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

Well, good morning. And for those of you over the webcast, welcome back to Citi's 2023 Communications, Media and Entertainment Conference. And for those of you I haven't met, I'm Mike Rollins, I cover communication services and infrastructure for Citi Research. Before we get started, I'd like to mention that we do have disclosures available at the registration desk and on the Citi Velocity page from which you're streaming the audio. And we're also going to work to incorporate your questions today. So for those of us in the room, if you have a question, we could push the button on your microphone, a [ mic ] will come up and we'll get you involved in the discussion. And for those of you online, there's a questions box, please enter your questions that way, and we'll work to incorporate them into the conversation. All of those details now out of the way, I'd like to welcome Jim Butman, President and CEO of TDS Telecom; and Doug Chambers, Executive Vice President and Chief Financial Officer and Treasurer of UScellular. Thank you so much for joining us today.

Thank you, Mike.

Thanks for having us, Mike.

So as we get started, maybe for each of you, from a TDS Telecom perspective and a UScellular perspective, it'd be great to learn your strategic and operating priorities for the year to come and maybe unpack if they're different than what we would have talked about a year ago at this time. And Jim, why don't we start with you on TDS Telecom, and we'll go over to Doug on UScellular.

Okay. Thanks, Mike, and thanks for having us. Our strategic priorities have not changed. In fact, for TDS Telecom, it's an incredible story. I'm very proud of leading the company because we're going to such a great transformation of the business, which was a must have for us. And Telcos while we're now becoming fiber force, okay? So if you look at our portfolio, it's [ 1.5 ] service addresses in 65% because we started off 65% of those service addresses, we can [indiscernible] services, okay? And by 2026, it's going to be 80%, which is incredible because you started as that copper network, DSL network, but we've done a great portfolio of cable properties, got a growing out of territory fiber, where we're now building and have built 100 communities across the country out of territory. So that has been the growth engine, the strategic growth engine for us to build scale, to build revenue. We're still focused on taking cost out of the legacy business to the [indiscernible] into the fiber business. And of course, we have a relentless pursuit for improving the customer experience, and we're transforming their workforce at all the same time, the network to workforce. It's pretty incredible. You think a company like us, we would have a very legacy workforce, but over 50% of our workforce has just changed where they've only been with us for 5 years. And that's a good thing because we're bringing in a lot of change agents into the business because it's such a changing industry. So the strategic priorities is fiber in-territory and out of territory. And we are very focused on delivering service, fiber service addresses especially this past year as well as going into next year.

Thanks. And Doug?

Yes. Our strategy is also unchanged, although we will need to do some things differently. So we're primarily a postpaid carrier, 90% of our connections are postpaid connections, and a priority for the next year is to stabilize postpaid. I think as this audience knows, we've lost in the first 9 months 2022, 90,000; postpaid handsets, $115,000; postpaid connections, we cannot sustain that. So changing the subscriber trajectory is our #1 priority. And our plans to do that include a number of things. One is, in November, we introduced flat rate pricing that's a $30 single-line pricing plan. And to give you perspective, 40% of our customers are currently 1- and 2-line customers. So there's a large amount of customers, potential customers that, that value prop will appeal to, going to be doing some more creative things with promotions with respect to no hidden requirements and more transparency behind them to fuel better results with the promotions, along with better churn results. So really highly focused on what we need to do in postpaid to improve it. We have some master rebranding going on, excited about a lot of the things we're doing. But the reality is we have to demonstrate that we can change that trajectory, working very hard to do that. Secondly, we have a number of growth factors we've talked about in the past. We continue to be focused on those. One is our tower portfolio. We've grown that at 12% year-over-year through the first 9 months. That continues to grow very well. So we look for that to continue, not quite at that rate next year kind of fueled by a lot of Dish new colors during the year but still at a very healthy rate. Our HSI business is going very well. We've increased our HSI customers by about 30% year-over-year through September 30. We have a lot of momentum there. We look to sustain that in our HSI business. Prepaid, it's going well. It could be doing even better. We lost 20,000 prepaid customers. We made some changes in midyear pricing product, and we're seeing better results with prepaid as of late. And the other thing that we're focused on, and we've been running a formal program since 2017 is cost optimization, really have made a lot of inroads in our cost structure. And when you look at our costs, if you exclude bad debt and loss on equipment, which you can't do [indiscernible] raw cost, but our other cash costs have actually gone down year-over-year through the first 9 months of 2022, and that's despite an inflationary environment. So I'm very proud of what we're doing on the cost side.

Doug, we'll spend maybe a couple more minutes on wireless and come back to TDS Telecom. When I think of UScellular, and I think of wireless companies and maybe reasons why they haven't gotten at least their fair share, there could be companies that don't have the spectrum portfolio UScellular does. There are companies that maybe are not local market focused, UScellular is. What have you been able to identify as to what's holding those share opportunities back for the company as you're looking to maybe optimize the go-to-market this year? And what are you seeing just more broadly from the competitive landscape?

Yes. I think what's been the challenge for us is more intense competition which we see through cable. Cable is now in 50% of our markets. Obviously, they have a lot of momentum and T-Mobile has been building out the last 5 years in our markets. We now have T-Mo competes with us for greater than 90% of our paths, right? So they're effectively everywhere. And that's on top of the legacy competition we've always had with AT&T and Verizon markets. So we are in a more intense environment and kind of taking stock of, well, what happened in 2022 and before. The reality is we weren't sufficiently differentiated. We have a great network. Others also have a great network. Our pricing and promos were very aggressive during the year, but we need to do more. And we are doing more with this flat rate pricing against more creative promotions, and we need to bolster our brand, which we're also working on in 2023. So all those things are really critical for us to turn this around. And we just have to be more differentiated in 2023 than we've been in 2022 and for the large part of 2021, and we're going to do that.

And when you think about the investments that you're going to make, whether it's in pricing and promotions that could continue into the new year or from a sales and marketing and branding perspective, does that mean that investors should be prepared from -- maybe from a philosophical perspective, that cash flow might have to take another step back before it takes 2 steps forward.

Yes. I think some things to keep in mind. One is, during 2022, we're highly promotional. We added new and existing offer active for 6.5 months. We don't know exactly how long we'll have it active during 2023. It may be less, that might be an opportunity. I would also say there are some headwinds that we need to acknowledge. One is the fact that again, we've lost 115,000 postpaid connections through the first 9 months of 2022. That does have a carryover impact into 2023, which is why we just have to as an imperative reverse the trend that we're seeing with our connections, right? So I would say we're not giving guidance yet, but our first job is we need to turn the subscriber trajectory around and there may be a delay in the -- in sort of the cash flow improvement until we do that because we have to get that job done.

That's helpful. And just in terms of just fixed wireless, you mentioned the high-speed Internet growth that you have, is there an increasing importance or opportunity for UScellular to broadly pursue converged fixed to mobile solutions and be a home broadband provider in a much greater part of your geography as a way to capture new customers and upsell existing customers?

Yes. We think there's an opportunity there. And the way where our entree into that is working with TDS Telecom, and we have a number of things going on with them, and Jim can talk more about this in the way of an MVNO, but also in Wisconsin starting to sell our product jointly in stores with TDS Telecom's broadband product and use that as a learning to leverage that and recognizing that at UScellular, only 4% of our households have access to TDS Telecom service. So any broader bundling is going to have to be through partnerships ultimately, but using TDS Telecom as a way to learn and develop that model is something that we're going to be pursuing in 2023. And Jim, I'll let you add on to MVNO plans and how we're going to work together on that.

Yes. So Mike, we're going to be rolling out UScellular service, branded TDS in our markets because, again, the footprints aren't the greatest overlap. However, for us, UScellular does cover over 40% of our footprints. So when we work with a mobile enabler, we will work to make sure that UScellular's network is used when we use the enabler, and we route the traffic over their network. So I think there's an opportunity to make sure that we're using their network. We're also working with their marketing teams, and this is all to Doug's point, Wisconsin is a very key market for both TDS Telecom as well as UScellular. I mean we're building all over the state Wisconsin fiber networks. So there will be a growing better and better overlap in the State of Wisconsin, which is your #1 market, I think, is it Iowa and Wisconsin 2 markets?

Yes.

So anyway -- so we're also working with our teams that they will sell our broadband in their stores. So when there's a competitive threat, or, say, Charter is offering broadband and they're saying, well, I'm going to go to Charter, their agents will be able to sell our broadband and bundle it with their wireless in Wisconsin. Now they're going to have to find solutions in other states, but it is a good start. So we're looking forward to working with them.

And maybe on the flip side of this, on the wireless side, is there also an opportunity to try to go after the cable MVNO business and turn the potential foe into a friend?

Well, as far as -- maybe either subs or partners...

Just partnering with cable and they're using an MVNO, the bigger ones are using it with Verizon, could you also be an MVNO solution for cable and in turn, what is an effective competitor right now into a source of new wholesale revenue?

Yes. We could, and we're open to that. Our challenge as a regional provider is that the cable companies are not coming to us first, right, because they ultimately will need -- we're in 21 states. And we're happy to be part of that, and we're going to -- it's something that we would certainly pursue. But the reality is that if a cable provider had an MVNO and used us, they would also have to use another carrier.

Right. For the outage?

Yes. Yes. And that's the model that was being pursued at TDS Telecom. So we do have the benefit of showing that can work. Once we do that, I think we'll have the opportunity to potentially sell wholesale on a regional basis.

That's where I think the opportunity is for UScellular because they operate in areas, the footprint still -- as we're working on our MVNO program, the footprints in the more rural parts and where UScellular is stronger, you can -- UScellular can be the network provider to even other carriers beyond us.

And maybe on the fiber side, just drilling down a little bit more on that. You mentioned the build. So how is the progress going in terms of the pace of the builds, the cost of those builds. And what you're seeing from a penetration perspective? .

Yes. I think we're scaling up well. It is -- there's no question, there's a good news, bad news. This is a difficult business to execute, building in communities that are already established and built, working with municipalities, locate companies. There's a lot of pressure out there, right? But we're good at it. And I'm really proud. Year-over-year, if you look at history, every year, we're increasing our fiber service addresses by 50%, and I expect to see that similar trends going forward. I'm really proud of the progress that we've made on the fiber service delivery. Now we've had some challenges, especially out in the Pacific Northwest. We actually had to eliminate a partner who was not performing. So that took us back a little bit from what our original projections were in 2022, but we're picking that up. We've got that back on track. So I'm feeling really good about how we're progressing in that area, and I think we've got the team to execute. In terms of the cost of builds, most of our builds, when we look at the -- we've got roughly 100 communities that I talked about that we're building out a territory. 17 of those are built already. They're in progress. We're selling. We've sold, they're up and operational. Most of all the other 100 -- or the other 80-plus that are in progress, we've got contracts already locked in. So we locked in a lot of prices because this takes a while. The RFPs and all that were being done earlier in the year. And then we've got a smaller percentage that we're still doing RFPs. Those costs are going up. However, we're offsetting them with new techniques in terms of -- our engineers are working with the vendors and lowering the cost of how we deploy the fiber counts and a whole variety of things. So I'm not too concerned about the cost. The biggest issue in the cost area is the contractor labor costs. And if they're not making money, they're not going to perform. So we're very focused on making sure we're good partners with them, and we think we've got really good established relationships with them. The third part of your question?

Penetration.

Penetration, yes, that's the one where we're feeling -- we performed very well. In our out-of-territory, think about it, the third provider, we're hitting penetrations in our established markets, our early markets, Dane County, [indiscernible] a number of these markets, Central Wisconsin, mainly Central Wisconsin and Dane County, we're hitting market shares over 50%. That's a 3-player market. So market share over 50%. I want to say penetration would be more like 45% penetration, but then you've got to factor the broadband and a number of things. So it's over 50%. So if you look at our cable operations, and again, I factor that into a market share because I like to think in terms of market share. Our cable operations got 59% market share. Our out-of-territory established markets 55%. And even in our wireline ILEC, which is the more -- has a higher percentage of DSL and bonded copper, we're still at 46% because we started investing early 10 years ago in the most attractive markets in deploying fiber. And then the remainder, I want to say, the piece of the network, there's -- if you look at our service addresses, 65%, as I said, can offer the very high speeds, fiber and co-ax. The 35% of our overall service addresses are still on copper. The beauty of that is the A-CAM extension program that we're working on is going to help with that state grants and the BEAD program. So we're feeling really good about the other territory, and we're feeling really good about being able to go deeper in our incumbent areas.