Dave Wittwer – CEO
Steve Campbell – CFO, US Cellular
Telephone and Data Systems, Inc. (TDS) Morgan Stanley Technology, Media & Telecom Conference February 28, 2012 5:45 PM ET
Good afternoon everybody. It's my great pleasure to welcome TDS and US Cellular here today. On my left we have Dave Wittwer, CEO of TDS; we have Steve Campbell, the CFO of US Cellular and Jane McCahon, Head of Investor Relations. Thank you for being here today.
Before we get started just want to please note that all-important disclosures including personal holding disclosures and Morgan Stanley disclosure appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures. So if we can start off and maybe this one for both Dave and Steve, 2012 priorities (inaudible) prior to hosting there is a lot of initiative you have that side and then obviously on the wireless side you've been looking at LTE rollout, you have some heavy investment there. So if we could just hit some of the key points and then we'll take it from there.
From a TDS teleconference perspective, couple of key strategic imperatives. One is enabling the network for IPTV. We have plans in 2012 to get about 19 markets that will represent about a third of our residential customers. We think IPTV is important because of the broadband share that it brings with it; it’s a full share that it brings with it as well as the revenue growth.
Secondly as to execute on our hosted and managed service, expansion strategy, we think that's a great place to be in. We've made three acquisitions to date relatively modest but we continue to expect, continue to add and we like the growth characteristics, we like the synergies of the business and then lastly is to continue to manage the regulatory environment we exist even though new legislation has been passed, the challenge now is how it ultimately gets implemented and continue to shape that policy. So those would be the three primary initiatives.
So for US Cellular I will build on what Dave said I think, certainly the regulatory area is an important influence on our business and so it's something that we'll need to continue to monitor it as well as advocate on issues that are of importance to the company. One of the impediments that we'll have to grow this year of course is that we're expecting a step down receipts from the universal service funds. There as you probably know the USF reform order creates a couple of new funds that represent potential sources of revenue to US cellular but at this point they are still a lot of work to be done by the SEC, its defining the rules and the regulations surrounding those funds. So to what extent we would be able to get receipts to offset the decline and USF running is I think something unknown at this point, it's something that we'll certainly be pursuing this year.
But in terms of the base business, I would say there are a couple of strategic imperatives for US cellular this coming year and the first clearly has to be getting the company growing again in terms of subscriber growth. That is probably the number one challenge in area focus for the company. We'll be addressing that in a number of ways. One is through enhanced marketing and advertising and making sure that we are really delivering the message to both existing and potential customers and the unique value that US Cellular offers through its network. Its belief plans and other unique features.
A second major focus Simon referred to it as your LTE deployment. So we began fielding the LTE network in 2011 and our Wave 1 launch as far as the network has actually been ready in December and is up and running and will be introducing our first LTE capable devices or smartphones and a tablet in the March April timeframe. So we'll be launching services that time.
2012 will also be a big year as far as the Wave II deployment. We'll be following the network and launching additional devices over the course of this year such that by the end of the year we expect to have about 50 to 55% of our subscribers covered with LTE service and that initiative will obviously continue on into 2013.
Beyond LTE, the company has a couple of other major initiatives underway that we refer to as our other enablement initiatives and the biggest there is as we disclosed in the past a new billing and operational support system that we're investing this year. So that will be another area of focus for us.
So Dave if we can come back to IPTV, your first and sort of focused area. Can you talk about the architecture of the plant that you and sort of Steve you are building to and how do you balance the economics. There is obviously revenues but there is content tasks when you get churn reduction from what you're sort of seeing what you're modeling so far. How is that all looking?
Sure. So, we started this about three years ago on a couple of markets in Tennessee over a fiber to the home network, a complete overbuild. And what we experienced when we looked at the original plans we've been able to achieve about 30% market share. In about two and a half year period. The majority of that market share came from the cable competitor rather than coming from the satellite TV provider which is good for us. So we're very encouraged by that kind of market share improvement. We did that without any significant promotional dollars in terms of significant front end loads. We found that the HD penetration was higher than we had originally contemplated and the DVR penetration was higher than we had originally contemplated. We've been in this business before.
We have been in the cable TV business in the past. We've always known that content are a factor in terms of that so I think we've got those adequately factored into our algorithm. What we see in terms of this, because it's not just about IPTV and the economics. You have to fundamentally believe that it's important to get the network with speeds that customers demand and so what we've done is synced up that high speed data plan per se with the deployment of IPTV. So rather than just simply to shorten loops and to install fiber to the home just to get the broadband capability we find the economics are much better to do that in concert with IPTV. So what we get from it is that the marginal lift from ITPV but more importantly it’s the broadband share that we pick up. So being a threshold TV provider, we model and with the actual experience, we've looked at what those markets look like, where we are at threshold TV provider and we're not. And there is a marked difference in terms of (inaudible). So customers that are moving into our service territory when we're the terrestrial TV provider, we have one more shot to be able to provide that customer video service, broadband service and in some cases voice service if that's what the customer wants.
So if you think about it from that perspective where we're the IPTV provider, we're the preferred broadband provider. Where the customer selects DIRECTV, not always but in most cases, we're the preferred broadband provider. When the customer selects Dish TV we typically are the preferred provider and we have a relationship with them. So we have a three out of four chance of getting that customer from a broadband perspective and that's where the economics really improve. We've tried to stay close to; we have a mix of service set so in some cases we're using fiber to the home where the economics make sense to do that. In other cases we are shortening loops but we're looking at it from the standpoint of saying, all other things being equal we prefer to go to fiber if we can because we believe that's a longer term solution. But wherever we have shortened loops, we're trying to stay within the AT&T U-verse model and therefore we can stay consistent with their vendor selection with how technology is evolving with them etcetera. So to the extent that customer or the venders are building VDSL 2 technology that optimizes for the kind of loop lengths that AT&T has, we can follow long beyond that. So to the extent the set top box manufacturers are building set top boxes operate some extra media room, and the appropriate digital rights management software we can follow along with that. So we're kind of riding that crest behind AT&T U-verse but at the same time ending up with a higher mix of fiber to the home.
The other thing that's important I think in terms of it is if you look at Verizon and a FiOS network, they've really build an independent network, a separate network and we're really making this part and parcel of an involving network. So we look for vendor manufacturers that are equipment agnostics so that they can operate plain old telephone service, they can operate ADSL-2 technology, VDS-2 technology (inaudible) all at the same time. We think that’s really important because that network will continue to evolve especially in the rural markets.
What percent of homes do you think will ultimately be economic to deploy this in terms of technology?
Well our original plans that we have underway now and for next year would cover about a third of our homes, you know if you look at our residential footprints it varies by market but generally the cable competition is in about 70% of that. So think of the inner city ring if you want to call that, that represents about 70% of the customer and then the customers that are outside of that don’t have current cable on service today, either for video or for broadband.
So I think that’s the question is going from that third to 70%, it clearly won't be 70%, it's not going to get there, DISH is a great partner, we will continue to use them as a partner but we think overtime with the franchise rules and technology we can move that up some. It's just unclear right now and you are going to have learned more as we build in the markets we are going to find out can we short loops less than we thought and will set top box cost continue to decline.
There are some great advances with wireless set top boxes; wireless set top boxes would significantly reduce the cost in the home that would really help the economics for us. So we will watch all of those things as we thinking of.
And then Steve turning to the wireless transit, told about getting back to growth, become the postpaid I think that Mary had spoken on the call some good momentum coming out of 2011, you are getting cost on for the iPhone, so you just talk about some of the moving parts here we had the iPhone going took some turn up, you had some promotional initiatives. You have got some new handsets, you got 4G coming.
I guess the investors want to kind look at the kind of mild post here and when should we expecting that you can start to you know turn back to positive adds?
Well I think as Mary said on the call and I would reiterate today that we are encouraged from what we have seen in terms of gross adds, so I think the work that we have been doing to enhance our marketing and advertising and making sure that the benefits of U.S. cellular provides especially through the belief plans is more clearly understood by both existing and perspective customers because it will affect both the churn and growth adds size of that and we are encouraged by what we have seen on the gross add side. Again as we have reported in the fourth quarter we were up year-over-year, we were up sequentially. If you looked at the trend over the course of the year before the quarter one of the strongest as far as gross adds.
And year-over-year we have seen an improvement so far in the early part of this year as well. I think the other thing that I would say though to be fair is that churn did live up the fourth quarter and there is no question if there was an impact of the iPhone on us.
It was interesting that the fourth quarter launch of the latest iPhone device was the first that that’s actually occurred in the fourth quarter that coincide with the heaviest wireless selling seasons at the holiday time.
And of course having three national carriers, tearing them offering across broader part of our footprint was a factor. I think we will need to see how that plays out over the course of this next year. But we need to focus on the things that we can so the things that we are working onto address that, some of you mentioned certainly again enhancing, sharpening the marketing and advertising messages, continuing to accelerate as fast as we can, our LTE deployment so that we are enhancing and maintaining our competitiveness is there.
In terms of the device line up 20 or so new devices we expect to introduce this year, fairly large number of them are smart phones so we expect to have smart phone offering across the spectrum from lower price to the highest most feature rich devices and we think we have offerings that compete with each model device. So the plan across would be to engage with customers in a discussion about your needs, what services do you want, how do you use your phone, we think we have the device that can compete effectively with the iPhone.
So when you take all that into consideration, I mean I think it's hard to say exactly when we would turn the corner net, but certainly our expectation and what we are driving for would be to have positive net subscriber growth this year compared to the loss of a 100,000 or so customers we had last year.
You made a lot of headlines with your decision not to take the acts on. Is the door closed on that, is this that something that there is maybe a new iPhone coming off at the end of this year and that something where there may be a different set of discussions around purchase commitments or whatever.
Yes so on, I can say from U.S. Cellular’s perspective that door certainly is not closed. The iPhone we all know is a great device and if U.S. Cellular could obtain an offer on terms and conditions that would be reasonable for us as a company. We certainly like to do that so it's something that as I have said from our perspective of the door is still open. We are talking to OEMs all the time, we certainly would like to continue in a dialogue with Apple.
And maybe Jane one for you, we have just gone through the special share collapse into the common shares, what are the next steps. Is that an end in and of itself or there are other opportunities of that now presents a number of people have highlighted the discount at which TDS the wire line business trades relative to the public trading price of U.S. Cellular, so there is some valuation discrepancies that made right your buyback activity or whatever.
No I think the share consolidation really was what we viewed as a first step when you looked at the various discounts happening was the most deeply discounted so addressing that and getting that accomplished past January was very important but we really do view that as a first step.
So we are looking can spoke on the call a little bit, everything around dividend policy, at both PDS and U.S. Cellular buyback policy how we approach that but also structurally M&A standpoint it's really, right now we are evaluating a lot of options. We are continuing to seek shareholder feedback on different ways they think we can create the most value but absolutely ongoing process.
How integrated is U.S. Cellular and TDS, Verizon folks about one Verizon and having a lot of common back office activities. They have some more of an overlap in terms of footprint but what are that sort of are the backlogs is fairly discreet today or are they a lot of common systems.
Well I think there are other, there are some commonality we shared and of course there are some discreet but for instance a company’s share a common financial system platform in the form of SAP and we manage certain of the financial activities of the company and one that comes to mind and important one would be cash management overall financing plans, rating agency, interaction.
So there are a number of financial functions that we manage centrally, other things of course customer service, the network I think they are necessarily more discreet systems that would be managed, operated at the business unit level, Dave anything you would comment?
I think when we look at from a TDS telecom perspective, U.S. Cellular overlaps us in about 40% of our market and so that’s a pretty big number but I think you can avert that and look at it from U.S. Celluar’s perspective it's about 4% and so it's not that meaningful to be able to do that, I think a lot of times people jump to things like billing systems and value others but quite frankly the billing is very, very simple. Install the operational support; it's all the provisioning and everything else. Those systems are very difficult; businesses are very different, you mean the very backend billing to the customer part is relatively straight forward.
All the complexity, all the cost, all the integration is in positioning the customer and so when you think about those two businesses relative to everything that needs to be done to provision wireless customer versus things to provision it. The wire line customer and I believe (ph) were quite different. But, I think wherever we can as Steve said we share those resources and (inaudible) has complaint to a whole variety of different things.
I think you both mentioned regulations. What are your big kind of points efficacy in Washington or at the state level, a wish list, it's obviously election year so not a lot gets done but what were the big things (inaudible).
Well let me start from a telecom perspective. The ICC and USF reform was significant. We believe that in spirit it met the objects that FCC had relative to support for broadband deployment in rural America; specifically $2 billion were set aside which was smaller than the amount today. $2 billion was set aside of the rate of return carriers to continue to provide and recognize the cost for our cost. That's good. I think the trick will be how that ultimately gets implemented. We've seen in the past what the spirit of an order like that is and how it gets challenged in the courts, how it ultimately get's implemented. So what we're going to have to do is spend a lot of time to continue to make sure that the intent of that order is delivered and it's delivered fairly and it's delivered for companies that TDS Telecom and for our customers and we truly believe that the things that the FCC set out to do are exactly aligned with what we think our report and we believe we just need to make sure that the dollars flow to companies that are doing what the FCC had intended.
So that's very important from a federal perspective. I think there is always uncertainty abound in election year on what's going to happen so we'll just have to wait to see what unfolds there. On the state side, we manage in 30 different jurisdictions. We have a great with those state commissions. We provide a high level of integrity and transparency with them. We understand that we need to work with them. They have a job to do and in terms of protecting consumers and commercial customers and we work well with them. So something can flair up in any particular state but it's much more manageable. I think the federal side is a little more volatile from a standpoint of the process that goes on and the constituencies that are involved.
I think on the wireless side of TDS there are a couple of issues that I think clearly from the top of the list of concerns with the company this year and one would be one of those that Dave mentioned and that's universal service. So I think we're going to continue to advocate there. As you know the FCC has created a couple of new mobility funds where funds will be available to carriers however the rules there are still emerging so that's an area that we'll have to monitor but importantly we will try to influence the intent to capture funding from those new funds will be an area for U.S. cellular.
Another is the company will continue to advocate both at the Congressional and FCC levels related to spectrum. So we're very interested in seeing more spectrum being brought to the market through auctions. We know there was some recent legislation on that related to the voluntary auctions from the broadcasters but again I think there is a lot more to come as far as rules and how that spectrum might get packaged. So we'll want to be advocating there to make sure that there are blocks offered that U.S. Cellular can be competitive in an auction and procedure.
And then I think the last thing is interoperability, I think making sure that we're striving for more interoperability, especially in an LTE world with the different bands of spectrum that will be used will be an important area from regulator advocacy for us this year.
Okay. We've got time for a couple of questions.
Simon mentioned integration in One Verizon. I have a question about now that you want to grow your customer base again, what are you doing on the U.S. Cellular side with the website, with multi channel strategies. I've noticed the website hasn’t changed very much and Verizon and Sprint are very much investing in this area.
Okay. So great question. And the fact is we're spending a lot of time in terms of the web. I referred earlier to what we were calling our enablement initiatives and there are actually three major ones and we've talked about those publicly to some extent but the first is the billing and operational support system that I mentioned.
The second is an improved data warehouse, customer relationship management system and the capability that it creates there is capturing customer data and being able to target offerings to specific segments and hopefully better efficiency and productivity as far as marketing efforts. The third is actually the web initiative.
So the it hasn’t changed much. I actually encourage you to go, I don’t know when the last time you were out there was but we actually made some enhancements to the web this past weekend that we're calling current customer shopping and it's a completely new look and feel and clearly one of our strategic goals is to drive not only additional sales but greater customer self service capability through the web which will also driver efficiencies in terms of the cost of providing post sales support. So have a look and give us some feedback but I think you'll see that it's quite different.
Can you spend a few minutes talking about the potential for handset pricing to come down over the next couple of years and what that might mean to your model on the wireless side?
Let me start by saying that I think that we've done a really good job this past year, actually in controlling the net subsidy or the loss on equipment that we have for handset sales. When you consider the significant shift in mix that we've seen in smartphone sales as a percent of the total mix I think for the fourth quarter alone it was 28% more smartphones. So we've actually been able to maintain the net subsidy per unit constant or flat year-to-year despite significantly higher sales of more expensive devices and we've done that through working with our OEM vendors to introduce a range of smartphones and in fact smartphones with lower cost points.
Over this next year there is going to be some upward pressure I think on cost as we introduce new LTE devices in to the portfolio. Those devices will be a little more expensive than the existing 3G devices but again our intention is to manage that portfolio and have a range of price points so that we can control cost. Pardon me?
Can you comment on the price rise (ph)?
That's hard to predict. I think I can say what I've said is that it's an everyday process of working that that's all I can offer you at this point.
Great. Well unfortunately we've run out of time. Thank you for your time. We appreciate it.
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