Ladies and gentlemen, thank you for standing by, and welcome to the TDS and U.S. Cellular Third Quarter 2020 Results Call. [Operator Instructions].

I would now like to hand the conference call over to your speaker today, Jane McCahon. Please go ahead. .

Thank you, Kenzie. Good morning, and thank you all for joining us. We do want to send out our very best wishes that you and your families are well. I want to make you all aware of the presentation we have prepared to accompany our comments this morning, which you can find on the Investor Relations section of the TDS and U.S. Cellular websites. .

from TDS, Pete Sereda, Executive Vice President and Chief Financial Officer; from U.S. Cellular, LT Therivel, President and Chief Executive Officer; Doug Chambers, 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. TDS and U.S.

Cellular filed their SEC Forms 8-K, including the press releases, and Forms 10-Q yesterday..

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 versions included in our SEC filings..

In terms of our upcoming IR schedule, Slide 3, we will be virtually attending the Raymond James SMID Cap Company Showcase virtually on November 12 and 13, and we are attending the UBS Global TMT Conference virtually on December 8.

And our open-door policy, now more of an open-phone or open-video policy, so please reach out to us if we can arrange something. Before turning the call over, I do want to remind everyone that due to the FCC's anti-collusion rules related to the RDOF auction and Auction 107, we will not be responding to any questions related to FCC auction..

And now I'll turn the call over to Pete Sereda.

Pete?.

Thanks, Jane, and good morning, everyone. I'm going to make some brief comments about the balance sheet and our liquidity position, but before doing so, I'd like to recognize the impressive operational and financial results of both businesses during the quarter. .

As we've discussed on past calls, maintaining financial flexibility is one of the pillars of our corporate strategy.

Over the years, we have worked to retain relatively low leverage levels, long-dated debt maturities, sufficient undrawn revolving credit facilities and significant cash balances while, at the same time, making sure that we have the financial resources we need to fund our businesses..

As you can see on Slide 4, at September 30, TDS continued to have a strong financial position, including $2.2 billion in immediately available funding sources, consisting of cash and cash equivalents, available credit facilities, undrawn term loans and undrawn portions of our EIP securitization facility..

In the quarter, U.S. Cellular took advantage of favorable market conditions and issued $500 million of 6.25% retail senior notes due in 2069. It is very typical for us to opportunistically tap the market for funding when conditions are favorable, as they certainly were in August.

As highlighted on the slide, we have a number of potential funding sources.

In this instance, given market conditions, we judged that the retail debt market was relatively favorable, taking into account all factors, including term, callability, ease of execution, lack of impact on the business operations, lack of meaningful covenants and, of course, the all-in cost of financing relative to our other potential alternatives..

In October, U.S. Cellular upsized its EIP securitization agreement from $200 million to $300 million. While shorter in term than some of our other financings, this is our lowest cost financing facility, and we have a solid pool of receivables against which we can raise funds.

In sum, we are in a very strong position to invest in the growth opportunities identified by both of our businesses..

I will now turn the call over to LT.

LT?.

Thanks, Pete. Good morning, everybody. Kind of hard to believe that I've been on the job for 4 months already, and I'm really looking forward to providing all of you with a brief update on the progress we've made over that time. .

But before we pass by this page, Page 5, I just want to point out the new logo that we introduced in September. This logo is just another aspect of our program to elevate and evolve the U.S. cellular brand. This provides, I think, a much more modern look, reflects the rapidly evolving technologies and the services we provide to our customers.

You can expect to see further changes to this brand in the marketplace in the coming quarters, but this logo is the first step..

Let's turn to Page 6 and talk a little bit about the quarter. So we reported a really impressive quarter, and I'm really proud of how the team executed. We had strong subscriber and financial results.

And I think that's evidence of just how essential our industry is, the value that customers ascribe to the services we provide, but it's also a credit to the talent and the resiliency of the organization. .

We saw strong sales of connected devices, and that, coupled with low churn, helped us grow our base. We also maintained significant expense discipline and drove adjusted EBITDA to increase 10% year-over-year. Those results are the primary drivers of our increased guidance for the year.

And Doug is going to provide a couple more details on that in a moment. .

I do want to remind you that one factor that impacted year-over-year comparability is the later iPhone launch. So last year, the device launch was late in the third quarter, and as you know, it was in October of this year.

We're excited about this launch and how that new timing is serving as the kickoff to this very nontraditional and pandemic-influenced holiday selling season. .

The timing should also help us to spread customer traffic out over the holiday selling season. And it's really important consideration to keep our customers and our employees safe during the pandemic.

Similar to previous launches, you have competitive offers that appeal, we believe, to both new customers and our existing customers who are ready to upgrade their devices. We're really pleased that the new iPhone 12 series of devices support our network requirements.

That includes full support 5G 600 megahertz spectrum that we're currently deploying as well as millimeter wave in the future. .

As with all businesses, we continue to face challenges from the pandemic. Safety of our frontline associates and our customers is of utmost importance. Our stores remained open throughout the quarter, but store traffic continues to trend below prior year levels.

We continue to have favorable experience in terms of customer payment behavior that contributed to year-over-year favorability in bad debt expense.

In addition, with respect to our participation in the FCC's Keep Americans Connected Pledge, 70% of customers that participated in the pledge paid on a partial payment or entered into payment arrangements..

Talking just a bit about 5G. On the 5G front, working with Qualcomm Technologies and Ericsson, we completed an extended-range 5G millimeter wave data session over a distance of more than 5 kilometers with speeds ranging from 100 megabits per second near the edge to 1.8 gigabits per second closer to the cell site, and this is a world record.

And it means that we're going to be able to connect our communities with fiber-like speeds over wireless in the future, and we're excited about that. Our network modernization and our 5G program continue to be on track. By year-end, we're going to deploy 5G to cell sites that handle about 50% of our overall traffic..

Let me turn briefly to our organization. So I've spent the last couple of months speaking with customers, employees, leadership team. And I have to tell you we have a fantastic culture in this company. We have amazing associates. We have an award-winning network. We have great distribution and great customer care. .

And we're in the process of making some changes that are going to promote even more organizational speed and agility, and this includes flattening the organization to create a faster and more decentralized decision-making process. And as part of that, we've redefined some of our leadership roles.

So Eric Jagher is now responsible for consumer sales and operations. Courtland Madock is responsible for operational marketing, Verchele Roberts for brand management.

We've also brought in some terrific new talent like Kimberly Kerr, who's expanding our participation in the business and government sector; as well as Austin Summerford, who's going to be focusing on business development, enhancing our partnerships and maximizing the return from our tower assets..

As part of that organizational restructuring, I also want to take just a moment to thank Jay Ellison, who formerly was our Chief Operating Officer. Jay has announced he's going to be retiring effective January 1, 2021. He's currently serving as a special adviser to me.

Jay first joined the company in the year 2000, and I just want to take a moment to thank him for his outstanding leadership and the countless contributions he's given to U.S. Cellular..

Given the timing of this call, I think it's probably worthwhile for me just to make a brief comment on the election. And like most of you, we're watching closely and regularly refreshing our Twitter feeds to stay up to date with the situation.

But that being said, regardless of who occupies the White House, I hope and my expectation is that the administration will focus on improving and investing in American infrastructure. .

As part of that, I think it's important to separate 2 issues that are critical to our customer base, and we talked about this in other forums. First, we need to ensure that strategies are put in place to ensure American competitiveness and leadership in 5G, particularly expanded access to spectrum for commercial use.

But secondly, we need to focus on ensuring access to quality, affordable wireless service, and that's regardless of G, in difficult-to-reach and expensive-to-serve rural areas. We're going to be focused on this as a company. These are issues that we think will resonate regardless of who wins the election. .

And so before I turn the call over to Doug, I want to take a moment to say thank you to the entire organization for the great results we posted this quarter. We're truly operating in unprecedented times, and it requires a huge amount of operational flexibility.

We've had a really strong quarter, which is a testament to the hard work and the dedication of the team. I think we're in a really strong position moving into the busy holiday season..

So with that, let me turn it over to Doug Chambers.

Doug?.

Good morning. Let me touch briefly on postpaid connections results during the third quarter, shown on Slide 7. Postpaid handset gross additions decreased primarily due to lower switching activity and decreased store traffic due primarily to the impacts of COVID-19 and to a lesser extent, the delayed iPhone launch.

This decrease is partially mitigated by increased demand for connected devices. .

Total smartphone connections increased by 3,000 during the quarter and by 45,000 over the course of the past 12 months. That helps to drive more service revenue given that smartphone ARPU is about $21 higher than feature phone ARPU. As mentioned, we saw connected device gross additions increase by 27,000 year-over-year.

This was driven by gross additions of hotspots, routers and fixed wireless devices as a result of an increase in demand by customers seeking wireless products to meet their need for remote connectivity due to the impacts of COVID-19. .

During Q3, we saw an average year-over-year decline in store traffic of 25%, related to the impacts of COVID, as well as some heavier activity in the prior year when we had service plan pricing changes and the iPhone launch.

The decrease in store traffic had a negative impact on gross additions, although connected device activity remained stronger than prior year..

Next, I want to comment on the postpaid churn rate, shown on Slide 8. Currently, as you would expect, churn on both handsets and connected devices is winding at very low levels. Postpaid handset churn, depicted by the blue bars, was 0.88%, down from 1.09% a year ago.

This was due primarily to lower switching activity as customer shopping behaviors were altered due to the COVID-19 pandemic, and we also saw more customers upgrading their devices with us, resulting in a 4% increase in upgrade transactions year-over-year. .

The FCC's Keep Americans Connected Pledge ended on June 30, and 70% of the customers that were on the pledge at June 30 are current or remain on payment arrangements. Total postpaid churn, combining handsets and connected devices, was 1.06% for the third quarter of 2020, also lower than a year ago..

Now let's turn to the financial results on Slide 9. Total operating revenues for the third quarter were $1.027 billion, a slight decrease year-over-year. Retail service revenues increased by $11 million to $674 million.

The increase is due to a higher average revenue per user, which I'll cover on the next slide, partially offset by a decline in the average postpaid subscriber base..

Inbound roaming revenue was $42 million. That was a decrease of $12 million year-over-year, driven by lower data rates and to a lesser extent, a decrease in data volume.

Other service revenues were $59 million, an increase of $2 million year-over-year due to an increase in tower rental revenues and miscellaneous/other service revenues, partially offset by a prior year tower rental revenues accounting adjustment that increased tower rental revenues in the prior year.

Finally, equipment sales revenues decreased by $5 million year-over-year due to a decrease in new smartphone unit sales and lower accessory sales..

Now a few more comments about postpaid revenue, shown on Slide 10. The average revenue per user or connection was $47.10 for the third quarter, up $0.94 or approximately 2% year-over-year. On a per-account basis, average revenue grew by $3.40 or 3% year-over-year.

The increase was driven by several factors, including increased device protection revenues, an increase in regulatory recovery revenues and having proportionately fewer tablet connections which, on a per-unit basis, contribute less revenue than smartphones. .

As part of caring for our customers during the COVID-19 crisis, we elected to waive overage charges from March through July. These waived charges partially offset the increases to ARPU..

Turning to Slide 11. As we continue our multiyear network modernization and 5G rollout, control of our towers remains very important. We have added this slide to provide visibility to rental income growth from our towers.

By owning our towers, we ensure that we are located at the optimal location of the tower, and it gives us the operational flexibility to move equipment, which is very important when you're going through a technology evolution. .

While the towers support our network strategy, we also recognize that they are valuable and provide a financing alternative, which we evaluate along with our other financing options. As you can see on the slide, since we entered into a third-party marketing agreement, we have seen steady growth in tower rental revenues.

We will continue to focus on growing revenues from these strategic assets..

Moving to Slide 12. I want to comment on adjusted operating income before depreciation, amortization and accretion and gains and losses. To keep things simple, I'll refer to this measure as adjusted operating income. As shown at the bottom of the slide, adjusted operating income was $232 million, an increase of $24 million or 12% year-over-year.

As I commented earlier, total operating revenues were $1.027 billion, a slight decrease year-over-year. .

Total cash expenses were $795 million, decreasing $28 million or 3% year-over-year. Total system operations expense increased year-over-year. Excluding roaming expense, system operations expense increased by 1%, mainly driven by higher cell site rent expense. Note that total system usage grew by 54% year-over-year. .

Roaming expense increased $2 million or 5% year-over-year due to a 69% increase in off-net data usage, partially offset by lower rates. Cost of equipment sold decreased $9 million or 4% year-over-year due primarily to a reduction in the number of new smartphone unit sales and a decrease in accessory sales.

Selling, general and administrative expenses decreased $23 million or 6% year-over-year, driven by a decrease in bad debt expense. Bad debt expense decreased $22 million due primarily to lower write-offs driven by fewer nonpaid customers and lower EIP sales in 2020 versus 2019..

Turning to Slide 13 and adjusted EBITDA, which starts with adjusted operating income and incorporates the earnings from our equity method investments, along with interest and dividend income.

Adjusted EBITDA for the quarter was $282 million, a $26 million or 10% increase year-over-year due to the improvement in adjusted operating income as well as an increase in equity and earnings of unconsolidated entities, partially offset by a decrease in interest income..

Moving to Slide 14. Given the strong results this quarter and overall improved visibility given where we are in the year, we have revised our 2020 guidance in a number of ways. First, we have narrowed our guidance for service revenues to a range of $3.025 billion to $3.075 billion, maintaining the midpoint.

For adjusted operating income and adjusted EBITDA, we have both increased the midpoint and narrowed the range. Adjusted operating income is now expected to be between $800 million and $875 million. Adjusted EBITDA is now expected to be between $975 million and $1.05 billion.

We are planning for aggressive promotional activity during the holiday season, which is reflected in these estimates. .

We are maintaining our guidance for capital expenditures at the $850 million to $950 million range as we work to meet our deployment goals for the year. We are well positioned to close out the year successfully, and we look forward to reporting those results to you in February..

I will now turn the call over to Vicki Villacrez.

Vicki?.

All right. Thank you, Doug, and good morning, everyone. TDS Telecom had a very strong third quarter. We grew both revenue and adjusted EBITDA, up 7% and 8%, respectively, and we made significant progress on advancing our strategic and our operational priority.

These include our fiber deployment strategy to generate growth and the work we're doing to upgrade our plant with A-CAM and state broadband grant as we continue to promote higher sales and customer satisfaction in existing markets..

Let me first begin by giving an update on the actions we've taken in the quarter. Disruptions caused by COVID-19 and steps taken to prevent its spread continue to impact our way of doing things day to day and probably will for a long time. We have established and continue to enhance protocols to keep our employees and customers safe. .

We monitor and safeguard our networks to ensure service availability during these times of critical need, and we are partnering with our communities to share our resources to support their critical programs.

Certainly, the pandemic has shown a spotlight on just how important connectivity is to our society and our economy, and we are proud to be providing these services to all of our customers, especially those in rural and underserved markets..

As it relates to the election, we have a history of working cooperatively with administrations from both parties. And we'll continue to do so in order to provide high-quality, affordable broadband service to rural America. .

The pandemic has also become an inflection point in our economy, and we are positioned to be a critical part of new and emerging workplace trends.

As innovation and human capital spreads from cities to rural areas, broadband services become increasingly important and will provide the connection that allows people and businesses to succeed, and we are perfectly positioned to provide that cornerstone..

Finally, as we expand into new markets, dependencies on third parties such as vendors, contractors and local governments have presented diverse challenges during this pandemic, which we are learning from and leveraging to create momentum in future projects. .

We are progressing with our launch of our cloud TV product called TDS TV+ across our IPTV market and across our largest cable market. While it's still early in its launch, we are focused on ensuring its success across our markets. We're currently assessing initial customer feedback and making upgrades to the product.

We plan to continue rolling out TDS TV+ to the remaining cable markets and to our out-of-territory fiber market..

In our out-of-territory fiber markets, presales continue to exceed our expectations. We are currently installing service in our Wisconsin and Idaho clusters and began construction in Spokane, Washington, which followed closely after its recently launched presale activities.

We have completed construction in 4 Wisconsin markets and remain focused on construction through the remaining communities. We've identified additional attractive markets that support our selection criteria and are evaluating expansion in our major clusters..

We are continuing to drive faster speeds in our established markets by building to meet our A-CAM obligations. In all our markets, we utilize targeted local marketing, and demand for our products is strong. This investment is providing necessary services to underserved areas.

Overall, we remain committed to achieving our strategic priorities through the remainder of the year, as outlined on Slide 16..

Now let me highlight our financial results for the quarter, as shown on Slide 17. Consolidated revenues increased 7% from the prior year. This growth is the result of our broadband initiative and the contributions from the Continuum cable acquisition. .

Our fiber expansions are driving incremental increases in wireline broadband and video revenue. .

Through September, our entry into new markets has produced $15 million of revenue and is expected to contribute over $20 million for the year. In addition to impacts from the acquisitions, we continue to see strong growth in cable residential ARPU and broadband subscribers..

Cash expenses increased 4%, about half of which is from the acquisition. In addition, expenses increased related to launching our new fiber markets and cost to maintain and upgrade our existing facilities. Revenue increases exceeded growth in expense, driving an 8% increase in adjusted EBITDA to $78 million.

Capital expenditures increased to $92 million as we continued to increase our investment in our fiber deployment and success-based spend..

I will cover our total fiber program in more detail in a moment, but for now, let's turn to our segments, beginning with wireline on Slide 18. Broadband residential connections grew 8% in the quarter as we continued to fortify our network with fiber and expand into new markets.

From a broadband speed perspective, we are offering up to 1 gig broadband speeds in our fiber market, and 12% of our wireline customers are taking this product where were offered.

Across our wireline residential base, including our out-of-territory markets, 38% of broadband customers are taking 100 megabit speeds or greater compared to 31% a year ago. This is helping to drive a 5% increase in average residential revenue per connection in the quarter..

Wireline residential video connections grew 9%. And at the same time, we expanded our IPTV markets to 53 up from 34 a year ago. Video remains important to our customers. Approximately 40% of our broadband customers in our IPTV markets take video, which for us is a profitable product. .

Our strategy is to increase this metric as we expand into new markets that value these services and through our new TDS TV+ product. Our IPTV services in total cover about 39% of our wireline footprint today. This is leading an opportunity to further leverage our investment in video. .

Slide 19 shows the progress we're making this year on our multiyear fiber footprint expansions, which includes fiber into existing markets and also out-of-territory fiber builds. As a result of this strategy over the last several years, 280,000 or 34% of our wireline service addresses are now served by fiber, which is up from 29% a year ago.

This is driving revenue growth while also expanding the total wireline footprint 5% to 823,000 service addresses. .

Our current fiber plans include roughly 320,000 service addresses that will be built over a multiyear period. And year-to-date, we have completed construction of 40,000 fiber addresses in addition to the 40,000 addresses we turned up in 2019 related to this program.

Overall, take rates are generally exceeding expectations in the areas we have launched to date. We are expecting our fiber service address delivery to accelerate in the remainder of the year, even though we continue to experience some delays in construction, as I've mentioned in previous quarters, which will shift some of this growth into next year..

Looking at wireline financial results on Slide 20. Total revenues increased 2% to $173 million, largely driven by the strong growth in residential revenues, which increased 8% due to growth from video and broadband connections as well as growth from within the broadband product mix, partially offset by a 2% decrease in residential voice connection.

Consumer (sic) [ commercial ] revenues decreased 8% to $38 million in the quarter, primarily driven by lower CLEC connections. Wholesale revenues increased slightly to $45 million due to certain state USF support timing. .

Wireline cash expenses were flat on lower employee expenses, legal expenses and the capitalization of new modems previously expensed, offset by higher video programming fees and maintenance expense. In total, wireline adjusted EBITDA increased 3% to $53 million..

Moving to cable on Slide 21. Cable total revenues increased as customers continue to value our broadband services. Total cable connections grew 12% to 377,000, which included 31,000 from the acquisition and a 9% organic increase in total broadband connections.

On an organic basis, broadband penetration continued to increase, up 200 basis points to 46%..

On Slide 22, total cable revenues increased 19% to $74 million, driven in part by the acquisition. Without the acquisition, cable revenues grew 10%, driven by growth in broadband connections for both residential and commercial customers.

Our focus on broadband connection growth and fast reliable service has generated a 29% increase in total residential broadband revenue, including organic growth of $5 million or 20%. .

Also driving the revenue change is an 8% increase in average residential revenue per connection, driven by higher-value product mix and price increases. Cable cash expenses increased 18% due primarily to costs related to the acquisition or 8% excluding acquisition due to increased employee expense.

As a result, cable adjusted EBITDA increased 20% to $25 million in the quarter..

On Slide 23, we've provided our revised guidance for 2020, reflecting the strong performance so far this year. We are maintaining our revenue and capital expenditure guidance and are increasing our expectations for adjusted EBITDA by increasing the midpoint and narrowing the range to $305 million to $325 million.

We are pleased with our results through the first 3 quarters of the year. And even with some uncertainty related to the pandemic and construction schedules, we remain aligned with our strategic goals and financial objectives.

Our fiber builds are expected to increase in the last quarter of the year, and with additional success-based spend, we expect to be within the guidance range for capital expenditures. .

And finally, I would like to sincerely thank all of the teams and individuals that have played such vital roles in managing the many moving pieces and in a lot of cases, overcoming adversity to embrace our culture and continue to serve our customers with excellence while bringing our new markets to life during a pandemic.

With all these efforts, we look forward to updating you on our progress in February..

Now I'll turn the call back over to Jane. .

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

[Operator Instructions] Our first question comes from the line of Rick Prentiss. .

I hope you continue to be well in these crazy times. A couple of questions. Slide 11 talked about the towers. Appreciate the extra detail on bringing out that revenue and seeing the growth over time. .

Clearly, infrastructure assets have become valuable. We saw American Tower buy InSite at a 30 multiple of tower cash flow. We've seen John Hancock come in and buy a 30% stake of ExteNet, a fiber small cell infrastructure play.

How should we think about how you compare financing or monetizing the tower business to other financial options out there -- or financing options? And is a minority interest stake something you would consider selling?.

Rick, it's LT. Thanks for the question. It's good to chat with you. .

Just at a high level, right, we see value in owning our tower portfolio because of the operational flexibility that it gives us. We won a J.D. Power award last quarter. Mike and team continue to drive just a tremendous network experience.

And that's in no small part because we're not really beholden to third parties, to "Mother, may I?" when we want to go touch our towers and make network improvements. .

And so that's really the primary driver that we see of owning the towers, and we continue to see that value moving forward. And we don't really plan on changing our approach there. If anything, with 5G coming up, we're going to have to be touching those towers more regularly.

And ownership gives us the ability to provide a stronger network experience to our customers. .

I'll let Pete answer your direct question about financing alternatives. But one of the reasons why we wanted to put this slide in the materials was because we have made a commitment to owning those towers. I think we've been quite clear about that in prior calls. But if we're going to own those towers, we got to sweat those assets. .

And so you'll notice, in my introductory comments, I talked about bringing Austin Summerford onboard. Austin -- one of Austin's primary jobs is going to be running and operationalizing those tower assets. And so we're going to continue to focus on sweating those assets.

And we tried to provide a little bit of transparency around that from a revenue projection and kind of how we're doing on that. And you can expect to see that from us moving forward. .

Pete, I'm not sure if you want to provide any more color on the financing question. But Rick, hopefully, that gives you some structure about how we're thinking about those assets and the benefit to the firm. .

Yes. So I -- well, I guess, the only thing I would add to that is the reason why you would sell the towers, if you wanted to sell them, is because you thought that somebody could lease up the towers faster than you could and you could monetize their ability to lease up those towers better than you could.

Or bringing in a partner, as you mentioned, Rick, same thing, somebody -- bringing in somebody else who has the expertise to help you lease up the towers faster than you can do. .

I think what we're trying to show on this Slide 11 is that we're doing a pretty good job. We're growing at a pretty nice rate now.

We start from a low base, but what we're trying to do at least in the near term is we're trying, as LT says, to sweat the towers more to increase the revenues that we're getting off those towers and get the advantage of the extra income that we can get off the towers, but also maintain the control at the same time.

So really, nothing has changed in our view on the towers since the last call. .

Okay. That helps. LT, I know you've been in the seat for 4 months, so maybe it's still a little early to ask this question. But as you sit here looking at the opportunity at U.S. Cellular, do you think you have the ability over a multiyear period to grow service revenues and EBITDA? Is U.S.

Cellular -- do you view it as -- is it a growth business in a competitive wireless world and 5G coming?.

Yes. That's a great question, Rick. And I would have said yes on my first day on the job, and I'm more convicted of that 4 months in. And I'll give you just a little bit of context around it. .

The thing that attracted me to the opportunity was -- if I take a step back, if I just look at the assets of the company. So tremendous spectrum position on our own towers, we have the best network where we operate, just won an award for it. We have the best customer engagement scores. .

We haven't translated that into top line growth. But when I look at the organic opportunities, I think there's some very near-term opportunities that could help us drive growth, and we've organized around those. So for example, bringing Kim Kerr on to run our enterprise and government business. I think there's a lot of growth opportunity in that area.

I think there's growth in prepaid, managing our prepaid customer life cycles more aggressively. So I think there's growth there. .

And I think on the expense side, there's continued opportunity to drive more OpEx discipline, more CapEx discipline. And so I see opportunity both on the top line as well as the bottom line. And that was just day 1. .

Since I've gotten here -- and I realize it sounds a little bit soft on a call with a bunch of Wall Street analysts, but this place from a culture and a people perspective is absolutely inspiring, and the team that we have is absolutely tremendous. And so my conviction that we can drive growth has only heightened since I've been here.

And I fully plan on making that real for you in the coming quarters. Hopefully, that answers your question. .

It does. And final one for me. Pete, can you talk to stock buybacks? You guys had done some in 1Q, a modest amount in 2Q, but then no buybacks in 3Q, even though the stock was under pressure.

How should we think about how you allocate capital and when to pull the trigger on stock buybacks and return to shareholders?.

So Rick, it's sort of a 2-part answer. The first is U.S. Cellular, where we strive to maintain our 80% ownership so that we can keep U.S. Cellular into the tax consolidation that benefits everybody to have one consolidated tax return.

And so to offset dilution from compensation programs, we need to, pretty much on an annual basis, buy in a certain number of shares. .

And so you saw we were pretty heavy in the first quarter when the stock price really took a tumble when the COVID crisis began. That's when we were really in the market. It's not to say that we couldn't be in the market at other times during the year. We just haven't really found it necessary to do that, but we're constantly looking at it. .

At TDS, that was a little more unusual because we don't have -- we have a stock repurchase plan out there and an authorization. We hadn't been using it.

And frankly, it's a balance that we have to maintain between investing in some of the things that, for example, Vicki was talking about with the fiber out-of-territory and all the wonderful initiatives over there versus using the capital to buy back the stock. .

At this point, we decided, at least during the first quarter, we were going to be buying back at some of these ridiculously low stock prices. We couldn't pass that up. But again, we have to balance that. And we decided throughout the rest of the year to let the balance fall more towards investing in the fiber out-of-territory. .

Our next question comes from the line of Phil Cusick. .

Nice to hear from you. So starting with LT. Maybe you can compare your iPhone offer this year to what you offered last year in the fourth quarter and talk about what you see in competition out there and how we might think about incremental costs year-over-year from that. .

And then second, Vicki, I thought it was interesting, you mentioned you're evaluating expansion opportunities in existing customers for fiber.

What are the variables that go into that evaluation? And what do you think the opportunity is over time?.

Phil, it's good to hear from you. So yes, I mean, from an iPhone offer perspective, I mean, it's been an interesting launch. We feel very good about how we are positioned vis-à-vis the competitors. .

What we focused on this year is really an offer around no requirements with our customers. And so not layering on a bunch of unnecessary requirements we believe have been unattractive to customers and have caused some distrust and some concern in the marketplace.

And so far -- and I can't provide the specifics, but so far, we're very pleased with how that offer has resonated in the marketplace. .

In general, from a competitive perspective, we've seen relatively aggressive offers. I think obviously, AT&T's upgrade offer is a particular one that I would highlight that we're paying particular attention to. But at the end of the day, I think we're -- we feel like we're well positioned in managing both subscriber retention, new growth. .

We feel good about the wind shear that our offer is driving. And obviously, we're also making sure that it's long-term profitable and long-term net accretive. And so I think we feel good about how we're positioned in the marketplace. Hopefully, that gives you a little bit of context about how we stand. .

Vicki, do you want to tackle the second question?.

Yes, absolutely. First, Phil, let me just tell you how I feel about our current out-of-territory fiber performance, which will give you the context of how we think about this going forward.

We are very pleased with the marketing and sales results in our new fiber market across Wisconsin, Idaho and the presale rates that we're starting to see in Washington -- in our Spokane, Washington market. And so we feel really good about the take rates that we're seeing.

They range between 30% to 40% broadband penetrations, and they're largely meeting our thresholds required for these builds at launch. .

While construction is moving slower than we'd like, we're -- we don't -- we believe we can overcome most of these challenges that we've been seeing. We're nearly complete with our fiber builds in Southern Wisconsin, and we're expecting to complete our fiber builds in Central Wisconsin by the end of next year.

And in Idaho, our Coeur d'Alene market is well underway with installations occurring at a rate that's meeting our expectations. And in Meridian and portions of Boise, where we've commenced construction earlier in this year, we're also reporting strong presale results.

So all of this is a backdrop that continues to give us the confidence in this fiber deployment strategy, and therefore, we are evaluating other areas where it makes sense to expand on our existing footprint or to expand into new markets with this fiber overbuild strategy. .

And the criteria is attractive competitive environment, target build costs that meet our expectations. So we really look at the build cost per household pass. We look for strong household formation and attractive demographics that have pent-up demand to buy these superior services.

Oftentimes, customers in these markets have not had good choices for broadband support. So that's really our criteria. .

Okay. LT, if I can go back for a second.

Do you think your offer this quarter, if this continued, for example, would cost you substantially more in EBITDA and cash flow than you -- than it did last year, the no requirements offer?.

No, Phil. When I compare it to where we were last year, I do not believe it's going to cost us significantly more, to be direct from my end. .

Our next question comes from the line of Simon Flannery. .

LT, you talked a little bit about 5G. Maybe you could just give us a little bit more color on your plans there and the performance. .

And I think we've heard both from Verizon and T-Mobile about their fixed wireless plans in 5G. How do you think about the opportunities? Obviously, you're getting some good results out of millimeter wave. .

And then maybe a second question just around your OpEx and CapEx discipline.

How are you rethinking the model post COVID in terms of digital interactions with customers, activations, et cetera?.

Simon, great questions. So 5G, let me provide a little bit of color there. So as I look at the opportunity for us, kind of break it down into a couple of segments. The first is around cost and expense improvements. .

So if you just look at the last quarter, over 50% increased usage on our network. Previous quarter was over 70% increased usage on our network. And we've been able to manage that with around a 1% increase in expense. And you only do that by having a modernized network, and 5G is going to be a key driver of that for us.

And so the first thing that we're looking at for 5G is how can it help us better manage our expense and our capital profile. .

Second piece, obviously, is around market share presence in the market. We'll have 5G in all of our markets by the end of Q1. I mentioned that we will have over 50% of our traffic carried at it by the end of the year. And so we're rolling out 5G relatively aggressively in order to ensure that we remain highly competitive. .

And then the final piece, obviously, is around the use cases. And we continue to pay a lot of attention to emerging use cases. Thus far, the most obvious one is the fixed wireless broadband piece.

And so I'll talk about that, that we continue to monitor, as is the rest of the industry, what will be the emerging use cases that really drive adoption in usage. .

Let me talk about high-speed Internet for just a bit. So I mentioned the trial that we ran along with Qualcomm and Ericsson. We're very enthusiastic about those results, being able to get 100 megabits per second at 5 kilometers. That's -- that speaks pretty highly for the kinds of services that we're going to be able to provide to rural North America. .

The interesting question obviously for high-speed Internet is the elasticity of demand relative to cable. And so that's something that we're going to be testing. We're going to have market trials in market in the first quarter, and we're going to be testing that. .

Let me be specific about what I mean. One obvious use case for high-speed Internet is monetizing excess capacity. So you build an architecture network for the needs of your mobile customers.

And then where you have excess capacity, you apply that capacity to some of your homes and try to serve them with really high-quality home broadband, and we're already doing that. .

We've seen really good results in the third quarter not with our millimeter wave-enabled high-speed Internet but just over LTE. We'll be testing that principle with millimeter wave because then the interesting question is, is there enough demand in the marketplace that enables you to purpose build for high-speed Internet.

And I think that's a question that we need to test. .

One of the things I love about this company is that we're small enough and we're nimble enough and we're lean enough that we can pivot quickly. And so we'll be running those market tests in the first quarter.

And assuming that we get good customer uptake, you can expect to see us continue to roll that out into more geographies and be fairly aggressive behind it. We have to test that elasticity with customers and see how that offer plays relative to cable. Hopefully, that answers your question, Simon. .

Absolutely.

Are there other use cases beyond fixed wireless that you think we could see in the next couple of years?.

Next couple of years, certainly. I mean, I think that we're -- we continue to look at connected ag -- I mean, for us in particular, right, our company in particular, we spend a fair bit of time looking at connected agriculture. We're working with drone companies to understand what the needs and the use cases are going to be there. .

I certainly think that COVID has highlighted the need for more robust connected health and connected education solutions.

But Simon, I think the fundamental question there, and this is something that I talked about in an address I made with CTIA, is how many of those use cases will require 5G versus how many of those use cases can actually be served by LTE. And it's more a question of coverage versus capacity and speed improvements. .

And so I haven't seen the silver bullet for the 5G use case beyond high-speed Internet. I have all the confidence in the world it will emerge.

I mean this industry has a long history of putting capacity in place and then sitting down with our partners and our partners inevitably find really creative ways to fill up that capacity and deliver solutions that matter to our customers. .

So I would expect that, that connected health, connected education space is going to be very robust, coupled -- because you have the coupling of the technology in 5G going in place.

And then I think that one of the silver linings of the pandemic is that you have customers now that are eager and are interested in solutions that might have been a little bit longer on the uptake in normal times, that the pandemic is actually going to drive more accelerated development of those solutions.

So those are a couple of spaces we're paying particular attention to. .

Great.

And then on digital transformation?.

Oh, yes. Thank you. So you hit the nail on the head. We -- I talked about slower traffic. Our traffic is down 25%, 30% year-over-year, depending on which quarter you look at. .

We expect that -- I don't really know what the holiday season is going to look like in terms of percentage, but I feel pretty confident that it's going to be down from a retail perspective year-over-year. And so you've got to have a robust digital solution. .

What we're really focusing our digital efforts on is around customer life cycle management. I think that the -- lots of voices in the industry have harkened to the death of physical retail for years and years.

And I still think that in the long run, this solution, the phone solution, let's call it the mobile solution, it's a big deal to our customers, and driving switching behavior is very challenging. And so I expect that retail stores will continue to play a meaningful role in terms of switching. .

But after you've switched the customer, the digital experience is going to be critical in terms of maintaining that customer, delighting that customer and expanding ARPU over time. And so you'll see increased investments from us in that digital life cycle management area to make sure that we continue to keep churn low and expand ARPU over time.

That's going to be the focus of our digital efforts, and you'll see investments behind it. .

Our final question comes from the line of Sergey. .

Maybe 2 for LTE. So on the previous call, you mentioned that you're really interested in exploring opportunities for more robust partnerships around products and infrastructure. And I think one of the examples that you gave is that AT&T Mexico had a network sharing relationship with Telefónica in that market. .

So could you maybe point us to any other examples where U.S. Cellular potentially could be focusing on partnerships -- on the partnership front in the future? And is there a way for U.S.

Cellular to better align itself with one of the national operators? And what could it look like?.

Sergey, great question. Yes, you're correct. And if I think about the priorities for next year, Slide 6 lays out our priorities for 2020. And you shouldn't expect a dramatic change in 2021, right? Growth is going to be a priority. Profitability is a priority. .

But the one thing I would add to that list for 2021 is an increased focus on partnerships. The -- we're open to a variety of different ways to grow our business and to better improve our return on capital and so -- whether it's infrastructure partnerships or whether it's revenue partnerships.

And so let me point at one that we actually launched this quarter. It's small, but I think it gives you an idea about the kind of things that we're looking at as a company. .

And that's a partnership that we launched with a company called Wyzant. And so one of the things that we realized as we sat down with our customers and we listened to them and one of the things that our customers highlighted was, during this pandemic, they were worried about educating their kids, worried about the digital divide.

Commissioner Rosenworcel's talked about the homework divide. .

I think that's something that resonates with me, and we wanted to do something about it. .

And so we went out in the marketplace, and we looked around for companies that were doing a really good job with tutoring. And we found this company, Wyzant. They're a great partner. And one of the things that really challenged the organization to do is to move from concept to execution much more rapidly.

And so we went from this idea of "Hey, education and tutoring appears to be important for our customers" to getting a deal out in the marketplace in a matter of weeks. .

And so we're currently out in the marketplace with this offer, partnering with Wyzant, where new adds to U.S. Cellular get a free hour of tutoring. And it's a fantastic benefit for our customers. We've had really good response. At the same time, it's great for our partner, Wyzant. We're giving them really robust distribution and really robust visibility.

And it's a win-win for our customers, for our partners and for us. .

And so yes, we are going to be looking at broader partnerships like the ones you referenced. I'm certainly not in a position to talk about anything specific. But we're also looking at a lot more of those smaller, more granular partnerships to just help us grow our business and delight our customers.

I think we realize that we don't have to do it all by ourselves and finding unique companies like Wyzant helps us bring something compelling to the marketplace, grow the top line, retain subscribers and delight them along the way as well. .

And so you can expect to see more of those types of partnerships in a much more regular cadence going forward. Hopefully, that answers your question, Sergey. .

Great. It does. And I have a follow-up on the tower portfolio. .

So obviously, U.S. Cellular owns probably a top 5 tower portfolio in the country. The differential and valuation multiples on the tower assets and where U.S. Cellular is trading is quite significant.

While you obviously made it clear that you guys would like to continue owning the tower assets and they are strategic, I wonder -- I mean how do you maximize the value of those assets for U.S.

Cellular and for our shareholders? And do you see an opportunity to create maybe a currency from your tower portfolio maybe to better highlight its value, possibly partially monetize it while retaining control so that the value is ultimately maximized?.

Okay. Fair question, Sergey. I think it's one we've tackled in the past, and I'll give you the same answer that we have given in the past. I'm sorry, I never say no, so we continue to evaluate any broad set of partnerships, any broad set of opportunities.

At the end of the day, right, that tower portfolio, we like it because it helps us better serve our customers, better run our business, better grow revenue, better expand margins, and that's what we're focused on. .

And so along with having that portfolio and retaining that portfolio, you bring up a good point, which is around the EBITDA multiple differential. My belief is that's driven by the fact that other towers and other tower companies are focused on sweating those assets. And so that's what we're going to be focused on as well.

So that's why we brought Austin onboard, is to better sweat those assets. .

We're going to be making sure that we're monetizing those effectively. We'll be reporting out to you guys along that realm. And so you can expect to see that slide in future presentations. But at the end of the day, we like the operational flexibility that it gives us.

We're not really eager to sacrifice that just for the sake of near-term EBITDA multiple pump. .

Jane, we'll turn it back to you, and I think that's our last question. .

Great. Thank you, everybody, for joining us this morning. We look forward to talking to you at various investor meetings going forward. Have a great weekend. .

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