Telephone and Data Systems, Inc. (NYSE:TDS) Q3 2023 Earnings Call Transcript

Telephone and Data Systems, Inc. (NYSE:TDS) Q3 2023 Earnings Call Transcript November 3, 2023

Telephone and Data Systems, Inc. misses on earnings expectations. Reported EPS is $-0.16 EPS, expectations were $-0.11.

Operator: Good morning, ladies and gentlemen and welcome to the TDS and UScellular’s Third Quarter 2023 Operating Results Conference Call. At this time all participants are in a listen-only mode. And please be advised that this call is being recorded. After the speakers’ prepared remarks there will be a question-and-answer session. [Operator Instructions]. Now at this time I’ll turn the things over to Ms. Colleen Thompson, Vice President, Corporate Relations. Please go ahead ma’am.

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-Qs 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.

I will now turn the call over to Vicki Villacrez. Vicki?

Vicki Villacrez: Okay. Thank you, Colleen, and good morning, everyone. Before we get into the details for the quarter, I want to reiterate that as we announced in connection with last quarter’s earnings call the Board of Directors of TDS and US Cellular have each decided to initiate a process to explore strategic alternatives for UScellular. We are not going to comment on that process at this time, however to say that it is active and ongoing. With that, let’s get into the details for the quarter. I am pleased that both business units delivered year-over-year improvements in adjusted EBITDA due to cost optimization programs and efforts to streamline expenses across almost every part of the enterprise. At the same time, we continue to make key network investments in order to take advantage of growth opportunities that can enhance our competitive positions.

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Q&A Session

Year-to-date through September, UScellular made steady progress de-levering, reducing short and long-term debt by approximately $340 million, while generating free cash flow. We also renewed the EIP facility for another two years at a very attractive rate. TDS was also opportunistic and entered into a $300 million secured term loan in order to fund our fiber expansion program. And while investing back into both our businesses is a priority, the current interest rate environment and access to capital remain a challenge. Going forward, we will pace and size our capital expenditures in order to remain within our funding capacity and leverage ratio thresholds, even if it means moderating our spend in the near term. As you can see on Slide 3 at the end of the quarter, TDS and UScellular combined have available sources of liquidity including cash and other sources.

We have long dated debt, extending any sizable maturities until well into the future. This helps us to manage the balance sheet effectively by keeping short term maturities to a minimum while we are investing to deploy fiber in new communities, and continuing our multi-year mid band deployment. With that, I’ll now turn it over to LT.

Laurent Therivel: Thanks, Vicki. Good morning, everybody. IF we turn to slide five. Even with the August 4th announcement of the review of strategic alternatives for UScellular, it’s important that we remain focused on operating the business to produce the best operational and financial results possible. And I’m pleased to update you on our progress this morning. First and foremost, our top priority remains improving our customer trajectory, while balancing subscriber growth with financial discipline. And while financial results are on track, driving subscriber growth additions remains our primary challenge amidst a very challenging competitive environment. Postpaid ARPU was a highlight again this quarter, increasing 2% and the team has done an excellent job and helping our customers realize the value of our premium plans and services.

And this ARPU growth was particularly impressive given a significant number of flat rate customers that we added to the base. These flat rate plans were designed to compete against the wireless offers cable companies have been flooding the market with. And we’re seeing strong adoption, almost 40% of postpaid handset gross adds in the quarter on those flat rate plans. We remain pleased with our flat rate plan performance, and I’ll remind you that these plans deliver similar lifetime economics as our other offerings, since the cost of the device is borne by the customer. Another accomplishment in the quarter was that adjusted OIBDA and adjusted EBITDA improved significantly, up 35% and 28% respectively over the past year. We were free cash flow positive in the quarter and for the nine months ended in 2023 and we expect to be for the full year.

I’m really pleased with the cost efficiency that our team has driven particularly in that challenging competitive environment. And speaking of the competitive environment as it relates to driving subscriber growth, we’re being very targeted and deliberate with our promotional spend, we are re-pulsing (phon) campaigns from time-to-time based on various factors in a given market. As we head into the busy holiday selling season, you’ll see us running a number of aggressive promotions designed to target new subscribers, as well as recent upgrades for our existing customers and thus increase the percentage of customers in contract. And those aggressive promotions are needed because the market for wireless customers is certainly what I would characterize as fiercely competitive.

And that competition includes our traditional competitors AT&T, Verizon, T-Mobile, but also increasing and significant pressure from the cable companies that resell wireless. Those now compete with us in about 60% of our footprint. This year’s Apple Watch is a good example. We saw hyper aggressive offers in the market. It’s important to note that cable’s combined pricing and promotional tactics are pressuring industry ARPU. These competitive dynamics result in ARPU and margin pressure that subsequently challenges the ability to invest in network capacity and future technology developments. And this is a really important shift in dynamics for our industry. While I think our results show that we’re striking a balance between subscriber growth and financial results, as an industry, we should be focusing on the actions required to balance competitive pricing, with the investment capacity required to effectively keep the U.S. globally competitive.

Turning to growth initiatives, our third-party tower revenues had another strong quarter, revenues up almost 8%. The wireless industry has moderated capital expenditures in ’23 we’ve experienced a slowdown in new tenant and amendment activity in the second and third quarters. And I do expect that will impact tower revenue growth rates in 2024. That being said, we still believe we’re uniquely positioned in the tower space, and I think we have a lot of opportunity to grow. Fixed wireless continues to be a bright spot for us. Fixed wireless revenues were up 35%. We finished the quarter with 106,000 customers. To-date, the vast majority of those subscribers are running entirely on low band spectrum. We expect strong subscriber growth to continue with the launch of our mid band spectrum.

I’m pleased that we received access to C band spectrum a few months earlier than planned, and we’re consequently able to further improve our 5G network experience faster than initially anticipated. As mentioned earlier this year, we’ve been upgrading a number of sites so they can be deployed as soon as we receive mid band clearance. So those sites are now operational, and they allow us to bring faster speeds and more capacity to mobile and to our fixed wireless customers. And we’re doing that earlier than we expected. Our mid band deployment is multi-year like all of our deployments. By the end of 2024 almost 50% of our data traffic will be carried on sites that are equipped with mid band. And where we’ve enabled mid band, we’re marketing a 300-megabit fixed wireless product and that’s really competitive in the marketplace.

And bring briefly on average, our fixed wireless subscribers are using about a 170 gigabits per month this year. That’s significantly lower than our peers. However I do expect that our customers’ usage is going to grow as they get access to the upgraded mid band experience. And more of note on network initiatives. We will be shutting down our CDMA network at the beginning of 2024. Team has done a great job migrating the base away from CDMA-dependent devices. Less than 42,000 customers are left and that’s down from 386,000 just 18 months ago. We believe we’re going to continue to see more customers migrate over the next several months. We intend to reform that spectrum to support our LTE network. And we expect to see additional systems operation savings once that CDMA network is fully shut down in 2024.