美國無線通訊 (USM) 2011 Q1 法說會逐字稿

Greetings and welcome to the TDS and US Cellular first quarter results conference call.

At this time, all participants are in a listen-only mode.

A brief question and answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Jane McCahon, Vice President Corporate Relations, TDS.

Thank you Ms.

McCahon, you may begin.

Thank you, Rob.

Good morning, everyone, thanks for joining us.

We moved our release and call back one day this year to help resolve some of the pressures on the jammed pack Thursday.

We hope this helped you out a little bit.

I want to remind you all that the quarterly conference call presentation we have prepared to accompany our comments this morning,you can find those on the Investor Relations pages of both the TDS and US Cellular websites.

With me today, and offering prepared comments and participating in the Q&A session, from TDS, Kenneth Meyers, EVP and CFO.

From US Cellular, Mary Dillon, President and CEO, Mike Irizarry, EVP and CTO, Steve Campbell, EVP and CFO and Alan Ferber, EVP and Chief Strategy and Brand Officer.

And from TDS Telecom this morning we have Bill Megan, the EVP Finance and CFO, and Kenneth Paker, the VP of Network Services.

This call is being simultaneously webcast on the Investor Relations sections on both the TDS and US Cellular websites.

Please see the websites for the slides referred to on this call including non-GAAP reconciliations.

The information set forth in the presentation and discussed during this call contain statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties.

Please review the Safe Harbor paragraphs in our releases and the more extended versions that will be included in our SEC filings.

Shortly after we released our earnings results this morning, and before this call, TDS and US Cellular filed SEC Form 8-K current reports, including the press releases we issued this morning.

Both Companies plan to file the SEC form 10-Qs later today.

As can you see on slide three, we'll be attending the following conferences over the next quarter.

May 16th is JPMorgan in Boston, May 24th is Barclays Capital in New York, and June 8th Raymond James in Boston.

If you'd like to meet with us at any of these conferences, please let us know and we'll try to accommodate you if at all possible.

Also, please keep in mind that we have an open door policy at TDS and US Cellular, so if you're in the Chicago area and would like to meet with the members of management, we would like to try to help you do that, calendars permitting.

With that, I'll turn the call over to Ken Myers.

Thank you, Jane.

Good morning.

It's been a busy, interesting few months since we last reported.

From a financing standpoint, TDS issued $300 million in 49-year debt at 7%, and in turn announced the redemption of $282.5 million of 7.6% of debt we had outstanding.

These two transactions kind of bridge the end of the quarter with the debt issuance in the first quarter, the redemption in the second quarter.

As a result, on the balance sheet you'll see $282.5 millionin the current portion of long-term debt, and $282.5 millionin restricted stock.

Going forward that all will resolve itself before the second quarter, and we will continue to look for additional ways to decrease interest expense.

Also in the quarter, TDS bought back approximately 407,000 special common shares for a little bit over $11 million and at US Cellular we repurchased 357,000 shares for approximately $17 million.

TDS ended the quarter with a strong balance sheet that provides the Company significant financial flexibility.

As a Company, we will continue to evaluate opportunities in the wireless, wireline and hosted and managed services basis.

We have always been an inquisitive Company, but are also extremely disciplined in our approach.

On the income statement, the effective tax rate for the quarter at TDS was at low at 35.6% primarily due to favorable changes in estimates for certain state income tax contingencies.

For the year, TDS expects to incur a taxable loss for federal income tax purposes as a result of the 100% bonus depreciation in effect this year.

At this point, we plan to carry back this taxable loss to prior years and have recorded a $22 million prepaid income tax item at the end of the first quarter related to the benefit associated with this carry back.

We anticipate reporting similar amounts related to this carry back in each quarter throughout 2011.

As you might expect, we will evaluate opportunities to acquire properties that might be divested in connection with the proposed AT&T and T-Mobile acquisition, if the properties help to strengthen our footprint and the economics work out.

And from a competitive standpoint, even though the acquisition would clearly change the industry, we continue to believe that as the big get bigger, US Cellular with its customer satisfaction strategy can compete even more effectively as a local company consumers know and trust.

We will be active in Washington to make sure that our concerns about market power and the impact on customer choice and competition are addressed in this process.

Turning to the regulatory environment.

We are very pleased with the FCC's adoption last month of an order on data roaming.

Customers have long enjoyed seamless nationwide roaming for voice.

They now expect nothing less for their data and broadband services.

The FCC's action will help assure that mobile customers, whether they are served by the largest national carriers, or the smallest world providers, can roam with their smartphones and other data devices.

In terms of other issues, we continue to work with policymakers on key concerns like 700 MHz device interoperability, and making more spectrum available to address the explosive demand in mobile broadband.

And of course, the universal service and inter-carrier compensation dockets will continue to work their way through the FCC.

We remain concerned about the direction the FCC has tentatively proposed and the impact it will have on our rural operations and the customers they serve.

Our teams in Washington are working hard to promote reasonable transition periods and long-term solutions that retain customer choice in high quality networks for both fixed and mobile customers.

And with that, I'll now turn the call over to Mary Dillon.

Mary?

Thank you Ken, and good morning everyone.

I am going to begin my prepared comments with an overview of the quarter, both accomplishments and challenges.

And then given the acceleration of our LTE roll out, I've asked our CTO, Mike Irizarry to share some of his thoughts on data usage and our network strategy.

Steve will then review our financial and operating results for the first quarter and update on our 2011 guidance.

Competition has been as aggressive as ever, particularly in the areas of handset subsidies and Verizon's launch of the iPhone.

As Ken discussed, the proposed merger of AT&T and TMobile has introduced a new dimension to the competitive landscape, and one that holds both opportunities and concerns for US Cellular.

I'd like to start by covering some of the successes from the first quarter.

We saw year-over-year growth at ARPU as smartphone penetration and the accompanying data plans continued to ramp rapidly.

While migrations to our Belief Plans have leveled off somewhat from the fourth quarter post-launch levels, the customer conversions remain strong and are contributing to ARPU growth.

Having new and existing customers subscribe to the Belief Plans is a critical part of our strategy going forward, as we expect these highly satisfied customers to be vocal advocates for US Cellular and help us to attract new customers.

Our postpaid churn also remains encouraging as we dipped under 1.4% with a 1.37% postpaid rate in the first quarter.

On the other hand, we still have much work do particularly in getting improvements in gross adds.

As shown in slide eight, we're actively working to stimulate adds in a variety of ways, including new advertising.

We continue to mine consumer insight to optimize our communication strategies.

We have a very strong conversion rate from consideration to sale.

However, we found that wireless customers who are not our customers aren't aware of the quality of our network or the competitiveness of our device lineup.

Especially insome of our under-penetrated markets, which thus reduces our ability to be in the consideration set.

The new advertising campaign which started running last week emphasizes the basic categories antes, or considerations.

Our great quality network, great lineup of devices, and value, it then goes on to explain the benefits of the Belief Project.

In addition, according to a leading independent third party research company we have the most satisfied customers in wireless and that's the theme of the campaign, is switch to US Cellular and be with the happiest customers in wireless.

If you haven't seen them yet, these new commercials are available for viewing on our website.

Our prepaid offerings were just enhanced with the addition of both smartphones and wireless modems as we intend to grow our data revenue over the entire customer base.

We continue to feel the impact of higher costs of subsidizing smartphone, although to a lesser extent than we saw in the fourth quarter.

We saw the percent of smartphones sold increase a bit further to 42%, and we plan to launch eight new smartphones over the next two quarters which will include our first Windows 7 device, our first touchscreen BlackBerry, our first Motorola smartphone, and our first devices with front-facing cameras.

We have started to introduce some lower cost devices and we have moderated the aggressiveness of our promotion somewhat.

Again working to achieve a better balance.

As you may have seen in our announcement last month, we have recently appointed Alan Ferber to the new role, of Chief Strategy and Brand officer, and also hired two new officers, Carter Elenz in newly created position of EVP for Sales and Customer Service, and David Kimbell as Vice President of Marketing.

These changes will allow us to leverage the vast strengths and talents of our existing team, and gain some of the additional perspectives of these new executives as we continue to innovate and delight our customers.

Now as you read in the press release, we've made the decision to accelerate our deployment of 4G LTE technology, and have raised our CapEx guidance accordingly.

Mike Irizarry will now walk you through some of the drivers and plans associated with this decision.

Mike?

Thanks Mary, and good morning.

First let's look at data growth on slide nine and this information probably will be nothing new to you.

The development and evolution of devices such as smartphones and tablets with applications and abilities that foster usage have lead to the actual levels of usage seen here.

But even more astoundingly, the projected levels through 2014.

The FCC forecasts that overall mobile data traffic in 2014 will be 35 times than what it was in 2009.

At US Cellular, we have been selling BlackBerry devices for several years, but we did not introduce our first Android powered phone until July of last year.

Android users typically utilize approximately 4 times as much data as a BlackBerry and approximately 30 times as a basic feature phone.

So while we have closely monitored data usage around the industry, as slide ten shows we only started to experience the sharp uptake over the last several months as smartphone sales, particularly Android devices, and penetration have spiked.

Smartphones have gone up from about 17% of total devices that we sold in early 2010 to 42% in the first quarter of this year.

As those of you who know us well already understand, we believe network quality is the most important satisfier of the wireless experience.

We have invested heavily in our network over the years, and are confident that we have the best network quality in the industry.

We have won 11 consecutive JD Power awards for network quality in the North Central region, in addition to third party validation that we have the most satisfied customers in wireless.

As can you imagine, with smartphone adoption moving at such a rapid pace, our analysis has been generating some pretty remarkable forecasts for data usage, and thus our reevaluation of how quickly we should move with LTE.

Turning to slide 11, in order to insure the quality experience for our customers in the short-term, we need to both increase EVDO capacity and move forward with LTE.

Make no doubt about it3G EVDO will be around for many years to come, as we transition customers from their existing devices to LTE devices.

So this additional EVDO capacity is critical now and for the next several years.

Our decision to accelerate our 4G roll out is based both on competitive factors as well as cost considerations.

Other wireless carriers are moving at faster rates, and we must respond to protect our base, as well to make sure we are being considered by potential switchers.

There's no doubt that the experience provided by LTE along with the cost savings will make this an easy decision.

Ten times the speed at half the cost.

The cost savings from an earlier LTE deployment are significant as it reduces our need to add EVDO capacity.

And to emphasise, we do not view our LTE spend as an increase in our long-term network plans, but a pull forward of those dollars from future years.

So what are our specific plans?

As shown on slide 12, we plan to launch LTE in 24 markets by November, which will cover 25% to 30% of our subscribers.

These initial 24 markets are concentrated in Iowa, Wisconsin, eastern North Carolina and Maine.

The deployment will utilize 700 MHz spectrum and involve approximately 1,250 cell sites.

We are working very closely with OEMs and initially expect to have a number of different types of devices available at launch, including a 4G smartphone, tablet, modem, wi-fi device.

Followed by a series of more models being introduced throughout 2012.

The entire Engineering team is very excited about this acceleration and is dedicated to seeing it executed on time and on budget.

I'll be happy to answer any questions during the Q&A session.

Now I'll turn the call over to Steve Campbell, our CFO for the review of the financial results.

Thank you, Mike, and good morning everyone.

As Mary said a little earlier in her comments, US Cellular achieved somewhat mixed operating and financial results in the first quarter.

These results reflect the continuing challenges of an extremely competitive market in which carriers continue to fight for a dwindling pool of new subscribers and the cost of acquiring switchers are significant.

As you can see on slide 13, retail gross additions were 256,000 in the first quarter compared to 305,000 last year, a decline of 49,000.

In the postpaid segment, there was a net loss of $22,000 customers for the quarter, compared to a net loss of 9,000 customers last year.

In the prepaid segment, we experienced a net loss of 9,000 customers during the quarter, compared to 33,000 net additions last year.

So in total, we lost 31,000 retail customers in the first quarter this year compared to 24,000 net additions last year.

We continue to achieve improved churn rates however for our postpaid customers.

As shown on slide 14, postpaid churn improved to 1.37% in the first quarter of this year, from 1.41% last year.

We continue to see benefits from the growing level of family plans and from the exceptional value we provide to customers, such as through our new Belief Plans, reward points which can be used for upgrades, and innovative programs like battery swap and overage protection.

We also believe our expanded handset portfolio, which now includes a variety of Android powered devices and our first tablet, has contributed.

During the first quarter we experienced continued growth in smartphones as a percent of our overall customer portfolio.

Our smartphone sales and penetration can be seen on slide 15.

During the first quarter, we sold almost 340,000 smartphones which represented 42% of total devices sold.

This is a substantial increase over the first quarter of 2010 when we sold about 135,000 smartphones or 17% of the total units sold.

Smartphones now represent almost 20% of our postpaid subscriber base compared to only 9% at the end of the first quarter of 2010.

We also recently launched smartphones as part of our prepaid offerings to improve our competitive position in the marketplace.

While near term profitability was impacted, we expected average revenue per customer will continue to benefit over time from the inclusion of these devices in the subscriber base.

Turning now to our financial performance.

As you can see on slide 16, service revenues for the quarter were $985 million which is an increase of $20 million from last year.

Breaking that down a bit further, retail service revenues were flat at $865 million.

Competition on service plan pricing over the past several quarters has put a lot of downward pressure on revenues, as has a loss of subscribers, but our increase in smartphone penetration and it's impact on data revenues has allowed to us offset this downward pressure.

As most of you know, US Cellular has always been focused on the postpaid customers.

As a result, we are now reporting a new metric postpaid ARPU.

The trend in this metric is shown on slide 17.

Despite the overall competitive environment and the significant downward pressure on voice pricing over the past several quarters, postpaid ARPU was $51.21 in the quarter, up from $50.70 a year ago.

Postpaid ARPU for the first quarter is starting to reflect the impact of our strong sales of smartphones in the fourth quarter as the majority of those sales occurred later in the quarter, along with the impact of the migration to Belief Plans.

As part of the required accounting for the Belief Plans, US Cellular defers a portion of its revenues to properly account for the loyalty reward program.

In the quarter, the Company deferred $8.3 million of net postpaid revenue which, had it been recognized during the first quarter, would have added approximately $0.51 to postpaid ARPU.

As the loyalty reward points are redeemed or used in the future, revenue will be recognized as either service or equipment revenues depending on how the points are used.

Going back for a moment to slide 16.

Inbound roaming revenues increased for the third quarter in a row, growing $12 million or 24% year-over-year to $64 million.

Primarily a result of increased data roaming traffic.

And ETC revenues were $42 million which is up $7 million compared to a year ago.

In cost and expenses, system operations expenses of $218 million were up $11 million or 5% year-over-year, this was due in part to a 5% increase in the average number of cell sites in service, higher expenses related to increases in customer data usage on our networks, and higher roaming expenses as our customers used more data services off our networks.

Over the past year, total data network usage increased almost 300%.

The net loss on equipment for the quarter was $122 million, up $20 million from last year.

This was primarily due to a 25% increase in the average cost per device sold due to a shift in mix to smartphones.

As I mentioned earlier, smartphones represented 42% of total device sales in the quarter and while the immediate drag on earnings was negative, customers using these devices have higher ARPU.

Selling general and administrative expenses of $442 million increased $12 million year-over-year.

We incurred higher advertising expenses Related to the messaging on the Belief Project, increased costs related to customer care support for the smartphone growth and the Belief Plan launch, and higher expenses related to our multi-year initiatives.

So operating cash flow for the first quarter of $203 million was down 11% to last year's $226 million, and the operating cash flow margin was 20.6% compared to 23.4%.

Below the operating income line as shown on page 18, total investment and other income net for the quarter totalled $6.4 million including earnings of approximately $13 million related to our interest in the Los Angeles partnership.

Net income attributable to US Cellular shareholders totaled $34.1 million, or $0.40 per diluted share, versus $47.4 million, or $0.54 per diluted share in 2010.

The decrease in net income reflects lower operating income as we discussed and a lower effective tax rate.

The tax rate for the first quarter this year was 38% compared to 38.8% last year with a reduction primarily due, as Ken mentioned, to favorable settlements of certain state income tax audits.

As shown in the press release, this quarter we generated cash flow from operating activities of $202 million compared to $152 million last year.

And net of capital expenditures of $96 million, free cash flow of $106 million, up substantially from $31 million in 2010.

US Cellular' s balance sheet remains sound and we have significant liquidity and financial flexibility.

Together with expected cash flow from operations and funds available under our revolving credit facility to meet our financing needs.

At March 31, cash and short term investments totaled $543 million and we have about $300 million of unused borrowing capacity under our revolving credit agreement.

Our guidance for the full-year 2011 is contained in today's press released and it's shown here on slide 19.

Our guidance remains the same for all metrics except for capital expenditures, which is now in a range of approximately $750 million to $800 million, reflecting additional expenditures to increase data capacity and accelerate the LTE deployment.

Now I'll turn the call over to Bill Megan, of TDS Telecom.

Bill?

Thank you, Steve.

Good morning, everyone.

Telecom had a solid first quarter.

Driving this performance was continued growth in data revenues including the affects of acquisitions, initiatives to stabilize revenues and line losses, and cost control efforts.

As you can see on slide 21 for the quarter, Telecom's combined ILEC and CLEC revenues increased 1.7% from last year.

ILEC revenue grew 3.8% with growth in high speed data and our HMSacquisitions more than offsetting declines and voids in network access revenues.

CLEC revenue declined 5.1%,reflecting our plan to limit investment in new residential customers.

Turning to slide 22, ILEC data revenues increased 28% in the first quarter driven by high speed data subscriber additions, and also by our acquisitions of VISI and TEAM which provide hosted and managed services.

High speed subscribers grew 7% year-on-year.

We continued to attract healthy levels of new customers and they are taking higher speeds.

Our high speed data penetration over all access lines is now at 46%, up 5 percentage points from last year.

In a similar manner, our residential DSL penetration has advanced to 58% of primary residential lines.

Residential, DSL ARPU remained stable at a bit over $36 as migration to higher speed service offsets competitive pricing pressures.

78% of our customers are taking speeds of 3 Meg or greater, up from 67% a year ago.

The decline in ILEC voice revenues was driven by the continued trend in physical access line loss as can you see on slide 23.

Line loss was 5.5%.

Our star voice packages continued to help us mitigate line loss.

At March, we had 180,000 customers on these plans, which is 49% of our residential customer base, up from 32% at this time last year.

We now have 59% of our residential customers on some type of voice package.

On slide 24, we continue to emphasize our Triple Play bundles, voice, data and video with video offered primarily through our partner, Dish Network.

We added 1,900 net Triple Play subscribers in the quarter bringing our penetration of residential lines to 26%.

We know the importance of bundling in reducing churn.

Churn on our Triple Play customer is very low at roughly 0.05% per month.

We've had measurable success with our bundled offerings with 64% of our residential customers on a Double or Triple Play bundle, up from 58% last year.

In the commercial segment, slide 25, we continue to lead with our hosted IP service we call managed IP for both ILEC and CLEC, we now have 32,000 stations installed, an increase of 15% sequentially and nearly double over this time last year.

Turning to the P&L on slide 26, consolidated cash expenses were down 3.3% for the period.

Discrete items, including insurance proceeds related to an asset loss, the refund of prior year regulatory contributions, and the settlement of a legal dispute reduced expenses $5.3 millionin the first quarter.

Lower expense in the CLEC is in line with fewer residential customers, and we've maintained our focus on cost control and continue to see greater efficiencies throughout our organization.

All-in, operating cash flow for the quarter increased to $77.1 million for a margin of 38.8%.

Slide 27 shows our 2011 guidance and it is unchanged from February 24th.

As we mentioned on the last call, our 2011 CapEx guidance reflects investments that we are making to enhance our network.

So now I will turn the call over to Ken Paker who heads up our Network Services group, and he will discuss our network plans.

Ken?

Thanks, Bill, and good morning everyone.

I would like to take a few minutes to provide you with an overview of the TDS Telecom's network strategy, slide 28, and a little more detail on some of our projects and priorities for 2011.

TDS Telecom is continuously transforming its network to provide greater flexibility and product offerings and to economically grow capacity to meet increasing customer bandwidth requirements.

Our network strategy focuses on transitioning to a highly reliable IP based network that will require integration of new technology and refinement of the network architecture.

This transition is divided into several tactical areas.

The data network, the middle mile infrastructure, and the last mile infrastructure.

We began the transformation of our legacy data network to an IP based network a number of years ago and have completed building the inter-regional level of the core 10-gig network shown on slide 29.

Final circuit migrations are underway inter-connecting 8 regional hub sites in ILEC and CLEC markets and carrier hotels in Chicago and New York along with additional work to inter-connect all TDS Telecom service territories.

Our investment in this network has allowed to us to temper the increase in circuit costs driven by the rapid growth in data use.

This core data network provides significantly greater capacity and through geographical route diversity improves the overall reliability of our services.

We have also deployed multi-protocol label switching, MPLS, as a network management tool at the application layer to further enhance network reliability.

This reliability will be leveraged into IP product offerings including voice-over-IP services, enhanced data services, and IPTV that can all help drive revenue growth.

The 10-gig network is expected to reach approximately 80% of our access lines by the end of this year.

On slide 30, increasing customer bandwidth requirements are also mandating upgrades in the middle mile infrastructure of our network.

From a technological prospective this is driving the conversion of SONET transport systems into 10-gig Ethernet based transport systems.

These upgrades will facilitate consumer IPTV deployments, commercial Ethernet transport products and on net customer builds, bandwidth growth in the DSL services, and cost reductions in provisioning IP-based services.

As a result, middle mile projects have become many of the Company's most important projects in 2011.

On slide 31, the last mile infrastructure is primarily compromised of buried and aerial copper plant that was originally installed to provide POTS service.

Driven by our IPTV roll out and super high speed data initiatives, the network strategy for the last mile has been modified to using a mix of passive optic network over builds and copper network equipment upgrades to bring strategically targeted speeds greater than 25 Meg to our customers.

Ongoing transformation of the last mile access infrastructure includes, first, super high speed data with the availability of new VSL2 technology, the transformation of the last mile copper infrastructure can be accelerated with reduced capital investment.

And secondly, IPTV.

TDS Telecom will deploy MicroSoft Mediaroom to markets beyond its Tennessee test markets beginning in late 2011.

Our super high speed data plan will be prioritized to incorporate IPTV expansion opportunities.

And finally, with regard to broadband stimulus, as you may know, TDS Telecom will receive $105.1 million in federal grants and will provide $30.9 million of its own funds to complete 44 projects between 2011 and 2013.

TDS Telecom will work with RUS to bring broadband services to some of our most remote networks, and this program will enable the construction of an additional 1,300 miles of fiber plant, passing approximately 27,000 service addresses.

So this is a quick overview of some of the key elements of our network strategy, and I will now turn the call back over to Jane.

Thanks, Rob, we would be glad to take questions at this point.

Thank you.

(Operator Instructions).

Thank you.

Our first question this morning from the line of Robert Dezego of Sun Trust Robinson Humphrey.

Caller, please state your question.

Good morning, how are you today?

How are you, Rob?

Good.

My question, as you listen to all of the conference calls, everyone seems to be going after the same high ARPU, low churn smartphone user.

The question I have, does this magnify your scale advantage that you have against the AT&Ts and the Verizons since these phones are going to be more expensive?

I was hoping maybe you could walk us through the economics of how you see smartphone ads versus non-smort phone ads, in terms of subsidies and ARPU and the payback, if you could walk that through a little bit of that math for us, that would be great.

So, it's Steve.

Let me start there.

I don't know that the scale advantage here is really a huge issue for us.

I think that we feel that we've had a significant increase in the competitiveness of our handset line.

I think that we see that the Android power devices that we introduced beginning in the second half of last year have put us in a very strong, competitive position relative to others.

We're seeing a lot of interest and uptake for those devices.

In terms of of the overall economics and payback, as to how we're looking at, as we've said, the cost of those smartphones are high but the payback come in the form of higher ARPU.

We're deriving substantially higher ARPU from smartphone users as they are typically taking data packages.

The challenge over time is to continue to work with the OEMs to introduce lower cost devices to try to keep those subsidies under control, but netting it out we feel that the economics of smartphone users and the data revenue that they drive are still economic for us.

And Steve, let me just add a couple of other points which is that this is also, we think, a way for us to really leverage our key strengths, which is that smartphone users, they want great customer service, they want a great quality network and those are things we provide very well.

So, we think that that's something that will continue to differentiate us as it relates to competing for those kinds of customers.

Okay.

If I could just follow-up with one more question here.

As far as the LTE build out, it looks like you're doing about 25% to 30% of the subs in the first wave.

Is there a reason to not rollout faster or is it too difficult?

As you talk about the cost advantages and the speed advantages, it would seem that a faster rollout might be better from a competitive standpoint?

If not, could you talk about what phase two would be, when you think you're going get larger coverage of the base and what the total cost for an LTE build out might look like?

This is Mike Irizarry.

Let me try to take a stab at your questions.

We have just started the assessment of what wave two is going to look like so I can't share specifics with you right now, but I can tell you it will follow the same logic that we used for phase one, targeted where we can get the best cost benefit investing in the new technology and the biggest bang for the buck in terms of competitive positioning.

And that really, quite frankly, is why we selected the markets that we did, is it really minimizes the investment in the legacy technology, lowers our cost to deliver and really increases the customer experience.

We also intend to be fluid, stay very close to usage growth and we can adjust our subsequent deployments based on those factors, and we'll do that if necessary.

And the total cost you think to build out LTE network?

We're not going to share that on this call.

Okay.

Suffice it to say, a dollar invested in LTE is getting you a lot more than a dollar invested in EVDO.

Absolutely.

All right, best of luck.

Thank you.

Our next question is from the line of Phil Cusick of JPMorgan Chase.

Please state your question.

Thanks for taking the call.

Following up first a little bit on Rob's question, not in terms of the total cost of the build, but can you talk about what happens to OpEx as we get into the third and fourth quarter when the LTE network is coming together?

Should we look for OpEx coming through but then EBITDA is unchanged?

Is that the way to think about it from other guidance?

Yes, Phil, the timing of the deployment is clearly weighed to the back half of the year so there will be some incremental OpEx costs but it isn't significant relative to OpEx as a whole for a year, and whatever impact or incremental impact there would be is reflected in the guidance that we've shared with you today.

Okay.

Can you tell what vendor you've selected for LTE and how that's going to change the network?

Yes, this had is Mike Irizarry.

We have selected for the ran part of our deployment, which is the bay station and radio network controllers, for wave one and wave one only, Erickson.

We currently have a longstanding relationship with them with the legacy Nortel equipment which they acquired, and we're continuing to conduct trials with all of the major vendors for subsequent phases of the deployment.

Our decision to use Erickson is only for the first phase of our deployment and we're excited and happy to be using them in our network.

Okay, great.

And then can you talk a little bit about the upgrade rate?

You talked about it a little bit last quarter, I think I asked about it, but can you talk about what it's done?

Are you seeing an increase?

Last quarter I think we had a big jump at the end of the year in terms of upgrades and I'm just wondering what happened this quarter?

Thanks.

Hi, Phil.

This is Alan Ferber.

The rate in the first quarter was just under 10% of our base upgraded phones that's down a little bit from the fourth quarter.

Primarily a result of overall seasonality, as well as the moderation of our aggressiveness of our device market pricing and promos as Mary mentioned earlier in her comments.

Okay.

And then last one and I'll let it go.

Any sort of shift in the designations or the sources of churn this quarter, and not just this quarter but as you've brought the Belief Project into sort of wider distribution over the last five or six months ?

I wouldn't say really, Phil.

There was a spike from the iPhone launch itlasted for about 6-8 weeks.

It's back down to its normal level, so not any major shifts in our port out data or overall defects.

Good.

Thanks, guys.

Thank you.

Our next question is from the line of Simon Flannery of Morgan Stanley.

Please state your question.

Thank you very much, good morning.

On last quarter's call I think you talked about evaluating corporate structures particularly around the discount of the F shares, I was wondering if you could give us update on that?

And on data roaming, can you talk about next steps there and when could we see this really as an opportunity to either get new commercial arrangements or significantly change your cost structure?

Thanks.

This is Ken, Simon.

Yes, the first quarter I talked about one of my objectives for the year is to look at things that we can do to help eliminate the almost 15% discount between the common and special common shares at TDS and since that time I have continued to meet with shareholders and bankers on it.

I don't have any proposal that I'm announcing today, but it is something that remains on top of my list of things to address yet this year.

Something we're actively working on.

Thank you.

Simon, on data roaming, not sure I totally got the question.

I guess if you can just comment, you talked about the FCC ruling being a positive step for you.

Perhaps you can just talk about where you take it from here.

I think that we believe that it was a positive step and it should facilitate getting data roaming agreements in place with roaming partners in the future.

Currently we have 3G roaming agreements in place which are meeting our needs and I think where we would take it from there is we would continue to talk to potential roaming partners about the 4G opportunity as time goes on.

So nothing immediate, more of a medium term benefit?

It's actually more of a longer term strategic issue that gets taken off the table is the way I think about it.

The Company has been very successful in having roaming agreements with everybody today around the 3G opportunities.

4G was a little bit of a unknown at this point until the FCC came out and took a stand on it so it just eliminates that risk goes forward is the way to think about it.

Okay, great.

So when you launch service later this year with LTE you should be able to have the nationwide roaming?

It's something we'll being working on.

Okay, great.

Thank you.

Thank you.

Our next question is from the line of Ric Prentiss of Raymond James.

Please state your question.

Nice to see ETC revenue up year-over-year as well as roaming up year-over-year.

Can you talk a little bit about the trends that you see going forward, typically roaming does go up in the summer months, but just wondering what you're seeing out there on ETC and roaming?

On roaming, I think we expect to see the year-over growth that we saw in the first quarter to continue over the course of the year.

As I said, that's being driven by data roaming.

In ETC revenues, some of the uplift year-over-year was related to expanded eligibility in one of our states, part of it was simply use acquisitions related to line count updates.

But over the balance of this year, obviously we don't know what action the FCC might take.

It's an active docket USF, but for now in the short-term we're looking at $35 million to 40 million a quarter for as far out as we can see.

On smartphones, obviously an increase on the sales in the quarter, what are you seeing as far as the cost to you guys as far as smartphones?

What's the trends been over the last couple of quarters and what's your forecast going forward on where you see the cost of those smartphones.

Hi, Ric, this is Alan Ferber again.

I think we're seeing more of a smartphone tiering than we have in the past.

In fact, last month we introduced another below $200 cost to us smartphone and that's something we anticipate going forward as well, a tiering of low-mid-high tier smartphones.

With regard to the competitive environment, we'll have to wait and see how that goes in terms of pricing to the acutal consumer, but we expect the cost side to have much more tiering on it.

The final question on the LTE.

As you think about the acceleration of what you brought into the budget for this year, what kind of price per pop are you thinking about LTE costing or maybe going back to Phil's question a little bit, what are you actually physically doing at the site when you do an LTE at those 1250 sites?

Actually what we're doing at the physical sites is, one, adding new back call, more efficient back call, ethernet where we can get it or ethernet over microwave.

Two, we're adding what is called a new base band unit in the existing building at the base of the tower, then using fiber, we have a remote radio unit that at least in the first wave we're mounting at the lower point on the tower, and then in some cases, new antennas to maximize coverage.

That's the bulk of the work at the sites.

And so radios going up, the tower is definately a trendwe've been seeing.

You guys have use a lot of microwave in the past, and that's being used as well, and the 700 would have its own antenna structure?

Is that what I was hearing, or woudl it be a multiple frequency antenna?

In some cases we will have antennas that will support more than 700 and in some cases we'll have dedicated antennas.

As I said, the first wave, we will probably not have the remote radio unit mounted up on the tower.

We're conducting trials around reliability.

As we've stated all along, quality and reliability is critical to the customer experience so we're not going to jump into that until we're confident it's super reliable.

Okay, thank you.

Our next question is from the line of Kevin Roe of Roe Equity Research.

Please state your question.

Following up on the LTE discussion, pleased to hear the accelerated build out.

Voice over LTE, could that be part of your long-term deployment plans?

This is Mike, I'm take that one.

We are going to be conducting trials of voice over LTE later this year.

Our long-term thinking is that, yes, we would like to utilize that capability of LTE to further improve our efficiencies.

However, we don't want to move our customers off of what is super reliable, high quality [CD May 1X] network and put them on there until we're absolutely sure it gives them a seemless perfect experience and it inter operates with the legacy network, but long-term that's our hope and that's what we're planning for.

That's helpful and can you repeat again the states that you're rolling out LTE?

I didn't get all of that.

Sure.

We said they were concentrated in Iowa, Wisconsin, east North Carolina and Maine.

Not Illinois, so not the Chicago market initially?

Not in wave one.

Not in wave one, okay.

When does wave two kickoff?

I think we all ready stated, we're starting the assessment of what marketsthat activity is starting, it's ongoing right now, so we haven't identified the markets yet.

Just on the timing of wave two?

We haven't set any timing for that.

Okay, just switching gears on postpaid subscribers in the quarter.

Fifth quarter of post paid sub losses, you guys have made a lot of positive changes to address that as you've discussed today.

When do you think that starts bearing fruit on a quarterly basis?

Yes, I'll take that, thank you.

It's Mary.

We're very focus on that so we're pleased with the improvements in ARPU and churn, but obviously gross ads is really an opportunity for us.

We're hoping to start to see that improve.

The new advertising that we just launched just hit about a week or so ago and part of that was designed to really open up the number of shoppers in the industry who are looking for a new carriers to understand the benefits of U.S.

Cellular more clearly so that the combination of great quality network, great customer satisfaction and the benefits of Belief.

That just started so we think that will begin to play out over the quarters to come and we hope to see the gross ads start to improve soon.

And for the second quarter specifically is too soon to hope for positive post paids ?

Yes, I think our trends are pretty consistent right now with where they've been in the last quarter.

The new advertising campaign just started and we need a little bit of time for that to get enough momentum in terms of awareness.

Very good.

Thank you.

Our next question is coming from the line of Stephen Mead with Anchor Capital.

Please state your question.

Yes, hi.

On the cash flow and the CapEx, does that change anything in terms of the share buy backs at the USM level for this year?

Steve, not at this point it does not.

If you look at the cash balances at U.S.

Cellular they were rather substantial and in fact, as we've said in the past, one of the reasons we had let those cash balances build a little was because we knew that the LTE was just a matter of time.

Okay.

And then is the total amount of the incremental CapEx, is that all wave one of the LTE?

No, not entirely.

There's a good part of the increase is for LTE wave one, but we're also add data capacity on our EVDO network to accommodate the explosive growth that Mike talked about in his prepared comments.

Okay.

I don't know it well enough, but you guys do not have the apple iPhone?

Correct.

When do you expect to actually be able to offer that?

Great question.

I like, that, I like the way you worded that.

I would step back and just say two things.

One, is that we do have a great lineup of very competitive hands sets and we have many more to come as I described, so we feel good about that.

Now that the [PBMA] version is available, we'd love to have it but we don't have the plan right now and that's it.

Okay.

And then because the Android has really made a huge difference in terms of kind of operators being able to hold, share in that segment of the market.

I was wondering what you're seeing in term of loss of customers and the reason for loss of customers more recently with Verizon iPhone introduction?

I'll take part and ask Alan to jump in if he would add anything to it.

We did see a spike when the Verizon iPhone launched, it lasted about 6-8 weeks, but that then moderated.

I think there's a host of reason why people come to and leave carriers and we're really focused on leveraging our strengths.

We talked about highest customer satisfaction, great quality network, driving more awareness of the devices that we offer and the great value of the Belief Plan.

I think there's a mosiac of reasons why people come in and out and I wouldn't identify it to just specific driver typically over time.

The only thing I would add, Steven, just to note that our churn is actually down despite this highly competitive environment and for all of the reasons that Mary said, I don't think there's one thing you could point out.

One more question.

Why was wave one in the locations that you choose to do the LTE versus in Illinois and St.

Louis and some of the larger concentrated markets ?

As I stated earlier, the logic we went through to decide the market pretty much was driven by cost avoidance, so we looked at our markets and where the usage was heaviest and where the investment in the legacy technology would be greatest in addition to that we looked at competitive deployments of LTE and strategically selected the markets that we shared with you for wave one.

Okay.

All right, thanks.

Thanks, Steve.

Our next question is from the line of Ben Mackovak from Rivanna Capital.

Please state your question.

Hi, thanks for taking my call.

Can you give us an update on the various share counts?

Yep.

Give us a second to big those out.

Okay.

Okay, so TDS 6.5 million of the Series A common, 47.17 of the special common, and 49.9 of the common.

At cellular, there's 52.2 million of the common and 33.0 millionof the Series A there.

And I may have missed this, but can you just update us on any plans to simplify the capital structure?

Yes.

The question was actually asked a little bit earlier, Ben, and it really referred to comments that I have made both in the first quarter call and with others, and that is the parent company has a 15% discount between it's common share and special common shares.

Two classes of shares that have the exact same dividend rate, the exact same liquidation right, they have a minor difference in a voting right, but it's a company that all ready has a family-controlled trust thathas 52% of the votes.

That 15% discount is an anomoly to say the least, and it's something that is problematic for the Company because as we look at acquisitions as we look at benefit plans, anything that we used those special common shares for, we have excess dissolution to that 15% discount involved.

It's an item that's on my radar screen.

I've had discussions with about every investor that owns stock in us today ooking for their ideas in how we go about that, working with bankers and lawyers to understand what we can do to try to eliminate that.

Okay.

I think the simpler the better in the eyes of investors.

Good quarter.

Thanks.

Thanks.

Thank you.

Our last question is from the line of Chris King with Stifel, Nicolaus & Company.

Please state your question.

Hi, good morning.

Just a couple of quick follow-ups on some other questions I guess.

First of all, just reading kind of between the lines, both in the press release and your comments here.

It sounds like kind of a more immediate focus on a mass marketing efforts, trying to drive gross subscribers more traffic into your distribution points and the like.

Just was wondering where we should think about those costs going particularly on the SG&A side and how that will shift over the course of the next couple of quarters or so?

Then secondly, just wanted to get a quick sense from you because it was a little bit unclear I guess due to the consistency of your numbers over the course of the past couple of quarters.

Have you guys seen any real direct impact from Verizon's iPhone offering over the course of the last couple of months and if so, where have you seen that?

Thanks.

Chris, thank you for that question because I want to clarify.

The discussion about the new advertising campaign is really very much about a more focused and targeted message and evolution of the message, not a ramp up up in spending.

It's taking what our normal advertising and overall marketing spend would be and redirecting it to messages that we've determined are even more compelling and it will be holistic.

It's not really just your mass media, I've talked about that, but it's really leveraging social media, word of mouth advocacy, et cetera, so the ideal is to refine with current spending.

Do you want to comment on the iPhone?

Yes.

On the iPhone the only thing I would say again is while we do see an impact when Verizon launched the iPhone and we saw an impact with AT&T countered with a $49 iPhone, that impact on defects has been relatively short lived and has come back down to normal levels over the past 68 weeks and net-net we still had lower churn.

Thanks.

Thank you.

There's no further questions at this time.

I would like to turn the call back over to management for closing comments.

Thanks very much for spending the time with us this morning and look forward to follow-up.

Take care.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.