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

I'm Phil Cusick. I follow the communication services and infrastructure as well as media space here at JPMorgan. I'm pleased to welcome Ted Carlson, President and CEO of TDS Telecom as well as Chairman and Founder of U.S. Cellular. We're joined by Michelle Brukwicki, thanks for joining us, senior VP and CFO of TDS since February. Congratulations on your new job.

Thank you.

So let's start with Ted. Thanks for joining us again. It's been a little while. But looking at both the U.S. Cellular and TDS business, what's the top of mind for you in terms of priorities this year?

Well, let me start, Phil, with U.S. Cellular. U.S. Cellular is working hard on its strategy, and its strategy is involved with keeping true to its mission, which is serving the unserved and underserved parts of the United States that we have a wireless footprint over, and that's 32 million people, and we're excited about what we're doing for them. We're looking for growing our business at U.S. Cellular. We're looking to increase our return on capital. We're looking to get as much as possible from the new BEAD infrastructure program. We're investing heavily in our network, and we're investing in our people. We recently won an award for the best company in the communications industry for Best Place to Work. So it just goes to show how we're actually doing what we say. So U.S. Cellular is doing some great things, and we'll talk more about that, I'm sure, in the Q&A, Phil. But let me turn this over to Michelle to talk about what we're doing at telecom because I think she should answer that question.

That's right. So I joined as CFO of TDS Telecom in February. And along with the rest of our TDS Telecom leadership team, we are all about focusing on executing our planned fiber builds and generating the expected financial returns that we are expecting from those new markets that we're entering into. We are also working hard at telecom and across the company to navigate supply chain and inflationary pressures to ensure we stay on track with these builds, make sure that we have the right materials and the right labor in the places that we need them, when we need them, in order to stay on track and keep the builds progressing as planned. And in addition to focusing on execution, we are continuously looking for new opportunities to take fiber into new markets and looking for opportunities to take fiber deeper into our existing territories. And like Ted mentioned, we would do that with our own investments and through government programs like A-CAM and the infrastructure bill, or some call it BEAD, as Ted referred to it. So at TDS Telecom, you can probably tell, we are all about broadband and especially fiber.

Okay.

And Phil, let me just add a couple of comments about TDS Corporate. We have a philosophy of being very sound financially, and that means maintaining our current credit ratings, which are mid-BB+ in the case of 2 of the 3 agencies. And we have done some significant refinancing over the last couple of years, which brought our interest rate down materially. And of course, we issued that perpetual preferred stock, which provided us a wonderful source of low-cost capital to accelerate the fiber build program over at TDS Telecom. We have returned capital to our shareholders primarily through an increasing dividend over 48 years. And more recently, we've done some selective, opportunistic, modest share repurchase.

So Ted, let's start with the U.S. Cellular side of the business. You brought LT in a couple of years ago to sort of steer U.S. Cellular. How has he changed the business since then? And has it reacted the way you had hoped?

Yes. LT is, I believe, doing a great job at U.S. Cellular. And I mentioned his strategic priorities when he started off here. But let me talk about some of the growth areas that he's working on. I would say, the primary growth area for us right now, and it's a challenge, is turning around the postpaid handset customer count. We lost some postpaid customers in the first quarter. We don't like that. We -- our strategic growth goal for postpaid customers is to stabilize our market share. And we're taking some measures there to do that. He mentioned one of those recently, and that's a price lock on U.S. Cellular plans through the end of 2023 and possibly beyond. And he said there were other activities coming of significance before the end of the second quarter. So we're working on the postpaid customer trajectory. We also are growing the postpaid ARPU, which is growing nicely, and that grew 4% year-over-year. which is a big deal in this industry, as you know from years past, to grow your ARPUs. But that was based on the plan mix, improving our plan mix to the higher profile plans, and also due to an administrative charge that we put in at the end of last year and also due to selling more of our device protection programs, and we're only about 50% penetrated on those. So there's room to grow those. So ARPU is the second element of growth. A third element is our fixed wireless access. We have about 50,000 customers today, fixed wireless access. We think that with the mid-band and millimeter wave band that we will be able to have the capacity and the reach to offer fixed wireless access really across our footprint. Now obviously, it's more relevant in rural areas and small towns where there is maybe only a cable company or maybe not even a cable company offering high-speed access. But it's a big opportunity because we do skew rural and we do skew small town at U.S. Cellular. Another area of growth for us is business and government. And we are growing that part of the business. You'll remember we brought in the lady who was had run all of Sprint's business and government for them, and she's changed a lot at U.S. Cellular and how we go about that business, and it's having an effect. Another area of growth for us is our tower business. Our tower business, we're the only one of the large carriers. Although I guess we're a midsized carrier. We're the only one of the larger carriers that retained its towers. We're the fifth largest tower company in the United States, just a little bit behind Vertical Bridge. And we grew our tower revenues, from outsiders that is, year-over-year by 10% first quarter to first quarter. And that growth is coming. And that's, I think, due to, again, LT bringing someone in from AT&T who had run their tower business when they had one, and he's doing a wonderful job, too, as well as LT. And then the final area of growth that I'd like to talk about is the prepaid business. And although we lost some prepaid customers in the first quarter, we gained prepaid over all of last year and we're taking steps in the prepaid business to address customers at different points in their life cycle. We've made some pricing changes there. And I think we're off to a good start under LT's leadership in that area. So there are quite a number of these important growth areas that LT has identified and, really, if I can say it, put the shillelagh to. So it's delightful.

So despite that, and the industry is growing pretty substantially in the first quarter, you lost postpaid phone subscribers.

Right.

And so the -- he's had a couple of years of changing things and addressing -- getting toward addressing some of these new markets, and yet your churn is higher than it's been in quite a while, and relative to your peers, higher as well.

Yes. So let me speak to that. What the primary driver of that loss in postpaid customers in the first quarter was the increase in churn that you mentioned, Phil. And we believe the increase in churn is due to the fact that most companies have aggressive offers for new customers, okay? And U.S. Cellular is among them. U.S. Cellular did not have as aggressive an offer for existing customers as the other companies in the industry had. So we believe that our customers left us because they were not having as nice an offer for upgrading their phones as our competitors had. And we're going to be investing in that upgrade rate, increasing our upgrade rate, investing in churn, as LT said recently that we want to reduce that churn, Phil, and get it back to where it was 6 months ago or so when it was meaningfully lower than what it is now.

You and I have talked over the years about wireless competition. And we've talked at times about with Sprint and T-Mobile coming together, the competition may come down. And yet it seems it's as high and may be higher, especially on those retention plans, as it's ever been. Do you see a scenario where competition and promotion levels sort of come down over time or a reason that happens?

Well, let me try to answer that in a couple of parts. I think that the overall level of competition in the industry has come down since Sprint and T-Mobile merged. I mean I can remember, and I know you do, a day when industry ARPUs were declining year-over-year and people were saying, "Gee, will they ever grow again?" "Could they ever grow?" And I think they're growing today not just for us. We have a 4% ARPU increase year-over-year at U.S. Cellular. But they're growing for others, too. And the industry revenues, if you look at service revenues, are growing. And I think it's still a very competitive industry. Don't get me wrong. But I think that Sprint and T-Mobile, they kind of beat each other's brains out when they were both existing, right? And I think that's changed. And I think that we have 4 -- we have 3 national players now. And admittedly, there is competition from cable companies, but let's remember how those cable companies are operating. They're really running on Verizon's network. So Verizon has the power, subject to FCC oversight, to control how much of a discount the cable companies get in terms of their ability to get low-priced minutes or data buckets or bits. And I guess the other thing that I would point out is that so much spectrum has been offered and acquired by the big 3 companies, well, and by U.S. Cellular in its territory that I think it would be very, very difficult for a fourth operator to get started now. That didn't use to be the case. I mean before we were in the C-band auction, it was potentially possible for someone to come in and spend big bucks and get started as a robust fourth operator. Now I know DISH has ambitions to be that, but recently, they've kind of backed away a little bit and said they're primarily going to be a wholesale operator. So I think we're really now in a 3-player market for the most part. U.S. Cellular is a fourth player where it operates. I think it's a better industry than it was then.

I agree with that. I think the question is whether T-Mobile now has put so much pressure on AT&T and Verizon that you're getting the blowback in your markets for the fight that's being fought at the major markets as well.

T-Mobile is still price competitive with us. I mean we're price competitive with them. We're both pricing about 10%, 20% below AT&T and Verizon. But I will just point this out, and who knows what's going to happen, T-Mobile made a commitment when it bought Sprint that it would not raise prices until a certain date. I think that date is coming, and that's not too far away. So they will have a choice to make at that point, whether they want to continue aggressive price competition or they want to raise their cash flow and their margins. And I don't know how that choice will go, but at least there's an opportunity.

You're right. On service prices, you and T-Mobile are both, give or take, 10% to 20% below. They've been able to hold out and not give away handsets to their existing base as aggressively as AT&T and Verizon have lately. It seems like you're having to go down that path. So after a couple of years of your margins sort of creeping higher, it looks like you're going to have to give away a lot of handsets to hold on to your customers.

Well, we haven't decided exactly what we're going to do, but we would like to increase our upgrade rate. And the fact of the matter is that customers are holding on to their handsets longer. And because they are, many customers now are out of contract. And when a customer goes out of contract, the churn rises dramatically. So for carriers to reduce their churn, they have to get customers back on contract. So in a way, they almost have to provide an upgrade to get customers back on to some kind of contract.

It seems like a lower margin structure than where you've been.

Well, maybe temporarily lower, so we get 5G handsets in people's hands. But once that handset is in their hands, if they hold on to it for 42 months.

Is that where you are, 3.5 years at this point on...

We're about 42 months on average, yes. It's a long time.

Okay. Yes. That's interesting. You and I first met, I think it was 2006 or 7, we had breakfast, and I asked you about, "Ted, how do you think about return on capital?" And your response was how great an industry wireless was to be in. And I'll never forget it. And is wireless still a great business to be in as a regional operator?

Well, let me talk about it this way. It's a great business. Strategically, it's a great business because people have to have it, okay? And if you have to have something, you're going to pay whatever the market requires you to pay. Now U.S. Cellular cannot set the prices in this industry. The Verizons and the AT&Ts have to be the price setters, and maybe someday the T-Mobile when it's released from the requirement that it signed up to. So we're a price taker, but the industry leaders have the ability to set prices and they have the ability to raise prices if they choose to. Most recently, AT&T raised prices for its existing customer plans, and Verizon followed with an increase, effectively an increase in prices through an administrative charge. So the industry leaders recently, okay, very recently, decided that they could do this. We shall see whether T-Mobile follows or not.

So is it still a great business to be in?

Yes. I think it's a great business. Absolutely. It's become more and more essential for American life. You can't live today without a cellphone. I don't. I mean you're just...

No, I wouldn't. I don't how I'd do it. And I also couldn't live without fast broadband at home.

Right.

And so let's transition to TDS and Michelle's new job. So you've you worked to accelerate the fiber build over the last year.

That's right.

So talk about what it's taken to do that and how effective you've been and what the response from some of the incumbents might have been so far.

Yes. So over the last few years, you're right, we have been steadily ramping up our fiber program in each year, delivering more service addresses. And this year, you're seeing many more market announcements. We just came out with a few in Montana and in Wisconsin. We've got a pretty ambitious goal to get to 160,000 service addresses this year. That's double what we did last year. So yes, over the last few years, we've had to sort of ramp up our -- what we call our factory, get ourselves going operationally, getting everything staffed, identifying these markets. We've done a lot of market selection work to get ourselves a good pipeline of markets, getting them through the RFP process. And so you are seeing us start to announce some more of these markets. And at year-end, we shared publicly what our larger-term goal is, to get to about 1.2 million service addresses or more by 2026. And so you're seeing us set out these goals for ourselves in this short-term annual 160,000 address and then, over the long term, where we see this going. So I would say that the biggest thing that we've had to do over the last couple of years is get that pipeline of markets going, identified and approved in the process so that we can really start building and getting markets launched.

Okay. So talk about that factory that you've been ramping up in terms of buying, deploying fiber and getting that out. How has that gone? And what have you seen in terms of the responsiveness of the markets so far?

Yes. So far -- well, let me talk about the markets that we select. It's a pretty rigorous process that we go through, and there's a few key criteria of where we'll go. One of the first things we look at is what are -- is it a favorable competitive environment. So is there already no fiber there? So we look at places where the incumbent provider, the LEC, has not already invested significantly to upgrade its network and where there is not already a fiber overbuilder. So usually, the places we go has a cable company offering high-speed broadband and usually a LEC that's offering not competitive speeds. So we're able to go in and be the second provider, and that allows us to pretty much split the market with the cable provider. So we're looking for places that don't already have fiber. We're looking at for places that are going to show some household growth over the long term. And we're looking at places that have customers who are going to want and need high-speed broadband, so families, and where they've got more and more uses are coming up with every day that are going to demand these higher speeds. So the favorable competitive environment is important. Also looking at the regulatory environment and how welcoming the community is to a fiber company coming in and doing a build. These builds go on for quite a long time, and they are disruptive to a community. And so you need to make sure your community is really going to be able to back you, have the patience to get through the build with you and really see the value in fiber so that they'll go through that process with you and partner with you. So that's the second important criteria. And then also the ability to cluster. So you can identify kind of an anchor market and then think about where will the growth be around it, are there other communities to pull in over time. That helps provide some synergies with some of those upfront costs that you put into a market. You can help spread that over a larger area. So that's what we look for when we select our markets. And so far, as we get into these markets and we actually start building and launching, the penetrations and the financial results are playing out according to our business plan. And so it's telling us the model is working. In terms of competitive responses, the cable company can do some things with promotions and a little bit of pricing. But so far, we've seen a pretty rational response, nothing that is too irrational in terms of reactions from the competitors. And so far, what we've seen is that once an overbuilder enters a market, generally, other overbuilders stay out. You don't want to have too many fiber providers in the same market and then you're splitting it too many ways. So, so far, that's what we've seen play out in the markets that we've been going to.

Okay. And you've talked a lot about Southern Wisconsin.

Yes.