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Text: We want to send out our very best wishes that you and your families are well.
We've worked hard to prepare our materials and remarks for today to share with you the strength of our businesses and provide insight into what we believe, well, to be some of the most significant opportunities and challenges we'll face in the coming months.
Please let us know if we can do anything to provide more timely and important information.
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; Ken Meyers, Senior Advisor to the CEO; Doug Chambers, Senior Vice President and Chief Financial Officer; and Mike Irizarry, Executive Vice President and Chief Technology Officer.
From TDS Telecom, Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer.
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 have updated our safe harbor statements to include specific risks related to COVID-19 and its impacts on our businesses and provided that here specifically on Slide 3.
In terms of our upcoming IR schedule, Slide 4, we will be virtually attending the Morgan Stanley's Corporate Access Day on August 13th and then doing a Virtual Morgan Stanley Non-Deal Roadshow on August 20th, which will include a fireside chat and our open-door policy is now more of a open phone or a open video policy, so please reach out to us and we can arrange them.
Before turning the call over, I'd like to remind everyone that due to the FCC's Anti-Collusion Rule, we will not be responding to any questions related to the FCC auctions and spectrum strategy.
I'm going to make some brief comments about the balance sheet and actions we've taken during the COVID-19 crisis to protect ourselves, financially.
But before doing so, I'd like to highlight the strong operational and financial results of both business units during the quarter.
The pandemic has highlighted the criticality of our products to our customers and the teams have stepped up and continued to deliver on their typically outstanding service levels.
Now to the balance sheet.
As we've talked about before, maintaining financial flexibility is one of the pillars of our corporate strategy.
Over the years, we have worked to retain relatively low leverage levels, long-dated debt 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 5, at June 30th, TDS had $1.7 billion in available funding sources, including cash and cash equivalents, available credit facilities, undrawn term loans and the undrawn portions of our EIP securitization.
We took a number of steps earlier this year to solidify our overall liquidity and feel confident we are in a stable and sound position for the rest of the year.
We also repurchased a little over 500,000 TDS common shares at favorable prices during the quarter, balancing the need to retain liquidity with a pricing opportunity offered by the market.
As this is our practice, we will look to take advantage of favorable market conditions to augment our balance sheet going forward.
We believe we have additional access to the debt capital markets both retail and institutional as well as other conventional debt sources.
If it were necessary, we believe, we would also have a number of potential additional funding sources, including some related to our own towers and wireless partnerships, although we would view such financings less favorable -- less favorably than straight debt for costs and operational reasons.
Finally, as you can see from the chart on the right side of the page, most of our existing debt is very long-dated with essentially no near-term maturities pressuring our liquidity position.
I'd be lying if I told you this wasn't a bittersweet moment for me.
I'm so proud to have worked for TDS and U.S. Cellular for over 30 years, by my count -- actually, by Jane's count.
I've been involved in reporting for some 136 quarters, with many of you on the receiving end of some those, maybe even many of those or maybe just feeling that way.
And I want you to know that I'm confident that I am leaving the organization in great hands.
U.S. Cellular has an exceptionally talented management team and the most customer-focused associates in the industry.
And now, has a new leader with the skills and experience to move the company forward.
I'm humbled to have worked with you and which -- and wish each of you much success going forward.
LT, it's all yours.
Given that I started this job just on July 1st, I'm going to share some of my initial impressions, but for the most part, I'm going to be in listen mode today.
Doug Chambers is going to -- are going to -- is going to walk you through our results for the quarter.
And this has been a challenging few months for everyone but I have to say, I'm proud to be part of this industry and I'm particularly proud to be part of this company.
The pandemic has validated that what we do is truly essential, connecting family, friends and commerce and this is a particularly exciting time to be in wireless, especially as we embark on 5G.
As you know, we've already launched some initial markets on 5G and we're going to provide some more details on that later in the call.
My first month at U.S. Cellular has been full of learning and listening and I feel it's been a seamless and effective transition.
Over the past few weeks, I traveled to several of our various locations, met with many of our associates, of course, in the safest manner possible and I'm consistently inspired by our customer-centric culture and the high levels of engagement that we have across the entire company.
The flexibility and resiliency that our associates have displayed throughout this pandemic are tremendous and it's clear to me that our focus on the customer and our high quality network are critical to growing this business.
And speaking of network, I'm pleased to report that our network strength was recently recognized as we won another J.D. Power Award.
This recognition validates for me that our network modernization strategy is working.
I want to talk for just a minute about why I joined this company.
It's a strong company, tremendous corporate culture, it is also a company with incredibly valuable assets, spectrum, towers, distribution, and our assets have both significant financial value and operational importance.
And my goal is to build on that strong culture and that strong assets in order to drive strong growth.
Let me be very clear, I was hired to lead U.S. Cellular into the future to grow this business.
I'm going to be very focused on building value for all of our constituents.
Over the coming months, my leadership team and I are going to be developing a strategy aimed at doing what is best for U.S. Cellular to continue to be a formidable competitor over the long-term.
Let me touch briefly on the quarter.
Many aspects of our second quarter performance were impacted by the pandemic, yet we were able to generate very solid results.
I'm extremely proud of what the team has accomplished and the results are really a testament to Ken and his leadership.
Doug is going to take you through the details in a moment.
And looking forward to the rest of the year, we're going to build off these strengths, we'll also intensifying our focus on community specific campaigns and delivering the products and services and solutions that our customers want.
I'm looking forward to reporting on our progress throughout the back half of 2020 and getting to know all of you, our investors and our analysts.
Network quality is foundational to U.S. Cellular.
Our goal is to ensure our customers have a great experience, whenever and wherever they use their devices.
As most of you know, Iowa and Wisconsin were phase one of our multi-year 5G network expansion.
And last week, we announced our next phase.
Phase two will begin in the second half of 2020 and we will deploy in 11 states or about 10 million PoPs.
We are working with three equipment vendors and we are continuing to expand the number of 5G devices.
We've been very pleased with the performance of phase one.
Customers are receiving an improved customer experience, our 5G deployment improves average and peak speeds for our 5G and our 4G customers.
In addition to improved customer experience and new revenue opportunities, we expect 5G to carry traffic more efficiently, improving the cost to deliver a bit.
And this efficiency enables us to get the most out of our spectrum portfolio.
We expect to begin deploying our Millimeter wave spectrum in 2021 to improve speed and capacity in denser areas of our footprint.
Further, we expect to conduct trials of our Millimeter wave fixed wireless service in 2021 in CLEC markets.
Turning to Slide 8.
First, let me briefly provide a COVID-19 update.
First, our entire organization has been incredibly resilient as we successfully managed through continuing uncertainty.
We have maintained our work-at-home program for those where it is feasible and while we are working on a return to office plan, we have not set a timetable for doing so.
On the retail front, our stores are opened and largely back to normal hours.
We continue to follow important safety steps to keep our frontline associates and customers safe.
As expected, the pandemic led to reduced store traffic levels in the quarter.
However, each metric has shown steady improvement off the post-pandemics lows.
Recently, store traffic has been running about 20% below prior year levels.
Finally, our supply chain remains fully functional and our inventory levels are good.
Turning to Slide 9.
Even with all this disruption, we are still executing on our strategic priorities.
As I will detail in a moment, subscriber results benefited from very low churn and strong connected device additions in the quarter.
Revenue growth in the quarter was impacted by reducing roaming -- reduced roaming revenue, which was partially due to decreased mobility of wireless users during the pandemic.
Also, as an additional way to help our customers, we removed caps on data usage and waived overcharges, which had a negative impact on ARPU in the quarter.
We signed the FCC's Keep Americans Connected Pledge, where we committed to not disconnect customers who are experiencing COVID-19 related challenges for non-payment through June 30th.
We had about 56,000 subscribers sign up for the pledge with 39,000 remaining at June 30th.
This [Technical Issues] amount of paid subscribers is less than we anticipated at March 31st and resulted from proactively working with pledge customers to administer collections and enroll them in payment arrangements.
As a result, we decreased our estimate of bad debts expense related to the pledge in the second quarter.
Overall, despite some negative impacts to revenue and expenses as a result of the pandemic, we continue to control cash expenses, which decreased 3% year-over-year.
From a network standpoint, we engineer our network for peak usage periods and the network continues to perform well.
To-date, COVID-19 has increased data traffic about 20%-25% and our network has been able to handle that extra demand.
Throughout the quarter, we continued our network modernization and 5G efforts and we will be finishing our VoLTE deployment this year.
Our expansion markets in Iowa and Northern Wisconsin are doing well.
And as LT highlighted, we won another J.D. Power Award.
Let me touch briefly on postpaid connections results during the second quarter shown on Slide 10.
Postpaid handset gross additions decreased primarily due to mobile switching activity and decreased store traffic due to the impacts of COVID-19.
Partially offsetting this was an increase in demand for connected devices.
Total smartphone connections increased by 11,000 during the quarter and by 64,000 over the course of the past 12 months that helps to drive more service revenue given that smartphone ARPU is about $21 higher than feature phone ARPU.
As mentioned, we saw connected device gross additions increased by 9,000 year-over-year.
This was driven by gross additions of Internet products such as hotspots and routers as a result of an increase in demand by customers seeking wireless products to meet their need for remote connectivity due to the impacts of COVID-19.
During Q2, we saw an average decline in store traffic of around 35% with the larger drop in traffic at the beginning of the quarter and the end of the quarter.
Decrease in store traffic had a negative impact on gross additions and accessory margin although connected device activity remained stronger than the prior year.
Next, I want to comment on postpaid churn rate shown on Slide 11.
Currently, as you would expect, churn on both handsets and connected devices is running at very low levels.
Postpaid handset churn depicted by the blue bars was 0.71%, down from 0.97% a year ago.
This was due to mobile switching activity, resulting in a decrease in defections as customers' shopping behaviors were altered due to the overall COVID-19 crisis as well as reduction in non-paid defections related to the FCC pledge.
Postpaid churn combining handsets and connected devices was 0.89% for the second quarter of 2020 also lower than a year ago.
Now let's turn to the financial results on Slide 12.
Total operating revenues for the second quarter were $973 million, flat year-over-year.
Retail service revenues decreased by $4 million to $658 million.
The decrease was due to a decline in the postpaid subscriber base, partially offset by higher average revenue per user, which I'll cover on the next slide.
Inbound roaming revenue was $41 million that was a decrease of $3 million year-over-year driven by lower rates, partially offset by higher data volume.
Other service revenues were $54 million, that was an increase of $3 million year-over-year attributable to a 16% increase in tower rental revenues.
Finally, equipment sales revenues increased by $4 million or 2% year-over-year due to the increase in devices sold, partially offset by a decrease in the average selling price and a decrease in accessory sales.
Now a few more comments about postpaid revenue shown on Slide 13.
Average revenue per user or connection was $46.24 for the second quarter, up $0.34 or approximately 1% year-over-year.
At a per account basis, average revenue grew by $1.24 or 1% year-over-year.
The increase was driven by several factors, including having proportionately less tablet connections, which on a per unit basis contributed less revenues in smartphones, an increase in regulatory recovery revenues and increased device protection revenues.
As part of caring for our customers during the COVID-19 crisis, beginning in March, we elected to waive overage charges and we also waived late fees and other fees in conjunction with the FCC pledge.
These waived charges partially offset the increase to ARPU.
Let's move next to our profitability measures on Slide 14.
First, I want to comment on adjusted operating income before depreciation, amortization and accretion and gains and losses.
To keep things simple, I'll refer to this measure as adjusted operating income.
As shown at the bottom of the slide, adjusted operating income was $235 million, an increase of $23 million year-over-year.
As I commented earlier, total operating revenues were $973 million, flat year-over-year.
Total cash expenses were $738 million, decrease in $23 million year-over-year.
Total system operations expense increased year-over-year.
Excluding roaming expense, system operations expense increased by 3%, mainly driven by increases in cell site rent expense and non-capitalized cost to add network capacity, while total data usage on our network increased by 72%.
Roaming expense decreased 2% year-over-year due to lower rates, partially offset by a 42% increase in off-net data usage.
Cost of equipment sold decreased by $6 million or 3% year-over-year, primarily due to a lower average cost per device, a decrease in accessory sales and a decrease in charges recorded to reduce inventory to its net realizable value.
These decreases were partially offset by the increase in the volume of devices sold.
Selling, general and administrative expenses decreased 6% year-over-year, driven by a decrease in bad debts expense, advertising and employee-related expenses.
The decrease in bad debts expense resulted from decrease in our estimated allowance for bad debt in the second quarter of 2020 related to our participation in the FCC pledge.
As I mentioned earlier, this decrease was driven by overall favorable experience in both administering collections from the FCC pledge customers and enrolling them in payment arrangements.
Shown next is adjusted EBITDA, which starts with adjusted operating income and incorporates the earnings from our equity method investments along with interest and dividend income.
Adjusted EBITDA for the quarter was $280 million, a 9% increase year-over-year due to the improvement in adjusted operating income as well as an increase in equity and earnings of unconsolidated entities, partially offset by a decrease in interest income.
Slide 16 provides our guidance for the year and for comparison, we're also showing 2019 actual results.
For purposes of developing our guidance, we assumed that our markets will remain out of lockdown for the remainder of the year and an improvement to a more normal state by late Q3 2020.
I want to take a moment to remind everyone that our guidance is on service revenues not total operating revenues, which includes both service revenues and equipment sales.
Variations in equipment sales typically have a corresponding impact on cost of equipment sold and as a result, are less impactful to our profitability measures.
Therefore, we believe that service revenues are the more meaningful revenue measure for guidance purposes.
For total service revenues, we have maintained a range of $3.0 billion to $3.1 billion.
We have also maintained our adjusted operating income and adjusted EBITDA ranges of $725 million to $850 million and $900 million to $1.025 billion respectively.
For capital expenditures, we are maintaining our guidance range of $850 million to $950 million.
We continue to make good progress on our key projects such as VoLTE deployments, 4G LTE network modernization and 5G, and do not currently anticipate a major disruption to any of them.
As we've highlighted throughout the call, there remains a good deal of uncertainty related to potential business outcomes for the year.
COVID-19 has an impact on service revenues, handset subscribers, gross additions and defections, roaming activity and operational costs.
In addition, impacts related to the ongoing pandemic on the economy and society, including additional governmental response to the pandemic are still not entirely clear.
This level of uncertainty factored into our decision to maintain our existing guidance at this point of time.
Overall, we are very pleased with our results for the first half of the year and our ability to quickly and effectively respond to the COVID-19 pandemic.
We grew both revenue and adjusted EBITDA in the second quarter and made progress on advancing our fiber deployment strategy.
Let me first begin by giving an update on the actions that we have taken in the quarter.
In accordance with the FCC pledge, we did not disconnect customers due to non-payment and we agreed to waive late payment fees for customers impacted by the pandemic.
As a result of both these actions, we recorded a reserve of $2 million in the quarter.
In advance of processing non-pay disconnect, which we began in July, early indications suggested about 70% of our customers are prioritizing their services and making arrangements to stay connected.
In addition to the FCC pledge, we also offered a free 60-day broadband promotion, contributing to our growth and we are now seeing the majority of these customers paying for these services.
From an operational perspective, our highest priority is keeping our employees and customers safe.
To that end, we continue to operate in a work at home environment wherever possible and have expanded safety protocols for frontline workers, including the direct sales force as they return to selling door-to-door in the second quarter.
From a product perspective, we are pleased to report that we have expanded our launch of our cloud TV product called TDS TV+ to additional cable and wireline markets, including our Wisconsin out-of-territory clusters and expect to complete those rollout in the third quarter.
Additionally, we plan to roll out TDS TV+ to our new fiber market, Coeur d'Alene, Idaho in the fourth quarter.
This is a really great product and while it is still early in its launch, we are focused on ensuring its success across our markets.
From a network perspective, the current prices continues to reaffirm the importance of high-speed Internet and how important not only our investments have been, but also our continued efficacy on behalf of rural America.
As a result of driving fiber deeper into our market, we have robust networks, which continue to remain very stable and meet our customers' need.
From an out-of-territory perspective, pre-sales continue to exceed our expectations.
We are currently installing service in our Wisconsin and Idaho clusters.
We remain focused on construction throughout these communities and we are working toward commencing construction in Spokane, Washington, where we recently launched pre-sale activity.
Overall, we remain committed to achieving our strategic priorities through the second half of the year as outlined on Slide 19.
Now, let me highlight our financial results for the quarter as shown on Slide 20.
Consolidated revenues increased 3% from the prior year, primarily due to the cable acquisition, which closed at the end of last year.
It also reflects organic increases in broadband and video from our fiber expansions in wireline and continued growth in cable residential ARPU and broadband subscribers.
Again, these increases were partially offset by the reserve related to the FCC pledge.
Cash expenses increased 2%, including the acquisition and were flat without.
As we have seen meaningful favorability on employee expenses in the quarter and other cost-saving initiatives, offset by increased plant and maintenance expense.
Adjusted EBITDA increased 2% to $83 million due to these increases in operations, partially offset by lower interest income in the quarter.
Capital expenditures increased 7% to $75 million as we continued to invest in our fiber deployment.
I will cover our total fiber program in more detail in a moment, but for now, let's turn to our segments, beginning on wireline on Slide 21.
Broadband residential connections grew 6% as we continue to fortify our network with fiber and expand into new market.
At the onset of the pandemic, we saw an initial surge in demand, which has subsided to expected growth levels.
Also contributing to this growth is customers not disconnected due to the FCC pledge.
In June, we were excited to return our direct sales force to selling door-to-door and we saw an immediate impact on our new fiber market sales.
From a broadband speed perspective, we are now offering up to 1 gig broadband speeds in our fiber markets.
Across our wireline residential base, essentially, one-third of all broadband customers are now taking 100 megabit speeds or greater compared to 26% a year ago.
This is helping to drive a 4% increase in average residential revenue per connection in the quarter.
Wireline residential video connections grew 9% compared to the prior year.
Video is important to our customers, approximately 40% of our broadband customers in our IPTV market take video, which for us is a profitable product.
Our strategy is to increase this metric as we expand into new markets the value of these services and through the launch of our new TDS TV+ product.
Our IPTV services in total cover one-third of our wireline footprint, leaving opportunity to further leverage our investment in video.
Slide 22 shows the progress we are making this year on our multi-year fiber program, which includes our in and out-of-territory fiber build.
As a result of this strategy over the last several years, 265,000 or 33% of our wireline serviced addresses are now served by fiber, which is up from 27% a year ago.
This is driving revenue growth, while also expanding the total wireline footprint 3% to 810,000.
Our current fiber plans include roughly 320,000 serviced addresses that will be built over a multi-year period.
Year-to-date, we have completed construction of 25,000 fiber addresses, and overall take rates are generally exceeding expectations in these areas that we've launched to-date.
We are expecting our fiber service address delivery to more than double in the second half of the year, as we continue launching new markets.
However, as we discussed last quarter, we are seeing some delays in construction, but at this point, we still expect to deploy at a pace that is within our capex guidance for the year.
For example, slower municipality permitting as well as electric utility dependencies associated with the aerial portion of our fiber build, continue to be a major watchpoint for us.
In some cases, we are pivoting to buried alternatives where it makes economic sense.
Looking at wireline financial results on Slide 23.
Total revenues decreased 2% to $169 million, largely driven by the continued decline in CLEC commercial revenues and a decline in wholesale revenues.
These declines in commercial and wholesale revenues are offsetting strong growth in residential revenue, which increased 6% due to growth from video and broadband connections as well as growth from within the broadband product mix, partially offset by a 3% decrease in residential voice connection.
Commercial revenues decreased 10% to $38 million in the quarter, primarily driven by lower CLEC connections.
Wholesale revenues decreased 6% to $46 million due to retroactive ATM[Phonetic] funding in 2019 and decreased access revenue.
Wireline cash expenses decreased 2%, this was driven by lower employee expenses, the capitalization of new modems, previously expensed and reduced cost of legacy services, partially offset by higher video programming fee.
In the quarter, maintenance expense also increased partly due to storm damage in several markets.
In total, wireline adjusted EBITDA decreased 4% to $59 million.
Moving to cable on Slide 24.
Cable total revenues increased as customers continue to value our broadband services.
Total cable connections grew 12% to 378,000, while -- which included 31,000 from the acquisition and a 9% organic increase in total broadband connections.
On an organic basis, broadband penetration continued to increase, up 220 basis points to 46%.
On Slide 25, total cable revenues increased 16% to $71 million, driven in part by the acquisition.
Without the acquisition, cable revenues grew 7%, driven by growth in broadband connections from both residential and commercial customers.
Our focus on broadband connection growth and fast reliable service has generated a 25% increase in total residential broadband revenue, including organic growth of $4 million or 15%.
Also driving the revenue change is a 6% increase in average residential revenue per connection, driven by higher value product mix and price increases.
Cash expenses increased 13%, due primarily to costs related to the acquisition, or 4% excluding acquisition due to increased employee expense to support the growth.
As a result, cable adjusted EBITDA increased 20% to $24 million in the quarter, improving margin by 130 basis points to 34%.
On Slide 26, we provided our 2020 guidance, which is unchanged from the guidance we shared at the beginning of the year.
We are pleased with our results in the first half of the year and even with some uncertainty related to the pandemic in the second half of the year, we remain committed to our strategic goals and financial objectives.
Our fiber builds are expected to ramp up in the second half of the year and we currently expect to be within the guidance range.
I look forward to updating you in the third quarter.
And before opening the call to questions, I'd like to remind everyone once again that due to the FCC's anti-collusion rules, we will not be responding to questions related to any FCC auctions or spectrum.

user
q2 revenue $973 million versus refinitiv ibes estimate of $900.7 million.
qtrly postpaid retail arpu $46.24.

assistant