美國無線通訊 (USM) 2012 Q2 法說會逐字稿

Greetings, and welcome to the TDS and US Cellular second 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, Miss, you may begin.

Thank you, Dan.

Good morning, and thank you for joining us.

I want to make you all aware of 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 -- from TDS, Ken Meyers, Executive Vice President and CFO; from U.S. Cellular, Mary Dillon, President and Chief Executive Officer; Steve Campbell, Executive Vice President and CFO; and from TDS Telecom, Vicki Villacrez, Vice President, Finance and CFO; and Kevin Hess, Senior VP, Government and Regulatory Affairs.

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 the slides referred on this call, including non-GAAP reconciliation.

The information set forth in the presentation and discussed during this call contains forward-looking statements about expected future results and financial results that are forward-looking and subject to risk 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 U.S. Cellular filed SEC Form 8-K report, including the press releases we issued this morning.

Both Companies plan to file their SEC Form 10-Qs later this afternoon.

On September 27, 2012, the FCC plans to conduct Auction 901.

A single-round sealed bid reverse auction, to award up to $300 million in one-time Mobility Fund Phase I support to successful bidders that commit to provide 3G or better wireless service in areas designated as underserved by the FCC.

U.S. Cellular has filed short-form applications with the FCC for each of the states in which we have ETC status, which preserves our ability to participate in the auction if we so choose.

FCC anti-collusion rules place certain restrictions on business communications and disclosures by participants in an FCC auction, so we will refrain from discussing any impermissible topics relative to that auction.

Please keep in mind that TDS as an open door policy so if you are in the Chicago area and would like to meet with members of Management from TDS Corporate, U.S. Cellular, or TDS Telecom, the Investor Relations team will try to accommodate you, calendars permitting.

Now I would like to turn the call over to Ken Meyers.

Thank you, Jane.

Good morning, everyone.

As you will hear from the team, with mixed quarter with some good progress on several fronts, including the level of postpay and prepay gross adds, and another HMS acquisition, and there are some tough headwinds we are face, we working our way through.

I will let the team provide the details.

I do want to point out three unusual items this quarter that affect comparisons.

The first is related to interest expense, which was down $22 million year-over-year as a result of a $15.4 million write-off of unamortized debt issuance costs in the second quarter of last year.

The second item is on the gain/loss on investment line, where last year we had a $13.4 million gain on the sales of property and this year we had a $3.7 million loss, producing a swing of $17.1 million.

There is also a big change in taxes.

TDS' overall effective tax rate was 39% this quarter, compared to 9.5% last year when income tax expense was reduced by $29 million, primarily due to tax benefits from some state tax law changes and discrete items.

These three items, which are all below the line, significantly impact EPS comparisons.

Staying with taxes for a moment, as you know the bonus depreciation rate for federal income tax purposes is currently 50% and is expected to expire at the end of this year.

We expect federal income tax payments to substantially increase beginning in [2012] (Company corrected after the conference call) and remain at a higher level for several years as the amount of TDS' federal income tax depreciation deduction substantially decreases.

By the way, for the full year we are estimating the effective tax rate at TDS at about 35%.

Our balance sheet remains strong.

We ended the second quarter with $820 million in cash, cash equivalents in [short-term] investments as well as all of the $700 million on the revolving credit facilities.

And I think it's always good to point out once in a while that we have no unfunded pension liabilities.

You will also note that we did not purchase any shares this quarter.

Many of you have asked about our progress in identifying and evaluating additional steps TDS and/or U.S. Cellular could take to enhance share value.

I assure you that it is receiving a great deal of Management attention.

But unlike the very specific undertaking last year that involved analyzing how we could lessen or eliminate the discounts between two classes of TDS common stock, this is a much more complex set of alternatives.

Many of which have interrelating dependencies and competing interest for capital such as areas of potential investment versus other uses of cash.

So know that we are working on it and that we will share any conclusions and actions at the appropriate time.

Now I will turn the phone call over to Mary Dillon.

Thank you, Kevin, and good morning everyone.

We had both successes and challenges in the second quarter and I will update you today on the highlights on our initiatives to drive future results.

First, I will review our accomplishments, starting on Slide 5. We made solid progress in our customer acquisition efforts in the quarter with a 23% increase in retail gross additions, which breaks down a 9% increase in postpaid and a 77% in prepaid.

These results reflect efforts to aggressively drive new customer acquisition in two ways.

By increasing awareness consideration and conversion of the U.S. Cellular brand and also by strategically expanding our distribution base.

Key initiatives for the quarter included the introduction of a new product offering called U Prepaid in select Walmart stores.

Ongoing deployment of our 4G LTE services and the evolution of our postpaid plan pricing to include tiered data while continuing to offer differentiated products that include the industry's only points-based rewards program.

These efforts will continue to be foundational to our acquisition strategy going forward and are now supported by a new marketing and communication campaign, Hello Better, which launched in July.

Our prepaid business grew significantly with the addition of 20,000 net customers in the quarter, driven by the launch of U.S. Cellular prepaid offerings in more than 400 Walmart stores, as well as the launch of new price plans and the expansion of our device portfolio.

Smartphone adoption in the quarter was 52%, up 40% a year ago, though slightly dampened versus previous quarter by the U Prepaid launch, which is largely feature phones.

Continued smartphone adoption along with ongoing adoption of higher ARPU Belief Plans drove total ARPU up 6%.

In fact, 68% of our postpaid customers now have Belief Plan.

Now I will discuss some of our challenges in the quarter, turning to Slide 6. Postpaid churn remains elevated, which we attribute to the expanded iPhone distribution and aggressive promotions by competitors, including big box retailers, particularly for 4G LTE devices and services.

In addition, we continue to see migration from postpaid to prepaid offerings.

We are aggressively combating this through the use of advanced analytic tools to identify and predict the primary drivers of churn across our customer base, implementing a wide range of new actions aimed at retaining high-value customers by present them with highly-targeted and attractive offers.

Management of costs and expenses continues to be a challenge.

High equipment subsidies, network costs and investments in our multi-year initiatives are all putting significant upward pressure on our cost and expense structure.

However, we have taken and continue to take numerous actions to control and reduce cost.

Actions such as working with our OEMs to introduce lower-cost devices into our portfolio, closing less productive retail stores, implementing various mechanisms to control data usage and costs both on and off networks and tightly controlling both internal and third-party labor costs.

Overall, I believe that we're finding ways to improve the efficiency of operations and effectively managing our controllable costs and expenses.

Another challenge is managing data capacity.

Data usage, both on and off networks, continues to grow and we're building 3G and 4G LTE capacity to meet this demand.

We are also managing off the network usage through a number of initiatives to reduce the cost of outbound roaming.

The growth in data usage underscores the urgency of rolling out our 4G LTE service and devices and we are offering our customers incentives to make the migration happen as quickly as economically feasible.

For example, in our markets where 4G LTE service is available now or will be by the end of the year, we priced our 4G LTE smartphone, the Samsung Aviator, more aggressively to encourage adoption where it will have the most immediate benefit.

Now turning to Slide 7, our 4G LTE initiative is one of three we launched this year to grow our business and improve profitability over time.

The network is performing very well in terms of system availability, speed, and overall customer experience.

We are now working on our Wave II market, with the goal of bringing coverage to 58% of our customers by the end of the year.

Sales of our first 4G LTE devices accounted for 17% of all smartphones sold in the quarter.

We expect that momentum to continue with the launch in July of the Samsung Galaxy S III.

We are very proud to offer this device to our customers at virtually the same time as the four national carriers, and we have been very pleased with the sales of that device so far.

To continue to drive adoption, we plan to introduce a three to four 4G LTE devices in 2012 for multiple vendors.

On Slide 8 we have more details about the U Prepaid initiative which I mentioned earlier.

We are currently in over 400 Walmart stores.

U Prepaid is our first phone in a box and offering it through the world's largest retailer is a tremendous opportunity to be where our customers want to shop.

And while it's early, we are very pleased with our results so far.

We are actively pursuing additional big box opportunities and we are working to make our own distribution network more effective as well.

Moving to Slide 9, we launched the third initiative, updated pricing, on May 1 with three goals.

To drive new customer growth, to increase profitability, and to grow ARPU over time.

The addition of tiered data pricing for smartphones was one of our most significant adjustments.

We are offering some smaller data plans to encourage more customers to upgrade to their first smartphones, as well as larger plans that enable us to increase ARPU as customers become more experienced with their devices and then consume more data.

The tiered plans also help us better monetize the heaviest data consumption.

On July 1, we also added two promotional plans with unlimited voice and messaging as a competitive response to new shared data pricing plans in the market.

To succeed with the three initiatives I just discussed we have to continue to build awareness of U.S. Cellular and our differentiation in the marketplace and that's we recently launched our new advertising and marketing campaign, Hello Better, detailed on Slide 10.

This campaign delivers a strong and clear message that we are different from other carriers and, quite frankly, offer a better wireless experience.

In an industry where more than half of wireless customers are unhappy with their current providers, we want consumers to know they don't need to settle for a mediocre or a worse experience, particularly for a product that is just so important in their lives.

Our goal is to make more people aware that U.S. Cellular offers a much better wireless experience and to show them how they can really benefit from switching and becoming our customers.

We will be using a wide range of traditional, social, grassroots and retail tools to reach potential customers who are frustrated with their current carriers and helping them make the switch to build a better relationship with U.S. Cellular.

To sum up, we are making progress in important areas by getting more people to switch to U.S. Cellular, increasing our points of distribution, as well as increasing ARPU, while supplying that same level of intensity in analytics to addressing postpaid churn.

Device subsidies will continue to be a major watch point as we look to migrate customers over to the better experience and economics of our 4G LTE network.

Now I will turn the discussion over to Steve for a review of the quarter's operating and financial results.

Thank you, Mary, and good morning, everyone.

At a high level, U.S. Cellular's results reflect positive growth in revenues quarter-over-quarter as we improved ARPU.

Operating cash flows declined, primarily due to increased handset subsidies and higher system operations costs for data growth.

Customer results were mixed as we improved retail gross additions.

But as Mary said, still challenged with retaining customers in the extremely competitive marketplace and the somewhat still sluggish economy.

Prepaid gross and net customer additions improved significantly as a result of our introduction of new prepaid in over 400 Walmart stores.

As shown on Slide 11, second quarter retail gross additions were 277,000, up 23% from 226,000 in the prior year quarter.

In the postpaid segment, there was a net loss of 48,000 customers as the 9% increase in postpaid gross additions was offset by an increase in churn.

In the prepaid segment we did much better a year ago, adding 20,000 customers.

In total, we lost 28,000 net retail customers in the second quarter this year compared to a much larger net loss of 58,000 last year.

Postpaid churn, shown on the next slide, increased to 1.57% from 1.38% last year and remains stable from the level in the first quarter.

As Mary commented earlier, we attribute this increase to the expanded distribution of the iPhone and aggressive promotions by our competitors, particularly for LTE devices and services.

Additionally, we continued to see some migration from postpaid to prepaid offerings.

We continue to add customers to our Belief Plans, 238,000 during the second quarter.

So we currently have 3.6 million customers, or 68% of our postpaid base, on our Belief plans.

Slide 13 shows the trends in smartphone sales, penetration, and postpaid ARPU.

During the second quarter, we sold 410,000 smartphones, which represented 52% of total devices sold.

This compares to the second quarter of last year when we sold 308,000 smartphones, or 40% of the total units sold.

68,000, or 17%, of the smartphones sold this quarter were 4G LTE devices.

Smartphones now represent 37% of our postpaid subscriber base, compared to 23% for the same period last year.

While the overall cost to subsidize smartphones, especially the 4G devices, is greater, we expect that the higher ARPU and migration of data message off our 3G network on to our 4G LTE network will benefit our results over time.

As you can see on the graph at the far right, postpaid ARPU has steadily increased over the past several quarters due to strong smartphone sales as well as continued migrations to our higher ARPU Belief Plans.

Postpaid ARPU was $54.42 in the quarter, up 5% from $51.84 a year ago.

Turning now to our financial performance shown on Slide 14.

Service revenues for the quarter were $1.03 billion, which is an increase of $28 million, or 3% from last year.

Breaking that down a bit further, retail service revenues were $889 million, an increase of 2%, with billed ARPU growing 6% year-over-year.

The inbound roaming revenues increased, growing $4 million, or 4% year-over-year, to $86 million, primarily as a result of increased data roaming traffic.

We expect continued growth in data roaming traffic, both onto our networks by customers of other carriers and off our networks by our customers, but lower roaming revenues and expenses over time due to our ongoing efforts to negotiate lower reciprocal rates.

System operations expenses of $243 million were up $15 million, or 7% year-over-year.

This was due to several factors, including expenses associated with the deployment of the 4G LTE network, a 2% increase in the number of cell sites and service, and higher data usage and roaming expenses as our customers use more data services both on and off our networks.

As data usage continues to grow, we are implementing a number of measures designed to minimize the impact on our expenses.

Net loss on equipment for the quarter was $117 million, up $20 million from last year, primarily as a result of increased smartphone sales and higher costs related to 4G LTE devices.

The average loss per device sold increased year-over-year due primarily to the shift in mix to smartphones as these devices were 52% of sales versus 40% last year, and in total we sold 33% more smartphones.

We expect equipment pricing will continue to be very aggressive across the industry and that our costs will be impacted by the continuing shift in mix to smartphones and the continuing introduction of 4G LTE devices throughout the year.

Please keep in mind that we're currently selling 4G devices in our 3G markets so that we can capture the cost savings immediately when the market becomes 4G.

SG&A expenses of $435 million were up 3% year-over-year due to modest increases in a number of categories, including USF contributions driven by higher rates, employee-related expenses, and bad debts expense driven by higher gross additions.

Operating cash flow for the second quarter of $234 million was down 8% compared to last year's $254 million.

Operating cash flow margin was 22.8%, compared to 25.3%.

Continuing on Slide 15.

Total investment and other income net for the quarter totalled $9.7 million, compared to $11.6 million a year ago.

Earnings related to our interest in the Los Angeles partnership were $19 million, up from $14 million last year.

Also, this section of the statement of operations includes two of the unusual comparisons that Ken mentioned earlier.

The first is gained loss on investment where we had a loss of $3.7 million this year, versus a gain of $13.4 million last year, a swing of $17 million.

The second is interest expense, which was down $13 million in the quarter, primarily due to the write-off of $8 million in unamortized debt issuance costs in 2011, as well as lower interest rates on our outstanding debt.

Net income attributable to U.S. Cellular shareholders totalled $52.7 million, or $0.62 per diluted share, versus $74.9 million, or $0.88 per share in 2011.

Decline was due in part to the lower operating income, but also to a higher effective tax rate.

The effective tax rate for the second quarter this year was 36.9%, compared to 30% last year, when income tax expense was reduced by $4.5 million, primarily due to tax benefits from the expiration of the statute of limitations for certain tax years on some discrete items.

For the full year, we are estimating an effective tax rate at U.S. Cellular of approximately 33%.

For the quarter we generated cash flow from operating activities of $155 million.

Cash used for additions to property, plant, and equipment in the quarter was $221 million, reflecting significant expenditures related to our 3G and 4G LTE networks as well as for our multi-year enablement initiatives.

U.S. 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 June 30, cash in short-term investments totalled $538 million and we have about $300 million of unused borrowing capacity under our revolving credit agreement.

Slide 16 shows our guidance for the full year 2012, which is unchanged from that announced earlier this year.

We're estimating service revenues in the range of $4.05 billion to $4.15 billion, operating cash flow in the range of $800 million to $900 million, and capital expenditures of approximately $850 million.

Factors impacting our results for the remainder of the year will be the expected loss of $16 million in ETC revenues, higher LOE and other selling and marketing expenses associated with heavy promotional activity during the fourth quarter holiday periods, and increased expenses related to the implementation of our new billing and operational support system scheduled for implementation in 2013.

Now I will turn the call over to Vicki Villacrez to cover TDS Telecom.

Thank you.

Good morning, everyone.

Before reviewing results by segment, turning to Slide 18, I'd like to give you an update on some business developments.

First, with respect to IPTV, we now provide service in five markets as of June 30.

Our market rollout plans are moving slower than anticipated as more rigorous plant upgrade activity has been needed to enable our copper network and prepare other infrastructure for IPTV services.

As a result, we have reduced the number of markets to 10 that we plan to provide service to by year-end.

TDS TV in these 10 markets will pass approximately 65,000 households in total.

The delayed rollouts will not materially impact 2012 as many of the market launches are expected late in the year.

While in the early stages of recent launches, we remain excited about our IPTV service, which is meeting our high expectations for customer take rates and we will look to launch additional markets in 2013.

Also, we are seeing a slightly greater impact of USF and ICC Reforms, principally on the ILEC as Interstate VoIP traffic has been billed at lower rates, coupled with an increased percentage of voice traffic.

We continue to see the expected reduction of safety net support.

Also, declines in minutes of use continued, impacting other components of regulatory revenues.

These impacts have been ongoing and are not related to the USF/ICC Reform.

As Kevin Hess will discuss in more detail, recovery mechanisms will kick in that we will expect will lessen the impact of the changes from the USF/ICC order over the back half of the year.

And the third development I wanted to note is our June acquisition of Vital Support Systems, headquartered in Des Moines, Iowa.

Vital brings nearly $80 million in revenue, but is a lower-margin business as the large majority of its revenues are generated from reselling equipment.

The acquisition brings deep IT Solution Provider capabilities and strong customer relationships to our portfolio of Hosted and Managed Service offerings, and greatly expands our engineering and sales capabilities.

We plan to leverage the existing TDS HMS data center infrastructure and hosting and cloud service capabilities with Vital's suite of products and services to provide customers with an end-to-end solution to their IT needs.

As shown on Slide 19, our Hosted and Managed Services segment drove TDS Telecom's revenue growth.

The number of ILEC and CLEC connections continues to decline, and losses in high-margin regulatory and wholesale revenue streams outpaced growth in new, lower margin replacement revenues such as data, video, managedIP and HMS.

Consolidated cash expenses were up [16%] (Company corrected after the conference call) for the period, primarily due to acquisition effects, costs associated with our system improvement activities, the expansion of IPTV and developing infrastructure in new products and services for HMS.

All-in, operating cash flow for the quarter was $59.5 million, a decrease from the $70 million achieved in 2011.

Turning to Slide 20, let me discuss each segment.

ILEC revenue decreased 4% overall.

Residential revenues were flat with last year as a result of increases in data connections, offsetting voice line losses.

ILEC commercial revenues declined 3% as a result of voice line losses and a small ARPU decline, but managedIP was strong as connections more than doubled.

In the quarter, wholesale revenues declined $5 million, a 9% decrease, primarily as a result of changes in regulatory recovery, wholesale rates and an increase in VOiP traffic coupled with the continued decline in minutes of use.

Kevin will discuss in more detail the effects of the USF/ICC Reform, the recovery mechanisms and implications on the business for the remainder of the year.

ILEC cash expenses increased 3% due to additional work needed to prepare for our IPTV market expansions, including contractor charges to prepare back office system support, Universal Service Funding and property taxes also contributed to the increase in the ILEC.

Turning to Slide 21.

ILEC residential broadband subscribers increased 2% year-on-year and 67% are taking speeds of 5-megabits or greater and 21% of taking speeds greater than 10-megabits.

Residential broadband penetration with 64% of primary residential lines and residential broadband ARPU has trended upwards to $38 as migration to higher speeds service offsets competitive pricing pressures.

On the residential side, our Star Voice packages continue to help us mitigate line loss.

At the end of June, we had 204,000 customers on these plans, or 58% of our residential customer base.

This is up 52% at this time last year, which helps us to stabilize voice ARPU.

On Slide 23, we continue to emphasize our Triple Play Bundles.

Voice, data and video, with video offered through Dish Network and increasingly through our own IPTV service, TDS TV.

We add 900 net Triple Play subscribers in the quarter, bringing our penetration of customers to 30%.

Churn on our Triple Play customers continues to remain very low at roughly 0.5% per month.

69% of our residential customers are on a Double or Triple Play Bundle, up from 65% last year.

Churn for a Double Play customer, while not as low as a Triple Play, is still significantly lower than churn with a single service.

Now turning to the CLEC business on Slide 24.

Revenues were down 3% as commercial revenues were flat and residential revenues declined in line with our churn expectations as we no longer sell to this segment.

On the commercial side of the CLEC, Slide 25, we saw 85% growth in our flagship commercial voice and data communications solution, called managedIP, which outpaced our losses in legacy physical lines and data connections, driving total commercial connections up by 1%.

Turning to the HMS segment on Slide 26, acquisitions increased revenues by $16 million.

We are investing in the infrastructures, support systems and development of new products and services, causing expenses to be higher.

As I said earlier, we made our fourth acquisition, solutions provider Vital Systems in June.

OneNeck was purchased in July 1, 2011.

Now I will turn the call over to Kevin Hess.

Kevin?

Thanks, Vickie.

Turning to regulatory Slide 27, as everyone is aware, last November the FCC moved forward with the transformation order to reform their Universal Service Fund and Intercarrier Compensation program rules.

At a high level of thrust to their reform efforts relating directly to USF is to encourage the deployment of broadband in unserved areas while simultaneously making sure USF disbursements are being made in the most cost-effective manner possible.

Regarding ICC Reform, the FCC's primary goal was to evolve the Legacy compensation scheme and move toward a bill-and-keep regime for switched access for all carriers, limiting the impacts over a reasonable transition period.

In doing this, the FCC also made certain reform decisions related to VoIP and phantom traffic.

And finally the order included many new reporting requirements for the wireline industry.

My comments today relate specifically to the rules that impact rate of return carriers, as all of the wireline companies owned and operated by TDS are under rated return regulation for Interstate purposes.

As shown as Slide 28, focusing first on the USF components of their decision, prior to the FCC orders TDS Telecom received Universal Service Funds through four sources.

Interstate Common Line Support, Local Switching Support, High Cost Loop, and the safety net additive.

In 2011, this support totalled approximately $90 million.

While the FCC's order impacts the various mechanisms differently, all of the support mechanisms going forward will become a part of the new Connect America Fund.

Based on their decision and further clarifications that came later, revenues for Interstate Common Line Support and Local Switching Support will remain mostly unchanged in the near term, although Local Switching Support will now be drawn from a new ICC restructure mechanism beginning in July 2012.

High Cost Loop mechanism is still in place, but has been adjusted to reflect the new investment and expense caps the FCC adopted.

However, just to remind everyone, we continue to see pre-reform declines in support under this mechanism.

In the fourth mechanism, safety net, is being eliminated over the next couple of years, which is a loss of approximately $4 million of funding this year and an additional $4 million the following year.

Finally, as mentioned, a new ICC restructure mechanism was implemented on July 1 to provide partial recovery of the ICC rate reductions and will also be a part of Connect America Fund going forward.

Related to ICC reform on Slide 29, I stated the FCC's primary goal was to find a way that they could move the industry to a bill-and-keep regime for switched access rates while limiting the financial impacts over the transition period.

Accordingly, the SEC adopted a nine-year transition period for the rate of return industry to transition and move terminating access rates to zero.

During this time, there would be three revenue streams aimed at easing the impact of the transition.

First, companies would continue to bill their reduced switched access rates to carriers and keep those revenues.

Second, the SEC adopted a new access recovery charge limited to a monthly fee of $0.50 for residential customers in 2012 that can be billed to end-users and those revenues would also be retained by companies.

And last, if there remains a revenue shortfall after implementing the first two transition options and the 5% annual step-down reduction, the FCC has instituted the newly structured mechanism for ILECs to help reduce that shortfall.

In addition to these changes, the FCC also confirmed that VoIP traffic is subject to access charges and adopted rules intended to curb phantom traffic, which is traffic we could not appropriately bill for since in the past we did not receive sufficient information to do so.

So what are the impacts to TDS Telecom?

First, let me clarify that the impacts on Slide 30 that I'm referring to here are the incremental impacts which are projected 2012 regulatory and wholesale revenues for both the ILEC and CLEC segments from the FCC's recent order, not a comparison to 2011.

That is important to understand is what I'm trying to detail here are just those impacts specifically related to the FCC's order, not differences from the prior year.

With that said, the primary changes to 2012 USF revenues will come from the FCC's decision to eliminate safety net-added support.

As previously mentioned, this will reduce our 2012 annual revenues by $4 million.

In addition, there will likely be some modest adjustments to High Cost Loop Support related to the implementation of the caps.

But this is not expected to be material.

And as I stated previously, Interstate Common Line Support and Local Switching Support revenues for 2012 will remain largely intact and very similar to what they would have been for 2012 without the adoption of the order.

Relating to the ICC Reform changes, the main impacts for the first six months of 2012 relate specifically to intrastate VoIP access revenues as rates for this traffic both originating and terminating were reduced to Interstate levels without a recovery mechanism option, resulting in a reduction of revenues of $1.6 million.

However, for the second half of the year the terminating rate impacts for this VoIP traffic will be part of the new restructure mechanism and the originating rates will return to their previous intrastate levels beginning in July.

Since new restructure mechanism will begin to flow in July.

Impacts for the second half of 2012 from ICC Reform are expected to be modest.

Turning to Slide 31.

With all that has changed, there are still many items subject to the FCC's further notice of proposed rule-making.

Such items as investment and expense caps for Interstate Common Line Support, represcription of the Interstate rate of return, bill-and-keep for originating access and transport rates, broadband build-out speed requirements, the recovery of High Cost Support in areas with an unsubsidized competitor and whether there will be a new broadband fund for rate of return carriers.

Decisions on any of these could impact future revenue streams and/or investment levels and we are actively engaged in regulatory and legislative advocacy efforts to manage those potential impacts.

In closing, policy makers have long recognized the critical role for Universal Service Funds in enabling companies like TDS Telecom to provide quality service to our rural customers.

Even in the face of significant change, we believe the USF program and the process of being reconfigured for a broadband-centric role must continue to play a key and vital role in our nation's and our Company's regulatory future.

Now I will turn this back to Vicki.

Vicki?

Thank you, Kevin.

Slide 32 shows our 2012 guidance.

We have adjusted our revenue guidance up by $40 million, to a range of $850 million to $880 million to reflect the acquisition of Vital.

We have tightened the range on operating cash flow to a range of $245 million to $265 million.

This reflects first half results and current trends in the business.

One, higher losses of the high-margin legacy revenues, including the impact of the USF/ICC Reform.

And two, higher costs as we implement IPTV, prepare back system offices and develop our HMS businesses, offset somewhat by operating cash flow for Vital.

We have increased our outlook on capital spending from $170 million to $190 million to reflect the impacts of certain non-cash items required to improve our copper network for IPTV and the decision to invest in the development of cloud products and services.

As a result of our increased capital guidance and coupled with the effects of Vital, we are increasing our guidance on depreciation and amortization to a range of approximately $190 million to $195 million.

Reflecting the changes above, operating income is now estimated in the range of $50 million to $70 million.

I will turn the call back to Jane McCahon.

Jane?

Thanks, Vicki.

Dan, we'd like to take questions now.

(Operator Instructions)

Simon Flannery, Morgan Stanley.

Mary, I wanted to talk again about the iPhone.

We have seen a couple of smaller carriers do deals with Apple around the iPhone and not have to make some of the commitments that Sprint, for example, had made.

Any opportunity there to find a meeting of the minds between yourselves and Apple?

And then we have had a lot of spectrum deals in the industry; there is some spectrum for sale right now.

Perhaps you could just update us on where you think your spectrum position, your spectrum needs, are and whether we should see you doing anything more in the coming months?

Thanks.

Okay, Simon, thank you.

On the iPhone, first of all, I can't speak to or have knowledge of the specific commitments made or not with other carriers, so I don't really know that.

What I would say is that, yes, we would be open to selling an iPhone if we could -- if the terms are mutually beneficial.

When we look at our business right now and look at our gross add momentum, there is plenty of people out there in the marketplace who are coming to US Cellular, obviously without carrying the iPhone and that is something that we're really proud of.

We will continue to look at options.

One of the ways that we think about this, too, is that the device is just one part of the overall experience.

And we're really focused on making sure that we are going to continue to be able to differentiate and excel by doing what we do best, which is delivering leading customer satisfaction across the entire experience.

A phone needs some work wherever you are, no matter what the phone or operating system is, and that's, for example, something that we are best at in terms of our network.

We are going to continue to lead with our strengths, keep our options open, and really balance for our customers and for the bottom line.

And on the spectrum?

Yes.

Simon, it's Steve.

I will take that one.

I think as Jane said in her introductory comments, we have filed applications with the FCC to preserve our rights to participate in the upcoming auction.

And as a result, we can't really say a lot about spectrum needs and activities right now, given the anti-collusion rules.

What I would suggest you do for some information is have a look at our 10-Q filing.

In there we have some disclosures about some recent and pending transactions that will give you some idea about recent activity, but for now we can't really say more that.

Okay.

Thanks, Steve.

Ric Prentiss, Raymond James.

Thanks.

A couple questions.

It's been a busy day, so I apologize if this was touched.

Can you tell us what percent of your base upgraded phones in the quarter?

And also what your policy now is on upgrades?

Let me take that.

Yes.

Simon -- sorry, Ric, I'll start.

This quarter we had about 9% of our base upgrade their devices.

And we have made some recent changes in our policies around upgrades.

Dave Kimbell, who is our Senior Vice President of Marketing, will maybe comment on those changes.

Hi, Ric, Dave Kimbell.

Yes, we have continued to manage our upgrade economics through a couple of changes that we've made recently within the last quarter.

We've introduced a device activation fee.

We have adjusted our upgrade timer, and we've changed through our rewards program the number of points that are required to move your timer up.

But most importantly I think for us is continuing to manage the economics as well as the growth in our business.

While we want to manage that upgrade, we also want to actively move people to our LTE network.

We will continue to do that.

We are also introducing some tremendous iconic devices like the PS3, as an example.

We will continue to see migration towards that.

As we move more of our future phones, that will continue to play a role in our upgrade rates.

So we'll manage it, but we're also looking to strategically move that upgrade rate forward throughout the rest of the year.

Okay.

And what was that upgrade rate last quarter and the year before, just to compare?

The last quarter was --

It's been running around that 9% level the last couple of quarters.

There was nothing unusual -- movement either way in the second quarter, versus what you have seen in recent periods.

Okay.

Second question is -- if you think back to the last iPhone introduction, did you see churn spike up?

I seem to recall that from the call.

And as we look to the potential introduction of a new iPhone 5, say in the fall, what are you thinking as far as how to combat that?

Yes, well -- Ric, it's Mary again.

Yes, we would expect there is some pent-up demand in the marketplace.

I guess we will see some impact on that.

One the things we are really proud of, frankly, and Dave touched on this, is that we have offered a very iconic, cutting-edge LTE device already to our customers with the S III, which our customer base has been responding very favorably to.

The access to an LTE device really well ahead of this phone was something important to us strategically.

I would say as it relates to how we will manage it, it's really a continuation of a couple of things.

I guess, first, it would just be continuing to play our offense, which is making sure that we have great offerings like the S III and many others.

That we continue to launch LTE devices as well as roll out our network.

That we have a new advertising and marketing campaign that's really designed to really break through the clutter in the marketplace and differentiate U.S. Cellular further as well as continue to offer a great experience and customer service.

So for us it's about continuing to play our offense.

I would say that we also have really built and increased our capability around what I would call predictive analytics in managing the life cycle relationships with customers with US Cellular.

Whether it's making sure that we have a long-term, rewarding loyalty program and membership experience, but also using analytics to really understand and predict who might be likely to churn, and proactively target those folks with relevant retention offers.

And LTE sounds like a pretty important part of the process.

What percent of your cell sites have got the fiber backhaul now for the LTE?

How important is Voice over LTE in the process?

I think we probably want to get you the number on the percent of fiber backhauls, so we will look that up.

That is certainly a key part of the strategy.

In terms of Voice over LTE, I think like everybody in the industry, we look to that as one of the future areas that we certainly will be entering and it's certainly a way to help manage data growth and cost.

We will be doing some trials, middle to late next year on VoLTE continue to develop that capability as well.

Okay, thanks.

Sergey Dluzhevskiy, Gabelli & Company.

Two questions.

First of all, Ken, on your review of the various options to enhance shareholder value, we were just wondering what the timetable is for your decision-making process.

Clearly, the Company has already spent a considerable amount of time, and it impacts your ability to repurchase stock.

If you could provide some update on when should we hear more, maybe a more substantive update on these issues?

Second question -- Mary, on LTE rollout, you plan to [count] markets at about 58% of your customers is LTE by the end of the year.

If you could give us a sense of what the initial response has been to LTE in your markets?

What you are learning from those LTE launches and how it may impact your future LTE rollouts for the remainder of your footprint?

Hi, Sergey, this is Ken.

I am going to go first,because Mary is going to be able to give you some nice information that I am not going to be able to give you, because I can't give you a more specific timeline.

As I said, this is a process that has many interwoven and overlapping effects to it.

It's something that will eventually have a lot of Board involvement in it, and I can't speak to that decision-making process.

What I can tell you -- what I said is, as soon as there is something to say, I will be out and let everybody know.

Mary?

Thank you.

Yes, Sergey, we are excited about -- we are really proud about our launch of LTE.

Our team has done a great job of moving quickly.

The experience so far for customers is exactly what we had hoped, which is the network is performing very well.

In terms of speeds and latency and very low amount of any issues or dropped calls.

We are very pleased with how the network is performing.

As you noted, we continue to move pretty aggressively, I'd say, through this year.

We'll continue really to get to pretty much all of our sites over time in the next couple of years, I'd say.

The other thing that we're doing is really aggressively seeding LTE devices, even in markets that are currently 3G markets, so that we have customers who are ready to be on the 4G network as soon as those devices are available to them.

Because A, they love the experience, and B, we love the impact that it will have for us ongoing as it relates to costs and data management.

So far, so good.

I know our engineering team is working very closely with our suppliers to make sure that we learn as we go in terms of efficient deployment and we are getting better at that all the time.

Thank you.

Phil Cusick, JP Morgan.

Can you talk a little bit first about your churn, up here 1.6% from the last few quarters?

What's the indication going forward?

Can you give us some idea on what sort of on-contract, off-contract your base is doing, especially given the fairly high upgrade rate?

Let me speak to the churn question first, which is -- Phil, obviously that is something that we are very focused on.

As I mentioned earlier, really quite excited about our growth add momentum.

That is something that doesn't happen on accident in this competitive of a marketplace.

It tells us that the way that we are approaching the market and differentiating what we are offering is appealing to a lot of folks, but certainly we are not happy with the churn level and are very focused on that.

Whether it's more deeply managing the life cycle relationship with our customers.

For example, the notion of rewards, which is the basis of the whole Belief project when it was launched -- rewarding customers for loyalty -- is still very appealing.

We're making sure that we are engaging our customers as much as possible and the rewards program is finding and testing and learning about different ways to incent them with rewards for loyalty to stay, obviously.

In addition, using some predictive analytics to more deeply predict who might churn and why, so that we can then more proactively reach them with relevant offers, whether it's even earlier upgrades or making sure they are on the right price plans, et cetera.

We are using all our tools in our tool kit today to manage both driving continued growth adds and reducing churn over time.

Okay.

As you think about your gross add, you alluded to it but I don't know that anybody has called it out.

Gross adds up quite a bit year-over-year.

Do you anticipate that continuing to grow over the next few quarters on a year-over-year basis?

Or could that even grow on a -- accelerate from here as well?

Well, we are focused on putting everything we can in the marketplace, I'd say, from inside-store execution to do exactly that, which is to continue to increase our share of postpaid customers.

And that's working so far.

Again, whether or not that will continue, I certainly hope it does.

We need to manage churn so that our net add numbers improve as well.

There was one comment about upgrades going up.

Is that upgrade rate going up from the current 9%?

Or did I hear that wrong?

This is Dave.

No.

We didn't make a comment about upgrade rates going up.

We talked about managing that as -- throughout the rest of the year and maintaining an upgrade rate consistent with a year ago.

We did talk about instituting an upgrade fee.

Okay.

I thought I heard the rate going up.

And lastly, what's the potential for shared data within your company?

Do you have the systems that are easily set up to do that, or is that more of an effort that maybe is worthwhile?

Well, certainly we are looking closely at how the marketplace is reacting to that.

What we did initially was launch a -- very quickly, a promotion plan that we knew was very competitive with the new offerings.

Unlimited data, unlimited text, and a plan that's very competitive with what Verizon has launched.

We are looking at shared data to understand it better, and certainly we will evaluate whether or not we move to that in the future.

Great, thanks, guys.

Sal Muoio, SM Investors.

Thanks.

I have one comment and then one question, if I could.

Just kind of following up on Sergey's question -- it's just a shame you really can't be buying stock back here with the stock in the low 20s.

And it was even below 20 a few months ago.

Such a fabulous time to be doing it.

I just want to give you my thoughts on your process of -- that you are going through with the Board relative to the valuation.

You have a tough, competitive hand to deal with, obviously, and that's a fact.

You're running the Business as well as you can subject to the environment you're operating in.

The fact is, you have not been able to grow the value of -- the intrinsic value of the Business per share for many years.

The business is run well, et cetera, but the environment is very difficult.

The process you're going through here -- I hope you are looking at it in two ways.

The first being, how do you close the gap between mark-to-market valuations, et cetera?

That's the easy thing to do.

The other thing to do is, how do you grow the intrinsic value per share in this kind of competitive environment?

You have your -- A, you operate the business as well as you can, which you are doing already, you have been doing.

But what I think you need to do, really, is consider a really serious stock repurchase, because if the business is worth whatever you evaluate it to be worth -- we have our own numbers, obviously, as does everyone.

If you could buy stock back at $0.30 on the dollar or $0.40 or whatever you think the intrinsic value is, it's a fabulous way to grow value over time.

And B, your balance sheet is under-levered.

You have the ability to do that, but what you need to do is generate more free cash flow.

Part of what you are looking at is operational, part is how do you grow value per share, and part is how do you monetize the value that is in the business that you don't see in the stock price?

I know it's very complicated.

I just hope that a significant share repurchase would be part of something that you are seriously looking at.

And a question I have is really on capital expenditures.

I just want to get a sense, really, for how much USM is accelerating capital expenditures this year, or additional capital expenditures, because of the tax benefits?

And whether it's pulling CapEx forward from next year into this year?

Or just some sense of the dynamics on -- I am not asking you for numbers for next year yet.

Really just how much -- ? Well, you get the idea.

Sal, it's Ken.

Thank you for your commentary.

It wasn't lost on me.

Secondly, with respect to CapEx, the big driver CapEx right now is the double effect of explosive data growth, primarily from 1X devices, since that's the bulk of the customer base, at the same time that you're laying in your new LTE network.

Last year and this year are heavy years, as we have the double effect.

Now, going forward, as we have more LTE in the network, and as Dave already talked about, we are pre-selling LTE devices in markets that aren't yet LTE, so that as soon as we turn on the LTE, we'll be able to reduce 1X investment going forward.

If you put those two together, they're the primary drivers of our capital and why we are optimistic about that trend line going forward.

I won't blame it on bonus depreciation or anything like that because, quite frankly, in today's extraordinarily low interest rate environment, that benefit is nice but it's not compelling enough to really change your capital spending strategy.

Okay.

I got it.

Thanks a lot.

Dan, I think we're out of time, so would you like to wrap it up?

Absolutely.

Ladies and gentlemen, this concludes today's teleconference.

You may now disconnect your lines at this time and thank you for your participation.

Thanks, everyone.