Telephone and Data Systems, Inc. (TDS) Q2 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the TDS and U.S. Cellular Second Quarter Operating Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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 at TDS. Thank you, Ms. McCahon, please begin.

Thank you, Tim. Good morning everyone, and thank you for joining us. I want to make you all aware of the presentation we have prepared to accompany our comments this morning, which you'll find on the Investor Relations sections 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; 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 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 paragraph 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 upcoming forward [ph] auction for 600 megahertz spectrum known as Auction 1002. As the anti-collusion rules are now in effect, we are prohibited from speaking about it further, therefore we will not entertaining any other questions relating to spectrum of 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 their Form 10-Qs. Of note, in our 10-Qs we are now breaking out postpaid churn between handset and connected devices. TDS will be presenting at the Drexel Hamilton Conference in New York on September 7 and we're hosting analysts meetings at CTIA, in Las Vegas on September 8. And please keep in mind that we do have an open door policy. So if you're ever in the Chicago area and would like to meet with members of management, the IR team will try to accommodate you, calendar's permitting. Now, I'd like to turn the call over to Ken Meyers.

Good morning. I'll start with Slide 4. We're now halfway through the year and continuing to move forward. Our result reflects steady progress across multiple fronts. Smartphones and connected devices are growing, customer engagement continues to improve, the current network is performing well and our first voice over LTE build out is on track. Now let's go little deeper starting with customer growth, our top priority. We are moving forward but still not at the pace I'd like to see. That's probably not surprising given the low churn rates we've seen across the industry and overall consumer weakness. We are having continued success with connected devices primarily tablets. Both gross and net additions are increasing and postpaid connections per account. A share of wallet metric was up 6%. Net postpaid additions were more than twice than at last year at 36,000 once again driven by tablets and smartphones offset by the loss of feature phones. We continue to see good progress from our increased focus on small and medium-sized businesses in regional government entities. Handset growth adds for this segment continued to grow and our M10 [ph] sales are gaining momentum. As an organization, we're constantly measuring our customer satisfaction and adjusting our business practices and offerings to better meet their needs. Our survey showed this strategy is working is evidenced by our improving engagement scores in churn. I'm particularly encouraged by our continued improvement in postpaid churn 1.2% in the quarter, a record low for the company. As Jane mentioned in response to investor and analyst request, we've also begun to breakout postpaid handset and connected device churn, which at 1.10% and 1.84% also showed significant improvement from year ago. Our customers overall satisfaction is largely influenced by our network strategy. Last year, we completed our deployment of 4G LTE. It now reached 99% of our postpaid connections and today it's carrying almost 90% of all of our data traffic. Additionally, three 4G roaming agreements are in place, so our customers are now receiving better data experiences as they travel. Finally, so I said our network team is on track to launch our first commercial deployment of Voice over LTE early next year. I think it's important to note, the inflection point we've reached with our roaming agreements. This year, is one of significant transition as we move from 3G CDMA agreements to 4G LTE agreements to significantly lower the price per gigabit, both from revenue and expense point of view. Also our remarkably talented engineering group has lead the way in implementing technology that allows for data roaming and one network, with a fallback to another carrier for voice services. This will open up the door first provide data roaming to more than just CDMA based carriers and allows to better manage the quality of our customers roaming experiences. Spend a few moments 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 our income statement geography, some of which are more real. First and largest, we have the impacted EIP adoptions which have the effect of moving service revenue to the equipment line. Also we have the still early but developing trend at the customer keeping equipment longer or bringing equipment with them and finally the ongoing soft pricing environment industry. These three factors combined to more than offset the positive impacts on service revenue of smartphone adoption which was now 77% of the postpaid handset base and our growth in prepaid and connected devices. Within EIP take rate of 69% in the quarter, our EIP penetration continues to grow rapidly and now is at 37% as compared to 20% a year ago. Of note, I'd also highlight that we have steadily improved the number of connections per account resulting in a year-over-year increase in average billings per account. Steve will provide more detail on these trends in a moment. But first let me lean into or perhaps share a new or different ways to think about upgrade rates. Historically, a lot of attention has been paid to upgrade rates because in a subsidized handset business model every time a customer wanted to move or upgrade to a new handset, the carrier would lose hundreds of dollars on the transaction and the customer signed a new contract. This upgrade rate was a metric that explained part of the equipment purchased [ph] each quarter, lower the upgrade rates improve the P&L. Conversely, increase the upgrade rate and negatively impact the P&L. We saw this a few years back as we transitioned off of rewards points, as a way to build customers stickiness and move back to contracts and headquarters of upgrade rates and the teams of the obvious P&L hit. Not talked about or at least not talked about as much was a positive that came with us, which was more of a carrier's customer [ph] base was under contracts. In today's EIP driven business model, we've dramatically changed the economics of equipment transaction and now I look at this metric quite differently. With the P&L impact of upgrades dramatically reduced I look at renewal rates and the percent of base under contract as indicators of customer satisfaction and with 81% of our postpaid customer base under contract with us at the end of the quarter. I'm quite comfortable with where our renewal rate was this quarter, especially in light of all the anticipation it builds every time another iconic device launch approaches. Speaking of which, we will be ready to compete aggressively during the iPhone launch. We know there are still many non-U.S. Cellular customers out there that are still unaware that we carry Apple products. So we will be looking to increase that awareness and win their business. In summary, we've been making steady progress over the first half of the year and I expect to continue to move forward on our priorities during the second half. And now, let me turn the call over to Steve.

Thank you, Ken and good morning, everyone. I'll begin my comments with a few additional things to say about customer results shown on Slide 5 of the presentation. As Ken already mentioned, we grew connections during the second quarter with 36,000 postpaid net additions, a solid increase from 17,000 net additions a year ago. Growth was driven by positive results in both postpaid gross additions which increased 3% year-over-year to 197,000 and postpaid churn which improved again this quarter to 1.2% compared to 1.34% a year ago. Similar to the past few quarters the growth in postpaid net additions was driven by data centric devices like smartphones and connected devices, together they accounted for 57,000 net additions. In the prepaid category, we had 14,000 net additions, an increase from a year ago driven by the success of our new Simple Connect plans sold through our company and agent stores. As shown at the bottom of this slide, postpaid handset net additions were negative 13,000 an improvement from negative 19,000 in the prior year driven by reduced churn. However, although overall handset net additions were negative smartphone net additions were positive 8,000. Further when upgrades from feature phones are included total smartphone connections increased by 46,000 during the second quarter. We're providing more information about the smartphones on the next slide. Smartphones represented 91% of total handsets sold this quarter and smartphone penetration increased to 77% of our base of postpaid handset connections up from 69% a year ago. We believe that we still have some opportunity to upgrade more of our remaining feature phone customers to smartphones and drive additional data usage revenues. The next slide shows the longer term trend in our postpaid churn rate, which at 1.2% for the second quarter is at a historically low level. Now let's talk about our financial results starting with revenues. Total operating revenues for the second quarter were $980 million about the same as last year's $976 million. The small improvement in revenues reverses the trend of the last couple quarters when revenues declined both sequentially and year-over-year. However as we look ahead, I need to remind you that last year's third quarter had a one-time bump up in revenue due to the elimination of the reward points program and we won't have another event like that, this quarter. Service revenues were $762 million down $62 million from $824 million last year. The largest component of service revenues retail service at $680 million decreased by 8% driven by lower average revenue per user. But this decrease in our pool 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 which declined by $11 million or 23% primarily due to lower rates for data usage. Keep in mind that we benefit from lower rates on our outbound roaming traffic. Total expense for outbound roaming decreased by 11% year-over-year with lower rates offsetting a significant increase in data usage. Equipment sales revenue grew 44% to $218 million driven by higher equipment installment plan sales. Percentage of postpaid device sales on installment plans increased to 69% in the second quarter, compared to 44% a year ago. We do expect the installment plan take rate to continue to increase over the course of the year. Now I want to say a few words about our postpaid average revenue metrics. Postpaid ARPU was $47.37 for the second quarter, down 12% year-over-year. Most of this decline is driven by 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, the average revenue shows a decrease of 3% year-over-year with about half of that decrease estimated to be, the dilution from connected devices. The average revenue per account benefits from the increase in connection per account which grew by 6%. For the second quarter, the average revenue per account was $124.91 down 7% year-over-year, but when equipment installment plan billings are included the average billings per account actually increased by 2% year-over-year. We expect that there will be continuing downward pressure on service revenues, but the equipment sales revenues will continue to grow as more of the customer base moves to unsubsidized equipment pricing. Operating cash flow for the quarter, shown next was in line with our expectations. Operating cash flow was $168 million compared to $162 million a year ago. Total cash expenses were essentially flat year-over-year with an increase in the cost of equipment driven by 6% higher volume offset by reductions in other cost categories. When looking at operating cash flow and the year-over-year comparison remember that this year's number includes the cost of the incremental customer growth that, we achieved. Retail gross additions increased by 5% and net additions increased from 25,000 to 50,000. Adjusted EBITDA shown on the next slide incorporates the earnings from our equity method partnerships along with interest in dividend income which consist mainly of imputed interest income from our equipment installment plants. Adjusted EBITDA for the quarter was $218 million compared to $207 million a year ago. Earnings from unconsolidated entities were $37 million and this includes $20 million from the Los Angeles partnership, a slight increase from the year ago. Next I want to cover our annual guidance for 2016 which is shown on Slide 12 of the presentation. For comparison, we're showing our 2015 results both as reported and excluding the impact of the termination of the rewards programs. Our current estimates for the year are unchanged from those provided initially in February and confirmed in May, I'll quickly review them. For total operating revenues, we expect range of approximately $3.9 billion to $4.1 billion. This reflects our continuing expectation for modest customer growth additional demand for data and increased adoption of equipment installment plans along with very competitive pricing environment. There is clearly uncertainty related of the impact of the new iPhone launch this fall, along with the normal uncertainty related to the holiday selling season. For operating cash flow we expect the range of $525 million to $650 million, that estimate also flows through to the estimated range for adjusted EBITDA which is $725 million to $850 million. To the extent that we achieve a lower level of customer growth and currently estimated, we would expect results to be in the upper portion of the ranges. On the other hand to the extent that we're successful in attracting higher level of customer growth than currently estimated or if the pricing environment worsens. We would expect results to be in the lower portion than the ranges. Capital expenditures are expected to be about $500 million. This lower level of spending compared to 2015 reflects the completion of our 4G LTE deployment. It includes spending to meet higher data demand and to prepare for the initial commercial launch of Voice over LTE. 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 first six months of 2016 were $261 million while cash flows used for investing and financing activities totaled $355 million resulting in a net decrease in cash and equivalents with $94 million. As of June 30, cash and equivalents totaled $621 million, in addition to these existing balances U.S. Cellular has $283 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. Recall that the company has a 5.5% interest in the Los Angeles partnership and that the partnership had suspended cash distributions to the partners beginning in 2015 in connection with the purchase of spectrum license in FCC Auction 97. We were notified recently by the general partner, the note payable related to the license purchase will be completely repaid by June 30 and that cash distribution will be made in the third quarter of 2016. U.S. Cellular received a distribution of $9.6 million on July 28. So to wrap up the discussion of U.S. Cellular, I'll just reiterate what Ken said earlier. Overall, we've made steady progress over the first half of the year which results in line with our expectations and we're confident that we can continue to move forward on our priorities. And with that, I'll turn the call over to Vicki Villacrez to discuss TDS Telecom. Vicki?

Okay, thank you Steve and good morning, everyone. TDS Telecom's overall results for the second quarter showed improvement over the first quarter as revenues strengthened in all three segments. First, Wireline revenues were nearly even with last year and it's adjusted for divestiture showed positive growth with a 5% increase in residential revenues. Second, Cable revenues grew 2% over the last year reflecting another quarter of strong broad brand subscriber growth of 12%. And third, HMS revenues grew 6% due to strong service revenue growth as well as increased equipment sales. As we continue to seek growth cash expenses increased in line with those revenues. As a result, adjusted EBITDA on a consolidated basis remains relatively flat at $80 million for the quarter. Our financial results are reflecting the successful execution of our strategy, as revenues for new products and services are offsetting declines in our legacy voice offerings. We are halfway through the year and we are tracking against our expectations. For the remainder of the year, we will continue to focus on those strategic priorities that we shared with you on February which will be highlighted in the coming slides. Beginning with Wireline on Slide 15, our investments and our network and efforts to make higher speed options available to customer continued to drag growth in IPTV connections. We completed our planned IPTV market roll out last quarter, but continued to build out service in those 28 markets now enabling 180,000 service addresses. We are completing our planned fiber builds which will reach approximately 21% of our ILEC service addresses. And when combined with copper service, our IPTV enabled markets will cover approximately 25% of our total ILEC service addresses. For the reminder of the year, we will focus 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 an additional 30% of our ILEC service addresses, in order to drive higher data speeds in our middle-tier ILEC copper markets. In our remaining markets, we are evaluating the FCC's modified universal service funding mechanism to support broadband build out. Recall, that the FCC announced, a modified USF mechanism that is providing greater return carriers with two paths to receive support funds, to extend broadband services to un-served and underserved areas. TDS will need to make a decision on which support action it will elect, an alternative to connect to American Cost Models, which is commonly known as A-CAM or revised USS mechanism to say on greater returns. In order for us to make this termination, the FCC needed to finalize the amount of support that TDS would get if we elected the A-CAM path. We've just received the offer from the FCC which was made public this week. We are very pleased with the offer for $82.3 million of support revenue annual for 10 years. As it helps us provides a better, faster, broadband service to our most rural customers. Additionally will be provided funding for transition in the early years in certain states. This support comes with an obligation to build defined broadband speed to reach approximately 159,600 homes which will require a significant capital investment over a 10-year period. We have 90 days to make our decision to accept the FCC offer at which times the FCC may under certain circumstances revise their offer and we would have another 30 days to respond. The FCC's goal is to make this program effective January 1, 2017. Looking at the metrics on the bottom of the slide. IPTV connections grew nearly 50% adding 13,300 compared to the prior year and we added 2,800 broadband connections excluding divestures. We are offering a variety of speeds up to 1 Gig service in all our IPTV markets. The uptick in IPTV has grown steadily and is now in an average penetration rate of almost 30% of residential service addresses. It is important to remember that 97% of our IPTV customers, subscribe to a triple play bundle which results in a low churn rate and continues to increase average revenues per connection, which is now up 4% to $43.67 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 50% choosing speed of 10 megabits or greater and 19% choosing speeds of 25 megabits or greater. This will also contribute to the higher ARPUs we've been experiencing. Looking at Slide 16, Wireline results were solid even with 2015 ILEC divestitures which reduced revenues and expenses about 1%. As reported residential revenues increased 4% as growth in IPTVs and broadband more than offset the decline in legacy voice service. The year-over-year decrease in ILEC residential voice connections improved to 2% excluding divestitures. Commercial revenues decrease 4%, however we're seeing managed IP connections continue to increase. Wholesale revenues decreased only 3% partly due to favorable annual adjustments in the second quarter. Total Wireline service revenues held nearly even with the prior year at $175 million Wireline cash expenses increased 1% as increases in employee related expenses and IPTV programming cost outpaced the reduced cost of provisioning legacy services. As a result, Wireline adjusted EBITDA decreased 2%. As we stated in our strategy, we plan for capital intensity to decline this year, as we complete our fiber build out. In the quarter capital spending declined $4 million which resulted in a higher free cash flow compared to prior year. Slide 17 shows Cable connections grew 14,600 or 5% to 287,600. On the residential side connections increased driven by 12% increase in broadband and an 18% growth in voice. The residential broadband connection growth drove at 300 basis point increase in broadband penetration. And total commercial connections declined due to drop off in video, however broadband grew 11%. Staying with Cable operating performance for a minute on Slide 18. Residential revenues increased 3%, as increases from our connections growth was offset by continued promotional offerings. Commercial revenues decreased 3% primarily due to a discrete adjustment that occurred last year, without this adjustment commercial revenues were up 5%. Total Cable revenues of $45 million reflected increase of 2% as reported. However without the impact of that adjustment revenues grew 5%. Cash expenses increased 7% due to the higher employee video programming cost and property taxes. As a result Cable adjusted EBITDA decreased. Turning to the HMS segment and speaking to both Pages 19 and 20 in total. You can see HMS revenues grew 6% in the quarter, this was driven by service revenue growth of 11% from increased professional services and equipment maintenance revenue. This growth offset a 2% decline in recurring hosting revenues in the quarter. Equipment sales were up 3% year-over-year due to higher spending by existing customers. Cash expenses were up 2% compared to the same period in the prior year primarily due to the commissions on the higher sales. Adjusted EBITDA increased by $3 million to $7 million. Turning to Slide 21, we have provided our 2016 guidance which is unchanged from the guidance we shared with you in February, as we anticipate the second half of the year to be in line with our initial expectations and given the timing of the FCC USF reform order. We do not expect a significant impact to this year's results. But we will revisit this again in the third quarter as we learn more. Overall we're pleased with our results of the second quarter and we'll continue to update you on our successful execution of our strategic priorities throughout the year. Now I'll turn the call back over to Jane.

Thanks, Vicki and Tim, we're ready for questions.

[Operator Instructions] our first question comes from the line of Ric Prentiss of Raymond James. Please proceed with your question.

Couple questions if I could, first, Ken you talked a lot about upgrade rates and how you look at it now because you definitely had a different trend in the industry, the industry was light on upgrades, you guys were little higher. But you also saw increasing gross adds which was something we hadn't really seen a lot. Can you wrap that around how you're looking at upgrades versus gross adds and then weave into churn also, I appreciate the postpaid phone churn number which is good. But is there further to drop on that given what you're trying to do with upgrades and gross adds kind of wrap that all into one question you can expound on.

Well, Jay Ellison sitting here and every quarter we have this conversation about churn and you ask for lower and he squirms a little bit in his seat. But you're all connected, Ric and you got it right. It is, continuing to drive the satisfaction within our current base and as we continue to serve them well, make sure the network is where they needed, when they needed. We get to sell more services to that, so that drives our tablets, it drives other revenue line and with that comes lower churn both because a; first you're meeting our needs and then they're voting with their wallet to buy other services with you. As they do that, that also then unlocks word of mouth and it helps to fund the gross add side. We don't emphasize renewals versus growth ads, what one versus the other. We're looking to drive both of them.

And as far as churn, do you feel there is further improvement? On a couple of calls, for last couple of quarters you've been pretty optimistic on where you could drive churn to, obviously good number but is there more to go.

Ric, this is Jay. Since Ken is staring at me, I think I'll take that part of the question. I think we have done a superb job as the business is stabilised and we really put a lot of focus and earlier mentioned as we shifted to getting contract from place with around 81% of our base [ph] under some type of lock currently and on top of that, what we are doing now is obviously further refining those programs, we offer in the marketplace whether it's in the call centers or at the point of the sale to really target those customers and further reduce that churn. I feel confident with the level of customer engagement that we are starting to see that we will continue to see improvement in that area and that is all that I think I will say at this point and Ken continues to stare at me.

I've got it you doing it for me, Ric.

Thanks.

Great and then actually whether to switch back to Vicki for a second on the FCC. The A-CAM order if you do elect that based on the FCC details you were given, the $82.3 million revenue per year for 10 years does that start in year one, as a consistent $82 million a year and is there some kind of thought we should lay out there as far as early thinking, as far as what the capital cost per home might be to deploy that type network.

Sure, thank you Ric. First off, let me just start by saying that. I'm very pleased with the FCC's offer to provide that support necessary to bring better and faster broadband services to a substantial portion of our customers, who live in rural locations. And quite frankly that is too costly for us to build a necessary network to without this level of support from the government. The offer of $82.3 million per year over the 10 years of support is a bit higher in the earlier years and that is to support. We've got a support transition mechanism that we'll aim to be higher in the early years and then it will taper off. So in total, I think the 10-year amount is the $852 million with that transition number and yes it's going to require us to deploy significant capital over that, over that timeframe. Right now we're deep into the network build designs to try to better understand those economics before accepting the model support versus staying on rate of return. And our acceptance will be on a state-by-state level and I think it's important to remember that all rate of return carriers going forward are going to have broadband build out obligations regardless of the USF option. So right now, we're making those estimates and we'll know more as we look at 2017. As I said I don't think this will impact 2016 too significantly, we'll revisit that back in the third quarter but we have a lot of work to do before we put anything else there in terms of the capital number.

Okay, that does based on your tone of being very pleased it does feel like you're going to be able to build something in order nice return and get people to service what they want.

Yes, we're pleased with the offer.

Great, thank you.

Our next question comes from the line of Sergey Dluzhevskiy of Gabelli & Company. Please proceed with your question, Sergey.

Couple questions, if I could. First one for Ken. You guys obviously have 4,000 towers that you own, have you look out into next two years as you're going to be deploying royalty and eventually possibly transfer for 5G. Can you talk about your strategy for utilizing those towers and how you could maximize the value and contribution from your core tower portfolio?

Thanks, Sergey. Yes those towers are critically important to us, it allows us control over our network deployment plans and given our whole strategic positioning around quality it ensures that we have access, where we needed but it turns out it's almost two-thirds of our towers now. Also it protects us from some of the rent increases we've been hearing about in the industry and other kind of economic battle, so I'm very happy that we've got those towers. We will continue to work on growing revenues off those towers by leasing those to other parties, but they are in a fundamental underpinning to our whole networking position and I'm real glad that we've got.

Great. And I have two questions for Vicki. On A-CAM so obviously you're pleased with award $82 million I think last year in total. You guys were all federal USF you received about $74 million, $75 million could you remind us what is the comparable number for this $82 million. What portion of $74 million, compares to the $82 million.

Yes, so the comparable number I think you're citing a total federal support number. The comparable number is more on the average about $50 million annually and that's coming from two, it's really replacing two funding mechanisms and our carrier loop support, their high cost loop support.

Right, great and the second question on Cable acquisitions and kind of what your view is of current deal environment in the Cable space and your potential deal pipeline and if, I mean have you see some properties that maybe you came close to, I mean close to came close to passing your M&A criteria but the end of the day you decided not to pull the trigger and what were the main reasons you decided for say not to purchase them.

Well okay so, let me just say right now from an opportunity standpoint. We are seeing more activities and we saw the last half of last year. I mean it was very quiet in the last half of last year. So we're seeing more activity not particularly robust but I would say we're seeing a few more opportunities and as you know, I can't comment on and even specific in the pipeline right now. But again I wanted to reiterate we are actively pursuing Cable acquisitions and are very bullish on our Cable strategies.

Thanks.

Our next question comes from the line of Phil Cusick of J.P. Morgan. Please proceed with your question.

A few if I can. First, Ken. Inbound roaming was up nicely year-over-year for the first time in a long time. What's the dynamic happening with potential partners?

So I think the number is, you're obviously wrong there. Actually the roaming revenue is down year-over-year. I think Slide 8 would show that, traffic continues to grow its pricing. As pricing that also close right through to our cost line. We're going to where we need to go and want to go. It's not that we're going someplace we don't want to go. Dynamic around roaming is really getting playing us just the way that, I hope it would like to see it. We've got, now three agreements that we've executed. We're going to should we turn it out and couple more as I mentioned, our engineers have been leaving the pack and getting some technology implement that actually allows us to deliver to our customers when they're roaming data on one network, voice on a different one and what that does is that it lets us, continually monitor the customer experience to make sure that we get the best experience for our customers, wherever they're at. On the other side what that also means is that, in the past all of our roaming only been from CDMA based carriers and we thought eventually when we got to VoLTE we'd be able to serve more carriers, this would allow us to at least meet the data needs to other carriers before we get all the way to VoLTE. So it's got some real positives behind it. Anything that's going on with roaming, is as our customers now get a better 4G experience as they travel. We're seeing an increase in usage from them just like we saw increase of usage when they got 4G in our own network. So couple dynamics on there, but I'm happy with where roaming is setting up in terms of the revenue picture going forward.

Okay, so if we could ignore me being totally incorrect to start, should we start looking at the stabilizing going forward? Is that fair?

I don't know, yes it should whether it's this quarter that we get there, whether it might from a past standpoint sequentially I got one more in front of us, but yes we should be.

Okay, that's great. And then Ken higher churn of tablets versus phone that's great to break out. Does that - looking at that make you question a little bit more the value would you be easy, you still feel good about that?

No we're still, it's resting. We look at this, we look at it regularly there still nice adjunct products along a couple of different dimensions. So yes they're generating incremental revenue and incremental margins and as I said, we looked it as recently as probably last month. But in addition to that, it really goes a long way to strengthening that customer relationship and so even though you may see a higher churn rate and tablet, albeit a low rate by historic standards. It's higher than smartphones is an example. But it strengthens the overall relationship of the account. And so I'm not going to really worry about that and even at 1.8% besides the economics happen [ph] it continues to improve. It's - pretty nicely year-over-year.

Okay, you also Ken bought back some stock at U.S. Cellular in the second quarter with the LA distribution coming back on, should we look for buybacks to ramp in the third quarter?

The LA distribution wasn't you know a reason to buy or not buy the U.S. Cellular. At the U.S. Cellular level our buyback is primarily to design just to offset the dilution that comes every year out of our different benefit plans. So that change in LA status, which we kind of anticipating isn't a big driver one way or another with our level.

Okay and last one, if I can for Vicki. HMS equipment sales I saw nice pick up this quarter. Is that seasonal or should we be thinking that business is starting to catch some traction?

So yes, we had nice service revenue growth in the second quarter 11%, but that growth was really driven and generated by primarily professional services and selling equipment maintenance agreements on hardware purchases, so that's more one-time type revenues. These are important to our customer and our business, but we really want to see more revenue growth coming from our cloud and hosting areas, which is the recurring service revenue that really leverages our data centers and our managed service offerings. So that with strong professional services and maintenance agreements.

And what should we be thinking in terms of ramp in that cloud and hosting?

So the ramp and the cloud and hosting, I think year-to-date has been, I think you could translate it and to the low-to-mid single digit growth for the year.

Okay, thanks Vicki.

[Operator Instructions] If there are no further questions, I'll like to turn the conference back over to management for closing remarks.

We'd like to thank you all for your participation on summer Friday. So if you have any other follow-up questions let us know or we'll look forward to seeing you over the next few months. Thanks so much.

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.