Good morning, and welcome to TDS and UScellular's Fourth Quarter 2023 Operating Results Conference Call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Colleen Thompson, Vice President of Corporate Relations. Thank you. Please go ahead.

Good morning, and thank you for joining us. We 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 UScellular websites. With me today and offering prepared comments are from TDS, Vicki Villacrez, Executive Vice President and Chief Financial Officer; from UScellular, LT Therivel, President and Chief Executive Officer; Doug Chambers, Executive Vice President, Chief Financial Officer and Treasurer; and from TDS Telecom, Michelle Brukwicki, Senior Vice President of Finance and Chief Financial Officer. This call is being simultaneously webcast on the TDS and UScellular Investor Relations website. 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 UScellular's wireless partnerships. TDS and UScellular filed their SEC Forms 8-K, including the press releases and our 10-Ks earlier this morning. 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 filings. And with that, I will now turn the call over to Vicki Villacrez. Vicki?

Okay. Thank you, Colleen and hello, everyone. I hope you are doing well. This morning, we'll take a quick look back at last year and also share with you our 2024 priorities and goals. 2023 was a challenging year for the organization, yet the teams navigated it well, and we ended the year in a good place as we move into 2024. Before we get into the details, I want to reiterate that as we announced on August 4 last year, we've embarked on a review of the strategic alternatives at UScellular. We are not going to comment on the process today except to say that it remains ongoing and that management of TDS and UScellular along with both boards are committed to a path that is in the best interest of the company and our shareholders. Given the nature of the process, we do not expect to have updates until it is concluded. Now, let's talk about the business. In 2023, we continue to make substantial investments in our businesses in order to improve our competitiveness while enhancing the customer experience. Over the last two years, TDS Telecom invested heavily and increased its total footprint by 21%, setting it up for strong top and bottom line growth as evidenced by Telcom's guidance for 2024. UScellular has made progress on its 5G rollout and expects to continue investing in mid-band deployment throughout 2024. UScellular also modestly delevered in 2023 and will continue to balance ongoing investments with the need to generate positive free cash flow. While reinvesting still remains a high priority, given the interest rate environment and high cost of debt, we plan on slowing our CapEx investments for TDS Telecom in 2024 as you can see in our guidance. Despite the high interest rate environment, TDS's weighted average…

Thank you, Vicki. Good morning, everybody. My remarks this morning are going to primarily focus on our annual results highlighting the key achievements in 2023, but then I'll turn to our priorities for 2024. Doug will then cover the fourth quarter results in a little more detail along with covering guidance. So let's start by reviewing the highlights on Slide 5. We've had a consistent message that we've reinforced in prior calls that our goal for 2023 was to properly balance subscriber objectives with financial goals. And I think our results are a reflection of that deliberate approach. As we discussed throughout 2023, our challenge was driving subscriber growth add momentum in the context of an extremely competitive environment. We delivered on our operating cash flow and adjusted EBITDA guidance for the year. We were able to do so through solid growth in ARPU coupled with disciplined and efficient spending. For the full year, we delivered 2% growth in postpaid ARPU and a 3% increase in adjusted EBITDA. Last year was our first full year of offering flat rate plans. And we ended the year with 17% of our postpaid handset customers on these plans. It's up from 5% around this time a year ago. And I'm really pleased with how they're performing. Many of our customers benefit from the options of this lower service plan pricing in exchange for lower promotional value. And as a reminder, these plans generally provide the same economics to us as our traditional plans since we don't incur device expense. Our average in-contract rate for 2023 was just North of 62%, that's up 1.5 points from the prior year, and that helped us to moderate churn. For the full year, we modestly reduced both postpaid and prepaid churn. That's a nice result given the…

Okay. Thanks, LT. Good morning, everybody. Let's start with the review of our customer results on Slide 7. For the quarter, postpaid handset gross additions decreased by 25,000 and net additions correspondingly declined 33,000, largely due to the intense competitive environment as well as an increase in churn, partially attributable to a decline in our in-contract rate. Connected device results were largely in-line with the prior year and include the strong fixed wireless results that LT previously mentioned. Moving to Slide 8. Prepaid gross additions declined $18,000, driven by the competitive environment, a lower pool of prepaid gross adds, which is partially due to the availability of lower-end postpaid offerings and a reduced number of national retailers offering our full suite of prepaid products as we rationalize our prepaid distribution based on profitability. This decrease in gross additions was mitigated by an improvement in prepaid churn as we continued to enhance both pricing and digital engagement with our prepaid customers during 2023, and as a result, prepaid net additions decreased 11,000. Now, let's turn to the financial results starting on Slide 9. Service revenue declined 3% due to a decrease in our average retail subscriber base, partially mitigated by an increase in postpaid ARPU, which was largely driven by a decrease in promotional cost amortization. Power results are shown on Slide 10. The business delivered a solid quarter with $25 million of third-party tower revenues, which represents 3% growth. And as LT mentioned, we are bullish on the long-term revenue opportunities of the tower business. On the next slide, as disclosed last quarter, our own towers are well diversified from a geographic and revenue distribution standpoint. Next, let's turn to our quarterly operating performance shown on Slide 12. For this discussion, I will refer to adjusted operating income before depreciation…

Thank you, Doug. And good morning, everyone. I'm pleased to report on TDS Telecom's 2023 accomplishments on Slide 15. We are successfully executing on our fiber growth strategy that began many years ago. We had strong momentum in 2023 which is positioning us well for 2024. We ended 2023 with all of our expansion communities initially launched. In 2023, we exceeded our fiber address delivery goal by adding 217,000 new marketable fiber service addresses. That's up 24% from our initial 2023 target, and it's quite an accomplishment for this team. As we make progress on our fiber deployments, we also focus on growing broadband penetration. For the year, we grew total broadband connections 6%, mainly from growth in our expansion markets. And finally, to address the broadband needs of our most rural markets, we successfully secured enhanced A-CAM funding, which provides us with $90 million of annual regulatory revenue support for the next 15 years. That's $1.3 billion in total in exchange for delivering high speed broadband to approximately 270,000 addresses. Turning to Slide 16. Let me describe the vision we have for TDS Telecom. We are transforming ourselves into a fiber broadband company. We're doing this through investments in all of our market types, expansion, cable, and ILEC markets. First is our fiber expansion program. Today, we have 370,000 service addresses in our expansion markets. They are 100% fiber. And we plan to continue growing our footprint in our expansion markets over the next several years. Next are our cable markets. We have approximately 500,000 cable service addresses which are already enabled with 1 gig speeds using DOCSIS 3.1 and fiber. 16% of our cable addresses are fiber today. And going forward, we will add more fiber opportunistically in certain markets and in new greenfield areas. And finally, in…

Okay. Just as a reminder, we will not be answering questions related to the strategic review of UScellular today. Operator, we are ready for the first question.

Thank you. [Operator Instructions] Our first question comes from Ric Prentiss from Raymond James. Please go ahead. Your line is open.

Nice. Good morning, everybody.

Good morning, Rick.

Hey. A couple of questions. First, I think people are a little surprised that there's a shelf filing at USM for, I guess, it says it's a mixed shelf debt preferred, or maybe some depositary shares. Explain to us what's the purpose of that shelf. And I've got two other quick follow-ups.

Yeah, Rick. First off, the shelf filing, we made a shelf filing actually both at TDS and at UScellular. Right now we're giving ourselves flexibility to keep all our options open. This is an really administrative at this point and it's in conjunction with replenishing our shelves. And specifically, at UScellular, our shelf was set to expire in May, and we're getting ahead of it with the 10-K filing. So at this point, we don't really have any specific current intentions to use it now.

Okay. Second question is, LT, you talked, and Doug, you talked about churn and gross adds on the postpaid side. Looking at Slide 7, obviously there had been a tick up, even seasonally on the churn side. I think you also mentioned you're going to focus in '24 on retention. How should we think about churn going into '24? Is third and fourth quarter indicative of kind of what we think is happening in the competitive universe or are you going to really be attempting to get down back to prior year levels?

Yeah. Good morning, Rick. So a few things with that, one is when you look at the fourth quarter churn, about half of that increase about 5 basis points was due to some involuntary churn that got pushed from Q3 to Q4 based on some systems issues we had with our collections queue. So that's one time. That's not going to recur. And as LT mentioned during his remarks, we're very focused on retention in 2024 and investing a lot of our promotional dollars in maintaining our existing customers. So our expectation or our goal in 2024 is to bring churn down. I will say early in '24, we're seeing some good signs and we're to keep highly focused on postpaid handset churn in particular.

Okay. And then on the tower segment, obviously, some pressure there, CapEx spending in the industry has kind of slowed down a little bit. I know in the past we've talked about why not put in place a tower segment reporting, right, of anchor contract between UScellular wireless and UScellular towers. Can you update us as far as thinking about why not put in place a contractual relationship between UScellular towers and UScellular wireless?

Hey, Rick. So, I mean, the kind of two questions there. I mean, the first, from a slowdown perspective, this is industry wide, not surprising as we've heard both, all the other wireless carriers report pullback in CapEx, they're primarily complete with their mid-band rollout. And so everybody's pulling back a bit from a spend perspective. And that affects new tenancies, it affects amendments. And you've also seen that on all the other tower companies' earnings results. And so we're not immune to that. Long-term term, we do remain really bullish on our towers. We have, I believe, strong MLAs in place with all the wireless carriers. My sense is that -- without knowing their strategy, my sense is dish is taking a breather after hitting their last build out obligation, but they've got more to come. If I fast forward what's going to drive further capacity expansion in the wireless industry, there's no new spectrum on the horizon. We can talk about this on a different topic. I mean, the SEC doesn't even have spectrum authority right now, and so there's no new spectrum on the horizon. So the way to add capacity is going to be more AOs and work hours. And that means more long-term growth for the tower segment. And so we remain optimistic about it, even though we did see a bit of a slowdown in '23, and we expect that slowdown to increase in '24. As far as your question about separate segment reporting, we continue to evaluate it. Frankly, and to be transparent on this, this is one of those things that once you do it, you can't dial it back. And so we're trying to be deliberate and disciplined about what information we provide and when and how we provide it. We have heard you and others in terms of a desire to have more information on our towers, and we provided that. And so we continue to provide more detail on that tower business. Separate segment reporting is not something that we're ready to pull the trigger on just yet, but that may be something we do in the future.

Great. Thanks, everyone. Stay well.

Thanks, Rick.

Thanks, Rick.

Thanks, Rick. Next question.

Our next question comes from Simon Flannery from Morgan Stanley. Please go ahead. You line is open.

Great. Thank you very much. Good morning. To start off, do you have any sizing of any exposure to ACP across the businesses?

Good morning, Simon. Yes, we do. So we're under index in ACP. We have about 20,000 ACP customers. And so we just don't have a lot there. Our marketing teams are working on giving those customers a soft landing to the extent that ACP does go away, which is the current expectation. And so the short answer is minimal exposure.

Yeah. And, Simon, on the TDS Telecom side, very similar story. We have about 19,000 customers enrolled in ACP, and we too are following the SEC's direction in terms of winding down that program. We're working with all of those customers in order to try to find the right broadband product for them. There might be a little exposure there to customers who may not land with us. But we actually also see this as an opportunity. There's ACP customers of other companies that might be looking for a new provider and we'd be happy to serve them. And we've got efforts in place to try to attract those customers. So impacts would be minimal and anything is included in our guidance.

Great. That's very helpful. And then on the wireless affiliates, just looking at the guidance, it seems like the expectation is for fairly similar contribution to EBITDA in '24 versus '23. Is that right? And any comments on the trends there or any growth expectations on that?

Yeah. You're exactly right, Simon. We're expecting that to be relatively flat in '24 relative to what you saw in '23, so no significant changes there. And obviously, we don't directly control those entities or the distributions, but our expectation is pretty flat.

Great. And then there's the last one on the BEAD timing. I know, LT, you talked about the program on the 5G. In working with your states, I know we're going through sort of challenge processes and so forth. But what's your latest view on when we'll actually see actual awards take place and when we'll know more about the FWA role and so forth?

I think dollars, Simon, will probably start to flow late this year. I think the majority of dollars will probably start coming in in 2025. I also expect to have a bit of a -- call it a sequenced, or you could call it a take two on funding plans. My expectation is that states will first come out with quite aggressive plans in terms of expectations of fiber build out, expectations of low cost pricing plans, expectations of a whole bunch of other, let's call it overhead associated with those plans. It'll be interesting to see how much uptake they get, right? Is this -- is round one of BEAD going to be a tremendous success or is round one of BEAD going to be all over again? I think that's a question that still needs to be answered. Based on our conversations, I still feel quite optimistic about the long-term role of fixed wireless that we can play, particularly for our more rural states. It's unclear to me if that will be kind of part of the first round with some of the states that we're talking about or if it's going to be later. But I wouldn't expect meaningful dollars to flow until next year.

Great. Thanks a lot.

Okay. Next question.

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

Thanks, and good morning. Just following up on the BEAD topic. When you look at UScellular as well as TDS, can you frame the type of financial capacity you have to go after BEAD opportunities? And if there are significant wins, how does that influence capital allocation for each side or both? Thank you.

Doug, do you want me to take that first for TDS?

Sure. Go ahead, Michelle.

Yeah. So, hi, Mike. For TDS Telecom, there's an important distinction here. So there are the two federal broadband programs. The first one is the enhanced ACAM program and the second one is BEAD. And it's our understanding that if addresses are under the enhanced ACAM program, which we opted into in almost all of our states, those addresses also cannot be funded by BEAD. Which makes sense that you wouldn't have two federal programs funding the same addresses. So because we've opted to be a large participant in the E-ACAM program, at TDS Telecom, we actually don't plan to be a BEAD participant. So for capital allocation, our -- our competing priorities are fiber expansion program and the enhanced ACAM program, and BEAD does not enter into that equation in any significant way.

So, let me tackle it from a fixed wireless perspective, Mike. So first -- the first place I would point to is where there are going to be BEAD opportunities that can be served within the radius of our current tower build. Where we can do that, it's a pretty simple equation. We utilize existing mobile capacity. We -- we'd leverage that capacity towards serving a fixed wireless need. And if we can do that with the support of BEAD dollars, all the better. And so for those homes and businesses, we think we have a really compelling return on capital equation that comes along with that. What percentage of those are going to be, I have no clue. Right, we kind of have to wait and see what the -- what the states come out with. There's a second set of homes, obviously, that are not currently reached by either fiber or by a sufficiently strong enough mobile signal that we can deliver a compelling fixed wireless product. And for that, you need to put a new tower in. The reason that we've advocated for BEAD is -- and the reason, I'll go back to our sequencing point that I made earlier, I expect that BEAD will create a significantly denser fiber grid, completely irrespective of fixed wireless. So that will bring our overall cost down to serve. And if I can -- I've mentioned this number before, but our cost to put a tower in rural America is between $650,000 to $1 million. If with BEAD dollars, I can bring that down to $100,000 or $200,000, then that could create a pretty compelling investment opportunity. I'll point you, though, from an overall high level guidance, I'll point you to the priority that I finished our conversation with about 2024, which is we're laser focused on return on capital. And so if there are BEAD opportunities in '24 or in '25 that help us expand return on capital, meaning we can have really efficient use of our internal capital spend, and we can drive attractive returns on it, we'll participate. If it's not a good use of capital, we won't. And I've also made that really clear to both the states and to NTIA. These programs have to be structured in a way that it's a positive return on capital equation, not just for UScellular but for anyone that's going to participate. And so if we were to expand our capital spend in the future because of BEAD, it would be because we see returns that are over and above the current ones that we would expect as part of our long-term plan.

Thanks. And just one other for you, LT. Going back to Slide 7, I'm just looking at the trajectory of postpaid handset gross ads, and I'm wondering if you can unpack a bit more of what's happening on the gross ad front for UScellular? And are there opportunities to start to bend the curve on this and get greater output on that front? Thanks.

Yeah. The -- I mean, it's a -- the thing that has driven the slowdown in gross ads, it's a pretty simple equation, and it's been the expansion and the rise of the cable wireless players. If I rewind three years, they had a share of essentially zero in our marketplace or in the markets where we operate, across our footprint. Even though we see cable competing by now in about two-thirds of our footprint, they're still not everywhere. And their market share is still only in the 3% to 4%. But their share of gross ads is about 15%. And so how are they able to do this? Well, it's really twofold. The first is they offload almost 90% depending on which statistics you look at. Let's call it 90% of their traffic is offloaded to Wi-Fi. But for us, that number is about 80%. 80% of the usage of our devices is done on Wi-Fi versus 20% is on cellular. And that doesn't sound like a big difference until you think about it from a usage on cellular perspective. And then you say, okay, well, 10% of a cable device users is on cellular, and they have to turn around and pay for that from a wholesale rate perspective. Whereas 20% of our usage is on cellular, so it's double the usage on the cellular network. And so their overall network economics are quite attractive. And then you couple that with their ability to essentially cross subsidize their plans with profits from their wireline business. Different people can agree whether or not it's -- whether wireless is a profitable business for the cable wireless players or not, but these are smart people, and they're driven by economics. And so they wouldn't be in the business if they didn't…

Thanks. And one other quick one. You mentioned the overlap with cable in terms of the competitive nature against the wireless footprint that you have. What's the overlap competitively with the big three wireless national providers?

So we see them in -- you mean the 60% some-odd that I quoted in terms of the percentage of our markets where we compete against them. And you're asking what the comp -- what the -- what that number would be for AT&T, Verizon, T-Mobile?

Yeah, for each of them. What's the percent overlap against each of those three national wireless players?

Yeah. It's substantially all. It's greater than 90% for all the big three.

Thanks. That's helpful. Thanks for taking my questions.

Absolutely. Have a good day.

Our last question will come from Sergey Dluzhevskiy from GAMCO Investors. Please go ahead. Your line is open.

Good morning, guys. Thank you. Thanks for taking the questions.

Good morning. Sergey.

Good morning. My first question is for LT on fixed wireless. So this C band being deployed, and in general, mid band being deployed for you, how does that impact your approach to fixed wireless over medium term? And also, what is the addressable market that you see with fixed wireless now that you have all your spectrum that you can deploy over the next few years? And also, how do you think about the capacity needs for fixed wireless over the next few years?

Yeah. Thanks, Sergey. So let me start with the overall market opportunity. I've referenced this number in the past. It hasn't changed. We see the overall opportunity for this business at around 400,000 subscribers. That's a combination of two factors. And it's a combination of the market dynamics where we believe this product is competitive versus the network dynamics of -- I mean, this is a product that rides on top of the investments that have been made in mobility. I've been transparent about this in the past. This is not a product that pays for itself, right? It doesn't pay for all the capital requirements that are needed to put new radios and new towers in place. And so you put capacity in place for the mobile subscriber, and then you pivot that capacity where you have it available and you serve the needs of fixed wireless. When you put those two things together, we see a market opportunity of about 400,000. Usually you would see growth rates starting to slow as you reach the kind of customer scale that we've reached. So when you first roll out a product, the first 5,000, the first 10,000 customers, you see fantastic growth. Right? But then as you start hitting scale, the numbers become more challenging. The real impact of mid band for us is all of a sudden, we can offer a drastically faster product that competes not just in rural areas, not just in un- and underserved, and not just where the competitor is DSL or satellite or nothing. We can offer 300-meg on a mid-band-enabled product. And so that competes extremely well against cable. And so we expect that mid band product to be the key driver of growth going into 2024 and in 2025, and it opens up new geographies for us. As I mentioned, we should have 30% of our towers carrying almost 50% of our traffic fired up with mid band by the end of the year. We'll be doing that on a steady cadence. And every time we upgrade a product -- we upgrade a tower with mid band, that shows up in -- for our stores as an opportunity to sell an enhanced broadband product to our fixed wireless customers. And so the net impact of it all is that we expect that attractive growth that we've seen in fixed wireless to continue, notwithstanding the fact that that business continues to scale to larger and larger numbers. So hopefully that gives you a sense about how we're thinking about it and of the impact of fixed wire -- excuse me, of mid band.

Yes. Thank you. And my second question is for Doug. You've made some progress, obviously, on cost optimization program, but it's still a focus for you in 2024. If you could provide more color on maybe, which cost categories do you see as opportunities for more meaningful cost reduction over the next 12 months to 18 months? How should I think about that?

Yeah. Well, Sergey, first of all, you see the progress we've made on that. And when you look at our 2022 margin compared to our 2023 margin went from 25% to 27%, as we talked about in our remarks, the program is working. And just to emphasize, we have this program organized across our business. We have 12 campuses, we have accountability from all of our leaders, and everybody is delivering on this program. So it's been really successful and we'll continue to go across the whole business for savings. We still have opportunities in really all of our areas. But as far as where most of the dollars are, it sort of follows our P&L, right? So we have a lot of dollars, of course, in engineering OpEx that'll continue to provide significant savings as will market in IT. So, we really are proud of what we've done so far. There's more to do, and it's going to be across the business.

Sergey, I'll just chime in. Thank you for directing the cost question to the CFO, but the CEO occasionally has something to do with it, too. So I won't dump it all on Doug. One thing that we've seen a lot of -- we've seen a lot of success is in our efforts around automation, in our efforts around transparency and flexibility for our customers. And so the example I'll give there is the upgraded bill that we provided to our customers. So we've both -- we've rolled out a new bill format. The first change that we made was almost a year ago, where we changed our approach to prorations. The second thing that we've done is we've recently launched an entirely new format for our customers, providing them a lot of transparency, what they can expect, how the bill breaks down, what they can expect the following months. It's all automated. That has significantly driven down cost of care. It's significantly reduced what I would call service-driven visits to our stores. We still love to see our customers in our stores, so those don't bother me. But it helps if a customer is walking in the store with an intent to buy rather than with a billing question. And so simple moves like that, moves that are focused on transparency, moves that are focused on flexibility, they're upfront investments that we make, but they also bring down costs. But they bring down costs without any kind of a negative experience on the customer. In fact, it's a positive experience on the customer. And you can probably expect to see more of those automation in digital investments from us in this year and beyond as well.

Got it. And my last question is for Michelle. So you've made significant investments, obviously, in expanding your fiber footprint, and you still continue with your fiber build. I guess, given where you are right now in terms of passings, how do you feel about conversion of your passings into paying fiber customers? And also maybe if you could provide more color as far as what has been working lately for you in terms of conversion of passings into paying customers and what still needs to be improved in your opinion in 2024?

Hi, Sergey. Thanks for the question. So, yes, we have had a lot of success in continuing to grow our footprint and getting our build really progressing in 2023, we had our biggest year yet. And what we're seeing in terms of customer sales and conversions into our service addresses, actually becoming paying service addresses is meeting and exceeding what we had expected to see. And this is happening generally across all of the markets that we've been launching. So in our broadband penetration, we do have a chart in one of our slides that shows you how we expect that broadband penetration to ramp over the first few years after addresses get launched. In year one, we expect it to be about 25% to 30%. So of the addresses that we launch, about 25% or 30% of those addresses turn into paying customers. And that's what we're seeing. And then slowly over the next few years, that continues to build until you get to about a steady state of what we expect about 40% broadband penetration in those markets. So a few of our markets have been launched and around for long enough to be able to get to steady state. And in all of those early markets we are over the 40% broadband penetration that we had been looking for. So we're really pleased with how the builds have been going and then also how the sales and marketing and customer conversion processes have been going.

Great. Thank you.

We have no further questions. I'll turn the call back over to Colleen Thompson for closing remarks.

Okay. Thanks, everyone, for your time today. Please reach out to IR with any additional questions. And have a great weekend.

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