Telephone and Data Systems, Inc. (AD) Earnings Call Transcript

Ladies and gentlemen, thank you for joining us. And welcome to the TDS and Array Third Quarter 2026 Operating Results Conference Call. [Operator Instructions] I will now hand the conference over to John Toomey. Treasurer, Vice President and Head of Corporate Relations. Please go ahead.

Good morning, and thank you for joining us. The presentation we prepared to accompany our comments this morning can be found on the Investor Relations sections of the TDS and Array websites. With me today and offering prepared comments are: on behalf of TDS, Walter Carlson, President and CEO; Vicki Villacrez, Executive Vice President and Chief Financial Officer. On behalf of TDS Telecom, Ken Dixon, President and CEO of TDS Telecom; Kris Bothfeld, Vice President of Financial Analysis and Strategic Planning of TDS. On behalf of Array Digital Infrastructure, Anthony Carlson, President and CEO of Array. This call is being simultaneously webcast on the TDS and Array Investor Relations website. Please see the websites for the slides referenced on this call, including non-GAAP reconciliations. TDS and Array filed their SEC Forms 8-K, including the press releases 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 full description of risk factors included in our SEC filings. I will now turn the call over to TDS President and CEO, Walter Carlson. Walter?

Thanks, John, and good morning, everyone. TDS made progress during the third quarter on our mission to transform the organization. Over the past several years, we have taken many strategic actions that position us well both for today and the future. Those include exiting the wireless business, monetizing spectrum at attractive values, retaining tower assets that can benefit from future demand, investing in fiber without the burden of high leverage in a period of rising interest rates, and repurchasing shares at prices we believe are attractive. Today, I am pleased to share TDS and arrayed Digital Infrastructure's third quarter results, which reflect the progress we are making. TDS Telecom delivered record construction activity and strong fiber customer growth but has more work to do to offset pressures on profitability. Array delivered strong revenue growth as it continues to optimize the portfolio. Across both businesses, we remain confident in our strategy and the investments we are making to create long-term value. Turning to Slide 3 and our 2026 enterprise priorities. Our objectives remain clear: grow and strengthen our fiber business, maximize the value of our tower portfolio. maintain disciplined capital allocation and continue transforming our business for the future. As Ken Dixon and Chris Barfield will explain TDS Telecom continues to expand its fiber footprint while increasing its focus on converting those addresses to customers. As Anthony Carlson will describe Array is advancing its strategic priorities through increased tower colocations and continued efforts to monetize its C-band spectrum. I do want to briefly comment on TDS' withdrawal of the previously announced offer to acquire the minority interest of Array in an all-stock transaction. As we noted in our September 1 press release, we continue to believe there could be strategic benefits to such a combination. However, after extensive review on both sides, the 2 parties were unable to reach agreement on value and form of consideration. With that process behind us, TDS continues to be laser-focused on supporting both array and TDS Telecom as they advance their respective strategic objectives and build shareholder value. I continue to be encouraged by the progress being made in both business units and by the work underway to strengthen our culture during this period of transformation. I would like to personally thank every associate across the enterprise for their continued commitment and contributions. I will now turn the call over to Vicki.

Thank you, Walter, and good morning, everyone. As Walter highlighted, our enterprise priorities are centered on creating long-term value, and our capital allocation is aligned to support them. First is fiber. TDS Telecom continues to advance its long-term goal of reaching 2.1 million marketable fiber service addresses, adding approximately 76,000 in the third quarter. . TDS Telecom now has a footprint of over 2 million addresses, an increase of 8% over the prior year and 63% of those addresses are served with fiber today. Delivering on this level of continued expansion requires intentional oversubscription, which drives pull-forward capital but is necessary to fill our pipeline to mitigate for temporary construction delays such as permitting or other factors. As we've noted previously, being first to market with fiber is a critical part of our investment thesis. It supports expected returns in the low to mid-teens and our fiber investments. We continue to see attractive opportunities to be first to fiber, and our strong capital position provides us the flexibility to pursue these investments. We remain confident in our long-term growth and value they can create. Second, I am pleased to share that following the termination of TDS' offer to acquire Array we were in the market and have now virtually exhausted all of our prior share repurchase authorization or $520 million. Given recent share prices and our view of the company's intrinsic value, we view this investment as an excellent use of available capital. Further, in an effort to afford us future flexibility the TDS Board has approved an additional $250 million share repurchase authorization. This is an open authorization that is not time bound and allows us to remain opportunistic as market and business conditions evolve. Finally, in the quarter, we completed the acquisition of Granite State Communications a tuck-in market in New Hampshire that brings nearly 13,000 fully fibered service addresses to the portfolio, strengthening our Northeast fiber cluster. Thank you. And now I will turn the call over to Ken Dickson to discuss TDS fiber business.

Thank you, Vicki, and good morning, everyone. At TDS Telecom, we are transforming our business to be fiber-centric. Slide 6 shows our progress at the end of the third quarter. We now have over 2 million service addresses and 63% of those are served by fiber. Another 19% are served by coax, meaning that 82% of our addresses can get gig speeds today. Our incumbent markets are now 56% fiber. And with the support of ACAM and our fiber deeper investments, we continue to drive copper out of our network. . As shown on Slide 7, we delivered approximately 76,000 marketable fiber service addresses in the third quarter bringing us to approximately [ 181,000 ] for the first 9 months of the year. This represents the best third quarter fiber address delivery in company history and demonstrates our continued momentum. Being first to fiber and seizing the current opportunity are critical which is why our fiber build plan is supported by historic levels of construction crews and our ACAM activity reached its highest level since the program began. In the third quarter, we delivered 27,000 new ILEC fiber addresses and expect that number to increase in the fourth quarter. That momentum is driving our CapEx guidance for the year. Looking ahead, we plan to deliver another 25% of our ACM addresses next year with less construction competition in rural areas today, we are seizing the opportunity to retain crews and accelerate our investments. As a result, we have a large pipeline of addresses in various stages of construction and investment across many markets. This pipeline positions us well to meet our goals, both this year and long term. In summary, our build teams are delivering at a record pace, giving us confidence in the construction plan and the opportunity ahead. Turning to sales. We ended the third quarter with approximately 17,000 fiber net adds, our highest quarterly result in company history, up approximately 50% year-over-year. We also saw improvement in our fiber churn when compared to last year's third quarter, which is typically the industry's highest quarter for churn. We are seeing the benefits of our new sales leadership and expanded capabilities. We have additional door-to-door vendors to attack the record open-for-sale opportunities to complement our existing teams. We have also increased capacity in our multi-dwelling space to accelerate sales for those units. In terms of customer acquisition, we have shifted a significant portion of volume toward the dot-com channel, which is our lowest cost of acquisition. We are excited by the sales opportunities we see as we close out 2026 and move into 2027. In our cable markets, subscriber trends continue to stabilize during the third quarter. As you know, 22% of our cable addresses today are served with fiber. As we continue to become a more fiber-centric company, I'm pleased to share that we are beginning activities to convert another 30,000 coax addresses to fiber. Our operational transformation is centered on efficiency, improving the customer experience and simplification. As I've noted before, we continue to make progress modernizing our systems and remain on track with our transformation road map, making it easier for customers to do business with us. Turning to Slide 8. Our long-term goals reflect the scale and long-term value we expect to create through our fiber growth strategy. We believe fiber is the superior broadband technology, not only for today, but well into the future. With the delivery of approximately 76,000 fiber addresses in the quarter, we now serve over 1.2 million fiber service addresses, representing 63% of our total footprint and with 82% of addresses capable of gig speeds. We are building at a record pace, improving our execution and steadily shifting the business toward fiber. We know there is more work ahead but the progress we're making reinforces our confidence in our strategy and long-term value of the fiber-centric business we are creating. Before I turn it over to Chris, I want to comment briefly on our third quarter financial results. We are very bullish on our fiber growth future, but continue to see pressure on our legacy business. This is a driver for our updated guidance. which Chris will cover in more detail. Thank you. And I will now turn the call over to Chris.

Thanks, Ken. Turning to Slide 9. The chart on the left shows our quarterly fiber service address delivery over the past 7 quarters and reflects the build momentum we are experiencing. As Ken highlighted, we had company record address delivery in the third quarter, representing an 82% increase year-over-year, and the momentum continues as we head into the fourth quarter. For the full year, we remain on track to deliver between 250,000 and 300,000 new fiber service addresses. The chart on the right illustrates the continued expansion of our fiber footprint. Over the past 3 years, we have increased the number of fiber service addresses across our markets by approximately 77%, demonstrating steady and meaningful progress toward our long-term fiber goals. On Slide 10, residential fiber net adds were approximately 17,000 in the third quarter, a 50% increase compared to prior year, driven by continued footprint expansion and ongoing copper to fiber conversions. Residential fiber connections have grown 81% over the past 3 years, outpacing our fiber footprint growth. We expect continued fiber connection growth as we expand our footprint. Turning to Slide 11. The chart on the left depicts our residential revenue per connection, which increased 2% year-over-year. This growth reflects annual price increases, partially offset by promotional activity. The chart on the right highlights total residential revenue between copper, cable and fiber. You'll see that fiber revenue is up 14% or $12 million versus prior year which largely offsets the legacy revenue stream pressures we are experiencing. In cable, revenues are down 7% versus the third quarter of 2025, reflecting continued market pressures partially offset by a onetime benefit in the quarter. Adjusting for this benefit, cable revenues would have been down 10%. As Ken highlighted, we are increasing investment in sales capacity in our cable markets and are starting to see progress. Overall, total residential revenue declined $3 million compared to prior year. Excluding the impact of divestitures, residential revenues were relatively flat. As Ken noted, we are deploying fiber across our footprint at a record pace to help mitigate legacy headwinds. Slide 12 summarizes our financial performance. Total operating revenues declined 3% in the quarter or 1% excluding the impact of divestitures. The remaining decline reflects continued legacy revenue stream pressures, partially offset by fiber revenue growth. Cash expenses increased 4% as cost to support our growing expansion markets, along with inflationary cost increases, including fuel and people-related costs, were not fully offset by our transformation and ongoing cost containment initiatives. Also note that the third quarter cash expenses include $4.2 million of strategic alternatives costs primarily related to workforce reductions. This compares to $3.5 million incurred in the prior year. We continue to drive efficiencies in the organization to help offset inflationary increases and costs associated with expanding service and growing our footprint. The decline in adjusted EBITDA for the quarter reflects these cost pressures as well as top line headwinds from divestitures and legacy revenue streams. Capital expenditures totaled $251 million in the quarter, reflecting higher address delivery, a higher mix of buried versus aerial builds, and a record level of addresses under construction across our fiber markets that will be delivered in future quarters. We are seeing higher costs to complete our EA can build in certain areas as we need to use more costly construction techniques and more miles of fiber required. Despite these higher costs, we believe the economics of our EA CAM program remain attractive. Slide 13 reflects our guidance for 2026, which has been updated. We are projecting total telecom revenues of $990 million to $1.01 billion, down from our prior guidance. We were anticipating fiber revenues to more than offset legacy declines during the second half of 2026, but continue to work toward that inflection point. We also moved our adjusted EBITDA guidance range downward to $290 million to $310 million as the lower revenue expectations fall to the bottom line and we are experiencing higher costs to support our extended hours to service customers in areas where we are building fiber. From a capital perspective, we have increased our guidance by $100 million from our prior midpoint to approximately $750 million. As Vicki and Ken both highlighted, delivery of fiber addresses at a record pace requires that we have a large funnel of addresses and the flexibility to pivot when delays arise from permitting and other factors. Nearly half of this increased CapEx is driven by a pull-forward of future spend, which we expect will contribute to address delivery in 2027. The remaining increase is largely due to higher A-CAM build costs and a pivot to construct more of the buried addresses in our expansion markets, as I mentioned earlier. Before turning over the call, I want to thank the entire TDS team for their continued execution and focus, their efforts across fiber delivery, customer growth and operational transformation are critical to the progress we're making toward achieving our long-term objectives. I'll now turn the call over to Anthony.

Thanks, Chris, and good morning. The third quarter represented another meaningful step in executing our strategy to optimize tower operations. Our year-over-year results are now becoming increasingly comparable as Q3 2025 mark both the launch of Array as a stand-alone tower company and commencement of the T-Mobile MLA. As highlighted on Slide 18, when adjusting for DISH and excluding T-Mobile Interim site revenue, cash site rental revenue increased 20% year-over-year. After also fully excluding the impact of the T-Mobile MLA Cash site rental revenue grew 7% year-over-year, demonstrating the strong organic growth of our tower portfolio. As T-Mobile continues its network integration activities, we are continuing to see the expected reduction in interim site revenue as those sites are terminated. Importantly, our leasing pipeline and sustained application activity continue to support healthy revenue growth which is expected to partially offset the impact of declining interim site revenue over time. Turning to Slide 19. We continue to gain greater visibility into the expected population of tenantless towers following T-Mobile's integration process. Based on the information available today, we refined our estimate that 1,200 to 1,600 tenantless towers. As a reminder, however, T-Mobile has until January 2028 to designate its committed sites under the new MLA. Given the likelihood that a meaningful number of towers will remain without tenants in the near term, we remain intensely focused on our ground lease optimization initiatives. While this is a multiyear effort, we have made progress in reducing lease costs on towers that are likely to become tenantless and identifying the most uneconomic sites for decommissioning. More broadly, we are accelerating our ground lease buyout program, which expands tower level margins while further reducing portfolio risk. Moving to Slide 20. There has been minimal change since last quarter with a notable exception that we received regulatory approval for the sale of certain 600 megahertz and 700 megahertz spectrum licenses. Subject to FCC finality and customary closing conditions, we expect the transaction to close by year-end. We also continue to pursue opportunities to monetize our remaining spectrum holdings, primarily our C-band spectrum. This spectrum is deployment-ready today, and we remain confident in its value as a highly attractive 5G asset, and the absence of near-term build-out requirements allows us to remain disciplined and avoid being forced sellers. Slide 21 summarizes the results of our partnership or noncontrolling investment interests. As a reminder, 2025 investment income and distributions were impacted by several onetime factors including the impact of the Iowa partnership, selling their wireless operations to T-Mobile and distributions received from Verizon related to their transactions with Vertical Bridge. Equity income for the 9 months ending September 30 was $116 million. Turning to Slide 23. Array delivered a strong quarter with year-over-year revenue growth driven primarily by the T-Mobile MLA complemented by solid growth from the rest of our customer base. As discussed in prior quarters, the year-over-year increase in cost of operations reflects the reclassification of certain property tax and insurance expenses from SG&A into cost of operations. This change also contributed to the year-over-year reduction in SG&A expense. SG&A continue to include costs associated with winding down the legacy wireless operations, although those expenses declined further during the quarter. In addition, SG&A remained elevated due to strategic alternatives related costs incurred in evaluating the proposal received from TDS to acquire the remaining publicly held shares of Array. Consistent with their classification, these costs are excluded from adjusted OIBDA. With the withdrawal of the TDS proposal, we do not expect these costs to recur in the fourth quarter. On Slide 24, our outlook remains unchanged. We expect total operating revenue of $205 million to $215 million, adjusted OIBDA of $60 million to $75 million and adjusted EBITDA of $220 million to $235 million. Capital expenditures are expected to be $25 million to $35 million, driven by an expected increase in ground lease buyout activity during the remainder of the year. In closing, Array continued to make meaningful progress on its journey to becoming a leading tower company. I want to personally thank our team for their dedication, execution and contributions throughout the year. We remain firmly focused on completing the T-Mobile integration, expanding our customer relationships and optimizing our ground lease portfolio. The momentum across the business is clear, and I'm excited about the opportunities ahead and the progress we will continue to achieve together. I will now turn the call back to Walter.

Thank you, Anthony. As I noted in my opening remarks, TDS continues to make solid progress advancing our strategic priorities. The momentum we are seeing across the businesses positions us well as we come into the last 2 months of 2026 and look forward to 2027. I'd like to again thank all of the outstanding associates across the TDS enterprise for their continued dedication and hard work in serving our customers and supporting the advancement of our business. Operator, please now open the line for questions.

[Operator Instructions] Your first question comes from the line of Rick Prints with Raymond James.

I have a couple, want to start on the TDS Telecom side, as we've looked at and tanks with that chart showing kind of fiber versus copper versus coax, as we look at that, obviously, pressure on the legacy side, you talked a little bit about cable and what you're doing there, trying to get some more coax to fiber changes in sales. But as I look at the copper side, it looks like copper, you've had some divestitures, but kind of down $10 million year-over-year on the revenue line in copper markets, but also down $2 million sequentially in 1Q to 2Q, 2Q to 3Q. When do we think about turning that around? I think you mentioned putting some more ILEC fiber out there. But how should we think about stemming that trend on the copper side? And when do we think, broadly speaking, the business in flex so that you get revenue growth at the total level and EBITDA -- OIBDA growth at the total as well as you kind of balance fiber versus legacy.

Thanks for the question. Yes, what's beautiful for us this year is the [indiscernible] program. And as you saw, the 27,000 addresses that we delivered in the third quarter in our ILEC market, this is core to our strategy is deploying fiber into those EA can markets. And then along the route, picking up those copper-served addresses today in our legacy footprint. So we saw a nice acceleration in the third quarter. We have a funnel very robust in terms of addresses for our EA Chem in the fourth quarter. And then as you see from some of my comments, we've got record crews right now from a construction standpoint. And candidly, the largest amount of addresses in our pipeline here going into the fourth quarter. So that gives us confidence that we're going to continue to be able to attack those copper markets and ultimately deploy fiber.

And Rick, to answer your question around total revenue growth, what I would say is that we expected in the second half of this year that our revenue our fiber revenue growth would more than offset these legacy declines but we're still working towards that inflection point. I will say that inflection point is around the corner. It's not years away. And just like Ken said, our strategy is to accelerate our fiber business as much as possible to offset these legacy pressures in the near term.

And how about as we look down to the OIBDA line? Obviously, you're investing a lot of CapEx think Vicki mentioned someone you mentioned kind of the return on capital hurdle for these projects in the low and mid-teens. How do you think about the OIBDA turning around and becoming growth then? .

Yes. So just to elaborate on that. Obviously, revenue plays a huge role in EBITDA. So we're doing everything we can to get to that inflection point on revenue, and that will drop to the bottom line. We also are on pace to hit our transformation initiatives. We've put a line in the sand that by year-end 2028, we will deliver $100 million in run rate benefits we're still tracking towards that goal. And so the increase in accelerated fiber revenue growth as well as those transformation efforts will help also turn around EBITDA in the future.

Great. And the second 1 is for Anthony. Obviously, it seems like we get daily, weekly buzz from what SpaceX is doing, what DISH is doing. Can you let us tell how many Dish sites you had and what's happening as far as any discussions on the tower side with satellite companies in general? And how soon might we see something from satellite companies that impact you guys? .

So in terms of your first question, we had about 330 DISH sites, of course, they're no longer paying for those. They're in the process of standing that equipment. That's not how many we have. We're not going to comment on any sort of particular satellite company. But what we will say is that we have great assets that are tracked to anybody who is interested in building out a terrestrial network and indeed, the largest carriers in the united states and many other players as well are already tenants of ours, and we look forward to working with anybody who's interested in building out retrial networks.