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Edited Transcript of TDS earnings conference call or presentation 2-Aug-19 2:00pm GMT

Q2 2019 Telephone and Data Systems Inc and United States Cellular Corp Earnings Call

CHICAGO Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Telephone and Data Systems Inc earnings conference call or presentation Friday, August 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jane W. McCahon

Telephone and Data Systems, Inc. - Senior VP of Corporate Relations & Corporate Secretary

* Kenneth R. Meyers

United States Cellular Corporation - President, CEO & Director

* Michael S. Irizarry

United States Cellular Corporation - Executive VP and CTO of Engineering & Information Services

* Peter L. Sereda

Telephone and Data Systems, Inc. - Executive VP & CFO

* Steven T. Campbell

United States Cellular Corporation - Executive VP, Chief Administrative Officer & Director

* Vicki L. Villacrez

TDS Telecommunications Corporation - CFO & Senior VP of Finance

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Conference Call Participants

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* Jennifer Fritzsche

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Philip A. Cusick

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

* Sergey Dluzhevskiy

GAMCO Investors, Inc. - Associate Portfolio Manager

* Simon William Flannery

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good morning. My name is Erin, and I will be your conference operator today. At this time, I'd like to welcome everyone to the TDS and U.S. Cellular second quarter conference call. (Operator Instructions) Jane McCahon, you may begin your conference.

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Jane W. McCahon, Telephone and Data Systems, Inc. - Senior VP of Corporate Relations & Corporate Secretary [2]

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Thank you, Erin. Good morning, and thank you, everyone, for joining us today. Based on the positive feedback we received last quarter, we have again released our results and posted all of our documents to the Investor Relations sections of the TDS and U.S. Cellular websites after the market closed yesterday.

With me today and offering prepared comments are, from U.S. Cellular, Ken Meyers, President and Chief Executive Officer; Steve Campbell, Executive Vice President and Chief Administrative Officer; Mike Irizarry, Executive Vice President and Chief Technology Officer; from TDS Telecom, we've got 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 and adjusted earnings before interest, taxes, depreciation and amortization to highlight the contributions of U.S. Cellular's wireless partnerships.

As shown on Slide 2, the information set forth in the presentation and discussed during this call contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Please review the safe harbor paragraph in our press releases and the extended version in our SEC filings. TDS and U.S. Cellular filed their SEC Forms 8-K yesterday, including its press releases in addition to our SEC Forms 10-Q.

Taking a quick look at the upcoming IR schedule on Slide 3. I'll be attending the Morgan Stanley Media and Communications Corporate Access Day in New York on August 8. We are hosting a Madison-Wisconsin field trip with B. Riley FBR on September 9. Ted Carlson and I will be doing our annual European roadshow the week of September 23. And Ted Carlson, Doug Chambers and I will be doing a Citi Non-Deal Roadshow in Boston in New York on November 13 and 14. Now we've got Ken, Mike Irizarry and myself attending the UBS Global TMT conference on December 11 in New York.

Also keep in mind that TDS has an open-door policy. So if you are in the Chicago area and would like to meet members of management, the Investor Relations team will try to accommodate you, calendar permitting.

And with that, I'll turn the call over to Ken Meyers.

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [3]

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Thanks, Jane. Good morning, and thanks for joining us today. It's been a busy first half for us. Overall, I'm pleased with our second quarter financial results and generally with how the first half of the year has played out, though there remains areas for improvement.

In the quarter, service revenues grew 2%, driven by positive trends in average revenue per user and roaming. Also, operating cash flow, or operating income before depreciation and amortization, grew 4%. Equipment sales remained weak again this quarter and new subscriber activity, by that I mean gross adds, were not at the level I'd like to see. I'll talk more about that in a moment.

We are progressing nicely on our 5G and network modernization projects and we are just completing some significant web enablement work also. In the quarter, we completed the most recent millimeter auction. We're now able to show the successfully had in securing millimeter wave spectrum, which will be important for our future.

Later in the presentation, Mike Irizarry will provide a midyear update on our network activity and then Steve Campbell will provide more detail on the financials.

Turning back to sales activity. In addition to customers holding on to expensive phones longer, we faced a few additional headwinds this quarter. Our prepaid sales have been hampered by handset availability. Some of the global issues required us to change our supply chain and it took us a while to qualify new vendors and restock our channels. The issue is now behind us, and I expect to see a pickup in the second half.

Also during the quarter, store traffic was slower than expected. We did not have the beneficial impact usually associated with the new phone launch, and we had the impact of flooding in some major market areas and also felt the impact of some new entrant activity in the quarter. So all in all, while the quarter was competitive, it was slower than expected.

Despite slow sales, postpaid handset churn remained strong and our upgrade rate was what might be an historical low at 4.9%. Looking forward, I'm optimistic about the second half. In addition to resolving the prepaid supply chain issues and absorbing the initial new entrant impact, we have some exciting new capabilities coming online in conjunction with our system modernization work and other system investments.

Given our lower-than-expected transaction volume, we're lowering our guidance for equipment revenue again. Let me reiterate that this has no meaningful impact on our profitability measures. Service revenues are what really drives our profitability, and our guidance on our profitability metrics remains unchanged.

Talking about service revenue, we saw a 2% increase driven by growing average revenue per user as customers continue to migrate to our Total Plans, including unlimited plans, along with customers purchasing additional services such as device protection plans. At the end of June, 68% of our postpaid customer base was on our Total Plans, with 32% on unlimited plans. Device protection plans cover about 47% of our postpaid base, meaning we have room to grow that revenue stream.

We are finding that as customers pay the higher-priced phones themselves, they become more interested in protecting their investment in devices.

Moving on, roaming revenues grew 13% year-over-year. The team has positioned us well in the roaming arena by successfully migrating from 3G to 4G agreements and expanding the carriers we serve and improving our net roaming position.

Another focus for the company is our ongoing initiatives on controlling costs. For example, even though data usage increased 33% and despite more sites and increased maintenance on sites, systems operations expenses grew only 3%. Similarly, rates per roaming have been substantially lower. We continue to identify and work on cost-savings opportunities across the company.

The final key focus area for this year is our network. We continue to believe excellent customer service, coupled with an outstanding network, is what differentiates us from our competitors. And again, customers recognize this difference and awarding us the J.D. Power award for network quality. As we said at the beginning of the year, we are making a number of investments to ready our network for 5G, but also provide benefits such as increased speed and capacity. I'll let Mike update you on the progress in greater detail in a minute.

Turning to Slide 6. Spectrum is the lifeblood of this industry. We're at a critical juncture as our industry looks to equip itself for 5G and the innovations it will bring. U.S. Cellular's network strategy envisions the use of low-band, mid-band and high-band spectrum over time. Over the past 30 years, U.S. Cellular has amassed a significant amount of low-band spectrum, including 600 and 700 megahertz spectrum, cellular, AWS and PCS spectrum. Now with the purchase of millimeter wave spectrum from the most recent auctions, we are in sizable amount of millimeter wave spectrum also. However, as we continue to meet the growing demand for data services and further identify and define potential 5G use cases, we implore the SEC to bring as much mid-band spectrum to market as possible, as soon as possible and within a framework that will allow regional and smaller wireless carriers to continue to meaningly participate in this industry.

Finally, as we continue on our network modernization path, we're doing a lot of work on our towers. And for that reason, we continue to believe that owning our towers is critical to our network strategy. However, we also recognize that they're a valuable asset and we consider them as a potential source of liquidity. And if faced with compelling need for cash, would weigh them versus other financing alternatives. Today, as we work through our network modernization and 5G strategies, our towers remain strategic to us.

And now let me turn the call over to Mike Irizarry, who will update you well on our midyear network modernization.

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Michael S. Irizarry, United States Cellular Corporation - Executive VP and CTO of Engineering & Information Services [4]

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Thanks, Ken, and good morning. Network quality is foundational to U.S. Cellular. Our goal is to ensure customers have a great experience whenever and wherever they use their devices. And proof that we are succeeding is the recognition that U.S. Cellular won another J.D. Power award for highest network quality performance among wireless cell phone users in the North Central region. I want to recognize and thank our engineering team for the hard work, dedication and focus they put into the experience our customers enjoy on our network. Throughout the year, we have continued our deployment of Voice over LTE. We have commercially deployed VoLTE in Iowa, Wisconsin and our Northwest markets and plan to roll out VoLTE in our New England and Mid-Atlantic markets in the third quarter. We now have 1.2 million customers on our VoLTE service.

We are also working with multiple carrier partners on LTE and VoLTE roaming to ensure our customers have a great experience wherever they use their devices and to generate additional roaming revenue. As I shared during our February call, this year, we are committing capital to a multiyear project to modernize our entire network so it is ready for 5G NR. The modernization project will use various technologies, including 4x4 MIMO, LAA, 256 QAM and LTE-M to bring LTE Advanced features to our customers. Each features improve coverage, throughput and capacity of the network.

The modernization will support and utilize our existing low-band and mid-band AWS, PCS spectrum holdings. The equipment being deployed is an enabler for supporting future 5G bands, too. As a reminder, we will start the deployment in our largest markets and look to commercially launch these services in 5G in those markets in 2020. Like with other technology evolutions, we are pacing these investments so we are ready when our customers are ready. This multiyear approach had served us well with previous generation technology deployments such as VoLTE, 4G and 3G.

The work involved includes replacing the base stations with software upgradable basebands. New 5G features can be incorporated with simply a software upgrade rather than a hardware upgrade. Moving the radios up to the top of the tower, this improves coverage and software upgrades to the core of our network. We are pleased with our progress to date. Our infrastructure vendors thus far are meeting our hardware delivery needs. We have started the tower work required to support the new antennas and co-ax launch at the cell sites, and we are making good progress upgrading the key components of the network core. By the way, you can't have your 5G offering without a device, and we are working very hard with our major handset partners to ensure we have 5G devices to go with our 5G commercial launches.

Now I will turn the call over to Steve Campbell. Steve?

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Steven T. Campbell, United States Cellular Corporation - Executive VP, Chief Administrative Officer & Director [5]

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Thank you, Mike, and good morning, everyone. I want to talk first about postpaid handset connections, shown on Slide 8. Postpaid handset gross additions for the second quarter were 102,000, down from 111,000 a year ago. Ken talked about the factors influencing these results in his comments earlier. Postpaid handset net additions for the second quarter were negative 11,000, down from 5,000 last year, driven by the decline in gross additions and slightly higher churn.

On a sequential basis, handset gross and net additions were both about the same. We continue to have existing handset customers upgrading from feature phones to smartphones. Including the upgrades, total smartphone connections increased by 10,000 during the second quarter and by 104,000 over the course of the past year. That helps to drive more service revenue, given that ARPU for a smartphone is about $22 more than ARPU for a feature phone.

Next, I want to comment on the postpaid churn rate, shown on Slide 9. Postpaid handset churn, depicted by the blue bars, was 0.97% for the second quarter of 2019, with only small variations compared to the year earlier and sequential quarter results. In fact, handset churn has been right at or below 1% for several consecutive quarters, which is indicative of high customer satisfaction. Total postpaid churn, combining handsets and connected devices, also has been consistently low over the periods shown. It was 1.23% for the second quarter and has been trending down slightly for the past couple of quarters.

Now let's turn to the financial results. Total operating revenues for the second quarter were $973 million, essentially flat year-over-year. Retail service revenues increased by 2% year-over-year to $662 million. The increase was due largely to higher average revenue per user, which I'll cover in more detail on the next slide.

Inbound roaming revenue was $44 million. That was an increase of 13% year-over-year, driven by higher data volume. Equipment sales revenues decreased by $17 million or about 7% year-over-year. This was driven by a decrease in the number of devices sold. The impact of reduced volume was partly offset by an increase in the average revenue per device sold. We're continuing to see that customers are holding onto their devices for increasingly longer periods, driving the number of device transactions lower.

Just as we said last quarter, equipment sales have continued to fall short of our expectations coming into the year, causing us to again adjust our thinking about full year revenues.

Now a few more comments about postpaid revenue, shown on Slide 11. The average revenue per user or connection was $45.90 for the second quarter, up $1.16 or 3% year-over-year. That increase was driven by several factors, including a shift in device mix to smartphones, increased device protection revenue and the shift in service plan mix to the higher-priced plans. 32% of our postpaid connections are now on unlimited plans versus 20% a year ago.

Partially offsetting these increases was a decrease in universal support fund revenues resulting from the FCC's December 2018 ruling that revenues from text and multimedia messaging services are no longer assessable under the universal support fund. As a result, this year, U.S. Cellular stopped charging customers and is no longer paying the FCC USF fees on these revenue streams. Because the change also affected general and administrative expense by a like amount, it is neutral to earnings.

Looking through the change, ARPU on a comparable basis increased by $1.49 year-over-year versus the reported increase of $1.16, a pretty strong result. On a per account basis, average revenue grew by just under 1% year-over-year. And excluding the USF impact I just mentioned, ARPU would have grown by 1.5% year-over-year.

So let's move next to our profitability measures. First, 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 $212 million, up 4% from a year ago. Correspondingly, the margin as a percent of total operating revenues increased by about 1 percentage point from 21% to 22%. For those watching service revenue margins, the current quarter number is 28%, consistent with the prior year.

As I commented earlier, total operating revenues of $973 million were essentially flat year-over-year as a result of a decrease in equipment sales revenues. Total cash expenses were $761 million, down $8 million or about 1% year-over-year. The primary driver was a decrease in cost of equipment sold due to a decrease in the number of devices sold, partially offset by a higher average cost per device sold. Excluding cost of equipment sold, other cash expenses increased slightly year-over-year by $8 million or 2%, similar to the increase in service revenues. Total system operations expense of $193 million was up 3% year-over-year, reflecting higher usage by customers both on our network and while roaming. SG&A expenses were essentially flat year-over-year.

Shown next is 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 second quarter was $257 million, up 3% from a year ago. Most of the improvement is due to the increase in adjusted operating income. We also had an increase in interest and dividend income year-over-year, reflecting both higher interest rates and investment balances.

Adjusted operating income and adjusted EBITDA do not include depreciation, amortization and accretion expense. In connection with the network modernization and 5G initiatives that Mike discussed earlier, we are upgrading several of the network equipment outlets. This results in the recognition of accelerated depreciation on the assets being replaced. As shown in our press release, depreciation, amortization and accretion expense for the first half of 2019 is up about 8% year-over-year, and we expect that trend to continue for the remainder of the year.

Next, I want to cover our guidance for the full year 2019. First is total operating revenues. Getting underneath that, we expect service revenues from the full year to grow at about the same rate that we've seen in the first half, low single digits. However, as I said earlier, equipment sales revenues so far this year had been below our expectations coming into the year. We haven't seen the lift in gross additions that we would like, and our existing customers are holding their devices for increasingly longer periods. Therefore, we've reduced our expectation for equipment sales revenues for the full year. And as a result, we currently expect total operating revenues to be in the range of $3.9 billion to $4.1 billion. The expected reduction in equipment sales revenues will have a corresponding reduction to cost of equipment sold, and thus, a negligible impact on adjusted operating income and adjusted EBITDA. Therefore, the guidance for those 2 measures is unchanged at $725 million to $875 million and $900 million to $1.05 billion. The guidance for capital expenditures also is unchanged, still a range of $625 million to $725 million.

Now I'll turn the call over to Vicki Villacrez. Vicki?

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [6]

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Okay. Thank you, Steve, and good morning, everyone. I'm pleased to report favorable results for the second quarter and through the first half of the year. This puts us in a strong position to achieve our strategic growth initiative, as outlined on Slide 16.

We continue to benefit from the cost-saving initiatives we set in motion last year while we sustain revenue growth. For the second quarter, we had both top line revenue growth and expense reductions, which resulted in a 9% increase in adjusted EBITDA.

From a capital perspective, we continue to invest in our fiber deployment and rural broadband expansion projects. I'll give you a complete update on these programs in a moment after I summarize TDS Telecom's overall results for the quarter, beginning on Slide 17.

On a combined basis, total revenues were up over 1% as cable revenues increased 9% and wireline revenues were flat. Also in the quarter, total cash expenses decreased 2%. Wireline cash expenses decreased 3% due to cost reduction efforts while we held cable expense increases to just 2%. This net reduction is a direct result of actions we implemented last year to make room for the scaling up of sales and marketing expenses we will have later in the year with the launches of our new out-of-territory fiber markets. As a result, adjusted EBITDA increased 9% to $82 million from a year ago, and margins increased to 35%.

Capital expenditures increased significantly when compared to last year. However, we expect our capital spending to increase at an even greater rate through the second half of the year as it relates to our fiber deployment strategy.

Now let's turn to our segments, beginning with wireline on Slide 18. Wireline residential video connections grew 9% compared to the prior year. On average, our IPTV markets continue to achieve about 30% video penetration with some markets near 50%. About 80% of our IPTV customers are on triple play bundles as customers continue to find value in taking all 3 services given the rural nature of our geographical footprint and the bundling pricing we have in place. In addition, churn on these bundles continues to remain very low.

Our second quarter results highlight the success of our video strategy and its importance to our customers. Our plans with regard to cloud TV platform, called TDS TV+, remain an important initiative. While we're targeting a second quarter launch in our Bend cable market, we are now working towards a launch later this year and will take a phased approach for the remaining wireline and cable markets. From a broadband perspective, residential connections grew 3% and customers are continuing to choose higher speeds of up to 1 gig in our fiber markets. On average, 26% of all broadband customers are now taking 100 megabit speeds or greater, and that's compared to 20% a year ago, helping to drive an increase in average residential revenue per connection in the quarter.

We also continue to make progress on our network construction under both the A-CAM and state broadband programs. On the A-CAM front, we earmarked $3 million of CapEx in 2019 to continue to extend fiber to the outermost edges of our network in order to deliver higher broadband speeds required under this program. As a result, we are well underway to meeting our first stated obligations under the program as we've completed 27,000 of our required 64,000 service addresses with broadband speeds of up to 25 3, which comes due at the end of next year. We also continue to improve speed capabilities to additional service addresses that are enhanced by our construction under this program.

Slide 19 provides an update on our fiber deployment strategy, both in and out of territory. Last quarter, we announced that we launched our second new out-of-territory fiber market in our Southern Wisconsin cluster and are pleased to announce that our market share gains, while still early, are tracking to our expectations. We are in various stages of construction and expect to launch 4 additional markets in the Southern Wisconsin cluster throughout the year. And we've begun construction in 2 new out-of-territory clusters, targeting 80,000 total service addresses: one in Mid-central Wisconsin, which is comprised of 8 communities, in and around Stevens Point in Wausau; and a second one in Coeur d'Alene, Idaho, which includes 3 surrounding communities. These clusters are terrific examples of a criteria we are targeting for our growth. They are underserved for broadband and have attractive demographics with potential for household growth.

As a result of our fiber deployment strategy over the last several years, 27% of our wireline service addresses are served by fiber. It is this fiber that enables our ability to provide the services our customers demand, including both high-speed broadband and video.

Looking at wireline financial results on Slide 20, total revenues decreased 1% to $172 million. However, residential revenues increased 1% due to growth from the video and broadband connections as well as growth from within the broadband product mix, offset by a 5% decrease in residential voice connection. Wholesale revenues increased 5% due to additional A-CAM funding.

During the second quarter, the FCC authorized the payment of revised support under an order for TDS Telecom to receive an additional $4 million per year. The support includes additional speed requirements, and importantly, extends the term of full annual funding of $82 million by 2 years through 2028. As a result, we reported $2 million of additional A-CAM support during the quarter.

Commercial revenues decreased 8%, primarily driven by lower CLEC connections as we continue to execute on a strategy to maximize cash flow from these markets which are coming under renewed pressure from deregulation.

Wireline cash expenses decreased 3% due to lower employee-related expenses. Remember, in the second quarter of 2018, we recorded $2 million of severance expense associated with our cost-savings initiative. We also continue to see the reduced cost of providing service for our declining legacy products, offset by higher programming fees associated with our video offerings. As a result of the decreased expenses, wireline adjusted EBITDA increased 4% to $62 million.

Moving to cable on Slide 21. Cable total revenues increased as customers continue to value our broadband services. Total cable connections grew 5% to 339,000, driven by an 8% increase in total broadband connections. As a result, broadband penetration increased 300 basis points to 44% compared to the prior year.

On Slide 22, total cable revenues increased 9% to $62 million, driven primarily by growth in residential connections. Our focus on broadband growth has led to a 2% increase in average residential revenue per connection. Cash expenses increased 2%, due primarily to higher programming content cost and circuit expenses. As a result, cable adjusted EBITDA increased 29% to $20 million in the quarter. In addition, EBITDA margin increased to 33% from 28%.

On Slide 23, we have provided our 2019 guidance, which is unchanged from the guidance we shared at the beginning of the year. We expect our revenue trends to continue but anticipate expense growth in the second half of the year as we continue to launch our new fiber market. As I mentioned earlier, our capital spending will increase throughout the year to support fiber build-outs and I'll continue to update you on our progress in capital spending as it relates to these investments.

And in closing, I'd like to thank all of our employees for their continued effort to evolve our business and look forward to updating you on our progress in the third quarter.

Now I'll turn the call back to Jane.

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Jane W. McCahon, Telephone and Data Systems, Inc. - Senior VP of Corporate Relations & Corporate Secretary [7]

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Thanks, Vicki. And Erin, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Ric Prentiss from Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [2]

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Couple of questions. Ken, you mentioned, obviously, you weren't happy with the gross add level versus what you want to see. As you look at the promotions and other things you're putting in place for second half '19, is the anticipation you'd like to get back up to prior year levels? Or do you want to just kind of close the gap a little bit? Where do you think you could get to given also the new entrant activity that you mentioned?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [3]

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Well, as we stated at the beginning of the year, one of our key objectives for the year is to both strengthen and grow our customer base. So my objectives for the year is just that, strengthen and grow the base, and I'm not moving off of that at this point in time. The new entrant activity, there's some bundling that we saw in some of our larger markets and what you're seeing is a low price point, 1, 2 line attractiveness. And we're starting to see some of that come back as deals like leave for price, come back for network. It's early in both counts, so it is something that we're watching. But it's as much just was a slow traffic. If I think about all the flooding we saw in Nebraska, Iowa, Northern Illinois, Wisconsin, that hit a lot of our main areas pretty hard this year. So we just saw lower than anticipated and certainly lower than historic levels of store traffic.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [4]

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So now that we're 1 month into the third quarter, have you seen some of that improve as the waters have receded and people are getting back to normal trends?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [5]

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Well, careful, normal trends, one of the things that the Americas farmland is dealing with is people that didn't plant, right? They are on subsidies. We aren't seeing -- some of the retail numbers I'm seeing out of some of the Iowa, Nebraska stuff aren't real vibrant at this point.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [6]

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Okay. And the second one, I know you and I have had the discussion on towers for 5 years, 10 years, 15 years. I know we've talked about them for a long time. You mentioned they're still strategic, critical for your network strategy but that you would also consider them as a source of liquidity if a need for cash was there. What would be examples of what would be a cash financing need that would kind of trigger something on the tower side?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [7]

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So as I look forward right now, and given our expectations around auctions and everything else, I don't know that I can see a great big one there. Had attractive spectrum been made available in any of the deals that are going on that's a lot of mid-band, that got my attention. Gosh, we don't know when we're going to see the mid-band options now. But the fact of the matter is right now, as the team is out doing this modernization project, we're all over those towers. And with new antennas and moving them up and down on to the top, as Mike had mentioned, and not having to pay a fee every time you do that or not having to increase your rent manifests itself in some of the lower costs or lower rate of increased cost we've seen on a network side. So we know they're valuable. We appreciate the fact that right now, they remain really valuable in a different way to our business.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [8]

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Great. It makes sense. And then for Vicki on the -- from the TDS Telecom side, obviously, a good start to the year with the A-CAM catch-up in 2Q helped. So as far as maintaining guidance towards that, it's looks like you're headed to the high end or above high end, but it sounds like we should also factor in the build cost on the expense side. Is that the way we should be thinking about TDS Telecom?

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [9]

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Yes, that's right. From a revenue perspective, I think you can expect similar trends that we saw in the first half as contributions from our newest fiber market will come much later in the year with those launches. And as I had indicated, we're going to have higher cash expenses as we've launched our new fiber market associated with our door to door, sales ramp-up, the marketing and advertising expenses and commissions that go with that. And so we've got our next couple of new out-of-territory markets launching in August. So right now, we're really pleased with the first half of the year. We expect to be well within our guidance for adjusted EBITDA and we're running to the upper end of that range right now.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [10]

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That makes sense. And then the benefit of those costs probably start showing up as you start ramping sales in 2020 then until revenues come in.

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [11]

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That's right. And we'll include that in our guidance for next year.

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Operator [12]

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Your next question comes from the line of Philip Cusick with JPMorgan.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [13]

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I have to point out that it's been almost 19 years of me following Ric in Q&A and I really enjoy it. So to again follow up one more time on Ric's questions, first, on the gross add side. You talked about more aggressive plans to drive gross adds. Are there already more aggressive promotions in the market? Or what do you think we should look forward?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [14]

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No, what I said is that I didn't talk about more aggressive plans. I talked about capabilities that are coming on line in the second half as a result of both the modernization work that we've been doing as well as other system enhancements like web enablement work. Promotion -- just promoting to promote isn't what's moving the market these days. So I don't know if being more aggressive in that area is a difference, it's about product and service as much as anything.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [15]

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Okay. So -- and as you said, I think you said some of the new entrants. Should we think of that as T-Mobile sort of coming into your market? Or are there are other more prepaid brands that are coming in?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [16]

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Neither. What we saw particularly was more of a cable influence where they already had customers, their end customers. And then they have a low 1-line rate, it looks like $15 per gig, right? So it's a $15 entry point. And that's what we saw this quarter and I said, from reports that Jay was just out in the market and then some of the stores, seeing those same customers coming back now. So we're just going to kind of ride that out a little bit.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [17]

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Okay. Yes. I just looked back at the press release and you said we have aggressive plans and strategies in place to attract new customers in the second half. So that's not more aggressive pricing plans, that's just improving the business?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [18]

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Right.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [19]

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Okay. Understood. And then for Vicki, can you remind us where you are in the video launch to bundle with broadband? How are negotiations going with content companies?

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [20]

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Can you repeat the question? You're cutting out a little bit, though.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [21]

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Sorry about that. Where are you in the video launch process to bundle with broadband?

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [22]

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So today, we do bundle with broadband, both in our cable markets and our ILEC markets. We authorize TV services. And in the second quarter, you saw we had a 9% growth in our video connections in our ILEC markets. With respect to moving to a cloud TV platform, which is going to benefit both our wireline and cable businesses, we're excited about this product and we're anticipating the rollout of that towards the latter half of this year. And we see it as providing an even superior video entertainment experience than what we have in our IPTV markets today. And it's rich with features. It's got an interface that aggregates the search across both linear channels and 3G, over the top streaming applications. So where we're at right now is making sure that, that product is solid and is going to offer the superior experience that we expect. We have a good experience right now in our IPTV market so we just want to make sure that's even better.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [23]

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Is that going to be a wider content package or is it more capabilities on the set-top box and DVR, things like that?

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [24]

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Well, we're going to -- the business case is really about saving CPE. You don't have as high a CPE expense as with your cloud TV, so that's where really the business case around it as well as the superior service. And right now, the bundling package strategy is going to continue to be a very important strategy to us and a pricing strategy as most of our IPTV customers, in fact, 80% of our IPTV customers takes a triple play bundle. So very important to retaining that broadband and voice. And a key...

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Operator [25]

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Your next question comes from the line of Simon Flannery with Morgan Stanley.

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Simon William Flannery, Morgan Stanley, Research Division - MD [26]

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Ken, just coming back to the industry dynamics. Can you just give us your updated thoughts on the merger between Sprint and T-Mobile, given the settlement with -- proposed settlement with the DOJ?

And then on the towers, you talked about the strategic nature of the towers. Are there -- there's obviously a -- we've seen record -- more multiyear highs in leasing activity. Perhaps you could update us on what you're doing to maximize the opportunity around leasing up those towers.

And then are there other solutions that might help sort of surface some of the value whilst keeping control, whether that's something like Vodafone's proposing a separate subsidiary, sub-IPO, bringing in a minority partner? How do you think about things like that to know obviously the multiple difference between your stock and the towers right now is at record wides?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [27]

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On the first one, man, I don't know what's going on. I mean I thought we had a deal, then we had more states jumping in the fray now. My job is to keep my organization focused on our customers and the marketplace and let folks in D.C. or wherever we're going to be litigating those, figure out where do we go next. I have no idea. I've given up. Go ahead.

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Michael S. Irizarry, United States Cellular Corporation - Executive VP and CTO of Engineering & Information Services [28]

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Yes, just one. The towers, actually, we've been doing a lot to drive more value there. I'm going to let Steve talk a little about some of the things we've been doing.

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Steven T. Campbell, United States Cellular Corporation - Executive VP, Chief Administrative Officer & Director [29]

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Well, I think a very important development is that late last year, we actually engaged with an external third party who's active in the space to help us market space on the towers with the idea of growing that. Obviously, we're still in very early stage of that with them, let's call it, taking over the marketing and leasing activities in the first part of this year. But so far, we're seeing good activity. We expect more growth in the future. But if you look at the tower revenue for the first half of the year, the tower rents, meaning the rents that we're actually collecting from lessees on those towers, is up about 7% year-over-year. So trend wise, look for that to continue and actually grow as we get more traction from -- with our third-party agent at this point.

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Simon William Flannery, Morgan Stanley, Research Division - MD [30]

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Okay. And in terms of other structures?

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Peter L. Sereda, Telephone and Data Systems, Inc. - Executive VP & CFO [31]

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Simon, Peter Sereda from the TDS. I'm the CFO of TDS. Yes, we've looked at other structures, the things besides doing a straight sale and leaseback of the towers. But every time you look at one of those structures, you pretty much wind up with the conundrum that the more value you try to get out of those towers, the less control you give up of the towers, which goes back to the point that Ken was making that you really want to see -- you really want to have a big funding need to induce yourself to go in and do any kind of tower deal because of the control that you do give up over the tower space.

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Operator [32]

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Your next question comes from the line of Sergey with GAMCO Investors.

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Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [33]

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One -- first question on the wireless side, kind of a follow-up to Sprint, T-Mobile question. If we assume that the merger you mentioned goes through, you make that assumption, what have you seen from T-Mobile so far in terms of the overbuild? And if the merger does go through, what are your expectations over medium term? And also, obviously, DISH is now a part of all this. So what are your thoughts on DISH becoming a wireless entrant?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [34]

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Oh boy, so we continue to see some network activity with T-Mobile in various markets. But as I've said in the past, T-Mobile is in most of our markets already from a distribution standpoint with at least one of their different brands. So I don't think I've seen any dramatic change in market level activity by them over the last few months. But that I also haven't expected it either. My view at least is part of the rationale they use to get this approved was -- were all things we're going to do in rural America. So I haven't expected them to be doing anything until they get approval. Because, otherwise, they lose that argument, right? So I think one was just getting ready. And while they're getting ready, we've been very busy with our customers. I think the churn rate you see shows all the work we're doing to make sure that we've got our customers very well satisfied. And we'll continue to use targeting retention activities to address concerns of groups that we think may be at risk to churn.

DISH, boy, I don't know. We're going to wait and see on that one. On one hand, if they've been kind of talking about a network for a long, long time and they're going to take a long time to build that out, the numbers, historically, are that you get your payback and you build your distribution or whatever in dense areas. It's tough to get as much out of the less densely populated areas. I don't have a lot of plans around DISH right now. I'd say that's probably more of a next year issue from what I'm seeing right now anyhow.

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Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [35]

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Great. And another question on the wireless. So you guys talked a little bit about your 5G strategy and where you're at with network modernization. So if -- it seems that at a high level, your 5G road map may look similar to T-Mobile's. So you're going to be using low band 600 and mid-band for 5G first and supplementing it with millimeter wave. Is that a fair assessment? And also at the high level, if you could point to any major differences or similarities that you see in your approach to the big 3 carriers with the way they're doing it?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [36]

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I know Mike put a little light on this, but I would say off the top, the similarities are there with T-Mobile because when we started down this path a year ago, we were in similar positions in terms of portfolio of spectrum, right? What we had was low band and the -- and so what we were using was the low band. As we now get access to millimeter, we will incorporate that into how we're thinking about it. And I guess that's probably one thing for you to talk about, Mike, as when we think about millimeter wave, how you're thinking about using that, and as much -- we aren't talking about a streetlight whole type of deployment.

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Michael S. Irizarry, United States Cellular Corporation - Executive VP and CTO of Engineering & Information Services [37]

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Yes. I would say to build on what Ken said that our strategy is similar to T-Mobile's in that we're using low band and mid-band. The difference perhaps between our deployment and some of the other Tier 1s is that the use of millimeter wave will be on macro sites, much higher up on the tower. While I think the industry will move that way ultimately, other carriers have started with lamp post heights to really serve specific use cases. So that's probably the big difference. Other than that, I think everybody believes you need a good amount of low, mid- and high band spectrum to deliver a fulsome 5G service. And we're all starting off with what's called the NSA core but then eventually migrating to SA core once it's a product that's still being worked on right now.

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [38]

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I think one of the points that Mike just reinforced is the strategy is about low band, mid-band and high band, right? And what the industry, as well as we as a participant, really need is access to that mid-band if we're going to be able to deliver meaningful coverage in some midsize and rural markets. That's something the team has been working on a lot with the regulators, helping them understand the criticality of that need. It's something that we will continue to need to push going forward. It's something that the whole investment community can help with, making people understand how important that mid-band is to kind of 5G taking hold in the U.S.

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Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [39]

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And my last question is for Vicki. So you indicated that you have one new market outside of Wisconsin now in Idaho and other out-of-territory fiber builds. So could you talk a little bit about how you fix that market and why you decided to go there, how it compares to your Wisconsin markets? And maybe kind of a bigger picture question, how large do you think this out-of-market fiber opportunity could be for TDS over medium term?

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [40]

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Sure, Sergey. That's a great question. We're really excited about our fiber overbuild growth strategy and we see a lot of potential as we look across the U.S., both contiguous at some of our current markets and in entirely new cluster areas. And one of the things that we really look for is really nice demographics, growth demographics, heavily weighted with family that are going to be buying our products and services in these bundled packages that we're offering. And we're looking for attractive growing areas as well. Already in Sun Prairie, we've seen some really attractive growth that's happened over here over the warm climate. That housing growth continue to provide us new opportunities.

So as I had mentioned, the second area that we are focused on right now and have already started construction in the -- comprises of 4 communities centered around and including Coeur d'Alene, Idaho. And this is a very attractive demographic and has helpful growth rates that exceeds the national average. And so at the same time, it's also been underserved for broadband and that's the key for us. As we look at the incumbent carriers in those markets, they have not been investing in their networks and we feel that this is an opportunity to provide services that the customers in those markets demand. So yes.

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Operator [41]

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(Operator Instructions) Your next question comes from the line of Jennifer Fritzsche with Wells Fargo.

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Jennifer Fritzsche, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [42]

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Ken, I just wanted to kind of revisit said the C-band or mid-band question. If you're -- would you say that U.S. Cellular -- and sorry, if you've taken the stance, but has an issue with the C-Band Alliance proposal because it seems like it's really only geared towards national players. And I'm just wondering, it sounds like you agree with that but I want to confirm that.

And then a separate question on T-Mobile stand-alone, putting aside Sprint and DISH, are you seeing more -- a big fear for U.S. Cellular 1.5 years or so ago was that you're going to see more distribution points appear from U.S. -- or excuse me, T-Mobile in your market? Has that been any sort of disruptive effect that's been meaningfully worrisome?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [43]

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Okay. So going to the first question, C-band. Any proposal that doesn't have a lot of spectrum on the table, that doesn't have a lot of spectrum on the table quickly and isn't done in a way that gives midsized and smaller carriers access to it isn't one that is -- one I'm interested in. To the extent that there are ways that we can protect the interest of midsized and smaller carriers, we can talk about it. But you need a lot here, right? I mean if we're only going to put out a couple of hundred, it doesn't do the industry -- may do a lot for any 1 or 2 carriers, but it doesn't do anything for the industry. So that's about, I think, as far as I want to go on C-Band Alliance or any other thing.

On the distribution, no, we haven't seen a lot of new distribution coming online. As I said, we've got most of the brands in most of our cities today. So it's more -- my expectation is more about network build-out that it is just distribution. We haven't seen much of it yet.

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Operator [44]

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There are no further questions at this time. I turn the call back over to the presenters.

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Jane W. McCahon, Telephone and Data Systems, Inc. - Senior VP of Corporate Relations & Corporate Secretary [45]

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Great. I just wanted to thank everybody for joining us today. Let us know any follow-up questions and hope to see you over the next couple of months. Bye-bye.

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Operator [46]

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