美國無線通訊 (USM) 2011 Q3 法說會逐字稿

Greetings, and welcome to the TDS and U.S.

Cellular third-quarter operating 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 of Corporate Relations for TDS.

Thank you.

Ms.

McCahon, you may begin.

Thank you, Christine, and good morning, everyone.

Thank you for joining us.

I wanted to make you all aware the quarterly conference call presentation we have prepared to accompany our comments this morning, which you can find on the Investor Relations pages of the TDS and U.S.

Cellular websites.

With me today and offering prepared comments are, from TDS, Kenneth R.

Meyers, Executive Vice President and CFO; Joseph Hanley, Vice President, Technology, Planning and Services.

From U.S.

Cellular, Mary Dillon, President and CEO; Steve Campbell, Executive Vice President and CFO.

And from TDS Telecom, Vicki Villacrez, VP, Finance and CFO.

This call is being simultaneously webcast on the Investor Relations sections of both the TDS and U.S.

Cellular websites.

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

The information set forth in the presentations and discussed during this call contains 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 release 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 U.S.

Cellular filed SEC Form 8-K current Reports, including the press releases we issued this morning.

Both Companies plan to file their SEC Form 10-Q Reports next week.

Between now and year-end, we will be attending three conferences, all being held in New York.

The Wells Fargo conference is in November, and the JPMorgan and UBS conferences are in December.

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

Please keep in mind that TDS has an open door policy, so if you are in the Chicago area, and would like to meet members of management from TDS Corporate, U.S.

Cellular, or TDS Telecom, the IR team will try to accommodate you if the calendar is permitting.

And with that, I'll turn the call over to Ken Meyers.

Thank you, Jane.

Good morning.

I have just a few comments before turning the call over to the rest of the team.

First, the financial results for both of our businesses were solid, with TDS' consolidated operating revenues and profitability showing improvement.

There was an unusual item in the quarter, with TDS recording a $12.7 million net gain related to its acquisition out of bankruptcy of a 63% interest in a Wisconsin-based wireless provider.

I point it out, since historically, one would not expect a gain in an acquisition, but here is -- here, we have one.

Also, you will note there are two additional pages attached to the press releases for both TDS and U.S.

Cellular, detailing some non-material corrections to prior financials.

These errors related to accounting for asset retirement obligations.

Since the amounts are immaterial, we will revise prior periods in the third quarter 10-Q and future filings in accordance with the applicable literature.

To update you on the share consolidation, the TDS Board of Directors is currently considering potential changes to our share consolidation proposal, and anticipates completing this review process in the near future.

Management and the TDS Board of Directors continue to believe that the share consolidation is in the best interest of all TDS shareowners.

It will simplify TDS' capital structure, improve market liquidity, and provide greater financial flexibility.

Because of the ongoing work on this project, we did not repurchase any stocks in the quarter.

We ended the quarter with a strong balance sheet and ample liquidity.

Over the past few quarters, we have termed out our debt maturities and have no unfunded pension liabilities.

All in all, this provides us with a strong financial platform to support our businesses going forward.

Now, I'd like to turn the call over to Joe Hanley.

Joe?

Thanks, Ken.

As we turn to the regulatory area shown on slide four, the most significant development -- and it affects both businesses -- is the FCC's recent action on universal service and intercarrier compensation.

We support the FCC's goal to modernize and evolve USF and ICC.

We continue to urge the FCC to do so in a way that will enable world carriers to deliver broadband services, both fixed and mobile, that are affordable and comparable to those in urban areas.

On October 27, the FCC adopted an Order and a Further Notice of Proposed Rulemaking.

The full text of the Order and the Further Notice, expected to be 500 pages in length, has not been released yet.

The FCC has released an executive summary, which provides the basis for our high-level analysis at this point.

Also, a number of important issues will be taken up in the Further Notice, which means that some key decisions have been deferred.

But here is what we know.

On the wireless side, the FCC has established a dedicated mobility fund, deployed in two phases.

Phase 1 is a one-time distribution of $300 million expected next year.

Phase 2 will provide $500 million per year, beginning in 2013.

As this fund is brought online, the FCC will step down legacy support for wireless carriers at a rate of 20% per year beginning July of 2012.

Further reductions in legacy support would continue annually, with the legacy funds going to zero in July 2016.

An important qualifier, however, is that if the FCC for some reason is unable to put the $500 million ongoing mobility fund in place by June of 2014, the step-down stops at 60% of the 2011 level.

So what are the impacts to U.S.

Cellular?

U.S.

Cellular currently draws approximately $160 million per year in universal service high-cost support, which we refer to in our financial statements as ETC revenues, and which represents taxable revenue to the Company.

Barring court action, ETC revenues will begin stepping down in July 2012.

One potential source of upside, however, is the new mobility funds.

The size of the U.S.

Cellular opportunity will depend on how the FCC works out the details on the fund, and also which other carriers choose to participate.

The new fund does carry new obligations.

And companies, including U.S.

Cellular, may weigh the costs and benefits of participating differently.

Also, as I mentioned earlier, the pause in the step-down provides a backstop if the FCC doesn't put the fund in place.

Another potential upside for U.S.

Cellular is the phase-down and eventual elimination of intercarrier compensation, an expense to U.S.

Cellular and other wireless carriers that currently costs U.S.

Cellular approximately $60 million to $70 million per year.

The FCC is mandating reductions and access rates, and ultimately, elimination of access charges altogether -- a model referred to as Bill and Keep.

While some rate reductions begin in the near-term, the full migration to Bill and Keep is a long-term process.

As a result, the timing for full realization of this benefit is difficult to predict right now; but using the longest transition period, should occur over roughly a 10-year period.

Further, it is unclear whether U.S.

Cellular and other wireless carriers would actually realize this benefit, or whether it would be competed away in the form of reduced pricing to customers.

Turning to TDS Telecom on slide five.

As a rate of return wireline provider, there are more moving parts and more questions to be answered in the Further Notice of Proposed Rulemaking.

We really need the full text of the Order, and resolution of the issues teed up in the Further Notice, to have a complete picture.

To start with, though, the access rate reductions, which benefit U.S.

Cellular, take some revenues away from TDS Telecom.

The FCC is providing an opportunity for much of that loss in the early years to be recovered through the new Connect America Fund and through new end-user charges.

Moreover, as I noted earlier, there is an extended transition period, with the longest adjustment period being applied to rate of return carriers like TDS Telecom.

On the Truth in Billing front, the FCC's efforts to curtail or eliminate phantom traffic and access stimulation should provide for a fairer system, with more predictable cost in revenues for all carriers.

With all of this said, the FCC is also modifying some parameters in the existing USF programs, and they propose to phase out the safety net additive fund, which will have some impact on TDS.

Finally, the FCC will be taking a look at the interstate authorized rate of return, something that gets revisited from time to time.

TDS Telecom is a rate of return carrier, so, of course, an adjustment in this rate would have some impact.

Currently, under all of the USF programs, TDS Telecom receives approximately $90 million annually.

As I noted earlier, there are many components to the support, and the timeframe for transition and opportunity for recovery are not fully knowable at this time.

But, that said, given what we do know, we would expect the overall long-term impact on TDS Telecom to be moderate.

So, to summarize the impacts of the FCC's actions, clearly, some legacy support will go away.

Offsetting that will be opportunities to access the new Connect America and Connect America Mobility Funds.

The net impact will depend on the details of how these funds are set up, and who participates in them.

The outcomes may also depend on the courts, as portions of the Order may be challenged, possibly on multiple fronts.

In any case, our Companies will be active in the continuing rulemaking process and will be determining how to maximize the opportunities available to us.

Universal Service has been a critical element in enabling U.S.

Cellular and TDS Telecom to provide great service to their rural customers.

They will continue to play that vital role, even in the face of significant change.

Before leaving the regulatory area, I want to touch briefly on one other issue.

Congress has been considering spectrum legislation for some time.

The past few months, this issue has become part of the larger agenda of the so-called Super Committee that emerge from the debt ceiling crisis.

We remain hopeful that spectrum legislation will be adopted that will open up a new pipeline of spectrum for use by wireless carriers.

This is an issue where there is broad agreement among wireless carriers, and we are continuing to work with lawmakers, the FCC, and our industry associations, to secure spectrum opportunities for the future.

And now I will turn the call over to Mary Dillon.

Mary?

Thanks, Joe, and good morning, everyone.

I'll begin our prepared comments with an overview of the quarter, and Steve will follow with a review of our financial and operating results.

So, turning to slide seven.

As has been the case for the past few quarters, our results were mixed.

Key highlights, include ARPU, continue to climb as smartphone penetration increased to 26% of our postpaid base.

Migrations to our Belief Plans continued, with customers choosing more data packages leading to higher ARPU.

We now have nearly 2.8 million customers on those plans.

Postpaid churn improved slightly.

It's important to note that as competitive as this industry is, this is the seventh consecutive quarter of year-over-year improvement in our postpaid churn.

We're also proud to report that U.S.

Cellular continues to have the strongest overall satisfaction scores in the industry, as measured by a leading independent research firm.

This is driven by a superior network and customer service satisfaction among current customers.

In fact, we've experienced steady increases in overall satisfaction, and would recommend scores corresponding with the launch of the Belief Project.

Inbound roaming, reflecting increased data usage and industry-wide, was a meaningful contributor to increased margins and profitability.

And, finally, we have numerous cost reduction efforts underway across all functional areas, such as vendor contract negotiations and network optimization, which helped to offset increases in areas related to smartphone and data adoption.

Subscriber results, primarily gross adds, improved from recent quarters above and beyond normal seasonality, but remained below our expectations.

Assimilating gross adds is one of our highest priorities.

We're intensely focused on innovative ways to highlight our unique customer experience and offerings to the targeted customer groups.

Metrics measuring the impact of our current Happiest Customers in Wireless advertising campaign continue to demonstrate an improvement over previous campaigns, with key metrics reaching levels consistent with industry norms, and that are consistently and significantly higher than earlier efforts.

This is important progress.

And we're confident that this, along with the impact of other initiatives, will translate into improved store traffic consideration and gross adds, over time.

As we approach the important holiday season, we're focused -- fully focused on continuing all efforts to improve our customer growth trends.

We will have our strongest device lineup ever for the holidays.

High-end devices, such as the highly-rated Motorola ELECTRIFY, which has been very well received since launched.

The LG Majestic and the HTC Hero S, are all among the best Android devices on the market.

The Samsung Mesmerize continues to be one of our most popular phones, and will be very competitively priced as it reaches end-of-life, while the HTC Wildfire and Samsung REPP are outstanding entry-level smartphones.

For the first time, we'll be leveraging our Rewards Program in our promotional activity, offering bonus points for new customers that can be used immediately for items such as accessories and ringtones, or accumulated over time to use for faster upgrades or even a free phone.

We'll continue to drive strong interest in our great device lineup through aggressive offers and creative use of switch or credit.

We recently also redesigned nearly all of our retail stores to provide a bright, sharp, and more intuitive shopping experience.

We've been very pleased with the early results of our innovative use of social media and online sales to promote customer advocacy and referrals.

And finally, we're optimizing the productivity across our marketing and promotional spend, based on concentrated effort to deepen our consumer and analytic insight.

As for our 4G LTE launch, we're on track with network readiness for the first wave of markets before year-end, as we continue to work with our OEM partners to ensure that we have 4G devices that will meet our network and customer satisfaction requirements in the latter half of the first quarter.

At the same time, we'll continue to refine our list of markets that will be included in Wave 2 next year.

And finally, the launch of the new iPhone will continue -- will keep competition for new customers as intense as ever.

And while we had the opportunity to add the iPhone to our device lineup, the terms were unacceptable from a risk and profitability standpoint, and would have forced us to compromise on our commitment to offering an unparalleled customer experience.

Our game plan for the fourth quarter was developed with all of these considerations front and center.

We believe the combination of our outstanding network, a compelling lineup of cutting-edge devices, superior customer service, and unique product offerings such as One and Done contracts, will allow us to successfully differentiate and grow in this market.

Now, as Steve will review, we've increased our guidelines -- our guidance this quarter, raising the range of OCF consistent with our year-to-date performance, yet reflecting the uncertainty associated with the highly competitive and heavily promotional nature of the holiday selling season.

Now, I focused most of my remarks this morning on our efforts to stimulate customer adds, but as I hope you can see from our performance so far this year, we also remain committed to improving the bottom line at the same time.

And now I'll turn the call over to Steve.

Thank you, Mary, and good morning, everyone.

U.S.

Cellular's results reflect the continuing challenges of the sluggish economy, as well as an extremely competitive market in which carriers continue to fight for a dwindling pool of new subscribers, and the costs of acquiring switchers are significant.

Retail gross additions, as reflected on slide eight, were 284,000, down from 301,000 in the prior-year quarter, but up from 226,000 in the second quarter.

In the postpaid segment, there was a net loss of 34,000 customers, as a decline in retail gross adds was partially offset by a slight improvement in churn.

In the prepaid segment, we had an increase of 11,000 customers.

So, in total, we lost 23,000 retail customers in the third quarter this year compared to a higher net loss of 25,000 last year.

Our churn results are shown on slide nine.

Post-paid churn improved slightly to 1.55% from 1.58% last year.

Remember that the third quarter has historically been our highest churn quarter.

We continue to add customers to our belief plans -- 452,000 during the third quarter, as customers recognize the value and exceptional service we provide.

The increasing level of family plans, now 73% of postpaid customers, is also contributing to the churn improvement.

Slide 10 reflects our smartphone sales, penetration growth, and the impact on postpaid ARPU.

During the third quarter, we sold 356,000 smartphones, which represented 40% of total devices sold.

This compares to the third quarter of 2010, when we sold about 216,000 smartphones, or 24% of the total units sold.

Smartphones now represent almost 26% of our postpaid subscriber base compared to 12% at the end of the third quarter of 2010.

While the cost to subsidize these devices is greater, we expect average revenue per customer will continue to benefit over time.

And you can see that in the third graph at the far right -- postpaid ARPU growth from strong smartphone sales beginning late in the fourth quarter of last year, in addition to the Belief Plan migrations.

Despite the overall competitive environment and the significant downward pressure on voice pricing over the past several quarters, postpaid ARPU was up 3.1% to $52.41 in the quarter, up from $50.82 a year ago.

As part of the required accounting for the Belief Plans, U.S.

Cellular defers a portion of its revenues to properly account for the loyalty reward program.

In the third quarter, the Company deferred $10.7 million in net service revenue, which, had it been recognized as service revenue during the third quarter, would have added approximately $0.67 to postpaid ARPU.

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

Turning to our P&L.

As you can see on slide 11, service revenues for the quarter were [$1.037 billion], which is an increase of $53 million or 5% from last year.

Breaking that down a bit further, retail service revenues were relatively flat at $871 million.

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

Inbound roaming revenues increased once again this quarter, growing $35 million or 48% year-over-year to $108 million, primarily a result of increased data roaming traffic.

We expect to see continued strength in this very high-margin revenue stream.

System operations expenses of $242 million were up $24 million or 11% year-over-year.

This was due primarily to higher usage and roaming expenses, as our customers use more data services both on and off our networks.

Through September of this year, total data network usage increased over 350% from the same period last year.

Net loss on equipment for the quarter was $120 million, up $8 million from last year.

We had fewer transactions as a result of fewer gross adds, but this was offset by an $8 or 7% year-over-year increase in the average loss per device sold, which reflects the shift in mix to smartphones.

Given the 65% increase in smartphones sold, we believe that we've done a very good job of controlling our equipment costs by better balancing of the types of devices offered, and introducing lower-cost, entry-level smartphones into the lineup.

SG&A expenses of $442 million were down slightly year-over-year.

Reductions in USF contributions, selling expenses, and advertising were offset by increases due to higher spending for Belief Project phone programs, which were started in the fourth quarter of last year.

Operating cash flow for the quarter of $234 million was up 13% compared to last year's $207 million.

Operating cash flow margin was 22.5% compared to 21%.

Below the operating income line, as shown on slide 12, total investment and other income net for the quarter totaled $11 million, including earnings of approximately $17 million related to our interest in the Los Angeles Partnership.

Net income attributable to U.S.

Cellular shareholders totaled $62.1 million or $0.73 per diluted share versus $38.3 million or $0.44 per diluted share in 2010.

The increase was driven by higher operating income.

The tax rate for the third quarter this year was 38.4% compared to 36.7% last year.

We generated cash flow from operating activities of $354 million compared to $180 million last year; and net of capital expenditures of $248 million, free cash flow of $106 million, up substantially from $56 million in 2010.

As Ken said earlier, we ended the quarter with a very strong balance sheet and ample liquidity.

Our guidance for the full-year 2011 is contained in today's press release and is shown here on slide 13.

The guidance for service revenues, depreciation and capital expenditure is unchanged.

However, we increased the ranges for operating income, and adjusted operating income before depreciation and amortization up by $20 million on both ends, consistent with our year-to-date results.

And now I'll turn the discussion over to Vicki Villacrez.

Vicki?

Thank you, Steve, and good morning, everyone.

As shown on slide 15, I am pleased to report TDS Telecom's third-quarter performance was highlighted by the continued growth in ILEC data revenues, including the effects of hosted and managed service acquisitions.

Also, the ongoing initiatives to stabilize traditional wireline revenues and our continued cost control efforts.

As you can see on slide 16, revenues for Telecom's combined operations, including hosted and managed services, were up 4.3% from last year.

ILEC revenue grew 6.9%, with HMS acquisitions and growth in high-speed data more than offsetting declines in voice and network access revenues.

CLEC revenues declined 4.3%, as commercial revenues stayed flat and the number of CLEC residential customers declined, due to the Company's decision to no longer target residential customers.

Turning to slide 17, ILEC data revenues increased 48% in the third quarter, driven by our acquisitions of VISI and TEAM, and most recently, OneNeck, which provides hosted and managed services, and also by our high-speed data subscriber additions.

High-speed data subscribers grew 6% year-on-year.

We continue to attract new customers and they are taking higher speeds.

The number of data subscribers taking speeds of 5 megabits or greater has nearly doubled to 55% since last year, and 17% are taking greater than 10 megabit speeds.

Residential DSL penetration has advanced to 61% of primary residential lines, and residential DSL ARPU remained stable at nearly $37, as migration to higher-speed service offsets competitive pricing pressures.

The decline in ILEC voice revenues was driven by the continued trend in physical access line loss, as you can see on slide 18.

Line loss was 5.2%.

Our Star voice packages continue to help us mitigate line loss.

At September, we had 197,100 customers on these plans, which are 55% of our residential customer base, up from 42% at this time last year.

As a result of our success with selling voice packages, we've seen an improvement in residential voice ARPU.

On slide 19, we continue to emphasize our triple-play bundles -- voice, data and video, with video offered primarily through our partner, Dish Network.

We added 2,600 net triple-play subscribers in the quarter, bringing our penetration of customers to 28%.

We know the importance of bundling and reducing churn.

Churn on our triple-play customers is very low at roughly one-half a percent per month.

We have had measurable success with our bundled offerings, with 66% of our residential customers on a double or triple-play bundle, up from 61% last year.

In the Commercial segment, slide 20, we continue to lead with our hosted IP service we called managedIP.

For Telecom's combined operations, we now have 39,400 stations installed, an increase of 12% sequentially, and 68% more this time last year.

Turning to the P&L on slide 21, consolidated cash expenses were up 4.6% for the period.

ILEC cash expenses increased 8.3% with HMS acquisitions.

A discrete item recorded in 2011 for the refund of prior-period -- prior-year regulatory contributions decreased expense $2.4 million.

A 4% decrease in CLEC expenses is in line with fewer residential customers.

We have maintained our focus on cost control and continue to seek greater efficiencies throughout our organization.

All in, operating cash flow for the quarter increased to $71.2 million, from $68.6 million in 2010.

As you know, on July 1, we continued to expand into the hosted and managed services arena.

Slide 22, with the acquisition of OneNeck IT services Corporation, a premier provider of hosted application management and managed IT hosting services to middle-market businesses.

Our strategy is to have a robust suite of HMS offerings, which will enable us to leverage the data center assets recently acquired with VISI and TEAM.

This is an exciting complement to our business, as we move further into the rapidly growing hosted and managed services area.

Additionally, we continue to evaluate acquisition opportunities both in managed services, as well as in our more traditional RLEC market.

And, finally, slide 23.

Let me note that we are maintaining our previous guidance as shown in the press release.

I will now turn the call back to Jane McCahon.

Thanks, Vicki.

We've asked Alan Ferber, our Executive Vice President, and Chief Strategy and Brand Officer at U.S.

Cellular, to join us for Q&A.

And, Christine, we'd like now to open the lines for questions.

(Operator Instructions).

Phil Cusick, JPMorgan.

Let's start with the iPhone.

I think I heard you say that it's too expensive and you're going to choose to not fill it.

Is that fair?

Hi, Phil.

This is Mary.

Yes, that's -- what we said is that we have the option to carry it; decided that it didn't make sense for our business economically.

And so we're focused on really playing to our strengths and feel that we're in a competitive position.

I don't blame you.

And so, given the competition out there, should we look for CPGA sort of up in the fourth quarter despite a higher typical gross add mix, as you try and fight back against that incremental competition?

Phil, this is Alan Ferber.

We don't expect that.

I mean, we expect to be competitive in the fourth quarter.

We're very pleased with our overall device lineup.

We do expect to sell more smartphones, but we don't expect any meaningful increase in CPGA.

Okay.

A couple of other things.

Prepaid was good this quarter despite sort of a typical seasonal weakness.

Is there sort of re-emphasizing there?

And should we look for that to accelerate in the fourth quarter?

Phil, you know, our focus in our business is largely postpaid, but we were pleased with our prepaid results as well, because they did reflect some enhancements in the marketplace.

We had a smartphone, a couple of different price plans, but it will continue to be the smaller part of our focus.

We're really focused on the postpaid side of the business.

Okay.

G&A in the wireless business dropped pretty dramatically sequentially.

Is something changing and that's a new run rate?

So, I think there's a couple of things there.

I wouldn't say a new rate -- a new run rate necessarily, but the USF contribution number was down a little bit in the quarter.

Also, we've been running good results on bad debt expense, so we've seen a little bit of improvement here.

But I think if you look at the guidance for the year, you kind of see where we're seeing the year come out.

So I wouldn't be projecting a significantly different run rate on G&A at this point.

Okay.

Then, last, I'm not sure what you can say, but can you give us an update for what you can on the TDS and special share situation?

Thank you.

Hi, Phil.

It's Ken.

Not a lot I can say except what I just did.

And that is that we did publicly announce that the Board was considering making adjustments to the current proposal; working on that with a hope to have something done in the near future.

And we think it's the right thing to do.

Within those four walls, I could say it about five different ways, but that's about all I can say about it right now.

Thanks, Ken.

Steve Velgot, Susquehanna.

I had a question just concerning the current ownership structure of U.S.

Cellular within TDS.

And the question is really whether there is anything that would prevent the Company from one day pursuing a tax-free separation of U.S.

Cellular.

And of particular note is just how the valuation of TDS is so depressed in the current market that it seems very apparent that the Board could create a lot of value by pursuing a tax-free separation.

Hi, Steve.

This is Ken Meyers.

When you say is there anything that prevents it, I don't -- from a legal standpoint or a tax standpoint, I'm not aware of anything that would prevent it, except that strategically, we think that the Company is stronger having both the wireline and wireless operations together.

It gives us some strength, especially on the credit side; there is some services that we share.

So, nothing prevents us to do it; it's simply not part of the strategy currently.

Okay, and then just a follow-up there.

I know that the rationale for the share class collapse was that, basically, you're providing increased liquidity and a simpler structure, but also, that you don't, in effect, have an acquisition currency with the S shares trading at a discount to TDS.

And that potentially by collapsing the share classes, you would have an acquisition currency.

It's just that with TDS trading where it trades, I think that line of reasoning is a bit off.

And I'm wondering, are you talking about some point in the distant future, where TDS may have a better valuation in the stock market?

Or when do you envision potentially having an acquisition currency if you did get the share collapse accomplished?

I think those are two different questions.

One is I think, strategically, a company's capital structure has to have a fully valued acquisitions currency.

Once you get to fully valued, there's two different issues.

Right?

There's one that we have a discount as between the two, which is strictly a liquidity-driven event.

Separately, there may be other matters that affect valuation.

I think we're working on one of them at a time right here.

Okay, thank you.

Simon Flannery, Morgan Stanley.

I think on LTE rollout, I think in the past, you've said your initial rollout would be to about 25% of the footprint.

And I assume that's what we're going to see here in the next couple of months.

Perhaps you could update us on that.

And how are you thinking about the rest of your footprint and the timeline there?

Then on the roaming, good roaming numbers, wanted to understand what do you see on seasonality around that?

And also, Sprint has been talking with Network Vision about their ability to substantially reduce their roaming bill over time.

Do you see that as a risk?

Thank you.

Simon, first, I'll take the LTE question.

Yes, you're right, that is our current game plan.

We are, by year-end, we'll have LTE network rolled out to about 25% of our customers and we're well on track for that.

And that we would, towards the end of the first quarter, be launching LTE devices to our customers.

And frankly, we're in the process right now of assessing the remaining market and timeframe, and when we'd launch the markets; but we're absolutely planning to continue on the path of LTE for our entire footprint.

It's just a matter of pacing that, and making sure that we look at which markets make the most sense to roll into next.

But we'll get more detail on that soon.

Simon, this is Steve.

On the roaming questions, definitely there's some seasonality; third quarter is a strong quarter for roaming.

That said, we expect to, as we said in the prepared comments, expect to see a nice strong stream in roaming continuing.

I think due to some seasonality, fourth quarter may be down a bit, but I think it will still be up nicely year-over-year, driven by data usage.

As far as the Sprint issue is concerned, Sprint is an important roaming partner for us.

But that is not something -- well, I would say first of all, it's not a major part of our revenue, although it is substantial.

And as you know, these agreements aren't take-or-pay, so it's a little -- there's some uncertainty and a little hard to predict that.

But at least, in the near-term for the foreseeable future, we expect to see Sprint be a strong roaming partner for us.

That's helpful.

Thank you.

Ric Prentiss, Raymond James.

Just want to go back to the first slide, where you provided some of the details on the USF ETC changes.

Just want to make sure, thinking about it correctly -- on the Phase 1 and Phase 2 in the step-downs, you mentioned now you're running kind of $160 million a year on ETC.

So is the thought that at second-half '12, we should see that come down 20%?

So the FCC's plans are to freeze a set of baseline based on -- at a steady area level based on year-end 2011.

I think we would expect within that context to see revenues go down by 20% on -- in the middle of the (multiple speakers) --

Sorry, say again?

Beginning midyear, so it would be roughly 10% of a normalized number.

So if you're working off -- it's the [150 to 160], you'd be talking about an impact for all of next year (multiple speakers).

Right, [up] 10% of that.

Right.

And then looking into '13, you'd pick up the other 10%, and then second half '13, you'd get another step starting down?

That's correct.

And then the one-time payments, how do you think that's going to work out?

So the FCC is planning on a $300 million fund to be distributed using a reverse auction.

It will be targeted to census blocks that are currently viewed as unserved.

And that's about as much as we know pending the -- seeing the details and the order, and also the way an auction notice would play out.

Okay, and then on the 4G.

Devices for 4G late first quarter, I think is what I just heard.

When do you think voiceover LT or [VOLTI] devices will become available?

And as you think about the cost curve on those 4G devices compared to an iPhone, what are your thinking?

This is Alan.

In terms of voiceover LTE, I think it's a little too early to tell.

We don't believe it's going to be 2012.

It will be 2013 at the earliest and probably later than that in terms of high quality phones.

In terms of the cost of the 4G LTE devices, our current belief is it would be less than the iPhone.

And then final question on the tiered pricing.

Can you update us as far as what you guys are doing, as far as -- you're seeing good smartphone sales; you're seeing ARPU go up.

How are you managing the network?

Yes.

So there's really a couple of questions there.

There are a number of things we've put into place on the network side and on the handset side, in terms of compression and WiFi offload that's helping us manage overall data growth.

Obviously, LTE is a big piece of that as well.

The last piece is a pricing fees and we still plan to introduce tiered data pricing in the first half of next year.

That will not only help us on the monetizing the data growth, but we believe also in combination with lower-cost smartphones, will allow more customers to upgrade out of their feature phones into their very first smartphone.

I meant to ask you, have you given us what percent of your base upgraded in the quarter, speaking of which?

It was just under 11%.

Great, thanks.

Robert Dezego, SunTrust Robinson Humphrey.

I just wanted to go back to the iPhone for a second and just follow-up here.

Is the thought that it's a cost of the actual handset?

Or is there more of a concern with the network strains and the spectrum that you have, that if you're adding all these subscribers that are using this kind of data, I'm wondering what the -- if you could talk a little bit about the decision to not take that phone.

Yes.

You know, I'm not at liberty to discuss many of the details.

I would just say that, overall, the decision for our business, we believe, is right to play our offense and play our game.

And we have a very competitive lineup of devices that we think makes sense for our customers and make sense for our business.

Okay.

And then the follow-up is, your churn is obviously still pretty impressive here on the postpaid side, but with the lack of gross adds coming in the door, could you talk about what the reason is for some of the churn that you're seeing?

Are the family plans reducing that churn?

Are you still seeing a lot of family plan churn come out of the base?

And then if maybe you could talk about what your peers are really doing, do you think, that are allowing them to still take share.

What are the biggest competitive threats that you're seeing?

Well, I would start with churn, which we are pleased with our churn numbers, and we're obviously going to focus on that.

I think that starts with keeping our customers very, very satisfied.

As I said in my prepared comments, we know that in our footprint, our customers give us the highest satisfaction rating scores, whether it's network quality or customer satisfaction and -- or customer service.

And that says that these -- our customers are happy.

Our job is to keep them even happier as we go forward.

But, also, continue to target new customers.

Obviously, getting more gross adds is a key priority for us.

So leveraging our great network, our customer service.

But I'd say enhancing what we have in the marketplace with a more competitive device lineup, very differentiated loyalty program through the Belief Project.

And we believe those things, combined with innovative breakthrough kinds of use of marketing tools, social media, better advertising, will continue to attract new customers.

So it's really a combination of that that is keeping our current customer satisfied to keep that churn low and lower, but also it's a very competitive marketplace.

So breaking through that clutter isn't easy, but we're focused -- we think we can do that.

And if you talk about what your peers are doing, you think, to really -- that are taking share?

You know, I think it's just a really competitive -- I mean, you know how competitive this marketplace is.

So there's a lot of spending.

There's a lot of competition and price in device, and everybody's plan is slightly different, but I think we're all playing it that way.

Our approach at U.S.

Cellular is to really focus on a customer experience and customer loyalty to differentiate within that -- within the pack.

Okay, and the final question is, so just for the postpaid business, do you see a trajectory to get to positive adds at some point in the future?

Or do you think you'll run this business to continue to see the subscriber count creep down, but getting the higher ARPU and getting a better quality, basically running a smaller subscriber business, but a higher-quality subscriber business?

I can tell you we're absolutely 100% focused on subscriber growth.

And we're going to continue to focus on that and use the tools in our tool kit to achieve that over time.

Do you see a trajectory to get there?

Well, I can't -- I don't have a crystal ball.

I mean, we're focused on it.

We see -- we believe it will happen over the next several quarters, and stay posted.

Okay, and then, finally, I guess the last question on it would be the impact to margins as you try to get the subscriber base back to growth?

Well, again, I'd say in the short-term, you can see what we've got in the guidance.

It reflects some expansion year-over-year.

We've said a number of times that our longer-term goals are to deliver a return on capital that exceeds our cost of capital.

The goal is to do that over the next few years.

That will require additional margin expansion.

Okay, great.

Well, thanks for taking the questions.

Best of luck.

James Moorman, Standard & Poor's.

Just a follow-up on some of the earlier questions.

First, when you're talking about the subsidy for the LTE phones, you said it'd be less than the iPhone.

But can we assume that it's more than what you're paying on the current smartphones?

The second part of the question is, you said you passed on the iPhone.

Could part of that be the strain of your CDMA network?

And would you consider an LTE version if it comes out in the first half of next year?

Let me start with the second question first and then I'll turn it over to Alan for the first question.

No, we feel confident in our network progress, our capacity, our -- the capability that we have in our network, and that was not a strong consideration.

I would say in terms of the future, we're always open to possibilities.

So I can never say never.

So in terms of the handset costs, if you think about our current smartphone portfolio, we have a good spread from sort of the low-end to the high-end, so the average cost of a CDMA smartphone will be less initially than the LTE smartphone, which will be focused more on the high-end.

Over time, we expect that to ratchet itself down and for the LTE device portfolio to also become much more diverse.

Great, thanks.

Stephen Mead, Anchor Capital Advisors.

Just going back to the iPhone, and you had -- you said you had 356,000 smartphone sales.

I was just curious as you look at the -- you can kind of share with us how many of those are actually former iPhone customers coming back to a different type of phone?

I don't think we have a way to measure exactly that.

But what I will say is that when customers come to our stores, our frontline sales associates are very well equipped to help people understand their needs and to highlight for them the various devices that we have, and how they stack up against competitive devices in the marketplace.

So that's, I think, a good dynamic for us.

I don't think we have the data to answer your exact question.

Okay, and then as you look at, in terms of -- I didn't hear the first part of the call -- but as you look at the guidance on your operating income and EBITDA or the cash flow number, and if you back into what that implies for the fourth quarter in terms of comparisons with last year, I was trying to get a sense of whether there are certain things that have made that comparison more difficult this year versus last year?

Well, I think when you back into the number, you certainly see that the projection for the fourth quarter is lower than either Q3 or the average.

And that's -- reflects the seasonal nature of the business.

With the heavily promoted fourth quarter, that would be normal.

I think, year-on-year, remember that we're making substantial investments in enablement programs like our new billing system and so forth.

So, year-on-year, those expenditures would be higher fourth-quarter against -- from last year.

And, also, recognize that we did, in fact, raise the guidance this quarter, reflecting the strong results we've had year-to-date.

And then in terms of the impact on CapEx of the LTE expansion, how much of the getting to 25% coverage in the first quarter of 2012, how much of 2011 CapEx is part of that process?

Steve, it's Ken.

I can get you the exact number, but in '11, if you remember, we raised CapEx in the first quarter when we announced our plan, and ballpark the number I'm thinking -- it's something like 120-million-ish all-in for this year for LTE, but I don't have the exact number in front of me.

Well, it doesn't have to be exact.

I'm just trying to get a sense.

And then I also was wondering in terms of the incremental cost, to do that as we look into 2012, to get to much broader coverage of LTE, what that impact on CapEx might be, when you look at putting together your 2012 number versus your 2011 number?

Well, I think Mary said that our expectation is that we are going to continue the rollout of LTE.

We've got the first 25% in the network by the end of this year.

And we will -- we expect that's going to be a multi-year project to continue to roll that out.

The exact scope of next year's follow-on and the markets that were to be included aren't -- that work isn't completed yet.

But if I think about this as being a multi-year project, I would not expect to see huge differences year-to-year.

Then when you look at what you need in terms of network capacity and what it takes to get there, I'm wondering in terms of once you get the coverage of LTE, where are you in terms of capacity, versus if you look at the growth of data uses and devices, and stuff like that, how much capacity have you created?

How much more do you need over time?

I mean, is there any way to kind of comment on that?

Yes, the comment I would make is that, certainly, as we are planning our buildout of LTE or even just our day-to-day management of the network, it's always with an eye towards current needs as well as future needs.

So, we're certainly modeling and predicting where that growth might go and building capacity in anticipation of that.

(laughter) Yes, okay.

Well, I'm not -- I can't get more specific right now, but that's exactly -- certainly, we are looking at that all the time.

Well, but I was just wondering whether you get to the end of 2012 and realize that we're still pretty constrained here; or in terms of data pricing, both on the roaming side and your own customer base, you have to -- and this is why it's important that people can actually price based upon usage.

I absolutely -- well, first off, you look at the metrics in our network performance today, it's very strong.

We have very strong compelling metrics on the performance of our network today.

So we don't have the capacity issue today.

As we look to the future, we expect that data growth will continue to grow, obviously.

And as Alan mentioned earlier, we're going to look to doing more with tiered pricing, so that we can both manage on the high-end of people who use a lot of data, as well as open up opportunities for people to come into their first smartphone at lower-end data plans.

So we're planning to do that.

Okay.

I have follow-up questions, but I mean, I'll turn the floor back.

Kevin Roe, Roe Equity Research.

Just one question on postpaid ARPU.

Very nice growth in the quarter, 3%.

Only -- less than 30% of your postpaid sub-base has smartphones, so it seems like you have a lot of runway to improve postpaid ARPU going forward.

Is a 3% growth rate a good number near-term?

Or do you think it could accelerate or decelerate?

Some thoughts there.

This is Alan.

There's obviously a lot of smartphone growth in front of us.

And we're -- all of our plans anticipate that and are moving in that direction.

Obviously, the big unknown is what happens in the competitive environment?

So I think that's a fine number to use for now.

The 3% growth rate?

It's as good as any right now.

Very good.

Thank you.

Jung Lee, Ithaca Partners.

Thank you but my question has been answered already.

Thank you.

Our next question comes from the line of Ali Motamed with Robeco.

Please proceed with your question.

Mr.

Motamed, your line is live.

Our next question comes from the line of John Frank with Harbert Management.

Please proceed with your question.

Thank you for taking my question.

A quick follow-up to a previous caller's question.

Assuming the Company is successful in share collapse proposal -- which I truly hope you will be because it's a shareholder-friendly proposal that make sense -- just regarding using equity as an M&A currency, would a negative theoretical value on the TDS shares -- meaning taking the current value of TDS less the USM market value, which is currently negative and has been for some time -- would that valuation -- would a negative valuation prevent you from using that equity in the context of M&A?

I think it would make it very difficult to use.

But in a vacuum without analyzing the value of what's being bought, okay -- I can't answer the question.

Okay.

And, further, again, I do applaud the Company's step to collapse the shares, and again, hope you do reach the vote.

I get the sense that this perhaps is the first in potentially a series of steps that the Board and management is going to take to address this valuation that we were just speaking to.

I understand that there are sensitivities and an inability to speak explicitly, perhaps, about some of the steps; but can you offer any more characterization or color in terms of how you view the current valuation of your equity?

One.

And, two, maybe once we get through the share collapse, at what point do you think we'll have some more color regarding where the Board's mind and thought process is, in terms of addressing the valuation?

John, I am in a severe box in terms of what I can say.

Right?

We've got a new proxy statement out there.

But let me assure you that the Board is very focused on building shareholder value.

We think that, like you, this first step is something that will benefit all shareholders and hope to complete that process.

And then continue to address other factors that may help improve the valuation in the future.

All right, well, I hope to hear more soon.

Thanks.

Christine, we have time for one more question, please.

Thank you.

Our last question is from Ric Prentiss with Raymond James.

Please proceed with your question.

Hey, just one quick follow-up, maybe also an unanswerable, but -- with the T&T mobile transaction out there, can you update us as far as what your stance is, as far as that transaction?

And then what your appetite might be in case there's any divestitures, as far as if they're regional or national?

Right.

Well, a couple of things.

One is if there aren't any divestitures, we will certainly be open to considering things that might augment our geography and our markets.

In terms of our stance on it, we are neutral, I would say.

We see some positives; we see some potential negatives, but really focused on conditions that we think would need to be imposed if the merger went through.

Along the lines that things that would help us maintain competitiveness in the industry going forward -- so, you know, roaming, handset exclusivity, interoperability with LTE and spectrum access, those kind of items.

So that's what we've been focused on.

Great, thanks.

Ms.

McCahon, we have reached the end of the question-and-answer session.

I would now like to turn the floor back over to you for closing comments.

Just like to thank everyone for their time today and look forward to speaking to you soon.

Thanks.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.