Telephone and Data Systems, Inc. (TDS) Q1 2020 Earnings Report, Transcript and Summary

Good morning. My name is Suzanne, and I will be your conference operator today. At this time, I'd like to welcome everyone to the TDS U.S. Cellular First Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Jane McCahon, you may begin your conference.

Thank you Suzanne, and good morning and thank you everyone for joining us. We want to send out our very best wishes that you and your families are well. We've worked hard to prepare our materials and remarks today to share with you about the strength of our businesses and provide insight into what we believe will be the most significant opportunities and challenges we will face in the coming months. Please continue to provide us feedback about what we can do to provide timely and important information. Now back to the normal script. I want to make you all aware of the presentation we prepared to accompany our comments this morning, which you can find on the Investor Relations sections of the TDS and U.S. Cellular websites. With me today, from all corners of the world and offering prepared comments from TDS, Pete Sereda, Executive Vice President and Chief Financial Officer; from U.S. Cellular, Ken Meyers, President and Chief Executive Officer; Doug Chambers, Senior 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 our 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 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 versions included in our SEC filings. We have updated our safe harbor statements to include specific risks related to COVID-19 and its impacts on our businesses and have provided that here specifically on slide 3. TDS and U.S. Cellular filed their SEC forms 8-K, including press releases and forms 10-Q yesterday. In terms of our upcoming IR schedule on slide 4, we will be virtually attending the JP Morgan Global Technology Media and Communications Conference on May 12. And our open door policy is now more of an open phone or open video policy, so please reach out to us if you'd like to arrange a meeting. And now, I'd like to turn the call over to Pete Sereda. Pete?

Thanks, Jane, and good morning everyone. Our mission at TDS from our founding 50 years ago has always been to provide outstanding communication services to our customers and meet the needs of our shareholders, our employees, and our communities. And I think now more than ever, we all recognize the importance and responsibility of providing critical communications and data services that our customers and communities depend on. I'll start on slide 5. First, in order to serve our customers, we've continued to invest in our networks to ensure that we can meet their increased data and usage demands. And now with work at home and remote learning, these investments are proving to be critical. To keep our customers connected to these essential services, both U.S. Cellular and TDS Telecom have signed the FCC's pledge not to turn off service or charge late fees due to a customer's inability to pay their bill because of circumstances related to COVID-19. We're also grateful to our employees for their dedication in serving our customers, and we recently enacted a number of programs, such as work at home social, distancing and additional cleaning to protect them and their families. And for our stockholders and our debt holders to support our long-term sustainability goals, we've always strived to be financially conservative. Turning to slide 6. Maintaining financial flexibility through a strong balance sheet is one of the pillars of our corporate strategy, and over the years we have worked to retain relatively low leverage levels, long-dated debt maturities, sufficient undrawn revolving credit facilities and significant cash balances, while at the same time making sure we have the financial resources we need to fund our businesses. If you can see on the slide at March 31st TDS had nearly $1.5 billion in available funding sources including cash and cash equivalents, available credit facilities, a mostly undrawn term loan and an undrawn EIP securitization facility. We also have a number of other potential sources, including our own towers and wireless partnerships. As you can see, most of our debt is very long dated. Turning to slide 7, I also wanted to highlight some recent liquidity initiatives and anticipated tax benefits. We had completed all of our financing initiatives for 2020, prior to the onset of the COVID-19 outbreak. So we are not in a position of having to complete any financings currently. We have been advised by our banks that the debt markets have opened up sufficiently, such that we would be able to raise new money if the need arose, although we do not currently see such a need. Since the impacts of the COVID-19 outbreak began to be felt by the overall economy in our businesses, monitoring cash activity and balances and a number of other metrics more closely. We have not detected any meaningful degradation in our cash flows that are generally drawing down on our existing credit facilities, but have determined that it is not necessary at this time, as we have sufficient liquidity to run our businesses. Our business trends do not currently indicate that, we are in danger of violating any bank covenants. Potential strength of our credit banks is very strong. However, as previously planned TDS recently drew $50 million under its $200 million delayed draw term loan to fund capital expenditures, at TDS Telecom and U.S. Cellular for the first time and as previously planned, around $125 million on its EIP securitization facility, in order to pay for the spectrum purchase in Auction 103. And because both stock prices we're at very depressed levels during the quarter. Purchased stock at both companies in a measured fashion balancing the market opportunity to buy in shares, at extremely favorable prices with the requirement that we preserve liquidity in case, the current general economic situation becomes worse, than we currently anticipate. Lastly, due to precarious federal tax legislation, we had a low effective tax rate in the quarter. And we project a reduction of income tax expense throughout the remainder of 2020, as a result of an anticipated tax refund in 2021. I will now turn over the call to Ken Meyers. Ken?

Thanks Pete. Good morning. And let me add my well wishes to all of you. I hope you and yours are healthy and coping well with all the changes and challenges, over the last couple of months. I've been in this business a long time and have helped manage through a number of disruptions, whether natural disasters acts of terrorism financial crises and even recessions. But never ever have, I experienced a level of disruption and uncertainty that we're going through today. And never have I been prouder of an organization and all of the people connected to it. To all of our associates here at U.S. Cellular, I'm humbled to be part of your team. And I thank you for your continuing efforts to support each other, our customers and our communities. Turning to slide 9 let me start with just a quick snapshot. While there are many uncertainties and challenges yet in front of us, U.S. Cellular is strong. We provide an essential service to our customers, which we believe will continue to be in high demand. Our culture is strong. We've always been focused on having our customers back, with a great network and exceptional customer service. And our financial foundation and flexibility are solid, as Pete just reviewed. I'm not going to spend a lot of time today reviewing first quarter results, although they were solid in most every regard. Doug will go into some detail in a few moments. Those results are only to set the stage as we look out over the next few quarters now. We're providing all the typical metrics. But we'll focus our comments on current trends. I'm also going to give an update, on our strategic priorities for the year. So first let me talk about, how we're operating today. After a massive transition that occurred in late March, I would characterize April, as a period of moving towards stable, different, but stable. To respond responsibly to the state home orders currently in place throughout our footprint and to protect our associates while continuing to care to the needs and safety of our customers. We have moved work that can be done remotely to a work from home environment. And our retail stores and call centers that remain open we have implemented a number of safety steps to keep our frontline and customers as safe as we can. For example about 80% of customer service work is now done in a work from home model thereby ensuring associates in the actual call centers have plenty of room for social distancing. At the same time, we've implemented enhanced cleaning processes too. In order to support our customers we have strategically kept stores open in each market. Currently, about 70% of our company-owned stores are open albeit with reduced hours and open fewer days. Stores are being physically modified and associates given personal protective gear to protect them and our customers too. We have limited the number of people in the store at any time and even instituted curbside services. One innovative initiative we have undertaken is having associates from closed stores helping with customer care while others are helping the telesales team. Also we've been reaching out proactively to our customers just to check in and see how they're doing. Interestingly, those calls have been highly appreciated by our customers. In terms of recent trends, store traffic is running at about 50% of what I'd call pre-COVID levels. To further support customers impacted by COVID-19, we signed the FCC's Keep America Connected Pledge under which we will not disconnect customers or charge late fees for those who are unable to pay their bills due to circumstances related to the crisis. In connection with the pledge, we expect to incur a higher than normal level of bad debt expense and as a result, recorded an incremental charge of approximately $9 million during the quarter. Bad debt expense is one of our major watch points for the next few quarters. To ensure customers have access to the data services they need during the crisis, we have removed caps on usage and waived overage fees for them also. The supply chain at least for handsets is operating smoothly. We have spread our inventory out across multiple warehouses to minimize risks. Routers and hotspots are constrained today. Demand skyrocketed just as suppliers were starting to move out of 4G devices toward 5G devices. Supply is starting to move now, but I expect it will be tight at least through the next quarter. I'll talk about the network. I know we meaning the entire industry are holding our collective breadth as this pandemic is unfolding. Will our networks be able to handle the seismic shifts of where and how work of all kinds was being formed as well as the expected increase in usage? I guess sometimes you catch a break because we engineer our networks for peak usage periods. What we have seen is an extension of those periods of high usage throughout the day and only a slight increase in the overall peak demand. This is our best case scenario. Another fortunate result was the traffic spread out from the highly utilized sites in more urban areas to more residential sites actually enhancing network performance. So, while data usage is up from pre-crisis levels approximately 15% -- I guess almost 60% year-over-year, our network has been able to handle the extra demand. So, in summary, a lot has changed over the last couple of months and I'm pleased to report that U.S. Cellular has to date adapted to that change well. Turning to slide 10, even in light of all this disruption we still need to manage our business in line with our strategic priorities we set out with you a few months ago. No doubt customer growth will be a challenge given the overall decline in retail activity across the nation. A couple of bright spots for us include our expansion markets in Iowa and Northern Wisconsin and the new iPhone launch as well as the pickup of connected device sales in March. I'm talking about connected device here; I'm talking about hotspots and fixed wireless access equipment. We remain intensely focused on reducing churn which clearly will be low while we're in the lockdown. However, we are developing plans to address the churn risk associated with customers under the FCC pledge. On the expense side, we continue to push forward with our internal program to reduce spending. Bad debt will be a watch point going forward and we will need to adjust spending in other areas to offset new costs such as costs of additional cleaning, the personal protective equipment and higher customer usage. As of today, we see no major disruption to our network investments. We are seeing some localized network projects delayed due to the closure of offices of some regulatory bodies. We, along with other carriers in our industry trade association are trying to work through this issue. As you know the CBRS spectrum option has been slightly delayed and it's possible that the C-Band auction could slip into next year. However, we feel good about our inventory of millimeter wave spectrum to complement our rollout of 5G and 600 megahertz spectrum. Doug is going to talk about 2020 guidance in a moment. I want to say a few words about the expected full year impact of COVID-19. For purposes of developing our guidance, we assume that our markets will come out of lockdown near the end of the second quarter, with some relaxation of social distancing in Q3 and a return to a more normal state by the end of Q3. In terms of the largest revenue impacts of COVID-19, we will have some service revenue impact from waiving overage fees and also expect to see a drop in equipment sales including accessory sales as a result of lower store traffic. On the expense side, bad debt is the current expected largest expense increase and could increase further as additional customers sign up for the FCC pledge. All of our associates are working and being paid, so I expect little change in labor costs. So with that, let me turn the call over to Doug. Doug?

Thanks, Ken and good morning everyone. Let me touch briefly on postpaid connections results during the first quarter shown on slide 11. Postpaid handset gross additions were down due to two factors. Early in the quarter, we pulled back on promotional activity to focus on brand initiatives. And as we moved back to a more competitive posture, store traffic dropped due to the impacts of COVID-19. Partially offsetting this was a jump in demand for connected devices. Total smartphone connections increased by 4,000 during the quarter and by 63,000 over the course of the past 12 months. That helps to drive more service revenue given that ARPU for a smartphone is about $21 more than ARPU for a feature phone. As mentioned, we saw a 7,000 increase in connected device gross additions year-over-year. This was driven by March gross additions of Internet products such as hotspots and routers, as a result of an increase in demand by consumers, as well as our business and government customers. Both customer groups were seeking wireless products to meet their needs for remote connectivity resulting from the stay at home orders from various states in response to COVID-19. In April, we saw about a 50% decline in-store traffic, negatively impacting gross additions, equipment sales and accessory margin. Although connected device activity remains stronger than prior year, we expect gross additions to trend below prior year levels through the duration of the COVID-19 crisis and perhaps beyond. Next I want to comment on the postpaid churn rate shown on slide 12. Postpaid handset churn depicted by the blue bars was 0.95% for the first quarter of 2020. We saw higher handset churn in January and February as compared to prior year, primarily as a result of aggressive industry-wide competition. However, we saw a decrease in defections in March as customer shopping behaviors were altered due to the overall COVID-19 crisis and related stay at home orders. Total postpaid churn combining handsets and connected devices was 1.21% for the first quarter of 2020, also lower than a year ago. Currently, as you would expect, churn on both handsets and connected devices is running at very low levels. April looks like it will follow that trend with both voluntary churn and involuntary churn trending lower than pre COVID-19 crisis levels. Keep in mind, involuntary churn is depressed as customers that have signed up for the FCC pledge are not being disconnected for non pay. Now, let's turn to the financial results on slide 13. Total operating revenues for the first quarter were $963 million, a decrease of $3 million year-over-year, while service revenue increased $21 million. Retail service revenues increased by $12 million to $671 million. The increase was due largely to higher average revenue per user, which I'll cover on the next slide. As part of caring for our customers during the COVID-19 crisis beginning in March, we elected to waive overage charges and we also waived late fees and other fees in conjunction with the FCC pledge. Inbound roaming revenue was $37 million. That was an increase of 10% or $3 million year-over-year, driven by higher data volume partially offset by lower rates. Since late March, we have seen a decline in data traffic both from an inbound as well as an outbound perspective. This trend has continued on into April. The extent to which roaming traffic will be impacted in the future will depend upon the duration and pervasiveness of stay at home orders, as well as customer behavior in response to the outbreak. Other service revenues were $54 million that was an increase of $6 million year-over-year, including an increase in tower rental revenues. Finally, equipment sales revenues decreased by $24 million or about 10% year-over-year due to changes in the average selling price and mix of devices sold. Going forward for the rest of the year, equipment revenues are expected to trend in line with gross additions and upgrades. Now, a few more comments about postpaid revenue shown on slide 14. Average revenue per user or connection was $47.23 for the first quarter up $1.79 or approximately 4% year-over-year. On a per account basis, average revenue grew by $4.08 or 3% year-over-year. The increase was driven by several factors, including a higher mix of smartphones relative to connected devices, an increase in regulatory recovery revenues and increased device protection revenues. Let's move next to our profitability measures on slide 15. First, I want to comment on adjusted operating income before depreciation, amortization and accretion and gains and losses. To keep things simple, I'll refer to this measure as adjusted operating income. As shown at the bottom of the slide, adjusted operating income was $231 million flat year-over-year. As I commented earlier, total operating revenues were $963 million, a decrease of $3 million year-over-year. Total cash expenses were $732 million, decreasing $3 million year-over-year. Total system operations expense increased year-over-year. Excluding roaming expense system operations expense increased by 6%, mainly driven by increases in cell site rent expense and maintenance expense, while total data usage on our network increased by 59%. Roaming expense decreased 13% year-over-year, due to lower rates, partially offset by a 55% increase in off-net data usage. As I said earlier, outbound roaming has been and is expected to be lower as roaming activity has decreased in relation to stay at home orders. Cost of equipment sold decreased 7% year-over-year. We also expect cost of equipment sold to trend in line with gross additions and upgrade levels. Selling, general and administrative expenses increased 3% year-over-year, driven by an increase in bad debt expense of $9 million, primarily as a result of U.S. Cellular's participation in the FCC pledge to not terminate service, due to customers' inability to pay. As a result of our participation in the pledge, we expect to have further negative impacts to our financial results including bad debt expense. Moving to slide 16. Shown next is adjusted EBITDA, which starts with adjusted operating income and incorporates the earnings from our equity method investments along with interest and dividend income. Adjusted EBITDA for the first quarter was $281 million flat year-over-year. Earnings of unconsolidated entities increased by $1 million or 3%, while interest income decreased by $2 million, due to a decrease in the average amount invested for the quarter as well as lower interest rates. Adjusted operating income and adjusted EBITDA do not include depreciation, amortization and accretion expense. In connection with the network modernization and 5G initiatives, we are upgrading several of the network equipment elements. This results in the recognition of accelerated depreciation on certain of the assets being replaced. As a result, depreciation, amortization and accretion expense was up 5% from a year ago. Our final slide, Slide 17 provides our updated guidance for the year. As we have highlighted throughout the call, there is a good deal of uncertainty related to potential business outcomes for the year. Given the timing of the COVID-19 outbreak and the manifestation of its impacts having only begun to take effect in mid- to late March, we essentially have less than one month of data to consider as we think about the likely outcomes for the year. However in that time we have seen limited impacts on revenue. On the cost side we have seen more impact, although still modest, driven primarily by the FCC pledge and the associated incremental bad debt expense as previously discussed. These outcomes in our consideration of other potential impacts on the business including those related to customer sales activity roaming and other operational costs to care for associates and customers have informed the guidance we are providing today. I want to take a moment to remind everyone that our guidance is on service revenues not total operating revenues, which includes both service revenues and equipment sales. Variations in equipment sales typically have a corresponding impact on cost of equipment sold and as a result are less impactful to our profitability measures. Therefore we believe that service revenues are the more meaningful revenue measure for guidance purposes. For total service revenues, we have maintained our range of approximately $3.0 billion to $3.1 billion. We have lowered our adjusted operating income and adjusted EBITDA ranges by $50 million each to $725 million to $850 million and $900 million to $1.025 billion, respectively. For capital expenditures, we are maintaining our guidance range of $850 million to $950 million. As Ken noted in his opening remarks, at this point we continue to make good progress on our key projects, such as VoLTE deployments, 4G LTE network modernization in 5G and do not currently anticipate any major disruption to any of them. I will now turn the call over to Vicki Villacrez. Vicki?

Okay. Thank you, Doug and good morning, everyone. Let me begin by addressing the actions TDS Telecom has taken, as an essential partner with the communities we serve during the COVID-19 pandemic. Our response was above and beyond the FCC, Keep Americans Connected pledge, which we have agreed to extend to June 30. We are not terminating service to customers because of their inability to pay their bills and we are waiving any late fees due to disruptions caused by the pandemic. In addition, TDS offered free broadband for 60 days to new customers who are either low-income, families with children or college-aged students. And we are making cash contributions within our communities to provide direct relief for those in need. What we've been able to validate since the crisis began is the importance of high-speed Internet. And how important not only our investments have been but also our advocacy efforts on behalf of rural America. Our immediate response to the pandemic was to prepare for a shift to more Internet use from home and we saw a significant increase in demand for our broadband product. And at the same time, we were pleasantly surprised by increased demand for our voice products as well. As you know, we serve some of the most rural areas in the country. Many places where mobile connectivity may not be good enough for work or school activity, so customers are turning back to us for traditional voice connections. As a result of driving fiber deeper into our network, we have robust networks which are and remain very stable. We've been very fortunate that our workforce has remained healthy and have been able to respond to the increased demand for products, services and support. We are limiting our technician's time within the customer's home and are pleased with the team's ability to operate effectively and safely in this environment. And we are using increased customer demand for innovative solutions as a catalyst to move faster towards their vision of utilizing self-service for more of our customer interaction. So overall, we are very pleased with the start of the year and our ability to react quickly to the impact of the pandemic. We remain committed to achieving our strategic priorities as outlined at year-end and included on slide 20. Now let me highlight our financial results for the quarter as shown on slide 21. Despite the impact of the pandemic, most of our rural -- most of our results are indicative of trends for the year. Consolidated revenues increased 4% from the prior year, about half of which is due to the Continuum cable acquisition, which closed at the end of last year. It also reflects organic increases in broadband and video from our fiber expansions in wireline and continued growth in cable ARPU and broadband subscribers. Cash expenses increased 7% including the acquisition and 5% without as we increased spending associated with our new markets. Adjusted EBITDA declined 2% to $82 million. Capital expenditures increased 27% to $54 million as we continue to invest in our fiber deployment. This quarter, we launched two new out-of-territory fiber markets, one in our Southern Wisconsin cluster and our first market in our Central Wisconsin cluster. I will cover our total fiber program in more detail in a moment. But for now, let's turn to our segments, beginning with the wireline on slide 22. Broadband residential connections grew 3%, driven by significant growth in our out-of-territory markets. We are offering up to 1 gig broadband speeds in our fiber market. Across our wireline residential base, essentially one-third of all broadband customers are now taking 100 megabit speeds or greater compared to 25% a year ago, helping to drive a 4% increase in average residential revenue per connection in the quarter. Wireline residential video connections grew 9% compared to the prior year. Video is important to our customers approximately 40% of our broadband customers in our IPTV markets take video, which for us is a profitable product. Our strategy is to increase this metric as we expand into new markets that value these services. However, we will be monitoring the potential impacts of this pandemic on cord cutting going forward. Slide 23 shows the progress we are making this year on our multiyear fiber program, which includes in and out-of-territory fiber builds. As a result of this strategy over the last several years, 32% of our wireline service addresses are now served by fiber, which is up from 27% a year ago. This is driving revenue growth while also expanding the total wireline footprint, which grew 5%. Our current fiber plans now include roughly 320,000 service addresses with our recent announcement of the addition of Spokane Washington to the Pacific Northwest Cluster, located approximately 30 miles west of Coeur d'Alene, Idaho. The 1 gig network will ultimately connect more than 87,000 Spokane homes and businesses across the community. We are also planning for additional markets and are evaluating expansion in our major clusters. During the quarter, we've completed construction of 14,100 fiber addresses. And take rates are generally exceeding expectations in the areas, we've launched to date but we are starting to see some delays in construction. For example, slower municipality permitting as well as electric utility dependencies associated with the aerial portion of our fiber build continues to be a major watch point for us. Also as a result of the pandemic, we have temporarily suspended door-to-door sales and have redeployed those sales teams to customer support service. We are seeing online sign-ups beginning to grow as a result of our direct marketing campaign. Looking at wireline financial results on Slide 24, total revenues decreased 1% to $169 million largely driven by continued decline in CLEC commercial revenue. This decline is offsetting strong growth we have seen in residential revenue which increased 4% due to growth from video and broadband connections, as well as growth from within the broadband product mix partially offset by a 4% decrease in residential voice connections. Commercial revenues decreased 10% to $39 million in the quarter, primarily driven by lower CLEC connections and wholesale revenues were flat compared to 2019. Wireline cash expenses increased 3%. Employee expenses increased as we are staffing in our new markets. We continue to see reduced cost of legacy services partially offset by higher programming video fees. Maintenance expense increased as we incurred tornado damage in some of our Tennessee markets during the quarter. As a result of increased expenses from the fiber market buildup and decreases in commercial revenues, wireline adjusted EBITDA decreased 9% to $57 million. Moving to Cable on Slide 25. Cable's total revenues increased as customers continue to value our broadband services. Total cable connections grew 10% to $372,000 which included $31,000 from the acquisition and a 6% organic increase in total broadband connections. On an organic basis broadband penetration continued to increase up 19 basis points to 44%. On Slide 26 total cable revenues increased 19% to $71 million driven in part by the acquisition, without the acquisition, cable revenues grew 10% driven by growth in broadband connections for both residential and commercial customers. Our focus on broadband connection growth and fast reliable service has generated a 27% increase in total residential broadband revenue including organic growth of $4 million or 17%. Also driving the revenue change is a 10% increase in average residential revenue per connection, driven by higher-value product mix and price increases. Cash expenses increased 17% due primarily to costs related to the addition of the acquisition or 7% excluding acquisition due to increased employee expense and plant maintenance. As a result cable adjusted EBITDA increased 22% to $25 million in the quarter driving increasing margins by 100 basis points. Now turning to Slide 27 we want to provide you with some of the leading indicators we are monitoring for effects on our business from the pandemic. From a customer perspective, we are expecting an increase in bad debt in future periods and we have adjusted our reserves and continue to monitor this closely. Some of our most at risk customers are the small business customers that make up the base of our commercial services which currently represents about 20% of our total revenue. As I mentioned earlier, we've seen increased demand for our residential products. But we do have areas where we have copper customers who are unable to upgrade to higher speed. However, defections continue to remain low. From an operational perspective, our highest priority is keeping our customers and employees safe. To that end, we've expanded safety protocols for frontline workers and have had to temporarily cease door to door sales. We have also launched TDS TV+ in certain cable markets, which has a more efficient installation reducing customer contact time. We are planning to launch additional markets over the next several months. As I noted earlier, portions of our fiber builds depend on third parties in advance of our fiber deployment, which may impact our ability to stay on our aggressive construction schedule. Taking these factors and all the other uncertainties for the remainder of the year into consideration on slide 28, we have provided our 2020 guidance, which is unchanged from what we shared in February. Even with so much uncertainty, we see a path towards our objectives at this point and we remain committed to hitting our expectations. And with that I would like to thank all our employees for their incredibly dedicated responses to the newly imposed challenges to their work. Whether it is our customer-facing employees or the rest of us that have transitioned to work at home, we have had a challenging, but successful start to the year and remain committed to keeping our employees, customers and community safe. Now I'll turn the call back over to Jane.

Thank you, Vicki and Suzanne. We're ready to take questions.

Thank you. [Operator Instructions] And our first question comes from the line of Simon Flannery of Morgan Stanley. Your line is open.

Great. Thank you very much. Good morning. And thank you for all the detailed color. That's very helpful. A question on the wireline and on the wireless side. On the wireline, can you talk a little bit more about self-install on both the cable and on the traditional telco side? How much are you able to do? And to what extent does this delay activity? And what do you think you can do going forward on that once we get past this? And then on the wireless side, you talked about the momentum in connected devices. Can you just give us a little bit more color on how a connected device ARPU particularly the new ones you're selling compares to your traditional phone ARPU? Thanks.

Vicki, why don't you take that first part?

Yes. So good morning.

Good morning.

First, let me say, I am truly amazed on how our employees quickly, quickly transitioned in this environment and have continued to operate effectively and at the same time developed new process and tools to put in place to keep our customers and our frontline workers at pace. And safety has really been our number one priority. And so as we think about some of the innovations that we've put in place we have focused on doing as much equipment assembly outside of the home. We've transitioned to using a technology that provides our technicians with video assist capabilities to help the customer self-service within the home. And we have reduced our truck rolls in all of our fiber broadband upgrade. So we have found that our network and our line are secure and reliable and steady and we're able to do broadband upgrades from a remote standpoint. So all of that is helping to keep our technicians safe and reduce the amount of time that they are spending in the home. I also mentioned that we are -- we temporarily ceased our door-to-door sales activity. And in place of that we have been working very diligently to hang door hangers. So we're able to go out and put door hangers on customers' homes. And we've redeployed our door-to-door sales teams on to the phones. And so our calls and our web sales are picking up with speed. And we're finding right now just in the recent activity on the website our broadband sales on the website, we're seeing about 30 -- well, 40% are taking video. And within our -- with our new broadband promotion, we're seeing 30% of those customers taking voice sales. So we've seen a real initial surge of product demand during the pandemic.

Great.

Simon, its Ken here.

Yes.

Average revenue on some of these connected devices running a little bit less than a typical smartphone, well north of what we're seeing on a prepaid, let's call it about 40 right now. I put the right now there, given that the growth is very recent. I mean, we've had a lot of them out -- we had a number of them out there for a long time. But a lot of our growth is the real reason. We're just going to be going through our first billing cycle right now on it. So it's something we're watching. But right now I like it a lot.

Great. Thanks a lot, Ken.

Your next question comes from the line of Zack Silver of B. Riley. Your line is open.

Okay, great. Thanks for taking my question. The first one on the wireless side. Thanks for the color on the store traffic quarter-to-date. Can you just give us any sense of how that traffic is converting into new connects and/or upgrades, given that it seems like your customers are coming into the store, they're probably doing it with more purpose than just kind of shopping or browsing?

I don't know that we've seen a significant change in what I would call the closure rate. It's a traffic that's down. We actually have -- historically had a number of customers that actually paid their phone bills in person. And we're actually going out and picking those up at the curbside to kind of take care of them and prevent more traffic in the stores than necessary. I don't think the closure rate, right now, is dramatically different than it was before. It's just, the whole level of retail activity has slowed down.

Got it. And then, again another one on the wireless side, just kind of balancing the growth in data usage with maybe more consumers tightening budgets on economic weakness. Can you talk about what sort of trends you're seeing in upgrade rates to unlimited plans?

Again, not a big change right now, because with the FCC pledge out there, a customer doesn't need to go to an unlimited plan off of let's, say, 8 gig plan in order to get the benefit of more usage. So you aren't -- until the pledge ends, I don't think you're going to see that. But I think what you may see, is people having used more data for a longer period of time when the overages and the caps start to go back in place, I think, that's when we get to see the migration.

Got it. That makes sense. And then, one for Vicki on TDS Telecom. You called out a lot of COVID-related headwinds that have emerged since February, but you're keeping the guidance as is. Can you talk about what potentially is offsetting some of these headwinds that have recently emerged?

Sure. I think in my prepared comments I had mentioned that this pandemic certainly has validated just how important our services are and also the importance of the investments that we've made into our network. And so, our immediate response, number one, was to shift to more Internet use from the home. And at the end of March we saw a significant surge of demand for our broadband products, as I mentioned in my earlier question-and-answer there, including the reinstallation of some voice lines. So we saw our network usage increase 60% during our non-peak and 15% during our peak hours. And yet our network has remained very stable throughout. And so, that traffic really represented a growth rate of 24% in average gigabytes per month per user. So pre-COVID, during COVID. As I look at the backside of this pandemic, that's really some of the headwinds that we outlined in our slide. Bad debt will most certainly increase especially with our decision to extend the FCC pledge through June 30th. But we did increase our reserves in the first quarter to a certain extent and we'll reevaluate that again at second quarter. Small business customers are also a concern as they make up most of our commercial revenues, which I had sized at 20% of our total revenue. So small business customers and their ability to pay and stay in business is a real watch item for us. On the upside, I was indicating we had a surge of product demand, March and April gross adds were up significantly. And while we're just starting to see this surge slow, we're well ahead of our expectations. And at the same time our voluntary churn is very low. So all of those puts and takes, we really see a path to our guidance at this point.

Got it. Very helpful. Thank you, Doug.

And our next question comes from the line of Rick Prentis. You line is open.

Thanks. And thoughts to you, your families and employees as we all go through this. First question is on the wireless side, the change in guidance, obviously, service revenue is maintained, but the service or OIBDA is down $50 million. Kind of break that down for us that partially probably was bad debt. But what's made up of that $50 million reduction to guidance?

Well, overall Rick as I look at it in terms of where we started the year, we're going to see as I said a little bit less revenue in the first part of the year from overages and fees that are being waived, okay, and those, kind of, fall right to the bottom line. Similarly with less store traffic and less equipment sales, we're going to see less accessory sales and there's a nice margin on accessory sales that we also won't get there. I talked about a little bit more usage cost from the increase there and the risk around bad debt are really the main components. And they're all things that we just have to watch and manage.

Okay. Speaking of overage fees, late fees, what percent of ARPU or what's that traditionally run as far as how much overage and late fees mean on your ARPUs?

Well, historically, okay, and I say underline that because who knows what it looks like when we come out of this. But right -- historically a couple of percent, nothing major.

Okay. And clearly roaming both revenue and expense will still sums up -- can you help us understand maybe like in April, what you saw as far as reductions in roaming revenue, roaming expenses, knowing that summer periods are usually the bigger periods?

Yeah. Real -- well we are cautious with preliminary one month information at this point in time. Yeah, we've been clear that we expect to see some decline just in traffic, but that's when I don't have enough information to really give you something I'm comfortable with at this point.

Sure, makes sense. And factually what happened to upgrades in the first quarter and obviously store traffic will affect upgrades going forward. How do you see what was the actual for upgrades and what you think might be the trend this year?

I think upgrades were 4.5% down a little from when they've been at. Yes you've got store traffic impacting that late in the quarter, because we had two solid months. But it's -- again it's the ongoing elongation of the amount of time with customers holding the phone, expensive phones that are built better, lasting longer and costing more right? So people just stretching it out. I don't think that there's any other real big change there going forward. I expect at least today that to continue with the reduction in retail traffic perhaps, pushing that down a little bit over the next couple of months, but not even further.

Makes sense. And do you have a similar small business exposure like Vicki had for the telco side? What percent of your business is small medium business? And is that factoring into the bad debt thoughts?

So, one a lot of our real small business is all – our all phones that really look like consumer lines. They're in the individual owner's name, right? And my own view is that when we talk about lines at that level not as much risk, because they still need their communication devices. It kind of reminds me of back in – years ago when we went through this as an industry the first time and there was – unemployment was higher. People were keeping wireless devices because that was the way they were out looking for a job. That was the way they were being contacted. Right now, I still see this as an absolutely critical vehicle for communications. And I don't know that we're going to see a big jump on that.

Okay. Great. Well again thoughts to all your family friends and employees as we go through this. Best wishes.

Appreciate it. The same to you. Be safe.

Suzanne, we have time for one more question.

Great. And your next question comes from the line of Michael Rollins. Please go ahead. Your line is open.

Hi. Thanks and good morning. Just curious as you look at the acceleration of investment into the wireless business this year and you contemplate what's happening in the current environment does this impact your interest to accelerate fixed wireless broadband products into your U.S. Cellular footprint? And maybe just some thoughts in terms of how you're thinking about bringing these new capabilities to customer's overtime?

Thanks Mike. Hopefully, all is well on your side. We were interested excited and optimistic about fixed wireless from the outset well before this. And more of the delays in terms of to be able to recognize its full capability hasn't been network-related, as much as it's been what I'll call CPE-related getting – being able to you get equipment that will use all the advantages of the advanced in networks. So as we continue to move forward with 5G and starting with enhancing that 5G, even further with some millimeter, yeah, we're – we think that, it's not going to really speed us up in the sense that we're going about as fast as we think is appropriate today. Part of this technology is still evolving and we don't want to be so far off – so far out in front of the skis that we've got to kind of reduce it up. But I think we're moving at the right pace. And that pace is driven by the optimism we have about what that fixed wireless opportunity looks like.

Thanks.

Thank you. I appreciate everybody's time today and flexibility in making this work.

Thank you so much. And any follow-up calls let us know. Stay safe.

And this concludes today's conference call. You may now disconnect.