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United States Cellular Corporation (USM ) Q3 2019 Earnings Call Transcript

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United States Cellular Corporation  (NYSE: USM)
Q3 2019 Earnings Conference Call
Nov. 04, 2019, 3:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the TDS and U.S.Cellular Third Quarter Conference Call. [Operator Instructions]

I would now like to turn the conference over to your speaker today, Jane McCahon. Thank you. Please go ahead.

Jane McCahon -- Senior Vice President of Corporate Relations and Corporate Secretary

Thank you, Jody. Good morning everyone and thank you for joining us. With me today and offering prepared comments are from U.S. Cellular, Ken Meyers, President and Chief Executive Officer; and Doug Chambers, Senior Vice President and Chief Financial Officer. 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 and adjusted earnings before interest, taxes, depreciation and amortization to highlight the contributions of U.S. Cellular's wireless partnerships.

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 paragraph in our press releases and the extended version in our SEC filings. TDS and U.S. Cellular filed their SEC Forms 8-K yesterday, including its press releases, in addition to our SEC Forms 10-Q.

Taking a quick look at the upcoming IR schedule on Slide 3. Ted Carlson, Doug Chambers, and I, will be out on the road in New York with Citi on November 14th. Doug Chambers, and I, will be doing one-on-ones at the Wells Fargo TMT Conference in Las Vegas on December 3rd, Ken Meyers, Mike Irizarry, and I, will be attending the UBS Global TMT Conference on December 11th, and Ken and I, will be attending Citi's 2020 TMT West Conference on January 7th. And please keep in mind that TDS has an open door policy. So if you're in the Chicago area and would like to meet with members of management, the IR team will accommodate you calendars permitting.

Before turning the call over, I want to remind everyone that U.S. Cellular is registered to participate in the FCC's auction 103 and due to the anti-collusion rules, we will be unable to respond to any questions related to FCC auctions.

And now I'd like to turn the call over to Ken Meyers.

Kenneth R. Meyers -- President and Chief Executive Officer

Thank you, Jane. Good morning, and thanks for joining us today. I know the headlines for the quarter looked like another quarter of revenue and adjusted EBITDA growth, albeit with a small loss on postpaid handset additions. But in fact it was much, much more than that. In fact, it was a very busy quarter for us.

First , the quarter started off rather soft, but we picked up nice momentum throughout the quarter some of the many initiatives we've been working on were implemented and progress was made on others. Subscriber activity picked up and improved month-to-month with positive net postpaid handset additions in September and again in October. As we head into the busy holiday season, I like our position and the trends that we're seeing.

In the quarter, service revenues grew 2% driven by positive trends in average revenue per user in roaming revenue. Operating cash flow or operating income before depreciation and amortization grew 6%. One of those major initiatives was the completion of a refreshing of our brand and the launch of a new tag line Bringing Fairness to Wireless. Our new brand positioning nicely captures all that U.S. Cellular has stood for years, in a fresher, more modern look designed to broaden our appeal in the marketplace. This Bringing Fairness to Wireless campaign is the umbrella philosophy that covers our approach to public policy, the mindsets of our team of incredibly engaged associates and our approach to the marketplace.

Another significant endeavor was work to deliver new web-based technology that powers our online customer activity, including via their mobile devices. This is a major plumbing project that now allows our customers to have a better and faster online experience today, provides the platform for future growth in this channel.

Another unexpected effort resulted in competitive pricing change in the quarter. The team was able to respond very quickly limiting the competitive impact of the change. I must admit, I remain amazed and baffled at the pricing strategy that play in this industry. Our changes lowered pricing on select plans and implemented congestion based controls and set of hard caps on unlimited plans.

As previously discussed, customers are continuing to hold on to their expensive devices longer, holding them in equipment sales. Our upgrade rate remained low at 6% in the quarter. Also device protection revenues grew about 10% year-over-year and postpaid subscriber penetration on that product is now at 48%. Driving revenue remains a strategic priority and is key to our ability to improve profitability. At the end of the quarter, 71% of our postpaid customer base is on our new Total Plans, helping to drive a 2% increase in average revenue per user. Also contributing to that ARPU increase, were a higher mix of smartphones, relative to the feature phone and connected devices and the growth in the device protection revenues that I mentioned.

The prepaid segment, especially improved, especially average revenue per user and churn, though prepaid still remains just about 10% of our business. Roaming was a highlight, with if it's showing on both the revenue side due to traffic growth and the expense side where total costs fell 9%. The organizations continues to manage its costs, again data usage increased 36% this quarter, while True Systems operating expense excluding that the roaming benefit I talked about increased just 2%. However, we did see higher G&A this quarter as a result of the number of the IT-related projects and higher bad debt expense.

Turning to the network. Our 5G and network modernization initiatives have been progressing nicely and we announced that we would launch 5G services in Iowa and Wisconsin during the first quarter of 2020. Also as we have readied our network for 5G, customers with 4G devices are experiencing better network quality and improved speeds.

In addition, we will continue to rollout VoLTE technology. We now reached 67% of our subscribers with VoLTE services in Iowa, Wisconsin, California, Washington, Oregon and New England and the Mid-Atlantic areas. We will continue to rollout VoLTE in the remaining markets over the next year or so.

Finally, as you may have heard at the CTIA GSMA show in Los Angeles last week or seen and our recent filings with the SEC. I believe it's critical for the industry to get access to significant amount of mid-band spectrum quickly. The rest of the world is deploying and mid-band today and failure or delays in deploying mid-band spectrum in the United States will not only impact our customers [Technical Issues] already to roam in other countries will severely inhibit carrier's ability to deliver meaningful 5G services outside the larger cities.

While I recognize solutions are not easy and I applaud the FCC's efforts to navigate the maze of difficult policy and technical issues involved. It is vitally important that we make even more progress in this area quickly.

With that, let me turn the call over now to Doug Chambers, who will update you on the financial results. Doug?

Douglas W. Chambers -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Ken and good morning everyone. I want to talk first about postpaid handset connections shown on Slide 6. Postpaid handset gross additions in the third quarter were 124,000, down from 133,000 a year ago. Due to an aggressive competitive environment that included service plan pricing changes and rich promotional offers for handsets. Also in the third quarter of 2018, we saw a one-time increase in gross additions due to the exit of a competitor in one of our key markets. Postpaid handset net additions for the third quarter were negative 2,000, down from positive 15,000 last year, driven by the decline in gross additions and slightly higher churn.

I'll touch more on churn in a moment. On a sequential basis, both gross and net additions improved, due in part to positive response to our price plan changes, which Ken discussed earlier in his comments and also to the normal seasonal trend. In addition to gross additions of smartphones ,we continue to have existing handset customers upgrading from feature phones to smartphones. As you can see on the graph on the right side of this slide, including the upgrades total smartphone connections increased by 22,000 during the quarter and by 92,000 over the course of the past year. That helps to drive more service revenue given that ARPU for a smartphone is about $22 more than ARPU for a feature phone.

Next I want to comment on the postpaid churn rate shown on Slide 7. Postpaid handset churn depicted by the blue bars, was 1.09% for the third quarter of 2019 higher than last year, driven primarily by aggressive industrywide competition. Sequentially, postpaid handset churn increased partly due to seasonal trends, but we did see an improvement in churn in the last portion of the quarter, which we attribute in part to positive response from our customers to our price plan changes. Total postpaid churn combining handsets and connected devices was 1.38% for the third quarter of 2019 higher than a year ago. In addition to the uptick in handset churn, connected device churn was also higher year-over-year, primarily as a result of deductions on connected wearables.

Now let's turn to the financial results. Total operating revenues in the third quarter were over $1 billion, up $30 million or 3% year-over-year. Retail service revenues increased by 1% to $663 million. The increase was due largely to higher average revenue per user, which I'll cover on the next slide.

Inbound roaming revenue was $54 million, that was an increase of 9%, driven by higher data volume. Other service revenues increased by $7 million. This was driven primarily by an out-of-period accounting adjustment related to tower rental revenues that resulted in $5 million of additional revenue being recognized this quarter. Finally equipment sales revenues increased by $15 million or 6%. This was driven primarily by an increase in the average revenue per device sold, partially offset by a decrease in the number of devices sold.

As I mentioned earlier, there was a decrease in gross additions activity year-over-year and impacted device sales. In addition, we are continuing to see that existing customers are holding onto their devices for increasingly longer periods, resulting in a slight decrease in upgrade transactions.

Now a few more comments about postpaid revenue shown on Slide 9. The average revenue per user or connection was $46.16 for the third quarter, up $0.85 or 2% year-over-year. The increase was driven by several factors including a shift in device mix to smartphones, increased device protection revenue, and the shift in service plan mix to higher priced plans. 37% of our postpaid connections are now on unlimited plans versus 23% a year ago. Partially offsetting these increases were higher promotional sales expenses also there was a decrease in universal service fund revenues resulting from the FCC's December 2018 ruling and revenues from text and multimedia messaging services are no longer assessable under the universal service fund. As a result, this year U.S. Cellular stopped charging customers and will no longer pay the FCC USF fees on these revenue streams.

Because this change also affected general and administrative expense by a like amount, it is neutral to earnings. Looking through this change, ARPU on a comparable basis increased by $1.21 year-over-year versus the reported increase of $0.85, a pretty strong result. On a per account basis average revenue grew by $0.45 year-over-year, excluding the USF impact that I just discussed, ARPA increased by a $1.39 or 1.2%.

Let's move next to our profitability measures. 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 $208 million, up 6% from a year ago. Correspondingly the margin as a percent of total operating revenues was up about half a percentage point to 20%.

For those watching service revenue margin, the current quarter result was 27%, an increase of one percentage point year-over-year. As I commented earlier, total operating revenues increased by $30 million or 3% year-over-year. Some of that increase in revenues was offset by higher operating expenses, which in total grew by $19 million or 2%. Total system operations expense was essentially flat, roaming expense, which is included here decreased 9% due primarily to lower rates, partially offset by a 29% increase in off-net data usage. Excluding roaming expense, system operations expense increased by 2% as a result of increased network maintenance expenses and cell site rents. Cost of equipment sold increased due primarily to a higher average cost per device sold, partially offset by a decrease in the number of devices sold.

SG&A expenses increased 3% year-over-year, in large part due to higher costs related to Information Systems initiatives. 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 third quarter was $256 million, up 5% from a year ago. Most of the improvement is due to the increase in adjusted operating income. We also saw an increase in equity in earnings of unconsolidated entities. Adjusted operating income and adjusted EBITDA, do not include depreciation, amortization and accretion expense. In connection with network modernization and 5G initiatives, we are upgrading several of the network equipment elements. This results in the recognition of accelerated depreciation on the assets being replaced. Depreciation, amortization and accretion expense is up 10% for the year-to-date period and we expect a similar increase in our full year results.

Next I want to cover our guidance for the full year 2019, which is shown on Slide 12. For comparison, we're also showing our 2018 actual results. For total operating revenues, we now expect a narrower range of approximately $3.95 billion to $4.05 billion reflecting increased visibility as we move into the last quarter of the year. For adjusted operating income before depreciation and amortization, we have narrowed the range to $750 million to $850 million. Correspondingly we have narrowed the range for adjusted EBITDA to $925 million to $1.025 billion. For capital expenditures, the guidance is the same as provided in August. Our expenditures through the third quarter were $467 million.

Now I'll turn the call over to Vicki Villacrez.

Vicki L. Villacrez -- Chief Financial Officer

Okay. Thank you, David and good morning everyone. I'm pleased to report on our efforts to grow the business by building out new fiber markets. This transformation demands discipline and a focus on execution, and we are moving steadily toward our strategic growth initiatives, as outlined on Slide 14. At the same time, we continue to promote higher sales and customer satisfaction in our existing markets.

Among our many accomplishments. I'd like to highlight several that occurred during the third quarter. First, we launched a third new out of territory markets advancing our fiber footprint. Second, we entered into an agreement to purchase another cable company, and third, we enable DOCSIS 3.1 for an October launch in one of our key cable markets. You will also notice that the graphic presentation on Slide 14 has been modified to show service addresses by speed to better illustrate the transition of the work we are doing to upgrade our plants with A-CAM, state broadband grants, and fiber investment.

Moving to Slide 15, on a combined basis, total revenues held nearly steady with last year, despite challenges in the commercial market and expected reductions in wholesale revenue. As a reminder, in the third quarter last year TDS Telecom received an additional $4 million of support revenue provided through the A-CAM program, which was retroactive to January of 2017.

Total cash expenses increased 3%, partly as our fiber market launch activity ramps up, but also due to a $2 million of increased legal expense in the quarter. As a result, adjusted EBITDA decreased 9% to $73 million from a year ago . Capital expenditures increased 50% to $81 million as we continue to invest in our fiber deployment and rural broadband expansion program. We also enable DOCSIS 3.1 in our Bend cable market, which allows us to offer 1-gig broadband services.

And finally, we expect our capital spending to be even higher in the fourth quarter due to our fiber deployment strategy in our new markets. Specifically in this quarter, we launched our third new out of territory fiber market in our Southern Wisconsin cluster. We are in various stages of construction and while we've experienced some delays, we expect to launch four additional markets in this cluster yet this year and early next year.

As I previously announced construction is progressing in two new out of territory clusters targeting 80,000 total service addresses, one in mid-central Wisconsin, which is comprised of eight communities in and around Stevens Point and Wausau. And the second one in Coeur d'Alene, Idaho, which includes three surrounding communities. These clusters fit the criteria, we are targeting for our growth. They are underserved for broadband and have attractive demographics with potential for household for growth.

As a result of our fiber deployment strategy over the last several years, 29% of our wireline service addresses are now served by fiber. Fiber enables our ability to provide the services to our customers demand, including both high-speed broadband and video. Additionally, we continue to make progress on our network construction under both A-CAM and state broadband programs. On the A-CAM front, we are on pace to meet our first stated obligations under the program. As we've completed 31,000 of our required 64,000 service addresses with broadband speeds up to 25.3.

As a result, we have reached our first FCC milestone in 10 out of 24 states ahead of our deadline, which is at the end of next year. We also continue to improve speed capabilities to additional service addresses that are enhanced by our construction under this program

On the cable acquisition front, TDS entered into an agreement to purchase the assets of Continuum, a broadband video and voice operator located just north of Charlotte, North Carolina for a purchase price of $80 million. Continuum offers high-speed fiber and coax-based services passing a total of 40,000 locations. This transaction is expected to close in the fourth quarter of 2019.

Now let's turn to our segments beginning with wireline on Slide 16. From a broadband perspective, residential revenues grew 2% and customers are continuing to choose higher speeds of up to 1-gig in our fiber market. In total, 28% of all broadband customers are now taking 100 megabit speeds or greater compared to 22% a year ago driving a 4% increase in average residential revenue for connection in the quarter. Wireline video connections grew 8% compared to the prior year. Video remains an important driver of growth in our ILEC markets as we continue to roll-out IPTV to more customers. On average, our IPTV markets continue to hold about 30% video penetration with some markets nearing 50%

About 80% of our IPTV customers are on triple play bundles, as customers find value in taking all three services, given the rural nature of our geographical footprint and the bundling pricing. In addition churn on these bundles continue to remain very low. Our third quarter results highlight the success of our video strategy and its importance to our customers. Our plans with regards to the cloud TV platform called TDS TV Plus remain an important initiative. We are now aiming to roll-out cloud TV in the first quarter of next year, after a successful test market is completed.

Looking at the wireline financial results on Slide 18. Total revenues decreased 4% to $169 million. Residential revenues increased 3% due to growth from video and broadband connections, as well as growth from within the broadband product mix, partially offset by a 4% decrease in residential voice connection. Commercial revenues decreased 9%, primarily driven by lower CLEC connections as we continue to execute on a strategy to maximize cash flow in these markets, which are coming under renewed pressure from deregulation .

Wholesale revenues decreased $5 million or 11% compared to 2018 but as I mentioned earlier, TDS Telecom received an additional $4 million of retroactive A-CAM support revenue last year. Wireline cash expenses increased 2% due primarily to increases in legal and consulting expenses. We continue to see reduced cost of providing service for our declining legacy products, partially offset by higher video programming fees. Employee expenses while still slightly lower than last year are increasing as we staff for our new fiber market.

All in, including the discrete items of A-CAM and legal costs discussed earlier, that impact year-over-year comparisons, wireline adjusted EBITDA decreased 16% to $52 million.

Moving to cable on Slide 19, total cable connections grew 2% to 338,000 driven by a 7% increase in total broadband connections. As a result, broadband penetration increased 200 basis points to 44% compared to the prior year.

On Slide 20, total cable revenues increased 8% to $62 million driven primarily by growth in residential connections . Our focus on broadband growth has led to a 6% increase in average residential revenue per connection. Cash expenses increased 5% due primarily to additional maintenance in the quarter. As a result, cable adjusted EBITDA increased 14% to $21 million. In addition, EBITDA margin increased to 34% from 32%.

On Slide 21, we provided our 2019 guidance, which is unchanged from the guidance we shared at the beginning of the year. We expect our revenue trends to continue and plan for growth and expenses as we ramp up to launch new fiber market, with some of the fiber construction delays we've experienced, we will be challenged to spend all of our capital this year and expect to be at the near the low end of the range.

And in closing, I'd like to thank all of our employees for their continued efforts and look forward to updating you in February on our fiber construction and results.

Now I'll turn the call back to Jane.

Jane McCahon -- Senior Vice President of Corporate Relations and Corporate Secretary

And Jody, we'd like to open up the call for questions.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Our first question comes from the line of Philip Cusick of JPMorgan. Please go ahead, your line is open now.

Philip Cusick -- JPMorgan -- Analyst

And now you're just teasing Rick. So maybe we can -- [Speech Overlap] you can tell -- Hi guys. Maybe we can dig into the wireless momentum during the quarter. Can you take us as granular as you can through the months and what changed the things exited better and maybe a little bit a view on has September strength continued in October? Thank you.

Kenneth R. Meyers -- President and Chief Executive Officer

Yeah, I would say that June, July -- July, August, were just slow, OK. What changed in September was everything from the launch of the brand Refresh, which increased advertising as well as the impact of pricing changes that went in late in August to respond to somebody else's move. So you had a double there. The launch of the new iPhone was late in the quarter had minimal impact. But we saw a carry through right through October, just like the September. So those are notably different in terms of store traffic everything.

Philip Cusick -- JPMorgan -- Analyst

And that was driven -- it sounds like more of a gross add issue but churn was up quite a bit as well. What's going on there?

Kenneth R. Meyers -- President and Chief Executive Officer

What's going on is, if I look at total, we're still getting through the connected device stuff, where inexpensive tablets to put out a year ago, come off their year commitment and people just don't keep those and you'll continue to see that. And I think the modeling suggests through early part of next year. Similarly to watches, those two nice, they work well connected to the phone, not seeing a lot of stickiness on the revenue side there. So you're going to continue to, I think to watch us as in the industry struggle with the revenue off of some of the call and connected devices, call and the accessories, right where the core phone is right there and I don't need it, especially given the way some of the unlimited packages are structured that I can get it -- that data one way or another.

Philip Cusick -- JPMorgan -- Analyst

All right. And then, have you seen. Last quarter you called out cable in terms of new competition, have you seen that continue or is there have been a little bit of a slowdown there, since there -- they've been in the market for a while?

Kenneth R. Meyers -- President and Chief Executive Officer

I'd say that it's similar effect , it is not increasing. And then the -- what it is and if you think about how that's priced. We feel the pressure at our very, very low-end customer that isn't using one gig or two a month, given that the pricing is very low and they have in the bundle it in , it's -- that's and then I'm interested in chasing right now.

Philip Cusick -- JPMorgan -- Analyst

Okay, all right. Thanks very much guys.

Operator

Our next question comes from the line of Ric Prentiss of Raymond James. Please go ahead. Your line is open.

Ric Prentiss -- Raymond James -- Analyst

Thanks, good morning. I guess our Freaky Friday, Phil and I switched places like a Disney movie. Halloween. No, I want to follow-up on some of Phill's questions there. In prior quarters you've also mentioned that you were starting to see some win back effort as cable moves in. Can you update us a little bit on -- are you trying to win back those customers as they are lower usage and lower end customers?

Kenneth R. Meyers -- President and Chief Executive Officer

The real low ends -- we aren't -- there's not a lot of value there. What we are doing is specifically identifying any that may be more account related or ones that have greater usage, where the value proposition that we offer is more compelling. And we will continue to do that. We've got ongoing life cycle management program that we execute against.

Ric Prentiss -- Raymond James -- Analyst

Okay. And Ken I think in your prepared remarks, you mentioned positive ads in September and October for postpaid, was that postpaid phone or postpaid total?

Kenneth R. Meyers -- President and Chief Executive Officer

Phones, phones.

Ric Prentiss -- Raymond James -- Analyst

Both were positive in September, October, so it's good to see the trend on positive postpaid phones. Okay. And that you had seen churn improvement later in the quarter with the Refresh on the brand and the rate plans back down to a more normal level or just kind of closing the gap just trying to gauge how much improvement the Refresh and the rate plans have had?

Kenneth R. Meyers -- President and Chief Executive Officer

You're asking at a level of detail that I don't have in front of me right now, Ric.

Ric Prentiss -- Raymond James -- Analyst

That's fine. And when you talk about the new rate plans. How should we think about that trend and what it means to ARPUs? Are you expecting that you've gotten aggressive to the point where ARPU upward bias given smartphones and unlimited would starts flattening out or is there still the ability to say listen, we've got protection plans, we've got unlimited, we got smartphones, so we continue to see upward dynamic on ARPU?

Kenneth R. Meyers -- President and Chief Executive Officer

Yeah, I'm expecting to still to continue to see the upward dynamic, as we continue to manage the base, look at other services that we can put in there, like the device protection or whatever, it is imperative that we continue to grow that revenue, and all our efforts are aimed at that, and that's what -- that's what our plans are designed to do.

Ric Prentiss -- Raymond James -- Analyst

And Doug called out the change in the USF as far as those --some of those USF fees being lower both revenue and expense. Did that start in third quarter, was that a previous quarter this year that that happens?

Kenneth R. Meyers -- President and Chief Executive Officer

We've had that all year. First three quarters, because it was a December last year event. And so, we'll see that again in the fourth quarter then the year-over-year effect will go away.

Ric Prentiss -- Raymond James -- Analyst

Exactly, already to get to the lapping time. Okay. And then one for Vicki. Vicki, you mentioned called out $2 million, I think you said in legal and consulting expenses. What was that for, is that kind of one-off and you're done with that, so we can get back to a more normal level obviously without the retro from 3Q '18?

Vicki L. Villacrez -- Chief Financial Officer

Yeah. Both legal and consulting were one-time items. Legal matter was a one-time payment to resolve commercial litigation.

Ric Prentiss -- Raymond James -- Analyst

And then Ken, I know you can't talk on Millimeter Wave, but any thoughts on the C-band you guys were a joint signatory on an interesting letter that seem to build a lot of consensus. Any thought on, can we get C-band action from the FCC this year and get some kind of move forward on a auction process next year?

Kenneth R. Meyers -- President and Chief Executive Officer

I can only hope. You've talked about it last week I mentioned it. Yes, the industry needs -- mid-band we need a lot of it and we need a lot of it right away. And anything that gets us there is something that we'll support. If there is a better way to get it to get more and to get it faster, we'll go there. I really don't care how we do it, we just -- I think it just critical to get it and get it soon.

Ric Prentiss -- Raymond James -- Analyst

Okay, thanks guys.

Kenneth R. Meyers -- President and Chief Executive Officer

Thanks, Ric.

Operator

Our next question comes from the line of Simon Flannery of Morgan Stanley. Please go ahead, your line is open.

Simon Flannery -- Morgan Stanley -- Analyst

Great, thank you very much. Yeah. Just following up on Ric's point on C-band and mid-band spectrum. One of the elements of the filing included reserve prices. And I guess there's always this question of if you have a nationwide reserve price or if there is something that reflects perhaps the greater demand in urban areas, so that you're not having to pay the price that New York City might have as a reserve price. So do you think there is an opportunity there for a differential reserve prices urban versus more regional markets? And also, how are you thinking about CBRS playing into this mid-band spectrum, do you think that's a viable solution or is that really just to kind of indoor and small cell? And any thoughts on, given the sort of numbers that have been thrown around by the -- on the satellite side of things, any thoughts about how you would fund your spectrum spend? Thank you.

Kenneth R. Meyers -- President and Chief Executive Officer

Okay, boy[Phonetic] lots of questions there. Look -- to start with. Yeah, I would fully expect that you will see -- like you have with all spectrum different prices based upon the demographics of the individual markets that are being licensed. I mean, you know that we all run economic models to decide how much spectrum is worth in various areas. And I don't think that would change. With respect to CBRS versus the C-band. Mike Irizarry, CTO is in the room, and I'll throw the -- the question to him in just a second. But we're interested in both OK generically anything -- any spectrum is good, but are they -- how are you thinking about it?

Michael S. Irizarry -- Executive Vice President and Chief Technology Officer

Yeah, thanks, Ken and good morning.

Kenneth R. Meyers -- President and Chief Executive Officer

Good morning.

Michael S. Irizarry -- Executive Vice President and Chief Technology Officer

CBRS is not in our view, an alternative to C-band, there is not enough of it and currently the power levels are significantly less than what's planned for C-band. So while it has a place and our 5G strategy we view C-band it's critical to offering high speed and capacity in the less dense areas.

Simon Flannery -- Morgan Stanley -- Analyst

Great, thank you. And then funding?

Peter L Sereda -- Executive Vice President and Chief Financial Officer

Funding. Well, we have in place multiple funding vehicles that have an untapped. Peter Sereda, CFO of TDS is actually in the room too. Pete, you want to talk about funding?

Kenneth R. Meyers -- President and Chief Executive Officer

Sure. Yeah. So we've got lot of cash on the balance sheet right now. We've got an undrawn EIP receivable securitization that we put in place a couple of years ago. So we've got ample capacity to enter that. We've got open bank lines undrawn, and we also -- in worst case we have adequate access to the capital markets. So there's lots of sources for cash to do this.

Simon Flannery -- Morgan Stanley -- Analyst

Great, thank you.

Kenneth R. Meyers -- President and Chief Executive Officer

Thanks, Simon[Phonetic] [Indecipherable] and have a good weekend.

Simon Flannery -- Morgan Stanley -- Analyst

Thank you.

Operator

And our next question comes from the line of Sergey of GAMCO Investors. Please go ahead. Your line is open.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Thank you, good morning guys. First question is for Ken on the tower front. So, I think last quarter you guys have mentioned that you've been working with an outside firm to market the towers to increase lease-up rate. So could you update us on the progress on that front have you seen an improvement in lease-up rates and also kind of looking longer term, maybe over medium term? How do you plan to maximize the value of your sizable tower portfolio considering U.S. Cellular operational priorities, but also taking advantage of the top five wireless portfolio in the countries that you guys own?

Kenneth R. Meyers -- President and Chief Executive Officer

Okay, Sergey. I'm going to let Doug to talk about kind of the progress to date. Before I throw it to him and let me talk about the back side of that question a little bit. We have entered into an agreement with the company to put more marketing efforts behind the tower portfolio to lease it up more. However, in doing that, I'm still going to be stubborn and say that that work is subject to our engineering needs as we are doing our network modernization we are once again moving all over the tower going with tower top amplifiers on some of things we're putting MIMO antennas at other places and while there is value -- significant value in the towers, the fact of the matter remains that we've got a wireless business, that requires us to control that real estate, so that we can control the quality of the service, which is what the whole business is based upon.

But having said that, we are continuing to try to get more revenue out of that asset. Doug?

Douglas W. Chambers -- Senior Vice President, Chief Financial Officer and Treasurer

All right. With respect to the new marketing arrangement. We're about one year into that relationship and overall, we're very pleased with the results so far. Some of the accounting under the new arrangement is different and effects of financial statements comparisons Q3 to Q3 as we work through the transition, so on a comparable basis, the net contribution to operating income increased 5% year-over-year as for these to our tower leasing business and we're continuing to work on driving more growth in the future.

Kenneth R. Meyers -- President and Chief Executive Officer

Thanks Doug.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Great. And just a quick follow-up on that. What were the tower rental revenues in the quarter and what was the growth rate?

Kenneth R. Meyers -- President and Chief Executive Officer

$17 million in the quarter and the growth rate was, it was higher than 8% or higher than 5%. Sorry. But as I said, it's not comparable based on some of the accounting changes that took place upon the transition to the new service provider.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Right, understood. Thank you. And another question on the U.S. cellular side related to the buyback. So for the first time I think since 2016, you repurchased $21 million worth of USM shares in the quarter. Could you talk a little bit about the main reasons for this. Was it just valuation or was there other aspects working and in terms, you've had this program I believe since 2009 and you have remaining authorization to buy back over 5 million shares.

So given current valuation should we expect U.S. Cellular to get more aggressive on this buyback?

Peter L Sereda -- Executive Vice President and Chief Financial Officer

Well, Sergey this is Peter. So you know that this program is primarily designed for to offset dilution from options and RSUs and things like that, so that we can continue to keep our tax consolidation. So we will, we have been in the market from time to time, we will be from time to time to prevent that dilution.

So yes, I guess the answer is, over time we will be doing that as the situation arises.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Okay. And the related question for you, Peter, on the TDS front. So if we mark TDS ownership in U.S. Cellular to market the things implied valuation on TDS Telecom is below three times EBITDA. So given that valuation will buybacks become a larger portion of your capital returns in the near-term obviously taking into consideration the overall capital allocation plans, but also given the valuation implied valuation of TDS Telecom?

Kenneth R. Meyers -- President and Chief Executive Officer

While Sergey, we're not as we've discussed in the past, we're not happy with that valuation. But the reality is, given all the projects that we're working on now and Vicki talked about the fiber roll-outs and everything. I think for the time being we're going to stay put on stock repurchase of the TDS level.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Okay. And my last question is for Vicki. On the cable front, so obviously you are in the process of acquiring assets of Continuum in North Carolina. Could you talk a little bit about what attracted you to this asset, how does it compare to your prior cable acquisitions and also the company generated $21 million in revenues last fiscal year, what kind of margins were they generating at that point?

Vicki L. Villacrez -- Chief Financial Officer

Sure. Good morning, Sergey. Cable acquisitions, continue to be an important part of our growth strategy in addition to our fiber deployment program. And as I've talked about in the past we specifically look for opportunities that meet our target criteria which are for example underserved for broadband, attractive household market growth and our target market, the demand premium entertainment services. And so Continuum which serves customers just north of Charlotte, North Carolina meet this criteria and at the same time, has a culture that focuses on providing outstanding customer service, which I think aligns really well with TDS's long-standing mission.

So it was just really a great fit. Continuum has an upgraded network and is offering up 500 megabit speeds and in some areas where it has fiber in place, it's offering up to 1-gig speeds and that's about 10% maybe of the footprint. So we're really excited to have Continuum join our family of companies and when we close, we'll have more information for you about the numbers that we're looking at for guidance next year.

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Thank you.

Operator

[Operator Instructions]. Our next question comes from the line of Zack Silver of B Riley, FBR. Please go ahead. Your line is open.

Zack Silver -- B Riley, FBR -- Analyst

Okay, great. Thanks for taking the question. I just had one for Ken. You guys toward the end of last year flagged an opportunity to use both the -- to hedge out some of the markets, I think you said it was about 500,000 parts were coming up on the launch of that. So can you reframe that opportunity for us and whether anything has changed on that front in terms of how you see the opportunity and also the timing of that?

Kenneth R. Meyers -- President and Chief Executive Officer

Yeah. Zack specifically what you're referring to prevails as we had licensed areas, immediately adjacent to our current footprint primarily Northern Wisconsin and Sioux City, Iowa. We continue to build out those areas couple of zoning challenges probably push us back to the first quarter of next year, but those zoning challenges are behind us now and we're continuing to make progress working on distribution as we speak.

So I'm still excited about the opportunity. We probably is going to slip about three months it looks like.

Zack Silver -- B Riley, FBR -- Analyst

Got it. And then I guess more of a high-level question. Just, with the launch of 5G in a couple of markets coming up I think somebody asked this a couple of quarters ago. But just high-level any updated thinking about how we'll monetize that technology in either residential or commercial side?

Kenneth R. Meyers -- President and Chief Executive Officer

So what's really fascinating to me at least around 5G merge that we're on here in the U.S. was a year ago, it was all about use cases and business to business. And all of that revenue is really long lead time revenue, the amount of time it takes to bring a city along a town even along is not measured in months,

And what you've seen in the last year is really the consumer market drumbeat around it. And which you've seen a couple of attempts the pricing there, but it's not been real clear that people have unlocked how to capture some of that value. So that's a watch point.

Now for us on the use case, that is consumer and that we're very interested in is the fixed wireless and we've been doing that with 4G today and the capacity pickup that we get with 5G, so I think it lets us compete even better there.

Zack Silver -- B Riley, FBR -- Analyst

Got it. All right, thank you very much, Ken.

Operator

Our next question comes from the line of Michael Rollins of Citi. Please go ahead. Your line is open.

Michael Rollins -- Citigroup -- Analyst

Hi, thanks and good morning . Two questions if I could, please. The first one is, when you look at your wireless business, it's a portfolio of markets can you share with us just high-level observations of whether you're seeing differences in certain market areas in performance in terms of subscribers and revenue growth versus other areas. And maybe what are the common characteristics of where you're outperforming and underperforming? And then just secondly, just taking a step back, are there opportunities, strategic partnering opportunities that you see that -- maybe some have used in the past that might be an opportunity for U.S. Cellular and or TDS to revisit as you think about the dynamics of the industry moving forward? Thanks.

Kenneth R. Meyers -- President and Chief Executive Officer

Thanks, Mike. Yeah, so with respect to the first one, you're right, it's a portfolio. Just like everybody has a portfolio in different markets have different either underlying economics or different competitive positioning or in our case, different spectrum and coverage properties. So there are some markets in our portfolio that are much higher in the 10% prepaid rate that we talk about as a company average, OK. So there are also somewhere it's very, very tiny. And -- we have historically seen as an example, very, very strong -- bad debt results out of what I will call, the Mid America farming[Phonetic] markets. And prepaid markets, we've got the higher churn.

So there's a lot of differences across the portfolio and we deploy different strategies to maximize the ore out of what I call, each one of those mines. So in some places, we push prepaid, because that's what the economy and the customer base in the market wants.

With respect to looking at how else do you build value in the operation. We are always looking at that. And as the landscape changes in this industry, potentially again assuming certain transactions actually move forward or maybe they don't and there's opportunities there. We are looking at analyzed discussing how else could we either use our network or partner up and serve some other network needs. So yes, we are in order to -- yes, that's where I'd like it to be long-term, we need to continue and revenue and cost and that doesn't necessarily have to come out of just our consumer market.

Michael Rollins -- Citigroup -- Analyst

And so when you think about things on the strategic front, is it that the -- some of the transactions or the proposed wireless transaction that's out there is -- until that gets resolved it's hard for you to take any steps forward strategically is that the -- is that the issue right now?

Kenneth R. Meyers -- President and Chief Executive Officer

Well, until it's resolved the interest or the ability of other parties to commit is muddied best right. I mean, everybody is going to see where all the pieces fall, so you can decide what's the next best move. And everybody is looking at the same board saying, if this happens go this way, but if that happens, maybe go a different way. We're still waiting for that.

Michael Rollins -- Citigroup -- Analyst

Thank you.

Kenneth R. Meyers -- President and Chief Executive Officer

Thanks. Have a great weekend.

Operator

There are no further questions at this time.

[Operator Closing Remarks].

Duration: 56 minutes

Call participants:

Jane McCahon -- Senior Vice President of Corporate Relations and Corporate Secretary

Kenneth R. Meyers -- President and Chief Executive Officer

Douglas W. Chambers -- Senior Vice President, Chief Financial Officer and Treasurer

Vicki L. Villacrez -- Chief Financial Officer

Philip Cusick -- JPMorgan -- Analyst

Ric Prentiss -- Raymond James -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Michael S. Irizarry -- Executive Vice President and Chief Technology Officer

Peter L Sereda -- Executive Vice President and Chief Financial Officer

Sergey Dluzhevskiy -- GAMCO Investors -- Analyst

Zack Silver -- B Riley, FBR -- Analyst

Michael Rollins -- Citigroup -- Analyst

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