Q3 2023 Telephone and Data Systems Inc Earnings Call
Yeah.
Please standby were about to begin.
Good morning, ladies and gentlemen, and welcome to the Tds and U S. Cellular third quarter 2023 operating results conference call. At this time all participants are in a listen only mode and please be advised that this call is being recorded after the speakers' prepared remarks, there will be a question and answer session I would like to ask a question.
During this time simply press star one on your telephone and if you would like to withdraw your question simply press Star one again not at this time I'll turn things over to MS. Colleen Thomson Vice President Corporate Relations. Please go ahead ma'am.
Good morning, and thank you for joining us.
And 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 sticky Villa Kress Executive Vice President and Chief Financial Officer from U S. Cellular LTE terrible President and Chief Executive Officer, Doug Chambers, Executive Vice President and Chief Financial Officer, and Treasurer and from Tds Telecom, Michelle broke lakey senior Vice President of <unk>.
Finance and Chief Financial Officer.
This call is being simultaneously webcast on the Tds and U S cellular investor relations websites.
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 earlier this morning.
As shown on slide two the information set forth in the presentation and discussed during this call contains statements about expected future events and financial results that are forward looking and subject to risks and uncertainties.
Please review the Safe Harbor paragraphs in our press releases and the extended version included in our SEC filings.
And with that I will now turn the call over to Vicki Bill or Chris Vickie, Okay. Thank you Colin and good morning, everyone.
Where we get into the details for the quarter I want to reiterate that as we announced in connection with last quarter's earnings call. The board of directors of Tds and U S. Cellular have each decided to initiate a process to explore strategic alternatives for U S. Cellular.
We are not going to comment on that process. At this time, however to say that it is active and ongoing.
With that let's get into the details for the quarter.
I am pleased that both business units delivered year over year improvements in adjusted EBITDA due to cost optimization programs and efforts to streamline expenses across almost every part of the enterprise.
At the same time, we continue to make key network investments in order to take advantage of growth opportunities that can enhance our competitive positions year.
Year to date through September U S. Cellular made steady progress delevering, reducing short and long term debt by approximately $340 million, while generating free cash flow. We also renewed the AIP facility for another two years at a very attractive rate.
<unk> was also opportunistic and entered into a 300 million secured term loan in order to fund our fiber expansion program and while investing back into both our businesses as a priority. The current interest rate environment and access to capital remain a challenge going forward, we will pace and size are.
Capital expenditures in order to remain within our funding capacity and leverage ratio threshold, even if it means moderating our spend in the near term.
As you can see on slide three at the end of the quarter Tds and U S. Cellular combined have available sources of liquidity, including cash and other sources.
We have long dated debt extending any sizeable maturities until well into the future. This helps us to manage the balance sheet effectively by keeping short term maturities to a minimum while we are investing to deploy fiber and new communities and continuing our multiyear.
Band deployment.
With that I'll now turn it over to L. T.
Thanks, Nikki and good morning, everybody, if we turn to slide five.
Even with the August 4th announcement of the review of strategic alternatives for U S. Cellular it's important that we remain focused on operating the business to produce the best operational and financial results possible and I'm pleased to update you on our progress this morning.
First and foremost our top priority remains improving our customer trajectory, while balancing subscriber growth with financial discipline, while financial results are on track driving subscriber gross additions remains our primary challenge amidst a very challenging competitive environment.
Postpaid ARPA was a highlight again this quarter increasing 2% as.
But the team has done an excellent job in helping our customers realize the value of our premium plans and services.
And this ARPA growth was particularly impressive given the significant number of flat rate customers that we added to the base.
This flat rate plans were designed to compete against the wireless offers with cable companies have been flooding the market with and.
And we're seeing strong adoption almost 40% of postpaid handset gross adds in the quarter on those flat rate plans.
We remain pleased with our flat rate plan performance and I'll remind you that these plans deliver similar lifetime economics at our other offerings.
Since the cost of the device is borne by the customer.
Another accomplishment in the quarter was that adjusted OIBDA, and adjusted EBITDA improved significantly up 35% and 28% respectively over the past year.
We were free cash flow positive in the quarter and for the nine months ended in 2023, we expect to be for the full year.
I'm really pleased with the cost efficiency that our team has driven particularly in that challenging competitive environment.
And speaking of the competitive environment as it relates to driving subscriber growth, we're being very targeted and deliberate with our promotional spend for <unk>.
<unk> campaigns from time to time based on various factors in a given market and.
As we head into the busy holiday selling season, Youll see us running a number of aggressive promotions designed to target new subscribers.
As well as in scent upgrades for our existing customers and thus increase the percentage of customers and contract.
So it was aggressive promotions are needed because the market for wireless customers is certainly what I would characterize as fiercely competitive.
And that competition includes our traditional competitors AT&T Verizon T mobile.
But also increasing and significant pressure from the cable companies that resell wireless those now compete with us in about 60% of our footprint.
This year's Alpha launch is a good example, you saw hyper aggressive offers in the market.
It's important to note that cable is combined pricing and promotional tactics are pressuring industry RP.
These competitive dynamics result in RFP win margin pressure and that subsequently challenges the ability to invest in network capacity and future technology developments and this is a really important shift in dynamics for our industry.
Well I think our results show that we're striking a balance between subscriber growth and financial results.
As an industry, we should be focusing on the actions required to balanced competitive pricing with the investment capacity required to effectively keep the U S globally competitive.
Turning to growth initiatives, our third party tower revenues had another strong quarter revenues up almost 8%.
The wireless industry is moderated capital expenditures and 23, we've experienced a slowdown in new tenant and amendment activity in the second and third quarters.
I do expect that will impact tower revenue growth rates in 2024.
That being said, we still believe we are uniquely positioned in the tower space and I think we have a lot of opportunity to grow.
Fixed wireless continues to be a bright spot for us fixed wireless revenues were up 35%. We finished the quarter with 106000 customers.
To date, the vast majority of those subscribers are running entirely on low band spectrum, we expect strong subscriber growth to continue with the launch of our mid band spectrum.
I am pleased that we received access to C band spectrum, a few months earlier than planned.
And we are consequently able to further improve our <unk> network experience faster than initially anticipated.
And as mentioned earlier this year, we've been upgrading a number of sites. So they can be deployed as soon as we receive mid band clearance.
Those sites are now operational and they allow us to bring faster speeds and more capacity to mobile into our fixed wireless customers and we're doing that earlier than we expected.
Our mid band deployment as multiyear like all of our deployments.
By the end of 2020 for almost 50% of our data traffic will be carried on sites that are equipped with mid band and.
And where we've enabled mid band, we're marketing a 300 megabit fixed wireless product and Thats really competitive in the marketplace.
And briefly on average our fixed wireless subscribers are using about 170 <unk> gigabit per month. This year are significantly lower than our peers.
However, I do expect that our customers usage is going to grow as they get access to the upgraded mid band experience.
And one other note on network initiatives, we will be shutting down our CDMA network at the beginning of 2024.
Team has done a great job migrating the base away from CDMA dependent devices less than 42000 customers are left and that's down from 386000, just 18 months ago.
We believe we're going to continue to see more customers migrate over the next several months.
And we intend to re farm that spectrum to support our LTE network.
And we expect to see additional systems operation savings once that CDMA network is fully shutdown in 2024.
As always I want to thank the team for all their hard work and continued dedication and I'll now turn the call over to Doug Chambers to provide more details on our financial results. Doug. Thanks healthy good morning, let's start with a review of customer results on slide six postpaid handset gross additions decreased year over year by 23.
Largely due to the intense competitive environment from traditional carriers and <unk> as well as a decline in the pool of available customers chorus.
Correspondingly postpaid.
Handset net additions were down 16.
Connected device gross and net additions include fixed wireless subscribers and as LTE mentioned, we continued to see great momentum in fixed wireless with our base of customers up 57% from the prior year and up 10% sequentially.
Postpaid handset churn decreased year over year and increased sequentially.
<unk> increase was partially due to seasonality and a decrease in our in contract customer base.
Also we have been experiencing a positive trend in postpaid handset churn over the past year due in part to the aggressive device offers to new and existing customers that we maintain for mid June 2022 through February 2023.
Moving to slide seven prepaid gross additions declined 10000, and net prepaid additions decreased 2000.
In terms of gross additions the overall pool of available customers declined year over year, which we believe is partially driven by competitively priced postpaid offerings.
Now, let's turn to the financial results starting on slide eight.
Total operating revenues for the third quarter decreased 11%.
With the industry, we saw a decline in upgrade rates contributing to the lower equipment sales.
Service revenue declined 2% due to a decrease in our average retail subscriber base and roaming revenue.
Inbound roaming revenue declined 53% as a result of negotiating lower rates with other carriers noted this decrease in inbound roaming revenue was almost entirely offset by a corresponding decrease in our outbound roaming expenses. Despite a 58% increase in our off net data traffic.
On the positive side LT mentioned the increase in postpaid <unk>.
This increase was partially driven by increased device protection revenues and favorable plan and product offering mix as a result of customer adoption of our higher value higher tier plans. We continue to see consistent growth in our highest tiers of unlimited plans and as of the end of the quarter, 46% of our postpaid handset customers.
Our now on these higher tier plan clients and Thats up from 38% just one year ago.
Now, let's turn to tower results on slides nine and 10 as you can see the business delivered another strong quarter with 8% revenue growth, including U S. Filer sites. Our tower tenancy ratio is currently 154.
From 146, just two years ago.
We've also added a couple of additional disclosures this quarter.
Provide you with insight into both the geographical diversity.
Carrier Terrier composition of our tower portfolio.
As we noted last quarter, our towers are well positioned geographically with about 30% of them is that having a competing tower within a two mile radius.
And you can see that our tower revenue is well distributed among the large wireless carriers.
Next let's turn to our quarterly operating performance shown on slide 11 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 11%, however, with lower device sales lower promotional costs lower bad debt expense and a steadfast focus on controlling costs cash expenses decreased and has declined more than offset the decline in revenue.
System operations expense declined 6% due primarily to the previously mentioned decrease in off net roaming expense.
2024, we will begin to realize net savings associated with the shutdown of our CDMA network to LTE previously mentioned.
Offset partially by decommissioning costs.
Starting in 2025, we expect annual run rate savings of approximately $30 million related to the CDMA shutdown. These expected savings will help mitigate expense increases associated with our ongoing <unk> mid band deployment.
Loss on equipment or equipment sales less cost of equipment sold decreased $25 million as a result of lower device sales and promotional costs.
As previously mentioned, we ran an aggressive new and existing promotion for the entire duration of the third quarter of 2022 and did not execute this level of promotional intensity in 2023.
Selling general and administrative expenses decreased 10% driven primarily by decreases in bad debt expense and the favorable impact from the reduction of workforce that was executed in the second quarter of 2023.
As we indicated last quarter, we estimate full year run rate savings related to the reduction in workforce of approximately $45 million, which we expect to fully realize in 2024.
Wrapping up the slides adjusted operating income increased 35% adjusted EBITDA, which incorporates the earnings from our equity method investments along with interest and dividend income increased 28%. Both of these amounts have been adjusted to exclude the $3 million of expenses incurred in the third quarter related to a strategic.
Alternatives review.
Capital expenditures decreased 18%, mainly driven by the timing of expenditures in 2023 relative to the prior year.
Free cash flow was $237 million for the nine months ended September 32023, and we expect healthy positive free cash flow for the full year 2023, as we continued to invest in our multiyear <unk> mid band deployment, while prudently managing our free cash flow.
As shown on slide 12 service revenue and capital expenditure guidance remains unchanged. Further we have retained the mid points of our adjusted operating income and adjusted EBIT guidance and tightened the ranges of these measures reflecting reduced uncertainty given we are in the later stages of the year.
I will now turn the call over to Michelle Berrey quickie shelf.
Thank you, Doug and good morning, everyone turning to slide 14, I'll share third quarter highlights for Tds Telecom our team delivered 61000 fiber service addresses in the quarter, our highest quarter to date, bringing our year to date total to 127000 at the end of September.
Given where we are in the year and the strong momentum. We've had we are raising our 2023 goal to 200 fiber service addresses up.
From 175000.
Another important milestone for our fiber program is that we expect all of our expansion markets will be launched by the end of 2023.
These markets are primarily in Wisconsin in the Pacific Northwest and a few of our recently announced markets, our Missoula Butte Helena in Great Falls Montana.
Windfalls in Caldwell, Idaho, and fond of lack in Sheboygan, Wisconsin.
Another important highlight this quarter is that Tds telecom elected to participate in the federal enhanced ATM program in 24 states.
This program will provide us with revenue support through 2038 in return for us delivering increased speeds of 100 megabits down in 'twenty up to about 270000 locations.
As a reminder, the existing ATM program provided $82 million a year through 2028.
The new program increases the revenue amount to approximately $90 million per year, beginning in 2024 and extends through 2038.
Therefore, we expect to receive a total of about $1 3 billion of EAA Cam revenue support over the next 15 years.
We anticipate this program will help to accelerate the delivery of higher speed broadband to various rural high cost areas that we serve this is a fantastic outcome for Tds telecom and to our customers.
Now, let's jump into our quarterly results starting on slide 15, as you just heard with our successful fiber service address results. We have increased our fiber service address goal to 200000. This year, we're really proud that we have developed a strong competency in managing builds and navigating challenges.
Longer term you can see where we are in our scorecard, we're targeting $1 2 million marketable fiber service addresses by 2026, we ended the quarter with 709000, so we're making good progress.
We are also targeting 60% of our total service addresses to be served by fiber by 2026, we ended the quarter with 44%.
This reflects progress in growing fiber through our expansion markets as well as fiber ing up our incumbent markets.
Specifically by 2026, we plan to serve half of our ILEC addresses with fiber at the end of the quarter, 40% of our ILEC with fiber.
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 69% at gig speeds.
We continue to believe these long term targets are achievable, although our address delivery numbers may fluctuate from year to year, depending on a number of factors our 2026 goals remain front and center throughout the organization.
And we are pleased with the results of our fiber builds to date, we continue to achieve the broadband penetrations that are projected in our business cases.
On slide 16, you can see that we are growing our footprint with an 11% double digit growth in total service addresses year over year.
Shown on the graph on the right, we see increasing demand for higher broadband speeds with 75% of our customers, taking 100, megabits per second or greater up from 69% a year ago.
We continue to increase the availability of gig plus speeds and we are now even offering eight gig speeds in certain markets custom.
Customer take rates of these speeds are growing with 14% of our customer base on one gig or higher at the end of the quarter.
Our broadband investments are driving positive results, including a 10% increase in total residential broadband revenue.
As shown on slide 17, we experienced a 5% increase year over year and total broadband residential connections.
Average residential revenue per connection was up 3% due to price increases and product mix, partially offset by promotions.
As shown in the chart on the right we had another quarter of 4% growth in residential revenues with expansion market residential revenues increasing to $20 million in the quarter.
This aligns with our expectation of steady revenue growth following the timing of service address delivery as penetration ramps in these new markets.
Residential wireline incumbent in cable revenues were flat as the decline in video and voice connections was offset by price increases and growth in broadband connections.
Our wireline incumbent which includes our ILEC markets is facing increasing competitive pressures.
We consider capital prioritization and expected economic returns as we respond to competition in select ILEC markets with fiber builds.
The ATM program will provide funding to help us define these markets.
As expected commercial revenues decreased 12% in the quarter, primarily driven by lower CLEC connections.
And lastly, wholesale revenues decreased 3% for the quarter, primarily due to lower special access revenue.
On Slide 18, you can see our quarterly performance operating revenues were flat in the quarter as the growth in residential revenues was offset by the decline in commercial and wholesale.
Cash expenses decreased modestly in the quarter. This decrease is a result of our intense focus on cost efficiencies and disciplined spending.
As a reminder, the expense results shown here include the cost to initially launch our fiber markets, which are incurred upfront and prior to generating revenues.
Adjusted EBITDA was up 3% in the quarter as a result of the decrease in cash expenses.
Capital expenditures of $172 million were up modestly from the prior year due to our investments in fiber.
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.
Slide 19 shows our 2023 guidance.
We are keeping our revenue guidance range unchanged from last quarter, although we expect to be towards the low end of our range of 1.03 to 1.06 billion.
Even though we are expecting to deliver more fiber addresses than originally planned. This year. The majority will be launched in late 2023, and it will take time for penetrations in revenues to build.
Adjusted EBITDA is expected to remain between 270 and $300 million in 2023.
As we look forward, we are still on track to have our expansion community has launched this year. This means we can begin serving customers and generating revenues.
Starting next year and over the next several years, we expect our broadband penetrations revenues and adjusted EBITDA to grow.
Moving onto Capex consistent with our uptick in expected fiber service address delivery and our investments to establish internal construction crews. We are now expecting capital expenditures for this year to be approximately $550 million.
As Vicki mentioned earlier going forward, we will continue to size and pace the timing of our capital expenditures to be commensurate with our financial capacity.
Due to the pull forward of service addresses and corresponding higher Capex in 2023 next year, we plan to slow our spending and focus on driving broadband penetration and revenues and our new fiber markets.
Service addresses in 2024 will likely be closer to what we delivered in 2022.
In summary, we remain on track to achieve our 2026 fiber program goals recognizing the number of service addresses may fluctuate from year to year.
We will give more specific guidance for 2024 during our year end call. However, we wanted to provide directional insight on next year's fiber program in the context of our expected addressing capex results for 2023.
In closing I want to acknowledge all of the Tds Telecom associates. It is taking a tremendous amount of engagement and adaptability to execute on our strategy and I want to thank the entire organization for pulling together to make that happen.
I'll now turn the call back over to Colleen.
Okay. We will now open up the call to questions. As a reminder, our focus today is on a quarter and we will not be taking questions on the strategic alternatives review for U S. Cellular.
Operator, we are ready for the first question.
Thank you MS. Thompson, just a reminder, ladies and gentlemen, any questions. This morning. Please press star one and as you find your question has already been addressed you can remove yourself from the queue by pressing star. One again, we will go first this morning to Ric Prentiss at Raymond James.
Thanks, Good morning, everybody.
Good morning, Rick.
Okay.
First question. Thanks for the extra color on the tower revenue distribution Pie chart.
Have you had a chance to think through the T mobile, 29% I think it shows.
How much is split or potential sprint churn that might be out there I think you mentioned that you expect the industry.
Industry Capex slowdown will affect Q2.
<unk> 24, a releasing revenue, but just also worried about kind of a churn effect.
Yes, good morning, Greg.
We don't.
The sprint T Mo.
Disconnects a lot of that activity occurred in the fourth quarter of last year and the first quarter of this year. We've had about 100 cumulative lease terminations as a result of the merger that slowed way down in the second and third quarter. So we think we're through most of it. So the short answer is we don't think there's a lot left with respect to.
Additional terminations.
Yeah.
Great and you can see sequentially, our tendency rate went down a little bit because of that exact reason.
Okay, that's what I thought okay.
And then fixed wireless obviously, you've got the C band now earlier than originally planned can you help us understand where you think the addressable market is.
As far as households for the fixed wireless product how many houses to you covered now.
<unk> would you like to cover over the next couple of years, just so we can kind of size that opportunity.
Yes.
Yes sure so.
I mean, let me talk a little bit about the dynamics. There I mean, the first dynamic is I mentioned it in the prepared remarks, but as we turn on our mid band spectrum that allows us to both provide.
Better speed experience to our customers.
It also allows us to handle more capacity.
One of the things I pay a lot of attention to is do we do we need to stop selling anywhere because of the impact.
Fixed wireless subs are putting onto the mobile network.
And thus far we've been able to restrict any stop sells to a truly very very small number of of towers and so.
The impact on the mobile network has been manageable thus far.
And we expect that to continue because we are going to be targeted in how we rollout mid band.
Part of the.
Rationale for which towers, we choose to put mid band on the demands placed on it by fixed wireless and so.
At a high level, if you look at the growth rate that we've experienced in the past over the last let's call. It 18 to 24 months.
I expect that growth rate to continue.
The final full potential of that product.
Little bit difficult to predict you have to think through both the how the how the product place competitively.
And certainly for for if I, just look at how well it matches up against cable products and upgraded fiber footprint and so on.
I could see that product growing two to 400000 or more households to challenge, though will come as those households come onboard as they start using mid band spectrum.
Obviously, the usage per household increases as well and so now you have to scale that back a little bit based on demands on mobile capacity.
Don't know what that looks like yet because we're in the very early days of rolling that product out. Thus far we're very bullish we haven't had to like I said shut down any any sites are stopped selling on any sites.
But I think probably 400000 is the absolute top of the of the addressable market range.
Because you got to dial it back based on capacity needs hopefully that answers your question.
And final one it's a theoretical question, which I was looking at in there.
When you think about the difference between EBITDA and EBIT large part is the minority interest.
You guys received dividends from those minority interest. So if you think about one of the strategic alternatives might be to do something with the minority interest how should we think about theoretically why sell something where you would get a dividend.
There is some tax efficient means would you consider stock just trying to think through the logic of that minority interest line item of what might be.
Interesting to do and why.
Yes, so I mean the.
As you mentioned I mean, we do see health.
Healthy cash flow distributions from those partnerships, we're happy with how those partnerships operate.
How those partnerships interact and influence the strategic assessment I'm not going to comment on today.
Okay.
One thing that maybe is safety is wood with stock be the considerations that with cash.
If things were looked at as currently when you think about tax efficiency methods.
Yes, Rick.
We're not going to comment on on any questions that relate.
In that area so.
We're just not going to comment on any outcome implications.
We're not we're not even going to speculate today, but thank you.
Finally got to China.
Yeah. Thanks, Rick Operator next question.
Thank you we'll go next now to Phil Cusick at Jpmorgan.
So you said no outcome or implications, but is there anything you can say about timing in terms of where we are and when we might hear something yes. Thanks Phil.
Thanks for the question both to both of you. It is an opportunity for for us to reiterate our comments.
All right.
Our announcement on August 4th we are focused on all strategic options.
That are in the best interest of the company and its shareholders.
And this process is active and ongoing that's all I can comment on right now and I'm not going to comment on the timing.
Or speculate on the timing either.
You figure it's worth a shot.
LTE.
You're pretty clearly paring back on mobile spending accepting the slower growth that Chris as it come with us because it makes sense to pull back further on sales and marketing, especially.
Especially in a quarter where the.
Noise volume will be higher from here.
Dave save even more money given us Mr. Strategic review and also are you paring back on Capex as well near term because of the review as well.
So what we try to do as we think about balancing our promotional spend is matching right the volume of that spend to the available volume in the marketplace.
Fourth quarter because of the holiday is when we see most.
Hi, its level, certainly a switching activity and.
And we need to match that available switching activity with as much volume as we can put in the marketplace and so.
I'm I'm not adjusting our promotional spend or our capital spend based on any potential outcomes of the strategic review.
We're doing is we're adjusting that spend based on what we see as the dynamics in the marketplace in the third quarter.
We saw an opportunity to pull back a little bit in terms of spending and you see that in our strong financial performance.
We see there is going to be an opportunity in the fourth quarter, particularly on the upgrade side to ramp up our volumes and so we plan on aggressively pursuing those.
And as far as capital goes.
The capital moves have really been driven by two factors. The first factor is we're very comfortable with the results of our <unk> modernization program.
We now have five active.
Active on sites to carry 80% of our traffic and Mike and team have done a really nice job of rolling that out.
And so what we're able to do is we're able to slow our capital spending associated with five G.
While at the same time, we're replacing some of that spending with misfit. We mentioned it on the call. We got early access to that to that C band spectrum.
Where we roll that out we see really strong mobile performance and it helps us sell a better fixed wireless product and so.
Much of that slowdown in Capex, that's associated with <unk> is being replaced by <unk>.
Acceleration of mid band.
The net of it is what you see in our both in our numbers for this year and thinking about next year fairly similar capital capital spend as well.
So so capex and promotional approach really driven by marketplace dynamics not being influenced by the strategic assessment.
Okay. Thank you and then one for Michelle if I Ken can.
Can you dig more into the competition in the ILEC markets is that cable footprint expansion youre alluding to or maybe fixed wireless.
Hello comprised the ATM funding can be used to defend yourself against cable incursion is that what's going on.
Hi, Phil Thanks, a lot for the question yeah. So in our ILEC, we are facing a little bit more of a competitive pressure than we had in prior years and it's not primarily coming from fixed wireless cable is always a tough competitor for us, but it's it's starting.
B some of the smaller fiber overbuild us are starting to come into some of our ILEC markets and so.
We have been very focused on our ILEC for the last decade, we've been building fiber in our ILEC and so we've got 40% of our ILEC fibered up right now we have goals to continue that and that's a really great way to defend and compete in those markets and we do see that the EAA Cam.
Graham once we get those builds going those are going to be fiber builds and that will also be a way that helps us defend those ILEC markets from.
Yes.
Those fiber overbuild us from potentially coming any farther or entering in the first place.
Okay. Thank you.
Thanks, Bill next question.
Thank you well go next now to Simon Flannery at Morgan Stanley.
Great. Thank you very much good morning.
LTE just following on on the <unk>.
Good results continue there could you just give us a little bit on the profile of these customers where they are coming from is this in kind of more suburbia or are you seeing in more rural areas, what's the kind of the.
The sweet spot here for that customer base, and then just coming back to the point you were making about the competitiveness in.
And wireless.
Cable's been aggressive for some time I might add some sort of leveled out here for a few quarters. What are you seeing something new was it more players in your markets or what was the delta here in the last few months that you were kind of trying to highlight and then maybe just one last one on the fiber side the slower build so youre going to concentrate more your bill.
Next year on in or out of region.
The fiber side.
Thanks, Simon and kudos to you for not trying to slip in a strategic assessment question. We appreciate it.
Yes.
Yes, it was.
Appreciate it.
Yes, let me start with let me start with fixed wireless.
Interestingly enough, we actually see a fairly decent blend of customers. So.
I'll remind again right. This is a low band product almost exclusively been selling on thus far which would lead you to believe that it would it would skew heavily rural.
Right, where we're the primary competition is satellite or DSL and interestingly enough I mean, we've seen a <unk>.
Seen a really good blend of customers.
There is no switching information out there. So we don't know its like Youre switching a number over so we don't know exactly who they are coming from or if they're necessarily adding.
Maybe maybe a backup.
Connection so we don't know where they're coming from but the geographical mix would indicate that we're taking from cable and we're primarily and in many cases, we've been taking where cable is upgraded their plant.
And so Thats also what gives me a lot of optimism about about the mid band fixed wireless as we rollout that 300 Meg product.
It isn't purely just a speed game there is simplicity of installation.
Positive customer experience associated with this product our churn continues to go down on the product trends, we continue to see really good churn performance.
And so it isn't just a just a rural oriented product is frankly I had initially assumed it might be.
We're seeing really good performance, even in places where cable is quite active.
The one place I can tell you where we have not seen.
Significant progress has places where you've got fiber alright, so if you've got if you've got a dense fiber build.
The economics of the product, it's pretty difficult to compete against those against against the physics to fiber provider, we see a really robust blend.
Let me switch to the cable your question about cable what's different.
Really two things are different for us.
First is you've seen just a steady expansion of their footprint.
So early on U S cellular was a bit insulated from cable competition.
Because they started in larger cities and so our competitors saw a larger competitive impact from cable than we did.
A few quarters ago, I mentioned that we saw cable competition and 50% of our footprint as of today, it's 60% of our footprint.
And so so we've simply seen an expansion of that cable competition <unk>.
Another dynamic that I expect to see that I would just highlight is <unk>.
Up until now we've had larger the large cable companies, providing providing <unk> and providing that wireless service and I expect that we'll see smaller cable players do that.
I expect to see smaller cable players rollout of wireless service.
And that will create a little bit of increased competition.
And then the final dynamic that I think is kind of interesting is that we're seeing.
A larger amount of Av.
The cable players start to subsidize devices.
I think that's going to be really interesting dynamic to track because in the early days, it's quite easy to offer wireless service and see really positive net add performance because one you obviously don't have to deal with churn dynamics of customers.
Rolling off of your service and two.
You can cherry pick in the sense that you can take customers, who maybe aren't ready to upgrade their device and that's who you offer service too and I think thats what <unk> done.
Now I believe that that business is mature enough inside some of the larger cable players that they're having to deal with customers, who now want to upgrade their device and where they don't provide some form of subsidy.
They will start to have to deal with churn dynamics and so I think that that subsidy and we saw that in the iPhone launch by the way.
The the subsidies the cable or providing us a third dynamic that I'm tracking pretty carefully.
For the third question, Michelle I'll hand, it to you.
Yes.
Yes. Thank you, yes, thanks, Alethia and thanks for the question Simon.
So you asked about next year, whether we're going to prioritize fiber in our out of region and I can tell you. The short answer is it's going to be prioritized on out of region, but let me give you a little bit more context as to why that's our focus.
So as I mentioned in 2023, given our momentum we have allowed ourselves to spend more this year and to deliver more addresses.
In 2023, and then we can start selling into those addresses but next year, we do plan to slow our spending and we do expect addresses to come in lower and we expect capex to be lower next year than it has been in the 2022 and 2023 levels and we're able to do that by by prioritizing.
Our spending.
And for a number of reasons so one of the reasons.
Is because of the a cam program in 2023, we're going to wrap up our existing ATM obligations and milestones and spending and then we're going to pivot and shift our focus to planning and engineering and getting contractors lined up so that we can start delivering the higher speeds.
Doing those builds.
Two more addresses that are now going to be in that program. Starting in 2024. So there is going to be a period, where we're not spending quite as much on a cam while we're doing that spending and then that will ramp up more significantly at the end of 2024 and going into 2025.
But because of that EAA Cam program.
That also is going to allow us to not spend as much.
And our base business, because we know that that E rate funding is coming and will help fortify those markets through that program. So we're able to back off a little bit on some of our incumbent.
<unk> spending of Capex and builds next year.
Sort of waiting for that that <unk> funding to be able.
It's not necessarily that we're waiting for the funding by waiting for that work to begin to be able to really start.
Giving a lot more attention into those ILEC markets. So that's why we're able to then focus in and prioritize a little bit more on our out of territory our expansion market regions next year.
So hopefully that helps.
Thank you.
Okay next question.
Thank you well go next to Michael Rollins at Citi.
Thanks, and good morning, just a couple of follow ups first on the wireline side just.
I'm just curious as you look at the goals for 2026.
Can you give us an update in terms of the total spend to get to those goals, whether it's on a gross basis of just capital investment needed to get to that point or on a net basis. So what's the net funding need for the businesses over the next few years.
And then.
On the wireless business.
Yes.
You commented a little bit earlier on the churn dynamics and.
I'm curious when you look at your churn versus maybe where some of the national carriers or is this the obvious opportunity to try to push that down 2030 40 basis points.
Improved total subscriber postpaid phone trajectory for the business. Thanks.
Yes.
Hi, Mike This is Michel I'll start and then let <unk> jump in.
So in terms of fiber funding in our 2026 goals.
Not going to give guidance or specific numbers beyond 2023, right now, but I can give you some some context.
We do still believe that those 2026 goals are achievable, we still have a plan in place to get to those 2026 goals it will take additional.
Additional capex versus where telecom had historically been <unk> seen the elevated capex in 2022 2023, but what I can tell you is that for 2024 Directionally I can tell you anyhow that capex is going to be lower next year.
And that's for a couple of reasons I just mentioned about ATM, we're going to be spending a little bit less on that as we get our planning going for the new program.
And then our incumbent in in our cable markets.
We're being very prudent with Capex, we are identifying anything that can be reduced or deferred, especially knowing that that EA Cam program work is coming.
And can address some of the needs that we that we have in our ILEC markets.
And then third another reason that Capex will be lower next year is.
On our expansion markets <unk> seen very elevated capex. The last couple of years, but a lot of that has been to get that upfront spending in in order to get those markets launched and by the time, we get done with this year all of those markets will be launched which means that that upfront spending will largely be behind us and thats things like getting the hub.
<unk> cabinets plays transport Ralph things like that so going forward, we're going to be able to deliver addresses at an incrementally lower cost than what we've had in the last couple of years. So that's also going to be able to bring our capex down slightly next year, not slightly but just bring it down commensurate with the addresses that we're expecting.
<unk> to deliver next year.
So we've been really disciplined with Capex opex, we're focusing on growing our EBITDA and managing our capex. So that we can self fund this fiber program as much as possible.
And that's really important to us as we manage within our leverage that we're comfortable with and considering capital markets today and the high cost of capital So.
Capex will will continue to be elevated but just know that our our focus is to try to to drive profitability and manage capex such that we're able to self fund as much as we possibly can.
And Mike let me tackle the churn question.
The simple answer to your question is yes.
But you probably want a little bit more color than just yes. So talking briefly about churn I mean, what you've identified is the opportunity which is how do we drive that continue to drive that churn number down.
We do see that as the biggest opportunity to improve our net add performance.
Doug mentioned in his prepared comments about the positive trend that we've seen in postpaid handset churn over the past year and the thing Thats driving that is the aggressive offers that we had in the marketplace around new and existing.
New and existing basically means hey, we're going to we're going to provide attractive upgrade offers we saw a lot of customers adopt those and that's helped us with with year over year churn.
We plan on doing something very similar through the holiday period. So we're focused very carefully on upgrades improving our in contract rate.
<unk> spend that we see that we see as efficient.
So the money that you spend on those upgrade offers not cheap right.
It's an it's an aggressive offer you have to put in the marketplace, but it works and there isn't it works with customers and contract and <unk> contract customers churn at a much lower rate so.
Yes, we do see that as the biggest opportunity in front of us in the next couple of months.
Thank you.
Okay next question.
Thank you with reduction have to Sergey <unk> at Gabelli funds.
Good morning, Thank you for taking the questions.
Good morning.
My first question is for LT.
On the tower business.
Could you talk a little bit more about the progress that you're making and increasing the number of co locators, but more broadly I guess, if you could talk a little bit about the.
Medium term strategy for the tower business what have you.
<unk> been working well so far what you still need to improve in order to gain a much larger scale and have a more pronounced revenue growth in those businesses.
Yes, Hi, Sergey.
I mean, the improvement in co location I mean, the numbers on the slide right were up 2% year over year, but I mean to speak a little bit more about that.
The the growth itself in terms of new tenants and in terms of amendments on existing towers has slowed.
But we think that slowed because of let's call it macro industry dynamics not because of anything that we are or aren't doing well.
In terms of marketing the towers.
We've mentioned it we've slowed our we've slowed our capital spend if you look at our competitors and their announcements there doing the same thing and we're seeing the impact of that as.
As we see new amendments and new co locators in the tower business by the way that's entirely consistent with our tower competitors as well are seeing in reporting exactly the same thing.
Mid term, we remain optimistic and the reason for that optimism is there are several.
First let me just start from a macro industry demand perspective.
<unk>.
The FCC does not have spectrum authority right now.
I think thats a travesty.
But nonetheless, there is no spectrum auctions on the horizon.
And even though we haven't seen the spectrum plan from the NTIA.
There is no obvious near term mid band spectrum that they're talking about releasing notwithstanding my best efforts to try to convince them otherwise.
Does that mean it means that as we get into six chi the way that youre going to be able to support the increased demand from wireless customers, whether it's consumer whether it's enterprise is going to be with a denser grid.
You either have to put more spectrum on the existing grid.
Don't currently have a roadmap towards that.
And so with wireless companies are going to support that need theyre going to have to densify their grid and a denser grid in the long run is good for the tower business and is particularly good for our tower business and.
And the reason I say, it's particularly good for our tower business is that I think that our towers are particularly differentiated in terms of their proximity to other competitive towers, Doug mentioned in his in his.
Prepared remarks.
30% of our tower portfolio doesn't.
It doesn't have another tower within two miles.
What that means is as we move towards <unk> and as the needs of the network get towards higher and higher bandwidth those towers are going to be particularly differentiate it.
So you couple that with the fact that our existing co location rate is already significantly below our competitors I view that as only upside.
That with wireless companies are going to have to densify in our tower portfolio is really well positioned to support that densification.
That's why we remain really optimistic about the long term growth in this segment.
And while I say segment not formally a segment the long term growth in this portion of the business.
And notwithstanding some of the kind of more near term slowdowns that we're seeing as folks pull back on capital hopefully that gives you a sense about how we're thinking about.
Thank you.
And my second question is both for LTE.
Michelle.
So I think earlier this year management of both company has talked about kind of stepping up collaboration efforts.
And we have no relationship selling each other's products potentially by applying for government funding together. So I was wondering.
We're close to the apples a year, where you are in this collaboration.
And looking into 2024 I guess.
To what degree does it makes sense to apply for bid funding or other government funding together or rollout fiber services in silos.
U S cellular markets.
If it makes sense to explore possibilities for the bundled offering.
As opposed to you have one kind of broader collaborations.
Yes, Sergey I'll, let Michele talk about <unk>, and how <unk> and Tds or thinking about that.
In terms of collaboration opportunities you keyed on two of them I think we continue to explore opportunities where we can co sell.
We have multiple pilots running where our footprint overlap.
A relatively small overlap as far as U S. Cellular's overall footprint, but where we do we continue to see if there's opportunities for us to market and sell and serve Tds is.
Wireline products, particularly fiber.
You keyed on deed.
I think that could be a really interesting opportunity but.
But we have to wait and see how the states are going to define the bid parameters and let me just explain what I mean.
It's not clear to me if states are going to create a.
Our set geography, and then put that so let's call. It one quarter at a state or a 10th of a state or a county and Theyre going to say.
Please bid on this geography, and what it would cost to connect all the homes in that geography, and underserved with whatever the best technology is that you have.
That's the way states choose to approach it.
I think fiber companies of any sort, including Tds are going to have to partner with wireless players because there is almost certainly going to be homes in that geography, but it's not cost effective and it's not kind of effective to connect with fiber <unk>.
Beautiful thing about this is obviously, we already have an existing solid partnership and solid connections with Tds. So we think we'll be particularly well positioned.
To bid for those areas, where states choose that approach, but it is a different approach they could take.
The second approach they could take us instead, they could they could define a geography and they can say okay.
<unk> fiber players.
<unk> bid for whichever connections whichever homes, you think you can connect in this area with fiber.
And then they could come back with a second round and say, okay, whether it's wireless players fixed wireless swift.
I don't think satellites, particularly going to play very well, but they might try to.
Can you know.
What would it take for you to cover the rest of those homes.
And that situation wouldn't see as much opportunity to bid jointly.
I personally think based on my conversations with state officials are going to be leaning more towards the former approach.
Would lead for some really good collaboration opportunities, but it's a little bit early to tell we're still only seeing the first the first state plan start to trickle out we're going to have to see more before we can really define the full potential of what that partnership might look like.
I'll, let Michele talk whatever she'd like to about the <unk> options at our telecom.
Yeah. Thanks, Thanks LTE.
Yes, so far and D&O.
Our currently making great progress on getting an <unk> product launched for Tds Telecom, it's going to be called Tds mobile or in the final stages of contract negotiations and integrations with our partners.
And TTC member and so we have chosen to participate in the <unk> CTC <unk> program and sign up with the partners that they have selected to support that program. However, we will also be working with U S. Cellular.
As we've mentioned in the past U S. Cellular does overlap with Tds telecoms footprint and about 40% of our geographies could be served by U S cellular and where that overlap happens, we do expect <unk> to be our partner to offer Tds mobile where that does not overlap than we will.
Have to leverage a different wireless carrier and that's that's the partner that Ntt's. He has chosen so we're very excited about this new Tds mobile product, we're getting very close and we expect to have it launched here within in the next few months.
Got it thank you.
Okay.
Thank you Ms Thompson, and I will turn things back to you for any closing comments at this time. Okay. Thanks, everyone for your time today and have a good weekend.
Thank you Ms Thompson, ladies and gentlemen, it does conclude the Tds and U S. Cellular third quarter 2023 operating results call, we'd like to thank you all so much for joining us and wish you all a great day Goodbye.
Please wait the conference will begin shortly.
Okay.
Thank you.
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