Thank you for standing by. At this time, I would like to welcome everyone to the TDS and U.S. Cellular First Quarter 2023 Operating Results Call. [Operator Instructions] Thank you. Colleen Thompson, Vice President of Corporate Relations, you may begin your conference.

Good morning, and thank you for joining us. We want to make you all aware of the presentation we have prepared to accompany our comments this morning, which you can find on the Investor Relations sections of the TDS and U.S. Cellular websites. With me today and offering prepared comments are from TDS Vicki Villacrez, Executive Vice President and Chief Financial Officer. From U.S. Cellular, Laurent Therivel, President and Executive Officer; Doug Chambers, Executive Vice President, Chief Financial Officer and Treasurer; and from TDS Telecom, Michelle Brukwicki, 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 the websites for slides referred to on this call, including non-GAAP reconciliations. We provide guidance for both adjusted operating income before depreciation and amortization or OIBDA and adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, to highlight the contributions of U.S. Cellular's wireless partnerships. TDS and U.S. Cellular filed their SEC Forms 8-K including the press releases and our 10-Q yesterday. As shown on Slide 2, the information set forth in the presentation and discussed during this call contain statements about expected future financial results that are forward-looking and subject to risks and uncertainties.

A second, Colleen. Operator, could you just do us a favor and make sure all the lines are muted, please.

Okay. I'm going to go back to 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 paragraph in our press releases and the extended version included in our SEC filings. In terms of our upcoming IR schedule on Slide 3, on May 23, we will be attending JPMorgan's 51st Annual TMT Conference in Boston. And in late June, we will be virtually attending the New York Stock Exchange Investor Access Conference. And as always, we have an open door or video call policy, so please reach out if you're interested in speaking with us. I will now turn the call over to Vicki Villacrez. Vicki?

Okay. Thank you, Colleen, and good morning, everyone. Both of our business units reaffirmed their guidance shared with you in February. U.S. Cellular is making significant investments in advancing its network and TDS Telecom is executing its strategy to deploy fiber in approximately 100 new markets. We continue to ensure we have the balance sheet strength to support the investments the enterprise needs and are managing within our planned levels of leverage for 2023. We ended the quarter with approximately $1.1 billion in available sources of liquidity, including cash, revolver and asset securitization facility to choose from to help fund our investments as needed, and we continue to have access to the debt capital markets. And now I'll turn over the call to LT to update you on U.S. Cellular's results. LT?

Thanks, Vicki. Good morning, everybody. I hope everyone is doing well. If we turn to Slide 6. Our top priority continues to be improving customer results. And although we still have plenty of work to do, I'm pleased with the progress that I've seen. As you can see on Slide 8, we've driven both improved postpaid gross adds on a year-over-year basis. We've improved postpaid churn on both a year-over-year and sequential basis. And we hope to see those trends continue moving forward. And I want to talk for just a second about the drivers of some of the results that you're seeing. Take you back mid-'22, we launched several pricing and promotional efforts in order to address subscriber challenges. And specifically, we were looking to address churn reduction. And based on the testing we've done in our regional trials, we knew it would take about 6 to 9 months to see the consumer churn benefit. And we're now starting to see that in the consumer channel. Our voluntary churn improved about 10% year-over-year. At the same time, we also launched our flat rate plans in order to improve the gross ad trajectory. And we continue to see steady adoption of those plans. And on average, nearly 27% of our flat rate customers have selected the higher tier unlimited plans. As a quick reminder, while flat rate pricing generates lower ARPU than our traditional postpaid pricing customers that are on those flat rate plans are not eligible for higher levels of device promotional discounts. And so those plants have similar economics over their contract terms. And I'm pleased with the balance that we're striking between subscriber and financial aggressiveness. You'll see postpaid ARPU is also up 2% for the quarter. I also want to take a second and highlight our…

Thanks, LT. Good morning. Let's start with a review of our customer results on Slide 8. Postpaid handset net losses improved $11,000 on a year-over-year basis due primarily to lower voluntary defections as voluntary churn improved both year-over-year and sequentially in large part due to the increase in percentage of customers in contract as a result of our attractive upgrade offers in the second half of 2022 and first quarter of 2023. We saw connected device gross and net additions increased by 9,000 on a year-over-year basis, driven by fixed wireless customer growth. As LT mentioned, we continue to see strong momentum in fixed wireless with a base of customers up 63% from the prior year and up 11% from the end of 2022. Moving to Slide 9. Prepaid gross additions declined 12,000 and net prepaid additions decreased 5,000. In terms of gross additions, the overall pool of available customers declined and we believe the year-over-year decrease in income tax refunds contributed to this. In addition, given the relative pricing parity between our flat rate postpaid offering and our prepaid plans, we are seeing our customers choosing to take our flat rate postpaid offer instead of prepaid, and that's a good trend as our flat rate plans provide better economics. Lastly, we saw a decline in our prepaid churn rate. Now let's turn to the financial results starting on Slide 10. Total operating revenues for the first quarter decreased 2% from the prior year with service revenue declining 3%. The primary drivers of lower service revenue are declines in the average postpaid subscriber base and roaming revenue. You will note, that the decline in roaming revenue is due to decreasing reciprocal roaming rates with our carrier partners, and this roaming revenue decline is more than offset by the decline we…

Thank you, Doug, and good morning, everyone. I'm pleased to report on TDS Telecom's first quarter results and to confirm that we are on track to meet both our operational and financial goals set out earlier this year. Here are the key messages. First quarter fiber service address delivery and financial results came in as expected. This sets the foundation for us to meet our fiber service address target and financial guidance that we set out at the beginning of the year. We delivered 25,000 marketable fiber service addresses during the quarter. Our full year goal is 175,000 addresses, so we will be significantly ramping up deployment as we move out of winter months and construction activity can accelerate. On the financial side, broadband penetration in our new expansion markets continues to grow at the pace expected in our business cases. This is translating into revenue growth. Since we are still in the early phases of market launches in the majority of our markets, we continue to see pressure on adjusted EBITDA. This is a result of incurring start-up costs before the revenues from the markets start coming in. This is all part of our 2023 guidance. As these new markets start generating revenue, which follows our service address delivery, adjusted EBITDA will start to improve in future years. I'll give more detail on our fiber program and financials as we go through the slides, but I wanted everyone to have this context upfront. So let's move to Slide 15. Here, you can see our strategic areas of focus that will help us achieve our goal to be the preferred broadband provider in the markets we serve. Investments in these strategic priorities will drive profitability and improved returns over time ultimately strengthening TDS Telecom's financial and market position. Moving to…

Okay. Operator, we're ready for the first question.

[Operator Instructions] Your first question is from Rick Prentiss of Raymond James.

Can you hear me okay?

Rick, it's a little hard to hear you.

Yes. A couple of questions. Can you hear me better now?

Yes, much better.

Okay. Cool. Yes. First, I want to focus on the balance sheet and capital allocation maybe. Vicki, as you look at investment years at both U.S. Cellular and TDS Telecom, help us understand, you mentioned the level of leverage you want to see in '23. Where is that at? How are you viewing the dividend as far as that capital allocation goes and any consideration of looking at possibly securitizing the tower business, which seems to still be doing very well.

Okay. A couple of questions there. Let me start first with capital allocation strategy. Just broadly, as we are looking across our businesses, we've talked significantly about last year, the last couple of years, this year, we are in a heavy investment cycle, both with the 5G modernization and C-band deployment at U.S. Cellular and the expansion of our footprint and into approximately 100 new markets at TDS Telecom. But I have to balance the needs and the pacing and the timing of those investments with our leverage and with dividends that we feel are important to our shareholders. So it's a balance. And as I look at our leverage, we are working to manage -- really manage well under our debt covenants with significant safety net. And we are looking to manage within our credit rating requirements. And so we're balancing that with the pacing of our investments back into the business. And then let's see. You had a second question on towers. If I think more broadly about our noncore assets and towers, that gives our balance sheet strength. And it also gives and contributes strength to the business. So we talked a lot about the towers and the importance to the U.S. Cellular as a core part of its operation. And but it gives us balance sheet strength. So I will tell you that we have sufficient liquidity for 2023 and we have sufficient sources -- but I would not -- I would have those -- if I needed them, but for 2023, I'm not needing to monetize anything on the balance sheet.

Okay. And the dividend was increased not that long ago, I think, what, 49th year in a row or so, so still a strong commitment to paying the dividend.

We have a very strong commitment to paying the dividend. We have a long track record that we're very proud of, and we are focused on modestly increasing it, which we did this year.

Okay. Second question for me. LT, when you joined, you mentioned that there could be opportunities for partnerships in the business to help return on capital. It's been several years. Obviously, it's been a difficult environment out there. But update us as far as what potential partnerships are out there, where you're at as far as maybe bringing them to fruition.

Yes, I remain -- the concept of partnerships and the opportunity for partnerships is founded on two concepts. The first concept is that the capital intensity for the industry as a whole is in a challenging place. It's the case for us. It's also the case for our competitors. And the second concept that it's founded upon is it simply does not make sense in my perspective, if you think about network density, site density required to support 5G, let alone 6G, which is starting to be talked about. Building multiple duplicative, 4 or 5 duplicative networks in rural America, given the capital intensity challenges to me doesn't make sense. And so we continue to have conversations with players in the industry. Obviously, I can't get into specifics. I think there's general agreement upon those two founding principles. One interesting example, it's a very micro example, Rick, but it gives you a sense about how people are thinking about this. In our tower business, One of the interesting things that we can do is we don't just market real estate on the tower because we're an operator, and we also have assets at that tower that other people can use, we can market those as well. And so those are shelters and generators and those core sorts of things that you would expect. The interesting one is backhaul. So we've had some conversations with people about sharing backhaul. And in the past, that concept would have been no thank you, right? That means that there's a piece of my network that I have to share with someone else. And we're actually seeing a lot of interest in some of those backhaul sharing conversations. So I believe the momentum behind those partnerships remain reasonable. I think it's still a good strategic concept. To your point, we haven't seen meaningful progress that I can report out on a call like this. But I do think that the underlying strategic rationale remains sound, and we continue to have those conversations with folks in the industry.

Your next question is from Sergey Dluzhevskiy of Gamco Investors.

My first question is for LT. You mentioned that the promotions and offers that you had in the market in the second half of last year and first quarter of this year, are having positive impact on churn with a 6 to 9 months lag effect as you expected. My question is, as you look at the magnitude of churn improvement, is that what you expected? Is it tracking better or worse compared to your kind of initial expectation based on some of the trials that you did in your regional markets before? And also, besides getting more customers in contract, which is obviously what you're working on, what additional steps do you see that are working for you or have been working for you recently in terms of improving churn and what else could be done?

Thank you for the question. I am pleased with the progress that we've made on churn. Clearly, still have a lot of room to go. But more broadly, as I think about trends in the business, we've had, if I look at 2022, every quarter had better net add momentum than the quarter before. In the first quarter of this year, we have better net adds -- better net add results than the first quarter of last year. Q1 is generally going to be down from Q4 for net adds in our industry, as you well know. And so the momentum in the business, the direction of the business is heading from a net add perspective, I'm pleased with. It's not fast enough. We have to continue to improve the momentum and the reason I share that with you is because it's somewhat similar to the results that we saw on churn. So the net impact of the promotions has been about what we expected. It took a bit longer than we had seen in our test market. And so the improvements took a few more months to drive the benefits that we hoped to see in terms of churn improvement than we had seen in our test markets. But the overall impact of the improvement is consistent, and we remain optimistic that we can continue to drive those kinds of improvements in churn. As long as we can keep people in contracts, right? Our in contract rate right now is about 64%. It's as high as it's been in a long time. We're going to have to maintain that type of in-contract rate if we want to continue to see positive churn momentum. And so that's going to be a key driver of it. The other pieces of it…

Got it. My second question is on the gross add front. Handsets gross adds were up 2% year-over-year, but it was largely driven by, I think, 5,000 increase in feature phone gross adds. The smartphone gross add down 3%. Maybe a 2-part question. First, what is the reason for increasing number of feature phones or size over the past few quarters? And second, more broadly, if you look across different geographies and different markets that you have. What are some of the common characteristics of markets where you tend to do better in terms of gross adds over the past few quarters? And are there any license loans that could be applied to other markets that are underperforming right now?

Yes, Sergey, on the first part of your question with respect to the feature phone success, one thing we see occurring is that customers that have been on our prepaid plans, some are migrating over to our flat rate plan. So in the first quarter of this year, 3,500 prepaid customers migrated to our postpaid flat rate plans. That counts as a postpaid gross add and that's why you're seeing that dynamic between feature phones and smartphones in the first quarter.

And Sergey, I'll tackle your second question in terms of market characteristics. You won't find it shocking, right? Markets where we have a strong network, we generally do well from a subscriber performance perspective. When we roll out 5G, we see improvements in customer perception. We don't just see improvements in perception. We see actual demonstrated improvements in performance. And so where we have upgraded our network, we tend to see better subscriber results. By upgrading our network, you can think of that in two ways. The first way is modernizing the 5G. As I mentioned in my earlier comments, we have 80% now of our traffic is -- rides over a tower that has been upgraded to 5G. I mentioned that only because as customers move to 5G handsets, that's the key metric that we're following is not what's the total percentage of traffic on 5G, it's what's the total percentage of traffic that rides over a 5G-enabled tower. Because as you know, getting a 5G signal requires you to upgrade the tower, but it also requires you to upgrade a handset. We feel good about how we've invested, how we've made those investments and how we've upgraded our network to 5G. The next pivot in terms of continuing to improve our network is with mid-band. And so we've begun deployment of that mid-band spectrum. Right now, we can only light up the 3.45 spectrum that we purchased from the Department of Defense but we are deploying the C-band spectrum as well that we expect to be able to light up at the end of this year. As we reported, I think we've been able to clear any interference concerns we have with the FAA. And so we feel good about our ability to deploy that spectrum for the benefit of our customers. And as we light that up, we believe we'll have an even more compelling network offering and so that helps us drive subscriber performance both on the churn side and the gross adds side. Go ahead, Sergey, one more?

Yes. One more question for Vicki. Last question. Basically, TDS and USM stocks obviously have been under pressure for some time and operational turnaround that US Cellular is taking longer than expected. I mean, obviously, we see green fields, but it's taking longer than expected, while competitors obviously don't sit still. So given all that, what moves around capital allocation or financial engineering with TDS and US Cellular considered to surface value from a significant collection of underappreciated assets that you have in your portfolio that potentially could provide you with additional capital to invest for growth? And also just in general, broaden strategic flexibility.

Yes. Thank you, Sergey, for the question. as I had answered before, we have a balanced approach to our resource allocation, and we're constantly weighing the returns that we're getting on our investments and as we are allocating our capital, we're very focused as LT has outlined, and Michelle and Doug have outlined, the strategic objectives at both businesses. Having said that, our stock is under pressure as it -- we saw a decline in that, and we are making heavy investments right now, and that is pressuring our profitability and our free cash flow in the near term. However, we are very focused on these investments, trying to position both businesses for future growth and improved returns over time. And that is our goal. As I've talked about, we've got a strong balance sheet. We have strong assets on our balance sheet and noncore assets. And if we should need to do something with those from a financial engineering perspective, that would always be an option. But right now, that is not our plan for 2023.

Your next question is from Simon Flannery of Morgan Stanley.

I don't think you really referenced macro much on the call, which I guess is a good thing. But some companies have talked a little bit about slower payments or higher involuntary churn. I wonder if you could just talk across both the consumer and the enterprise wireline and wireless. Anything you're seeing or you're monitoring on the macro side of things or enterprise decision-making. And then LT, you talked a lot about fixed wireless. Nice to see the momentum there. Help us a little bit with this scaling as you bring on the mid-band spectrum. How should we think about your go-to-market across your footprint with that mid-band 5G footprint, we're obviously seeing a lot of traction at Verizon and T-Mobile. So how will that flow into 2024 for the company? And how do you address the concerns or the kind of pushback by some about the inability of wireless to handle broadband traffic beyond a certain point?

Thanks, Simon. A lot there. I'll have Doug tackle the macro from the U.S. Cellular perspective. You mentioned wireline. So I'll have Michele tackle macro from the telecom perspective, and then I'll answer your question about fixed wireless. Doug?

Yes. Simon. So on the macro side, I mean, there's continued pressure with generally higher inflation rates and potential recession later this year. But I would say as we're managing our payments and bad debt quite well. If you look at our bad debt expense, it's actually flat year-over-year at $26 billion for this quarter. Our involuntary churn went up very slightly and the weight per involuntary defect went up slightly. So there is some pressure there. We're spending a lot of time monitoring it and taking action specifically. We tightened credit twice in the fourth quarter of last year. We've taken some antifraud measures, including ID scanners and enhance ID scanners in our stores as well as extending the device locking period. All of those are going to help us in 2023 as it relates to bad debt. Certainly, watch point given the macro environment, but we continue to manage it well and feel good about where we're at right now.

Simon, it's Michelle. So I'll take it from the telecom side. Yes. So from our perspective, on the customer payments, bad debt expense, we're operating at the pre-pandemic levels. We had gotten back to that already most of last year. So things are trending just normally for us. So not really any concerns there. Last year, you did hear us talk about supply chain concerns and some actions we were taking with that. We did a lot of prebuying in 2022 to make sure that we had the materials that we needed in order to make sure to not delay any of our fiber builds. We were very successful in doing that, and that's a shout out to our supply chain management team. So -- at this point, we're seeing some of the supply chain constraints loosen a little bit. And so we don't see the same risk in supply chain this year going forward. We were positioned really well coming into 2023. And, in fact, hope to be able to just start utilizing some of that pre-buying that we had done. In terms of inflation, we do see some higher costs in certain areas of our business. As it relates to our fiber builds, there are some higher costs related to labor and materials, but we have consistently worked and I think I've talked about this before, to find ways to mitigate some of those cost increases with implementing process improvements and figuring out ways to design our network builds more efficiently, more effectively making sure we're targeting the lowest cost areas to build. So far, even though there's been some cost increases in certain areas related to our business case on fiber, we're able to maintain the overall business case expectations and the returns we expect to get out of those projects. Because of the mitigating initiatives that we put to offset some of those higher costs. So I'm not sure, Vicki, if you want to talk at all about interest rates from the macro perspective?

Yes. I mean, certainly, we saw an increase, another increase modestly by the Fed. I think I've shared with you for every 1% increase in the rates, it's about $20 million more in interest expense. But I think I'm very comfortable with the balance between our fixed -- in our variable portions of debt, and we've got that built into our projections.

And Simon, let me tackle fixed wireless based on your question. We are very pleased with the momentum we've seen in that product. Like I mentioned before in the comments, but I'll just reiterate it briefly. We do have two interesting continued catalysts. One, we didn't expand that product footprint wide until June of last year. And so as you're looking at year-over-year growth, we still feel good about Q2 in terms of our ability to grow meaningfully because we have it across our entire footprint. And additionally, as we start to bring on mid-band spectrum, we have an ability to satisfy not only capacity, which is certainly an issue that we're paying attention to, but also deliver a far higher speed experience. And so we have the ability to compete in areas and effectively compete in areas that maybe we're not really touching right now. The interesting thing about our rollout is it's a little bit different than our competitors. And I think it creates a more sustained opportunity and it also creates an opportunity to manage our network differently and that's -- we're focusing more on rural areas and rural customers. First, it's a very different competitive dynamic. Right now, our low-band product competes primarily with satellite with DSL, and you can see the growth that we've been driving in it. When we roll out mid-band, we'll be competing not only against those technologies, but against an upgraded cable plan, even upgraded cable plan when people aren't happy with their cable provider. The one place and I've been trying to be pretty clear about this in the past, we don't view this product as being particularly competitive against is where there's existing fiber. We do not plan -- you asked about go-to-market, right? We don't plan on aggressively distributing or going to market or marketing the product in areas where there is fiber. But we do plan on aggressively marketing it everywhere else. And the other nice thing about doing this in rural areas is it's more manageable from a capacity perspective. Capacity is certainly something we're still going to have to pay attention to. Fixed wireless subscribers is a lot [indiscernible] but when you have a less dense subscriber base, utilizing fixed wireless off of a tower, you then also have less competition with your mobility product. And so you can manage those capacity demands in a bit more of a targeted in an elegant fashion. And so right now, our plan is we continue to be full speed ahead with the product. We continue to expect to distribute it across our entire footprint, and we remain really bullish on what we're seeing.

So that's really helpful, both on the macro and the fixed wireless. So just -- I think you would have 30 million POPs or something. So maybe is that fair to think that, that's 12 million and 15 million households. And will you have 5G to half of those, more than half of those with fixed wireless next year?

I'm trying to follow the bouncing ball on the math, Doug, you've got...

Yes. So I mean, right now, Simon, over a low-band, it covers our entire footprint. That's about 13 million homes. With respect to mid-band, that's going to be multiyear rollouts. We're going to get to more homes -- we're going to get to those 13 million homes over time. And probably, frankly, not all of them over time based on the way mid-band propagates. But we will continue to expand that coverage starting this year with our build-out. And again, it's multiyear.

Your next question is from Tom Lidka [ph] of Citadel.

I've been a shareholder for 32 years, and I purchased the stock at $14.34. And 32 years later, I've lost half my money. And I've listened to this presentation of enthusiastic future results, and they don't seem to come. And I'm wondering at some point, if it makes sense to put the company up for sale and let these assets be more efficiently run in a larger system because I don't know where we're headed here, the stock is at a 32-year low. And I wonder if someone can explain this to me?

Tom, it's LT. We certainly appreciate you sticking with us. I appreciate you being a shareholder for so long. Certainly questions that you're asking or questions we've been asked before and they continue to be things that we evaluate in terms of strategic options for the business. We believe in this business, we believe in the long-term future of the business. It's -- the wireless industry as a whole is in an interesting place right now. Lots of people have invested a lot of capital to produce and to deliver 5G and those use cases have been slow to manifest themselves. And I think that's created capital intensity pressures, not just for us but for our competitors. And I do think you see that reflected in the performance of the equity. That being said, I believe we have a very strong set of assets in this business. We have strong spectrum holdings. We've reset our debt over the last few years to have -- so that we have a better positioned balance sheet. I think Vicki went through that. And I believe that we're well-positioned to support that 5G demand as it begins to emerge in the coming years. And so I understand your frustration. I share it. Obviously, I'm a shareholder as well. I appreciate the question. We think we're well-positioned to take advantage of that growth, and we're staying the course with our strategy because we believe in it.

There are no further questions at this time. I will now turn the call over to Colleen Thompson for closing remarks.

Okay. Thanks, everyone, for your time today. Again, please reach out to IR, if you have any additional questions. Have a great weekend.

This concludes today's conference call. Thank you for your participation. You may now disconnect.