Q1 2023 United States Cellular Coporation Earnings Call
Okay.
Thank you for standing by at this time I would like to welcome everyone to the Tds and U S. Cellular first quarter 2023 operating result call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question has been during this time simply.
Star followed by the number one on your telephone keypad, if you would like to withdraw your question again press the star one.
Colleen Thompson Vice President of corporate Relations 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 Brookwood key senior Vice.
And our finance and Chief Financial Officer.
This call is being simultaneously webcast on the Tds and U S cellular investor relations websites.
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.
Actual resolved one.
That are forward looking and subject to risks and uncertainties that can Colin hey, operator could you just do us a favor and make sure all the lines are muted. Please.
All lines are muted.
Thank you.
Okay I'm going to go back to slide two the information set forth in the presentation and discussed during this call contains statements about expected future events and financial results that are forward looking and subject to risks and uncertainties.
Please review the Safe Harbor paragraphs in our press releases and the extended version included in our SEC filings.
In terms of our upcoming IR schedule on slide three on May 23rd we will be attending J P. Morgan's 50, <unk> annual TMT conference in Boston.
And in late June we will be virtually attending the New York stock Exchange Investor Access conference.
And as always we have an open door or video call policy. So please reach out if you're interested in speaking with us.
I will now turn the call over to Vicki Bellicose Vicky.
Okay. Thank you Colin and good morning, everyone.
Both of our business units reaffirmed their guidance shared with you in February .
U S cellular is making significant investments in advancing our network and Tds Telecom is executing its strategy to deploy fiber and approximately 100 new market.
We continue to ensure we have the balance sheet strength to support the investment the enterprise needs and are managing within our planned levels of leverage for 2023.
We ended the quarter with approximately $1 1 billion in available sources of liquidity, including cash revolvers and asset securitization facility to choose from to help fund our investments as needed.
And we continue to have access to the debt capital market.
And now I'll turn over the call to LTE to update you on U S Cellular's results.
L T.
Thanks, Nikki good morning, everybody hope everyone's doing well.
Turn to slide six our top priority continues to be improving customer results.
And although we still have plenty of work to do I'm pleased with the progress that I've seen.
You can see on slide eight we've driven both improved postpaid gross adds on a year over year basis.
We've improved postpaid churn on both a year over year and sequential basis, and we hope to see those trends continue moving forward.
And I want to talk for just a second about the drivers some of the results that youre seeing.
You're back mid.
Mid 'twenty, two we launched several pricing and promotional efforts in order to address subscriber challenges.
Specifically, we were looking to address churn reduction.
Based on the testing we've done in our regional trials, we knew it would take about six to nine months to see the consumer churn benefit we're now starting to see that in the consumer channel.
Our voluntary churn improved about 10% year over year.
At the same time, we also launched our flat rate plans in order to improve the gross add trajectory and we continue to see steady adoption of those plans and on average nearly 27% of our flat rate customers have selected the higher tier unlimited plans.
As a quick reminder, while flat rate pricing generates lower <unk> than our traditional postpaid pricing customers that are on those flat rate plans are not eligible for higher levels of device promotional discounts.
And so those plans have similar economics of their contract terms.
And I am pleased with the balance that we're striking between subscriber and financial aggressiveness Youll see postpaid ARPA was also up 2% for the quarter.
I just want to take a second and highlight our continued strong momentum in fixed wireless.
Gross adds up 130% year over year, we finished the quarter with 87000 subscribers.
We expect to reach 100000 subscribers later this year.
We expect another solid quarter of year over year growth in the second quarter as we did not expand fixed wireless to our entire footprint until June of last year.
And Additionally, as we start to deploy our mid band spectrum that will provide additional growth momentum for fixed wireless in the coming quarters.
Our tower business produced another strong quarter of results with revenues growing 11% year over year.
And also to further highlight our performance we've expanded our presentation to include some additional metrics as you see on slide 11 of the presentation.
We also rolled out our master brand campaign in the quarter built for US and that included an initiative called phones down for five challenge.
Challenge is built on a pretty simple action taken a break from your phone for five days five hours or even just five minutes in order to reset your relationship with technology.
The response to the campaign has been very encouraging we believe it's positively affected our net promoter score which is up meaningfully in the past few months.
On the network side about 80% of our traffic is carried by site supporting <unk> with.
We've continued our mid band deployment, which includes beginning to light up markets with Vod spectrum and further building out C band. So there will be ready to light it up in portions of our network when the spectrum clears and we expect that to be in late 2023.
As I wrap up my comments I want to spend just a moment discussing our recent decision. We've made as we continue to prioritize our investments and our focus on growing the revenues and the returns of our business.
Earlier this week, we announced a reduction in staffing and U S cellular and that spans across numerous areas of operation.
This decision was carefully considered and it was a difficult one this action allows us to sharpen our focus and our alignment as well as improve our operational efficiency and effectiveness Doug.
Doug will provide some additional context in terms of the impacts to our financials in the quarter.
And consistent with our culture will care for our team during this transition with empathy and respect.
I. Thank all of our associates for their continued focus and dedication as we focus on serving our customers with excellence.
And with that I'm going to hand, it over to Doug.
Thanks, <unk> good morning, let's start with a review of our customer results on slide eight postpaid handset net losses improved 11.
On a year over year basis, due primarily to lower voluntary factions as voluntary churn improved both year over year and sequentially in large parts due to the increase in percentage of customers in contract as a result of our attractive upgrade offers in the second half of 2022 and first quarter of 2023.
We saw a connected device gross and net additions increased by 9000.
On a year over year basis, driven by fixed wireless customer growth.
As <unk> mentioned, we continued to see strong momentum in fixed wireless with a base of customers up 63% from the prior year and up 11% from the end of 2022.
Moving to slide nine prepaid gross additions declined 12000, and net prepaid additions decreased 5000.
In terms of gross additions the overall pool of available customers declined and we believe year over year decrease in income tax refunds contributed to this.
In addition, given the relative pricing parity between our flat postpaid offering and our prepaid plans, we are seeing our customers choosing to take our flat rate postpaid offer instead of prepaid and thats a good trend as our flat rate plans provide better economics.
Lastly, we saw a decline in their prepaid churn rate.
Now, let's turn to the financial results starting on slide 10.
Total operating revenues for the first quarter decreased 2% from the prior year with service revenue declining 3%.
The primary drivers of lower service revenue or declines in the average postpaid subscriber base and roaming revenue.
We all most of the decline in roaming revenue is due to decreasing reciprocal roaming rates with our carrier partners and this roaming revenue decline is more than offset by the decline we see in our off net roaming expense and therefore, the overall decrease in roaming rates is accretive to our profitability.
On the positive side LT mentioned the increase in postpaid ARPA and this increase along with the increase in our PA was driven primarily by favorable plant and product offering mix as a result of customer adoption of our higher value higher tier plans and an increase in device protection revenues.
These increases were partially offset by an increase in promotional costs. We continue to see growth in our highest tiers of unlimited plans and 42% of our postpaid handset customers, Brian These higher tier plans at the end of the quarter.
Equipment revenues decreased by 2% due primarily to a decline in volume partially offset by an increase in the average revenue per device do you see them dynamics played out on the cost of equipment sold side, resulting in loss on equipment being flat year over year.
Next let's turn to our quarterly financial result results shown on slide 12.
For this discussion I will refer to adjusted operating income before depreciation and amortization as adjusted operating income.
As I noted total operating revenues declined 2% year over year, while total cash expenses increased 2%.
Cash operating expenses in the first quarter of 2023 includes $10 million of severance and related costs attributable to a reduction in staffing previously mentioned by LP.
This reduction will become effective in the second quarter in both the severance impact in the 2023 in your savings impact are incorporated in our guidance.
This action is in addition to our ongoing cost optimization program as we continue to effectively manage costs through our ongoing five G deployment and inflationary pressures.
This program has delivered outstanding results with respect to controlling our cash expenses.
Specifically during the period 2017 through 2022, excluding the impacts of loss on equipment in bad debts expense, which have been impacted by the aggressive promotional environment and payment behavior. During the pandemic. We have held cash expenses essentially flat and expect to do the same in 2023.
Selling general and administrative expenses were also impacted by an increase in advertising expense in the first quarter related to timing primarily media costs associated with the launch of our new Master brand campaign, which <unk> highlighted in his opening remarks.
Capital expenditures have increased 52% driven by timing of expenditures.
As our guidance indicates we expect our full year 2023 capital expenditures to be less than the prior year as we invest in our multiyear five G mid band deployments, while prudently managing our free cash flow.
As shown on slide 13, our 2023 financial guidance remains unchanged from the guidance we issued in February of this year as we remain on track to our financial plan.
I will now turn the call over to Michelle broke quickie Michelle.
Thank you, Doug and good morning, everyone.
I'm pleased to report on Tds Telecoms first quarter results and to confirm that we are on track to meet both our operational and financial goals set out earlier this year.
Here are the key messages.
First quarter fiber service address delivery and financial results came in as expected.
This sets the foundation for us to meet our fiber service address targets and financial guidance that we set out at the beginning of the year.
We delivered 25000 marketable fiber service addresses during the quarter our full year goal is 175000 addresses.
We will be significantly ramping up deployment as we move out of winter months and construction activity can accelerate.
On the financial side broadband penetration and our new expansion markets continues to grow at the pace expected in our business cases. This is translating into revenue growth.
Since we are still in the early phases of market launches and the majority of our markets. We continue to see pressure on adjusted EBITDA. This is a result of incurring startup costs before the revenues from the markets start coming in this is all part of our 2023 guidance.
As these new markets start generating revenue, which follows our service address delivery adjusted EBITDA will start to improve in future years.
I'll give more detail on our fiber program and financials as we go through the slides, but I wanted everyone to have this context upfront.
So let's move to slide 15.
Here you can see our strategic areas of focus that will help us achieve our goal to be the preferred broadband provider in the markets we serve.
Investments in these strategic priorities will drive profitability and improved returns over time, ultimately strengthening Tds telecom's financial and market position.
Moving to slide 16, let me update you on our progress towards achieving our longer term goals.
At yearend I shared three metrics that we will consistently monitor and report on each quarter. So you can follow the progress we're making towards these goals.
The headline is that based on first quarter results and our expectations for 2023, we remain on track.
As previously mentioned, we deployed 25000 marketable service addresses in the quarter and we remain confident that we're on track to reach 175000 by year end.
As a reminder, most of our expansion markets are in the Pacific Northwest in Wisconsin, where weather slows down delivery during winter months. So our expectations are that service addresses will build steadily throughout the year.
So let me start where we're at on our fiber program metrics.
We're targeting $1 2 million marketable fiber service addresses by 2026.
We ended the quarter with 607000, so we're over the halfway mark.
We're also targeting 60% of our total service addresses to be served by fiber by 2026, and we ended the quarter with 40%.
This reflects progress in growing fiber through our expansion markets as well as fiber up our incumbent market.
Specifically by 2026, we plan to serve half our ILEC addresses with fiber and at the end of the quarter, 37% of our ILEC was fibered up.
And finally, we are expecting to offer speeds of one gig or higher to at least 80% of our footprint by 2026.
We finished the quarter with 67% eight gig speeds.
We're pleased with the pace of our fiber build and with our fiber expansion results. So far we continue to successfully navigate challenges and getting our builds completed.
We have been scaling up our service address deployment since we launched this program and have a repeatable process in place as we expand it.
Based on our experience, we still see positive contributions from our market launches starting around the three year, Mark and we still expect to achieve broadband penetration rates of at least 40% in a steady state.
The success that we've seen in our early markets validates our business cases, and our expectation of low to mid double digit returns.
On Slide 17, you can see that our fiber program is a multiyear journey.
We have about 100 communities that are in various stages of development with most of these in or about to begin construction.
We have seen an 8% growth in total service addresses year over year.
Successfully ramping up construction this year is key towards hitting our longer term 2026 goal.
We also continue to address the broadband needs in our most rural markets by upgrading our copper networks with support from state broadband grant programs and by meeting our obligations under the federal aid Cam program.
It is our understanding that the FCC is moving towards adopting an extension of the a cam program hopefully by third quarter.
<unk> extension would provide an additional six years of support for speeds of 100 down in 'twenty up the same speeds is speed.
This means getting fiber to almost all of our 168 Cam addresses.
We are very enthusiastic about an ATM extension, because we believe that extending the current federal a Cam program first and then pursuing <unk> program funding would be the fastest path for Tds telecom to take fiber deeper into our communities.
Our broadband investments are driving positive results.
As shown on slide 18, we experienced a 4% increase year over year and total broadband residential connections.
Shown on the graph on the right, we see demand for greater broadband speeds with 72% of our customers, taking 100, megabits per second or greater up from 67% a year ago.
Tds Telecom can now offer at least one gig service to 67% of its footprint in some markets, where now even offering eight gig speeds and.
In areas, where we offer gig plus service, we're seeing 24% of our new customers taking this product.
And finally, our focus on fast reliable service has generated an 8% increase in total residential broadband revenue.
On slides 19, and 20 I'll share some financial highlights which were in line with our expectations.
Total revenues increased 1% for the quarter. This 1% increase is made up of an increase in residential revenues offset by a decrease in commercial and wholesale.
Residential revenues across all of our markets increased 4% for the quarter.
Average residential revenue per connection was also up 4% due to price increases and overall product mix, partially offset by promotions.
As shown in the chart on the left expansion market residential revenues were up to $15 million in the quarter. This aligns with our expectations of steady revenue growth. Following the timing of service address delivery as penetration in these new markets built.
Residential wireline incumbent in cable revenues increased year over year due to price increases and growth in broadband connections, partially offset by promotional activity and a decline in video and voice connections.
Commercial revenues decreased 7% in the quarter, primarily driven by lower CLEC connections and lastly, wholesale revenues decreased 4% for the quarter, primarily due to lower special access revenue.
Cash expenses increased 10% in the quarter, mainly due to our growing fiber program.
As a reminder, cost to support launching our fiber expansion markets include direct costs, such as sales marketing real estate and technicians. In addition to shared services.
These costs are incurred upfront and prior to generating revenues.
As we expected the increased cash expenses resulted in a decline in adjusted EBITDA of 17% for the quarter.
Capital expenditures of $130 million were up from the prior year due to increased investment in fiber deployment keep.
Keep in mind that these investments support our multiyear strategy and our goal of increasing free cash flow and return on capital over the long run.
On Slide 21 is our 2023 guidance, which is unchanged as we are tracking to our plan.
We are forecasting total telecom revenues of 1.03 billion to 1.06 billion.
This reflects our goal of top line growth driven by continued improvements in residential revenues across all of our markets offsetting declines in commercial and wholesale revenues.
Adjusted EBITDA is expected to be between $260 million to $290 million in 2023.
Adjusted EBITDA reflects our continued fiber expansion, which requires upfront spending.
At the end of 2023, almost all of our 100 communities will have been launched as our market builds mature and we increase our penetration we expect the pressure on adjusted EBITDA to lessen over time.
Capital expenditures are expected to be between 500 $550 million in 2023. This reflects increased spend on fiber service delivery and nearly 90% of our capital spending is allocated to broadband growth.
Before turning over the call I want to thank the team for all of their hard work and continued dedication to our mission at.
It takes alignment across the entire organization to execute on our strategy to each one of our associates is contributing to Tds telecom success.
I'll now turn the call back to Colleen.
Okay, operator, we're ready for the first question.
Thank you to ask a question. Please press star one your first question is from Rick Prentiss of Raymond James. Please go ahead. Your line is open.
Thanks.
Can you hear me okay.
It's a little hard to hear you okay.
Okay.
Yeah.
Yes, a couple of questions can you hear me better now.
Yes, much better.
Okay cool.
First I wanted to focus on the balance sheet and capital allocation maybe.
Thank you as you look at investment years at both.
Cellular or Tds Telecom help us understand you mentioned.
The level of leverage you want to see in 'twenty, three where is that.
How are you viewing the dividend.
As far as the capital allocation goes and any consideration of looking at possibly securitizing, the tower business, which seems to still be doing very well.
Okay.
Okay. Thanks, Rick couple of questions. There, let me start first with capital allocation strategy just broadly as we are looking across our businesses we've talked.
Significantly about.
Last year. The last couple of years. This year, we are in a heavy investment cycle, both with the <unk> modernization.
The band deployment at U S cellular and the expansion of our footprint.
And into.
Approximately 100, new markets at Tds Telcom.
I have to balance the needs of the pacing and the timing of those investments with our leverage.
With dividends.
We feel our <unk>.
To our shareholders. So it's a it's a balance and as I look at our leverage we are working to manage REO.
Really manage well under our debt covenants.
Significant safety net and we are looking to manage.
Within our credit rating requirements and so we're balancing that with the pacing of our investments back into the business.
And then let's see you had a second question on towers.
Cause I think more broadly about our noncore assets.
On towers that give.
Our balance sheet strength and it also gives and contribute strength to the business. So we've talked a lot about the towers.
In the important U S cellular.
A core part of its operations.
And.
But it gives us balance sheet strength, so I will tell you that.
Has sufficient liquidity for 2023.
And we have sufficient sources.
But I would not.
Alright, I would have those if I, if I needed bandwidth for 2023, I'm not meeting I'm, not meaning to monetize anything on the balance sheet.
Okay.
And this dividend was increased not that long ago, I think what 49th year in a row or so so it's still a strong commitment to paying the dividend.
We have a very strong commitment to paying the dividend we have a long track record that we're very proud of and we are focused on modestly increasing it.
Which we did this year.
Okay second question for me LTE. When you joined you mentioned that there could be opportunities for partnerships in the business to help return on capital.
Then several years, obviously, it's been.
Difficult environment out there, but update us as far as what potential partnerships are out there where you're at as far as maybe bringing them to fruition.
Eric Good morning.
I remain the concept of partnerships and the opportunity for partnerships is.
Founded on two concepts.
The first concept is that the capital intensity for the industry as a whole is in a challenging place.
The case for US. It's also the case for our competitors and the second.
Concept that is founded upon is simply does not make sense from my perspective, if you think about network density.
Site density required to support five G. Let alone <unk>, which is starting to be talked about.
Building multiple duplicative or five duplicative networks in Rural America, given the capital intensity challenges to me doesn't makes sense and so we continue to have conversations with other players in the industry, obviously I can't get into specifics.
There is general agreement upon those two founding founding principles.
One interesting example, it's a very micro example, Rick but it gives you a sense about about how people are thinking about this.
In our tower business one of the interesting thing that we can do is we don't just market real estate on the tower, because we're a operator and.
We also have assets at that tower that if people can use we can market those as well and so those are the shelters and generators and <unk>.
Those sorts of things that you would expect the interesting one as backhaul.
So we've had some conversations with people about sharing backhaul and in the past that our concept would have been no. Thank you right that means that there is a piece of my network that I have to share with someone else.
We're actually seeing a lot of interest in some of those backhaul backhaul sharing conversations so I believe the momentum behind those partnerships remain.
Reasonable I think it's still a good strategic concept.
To your point, we haven't seen meaningful progress that I can report out on a call like this but I do think that the underlying strategic rationale remains sound and we continue to have those conversations with folks in the industry.
Great. Thanks, everyone stay well.
Thanks, Roger next.
Your next question is from Sergey <unk> of Gamco investors. Please go ahead. Your line is open.
Good morning, guys. Thank you for taking the questions.
My first question is for LTE.
You mentioned that.
Is it promotions no force that you have.
The markets in the second half of last year in the first quarter of this year are having positive impact on churn.
Six to nine months lag effect or do you expect that my question is as you look at the magnitude of churn improvement is.
What do you expect that is it's striking better or worse compared to your kind of initial expectation based on the thousands of trials that you did in Europe .
The original Mark as before and.
Also besides getting more customers and contract which is obviously what you are working on what additional steps do see.
Is it working for you or have been working for you recently in terms of improving churn and what else could be done.
Yes, hi, Thank you for the question I am pleased with the progress that we've made on churn clearly still have a lot of room to go.
But.
More broadly as I think about trends in the business.
We've had if I look at 2022.
Every quarter had better net add momentum in the quarter before it.
In the first quarter of this year, we have better net add.
Net add results in the first quarter of last year.
Q1 is generally going to be down from Q4 for net adds in our industry as you well know and so the momentum in the business. The direction of the business is heading from a net add perspective I'm pleased with it's not fast enough we have to continue to improve the momentum.
And the reason I share that with us because it's somewhat similar to the results that we saw on churn.
So the net impact of the promotion has been about what we expected it took a bit longer than we had seen in our test market and so the improvements took a few more months to drive the benefits that we hope to see in terms of churn improvement and we.
<unk> seen in our test market.
The overall impact of the improvement is consistent and we remain optimistic that we can continue to drive those kinds of improvements in churn.
As long as we can keep people in contract radar in contract rate right now is about 64%.
It's as high as it's been in a long time, we're going to have to maintain.
That type of an contract rate if we want to continue to see positive churn momentum and so thats going to be a key driver of it.
The other pieces of it.
We have to be targeted and smart with our upgrade offers.
We continue to pulse in and out between mass upgrade offers and targeted upgrade offers and by targeted I mean digital outreach to customers.
The results we see from those targeted offers are considerably better than our than our tests.
Our test cohort and so I'm optimistic about the results that we get from those those targeted efforts.
You don't get the same Bang for you don't get the same bang.
As you deal with mass upgrade offers but you get better Bang for your Buck with those targeted upgrade offers.
That brings me to my last the last piece of the equation, which is the balance between subscriber and economic results that we tried to strike.
Yes, there is an easier way to continue to drive churn down which is just to be super aggressive on upgrade offers do mass upgrade offers and throw more money at it.
Try to be very disciplined in this market, it's a highly competitive market and in a highly competitive market, which you don't necessarily want to do is continue to lead a charge to the bottom.
So what we've tried to do is be disciplined and the balance between the financial results.
Results in the subscriber results and I think you see that in our view.
You see that in our continued improvement in <unk>.
In the face of some pretty intense competitive pressures and in the face of rolling out flat rate.
Which as we talked about earlier has a net dilutive effect on arps. So hopefully that gives you some sense Sergey about how we're how we're thinking about it in some of the levers that we're trying to pull.
And how how those are affecting the results that we're seeing good momentum we've got to make sure we keep it going.
No.
My second question is on the gross add front sensor, because that's where up.
2% year over year, but it was largely driven by I think 5000 increase in feature phone gross adds the smartphone gross adds are down 3% maybe a two part question. So what is the reason for increasing the number of feature phone gross adds over the past few quarters and second.
More broadly if you look across different geographies.
Different markets that you have what ourselves a commentary touristic markets, where you tend to do better in terms of gross adds over the past few quarters and.
Other annualized since learned that could be applied to other markets with the underperforming right now.
Okay.
Yes sure.
The first part of your question with respect to the feature phone and success. One thing we see occurring is that customers that have been on our prepaid plans.
Some are migrating over to our flat rate plan. So in the first quarter of this year 3500 prepaid customers migrated to our postpaid flat rate plans at <unk>.
Postpaid gross add and Thats why youre seeing that.
Dynamically between feature phones.
Smartphones in the first quarter.
And sorry <unk>. Your second question in terms of in terms of market characteristics.
You won't find this shocking right markets, where we have a strong network, we generally do well from a subscriber performance perspective, when we rollout five G. We see improvements in customer perception.
Aren't you seek improvements in perception and we see actual demonstrated improvements in performance.
So where we have upgraded our network, we tend to see better subscriber results.
Upgraded our network you can think of that in two ways. The.
First way is modernizing five G. As I mentioned in my earlier comments, we have 80% now of our traffic.
His rides over a tower that has been upgraded to <unk>.
I mentioned that only because as customers move to five <unk> handsets.
That's the key metric that we're following is not whats the total percentage of traffic on <unk>. It's what the total percentage of traffic that rides over our <unk> enabled tower because as you know getting a <unk> signal requires you to upgrade the tower, but it also requires you to upgrade your handset.
We feel good about the about the how we've invested how we've made those investments and how we've upgraded our network to <unk>. The next pivot in terms of continuing to improve our network is with Midland and so we've begun deployment of that mid band spectrum.
Right now we can only light up the 345 spectrum that we purchased in the department of defense, but we are deploying the C band spectrum as well, but we expect to be able to light up at the end of this year.
As we reported I think we've been able to clear any interference concerns we had with the FAA and so we feel good about our ability to deploy that spectrum to the benefit of our customers.
And as we liked that up we believe will have an even more compelling network offering and so so that helps us drive.
Subscriber performance, both on insurance side and the gross adds.
Great.
Michael.
Go ahead sorry.
Yeah, one more question for me last question.
Basically.
In the U S. M stocks, obviously have been under pressure for some time and operational turnarounds at two of solar is taking longer than expected.
Let me say green shoots, but it's taking longer than expected while competitors, obviously don't sit still so given all of that.
What moves around get the location or financial engineering with Tds.
And you'll sell a consider to surface value from our significant collection of underappreciated assets you have in your portfolio that potentially could provides us additional capital to invest.
And also just in general problem, but it is a flexibility.
Yeah.
Thank you Sergei for the question.
As I had answered before.
We have a balanced approach to our resource allocation and we're constantly weighing the returns that we're getting on our investments.
And.
We are.
Allocating our capital and we're very focused.
L T has outlined and Michelle and Doug have outlines the strategic objectives at both businesses, having said that our stock is under pressure.
Yeah.
We saw a decline in that and we are making heavy investments right now and that is pressuring our profitability and our free cash flow in the near term.
However, we are very focused on these investments trying to position both businesses for future growth and improved returns over time and that.
It is our goal.
And as I talked about we've got a strong balance sheet.
We have strong assets on our balance sheet and non core asset.
And if.
If we should need need to do something with those from a financial engineering perspective that would always be an option, but right now.
That is not our plans for 2023.
Yeah. Thanks, Sergey Thanks, Theyre getting a question.
Your next question is from Simon Flannery of Morgan Stanley . Please go ahead. Your line is open.
Great. Thank you good morning.
I don't think you really reference macro are much.
Call, which I guess it was a good thing.
Some companies have talked a little bit about.
Slower payments are higher involuntary churn I wonder if you could just talk across both the consumer and the enterprise wireline and wireless any anything you're seeing or you're monitoring on the macro side of things our enterprise decision, making.
And then you talked a lot about fixed wireless nice to see the momentum there help us a little bit with the scaling as you bring on the mid band spectrum.
How should we think about your go to market across your footprint with that downside footprints, we're obviously seeing a lot of traction.
Verizon and T mobile so how will that flow into 2024 for the company.
How do you address the concern so are they.
Kind of pushback.
Pushback by some about the inability of wireless to handle broadband traffic.
Beyond a certain point thanks.
Thanks, Simon a lot there I'll have Doug tackle the macro from the U S cellular perspective.
Mentioned wireline, so I'll have michele tackle macro from the Telecom perspective, and then I'll answer your question about fixed wireless.
Yes, good morning, Simon so on the macro side I mean, theres continued pressure with generally higher inflation rates and potential recession. Later this year, but I would say is we're managing our payments and bad debt quite well. If you look at our bad debt expense, which is effectively flat year over year.
26 billion for this quarter.
Our involuntary churn went up very slightly in the rate per involuntary defect went up slightly so there is some pressure there we're spending a lot of time monitoring it and taking action specifically, we tightened credit twice in the fourth quarter of last year.
Tickets from anti fraud measures, including IV scanners, and our enhanced IV scanners in our stores as well as extending new device locking period. All of those are going to help us in 2023 as it relates to bad debt certainly watch point, given the backrow environment, but we continue to manage it well and.
Feel good about where we're at right now.
Okay.
Thank you Doug.
Hi, Simon its Michel so I'll take it from the telecom side.
Yes, so from our perspective, and the customer payments bad debt expense, where we're operating at pre pandemic levels, we had gotten back to that already most of last year. So things are trending just normally for us so not really any concerns there.
Last year, you did hear us talk about supply chain concerns and some actions we were taking with that and we did a lot of pre buying in 2022 to make sure that we had with the materials that we needed in order to make sure did not delay any of our fiber build we were very successful in doing that and that's that's a shot.
Out to our supply chain management team.
So at this point, we're seeing some of the supply chain constraints loosen a little bit and so we don't see the same risks and supply chain. This year going forward, we were positioned really well coming into 2023 and in fact hope to be able to start utilizing some of that pre buying that we had done in terms of.
<unk>, we do see some higher costs in certain areas of our business as it relates to our fiber builds there are some higher costs related to labor and materials, but we have consistently worked and I think I've talked about this before to find ways to mitigate some of those cost increases with implementing <unk>.
<unk> improvements and figuring out ways to design, our network builds more efficiently more effectively making sure we're targeting the the lowest cost areas to build so so far even though there's been some cost increases in certain areas related to our business case on fiber, we're able to maintain that.
Overall business case expectations and the returns we expect to get out of those projects because of the mitigating.
Initiatives that we put on to offset some of those higher costs.
Im not sure Vicki if you want to talk at all about interest rates from the macro perspective.
Yeah, I mean, certainly we saw an increase another another increase.
Modestly by the Feds.
I think I've shared with you for every 1%.
Increase in the rates, it's about $20 million more in interest expense.
But I think Uh huh.
I am very comfortable with the balance between our fixed.
And our variable portions of debt and.
We've got that built into our projections.
Okay, Simon let me tackle fixed wireless based on your question. We are very pleased with the momentum we've seen in that product.
Like I mentioned before in the comments, but I'll just reiterate it briefly you. We do have two interesting continued catalyst one.
We didn't expand that that product footprint wide until June of last year, and so as youre looking at year over year growth. So we feel we still feel good about Q2 in terms of our ability to grow meaningfully because we have it across our entire footprint.
And Additionally, as we start to bring on mid band spectrum.
We have.
And the ability to satisfy not only capacity.
Which is certainly an issue that we're paying attention to but also deliver a far higher speed experience and so we have the ability to compete in areas and effectively compete in areas that maybe were not really touching right now the interesting thing about our rollout is it's a little bit different than our competitors and I think it creates a more sustainable.
Gained opportunity and it also creates an opportunity to manage our network differently and that's that we're focusing more on on rural areas and rural customers.
First it's a very different competitive dynamic.
Right now our low band product competes primarily with satellite with DSL and you can see the growth that we've been driving it.
When we rollout mid band will be competing not only against those technologies, but against an upgraded cable plant, even upgraded cable plant and people aren't happy with their cable provider. The one place that I've tried to be pretty clear about this in the past that we don't view this product as being particularly competitive against us where there is existing farmer.
We do not plan you asked about go to market, we don't plan on aggressively distributing or going to market or marketing the product in areas, where there is fiber, although we do plan on aggressively marketing it everywhere else and the other nice thing about that about doing this in rural areas as its more manageable from a capacity perspective.
Capacity, certainly something we're still going to have to pay attention to fixed wireless subscribers.
Yeah.
But when you have a less dense subscriber base utilizing fixed wireless off of the tower. You. Then also have less competition with your mobility product and so you can manage those capacity demands and a bit more of a targeted an elegant fashion and so right now our plan.
As we continue to be full speed ahead with the product we continue to expect to distribute it across our entire footprint.
And we remain really bullish on what we're seeing.
That's really helpful. Both on the macro on the fixed wireless.
I think you would have 30 million pops or something so maybe is that fair to think about that.
12.
12 15.
15 million households.
When do you have.
Yeah.
Half of that was more than half of those with fixed wireless next year.
I'm trying to follow the bouncing ball and the math you've got yes. So I mean right now Simon over a low band that covers our entire footprint, that's about 13 million homes.
With respect to mid band that's going to be multiyear rollouts, we are going to get two more homes.
We're going to get to those 13 million homes over time, it'd probably frankly, not all of them overtime basically mid band propagates. So we will continue to extend that coverage starting this year with our build out and again it's multiyear.
Great Alright, alright, that's very helpful. Thank you. Thanks.
Thanks for the question. Simon next question. Your next question is from Tom <unk> of Citigroup. Please go ahead. Your line is open.
Thank you.
I appreciate you taking the call.
I've been a shareholder for 32 years.
I purchased the socket.
$14.
34 <unk>.
And 32 years later type loss pay off my money.
And.
I listen to this presentation.
Presentation of enthusiastic future results.
They don't seem to come and I'm wondering at some point if it makes sense.
To put the company up for sale.
Let these assets.
Be more efficiently run and a larger system, because I don't know, where we're headed here the stock with a 32 year low.
And.
I wonder if someone could explain this to me.
Okay.
Hey, Tom It's L T.
Certainly appreciate you sticking with us.
<unk> been a shareholder for so long.
Certainly questions that you're asking your questions. We've been asked before and they are they continue to be things that we evaluate in terms of strategic options for the business.
We believe in this business, we believe in the long term future of the business.
The wireless industry as a whole is in an interesting place right now.
Lots of people have invested a lot of capital to produce and to deliver five G.
And those use cases have been slow to manifest themselves and I think thats created capital intensity pressures not just for us but.
One of our competitors and I do think you see that reflected in the performance of the equity and that being said I believe we had a very strong set of assets in this business, we have strong spectrum holdings.
We've reset our debt over the last few years to have it. So do we have a better positioned balance sheet I think vicki went through that.
And I believe that we're well positioned to support that five G demand as it begins to emerge in the coming years, and so I understand your frustration I share. It obviously I'm a shareholder as well I. Appreciate the question, we think we're well positioned to take advantage of that growth.
And we've we're staying the course with our strategy because we believe in it.
Thanks, Tom.
Operator next question.
There are no further questions at this time I will now turn the call over to calling Thompson for closing remarks. Okay. Thanks, everyone for your time today again, please reach out to IR. If you have any additional questions have a great weekend.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Thank you.
Yeah.
Yeah.
Yeah.
Yeah.
Okay.