Earnings Call Transcript - TDS Q1 2022

Operator, Operator

Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the TDS and U.S. Cellular First Quarter Earnings Results Conference Call. Today's conference is being recorded. Colleen Thompson, Vice President of Corporate Relations, you may begin your conference.

Colleen Thompson, Vice President of Corporate Relations

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 section of the TDS and U.S. Cellular websites. With me today and offering prepared comments are from TDS, Pete Sereda, Executive Vice President and Chief Financial Officer; Vicki Villacrez, incoming 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. We filed the majority of our documents with the SEC after market close yesterday, but due to issues with EDGAR, they are not yet appearing on the SEC's website. All but the TDS 10-Q are on our websites 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 in our SEC filings. In terms of our upcoming IR schedule on Slide 3, on May 23, we are attending JPMorgan's 50th Technology, Media and Communications Conference in Boston. And on June 2, we are doing a non-deal roadshow in New York with Citi. And as always, our open door policy can now be in open door, phone or video policy so please reach out if you're interested in speaking with us. Turning to Slide 4, we continue to make progress on our environmental, social and governance or ESG program. And as you can see on the slide, we have had a number of initiatives that illustrate our commitment. I will now turn the call over to Pete Sereda. Pete?

Pete Sereda, Executive Vice President and Chief Financial Officer

Good morning. I'm confident that when I retire at the end of this month, TDS will be in good hands with Vicki Villacrez as CFO. Vicki has over 30 years of experience with the TDS enterprise, and she and I have spent the last 6 months working closely together to ensure a smooth transition. In her 10 years as CFO of TDS Telecom, she was a key leader and business driver, and she deserves much of the credit for the creation and execution of the fiber transformation that is underway as well as the general financial success of the company. We are very lucky to have someone with her level of ability. She's a very talented leader and will do an outstanding job as CFO of TDS. And with that, I will turn the call over to Vicki. Vicki?

Vicki Villacrez, Incoming Executive Vice President and Chief Financial Officer

Thank you, Pete, and good morning, everyone. As I step into this role, I am fortunate to be the CFO at a company with such a strong financial foundation and exceptional talent. Going forward, we will continue to ensure that we maintain this position so that each of our businesses can take advantage of their growth opportunities to enhance their competitive positions and ultimately improve long-term returns. We expect to also continue to return value to shareholders, primarily through cash dividends, which have increased every year for the past 48 years. In addition, we repurchased a modest amount of stock this quarter and may continue to do so opportunistically and again, at a modest level, depending on market conditions. Both of our businesses are focused on executing their strategic priorities and meeting the financial expectations that we guided to at the beginning of the year. U.S. Cellular is continuing to make improvements in its high-performing network, and TDS Telecom is seeing good success in its fiber expansion program. Inflation and supply chain are two areas we are watching closely. We've developed strategies to mitigate any impacts, and overall, I believe the organization is managing well. At the same time, we are working to ensure that we'll be a key player in the Infrastructure Investment and Jobs Act, or IIJA, program at both businesses. We also strongly advocate the extension of the FCC's A-CAM program, which we currently participate in today. Each business unit will touch on their specific areas of focus on these topics this morning. And now I'll turn the call over to LT.

Laurent Therivel, President and Chief Executive Officer

Thanks, Vicki. Good morning, everyone. As you can see on Slide 7, our mission remains the same: connecting customers to the people and places that matter most to them. Slide 8 outlines the strategies we've developed to foster revenue growth and enhance returns over time, starting with postpaid. I am not satisfied with our subscriber results in the first quarter. We constantly strive to optimize financial results alongside subscriber outcomes. The competitive landscape has been intense for the past two years. While we have tested aggressive offers regionally, particularly for acquisitions, we've also maintained financial discipline, as reflected in our strong adjusted operating income for the quarter. When we get to the Q&A, there may be questions regarding AT&T's recent pricing decisions. Although I lack full insight into all the factors behind that choice, it's important to recognize that we operate in a capital-intensive industry. Despite some resilience to inflationary pressures, we are facing rising labor costs and supply chain expenses. However, we see this as an opportunity to serve our customers during tough economic times, assuring them that we will not raise prices on their existing rate plans until at least the end of 2023. We are focused on reducing churn, and this commitment is one aspect of our broader strategy. On the topic of balance, we recognize our need to improve subscriber numbers while driving positive ARPU results, which we successfully achieved. As Doug will discuss shortly, our postpaid ARPU increased by 4% year-over-year, positively impacting our service revenues. We are encouraged by our ability to grow postpaid ARPU consistently, showing a 2% increase in each of the last two years, with strong growth in the first quarter of 2022. This ARPU growth is particularly noteworthy given the promotional challenges we face, including monthly credits tied to device discounts. Now, moving to prepaid, even though the overall results don't seem great, I'm actually satisfied with the relative performance of that segment. Our prepaid results were impacted by a smaller switching pool across the industry in the first quarter, yet our share of gross adds within that pool performed solidly. Additionally, we are witnessing positive momentum in growth investment areas of our business, with another strong quarter for high-speed Internet. Our gross adds for this segment were up 27% year-over-year, primarily driven by our low-band product, while we continue to expand our 5G millimeter wave footprint. We now offer 5G millimeter wave fixed wireless access in 10 cities and plan to introduce this service in numerous additional cities throughout the year. Our tower business is also experiencing double-digit revenue growth, and we are seeing ongoing positive trends in the B2B market. We recently signed our first private networking deal and continue to see favorable deal momentum in the IoT space. We are starting to see positive results from our digital capability investments that enhance lifecycle management, targeting, and messaging. For instance, we've recorded a significant increase in mobile app traffic and transactions, greatly improving customer experiences as indicated by app scores. This has led to a 45% year-over-year increase in app sessions by the end of the quarter, enhancing customer engagement and helping us manage long-term costs. Regarding our network, we are advancing our network modernization and multi-year 5G deployment. Most of our traffic is now handled by sites with 5G technology, and importantly, we are providing 5G devices to our customers. Currently, 34% of our subscribers own 5G-capable devices. As Vicki mentioned, we are actively meeting with key stakeholders to maximize opportunities for wireless within the Infrastructure Investment and Jobs Act (IIJA) program. To provide context, this program will allocate nearly $43 billion of broadband funding to states, with as much as $8 billion likely directed towards areas where we operate. We recognize fixed wireless as a valuable broadband solution for homes and businesses where fiber installation is not feasible. Our technical trials have shown speeds nearing 1 gigabit over 7 kilometers, while we market our product at 300 megabits. This represents a significant improvement in speed and capacity for rural America. Furthermore, our investments in wireless broadband not only enhance our wireless mobile network coverage but also drive additional revenue from our tower operations. In summary, I am pleased with our financial outcomes in the first quarter. We continue to see positive momentum in growth investment areas, and despite challenges in subscriber results, particularly in postpaid, we aim to strike a balance between financial and subscriber outcomes. Now, I’ll hand the call over to Doug, who will go through the financial results. Doug?

Douglas Chambers, Executive Vice President, Chief Financial Officer and Treasurer

Thanks, LT. Good morning. Let's start with a review of customer results on Slide 9. Postpaid handset gross additions decreased by 13,000 largely due to continued aggression in a competitive environment. Postpaid handset net additions were down 33,000, driven by the lower gross additions and an increase in churn, which I will discuss in a moment. We saw connected device gross additions decline by 4,000, driven by lower tablet additions, due in part to global supply constraints. This was partially offset by an increase in fixed wireless additions. Overall, we continue to see solid growth in fixed wireless as unlimited plans are now available in the majority of our network. Next, let's turn to the postpaid churn rate shown on Slide 10. Postpaid handset churn increased from the prior year, driven by higher voluntary churn as a result of increased switching activity and continued aggressive industry-wide competition. Involuntary churn also increased, attributable to changes in consumer payment behavior as we experienced very low involuntary churn rates in 2021 due to the various impacts of the pandemic. Total postpaid churn, combining handsets and connected devices, increased due to higher handset churn in certain business and government customers disconnecting connected devices that were activated for various reasons associated with the pandemic over the past two years. Moving to Slide 11. Prepaid gross additions declined 7,000, largely driven by a lower prepaid gross add pool in 2022. Net additions decreased by 18,000, driven by lower gross additions and higher churn, which was also lower last year due to the effects of the pandemic. Now let's turn to the financial results, starting on Slide 12. Total operating revenues for the first quarter declined 1% from the prior year. Retail service revenues improved by 3% due primarily to a higher average revenue per user, which I will discuss in a moment. Inbound roaming revenue declined 27% due to lower data volume and lower rates. One of the factors contributing to this data volume decrease is the merger of Sprint and T-Mobile and the continued migration of Sprint roaming traffic to T-Mobile's network. Other service revenues were up 8% due to both higher tower rental revenues and miscellaneous/other service revenues. Finally, equipment sales revenues decreased by 12% due to a decrease in units sold as well as a decrease in average revenue per unit, which was driven by an increase in the value of promotional offers as a result of the competitive environment. Turning to Slide 13. Average revenue per user and average revenue per account were up 4%. The increases were driven by favorable plan and product operating mix and an increase in cost recovery surcharges and an increase in device protection revenues. These were partially offset by an increase in promotional costs. Currently, 33% of our handset customers are on our two highest tiers of unlimited plans, and we are focused on continuing to grow this number to further improve ARPU and to provide our customers with the enhanced value of these plans. As you can see on Slide 14, we continue to see steady growth in tower rental revenues, which increased by 10% from the prior year, driven by an increase in our tower tenancy rate. Our overall financial results for the quarter are shown on Slide 15. For this discussion, I will refer to adjusted operating income before depreciation and amortization and accretion and gains and losses as adjusted operating income. As I commented earlier, total operating revenues declined 1% while total cash expenses were essentially flat. The cost of equipment sold decreased 6%, driven by a decrease in units sold. Selling, general and administrative expenses increased 6%, driven by an increase in bad debt expense due to an increase in write-offs related to involuntary actions which have increased from very low levels experienced throughout the pandemic to historical pre-pandemic levels. Total system operations expense was essentially flat. Excluding loss on equipment, which reflects the impact of the highly promotional environment and bad debt expense, which is returning to pre-pandemic levels, other cash expenses were essentially flat year-over-year and is a result of our operating expense discipline and the execution of our multiyear cost optimization program, which continues to yield strong results. Adjusted operating income declined 6%, and adjusted EBITDA, which incorporates the earnings from our equity investments, along with interest and dividend income, decreased 4%. Capital expenditures have increased 10%, mainly driven by the timing of expenditures in 2022 relative to the prior year. Turning to Slide 16, I will cover our guidance for the full year 2022. Our guidance range for total service revenues, adjusted operating income and adjusted EBITDA remain unchanged. This reflects our estimates for low single-digit growth in retail service revenue, continued decline in high-margin roaming revenue and the expectation of a continued highly competitive and promotionally focused environment. For capital expenditures, we are also maintaining our guidance range as our investments in 5G and network modernization and initial preparation for our mid-band spectrum deployments remain on track. I will now turn the call over to Michelle Brukwicki. Michelle?

Michelle Brukwicki, Senior Vice President of Finance and Chief Financial Officer

Thanks, Doug, and good morning, everyone. We are pleased with our results at TDS Telecom for the first quarter. We are tracking to our financial guidance expectations and had strong growth in our fiber program. As planned, we added 22,000 marketable fiber service addresses to our footprint and continue to execute on our fiber strategy. Since February, we announced our expansion into four new markets in Montana and several communities in Wisconsin. We also completed fiber construction in our central Wisconsin cluster and are pleased with our results to date. We remain committed to the same strategic pillars we have focused on for several years. Our primary strategic objective is to provide growth and improve returns by investing in our flagship product, high-speed broadband. We are directing our investments to expand our fiber footprint in new and existing markets and to enhance our product offerings, and these investments are driving revenue growth. At the FCC's upcoming meeting in May, an extension of the A-CAM program will be considered, which we aggressively advocated for and fully support. We anticipate an extension program would provide additional years of revenue support in exchange for deploying higher broadband speeds. Extending the current federal A-CAM program, along with the IIJA broadband funding, would provide even more opportunities for TDS Telecom to help bridge the digital divide in our most rural areas. Turning to Slide 19, we highlight the achievements we've made for this quarter. As mentioned, we announced four new fiber markets in Montana, Great Falls, Butte, Missoula and Helena. We also announced two new markets in Wisconsin: Janesville and Brookfield, and we expanded our western Wisconsin cluster by two additional communities. Beginning in 2022, we are now measuring fiber service addresses in our cable markets as we are deploying fiber in opportunistic areas such as greenfield development. We deployed 22,000 marketable fiber service addresses in the quarter and are working hard to reach our target of 160,000 for the year. Seasonality will impact the quarterly cadence of fiber service address delivery, starting slowly in the first quarter and steadily building throughout the year. Thirty-three percent of our total footprint is now served by fiber, and this metric, as I mentioned, now includes fiber in our cable markets. As a reminder, as reported in February, we expect to serve approximately 60% of our total footprint with fiber by 2026. As we look to deliver our service address goals for the rest of the year, we continue to manage a variety of industry-wide headwinds, including inflation, supply chain and contractor performance challenges. We are working to mitigate these headwinds and are pleased to have a robust pipeline of markets to help us pivot if necessary. In line with our growth objectives, service addresses grew 7% year-over-year. In the first quarter, we completed the network upgrade to DOCSIS 3.1 in our continuum market and increased our availability of 1-gig speeds to 62% of our total service addresses, up from 55% a year ago. We also continue to see positive trends in our broadband penetration rates for markets that have been fully launched for more than 12 months, and we still anticipate 40% to 50% consumer penetration in a steady state. On Slide 20, you can see the broadband connection growth across all markets. Total broadband residential connections grew 6% in the quarter as we continue to fortify our networks with fiber and expand into new markets. We are on track in our network construction under the A-CAM program, also helping to drive growth in our incumbent market. Shown on the graph on the right, we continue to see demand for greater broadband speeds, with 67% of our customers taking 100 megabits per second or greater, up from 62% a year ago. Our 1-gig product, along with our 2-gig product in certain markets, are important tools that will allow us to defend and win new customers. In areas where we offer 1-gig service, we are seeing 21% of our new customers taking this superior product compared with 17% a year ago. Our focus on fast reliable service has generated a 10% increase in total residential broadband revenue. On Slide 21, total operating revenues increased 1% year-over-year, largely driven by growth in residential revenues, which increased 4% across all markets. As shown in the chart on the left, expansion market revenues have increased year-over-year, following the timing of service address delivery. Residential wireline incumbent market revenue was flat year-over-year due to growth in broadband connections, offset by a decline in video and voice connections. Cable residential revenues grew 3% due to an increase in broadband connections. Commercial revenues decreased 6% in the quarter, primarily driven by lower CLEC connections, and wholesale revenues decreased 2%. Overall product mix changes drove a 2% increase in average residential revenue per connection. Let me sum up the combined financial results for the quarter as shown on Slide 22. As we just mentioned, revenue increased 1% from the prior year as growth from our fiber expansions and increases in broadband subscribers exceeded the declines we experienced in our legacy business. Cash expenses were flat year-over-year, with increases to support current and future growth offset by savings in our platform costs. As a result, adjusted EBITDA improved 3%. Capital expenditures increased 50% from last year as we continue to increase our investment in fiber deployment and focus on broadband growth. Moving to Slide 23. We have presented guidance, which is unchanged from what we shared in February. We continue to progress on our fiber deployments in new markets which, as a reminder, will put pressure on adjusted EBITDA during the year as reflected in our guidance. I want to thank all our team members for their continued dedication to our ambitious growth agenda. We have had a successful start to the year and look forward to updating you on the second quarter. Now I will turn the call back over to Colleen.

Colleen Thompson, Vice President of Corporate Relations

Okay. David, we are now ready for questions.

Operator, Operator

We'll take our first question from Simon Flannery with Morgan Stanley.

Simon Flannery, Analyst

So LT, just coming back to the wireless competitive environment. The churn was up quite a bit, as you noted on the competition. Is this T-Mobile's rural build? Is this cable getting more aggressive? What are you seeing in the marketplace? And then on the involuntary, Verizon had talked about a softening in store traffic. What are you seeing on the macro? Is this just that last year was very low and that this is more normal? Or are you sensing some slowdown in the consumer behavior that some others are talking about?

Laurent Therivel, President and Chief Executive Officer

You kind of quickly triangulated toward the pressure from the subscriber results. I'll answer the churn question to put a tiny bit of context around. The gross add side of the equation actually is still relatively strong. We've seen the switcher pool in our footprint is down almost 7% year-over-year. I expect a lot of that is because people are spending their tax refunds on things other than mobile devices. And so when I adjust for that, our new account gross adds are down 2% from last year. Overall share of gross adds is actually up from 2019 and 2020. And so the gross add side of the equation, while we clearly need to continue to focus on it and need to drive good performance there, it's actually quite good. The challenge is on add lines and we've got some plans in place to address that, and then on churn, as you correctly identified. When I look at the competitive environment that you asked about, what we're seeing in the footprint is not particularly different from what you see nationally. You see T-Mobile continue to grow but not, in any way, incrementally in our footprint than what you see nationally. Same with cable, except we're actually a little bit more insulated from cable than overall national trends. Cable is really present, about 50% of our footprint. And so although we do continue to see them present in our marketplace, we think we're a little bit more insulated, given the rural nature of our footprint. So what else are we seeing? It's really been a very aggressive upgrade environment. Particularly from AT&T. Verizon has matched that. And so we really have to focus on two things. One is add lines and the other one is we've got to continue to focus on churn with our customers. And you'll notice I talked about the announcement we're going to be putting out there about not raising prices on any of our customers, postpaid or prepaid, until at least the end of 2023. And we think it's the right thing to do. I think customers are looking for certainty. And given the position of telecom and the overall economic conditions, right, telecom. There is a recession, we enter it late and we exit early so I think we're relatively insulated. That being said, if we do see really high levels of inflation, we do have the flexibility to raise prices, if we need to, on new customers, or we can always require new rate plans, if you want to qualify for device promotions. So we still have flexibility to adjust, if we need to, but we think it's the right thing for customers. And we think it will be very attractive for bringing down churn. We also have a couple of other plans that we're going to be rolling out later in the quarter to address the churn problem. So I'm optimistic in our ability to address churn while we continue to improve gross adds. Doug, let me turn it to you to answer the invol questions.

Douglas Chambers, Executive Vice President, Chief Financial Officer and Treasurer

Yes. Sure, Simon. The reason on the invol side is what you cited. During the heart of the pandemic in 2021, we experienced somewhat of a low watermark for bad debt expenses, $56 million for the entire year. Consumer savings rates were high. There was government stimulus. Consumers were paying their bills and that manifests itself in really favorable bad debt expense. What we've seen in the first quarter is bad debt expense really returned to pre-pandemic levels. We plan for this to speak in our guidance, nothing unusual. We're just not experiencing that same sort of benefit that we did during the pandemic.

Simon Flannery, Analyst

Okay, great. And store traffic any sense of the consumer slowing down or the industry slowing down after a strong year?

Douglas Chambers, Executive Vice President, Chief Financial Officer and Treasurer

No. I mean, our store traffic is down slightly year-over-year but nothing concerning.

Sergey Dluzhevskiy, Analyst

My first question is on kind of your go-to-market strategy, LT. So obviously, you have a differentiated regional approach and you're trying different things in different markets. You have various clusters that are noncontiguous, so you can do that. Maybe if you could reflect, since you implemented this approach, what have been the results so far? What has worked on that front? What could be improved? And how do you make this approach more effective to maximize potential gross add and share gain opportunity going forward?

Laurent Therivel, President and Chief Executive Officer

Sergey, I am very pleased with the regional approach you have discussed, and I would like to put it in context. Transitioning to create regions and establishing the necessary processes and structures to use them as testing grounds, along with executing effectively, is challenging. Over the past year, we have conducted more than 40 distinct pricing, promotional, and marketing mix trials across our regions. While I don’t want to disclose specifics about our upcoming plans, I can say that later this quarter we will be making a significant move based on insights gained from these regional trials. Another point to highlight is the increase in ARPU we have experienced, which has been quite strong compared to some of our competitors. This success is due to the lessons learned from our regional trials. We have achieved ARPU growth without needing specific upsell plans; we relied on sales and strong execution, made possible by testing different strategies in our individual regions. I am very pleased with the progress we have made, and you can expect it to continue. Occasionally, we will implement national initiatives, like the rate plan guarantee I mentioned, but we also consistently test various individual device promotions. Our prepaid rate plans differ significantly from region to region to ensure we adopt the best approach, and our distribution strategies vary considerably as well. We are committed to testing and learning, which has optimized our performance and will help us continue to improve. I am very satisfied with the way things are moving forward.

Sergey Dluzhevskiy, Analyst

Great. My next question is on your fixed wireless strategy. You're out in 10 markets and you said that you're going to be out with fixed wireless and millimeter wave in dozens more markets throughout the year. At a high level, could you talk a little bit about your approach to fixed wireless in 2022? What kind of speeds do you expect to comfortably market in your fixed wireless footprint? And how quickly do you expect to scale this wireless offering? Maybe what kind of markets you're prioritizing in your fixed wireless build?

Laurent Therivel, President and Chief Executive Officer

We have achieved significant year-over-year growth in gross additions, with a 24% increase, mainly driven by our low-band product. This product excels in rural areas where our primary competition is DSL or satellite. Customers appreciate the low-band experience and are remaining loyal, giving us valuable operational insights. We currently have over 60,000 customers using this product, which will inform our millimeter wave expansion. As we introduce our mid-band spectrum, specifically C-band 3.45, we also intend to support fixed wireless with it. We've launched our millimeter wave product in 10 cities, marketing speeds of 300 megabits, which we believe is a conservative estimate compared to actual performance observed in technical trials. We strive for a conservative market approach to offering a high-quality product at that speed. Our strategy for mid-band and millimeter wave focuses on economically viable areas for deployment. There are numerous locations within our network footprint where we can install millimeter wave and C-band spectrum to effectively serve homes and businesses with a strong product offering. The opportunity with the Infrastructure Investment and Jobs Act (IIJA) is significant; currently, it costs between $500,000 and $600,000 to build a tower in rural areas, and we need a certain customer density within a 5-kilometer radius to be profitable with fixed wireless. If the IIJA helps reduce that cost to $200,000 or even lower, we can successfully expand our services into lower-density areas that states are advocating for. The IIJA focuses on unserved and underserved regions, which are often costly to develop for fiber but suitable for fixed wireless. We are optimistic about participating in state-level plans that align with these initiatives. This investment not only supports fixed wireless for homes and businesses but also enhances the 5G mobile experience in those regions, benefiting our mobile operations. Additionally, as the fifth-largest tower company in the U.S., we can also offer these towers to other carriers, further bolstering our revenue. This multifaceted approach highlights the compelling benefits of pursuing IIJA funding, and I am very confident about our prospects in that area.

Sergey Dluzhevskiy, Analyst

Great. My last question is for Doug regarding guidance and cost savings opportunities. The midpoint of your EBITDA guidance suggests about 200 basis points, slightly less, of margin pressure compared to the actual results from 2021. What measures are you currently implementing to reduce costs and alleviate some of that pressure? Additionally, looking ahead over a two- to three-year period, what cost-cutting efficiency initiatives are you working on and how impactful could they be in the long run? What are the main areas of those cost-efficiency opportunities?

Douglas Chambers, Executive Vice President, Chief Financial Officer and Treasurer

Yes. We have a cost optimization program that we're highly focused on. We've been executing it. It's going on our sixth year right now in 2022, and it's really across the business. It's on the engineering side, focused on everything from backhaul with sell-side rent to maintenance agreements and the IT and the mix of labor between contracts and internal and doing things more efficiently as well. Really, even our insurance provider, we changed recently across the business. We're finding cost and revenue opportunities. And you can see the results of that part. When you look at our margins in 2017 as a percentage of service revenues, they were in the 22s, they steadily increased to in excess of 28% in 2020. Now in 2021, a little step backward because of all the dollars we had to invest in promo, but we're still making progress on this cost. And similar way, in 2022, because of the promo expense using that high-margin roaming revenue, which we're mitigating partially with roaming expense savings and the bad debt expense increase that I talked about earlier, we're losing a little bit of margin because those things are all happening very quickly. In the background, we are continuing the pressure on the costs, again, going in the sixth year and we're not stopping it. Last year was the first we started doing zero-based budgeting as part of our process as well. So it's really across the business. And it's been a great success. And like I said, we're keeping the pressure on.

Michael Rollins, Analyst

Just curious where strategically you're thinking about the U.S. Cellular business in terms of opportunities for partnerships or alliances with other carriers in the category to either bridge scale or expand focus and TAM? Any updates on that front would be great, please.

Laurent Therivel, President and Chief Executive Officer

Mike, the position on this hasn't changed, which is, I'm open for business on that front. My belief is that, and I'll harken back to the conversation that we just had around fixed wireless and IIJA, my belief is that it makes no sense whatsoever to have multiple duplicative 5G networks in rural area three, four, five, where we're heading towards. Given the capital intensity that's involved, I don't think that makes a lot of sense. And I think there's plenty of opportunities to work together to bring the capital intensity down to make the investments more worthwhile and to deliver a high-quality experience in rural America. So I remain very open for that. We've had multiple conversations. We continue to have multiple conversations. These things do not move quickly. And so I don't want to say anything is imminent. But I think that, that viewpoint is shared across the industry around the capital intensity that's required. I think some of that is probably behind AT&T's most recent pricing move. So I think there's opportunity, and we've been quite clear with that with other folks in the industry.

Michael Rollins, Analyst

Just maybe going a level deeper on that for a moment. When you think of the cost versus performance of rural builds for 5G, if you work with another carrier and let's say, double the spectrum that you have access to, would that create a lot more performance where you can make the case that you'd do it cheaper and better? Or does U.S. Cellular, because you've built a large spectrum position over time, is spectrum not the gating factor to drive performance relative to cost for those users?

Laurent Therivel, President and Chief Executive Officer

So I think you have to divide this up, Mike, into now and future. Right now, Spectrum is not the gating factor. Coverage remains the largest concern and that's why I'm so bullish about IIJA and the ability to put more towers in rural America at a lower cost. Possible partnerships give us the ability to deliver that service to deliver that coverage and do it at an even lower cost and to do it at an even lower level of capital intensity, potentially share OpEx. It doesn't make sense for me to climb a tower, AT&T, Verizon, T-Mobile, Dish, all of us climbing the same tower, putting the same equipment in place, spending the same capital dollars and the same OpEx dollars. Now let's fast forward. In an AR/VR world, autonomous vehicles, those drones, those use cases will place a substantive load on speed requirements for the network. In the long run, finding creative ways to aggregate spectrum, a little level deeper, whether it's our partnership or there's a whole variety of different ways to tackle this problem. I think we fast forward five years, fast forward 10 years, the opportunity to aggregate spectrum in a cost-effective way in rural America will also be able to then provide a differentiated service. So near-term cost efficiencies, long-term experience opportunity.

Richard Prentiss, Analyst

I apologize for being late. Busy day in earnings again. I wanted to ask the question on partnerships. You guys have talked previously about looking at how you might partner with obviously, adds in the quarter were weak. But any update on partnerships you're working with? Network sharing came up on the DISH call today as far as asking DISH what they'd consider network sharing. What are you thinking about partnerships and network sharing opportunities?

Laurent Therivel, President and Chief Executive Officer

Ric, we just answered that question, so for the sake of time, I’ll refer you back to the transcript. In short, I believe there is an opportunity. We have made that clear and continue to have discussions. While there’s nothing imminent, I think there is a long-term opportunity to reduce costs on both the operational and capital expenditure fronts through some of those partnerships, as indicated in our conversations.

Richard Prentiss, Analyst

Okay. I'll go to another question. Sorry about that. Fixed wireless access, has that come up?

Laurent Therivel, President and Chief Executive Officer

It did.

Richard Prentiss, Analyst

And did you talk about gross adds as far as are you reporting them? I think you said in the press release that gross adds were up, but is it something you're reporting, where is it reported? Are they included in the numbers anywhere yet?

Douglas Chambers, Executive Vice President, Chief Financial Officer and Treasurer

No. Ric, at this time, we're not separately reporting fixed wireless. It's included in our postpaid count of adds and so forth and so that's where it is. And currently, substantially all of our fixed wireless access customers are low-band 4G customers.

Richard Prentiss, Analyst

Right. And so I assume that's in postpaid other, not postpaid phone line.

Douglas Chambers, Executive Vice President, Chief Financial Officer and Treasurer

That's correct. Yes, it's in connected devices.

Richard Prentiss, Analyst

Okay. And trying to review the transcript as we're talking, too. Did you talk about prepaid churn?

Laurent Therivel, President and Chief Executive Officer

So we did not, so happy to tackle prepaid churn. So if I just kind of take a step back on the prepaid business. At a high level, switching pool down fairly substantively. And so our share of gross adds around that switching pool is still quite strong, so we feel good about how we're positioned in the marketplace. On the churn side, it's important to understand that, and this is the nuance of the prepaid business, is that Q1 churn generally represents Q4 results because the customers don't churn off until 90 days later. And so you usually will see significantly higher levels of prepaid churn in the first quarter. That was no different for us. It's not something that I think is out of line with expectations. We feel good about the offers that we have. We feel good about the customer lifecycle management activity that we have. And so I remain generally quite pleased with prepaid.

Richard Prentiss, Analyst

And as you think about the switching pool down, what would you ascribe that to? Because obviously, it's an industry trend we've seen. Is it pre to post migration? Is it the consumers better or worse off? What do you attribute that to? And so what would it take to turn that around, switcher pool or the activity in the area?

Laurent Therivel, President and Chief Executive Officer

I think it's macroeconomic. If you look at what's going on with inflation and people getting their tax refunds, people are having to spend their tax refunds on things other than mobile phone service. And so I don't think it's necessarily anything specific to the attractiveness of the prepaid business. There probably is slightly higher prepaid to postpaid migrations because of the aggressive upgrade offers that have been in place in the marketplace. So I think that's probably driving some of it. But that would be the two key drivers, I think, prepaid to postpaid migrations because of aggressive upgrades, and then just it's tough out there right now for folks.

Colleen Thompson, Vice President of Corporate Relations

Okay. Thanks, everyone, for your time today. Again, please feel free to reach out to IR if you have any additional questions. Have a great weekend.

Operator, Operator

This concludes today's conference call. You may now disconnect.