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Telephone and Data Systems, Inc. (TDS)

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Telephone and Data Systems, Inc. (TDS)

Q1 2018 Earnings Conference Call

May 1, 2018 10:30 AM ET

Executives

Jane McCahon – Senior Vice President of Corporate Relations

Ken Meyers – President, and Chief Executive Officer-U.S. Cellular

Steve Campbell – Executive Vice President and Chief Financial Officer-U.S. Cellular

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

Analysts

Philip Cusick – JPMorgan

Ric Prentiss – Raymond James

Sergey Dluzhevskiy – Gabelli & Company

Simon Flannery – Morgan Stanley

Presentation

Operator

Greetings, and welcome to the TDS and U.S. Cellular First Quarter 2018 Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to your host, Jane McCahon, Senior Vice President of Corporate Relations for TDS. Jane, please go ahead.

Jane McCahon

Thank you, Kevin. Good morning, everyone and thank you for joining us today. 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 U.S. Cellular, Ken Meyers, President, and Chief Executive Officer; Steve Campbell, Executive 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 those 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.

As shown on Slide 2, the information set forth in the presentation and discussed during this call contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Please review the safe harbor paragraphs in our press releases and the extended version included in our SEC filing. Shortly after we released our earnings and before the call, TDS and U.S. Cellular filed SEC Forms 8-K, including today’s press releases. We intend to file our SEC Form 10-Q on May 4.

Taking a quick look at the upcoming IR schedule Slide 3, we’ll be attending the JPMorgan Conference on May 16 presenting at Citi Small & Mid Cap Conference on June 7 and Oppenheimer’s Conference on August 7. Please let us know if you’d like any information about these events. Also 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 Investor Relations team will try to accommodate you, calendars permitting.

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

Ken Meyers

Thank you, Jane. Good morning. 2018 is off to a nice start for us and certainly a newsworthy start for the industry. The competitive environment has been pretty stable. I’m pleased with our customer satisfaction and network performance metrics. I also like what we’re seeing in revenue and the impact of our cost-reduction efforts, both of which contributed to our increased profitability.

Let’s review the first quarter on Slide 5. Handset customer results are better than last year, driven by a slightly higher total of gross adds and lower churn. Revenue trends are improving even though the change with the new revenue accounting doesn’t let it all show through. Our cash expenses are down, and profitability is up. And this, too, is after a downward impact from the new accounting for revenue.

To set the stage, the first quarter has historically been the slowest of the year, and this quarter looks to be the same. Industry-wide switching activity continues to be extremely low levels, impacted by equipment installment plans and customers keeping their phones longer. Our average customer now holds on to their device for 29 months, and this probably will increase, at least from what I’m hearing across the industry.

Competitively, it was also a relatively quiet quarter with some promotional activity but mostly around equipment offers rather than service plan pricing. We maintained discipline with our promotional offers, and there were not any big shifts in port ins or port outs during the quarter. Over the course of the year, we plan to target our promotions and programs that strive to achieve our top strategic priorities of attracting new customers and protecting our subscriber base.

In the first quarter, postpaid handset gross adds were up modestly year-over-year and postpaid handset net losses improved year-over-year by 12,000. Importantly, postpaid handset churn continues to be very low at 0.97% per month. We also reported some growth in our prepaid business by adding 6,000 new customers. As reported, 2018 revenues reflect the adoption of the new accounting recognition standard while the 2017 results do not, causing differences in year-over-year comparisons. I’m going to let Steve walk you through all of that in a few moments.

Going into the year, we knew we need to grow revenues and continue to work on our cost structure in order to improve EBITDA, and we did both in the first quarter. In terms of driving revenue growth, we saw stabilization in revenue due to a larger customer base and contributions from other high-margin revenue streams and new products and services. And as I mentioned early, we continue to be disciplined in our promotions, balancing customer growth with profitability.

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