Telephone and Data Systems' Management Presents at Citi 2014 Global Internet, Media and Telecommunications Conference (Transcript)

| About: Telephone and (TDS)

Telephone and Data Systems, Inc. (NYSE:TDS)

Citi 2014 Global Internet, Media and Telecommunications Conference

January 07, 2014 12:45 PM ET

Executives

Kenneth R. Meyers - President and Chief Executive Officer U.S. Cellular

Analysts

[Call Starts Abruptly]

Unidentified Corporate Participant

… great opportunity. Appreciate the invitation.

Unidentified Analyst

And we also have Jane McCahon with us from Investor Relations at TDS.

So, unfortunately because of travel Ted wasn’t able to make it because of the weather issues. So maybe just starting off with a very high level, Ken if you could talk to us about your strategic and operating priorities for 2014 and in particular as CEO of the wireless business how are you looking to put your mark on the company?

Kenneth R. Meyers

Wow, that’s a nice opening question, my mark. I think that it’s not about my mark, it’s the, really executing the strategy that we’ve had at U.S. Cellular for years and that is we are at the heart a service provider.

A lot of technology in this business, it’s all about the service that we provide our customers and we’ve built a culture and an organization that’s dedicated to that, serving mid-sized and world markets, starts with a great network. We’ve got the advantage of having [850] licenses, that we now have LTE built out across 90% of our customer base. So the last 10% of our customer base to cover, but this is very quality LTE network.

In fact we’ve got two LTE networks right now. In addition to some 700 LTE that we rolled out over the last two years we rolled out LTE in the 850 band over the last year. So we were able to launch the iPhone in the fourth quarter.

In addition to the network quality it’s our broad distribution, primarily controlled up to now, meaning it’s our stores and third-party agents and what we are doing is we’re expanding distribution, both last year and into the future to increase our addressable market and making changes to our product offering.

Again, as we increase the addressable markets that we have, are real excited about where we sit right now. We’ve made some big investments over the last couple of years around LTE, around billings system, around the investment in the Apple products and next year is about capitalizing on those.

Unidentified Analyst

That’s a great start, may be just to drill down on the announcement that came out this morning and you guys prided yourself, as you mentioned, on service quality and it looks like you had some billing issues in the fourth quarter. Can you walk us through what the issues were, have they now resolved? And then there is a $15 million value to customer credit and then if we can sort of like pick that apart, is it cash, is it just the future credit, how do we think about all those things?

Unidentified Corporate Participant

Yeah, and as you said, that we pride ourselves on the quality of the service and quite frankly we did not meet our own standards for us in the billing conversion that we’ve gone through. We, our billing conversions 15 years’ worth of data wound up taking longer than we like, delayed some billings, delayed billings, create customer questions, customer calls and we weren’t delivering the level of service and customer service that our customers expect with those increased call volume.

So where we are right now is we’ve got the systems up, it’s running, it's producing the bills doing all the things it needs to do. But as you catch up on your billing, it literally stopped for a while, it creates customer confusion, because if you didn’t bill for the last six weeks you don’t issue a six week bill. You issue the bill that was due six, two weeks ago, in two weeks now you issue the next month’s bill. So our customers see two bills and I just paid one. They forget that they then didn’t one for six weeks, they just saw two.

So that creates confusion, long lead times, the customer service creates dissatisfaction. So we’ve seen higher churn, quite frankly we didn’t meet our commitment around service. So one of the things that we did do is both apologize as well as show our appreciation for their loyalty. We reached out to them end of the year and thanked them for their business, apologized for the service shortfall and issued to each account some rewards points. Reward point has a value of about $50 million, I mean the accounting for that is it actually comes out of revenue now. We can say goes on your balance sheet as a liability. And then over the next year or two as they use those either to buy new equipment, to buy accessories, to get handsets upgrades sooner, whatever it comes back to revenue.

So, it’s a, from accounting standpoint or how you see the P&L you actually see it come out of revenue for the quarter.

Unidentified Analyst

So it's a non-cash liability for the future that could be fulfilled by customers purchasing services and goods, it’s not a got cash credit to the customer today?

Kenneth R. Meyers

Well, it's not a cash credit, that’s true. But in terms of well things that you look at, Mike, it can go through operating cash amount.

Unidentified Analyst

And so, now that you are, you say you are through this, the billing systems’ up and running so in first quarter wherever the numbers ended up in the fourth quarter from subscription would you expect to see a significant turnaround back to what you would have viewed before this conversion as normal or does it take more time to repair the customer experience?

Kenneth R. Meyers

I expect by the end of the first quarter we’ll have the service levels where we expect them to be. I think the challenge that goes in the second quarter, again it's a first and second quarter issue is more just a fall out from it.

Unidentified Analyst

Okay, and can you talk about more broadly the iPhone launch? And can you talk a little bit about how that has helped or impacted the performance of the company?

Kenneth R. Meyers

Yeah the iPhone launch when it finally happened went very well. The phone itself performs very nicely. It's got good operating characteristics in terms of call quality and data speed and things like that. It’s on a LTE network that just got empty. So they are getting a great experience with that. As I said it’s later than we had hoped for.

The mix in terms of our overall product mix is just where we want it. I mean it’s not one that you want a 100% of all your customers taking it, you don’t want zero, this mix is right in line, heavier on the renewal side than the gross add side which we do expect given that we were the last carrier to get it on the gross add side and it was pent up demand from our customers that were waiting for it.

So we’ve done. So we’ve eliminated the reason or the excuse for higher churn in the past because of not having that. I would say that our handset portfolio is absolutely the best band between that, the Samsung products and the Motorola products that we had. So I am really encouraged where we sit with handsets right now.

Unidentified Analyst

And how long does it take to get that broader distribution, indirect distribution up and running?

Kenneth R. Meyers

It is an ongoing process. We had started a year and a half ago with Wal-Mart. There were enablement that we have been putting to the new system for and we’ve got discussions going on with other third party distributors and between that and it involves a push into more small and medium size businesses, I think we are going to be able to expand our distribution in a couple of different channels.

Unidentified Analyst

And then just taking a step back U.S. Cellular has been very busy this past year monetizing non-core assets following on the divestiture of Chicago and Saint Louis. Can you give us an update in terms of where you are in the process and how you are thinking about future monetization opportunities?

Kenneth R. Meyers

So where we are is we feel back to about a year and half ago you went through the Chicago transaction. $480 million were generated by that and returned to shareholders early this year in a -- last year in a special dividend. We then had about $400 million worth of spectrum transactions, spectrum that was not core to our operations meaning it was neither right on top of our operations or immediately adjacent to it.

And that’s probably 75% to 80% of that spectrum pool that we have. And spectrum is a volatile asset, meaning if someone is out there and they want a certain type of spectrum prices can run real, real fast. And if someone isn’t buying a certain band of spectrum the clearing price may be different. And so we are opportunistic with that spectrum. We will be in and out of the market like we are, when we are buying the spectrum depending upon what’s available but we cleared out most of that.

And on the third area, which were the towers we had 550 ish towers that were in the Chicago land market, that were not part of the Sprint transaction that we needed to get that transaction closed and get some agreements between us and Sprint in place on those towers and we’re going to go monetize those.

This network transition has taken a little time but let’s say first half of this year we expect we’re going to get that done. And that will be the bulk of our efforts around that. I say the bulk because those assets that we’ve identified, both the Chicago, the spectrum and the towers were what we consider kind of non-core.

Everybody asks about what will you do with the rest of your towers. And right now we have no plans around those. We are going to finish the 550 and we’ll see what learnings we come out of that. But we’re still on the midst of transitioning networks and like to control that we get when we own those assets.

Unidentified Analyst

There is some larger wireless companies have done some transactions in which they have given themselves a lot more control or options for expansion in the future. Do those transactions influence your interest to consider a broader monetization given that values and the churn that were apparent in those transactions?

Kenneth R. Meyers

There have been some very interesting recent transactions that have been looked at closely but right now we’re going to focus on getting the 550 done. And we’ll set our course after that one task completed but to kind of chase something else before we get the first piece done just to -- is a loss of focus, I’d like to get that piece done before we go anywhere else.

Unidentified Analyst

Just one other question on that. If you look at the size of that tower portfolio, does it rank as maybe if it were its own tower company the fourth or fifth largest tower company in the U.S. and if it’s a representation of that?

Kenneth R. Meyers

I’ll take your knowledge of the industry and say okay, let’s start with 4000, about 4,000 towers.

Unidentified Analyst

So does that also provide an option on the table to sort of run that? You mean internally to you though as a separate tower company and to try to take advantages of the economics and growth drivers for that category may be differently than managing it as part of the U.S. Cellular network portfolio?

Kenneth R. Meyers

Possibly, it's a good idea.

Unidentified Analyst

Moving on to maybe that question on TDS here. You know TDS came out and talked about its plans for cash repatriation to shareholders, the idea that any monetizations or value created, the aspiration was to 25% and return it back to shareholders and you’ve authorized I think a share buyback over the past summer and then 75% to try to reinvest it.

Can you give us an update on where TDS is with those initiatives and may be some initial progress on how the Baja Broadband acquisition is going?

Unidentified Corporate Participant

Sure I think that the identification of growth opportunity for TDS was kind of what led us to discuss that capital allocation, because we’ve identified both the hosted and managed service area as well as the cable space as areas where we think it makes natural sense for us to continue to invest in our business. So you’ve seen us over the last two, two and half years buy five different hosted managed service companies and at this point we are very, very satisfied with kind of the full suite of portfolio products that we have and our position in that.

So I think you are going to see us at this point focus on execution in that business, but we acquired, as you said, Baja Broadband last year. The integration is going very well and we continue to look for cable assets to buy and that’s going to be an ongoing process. We are really excited about that space and where we think we can leverage our existing capabilities in the future.

Unidentified Analyst

Looking back to wireless side, can you talk about Ken, how you are utilizing your spectrum inventory of what’s core spectrum and do you see yourselves with plenty of room to grow usage and utilization on a network or as you look at the upcoming options are you are going to need more spectrum?

Kenneth R. Meyers

So right now I am pretty comfortable with our overall spectrum position and that’s a function of really we started with in most of our markets the 850 underneath it. We’ve bought 700 in most of those markets. We’ve got a few markets where they were PCS markets that we don’t have as much spectrum in as we would like and we’ve actually been buying some in the secondary market. But overall we’ve got a nice mix of what we consider to be high and low band spectrum that meets our needs today. We continue to enjoy the benefit of the data growth and haven’t had problems meeting it so far.

But the unanswered question is three years from now how much it's going to be enough and I don’t know that we’ve got any better insights than anybody else. We see some of the same studies that come out of some the networking houses that show the angle, the curves for data just going straight up. And you want to make sure that you are adequately sourced for that type of growth in the future. So we will absolutely prepare ourselves for the different options that might be available.

We are active and lobbying to make sure that as those options are put together that they are put together in a way that a mid-size carrier like us can participate. What’s important to us is that the rules around the spectrum be such that meaningfully sized pieces are auctioned off as opposed to just national licenses or something else that we couldn’t play. You want to make sure that interoperability standards are addressed and enforced on the front end. We don’t have the same challenges that we had around the lower 700’s over the last couple of years.

So we expect to be very active in Washington in the regulatory front as each one of these new auctions gets put on the table and then we expect to show up for those auctions that meet our kind of criteria to make sure that that in the markets that we operate we are positioned properly for the future.

Unidentified Analyst

Can you share with us what your strategy was for the H Block auction coming up?

Kenneth R. Meyers

We are not in the H Block and everything from interoperability where we stand right now, who else is going to play there is just really nothing there for us.

Unidentified Analyst

Okay. And on competition side I think what’s interesting is and maybe you can give us some background on this issue as well on pricing. So I perceive that in the past some of your pricing was at a discount to some of your national competitors as one of the tools to try grab share. But you cannot renew shared data plans. Am I correct in comparing that it’s much more analogous to what AT&T and Horizon were offering at the time versus a meaningful discount, can you take us through the pricing strategy and is that just a reflection now what you said earlier the device line up to par, the product, the network. Can you walk us through that?

Kenneth R. Meyers

Yeah, I think that it is a fair assessment of where we have currently positioned the company. And in the past there were different challenges we had, device line up was one. Forgetting just the iPhone, you go back two years before that, and that we weren’t in the first round of smartphones. So we were chasing a little bit on the product side in the past. And also with some of the challenges around distribution, so we had used price as one of the other levers. And now given the quality of our network, given the broad product line-up that we have, it’s one of the strongest we’ve ever had.

We think that we’ve got to get full value out of the services that we provide in order to generate the appropriate returns in long-term.

Unidentified Analyst

And what’s been the response then to your shared data plans, any early data points on that?

Kenneth R. Meyers

Early returns are right in line with our expectations. I think what’s interesting is the little bit higher mix of probably the six gigabit plan than we expected, expected a little bit more hopefully on the four then the six but generally right in line, doing exactly what we’re hoping we would do.

Unidentified Analyst

So is this a catalyst for meaningful ARPU expansion as you ramp the penetration of 4G smartphone device you can get your customers on to these better priced shared data plans?

Kenneth R. Meyers

Well I think that’s one of the underlying drivers to revenue growth, is going to the monetization of data over the next few years which is why the whole push for LTE. We have about 34% of our customer base now is on LTE devices, checking to make sure I am right. But the press has known that in the last year we’ve really made some really nice progress on that. We actually pre-seeded some of our networks by selling LTE devices before the network was even there.

And with continued migration of that customer base as well as the capitalizing of that through the shared data we’re pretty optimistic about revenue growth.

Unidentified Analyst

Where are the latest thoughts both at the U.S. Cellular level and TDS of the appropriate to manage the financial leverage?

Kenneth R. Meyers

We do. Again you think about where we position ourselves within the business, within the industry. Frankly we aren’t -- weren’t one of the biggest companies we have got business risk in our company just given who we compete against.

And one of the ways that we offset some of that business risk is by reducing the amount of financing risk that we undertake. And so we aren’t as leveraged as many other companies. And quite frankly that isn’t something that probably changes. It is just core to who we are and how we operate.

Unidentified Analyst

As CEO of U.S. Cellular if I could ask how has the relationship with TDS management been the same or evolved or changed for you in terms of your allocation at the U.S. Cellular level versus may be what some of the goals are at TDS level?

Unidentified Corporate Participant

Not a [inaudible] question.

Unidentified Analyst

Well, as CFO of TDS your objective of course was presumably to help the value for TDS which sometimes may not be completely in sync with what might be best for U.S. Cellular. And is that ever an issue or is that…?

Unidentified Corporate Participant

I don’t think that’s a false premise. The reason I do that is that U.S. Cellular is 80% of TDS right. If you increase the value of U.S. Cellular you increase the value of TDS. So I don’t know that there is a conflict between those. I’d say what’s interesting right is that I used to be the CFO of U.S. Cellular and understood that business and then I became the CFO of the parent have different insights, especially when it came time back, merger times and negotiations right and I knew the game.

And now that I am back at U.S. Cellular I didn’t teach everybody at TDS all the games. It's actually it's a real healthier environment. I’ve been with the company for many, many years, we’ve got a long history of very being open transparent and trusting. So I don’t need to change anything.

Unidentified Analyst

And can you talk a little bit more in the margin side. So now as you move past the short term friction issues with the billing. How do you see margins in the business now overtime as you get through the initial impact of the iPhone dilution. And is there a significant margin expansion opportunity now that you’ve gotten streamlined on more efficient networks how should we think about that?

Unidentified Corporate Participant

So I think that margin improvement is one of the absolute imperatives for the company. When you start thinking of a multi-year environment and there is a lot of different avenues towards that. So starting at one, right now we are running multiple networks between the LTE as well as the 3G network over time. We are kind of get to one there. Running revenue is something that as an example has come under pressure over the last couple of years, but as we get to LTE the number of opportunities to deliver roaming services to others grows dramatically.

So a new revenue growth opportunity over the next couple of years and quite frankly we haven’t had over the last couple of years kind of reversing that trend. We will both this year we’ll be dealing with the year-over-year impact of an iPhone right. But as we come out of the billing transition one of the enablement’s of that billing system was device financing. And so that is expected to get rolled out later this year and that will have an impact.

As we continue to broaden distribution you’ll have a more variable cost model in certain part of the distribution then the fixed cost model you have today.

So I think there are a lot of different opportunities over the next couple of years to get margin trajectory back where it needs to be.

Unidentified Analyst

And what do you think about the future of service unbundling. You know is it something that you think is a strong argument for the industry and strong path to go down or it's just the flavor of the moment? And then related to that we are seeing companies put bounties on customer acquisition now, I am interested for your thoughts on that and how you think that affects the competitive landscape?

Unidentified Corporate Participant

In terms of the unbundling I am excited about it, when I think about it from a pure carrier standpoint. But there is a second order impact that I don’t -- I haven’t thought through yet. That is if we think that changing the consumers are going to somehow change their behavior and they are going to spend $500 for phones instead of $50, I think that’s short term thinking. Because if that plays out at least my view as an American consumer it's all about what I pay when I walk out the door right now, I am not paying $500 for that phone. Maybe I am not buying it as often and I’ve got big manufacturers aren’t going to like that.

So there is a second effect that comes down somewhere down the road. So it's interesting and to the extent somebody wants it we are going to go there. I just don’t know that it's long term how that plays out.

The bounty thing probably not the first time it’s ever happened in this industry, it’s probably the first time it’s been as public as it is. I am not convinced that it’s going to be anything more than some short term noise maker though we will watch it.

Unidentified Analyst

When you look at your market portfolio, now post the sale in Chicago being done, are there significant gaps where some markets are outperforming the average meaningfully but then others are underperforming the average meaningfully and do you look there for opportunistically working on the portfolio like you did with Chicago and Saint Louis?

Unidentified Corporate Participant

Absolutely, I mean that’s -- any time you got a portfolio you’ve got your stars and you’ve got few others nice and one of the things that we are doing is we’re getting a lot more local in our strategy as well as our execution, and specifically targeting some of those places that we have underperformed, to understand what are the growth opportunities, what are those investments and returns look like? And it’s something that has been actively worked on.

Unidentified Analyst

To ask questions folks please click your silver button in the microphone and we can get to you.

Question-and-Answer Session

Unidentified Analyst

Just a quick question about your buyback policy. How are you guys thinking about that especially after the big run in the markets in general and also with regards to your…?

Unidentified Corporate Participant

The $250 million authorization is something we’ve said we expect to start rather modestly and we’re not trying to time it at all in terms of stock price or market run but it’s something that we think we will execute on consistently but modestly over the next couple of years.

Unidentified Analyst

(Question Inaudible).

Unidentified Corporate Participant

No, it’s more just a consistent return.

Unidentified Analyst

And just a question on TDS Wireline business. So you have invested significantly in cloud and hosting where do you stand with those products and just what you are seeing in the market in terms of demand for your services?

Unidentified Corporate Participant

So I think the most important thing to recognize in our strategy for this is that we are looking to put together that cloud colo managed services, hosted services for the mid-market customer. All the research we did in starting this business is around the demand and the requirements of these. They are much earlier on the curve in terms of starting to outsource these. So we think there is a real tremendous opportunity to start these relationships early and whether it’s through cloud, whether it’s through colo and then build this kind of products and services that they buy for us -- from us over time. And what we’ve seen is that these mid-market customers they really want a little bit of a local presence.

It’s not, I just want to keep this cloud service and it can be anywhere in the world and I am willing to do. That they want a higher touch, a higher customer satisfaction and then that’s, that’s our DNA, that’s what we’re good at.

And so what we’ve done in our last two acquisitions is purchase service providers, solutions providers, that are really just resellers but have these very long-term trusted relationships with their customers and what the strategy is, is to now provide them with the full fleet of products not just reselling equipment but now that, you’ve got the entrée into this business we can go sell colo or we can sell that and build it over time.

So that’s really kind of we’re proving that strategy out this year to make sure it works but whether it’s Vital in Iowa, our recent purchase of MSN in Denver, we really like those initial results. And so we’ll have a mix of equipment revenue which is obviously lower margin and will be lumpy over time. But the end gain is to build that recurring monthly recurring revenue, that higher margin that they are expecting.

Unidentified Analyst

And so as you look at the two businesses I have asked this question in the past but now that you’ve got LTE and you’ve got cloud and you’ve got services that different than we’ve had in the past. And may be overlay each other, can be a little bit better, are there different ways or new ways of the two companies working closer together on some of these issues or are both companies on their individual path sometimes those path may cross but it’s more coincidence than intention how should investors think about that relationship?

Kenneth R. Meyers

In between, okay. I will go as far I’ll say that it’s not an integrated operation. They are separate operations. However in areas where there are market opportunities I think we are working better than we have in the past to capitalize on those. So an examples would be State of Iowa where Cellular has been for a long time some of the acquisitions we’ve made in the hosted and managed service space are in Iowa and so there are opportunities for the sales organization of the HMS continue to both leverage some of the customer relationship that we have or quite frankly let’s Cellular to sell often to some larger entities there.

So that is not a single integrated operation. They’re have just integrating all the HNS companies as we speak right now but not also as haphazard may be could be either.

Unidentified Analyst

And so may be just to finish up as I think of the telecom and the wireless industry we’ve written about telecom industry this year may be growing around 2%, wireless growing a little bit better than that. As you look at all of the investments and initiatives at U.S. Cellular can the company return to being a share taker relative to the industry and overtime begin to outpace industry or do you think it's more industry growth? How do you look at the positioning over time for revenue at U.S. Cellular?

Kenneth R. Meyers

Right now where I think we are at is that we have not kept pace over the last couple of years and there have been various reasons why we haven’t, different products and services that we have. We no longer have those challenges. We don’t have their arm tied behind their back and we do have some real network advantages in the markets that we serve. So our objective is to take back some of the share that we’ve lost over the last couple of years.

Unidentified Analyst

And one last follow-up with regard to the Chicago and St. Louis divestitures what’s your expectation of the networks to be turned down and be fully cut off?

Kenneth R. Meyers

Very soon. I think St. Louis has probably already been done and I think the Chicago one is probably within the next 60 days.

Unidentified Analyst

Well, thank you for sharing your time at this day. We appreciate it. Thank you.

Kenneth R. Meyers

Thank you for the invitation.

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