Good morning. My name is Adam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the TDS and U.S. Cellular First Quarter 2019 Earnings Call. [Operator Instructions]. Thank you. Jane McCahon, you may begin your conference.

Thank you, Adam, and good morning, everyone, and thanks for joining us. As you notice, we released our results and posted all of our documents to the IR section of our website yesterday after the close to give you a little more time to digest. So let us know if you found that helpful. 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, Senior Vice President of Finance and Chief Financial Officer. This call is being simultaneously webcast on the TDS and U.S. Cellular Investor Relations websites. Please see those 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. As shown on Slide 2, the information set forth in the presentation and discussed during this call contains statements about expected future events and the 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. TDS and U.S. Cellular filed their SEC Forms 8-K yesterday after the close, including its press releases in addition to our SEC Forms 10-Q. On the accounting side of the house, we adopted ASC 842 for leases on January 1, 2019, using a modified retrospective method. This new accounting standard led to the balance sheet being grossed up by about $1 billion with no impact to the income statement. Also, now that we have been selling equipment installment plans since 2014 and penetration is up to 74% of the postpaid base, we are no longer -- we no longer find that APU and APA, excuse me, are as meaningful and we'll no longer be providing those. We will continue to provide ARPU and ARPA. Before turning the call over, I do want to remind everyone that the anti-collusion rules are still in effect, and we are unable to respond to any questions related to FCC auctions. And now I'll turn it over to Ken Meyers. Ken?

Thanks, Jane. Good morning, and thanks for your interest today. Overall, I'm generally pleased with the -- how the first quarter has turned out. Service revenues and cash flow, better known as adjusted operating income before depreciation and amortization, are actually above our targets. Subscriber activity is a bit better than last year, but still not at the levels I'd like to see; and equipment revenues are lower than expected, consistent with industry trends, and that shortfall has minimal bottom line impact. Steve will go in detail on all of these in a bit. Finally, our network modernization plans are on target, albeit we are in one of the less busy quarters from a network build standpoint. Speaking of the network, I'm very proud of the job our team has done to ensure the communities and customers impacted by late winter storms and flooding have had access to vital wireless services when they were most needed. Thank you, team. Now looking back at the priorities we set for the year, strengthening and growing our customer base continues to be our top priority. We continue to strengthen our base through initiatives aimed at improving their roaming experiences, continuing to roll out voiceover LTE and through unique value offerings like our Unlimited Plans with Payback. As evidence of our success, we need to look no further than churn, which remains low, and the recent growth in average revenue per user. In terms of growing our customer base, as most of you know, the first quarter tends to be seasonally -- a seasonally slower quarter, and our plans are built reflecting that reality. In the first quarter, we did a little bit better than last year in terms of gross and net adds, but we need to drive more growth. We are targeting…

Thank you, Ken, and good morning, everyone. I'll begin my comments by talking about postpaid connections. As shown on Slide 5 of the presentation, total postpaid gross additions for the first quarter of 2019 were 137,000, up 6% year-over-year. Gross additions of both handsets and connected devices were higher year-over-year. The increase in gross additions was partly offset by slightly higher disconnects that drove a modest improvement in net postpaid activity on a year-over-year basis. We ended the quarter with 4.4 million postpaid connections, which represented 90% of our total retail base. Postpaid handsets are our primary focus, so let's go next to that detail. Postpaid handset gross additions and net losses for the first quarter were 102,000 and negative 14,000, respectively, both improving year-over-year, albeit, as Ken mentioned a bit earlier, not at the level we'd like. The increase in handset gross additions resulted from more aggressive promotions offered in the first quarter of 2019 compared to the prior year. We continue to have handset customers upgrading from feature phones to smartphones. That helps to drive more service revenue given that ARPU for a smartphone is running about $22 more than for a feature phone. Including the upgrades, total smartphone connections increased by 12,000 during the first quarter of 2019. Along with the growth in gross additions that we've achieved, postpaid churn has consistently been at a low level, as shown on the next chart. Handset churn, depicted by the blue bars, was 0.99% for the first quarter of 2019, fairly flat both year-over-year and sequentially. Churn for connected devices was just over 3%, still elevated as heavily discounted tablets sold in connection with various past promotions continue to roll out of contract. Total postpaid churn, combining handsets and connected devices was 1.26% for the first quarter of 2019,…

Okay. Thank you, Steve, and good morning, everyone. Overall, we are pleased with how we started the year, working to achieve our strategic priorities, which are outlined on Slide 14. Both wireline and cable continued to grow broadband connections at 2% and 9%, respectively, reaching penetration levels in the low to mid-40s. We continue to be successful with the bundling of our video products and are close to completing the cloud TV platform called TDS TV+, which will expand our ability to build on this synergy going forward. We are targeting a launch in our Bend cable market in the second quarter and will take a phased approach for the remaining wireline and cable markets. I'll give you a complete update on our fiber program in a moment after I summarize our overall results for the quarter, beginning on Slide 15. Adjusted EBITDA increased 2% as we grew cable revenues, 8%, and maintained growth in wireline residential revenues, helping to offset declining wholesale and commercial revenues. On a combined basis, revenues were flat. Total cash expenses decreased 1% in the quarter. Wireline cash expenses decreased 2% due to cost control efforts, while cable expenses grew 3%, well below revenue growth rates. This net reduction is a direct result of the initiatives we implemented last year to make room for the scaling up of sales and marketing expenses we will have later in the year with the launches of our new out-of-territory fiber markets. Capital expenditures increased slightly when compared to last year. We expect our capital spending to increase substantially and on an accelerating basis through the year to support our fiber investments, both out of territory and in our existing ILEC footprint. As a result of our fiber deployment strategy over the last several years, 27% of our wireline…

Adam, we're ready for questions.

[Operator Instructions]. And your first question comes from Simon Flannery.

Ken, some really great cost control in the business in wireless. Can you just talk about what the initiatives are and how do we think about where you are in achieving the objectives? Can you keep this sort of flat level for the next few quarters? And then any color on the equity income, a nice 16% up year-over-year? So any color on were there specific onetimers or is that a pretty good rate for the year?

Thanks for the question. Yes, I'm extraordinarily pleased with the efforts of the cost control program that -- it was something we started 2 years ago under Steve Campbell, and they have gone through every part of the organization, and they continue to do so. On the network side, things from changing some backhaul costs all the way through to what we do in reverse logistics on moving our handsets. So there hasn't been a part of the organization that hasn't been touched. And by our own estimates, we think that we have been able to take out about $200 million of spend over the last couple of years. As we started off this year, we have got our target set for another large meaningful swath. All of the areas haven't been identified yet. That's part of what we do is we keep refreshing the list right now. So I'm not going to say this is where we're going to work it, but we will continue to work it all year, and it's something that Lee Arnett [ph] really built into the culture of the organization. So it's not something that at the end of this year just goes away.

Is there a way to think about what a target margin or what -- just how we think about the outlook?

Boy. Target margin. Given the current level of investment of network, my old targets don't work anymore, right? We've got to keep improving the margins. And it's been tough to do in the last couple of years with all the pricing pressures. But now that we've seen pricing stabilize, we've got some different pricing strategies we've used to help drive ARPU. I'm pretty optimistic about being able to keep inching that up depending upon what happens with growth in any quarter. So we've got more work to do on the margin. In terms of the equity income, Steve, any color you want to add around that?

Simon, you asked about onetimers. There aren't any onetimers in the numbers. We've seen improvements in the reported earnings from each of our major investments, including Los Angeles, New York 1 and 2. And those are operationally-driven, some of the same -- to the extent we understand them, the same factors that we've talked about, some modest growth in service revenues, some cost controls. So nothing that we would say is unusual. We don't have a lot of visibility into the forecast going forward, but we think we'll have some year -- on a full year basis, some year-over-year growth in those investments.

Great. And hopefully it translates into higher dividends?

Absolutely.

Yes.

And your next question comes from Ric Prentiss.

A couple of questions. First on the equipment revenue side. Obviously, you talked about the lower gross adds and the longer life. Can you help us understand what did you see in the quarter as far as upgrade rates and the percent take on EIP can also kind of shift revenues around in the equipment area?

Yes. Our upgrade rate in the quarter was about 5%. And EIP, the percent of sell-through is quite high. It's in the 90 percentage range at this point.

Okay. So that -- I think last year, your upgrade rate was probably closer to 6, so yes, people are keeping them longer.

They absolutely are, across the board.

The time that they're holding them is a bit of a moving target from quarter-to-quarter. But in general, it's probably 10% longer than it was a year ago.

Great. That helps. And appreciate the color on the postpaid ARPU with the SMS texting fee going away, but on the revenue and the cost side, the prepaid continues to really surprise us on the upside as well sequential and yearly growth in prepaid ARPU. Talk a little bit about the competitive dynamics in that industry and what people are using in the prepaid product these days.

Peter, it's Jay. So on the prepaid front, we have seen similar behaviors relative to -- as we've introduced some unlimited products in that area, we're seeing that. We're seeing a lot of focus on our teams working promotionally with incremental addition of prepaid cards or topping up right at the point of sale, therefore increasing longevity. We're seeing -- we see better churn rate. And really, continued focus on some. But I'll say is the test-and-learns that we've been doing in our distribution channel strategy and things along those lines, so we put some focus on there. We're doing significant what we call prepaid revolution or evolution with, as I mentioned, family plans and additional capabilities for our customers. So all in all, we've put a lot of focus at the end of '18 and planning for '19.

Yes. I'd say one of the things to be careful is, Ric, is that because of the lack of low-end phones, we haven't seen as much prepaid out of some of the, call it, lower ARPU channels. And as we get those lower-end phones back into our distribution in second half, we're expecting to see more activations, but those activations actually make take down that ARPU a little bit.

Makes sense. Trading off adds for ARPU. Okay. And last question I had, Ken, you mentioned on the 5G initial rollout, 600 megahertz, and then augment with mid and high. I've got to admit the old engineer in me, what's the definition these days for mid-band and high band? And then how do you see availability for the different bands coming about?

Well, I'm not going to try to answer that, but I've got Mike Irizarry in the room. We'll let him talk about what he thinks about when he says mid band and low band.

So when I think about mid-band, it's 3.5, so think CBRS, the C-band spectrum that's talked a lot about; and then high band would be the millimeter wave stuff, so 24, 28, 39, 37.

And then what about availability? I guess, handsets is the question.

Yes. So handsets, I think for 5G, at least, 5G NR at least in the low bands towards the end of this year. And big focus on the chipset readiness for devices.

Given our buildout plans combined with what we see in terms of all the handset availability, anything that we get this year is going to have a tiny, tiny, impact. We're really talking about a 2020 launch for anything that we're doing, and we expect to have availability of handsets in time for that launch.

And as far as the mid-band, the 3 5, CBRS, CBN stuff, obviously, you've got to get the spectrum figured out first and then into the infrastructure on handsets. What kind of time line do you see those chipsets in that 3 5, 3 7 4G range coming about?

For the chipsets is I think are going to follow the availability of the spectrum, is stuff I've seen historically. And that is the muddiest part of the spectrum puzzle right now, right? The good news is that we're hearing more FCC commissioners saying we've got to get moving on this. From our standpoint, we think that is important spectrum. Our strategy that we talked about last year had always had what we call a wedding cake view of spectrum, where the base layer is the coverage of low band. You need a nice meaningful segment of mid-band and then you have the high band on top of that. For the U.S. to really make headway, I think we need that mid-band, and a lot of energy is being spent on that and at the company and the industry level to try to get that resolved in D.C.

And your next question comes from Zach Silver.

The first one on the U.S. Cellular side. On roaming, some really nice growth there, and I don't think that I heard you call out any higher rate 3G traffic impacting that. I know this line is a bit lumpy, but I mean, how should we think about the potential for volume offsetting lower rates going forward this year?

Well, if you -- as we said and you repeated in your comments, we had pretty nice growth in the first quarter, double digits. I think 22% was the number we quoted, and that's volume-driven. So we've seen increased volumes from one of our principal partners that, frankly, we didn't anticipate coming into the year. Hard to predict whether we'll see that continue, but at this time, we are forecasting for the full year, year-over-year growth but more modest than what we saw in the first quarter. I would say somewhere in the single digits.

Got it. And then just to check in on the competitive environment with T-Mobile, FirstNet, any increase in competition from those guys in the first quarter?

Nothing that's a step function. I mean both of them are -- both of them, along with AT&T's Chorus business and the Verizon business, the Sprint, they are in most of our markets. We've got a competitive marketplace that exists today and has existed. There wasn't any step function increase in the quarter, though.

Okay. Got it. And then for Vicki on the TDS side. For the out-of-market builds, I mean, this new area that you're targeting, 80,000 service addresses is a big step up from, I guess, the second out-of-market build. Be great to get a little bit more detail on the characteristics of those markets and whether you think you can achieve what you've done so far in Sioux city and with the presales in the second market.

Okay. So let me take your question in parts, Zach. So thank you for that. The Sioux city piece I think is related -- you mean Sun Prairie?

Yes, Sun Prairie.

So okay. So Sun Prairie was our out-of-territory first trial market. And just -- we're just a little over 1 year into that market, and I think I've shared our results there. We've been very pleased. Our penetration rates from a broadband perspective has been nearing 50%. Our video penetration has been about 25%, and we've also been pleased with our commercial success there. So that was really our trial market to really support our out-of-territory fiber deployment strategy, which we really like a lot because we can go where we see the attractive demographics, we can go neighborhood-by-neighborhood and we can scale it to our needs and to where we see the growth opportunities. So having said that, I announced we launched our second out-of-territory market in the same southern Wisconsin cluster. And our early -- it is early, but we're -- our early sale and install phases of this market are starting to mirror exactly what we saw in our trial market. And so we're very excited. We're going to follow it with a third launch in the same cluster in May. So we're going to have some more results to share with you as we go forward. From a larger perspective, we are focused on, and this is a really a year of construction for us, 2 new clusters. One that's in mid-Central Wisconsin and the other that's in growing communities outside of Wisconsin. And that does comprise about 80,000 service addresses that we've earmarked that'll take us through towards the end of the year, and we'll start to light up that network in those clusters as we go, and that should happen at the end of the year. And our business cases are -- we're expecting results similar to what we're seeing so far. So updating you as we go forward.

[Operator Instructions]. And your next question comes from Sergey Dluzhevskiy.

My first question is for Ken, kind of a 2-part question on towers. One is just a clarification. What were the tower revenues in the quarter? And what was the growth rate? And the bigger question is fully understanding that towers are strategic for you guys, could you update us on what the company is going to improve third party lease operate for the tower portfolio, which I think is the 4th or the 5th largest in the country? And how do you increase contribution from the tower portfolio going forward without sacrificing anything from the strategic or operational perspective?

Thanks for the question. I think revenue was about $16 million for the quarter, and it doesn't show a lot of year-over-year growth. But the, what I'll call, the pipeline is growing nicely right now. There is a lot of interest, a lot of different deals that are being worked through. So I'm optimistic about the pipeline. We've been -- we've augmented our marketing resources in that area to further monetize those assets subject to not getting in the way of what we've got to do with our network modernization because as we start to go through this project, and we're talking about everything from tower -- moving radios up the tower to MIMO and different things, are going to increase our utilization of the tower and increase our piece of change in that real estate. We will look to drive value where we can. But the extra bucks we get on tower rent are sequential if they get in the way of our network quality to our core business. So a tightrope we continue to walk with trying to maximize the value of those assets. And as I said, one of the big things is, we bought many of the marketing resources in that area.

Great. Another question on the wireless side. Could you maybe provide more color on your Iowa and Northern Wisconsin edge-out opportunity? What prompted you to pursue this after several years, I guess? Just focusing on your existing markets. And what are the next steps in this process? And do you see other edge-out opportunities as you look at your footprint?

So the edge-out is a combination of a desire to continue to leverage our distribution, our name, our systems combined with the evolution of the technology. For years, we've had some licenses that are -- cover part of our footprint today but also cover these other areas. But CDMA equipment was not built for those license -- for that spectrum. So as a result, we couldn't go in with a voice product given that CDMA was our core service. As we have moved to voiceover LTE, though, we can -- which we have put across Iowa and Wisconsin now, we can use this spectrum and offer both a voice and data product in those markets. So the -- what we're doing today is we're building out those areas. We expect to have some meaningful coverage by the end of the year. At the same time, we're starting to work on distribution so that we can competitively enter those markets late this year or right around when we turn the corner into next year. Similarly, there are a few other areas with today's licenses that we will look at once we get these launched and get the results in from these markets.

Great. My next question is, I think, for both businesses, the FCC recently announced the agency is contemplating -- creating a rural digital opportunity fund focused on building out highspeed broadband in rural America. So if you could share your initial thoughts on this proposal and whether you see incremental revenue opportunities from this fund going beyond A-CAM support on the wireline side. And also on the wireless side, could this be an opportunity for U.S. Cellular in some markets?

So what I'll say for the wireless side is, it absolutely could be an opportunity, but I can't go past "could" because there aren't sufficient details out on this program yet to really going further. I mean, we see -- we like the idea that they're putting money for it. We're going to be actively involved in trying to help formulate rules that allow us to participate. But at this time, there just isn't enough on the table for us to put any real light on it.

And Sergey, I'm sitting right where Ken is as well. This could open up opportunities for rate of return carriers, certainly looking to let edge-out into adjacent underserved areas where the money could be available. But again, we're waiting to see the details. But clearly, onetime infusions aren't adequate. A long-term program is going to be needed to really close the digital divide in rural areas.

And my last question for Vicki is on the edge-out on the out-of-footprint builds. So you already touched a little bit on the Sun Prairie market, but my question is, I think, is slightly different. So maybe if you could share what you guys have learned from Sun Prairie market and what are the best practices as you've had the service in this market launched for over a year that you could use and build on as you go into adjacent markets and potentially other markets in different states.

Well, we have -- Sergey, we've learned a lot just from our fiber deployment strategy within our existing ILEC wireline footprint. As you know, we've got over -- up to 30 markets now where we've deployed our fiber right within our own ILEC market. And through that repeatable process, we have learned a lot around our construction, our planning, our looking at neighborhoods, the attractiveness, the pent-up demand in certain neighborhoods, the density factors, the topography factors, aerial versus buried. All sort of complexities that go into our analysis. And they're different market by market. Having said that, all of those learnings have been carried forward. And certainly within our trial market in Sun Prairie, we, right off the bat, learned that there was a greater pent-up demand for alternative choices to those that these customers had in those markets where they had an incumbent telco that hadn't been keeping up with upgrading their network and didn't have a lot of choices. And so our take rates off the bat are exceeding our expectations. And we roll those learnings forward. Certainly, on the construction side, you have different challenges as you go forward, and those learnings get rolled into our analysis as well.

And your final question comes from Michael Rollins.

If I could follow up, you mentioned LTE -- VoLTE briefly and was wondering if you could talk a bit about, first, where is the [Technical Difficulty] VoLTE and when do you think the company would be in a position to not need CDMA chips in the phones where you can just have customers fully on LTE and VoLTE? And then secondly, just on the other side of VoLTE, the roaming side, you talked a little bit about the roaming performance this year. But where is VoLTE in all of that? And is there an incremental dollar opportunity from that product arena?

Mike, we're going to have to go back. We lost about 10 seconds of your question from when you started to introduce it, the next thing we heard was, CDMA chipsets. So whatever was in between that, we lost it.

So I was asking as you think about the migration your customers to VoLTE, when you could potentially be in a position with your network in the VoLTE usage where you wouldn't need to put CDMA chips anymore in your phones, you can just sell an LTE VoLTE phone standalone.

Mike, this is Mike Irizarry. So as we said before, the VoLTE program is multiyear. So right now, we're targeting to have our entire footprint completed by the end of 2020, early 2021. You still have to migrate customers over, and we expect that to have a tail for us. But in terms of network completion, end of 2020, first part of 2021.

And so as you think about it from a handset perspective, end of '21, all the handsets in all the markets would no longer need a CDMA chipset. And it's possible that earlier than that date in certain clusters, we'll only be putting VoLTE in there. But from a network standpoint, just because we stopped, we had VoLTE everywhere doesn't mean that we're necessary going to be turning off the CDMA. It's going to be a matter of how much traffic is still being utilized on the small amount of spectrum that we have dedicated to it. And that will be a 'then' type of decision.

[Indiscernible] roaming side?

On the roaming side? So yes, we've always looked at VoLTE as an opportunity to serve more than just the historic CDMA carriers. I'll let Steve talk a little bit about where we are with that.

Yes. And so we currently have the commercial agreements in place with all of the 4 national carriers. We have some inbound, a little bit of outbound traffic on VoLTE, but it's very minor at this point. We're in various stages of testing and implementation with the others. So there's definitely some potential upside revenue to come. Right now, it's very negligible in terms of the overall income and expense. But I think the important thing is having gotten those commercial agreements in place and having started to work with the other carriers towards implementation.

And we have no further questions at this time, so I'll turn the call back over to the presenters.

We'd like to thank you again for joining us, and please let us know if you have any follow-up questions. Have a great weekend.

And that does conclude today's conference call. You may now disconnect.