美國無線通訊 (USM) 2013 Q1 法說會逐字稿

Greetings, and welcome to the TDS and U.S. Cellular first quarter results conference call.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Thank you.

Ms. McCahon, you may begin.

Thank you Melissa.

Good morning, and thank you for joining us.

I want to make you all aware of the presentation we have prepared to accompany our comments this morning, which you can kind on the Investor Relations sections of the TDS and U.S. Cellular websites.

With me today and offering prepared comments from TDS, Kenneth Meyers, Executive Vice President and Chief Financial Officer.

From U.S. Cellular, Mary Dillon, President and Chief Executive Officer,Steve Campbell, Executive Vice President and Chief Financial Officer, and from TDS Telecom, Vicki Villacrez, Vice President Finance and CFO.

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

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

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

Please review the Safe Harbor paragraphs in our release, and the more extended version included in our SEC filings.

Shortly after we released our earnings and before this call, TDS and U.S. Cellular filed SEC Form 8-Ks, including the press releases we issued this morning, and pro forma financial statements reflecting the consolidation of New York One and Two, and the divesture transactions.

Both companies have also filed their Form 10-Qs.

We will be hosting our Annual Analyst Day at CTIA in Las Vegas on May 22nd, and we also invite to you join us or listen to the webcast of our Annual Meetings.

U.S. Cellular's is on May 14th, and TDS's is on May 24th.

We would also ask that our shareholders support our extremely qualified fleet of Director nominees at both TDS and U.S. Cellular.

As always, please keep in mind that TDS has an open door policy, so if you are in the Chicago area and would like to member with members of the management teams 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, and thank you for joining us today.

I will use slide five to make a few points at the beginning of today's presentation, and then turn it over to the rest of the team.

We have a lot to share with you this morning.

The bottom line is that we are making good progress on many fronts.

First, the Sprint deal is marching towards close, and is now expected to close this quarter in the second quarter of 2013, which is slightly earlier than originally planned.

Second, we are continuing to move forward with our 4G LTE rollout in migration of our customer base to 4G smartphones.

In fact, as Mary will cover, we are increasing our investment in 4G LTE to deploy some of it on our 850-megahertz spectrum, building roaming potentials and enabling new devices.

Third, planning around our Baja acquisition is on track, and we recently added a new executive, Mark Barber, to the team, who brings 32 years of cable experience.

We have successfully launched a pilot of our new billing system at U.S. Cellular, and we are starting to see some success from selling cloud services through Vital, the solution provider we acquired late last year.

Also, we continue to work on value building options for the towers and spectrum assets that we retained in the divesture markets.

Finally, as you saw in early April, in the process of negotiating a 700-megahertz lease with Verizon in New York One and Two, we triggered a change in accounting under GAAP.

This change requires us to deconsolidate the results of New York One and Two in our financials beginning in the second quarter.

Steve will provide additional detail on how this flows through our financial statements and guidance, but let me repeat that it has no impact on our ownership interest in these profitable markets, or their contribution to our bottom line.

We announced earlier this year that we will be using adjusted income before taxes as a metric for guidance.

This is income before deterioration, amortization, and accretion, and it excludes any gain or loss on the sale of business or other costs, interest, and income taxes.

This metric brings visibility to the earnings of all of our assets, including our investments in Los Angeles, Oklahoma City, and now, New York One and Two.

Before turning the call over to Mary, let me try to clarify what is going on with guidance, and specifically, how the accounting and timing of the divesture transaction is impacting results.

First, with respect to guidance.

We have updated our forecast related to the divesture transaction close date.

We now expect it to close on an earlier date than when we issued our original 2013 full-year guidance back in February.

Accordingly, our revised 2013 guidance related to both service revenues and adjusted income before income taxes, includes reductions to account for the fact that we will own and include the financial results of these divesture markets for a shorter duration in 2013 than expected in our original guidance.

Separately, we have been and will be recognizing amounts in the financial statements line item labeled gain/loss on sale of business, and other exit costs related to the divesture transaction.

This amount is excluded from our non-GAAP profitability measure adjusted income before income taxes, for which we provide full year 2013 guidance, and therefore, this financial statement item does not impact our 2013 guidance.

In accordance with GAAP, we expect to recognize a net gain on the divesture transaction from the period beginning in the fourth quarter of 2012 when we entered into the transaction, through 2014 when we expect to have the impacts of the transaction fully recorded, including the network decommissioning costs.

Through the end of the first quarter of 2013, on a cumulative basis, TDS and U.S. Cellular have recognized $31.6 million of losses related to the transactions so far, including $7.1 million of losses in the first quarter of 2013.

We expect to recognize a large gain in the second quarter of 2013 upon the close of the transaction.

After the second quarter of 2013, we will continue to recognize gains and losses on the divesture transaction through 2014.

I know it is confusing, but in summary we expect to recognize a total gain on the sale of the business and other exit costs in the range of $289 million to $324 million for TDS, and $229 million to $264 million for U.S. Cellular.

This net gain has been and will be recognized from the period of fourth quarter of 2012 through 2014, with the majority of the net gain being recognized in the period when the transaction closes, which we expect to be second quarter of 2013.

Lastly, the divesture transaction has caused us to accelerate depreciation of certain property, plant, and equipment, and accelerate accretion on certain asset retirement obligations.

This has caused increased depreciation, amortization, and accretion expense, beginning in the fourth quarter of 2012, affecting the first quarter of 2013, and expected to continue at increased levels through the fourth quarter of 2013.

This is a non-cash expense, and it does not impact our 2013 guidance.

At a high level, I hope that explain a couple of the moving parts.

Now let me turn the phone call over to Mary Dillon.

Mary.

Thank you Ken.

First let's take a moment to look at slide seven to review key takeaways from the first quarter.

Our year-over-year gross add growth continued in the first quarter, albeit at a slower pace than 2012.

Early in the quarter, we felt some impact from the delays in tax refunds and the expiration of the temporary reduction in payroll taxes, but experienced stronger results in the subsequent months, ending the quarter with postpaid gross adds up 1% in our core market.

Continued elevated churn led to postpaid net losses of 32,000 in our core markets, this was offset by prepaid growth resulting in total retail subscribers at a slight decline of 1,000 for the quarter.

Now importantly, we made significant progress against our strategic priorities in many ways in the first quarter.

We continue to receive third-party recognition for our outstanding network and differentiated customer experience.

J.D. Powers and Associates awarded us with the highest network quality in the north/central region for the 15th consecutive time.

Also, U.S. Cellular was named by PC Magazine's Readers Choice for Best Mobile Carrier, with highlights around overall satisfaction, network reliability, speed, and coverage.

Secondly, in our efforts to expand distribution, we continue to benefit from our distribution at Walmart, and are pleased to have reached an agreement to offer U.S. Cellular postpaid products and services at select Sam's Clubs in our footprint.

We continue to also make strong progress with providing our customers with a wide variety of compelling devices in Q1, led by the Samsung GS 3 and Note 2, and the Motorola Electrify M. Our connected devices continue to grow with the addition of the Samsung Note tablet, and strong sales of our LTE hot spot.

We also saw continued adoption of smartphones, with penetration increasing to 43% in our core markets.

More importantly, this has largely come through the sales of our wide selection of 4G LTE devices, and while this increased our loss in equipment sold, it further lowered our expected capital spending on our legacy networks.

Our efforts to communicate our brand promise continue to improve.

Our Hello Better marketing campaign has been in market for nine months, and continues to exceed industry benchmarks for breakthrough and branding.

Our actions to effectively manage our upgrade rate resulted in a decline in our core markets from 9.46% in the first quarter of 2012, to 8.37% in the first quarter of 2013.

We also successfully converted our first wave of customers onto our new billing and operational support system.

We remain on track to complete this critically important project this year, and it will enable us to launch new products and services such as shared data later this year, and enable significant savings and benefits going forward.

Finally, we made good progress with our transaction to sell a set of underperforming markets in the Midwest to Sprint.

We continue to believe this transaction will enable us to be stronger, more focused, and over time, more profitable.

We have received regulatory approval and expect to close the transaction this quarter.

Now while we are pleased with the results of these actions and many others we have taken across the business, we also need do more to ensure we are attracting and retaining customers, growing our postpaid customer base, and reducing costs.

So in addition to our other strategic priorities, we have made a decision that we believe will help us to grow our customer base over time.

We signed a contract with Apple to begin to provide Apple products later this year.

As we have discussed on previous calls, our postpaid churn has been unexpectedly elevated for several quarters, and while we have taken a variety of actions to reduce this, we know that a high portion of this churn is driven by not offering Apple products.

Importantly, we are comfortable with moving forward with this relationship because we have an LTE solution.

In order to offer these and a variety of other devices, as well as to better enable future roaming arrangements, we will be refarming some of our 850 spectrum for 4G LTEs sooner than we had expected.

We intended to have this bandside LTE solution built, and nearly matching our band 12 network later this year.

This is an investment that has many future benefits versus future investment in our 3G network.

You will see this reflected in an increase in our CapEx guidance for the year.

Additionally, this relationship will have a short-term impact in our margins, which Steve will detail in updated operating income guidance.

Before I turn the call over to Steve, let me recap our strategic priorities shown on slide eight for the remainder of 2013.

We plan to accelerate growth by expanding our device lineup, and providing exceptional and innovative customer services that incurs loyalty and advocacy.

In fact, we are among the first carriers to launch the Samsung Galaxy S4 earlier this week, several weeks ahead of the announced launch timing of our largest competitor.

Additionally, we will be launching a home phone replacement product later this year to drive incremental revenue with our existing customers, and attract new customers.

We will continue to drive growth with business customers as well.

Just yesterday, we launched Celebrating Small, our fully-integrated small business marketing and sales campaign.

It was creative from insights about entrepreneurs, the program gives SMB customers greater flexibility to tailor their plans, devices and data needs by line, a completely revamped web experience, industry specific app suggestions, and many other innovative features that will help us build penetration in this important segment.

We have coupled this with a renewed sales focus, and we are confident that we will have success attracting and retaining these important customers.

We will continue to enhance and integrate our channels to improve sales and service delivery, and create more opportunities to be where customers shop, and will drive smartphone penetration and ARPU with the 4G LTE network expansion and devices.

We will also take an important step forward in positioning U.S. Cellular for significant operational efficiencies, as we implement our new billing and operational support system.

Lastly, we will continue our efforts to reduce complexity and cost across the Company.

We are actively examining our entire operating expenditure base, to find ways to continue to become more efficient, while still delivering an exceptional customer experience.

In conjunction with these efforts, we began the implementation of a number of organizational changes that will result in a modest reduction in our work force.

Now I will turn to over to Steve, who will walk you through our first quarter results in more detail, and outline our financial expectations for this year.

Thank you Mary, and good morning everyone.

U.S. Cellular's core market results for the quarter reflect the trends that we have seen over the past several quarters.

We improved retail gross additions, but are still challenged with retaining customers in this extremely competitive market.

Prepaid gross and net additions continued to improve significantly due to the success of our prepaid offering through Walmart.

As shown as slide nine, postpaid gross additions in the core markets were 184,000, up 1% from 182,000 last year.

However, postpaid churn also increased, resulting a postpaid net loss of 32,000 customers for the quarter.

Prepaid net additions in the core markets were 31,000, up significantly from last year.

And total retail, net loss in the core markets were 1,000 compared to 16,000 last year.

Next we are showing you the trends in smartphone sales, penetration, and postpaid ARPU in our core markets.

During the first quarter, we sold 449,000 smartphones, which represented 62% of total devices sold.

This compares to the first quarter of 2012, when we sold 364,000 smartphones, or 54% of the total units sold.

340,000 or 76% of the smartphones sold this quarter were 4G LTE devices.

As smartphones now represent 43% of our postpaid subscriber base, compared to 34% for the same period last year.

As we have discussed before, while the overcall costs to subsidize smartphones, especially the 4G devices is greater, we expect that the higher ARPU from smartphone users, as well as the migration of data usage off of our 3G network onto our 4G LTE network will benefit our results over time.

As you can see on the graph at the far right, postpaid ARPU generally has continued to trend up over the past several quarters, increasing 2% over last year.

Turning now to our financial performance.

First, service revenues in the core markets.

First quarter service revenues were $899 million, down just slightly from $913 million last year.

Retail service revenues were $794 million, an increase of 1% with billed ARPU growing 1% year-over-year.

Inbound roaming revenues decreased $16 million, or 21% year-over-year to $61 million, driven by lower negotiated rates, which also caused a similar reduction in roaming expenses.

An increase in inbound data usage was offset by lower inbound voice usage, lower rates for both data and voice, and the loss of some roaming revenue from a market that we sold in 2012.

Looking out into the future, we expect continued growth in data roaming usage, both inbound and outbound, but both lower revenues and lower expenses due to significantly lower rates.

In the first quarter, ETC revenues declined about $9 million due to the phase out of the Universal Service Fund support.

As you will recall, such support is being phased out at the rate of 20% per year begin in July 2012.

For the total Company, including both core and divestiture markets, service revenues were $996 million, down about 3%.

About half of the decrease occurred in the core markets, as I just described, and the other half was in the divesture markets.

In the divesture markets, billed revenue has declined, as customers in those markets are now churning off at higher than our average rates.

System operations expense of $216 million decreased $17 million, or 7% year-over-year.

This was primarily due to a decline in roaming expense of $13 million, as higher off-net usage was more than offset by lower rates, and as data usage continues to grow rapidly, we have implemented a number of measures that have been effective in minimizing the impact on our expenses.

Loss on equipment for the quarter was $156 million, up $38 million or 32% from last year, primarily as a result of increased smartphone sales, and higher costs related to 4G LTE devices.

Average loss per device sole increased 30% year-over-year, due primarily to the shift in the mix of devices sold to smartphones that I mentioned earlier, from 54% to 62%, and in total we sold 13% more smartphones than we did a year ago.

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

Keep in mind that we are selling 4G devices in our 3G markets, so that we can capture the cost savings immediately as we continue to launch 4G service in those markets.

As we successfully migrate more customers to 4G, we expect lower capital expenditures for our legacy networks.

SG&A expenses of $420 million were down 5% due to our ongoing efforts to tightly manage these expenses.

Operating income for the quarter was $1.5 million.

This reflects $45 million of expenses related to the divesture transaction.

Excluding these divesture related expenses, operating income was $46 million, which represents a decline of about $39 million from the $85 million reported for 2012.

A major factor in the decline was higher loss on equipment, which as I just mentioned, was up $38 million, or 32% from the year ago quarter, changes in revenues and other expense line items partially offset it.

On slide 13, we show the details of the divesture related items that impacted operating income in the first quarter.

The biggest item at $38 million is depreciation, amortization, and accretion.

As Ken mentioned earlier in his comments, the divesture transaction has caused us to accelerate deterioration of property, plant, and equipment, and accelerate accretion on our asset retirement obligations.

We also incurred $7 million of employee-related contract termination and other costs, which are reported in loss of sale of business and other exit costs in the statement of operations.

As shown on the next slide, total investment and other income net for the quarter was $16.6 million, including earnings of approximately $21 million related to our interest in the Los Angeles partnership, up from $17 million last year.

Net income attributable to U.S. Cellular shareholders totaled $4.9 million, or $0.06 per diluted share, versus $62.5 million, or $0.73 per share in 2012.

The effective tax rate for the first quarter this year was 40.8% compared to 27.1% last year.

Net rate was lower last year due to benefits related to the expiration of the statute of limitations for certain tax years, and a correction of state deferred taxes.

For the first quarter, we generated cash flow from operating activities of $224 million, down from $257 million last year.

Cash used for additions to property, plant, and equipment during the quarter was $151 million, reflecting significant expenditures related to our 4G LTE network, as well as for our multi-year enablement initiatives, primarily our billing system conversion.

Free cash flow for the quarter was $73 million compared to $48 million in the prior year quarter.

As you can see in the press release, our balance sheet remains very 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 for the foreseeable future.

At March 31st, cash and short-term investments totaled $530 million, and we have about $300 million of unused borrowing capacity under our revolving credit agreement.

Next I would like to review our updated guidance for the full year 2013.

As shown on slide 15, we are providing visibility for estimates for our core markets, as well as to what we expect the divesture markets to contribute through the close.

I will walk you through our estimates for our core markets next, which is where we will be most focused going forward.

For service revenues, we have lowered our estimate by $125 million, and are now forecasting a range of $3.475 billion to $3.575 billion.

This change is being made primarily to reflectthe deconsolidation of the New York One and Two markets, and lower subscriber growth so far this year, offset by a small increase expected from the sale of Apple products later in the year.

Adjusted income before income taxes is now being provided, as Ken highlighted earlier, to provide visibility to the profitability of all of our assets, including our investments in partnerships such as Los Angeles, Oklahoma City, and now New York One and Two.

We had provided numerous reconciliation to help you understand this composition.

I do want to call out how we treat the indirect costs that had previously been allocated to the divesture markets.

In order to provide the most accurate picture of what our results will look like after the divesture deal closes, the estimated results for the divesture markets include only the direct costs related to those markets.

A significant amount of indirect costs previously allocated to the divesture markets will continue for a period of time, and accordingly, are included in the estimated results of the core markets.

Our attempt to reduce those expenses and align our overall expense structure with our smaller size, but that will not happen overnight.

So for the core markets, we have lowered our guidance for adjusted income before income taxes by $205 million, a major factor in the reduction is higher loss on equipment and other expenses related to offering Apple products later this year.

Other factors include both lower subscriber growth and higher loss on equipment overall so far this year, as well as an adjustment of approximately $30 million to reflect the deconsolidation of the New York One and Two markets.

As we disclosed, our ownership interest in these markets, and therefore, their contribution to net income remains unchanged.

This is purely a change in the geography on the financial statements.

For capital expenditures, we are increasing our guidance by $130 million, to reflect the cost of rolling out 4G LTE technology on some of our 850-megahertz spectrum.

As Mary mentioned earlier in her comments, this deployment will support the sale of Apple products later this year, as well as enable potential future 4G LTE roaming arrangements.

Also incorporated into this forecast is a reduction due to the deconsolidation of New York One and Two of approximately $25 million, and a further reduction in our spending on our legacy networks, due to the success we have had migrating customers from 3G to 4G.

For the divesture markets, we have adjusted our guidance to reflect our current expectation of an earlier closing date, as Ken mentioned earlier, as well as the cost reduction actions that we have been taking in those markets.

And now I will turn the call over to Vicki Villacrez.

Thank you Steve.

Good morning.

Before discussing the results of operations, let me first touch on each of our primary initiatives shown on slide 18.

With respect to IPTV, we provide service in ten markets as of March 31st, and pass approximately 75,000 service addresses, up from approximately 65,000 at year end.

We continue to expand IPTV to new markets, but at a rate slower than 2012, as our primary focus is on expanding our service in our current ten IPTV markets, and driving up penetration.

We are excited about our IPTV service, which is meeting our high expectations for customer take rates.

Over 90% of these customers select an expanded package, and 40% are purchasing the highest tiered products we are offering for both internet speeds and channel packages.

Additionally, 95% of our TDS TV customers are taking all three of our services, video, data and voice.

We continue to make excellent progress on our broadband stimulus projects.

Construction is underway on 41 of the 44 projects for which we are receiving stimulus funding, and we should turn up services in the majority of these markets throughout 2013.

When we have completed these projects, approximately 97% of our ILEC access lines will have broadband access.

Our HMS business is making solid progress towards becoming the end-to-end solution provide for our mid market customers IT needs.

Vital, which we acquired in June of 2012, has begun to leverage its trusted IT advisor status with customers to gain traction in selling recurring services, such as our enterprise class ReliaCloud offering.

We are also encouraged by the sales pipeline so far this year, particularly with respect to our hosted application management services, and would expect that to translate into increasing revenue as we move through 2013.

And lastly, in February we announced an agreement to acquire substantially all of the assets of broadband, Baja Broadband LLC.

Everything is proceeding on track, and we continue to expect the acquisition to close in the third quarter.

As shown on slide 19, on a consolidated basis, revenues are up over 6% on the effects of the Vital acquisition, which is included in our hosted and managed services segment.

Cash expenses were up 11% for the period.

Again, this is primarily due to the Vital acquisition which includes transition costs.

Overall, adjusted income before income taxes declined 6%, reflecting the decline in high margin regulatory revenue.

Turning to slide 20, I will discuss the ILEC and CLEC results on a combined basis.

We have continued growth in our broadband IPTV and managed IP products, however, this growth has not been quite strong enough to offset the losses in our legacy voice products, but the decline in total connections is slowing.

Residential revenues declined 2%, due mainly to a reduction in our CLEC residential connections.

We saw a 2% increase in commercial revenues, driven by growth in managed IP.

As expected, wholesale revenues declined primarily as a result of changes in regulatory recovery, due to the reform order, lower wholesale rate, and the . continued decline in interstate minutes of use.

As we have discussed previously, the FCC reform order was issued in November of 2011, while portions of the order are still forthcoming and the impacts are unknown, the portions that have been settled will reduce revenues and adjusted income before income taxes in 2013.

The impacts of the reform order, along with other declines in wholesale revenues are forecast to reduce adjusted income before income taxes by $10 million to $12 million in 2013.

This has been incorporated into our guidance.

Turning to slide 21.

ILEC residential broadband connections increased 1% year-on-year, adding to an already high penetration rate to reach 66% of primary residential lines at the end of the period.

73% of these customers are taking speeds of 5 megabits or greater, up from 65% a year ago, and 29% are taking speeds of 10 megabits or greater, up from 20%.

With the upgrade to super high speed data for IPTV, we have enabled approximately 25% of our residential service addresses for speeds of 25 megabits or greater, and are moving more customers to these higher speeds.

Residential broadband ARPU has trended upward to nearly $39, as migration to higher speed service offsets competitive pricing pressures.

On slide 22, we continue to emphasize our Triple Play bundle, voice, data, and video.

With video offered through Dish Network, an increasingly through our own IPTV service, TDS TV, Triple Play subscribers now represent nearly 32% of our ILEC residential customers, churn on our Triple Play customers continues to remain very low.

71% of our residential customers are on a Double or Triple Play bundle, which is up from 68% from last year.

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

On the commercial side, ILEC and CLEC together, slide 23, we saw 60% growth year-over-year in our flagship commercial voice and data communication solutions, called managed IP, which outpaced our losses in legacy physical access lines and data connections.

Turning to the HMS segment on slide 24.

Acquisitions increased revenues by $16.9 million, and cash expenses by $17.2 million, which includes transition costs.

Adjusting for the affects of acquisitions, organic growth was 6% for the quarter, with growth and co-location and managed services revenue.

We have been positioning for future growth by investing in the infrastructure, support systems and development of new products and services causing margin to be lower.

On a consolidated Telecom basis, we continue to focus on improving our cost structure.

Total cash expenses excluding the impacts of the Vital acquisition decreased 1%.

As shown on slide 25, our 2013 guidance is unchanged from our year end call.

As a reminder, we will not update 2013 guidance for the Baja acquisition until it closes.

Now I will turn the call over to Jane.

Thanks, Vicki.

Melissa, we will now open up the call for questions.

Thank you.

(Operator Instructions).

Our first question comes from the line of Simon Flannery with Morgan Stanley.

Please proceed with your question.

Great, good morning.

Thank you.

Congratulations on the Apple deal.

Couple of questions.

First on the Apple deal, I think in the Q you are highlighting a $1.2 billion 3-year commitment.

I just want to understand how we should think about that in terms of proportion of smartphone sales, how you got comfortable with your ability to deliver that number?

You have talked about economics being unattractive.

What has changed there?

T-Mobile has obviously revamped their go-to-market strategy on a number of directions, increasing competition.

I wonder if you have thoughts on how the competitive environment is trending, and whether would you ever consider some of this installment financing type options for your customers?

Thanks.

Thank you Simon, thank you for your questions.

In terms of getting comfortable with that, certainly as we look at our business over the last several quarters as we have discussed, we have experienced elevated churn, and we know that a significant portion of that is related to not carrying the iPhone.

We know that 85% of the customers who have left us for the iPhone in fact are quite satisfied with us as a carrier and the overall experience.

As we look at the upside growth potential that we have in terms of smartphones in our base, the continued demand for the iPhone in the marketplace, the fact that we know there is demand with our customer base to carry the iPhone, we are confident and comfortable with the estimated range of that commitment.

In terms of what is new about this, is frankly probably the newest aspect is that we now have an LTE solution in order to offer these products, and that allows us to move forward with less investment, if any, in our legacy network, and we think that makes a lot more economic sense for us.

In terms of the competitive environment, there certainly is a lot going on, that may be the understatement of the year.

As we look at T-Mobile for example, there are definitely interesting things that they are doing on their business model.

Everybody is working through different ways to think about subsidies.

We are watching and monitoring, and certainly doing some of our own experimentation as well.

Great.

Thank you.

Thank you.

Our next question comes from the line of Michael Rollins with Citi.

Please proceed with your question.

Thanks for taking my questions.

First question is that you weren't very specific with the timing for deploying the iPhone in your handset lineup for customers.

Are there certain things that have to happen first, that could either accelerate or delay the launch timing of the iPhone?

Then the second question, can you mention that you are potentially were going to close the divesture sooner than you anticipated.

Can you talk about how you are thinking about the use of that cash potentially, and when investors should expect an update on the direction of what the Company has decided on that front?

Thanks.

Sure, Mike.

The only reason we are not being specific as to the timing is that we are not ever specific about launches prior to when we are closer to the launch, so that is really the reason for that.

In terms of the closing of the deal, yes, we are absolutely at Board level discussion, and when the deal closes, we will make a decision with our Board about the use of those proceeds, and go from there.

Is that something that investors should expect relative close proximity from once the transaction is closed to determining the use of that cash, or do you think there could be a few-month delay, in terms of just thinking through those mechanics?

Thanks.

Ken, would you like to jump in on that?

Yes.

Mike, as we have talked in the past, we have been and we continue to work with the Board on various strategic alternatives for it.

I am not in a position to speak for exactly when the Board is going to make the decision, as much as to say that we have been working with them.

We are aware of the acceleration of the close of this transaction, and have continued to work with them, and we hope to be out there very timely with information.

Thanks.

Mike, if you don't mind, Mike, I want to add one other thing on your question about timing.

Our network will be ready for the launch whenever we are ready to launch, so that is not a concern.

And when you say network, is that the LTE upgrades that you have to make, or is that just a capacity qualification?

That is really the refarming of our band 5 spectrum, and that is in process.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Phil Cusick with JPMorgan.

Please proceed with your question.

Thanks.

Ken, you and I spoke 1.5 to 2 years ago, the discussion was that the iPhone was just too expensive, and didn't make any sense for the Company.

At this point, do you feel like the price point has come down?

Is the pain threshold just too high?

Then on the LTE side, you mentioned that, Mary, but are you also going to be calling the CDMA-only versions?

Thanks.

I will try the first part of that.

I think Mary already answered it, Phil, and that is, we look at economics.

It is the cost of any subsidy, but it is also the network, and the fact that we are refarming 850 LTE in advance, so that we can have LTE capacity for this, and have a long road with LTE, as opposed to the shorter life of CDMA has a dramatic effect on how we think about this.

Great.

Dave, do want to comment on the second part of Phil's question?

Yes, around CDMA, certainly we are working with Apple.

We don't have any specifics on the exact devices that we are offering, but obviously the trend in the marketplace is towards more LTE devices, so that is what we are building our entire vision and future of our business around.

Okay, I just wanted to understand that it is really the LTE devices that you would be selling, not the CDMA to go along with Ken's point.

Separately, can you give us an idea on the interest level for the towers in those divested markets?

Thanks.

This is Ken.

We are in the early stages of that work, but we are optimistic that there is real value in both the 500 and some towers that we are retaining as a result of the divesture transaction, as well as the spectrum that is no longer strategic, given that you won't have operations underneath it.

Those are two avenues that we continue to work down, with the expectation of having results to discuss by the end of the year.

On the towers, is the accounting on those towers sort of up to snuff, in terms of how towers trade?

Is it all set and you know the profitability and the lease levels on each tower individually, or is that part of what has to be done over the next few months?

No, we know where the towers are, what leases we have on which towers, all of that information is pretty much readily available.

Okay, thanks again.

Thank you.

Our next question comes from the line of Sergey Dluzhevskiy with Gabelli & Company.

Please proceed with your question.

Good morning guys.

A couple of questions, one on churn reduction.

Obviously, the Apple announcement is part of your strategy, and should help with reduction of churn as you launch those products, but Mary, could you comment a bit on some other directions that you are planning to take during the remainder of the year, that you think are going to continue to churn reduction, and what are the most effective actions that you think are going to take place?

Also, Ken and Mary, maybe could you comment a little bit on the M&A activity in the space, kind of your reaction to the recent deal activity?

Also, given what us happening in the sector, why you believe being the original operator is still a good strategy and there is still room for an independent regional carrier in this consolidating space?

Okay, Sergey, first of all on churn, we for several months now have been actively working on what a call a life cycle strategy, and we have developed strong capabilities around using predictive analytics, to help us really understand who is likely to churn and why, and also the profitability of that customer, and we have put a series of tactics sort of test and learn, and then implement strategies and tactics around how to predict and then prevent churn for multiple reasons.

Obviously the iPhone will be an important component of that, but we are actually going to continue, because not everybody who churns will churn for that reason.

We see good response and good progress as it relates to that to reduce churn.

Do you want to give a couple of examples of that Dave?

Absolutely.

We have looked across a variety of different metrics within the data that we have to try to understand the motivation, or to be able to predict when people are going to possibly leave us.

Good examples of that are certainly device driven, based on the device they are on today, and other actions they are taking, we are able to predict a high likelihood of potentially leaving us, and direct messaging and communication of that.

We also find things like minutes used, either low minutes used or high minutes used over time also is a good predictor of churn, then we are able to come back with simple programs, like a plan evaluation that happens either in our stores or online, and we have had high success being able to retain those, much higher than we have had in the past, so the analytic tools that we are doing, in addition to really our entire marketing program is centered around the idea of kind of delivering a broader customer experience, and understanding of what we bring that is unique to the marketplace, all intended to drive that churn down.

And that might be a good segue to the second part of the question.

There is certainly a lot going on in the industry.

We really are focused on our business, and really improving our business, and serving our customers.

We believe that by focusing on the markets we're going to be focusing on going forward, where we have very strong market share positions, and really differentiating ourselves as Dave said, doing things to really make sure that we improve our subscriber trends, our revenue, as well as improve our costs over time, are all different levers of the business that we are pulling that we deliver the returns, and have a successful long term business.

Thanks.

Just one more question on the TDS side.

Basically we are seeing the national carriers rolling out 4G LTE products as kind of wireline replacement products, we are seeing AT&T trying to reach 25% of their wireline customers locations with LTE, and also Verizon Wireless rolling out Home Fusion.

I was wondering if you are seeing any of the services yet in your markets, and what are your thoughts as far as these services being a competitive threat to wireline, and also some of the steps that maybe you are taking to combat this potential competition?

Good morning, this is Vicki.

We have not been seeing the effective broadband substitution in our markets.

Our porting has been very low, our churn has been very steady, in fact our wireline churn in our residential areas has been slowing.

We are really excited with all of the fundamentals that we are seeing.

As you know, we have been pursuing our IPTV and super high speed data strategy rollout, that not only does the super high speed data enable our network within our TDS TV markets, where we have our strongest cable, we are extending that super high speed data even farther out into our network.

We see this as a viable strategy.

In addition, are really excited as well with the broadband stimulus markets that will expand our reach all of the way to 97% of our access lines.

Okay, thank you.

Thank you.

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

Please proceed with your question.

Thanks, good morning.

Good morning.

I have a couple of questions.

First, on the iPhone.

Mary we have seen other regional carriers when they have picked it up, get a pretty quick adoption curve, sometimes 3% or 4% of their base per quarter coming on.

Shenandoah just had their call today, and said that the iPhones are like 20% or 21% of their base in just a short period of time.

If you think about the iPhone, how fast of an adoption are you guys hoping or could you be seeing, given the low smartphone percent in your base?

On the other side of the equation, on the churn benefit, we have heard other carriers talk about 20, 40, maybe even 80 basis points of churn improvement over a period of time.

As you think about the algebra, and why you are carrying it, the high expense, but the benefit, help us understand a little bit about the adoption curve, and what the churn benefits might be?

Thank you, Ric.

It is certainly early, and we are not even to launch yet, but we made this decision because of two things.

We know that, and we will have a quick adoption, and good benefit to our churn.

Frankly, we also offer great devices from companies like Samsung and Motorola as well, and we would like the notion of being able to have a buy for users quick with current and future customers.

So as we do the algebra across that entire equation, we feel good about that over time.

Davie, is there anything you want to add to that?

No, I think definitely our plans as we thought about the balance of this year and going into next year, we see that it will have a significant impact, both on gross adds, as well as pretty quickly impacting our churn.

Nothing very specific at this point.

We know that will have an important impact on our overall subscriber trends.

Okay, and then on the guidance, a lot of moving pieces there.

Could you maybe outline for us, particularly on the OIBDA line, or however you are pronouncing that new word these days, how much of the change was related to the deconsolidation versus iPhone, versus lower subs, versus higher loss on equipment, or at least rank order them, just so that we can understand what the bigger drivers were?

So, Ric, on the adjusted income line, when you look at the change guidance to guidance in terms of rank ordering, the impacts associated with offering Apple products would be the biggest factor, New York One and Two, I think I mentioned in my prepared comments, that was probably a $30 million impact, and then just when you look at the trend that we have seen so far this year, overall, there is a factor for that, but I would sort of rank them in that order.

Sure.

And then you mentioned CapEx was going up to buy LTE at 850.

What exactly do you have to buy?

Is that more antennas, is that something in the base station?

What exactly are you going to be buying with that increased CapEx?

I think it is more about the base stations.

One other quick one, since you are getting them fast.

Is the roaming is down, but we should see seasonality still kick in, right, so while the roaming will be down year-over-year, I would expect we would probably see increases in the second and third quarter with the seasonality?

Yes, I think you would expect to see normal seasonal trends.

There is nothing in our roaming performance or our guidance that reflects a change in what you would normally see seasonally.

The year-over-year impact that you are seeing in the first quarter as we have said is all about renegotiating lower rates.

Right.

So it is more rate-related rather than some kind of overbuild attempt to buy them out completely?

That is correct.

In fact, again, when you drill down into the components, we are actually seeing, still seeing a very significant growth in data usage.

As you would expect, some decline in voice, but data usage is still growing very significantly.

The driver here is the rate negotiation that we have done.

Great, thanks a lot.

Melissa, we have time for one more question.

Thank you.

Our final question will come from the line of James Moorman with S&P Capital IQ.

Thanks for taking my question.

The first is that, you mentioned it with the billing system being completed by the end of the year, you plan to offer shared data packages.

Could you just give a little bit more detail, or if it is too early, what you look to do in terms of, with family plans, and also sharing devices for individuals?

How you look to implement that?

If there are any additional costs in offering that, or it is pretty much just roll it right out once you complete the billing system?

On the second question in regards to what you are seeing about the other devices besides the iPhone, I guess it is a little embarrassment of riches, but now that you have the S4, which has been very popular, is there anything that you are going to look to do to control like how you sell one more than the other, or is it going to be just however the customers want them?

Thanks.

Great, I will answer those.

First on the shared data and the billing system.

As we have discussed in the past, we do plan on rolling out a shared data solution later this year, after the billing system is in.

The timing we will share as we get closer.

As will we share the specifics around it, and what exactly that looks like, but certainly the overall intent is to encourage and to monetize data usage, encourage traditional adoption of connected devices, which is an area we have had success with already, but we will see that, we see shared data as an opportunity to really accelerate the growth of our connected devices, and to give people more options around different data solutions within their family.

We are excited about that and we think it will have a really positive impact, both on our subscriber trends, as well as our ARPU.

Related to the devices we do believe that we have a very strong portfolio today.

As Mary said, we have launched the S4.

This week and have, while it is obviously early, really pleased with that result so far in our partnership with Samsung, as well as Motorola, and all of the other device manufacturers.

We will let the consumers decide what is right for them.

Our key is to make sure that we are offering the right portfolio and the right options, so we can deliver a great customer experience, so we won't be trying to manage that one way or the other, other than our broader efforts to try to manage LOE.

Thank you.

Thank you.

We have come to the end of our Q&A session.

I would like to turn the floor back over to Ms. McCahon for closing comments.

Thanks, Melissa.

I would like to thank everybody for joining us.

I know we had a lot of folks in the queue for questions, so please follow-up with us for the rest of the day today, and hopefully we will be seeing you at CTIA, and other trips that we are taking throughout the quarter.

Thank you very much.

Thank you.

This concludes the teleconference.

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Thank you for your participation.