Good morning. My name is Jessie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the TDS U.S. Cellular Second Quarter Conference Call. [Operator Instructions]. Jane McCahon, you may begin your conference.

Thank you, Jessie. Good morning, and thank you for joining us. I want to make you all aware of the presentation we've prepared to accompany our comments this morning which you can find on the Investor Relations section of the TDS and U.S. Cellular websites. With me today and offering prepared comments are, from 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 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. As shown on Slide 2, the information set forth in the presentations 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 in the extended version in our SEC filings.Shortly after we released our earnings and before the call, TDS and U.S. Cellular filed their SEC Form 8-K, including today's press releases, in addition to our SEC Forms 10-Q. Taking a quick look at the upcoming IR schedule, Slide 3. We'll be attending Oppenheimer's Annual Technology, Internet & Communications Conference in Boston on August 7, and Morgan Stanley's Corporate Access Day on August 9 in New York. Please let us know if you'd like information about these events. Also keep in mind that TDS has an open-door policy so if you are in the Chicago area and would like to meet members of management, the Investor Relations team will try to accommodate you, calendars permitting. Before turning the call over, I want to remind everyone that due to the FCC's anti-collusion rule, we will not be responding to any questions related to FCC auctions. And now I'll turn the call over to Ken Meyers. Ken?

Thank you, Jane, and good morning, and thanks for joining us today. Let me start by saying I'm very pleased with the second quarter results and how the first half of the year has come together as we continue to execute our customer satisfaction strategy. Increased revenues, combined with cost reduction efforts, produced strong increases in profitability for the quarter, leading us to raise our full year 2018 guidance. Let's start with customer results. Now when reviewing year-over-year results, I want to remind everyone that second quarter of 2017 was the first full quarter that we're selling our Total Plans, which include unlimited options, so we're up against a strong comparison that metric. That said, we produced 5,000 handset net adds in the quarter. While still below the pace I would like to see, this is a significant improvement over Q1, and we have now grown our handset base in 4 of those last 5 quarters. Sequentially, gross and net adds improved and postpaid handset churn results were a low 0.92%. Looking back, I'd say the quarter started out a little slow for us and improved as we went along. Customers, both new and existing, continue to appreciate the simplicity of the Total Plans. And today, 57% of our postpaid customer base are on them. Competitively, I'd call the environment still aggressive, although the focus of competition has now shifted back to device-related pricing, buy-one-get-one-frees and other types of discounts. Service plan pricing has remained relatively steady, and you see the positive impact of that starting to show in the average revenue per unit and total revenue. Industry-wide switching activity during the quarter was still low but the rate of decline slowed somewhat, impacted by equipment installment plans and customers keeping their devices longer. Our average customer now holds onto…

Thank you, Ken, and good morning, everyone. Let's begin by talking about connections. Overall, we ended the quarter with approximately 5.1 million total connections, that's about 1% higher than a year ago. Slide 6 of our presentation focuses on the postpaid category, which remains the largest and most important part of our business at just under 90% of our total retail connections. Postpaid gross and net additions for the second quarter of 2018 were 146,000 and negative 13,000, both down a bit year-over-year. But remember, as Ken said earlier, the second quarter of 2017 was a strong one, having been the first full quarter that we were selling our Total Plans with the unlimited options. On a sequential basis, gross and net additions both improved significantly, and we added 5,000 handset connections in the second quarter after losing 16,000 in the first quarter. Perhaps a little less visible but nonetheless important to our success, is that we continue to have handset customers migrating from feature phones to higher-revenue smartphones. Smartphone ARPU is running about $20 more per month. Including the upgrades, total smartphone connections increased by 38,000 during the second quarter of 2018. The all-in or total postpaid churn rate for the second quarter was very good at 1.19%. The next slide breaks that down in more detail. Churn for handsets was 0.92%, essentially the same as last year's 0.91% and better sequentially than the 0.97% level in the first quarter. Churn for connected devices was 2.85%, still elevated as the discounted tablets sold in connection with various promotions continue to roll out of contract, and we expect that to continue for the near future. Now let's go to the financial results for the second quarter, beginning with a brief review of the impact of the new revenue recognition accounting…

Okay. Thank you, Steve, and good morning, everyone. Overall, our results in the quarter and through the first half of the year are in line with expectations as we're working through our growth initiatives and cost management efforts. As you know, we're making significant investments to increase fiber deployment, first, by overbuilding in new markets where TDS has strong brand awareness; and second, by continuing to expand fiber and other technologies in our existing markets. These investments will position us for future revenue growth. In wireline, we've been operating in our first out-of-territory market, Sun Prairie, Wisconsin, for about 1 year now and continue to see very strong growth. We've announced plans for a new fiber construction in several corridors within Madison and five communities near Madison and have begun work in several of these markets. On a combined basis, these markets represent roughly 18,000 service addresses, targeting both residential and commercial services. And we've begun pre-selling in these new markets and are very pleased with our results so far, which are similar to what we saw early on in Sun Prairie. For example, McFarland, which is the first market preparing to launch service in November, has reached its preregistration targets in 3 neighborhoods already and has reached over 50% of our required threshold to ensure we earn a targeted return on investment. We are also purchasing and building out a cloud TV platform, which we expect to launch in the latter half of 2019 across both our wireline and cable markets. We continue to see growth in video and bundles, which supports our belief in its value and will continue to evolve our product offering to meet customer demand. For example, in our new out-of-territory fiber market, over half of our customers told us they chose TDS broadband services…

Briefly on Slide 22, I'll provide a few comments about our HMS business before we go to questions. In terms of results, OneNeck continued to experience some declining revenues, mostly on equipment sales from existing customers and lower adjusted EBITDA. However, year-to-date bookings for monthly recurring revenue remained up year-over-year and the team has completed several projects intended to enhance customer experience. So now, Jessie, we'd like to open the call for questions.

[Operator Instructions]. Your first question comes from Rick Prentiss with Raymond James.

Some questions, first on the wireless side. Ken, you mentioned how you moved beyond just the Midwest. Iowa, Wisconsin now have the VoLTE. On the West Coast, California, Oregon, Washington, with New England and Mid-Atlantic to come. What percentage of your POPs do you now have VoLTE offered in? And what should we think of heading towards end of '18 and '19?

So I don't have the POPs. We can get that back for you. I would say that by the end of '19, we'll have most of all of our markets covered with it. 90 is the number that the other end of the table just came through it.

I'm sorry, what was the number?

End of '19 we'll be at 90%.

90%, okay. And at least a kind of the roaming question. Obviously really nice improvement in roaming year-over-year, up 26%. You pointed out 3G traffic. But it sure seems like GSM operators, once you have the VoLTE in place, could be a noticeable improvement to roaming. How much have you already seen? And how should we think about how that could come in to the results with some high margins?

Great question, Rick. We actually have agreements in place across-the-board and starting to move at market-by-market, at least 1 of the GSM carriers onto our network. We're seeing nice traffic there. I continue to expect that to build over the next couple of years. The haul up we want to be careful of though is that we still have a very nice chunk of 3G-related roaming that's at a higher price. And as that migrates from 3G to 4G, we won't see the same revenue growth on in that piece. But overall, the plan when we talked about going to VoLTE was that we thought it would increase our addressable market on roaming, and that's exactly what we're seeing.

Okay. And the flip side of that question is have you seen any overbuilding yet with T-Mobile with the 600-megahertz spectrum they bought or AT&T FirstNet? What are the kind of the signs you're seeing out there?

We haven't seen any what I'd call market-level impacts yet. We're seeing activity as we're -- Iowa Wireless has told its customers it's shutting down its network. I'd expect that fourth quarter we'd probably see T-Mobile, third quarter, fourth quarter, start to market there more effectively. Right now, it's been more of an opportunity for us as their customers are reevaluating what their options are. So I'm thinking -- I'm expecting we see some but still later in the year.

Okay. And final question for me. You touched on it a little bit, 5G testing. As you think about millimeter wave, mid-band maybe like C-band and CBRS, how are you thinking about how those would fit into your footprint, use cases and appetite for auctions?

So with respect to that last word, auctions, we're going to avoid any questions around auctions per se. As we think about it -- Mike's here. Mike, why don't you share a little bit of our thinking on it?

Yes. Thanks, Rick. So I think Ken mentioned it earlier. We've been spending a lot of time trying to understand what 5G use cases represent the greatest opportunity for us. And frankly, the use cases that you focus on really drive how you think about the spectrum that you might need. So if you wanted to cover this full range of 5G use cases that are talked about, you would probably need a good amount of low-band, mid-band, a.k.a the C-band and millimeter wave. On the other hand, if you weren't interested in some of the higher-speed use cases, lower-latency use cases, you might consider foregoing a lot of millimeter wave or cut back on the amount you want there. So we're still working on getting clarity around the use case, and then that'll then form how we think about what we need for spectrum.

Do and you think you'll be able to share with us some of those use cases, thoughts as we go through the rest of this year into next year?

As we get more clarity around it, I think we will be able to. I think the one thing that is of note and that is how fast the movement around 5G and the industry is learning of its capabilities is really moving. I'd say that our own thinking 6 months ago around millimeter was really in rural areas. I don't know. But some of the recent work that Mike and team have been seeing is showing paths for it to better coverage than we originally thought with that spectrum. So there's a lot of research, testing and learning going on right now. And more to be done before we finalize overview on that, but it's moving fast.

Your next question comes from Philip Cusick with JPMorgan.

Ken, can you update us on your cost cutting efforts? And what type of programs are you running this year? What do you see in terms of opportunity?

Yes. So this is a enterprise-wide initiative that Steve, the CFO, has been leading that has looked at all parts of the organization. I think, I -- our own internal scorecards, we drove out about $100 million last year in various areas. We've got similar targets for this year and I think we are well on our way toward that, and we don't see it stopping at the end of this year. This is an ongoing program and so we'll be continuing to work on this, not only on things that effect this year but things that effect next year, too.

And sort of similar potential volumes over the next few years do you think? Is it big numbers?

No, no. I've given you this year's targets and last year's. Next year's we're still working on.

Okay. And can you expand on your comment about IoT sales to small business and government? What type of products are those? And would those benefit from a 5G or they just fine with 4G?

So we stood up this with direct sales force or government and business sales force now about two years ago. We've taken some time to get the right people in place and get the training and everything else as well as the products and services. And now they're starting to have a impact in our markets, as I said, really leading more with IoT devices. And most of the applications today do not require 5G. They work very effectively on our current network. And they are everything from things that help the County Highway Department run their trucks more effectively -- efficiently, I guess, as well as working with industrial company utilities and monitoring devices for them. Especially given our more less densely populated areas, it really helps them save cost as they can automate more of that work.

That's interesting. And is that sales force having any success selling mobility to SMB and government or is that just really early on?

Oh, no. Absolutely. We just don't lead with that. Everybody's got that. We're more focused on how we help them compete, how we solve their problems. And then the handset business is an extension off of that as opposed to going in and trying to sell what they already have.

Your next question comes from Sergey with GAMCO Investors.

Could you talk a little bit about maybe what you're seeing from cable companies in your markets in terms of their mobile offerings? You probably have a large overlap with Charter but maybe you have some Comcast as well. So maybe your thoughts on their mobile products right now and where do you think it could go in your markets in a year or 2?

So Sergey, it's nice talking to you again. I didn't know we'd be talking to you given your change in roles. But Comcast, I think the number's like 13% of our market has some Comcast presence -- 8 per -- oh, 8%, I'm being corrected. You've got to speak up. 8% not 13%. And single-digit numbers, not single-digit percentage. Very, very small activity on that side. As you know, Charter just launched at the end of the quarter. So no impact to date that we've seen. I'm expecting that we'll see some -- from what I've seen so far, they aren't out selling mobile to sell mobile, they're selling mobile to help drive their bundle. So we could see some impact in Wisconsin. But it's nothing yet. So I'm expecting that they will get some share going forward. I think about next year or the year after that we, in fact, take some out of the switcher pool but nothing that I can point to yet.

Okay. And a question on fixed wireless technology. This is probably both for the U.S. Cellular guys and for TDS Telecom. So Ken, if you could talk about your thoughts on fixed wireless use case for 5G? Or maybe fixed wireless on LTE that you might be using in some of your markets. What kind of opportunity you see there? And on TDS Telecom, maybe if Vicki could talk a little bit about the risks from 5G in your markets? And also how are you preparing for potentially Verizon and other carriers launching fixed wireless solutions?

So let me now start. There are two different products for two different markets. The -- we have a 4G fixed wireless product out there today that is really aimed at the more rural areas where you don't have cable or any other competitive product. And it's a nice product, it drives nice incremental sales. Interestingly, for about 25% of the new adds that come in taking that fixed wireless coming with it, bring a handset line with them. It's actually driving usage in parts of the network that aren't as challenged in terms of capacity as some of our city centers. So I like it. Nice product. For a 5G, that's one of the use cases we're looking at, and it would be something we'd look at in much more densely populated areas than the current one. That's under the theory that it's more of a millimeter wave product in terms of getting enough speed, you need more spectrum. Or as I said, our understanding of that performance of millimeter keeps changing. So too early to decide that one. But it's one we're looking at.

Yes. And Sergey, from a telecom perspective, the majority of our markets are very rural, and we're not seeing any elevated wireless substitution at this time. It certainly is a strategic watch point as the use cases start to develop. But the average usage per month per user in many of our markets is typically 10x that of wireless and that demand curve keeps increasing. So as we monitor the trends, we looked to the bottom decile or 2 of usage and that may be the most susceptible, but we haven't seen anything meaningful yet. And you also are going to have the topography and foliage interference that will cause challenges with that deployment. So 5G may change that but we believe it's a long ways away from the market.

Okay. Great. And another question on the wireline side in terms of fiber build. You mentioned that you're building in Wisconsin, so that's outside of your ILEC market. Could you maybe compare that market to Sun Prairie, what are some of the differences that you are seeing? And maybe just talk in general about your strategy for out-of-footprint build? What are some of the characteristics that you're looking at for those markets? And maybe where else you are going, if anything has been announced already?

Okay. Sure. So let me just start recapping our success that we've seen with our Sun Prairie market, which is really our first out-of-territory build. As I said, we're really pleased with that success. We have been able to achieve 46% broadband penetration and 24% for video. Our take rates are exceeding our experience in some of our more attractive ILEC fiber markets, where we are the incumbent telco company. And that's because Sun Prairie is a large market, good density and better demographics compared to many of our ILEC fiber markets. So we really like that kind of target and that's what we're looking as we look at the next 4 markets, which are all in the Dane County area where we are currently headquartered. So as of May, we began pre-selling in all 4 of those new fiber markets, 2 more recently than the other 2. But we're already seeing really strong results that looked very similar to what we experienced in our Sun Prairie market. And so we are excited with this strategy, it's important to our future growth and we certainly have earmarked about half of our capital spending on fiber and half of that $60 million in 2018, and we'll update you as we go into 2019 on what that strategy will look like.

Great. And last question, maybe for Jane, on HMS. Obviously, I mean, equipment revenues are still a drag but you're seeing some progress on the service side. At what point do you guys would need to make a decision whether this is going in the right direction and you need to continue investing in this or maybe it's time to exit this business? I guess, what are some of the benchmarks you have set for this business and some of the things that you're looking for to make the determination?

I would say that, Sergey, we really remain pretty optimistic that we are in the right market with that business, serving mid-market customers. I think we're looking -- we moved that under corporate. And Kurt Thaus, our CIO, is working with Terry Swanson, the CEO there. And they've done a lot of work looking at the product set and making sure we've got that right portfolio. So things like building an emphasis on security products, which our customers are asking more and more about and aligning that colo and cloud product with that. So we still see a lot of room there and at this point, are certainly looking to operate that business and get it back on a growth trajectory.

[Operator Instructions]. The next question comes from Simon Flannery with Morgan Stanley.

It's Spencer for Simon. Just a couple of follow-ups on your earlier comments. On net adds, your net adds in the industry as a whole had been really strong this quarter and over the past few quarters, really. What do you think is driving that industry strength and how much of that is sustainable? And then separately, on the balance sheet, based on your current 2018 guidance, I think, net leverage is about 1.3x, which is lower than a lot of your peers. Could you talk about balance sheet optionality and any updated thoughts around leverage?

So I'll start with the second part of that question first. We're comfortable with where we are on our leverage right now. We don't have any financing needs in the near term, and I don't see any change there. We've got some lines available to us should we wind up being at whether it be from spectrum or whatever. But right now, we're fine. And the adds, I don't know that I'd speak at the industry level in terms of how sustainable growth is. We like it. I talked about how we started off the quarter slow and moved slow and things have picked up. I like that. I like what I'm seeing. I think we've got continued opportunities in some of our markets, especially as we continue to move customers, as Steve mentioned, from...

Feature phones.

Feature phones. Thank you. I lost the words. Feature phones to smartphones as well as continue to broaden our addressable market. We've been doing a lot of work to broaden our appeal to some of the segments that we haven't been as strong in and what we're doing in the SMB space is quite an example of that. So we've still got some more room to grow, I think.

Okay, then some of the, I guess, promotions of your peers, the military and some of -- targeting seniors. Is that having any outsized impact on you or is it pretty neutral?

I wouldn't call it outsized at all as evidenced by the churn rate that you've seen.

There are no further questions. I'll turn the call back to the presenters.

Very good. Well, thank you for joining us this morning, and we look to any follow-up calls or questions you may have. Have a great day.

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