Good day and welcome to the TDS and U.S. Cellular Third Quarter 2022 Operating Results Conference Call. Please note, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. At this time, I'd like to turn the conference over to Colleen Thompson, Vice President of Corporate Relations. Ms. Thompson, you may begin your conference.

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 U.S. Cellular websites. With me today and offering prepared comments are from TDS' Vicki Villacrez, Executive Vice President and Chief Financial Officer; from U.S. Cellular, 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 U.S. Cellular 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 U.S. Cellular's wireless partnerships. TDS and U.S. Cellular filed their SEC Forms 8-K including the press releases and our 10-Qs yesterday. As shown on Slide two, 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. In terms of our upcoming IR schedule on Slide 3, we are attending the Raymond James Technology Conference in New York on December 07 and the Citi Communications Media and Entertainment Conference Scottsdale on January 05. And as always, our open door policy can now be an open door phone or video policy, so please reach out if you're interested in speaking with us. I will now turn the call over to Vicki Villacrez. Vicki?

Okay. Thanks Colleen and good morning, everyone. Both our business units are well positioned to take advantage of growth opportunities to enhance their competitive positions and have tightened guidance ranges as we enter the fourth quarter. As we discuss both U.S. Cellular and TDS Telecom, they are in key investment cycles that are pressuring free cash flow in the near term. So with the goal to position us for growth and improved returns over time. Both businesses are effectively managing through inflationary and supply chain pressures through a number of mitigating actions to address these risks. Importantly, our balance sheet strength also positions us well to manage against the interest rate increases that we are currently seeing. We continue to be pleased with our financing strategy, which incorporates a combination of long-dated maturities and preferred equity, in addition to opportunistic short-term financing to help fund our network modernization investments in both businesses and expansion into new markets at TDS Telecom. I also want to highlight that during the quarter, we repurchased a modest amount of stock at both companies. As a result, we have spent $55 million on stock buybacks this year, $26 million and $29 million at TDS and U.S. Cellular, respectively. Okay. And now I'll turn the call over to LT.

Thanks, Vicki. Good morning, everybody. If I think back to our last quarter call, we recently launched a number of new pricing and promotional offers that were designed to address the subscriber challenges that we saw in the first and second quarter. And while I'm encouraged with the early results of these promotions, you can see our all-in postpaid subscriber results are still challenged. But we are seeing a number of leading indicators moving in the right direction, and I'm going to expand on that shortly. But since many of our promotional efforts are designed to address churn, we know it's going to take some time for those efforts to translate into overall improved subscriber results. Now we're seeing continued competitive intensity and shifts in the macro economy reflected in our numbers in this past quarter. And so let me touch on each of those briefly. From a competitive perspective, substantially more investment is required in promotional expense compared to several years ago. We see our carriers expanding into rural America. And although our exposure to cable is lower than the national average, bundled wireless with wireline adds another competitor into the mix in parts of our footprint. Doug is going to discuss the rise in bad debt expense in some more detail. What we're seeing is that although the percentage of defaults are consistent with prepandemic levels, the rate per default is greater than in the past. And we anticipate that these macro factors will continue through the remainder of the year, so we've lowered the high end of our service revenue and profitability guidance for 2022. We still expect to be within our original range. We remain confident that we have the right strategies in place to drive customer growth and improve returns over time. As part of those strategies, during the third quarter of 2022, we've been executing our promotion called 'Any Phone Free for Anyone,' for new and existing customers. We’ve launched more aggressive flat rate pricing in certain markets, leading to improvements in several key areas. For example, we are seeing a 54% increase in upgrades and a 6% increase in add-a-line gross compared to the prior year. As a result, our percentage of postpaid handset connections that are in contract is now at 62%. This is significant because in-contract customers churn at a much lower rate than out-of-contract customers. We believe these moves should lead to lower churn in future periods. We've also seen a highlight in postpaid ARPU, which is growing nicely at 4% year-over-year, one of the highest in the industry, despite a highly promotional environment. Our team has done a really nice job of helping customers realize the value of premium plans and services that's driven ARPU growth. We also have a strong cost optimization program, which is helping to mitigate the effects of inflation, though it isn't apparent in the third quarter financials due to increased loss on equipment and bad debt expense. Other areas of the business show momentum in our growth initiatives. Fixed wireless products remain strong, with gross additions up 82% year-over-year. Promotional offers bundling fixed wireless and mobility together will further enhance this product as we launch our mid-band spectrum in late 2023 and early 2024. Towers produced another quarter of double-digit revenues, up 14%, principally due to a 17% increase in the number of colocators. Our network modernization program and multiyear 5G deployment have progressed nicely, currently covering 45% of our POPs with 5G. We've completed the modernization of sites that carry 75% of our total traffic, with plans to expand 5G coverage to over 60% of our POPs by the end of 2023. We've also successfully won 34 wireless licenses in auction 108, filling in some mid-band gaps at an attractive price. Additionally, U.S. Cellular is refreshing its Board, appointing Xavier Williams effective January 1, 2023. With over 30 years of telecommunications experience, U.S. Cellular will benefit from Xavier’s significant experience, and we look forward to his contributions. To summarize, while we've seen postpaid subscriber growth challenges, I'm optimistic we have the right strategy and initiatives underway, especially as we head into the busy holiday season. I’m pleased with the trajectory of ARPU in our growth areas like fixed wireless and towers. I will now turn the call over to Doug, who's going to take you through the operating and financial results in more detail. Doug?

Thanks, LT. Good morning. Let's start with a review of customer results. Postpaid handset gross additions increased by 2,000, driven by increased out-of-line activity, as LT mentioned previously. Postpaid handset net additions were down 17,000 driven by an increase in churn. However, compared to the first and second quarter, our ongoing promotions drove improvements in both gross and net additions. Connected device gross additions increased by 4,000 driven by fixed wireless additions, while net additions decreased by 6,000, primarily due to higher defections. Overall, we are pleased with our momentum in fixed wireless, and we now have a base of 66,000 customers with this product, up 40% from the prior year and 16% from the prior quarter. The postpaid churn rate increased from the prior year fairly evenly between voluntary and involuntary. Voluntary churn increased as a result of increased switching activity and aggressive industry-wide competition. Involuntary churn also increased as the frequency of non-pay customers rose to prepandemic norms. Total postpaid churn increased due to higher handset churn and certain disconnects among business and government customers. Moving to our financial results, total operating revenues for the third quarter increased 7% from the prior year. Retail service revenues were relatively flat as higher average revenue per user was offset by a decrease in average postpaid connections. Inbound roaming revenue declined 43% due to lower rates. Equipment sales revenue increased by 32% due primarily to an increase in volume as a result of strong promotional activity that drove the increase in handset upgrades. LT mentioned the strong increase in average revenue per user. This increase, along with the increase in ARPOM, was driven primarily by favorable plan and product offering mix, an increase in cost recovery surcharges, and an increase in device protection revenues. These increases were partially offset by an increase in promotional costs. At the end of the quarter, 38% of our handset customers are on our two highest tiers of unlimited plans, and we are very pleased with the consistent growth in this area. Overall, our financial results show that adjusted operating income declined 23%, driven by increases in loss in equipment and bad debt expense. We expect loss on equipment and bad debt expense to remain at higher levels than the prior year in the fourth quarter as we plan to continue our promotion. Our guidance remains within the original ranges provided all year but we are lowering the top end for service revenues and adjusted operating income and EBITDA, each impacted by subscriber growth challenges. We believe it will take time for our promotional offers to drive results, but we are committed to staying the course, especially during the holiday season. Our capital expenditures remain on track. I will now turn the call over to Michelle Brukwicki.

Thanks, Doug, and good morning, everyone. We are pleased with our results at TDS Telecom for the third quarter, and I'm also pleased to report that we are continuing to grow our business by providing quality, high-speed broadband. Our strategy is working. TDS Telecom grew its footprint by 7% from a year ago, now serving 1.5 million service addresses across our markets. This quarter, we added 33,000 marketable fiber service addresses to our footprint. We are directing our investments to expand our fiber footprint in new and existing markets and to enhance our product offerings. These investments are driving revenue and broadband connection growth. In our expansion markets, we began offering service in Billings, Montana, and Green Bay, Wisconsin, and announced fiber expansion into 18 additional Wisconsin communities. Today, we have nearly 100 communities in our fiber expansion program at various stages of development. In our cable markets, we have upgraded to offer 1-gig speeds across our footprint and achieved superior market share. In these markets, we are also deploying fiber in opportunistic areas. Likewise, in our wireline markets, we are pleased that we achieved superior market share where we've invested in fiber. Our recent grant from the State of Tennessee is beneficial, and we support the proposed extension of the federal A-CAM program. We anticipate that this extension will provide six additional years of revenue support in exchange for deploying higher broadband speeds. We remain engaged in the comment process and expect final rules later this year or early next year. While we face challenges from inflation and supply chain issues, we are well positioned to achieve our long-term strategic plans. We completed construction of 72,000 marketable fiber service addresses, deploying 33,000 in the quarter. We expect to serve approximately 60% of our total footprint with fiber by 2026. Moving to Slide 19, total broadband residential connections grew 4% this quarter as we fortify our networks with fiber and expand into new markets. Our one-gig product continues to drive higher customer satisfaction, and we expect continued revenue growth. Our updated 2022 guidance is in line with expectations as we narrow our range for adjusted EBITDA. Capital expenditures remain aligned with our expectations despite a lower service address delivery estimate. I want to thank all our associates for their hard work, and I look forward to sharing our final 2022 results with everyone in February. Now I will turn the call back to Colleen.

Erika, we are now ready for questions.

Your first question comes from the line of Rick Prentiss with Raymond James.

A couple of questions. We'll start on the wireless side. LT, Doug, you guys mentioned you've seen an increase in upgrades. Where were upgrades at in the quarter? And where do you think they're headed as we look into the next year?

Yes, Rick, our upgrade rate in Q3 was 8.2%. I would look for a similar trend in the fourth quarter. As we mentioned, we're running our new and existing promo throughout the end of the year, and that's driving a lot of upgrades.

Right. And one of the things you called out was also expanded competition in rural America. When you think about the voluntary churn side of things, where were you losing customers to if you think of the porting ratio kind of stats? Are you losing it to Verizon, AT&T, T-Mobile or the cable bundles?

Yes, I'll start by saying we've always lost and gained more customers from Verizon just by virtue of their market share. With respect to trajectory, as far as how that's headed, the loss share and win share reflects what you're seeing in the national trends. When you see the carriers report the winners and losers on a national basis, I would say that’s reflective in our markets as well.

Okay. So you are noticing an increase in the build-out of AT&T and Verizon in your markets?

I would say we're losing less to Verizon than we have historically.

Yes. A couple of quick ones. On the fixed wireless side, obviously, some nice success there as others are starting to tap that. Who do you see is taking those services? On the opposite side of that first question, who are you gaining share from on the fixed wireless side?

So generally where we're selling this product and where we're seeing success is much of the sales is still on a base product. Some of it is 5G, where we've upgraded our network, but much of it is LTE. This product generally competes against DSL and satellite. Although we don't have the exact figures, my expectation is that generally we’re taking share from those services. Next year, when we fire up mid-band, I expect that mix to move more towards taking share from cable companies.

Okay. And the last one, we've seen a lot of movement on the DISH side as they look to hit their bogey for population coverage. Any updated thoughts on just specifically, but other partnership agreements that you might be looking into working with as we think about capital efficiency in this wireless competitive world?

From the tower side of our business, we continue to see increased interest, both from DISH and from other players. We've opened the towers up for business about 1.5 years ago, and we're seeing the benefits of that, with revenue growth on the tower side. From a deeper partnership perspective, we continue to engage in conversations, and in the long run, this concept of building out four or five duplicative networks in rural America doesn't make sense economically. We continue to have conversations with players in the industry, but probably nothing specific to report beyond that.

Operator, next question?

It's from the line of Simon Flannery with Morgan Stanley.

Great LT, just continuing on, you talked about the mid-band. So perhaps you can just give us some more color around how long it will take you to sort of fully deploy the mid-band across your footprint? And is that mostly 2023 CapEx, how does that look versus '22? And then just a broader point on capital allocation.

So our goal is to roll out that mid-band to our towers now. We'll be putting those radios on towers throughout 2023. However, that spectrum doesn't clear until the end of 2023. Our goal is to be able to flip a switch towards the end of '23, early '24 and already have a substantive amount of that mid-band spectrum deployed. I think we are in a good position to fund the investments we are making.

And just a broader point on capital allocation. I think you started the call talking about this is a period of investment, both on the fiber side and on the wireless side, but that's putting strain on the balance sheet on leverage.

We went through a substantive rebalancing of our balance sheet earlier this year. Overall cost of debt down substantially, and I think we're in a very good position to fund the investments that we're making. I know we spent a lot on C-band and 3.45 spectrum, which we got at a relatively attractive rate compared to other auction prices. I think from an overall balance sheet health perspective, we're in a good position and were reinforced by conversations we've had with the rating agencies. We want to ensure we have the flexibility to fund our investments.

Okay. Operator, we're ready for the next question.

It's from the line of Philip Cusick from JPMorgan.

LT, maybe you can just talk about where you see this market going, the wireless market growing? AT&T was aggressive for the last few years. Now Verizon is matching them, giving away handsets to existing customers. T-Mobile is only going to get a wider footprint and cable is taking share as well. I see you fighting hard and I see the creativity, but this doesn't seem to be working out.

The strategy has three components: stabilize the postpaid consumer business while investing in growth areas and driving efficiencies. Last year, we struck a good balance of profitability and subscriber growth. We saw increased voluntary churn and felt we needed to address that aggressively. In the past quarter, we became more aggressive in upgrades, and more customers are now in contract. I expect the improvements to the voluntary churn will come as we continue this strategy.

That's helpful. Two follow-ups, if I can. One is on upgrades. At this pace of upgrades, when does that start to impact ARPU?

We do not expect to see that. The way we've structured the offers supports growth in ARPU. We're seeing an expansion in ARPU due in no small part to the promotion, and our teams are successfully moving people up the rate stack. So we expect to continue to grow ARPU.

And then finally, you mentioned bad debt. It sounds like a similar rate but higher losses. Should I interpret that to mean that you're losing more per customer?

We have been making adjustments to our credit policy and implementing additional anti-fraud measures. The frequency of write-offs has returned to prepandemic levels, and the average write-off per customer has increased approximately 15% since prepandemic levels. We think we're in the right place with our credit policy.

Next question, please?

Your next question comes from the line of Michael Rollins.

Two questions. First, I think back to the history of U.S. Cellular, a time when the company shed Chicago and St. Louis as those markets weren't matching others. Do you have a similar situation today where there's a tale of two cities, a difference in performance among your markets?

In any business, there's variability in profitability across geographies. There is a range depending on market penetration and quality spectrum. Higher share generally leads to higher profitability. However, there's no clear 80-20 breakdown; rather, it correlates to those factors.

And then, separately, LT, what is your view on the urgency of strategic actions related to U.S. Cellular?

We have a consistent sense of urgency to execute strategy that includes investing in growth areas such as digital customer experiences. We're investing in a strong digital strategy, high-speed internet, and rural wireless service. We are also focused on potential government infrastructure funding opportunities.

Operator, we are ready for the next question.

Your next question comes from the line of Serge Dluzhevskiy with Gamco Investors.

LT, maybe the first question is on your differentiated market approach and some of the offers you try in those markets. How did those local offers perform in the third quarter?

We've run a variety of promotional offers across our footprint. In lower-share markets, where we're running flat rate offers, we're seeing good performance from a gross add perspective. The key dynamic is whether those promotions will drive the desired churn performance. Historically, these promotions take around 6 months to impact voluntary churn, and we're cautiously optimistic that we can see improvement in that area in the coming quarter.

Got it. I'll ask a follow-up to Mike's question on strategic actions. Given the current competitive and capital markets environment, how do you view financial engineering moves that may surface value of your assets?

We want to ensure we have the financial capacity to support our investments. I think we're in a good position and do not feel the need for financial engineering in the near term. We have the flexibility to execute our strategy without added complexity right now.

Could you talk about the progress you've made in the business and government sector regarding revenue growth and share?

We continue to see good demand for private networking and IoT products. While we have connected devices disconnecting due to subsidy expiration, we also see revenue stability in postpaid. Future growth areas such as IoT and private networking are encouraging as enterprise clients show increased interest in our offerings.

That was our last question, operator.

Thank you for participating in today's conference. You may disconnect at this time.