Jane McCahon - Vice President, Corporate Relations and Corporate Secretary, U.S. Cellular Ken Meyers - President and Chief Executive Officer, U.S.

Cellular Steve Campbell - Executive Vice President, Finance and Chief Financial Officer Vicki Villacrez - Vice President, Finance and Chief Financial Officer, TDS Telecom Jay Ellison - Executive Vice President, Operations, U.S. Cellular Doug Shuma - Chief Accounting Officer, U.S.

Cellular Mike Irizarry - Chief Technology Officer, Engineering and Information Services.

Ric Prentiss - Raymond James Simon Flannery - Morgan Stanley Sergey Dluzhevskiy - Gabelli & Co. Phil Cusick - JPMorgan Michael Rollins - Citi.

Greetings, and welcome to the TDS and U.S. Cellular Third Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Jane McCahon.

Thank you. Please go ahead..

Thank you, Brenda. Good morning and thank you for joining us. I want to make you all aware of the presentation that we have prepared to accompany our comments this morning, which you will 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, Finance and CFO; and from TDS Telecom, Vicki Villacrez, Vice President, Finance and CFO. 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 other non-GAAP and operating cash flow, adjusted EBITDA reconciliations.

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 the extended version in our SEC filings.

Shortly after we released our earnings and before this call, TDS and U.S. Cellular filed SEC Forms 8-K, including today’s press releases and their SEC Forms 10-Q. We will be presenting at the Wells Fargo Conference in New York on November 10 and at the Citi Conference on January 6 in Las Vegas.

Also please keep in mind that TDS has an open door policy, so that if you are in the Chicago area and would like to meet with members of management, the IR team will try to accommodate you, calendars permitting. And now, I would like to turn the call over to Ken Meyers..

Good morning and thanks for your time today. I am glad to have this opportunity to talk about our progress this quarter.

Highlights include the completion of our 4G LTE rollout project delivering reliable, high-speed data services into our more remote rural areas, continued customer and revenue growth and strong cost management combining to provide solid growth and operating cash flow on a business as usual basis.

We also wound down our rewards program, which brought back $58 million of previously deferred revenue. These results have us increasing operating cash flow guidance for the year as Steve will cover later.

But it’s important to note that the guidance increase is driven by both the operating results and the cessation of the rewards point program, not just the end of the rewards point program. As I mentioned, we finished our rollout of 4G LTE.

This program covered four years and included some groundbreaking work, like the introduction of LTE and what we call Band 5 or on our 850 megahertz licenses. Today, this network is now carrying 83% of our total data traffic. While we just finished with this 4G LTE rollout, we are already working on our voice-over-LTE or VoLTE trials.

We are modifying networks in Northern Illinois and Southern Wisconsin to support VoLTE. The work on the network is close to completion and we expect to begin friendly user trials on this network, this quarter. As mentioned in my opening comments and as previously discussed, we terminated our rewards point program this quarter.

This program was very innovative when rolled out five years ago. It served us and our customers well over the years. Now, in a more price competitive environment, the value of the rewards program had diminished. So, we have terminated the program to allow us to better focus our resources in areas currently more valued by our customers.

Our reported financial results this quarter reflect the one-time benefit of taking the remaining $58.2 million of previously deferred revenue from that program back into service revenue. In order to help you see through this one-time adjustment, our comparisons will show as reported and as adjusted results.

During the quarter, we continued to grow our customer base. Net adds of 17,000 primarily reflect the benefits of continued low levels of postpaid churn. This quarter, postpaid churn was 1.4% down from 1.6% last year.

And Steve will discuss the customer additions similar to the past few quarters are primarily data-centric devices like smartphones and tablets, which are taking advantage of our extensive LTE coverage.

Gross adds were down year-over-year and were lower than we would have liked driven by declines in consumer traffic and our stores like we have seen across electronic retailers generally. Accelerating the growth of our customer base remains a priority, but we need to do it on an economic basis.

This means we will focus on maintaining low levels of churn like we are now seeing and increasing revenue generating gross adds. The strategic imperative is what drives our best value position and we plan to be appropriately aggressive this holiday season to stimulate that growth.

We will also continue to run tablet promotions from time-to-time to stimulate store traffic and increase customer satisfaction by giving customers more ways to capture the value they receive from our wireless service. This quarter, connected devices represented 34% of postpaid gross additions.

Connective device penetration is now about 10% of our customer base. While still low, this area has seen increasing demand from small and medium businesses and local government accounts. Our business channel is having increasing success showing how these connected devices can improve operational efficiency across many organizations in our markets.

The equipment installment plan offerings remain popular with some of our customers and have helped lower subsidy cost on higher end devices. 44% of postpaid devices sold to customers in the current quarter were on equipment installment plans.

While we would expect to see our take rate increase now that our agent stores are offering EIPs, we currently expect to offer both subsidized and finance devices to meet the needs of all of our customers. Our shared data plans, which we called Shared Connect, now account for 72% of our postpaid customers, up from 35% a year ago.

And with the strong tablet sales this quarter, average postpaid devices per account rose sequentially from 2.5 to 2.54 devices per account. These trends of smartphone adoption and the addition of connected devices continued to drive strong growth in data consumption. These are important steps in our strategy to monetize growth and data usage.

All of those activities, smartphone adoption to connected device sales, Shared Connect adoption with larger data buckets and EIP uptake, partially offset by aggressive pricing competition led to revenue growth of 1% over the prior year, excluding the impact of the cessation of the rewards point program.

That revenue growth, combined with tight spending controls in other areas worked to generate $208 million of total or reported operating cash flow in the quarter, or $150 million of operating cash flow when you exclude the impact of the rewards point revenue. Even on this adjusted basis, operating cash flow was up 57% over last year.

Similarly, we posted significant growth in adjusted EBITDA and net income. To summarize, this quarter we continue to move forward across many fronts including the completion of our 4G LTE network continued customer growth, maintaining our low churn and strong growth in operating results.

I want to acknowledge the efforts of all of our associates that made this possible. While still recognizing, we have further to go to strengthen our position in our markets and to generate the long-term returns shareholders expect. Now, I would like to turn this call over to Steve Campbell.

Steve?.

Good morning, everyone. I am going to begin with a few comments on our customer results for the quarter shown on Slide 6 of the presentation. As Ken said, during the third quarter, we continued to grow our customer base.

Postpaid gross additions for the third quarter of 2015 were 200,000 compared to 251,000 a year ago when we saw higher switching activity across the industry. Gross additions for the third quarter were actually very consistent with our results during the first half of the year, up 5% sequentially and at the same level as the first quarter.

Postpaid net additions of 17,000 also were consistent with the levels achieved in the preceding two quarters and reflected the benefit of continuing low postpaid churn. This quarter, postpaid churn was 1.41%, down from 1.59% last year. I will say more about postpaid churn in a minute.

In the prepaid category, we had 12,000 net additions versus 2,000 net losses last year. Gross additions were up about 11% and churn improved also. It was 5.2% this quarter versus 6.3% a year ago. The mix of our postpaid gross and net additions in the third quarter is shown at the bottom of this slide.

Similar to the past few quarters, the postpaid additions were primarily data-centric devices like smartphones and connected devices, especially tablets. Smartphones represented 60% of total gross additions. Connected devices represented 34% of gross additions and translated into 39,000 net additions.

The next slide has a chart showing the trend in the postpaid churn rate over the past nine quarters. Churn peaked at 2.29% in the first quarter of 2014 and has continued on a steady downward trend since that time decreasing to 1.41% for the third quarter in 2015.

As stated earlier, our gross additions consist primarily of data-centric devices with smartphones being the latest component. To shed further light on that activity, Slide 8 shows the positive trends in smartphones sales and penetration. During the third quarter, we sold 522,000 smartphones, which represented 87% of total handsets sold.

This drove smartphone penetration to 72% of our base of postpaid handset customers, up from 62% a year ago. So, at the end of the third quarter, we still had about 28% of our postpaid customers with basic phones and we are working aggressively to upgrade these customers to smartphones and thereby drive additional data usage revenue.

During the third quarter, we also sold 72,000 connected devices. As Ken said, along with the higher penetration for smartphones and connected devices, we are also seeing more customers adopt our Shared Connect data plans. The penetration on these plans is now 72%, up from just 35% a year ago.

Getting more customers on data-centric devices and shared data plans is critical to our strategy of monetizing to growth in data usage. The next slide in the presentation illustrates just how much data usage has continued to grow over the past seven quarters in terms of both total system usage and on a per subscriber basis.

I should point out that the average usage per subscriber shown here reflects all data subscribers, including those using connected devices. For smartphone users only, the average usage totaled 1,760 megabytes this quarter versus 1,560 megabytes a year ago. We are seeing net usage to have a positive impact on revenue.

Postpaid ARPU as reported was $58.12 for the third quarter, up 3% year-over-year. Excluding the impact of the rewards points expiration, which was $4.48 postpaid ARPU was $53.64, down about 5%.

However, there are a lot of moving parts that affect ARPU, some positive like the significant growth in data usage and some negative like the industry price competition. Notably, with the introduction of equipment installment plans, we have seen an industry-wide shift in some revenue from service plan revenue to equipment revenue.

When we normalize for that shift by combining ARPU and equipment installment plan, or EIP billings, we see that the year-over-year change is actually an increase of about 3%, not a decrease of 5%. There is a similar effect for average revenue per account.

Excluding the impact of the rewards point expiration, average revenue per account was $135.66, up 2%, but when we consider the EIP billings, the increase is actually about 11% year-over-year.

Going on to total operating revenues, which for the third quarter, excluding the one-time rewards program impact of $58 million, were just over $1 million, up 1% year-over-year. The major factor in the increase was equipment sales revenues, which grew 16% to $173 million driven by higher equipment installment plan sales and accessory sales.

Service revenues were $838 million, about 2% below the prior year level, largely reflecting lower planned pricing due to industry competition as well as the planned discounts that accompany EIP sales and activations of customer owned equipment.

The other significant item contributing to the reduction in service revenues was roaming revenue, which declined by $8 million, or 11% primarily due to lower rates on data usage. Note, however that we also realized a benefit from lower rates on our outbound data roaming traffic.

Total expense for outbound roaming increased by about 4% year-over-year due to a significant increase in data usage, but reflected a $12 million benefit associated with lower rates on that usage.

ETC revenues included in the other category on this slide were flat year-over-year at $23 million as the FCC’s phase down of Universal Service Fund support remains suspended. Our overall financial performance for the quarter was quite strong as shown on Slide 12.

Operating cash flow was $208 million as reported, or $150 million excluding the one-time rewards program adjustment. Even as adjusted, operating cash flow was up $55 million, or 58% over last year. Several factors contributed to that overall improvement. First, as I just discussed, total operating revenues grew by an adjusted 1% year-over-year.

Total cash expenses of $861 million decreased by $44 million, or 5% year-over-year. System operations expense was flat to last year. Cost of equipment sold fell by $21 million, or 7% driven by decreases in both units sold and the average cost.

SG&A expenses fell by $23 million, or 6%, due to lower sales commission on reduced volume, lower consulting and outsourcing costs related to the impacts of the billing system conversion on last year, and lower roaming administration fees. This slide also highlights our adjusted operating performance for the quarter.

As you see at the bottom of the slide, operating income excluding the non-recurring items in both periods improved from a loss of $54 million last year to essentially a breakeven position this year. Adjusted EBITDA shown next, incorporates the earnings from our equity method partnerships along with imputed interest income from the EIP transactions.

Adjusted EBITDA for the quarter was $257 million or $199 million excluding the rewards program impact, up $64 million or 47% from $135 million last year, driven largely by the increase in operating cash flow. Earnings from unconsolidated entities were $40 million including $19 million from the LA Partnership.

As we disclosed last quarter, we were informed by the general partner of the LA partnership that the general partner and the LA Partnership entered into a transaction, with respect to a spectrum license in the LA Partnership’s market acquired by the general partner in FCC Auction 97.

We also were informed by the general partner that cash distributions from the LA Partnership will be suspended until the general partner has been paid for the spectrum license. Accordingly, we do not expect to receive a cash distribution in 2015.

By comparison we have received cash distributions of approximately $60 million during the full year of 2014. Cash distributions from the LA Partnership do not affect the measurements of either operating cash flow or adjusted EBITDA nor where the reduction in the cash distribution for 2015 have a material effect on U.S.

Cellular’s liquidity or financial flexibility. Our estimates for full year 2015 financial results are shown on Slide 14 of the presentation. These estimates include the impact of the one-time rewards program adjustment. For total operating revenues, we now expect approximately $4 billion for the year.

This reflects somewhat lower customer growth and lower EIP participation than previously expected. For operating cash flow, we are increasing the overall guidance while narrowing the range from $100 million to $80 million. The current estimate is $540 million to $620 million. This increase incorporates the impact of the rewards program termination.

Yet also balances the positive performance that we have had so far this year, with the fact that we still have an intensely competitive market, with a lot of pricing uncertainty, along with the expectation that we will need to be as Ken said earlier appropriately aggressive this holiday season to achieve our subscriber growth base.

The changes for operating cash flow carry through to the guidance for adjusted EBITDA, where the current estimate is $710 million to $790 million. Capital expenditures are still expected to be approximately $600 million. Next, I want to make just a couple of brief comments about U.S. Cellular’s balance sheet and liquidity.

Overall, the balance sheet is in good shape. As of September 30, cash and equivalents totaled $597 million, up $385 million from the year end level. In addition to the existing cash and equivalents, we have about $282 million of unused borrowing capacity under our revolving credit agreement.

We believe that these resources together with expected cash flows from operating and investing activities provide sufficient liquidity and financial flexibility to meet our day-to-day operating needs and debt service requirements for the foreseeable future.

However, these resources may not be adequate to fund all future expenditures that we could potentially elect to make, such as purchases of spectrum licenses in FCC auctions or other acquisitions.

It may be necessary from time-to-time to increase the size of the existing revolving credit facility to issue new debt or to obtain other forms of financings in order to fund these potential expenditures. This will be a consideration as we assess our potential participation in FCC Auction 1000 scheduled for early 2016.

I will mention here, that as of September 30 accounts receivable related to equipment installment plans totaled approximately $310 million. These receivables represent another source of financing, if needed. And now I will turn the call over to Vicki Villacrez to discuss TDS Telecom.

Vicki?.

Thanks Steve and good morning everyone. TDS Telecom had a solid quarter. As we execute on our strategic priorities, we continue to see cable as a natural extension of our wireline business.

The common strategy for these businesses is to own the best price to the market and use that advantage to grow high margin broadband services, bundled with video and voice products.

To achieve this objective, we are continuing the integration of our cable and wireline businesses in order to take advantage of product operational and infrastructure synergies.

To execute on our broadband strategy and our wireline business, we continued to invest in fiber and have focused on providing high speed data services and related products which has led to strong growth in IPTV connection. TDS TV has been launched in 22 markets, enabling 150,000 service addresses or roughly 21% of our total footprint.

We expect to launch in additional six markets over the remainder of 2015 and are very pleased with the success of our IPTV deployments. We will continue to make fiber investments to achieve our goal of enabling approximately 25% of our ILEC service addresses into 2016.

As a result of continually reviewing all of our operations, we agreed to sell three small ILEC territories in Oklahoma and Arkansas and we expect that transaction to close in the fourth quarter.

Our cost and demographic metrics in these markets did not support the capital investment required to be the most competitive data service provider in these markets going forward. In our cable business, our investment thesis is around monetizing the growing demand for high quality broadband services.

To execute on this strategy, we have made investments to increase capacity on the broadband network and we have rolled out new products to improve the customer experience. Last quarter, we rebranded our Baja cable market as TDS Cable.

For both current and prospective customers, our recent improvements in the network and product offerings in these markets will positively influence their choice of TDS Cable. For the HMS segment, we continue to execute the vision we have for profitably serving the IT outsourcing needs of mid-market customers.

Specifically for HMS, we continue to focus on driving recurring service revenue growth, by improving our ability to sell across our entire portfolio of offerings. Moving to the third quarter results on Slide 17, on a consolidated basis we are seeing the success of our strategy.

First wireline, IPTV and broadband services are helping to replace the continuing declines in wholesale and commercial revenues. Second, cable operations grew through both the integration of BendBroadband and organic growth. And third, HMS had another quarter showing meaningful improvements.

Total revenues increased 21% to develop higher equipment sales and service revenues. Adjusted EBITDA on a consolidated basis grew 2% year-over-year to $76 million, primarily driven by contributions from cable acquisitions and HMS. As expected wireline adjusted EBITDA started declining last quarter as benefits from cost reductions slowed.

Our growth businesses of cable and HMS are offsetting this decline and positioning TDS Telecom for profitable growth. Looking at wireline results on Slide 18, residential revenues grew 2% as growth in broadband and IPTV more than offsets to decline in legacy voice services.

A year-over-year decrease in ILEC residential voice connections has held at about 3% over the past five quarters. As expected commercial revenues decreased 4%, as revenues from increases in managed IP connections did not completely offset decreases from our legacy voice and broadband connections.

Wholesale revenues decreased this quarter as a result of the continuing decreases and regulatory recoveries and lower intercarrier compensation rates. This is in line with our expectations. On a combined basis, total wireline revenues declined 2% to $175 million.

Wireline cash expenses increased 2%, as it increases an employee-related expenses and IPTV content cost outpaced the reduced cost of provisioning legacy services. As a result, adjusted EBITDA decreased $6 million, or 9%. Turning to Slide 19, our strategic focus on broadband and our IPTV product is reflected in our residential customer metrics.

In our ILEC markets, residential broadband customers continue to choose higher speed with 45% choosing speeds of 10 megabits or greater and 14% choosing speeds of 25 megabits or greater contributing to our higher residential ARPU. In this quarter, we launched two additional IPTV markets bringing our total up to 22.

The uptake on IPTV is encouraging at an average penetration rate of 26%. IPTV connections grew 46%, adding 9,600 subscribers compared to the prior year. We are offering a variety of speeds, up to 1-gig service in all IPTV markets. These actions are driving 98% of our IPTV customers to take all three services, which results in the very low churn rate.

As you can see on the table on the bottom of the slide, average revenue per residential connection increased 3%. This increase was driven by price increases for broadband and video services, customers opting for faster broadband speeds and customers selecting higher tiered IPTV packages.

Looking at the cable segment on Slide 20, you can still see the effects of acquisitions, which impacted two months of operations for the quarter. For the quarter end, customer metrics are relatively comparative year-over-year since BendBroadband is included in both 2015 and 2014. Total cable connections are 277,000.

On a same-store basis, total residential connections grew 6% as growth in broadband and voice were partially offset by decline in video connections. Excluding acquisition impacts, revenues grew 4% driven by an increase in residential connections.

Cash expenses increased due to advertising associated with re-branding efforts and higher plant maintenance and programming content costs. The increase in cable adjusted EBITDA was due to our BendBroadband acquisition. Turning to the HMS segment on Slide 21, we had another positive quarter.

HMS operating revenues increased $14 million, or 21% year-over-year on very strong equipment sales as well as improved service revenue growth of 9%, whereas recurring service revenues, which are comprised of co-locations, hosted, managed and cloud services were up only 2% for the quarter. We expect stronger growth in the future.

Cash expenses were up 16% compared to the same period in the prior year, which reflects higher cost of goods sold and cost of services needed to support the revenue growth. Due to efficiency improvements, other operating expenses were down.

HMS generated adjusted EBITDA of $5 million, which is beginning to show evidence of our efforts to integrate and streamline operations of our five acquisitions. As Slide 22 shows, our guidance continues to remains unchanged as it reflects operating results through September.

Overall, we are pleased with the results of our third quarter and will continue to update you on our successful execution of our strategic priorities at year end. I will now turn the call back over to Jane..

Thanks, Vicki. And Brenda, we are ready for questions..

[Operator Instructions] And our first question comes from the line of Ric Prentiss with Raymond James. Please go ahead with your question..

Thanks. Good morning..

Good morning, Ric..

Hey, I want to ask a couple of questions around subscribers and then one on margins. On the subscriber side, on the EIP, you mentioned I think 70 – I am trying to think what you said, sorry. EIP was 44% of sales does that mean your base is up to about 23% on EIP? Just trying to figure out where we are in the base..

That’s a good number..

Okay.

And in the guidance, you mentioned that one of the reasons for revenue changing was now EIP assumption would be at a lower take rate, what are you assuming EIP take rates are going to be now?.

So, Ric, as you said we have the 44% in the third quarter. And as we look out to the fourth quarter of this year, we think the rate will probably notch up to about 50% for the fourth quarter..

So, we had actually expected to see a little higher rate than we have been running. And part of the rate variance so to speak has been a slow deliberate rollout of EIP to our agent channel. And part of it has just been a customer base that still likes the subsidized model. And so we haven’t seen as fast a migration to EIP as maybe others.

And our view is we are going to make sure we got the right products for the right customers and then those that want subsidized plans as long as we can make the economics work, we will offer those as well as EIP..

Okay.

So, fourth quarter maybe more like 50% whereas before you were thinking, it might have gone even higher?.

Yes..

Okay.

And speaking of subsidy, what are you seeing as far as loss on equipment on a subsidy model these days given the competition and handset pricing?.

Well, first of all, what we are seeing is a bifurcation by mix I guess I would say. Higher end phones are all migrating to the EIP and part of that is just our management in the pricing. So, if I think about LOE on a subsidized phone, I don’t have the exact number in front of me, but I am guessing it’s like 200..

Yes, roughly speaking, it’s up 215 on a subsidized phone..

Okay, cool. And then final question on kind of subscriber side is upgrades, what did you see in the quarter, we heard some of the other U.S.

carriers upgrades came in a little later than some people might have been expecting?.

Yes. So, that would be true for us as well. Our upgrade rate for the quarter was about 6.5% and it was about 8% in the comparable period a year ago..

And again, for us, the upgrade rate had been, yes, I should have been running 10% not too long ago and part of that was the whole migration from a strategy that did not involve contracts to bring in the customer base back under contract.

So, before a year ago, we were running about 10%, it’s about probably third quarter of last year, started marching itself down. And now I would say, we are more in line with the kind of industry average, where we have been running hot before..

Sure. And what are the other major trends in the industry and you guys talked to it was churn.

Slide 7, you show your quarterly seasonal churn numbers, do you expect that churn can continue down on a year-over-year basis and what’s driving that?.

So, I am looking across the table to Jay Ellison, who is Executive Vice President, Operations and you used that word expect, and I like to use that word a lot when I talk to him about churn. I think there is lot of things that are driving it. One is we believe it’s satisfaction.

It’s also when you get more and more lines and devices on an account and it’s more and more difficult to move all of those. So, I think its both satisfaction as well as it is difficult to your barriers almost..

Yes, I think just quickly additionally, with the completion of the LTE rollout this year, as well as to Ken’s point in the broad-based portfolio including the tablet selection, I think I expect to see us continue to have good churn results..

Thank you, Jay..

You’re welcome, Ken..

Great. Thanks guys..

Thank you. And our next question comes from the line of Simon Flannery with Morgan Stanley. Please go ahead with your questions..

Great. Thank you very much. Good morning. So, on the auction for 600, you talked about the funding requirements about that, can you just talk about how you think about that spectrum, it obviously won’t be available for a few years, but you have got a lot of rural territory presumably that could help with some coverage.

But you also have a quite a lot of low-band already capacity needs given some of your territory may not be as great, given the density, so how do you weigh all of those things. And then can you talk a little bit about return of capital, it’s a little while since you have done an M&A deal.

We didn’t see any buybacks this quarter, I understand as auctions coming up, but how are you thinking about other uses of cash beyond the auction in terms of acquisitions or buybacks? Thanks..

Okay. So let me just start with the auction question. You listed many different factors that all go into the great big black box to see what comes out. But as we think about it, we want low band spectrum everywhere and with our 850 and the 700 A Block licenses that we have, we have a real nice kind of coverage over most of our markets.

So there is a few that we don’t have any 800 or 750-sub. And also those would be the first targets for the 600 auction. So that we can ensure that we have got the coverage everywhere. After we have got the coverage spectrum, then we start thinking about capacity.

And to-date we have got AWS and PCS and other higher band frequencies that we use to augment that. But our engineers are also working on carrier aggregation.

And some of the recent work shows that, what we were concerned about in the past, which was called low, low aggregation after the aggregating multiple lower bands of frequency together is looking more promising and so some of the 600 actually could be capacity additions for us. So all of that says is, we have got the 600 coming up.

We are preparing both from a liquidity financing standpoint as well as from an engineering and analytical standpoint to be ready for that auction, once it gets there. In terms of M&A or use of cash, I am going to throw the question over to Doug Shuma who is in the room from TDS..

Hi, Simon. How are you? Yes. As far as M&A, we are absolutely still interested in acquiring additional cable companies to help improve our returns. Obviously, we haven’t done any of that this year. We were committed still to this 75-25 invest in the business return to shareholder strategy.

We have said consistently that we would do that pretty modestly, moderately. We are doing that. At any point in time we maybe in or out of the markets for a bunch of different reasons..

Okay, great. Thanks for the color..

Thank you. And our next question that comes from the line of Sergey Dluzhevskiy with Gabelli & Co. Please go ahead with your questions..

Good morning..

Good morning Sergey..

Couple of questions, first one for Ken, just following up on the question about the auction, one of your competitors, I guess was concerned that 600 and 700 megahertz spectrum bands don’t play well together, due to interference.

I was just wondering maybe a bigger question is there are other interference concerns related to that band, so maybe if you could talk, a little bit.

How you look at some of those interference issues, how big of an issue you think that is and what are some of the things that could be done to alleviate some of those concerns?.

Sergey, you are asking me to talk about engineering and technical solutions is probably not the best idea. But Mike Irizarry, our CTO is in the room and I will let him talk about it. But the big thing is that we think that there is a lot of work going on and that is going to make that low, low work in certain applications.

Mike?.

Yes. Good morning, Sergey. Certain low-low combinations we believe are easier to carrier aggregate and others and it has to do with filtering limitations. And I would say that, carrier aggregating 600 and 700 is probably one of the more challenging low-lows to be addressed.

But there is a lot of work going on to improve filtering, improve antenna bandwidth to make all low-low combinations possible. But definitely 600 and 700 is one of the more challenging low-low combinations..

And we are seeing progress, I think even on the standards front to include that in the standard. So we are optimistic..

Okay. One question on the cable side for Vicki, so obviously we have seen additional cable deals I guess since last quarterly call.

So and I also, I mean given the recent market volatility, could you talk a little bit, if you are seeing an impact on deal environment in cable space and your potential pipeline, have you seen prices come down some of the assets that you are looking given market volatility?.

Sure. I think the activity you have seen in the cable acquisition says a couple of things. I think it says, one obviously how competitive the space is. And then – and two more importantly I think how attractive the space is. And as you know our strategy is around growing that broadband opportunity.

And so as we are looking at and I think we have been clear about that, as we are looking for cable acquisitions, we continue to be disciplined buyers. And we will only do the deal, if we can make it work. But overall, we really like the business and the opportunity from the broadband growth perspective..

Alright.

And last question, I guess going back to Ken, if you could talk a little bit about your machine-to-machine opportunities that you see in your markets is probably a small component of your business now, but where do you see it going over the next 2 years, what are some of the biggest opportunities for you?.

I don’t know that I can do justice to that question. Right now, our focus is more in the connected device space, especially bringing efficiencies to operations in some of our local government operations. We are seeing strong receptivity to solutions that help whether it would be the county government or the city government here.

Operate their fleets, operate – provide information to their citizens on a more efficient basis. Where that evolves long-term to really, I am still – we are more real. So I think about our customers in that area, they are more followers and they are going to be leaders. Right now, it’s all about connected devices..

Okay, thank you..

Our next question comes from the line of Phil Cusick with JPMorgan. Please go ahead with your questions..

Hi guys. Thanks. I think I remember you telling us that you are more conservative on EIP modeling in terms of residuals and things like that, than your peers.

Do you have any idea what the EBITDA impact might be, if you took a pure level assumption?.

I don’t know that I am more conservative than my peers. So I think that we are appropriately conservative. And when we record an EIP transaction we are looking at a residual value of 20% at the end of the – effectively year one, the way that works under our original offerings.

What that means in terms of margins or whatever, I think about it, that you really don’t know until after you play through your first cycle of EIPs. But in our case, the first upgrade eligible ones were, about four months ago and we are seeing a much lower and slower upgrade on those than we thought.

But Phil I don’t know that I can convert to – this is what somewhat else says, this is what I said and kind of work it out to a bottom line. I think we are – I am sure we get enough history with these. We don’t want to be in a position, where we have got a great big surprise on a balance sheet someplace.

I am not suggesting anybody else has one, I am just maybe saying that, our team here Steve and Doug have been working to make sure that we don’t wind up with one..

Good.

And then second gross adds on the phone side continue to be fairly slow even with a pickup in churn at AT&T and T-Mobile, how are you working to drive the sort of customer knowledge of the business and increase gross add share?.

Now, you are getting to the tough questions. What we are doing is a lot. One of the big opportunities for us was just awareness, still customers outside our base of the availability of the Apple products.

Jay, why don’t you talk about what we are doing there?.

So, we are using all of the standard vehicles obviously. We have tremendous amount of win back direct mail campaigns to Ken’s point relative to making the – continue to make the awareness grow relative to our iPhones.

We have got our second tranche of Apple related TV that just hit the air very recently and we are extremely as it is Apple very excited about the caliber and quality of the spots that we are putting out there. We have got ongoing pulsing of our tablets sales, which really have just been about a year in the market for us in an aggressive way.

As I mentioned, TV, print, radio all of those standard methodologies have really been our focus this year and we will continue with the strong portfolio in that effort going into Q4..

The other thing, Mike – not Mike, Mike is right here. Other thing Phil is that, what our study show is that most customers or prospective customers will shop online before they ever hit a store and they will still buy in the store if they shop online.

And so part of our whole pricing strategy is making sure that we stay in the consideration set, that’s why we are just under Verizon and AT&T in networks that are similar in quality to ours. So, when the customer is looking at it online that they see that value difference and keep us in the consideration side..

Okay. I think the challenge for a lot of investors and thinking about the stock, I think is that, while churn has come down that’s awesome. EBITDA is better that’s awesome. The question is just the relevance of the company and whether we could argue whether it’s sort of two or three competitors in your market. It’s pretty clearly not four.

But as Sprint slowly rolls out there 800 megahertz and T-Mobile, I would think eventually buy spectrum across your markets, it might be a few years before they can deploy it. I would think that the competitive level goes up.

Is this – do you see sort of three, four years from now that you can be more advantage competitively today than you are now or excuse me, than you are today?.

Well, that’s the whole strategy. That’s the whole set of challenges in front of us. Right as you said churn is down. That was something that was up. We have addressed it. As you said the financials are better than they were. We have addressed that.

Our local positioning, our continued investment in network quality are local and convenient distribution and the increased focus on small and medium-sized businesses are all the next steps that we are taking around continuing to grow the business. So as you said and what you have done there is always something else that needs to be done.

That’s where our focus is now..

Got it. Thanks, guys..

And our next question comes from the line of Michael Rollins with Citi. Please proceed with your questions..

Hi, thanks. Two if I could. First, could you update us on your AWS-3 spectrum and what your expected timing is to get that spectrum from the FCC? And I will follow-up with the second one if I could please..

Sure. If you are talking about our investment in advantage wireless, that’s the – it’s their spectrum. They are the owner of that. They were in the auction.

And we know that they have got, they are working with the FCC around getting the license grant, but I don’t know what the timing is of that and until such time as I hear from them, I am here just on hold..

Has there been any issues identified as to what – why the duration that it’s been?.

Not that I am aware of..

And then secondly if you could talk a little bit more broadly about allocation of capital, so from a TDS and the U.S. Cellular level, how are the companies looking at monetizing more of the wireless asset, whether it’s the spectrum, you have other assets like towers, the minority investments in wireless properties.

How are you looking at all of this as possible funding whether it’s for cable interest that you described earlier in the call or whether to create some opportunities or return more capital to shareholders? Is there an update on thinking on this allocation of capital? Thanks..

Let me try it from the cellular standpoint and kind of take – pick them one at a time. So, let’s start with the minority investments, when we talk about those, you are talking about investments primarily, the biggest one is LA. It is a very nice annuity that is paid for many, many years. They just bought a big license out there.

So, for the first time and as many years as I can remember, the cash flow has been redirected for this one year, but we fully expect to see the same level of cash coming out of that in the future as we have and that’s been running $60 million. Zero tax basis asset that you can run your numbers and put a value on that.

And until such time, there is another way to get similar value out of that to monetize that at some much lower potential return. This doesn’t make sense. Towers told you, we just finished the LTE rollout, but we are about to start down that VoLTE trial and what we are seeing in VoLTE is more cell site modifications that are needed.

And to be able to do those on at least half of our cell sites without incurring substantial lease renegotiation fees, as well as give us some leverage in those, of those remain a strategic asset and I don’t see that changing right now.

I think Steve pointed out, as we think about the auctions coming up between cash balances, what do you say $300 million of VIP related receivables unused lines of credit? I think we are pretty well there. In terms of other uses at TDS, I am going to point on that one to the people on the other side of the table..

Yes, Mike, it’s Doug. As far as TDS, we don’t look to any assets at U.S. Cellular could or potentially seller financed as a source of cash for TDS to invest in cable.

Cable acquisitions we look through the same places that are cash available on our balance sheet, potentially accessing the debt markets if we have to we think they are available to us, but we would not be selling assets at U.S. Cellular to fund cable acquisitions..

And just finally, as you are in the board meetings for both USM and TDS at times, how do you measure the success? Is there a one metric that you look at for U.S.

Cellular where you measure the success of your strategy? Is it revenue performance? Is it a metric of return on capital? Is there one thing that you guys look at and say this is the key thing you guys deliver on to demonstrate long-term success of your strategy?.

There are many factors that the Boards look at to evaluate the performance of this business and the management team here. One that we have talked about in the past that we continue to focus on, but it’s not the only one, but a very, very critical one for the board is return on capital and making sure that we are on a path to change that result..

Thanks very much, Ken. Thank you..

Thanks Mike. Have a great weekend..

Thank you. And this concludes today’s question-and-answer session. We would like to turn the floor back to management for closing remarks..

We would like to thank you all for joining us today and please let us know any follow-up questions. Have a great weekend..

Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time and thank you for your participation..