Earnings Call Transcript - TDS Q2 2021

Operator, Operator

Good day, and thank you for standing by. And welcome to the TDS and U.S. Cellular Second Quarter Earnings Results. I'll go ahead and hand the call over to Jane McCahon, Senior Vice President, Corporate Relations. Thank you. Please, go ahead.

Jane McCahon, Senior Vice President, Corporate Relations

Thank you. Good morning, and thank you for joining us today. We want to send out our very best wishes that you and your families are well. I 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: Pete Sereda, Executive Vice President and Chief Financial Officer; from U.S. Cellular: LT Therivel, President and Chief Executive Officer; Doug Chambers, Executive Vice President and Chief Financial Officer; and from TDS Telecom: Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer. This call is being simultaneously webcast on the TDS and U.S. Cellular Investor Relations websites. 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 press releases yesterday, and we filed our 10-Q this morning. As shown on Slide 02, the information set forth in the presentation and discussed during this call contain 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 versions included in our SEC filings. In terms of our upcoming IR schedule, Slide 03, the investor relations team is attending the Morgan Stanley Media and Communications Corporate Access Day on August 12th. And as always, our open-door policy can now be an open-door phone or video policy, so please reach out to us if you're interested in speaking with us. Also, we want to call your attention to our recently refreshed and updated Environmental, Social and Governance (ESG) website. In order to advance our ESG strategy, we recently conducted a materiality assessment to help prioritize and score ESG opportunities and risks from the perspective of internal and external stakeholders. When finalized, we'll publish the results on our website. Before turning the call over, I want to remind everyone that due to the SEC's and FCC's rules related to Auction 110, we will not be responding to any questions related to spectrum auctions. And now, I'll turn the call over to Pete Sereda. Pete?

Pete Sereda, Executive Vice President and Chief Financial Officer, TDS

Thanks, Jane, and good morning, everyone. Before speaking about the balance sheet and our funding strategies, I wanted to recognize all the actions that both of our business units are taking to deliver higher returns and stronger businesses over the next several years. Turning to the income statement, I want to call your attention to a couple of unusual items. First, our effective tax rate was a negative 48.9% during the quarter primarily due to the reduction of certain tax accruals. As part of redeeming some of our high-cost debt, we recorded an additional $36 million non-cash interest expense, $20 million of which was U.S. Cellular. This was to write up amortized debt issuance costs from prior bond transactions. As we've discussed on past calls, maintaining financial flexibility is one of the pillars of our corporate strategy. For many years we've worked to retain relatively low leverage levels, long-dated maturities, sufficient undrawn revolving credit facilities and significant cash balances, while at the same time making sure we have the financial resources we need to fund our businesses. As you can see on Slide 04, at the end of the second quarter, TDS continues to maintain a solid financial position including ample available funding sources consisting of cash and cash equivalents and available credit facilities which is especially important since U.S. Cellular and TDS Telecom are both currently in investment cycles. With U.S. Cellular investing in network modernization, 5G and spectrum, and TDS Telecom aggressively investing in fiber expansion, we will continue to look for innovative ways to finance these investments while preserving our credit rating. Turning to Slide 05, I also wanted to call your attention to all the work that has been done to lower the average cost of our financing. As you can see, through June 30, we redeemed over $1 billion in debt with a weighted average cost of 7.1% and replaced it with debt that has an average cost of 4.8%. This results in a run rate of $25 million in annual coupon savings on the redeemed debt. Earlier this week, both TDS and U.S. Cellular announced additional redemptions of high-cost senior notes, which will raise the amount of gains by over $450 million to a total of almost $1.6 billion. Also earlier this week, and shortly after we announced we were calling the U.S. Cellular notes and planning to fund the transaction by drawing down on our EIP securitization, Moody's affirmed TDS's corporate family rating but downgraded the remaining U.S. Cellular senior notes. The reason for this downgrade reflects the fact that the new EIP debt that will be taken on to fund the redemption comes ahead of the remaining notes in the payment waterfall. The downgrade is specific just to those notes, not to the company in general. Moody's views the recent refinancing steps to lower the cost of the balance sheet as credit positive. In summary, we believe both business units have a lot of growth opportunities and we're ensuring that we have the financial resources to fund them while at the same time continuing to lower the average cost to finance them. I will now turn the call over to LT.

Laurent "LT" Therivel, President and Chief Executive Officer, U.S. Cellular

Thanks, Pete, and good morning everybody. It's been about a year since I joined the company and I continue to be just blown away with the team and the culture of U.S. Cellular. I want to thank all of our stakeholders and that includes everybody on this call for the support they've provided over the past year. Turn to Page 07. Our strategic priorities remain simple and are designed to drive growth and improve return on capital over time. We're about halfway through the year and making really good progress towards these priorities. Doug and I will cover the operational and financial highlights of the second quarter, and I'd like to provide a couple of thoughts on these strategic priorities. Top of mind for me right now is the competitive environment. We've seen some really aggressive promotions out there for both new and existing customers and, as Doug will touch on, it had an impact on our postpaid subscriber results for the quarter. We are maintaining our focus on profitable growth. We are leveraging our regionally focused strategy to test different offers to help us hone in on the right balance between subscriber growth and profitability. I've talked about this in prior calls, but I believe one of the benefits of having noncontiguous regions is the ability to test different approaches to see what resonates with our customers. You can see this in how we're approaching the marketplace right now. We have some very aggressive offers to drive switching in certain markets and more upgrade-focused offers in others. We'll continue to run these trials so that we have the right approach when we get to the main selling season later this year. I spoke to you last quarter about some of our new initiatives to drive growth in our business and government and prepaid segments. We made some changes to our prepaid offerings which led to really strong prepaid results this quarter. The business and government segment is a longer-term effort but I'm beginning to see some encouraging signs. I feel confident in our ability to drive growth there, particularly in the IoT and private networking space. A few words on our network division. Network performance is a hallmark of our value proposition. We're continuing our network monetization program and our multi-year 5G deployment. A sizable portion of our traffic is now carried by sites that have 5G deployed and this helps maintain our network leadership and it also brings down our costs. We continue to be optimistic on the use of millimeter-wave spectrum for fixed wireless access. We're continuing two tracks of work: one on technology and one on market demand. The technology testing frankly is exceeding our expectations. We've been working with our partners on extending millimeter-wave business capabilities and most recently we achieved another world record using our 5G millimeter-wave spectrum, achieving near-gigabit speeds over a distance of 10 kilometers. As a milestone, it could potentially bring extended-range 5G service with massive capacity and low latency to more of our footprint. On the market demand side, we're continuing our 5G millimeter-wave high-speed internet trials and we've seen some early encouraging results. It's very clear that customers in our areas are looking for alternatives to the current providers in the marketplace. Turning briefly to Washington, I'm encouraged by the recent progress made on bipartisan infrastructure legislation and I've joined other companies in the Business Roundtable encouraging passage of the proposal. I'm encouraged that the proposed legislation sets aside funds for both infrastructure and affordability; both of those are going to be critical in bridging the digital divide. I'm particularly encouraged that the requirements for infrastructure funding don't require symmetric speeds. That would have been a disaster for efficient funding of rural broadband. Asymmetric requirements allow any network technology to compete for funding, which includes wireless. So, funding wireless buildouts helps both fixed and mobile use cases. I'm hopeful that this infrastructure legislation can be an example of avoiding partisan politics and putting Americans first. Following the rollout of the vaccine, I've recently had more opportunities to get out in the field, in the stores, talk to customers and talk to associates in person. Hopefully we'll continue to see progress on the vaccines so we can maintain the positive momentum we've seen over the past few months. Our field teams in the stores and the network are doing a tremendous job keeping our customers connected in some really challenging circumstances. The proportion of our workforce that had been working remotely has been substantial; we just announced our return-to-office approach. We'll be focusing on purposeful interactions instead of requiring a certain number of days in the office. We hope this will strike the right balance between in-person time for culture reinforcement while also acknowledging the productivity and coordination lessons learned from the pandemic. Personally, I'm looking forward to meeting more members of my team for the very first time in person. With that, Doug, I'm going to turn it over to you to cover the details of the quarter.

Doug Chambers, Executive Vice President and Chief Financial Officer, U.S. Cellular

Thanks LT, good morning. Let's start with the review of customer results on Slide 08. Postpaid handset gross additions increased by 16,000 year-over-year due to higher switching activity which was depressed last year as a result of the unfolding pandemic. Our ability to attract switchers remained flat year-over-year due to aggressive industrywide promotional activity on handsets. Connected device gross additions declined by 4,000 year-over-year. This was driven by lower gross additions of internet products such as hotspots and tablets compared to the prior year when we experienced an increase in demand due to COVID-19. The declines in hotspot and tablet sales were partially offset by an increase in connected watch gross additions. Total smartphone connections increased by 15,000 during the quarter and by 60,000 over the course of the past 12 months. That helps to drive more service revenue, given that smartphone ARPU is about $20 higher than feature phone ARPU. Additionally, I want to call out our strong prepaid results which are driven by changes to our prepaid offerings. Our prepaid base increased by 11,000 due to an increase in gross additions combined with a decrease in defections. Next, I'd like to comment on the postpaid churn rate shown on Slide 09. Postpaid handset churn, depicted by the blue bars, is 0.88%, up from 0.71% a year ago. This is driven by voluntary churn which continues to run higher year-over-year as a result of increased switching activity and aggressive industrywide competition. Total postpaid churn, combining handsets and connected devices, is 1.11% for the second quarter of 2021, higher than a year ago as we've also seen churn increase on connected devices due to certain business and government customers disconnecting devices that were activated during the peak periods of the pandemic in 2020. Now let's turn to the financial results on Slide 10. Total operating revenues for the second quarter were $1.014 billion, an increase of $41 million or 4% year-over-year. Retail service revenues increased by $28 million to $686 million. This increase was primarily due to a higher average revenue per user, which I will discuss in a moment, as well as an increase in average postpaid subscribers. Inbound roaming revenue was $28 million, a decrease of $13 million year-over-year driven by a decrease in data volume and rates. Another factor contributing to this data volume decrease is the merger of Sprint and T-Mobile and the migration of Sprint roaming traffic to T-Mobile's network. Other service revenues were $60 million, an increase of $6 million year-over-year, including a 6% increase in tower rental revenues. Finally, equipment sales revenues increased by $20 million year-over-year due to an increase in units sold and an increase in accessory sales as a result of higher volume, partially offset by a decrease in the average revenue per unit in large part as a result of an increase in promotional activity. We engaged in aggressive promotional activity during the second quarter of 2021 to remain competitive with the industry, particularly for switchers. A portion of the resulting promotional costs are captured in equipment sales revenues and increased loss on equipment which represents equipment sales revenues less cost of equipment sold. In addition, loss on equipment in the second quarter of 2020 was mitigated by the impacts of the pandemic, specifically lower device churn and less aggressive promotional activity. As a result of the combined impact of these factors, loss on equipment increased $20 million year-over-year from a positive margin of $2 million in 2020 to a loss on equipment of $18 million in 2021. This change in loss on equipment was the primary driver of our decline in profitability year-over-year. We expect the aggressive promotional environment to persist for the remainder of 2021 and our full-year guidance reflects the corresponding financial impact. Now, a few more comments about postpaid revenue shown on Slide 11. Average revenue per user, or ARPU, is $47.74 for the second quarter, up $1.50 or approximately 3% year-over-year. On a per-connection basis, average revenue grew by $1.55 or 4% year-over-year. The increases were driven primarily by favorable plan and product offering mix, an increase in regulatory recovery revenues, an increase in device protection revenues, and an increase in overage and other fees which were waived in the prior year to assist customers during the COVID-19 pandemic. Turning to Slide 12. As we continue our multi-year network modernization and 5G rollout, control of our towers remains critical. By owning our towers, we ensure we maintain the operational flexibility to add new equipment and make other changes to cell sites without incurring additional costs, which is very important particularly given our current technology evolution. As you can see on this slide, with the assistance of our third-party marketing agreement, we have seen steady growth in tower rental revenues. As I mentioned, second quarter tower rental revenues increased by 6% year-over-year. We will continue to focus on growing revenues from these strategic assets. Moving to Slide 13. I want to comment on adjusted operating income before depreciation, amortization and accretion and gains and losses. Keeping it simple, I'll refer to this measure as adjusted operating income. As shown at the bottom of this slide, adjusted operating income was $218 million, a decrease of 7% year-over-year. As I commented earlier, total operating revenues were $1.014 billion, a 4% increase year-over-year. Total cash expenses were $796 million, an increase of $58 million or 8% year-over-year. Total system operations expense increased 4% year-over-year. Excluding roaming expense, system operations expense increased by 7% due to higher circuit costs and cell site rent and maintenance expense. Roaming expense decreased $3 million or 7% year-over-year resulting from lower voice roaming while higher data usage was largely offset by lower rates. Cost of equipment sold increased $40 million or 19% year-over-year due to an increase in units sold and an increase in accessory sales as a result of higher volume. Selling, general and administrative expenses increased $11 million or 3% year-over-year, driven primarily by costs associated with supporting enterprise projects, building system upgrades and federal universal service. Turning to Slide 14. I'll touch on adjusted EBITDA which starts with our equity method investments along with interest and dividend. Adjusted EBITDA for the quarter was $267 million, a decrease of $13 million or 5% year-over-year. Equity in earnings of unconsolidated entities increased by $3 million or 7%. Next, I want to cover guidance for the full-year 2021. For comparison, we're showing our 2020 actual results. The total service revenues guidance range of $3.05 billion to $3.15 billion remains unchanged. For adjusted operating income and adjusted EBITDA, we're maintaining our guidance ranges of $850 million to $950 million and $1.025 billion to $1.125 billion respectively. As mentioned earlier, this reflects our expectation of a continued highly competitive environment for the remainder of the year. For capital expenditures, we are also maintaining our guidance range of $775 million to $875 million and we have provided a breakdown by major category. I will now turn the call over to Vicki Villacrez.

Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer, TDS Telecom

Okay, thank you Doug. And good morning, everyone. I am pleased with our financial results for the second quarter and through the first half of the year, and we are tracking to our guidance expectations. We continue to see strong broadband growth that has accelerated since the start of the pandemic. We grew residential broadband revenues 16% in total in the quarter, driving total residential revenue growth of 10%. Overall, we grew our topline 5% while planned investment spending on new market launches caused our adjusted EBITDA to be lower than prior year. Also notable during the quarter was strong average residential revenue per connection growth of 7%, driven by price increases and product mix, as customers take higher speeds. We continue to experience strong tailwinds which are driving increased broadband adoption. For example, work-at-home environments continue, bipartisan support for broadband is driving more federal and state opportunities, and population migration into our most attractive markets is driving strong household growth. During the quarter, we grew our total footprint 6% which increased strong organic household growth across our markets. Turning to Slide 17, we remain committed to the strategic priorities we've been focused on for several years. As previously discussed, our primary objective is to generate growth by investing in our high-speed broadband services. We have a multi-faceted approach in this growth that includes leveraging existing networks and constructing greenfield fiber in targeted locations. We are very pleased that where we've invested in fiber in our incumbent markets, we have achieved superior market share. Even in our expansion markets we are seeing strong customer preregistrations. In addition, we continue to drive faster speeds in our more mature incumbent markets by building to meet our A-CAM obligations and utilizing state broadband grants. On Slide 18, total residential connections increased 2% due to residential broadband growth in new and existing markets, partially offset by a decrease in voice and video connections. Total telecom broadband residential connections grew 7% in the quarter as we continue to fortify our network 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. Overall, higher-value product mix and price increases drove a 7% increase in average residential revenue per connection. On Slide 19, you can see the broadband connection growth across all markets. Our focus on broadband connection growth and fast, reliable service has generated a 16% increase in total residential broadband revenue. We are offering up to 1 Gig broadband speeds to 56% of our total footprint, including both our fiber and DOCSIS 3.1 markets. A 1 Gig product is an important tool that allows us to defend market share and to win customers in new markets. In areas where we offer 1 Gig service, we are now seeing 21% of our new customers taking this superior product. Turning to Slide 20, we have augmented our success growing broadband with our TDS TV offering. Our next-generation video platform enhances the customer viewing experience and bundled products help us to increase our broadband market share and reduce churn. Residential video connections were nearly flat. Wireline growth was 6% driven by our expansion markets and nearly offset losses in the cable market. Video continues to remain important to our customers. For example, we are experiencing a 40% video attachment rate to every broadband connection in our wireline markets where we offer IPTV services. Our strategy is to increase video connections through the offering of our cloud-based TDS TV+ product. The rollout of this product currently covers 60% of our total operation including our cable markets. Moving to Slide 21, we continue to be very bullish on our fiber strategy and how it will transform TDS Telecom in a very meaningful way over the next several years. Given the attractiveness of this opportunity and the heightened level of participation by other overbuilders, our sense of urgency has increased. We therefore are upsizing the number of expansion markets we expect to build over the next several years as well as increasing our fiber builds within our existing footprint. For competitive reasons, we are not specifically naming the markets or the number of service addresses yet and any additional spending this year is well within our guidance. We plan to announce these additional markets after we sign construction agreements and launch our pre-marketing and sales effort publicly. Fiber is the most economical long-term solution to deliver the best broadband experience. We continue to refine our market selection criteria and are highly confident in this process. Now let's turn to Slide 22. This shows the progress we are making this year on a multi-year fiber footprint expansion. This includes fiber into incumbent markets and also expansion into new markets. As a result of this strategy, 39% of our wireline service areas are now served by fiber. This is up from 33% a year ago. This is driving revenue growth while also expanding the total wireline footprint 8% to 873,000 service addresses. Moving to Slide 23, we have highlighted the total service addresses for the clusters that are in construction and that we are actively marketing. We recently announced our expansion of fiber into Spokane Valley, Washington, adding 33,000 service addresses to our plans in the Spokane cluster. In total, we completed 338,000 fiber service addresses to the second quarter and are working to build out an additional 57,000 service addresses by 2024. Performance of our launched fiber markets continues to be strong in most cases. Year-to-date, we completed construction of 31,000 fiber addresses adding 18,000 service addresses in the quarter. This progress is slower than planned and is putting pressure on service address delivery in the back half of the year. The delays we are seeing in construction could impact our ability to deliver our goal of 150,000 service addresses by the end of the year, but we are confident that we'll still complete a substantial portion of our plan. We also continue to proactively manage construction and customer equipment inventory demand as we're seeing lengthening lead times with our suppliers. We will continue to update you on our progress throughout the year. On Slide 24, total revenues increased 5% year-over-year to $252 million, largely driven by the strong growth in residential revenues which increased 10% in total. The chart includes residential revenue mix which highlights the increasing contribution of our expansion markets. Incumbent wireline markets also showed impressive residential growth of 7% due to increases in broadband connections as well as increases from moving the broadband product mix, partially offset by a 4% decrease in residential voice connections. Cable residential revenue grew 10% also due to increases in broadband connections as well as product mix. CLEC revenue declined 4% to $46 million. Wholesale revenue decreased 3% to $45 million, again primarily due to reductions in special access in the incumbent wireline market. So, let me sum up the combined financial results for the quarter. As shown on Slide 25, total revenues increased 5% from the prior year, and growth from our fiber expansion and increases in broadband subscribers exceeded the decline we experienced in our legacy business. Due to both supporting our current growth as well as spending related to future expansion into new markets which is not yet reflected in our revenue, future market costs include direct costs such as sales, marketing, real estate, and technician costs necessary to support new market growth. As a result, adjusted EBITDA decreased 7% to $78 million as expected. Capital expenditures increased 33% from last year as we continued to increase our investment in fiber deployments and success-based spending for new customers. On Slide 26, we provided our 2021 guidance which was issued at the beginning of the year. We expect expenses and capital expenditures to ramp up in the second half of the year as we continue to execute on our fiber expansion strategy, and we expect to end the year within the guidance range. I want to express my gratitude to all associates for their dedication to the success of TDS Telecom. Our positive quarterly results are products of your hard work. Thank you. I look forward to updating you in the third quarter, and now I'll turn the call back over to Jane.

Jane McCahon, Senior Vice President, Corporate Relations

Thanks, Vicki. Operator, we're ready for questions at this point.

Operator, Operator

The first question comes from the line of Rick Prentiss from Raymond James. Your line is now open.

Richard "Rick" Prentiss, Analyst, Raymond James

Thanks. Good morning, everyone. We'll start on the wireless side. LT, it's been a year as you point out. What caused the thought that partnerships could help U.S. Cellular in terms of service revenue growth and return on capital objectives? Can you tell me what kind of partnerships you're seeing out there that might make sense, and could you maybe also point out what are the pros and cons as you look at the AT&T and DISH announcements this year?

Laurent "LT" Therivel, President and Chief Executive Officer, U.S. Cellular

Thanks, Rick. Let me start with partnerships. I think partnerships manifest in two ways: partnerships to grow revenue and partnerships to manage cost. The way to think about these, and it's kind of across the business, is many of these are small, strategic examples. We've substantially moved or are moving some new stores over to our local dealers. Our retail organization has signed on a number of new dealer partners and we're co-investing with them so we can grow our footprint, share the cost and share the benefit. On the business side, we signed a number of partnerships to bring solutions to market. One example we announced just yesterday was around Geotab. Geotab is a fleet management service — by the way, it's one of the best fleet solutions in the business. We're excited to partner with them; it gives us another product to sell to our business customers and, obviously, growth in revenue and margin. On the infrastructure and cost side, those partnerships take time. We are in a variety of different discussions. I'll just point briefly at the Dish example, which I think is a pretty good example of a partnership. We have pivoted our tower business to serve potential co-location customers. One of those is Dish. We signed an agreement with them in L.A. I can't get into the details, but we're bullish about how that is going to help us, both to drive revenue and, more importantly, drive better utilization of our assets. So I feel good about the path we're on with those partnerships, and I think there's more to come. We continue to look for good ways to share investment, share revenue growth, and share margin expansion. I think we have a lot of opportunity to do so. When we pivot to the AT&T and Dish deal, you asked about that. There's been a lot written about that deal; my take on it is twofold. First, Dish has announced they're going to build a national network and set relatively aggressive buildout targets, and it's logical for them to try to find partners to supplement their buildout and provide coverage for their subscribers. From Dish's perspective, it's entirely logical to do it. From AT&T's perspective, I don’t know the details of the deal, but from AT&T's shoes I would say it can make sense to find a partner to fulfill certain needs. I think both sides create opportunities for us. We have coverage where AT&T does not, and that provides us an opportunity to work with Dish. On the flip side, if Dish builds out their network, there may be opportunities for us to take advantage of that to lower our capital build-out costs. So I think it's a logical deal, and I think it creates opportunities on both sides for U.S. Cellular.

Richard "Rick" Prentiss, Analyst, Raymond James

Makes sense. Also, you touched on a couple of times fixed wireless access. It seems like you're trialing it now. On the technical and market demand sides, when do you think you could move from trialing to actually launching, and what sort of addressable market is out there? Why would somebody choose U.S. Cellular?

Laurent "LT" Therivel, President and Chief Executive Officer, U.S. Cellular

We haven't announced a broad launch date, but certainly if the trials continue to go as we're seeing them so far, I expect this to be a product that we have in the market and generating meaningful opportunity by next year. Your question about the market opportunity is exactly what we're trialing, because there's a bull case and a bear case. The bear case is substantive fiber expansion and satellite improving substantially; in that path the opportunity for fixed wireless is meaningful but smaller. The alternative is fiber does not expand broadly beyond municipalities and satellite remains primarily an ultra-rural solution; that creates a lot of opportunity for fixed wireless. Our initial market trials indicate strong take rates — higher than I expected. That tells me customers are eager for an alternative to cable and other providers, especially in suburban and rural areas. Why should they pick U.S. Cellular? I'd argue our technical trials and network performance are excellent; we've set world-record-like results on speed over distance in millimeter-wave testing. I don't think there's many better positioned to provide connectivity for rural America. Once productization items are resolved — for example, external antennas on homes, getting signal inside the home, and in-home propagation — we expect to have a compelling offering. Timing is to be determined, but at the current course and speed I certainly think we'll be in the market in a meaningful way starting next year.

Operator, Operator

Your next question comes from the line of Simon Flannery from Morgan Stanley. Your line is now open.

Simon Flannery, Analyst, Morgan Stanley

Great, thank you very much. LT, you were talking about roaming and the impact of the Sprint merger. I think that moved 80% of the traffic onto the T-Mobile network. Is it fair to think that we're kind of crossing here and that you can grow that business as we go forward and perhaps the opportunity with Dish as well? Any color on where roaming goes from here would be great. And then, on the L.A. partnership or other wireless investments, any color on the outlook for distributions over the next couple of years, and can you comment on what to expect given proceeds from auctions and the spending there?

Laurent "LT" Therivel, President and Chief Executive Officer, U.S. Cellular

Thanks Simon, good morning. On roaming and the Sprint merger, yes we've seen inbound roaming revenues decline. A large part of that is Sprint traffic migrating to T-Mobile. Sprint represented about 15% of our inbound roaming revenue, so there's not a lot more there to lose, but that will phase away over time. We do project a decline in roaming revenue for the remainder of 2021 and going forward. That said, there are opportunities, including potential arrangements with Dish and others, and we'll be exploring those. Regarding the L.A. partnership distributions, our distributions in the first half of the year were about 70% of what they were last year and that was primarily due to operational reasons within the partnership. Our expectation for future distributions in the second half is that we would receive distributions close to what we received in 2020. Going forward, we have no visibility beyond that. We expect the current trend to continue and we have no knowledge of any unique arrangement with respect to spectrum or other assets that could change that. Also note we have a minority stake in that partnership and we don't control the distribution. If the controlling parties decide to change the distribution, that could change outcomes, but right now we are not aware of any significant changes.

Simon Flannery, Analyst, Morgan Stanley

Okay, thank you. And on the roaming, what are we seeing on the volume side there with COVID reopening and so forth? Is that back to normal levels or is there still some benefit as business and leisure travel returns?

Laurent "LT" Therivel, President and Chief Executive Officer, U.S. Cellular

There's two sides. Inbound roaming volumes are going down for the reasons I mentioned, including other carriers migrating traffic and technology transitions like 3G shutdowns. On the outbound side, our usage increased materially year-over-year; outbound usage in Q2 increased significantly compared to Q2 last year. Interestingly, while usage increased, our outbound roaming expense went down about 7% because we negotiated favorable rates on outbound roaming agreements. So those are moving in different directions and we're managing that side quite well.

Operator, Operator

Your next question comes from the line of Philip Cusick from JPMorgan. Your line is now open.

Amir Razban (for Phil Cusick), Analyst, JPMorgan (speaking for Phil Cusick)

Thank you for your time. Just one for me. Is U.S. Cellular registered for any upcoming auction?

Laurent "LT" Therivel, President and Chief Executive Officer, U.S. Cellular

We filed an application for the upcoming DoD auction. That's the answer.

Operator, Operator

Your next question comes from the line of Sergey Dluzhevskiy from GAMCO Investors. Your line is now open.

Sergey Dluzhevskiy, Analyst, GAMCO Investors

Good morning, guys.

Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer, TDS Telecom

Good morning, Sergey.

Sergey Dluzhevskiy, Analyst, GAMCO Investors

Thanks for taking the questions. My first question is for LT. You mentioned in your prepared remarks business and government segment a bit. Could you expand on the opportunities you see in that market? What is the size of the business and government market in your service territories, what is your share now and where would you like to be in a few years? What would you consider a success on a three-year horizon?

Laurent "LT" Therivel, President and Chief Executive Officer, U.S. Cellular

Sure, Sergey. From a business and government perspective, we don't disclose that segment independently, but a back-of-the-envelope way to think about it is our business share is approximately half of our postpaid consumer share. So there's a lot of opportunity. Where that opportunity lies: first, simple blocking-and-tackling on small business customers that walk into our stores. We're making growing small business a priority for our stores, and we're starting to see benefits. We're also adding products to the mix for our stores — for example, the Geotab partnership that provides fleet management services. Fleet management is bread-and-butter for small business sales through retail because you have many owners with multiple vehicles; it's a natural fit for our stores. More broadly, we're making a concerted effort to build distribution in the business and government space. Kim Kerr joined our team last year and has been expanding channels and distribution, and we're starting to see larger IoT deals and private networking deals. We have a fantastic asset — an industry-leading network in our markets — and historically we haven't put a strong business distribution behind that. We expect to now. This doesn't require a lot of new capabilities or capital; it's about building distribution and getting share at least similar to where our postpaid consumer share is, and that creates meaningful growth. Hopefully that addresses what you're looking for.

Sergey Dluzhevskiy, Analyst, GAMCO Investors

Great. Maybe one question on the competitive front. T-Mobile has been highlighting suburban and rural markets as a growth opportunity for them; they're trying to double their market share over the next four to five years. What have you seen from T-Mobile in your markets in Q2? How do you plan to mitigate any impact that you may see from their network builds, distribution expansion, and general marketing?

Laurent "LT" Therivel, President and Chief Executive Officer, U.S. Cellular

Sergey, I'll address T-Mobile. Two fundamental things are happening on the competitive front. First, we've seen much more aggressive upgrade offers across the industry. AT&T started that about 12 months ago and Verizon has been on-and-off in matching them. Carriers are trying to put 5G devices in customers' hands to improve experience and reduce churn, so aggressive offers in the near term are logical. We're seeing ARPU expansion as a benefit of those activities; higher-rate price plans are being chosen by a larger percentage of customers, which creates attractive long-term economics once promotional activity subsides. Second, regarding T-Mobile's moves into rural areas, we track market share and win and loss shares and so far we haven't seen meaningful movement. The work we do — building and monetizing networks — is hard, and it's even harder in rural America. I don't take T-Mobile lightly; they're a formidable competitor. But what we've seen to date looks more like marketing noise than substantial network deployment and customer action in our markets.

Sergey Dluzhevskiy, Analyst, GAMCO Investors

Got it. Maybe a couple of questions for Vicki. On the fiber build front, looking at your most mature markets and some of the new builds in Idaho and Washington, what are some lessons learned that are impacting how you're approaching future builds and tweaking your plans? What worked and what didn't?

Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer, TDS Telecom

Thank you, Sergey, and good morning. The successes we are seeing in our new fiber markets continue to meet or exceed our expectations where construction is completed and we can measure results. These successes increase our sense of urgency to accelerate our programs. For example, nearly half of our broadband connection growth in the quarter was due to our out-of-territory markets, reporting twice the number of connections compared to last year. Broadband penetration rates vary across markets due to timing of launches, but are averaging about 32% as of the end of the second quarter — still early for many completed markets. Voice and video connections are also growing across our expansion markets, with a video attachment rate at 41%. Contribution margins, although early, are north of 50% in markets that completed construction more than 12 months ago. In terms of construction, we are experiencing some delays and there are lessons learned. The pace of construction and challenges vary by market: sometimes permitting delays, sometimes difficult ground conditions. We are getting smarter, and cities that see these projects as important to long-term economic prosperity are working with us to facilitate construction. Permitting and municipal coordination are key learnings for us and our contractors, and we're improving those processes as we move forward.

Sergey Dluzhevskiy, Analyst, GAMCO Investors

Great. My last question is about video. You mentioned a 41% attachment rate. Some peers have deemphasized TV offerings and directed consumers to streaming and vMVPD options like YouTube TV. What are the reasons why your video strategy makes sense in your markets? What is different in your markets that others may not be seeing?

Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer, TDS Telecom

The video attachment rate of about 40% across our wireline markets indicates how important video is to our customers. Our video product is profitable and it's a state-of-the-art platform that, when bundled with broadband, offers a superior customer experience. In our markets we have a high percentage of single-family homes and these households often purchase entertainment packages and higher-speed broadband. Bundling is an important part of our strategy. The customer lifetime value of a customer who takes both data and video increases significantly and we observe lower churn on bundled products. So video remains valuable and strategic for us.

Operator, Operator

Speakers, I'm showing no further questions in the queue. Please continue.

Jane McCahon, Senior Vice President, Corporate Relations

Great. Well, we'd like to thank everybody for joining us today and look forward to our future conversations. Have a great weekend.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.