U.S. Markets close in 5 hrs 9 mins

Edited Transcript of TDS earnings conference call or presentation 24-Feb-17 3:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Telephone and Data Systems Inc and United States Cellular Corp Earnings Call

CHICAGO Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Telephone and Data Systems Inc earnings conference call or presentation Friday, February 24, 2017 at 3:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jane McCahon

Telephone and Data Systems, Inc. - SVP, Corporate Relations

* Doug Shuma

Telephone and Data Systems, Inc. - SVP, Finance, CAO

* Ken Meyers

Telephone and Data Systems, Inc. - President, CEO, US Cellular

* Steve Campbell

Telephone and Data Systems, Inc. - EVP Finance, CFO, US Cellular Corporation

* Vicki Villacrez

Telephone and Data Systems, Inc. - VP, Finance, CEO, TDS Telecom

================================================================================

Conference Call Participants

================================================================================

* Ric Prentiss

Raymond James & Associates - Analyst

* Simon Flannery

Morgan Stanley - Analyst

* Sergey Dluzhevskiy

Gabelli & Co. - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings. Welcome to the TDS and US Cellular fourth quarter operating results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Jane McCahon Senior Vice President, Corporate Relations of TDS. Thank you, Ms. McCahon. You may begin.

--------------------------------------------------------------------------------

Jane McCahon, Telephone and Data Systems, Inc. - SVP, Corporate Relations [2]

--------------------------------------------------------------------------------

Thank you Tim. Good morning, and thanks for joining us. 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 sections of the TDS and US Cellular websites. With me today, and offering prepared comments are from TDS, Doug Shuma, Senior Vice President, Finance and Chief Accounting Officer, from US Cellular, Ken Meyers, President and Chief Executive Officer, and Steve Campbell, Executive Vice President and Chief Financial Officer, and from TDS Telecom, Vicki Villacrez, Vice President of Finance and Chief Financial Officer.

This call is being simultaneously webcast on the TDS and US Cellular Investor Relations websites. Please see the websites for slides referred to on this call, including non-GAAP reconciliations. As a reminder, we provide guidance for both operating cash flow and adjusted EBITDA, and for TDS Telecom these are basically the same number. For 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. Shortly after we released our earnings and before the call, TDS and US Cellular filed SEC Forms 8-K, including today's press release, and filed our SEC forms 10-K. Taking a quick look at the upcoming IR schedules, slide three, we will be presenting at the Deutsche Bank Conference on March 6th, and the Raymond James Conference on March 7th, and heading to New York and Boston with Gabelli on March 22nd and 23rd. Please let us know if you would like information about any of these events.

And please keep in mind that TDS has an open-door policy, so if you are in the Chicago area, and would like to meet with members of management, the IR team will try to accommodate you, calendars permitting. As has been our tradition on our year-end call, we would like to take a moment and recap our major accomplishments for this year just completed, as well to set forth our strategic priorities for the coming year. To begin I would like to turn the call over to Doug Shuma, to talk about TDS Corporate.

--------------------------------------------------------------------------------

Doug Shuma, Telephone and Data Systems, Inc. - SVP, Finance, CAO [3]

--------------------------------------------------------------------------------

Thanks Jane. Turning to slide four, we continue to execute on our strategic priorities, and work to understand and capitalize on the many significant changes that occurred last year. During 2016, we saw benefits from prior-year investments, and worked to manage our capital intensity, as revenue growth became harder to achieve. The foundation of the US Cellular's value proposition is network quality. They continue to invest in spectrum, capacity, and new technologies, such as VoLTE, which will provide a great customer experience, as well as opportunities for additional roaming revenue.

In speaking of Spectrum, I want to remind you about our inability to discuss the ongoing auction for 600 megahertz spectrum, known as Auction 1000. Although the clock phase has ended, the anti collusion rules are still in effect, and we are prohibited from speaking about it, and will not entertain any questions relating to Spectrum. At TDS Telecom, our fiber investments in wireline and network enhancements at cable are now driving the growth we expect from our broadband strategy. As we think about capital allocation at the TDS level not much has changed, we did not buy and cable assets for the past two years, nor did we repurchase any meaningful amount of TDS shares. We did, however, return value our shareholders in the form of $65 million in dividends, and this morning we announced a 5% dividend hike, our 43rd consecutive annual dividend increase.

In 2016, US Cellular repurchased $5 million of its shares. We continue to look for cable acquisitions that meet our criteria, and plan to continue to target our three to one ratio of investing in the business versus returning value to shareholders for the foreseeable future. We are also assessing the opportunities and risks associated with the change in administration in Washington.

As we will cover in greater detail, getting the A-CAM program for TDS Telecom across the finishing line was a significant victory. One that provides commitment for ten years of support, and helps us provide enhanced broadband services to some of our most remote customers. Recent comments by FCC Chair Pai seemed to support the need for enhanced broadband in rural America, and we will work diligently to pursue any opportunities. Of course, any initiatives to relieve regulatory burdens would be welcomed by all of our businesses. We will also follow closely any tax reform efforts, knowing full well the devil will always be in the details. Now I'll turn the call over to Ken Meyers. Ken.

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [4]

--------------------------------------------------------------------------------

Good morning. Let me start this morning talking about 2016. What a year. Steve will cover the financial results for both the quarter and the year in some detail. But I am going to start with some summary comments. First, I want everyone to know that I am very proud of what this organization accomplished in the face of extremely aggressive, and one might even say, uneconomic competition. The spirit and the customer focus exhibited by all of our associates is extraordinary, and I want to the thank them for their efforts.

Looking back at the guidance we issued a year ago, we met all of our targets, though I must admit we got there a bit different than I thought a year ago. Revenue, while within our expected ranges, was at the lower end, as competitive pricing and promotion activity impacted both average revenue per unit and customer growth. Given that environment, we focused on protecting our customer base, reducing costs, and closely managing our investments. As a result, we lowered both post-pay and pre-paid churn in 2016, and delivered a small increase in operating cash flow and adjusted EBITDA, when you put things on an apple-to-apple basis. I am going to let Steve explain that later.

Turning to slide seven, some of the key factors behind last year's results and the key accomplishments include, first, with switching activity in gross additions down for the industry, promotions became increasingly richer as the year wore on. While we continue to win back customers at a healthy rate, we chose to manage our promotional spend at a reasonable level. Offering uneconomic promotions is not part of our strategy.

An important priority for 2016 was to increase customer engagement. This is a priority across all areas of the Company, from the front line to the network engineers, groups throughout the organization had goals and incentives to focus on this critical measure. And we saw meaningful improvement for this metric for the year. We also worked hard to secure and then operationalize ORG LTE roaming agreements, to provide an improved experience when our customers travel outside of our footprint.

We want our customers to receive great service in the middle of anywhere, be that in our network or while traveling and using the network of one of our roaming partners. At the same time these new arrangements have significantly lowered our roaming expenses, despite meaningful increases in usage by our customers. Also I think it's noteworthy that while carefully managing our capital spend, we have maintained our leading network quality, as evidenced by numerous third-party awards, including the JD Power Award for Highest Network Quality.

Similarly, we strengthened other aspects of our operations while controlling our costs. Our customer service team continues to engage customers on their terms, be it live on phones from our own centers, via chat, or completely in a self-service mode. During the year this team both increased customer engagement and reduced costs. Throughout our distribution channels, we use technology to improve the customer experience, modified store design to enhance the shopping experience, and produced solid growth in other high-margin revenues like accessories and device protection. I'm especially proud of the work done with one handset partner, to launch a store-within-a-store volume in our high-volume stores, similar to what is seen in big box national retailers.

Turning to slide eight, our customer's satisfaction is strongly influenced by our network strategy. And we are working hard to manage the capital necessary to live up to our brand promise, of a network that works in the middle of anywhere. In addition to investing in the new products and services our customers want. Our 4G LTE network reaches 99% of our post-paid customers, providing an excellent network experience in our suburban and rural markets, as well as outside of our footprint, with 4G LTE roaming agreements.

We are also preparing to roll out our first commercial deployment of Voice over LTE, VoLTE, across Iowa this year. We expect to have VoLTE roaming agreements in place shortly, and turn on those services towards the end of the year. We have also tested fixed wireless technology with both 4G and 5G. We completed 5G trials designed for real-world scenarios in stores and outside, focused on fixed wireless broadband-type services. Our results were successful, and showed very promising speeds and low latency. We used 28 megahertz spectrum through an experimental license with the FCC. We can also offer a fixed wireless solution on 4G LTE, and we are undertaking some friendly user trials in a couple of our markets, to better understand how fixed wireless can best serve our customers today.

Looking forward, Slide nine, I'm beginning to become a little more optimistic about some of the things I see in the industry. I think some of the competitive actions I'm seeing in the marketplace, namely those by the market leaders, are just the type of action a market leader needs to take in order to have a disciplined market. So while price cuts, super aggressive promotions, and big increases in advertising all create substantial uncertainty for the short-term, I think they are good for the long-term market structure, and I expect or at least hope to see appropriate changes within the year.

So with a marketplace that is currently unsettled, here are some of our priorities for 2017. First and foremost, protect our base. This means continuing to offer an outstanding experience whenever the customer interacts with us, whether when using our network, visiting our stores, or contacting customer service through any of its channels. Our products and services need to be competitively priced. Given our position in the industry, we are price takers, as such, we announced unlimited plans this morning, that are available to new and current customers as of today. While I'm not fan of unlimited plans in our business, given the need to constantly invest in capacity, I'm heartened by the fact that they have not left it long when offered in the past. By my reckoning, this is at least the third time we've seen unlimited plans in this industry.

Second, we will continue to aggressively promote our products and services with economically justified offerings. Last year we made significant headway in building awareness of our product offerings, and expect that to continue in 2017. We made some real breakthroughs with both our ads themselves, as well as with some of our handset partners on their rules, which previously had the effect of limiting some of our advertising reach.

We also continue with our heightened focus on serving the small and medium-sized business customers, including local and regional government entities. This is still an underpenetrated market for us, and yet it's one perfect for us, given our local positioning. Our approach has been to lead with end-to-end solutions for these groups, to improve both connectivity and efficiency. And build those relationships over time to include a wide portfolio of products and services. This focus began in 2015, gained traction in 2016, and is one of our more significant revenue opportunities this year.

Third, we will continue to drive other sources of revenue. Accessory sales produce margins that today help support the costs of our retail channel. Device protection is especially important to customers, given today's equipment and installment plans. And we believe that both our current 4G and future VoLTE network offer the ability to serve other carriers roaming customers. We have seen in our own customer numbers how dissatisfied consumers are, when they don't get the same experience when they travel. And are now working with other carriers to solve this problem for their customers as they travel across our networks.

Also we're working with both legislators and regulators to ensure that, as an industry, we meet the federal mandate of delivery to rural areas, services that are reasonably comparable to those offered in urban areas. This is a huge responsibility, that requires significant funding over many years to achieve. And one that deserves thoughtful consideration in future infrastructure builds. How soon the competitive environment improves, and what funding will be available to support broadband in rural areas are unknown today. So we need to continue to drive improvements and our cost structure. It's something that's more in our control. Notwithstanding the positive changes of the last few years, today's environment requires we continue that work across all parts of our organization.

In our network area, we are capturing economies in back haul, as we move off of CDMA, and continue to evolve to an IP network. And we have identified more opportunities in our supply chain, and continue to work on distribution and service costs. I am proud of the accomplishments the teams achieved in these areas in 2016, and we are all committed to more success in 2017.

Slide ten. Besides continuing to focus on our costs, we'll also be prudent in managing our investments of capital, we will continue to invest in our network to provide additional capacity to meet the growing demands for data services, and to continue to provide better in-home coverage. We'll continue our multi-year commercial rollouts of Voice-over-LTE, anticipating our next commercial roll out in early 2018. And finally, we'll continue to test fixed wireless in real-life scenarios, to ensure that we can offer a fast, high-quality network that works whenever and wherever our customers need it.

Slide 11. While Steve will talk guidance in a few moments, I hope my comments will give you a better lens to understand our view. Short-term there certainly is uncertainty in pricing. I'm optimistic that these uncertainties will be resolved in the near future. This industry offers a highly valued and important service to consumers and businesses. The importance and value is growing, not diminishing, as we enter the world of connected everything. Delivering those services will require ongoing investments, to ensure availability whenever and wherever it is needed. And those investments in turn require adequate funding and returns. I believe we have the funding and resources needed to continue to serve our customers, as the industry resolves these uncertainties. In closing, I want to thank all of our associates for their hard work and commitment to our customers. Now let me turn the phone call over to Steve Campbell.

--------------------------------------------------------------------------------

Steve Campbell, Telephone and Data Systems, Inc. - EVP Finance, CFO, US Cellular Corporation [5]

--------------------------------------------------------------------------------

Thank you Ken. Good morning everyone. I'm going to begin with a few additional comments on connection activity, which is shown on slide 12 of our presentation today. We had 2,000 retail net additions for the fourth quarter of 2016, down from 75,000 net additions a year ago. In the pre-paid segment, net adds for the quarter were 4,000, compared to 7,000 a year ago. We achieved a nice increase of about 20% in pre-paid gross additions, but only a very small amount of migration from our post-paid base, but that impact was offset by modestly higher churn.

In the post-paid segment, we had a net loss of 2,000 connections. This was largely the result of lower gross additions, which decreased 22% year-over-year to 187,000, due to a combination of factors, including lower switching activity, and extremely aggressive promotional activity by other carriers. Post-paid churn was at 1.41% this quarter, compared to 1.31% a year ago. I'll provide a breakdown of churn for handsets versus connected devices in a subsequent slide. But let me mention here that for the year, post-paid churn improved from 1.39% to 1.31%.

Shown at the bottom of the slide there was a net loss of 25,000 post-paid handsets in the fourth quarter. That compares to the net loss of 2,000 hand sets in the prior year. However, we continue to have upgrades from feature phones, and including those upgrades, total Smartphone connections increased by 31,000 during the fourth quarter. We provide a little more information about Smartphones on the next slide. Smartphones represented 93% of total handsets sold this quarter, and Smartphone penetration increased to 79% of our base of post-paid handset connections, up from 74% a year ago.

As I said, we saw that some Smartphone additions this quarter were migrations from feature phones. Given the current Smartphone penetration level of 79%, we still have some additional opportunity to upgrade more of our remaining future phone customers to Smartphones, whether they're on post-paid or pre-paid plans, and drive additional data usage revenues. Our next slide shows the post-paid churn rate broken out between hand sets and connected devices.

Hand set churn was 1.23% for the fourth quarter of 2016, very much in line with the consistently low level experienced over the past several quarters. For the year, handset churn improved from 1.3% to 1.18%. Connected device churn spiked up a bit to 2.49% for the fourth quarter of 2016, which we expected to see as the penny tablet sold in connection with various promotions over the past two years began to roll off. For the year connected device churn also improved a bit, though, from 2.2% to 2.11%.

Now let's talk about our financial results, starting with revenues. Total operating revenues for the fourth quarter were $991 million, up very slightly essentially flat, compared to $987 million a year ago. In more detail, service revenues were $737 million, down $65 million from $802 million last year. The largest component of service revenues, retail service at $656 million, decreased by 8%, driven by lower than average revenue per user. The decrease in ARPU was partially offset by the impact of growth in our customer base. And I'll come back and say more about ARPU in a minute.

The other item contributing to a reduction in service revenues was lower roaming revenues, which declined by $9 million, primarily due to lower rates on data usage. Keep in mind, however, that while we experienced a reduction in inbound revenue, due to lower data rates, at the same time we benefit from lower rates on our outbound data roaming traffic. For the fourth quarter of 2016, the benefit to outbound roaming expense due to lower data rates, was 2 times the rate related reduction in revenue. Equipment sales revenue grew 37% to $254 million, driven by higher equipment installment plan sales. Percentage of post-paid device sales on installment plans increased to 81% in the fourth quarter, that compared to only 53% a year ago. We expect the installment plan take rate will continue to increase, given that the majority of our retail device sales are now being done on installment plans.

Next as I said, I want to say a few more words about our post-paid revenue metrics. Post-paid ARPU was $45.19, down 12% year-over-year. Reflecting overall industry price competition, a continued migration to unsubsidized equipment pricing, and the growth in connected devices which have lower average revenues. Arguably, the reported decrease in ARPU is somewhat overstated, as it reflects the reduction in service revenue that accompanies the migration to an unsubsidized equipment pricing model. But it excludes the offsetting equipment installment plan billings to customers. The average billings per user, which includes those billings, provides a better representation of the total amount of revenue being collected from customers every month. This more inclusive measure shows a decrease of only 5% year-over-year, less than half the 12% decrease shown above.

Average revenue per account benefits from the increase in connections per account, which grew by 4% year-over-year. Fourth quarter average revenue per account was down 9% year-over-year. However, average billings per account decreased by about 1% year-over-year. We expect that there will be some continuing downward pressure on service revenues, but that equipment sales revenues will continue to grow, as more of the customer base moves to unsubsidized equipment pricing.

Operating cash flow for the fourth quarter of 2016, shown on Slide 17, was $130 million, compared to $136 million a year ago. The small decrease is the net effect of essentially flat, total operating revenues, offset by a 1% overall increase in total cash expenses. This small increase in expenses was driven by higher cost of equipment sold, reflecting both a greater proportion of Smartphones in the sales mix, and an increase in the average cost per unit.

Expenses in the other major categories were essentially flat year-over-year. Adjusted EBITDA, shown next, incorporates the earnings from our equity method partnerships, along with interest and dividend income. Adjusted EBITDA for the quarter was $177 million, the same as last year. Earnings from unconsolidated entities were $30 million, including $14 million from the Los Angeles partnership. Interest and dividend income totaled $16 million, and that consisted largely of imputed interest income on equipment installment plans.

Although the primary focus of our call today is the fourth quarter results, I want to take just a minute to review our results for the full year, which are shown on Slide 19. At the top we showed total operating revenues, operating cash flow, and adjusted EBITDA for the year on an as-reported basis. However, note that the year-to-year comparisons are affected by two discreet items. In 2016, operating cash flow and adjusted EBITDA were reduced by a charge of $13 million, related to the termination of a naming rights agreement. In 2015, on the other hand, total operating revenues, operating cash flow, and adjusted EBITDA were increased by $58 million, related to termination of the rewards program. The numbers at the bottom of the chart exclude the impacts of these discreet items. On this basis, total operating revenues for the two years were flat, actually the same. Operating cash flow and adjusted EBITDA increased by 2% and 4% respectively. Ken said in his comments earlier, these results are not where we want to be long-term, but they do show at least modest improvement in profitability, and are indicative of our attention to managing costs and investment in today's unsettled industry environment.

Next, I want to cover our annual guidance for 2017, which is shown on Slide 20 of the presentation. For comparison we're showing our 2016 results, both as reported and adjusted for the naming rights termination. Also note that we'll be making a change in 2017, related to the classification of imputed interest expense on equipment installment plans. Going forward that interest will no longer be reported below the operating income line in interest in dividend income, but rather will be included in service revenues, consistent with the approach that has evolved, and now being followed by most industry participants. So for 2017 then for total operating revenues, we expect a range of approximately $3.8 billion to $4 billion, reflecting the unsettled competitive environment, both in terms of pricing and promotion-driven subscriber groups.

For operating cash flow we expect a range of $500 million to $650 million. That estimate flows through to the estimated range for adjusted EBITDA, which is $650 million to $800 million. Of course to the extent that we achieve a lower level of customer growth than currently estimated, for if the competitive environment moderates, we'd expect our results to be in the upper portion of these ranges. On the other hand, to the extent that we're successful in attracting a higher level of customer growth than currently estimated, or the pricing environment worsens further, we would expect results to be in the lower portions of the ranges. Capital expenditures are expected to be about $500 million, and included here is spending associated with our continued deployment of VoLTE.

I want to make just a couple comments about US Cellular's cash flows and liquidity. Cash flows from operating activities for 2016 were $501 million, while cash used for investing and financing activities totaled $630 million, resulting in a net decrease in cash and equivalents of $129 million. 2016 there was a resumption of cash distributions from the Los Angeles partnership, with $29 million in total distributions for the year. And you'll recall that there had been no distributions the previous year.

As of December 31st, cash and cash equivalents totaled $586 million, in addition to these existing balances, US Cellular had $298 million of unused borrowing capacity under its revolving credit facility. We believe that these resources are sufficient to meet our operating investing and debt service requirements for the remainder of this year. We also noted in the Form 8-K filed last week, that we expect to meet our remaining obligations related to Spectrum purchased in Auction 1002, with cash on hand and/or drawing on the revolving credit agreement. Now I will turn the call over to Vicki Villacrez, to talk about TDS Telecom.

--------------------------------------------------------------------------------

Vicki Villacrez, Telephone and Data Systems, Inc. - VP, Finance, CEO, TDS Telecom [6]

--------------------------------------------------------------------------------

Thank you Steve. Good morning, everyone. I'm excited to share our 2016 accomplishments with you, and then I'll outline our strategic priorities for 2017. As you know, the common strategy for our wireline and cable businesses is to offer the best broadband connection in the market, and use that advantage to grow high-margin broadband services, bundled with both video and voice products. The strategy allows us to leverage our expertise and infrastructure across both segments.

On Slide 22 on our wireline business, we have continued our focus on driving fiber to the home connections, to provide the most competitive broadband service and related products, which has led to growth in both broadband and IPTV connections. Our wireline full year 2016 residential revenue increased 4%. By the end of 2016, we had deployed fiber to the home to 22% of ILEC service addresses. Fiber technology allows us to provide Internet speeds of up to 1 gigabit per second. To further strength the broadband offering, we have deployed copper bonding technology, to an additional 20% of our ILEC service addresses, to drive higher speeds in the middle tier ILEC markets.

Our IPTV product, called TDS TV, is an important offering, that leverages our high-speed network, improves ARPU and reduces churn through attractive bundling. We now have launched TDS TV in 28 markets, enabling 190,000 service addresses, which is roughly 26% of our total footprint. We have been focusing on bundling IPTV and high-speed broadband to drive higher penetration in these markets. One positive side effect of the increased Triple Play bundle, is that it has moderated the losses of legacy voice lines. The year-over-year decrease in ILEC residential voice connections was only 2%.

One of our big successes in 2016 comes in the area of Universal Service Funding. Recall the that the FCC announced a modified USF mechanism for providing rate of return carriers with support funds, to extend broadband services to unserved and underserved areas. We have chosen the Alternative Connect America cost Model, commonly known as A-CAM. In August, as you know, we received an initial offer from the FCC for $82 million of support revenue annually for ten years. However, due to insufficient funding levels to meet the demand of carriers electing the A-CAM option, the FCC made revised offers to carriers in December.

Under the revised offer, which we accepted in January, TDS will receive $75 million of support revenue annually for ten years, replacing approximately $50 million of annual support that we received in 2016. In 2017 we will also receive $7 million in transitional support funds in certain states, bringing our total 2017 support to $82 million.

Unlike the legacy program, this support comes with an obligation to build defined broadband speeds to reach approximately 160,000 locations. The revised offer to TDS maintained the obligation to build the defined broadband speed to the same number of locations. However, the speed requirements for certain locations were reduced. The FCC conditioned the acceptance of the revised offer, upon a requirement that carriers meet the terms of the initial offer if additional support becomes available in 2017. Buildout obligations under this program will require capital expenditures over the ten-year period that may be significant. Our estimated buildout costs will be incorporated into our capital expenditure guidance we provide each year. And for 2017, we expect that amount to be approximately $36 million. In general, we expect our A-CAM capital spending to be somewhat front-end loaded during the life of the program.

In our cable business, Slide 23, our investment thesis is around monetizing the growing demand for high-quality broadband services. We continued to make capacity investments in line with our strategy to increase broadband penetration in those markets. Our cable full year 2016 revenues increased 6%, primarily as a result of those broadband investments. In 2016 we completed an important project called analog reclamation. This initiative transitioned our analog cable markets to an all-digital video service, which provides an improved customer experience, and allows reclaimed spectrum to be used to provide higher broadband speeds. We are now offering 300 megabit service in our largest markets, which cover more than half of our cable service addresses. Our improvements in the network, product offerings, and customer experience, are driving strong growth in broadband and voice connections.

For our hosted and managed services business, we continue to execute the vision we have for profitably serving the IT outsourcing needs of mid-market customers. In 2016 we expanded our offerings, to provide customers with a choice of services, ranging from private to public cloud solutions, combined with our co-location services. While our recurring service revenue growth is still below our expectations, we remain focused on improving our sales performance.

Looking ahead to 2017, Slide 24, our strategic priorities remain the same. In the wireline business, we will focus on increasing penetration in the markets where we have already deployed fiber. And continue to modestly deploy fiber where it's strategically and economically makes sense, and where our costs and demographic metrics support the business case. We will leverage our copper bonding deployments to drive penetration of higher speeds, and IPTV in certain ILEC markets. And we will begin executing on our broadband buildout obligations under A-CAM, and certain state broadband programs.

Other elements of our strategy include our continued focus on providing exceptional customer service, the influential and regulatory reform issues, and managing our costs. For cable we will continue to make success based capacity investments to increase broadband penetration, bringing speeds of 300 megabits or greater over DOCSIS 3.0 technology to additional markets. We also expect to continue growing customer penetration levels by enhancing our offerings, including leveraging wireline products and services.

In addition to focusing on our existing cable markets, we have also been evaluating acquisition opportunities in the cable space. And as Doug said earlier, although we did not make any cable acquisitions in 2016, we will continue to pursue cable acquisitions that have favorable, competitive environments, attractive market demographics, and the ability to grow broadband penetration. And finally for our HMS operations in 2017, we are very focused on continuing to develop our hybrid cloud strategy, a selling solution, tailored to customers' needs to drive service revenue growth. And on the cost side of our business, we are committed to further optimizing our operations to improve profitability.

Now let's turn to our fourth quarter operating results on Slide 25. TDS Telecom's total operating revenues were flat. Cash expenses were down 1%. As a result, adjusted EBITDA on a consolidated basis was up 1% to $72 million in the quarter. In addition, capital spending was down by $28 million, and as a result, free cash flow improved significantly in the quarter.

Beginning with wireline on Slide 26, investments in our network, and efforts to make higher broadband options available to customers, continued to drive growth in both IPTV and broadband connections. Looking at the metrics on the bottom of the slide, you can see IPTV connections grew 32%, adding 10,900 compared to the prior year. And we added 1,100 residential broadband connections. We are offering a variety of speeds up to 1 gig service in all IPTV markets, and the uptake on IPTV has grown steadily, and is now at an average penetration rate of 30% of residential service addresses.

It is important to remember 96% of our IPTV customers, and 37% of our total ILEC residential customers, subscribe to Triple Play bundles. This results in a low churn rate and continues to increase average revenue per connection, now up 3% on a normalized basis, to 44.27 in the quarter. Reflecting both our fiber and bonded copper deployments, residential broadband customers in these ILEC markets are continuing to choose higher speeds, with 53% choosing speeds of 10 megabits or greater, and 22% choosing speeds of 25 megabits or greater, which also contributes to the higher ARPUs we have experienced.

Now moving to Slide 27. Wireline results were solid, please note that the 2015 ILEC divestitures reduced revenues and expenses about 1%. As reported, residential revenues increased 8% and 3% on an adjusted basis for one-time items in 2015. Growth in IPTV and broadband more than offset the decline in legacy voice services. Speaking to commercial revenue, we saw a 5% decrease, although managed IP connections continue to grow. Wholesale revenues, which include regulatory support decreased 5% in the quarter, as expected.

Total wireline service revenues held even with the prior year at $174 million. Wireline cash expenses also were flat, compared to last year, as increases in employee-related expenses and IPTV programming costs, were offset by the reduced costs of provisioning legacy services. As a result, wireline adjusted EBITDA was also relatively flat, compared to the prior year. As we have stated in our strategy, we planned for capital intensity to decline this year, as we completed the majority of our planned fiber buildouts. In the quarter, capital spending declined $24 million, which has resulted in a significantly high free cash flow, compared to prior year.

Moving to the cable segment, Slide 28 shows cable connections grew 12,000, or 4%, to approximately 292,000. On the residential side, connections increased driven by a 14% growth in broadband, and a 7% growth in voice. The residential broadband connection growth drove a 400 basis point increase, and broadband penetration. Although total commercial connections declined, due to a drop-off in video related to analog reclamation, broadband itself grew 13%.

On Slide 29 total cable revenues grew 13% to $49 million, reflecting another quarter of strong broadband subscriber growth. Our investments in the cable network and products and services, coupled with our rebranding efforts, all contribute to an improved customer experience, and are generating this revenue growth. Cash expenses increased 16% due to higher employee expenses, network maintenance, and video programming costs. As a result, cable adjusted EBITDA increased 6% .

Turning to the HMS segment and speaking to both Slides 30 and 31, HMS had a soft quarter, primarily due to the timing of low margin equipment revenue. In total, HMS revenues decreased 10% in the quarter. This was driven by a 16% decline in equipment revenue year-over-year. Service revenues also decreased 2% from fewer professional services and installations, which primarily track with our equipment sales. Hosting revenues were flat in the quarter, as higher customer churn and compression offset revenue growth. Cash expenses were down 10%, compared to the same period in the prior year, primarily due to lower cost of goods sold. Other expenses were also down, reflecting lower service revenues and cost containment efforts. Adjusted EBITDA was flat year-over-year. However, for the full year 2016, HMS adjusted EBITDA increased $3 million, and free cash flow turned positive.

Since this is the year-end, let me briefly highlight our results for the full year on Slide 32. In total, we ended the year with revenues of $1.15 billion, down 1% from the prior year as reported, and flat after excluding divestiture impacts. This was in line with our expectation. Adjusted EBITDA of $298 million was down $8 million, or 3% from 2015, yet was at the upper end of our guidance range.

Capital expenditures were $173 million, slightly below our guidance of $180 million. These results are a reference point for our 2017 guidance, which I will walk you through on Slide 33. So turning to guidance, we are forecasting revenues of $1.2 billion to $1.25 billion, which incorporates the impact of A-CAM. For wireline, we anticipate the growth in IPTV, broadband, and A-CAM revenues, to more than offset the declines in our legacy voice and commercial revenues. We expect total wholesale revenues to increase from the A-CAM support, offset to some degree by continued declines in intercarrier compensation rates, and lower minutes of use. We expect cable revenue growth in the high single digits, reflecting continued strong growth in broadband, and we expect HMS revenue growth in the mid-single digits.

Adjusted EBITDA is forecast to be within a range of $300 million to $340 million, contributions from wireline growth initiatives and A-CAM, coupled with cable and HMS operations, will more than offset pressures in the legacy wireline business. And overall, we expect some margin improvement with this growth. Capital expenditures are expected to be approximately $225 million in 2017. Wireline CapEx, which is about two-thirds of our total spend, includes A-CAM spending of approximately $36 million, state broadband buildouts, and modest fiber deployments. The cable capital budget includes funds for success-based growth, and HMS CapEx growth is due to one data center expansion in 2017.

At TDS Telecom we are very pleased with the support we are receiving on the regulatory front, to provide necessary broadband service to the most rural areas of our markets. And we are hopeful that the FCC will secure additional funding for the A-CAM program in 2017. We are proud of the progress we have made in our strategic areas of focus that will enable us to grow profitably. I would like to take this time to thank all of our employees who have contributed to our success. I will now turn the call back over to Jane.

--------------------------------------------------------------------------------

Jane McCahon, Telephone and Data Systems, Inc. - SVP, Corporate Relations [7]

--------------------------------------------------------------------------------

Thanks Vicki. Tim, we're ready for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions). Our first question comes from the line of Ric Prentiss of Raymond James. Please proceed with your question.

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [2]

--------------------------------------------------------------------------------

Thanks. Good morning.

--------------------------------------------------------------------------------

Jane McCahon, Telephone and Data Systems, Inc. - SVP, Corporate Relations [3]

--------------------------------------------------------------------------------

Good morning, Ric.

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [4]

--------------------------------------------------------------------------------

A couple questions on the 2017 guidance at the US Cellular side. Steve, I think you said that depending on kind of where as we're at and competition would take you to the lower, higher end. Looking at the actual results in 2016, is that kind of the baseline for the mid-point as far as your gross adds and net adds? Just trying to get a factoring in of what you think the range is of subscriber growth, and then also on the competition side, what your underlying assumptions are, what ARPUs might look like?

--------------------------------------------------------------------------------

Steve Campbell, Telephone and Data Systems, Inc. - EVP Finance, CFO, US Cellular Corporation [5]

--------------------------------------------------------------------------------

So, yes, going into the year I don't know that customer growth is expected to be much different than this year. Whether it be at the gross or net level. The second part of the question was?

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [6]

--------------------------------------------------------------------------------

The competitive environment as you look at the guidance you've given, what are the thoughts about what's baked into that as far as costs, like subscriber acquisition costs from promos, or further ARPU pressure. Just trying to think how to moderate that thought of what would cause competition to be seen as more moderating, versus more intense?

--------------------------------------------------------------------------------

Steve Campbell, Telephone and Data Systems, Inc. - EVP Finance, CFO, US Cellular Corporation [7]

--------------------------------------------------------------------------------

So, well, I don't know if I can answer that. Let me try it this way. I think competition is at that point where the big guys are stepping in now, and saying let's get some discipline here. So I'm hoping to see some rebound in pricing by the end of the year. A rebound is not baked into the numbers. But I think that as fast as things are moving in this industry right now, it's an area that we just need to watch.

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [8]

--------------------------------------------------------------------------------

Okay. And then when we look at the margins then, and obviously you're moving stuff to the revenue items. But the operating cash flow margins are still in the mid-teens. As you think going forward, what would your target be, as far as where margins could get back to, and what timeframe would be involved in getting there?

--------------------------------------------------------------------------------

Steve Campbell, Telephone and Data Systems, Inc. - EVP Finance, CFO, US Cellular Corporation [9]

--------------------------------------------------------------------------------

Until we get the stability in pricing, Ric. I can't even guess at that number.

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [10]

--------------------------------------------------------------------------------

Okay. And final question for me is, then are you seeing any overbuilding of your markets from T-Mobile or Sprint, and can you update us as far as what market shares Sprint and T-Mobile have averaged across your footprint?

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [11]

--------------------------------------------------------------------------------

Yes, sure. We have not seen significant overbuilding from either of those. In fact, we talked about the question has come up in the past about overbuilding with T-Mobile. And they've been using the 700 megahertz A license in most our markets. Not all, but most of our markets, that's the license that we have. In fact, we have 4G roaming agreements with both of those carriers, to help make sure that their customers get the service, wherever it is that they travel. So we aren't seeing a lot. I mean, we're seeing a little bit from the metro side, in terms of prepaid. But in terms of kind of the post-paid business, not a lot right now.

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [12]

--------------------------------------------------------------------------------

And as far as market shares, is there kind of a ballpark market share those guys have in your territory?

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [13]

--------------------------------------------------------------------------------

Gosh, the last numbers I saw for T-Mobile were still single digit. And Sprint not significantly changed from the last time we looked at it either. Not big moves.

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [14]

--------------------------------------------------------------------------------

Okay. So the competition is really maybe driven by Sprint and T-Mobile affecting the bigger two carriers, and then you competing directly up against the bigger two?

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [15]

--------------------------------------------------------------------------------

That is still the main formula. We both lose most of our, the highest number of ports that we lose go to Verizon, and the highest number that we get back come from Verizon. With AT&T being number two, those are our top two competitors. It's when they have to respond to things that are being done in the larger markets, that we feel that since everything is done on a national basis, particularly in our markets.

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [16]

--------------------------------------------------------------------------------

One final one on the guidance. What percent of your base is on EIP? That helps us understand when service is shifting to equipment, or revenue might stabilize. Where are you at, I know you've been doing 80% or so on the sales. Where are you on the base?

--------------------------------------------------------------------------------

Steve Campbell, Telephone and Data Systems, Inc. - EVP Finance, CFO, US Cellular Corporation [17]

--------------------------------------------------------------------------------

In terms of the penetration of the base, right around the 40% mark at this time.

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [18]

--------------------------------------------------------------------------------

We could see it still continuation of pressure there throughout 2017, but maybe more stabilization in 2018?

--------------------------------------------------------------------------------

Steve Campbell, Telephone and Data Systems, Inc. - EVP Finance, CFO, US Cellular Corporation [19]

--------------------------------------------------------------------------------

We definitely see a small increase I think in percent on EIP. Remember that we announced that in the retail sales will be primarily EIP going forward. So the percent of sales will grow, and we expect to see that penetration in the base grow with it over the next year plus.

--------------------------------------------------------------------------------

Ric Prentiss, Raymond James & Associates - Analyst [20]

--------------------------------------------------------------------------------

All right. Thanks, guys.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from the line of Simon Flannery of Morgan Stanley. Please proceed with your question.

--------------------------------------------------------------------------------

Simon Flannery, Morgan Stanley - Analyst [22]

--------------------------------------------------------------------------------

Great. Thank you very much. Good morning. So on the unlimited plan that you rolled out today, can you just talk about how the roaming will work? Is there going to be limitations on out of market roaming, is that potentially going to squeeze your margins if you have people who are using a lot more data, they're watching TV when they're in New York, or something like that? And how do we think about optimization, are there people on bigger bucket plans who may be paying more, that might have an opportunity to trade down to this, so there might be some dilution from that?

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [23]

--------------------------------------------------------------------------------

We'll try a couple of things there, Simon. One, there is, in fact, a limit on the roaming side. But what we've seen over the last year is as customers get faster speeds, as they roam now in 4G, that outbound roaming has grown faster over the last year, but only getting back to kind of more historic levels, somewhere in the 5%, 6% of total usage. So I haven't seen that shift dramatically, in terms of they still travel the same amount of time. Therefore, still use the same percentage of their total use on network or off network. Secondly, as Steve talked about, with the 4G roaming agreements that we've put in place, we've seen substantial reductions in the cost per unit of megabytes, gigabytes, whatever. Which will mitigate some of the risk around that margin compression.

--------------------------------------------------------------------------------

Simon Flannery, Morgan Stanley - Analyst [24]

--------------------------------------------------------------------------------

Okay. And has there been any marked impact from the Verizon Unlimited move last week? I know it's early days. Do you view that as a, obviously you've matched it. But do you view that as a major change in market dynamics from what you've seen so far?

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [25]

--------------------------------------------------------------------------------

Too soon to really see much impact at all. The organization moved unbelievably fast to get that into the marketplace, so there wouldn't be an impact to our customers. Getting back to that first point around protecting our customer base. Now in terms of do I think it's a shift, I think it's a message, a signal. You want to do this, we're going to do it, too. And, oh by the way, we're going to do it on high-quality networks, and everything else. Long-term I don't think it's sustainable by anybody. I am not in the business to keep investing in capacity, which is why I think we've been at the door a couple of times in the past, and eventually have pulled away. I think that's what I am expecting to see here, too.

--------------------------------------------------------------------------------

Simon Flannery, Morgan Stanley - Analyst [26]

--------------------------------------------------------------------------------

Okay. And any change to your long-term view about being a regional provider? Obviously you sort of gave some guidance here about subscriber trends continuing, but you're one of the few remaining regional providers here. How do you think about long-term, should you be open to consolidation approaches if they came?

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [27]

--------------------------------------------------------------------------------

We have said for many, many, many years we've got long-term shareholders, that are very interested in being long-term player in this industry. They have got their SEC forms, whatever they are, Doug. What is it? It's on file. Unless they have changed their view, and there's no indication that they are, we will continue to do exactly what we're doing today.

--------------------------------------------------------------------------------

Simon Flannery, Morgan Stanley - Analyst [28]

--------------------------------------------------------------------------------

Great. Thank you.

--------------------------------------------------------------------------------

Jane McCahon, Telephone and Data Systems, Inc. - SVP, Corporate Relations [29]

--------------------------------------------------------------------------------

Tim, we have time for one more question, please.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

And our final question will come from the line of Sergey Dluzhevskiy of Gabelli & Company. Please proceed with your question.

--------------------------------------------------------------------------------

Steve Campbell, Telephone and Data Systems, Inc. - EVP Finance, CFO, US Cellular Corporation [31]

--------------------------------------------------------------------------------

Hi, Sergey, good morning.

--------------------------------------------------------------------------------

Sergey Dluzhevskiy, Gabelli & Co. - Analyst [32]

--------------------------------------------------------------------------------

Good morning. Just I guess a two-part question on the wireless side. So on margins, and I understand that given the uncertainty on pricing, you are reluctant to provide longer-term guidance. But from your perspective, from cost management perspective, could you provide more examples, or greater clarity on what costs markets are you taking in 2017, maybe 2018? And the second part of my question is on towers, obviously you have a large tower for you are the fourth largest tower company, or tower in the country. What are your thoughts on realizing greater value from this portfolio, either organically or from potential of selling this portfolio, or spinning it off to shareholders?

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [33]

--------------------------------------------------------------------------------

Thanks, Sergey. So in terms costs it is across the board, the network guys actually have done a really good job this year, in terms of managing some of the back haul investments, and I expect that we are going to see more change in that area, especially as more and more of our traffic moves off of CDMA. At the same time we have, from when I look at it, 84% of all of our cash expenditures are outside the Company, meaning not personnel, not salary and wages. So we're working with all of our vendors, in terms of how do we sharpen our advertising spend.

How do we negotiate different discounts out of our handset, and on the reverse logistics side. We've been making changes on the commission side within our own distribution. And continue to optimize that. So it's across the board. It's not any one area. I can look at customer service last year, and say that millions came out of that area last year. As we put different technology in, as well as we give customers choices in terms of how to interact with us. None of those initiatives are going to stop.

As we look at towers, boy, on one hand I think year-over-year revenue is up 8%. And understand that the towers still are a major, major underpinning to our network quality, and how we get to migrate from LTE to VoLTE in a cost-effective way. In certain cases in order to mitigate the change in coverage, that one gets going from the CDMA voice to Voice-over-LTE, we've had to go and install equipment on top of towers. That means that the top of the towers isn't an area that we're willing to rent out to somebody.

So as we try to maximize revenue there, let's maximize it within the constraint, that the primary purpose of those towers is to ensure the flexibility we need to maintain network quality. It's not about trying to get the most money out of those towers, and then get in the way of our network strategy. So in effect there's a constraint in terms of that, not within that constraint, it would continue, it is up 8% year-over-year, we're going to continue to monetize that again more next year, but within the confines of not getting in the way of our network strategy.

--------------------------------------------------------------------------------

Sergey Dluzhevskiy, Gabelli & Co. - Analyst [34]

--------------------------------------------------------------------------------

Do you see any benefits to structuring your tower company maybe as a standalone, maybe even fully-owned subsidiary under US Cellular, but more for separate company, within your structure?

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [35]

--------------------------------------------------------------------------------

Not if it changes that constraint, right. If I were to put that, if I gave one person the charge to optimize that, and the optimization of those tower rent, which is what a revenue stream of $60 million. So let's say that person grew that by 20% next year, up dramatically from the 8%, that's $12 million. Okay. It would cost a lot more than that $12 million on the network side to deliver the quality we need, if the towers take priority, tower rent takes priority over network. So network is job one, and then optimize tower rental economics within the constraint of network quality being job one.

--------------------------------------------------------------------------------

Sergey Dluzhevskiy, Gabelli & Co. - Analyst [36]

--------------------------------------------------------------------------------

Okay. Thank you.

--------------------------------------------------------------------------------

Ken Meyers, Telephone and Data Systems, Inc. - President, CEO, US Cellular [37]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

--------------------------------------------------------------------------------

Jane McCahon, Telephone and Data Systems, Inc. - SVP, Corporate Relations [39]

--------------------------------------------------------------------------------

We would like to thank you all for joining us, and we are around for questions for the rest of the day. Have a great one.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

This concludes today's conference. You may disconnect your lines at this time, and have a wonderful rest of your day.