Telephone and Data Systems' CEO Presents at the 40th Annual UBS Global Media and Communications Conference (Transcript)

| About: Telephone and (TDS)

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

40th Annual UBS Global Media and Communications Conference

December 3, 2012 1:30 PM ET

Executives

LeRoy T. Carlson, Jr. – President and CEO

Kenneth R. Meyers – Executive Vice President and Chief Financial Officer

Jane W. McCahon – Vice President, Corporate Relations

Analysts

Batya Levi – UBS

Batya Levi – UBS

Okay. We’re going to get started now. Welcome everyone to our 40th Annual Global Media and Communications Conference. I’m Batya Levi with the telecom team at UBS. Next, our presenters are TDS. The Chief Executive Officer, Ted Carlson and CFO, Ken Meyers. We’re going to have some opening comments and then we’re going to go straight into Q&A.

LeRoy T. Carlson, Jr.

Thank you very much, Batya. I want to thank you Batya Levi and UBS for inviting us here today. As Batya said, I’m Ted Carlson, CEO of TDS and with me is Ken. Meyers, our Executive Vice President and CFO and also Jane McCahon. Jane, you want to identify yourself there? Okay, as Vice President of Corporate Relations.

I’d like to give you a brief update on some of our important activities. At TDS Corporate, we’re working to identify structural, operational or financial actions that we could take to enhance long term shareholder value and that are consistent with our strategy to have a growing, vibrant business. We completed a TDS share consolidation in January of 2012 which greatly simplified our capital structure and last month we announced an agreement between US Cellular and Sprint to exit some significantly underperforming markets. These are two good steps that position us to consider additional opportunistic steps and we continue to collect and to evaluate a large number and wide variety of possible steps to build additional long term value for our shareholders and we look forward to repotting continued progress.

I’d like to make a few comments on our recent decision to sell certain less perfuming Midwest markets. US Cellular is selling most of its PCS spectrum licenses and more than 500,000 customers in these Midwest markets to Sprint for $480 million. This transaction represents roughly 10% of US Cellular’s total customer base. By selling these markets, we can focus our resources on markets where we typically have stronger competitive positions and where we can anticipate over time improving margins and return on capital.

An important factor in the timing of this decision was the significant investment necessary to upgrade these markets to a 4G LTE network and the need down the road to eventually make additional sizeable investments in Spectrum for data growth. The transaction valuation $820 per customer or $1.74 per megahertz POP is in the range of recent comps and attractive.

Beyond the cash proceeds, US Cellular will retain its direct or indirect ownership interests in the owned tower portfolio in these markets and other Spectrum in the transaction markets. US Cellular expects to receive the cash proceeds at closing in approximately mid 2013.

In terms of the remaining footprint at US Cellular, these are mostly in markets where we have strong market share positions. In fact, of the top 10 remaining markets, we have the number two market share position in eight of the 10 markets. And now the U.S Cellular management team will be able to focus much more of its attention on these important markets.

At U.S Cellular, we continue to execute on our great customer experience, customer satisfaction strategy. Our Hello Better advertising campaign is showing good results so far as evidence by our increase in post paid gross additions year over year. We have a strong device portfolio led by the 4G LTE Galaxy S III and the Galaxy Note II heading into this important holiday season.

New distribution this year into Wal-Mart is providing incremental new customers for us and we’re working a number of initiatives to address our elevated postpaid churn. We’re excited about the effectiveness in rolling out our 4G LTE network. 58% of our customers will be covered by our LTE footprint by this year end and by year end 2013 we plan to cover 87% of our customers assuming the Sprint transaction closes by then.

We’re currently selling 4G LTE Smartphone devices in all of our markets, which is important because once LTE is turned on these markets, then we get more data capacity hence speed benefits immediately. Our goal is to move customers to 4G as quickly as possible so that we can stop spending capital on expensive, incremental data capacity for 3G networks.

Our 4G device subsidies will remain high as we move through this 3G to 4G transition. Going forward, especially given our 10% smaller revenue base at U.S Cellular, we’ll continue looking at ways to bring down our structure. As an example, we recently announced that we’ll be transitioning a call center at Bolingbrook, Illinois to an outsourcing partner. This action will allow us flexibility to better match call center capacity and call volumes and this step alone should reduce our facilities expense by more than $3 million annually beginning in 2014.

And now I’d like to tell you about two exciting TDS Telecom initiatives. We’ve made four acquisitions in the hosted and managed services space. We’re developing a full range of IT services to offer midsized and small businesses and government customers. These services include Cloud, core location, managed and hosted services and solutions provider services.

Part of our strategy is to cross sell between our HMS and our traditional ILEC/CLEC telecom business. We’re primarily targeting midsize companies and institutions, those with 100 to 2,000 employees. As e have found the competition for this segment is relatively fragmented. While we’re integrating our four acquisitions, we plan to grow both organically and through acquisitions.

Like all companies in early development stages, we’re investing in the people infrastructure support systems and new products and services for HMS and we’re doing so to realize the long term growth potential of this business.

TDS Telecom is also excited to be rolling out its own IPTV video service called TDS TV. By year end we expect to pass 65,000 households and by offering this high customer satisfaction service which used Microsoft Media Room, the company is increasing its residential bundle penetration and reducing its churn. We’re very pleased to report that almost half of our new TDS TV customers in our new markets are purchasing our highest tiered product.

And now Batia, we want to leave plenty of room for questions.

Question-and-Answer Session

Batya Levi – UBS

Okay, that’s great. Thank you. I want to start with the USM side. Maybe just tying it to your recent transaction with Sprint, can you talk about how you think USM fits to overall wireless landscape in the US? Some argue that being a regional player and competition with the nationals every day is very hard to do. What are your thoughts? How do you envision USM over the longer term?

LeRoy T. Carlson, Jr.

Well, the way we envision US Cellular over the longer term is as a carrier that has distinctly different capabilities than what the nationals have. For the last two years we have won the J.D Power award for the best network experience in our North central region. We’re the only carrier that outperformed Verizon in any region of the country and for the 12 periods, these are six month periods previous to that, we had the best call quality experience. So again in the north central region and again one of the few carriers really in any region that outperformed Verizon. So it starts with a great network experience, but it also goes into the great experiences we provide through the best in-store experience, our great call center experience and a great handset lineup and now we’re broadening our distribution to be where people want to shop. So I guess what I would summarize in saying is that we give the highest level of customer satisfaction and I don’t think I can name the organization’s name, but we just received word on Friday that we, for the third year in a row, we will be named the best large carrier in the United States in terms of customer satisfaction by probably the leading consumer activist group in the United States. And it really gives me great pleasure to say that. So US Cellular is not about being the biggest. It’s about being the best and distinguishing ourselves by being the best.

Batya Levi – UBS

Okay. In terms of your effort to focus on more of your regional footprints and maybe getting out of your tier one locations, similar to the transactions with Sprint, do you think that there are other maybe cities or regions that you would want to get out of and focus on your expertise in more regional groups?

LeRoy T. Carlson, Jr.

No. the question about do we want to get out of any other areas, Batya, you know we really don’t. I think the footprint that you see as a result of this transaction is the footprint that we would like to have going forward. Now there are some licenses that we own and a partner of ours is designated entity owns that overlay the areas that we’re in the Sprint transaction and those licenses now could be reexamined as to whether those are necessary strategically going forward because we will be exiting these markets. But that’s a different thing than what you’/re talking about here.

Batya Levi – UBS

Okay. In terms of the Sprint transaction, you mentioned that these properties were cash flow negative. Can you help us understand a little bit how much of the boost you will see on your margins after the sale of these assets?

LeRoy T. Carlson, Jr.

I’m going to let Ken pick that one up. But you didn’t finish your question. I’m sorry I jumped in there.

Batya Levi – UBS

No, it’s okay. I just wanted to add onto it. If you could share some details on the running of the network for them and I think it’s a two year contract. Can that be renewed and how do you think about that?

Kenneth R. Meyers

Okay. So this is kind of a background. The transaction with Sprint is a little bit unusual in that it’s not a single point in time we sell the market, we sell the operations and assets and walk away from it. Rather, at closing which we expect to be six to nine months, we will sell the Spectrum and the customer base to Sprint. Then in turn they’re going to actually lease the Spectrum back to us so that we can run that current network and we will run the current network for them while they start the process of transitioning the customers. That can be for as much as two years. If I expect it to be lesser than that, but it could be for as much as two years. During that period, we will get paid not only to run the network but we ought to get paid to shut down the network at the end of the transition period.

How all that flows through the income statement is you’ll see the sale of the license and customers at closing in a gain off of that. You’ll actually see us take the network effort and start depreciating them faster as of November 1st when we sign the deal and actually we will be depreciating those assets between now and the expected end of the transition period, call it two years from now. The same time we will incur operating and shut down costs that we’ll be paid for. So the income statement between now and through the end of the transition period is going to be a little bit messy, but we are actually working on different types of disclosures we’ll be able to put out to help everybody understand clearly how we’re going to pull it through.

Batya Levi – UBS

Okay. And you mentioned the value was attractive, about $1.74 per megahertz POP. If you stripped out the value for the customers and this network operation, do you have a value for just the spectrum? Did you look at the transaction that way?

LeRoy T. Carlson, Jr.

We didn’t really split the two. We do have to deliver a certain number of customers at the time of the closing Batya based on a number of factors and then if we don’t deliver that, then there’s a value of some $500 per customer to put on the shortfall. But we don’t anticipate there being any shortfall. But we didn’t really break those two parts apart.

Batya Levi – UBS

Okay. In terms of your business, you mentioned that postpaid churn remains elevated. Can you talk a little bit of your efforts to bring churn now? And what’s a more acceptable level for you? Where do you want to take churn to?

LeRoy T. Carlson, Jr.

Well, first I want to make the comment that the markets that we’re disposing of, their churn was running considerably higher at 2.8% per month compared to the 1.5% per month for the continuing markets that represent some 90% of our customers. But we’re doing a number of things to bring the churn down. One of the things is what I would call deep data analytics. We have a new team at US Cellular which analyzes data with literally I think 100 factors to identify those customers that are most likely to churn and it’s very interesting. Sometimes the customer who makes the most phone calls is one who’s most likely to churn and on the other hand, what we found is sometimes it’s the customers who make the least calls who are most likely to churn.

So we’re identifying the characteristics of customers who are most likely to churn and then approaching those customers with targeted offers and what we’re finding is that sometimes the customers are not on the right rate plan, but even in our discussions with the customers to bring them onto the right rate plan, we’re actually instead of giving a revenue or decline, we’re actually getting a small revenue lift from that analytical work in putting them on the right rate plan. So it’s turning out to be not only a churn reducer, but in the case of getting customers who are not quite on the right rate plan is turning out to be a revenue raiser which is I think a positive surprise. That’s an example. To be quite frank about it, one of the reasons why we have elevated churn is we don’t carry the iPhone. So that’s something that we will continue to look at, to evaluate and I can’t predict at this time what the outcome will be. We had our reasons a year for not carrying it, but we’re continuing to examine that.

Batya Levi – UBS

Okay. I do want to go a little bit deeper about on your decision not to carry it last year and what you’re looking at right now. I guess are you looking at different methods or strategies to carry the iPhone that could make it more affordable maybe, like an installments plan that some of the carriers have instituted or keeping maybe a lower subsidy. And I think the iPhone is a key component of the churn discussions but also the growth size discussion. If you could tie that into – if you look at the Smartphone sales in the US, about 60% of the new gross adds was the iPhone. So do you think that you’\re missing out in terms of gaining more gross add share and also seeing higher churn?

LeRoy T. Carlson, Jr.

Well, we’re looking at that very carefully. We have a wonderful lineup of phones. The Galaxy S III and the Galaxy Note II are great devices and there are others that we have, we’ll have in this fourth quarter. but the iPhone in the United States in particular does have a very strong following as you say. And so we have to look at the reasons why we didn’t take it and to see if those reasons have changed. So to go back, why didn’t we take it, just to remind everyone of that? What we did at that time, we pointed to the Sprint transaction where it appeared to us that the subsidy was about $450 per phone, that there was a very large volume commitment required and where there was a three year forward commitment on a take or pay basis which in effect transferred the risk from the manufacturer of the device over to the carrier for the success of the manufacturer’s product line over a three year basis into the future. And there was another factor that entered in at that time Batya and that was the question of whether or not we could obtain a 4G iPhone. As you know we’ve rolled out 4G in quite a few markets and we plan to do that in many more markets. Most of the markets where we rolled out 4G are on a 700 megahertz frequency band and we use the band 12 for most of our markets and the iPhone that’s produced today does not include band 12. So that’s something we would have to find an accommodation to either by Apple including band 12 in the device or we would have to roll out LTE on band 5 which is our fundamental 850 band which we haven’t done except in a few markets to date.

Batya Levi – UBS

Okay. But how do you think about the subsidy model? Is an installment plan the way?

LeRoy T. Carlson, Jr.

Well, certainly an installment plan is the way to spread the subsidy out over time. I’m not sure that it ultimately necessarily changes the subsidy, unless you could expect the customer to pay more in total let’s say over a two year time period. There are ways to protect the carrier by having higher termination fees or by stretching out the time to get a new phone and I know a number of the carriers have stretched that replacement cycle out considerably. Thus far US Cellular is on a much more rapid replacement cycle. I think we’re on a 10% per quarter, Jane if I’m right, replacement cycle whereas some of the very large carriers only replacing at the rate of 5% per quarter. So that’s one of the advantages that US Cellular has in the marketplace. We’re offering our customers the opportunity to replace their phones more quickly. So if we took on the iPhone maybe we would have to find a way to get those customers not to replace their phones so rapidly.

Batya Levi – UBS

When you look at the Smartphone penetration of your customer base, I believe you’re 39% of your subscribers have a Smartphone today and more than 50% of the new sales take a Smartphone . That percentage seems to be a bit higher for the other nationals. 70%, 80% take Smartphones. Can you talk about why there is a difference? I don’t think it’s just a lineup of devices. But do you see your customers maybe more gearing towards the feature phones?

LeRoy T. Carlson, Jr.

Well, I would say that our customer base is targeted a little differently than a couple of the larger carriers and that is we do not have so many what you would call power users and we don’t have so many what you would call early adopters, people who feel they have to have the latest devices. On the other hand, I would say this too, that we are very customer centric at US Cellular. So when a customer comes into our store, we will not try to move that person into a Smartphone if that person really doesn’t want to be on a Smartphone. We don’t want to have our customer to have what’s called buyer’s remorse. So we will move them there as they are comfortable moving there. Over the long term, I think we will get to 805 and then 90%. But our current run rate, I agree, in terms of Smartphone sales, at over 50% is not quite the size some of the other nationals. But it will get there. But our customers are not quite the early adapters that some of the other companies are.

Batya Levi – UBS

Okay. You’re a big proponent of your rewards program. Can you talk a little bit about the success of it and how well these plans are received by your customers?

LeRoy T. Carlson, Jr.

Yeah. I’m really excited about the rewards program. We have 3.6 million customers on the rewards program now and that’s growing. Our customers are actively engaged with the program. They’re turning in their reward points for accessories or to accelerate their phone replacement or to add a line. We’re the only one of the industry that has a substitute rewards program. All of the consumer testing that we have done show that our rewards program is one of the best things you can do for a consumer. People really like it. They like the idea of being rewarded for being loyal to their carrier. So it’s a great distinguishing characteristic of US Cellular and one thing that makes us special in the marketplace.

Batya Levi – UBS

I want to shift to pricing. Over this summer we saw AT&T and Verizon announce their shared data, share everything plans. Earlier in the year they instituted fees for upgrading phones. Can you share your thoughts on both of these different pricing structures?

LeRoy T. Carlson, Jr.

I’m going to pass that one to Ken to talk to. Ken?

Kenneth R. Meyers

As I thought of it. I like revenue, that’s why I get this question. In fact the upgrade is one that we have implemented also and it helps offset the cost of those expensive upgrades Ted was talking about. And there’s a lot of attractive serve on the shared data. We are in the midst of putting in a new billing system and that means we’ve frozen our current one. We aren’t making any changes to current one. So we won’t be able to adopt something like that until after the new system is in which will be second half of the year, but it’s something that we are very interested.

Batya Levi – UBS

I think AT&T and Verizon differ in their approach to shared data, shared everything. Verizon just offers this and for new customers they don’t have their individual plans available any more and AT&T makes it more flexible. What are your thoughts? What makes sense?

Kenneth R. Meyers

It’s premature to even talk about that given that we’re six months away from being able to have that capability to guess where the marker is going to be six months from now. More and you’ll be wrong.

Batya Levi – UBS

Maybe a question on prepaid. It has been stronger than expected. Can you talk a little bit about the segment, how you see that trending. If you continue to see prepaid as a big growth contributor and if you could touch on the economics on this group of customers as well.

LeRoy T. Carlson, Jr.

Why don’t I take the first part and then Ken maybe you can take the economics part. So prepaid is a major part of the US marketplace and it has a growth future. And postpaid I also believe has a growth future, although not as strong percentage wise as prepaid does. What we have found is that the prepaid customers like to shop in certain venues and we had not had a presence in Wal-Mart and a substantial percentage and I’m not going to probably remember the number right. Jane, is it like 40%? Maybe your 40%, 505 believe it or not of the prepaid business goes through Wal-Mart. And so by not being in Wal-Mart, we were missing out on that business. Now you can say well, wouldn’t those people have come and shop in your stores? Well, the answer to that is not really. Some 85% or so of the business that we’re getting in Wal-Mart and we do surveys of this, is new business. So people want to shop where they want to shop and they just are going to keep doing what they’ve been doing and that’s fine.

But we need to be where they want to shop. So Wal-Mart is the first example of that. There are some other examples I’m not going to name names, but we would anticipate moving forward and continuing to broaden our distribution with some of these major retailers over the next year. This is very important for US Cellular because in the past we’ve tried to what you might call control the experience of the store where people shopped, but what we learned is that that’s important to many people, but it’s not important to everyone. Some people will understand that you have a great network and if you appear on a rack at Wal-Mart, that’s okay. They just want to buy you there and they know you have a great network. So they will pick you off that rack because they know you have a great network. Batya, let me have Ken talk the economics factor.

Kenneth R. Meyers

Actually we’re very pleased with what we’re seeing come out of the Wal-Mart program so far. We’re running ahead of projections in terms of not only the level of activity, the ads coming out of it, but the revenue that we have built the business case. And we look at each one of the product lines and in this case this separate distribution standalone basis. We’re quite happy with it.

Batya Levi – UBS

Okay. You mentioned the call center transfer to a vendor as a cost cutting opportunity. Can you talk a little bit more about other opportunities that you have on the cost side?

LeRoy T. Carlson, Jr.

Ken, do you want to talk to that?

Kenneth R. Meyers

Yeah. There’s a few that come to mind right away, but there’s work going on throughout the business. As we talked about before, the new billing system is going in. that actually brings with it quite a bit of enablement in terms of both the amount of activity required in the store and/or in the call centers to take care of customers. We’ve been making enhancements in our web to both allow self service and more self service as well as selling. I think last time we looked at it we found that the percentage of our customers coming through sale side on the web just leaves a lot of room for improvement in terms of what others have already been able to show they can do. All aspects of the handset management, whether it would be reverse logistics, whether it would be upfront procurement. There’s a few different areas that we’re looking at there at the same time.

Batya Levi – UBS

Question about your LTE deployment. I believe you’re going to pass 58% of your pop this year and 87% by the end of next year. Can that be accelerated? Based on the competition that you’re seeing versus the nationals. If you’ve felt like you needed to go faster in order to compete more effectively, can you do that?

LeRoy T. Carlson, Jr.

It’s possible to accelerate it some, but a sale side build up program has to be planned many months in advance. So you could accelerate it by I believe a few months and we could accelerate going beyond the 87% if we felt that was desirable. At the moment we think that the 87% is where we should be. But it could change as you say based on market conditions. But you can’t change it on a dime. You can’t say well, I want the 87% a month from now. You won’t get it. It just can’t happen really fast.

Batya Levi – UBS

Okay. Maybe shifting to the TDS side, you mentioned the acquisitions that you’ve made on the hosted and managed services side. Can you give us an overview of what you’re seeing in that environment? How is competition? And if you could talk a little bit about where do you see that market trending and what kind of roles does TDS take in that?

LeRoy T. Carlson, Jr.

So we’re very pleased with the HMS market in total. What we’ve tried to do is become a full service provider and one of the most important new services that we have brought to the companies that we have acquired is a strong Cloud offering. The reason we’re able to provide a strong Cloud offering is that we have what are called tier 3 data centers which are highly secure locations and that are resident in parts of the country where there are not natural disasters. We have three of those locations. One in Minnesota, one is Iowa and one in Wisconsin and we have over the past six months, we have instituted very high quality subject to expert verification, Cloud services using Cisco and Jane, EMC, right? VMware. So and we’ve gotten very good traction initially from customers signing up for our new Cloud services.

So it’s an example of how we’ve taken different assets that we collected in those acquisitions and then put them to use with what is probably the leading edge service in the IT world, Cloud services to create a new growth salient on top of the growth that the companies that we acquired already had when we bought them. The companies that we acquired have good, solid growth that they came with and we’re doing everything we can to witness this example to accelerate their growth .and another area where we’re working to accelerate their growth is investing more in their sales force because companies over time if they’re small they tend to grow by modest little steps whereas when we make an acquisition we can invest more for the future, which means taking some losses early on to invest in sales force personnel. But we’re doing that as well.

Batya Levi – UBS

Has the integration of those four acquisitions been completed?

LeRoy T. Carlson, Jr.

Well, I think the word integration is maybe too strong a word because some cases it’s integration. In other cases I would call it cooperation. For example the company that we just acquired, Vital Support Systems is actually going to perform the sales force role for a company that was the second one we acquitted which was Team Technologies. So in that case it’s not total integration because they’re still separate legal entities, but it’s a form of sales cooperation. In other cases there’s less integration and it’s more about our providing additional resources as an example in the case of OneNeck to help them grow faster. So for each element that we purchase, we’re doing the right things for it to help it grow to the maximum extent that it’s possible to grow. But it’s not always what the traditional concept of integration would mean.

Batya Levi – UBS

Okay. And when you look at your product and service capabilities, do you feel like you have the right assets in hosted and managed services?

LeRoy T. Carlson, Jr.

Well, I think we have a good balance of assets today. That doesn’t mean that we’re not on the lookout for more acquisitions. We are. So we’re talking to a range of companies that we’ve identified that we think have attractive futures. And the companies that we’re most interested in are those companies that have outstanding relationships with their customers so that we can take and build on their reputations and help them to accelerate their growth.

Batya Levi – UBS

When you look at demand from customers, I believe you had said that it’s very strong when we met here a year ago. Now with some worries about the economy, the fiscal cliffs, can you give us an overview of have you seen any change of behavior from your customer base?

LeRoy T. Carlson, Jr.

Not that I’ve seen. Clearly very small businesses I think are careful about spending. So in our CLEC world as an example where we’re selling managed IP, we’re selling a lot of that and we’re very successful with it. But many of those customers are being very careful about not having their total telecom bill go up significantly in the process. So they’re wanting to make sure that they’re saving money and not just investing in the latest thing. So there is a caution out there, but it’s not the way it was in 2008 where we really did go over a cliff.

Batya Levi – UBS

Okay. In terms of your IPTV rollout, I believe you’re in seven markets today. How expensive do you want to be in your overall offering? And can you talk about the economics of this business also? Also maybe touching upon what kind of competitive response are you seeing from cable and satellite since you’ve entered this segment?

LeRoy T. Carlson, Jr.

Right. So IPTV we have seven markets launched. We are launching three more this year. So we’ll be at 10. Next year we will be mostly focused on expanding our footprint within those 10 markets and we will look at launching several additional ones although we have not identified yet which ones those will be. What we found is that the cost of implementing IPTV where we have to upgrade traditional copper facilities is running somewhat higher than where we had thought it would run. So we are taking another look at the different paths of moving to IPTV and seeing if there isn’t a way for us to do more of a fiber build rather than the upgrade of the traditional copper facilities because a fiber build will carry us further into the future – kind of future proof our network. Clearly if it were economically feasible we would love to take IPTV to all of the households that we pass at TDS Telecom.

But because of who we are and the companies that we require over the years, many of them are low density. So it’s not going to be practical at least from what we can see today to bring IPTV to them. So we will continue to work very closely with the Dish Network to provide the triple play to those areas where we cannot bring our own IPTV service. Wherever we take IPTV we do have a business case. We do business cases to make sure that it makes sense from our shareholders perspective to roll out these services and where it doesn’t make sense we will continue to work with the Dish Network. So we’re happy with the results to date. We’re getting good take up in these markets. So our business cases are proving out in terms of customer growth and we just have to be very careful that we don’t over invest in old technology because we might have to replace old copper technology in five years and then that would be a double investment.

Batya Levi – UBS

How do you think about the programming cost of the business?

LeRoy T. Carlson, Jr.

Well, the programming cost is clearly a challenge, not only for us as this relatively small television provider, but it’s a challenge for the entire industry and when we do our economic models, we assume that the programming costs will continue to go up. We purchase our programming through the Cable Cooperative. So the economies that we reach or achieve are about equivalent to a cable company with 500,000 customers. So the economics are not dead, but the costs do keep going up. So we have to keep raising our prices and that’s a concern for the entire cable industry.

Batya Levi – UBS

And if you could provide an update on the speed and the quality of your broadband footprint which I believe will be the benchmark to get the IPTV rolled out too. What percentage of your footprints get high speed and if you could just give us a breakdown of that.

LeRoy T. Carlson, Jr.

Well, now Jane I’m going to have to have you call the numbers out for me. Are we are 23% at the end of the year or 10%? I think the end of this year we’re 25ish% of our households, Jane, with 25 megabit speeds or greater, right? We have a portion of customers that’s – I shouldn’t guess but I’m going to – with fiber where the speeds could be much, much greater.

Batya Levi – UBS

And that’s the focus to increase the availability of 20 megs plus throughout your footprint?

LeRoy T. Carlson, Jr.

Yes. We’d really like to get to 40 or so. But 25 is certainly a good starting point.

Batya Levi – UBS

Okay. And maybe just the fiber to the cell opportunity in your footprint, can you give an update on that as well?

LeRoy T. Carlson, Jr.

Well, fiber to the cell is an opportunity and we have done some of that. It has not been our primary focus to date. But it is something that I know our management team at TDS Telecom is looking at and will continue to look at.

Batya Levi – UBS

Okay. Let’s see if there any questions from the audience.

Unknown Analyst

I have two questions about the recent sale. You mentioned Spectrum and the asset base was sold, but obviously that leaves the towers. How many towers were in those two markets and I guess how many tenants per tower? Is there some impediments towards selling those before the xix to nine month window? And then secondly, on that sale, was this a fully taxable event? Maybe can you remind us of what the purchase price for one of those markets was? Thank you.

LeRoy T. Carlson, Jr.

Ken?

Kenneth R. Meyers

Okay. With respect to the first question on the towers, we bought 560 towers. It’s a portfolio of towers from mono pole, from 350 foot, from wood tenants somewhere about and that is an asset that we retain ownership of. Prior to the sale we would have called that a strategic asset and one that like the towers in the rest of our markets that we have no plans to monetize. These assets no longer form that category. So we are looking at what else, what other ways we can drive value from those towers and there is nothing that would prevent us from doing it prior to close or prior to the transition period or anything else. Taxes, it’s to be a little bit tricky when you go back to the actual transaction. On the initial sale with the $480 million sales price, there is expected to be about $130 million tax bill out of that. But the actual network asset that will get written off from a tax standpoint at the end of the transition period we’ll have to wind up shielding a large part of that. But those could be in two different years.

Unknown Analyst

When you guys build fiber to the sale, how many competitors are you usually bidding on those contracts and what sort of returns are you targeting when you bid on those?

LeRoy T. Carlson, Jr.

So the question has to do with how many competitors do we put on the fiber to the cell tower? How many wireless carriers are we putting on?

Unknown Analyst

No. when you’re building fiber to the cell, how many people are usually competing for those contracts?

LeRoy T. Carlson, Jr.

I think that’s one we’re going to have to get back to you on. By asking that question, if you can give Jane your name, we’ll get back to you on that one, get the answers from our telecom team because we’re not doing a lot of that business right now. So I don’t have those answers.

Unknown Analyst

You had said that once you sell the Sprint market you’ll be two in eight out of the top 10 markets that you serve. So I would assume that the operating statistics for those remaining markets will be much higher than I guess your operating stats now. Have you quantified or can you talk to us about churn or ARPU or EBITDA margin for the market, ex the Sprint market?

Kenneth R. Meyers

No. We have not yet provided information on all the different operating statistics and a pre-imposed transaction. We will be working on that. One of them that I think Ted mentioned was I think overall churn post pay was like 1.6. It’s 2.8 in these markets and they’re and 1.5 in all of our other markets. Yes, I think these markets did account for more than a proportion of back of the net customer loss over the last year. But even without these, the company still would have lost net post pay customers. We’re actually trying to break out all of that for you, but we have not yet disclosed all that.

Unknown Analyst

Yes. On that trend with US Cellular notwithstanding that you have the best quality network and the awards you’ve been winning from J.D Power etc, the fact is as you just pointed out, you’ve still been losing customers and what else can you do to address that? And theoretically speaking, if you cannot, at what point will you start to consider strategic alternatives for that business?

LeRoy T. Carlson, Jr.

Well, we anticipate that we will be able to break even with our post pay customers without having to take on the iPhone. Now that’s a big challenge, but it’s a strategic objective for US Cellular and we have a great handset lineup and not everybody we believe needs an iPhone. So that’s our objective. If we had the iPhone our churn would be significantly reduced because about 30% of our voluntary churn, maybe a little more is going to the iPhone today and if we had the iPhone there would be perhaps more gross adds as well. So it would not only reduce churn, but would increase gross adds. So that’s something we’re considering. But we haven’t made any arrangement. So I can’t promise you that there will be an arrangement. We think we can have a solid business without doing that.

Kenneth R. Meyers

I think we’ve seen quite a bit of change over just the last year at US Cellular. I think the most recent quarter you’re seeing post pay gross adds are up 7% year over year and that reflects a lot of the work that has been started around messaging, around distribution, around product offering, all of which I think are necessary underpinnings to the growth. Most recently the churn has become an issue and those same resources that produce the increase in gross adds are now focused on that. So I am very optimistic that over the next few quarters we’ll see a change there. Quite frankly it’s a necessary change.

Unknown Analyst

Hi. One of the – I think my understanding is one of the goals of the several steps that have been taken in terms of the share class consolidation and the other moves that have been made has been to address TDS’s valuation relative to US Cellular. And I’m wondering if you think that – yet the valuation is still relatively low when you would make the adjustments and I’m wondering if you think that is important or something that you need to resolve before you can really take significant incremental TDS focused growth plans like the hosting strategy and pushing it further and faster.

Kenneth R. Meyers

So let me try that. I think we have been – I hope I understand the question.

Unknown Analyst

Well, let me try this way. Do you think that addressing TDS’s valuation as a standalone the wire line side of the business is something that you need to do before you can really get that business where it needs to go? Because from my perspective it doesn’t seem like you’re fully done with that yet, basically some way to stop trades.

Kenneth R. Meyers

Okay. So yes I agree that the TDS wire line valuation is not reflected in the TDS price. So there’s a discount of US Cellular, whatever you want to do it. The TDS price is not fully reflective of the ask value, neither does Cellular for that matter and w are trying to take steps across the whole portfolio to increase performance as well as valuation. I don’t know if there’s implications the way you asked the question before we do something else. What we have done is we started with simplifying the capital structure at the parent company. We started looking at assets to make sure that we see paths to long term returns and the Sprint transaction was a case where in order to get the penetration necessary in those markets to be sufficiently profitable long term, the investments we’d have to make to Spectrum and or fixed assets to get us to LTE just made that a bridge too far. So we made changes there. We will continue to look at other changes, whether it’d be some of the cost items that were asked about earlier, whether it’d be about other areas like HMS where we can invest in. so there isn’t like a lot of stuff to do before a big bold move. Rather it is an ongoing process of addressing one issue after another after another.

Batya Levi – UBS

Maybe we can tie it up with just final question on the balance sheet and how you think about it for both groups and what would be your optimal leverage level and how you think about cash returns.

LeRoy T. Carlson, Jr.

Well, let me make a high level comment and then let Ken talk about the cash and the balance sheet. TDS wants to operate as a solid investment grade company. And so we’re very careful to always preserve a high credit quality. We watch the nature of debt that we take on and we also watch the maturities of that debt and the nature of the way the debt is structured. So I’m very proud of – I’ll say this, Ken and his team just completed the best debt offering that TDS has had in its some 40 year history, 49 year bonds at a rate of 5% and 5.875%. That’s the best debt placement that TDS has ever done. So I’m very proud of it. So Ken, what about the balance sheet?

Kenneth R. Meyers

We can talk about it in two different pieces. In terms of the debt side of it, we like the debt that’s out there. We like the terms. We like the term. I don’t see any dramatic changes on that side. I think there’s some room on the balance sheet for some debt, but there’s not a compelling need for it and as Ted said, maintaining the investment grade rating is one of the platforms the whole strategy is built around. So we’re always cautious on that side. Moving off of that, looking into the cash side, we had allowed cash to build at Cellular above what we think of as our minimum level and we targeted $150 million to $200 million as the level of cash we’d like to see in that business. We let it build over the last couple of years in anticipation of some potential M&A activity coming from some forced divestiture or whatever that hasn’t happened. We continue to generate cash in that business sufficient to do the share repurchases that we’ve been doing there as well as by Spectrum. So cash is built and the same time this Sprint transaction should generate substantial amount of cash. The timing of that is nine months down the road. My anticipation is between now and then we’ll be working with the board at US Cellular around strategies to deploy that cash. And it’s going to be a board level decision. I don’t want to presuppose what the outcomes are. But there are just a little bit of numbers that we have to look at.

Batya Levi – UBS

Okay, thank you very much.

LeRoy T. Carlson, Jr.

Thank you.

Kenneth R. Meyers

Thank you, very, very much for your time.

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