Q2 2022 Telephone and Data Systems Inc and United States Cellular Corp Earnings Call
Increases that we are currently seeing.
Wanted to highlight that during the quarter, we repurchased a modest amount of stock at both companies. As a result, we have spent nearly $40 million in stock buybacks this year $20 million and $19 million at Tds and U S cellular respectively.
And now I'll turn the call over to L. T.
Thanks, Vicki and good morning, everybody.
U S failure or mission has always been to keep customers connected to the people and places that matters, most and as shown on slide five you can see some of the strategic priorities that support that mission.
Going to slide six.
You can see the strategies, we have developed to drive revenue growth and increase return on capital.
Let me start with postpaid and I'm going to take you back to the first quarter.
As I detailed during that first that first quarter earnings call.
UNFI some specific areas of subscriber pressure, where we saw opportunities to improve and that was noticeably churn and Avalon and this led to a series of regional tests and trials during the second quarter and as a result of those trials, we launched our new promotion in late June and that was any phone free for anyone and thats for new and existing.
Customers.
Now because of the timing of when we launched this promotion it had little impact on second quarter subscriber results.
But we believe this will meaningfully address a number of the subscriber challenges that we identified earlier in the year.
And while it's early so far we're pleased with the results we've seen significant increase in add a line and upgrade activity and.
And we expect that upgrade activity to result in improved churn downstream.
And thanks to the trials that we ran were able to structure. This offer in a way that we believe will drive positive subscriber results in the second half of the year, but with expense pressure that we believe is manageable and that offer structure, coupled with our ongoing expense discipline enables us to maintain our profitability outlook for the year even.
With those aggressive promotions.
And in fact, we are going to be maintaining all of our guidance, which Doug will discuss 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 on offense. This differentiates us from several other carriers that have taken different actions in the quarter.
It's still early in our marketing efforts, but we're seeing nearly 20% of new ads, specifically cite that pricing guarantee is the reason for switching.
So overall I'm quite encouraged with the financial results in the quarter postpaid <unk> 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 flow guidance.
I mentioned investing in growth areas.
And halfway through the year, we're seeing positive momentum in a number of those areas fixed.
Fixed wireless continues to grow we've seen gross ads up 23% year over year and.
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 this space as we continue to expand <unk> millimeter wave footprint, but we also plan to launch this product on mid band in late 2023 of our early 2024 when that spectrum clears.
Tower has also produced another strong quarter of double digit revenue growth up 13% and thats due principally to an 18% increase in the number of co locators.
Our team has done a great job in streamlining 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 both 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 <unk> segment.
Briefly 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 in 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, our broader sector has traditionally managed challenging economic environments very well I.
I don't see that changing.
So to summarize I am pleased with our financial results I'm encouraged by the momentum in our growth areas, but we still need to improve postpaid subscriber results were highly focused on this.
There are 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 is going to take you through the financial results in a bit more detail Doug.
Thanks, <unk> good morning, let's start with a review of customer results on slide seven postpaid handset gross additions decreased by 7000, largely due to continued aggression and the competitive environment.
Postpaid handset net additions were down 30000, driven.
Driven by lower gross additions and an increase in churn, which I will discuss in a moment.
We saw a connected device gross additions declined by 6000, driven by lower watch additions and tablet sales due in part to global supply constraints.
This was partially offset by an increase in fixed wireless gross additions.
As <unk> mentioned previously we had another strong quarter in fixed wireless and we now have a base of 57000 customers with this product up 36% from the prior year.
Next let's turn to postpaid the postpaid churn rate shown on slide eight.
Postpaid 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.
Involuntary churn also increased in the quarter as non paid infections increased pre pandemic norms.
Postpaid handset churn drove the increase in total postpaid churn is the churn rate for connected devices was essentially flat year over year.
Moving to slide nine prepaid gross additions declined 9000, and net prepaid additions decreased 14000, 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 results starting on slide 10.
Operating revenues for the second quarter increased 1% from the prior year.
Retail service revenues improved by 2% due primarily to a higher average revenue per user, which I'll discuss in a moment.
Inbound roaming revenue declined 36% due to lower rates in data volume.
The largest driver of this rate decrease our renegotiations on 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 revenues 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 favorable plan and product offering mix.
An increase in cost recovery surcharges and an increase in device protection revenues.
These were partially offset by an increase in promotional cost.
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 approved and to.
By our customers with the enhanced value of these plans.
As you can see on slide 12, and as mentioned by LTE earlier, we continue to see steady growth in tower rental revenues driven by an increase in our tower tendency right.
Our overall financial results for the quarter are shown on slide 13.
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 increased 1% year over year LTE mentioned, our expense discipline cost optimization program and how we are managing relatively well through this highly inflationary environment.
And 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 per unit of new smartphone sales.
Selling general and administrative expenses increased 2% largely driven by an increase in bad debts expense due to an increase in write offs related to higher bad paid infections as well as a shift to higher priced devices driving higher write offs per account.
Our guidance includes our includes our expectation that bad debts expense continues to increase for the remainder of 2022 relative to the prior year as inflation increased device costs and lack of government stimulus. Among other factors are negatively impacting customer payment behavior relative to 2021.
Generally the level of bad debt expense in 2022 is trending closer to pre pandemic levels that we experienced in 2019.
Adjusted operating income increased 2% and 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 certain of the.
Lying operating businesses.
Capital expenditures have increased mainly driven 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 decline of high margin roaming revenue and the expectation of a continued highly competitive and promotional focused environment.
<unk>.
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 <unk> and network modernization targeted millimeter wave buildout and initial preparation for a mid band spectrum deployments remain on track.
I'll now turn the call over to Michelle Breck wiki 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 objective to provide growth and improve returns by investing in our flagship product high speed broadband.
We are directing our investments to expand our fiber fiber footprint in new and existing markets and to enhance our product offering. These investments are driving connection and revenue growth. This quarter. We added 17000 marketable fiber service addresses to our footprint.
Overall, we generated residential revenue growth of 5% this quarter driven by an 11% increase in broadband revenue.
We are very pleased that we have achieved superior market share in our incumbent market, where we have invested in fiber and we are seeing strong broadband penetration and our launched expansion market.
In addition, we continue to drive faster speeds in our more rural incumbent market by building to meet our ATM obligations and utilizing state broadband grants.
In may the SEC issued a notice he can comment on the proposed extension of the ATM program, which we fully support we.
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 FCC and hope to have a final rule later this year.
Extending the current federal ATM program first.
And then pursuing the program funding would provide the best opportunities for Tds telecom to take fiber deeper in our community.
Like LTE, let me comment on the macroeconomic environment that is 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.
Inflationary increases have been managed through a combination of price increases process improvement and cost discipline.
And like U S. Cellular many of Tds telecoms contracts are long term with fixed pricing to mitigate longer supply chain lead times, we have placed orders early and worked with vendors to ensure our needed a lot of key components at acceptable prices.
Therefore, we continue to be well positioned to manage the managing the challenging economic conditions.
Turning to slide 17, we highlight the achievements we've made that's required.
Year to date, we completed construction of 39000 marketable fiber service addresses deploying 17000 in the quarter.
We currently serve 34% of our total footprint with fiber.
As we have previously shared we expect to serve approximately 60% of our total footprint with fiber by 2020.
In line with our growth objective.
This addresses grew 7% year over year in the second quarter, we increased our availability of one gig speed to 63% of our total service addresses up from 56% a year ago.
We also continued 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 delivery is close to what we had planned for mid year, we're still working hard to reach our goal of 160000 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 installation 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 bill.
It is 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 growth 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 market.
We are on track on our network construction under the ATM 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 speed with 68% of our customers, taking 100 megabit per second or greater up from 63% a year ago.
Our one gig product along with our two gig product in certain markets are important tools that will allow us to defend and win new customers.
In areas, where we offer one gig service.
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 the cost recovery fee implemented in the second quarter for broadband subscribers.
On slide 19, total operating revenues increased 2% year over year, largely driven by growth in residential revenue, 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 in broadband connections.
Offset by a decline in 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 connections.
Commercial revenues decreased 6% in the quarter, primarily driven by lower CLEC connections and wholesale revenues decreased 1%.
Price increases and overall product mix changes drove a 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 expansion and increase in broadband subscribers in average residential revenue per connection exceeded the declines we experienced in our legacy business.
Cash expenses increased 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%.
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 continued to progress on our fiber deployment in new market.
And we expect to end the year within the guidance range.
I want to thank all of our associates for their dedication to the success of Tds Telecom are 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 will turn the call back over to Colleen. Thanks, Michelle Chris We are now ready for questions.
Thank you and as a reminder for participants if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question today is from Ric Prentiss with Raymond James Your line is open.
Thanks, Good morning, everyone.
Yes.
Okay busy.
Busy day with earnings I apologize its been on a couple of calls.
I will tell you I think.
You talked to obviously the competitive environment, but can we probe a little bit deeper helped.
Help us understand.
Is there the ability to get back to positive postpaid phone adds and what does that take because it takes larger switcher pool does it take lowering churn.
Does it take more aggressive local offers just help us understand the path back to positive postpaid phone adds and then also how much room do you have on your on your RP level, they're moving feature phone to smartphone is there a thought of any price increases coming.
Okay.
Thanks, Rick I guess is 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 as everything you list.
You price to you I see a path to positive consumer postpaid net adds yes I do.
What is it going to take.
Biggest step that's going to take in the near term as churn improvement.
When 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 years, specifically two design designed to address that one.
The things we saw as we over the past couple of years.
Seen a larger and larger number of 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's 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 defections to gross adds improved substantively.
The other way that youre going to get to positive net adds on the growth side of the equation and we were light on analyzed and so this offer specifically addresses the Avalon opportunity and we're seeing out of line performance increase.
Substantively.
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 dive right worry what we expect to see.
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 we will see more benefit hopefully in the fourth quarter.
Second thing is you have to say is you have to see improvement in the growth areas of the business and so for us <unk> rolls up into postpaid net adds high speed Internet, we count as a connected device that rolls up into integrate into net adds and so we have to continue the momentum that we're seeing.
On high speed Internet.
Optimistic about what we're seeing from that product so far.
Net adds I'm, sorry, its subs up 23% gross ads up 23% excuse me, we're up to almost 60000 customers on that product and Thats.
Purely on LTE and so I mean, we had 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 wave and I would argue much more substantively when we fire up.
Mid band spectrum at the end of 2023 early 2024.
That will contribute to our results.
Finally be debate.
We're seeing good momentum on the business side of the equation.
That's being held back a little bit by we're still see COVID-19 related a disconnect. So think the EU hotspot disconnects some.
Government programs that required up during COVID-19 during the pandemic to receive subsidies. The subsidies are gone away one of the things we track really closely as our customers switching to another provider, which means there is a problem with our value proposition and need to be or are they just disconnecting because they don't receive a subsidy anymore and it's much more the latter and so on.
Really a combination of all those things that I think will will contribute to momentum.
As you know.
We don't operate in a vacuum it is an aggressive competitive environment out there, but I see some I see some opportunity for <unk>.
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 referenced that price guarantee as a reason for coming in and by the way that's before we even put TV advertising behind it which we didn't really didnt launch until until July so a lot of the a lot of 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 adds for the business as a whole it's going to take all of that executing on all cylinders.
Great.
As a follow up question on the high speed Internet fixed wireless access.
Can you start deploying and would you start deploying C band radios, even before it's cleared so that youre able to hit the ground running once the satellite guys get their work done.
Simple answer is yes, Rick I'll, let Mike give a bit more detail on operationally, how we're doing that we're actually starting that work this year.
Creating the designs of deployment designs identify needs at the sites power all of that issuance. 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 C band to be able to activate it.
We feel is necessary the goal Rick is to once that spectrum cleared as we want to be able to flip a switch and have meaningful mid band spectrum availability across a large part of our footprint, Mike Mikes Mitra rolling that out.
Sure seems Verizon, particularly T. Mo has had great success with that early stage of mid band fixed wireless access or 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 wave I would like to see more momentum behind the millimeter wave product before we get into targets. What I can tell you is you really have Q sweet spots of markets that we're targeting because again, we don't do this in a vacuum.
First sweet spot without infrastructure funding.
Is going to be suburban or call. It dense rural airlines that may sound, a bit more like an oxymoron, but right, but theres not intense role in their sensor model.
Suburban are denser rural areas, where fiber is not present.
Where you have enough customer density to make the economics of the product work.
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 Iia, coupled with fixed wireless.
I've been spending a lot of time.
And our folks in D C talking to governors.
The concept to be that it is very difficult to rollout fixed wireless in an economical way to really sparse rural areas.
But it is a heck of a lot more economical than trying to do with fiber.
So if we're going to connect these rural areas, we've got to do it with <unk> 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 at best have satellite or a best have really really poor DSL.
And so that will open up I think a whole another.
Universe for us to sell into.
Obviously because of the uncertainty about how that funding is going to come in that also makes it difficult to set specific targets.
I appreciate everyone's say well, thank you as well.
The next question is from Sergey <unk>.
<unk> 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 the medium term what types of malls you guys already implemented.
It seems to be working for you what else we could do on prepaid I mean in terms of market share where you are in your markets and what kind of share you are targeting or medium term in prepaid.
Okay.
Thanks, Eric.
Prepaid strategy I would really I would really break it up into a couple of 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.
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 and Walmart is a key driver obviously of prepaid growth, particularly in the markets that we serve but there's others as well.
So signing up a lot of places that are traditional prepaid distributors requires a very different operating model operating in.
Shops gas stations convene.
Convenience stores. This is a very different model than we're used to but it's one that we have to get good and so we are building out our distribution and a lot of these areas.
Signing up prepaid specific distribution partners.
That growth that growth happens over time, it doesn't happen overnight, but I am pleased with how our leader there and Megan Corker and is 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 that's 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 close date, but we're doing exactly the same thing with frequent so we have the opportunity to test different structures see what works for customers.
See what worked in different times.
The big opportunity for us and our footprint is appealing the migrant workers.
Those price points are very specific in their specific for very specific period of time and so we have to get good at that and the product piece of it.
And the final piece of this is where I think I see the biggest opportunity is around customer lifecycle management or 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 at a higher dollar value so expanding our too.
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 structure in place to be able to consume that data.
And.
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 we haven't published that what 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 of the envelope of 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.
Those three mechanisms I described.
Got it great.
Terms of.
The performance of the tower business, how would you characterize.
With our business performance was the best year compared to your expectations.
Number of allocators with our increased slightly but it's still around.
<unk> <unk> five per dollar.
I know that tower deals are somewhat lumpy.
You are going to see some revenues from this.
Later this year, but I.
I guess what needs to happen in order for you guys to see a step change in this business over the next two years.
As you are running the business more as a Standalone tower company. What is your what is your view on putting all of this.
In a separate segment under <unk> umbrella.
Two things have to happen for us to see a step change in this business.
The first is we have to continue to improve our co location right.
<unk>.
The team has put a variety of.
Cause operational streamlining mechanisms in place to just make it easier for people to work with us.
We were not particularly opened for business a few years ago and now we are and I am very pleased with how that team has.
The 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 am very encouraged by the revenue growth that we've seen thus far this year as you mentioned this is lumpy and it's a lumpy business youre going to see.
Some quarters Youll see <unk> some quarters you see nine we're targeting continued low double digit revenue growth in that in that in that business. 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 but I'm going to take you back to that infrastructure funding opportunity.
Cost a lot of money to put a tower in rural America.
Back of the envelope 600 $700000 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 economically 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 it.
Obviously, you 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.
So the reason I'm encouraged by by the fact that <unk>.
Allows for wireless and allows for fixed wireless is.
If we can 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 in those businesses with fixed wireless connection.
So we can triple dip on the revenue we have.
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.
Improved customer experience through NPS gross adds improved churn and then there's a third component which is we can also drive colocation revenue almost by definition, if we're putting a tower in rural America, because there isn't a tower there before and will also be attractive to our competitors to co locate on that tower and so that's why the infrastructure that's why the infrastructure.
Bill is so important.
That's another opportunity to kick start that business and to put it to kind of take it to the next level, we don't have to have it.
Encouraged by the momentum that we're seeing and if we can just continue that co location momentum as you mentioned our colocation rates.
Are still substantively below some of the leaders in the business and so we have an opportunity to grow that overtime, but that iga that IHA opportunity is it can really put it into into overdrive.
Great and my last question is.
<unk>.
So for loyalty as well.
So you guys, obviously have a large portfolio of warehouse infrastructure and investment assets across both businesses.
A lot of it is sitting within Europe solar and you are now.
Im getting.
Much credit for it so one that had been particular or group of vessels.
The wireless partnerships since you're getting cash distributions from.
Recently.
And as a telco consolidated communications agreed to sell their wireless partnerships. Thanks to horizon is about 11 five times last year's cash distributions.
Hi, Paul just kind of multiple on the cash distributions at the wholesalers.
We could get to $2 billion valuation for those partnership interest for you. So my question is.
What are your thoughts on surfacing 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 highlights.
Those assets and other infrastructure that you have.
Investment assets and surface value without meaningful sacrifices so youll strategic.
Operating priorities.
So.
Doug talk to the wireless partnership questions and then Vicky maybe you can give your perspective on the broader question Doug.
Yes sure.
So the investment partnerships, obviously, it's been a nice cash flow for us every year in the neighborhood of about.
$180 million what are the challenges we have with selling those interests as they have a very low tax basis. So there is the pre tax proceeds from the post tax proceeds and those are.
Significantly different based on the low tax basis of the investments and start to say, we would never entertain.
Youre an offer that was very attractive, but that is a barrier and we've looked at that in the past.
The.
Sort of it.
There's more compelling reason for.
Hanging onto the investments as opposed to selling them after on an after tax basis.
With respect to both the investments and other assets like towers and highlighted in their value.
Trying to do that here through our earnings call, giving you insights into what's going on with the towers Youre investments, which we obviously report on adjusted EBITDA to highlight the value that they're providing to the business as well as our cash flow.
So we're doing a lot of that sort.
We will explore more over time, but nothing planned right now.
Yeah, and so Sergey thank you for that question.
From a broader perspective.
Hum.
90 days in and.
And I have been spending a lot of time.
Focus on the businesses and the business needs and our long term strategy and first and foremost right. Now my first priority is to make sure that I'm able to fund the needs of.
That LT and Michelle.
For there.
So the <unk> build out we paid for our spectrum, we've got the <unk> build out in front of US you've heard lg's talked about another a number of growth opportunities that we are we are funding for long term growth.
Tds Telecom, we have a window of opportunity right now to fund our fiber build and so my first priority is to make sure that we're 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 need and leave enough capacity and leverage capability. So that we can take advantages of opportunities as they come down the road.
And through that and looking across our asset you've talked about the towers would we consider we are reporting our tower separately today right. Now we are reporting our tower revenue to show the double digit the low single.
The low double digit growth in LTE talks about.
Is that becomes greater and bigger part of our portfolio, we might consider providing additional information to show the value more clearly to investors as that becomes a more meaningful part of our revenue growth.
On the partnership.
Hi.
Just to add onto what John has already said, we recognize that our Verizon partnership our value are very valuable.
All of our partnerships are very valuable and I would have to have a.
Civic need.
A source of funding that is needed in.
In the business before I would consider a transaction in that transaction would require a very high multiple as you say and so on.
Looking at our entire portfolio and and possible sources of funding in the future.
Okay, great. Thank you.
Yes, Chris we're ready for the next question.
The next question is from Michael Rollins with Citi. Your line is open.
Hi, Thanks for taking my questions.
First question just furthering on the tower discussion.
You look at.
Your tower direct expenses has the external revenue that you're reporting from towers.
C J.
The direct power expenses, so before even considering what the allocation of rent could be from <unk>.
<unk> being the anchor tenant on that.
Is it breakeven or better and then.
Changing gears, a little bit to other possible.
Needle moving opportunities for U S cellular and Tds, just curious if theres an update more strategically on net.
Network sharing opportunities or other things or other ways that you could think about managing that.
Business and the operations over time thanks.
Thanks, Mike I'll have Doug talks about your tower question and I'll tackle the network sharing afterwards.
Yes, good morning, Mike on the towers, the incremental direct costs that we incur from a co location are very small so our our incremental margin on co locations is in excess of 90%. So what youre seeing in the way of revenue growth crews right to the bottom line and operating cash flow growth. So.
That's why we feel really good about that revenue and that revenue growth is really important to our profitability.
Let me tackle follow I would just sorry, just to follow up on the Powerpoint just for one more second.
In a situation where.
You have these direct rent costs, maybe you own some of the land rent some of the land you have utility cost. If you just add up all of those cost forgetting 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 breakeven or.
Better on the direct profitability basis.
Yes, it does.
The short answer is Mike it doesn't totally offset costs remember, you're obviously as costs being incurred for.
Our operating business and for our mobility and fixed wireless all of our products. So the short answer is no it doesn't sort of level, where offsets all of those costs.
I was just curious about that thank you.
Mike Let me tackle network sharing.
I'll expand your question just a tiny bit.
In the long run what we're committed to doing is to have meaningful expansion of return on capital in this business.
Financial metric of success, we've established for ourselves.
Our mission of connecting people and the only way to accomplish that mission is through a lot of investment we had to do a lot of investment is that we drive a healthy return and so we had 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 profitable revenue expanding ocs.
US improving return on capital I do see opportunity to improve the capital efficiency side.
I won't.
AIG or that any further but I do think that as 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.
<unk> talked about this in prior calls.
Not think it makes sense to bill.
Four or five duplicative five G networks in Rural America.
And if you think about 60 or 70.
That's mostly going to involve is denser network builds to get capacity 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 low customer density.
So I do think that network sharing is going to be a necessity in the long long run.
We are pursuing conversations to that Ed.
Sure.
I feel very good about our ability to hit our financial projections and to continue to move towards doubling of 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 the big one and I do think we have an opportunity I think we're good we're we're very realistic partner for others to work with.
And we're having those conversations I've talked about that in past in past calls these things don't move quickly.
But I do think there's a good opportunity.
And one last question.
The subject of dish.
Find 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.
How much construction there really should be in some of these rural markets.
Have you already entered into in <unk> or any sort of.
<unk> roaming deal with dish and maybe you can elaborate on maybe the opportunities beyond maybe just some of the.
The tower commentary.
The past.
Yes, so we have as I mentioned, our biggest opportunity with dish that we've entered into thus far is our is our tower MLA I can't talk 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.
Some of the areas in which we operate but 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.
Could you just talk a little bit more about the new promotions it sounds like they're having a good impact helped.
Help us understand what the accounting is going to look like for those promotions how much of the costs will you need to take upfront and how long will you amortize most of it over and then on the partnerships just coming back to that it looked like the equity in earnings dropped about 21% year over year I don't know if theres any kind of one timers.
Rivaling that or has there been any change.
That is.
Just like you to go go forward from here.
Simon I think in terms of the the revenue opportunity of those of those promotions and I talked a little bit earlier about the increased the increased upgrade momentum that we're seeing the increased AD aligned momentum that we're seeing.
One metric we track fairly closely is the ratio of gross add voluntary defects were seeing improvement there and so.
I'm optimistic that it's going to have the long term effect that we want to have on upgrades on sharing on avalon's, Let me, let Doug talk about specifically, how the expenses of that promotion or managed and then he can answer your second question as well.
Hey, good morning, Simon so with respect to accounting for the promotions.
About 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. So that's how to think about the spread of revenue also remember it was <unk>.
Offsets for revenue pickups in gross adds and things that were.
That we're gaining.
<unk> for the promotions. So those are offsets as well when you think about total operating cash flow.
And then moving on to your question about equity earnings.
It's being done on the single largest item was and the La partnership started in January of this year.
There is a holding company initiated a spectrum lease with the partnership.
Going to our share of that lease 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.
Various operating items that are different partnerships, including increased bad debt expense from increased network costs and kind of across the board, but the single largest item is that new spectrum lease.
Okay. So this is probably a good run rate.
It is yes that will be okay.
What a year $50 million per year, Okay, and then the 60% over 36 months is that a contra revenue.
Yes again structure.
Yes, Okay, great and then just one last one cost of <unk>.
Service and wireless was strong.
<unk> talked about some of the roaming reductions.
You said it.
How should we think about that going forward or is there more to come there.
Yes.
Mike and team are doing a great job of managing that when I talk when we talk about our cost optimization program. That's been the area, where there was progress.
Some great brands that being said.
Going forward as we do our <unk> rollout. We also have pressure there as we incurred more sell side, Brian backhaul and so forth for putting millimeter wave in mid band onto our cell site. So.
I wouldn't look for a continued decrease I would look at.
Is going to increase over time, but we're certainly looking to mitigate that through our cost optimization program.
Alright, thank you.
Yeah welcome.
We have no further questions at this time I'll turn it over to Colin Thompson for any closing remarks alright.
Alright, 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.
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Oh.
Yeah.