Array Digital Infrastructure Inc (AD) Q3 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the TDS and U.S. Cellular third quarter operations results conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Jane McCahon, Senior Vice President, Corporate Relations of TDS. Thank you. Ms. McCahon, you may begin.

Thank you, Tim. Good morning, and thanks for joining us in the home of the world champion, Chicago Cubs. I 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 section of the TDS and U.S. Cellular websites. With me today and offering prepared comments are, from U.S. Cellular, Ken Meyers, President and Chief Executive Officer; and Steve Campbell, Executive Vice President and Chief Financial Officer; and from TDS Telecom, Vicki Villacrez, Vice President, 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. As a reminder, we provide guidance for both operating cash flow and adjusted EBITDA. For TDS Telecom, these are basically the same number. For U.S. Cellular, however, the adjusted EBITDA measure includes imputed interest income from EIP and the significant contributions from our partnership, which we want to continue to highlight for investors. 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 in our SEC filings. As mentioned on our previous calls, U.S. Cellular filed a short form application for the ongoing forward auction for the 600 megahertz spectrum, known as Auction 1002. As the anti-collusion rules are still in effect, we are prohibited from speaking about it further and will not entertain any questions related to spectrum or the auction. Shortly after we released our earnings and before the call, TDS and U.S. Cellular filed their SEC Forms 8-K, including today's press releases, and Form 10-Qs. TDS will be hosting one-on-ones at the RBC Conference in New York on November 9 and presenting at the Wells Fargo Conference in New York on November 10 and presenting at the IDEAS Conference in Dallas on November 16. Also, keep in mind that TDS has an open-door policy. So if you are in the Chicago area and would like to meet members of management, the Investor Relations team will try to accommodate you, calendars permitting. And now I'd like to turn the call over to Ken Meyers.

Good morning. I'll start on Slide 4. And overall, we had a pretty good quarter. We saw record growth and strength in the prepaid product line and generated better operating profitability. I'd like to say upfront that our whole organization really pulled together to work around a couple of unexpected challenges, and in spite of these as well as the extremely competitive market, we continue to expect to deliver on the guidance we provided at the beginning of the year. Let's start discussion with customer results. We saw a sizable shift with postpaid adds declining but a huge pickup in our prepaid business, combining to generate 61,000 retail net adds. On the postpaid side, we saw unprecedented disruption in our new smartphone availability with the recall and eventual termination of the Note 7, and even though we had strong preorders for the new iPhone, we had significant supply constraints during the launch. All of this contributed to a net loss of 6,000 postpaid users. Churn remained low at 1.34% in the quarter compared to 1.41% a year ago. And breaking it down further, postpaid handset and connected device churn, which was 1.22% and 2.04%, also showed significant improvement from a year ago. Our customers' overall satisfaction is largely influenced by our network strategy. We were very pleased to be added back into the consideration side by J.D. Power for the network quality award in the North Central region and very proud to once again be at the top of that list. We are excited to receive this third-party validation of our network strength. Staying with the network theme for a second. 99% of our postpaid connections are now covered by our 4G LTE network, and that network is now carrying about 90% of all of our data traffic. Additionally, our customers are now receiving even better data experiences as they travel as a result of the multiple 4G roaming agreements that are now in place. Importantly, for reasons I'll discuss in a minute, our network team is on track to launch our first commercial deployment of VoLTE or Voice over LTE early next year. And finally, thinking further down the line, we recently had our first successful test of 5G technologies for fixed wireless applications. I think it's important to reiterate what I said last quarter about the inflection point we have reached with our roaming arrangements. This year is one of significant transition as we move from 3G CDMA agreement to 4G LTE agreement that significantly lower the price per gigabit, both from a revenue and an expense point of view. Our engineering group has implemented technology that allows for data roaming on one network with a fallback to another carrier for voice services. This has enabled us to provide data roaming with more than just CDMA-based carriers and allows us to better manage the quality and the cost of our customers' roaming experiences. And as we look forward to our deployment of Voice over LTE, we will be able to offer our roaming services to all carriers, effectively doubling the addressable market for roaming revenues over the next several years. We continue to see good progress in our increased -- from our increased focus on small- and medium-sized businesses and regional government entities. Handset gross additions from this segment continues to grow. And our M2M sales, while still small, are really starting to gain momentum. The team has seen success not just selling smartphones but bringing these local businesses and municipalities mobility and connected solutions that help make them more effective and more efficient. As I mentioned, one area that really stood out this quarter was the growth in prepaid. We saw record levels of both gross adds and net adds, and this replicates significant growth we've seen by other carriers in their prepaid product lines recently. Underneath these results, I believe, are both industry-wide and company-specific trends. Starting at the macro level, a few trends that are growing the overall prepaid market are, a, the increase in the value of these plans. Prepaid plans are now full-feature offerings, allowing consumers to buy or pay in a different manner. This trend fits with research that shows budget-conscious millennials preferring this pay-as-you-go approach, and the widespread adoption of EIP pricing pushes consumers looking for less-expensive phone options to prepaid products. I believe all these factors are stimulating growth in this segment of the market. This quarter, we successfully tapped into these trends by increasing our advertising committed to this product line and by working with one of our handset partners to be able to offer a very good smartphone at a very attractive price. Just how far or how long this trend will run is uncertain right now. Interestingly, we've been asked, is this just postpaid customers moving to prepaid? It might be at the macro level, but at least over the last few quarters, it has not been U.S. cellular postpaid customers moving to prepaid. Every quarter, we see some small amount of migration in our base from prepaid to postpaid and some moving from postpaid to prepaid. But overall, the level of switching between products remains small. Let's spend a few minutes on revenue trends. Overall, total revenue growth is just about where we thought it would be. Service revenues are down due to multiple forces, some of which are accounting or income statement geography-related, some of which are much more real. First, there's the impact of EIP adoptions, which have the effect of moving service revenue to equipment revenue line, and then there's also the ongoing competitive pricing environment. These 2 factors more than offset the positive impacts of smartphone adoption, now 78% of postpaid handset base, and the growth in prepaid and connected devices. With an EIP sales mix of 79% in the quarter, our EIP penetration continues to grow rapidly, now at 40% as compared to just 23% a year ago. Effective in September, new postpaid handset sales to retail customers are only made under EIP plans. Also, when looking at revenue comparisons, remember that last year, we recognized $58 million related to the termination of our rewards point program. Our upgrade rate for the quarter was 9%, in line with our expectations. And as I discussed last quarter, we don't look at upgrade rates the same way we did in a subsidized handset world given the significantly lower cost associated with upgrades in an EIP transaction. I now look at renewal rates as another measure of customer satisfaction and their willingness to renew with the company. In the terms of the financials, I think you've heard me say that we won't chase growth at any cost. We were disciplined in the quarter. We did offer a free iPhone 7, and the prepaid offerings are all expected to drive incremental profitability. As a result of the lower postpaid growth, we instead delivered more profitability. Given a couple of discrete events that impact our profitability metrics, both this quarter and the same quarter a year ago, I will let Steve walk you through it, but the bottom line is I like where profitability ended for the quarter. Heading into the all-important holiday season, we feel like we have a solid game plan in place and a talented, motivated team to make sure it is a successful selling season. And now I'll turn the call over to Steve.

Thank you, Ken, and good morning, everyone. I'll begin with a few additional comments on customer results, which are shown on Slide 5 of the presentation. As Ken already mentioned, we had 61,000 retail net additions for the third quarter of 2016, up from 29,000 retail net additions a year ago. That growth reflected very strong results in the prepaid segment. Prepaid net adds for the quarter were 67,000 compared to only 12,000 a year ago, with improvements in both gross adds and churn. As Ken said, we've seen only a very small amount of migration in our base from postpaid to prepaid. Rather, the drivers for the increase this past quarter included our strong promotion and advertising, along with the macro trends that are stimulating prepaid growth, such as increased value in prepaid plans, budget-conscious consumers preferring a pay-as-you-go approach and the widespread adoption of equipment installment plans that is pushing some customers looking for a less-expensive phone to prepaid products. In the postpaid segment, we had a net loss of 6,000 customers. This was largely the result of lower gross additions, which decreased 13% year-over-year to 174,000 due to a combination of factors, including low churn across the industry, extremely aggressive promotional activity by other carriers and unforeseen device supply issues. In the device supply area, our ability to satisfy customers' desires for iconic smartphones was impeded by both the recall and eventual termination of the Samsung Note 7 and the supply constraints on the new iPhone at launch. Postpaid churn remained low this quarter at 1.34% compared to 1.41% a year ago. As shown at the bottom of the slide, there was a net loss of 27,000 postpaid handsets in the third quarter, which is pretty comparable to the net loss of 22,000 handsets in the prior year. Total smartphone connections actually increased by 29,000 primarily as a result of upgrades from feature phones. We're providing a bit more information about smartphones on the next slide. Smartphones represented 92% of total handsets sold this quarter, and smartphone penetration increased to 78% of our base of postpaid handset connections, up from 72% a year ago. We know that some of our smartphone additions this quarter were migration from feature phones, and given the current smartphone penetration level of 78%, we still have some opportunity to upgrade more of our remaining feature phone customers to smartphones, whether that's on postpaid or prepaid plans, and drive additional data usage revenues. The next slide in the presentation shows the longer-term trend in our postpaid churn rate, which remains low at 1.34% for the third quarter. We did see a small uptick in churn from last quarter's historic low point of 1.2%, but that's a typical seasonal occurrence. Now I'll talk about our financial results, starting with revenues. As we discuss revenues and the year-to-year comparisons, I want to quickly remind everyone that service revenues for the third quarter of 2015 included $58 million related to the termination of our rewards program. This slide provides comparisons both excluding and including that revenue. In my comments on revenue, when referring to the 2015 results, I will be excluding the impact of the rewards program termination. Total operating revenues for the third quarter were $1,010,000,000, essentially the same as last year's $1,011,000,000. I'd also like to point out that total operating revenues increased sequentially again this quarter as they did last quarter. Service revenues were $771 million, down $67 million from $838 million last year. The largest component of service revenues, retail service at $681 million, decreased by 8%, driven by lower average revenue per user. This decrease in ARPU was partially offset by the impact of growth in our customer base. I'll come back and say more about ARPU in a minute. The other item contributing to the reduction in service revenues was lower roaming revenues, which declined by $14 million primarily due to lower rates for data usage. But keep in mind that we benefit from the lower rates on our outbound roaming traffic. For the third quarter of 2016, the benefit to outbound roaming expense due to lower data usage rates was greater than the rate-related reduction in revenue. Equipment sales revenue grew 38% to $239 million, driven by higher equipment installment plan sales. The percentage of postpaid device sales on installment plans increased to 79% in the third quarter of 2016 compared to 44% a year ago. We expect that the installment plan take rate will continue to increase over the course of the year as the majority of our retail device sales are now being done on installment plans. Next, I want to go back and say a few words about our postpaid average revenue metrics. Excluding the impact of the rewards program termination, postpaid ARPU was $47.08, down 12% year-over-year. The biggest factor in this decline is the continued migration to unsubsidized equipment pricing. Other factors include overall industry price competition and the growth in connected devices, which have lower average revenue. Since the ARPU metric excludes equipment installment plan billings to customers, another metric which includes those billings, average billings per user, may provide a better representation of the total amount of revenue being collected from customers every month. Reported this way, average revenue per user shows a decrease of 4% year-over-year, mostly reflecting competitive pricing pressure and dilution from connected devices. Average revenue per account benefits from the increase in connections per account, which grew by 5%. For the third quarter, average revenue per account was down 8% after adjusting for the impact of the rewards program termination. But when equipment installment plan billings are included, average billings per account actually increased 1% year-over-year. We expect that there will be continuing downward pressure on service revenues but that equipment sales revenues will continue to grow as more of the customer base moves to unsubsidized equipment pricing. Moving to Slide 10, which shows total operating revenues and cash expenses as reported in our statement of operations, together with operating cash flow and adjusted EBITDA. Operating cash flow for the third quarter of 2016 was $164 million compared to $208 million a year ago. The decrease is the net effect of 6% lower revenues, offset by 2% lower expenses overall, with reductions across all major expense categories. Adjusted EBITDA, shown next, incorporates the earnings from our equity method partnerships, along with interest and dividend income. Adjusted EBITDA for the third quarter was $216 million compared to $257 million a year ago. Earnings from unconsolidated entities were $38 million, including $17 million from the LA Partnership. Interest and dividend income totaled $14 million, consisting largely of imputed interest income on equipment installment plans. Before discussing our guidance for the full year, I want to provide some additional insight into our comparative operating results. The next slide shows our total operating revenues, operating cash flow and adjusted EBITDA for the third quarter as they are reported in the statement of operations. These are the numbers that I just reviewed with you. However, when analyzing the results for the quarter, you should note the impacts of 2 discrete items. In the 2016 period, operating cash flow and adjusted EBITDA were reduced by a charge of $13 million related to the termination of a naming rights agreement. In the 2015 period, total operating revenues, operating cash flow and adjusted EBITDA were increased by $58 million related to termination of the rewards program. The numbers at the bottom of the chart exclude the impacts of these 2 discrete items. As you can see, the exclusion of these items presents quite a different picture with respect to the year-to-year comparisons. Total operating revenues were essentially the same, whereas operating cash flow and adjusted EBITDA increased by 18% and 15%, respectively. Next, I want to cover our annual guidance for 2016, which is shown on Slide 12. For comparison, we're showing our 2015 results both as reported and excluding the impact of the termination of the rewards program. Our guidance for the year is unchanged from that provided initially in February and confirmed in May and August. The year is playing out as expected, with current estimates of results still within the published ranges, therefore, there's no change. I'll briefly review our estimates. For total operating revenues, we expect a range of approximately $3.9 billion to $4.1 billion. For operating cash flow, we expect a range of $525 million to $650 million. That estimate flows through to the estimated range for adjusted EBITDA, which is $725 million to $850 million. Capital expenditures are expected to be about $500 million. With quite a few projects still in progress as we approach year-end, there's some uncertainty around this number. However, I believe it's unlikely that our total expenditures for the full year will exceed $500 million. Finally, I want to make just a couple of comments about U.S. Cellular's cash flows and liquidity. Cash flows from operating activities for the 9 months of 2016 were $415 million, while cash flows used for investing and financing activities totaled $456 million, resulting in a net decrease in cash and equivalents of $41 million. As of September 30, cash and equivalents totaled $674 million. In addition to these existing balances, U.S. Cellular has $284 million of unused borrowing capacity under its revolving credit facility. We believe that these resources are sufficient to meet our operating, investment and debt service requirements for the remainder of this year. Now I'll turn the call over to Vicki Villacrez to discuss TDS Telecom's results.

Okay. Thank you, Steve, and good morning, everyone. Our overall results for the third quarter were mixed. With total operating revenues down 4%, certain strategic areas showed solid growth. First, wireline revenues were nearly even with last year, with residential revenues increasing 4%. Second, cable revenues grew 5% over last year, reflecting another quarter of strong broadband subscriber growth of 14% year-over-year. We also had positive residential video net additions in the quarter, which has been on an improving trend this year. And third, HMS revenues were down mainly on lower equipment sales compared to a strong third quarter last year. Cash expenses decreased, although not as much as total revenues, as a result, adjusted EBITDA on a consolidated basis was down 7% to $71 million for the quarter. However, capital spending was also down by $16 million in the quarter as we have substantially completed our fiber builds this year and completed data center builds in 2015. As a result, free cash flow improved in the quarter. With 1 quarter left in the year, we are tracking against our expectations. We have maintained our focus on those strategic priorities that we shared with you in February, which will be highlighted again in the upcoming slides. Beginning with wireline on Slide 15. Investments on our network in efforts to make higher speed options available to customers continue to drive growth in IPTV connections. We completed our planned IPTV market rollouts this year but continued to build out service in those 28 markets, now enabling 183,400 service addresses. Our planned fiber builds are almost complete and will reach approximately 22% of our ILEC service addresses. When combined with copper service, our IPTV-enabled markets will cover approximately 25% of our ILEC service addresses. We have been focusing on further driving IPTV and high-speed broadband bundles in these markets. To further strengthen our broadband offerings, we are deploying bonding technology up to approximately 20% of our ILEC service addresses to drive higher speeds in our middle-tier ILEC copper markets. In our remaining markets, generally those with no cable competition, we are evaluating how the FCC's modified universal service funding mechanism will further support broadband build-outs. On that point, recall that the FCC announced a modified USF mechanism that is providing rate of return carriers with 2 paths to receive support funds to extend broadband services to both unserved and underserved areas. The 2 paths are an Alternative Connect America Cost Model, commonly known as A-CAM, or a revised USF mechanism to stay on rate of return. In August, we received an offer from the FCC of the amount of support that would be received if A-CAM path was selected. The offer was for $82.3 million of support revenue annually for 10 years. That's replacing approximately $50 million of declining annual support that we receive today. Unlike the current programs, this support comes with an obligation to build defined broadband speeds to reach approximately 160,000 homes. This will result in capital spending over the 10-year period that could be significant. In October, we notified the FCC of our decision to elect A-CAM support and the associated obligations for all of our states. Whether our notification will be accepted or not was dependent on the number of carriers opting into the model and whether the support funds would be sufficient to meet that demand. On November 2, the FCC released a notice indicating that more rate of return carriers elected the A-CAM model than expected, which would require an additional $160 million annually to meet demand. The FCC has requested parties to file recommendations on measures they should consider to address the budget shortfall, and those comments are due by November 14. We intend to stay actively engaged with the FCC to advocate for measures that are in our best interest. For example, making sure that there continues to be a link between the level of support and the obligations. Should the FCC revise its offer to us, as we now expect, we will have another 30 days to respond. Depending how the FCC addresses the budget shortfall, we are hopeful the program will still be effective January 1, 2017. We'll update you regarding the final outcome of the A-CAM offer, and if known, we'll incorporate the expected 2017 revenue and capital impact in our guidance that will be shared with you in February. Given the timing, we do not expect a significant impact to our 2016 capital spending. Now back to Slide 15. Looking at the metrics on the bottom of the slide, you can see IPTV connections grew 44%, adding 13,300 compared to the prior year, and we added 3,000 broadband connections after considering the impact of divestitures. We are offering a variety of speeds up to 1 gig service in all IPTV markets. The uptake in IPTV has grown steadily and is now at an average penetration rate of 30% of residential service addresses. It is important to remember 97% of our IPTV customers subscribe to a triple-play bundle, which results in a low churn rate and continues to increase average revenue per connection, now up 3% to $44.25 in the quarter. Reflecting both our fiber and bonded copper deployments, residential broadband customers in these ILEC markets are continuing to choose higher speeds, with 52% choosing speeds of 10 megabits or greater and 21% choosing speeds of 25 megabits or greater, which also contribute to the higher ARPUs we have experienced. Looking at Slide 16. Wireline results were strong even with the 2015 ILEC divestitures, which reduced revenues and expenses about 1%. As reported, residential revenues increased 4% as growth in IPTV and broadband more than offset the decline in legacy voice services. The year-over-year decrease in ILEC residential voice connection was only 2% after considering the impact from divestitures. Commercial revenues decreased 4%. However, we are seeing managedIP connections continue to increase. Wholesale revenues, which include regulatory support, decreased 2% in the quarter, as expected. Total wireline service revenues held nearly even with the prior year at $174 million. Wireline cash expenses increased 3% as increases in employee-related expenses and IPTV programming costs outpaced the reduced cost of provisioning legacy services. As a result, wireline adjusted EBITDA decreased 6%. As we stated in our strategy, we plan for capital intensity to decline this year as we completed out our fiber build-out. In the quarter, capital spending declined $11 million, which resulted in a higher free cash flow compared to prior year. Moving to the cable segment. Slide 17 shows cable connections grew 14,100 or 5% to 291,000. On the residential side, connections increased, driven by a 14% growth in broadband and a 13% growth in voice. The residential broadband connection growth drove a 400 basis point increase in broadband penetration. Total commercial connections declined due to a dropoff in video, however, broadband grew 11%. One strategic project we shared with your earlier in the year was analog reclamation. We have substantially completed this work. This initiative transitions our analog cable markets to an all-digital video service, and the main benefits are improved customer experience and reclaimed spectrum to provide higher broadband speeds in our markets. We offer up to 300 megabit speeds in our largest markets, and we'll expand to cover approximately half of our cable service addresses by year-end. On Slide 18, total cable revenues of $46 million reflect an increase of 5%. This was primarily driven by a 6% increase in residential revenues from connections growth, offset by continued promotional offerings. Our investments in the cable network and products and services, coupled with our re-branding efforts, are generating this revenue growth. Cash expenses increased 7% due to higher employee expenses associated with the analog reclamation, network maintenance and video programming costs. As a result, cable adjusted EBITDA was flat. Turning to the HMS segment and speaking to both Slides 19 and 20. HMS had a soft quarter primarily due to the timing of low-margin equipment sales. In total, HMS revenues decreased 17% in the quarter. This was driven by a 25% decline in equipment revenue year-over-year. Service revenues also decreased 5% from fewer professional services, which primarily track with equipment sales. Hosting revenues were flat in the quarter as higher customer churn and compression offset revenue growth. Cash expenses were down 15% compared to the same period in the prior year primarily due to the lower cost of goods sold. Other expenses were also down due to cost-containment efforts. Adjusted EBITDA of $3 million was down in the quarter. However, on a year-to-date basis, adjusted EBITDA was up 31% compared to the year-to-date period last year. Okay. Turning to 2016 guidance on Slide 21. We've provided our guidance, which is unchanged from the guidance we shared in February as we anticipate the remainder of the year to be in line with our initial expectations. Again, we do not expect A-CAM to impact 2016 capital spending. We'll incorporate any [indiscernible] revenue and capital impact from A-CAM adoption into our 2017 guidance, which will be shared with you in February. Now I'll turn the call back over to Jane.

Thanks, Vicki. And Tim, we're ready to take questions.

[Operator Instructions] Our first question comes from the line of Ric Prentiss of Raymond James.

Slide 11, I think, is one of the more interesting slides in the deck. I want to make sure I understand everything correctly on that. The termination of the naming rights, $13 million payment seems like a onetime payment. Can you help us understand, one, will you save money now on an ongoing basis because you've terminated that agreement?

Sure. The way you said that, is there another part to that question, Ric?

There will be. There's no one-part questions from me.

It sounded like you said one. I was waiting for two. That's all. Two things. So let's talk about just [indiscernible], that $13 million is primarily, what I think at least, a noncash charge. I can't use that term. But what it represents is that the original deal that we structured with the Sox had us paying cash over a period of term that supported some of their financing. It turned out, when we got done with the deal, they had like a 3-year period. That was the difference between the original term of our deal and their lease on the stadium. And so knowing that you aren't going to find somebody for 3 years, they just added that 3 years to our term. What that meant is that we wound up having to take the payments that we've made and amortize them over a longer period of time. So a little bit of cash that was paid 10 years ago, 9 years ago, 8 years ago was sitting on the balance sheet that would reverse out in the final years of our deal. So that's what got written off now, okay? Going forward, that deal wasn't very big. It was under 2% of our total advertising PR budget. And well, there may be some savings. Primarily, we're going to see that redeployed into our local market activity. Instead of Chicago-based activity, we'll be doing things in Milwaukee and in Iowa and in Nebraska.

Makes sense. Too bad it was Comiskey instead of Wrigley.

We won't want to give it up then.

Right. So just to make sure that it's clear then, so this item is really nonrecurring. So Slide 11 that shows your operating cash flow, U.S. Cellular for the quarter really was $177 million. That's what we should be using maybe versus our estimates and consensus estimates to compare.

Yes, I think that's correct, Ric.

Okay. And was this anticipated in your guidance, the $13 million payment?

Well, it wasn't anticipated in the guidance when we established it in the very beginning of the year. It is considered in the reaffirmation of guidance for this quarter.

Right. I guess just thinking through it, if we think of guidance, this is something that most of us probably will not include in our analysis of your results, so if your guidance includes this item, we can use that in our Math. Okay. When we think of your guidance, I told you it's multi-parts, we're now 3 quarters through the year. It looks like the high end, the low end of your guidance would suggest fourth quarter would fall somewhere between $37 million or $162 million for OCS. That's a pretty wide range. What would cause you to go towards the low end of that range versus the midpoint or high end of that range?

Two things, Ric. Let's start with the annual guidance, okay? And we put out annual guidance back in February. Things haven't changed significantly, and so we're staying with the annual guidance as opposed to getting into the boxes, in effect, giving fourth quarter guidance when you start to narrow things down a lot after 3 quarters. But having said that, the dynamics in the industry are unchanged, and that is big swings in promotional activity. One layer or another that drive either a lot of volume or don't drive volume or what's going to cause that difference. There's not big changes around the roaming side. Earlier this year, we had concern about current year impact from the support mechanisms out of D.C. Those haven't materialized, so it's all good, revolve around promotional and sales activity in the fourth quarter.

Okay. So it makes sense. So we should -- most of us will probably exclude the termination of rights. Most of us will think guidance includes it, so you could say don't include it if you want to, and the guidance range is mostly just how competition played out in the quarter. Okay. The second question is -- I get it, the disruption in the supply chain with the iPhone constraints, the Samsung Note 7. Can you help us quantify, with gross adds being down 13% year-over-year, how much was this device disruption impactful in the quarter, do you think? As we look forward to thinking about what fourth quarter could be looking like seasonality in '17, how much of the anomaly in third quarter is related to these device issues?

Gosh, Ric, we've asked that question, looked at it 3 different ways, and I don't have a good way to tell you what didn't happen, okay? However, a bigger question I'm looking at is, is it -- how much of the shift is really just a change in how people are buying now? And we keep calling this prepaid, but in fact, if you go back to the early days, prepaid was a port to a segment of the consumer population that people didn't necessarily want, right? It was higher-priced, in effect, less full-featured. And what you're seeing now is it's not so much to the old prepaid as much as it is a full-service offering that has all the features of a postpaid product but packaged differently. And I believe we're seeing -- just like we talked about upgrade rates not being that important, it's an old metric that doesn't really show where the business is going. I'm starting to question how the change between products, as between postpaid and prepaid, how much of it is, again, old language that we're using versus real changes in the business.

Okay. But you do feel the disruption of the supply chain had an impact on your gross adds. If you were to, say, throw gross adds prepaid and postpaid together, there was an impact, and it was worth calling out.

It absolutely was because we had orders that we couldn't fill. We had stores that didn't have one of the iconic devices that was being advertised. And by the way, we had stores that were busy taking care of customers that had problems with phones as opposed to customers that could have been buying. So it definitely had an impact. I just can't measure it.

Our next question comes from the line of Simon Flannery of Morgan Stanley.

It's Spencer for Simon. I want to follow up on prepaid. Obviously, a very strong quarter. You mentioned you're adjusting your marketing strategy based on the trends you're seeing. Just to clarify, are you going to spend more in prepaid? Or is it really shifting marketing dollars from postpaid to prepaid given the relative success you're having there? And then lastly, we've seen a slowdown from Verizon and Sprint in prepaid. How much of your success do you think is from less competitive behavior from your peers?

So let's start with -- it's a shift within our marketing allocation. It's not putting more dollars on top of our marketing programs, number one. Number two, yes, we've seen a slowdown recently. But you were talking about the months here of July, August and September, and I'd suggest that the market was very competitive during the third quarter. So I don't know that it's a reaction to somebody else changing because we were -- that product line was hot for us during all 3 months of the quarter.

Okay. So probably spending a little bit less on postpaid then, but the overall marketing budget stays the same.

Yes.

Our next question comes from the line of Sergey Dluzhevskiy of Gabelli and Company.

A couple of questions for Ken on the wireless front. So first question, I understand your comment about postpaid versus prepaid changes in the business. But I mean, just looking at, I guess, fourth quarter and looking into 2017, what are the steps that you're taking to improve postpaid gross adds and particularly, postpaid handset gross additions? And the second question is your large wireless competitors are getting bigger and more diversified. Obviously, we saw AT&T buying Time Warner. Verizon is buying Yahoo!. They're focusing on millennials-oriented content, OGT [ph]. So what are your thoughts on kind of mobile-centric video offerings and impact on competitive environment in your markets? And what are some of the things that U.S. Cellular is doing on that front?

So Sergey, let's start with add, and let's kind of peel it back and go one step deeper, right, adds are one way of driving revenue, and it's all about how do we drive revenue. And as we look at that, there are a lot of different initiatives underway that include continuing to get new line sign-up. And I'm going to say line sign-up, so I get away from this prepaid, postpaid thing because I really think we're seeing a different type of shift going on right here. So if I can drive the economics out of full-featured prepaid lines to get them to a point where they're the same is what we get on a postpaid, the difference becomes meaningless. So we are going to continue to drive add growth. And one of the tools that is really continuing to strengthen for us is the work I've talked about before that we're doing in the business and government sector. We see that as market development type of work, where we're selling solutions into these organizations and getting our network strength better understood. I'm really happy, like I said, about us being back in the J.D. Power consideration set. Just because of the size of our operation when we got rid of Chicago, we dropped off the radar screen for the last couple of years, and so we weren't able to compete for it. This year, we were back in the consideration set. We won it again, okay, which fits to the strength of our networks, which is, at the end of the day, still the most important thing in the midsize and rural markets that we sell. So getting that message out there, getting people to understand it, which is what we do with the business-to-business channel, that helps us in the retail channel no matter which product we're selling. Similarly, we've rolled out other products this last quarter that will drive different revenue streams, one of which was a new insurance product that actually brought with it some different support for the iPhone that heretofore weren't in any of the programs. And that has a higher revenue attached to it and a nice improvement in margin. We continue to use our stores to sell more accessories to the point where our accessory margins start to cover some of the fixed cost of our distribution system. So a lot of different things working on revenue. I didn't even talk about all the work we've been doing on the roaming side that does position us for VoLTE roaming and being able to serve more carriers. On the consolidation -- not consolidation, the expansion of the business, a question that we keep looking at, right, and that's the economics around content. And I said this a year ago, but I don't understand how exclusive content really works from an economic standpoint, that my content is so valuable, I want to sell it to as many customers as possible, not just the 25% of the market that I might serve. And as we explore this deeper, there's actually FCC rules that get in the way of really capitalizing on exclusive content. So I'm still unconvinced around the economics of owning content. I think we have to make sure that it's accessible to us. We have to make sure that we've got a network that can deliver a very strong video experience for the customer, that the customer could get access to it wherever they're at. But I'm not convinced of the economics around it. And we'll continue to monitor it. We'll continue to drive the network experience for the customers, have a great experience where they're at, but I'm not ready to jump on that ship yet.

Okay, great. And a couple of questions on the wireline side for Vicki. So one, on A-CAM. So obviously, you had the initial offer of $82 million, and as you mentioned, the program got oversubscribed by about $160 million per year. I guess what are your expectations as far as how this oversubscription will be handled maybe given its relative size to the overall size of rate of return funds available to ILECs? And if you have any expectations, how different could the final offer be when you -- after, obviously, the FCC processes all those comments? I guess what looks realistic to you? And my second question is on the cable side, on the competitive environment. If you could share your -- just thoughts and view for competitive environment in your cable markets. And what are your thoughts on how it could evolve, I guess, over the next few years?

Sure. Thank you, Sergey. As I have said in my comments, with the revised offer and the oversubscription, right now, the timing -- from a timing perspective, we have comments -- the FCC is looking for comments by November 14. I know that another -- a number of comments have already been received. I just don't know yet and I don't know by how much. I think it will likely mean that the offer will be something less, but we just really don't know right now. And we're going to have to wait and see as the FCC revises its offer. We are hopeful that we're still going to have a decision and a program in place by January 1. In terms of expectations, how will they handle it? I think that will depend on a number of factors, and I just can't comment on those right now. I will say, though, that I do expect that revised offer will come with less location build-out obligation as well if it is revised downward. With respect to the cable competitive environment, we were really pleased with the growth that we saw in the third quarter, and that's really been about our investments that we've been making in our products and services. And we've been seeing a significant shift of moving our customer base from lower broadband speeds to higher broadband speeds, and I think that's really driving our success. The competitive environment, we've seen the telco primarily upgrading its copper networks with bonded copper capabilities, which is up to a 60 megabit product. And as you know, we have 100 megabit speeds, broadband speeds across our cable markets, and by the end of the year, we expect to be up to 300. Analog reclamation has been a key initiative this year that we are substantially completing here as we speak, and that is providing a much better viewing experience for our customers. And so I think as you had -- as I said, we had positive net adds for the first time in this quarter in our video net adds, and that is reversing a declining trend.

Our final question comes from the line of Barry Sine of Drexel Hamilton.

I wanted to go back to some of the trends around the postpaid subscriber gross adds. So first of all, on the iPhone, on the one hand, you talked about record numbers of preorders. But obviously, there are supply constraints. So as I think about the fourth quarter, that implies you've got some pent-up demand that may benefit you there. And then on the Samsung issues, on the call, you talked about the distraction of having customers coming into the store with flaming Galaxy Note 7s. Presumably, that's over. They're not bringing them anymore, so you can focus back on sales. And then also, I'm wondering, how tarnished are you seeing the Samsung brand? And if customers are bringing in a Note 7, are they opting for an iPhone, for another brand? And is that brand damage likely to have an impact on U.S. Cellular's postpaid gross adds in the fourth quarter?

Barry, so we're going to -- I'm going to let Jay answer some of those questions. But needless to say, the hyperbole is a little bit misplaced. There weren't any flaming anything involved with our customer base. And the Samsung brand is strong, has been strong and remains strong. There's clearly a little bit of shifting that happens when someone has got a phone that they want right now, and you don't have something in the inventory. But I don't think there's been any major shifts one way or another.

Barry, Jay Ellison here. So on the supply question, we're in really -- we really are in fairly good shape going into Q4 and into the holiday season, maybe with the exception, I think, everybody is still seeing this on the higher memory configuration of the phones themselves and some of the color. But otherwise, I'd say except for the comment relative to the launch, where we really did see some significant constraint, we're getting in pretty good shape there. I think Ken's right also on the brand image in the field. Customers are showing extreme -- they get very comfortable with certain brands, and they stick with it even with what's going on. And even surprisingly, as much as it's been out there, there is still some people that are even unaware of this issue in some of the marketplace out there. And finally, I think Ken also alluded to it, we really did not see much of a brand shift from Samsung to any one of our other products that we carry, really, in all of our stores. And I've just spent several days out in the markets and asked those very specific questions, and my comments reflect what's going on in the stores themselves.

Okay. And then the kind of the shift in popularity of prepaid versus postpaid, if I look at your offers out there, you've got a very attractive offer on postpaid, 7 gigabit, $49 a month. On prepaid, it's $45 for 2 gigabit, although you've got a very attractive price point, as you mentioned, I think it's on a Motorola phone. So are those the trends that you're talking about? Because pricing-wise, it's still pretty different as I look at your promos.

It's different, but then you got to add in the equipment cost on the postpaid phone, right? And it's a different phone, but it's a different overall package for the customer by the time they're done because you only wind up with an equipment financing plan on the postpaid. So there's still a little difference, but the economics are much, in total, are much more aligned than they've ever been.

Okay. On VoLTE, you guys have talked about VoLTE quite a bit, and you're really moving ahead now. So what does VoLTE do for United States Cellular? Do you need the capacity that it frees up? Does it offer better voice? What are the benefits to the company and to the customer?

Okay. Well, at the end of the -- Mike, do you want to lean in here and talk about -- Mike here is our CTO.

The main benefits we expect VoLTE to deliver to our customers is higher-quality voice. It has a feature called high-definition voice that would be immediately available to our customers. It also allows for simultaneous voice and data features on the device. And then lastly, we would be able to roll out a presence capability that allows customers to know where they're at, and video.

Video calling is another one of those customer benefits that comes with it. On the other side, it also eventually frees up capacity because you aren't using CDMA radio channels anymore. And from an industry level, it allows us to serve any other carrier that's also using VoLTE from a roaming standpoint.

Okay. My last question is -- first of all, congratulations on, again, winning the J.D. Power award. Question about that and what that means. In the past, a lot of carriers use Net Promoter Score instead or in addition to that. And one of the critiques of J.D. Power has been it may not measure actual customer satisfaction. So do you look at other measures? Do you look at Net Promoter Score? And I don't know if you'd be willing to reveal what your score actually is.

So we look at a lot of different metrics, okay? We, in fact, touch our customer base every month. We walk out of the store with a transaction. We're going to take a sample and see what you think about that store, what you think about your customer service interaction, what you think about the network. And so while there are multiple internal measures that we look at, what the J.D. Power award does is it gives us third-party, independent validation of where our network and how our network strategy plays. And that is critical because in today's world, advertising, everybody's shouting something, trying to shout louder, and consumers trust that J.D. Power imprimatur to say that we've looked at this, and this is the best there is. And so yes, it is gratifying, and it is an important part of our marketing strategy going forward, and it has been in the past.

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

Great. We'd like to thank everybody for joining us, and please follow up with additional questions. And we look forward to seeing folks as we travel about next week. Thanks.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.