Q3 2022 Telephone and Data Systems Inc and United States Cellular Corp Earnings Call
[music].
Good day, and welcome to the Tds and U S. Cellular third quarter 2022 operating results Conference call. Please note today's conference is being recorded all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question Press Star followed by the number one again. Thank you at this time I would like to turn the conference over to Colleen Thompson Vice President of corporate.
<unk> Ms. Thompson you may begin your conference.
Good morning, and thank you for joining us we want to make you all aware of the presentation. We have prepared to accompany our comments. This morning, which you can find on the Investor relations sections of the Tds and U S cellular websites.
With me today and offering prepared comments are from Tds, Vicki <unk> Executive Vice President and Chief Financial Officer from U S. Cellular LTE terrible President and Chief Executive Officer, Doug Chambers, Executive Vice President Chief Financial Officer, and Treasurer and from Tds Telecom Michel broke Mckee senior Vice President of Finance.
And Chief Financial Officer.
This call is being simultaneously webcast on the Tds and U S cellular Investor Relations website. Please see the websites for slides referred to on this call, including non-GAAP reconciliations.
We provide guidance for both adjusted operating income before depreciation and amortization or OIBDA and adjusted earnings before interest taxes, depreciation and amortization or EBITDA to highlight the contributions of U S Cellular's wireless partnerships.
Tds and U S cellular filed their SEC forms 8-K, including the press releases and our 10-Qs yesterday.
As shown on slide two the information set forth in the presentation and discussed during this call contains statements about expected future events and financial results that are forward looking and subject to risks and uncertainties.
Please review the Safe Harbor aircrafts in our press releases and the extended version included in our SEC filings.
In terms of our upcoming IR schedule on slide three we are attending the Raymond James Technology Conference in New York on December 7th and the Citi Communications Media and Entertainment conference in Scottsdale on January five.
And as always our opened our policy cannot be an open door phone or video policy. So please reach out if you're interested in speaking with us.
I will now turn the call over to Vicki Bill credits sticky.
Okay, Thanks, Pauline and good morning, everyone.
Both our business units are well positioned to take advantage of growth opportunity to enhance their competitive position.
And have tightened guidance ranges as we enter the fourth quarter.
As we discussed both U S cellular and Tds Telecom are in key investment cycles that are pressuring free cash flow near term.
So with the goal to position us for growth and improved returns overtime.
Both businesses are effectively managing through inflationary.
And supply chain pressures through a number of mitigating actions to address these these risks.
Importantly, our business.
Our balance sheet strength also positions us well to manage against the interest rate increases that we are currently seeing.
We continue to be pleased with our financing strategy, which incorporates a combination of long dated maturity and preferred equity.
In addition to opportunistic short term financing to help fund our network modernization investments in both businesses.
And expansion into new markets at Tds Telecom.
I also want to highlight that during the quarter, we repurchased a modest amount of stock at both companies.
As a result, we have spent $55 million in stock buybacks, this year $26 million and $29 million at Tds and U S cellular respectively.
Okay, and now I will turn the call over to L. T.
Thanks, Vicki and good morning, everybody.
If I think back to our last quarter call we.
We recently launched a number of new pricing and promo offers that were designed to address the subscriber challenges that we saw in the first and second quarter.
And while I'm encouraged with the early results of these promotions you can see our all in postpaid subscriber results are still challenged.
We are seeing a number of leading indicators moving in the right direction and I'm going to expand on those shortly.
Many of our promotional efforts are designed to address churn. We know it's going to take some time for those efforts to translate into overall improved subscriber results.
Now we are seeing continued competitive intensity in that as well as the shifts in the macro economy are reflected in our numbers in this past quarter and so let me touch on each of those briefly.
From a competitive perspective substantially more investment is required in promo expense compared to several years ago. We've.
We've seen other carriers expanding into rural America, and although our exposure to cables lower than the national average.
<unk> wireless with wireline adds another competitor into the mix in parts of our footprint.
Doug is going to discuss the rise in bad debt expense in some more detail. What we're seeing is that although the percentage of defaults are consistent with pre pandemic levels.
The rate per default is greater than in the past.
And we anticipate that these macro factors are going to continue through the remainder of the year.
So we've lowered the high end of our service revenue and profitability guidance for 2022.
Still expect to be within our original range. We remain confident that we have the right strategies in place to drive customer growth and improve returns over time.
As part of those strategies during the third quarter of 2022, we've been executing our any phone free for anyone new and existing customers. That's a mouthful. So we're just going to call it new and existing promotions for the rest of the call.
Executing that we've launched more aggressive flat rate pricing in certain markets.
And those offers have led to improvements in several key areas. Let me just kind of talk about those each one by one.
First is we're seeing a 54% increase in upgrades.
And we've seen a 6% increase in Avalon gross adds compared to the prior year.
And as a result, our percentage of postpaid handset connections that are in contract is now at 62%.
And not only is that up from 59% at the end just of last quarter. When we initially launched the promotion.
But it's also the highest percentage in contract that we've seen since 2019.
We expect that percentage of customers in contract to continue to increase.
And this is significant because in contract customers churn at a much lower rate than out of contract customers.
We believe those move should lead to lower churn in future periods.
We've got a highlight in postpaid ARPA is growing nicely, 4% year over year, it's one of the highest in the industry.
And that's despite a highly promotional environment, where those device discounts are actually a headwind to <unk>.
Team has done a really nice job of helping our customers realize the value of premium plans and services not drives ARPA growth.
We also have a cost cost optimization program that remains strong and it is helping to mitigate the effects of inflation, that's not apparent on the face of the third quarter financials due to increased loss on equipment and bad debt expense in the quarter.
Other areas of the business, we see momentum in our growth initiatives fixed wireless product remains strong gross additions were up 82% year over year.
We've also launched promotional offers that bundle fixed wireless and mobility together, we're going to have further opportunities to expand this product as we launch our mid band spectrum in late 2023 in early 2024.
Towers produced another quarter of double digit revenues up 14% and that is due principally to a 17% increase in the number of co locators.
Brief comment on our network our network modernization program in all our multiyear fiber deployment has progressed nicely.
We currently have 45% of our Pops covered with <unk>, we've completed the modernization of sites that carry 75% of our total traffic and we are we have plans to expand <unk> coverage to over 60% of our pops by the end of 2023.
And where we've modernized our network to five G. We see better performance and better customer perception of network quality.
In addition, we successfully won 34 wireless licenses and auction went away and that helped us fill in some mid band gaps that are really attractive price.
I also want to highlight that U S. Cellular has once again refreshing its board appointing Xavier Williams to the board effective January one 2023.
Over 30 years of telecommunications experience of U S. Cellular board will benefit from Xavier significant experience and we really look forward to his contributions.
I want to end the comment about the associates at U S. Cellular we recently completed our annual culture survey and the results once again underscore the amazing culture and the high associate satisfaction that we have.
So to summarize while we've seen postpaid subscriber growth challenges I'm optimistic we have the right strategy and we have the right initiatives underway, especially as we head into the busy holiday season.
I am pleased with the trajectory of <unk> in our growth areas like fixed wireless in towers.
So I'll now turn the call over to Doug Who's going to take you through the operating and financial results in more detail Doug.
Thanks, <unk> good morning, let's start with a review of customer results on slide eight postpaid handset gross additions increased by 2000, driven by increased <unk> activity as <unk> mentioned previously.
Postpaid handset net additions were down 17000, driven.
Driven by an increase in churn, which I will discuss in a moment.
However, compared to the first and second quarter are ongoing promotions drove improvements in both gross and net additions.
Connected device gross additions increased by 4000, driven by fixed wireless additions, while net additions decreased by 6000, primarily due to higher deductions, which I will discuss on the next slide.
Overall, we are very pleased with our momentum in fixed wireless and we now have a base of 66000 customers with this product up 40% from the prior year and 16% from the prior quarter.
Let's turn to the postpaid churn rate shown on slide nine.
Postpaid handset churn increased from the prior year fairly evenly between voluntary and involuntary.
Voluntary churn increased as a result of increased switching activity and aggressive industry wide competition.
Involuntary churn also increased as the frequency of non paid customers increased to pre pandemic norms.
Total postpaid churn combined enhances and connected devices increased due to higher handset churn and certain business and government customers disconnecting connected devices.
Many of which were originally activated during the pandemic in conjunction with government and agency funding that is subsequently ended.
Moving to slide 10, postpaid gross additions declined 12, and prepaid net additions decreased 9000.
Both declines were due to continued aggression in the competitive environment.
In response, we've launched new pricing for certain prepaid plans in July which is driving sequential improvement in both gross and net additions which were positive in Q3 for the first time in 2022.
Now, let's turn to the financial results starting on slide 11.
Total operating revenues for the third quarter increased 7% from the prior year.
Retail service revenues were relatively flat as higher average revenue per user was offset by a decrease in average postpaid connections combined with the discrete adjustment related to the timing of recognition of regulatory fee billings that increased revenue in 2021.
Inbound roaming revenue declined 43% due to lower rates.
The largest driver of this rate decrease as the renegotiation of terms with other carriers, which also has the impact of decreasing our roaming expense.
Equipment sales revenue increased by 32% due primarily to an increase in volume as a result of strong promotional activity that drove that 54% increase in handset upgrades.
Turning to slide 12, LG mentioned, the strong increase in average revenue per user.
This increase along with the increased ARPA was driven primarily by favorable plant and product offering mix and increase in cost recovery surcharges.
And an increase in device protection revenues.
These increases were partially offset by an increase in promotional costs.
At the end of the quarter, 38% of our handset customers are on our two highest tiers of unlimited plans and we're very pleased with the consistent growth that we've seen in this area.
Our overall financial results for the quarter are shown on slide 14.
For this discussion I will refer to adjusted operating income before depreciation and amortization as adjusted operated income.
Adjusted operating income declined 23% driven by increases in loss on equipment and bad debts expense.
As LTE commented earlier, we ran our new and existing promotion throughout the third quarter and a majority of our footprint.
This promotion is designed to reward our existing customers reduce churn and ultimately increased service revenue from increased customer volumes and <unk> over time.
As previously discussed.
In the near term this promotion drove a high upgrade rate in the third quarter and was the primary driver of a $28 million increase in loss on equipment.
Further bad debts expense increased $29 million as our in country churn rate has returned to pre pandemic levels and the average write off has increased as a result of customer selecting higher priced devices, partially attributable to promotional incentives.
As a reminder, bad debt expense was unusually low throughout 2021 as a result of the continuing impacts of the <unk>.
Pandemic, including government stimulus payments and high consumer savings rates, which resulted in strong customer payment behavior in the prior year.
We expect loss of equipment and bad debts expense to remain at higher levels than the prior year in the fourth quarter as we plan to continue our new and existing promotion and we expect in voluntary churn and bad debt expense to continue to follow a pre pandemic trends.
<unk> mentioned, our ongoing cost optimization program and this continues to deliver results. Despite our current inflationary environment, excluding cost of equipment sold and bad debts expense other cash expenses decreased $14 million year over year.
Turning to slide 15, I will cover our guidance for the full year 2022, our guidance remains within the original ranges that we've provided all year. However, we are lowering the top end of the range for service revenues adjusted operating income and adjusted EBITDA.
All of these ranges are negatively impacted by our subscriber growth challenges in 2022.
Further the adjusted operating income and adjusted EBITDA ranges are also impacted by the promotional investment, we're making in our new and existing promotion and relatively higher levels of bad debt expense.
We believe it will take time for our promotional offers to drive subscriber results, but we are encouraged with the positive trends we've discussed previously.
We are committed to staying the course and we are planning to continue our aggressive promotional activity during the holiday season, which is reflected in these estimates further we have been taking actions to mitigate bad debts and as always are balancing those measures with our subscriber growth objectives.
As a result, we have narrowed our guidance by decreasing the high end of the range of service revenues by $50 million and both adjusted operating income and adjusted EBITDA by $75 million.
For capital expenditures, we are maintaining our guidance range as our investments in <unk> and network modernization targeted millimeter wave buildout and initial preparation for mid band spectrum deployments remain on track.
I will now turn the call over to Michelle for equity shelf.
Thanks, Doug and good morning, everyone. We are pleased with our results at Tds Telecom for the third quarter and I'm also pleased to report that we are continuing to grow our business by providing quality high speed broadband our strategy is working TD.
Tds Telecom grew its footprint by 7% from a year ago now serving one 5 million service addresses across our markets.
This quarter, we added 33000 marketable fiber service addresses to our footprint.
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 revenue and broadband connection growth.
In our expansion markets, we began offering service and billings, Montana, and Green Bay, Wisconsin, and announced fiber expansion into 18 additional Wisconsin community.
In total today, we have nearly 100 communities in our fiber expansion program at various stages of development.
In our cable markets, we have upgraded to offer one gig speeds across our footprint and have achieved superior market share in these markets. We are also deploying fiber and opportunistic areas.
Likewise in our incumbent wireline market. We are very pleased that we have achieved superior market share where we've invested in fiber.
In addition to our own funding, we drive faster speeds in our more rural markets by building to meet our AGM obligations and utilizing state broadband grants in fact Tds Telecom just successfully won a grant in Tennessee.
This spring the FCC issued a notice seeking comment on a proposed extension of the federal ATM program, which we fully support.
We anticipate an extension would provide six additional years of revenue support in exchange for deploying higher broadband speeds.
We have been working through the comment process and remain engaged with the FTC and hope to have a final rule later this year or early next year.
Extending the current federal ATM program first and then pursuing bead program funding will provide the fastest path for Tds telecom to take fiber deeper into our communities.
Now Vicki alluded to this and let me make some comments on the macroeconomic environment as we do continue to face challenges that present cost pressures and stress our ability to meet our address delivery timelines in the short term.
We are actively managing and mitigating the impacts of inflationary increases labor shortages and supply chain challenges and with the actions. We are taking we are well positioned to achieve our longer term strategic plan.
Now turning to slide 18, we highlight the achievements we've made this quarter.
Year to date, we completed construction of 72000 marketable fiber service addresses deploying 33000 in the quarter.
We now serve 36% of our total footprint with fiber and as we've previously shared we expect to serve approximately 60% of our total footprint with fiber by 2026.
In line with our growth objective service addresses grew 7% year over year.
In the third quarter, we increased our availability of one gig speeds to 64% of our total service addresses up from 57% a year ago.
We also see positive trends in our broadband penetration rates per fully developed market.
And we still anticipate 40% to 50% consumer penetration in a steady state.
Now, although we're pleased with the 72000 fiber service addresses we deployed so far this year our service address delivery is slower than planned due to some industry wide headwinds such as labor shortages and permitting complexities, which are putting pressure on our service address target.
If we continue on our current trajectory, we will deliver around 120000 addresses for the year, a 40% increase over last year.
As we've previously mentioned our fiber program is a long term strategy and all those 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 19, you can see the broadband connection growth across all markets.
Total broadband residential connections grew 4% in the quarter as we fortify our networks with fiber and expand into new market.
Shown on the graph on the right, we see demand for greater broadband speed with 69% of our customers, taking 100, megabits per second or greater up from 65% 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.
We are working on a path to additional multi gig products and expect to offer even higher speeds in 2023 and beyond.
In areas, where we offer one gig service, we are seeing 24% of our new customers, taking the superior product.
And finally, our focus on fast reliable service has generated a 10% increase in total residential broadband revenue.
Moving to slide 22.
Total revenues increased 2% from the prior year as broadband growth offset legacy declines.
Residential revenues increased 5% across all markets.
Price increases and overall product mix changes drove a 4% increase in average residential revenue per connection.
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 in cable revenues increased year over year due to price increases and growth in broadband connections, partially offset by declines in video and voice connections.
Commercial revenues decreased 5% in the quarter, primarily driven by lower CLEC connections and wholesale revenues decreased 2%.
As shown on slide 21, cash expenses increased 9% year over year due to additional cost to support current and future growth, which is not yet reflected in our revenues.
Cost to support our fiber expansion include direct costs, such as sales marketing real estate and technician technicians. In addition to shared service costs.
As anticipated the increase in cash expenses resulted in an adjusted EBIT decline of 13% from the prior year.
Capital expenditures increased 82% from last year, as we increase our investment in fiber deployment, including accelerated equipment purchases.
On slide 22, we provided our updated 2022 guidance are.
Our revenue and adjusted EBITDA are in line with our expectations now.
Now that we're closer to the end of the year, we are narrowing our range for adjusted EBITDA to be between 270 and $290 million.
Capital expenditures are also in line with our expectations. Despite our lower service address delivery estimate delay.
Delayed spending on fiber builds will be offset by accelerated equipment purchases, we are making to manage supply chain lead times.
In closing I want to thank all of our associates for their continued dedication and hard work and I look forward to sharing our final 2022 results with everyone in February .
Now I will turn the call back over to Colleen.
Erica we're now ready for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad again Thats Star then the number one to ask a question.
Okay.
Your first question comes from the line of Ric Prentiss with Raymond James.
Hello.
Good morning, Rick.
Couple of a couple of questions sort of on the wireless side.
Doug you guys mentioned, you've seen increasing and upgrades were upgrades in the quarter and what do you think they're headed as we look into the next year.
Yeah, Rick our upgrade rate in Q3 was eight 2% I would look for a similar trend in the fourth quarter as we mentioned, we're running our new and existing promos throughout the end of the year and Thats driving a lot of upgrades.
Right.
The things you called out was also expanded competition in Rural America. When you think about the <unk>.
Voluntary churn side of things where are we losing customers to if you think of the liquidity ratios on the stats are you, losing at Verizon AT&T T mobile or the cable bundles.
Yes, I'll start by saying, we've always lost and gained more customers from Verizon just by virtue of their market share.
But with respect to trajectory as far as how thats had loss share and win share. It very much reflects what youre seeing in the national trends when you see the carriers report.
The winners and losers on a national basis I would say are also.
That's reflective in our markets as well.
Okay. So you are seeing some buildout increase in build out of AT&T and Verizon will move into your markets.
Yes.
I would.
Increase in goodwill.
A little bit from AT&T, what I would say is that on a relative basis, we're losing less to Verizon.
We have historically.
Yes.
Two quick ones on the fixed wireless side, obviously, some nice success there.
There's a user starting to tap that.
You see us taking those services the opposite side of that first question, who you're gaining share from on the fixed wireless side.
I've seen some reports that you'd like to see some some change in equipment.
Help us understand kind of the trajectory there on fixed wireless and who you're grabbing share from.
Yes, good morning, <unk>, So I think generally where were selling this product and where we're seeing success. If you think about the product that we're selling much of the sales is still on LTE.
LTE based product some of it is <unk>, where we've upgraded our network with much of it is LTE and so that product generally competes against DSL against satellite.
So although we don't have the exact figures because we don't see them kind of reporting in the same way that we do that we do the wireless moves.
My expectation is that's generally who were taking share from.
Next year.
When we fire up mid band, which will be at the end of next year.
I expect that mix to move more towards taking share from cable companies.
But at least right now, it's primarily I would say DSL and so.
Okay and the last one.
We've seen a lot of movement on the dish side as they look to hit their bogey.
For population coverage any updated thoughts on just specifically, but other partnership agreements that you might be looking into working with as we think about capital efficiency in this wireless competitive wireless world.
Yes.
End of answer that question in two ways I mean, certainly from the tower.
<unk> of our business.
We continue to see increased interest both.
From dish from other players as well I've mentioned before we are we.
We kind of opened the towers up for business about about about a year and a half two years ago, and we're seeing the benefits of that and you see it in the revenue growth on the tower side.
From a deeper partnership perspective think things like network sharing and so on we continue to engage in those conversations I.
I do think in the long run this concept of building out four or five duplicative <unk> or duplicative <unk> networks in Rural America doesn't make sense economically and so I think there will be opportunity there.
We continue to have conversations with players in the industry, but probably nothing specific to report beyond that.
Okay very good thanks, so let's stay well.
Thank you.
Operator next question.
Is from the line of Simon Flannery with Morgan Stanley .
Great. Thank you good morning.
Aleksey just continuing on you talked about the mid con. So perhaps you can just give us some more color around.
How long it will take you to sort of fully deploy the mid band across your footprint and is that mostly two.
<unk> 2023, Capex, how does that look versus 22, and then just a broader point on capital allocation. I think you started the call talking about this was a period of investment both on the fiber side and on the wireless side.
But thats, putting strain on the balance sheet on leverage so how do you think about capital allocation here about what target leverage should be about the dividend.
Your capex sort of levels, considering asset sales and other.
Other options to raise capital to pay for this.
Yes. Good morning, Thanks for the question.
So let me start I'll give you kind of a kind of a high level thought about mid band or mid band deployment and we've got Mike Irizarry, our CTO here he'll he'll add some more color and specifics.
And then let me answer briefly the question on on leverage and then I'll ask <unk> to chime in since I imagine she'll have more specifics. So let me start with the question on leverage.
We went through a substantive.
Substantive rebalancing of our balance sheet earlier this year overall cost of debt down substantively.
I think we're in very good position to fund the investments that we're making.
Yes, we spent a lot of money on C band and $3 four five spectrum for example.
I think we also got that spectrum at a fairly attractive rate relative to the rest of the rest of the auction prices and we were able to pay for it with I think very reasonably priced debt and so.
I think from an overall balance sheet health perspective, I believe we're in good shape and that was reinforced by conversations that we had here fairly fairly recently with the rating agencies.
I think that we're in a position to be able to fund the requisite <unk> investments mid band build out.
The way that doesn't particularly further strain the balance sheet, but I'm sure. If you can give more detail let.
Let me talk briefly about about mid band and then I'll have Mike go into more detail.
So Simon the strategy is that we will be starting to.
Rollout that mid band to our towers now so you can will be we'll be putting those radios on towers throughout 2023. However.
However that spectrum does not clear until the end of 2023.
So our goal is to be able to for lack of a better word flip a switch towards the end of 'twenty three early 'twenty four.
And already have a substantive amount of that mid band spectrum deployed.
That will help us in two areas. The first it will help us from an overall wireless perspective.
Improved speeds improved quality.
So we're excited to get that out for our wireless customers of where I also expect to see a really substantive lift is on the high speed Internet side of the equation.
We will be able to start marketing our product we haven't exactly decided the speeds will marketed output given that we're seeing gig speeds in trials and.
And we do have our millimeter wave enabled product out there in the marketplace at 300 Megs you can expect to see something similar from a mid band enabled product.
We think it can be highly competitive in the marketplace and so.
Cited about that mid band deployment in switching that on at the end of the year. Both for both sides of that business. Mike maybe you can give a little bit more detail about the deployment timeline and when we expect to see what from the from the mid <unk>.
<unk> assignment.
Ernie.
Gave a number for the end of 2023 and we're on track to light those sites up we've started the design purchase order and all of the.
Design stuff to launch those up and as we've done with other large capital intensive complex project, we break it over multiple years. This project will be very similar will pick up speed. After 2023 and look to activate anywhere between 800 to 1000 sites per year.
Very strategically targeted where we can improve the customer experience offload capacity and also synergize that with a fixed wireless opportunity. The LT talked about so we're excited about it and on track too.
To meet that plan.
Yes.
Thanks, Mike and.
Simon I'll just jump in here.
And to elaborate.
As you know Tds as always.
Had a disciplined financial policy and maintained a conservative balance sheet and Thats really characterized with a significant portion of long dated debt and preferred equity.
And and as I think about leverage.
We don't have targeted leverage ratio per say, we need to balance that with the needs of the business and as <unk> said.
And I said in my opening comments.
Both our businesses are going through an investment cycle at the same time, because theyre, taking advantage of a window of opportunity that we think is really important to position us for the long term growth at both.
That everybody has been talking about.
Going forward.
The balance sheet.
<unk> is really providing us with that room, and we've got the spectrum purchases paid for and behind US. They are really good spectrum and now we need to stay focused on our fiber build outs in our five G modernization.
I'd also say that.
We have increased our leverage to support our businesses.
But our intent is to stay at levels that we feel comfortable managing the business.
Which is moderate really for our industry overall and as LTE.
Mentioned.
Moody's and S&P reaffirmed our credit ratings.
Because theyre supportive of the type of investments that we're making.
These investments are for the long term sustainability of our business and they are critical.
We're well within our bank covenants.
We've got room, and our plans our plans incorporate.
The capital spending that we've got going forward.
Great. Thanks for all the color.
Okay, operator, we're ready for the next question.
Philip Cusick from Jpmorgan.
Hi, guys. Thank you.
No.
Maybe you can just talk about where you see this market going the wireless market growing.
AT&T was aggressive for the last few years now horizons matching them, giving away handsets to existing customers T. Mobile is only going to get wider footprint and cable is taking share as well.
Are you fighting hard and I see the creativity, but this doesn't seem to be working out so without going back through your script.
Help investors understand why they should update that you can turn the direction of subscriber growth.
Without destroying profitability of the business.
Thanks.
And Phil you don't want me to go back through my script I am disappointed I was really looking forward to move it back.
And I heard the whole thing yes.
And it over again.
So if I take a step back and I think about the strategy that I articulated a couple of years ago and that we have reinforced every time, we're on one of these calls.
It's a strategy that has a really high level.
Level of three components.
It is how do we try to stabilize the postpaid consumer side of the business.
While investing in growth areas of the business.
And while driving increased levels of operating efficiency and capital efficiency, Let me take those one by one.
The first.
Stabilizing postpaid.
Last year in <unk>.
Up until the first two quarters of this year.
We struck I believe a really good balance of profitability.
Profitability and subscriber growth.
The first two quarters of this year coming out of the pandemic.
We saw substantive increase in voluntary churn and so we felt that we needed to address that and address it aggressively.
So what we've done in the past and the past quarter as we have gotten much more aggressive on the upgrade side of the house.
The more you can get customers under contract at a really high level you can think of in contract customers churning at half the rate of out of contract customers.
And so the calculus is we need to go get more aggressive of getting customers upgraded and you've seen that in our numbers, 54% increase in upgrades and thats driven a substantive growth the number of customers and contract 59% to 62%.
So there is a bear case in a bull case for that for that strategy. The bear case is well. These are customers that would have upgraded anyway.
And consequently, we simply accelerated those upgrades.
The Bull cases, these are customers that might've churned in the future.
Instead now that we haven't been contracts they will not churn.
And it is a long term strategy.
That we've generally as a company invested in the long term, we've been comfortable with long term strategies and that's what we're doing.
I hoped to have seen.
Better improvements in voluntary churn this quarter.
That being said the leading indicators I think are strong for bringing customers in contract and thus, bringing churn down over time coupled.
Couple that with some more aggressive gross add actions.
Where we've run flat rate pricing for examples in some of our lower share markets. We've seen very good progress.
It aligns up substantively, ARP, who up substantively.
So the one piece of the equation that I think is disappointing for this quarter and you see it in our numbers.
Is our LOE is up because we've had to spend to get those upgrades.
And we haven't yet seen the improvement in voluntary churn.
I expect it to come and so I am confident in our strategy and we're going to stick with it.
The second piece of the strategy is okay. While you are working to stabilize postpaid.
We have growth areas of the business and I won't go through the script, but just to tick them off quickly right. We invested in towers, a 14% increase year over year in revenue we increase in prepaid we invested in prepaid 2000 positive net adds.
We invested in high speed Internet, 82% of gross adds year over year digital <unk>, we're seeing growth in those areas as well.
Finally, we're other than low <unk>.
Which Doug talked about in his in his comments, we're seeing continued improvement in overall expense discipline in expenses across the company and so.
The challenge as you accurately highlighted is from a competitive perspective.
Stabilizing postpaid the.
The best way to do that is to bring churned out I think we have the right. We have the right offers in the marketplace to do that we're seeing those leading indicators.
So I do expect churn to improve going into the fourth quarter going into next year.
While we continue to improve gross adds.
You talked about competitive intensity.
It's up.
At&t's used first net to expand a bit more aggressively into rural America T. Mobile certainly marketing more aggressively cable companies are expanding but there hasnt been a dramatic change in competitive intensity in this last quarter.
Doug mentioned it.
Fairly steady and it's fairly consistent with trends we've seen in the past the.
The changes we have decided to go invest heavily in upgrading our customers can get that back at them back into contract and you see that in our results.
That's helpful. Thank you two follow ups, if I can one is on.
Upgrades at this pace of upgrades.
When does that start to impact <unk>, because it sort of builds over time and we've seen that at AT&T for last few years, we're starting to see it for us this year.
I anticipate that youre going to see a sort of a dragging down of that <unk> growth in the next year is that fair.
We do not expect to see that.
So yes, there are there are dilutive impacts to <unk> from the offer in the form of in the form of those trailing Arca credits.
However, the way that we've structured the offer if I take you back to the regional strategy.
We trialed a number of these of these types of approaches in our different regions before we launched this across the majority of our footprint and the reason that we did that is we wanted to strike the right balance between aggressiveness in driving upgrades, but also bringing customers up the right staff.
And so what <unk> seen is an expansion in <unk> due in no small part to the promotion and our teams are doing a really nice job selling things like insurance and moving people up the right stack irrespective of the promotion, but the promotion is moving people up the right stack and that is having that is offsetting some of that negative future.
Arco trend so no we do not forecast further dilution in <unk> just because of this in fact, we think we're going to be able to continue to expand <unk>, maybe not exactly at the rate that you've seen this year, but we don't forecast ARPA dilution.
That's helpful. And then finally, you mentioned bad debt it sounds like a similar rate of higher losses.
Should I interpret that to mean that youre, losing more per customer and is that a function of the.
Very large handset subsidies you've offered over the last two years.
How have you change if that's correct how have you changed your credit.
Scoring maybe address that going forward.
Okay.
Yeah. So so we always we have.
Does some credit tightening strategically recently, we are looking at doing essentially more of that arise where is balancing our credit policy guidance.
The gross add potential good ads and so we're very surgical in how we do that.
And so we think we think we're in the right place. The reality is it's LTE and I. Both mentioned during the call. The frequency of write offs is back to pre pandemic levels and the rate per write off is up about 15% since pre pandemic levels and so we.
We have been making adjustments to our credit policy, we have been implementing additional anti fraud measures in our stores and we've been changing some of our collections strategies and tactics as well. So we are all over it but there is a macro environment of macro economic.
Aspect of this that is driving the majority of the increase.
Okay. Thanks, very much guys.
Okay any other questions. Thanks, Phil next question. Please.
Your next question comes from the line of Michael Rollins.
Thanks, and good morning.
Two questions.
<unk>.
Think back to the history of U S cellular.
I think back to a time, where the company shed Chicago and St. Louis because the performance in those markets weren't matching other parts of the portfolio do you have a similar situation today, where there is a tale of two cities, where there is a certain percentage of your markets.
Operating at one level.
And then.
Other subset of the market operating at a different level different trends different level of competitiveness.
And if you can if that's the case if you could maybe unpack some of the details that would be great and then just separately.
Just kind of curious LTE, where you're standing on the strategic front. These days in terms of the urgency to try to take some strategic actions along the lines of ideas you've talked about in the past to try to take.
Change the narrative for U S cellular over the longer term. Thanks.
Hey, Mike So.
As in any business, you're going to see some variability in terms of the profitability of our geographies.
There isn't.
80, 20, or some obvious delineation line.
The range of profitability generally that profitability correlates to two factors. The first and you will find meter of these surprising.
The first factor is market penetration, where we have higher share we generally have higher profitability.
And the second is availability of high quality spectrum, So where we have a strong spectrum position and we deliver a strong network experience because of that we generally see higher profitability better levels of network efficiency and so on and so.
There's certainly there's certainly a range, but I don't think theres anything surprising in terms of what's driving that range.
From a strategic perspective, that's a really broad question.
In terms of sense of urgency.
I think we have a consistent sense of urgency in terms of executing the strategy that I articulated in my answer earlier.
So in terms of investing in areas of the business, where we see attractive growth, we absolutely have urgency behind that.
So.
Continued focus on digital for example.
If we are going to serve customers with lower costs and a <unk>.
More variables and a more variable fashion serve people the way they want to be served certainly coming out of the pandemic.
We have to invest more in a strong digital experience and we're seeing it two years ago. Our average score in the App store was one five stars were north of four now and so that's an example of an area, where we have urgency behind it.
Certainly high speed Internet, we have the same urgency opening up our towers the same urgency.
There's two more macro factors that are discussed in the past one is <unk>.
Network sharing partnerships.
It takes two to tango and I think the last thing that you wanted to be doing is being.
Desperate when you enter into that and we're not.
We think we have a really strong set of assets.
We've compiled a really nice spectrum position, we own our own towers.
We think we provide a really high quality network experience and so.
Although I'm eager to find ways to reduce capital intensity over time.
We're not going to do so hastily or in a position that doesn't benefit benefit our shareholders and our customers and our employees.
Another area that I've talked about however is government infrastructure funding.
Strategic opportunity for us, particularly because the administration has been very clear they want to invest more in broadband and specifically they want to invest more in broadband in rural America.
And so both companies I will speak here for briefly for Tds Telecom as well.
Both companies are investing in finding opportunities to leverage that funding.
Michelle mentioned AKM and her and her discussions we certainly are in discussions around around the existing USF funding.
But the really exciting opportunity is the upcoming bead funding that's being discussed.
So the current current timeline around that it looks like the maps will come out later this year, there probably will be some discussion around those I think the FCC has mentioned the challenge and information process and so I'm sure providers will engage robustly in that but.
But I expect at some point in the middle towards the back end of the year of next year, you'll start to see those funds flowing from the states.
And we're optimistic that a chunk of those funds will go to rural fiber, where I think telecom is well positioned.
And also at a fixed wireless where we are well positioned.
We see it in some state grants, we recently won a state grant from the state of Nebraska for example, $6 million to go to new towers. So states see the benefit of investing in more infrastructure and co investing with us.
In those investment conversations we think we do so with credibility and you talked about the history of U S. Cellular.
The history of U S. Cellular's, one of investing in these areas and providing connections where others don't.
And states valued at and so you see that in the state Grant from Nebraska, We're in similar conversations with a variety of states across our footprint and by the way that's before they even have some of the clarity of the bead funding and before those dollars start to flow and so I do view that as a another opportunity to transform our business.
Particularly around capital intensity.
<unk> talked in the past the average tower costs between 600000 and $1 million in Rural America, and you have to have a certain density of customers. If you are going to offset.
That investment and where we don't have towers, it's not because we don't want to have towers.
Because.
It's because the economics are challenged.
If the government can help co invest and take 600000, and making $100000 now we have the opportunities to serve customers in a very different way and do so at a much more attractive capital intensity.
Michel I am not sure if you want to if you want to chime in any more about about how how you guys are thinking about those programs, but I know telecoms.
Invested in them as well.
I don't want to speak clumsily for telecom here.
Yes, no. Thanks, all key exit you did a great job articulating the position of both of our companies.
As I mentioned in my comments Tds Telecom is very excited about the funding that is available both at the state level and at the federal level.
Our part of the a Cam program today and are very excited about where that EQM extension program could take us on that certainly could provide additional funds to take even higher speeds to many many customers in our most rural areas and then outside of the ATM we too.
The opportunity with the <unk> program and as LTE mentioned, we anticipate and hope that a lot of that money does go towards funding fiber for those.
Unserved or underserved customers that are out in our territories.
But there will be a place also we see for fixed wireless fiber might not be economical to go everywhere and so this could be a nice blend of helping fund fiber and helping fund fixed wireless for the enterprise.
Okay.
Thanks.
Hey, thanks.
Operator, we're ready for next.
Next question.
Your next question comes from the line of Sergey loves Husky with Gamco investors.
Hi, Good morning, guys. Thank you for taking the questions.
L T.
Maybe the first question is on your dividends.
Market approach in some of the offers to try in those markets and it seems like.
What's your trial.
Before now you rolled out to a wider.
<unk> in the third quarter, but I guess my question is.
How are those.
Local offers performed in the third quarter and what do we need to take a greater step forward with local market approach. So that it has a more meaningful impact on your customer intake in the chair.
Okay.
Hey, sorry, guys. So.
If I break out our local offers.
Since we just put a bit of math behind it to give you a sense of how much trialing we do.
Since we regionalized about 18 months ago, I think we've run over 75 different promotional permutations.
Whether it's upgrade offers whether it's offers that are more designed to drive gross adds.
We currently have a variety of different offers running across our footprint.
In our in our lower share markets, where we're running our flat rate.
Offers we're seeing very good performance from a gross add perspective.
In our existing same as new markets, we've seen attractive add a line improvements.
And I won't rehash since since Rick already gave me a hard time about about re quoting things from my script I won't do it again, but you get a sense of what we're seeing from an upgrade perspective, and an AD aligned perspective in the areas, where we're running our existing same as new promotion.
The key dynamic is are those promotions going to drive the desired churn voluntary churn performance that we need them to.
And the markets that we trialed them in previously.
It took us six months or so six seven months to see the improvements in voluntary churn.
So if you if you forecast that forward that helps explain why we are cautiously optimistic that we're going to see that voluntary churn trend turn in the fourth quarter and into early next year, but you don't know.
The bet on upgrades is that the bulk case will prevail and not the bear case and that the people that are upgrading our doing so.
They might've been future charters, but we've been able to put an attractive offer in front of them. They have confidence in our network. They have confidence in the customer experience that we provide and they are choosing to stick with us and we've seen that in the markets that we trialed. This end and we expect to see it across the footprint.
There is the possibility that what we've done instead is accelerate upgrades and so meaning they would have upgraded and we've accelerated that.
So that helps explain a little bit of the variability that we put in our guidance for the rest of the year.
Is because you are never going to have exact certainty around that but the beautiful thing about this regional approach that we have is that we can try all these things and.
And I'll bring you back to the conversation around <unk> balance that was asked earlier.
There is a reason why we've been able to drive the RP performance that we have some of it is really good execution by our retail teams, but some of it is because we're structuring these promotions in a way that helps expand our and we've done that because of the regional trials and you can expect to see that continue.
Through the rest of the year when we get into the holiday season, we tend to have ubiquitous offers across the footprint. So we kind of hit pause for a little bit on the trials. The whole goal is to enter into the holiday season with a consistent approach and one that we think works and strikes the right balance between financial and subscriber results and.
And then as we get into early next year, you can expect to see those regional trials kicked kick back off again.
So that so that we're operating with strong information as we possibly can.
No.
Okay.
Maybe I'll ask a follow up question to Mike's question around the strategic actions, but maybe just the different permutations of that.
So obviously the turnaround is taking a bit longer than you would like and I guess in light of the current competitive environment and capital markets.
And how do you view financial engineering moves that may surface value will highlight the value of your greatest assets, whether it's towers investments in wireless partnerships on your spectrum that could provide us additional capital to invest in growth and also just.
Alright brother.
Flexibility.
So in terms of the timing I'm actually I think that from a from a strategic perspective, if I look at the growth investments that we've made and the performance of those growth investments I think it's right on track.
I think from a stabilizing post paid.
It's a very challenging competitive environment out there and I think that we're trying to navigate it about as best as we can you.
You used the word financial engineering, and that's what I want to avoid.
I want to make sure that we have the financial capacity to make the investments that we need.
I think that the corporate team and our finance team did a really nice job of restructuring our balance sheet to give us the flexibility that we need to purchase the mid band spectrum that we did.
I don't see in the near term new spectrum auctions on the immediate horizon theyre going to further stress that.
We have a good plan that Mike articulated about building out C band, making those investments on the network modernization that we need to make and I think our balance sheet is in a good place to do that.
And so Luckily I don't feel the need to engage in that financial engineering, because we took advantage of an environment of cheap debt and.
We're now have we now have a position to continue to execute this strategy and do so in a way that.
Helps us take share in the marketplace and helps us continue to drive those growth areas and so.
I am happy with the flexibility that we have I think we're in a good place from a balance sheet and an asset perspective.
And now it's time to continue to execute that strategy and start to see the benefits in the marketplace. So thank you for the questions here.
Okay.
And my last question.
Could you talk a little bit about the progress that you have.
Over the last quarter or two in terms of the business.
Government sector.
As far as kind of revenue growth in terms of share and.
What are the top objectives, maybe for next year.
Where do you see that going in terms of size and impact some of the company over the next few years.
Yes, sorry, I'll be quick because I think we're out of time, but briefly we continue I talked in the last quarter and more specifics about some of the some of the momentum that we're seeing on the private networking side on the Iot side.
We continue to see good demand for those products from our customers.
Very high level, we have three trends that we're working through on the business side. The first is a negative trend, which is we have connected devices that were that were gross adds that were driven by government subsidies that happened during the pandemic and we're seeing people disconnect us theyre not porting them, if they were to port them.
To a competitor I wouldn't be worried but theyre not putting them. These were subsidy driven devices in the subsidy of the subsidies have gone away and those devices are churning off.
On the postpaid handset side.
We want to see revenue stability and generally we're seeing that.
Where we're seeing where we want to have upside is on those new areas of growth Iot private networking and you want those areas of growth to offset the challenges that you have in connected devices and we're seeing that so we're seeing the interest from enterprise clients from small business clients. We're being brought into deals that I don't think we would have been brought into before before.
We had invested in that distribution and invest in those operational capabilities.
So I'm comfortable with that balance because if you think about the negative drag from the back end of that negative drag in terms of connected device disconnects from the pandemic, whereas I believe we're only at the beginning of what we're seeing from Iot private networking and some of these enterprise five key use cases, so I remain optimistic about.
Where we're going from a <unk> perspective, thanks for the questions everybody Hey, thanks, Sir Thank you.
Operator.
Okay.
Thank you for participating in today's conference you may disconnect at this time.
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