Telephone and Data Systems, Inc. beats earnings expectations. Reported EPS is $0.3248, expectations were $-0.22. Telephone and Data Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the TDS and UScellular’s First Quarter 2024 Operating Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Colleen Thompson, Vice President, Corporate Relations. Please go ahead.

Colleen Thompson: 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 UScellular websites. With me today and offering prepared comments are from TDS, Vicki Villacrez, Executive Vice President and Chief Financial Officer; from UScellular, LT Therivel, President and Chief 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 UScellular Investor Relations website.

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 UScellular’s wireless partnerships. TDS and UScellular filed their SEC Forms 8-K, including the press releases and our 10-Ks earlier this morning. 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 version included in our SEC filings.

And with that, I will now turn the call over to Vicki Villacrez. Vicki?

Vicki Villacrez: Okay. Thank you, Colleen, and good morning, everyone. Before we talk about the results for the quarter, I want to once again reiterate that as announced on August 4th last year, we embarked on a review of strategic alternatives at UScellular. I’m unable to comment on the process at this time except to say that it remains active and ongoing. Management of TDS and UScellular along with both Boards, remain committed to a path that is in the best interest of the company and our shareholders. Given the nature of the process, we don’t expect to have updates until it’s concluded. Okay. Now let’s talk about the business unit results. I’m pleased that both business units are showing notable year-over-year improvements in adjusted EBITDA and delivering on their profitability target set at the beginning of the year.

TDS Telecom is realizing the benefits of our multi-year fiber investments with both top and bottom-line growth in the quarter and UScellular reported a nice improvement in ARPU in addition to ongoing cost discipline. From a consolidated perspective, we are maintaining our focus on both OpEx and CapEx costs while at the same time prudently allocating our capital towards critical network investments that are advancing our technologies. At TDS Telecom, we are expanding our fiber footprint and at UScellular, our mid-band rollout remains on track. As we announced this morning, TDS entered into a $375 million unsecured debt facility and borrowed $300 million at closing. The proceeds will be used for general corporate purposes, including the advancement of TDS Telecom’s fiber build program.

As you will hear Michelle speak later on the call, TDS Telecom’s fiber strategy is working. TDS Telecom is reporting strong growth as expected both top and bottom-line, which gives us the confidence to keep investing in the fiber program. TDS’ overall long-term weighted average cost of debt and preferred equity increases 30 basis points with this borrowing to 6.8%, which is favorable in the current interest rate environment. We will continue to manage our balance sheet through a combination of long-dated debt maturities issued at historically low interest rates, reasonable leverage and sufficient liquidity, all of which provides flexibility to execute against our current operational objectives and longer-term strategic goals. I will now turn the call over to LT.

LT Therivel: Thank you, Vicki. Good morning, everybody. If you turn to Slide 5, you can see our quarterly highlights. As you can see, we delivered strong bottom-line results driven by solid ARPU growth and effective expense discipline. Post-paid ARPU was up 3%, which is impressive, given that approximately 40% of our post-paid handset gross ads over the past year have elected our lower-priced flat-rate plans. And as a reminder, those flat-rate plans offer lower pricing, but they’re not eligible for our richer device promotions, and therefore they yield similar overall economics as our legacy unlimited plans. A contributing factor to our post-paid ARPU increase has been continuing to move our customers to our higher-value top-two-tier plans.

We have 51% of our handset customers on those top tiers at the end of March 2024, compared to 42% a year ago. Post-paid churn was also a bright spot in the quarter, down five basis points year-over-year. During the quarter, we focused on retention through personalized promotional offers, as well as pulsing in aggressive mass upgrade offers. We saw solid results from our new Us Days retention program, and you can expect to see continued investment in retention throughout this year. Post-paid handset gross ads continue to be a challenge in the first quarter, and a significant driver of the gross ad challenges was a 16% year-over-year decline in the total pool of available subscribers. We made some changes in our promotions during Q1, and we’ve made some additional changes more recently to remove trade-in and plan requirements on our lead promotions.

And while it takes time to fully assess the impact of those changes, we’re encouraged by the early results, and we expect to continue to assess and adjust our promotions as necessary to drive improved subscriber results. Now briefly on cable wireless. As I mentioned in past calls, they’ve become a formidable competitor in our footprint. We compete against cable wireless across about two-thirds of our footprint, and while they have a mid-single-digit market share across that area, they’re currently winning about 15% of the share of post-paid handset gross ads by offering low-cost plans, which can be bundled with their fixed broadband products, and they’re now beginning to offer device promotions more frequently. We estimate they offload approximately 90% of their traffic to Wi-Fi, and that’s 10 to 20 percentage points higher than the estimated Wi-Fi offloads of U.S. cellular, and we believe the same goes for the other large wireless carriers.

Higher offload to Wi-Fi means lower usage on cellular, and we believe this dynamic, as well as their ability to cross-subsidize their bundle with wireline profits, means they could potentially make even more aggressive future moves on pricing and promotion. Now, our churn results show we’re competing effectively, but we’re going to need to ensure we have the right pricing and promotional constructs to remain competitive while we generate sufficient returns to invest in our network and provide our customers with a great experience. We have another strong quarter in fixed wireless. We’ve grown this subscriber base by 42% compared to the prior year, ending the quarter with 124,000 subscribers. Prepaid net losses improved year-over-year, as we saw improvement in our prepaid churn rate, which decreased 24 basis points.

Over the past year, we made enhancements to our prepaid distribution, and we expanded our digital engagement and we’re seeing the results of those efforts in our reduced churn and improved lifetime economics of our prepaid customers. Just to touch on the business space, and particularly 5G use cases, we’re seeing some interesting emerging examples of using advanced network capabilities to help drive innovation, particularly through partnerships. One example is a recent partnership with Rockwell Automation to deploy a 5G private cellular network within their connected enterprise lab. Rockwell is seeing their customers looking for guidance in real-time or near real-time decision-making with their applications, and private 5G provides the lower latency and the higher bandwidth to enable those applications.

We’ve already deployed a number of private cellular networks, and we see a lot of opportunities in the manufacturing and the utility space going forward. Another example is a recently announced partnership with Cape. They’re using our patent-pending MVNO revolution architecture to deliver an ultra-private and secure mobile wireless experience that keeps people connected securely wherever they are. And with wireless being a part of our everyday lives, there’s a heightened need for privacy and security, and we’re really pleased to partner with Cape as they offer a differentiated and innovative solution that protects customers’ data. Turning to the network. Our mid-band deployment is on track and I’m pleased with the results that we’re seeing where we deploy mid-band.

By the end of 2024, we expect to have mid-band on cell sites that handle almost 50% of our data traffic. And we’re seeing a strong correlation in the percent of traffic handled by our mid-band network and a corresponding increase in both perception and a higher Net Promoter Score and we’re excited about the value this network is delivering to both our mobility and our fixed wireless customers. Finally with respect to our financial results, our cost optimization program continues to deliver strong results, as we increased our profitability and our adjusted OIBDA by 11% in the quarter. Doug will provide some additional detail in his section, but I’m pleased with the financial results that we’re delivering even in the face of subscriber challenges.

A brief note on Washington. The Affordable Connectivity Program was initially created to help close the digital divide and we’re really disappointed that the program was not renewed. I’ve spoken in the past there’s two obstacles to bridging the digital divide in this country, particularly in rural America and that’s infrastructure investments and affordability investment. And BEAD in the 5G fund may help with infrastructure, but affordability still remains a challenge for many customers. ACP provided support to many people in our footprint. It’s disappointing that we couldn’t find a way to support them. Our exposure is relatively minimal, but we’re committed to continuing to serve these customers and we have a plan to provide them with special discounted offers to ensure that they’re able to stay connected.

Before I turn the call over to Doug, I want to recognize and thank all of our associates for their exceptional hard work and dedication towards helping our customers stay connected to what matters most each day. Doug, over to you.

Doug Chambers: Thanks LT. Good morning. Before we go to the quarterly results, I want to remind you that we sunset the CDMA network in January of this year. At the time of the shutdown, we had 11,000 postpaid and 2,000 prepaid connections still dependent on the network. These customers were removed from their respective basis and are not reflected as defections or churn in the first quarter results. We expect the CDMA network shutdown to be accretive to 2024 adjusted OIBDA and to result in approximately $40 million in run rate annual operating expense savings beginning in 2025. Let’s review the customer results on Slide 6. Postpaid handset gross additions decreased by 30,000 due to the intense competitive environment and as LT mentioned, a 16% reduction in the pool of available customers.

Correspondingly, postpaid handset net additions were down 22,000. Connected device net additions were slightly improved for the quarter, up 2,000 due to higher demand for fixed wireless home Internet, as well as a decrease in hotspot churn. Prepaid net losses improved by 10,000 connections due to improvements in prepaid churn previously discussed by LT. Now, let’s turn to the financial results, starting on Slide 8. Total operating revenues for the quarter decreased 4% as service revenues declined 2% and equipment sales declined 10%. The primary drivers of lower service revenue are declines in the average postpaid subscriber base, partially offset by a higher postpaid ARPU as LT discussed previously. Equipment sales declined due to a decrease in smartphone devices sold as a result of lower gross additions and upgrades, which was partially offset by an increase in price per unit sold due to customer demand for more expensive devices, as well as a decrease in promotional expense as customers continue to opt for flat rate price plans which are not eligible for higher levels of device discounts.

The decline in upgrade rates and the corresponding decline in equipment sales is consistent with the industry. Now let’s turn to Tower results on Slide 9. The business delivered a solid quarter with $25 million of third-party Tower revenues, which represents 3% growth. As we noted last quarter, the wireless industry has moderated capital expenditures which will impact Tower revenue growth rates in the short term, but we are bullish on the long-term revenue opportunities of the Tower business. Next, let’s turn to our quarterly operating performance, shown on Slide 11. For this discussion, I will refer to adjusted operating income before depreciation and amortization as adjusted operating income. As I mentioned, operating revenues declined 4%.

However, this decline was offset by a decrease in cash expenses compared to the prior year of 7%. Loss of equipment or equipment sales less cost of equipment sold decreased 40% as a result of lower transaction volume and lower promotional cost per transaction, partially due to higher adoption of flat rate plans, as previously discussed. Selling, general and administrative expenses decreased 4%, driven by lower employee-related expenses which includes decreases attributable to both the second quarter 2023 reduction in workforce and sales expenses, partially due to the decrease in gross add and upgrade volumes, partially offset by increases in expenses related to the strategic alternatives review. Wrapping up this slide, as LT mentioned, adjusted operating income increased 11% and adjusted EBITDA, which incorporates the earnings from our equity method investments, along with interest and dividend income increased 8%.

Both of these amounts have been adjusted to exclude $7 million of expenses related to our strategic alternatives review. Our cost optimization program continues to deliver strong results. Despite expected service revenue declines for the full year 2024 and cost increases that result from our ongoing mid-band 5G deployment, we expect our full year adjusted operating income margin as a percent of service revenues to remain relatively flat in 2024. The full year 2024 cost profile is expected to be positively impacted by the shutdown of our CDMA network in the first quarter of 2024, the reduction in force executed in the second quarter of 2023, and cost savings from initiatives across all areas of the business. Our associates have done an excellent job identifying and executing these initiatives and we remain focused on this program in 2024 to drive further cost savings.

Our capital expenditures decreased compared to the same period last year, partially due to the timing of mid-band capital expenditures in each respective period. In addition, we expect capital expenditures for the full year 2024 to trend toward the lower end of our guidance range and be less than 2023 capital expenditures. As shown on Slide 12, our 2024 financial guidance remains unchanged from the guidance we issued in February of this year as we remain on track to our financial plan. I will now turn the call over to Michelle Brukwicki. Michelle?

Michelle Brukwicki : Thank you, Doug, and good morning, everyone. Turning to Slide 14. As Vicki mentioned, the key highlight for TDS Telecom is that our fiber strategy is working. For the past several years, we’ve made significant investments in our fiber program, and our financial results are starting to reflect the benefits of those investments. We just delivered our strongest quarter of revenues and profitability since starting our fiber program. Our fiber results, combined with our disciplined expense management, produced a 5% increase in revenue and a 38% increase in adjusted EBITDA in the quarter. In addition to delivering strong financial results, the team continues to deliver a steady cadence of marketable fiber service addresses with 28,000 this quarter.

We’re on track to reach our annual goal of 125,000 marketable fiber service addresses that we shared with you in February. As we deliver these fiber addresses, we are also successfully selling into those addresses. Overall, we are achieving the broadband penetrations projected in our business cases. In first quarter, we reached a major milestone, exceeding 100,000 residential broadband connections in our expansion markets. Moving to Slide 15. You can see where we’re at on our longer-term scorecard. We are targeting 1.2 million marketable fiber service addresses. We ended the quarter with 827,000, so we’re two-thirds of the way there. We’re also targeting 60% of our total service addresses to be served by fiber. We ended the quarter with 49%.

This reflects progress in growing fiber through our expansion markets as well as fibering up our incumbent markets. We also refer to this as our ILEC. At the end of the quarter, 44% of our ILEC addresses were fibered up. And finally, we are expecting to offer speeds of 1 gig or higher to at least 80% of our footprint. We finished the quarter with 73% gig speeds. On Slide 16, you can see that we are growing our footprint with a 12% increase in total service addresses year-over-year. As shown on the right side of the slide, we are — we see increased demand for higher broadband speeds with 78% of our customers taking 100 megabits per second or greater, up from 72% a year ago. We continue to increase the availability of Gig+ speeds. Customer take rates of these speeds are growing, with 17% of our customer base on 1 gig or higher at the end of the quarter.

Our broadband investments are driving meaningful results. As I mentioned in the last call, during 2024, we are focusing on driving broadband penetrations in our new expansion markets. And we are executing as planned. As shown on Slide 17 we had 6,400 Residential Broadband Net Adds in the quarter, which contributed to 6% growth in residential broadband connections year-over-year. We see strong broadband connection growth in our expansion markets. We also continue to see Incumbent Copper customers convert to Fiber where available, protecting our base and providing a better customer experience. The enhanced ACAM program will get even more fiber into our ILEC markets to serve these customers. Average Residential Revenue per Connection was up 7%, due primarily to price increases.

And with increases in broadband connections and revenue per user, we saw 10% growth in residential revenues. Specifically, expansion markets delivered $26 million of residential revenues in the quarter, compared to $15 million a year ago. As expected, commercial revenues decreased 9% in the quarter as we continued to decommission our CLEC markets. Lastly, wholesale revenues increased 3%, due to the incremental revenues we have started to receive under the enhanced ACAM program. On Slide 18, you can see our quarterly performance. Operating revenues were up 5% in the quarter, as the growth in Residential Revenues in wholesale was partially offset by the decline in commercial revenues. Strong expense management led to a 6% decrease in cash expenses for the quarter.

As our penetrations and revenues grow, along with this disciplined cost management we are seeing nice growth in adjusted EBITDA, up 38% in the quarter. Capital expenditures were $87 million in the quarter down 33% from last year. Slide 19 shows our 2024 guidance, which remains unchanged from what we shared with you in February. We are confident in our plans for both top and bottom-line growth this year through increasing our fiber penetrations and effective cost management. Turning to CapEx, we are committed to pacing our, capital spend this year in line with our profitability. For the next few years we are balancing the priorities of both our fiber expansion program and the enhanced ACAM program. We are carefully planning and engineering both programs to keep them progressing at a pace to meet our build commitments, that’s also commensurate with our financing capacity.

In closing, I want to thank all of the TDS Telecom associates, for their focus on our strategic priorities. This quarter’s strong results reflect the hard work of our entire team. We have good momentum after the first quarter And I continue to be excited about the opportunities ahead. I’ll now turn the call back over to, Colleen.

Colleen Thompson: Okay. We will now open up the call to your questions. As a reminder, today, our focus is on the quarter. And we’ll not be taking questions on the review of strategic alternatives for UScellular. Operator, we’re ready for the first question.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Ric Prentiss with Raymond James. Your line is open.

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