United States Cellular Corporation (NYSE:USM) Q3 2023 Earnings Call Transcript

Specifically by 2026, we plan to serve half of our ILEC addresses with fiber. At the end of the quarter 40% of our ILEC with fibered up. And finally, we are expecting to offer speeds of one gig or higher to at least 80% of our footprint by 2026. We finished the quarter with 69% at gig speed. We continue to believe these long term targets are achievable. Although our address delivery numbers may fluctuate from year-to-year, depending on a number of factors, our 2026 goals remain front and center throughout the organization. And we are pleased with the results of our fiber builds to-date. We continue to achieve the broadband penetration that are projected in our business cases. On Slide 16, you can see that we are growing our footprint with an 11% double digit growth in total service addresses year-over-year.

Shown on the graph on the right, we see increasing demand for higher broadband speeds, with 75% of our customers taking 100 megabits per second or greater, up from 69% a year ago. We continue to increase the availability of gig plus speeds and we’re now even offering 8 gig speeds in certain markets. Customer take rates of these speeds are growing with 14% of our customer base on 1 gig or higher at the end of the quarter. Our broadband investments are driving positive results, including a 10% increase in total residential broadband revenue. As shown on Slide 17, we experienced a 5% increase year-over-year in total broadband residential connections. Average residential revenue per connection was up 3% due to price increases in product mix partially offset by promotions.

As shown in the chart on the right we had another quarter of 4% growth in residential revenues, with expansion market residential revenues increasing to $20 million in the quarter. This aligns with our expectation of steady revenue growth following the timing of service address delivery as penetration ramps in these new markets. Residential wireline incumbent and cable revenues were flat as a decline in video and voice connections was offset by price increases in growth and broadband connections. Our wireline incumbent, which includes our ILEC market is facing increasing competitive pressures. We consider capital prioritization and expected economic returns as we respond to competition in select ILEC markets with fiber builds. The E-ACAM program will provide funding to help us defend these markets.

As expected, commercial revenues decreased 12% in the quarter, primarily driven by lower CLEC connections. And lastly, wholesale revenues decreased 3% for the quarter, primarily due to lower special access revenue. On Slide 18, you can see our quarterly performance. Operating revenues were flat in the quarter as the growth in residential revenue was offset by the decline in commercial and wholesale. Cash expenses decreased modestly in the quarter. This decrease is a result of our intense focus on cost efficiencies and disciplined spending. As a reminder, the expense results shown here include the cost to initially launch our fiber markets, which are incurred upfront and prior to generating revenues. Adjusted EBITDA was up 3% in the quarter as a result of the decrease in cash expenses.

Capital expenditures of $172 million were up modestly from the prior year due to our investments in fiber. Keep in mind that these investments support our multi-year strategy and our goal of increasing free cash flow and return on capital over the long run. Slide 19 shows our 2023 guidance. We are keeping our revenue guidance range unchanged from last quarter. Although we expect to be towards the low end of our range of $1.03 billion to $1.06 billion. Even though we are expecting to deliver more fiber addresses than originally planned this year, the majority will be launched in late 2023 and it will take time for penetrations and revenues to build. Adjusted EBITDA is expected to remain between $270 million and $300 million in 2023. As we look forward, we are still on track to have our expansion communities launched this year.

This means we can begin serving customers and generating revenues. Starting next year and over the next several years, we expect our broadband penetration, revenues and adjusted EBITDA to grow. Moving on to CapEx, consistent with our uptick and expected fiber service address delivery, and our investments to establish internal construction crews, we are now expecting capital expenditures for this year to be approximately $550 million. As Vicki mentioned earlier going forward, we will continue to size and pace the timing of our capital expenditures to be commensurate with our financial capacity due to the pull forward of service addresses and corresponding higher CapEx in 2023, next year, we plan to slow our spending and focus on driving broadband penetration and revenues in our new fiber markets.