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Edited Transcript of TDS earnings conference call or presentation 3-May-19 2:00pm GMT

Q1 2019 Telephone and Data Systems Inc and United States Cellular Corp Earnings Call

CHICAGO May 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Telephone and Data Systems Inc earnings conference call or presentation Friday, May 3, 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

* Jay M. Ellison

United States Cellular Corporation - Executive VP & COO

* 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

* Steven T. Campbell

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

* Steven T. Campbell

United States Cellular Corporation - Executive VP of Finance, CFO, Treasurer & Director

* Vicki L. Villacrez

TDS Telecommunications Corporation - CFO & Senior VP of Finance

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Conference Call Participants

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* Michael Rollins

Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst

* Richard Hamilton Prentiss

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

* Sergey Dluzhevskiy

G. Research, LLC - Research Analyst

* Simon William Flannery

Morgan Stanley, Research Division - MD

* Zachary Alan Silver

B. Riley FBR, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning. My name is Adam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the TDS and U.S. Cellular First Quarter 2019 Earnings Call. (Operator Instructions) Thank you. 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, Adam, and good morning, everyone, and thanks for joining us.

As you notice, we released our results and posted all of our documents to the IR section of our website yesterday after the close to give you a little more time to digest. So let us know if you found that helpful.

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 Financial Officer; and from TDS Telecom, Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer.

This call is being simultaneously webcast on the TDS and U.S. Cellular Investor Relations websites. Please see those websites for slides referred to on this call, including non-GAAP reconciliations. We provide guidance for both adjusted operating income before depreciation and amortization, or OIBDA, and adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, to highlight the contributions of U.S. Cellular's wireless partnerships.

As shown on Slide 2, the information set forth in the presentation and discussed during this call contains statements about expected future events and the 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 after the close, including its press releases in addition to our SEC Forms 10-Q.

On the accounting side of the house, we adopted ASC 842 for leases on January 1, 2019, using a modified retrospective method. This new accounting standard led to the balance sheet being grossed up by about $1 billion with no impact to the income statement.

Also, now that we have been selling equipment installment plans since 2014 and penetration is up to 74% of the postpaid base, we are no longer -- we no longer find that APU and APA, excuse me, are as meaningful and we'll no longer be providing those. We will continue to provide ARPU and ARPA.

Before turning the call over, I do want to remind everyone that the anti-collusion rules are still in effect, and we are unable to respond to any questions related to FCC auctions.

And now I'll turn it over to Ken Meyers. Ken?

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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 your interest today.

Overall, I'm generally pleased with the -- how the first quarter has turned out. Service revenues and cash flow, better known as adjusted operating income before depreciation and amortization, are actually above our targets. Subscriber activity is a bit better than last year, but still not at the levels I'd like to see; and equipment revenues are lower than expected, consistent with industry trends, and that shortfall has minimal bottom line impact. Steve will go in detail on all of these in a bit.

Finally, our network modernization plans are on target, albeit we are in one of the less busy quarters from a network build standpoint.

Speaking of the network, I'm very proud of the job our team has done to ensure the communities and customers impacted by late winter storms and flooding have had access to vital wireless services when they were most needed. Thank you, team.

Now looking back at the priorities we set for the year, strengthening and growing our customer base continues to be our top priority. We continue to strengthen our base through initiatives aimed at improving their roaming experiences, continuing to roll out voice over LTE and through unique value offerings like our Unlimited Plans with Payback. As evidence of our success, we need to look no further than churn, which remains low, and the recent growth in average revenue per user.

In terms of growing our customer base, as most of you know, the first quarter tends to be seasonally -- a seasonally slower quarter, and our plans are built reflecting that reality. In the first quarter, we did a little bit better than last year in terms of gross and net adds, but we need to drive more growth. We are targeting to grow handset subscribers for the year, but we expect connected devices to continue to show the effect of penny tablets churning off.

Our prepaid product line has suffered from the loss of some suppliers of lower-priced phones and gaps in the product set. Both of these issues should be behind us by the end of the current quarter. And as such, I expect a stronger second half for that product, which is in line with our full year expectations.

Service revenue, especially average revenue per user, is one of the highlights of the quarter, reflecting both the success for a sales point of our Total Plans and the success in helping customers understand the value and importance of services, like device protection, especially at a time of increasing device cost and complexity.

Roaming also contributed to the year-over-year growth in service revenues. And now in the third year of our cost reduction efforts, the organization remains focused and continues to deliver. Just as 1 example, despite data usage increasing 37%, systems operation expense was actually down 1%. We continue to identify and work on cost savings opportunities across the company.

The company's focus on these first 3 strategic imperatives produce strong financial results for the quarter, with a $17 million increase in service revenues and a 6% or almost $13 million increase in operating cash flow; again, adjusted operating income before depreciation and amortization.

Turning to the network. We continue to believe that network performance is a key driver of our customer satisfaction, and we are investing on many fronts. First, we're investing to meet the increased amount of data usage on our network. At the end of March, 67% of our postpaid customer base was on Total Plans and 30% on unlimited plans. We expect data usage to continue to drive capital investment for increased capacity. Second, we are on track to roll out voice over LTE to our New England and mid-Atlantic markets later this year. And third, we are executing on our network modernization program, which will enable our first 5G commercial launches in 2020. We believe the investments we are making now to ready our network for 5G will also provide benefits, such as increased speed and capacity.

Our first 5G markets will be using our 600 megahertz spectrum with the expectation that we will to augment that in the future with mid- and high-band spectrum.

And last, to grow our business, we are expanding our footprint and edging out into Northern Wisconsin and Sioux City later this year.

As you can see, our network engineers are managing a number of concurrent projects that are all very important to the organization. And even with spending $102 million in the first quarter, many of these projects will be implemented in the second half of 2019, so we expect our spend to ramp up throughout the year.

Now with that, let me turn the call over to Steve Campbell. Steve?

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Steven T. Campbell, Telephone and Data Systems, Inc. - Executive VP & CFO of US Cellular [4]

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Thank you, Ken, and good morning, everyone. I'll begin my comments by talking about postpaid connections.

As shown on Slide 5 of the presentation, total postpaid gross additions for the first quarter of 2019 were 137,000, up 6% year-over-year. Gross additions of both handsets and connected devices were higher year-over-year. The increase in gross additions was partly offset by slightly higher disconnects that drove a modest improvement in net postpaid activity on a year-over-year basis. We ended the quarter with 4.4 million postpaid connections, which represented 90% of our total retail base.

Postpaid handsets are our primary focus, so let's go next to that detail. Postpaid handset gross additions and net losses for the first quarter were 102,000 and negative 14,000, respectively, both improving year-over-year, albeit, as Ken mentioned a bit earlier, not at the level we'd like. The increase in handset gross additions resulted from more aggressive promotions offered in the first quarter of 2019 compared to the prior year.

We continue to have handset customers upgrading from feature phones to smartphones. That helps to drive more service revenue given that ARPU for a smartphone is running about $22 more than for a feature phone. Including the upgrades, total smartphone connections increased by 12,000 during the first quarter of 2019.

Along with the growth in gross additions that we've achieved, postpaid churn has consistently been at a low level, as shown on the next chart. Handset churn, depicted by the blue bars, was 0.99% for the first quarter of 2019, fairly flat both year-over-year and sequentially. Churn for connected devices was just over 3%, still elevated as heavily discounted tablets sold in connection with various past promotions continue to roll out of contract. Total postpaid churn, combining handsets and connected devices was 1.26% for the first quarter of 2019, again, fairly flat both year-over-year and sequentially.

Now let's turn to the financial results. Total operating revenues for the first quarter were $966 million, up $24 million or 3% year-over-year. Retail service revenues, the blue portion of the bars, increased by 2% year-over-year to $659 million. The increase was due largely to higher average revenue per user, which I'll cover separately in a minute.

Inbound roaming revenue, which is included in the gray portion of the bars, was $34 million. That reflects an increase of 22% year-over-year driven by higher volume.

Equipment sales revenues, the green portion of the bars, increased by $7 million or about 3% year-over-year. This was driven by an increase in the average revenue per device sold. The impact of the higher average selling price was partly offset by a decrease in the number of devices sold.

We're finding that customers are holding on to their devices for increasingly longer periods, driving the number of total upgrade transactions lower.

In fact, equipment sales revenues actually were a bit below our expectations coming into the year, and as I'll discuss later, impacts our thinking about full year revenues.

I want to go back for just a minute to postpaid revenue, which is on Slide 9. The average revenue per user was $45.44 for the first quarter, up $1.10 or 2.5% year-over-year. One of the major factors in the increase was the continuing migration of customers to higher-priced service plans, especially the unlimited plans. Other factors included a shift in device mix to smartphones and higher device protection revenue.

One factor that was a drag on ARPU in both the year-over-year and sequential comparisons was a decrease in universal support fund revenues. In December 2018, the FCC ruled that text messaging and MMS revenues are no longer assessable under the universal support fund. As a result, U.S. Cellular stopped charging customers and will no longer pay the FCC USF fees on these revenues. This change also resulted in lower G&A expense, so it was neutral to earnings. Absent this change, ARPU would have increased by 3.5% year-over-year.

On a per account basis, average revenue grew by 1% year-over-year. And excluding the U.S. impact I just discussed, it would have grown by 1.5% year-over-year.

So let's move next to our profitability measures. Adjusted operating income before depreciation and amortization was $231 million, up 6% from a year ago. Correspondingly, the margin as a percent of total operating revenues increased by about a percentage point from 23% to 24%. And for those watching service revenue margins, the current quarter result was 31%, up a percentage point from the margin of 30% a year ago.

As I commented earlier, total operating revenues of $966 million increased by $24 million or 3% year-over-year. Total cash expenses were $735 million, up $11 million or 2% year-over-year, with the primary driver being an increase in cost of equipment sold.

Cost of equipment increased due to a higher average cost per device sold. That was partly offset by a decrease in the number of devices sold. Excluding cost of equipment, other cash expenses in aggregate actually declined by 1% year-over-year.

Shown on the next chart is adjusted earnings before interest, taxes and depreciation and amortization. This measure incorporates the earnings from our equity method investments along with interest and dividend income.

Adjusted EBITDA for the quarter was $281 million, up 8% from a year ago. In addition to the increase in adjusted operating income before depreciation and amortization, we also had increases in equity and earnings of unconsolidated entities and in interest and dividend income year-over-year.

Next, I want to cover our guidance for the full year 2019. As I said earlier, equipment sales revenues so far this year have been a bit 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. As a result, we've reduced our expectation for equipment sales revenues for the full year, which carries through and impacts our outlook for total operating revenues. We currently expect total operating revenues to be in the range of $4 billion to $4.2 billion. The expected reduction in equipment sales revenue will have a corresponding reduction to cost of equipment sold. The impact on adjusted operating income before depreciation and on adjusted EBITDA will be negligible, and therefore, the guidance for those measures is unchanged, at $725 million to $875 million and $900 million to just over $1 billion, respectively. 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 for the discussion of TDS Telecom. Vicki?

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [5]

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Okay. Thank you, Steve, and good morning, everyone.

Overall, we are pleased with how we started the year, working to achieve our strategic priorities, which are outlined on Slide 14. Both wireline and cable continued to grow broadband connections at 2% and 9%, respectively, reaching penetration levels in the low to mid-40s.

We continue to be successful with the bundling of our video products and are close to completing the cloud TV platform called TDS TV+, which will expand our ability to build on this synergy going forward. We are targeting a launch in our Bend cable market in the second quarter and will take a phased approach for the remaining wireline and cable markets. I'll give you a complete update on our fiber program in a moment after I summarize our overall results for the quarter, beginning on Slide 15.

Adjusted EBITDA increased 2% as we grew cable revenues, 8%, and maintained growth in wireline residential revenues, helping to offset declining wholesale and commercial revenues. On a combined basis, revenues were flat.

Total cash expenses decreased 1% in the quarter. Wireline cash expenses decreased 2% due to cost control efforts, while cable expenses grew 3%, well below revenue growth rates. This net reduction is a direct result of the initiatives 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.

Capital expenditures increased slightly when compared to last year. We expect our capital spending to increase substantially and on an accelerating basis through the year to support our fiber investments, both out of territory and in our existing ILEC footprint.

As a result of our fiber deployment strategy over the last several years, 27% of our wireline service addresses are now served by fiber. It is this fiber that enables our ability to provide the services our customers demand.

Now let's turn to our segments, beginning with wireline on Slide 16. Wireline residential video connections grew 8% compared to the prior year. And on average, our IPTV markets continued to achieve about a 30% video penetration, with some markets exceeding 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 bundle pricing. As a result, churn on these bundles continues to remain very low.

Our residential customers continue to choose higher speeds of up to 1 gig in our fiber markets. On average, 25% of all broadband customers are now taking 100 megabit speeds or greater, and that's compared to 18% a year ago, helping to drive a 2% year-over-year increase in average residential revenue per connection.

We also continued to make progress on our network construction under both the A-CAM and state broadband programs. On the A-CAM front, we earmarked $30 million of CapEx to continue to extend fiber to the outermost edges of our network in order to deliver higher broadband speeds required under this program. At the end of the first quarter, we enabled 6,600 eligible service addresses with broadband speeds up to 25 3 with the goal of reaching 27,000 eligible service addresses by the end of the year. We are well underway to meeting our first stated obligations under the FCC's program, which come due at the end of next year.

With respect to the state broadband grant programs, we are nearing completion on several projects that are upgrading 10,000 service addresses in our New York markets, and we continue to seek more opportunities in additional states where we have underserved broadband areas.

As an example, TDS Telecom was recently awarded a grant in Tennessee to expand broadband service at speeds at or above 100 megabit speeds to 2,000 locations. As an update from year-end, the FCC authorized and we accepted full funding of the A-CAM program, which will add 2 years of support to the entire program, now extending through 2028, and an incremental $4 million of annual revenue, which we expect to begin receiving in the second quarter.

As a result, we will receive base revenue support of $82 million in 2019, plus an additional $5 million of transitional amount.

Slide 17 provides an update on our fiber deployment strategy, both in and out of territory. We are pleased to announce that we've just launched our second out-off-territory fiber market, and initial sales results are very similar to our experience in our first market. We are in various stages of construction and expect to launch 4 additional markets in our Southern Wisconsin cluster this year as well as 2 new clusters targeting 80,000 total service addresses in mid-Central Wisconsin and in other attractive areas outside Wisconsin.

Looking at wireline financial results on Slide 18. Total revenues decreased 3% to $171 million. Residential revenues increased 1% due primarily to growth from video and broadband connections as well as growth from within the broadband product mix, offset by a 5% decrease in residential voice connection.

Commercial revenues decreased 9% primarily driven by lower CLEC connections, and wholesale revenues decreased 3% due to continued declines in access revenues. Wireline CAF expenses decreased 2% due to lower employee-related expenses and reduced cost of providing legacy services. This is partially offset by higher video programming fees.

Primarily as a result of the declines in commercial and wholesale revenues, wireline adjusted EBITDA decreased 3% to $63 million in the quarter.

Turning to Slide 19. We continue to be very happy with our cable segment performance in the first quarter despite the fact that we had a programming dispute that led to a blackout on major stations in early January. While a blackout is not our desired outcome, TDS will negotiate rigorously to ensure affordable programming for its customers.

Total cable connections grew 6% to 339,000 driven by a 9% increase in total broadband connections. As a result, broadband penetration increased 300 basis points to 44% compared to the prior year.

On Slide 20, total cable revenues increased 8% to $60 million driven by growth in residential connections. Our focus on broadband growth has led to a 1% increase in average residential revenue per connection.

Cash expenses increased 3% due primarily to higher programming content costs and circuit expenses. As a result, cable adjusted EBITDA increased 22% to $20 million in the quarter. In addition, we saw a meaningful EBITDA margin increase of 400 basis points.

These results in both wireline and cable demonstrate our commitment to video despite trends in the industry of increasing content costs and cord cutting. I'd like to reiterate, our video strategy is very important to our ability to both attract and maintain our customer base, and our customers tell us so. Half of our customers surveyed in our first out-of-territory market said they chose TDS because we had a video entertainment platform in addition to a superior broadband offering.

Our video attachment rate so far in our out-of-territory fiber markets is exceeding 50%. Without a robust video product to bundle with broadband, we would experience higher churn. Our customers value the convenience of an all-in-one entertainment solution.

On Slide 21, we've provided our 2019 guidance, which is unchanged from the guidance we shared in February. As I mentioned earlier, our capital spending will increase throughout the year to support our fiber buildouts. And as shown on the slide, we are now providing a pie chart breaking out the various capital expenditure initiatives.

And with that, I would like to thank all of our employees for the great start to the year and look forward to updating you on the second quarter.

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

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Jane W. McCahon, Telephone and Data Systems, Inc. - Senior VP of Corporate Relations & Corporate Secretary [6]

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Adam, we're ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Simon Flannery.

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Simon William Flannery, Morgan Stanley, Research Division - MD [2]

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Ken, some really great cost control in the business in wireless. Can you just talk about what the initiatives are and how do we think about where you are in achieving the objectives? Can you keep this sort of flat level for the next few quarters? And then any color on the equity income, a nice 16% up year-over-year? So any color on were there specific onetimers or is that a pretty good rate for the year?

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

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Thanks for the question. Yes, I'm extraordinarily pleased with the efforts of the cost control program that -- it was something we started 2 years ago under Steve Campbell, and they have gone through every part of the organization, and they continue to do so.

On the network side, things from changing some backhaul costs all the way through to what we do in reverse logistics on moving our handsets. So there hasn't been a part of the organization that hasn't been touched. And by our own estimates, we think that we have been able to take out about $200 million of spend over the last couple of years.

As we started off this year, we have got our target set for another large meaningful swath. All of the areas haven't been identified yet. That's part of what we do is we keep refreshing the list right now. So I'm not going to say this is where we're going to work it, but we will continue to work it all year, and it's something that [Lee Arnett] really built into the culture of the organization. So it's not something that at the end of this year just goes away. In terms of...

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Simon William Flannery, Morgan Stanley, Research Division - MD [4]

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Is there a way to think about what a target margin or what -- just how we think about the outlook?

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

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Boy. Target margin. Given the current level of investment in network, my old targets don't work anymore, right? We've got to keep improving the margins. And it's been tough to do in the last couple of years with all the pricing pressures. But now that we've seen pricing stabilize, we've got some different pricing strategies we've used to help drive ARPU. I'm pretty optimistic about being able to keep inching that up depending upon what happens with growth in any quarter. So we've got more work to do on the margin.

In terms of the equity income, Steve, any color you want to add around that?

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Steven T. Campbell, Telephone and Data Systems, Inc. - Executive VP & CFO of US Cellular [6]

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Simon, you asked about onetimers. There aren't any onetimers in the numbers. We've seen improvements in the reported earnings from each of our major investments, including Los Angeles, New York 1 and 2. And those are operationally driven, some of the same -- to the extent we understand them, the same factors that we've talked about, some modest growth in service revenues, some cost controls. So nothing that we would say is unusual. We don't have a lot of visibility into the forecast going forward, but we think we'll have some year -- on a full year basis, some year-over-year growth in those investments.

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Simon William Flannery, Morgan Stanley, Research Division - MD [7]

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Great. And hopefully it translates into higher dividends?

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Steven T. Campbell, Telephone and Data Systems, Inc. - Executive VP & CFO of US Cellular [8]

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Absolutely.

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [9]

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Yes.

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Operator [10]

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And your next question comes from Ric Prentiss.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [11]

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A couple of questions. First on the equipment revenue side. Obviously, you talked about the lower gross adds and the longer life. Can you help us understand what did you see in the quarter as far as upgrade rates and the percent take on EIP can also kind of shift revenues around in the equipment area?

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Steven T. Campbell, Telephone and Data Systems, Inc. - Executive VP & CFO of US Cellular [12]

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Yes. Our upgrade rate in the quarter was about 5%. And EIP, the percent of sell-through is quite high. It's in the 90 percentage range at this point.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [13]

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Okay. So that -- I think last year, your upgrade rate was probably closer to 6, so yes, people are keeping them longer.

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

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They absolutely are, across the board.

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Steven T. Campbell, Telephone and Data Systems, Inc. - Executive VP & CFO of US Cellular [15]

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The time that they're holding them is a bit of a moving target from quarter-to-quarter. But in general, it's probably 10% longer than it was a year ago.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [16]

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Great. That helps. And appreciate the color on the postpaid ARPU with the SMS texting fee going away, but on the revenue and the cost side, the prepaid continues to really surprise us on the upside as well sequential and yearly growth in prepaid ARPU. Talk a little bit about the competitive dynamics in that industry and what people are using in the prepaid product these days.

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Jay M. Ellison, United States Cellular Corporation - Executive VP & COO [17]

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Peter, it's Jay. So on the prepaid front, we have seen similar behaviors relative to -- as we've introduced some unlimited products in that area, we're seeing that. We're seeing a lot of focus on our teams working promotionally with incremental addition of prepaid cards or topping up right at the point of sale, therefore increasing longevity. We're seeing -- we see better churn rate. And really, continued focus on some. But I'll say is the test-and-learns that we've been doing in our distribution channel strategy and things along those lines, so we put some focus on there. We're doing significant what we call prepaid revolution or evolution with, as I mentioned, family plans and additional capabilities for our customers. So all in all, we've put a lot of focus at the end of '18 and planning for '19.

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

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Yes. I'd say one of the things to be careful is, Ric, is that because of the lack of low-end phones, we haven't seen as much prepaid out of some of the, call it, lower ARPU channels. And as we get those lower-end phones back into our distribution in second half, we're expecting to see more activations, but those activations actually make take down that ARPU a little bit.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [19]

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Makes sense. Trading off adds for ARPU. Okay. And last question I had, Ken, you mentioned on the 5G initial rollout, 600 megahertz, and then augment with mid and high. I've got to admit the old engineer in me, what's the definition these days for mid-band and high band? And then how do you see availability for the different bands coming about?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [20]

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Well, I'm not going to try to answer that, but I've got Mike Irizarry in the room. We'll let him talk about what he thinks about when he says mid band and low band.

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Michael S. Irizarry, United States Cellular Corporation - Executive VP and CTO of Engineering & Information Services [21]

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So when I think about mid-band, it's 3.5, so think CBRS, the C-band spectrum that's talked a lot about; and then high band would be the millimeter wave stuff, so 24, 28, 39, 37.

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [22]

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And then what about availability? I guess handsets is the question.

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Michael S. Irizarry, United States Cellular Corporation - Executive VP and CTO of Engineering & Information Services [23]

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Yes. So handsets, I think for 5G, at least, 5G [NR] at least in the low bands towards the end of this year. And big focus on the chipset readiness for devices.

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [24]

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Given our buildout plans combined with what we see in terms of all the handset availability, anything that we get this year is going to have a tiny, tiny, impact. We're really talking about a 2020 launch for anything that we're doing, and we expect to have availability of handsets in time for that launch.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [25]

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And as far as the mid-band, the 3 5, CBRS, CBN stuff, obviously, you've got to get the spectrum figured out first and then into the infrastructure on handsets. What kind of time line do you see those chipsets in that 3 5, 3 7, 4 2 range coming about?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [26]

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For the chipsets is I think are going to follow the availability of the spectrum, is stuff I've seen historically. And that is the muddiest part of the spectrum puzzle right now, right?

The good news is that we're hearing more FCC commissioners saying we've got to get moving on this. From our standpoint, we think that is important spectrum. Our strategy that we talked about last year has always had what we call a wedding cake view of spectrum, where the base layer is the coverage of low band. You need a nice meaningful segment of mid-band and then you have the high band on top of that. For the U.S. to really make headway, I think we need that mid-band, and a lot of energy is being spent on that at the company and the industry level to try to get that resolved in D.C.

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Operator [27]

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And your next question comes from Zach Silver.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [28]

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The first one on the U.S. Cellular side. On roaming, some really nice growth there, and I don't think that I heard you call out any higher rate 3G traffic impacting that. I know this line is a bit lumpy, but I mean, how should we think about the potential for volume offsetting lower rates going forward this year?

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Steven T. Campbell, Telephone and Data Systems, Inc. - Executive VP & CFO of US Cellular [29]

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Well, if you -- as we said and you repeated in your comments, we had pretty nice growth in the first quarter, double digits. I think 22% was the number we quoted, and that's volume-driven. So we've seen increased volumes from one of our principal partners that, frankly, we didn't anticipate coming into the year. Hard to predict whether we'll see that continue, but at this time, we are forecasting for the full year, year-over-year growth but more modest than what we saw in the first quarter. I would say somewhere in the single digits.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [30]

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Got it. And then just to check in on the competitive environment with T-Mobile, FirstNet, any increase in competition from those guys in the first quarter?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [31]

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Nothing that's a step function. I mean both of them are -- both of them, along with AT&T's Chorus business and the Verizon business, the Sprint, they are in most of our markets. We've got a competitive marketplace that exists today and has existed. There wasn't any step function increase in the quarter, though.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [32]

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Okay. Got it. And then for Vicki on the TDS side. For the out-of-market builds, I mean, this new area that you're targeting, 80,000 service addresses is a big step up from, I guess, the second out-of-market build. Be great to get a little bit more detail on the characteristics of those markets and whether you think you can achieve what you've done so far in Sioux City and with the presales in the second market.

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [33]

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Okay. So let me take your question in parts, Zach. So thank you for that. The Sioux City piece I think is related -- you mean Sun Prairie?

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [34]

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Yes, Sun Prairie.

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [35]

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So okay. So Sun Prairie was our out-of-territory first trial market. And just -- we're just a little over 1 year into that market, and I think I've shared our results there. We've been very pleased. Our penetration rates from a broadband perspective has been nearing 50%. Our video penetration has been about 25%, and we've also been pleased with our commercial success there. So that was really our trial market to really support our out-of-territory fiber deployment strategy, which we really like a lot because we can go where we see the attractive demographics, we can go neighborhood-by-neighborhood and we can scale it to our needs and to where we see the growth opportunities.

So having said that, I announced we launched our second out-of-territory market in the same southern Wisconsin cluster. And our early -- it is early, but we're -- our early sale and install phases of this market are starting to mirror exactly what we saw in our trial market. And so we're very excited. We're going to follow it with a third launch in the same cluster in May. So we're going to have some more results to share with you as we go forward.

From a larger perspective, we are focused on, and this is a really a year of construction for us, 2 new clusters. One that's in mid-Central Wisconsin and the other that's in growing communities outside of Wisconsin. And that does comprise about 80,000 service addresses that we've earmarked. That'll take us through towards the end of the year, and we'll start to light up that network in those clusters as we go, and that should happen at the end of the year.

And our business cases are -- we're expecting results similar to what we're seeing so far. So updating you as we go forward.

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Operator [36]

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(Operator Instructions) And your next question comes from Sergey Dluzhevskiy.

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Sergey Dluzhevskiy, G. Research, LLC - Research Analyst [37]

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My first question is for Ken, kind of a 2-part question on towers. One is just a clarification. What were the tower revenues in the quarter? And what was the growth rate? And the bigger question is fully understanding that towers are strategic for you guys, could you update us on what the company is doing to improve third party lease operate for the tower portfolio, which I think is the 4th or the 5th largest in the country? And how do you increase contribution from the tower portfolio going forward without sacrificing anything from the strategic or operational perspective?

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

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Thanks for the question. I think revenue was about $16 million for the quarter, and it doesn't show a lot of year-over-year growth. But the, what I'll call, the pipeline is growing nicely right now. There is a lot of interest, a lot of different deals that are being worked through. So I'm optimistic about the pipeline. We've been -- we've augmented our marketing resources in that area to further monetize those assets subject to not getting in the way of what we've got to do with our network modernization because as we start to go through this project, and we're talking about everything from tower -- moving radios up the tower to MIMO and different things, are going to increase our utilization of the tower and increase our piece of change in that real estate. We will look to drive value where we can. But the extra bucks we get on tower rent are inconsequential if they get in the way of our network quality to our core business. So a tightrope we continue to walk with trying to maximize the value of those assets. And as I said, one of the big things is, we bought many of the marketing resources in that area.

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Sergey Dluzhevskiy, G. Research, LLC - Research Analyst [39]

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Great. Another question on the wireless side. Could you maybe provide more color on your Iowa and Northern Wisconsin edge-out opportunity? What prompted you to pursue this after several years, I guess, just focusing on your existing markets. And what are the next steps in this process? And do you see other edge-out opportunities as you look at your footprint?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [40]

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So the edge-out is a combination of a desire to continue to leverage our distribution, our name, our systems combined with the evolution of the technology. For years, we've had some licenses that are -- cover part of our footprint today but also cover these other areas. But CDMA equipment was not built for those license -- for that spectrum. So as a result, we couldn't go in with a voice product given that CDMA was our core service.

As we have moved to voice over LTE, though, we can -- which we have put across Iowa and Wisconsin now, we can use this spectrum and offer both a voice and data product in those markets. So the -- what we're doing today is we're building out those areas. We expect to have some meaningful coverage by the end of the year. At the same time, we're starting to work on distribution so that we can competitively enter those markets late this year or right around when we turn the corner into next year.

Similarly, there are a few other areas with today's licenses that we will look at once we get these launched and get the results in from these markets.

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Sergey Dluzhevskiy, G. Research, LLC - Research Analyst [41]

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Right. My next question is, I think, for both businesses, The FCC recently announced the agency is contemplating -- creating a whole digital opportunity fund focused on building out high speed broadband in rural America. So if you could share your initial thoughts on this proposal and whether you see incremental revenue opportunities from this fund going beyond A-CAM support on the wireline side. And also on the wireless side, could this be an opportunity for U.S. Cellular in some markets?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [42]

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So what I'll say for the wireless side is it absolutely could be an opportunity, but I can't go past "could" because there aren't sufficient details out on this program yet to really go any further. I mean we see -- we like the idea that they are putting money toward it. We're going to be actively involved and trying to help formulate rules that allow us to participate. But at this time, there just isn't enough on the table for us to put any real light on it.

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [43]

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And Sergey, I'm sitting right where Ken as well. This could open up opportunities for rate of return carriers, certainly looking to edge out into adjacent underserved areas where there's money to be available. But again, we're waiting to see the details. But clearly, onetime infusions aren't adequate. A long-term program is going to be needed to really close the digital divide in rural areas.

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Sergey Dluzhevskiy, G. Research, LLC - Research Analyst [44]

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And my last question for Vicki is on the edge out -- on the out-of-footprint deals. So you've already touched a little bit on Sun Prairie market, but my question is, I think, is slightly different. So maybe you could share with you guys have learned from Sun Prairie market and what are the best practices as you had the service and this market launched for over a year that you could use and build on as you go into adjacent markets and potentially other markets in different states.

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Vicki L. Villacrez, TDS Telecommunications Corporation - CFO & Senior VP of Finance [45]

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Well, we have -- Sergey, we've learned a lot just from our fiber deployment strategy within our existing ILEC wireline footprint. As you know, we've got over up to 30 markets now that where we've deployed our fiber right within our own ILEC market. And through that repeatable process, we have learned a lot around our construction, our planning, our looking at neighborhoods, the attractiveness, the pent-up demand in certain neighborhoods, the density factors, the topography factors, aerial versus buried, all sort of complexities that go into our analysis. And they're different market by market. And having said that, all of those learnings have been carried forward. And certainly within our trial market in Sun Prairie, we, right off the bat, learned that there was a greater pent-up demand for alternative choices to those that these customers had in those markets where they had an incumbent telco, that hasn't been keeping up with upgrading their network and didn't have a lot of choices. And so our take rates off the bat were exceeding our expectations. And we roll those learnings forward.

Certainly, on the construction side, you have different challenges as you go forward, and those learnings get rolled into our analysis as well.

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Operator [46]

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And your final question comes from Michael Rollins.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [47]

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If I could follow up, you mentioned LTE -- VoLTE briefly and was wondering if you could talk a bit about, first, where is the

(technical difficulty)

VoLTE and when do you think the company would be in a position to not need CDMA chips and the phones where you can just have customers fully on LTE and VoLTE? And then secondly, just on the other side of VoLTE, the roaming side, if you could talk a little bit the roaming performance this year. But where is VoLTE in all of that? And is there incremental dollar opportunity from that product arena?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [48]

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Mike, we're going to have to go back. We lost about 10 seconds of your question from when you started to introduce it, the next thing we heard was, CDMA chips. So whatever in between that, we lost it.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [49]

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So that -- I was asking as you think about the migration your customers to VoLTE, when you could potentially be in a position with your network in the VoLTE usage where you wouldn't need to put CDMA chips anymore in your phones, you can just sell an LTE VoLTE phone standalone.

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Michael S. Irizarry, United States Cellular Corporation - Executive VP and CTO of Engineering & Information Services [50]

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This is Mike. This is Mike Irizarry. So as we said before, the VoLTE program is multiyear. So right now, we're targeting to have our entire footprint completed by the end of 2020, early 2021. You still have to migrate customers over, and we expect that have a tail for us. But in terms of network completion, end of 2020, first part of 2021.

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [51]

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And so as you think about from a handset perspective, end of '21, all the handsets in all the markets would no longer need a CDMA chipset. And it's possible that earlier than that date in certain clusters, we'll only be putting VoLTE in there.

But from a network standpoint, just because we stopped, we had VoLTE everywhere doesn't mean that we're necessary going to be turning off the CDMA. It's going to be a matter of how much traffic is still utilized on the small amount of spectrum that we have dedicated to it. And that will be a -- then [type of decision].

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [52]

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[The other part] on the roaming side?

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Kenneth R. Meyers, United States Cellular Corporation - President, CEO & Director [53]

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On the roaming side? So yes, we've always looked at VoLTE as an opportunity to serve more than just historic CDMA carriers. I'll let Steve talk a little bit about where we are with that.

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Steven T. Campbell, Telephone and Data Systems, Inc. - Executive VP & CFO of US Cellular [54]

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Yes. And so we currently have the commercial agreements in place with all of the 4 national carriers. We have some inbound, a little bit of outbound traffic on VoLTE, but it's very minor at this point. We're in various stages of testing and implementation with the others. So there's definitely some potential upside revenue to come. Right now, it's very negligible in terms of the overall income and expense. But I think the important thing is having gotten those commercial agreements in place and having started to work with the other carriers towards implementation.

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Operator [55]

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And we have no further questions at this time, so I'll 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 [56]

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We'd like to thank you again for joining us, and please let us know if you have any follow-up questions. Have a great weekend.

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Operator [57]

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And that does conclude today's conference call. You may now disconnect.