections increased the pre-pandemic norms.
Post-paid handset churn drove the increase in total post-paid churn as the churn rate for connected devices was essentially flat year over year.
Moving to slide 9, prepaid gross additions declined $9,000 and net prepaid additions decreased $14,000. Both declines were due to continued aggression in the competitive environment, including an increased presence of competitive brands in the national retail channel. —
Now let's turn to the financial result, starting on slide 10.
Total operating revenues for the second quarter increased 1% in the prior year.
Retail service revenues improved by 2% due primarily to a higher average revenue per user which I will discuss in a moment.
Inbound roaming revenue declined 36% due to lower rates and data volume.
A large striver of this rate decreased our renegotiations of terms with other carriers, which of course also benefits our roaming expense.
Other service revenues were up 5% due to higher tower rental revenues.
Finally, equipment sales revenue has increased by 2% due to an increase in average price per unit sold of new smartphone sales partially offset by higher promotional activity.
Turning to slide 11, average revenue per user and average revenue per account were up 5% and 4% year over year.
The increases were driven primarily by the
an increase in cost recovery surge charges, and an increase in device protection revenues.
These were partially offset by an increased emotional cost. It Colonial
Currently, 34% of our handset customers are in our two highest tiers of unlimited plans, and we are focused on continuing to grow this percentage to further improve our proof and provide our customers with the enhanced value of these plans.
As you can see on flight 12, and as mentioned by L.P. earlier, we continue to see steady growth in tower rental revenues driven by an increase in our tower tendency rate.
Our overall financial results for the quarter are shown in slide 13.
For this discussion, I will refer to adjusted operating income before depreciation and amortization and accretion as adjusted operating income.
As I commented earlier, total operating revenues increase 1% year over year.
L.T. mentioned our expense discipline cost optimization program and how we are managing relatively well to this highly inflationary environment. L.T. is a highly inflationary environment. L.T. is a highly inflationary environment.
That is reflected in our cash expenses, which, excluding the impact of cost of equipment sold, decreased by 1%.
Total system operations expense decreased 6% due primarily to a decrease in roaming expense.
While our off-net data usage increased year over year, our cost was down 35%.
Cost of equipment sold increased 7% driven by an increase in average cost for unit of new smartphone sales.
Selling general and administrative expenses increased 2%, largely driven by an increase in bad debt expense due to an increase in write-offs related to higher-bound paid infections, as well as a shift to higher-priced devices driving higher write-offs per account. Selling general and administrative expenses increased 2%,
Our guidance includes our expectation that bad debt expense continues to increase for the remainder of point two, relative to the prior year is inflation, the increased device cost, and lack of government stimulus, among other factors, are negatively impacting customer payment behavior relative to 2021.
Generally, the level of bad death expense in 2022 is trending closer to pre-pandemic levels that we experienced in 2019. The level of bad death expense in 2019 is trending closer to pre-pandemic levels in 2019. The level of bad death expense in 2019 is trending closer to pre-pandemic levels
Adjusted operating income increased 2% in adjusted EBITDA, which incorporates the earnings from our equity method investments, along with interest and dividend income, decreased 2% largely due to decreases in earnings from our equity method investments, driven by higher network expenses and certainly the underlying operating businesses.
Capital expenditures have increased manager by timing of expenditures in 2022, relative to the prior year.
Turning to slide 14, I will cover our guidance for the full year 2022.
Our guidance range for total service revenues, adjusted operating income, and adjusted EBITDA remain unchanged.
This reflects our estimates for low single digit growth in retail service revenue, continued to climb of high margin roaming revenue, and the expectation of a continued highly competitive and emotionally focused environment.
In addition, it also incorporates our near-term expectations related to inflationary pressure.
For capital expenditures, we are also maintaining our guidance range as our investments in 5G and network modernization, targeted millimeter wave build-out, and initial preparation for midband spectrum deployments remain on track.
I will now turn the cuddle over to Michelle Brickwicky. Michelle?
Thanks Doug and good morning everyone. We are pleased with our results at TDS Telecom for the second quarter and through the first half of the year and we are tracking to our financial guidance expectations.
We remain committed to our primary strategic objectives to provide growth and improve returns by investing in our flagship product, high-speed broadband.
We are directing our investments to expand our fiber footprint in new and existing markets and to enhance our product offerings.
These investments are driving connection and revenue growth.
This quarter we added 17,000 marketable fiber service addresses to our footprint.
Overall, we generated residential revenue growth of 5% that's quarter, driven by an 11% increase in broadband revenue. Why are you taking trusted incentives all around soups, broadband revenue.
We are very pleased that we have achieved superior market share in our incumbent markets where we have invested in fiber and we are seeing strong broadband penetrations in our launched expansion market.
In addition, we continue to drive faster speeds in our more rural and combat markets by building to meet our ACM obligations in utilizing state broadband grants.
In May, the FCC issued a notice seeking comment on a proposed extension of the ACAM program, which we fully support. We anticipate an extension program would provide additional years of revenue support in exchange for deploying higher broadband speeds.
We look forward to working through the comment process with the SEC and hope to have a final rule later this year.
Extending the current federal ACAM program first and then pursuing BEAD program funding would provide the best opportunities for TDS telecom to take fiber deeper into our communities.
Like LT, let me comment on the macroeconomic environment and set up a top of mind for all of us.
Inflation and supply chain challenges are concerning. However, we have been navigating these challenges successfully, and as a result, our strategic plans and guidance have not changed. We have not changed. We have not changed. We have not changed. We have not changed.
Inflationary increases have been managed through a combination of price increases, process improvements, and cost disciplines. And like US
To mitigate longer supply chain lead time, we have placed orders early and work with vendors to ensure our needed allotment of key components at acceptable prices. Therefore, we continue to be well positioned to managing these challenging economic conditions.
Turning to slide 17, we highlight the achievements we've made this quarter.
Year to date, we completed construction of 39,000 marketable fiber service addresses, deploying 17,000 in the quarter.
We currently serve 34% of our total footprint with fiber. And as we have previously shared, we expect to serve approximately 60% of our total footprint with fiber by 2026. We are now at the top of our total footprint with fiber by 2026.
In line with our growth objectives, service addresses grew 7% year over year.
In the second quarter, we increased our availability of 1 gig speeds to 63 percent of our total service addresses, up from 56 percent a year ago.
We also continue to see positive trends in our broadband penetration rates for markets that have been fully launched for more than 12 months, and we still anticipate 40% to 50% consumer penetration in a steady state.
Our service address delivery is close to what we had planned for mid-year. We're still working hard to reach our goal of 160,000 service addresses in 2022 with the expectation of ramping up in the second half of the year.
As we previously mentioned, we continue to manage a variety of industry-wide headwinds, including inflation and supply chain, as well as a variety of localized challenges, such as permitting complexities and contractor labor shortages.
We are pleased to have a broad pipeline of markets to give us flexibility in managing our build.
It's important to keep in mind that this is a long-term strategy, and although service address delivery might shift between years, we're still confident of meeting our goal of 1.2 million fiber service addresses by 2026. On slide 18, you can see the broadband connection across all markets.
Total broadband residential connections grew 5% in the quarter as we continue to fortify our networks with fiber and expand into new markets.
We are on track in our network construction under the A-CAM program, also helping to drive growth in our incumbent market.
Shown on the graph on the right, we continue to see demand for greater broadband speeds with 68% of our customers taking 100 megabits per second or greater, up from 63% a year ago.
Our 1GIG product, along with our 2GIG product in certain markets, are important tools that will allow us to defend and win new customers.
In areas where we offer long gig service, we are seeing 23% of our new customers taking the superior product.
Our focus on fast, reliable service has generated an 11% increase in total residential broadband revenue, which includes a cost recovery fee implemented in the second quarter of broadband subscribers.
On slide 19, total operating revenues increased 2% year over year, largely driven by growth in residential revenues, which increased 5% across all markets.
As shown in the chart on the left, expansion market revenues increased year over year following the timing of service address delivery.
Residential wireline incumbent revenue increased 2% year over year due to price increases and growth and broadband connection, offset by the climate video and voice connections.
Likewise, cable residential revenues grew 3% due to a price increase and an increase in broadband connection, also partially offset by a decline in video connection.
Commercial revenues decreased 6% in the quarter, primarily driven by lower select connection.
and wholesale revenues decreased 1%.
Price increases and overall product mix changes and there will be 3% increase in average residential revenue per connection.
Now let me sum up the combined financial results for the quarter as shown on slide 20.
As we just mentioned, revenues increased 2% from the prior year as growth from our fiber expansions and increase in broadband subscribers and average residential revenue per connection exceeded the declines we experienced in our legacy business.
Cash expenses increase 4% year over year due to increases to support current and future growth, which is not yet reflected in our revenues. And as a result, adjusted EBITDA declined 2%. And as a result, adjusted EBITDA declined 2%.
Capital expenditures increased 21% from last year as we continue to increase our investment in fiber deployment and focus on broadband growth.
Moving to slide 21, we have presented guidance which is unchanged from what we previously shared.
We expect capital expenditures and expenses to ramp up in the second half of the year as we continue to progress on our fiber deployment in new markets.
And we expect to end a year within the guidance range.
I want to thank all of our associates for their dedication to the success of TDS Telecom. Our positive quarterly results are a product of your hard work. And with that, I look forward to updating you in the third quarter. Now I'll turn the call back over to Colleen.
Thanks, Michelle. Chris, we are now ready for questions.
Thank you. And as a reminder for our participants, if you'd like to ask a question, please press star then one on your telephone keypad.
Our first question today is from Rick Prentice with Raymond James. Your line is open.
Thanks, good morning, everyone.
I think you talked to obviously the competitive environment, but can we probe a little bit deeper, help us understand...
Is there the ability to get back to positive post-paid phone ads? And what does that take? Does it take larger switcher pool? Does it take lowering churn? Does it take more aggressive local offers? Just help us understand the path back to positive post-paid phone ads. And then also, how much room do you have on your ARPU level there moving feature phones to smart phones? Is there a thought of any price increases coming?
Thanks, Eric. I guess it's cheating to just say yes, yes, yes, and yes, and move on to the next question. So I'll try and give you a bit more color. But in general, with everything you listed, do I see a price to do I see a path to positive consumer post paid net ads? Yes, thank you.
What is it going to take? I think the biggest step it's going to take in the near term is churn improvement.
I look at voluntary churn, that's where we saw the majority of our pressure in the first quarter. And we, the offer that we've launched here specifically to design, design to address that. And I look at the state being current in the future for forming donor designed to address that.
One of the things we saw over the past couple of years is we've seen a larger and larger percentage of customers that are out of contract.
and out-of-contract customers churn at a substantially higher rate than in-contract customers.
And so the goal is how do we get customers back into contract? And that was
One way is with the offer that we put forward.
We think it specifically addresses that issue and we're seeing really good results. So we're seeing upgrades up substantively.
We're seeing the ratio of voluntary defactions to grow a sad, improved, substance-tiply.
The other way that you're going to get to positive net abs on the growth side of the equation and we were light unaddle it.
And so this offers specifically addresses the Adeline opportunity and we're seeing Adeline performance increase.
Substantantly.
So I think execution on this offer, continuation of the momentum that we're seeing, and then it has to translate into churn reduction and that takes some time.
But you don't see churn immediately die. I worry what we expect to see is steady churn improvement throughout the second half of the year. So we should start to see some benefit from this in the third quarter. And then we'll see more benefit, hopefully, in the fourth quarter.
Second thing that she has to see is you have to see improvement in the growth area that's in the business.
And so for us, B2B rolls up into post-aid NetAds. High-speed Internet. We count as a connected device that rolls up into NetAds. And so we have to continue the momentum that we're seeing.
on high speed internet.
very optimistic about what we're seeing from that product so far.
Net ads, I'm sorry, subs up 23%, gross ads up 23%, excuse me. We're up to almost 50,000 customers on that product and that's
purely on LTE.
And so, I mean, we have a couple of millimeter wave cities that we fired up in the second quarter, but the vast majority of that growth that we're seeing in high speed internet is just on the low band product that we carry on LTE. And so, as we expand millimeter waves, and I would argue much more substantively when we fire up midband spectrum at the end of 2023, early 2024. And so, we fire up midband spectrum at the end of 2023, early 2024.
That will contribute to our results. And finally, B2B. We're seeing good momentum on the business side of the equation. We're seeing good momentum on the business side of the equation.
That's being held back a little bit by we're still seeing COVID-related disconnect. So thank the EDU hotspot disconnect.
some government programs that were fired up during COVID, during the pandemic that received subsidies, those subsidies have gone away. One of the things we track really closely is our customers switching to another provider, which means there's a problem with our value proposition in B2B, or they just disconnect them because they don't receive a subsidy anymore. And it's much more the latter. And so it's really a combination of all those things that I think will contribute to momentum. And I think we'll contribute to momentum.
Finally, as you know, we...
We don't operate in a vacuum. It is an aggressive competitive environment out there, but I see some opportunity.
AT&T and Verizon both raised prices. In the second quarter, we committed to our customers, we would not, and that is meaningful to them. And so we're seeing a lot of customers come into the store and specifically reference that price guarantee as a reason for coming in. And by the way, that's before we even put television advertising behind it, which we didn't really launch until July . So a lot of the momentum is positive. I'm optimistic that we're heading in the right direction.
But what will it take to get to positive consumer net ads for the businesses of the whole? It's going to take all of that thing and how it can take theWith end
Great. And to ask a follow-up question on the high speed internet fixed wireless access, can you start deploying and would you start deploying CBAN radios even before it's cleared so that you're able to hit the ground running once the satellite guys get their work done?
A simple answer is yes Rick. I'll let Mike give a bit more detail on operationally how we're doing this.
Yeah, we're actually starting that work this year, creating the designs, the deployment designs, identifying needs at the size, power, all that issuing POs so that we can start deployment next year. We're also working with the FAA to make sure we're ahead of any requirements that they have above and beyond what's already been identified. So we feel good about our plans and our prep for CBAN and to be able to activate it when we feel it's necessary. So we're working with the FAA. So we're working with the FAA.
The goal, Rick, is to once that spectrum clears, we want to be able to flip a switch and have meaningful mid-dan spectrum availability across a large part of our footprint. Mike's roll on that out.
And it sure seems Verizon and particularly T Mobile have had great success with that early stage of mid-band fixed wireless access. Do you guys have any targets you'd like to share with us as far as where you think that market could go as far as sizing it for you?
I'm not ready to share targets yet, only because it's still early days on millimeter waves. I'd like to see more momentum behind the millimeter wave product before we get into targets. What I can tell you is...
We really have two sweet spots of markets that we're targeting, because again, we don't do this in a vacuum. The first sweet spot without infrastructure funding is going to be suburban or call it dense rural. I realize that may sound a bit more like an oxymoron, but I put there's non-tense rural and there's dense rural. Suburban or dense rural areas where fiber's not present.
where you have enough customer density to make the economics of the product work, but you're not competing against fiber.
That's the sweet spot and we think we have a lot of room to run right now with geographies like that.
With infrastructure funding, my goal is to cover every square inch of our footprint if we can. That's the promise of the IIJA coupled with fixed wireless.
I've been spending a lot of time talking to folks in DC, talking to governors with the concept being that it's very difficult to roll out fixed wireless in an economical way to really sparse rural areas.
But it's a heck of a lot more economical than trying to do with fiber.
And so if we're going to connect these rural areas, we've got to do it with IIA funding. And if we can get that funding, now all of a sudden, we can start to connect areas that have never been connected before, or best have satellite, or best have, really, really toward the FL. And so that will open up, I think, a whole other... And so that will open up, I think, a whole other...
universe for us to sell into into
Makes sense appreciate everyone say well
Thank you, you as well.
The next question is from Sergei Duzlevski with Gamco Investors. Your line is open.
Thank you. Good morning guys. My first question is on prepaid. Could you talk a little bit about your prepaid strategy over medium term? What types of moves you guys already implemented that seem to be working for you? What else you could do on prepaid and in terms of market share where you are in your markets and what kind of share you are targeting over medium term in prepaid?
Thanks, sir. The prepaid strategy, I would really break it up into a couple different categories.
The first category is distribution.
So...
Two years ago, we were not particularly focused on the prepaid business.
And we have pivoted that over time. We have a..................
assigned a leader specifically responsible for driving this.
And one of the key things on our plate is driving increased distribution in the prepaid space.
The most obvious is Walmart. We've expanded our footprint within Walmart, but so many of our competitors. And so the Walmart competitive environment in Walmart is a key driver, obviously a prepaid girl, particularly in the markets that we serve. But there's others as well.
And so, signing up.
A lot of places that are traditional pre-payed distributors requires a very different operating model.
operating in pawn shops, gas stations.
convenience stores. This is a very different model than we're used to, but it's one that we have to get good at. And so we are building out our distribution in a lot of these areas.
signing up prepaid specific distribution partners.
That growth happens over time. It doesn't happen overnight. But I'm pleased with how our leader there, Megan Corcoran, has driving an increase in prepaid distribution.
Second piece is around the product. You have to have a competitive product. It has to be priced competitively. It has to be structured competitively. And it has to have increments that are compelling to customers. We've made continued tweaks to that prepaid product. And once again, this is an area where I think our regional structure benefits us.
I talked about trialing.
different price and promotion levels in our different regions in my opening comments. At the time I was referencing most of the post-pays but we are doing exactly the same thing
So we have the opportunity to test different structures, see what works for customers, see what works in different times. The big opportunity for us in our footprint is appealing to migrant workers.
Price points are very specific and they're specific for a very specific period of time. So we have to get good at the product piece of it.
And the final piece, and this is where I think I see the biggest opportunities around customer lifecycle management.
reaching out to customers in a way that is compelling after they join us, when their eligibility expires, getting them to re-up, getting them to re-up at a higher dollar value, so expanding ARPU. I see a lot of benefit there. It's a highly data-driven portion of the business.
That means that you have to put the systems in place, the structures in place to be able to consume that data and use it intelligently. We're investing in that. And so I see our customer lifecycle management improving over time as well. In terms of specifics around a target, we haven't published that. All I can tell you is a lot more than we have today. All I can tell you is a lot more than we have today.
We've been growing our prepaid business. I still see a lot of opportunity there. But again, we're generally very back at the envelope. Our market share in that business is about half of postpaid, and so we see a lot of room to run on the prepaid side via those three mechanisms I described.
Got it. Great. In terms of the performance of the tower business. In terms of the performance of the tower business.
How would you characterize the tower business performance as the best year compared to your expectations? The number of collocators per tower increased slightly, but it's still around about 0.5 per tower. And I know that tower deals are somewhat lumpy, and you are gonna see some revenues from this for later this year. But I guess what needs to happen in order for you guys to see a step change.
in the business over the next two years. And as you're buying these business more, the standalone tower company, what is your view on putting this business in the separate segment under U.S. Aloe umbrella? in the separate segment under U.S. Aloe umbrella?
Two things have to happen for us to see if that change in this business.
The first is we have to continue to improve our co-location rate.
I think the team has put a variety of...
called operational streamlining mechanisms in place to just make it easier for people to work with us. We were not particularly open for business a few years ago and now we are. And I'm very pleased with how that team has...
created a structure to make it easier for co-locators. Cycle times have generally improved consistently quarter after quarter after quarter. And so we just have to make it easier to work with us. I'm very encouraged by the revenue growth that we've seen thus far this year. As you mentioned, this is lumpy, right? It's a lumpy business. You're going to see some quarters. You'll see 13, some quarters. You'll see nine. We're targeting continued.
low double digit revenue growth in that in that in that distance. That's the first piece and the second piece is more towers.
The best way to accomplish that, and sorry if I'm a broken record on this, is I'm going to take you back to that infrastructure funding opportunity.
It costs a lot of money to put a tower in rural America.
In the back of the envelope, $600,000, $700,000 to build a tower.
And we've been investing in rural America for a long time.
This is not me, this is the business. The business is good at it. We've been focused on rural for a long, long time. And if there was an obviously economical, positive place to put a tower, we would do it.
I think we have an opportunity to build some new towers to improve our current tower rent profile. We have some really high rent towers, and we can build new towers to put in place there. We have the opportunity to put some towers in place to reduce our roaming exposure. But in general, the big opportunity is new towers to improve coverage.
And that is very difficult to do without some subsidy.
doing that on a standalone economic basis is challenging. And so the reason I'm encouraged by the fact that IIG allows for wireless and allows for fixed wireless is. IIG allows for wireless and allows for fixed wireless is.
If we can get states to move some of their infrastructure dollars towards fixed wireless
We can put new towers in place.
to cover those consumers and those businesses with fixed wireless connection.
But we can triple dip on the revenue. We have a revenue opportunity with fixed wireless. But then we also, because of the infrastructure subsidy that comes with that tower, we have the opportunity to improve our wireless.
operating metrics, improved coverage.
Improve customer experience, improve NPS, improve growth ads, improve churn.
And there's a third component, which is we can also drive co-location revenue. Almost by definition, if we're putting a tower in rural America, because there isn't a tower there before, and it'll also be attractive to our competitors to co-locate on that tower. And so that's why the infrastructure bill is so important, because that's another opportunity to kickstart that business and to kind of take it to the next level. We don't have to have it. I'm very encouraged by the momentum that we're seeing, if we can just continue that co-location momentum, as you mentioned, our co-location rates.
are still substantively below some of the leaders in the business. And so we have an opportunity to grow that over time. But that IIJ opportunity, it can really put it into overdrive.
Great. And my last question is probably for leakage, but also for LT as well.
So you guys obviously have a large portfolio of various infrastructure and investment assets across both businesses, but a lot of it is sitting within your seller and you are not getting much credit for it. So one asset in particular or group of assets is the wireless partnerships that you are getting cash distributions from. Recently –
And now the telco consolidate the communications, agreed to sell their wireless partnership stakes to rising at about 11 and a half times, last year's cash distribution. So if I put that kind of multiple and cash distribution that you have earlier received, we could get to $2 billion valuation for those partnership interests for you. So my question is, what are your thoughts on servicing value from those wireless partnerships?
And more broadly, what types of moves, maybe on the financial engineering front, would you be open to that would help highlight the value of those assets, and other infrastructures that you have, our investment assets, and surface value without meaningful sacrifices to your strategic and operating priorities?
So I'm going to have Doug talk to the wireless partnership questions and then Vicki maybe you can give your perspective on the on on serious broader question.
Yes, so the investment partnerships obviously they've stood off a nice cash flow for us every year in the neighborhood of about $180 million. One of the challenges we have with selling those interests is they have a very low tax basis. So there is the pre-tax proceeds and the post-tax proceeds and those are significantly different based on the low tax basis of the investments. It's not to say we would never entertain the...
You know, you know, offer that was very attractive, but that is a barrier and we've looked at that, you know, in the past and the, you know, surely it does.
there's more compelling reason for
hanging on to the investments as opposed to selling them after on an after-tax basis.
You know, with respect to both investments and other assets like towers and highlighting their value, you know, we're trying to do that here through our earnings call giving you insights and what's going on with the towers. You know, investments we obviously report on adjusted EBITDA to highlight the value that they're providing to the business as well as the cash flow. So we're doing a lot of that. Certainly we'll explore more over time but nothing planned right now. Yeah. Yeah.
So, Serge, thank you for that question. From a broader perspective.
I'm almost 90 days in, and I have been spending a lot of time focused on
the businesses and the business needs and their long-term strategies. And first and foremost right now, my first priority is to make sure that I'm able to fund the needs of the LT and Michelle have for the 5G buildout. We pay for our spectrum. We've got the 5G buildout in front of us. You've heard LT talk about a number of growth opportunities that we are funding for long-term growth.
And at TDS telecom we have a window of opportunity right now to fund our fiber builds. So my first priority is to make sure that we are able to take advantage of those. Second, I want to make sure that I've got enough flexibility across my balance sheet to be able to fund the business needs, and leave enough capacity and leverage capability so that we can take advantage of opportunities as they go forward.
information to show the value more clearly to investors as that becomes a more meaningful part of our revenue growth.
On the partnerships, just to add on to what Doug has already said, we recognize that our Verizon partnerships are very valuable. All of our partnerships are very valuable. And I would have to have a specific need, a source of funding that is needed in the business before I would consider a transaction. And that transaction would require a very high multiple.
discussion. But when you look at
your tower direct expenses has the external revenue that you're reporting from towers.
exceed the direct power expenses. So before even considering what the allocation of rent could be from.
You being the anchor tenant on that.
Does it break even or better? And then changing gears a little bit to other possible needle moving opportunities for US cellular and TDS. Just curious if there's an update more strategically on network sharing opportunities or other ways that you could think about managing the business and the operations over time. Thanks.
Thanks Mike, I'll have Doug talk about your tower question and I'll tackle the network sharing afterwards.
Yeah, good morning Mike. On the towers, the incremental direct costs that we incur from a colocation are very small. So our incremental margin on colocations is in excess of 90%. So you know, what you're seeing in the way of revenue growth, cruise right to the bottom line and operating cash flow growth. So that's why we feel really good about that revenue growth is really important to our profitability.
Let me just follow up on that tower point just for one more second. In the situation where...
You know, you have these direct rent costs. Maybe you own some of the land, you rent some of the land, you have utility costs. If you just add up all those costs, for getting a moment, the incremental opportunity, does the third party rent more than offset your costs? In other words, that this is a business that is already
break even or better on the direct profitability basis.
even or better on a direct profitability basis?
The short answer is Mike, it doesn't totally offset our costs. Remember, you obviously, these costs being incurred for our operating business and for our mobility and expires us all of our products. So the short answer is no. It doesn't, it's kind of a level where it offsets all of those costs.
Okay, I was just curious about that. Thank you.
Mike, let me tackle network sharing.
that I'll expand that your question is to tiny bit. In the long run, what we're committed to doing is to have meaningful expansion of return on capital in this business. That's the financial metric of success. We've established for ourselves.
We have a mission of connecting people and the only way to accomplish that mission is through a lot of investment. The only way to do a lot of investment is if we drive a healthy return. And so we have a goal of expanding return on capital. Most of the mechanisms that we've talked about thus far are expanding the return side of that equation.
driving revenue, driving profit, a more revenue, expanding OCF.
and thus improving return on capital. I do see opportunity to improve the capital efficiency side.
I think I won't be the I.I.J. or dead any further, but I do think that is a meaningful opportunity to improve capital efficiency over time.
If we can get infrastructure dollars to support our capital spend it means we can improve return on capital
Network sharing is another big one. I've talked about this in prior calls. I do not think it makes sense to build...
4 or 5 duplicative 5G networks in rural America.
And if you think about 6G or 7G, what that's mostly going to involve is DEMSA Network Builds.
to get capacity and to get intelligence closer and closer to the user.
That requires a lot of capital and that requires a lot of capital, it's difficult to justify when you have really well customer density.
And so I do think that network sharing is going to be a necessity in the long, long run. And we're pursuing conversations to that end.
I feel very good about our ability to hit our financial projections and to continue to move towards doubling a return on capital without a deal like that. So we don't have to have a deal like that to continue to expand return on capital. But in terms of a needle mover on capital efficiency, I think network sharing is a big one. And I do think we have an opportunity. I think we're a good, we're a, we're a very realistic partner for others to work with. And we're having those conversations. I've talked about that in past and past calls these things don't move quickly.
but I do think there's a good opportunity. And one last question on the subject of this. They've signed some deals with a couple of the other national wireless carriers. Historically, your company and the regions in which you operate, you've been able to sign deals with different national carriers to your point about the sensibility of.
know how much construction there really should be in some of these rural markets. Have you already entered into an IMVNO or any sort of roaming deal with Dish and maybe you can elaborate on maybe the opportunities beyond maybe just some of the
the tower commentary of the past. Yes, so we have, as I mentioned, our biggest opportunity with DISH that we've entered into thus far is our tower MLA. I can't talk in more specifics about that, but we're optimistic about the opportunity to support them. I think we have a good opportunity to work with DISH in the same way we have a good opportunity to work with anyone who wants to expand their connectivity in some of the areas in which we operate.
Beyond that, I can't go into detail on any specific agreements, Mike. Thanks. The next question is from Simon Flannery with Morgan Stanley . Your line is open.
Thank you. Good morning. LT, could you just talk a little bit more about the new promotions that sounds like they're having a good impact? Help us understand what the accounting is going to look like for those promotions, how much of the cost will you need to take up front, and how long will you amortize most of it over? And then on the partnerships just coming back to that, it did look like the equity and earnings dropped about 21% year over year. I don't know if there's any kind of one time is driving that or is there been any change?
that we is likely to go forth from here.
Simon, I think in terms of the revenue opportunity of those promotions, I talked a little bit earlier about the increased upgrade momentum that we're seeing, the increased adaline momentum that we're seeing. One metric we track fairly closely is the ratio of gross ad to voluntary defects we're seeing improvement there. Until...
I'm optimistic that it's going to have the long-term effect that we want to have on upgrades, on churn, on ad lines. Let me let Doug talk about specifically how the expenses of that promotion are managed, and then he can answer your second question as well.
Good morning, Simon. So with these comments, you are finding for the promotions.
Think about 40% of the cost of the promotion is recognized upfront on day one, if you will, and then about 60% is recognized in service revenue over the contract period, which is 36 months. That's how to think about the spread of revenue. Also remember, there's offsets for revenue pickups and gross ads and things that we're gaining from the promotion, so those are all offsets as well, when you think about total operating cash flow. Then moving on to your question about equity earnings and...
Those being down, the single largest item was in the LA partnership, starting in January of this year, the Verizon Holding Company, initiated a spectrum of these with the partnership that's going to, our share of that, these is about 15 million per year. So we're incurring that beginning this year, that wasn't present last year. In addition to that charge for the quarter, just variants operating the items that are different partnerships, including increased bagged expense and increased network costs.
roaming reductions and usage and stuff. How should we think about that going forward? Is there more to come there?
Yeah, I mean, my team had been doing a great job of managing that, and when we talk about our cost optimization program, that's been the area where we made the most progress and have some great wins. That being said, going forward as we do our 5G rollout, we also pressure there as we incur more cell site rent, backhaul and so forth for putting millimetre wave and midband onto our cell site.
I wouldn't look for a continued decrease. I would look, you know, it's going to increase over time, but we're certainly looking to mitigate that through a cost optimization program.
All right, thank you. Yep, welcome.
We have no further questions at this time. I'll turn it over to Colin Thompson for any closing remarks.
All right, great. Thanks everyone for your time today. Again, please reach out to IR if you have any additional questions and have a great weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.