美國無線通訊 (USM) 2013 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.

(Operator Instructions).

This conference is being recorded.

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

Thank you Ms. McCahon.

You may begin.

Thank you, Kevin.

Good morning and thank you for joining us.

I want to make you all aware of the presentation we reaped to accompany our comments this morning, which you can find on the Investor Relations section of the TDS and US Cellular websites.

With me today and offering prepared comments from TDS, Doug Shuma, Senior Vice President and controller, from US Cellular, Ken Meyers, President and Chief Executive Officer.

Steve Campbell, Executive Vice President -- did I call you Chief Executive Officer?

Steve Campbell, Executive Vice-President and Chief Financial Officer and from TDS Telecom, Vicki Villacrez, Vice President of Finance and CFO.

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

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

The information set forth in the presentation and discussed during this call contains at 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 more extended version in our SEC filings.

Shortly after we released our earnings and before the call, TDS and US Cellular filed SEC Forms 8-K, including today's press releases and also pro formas, showing the impact from both the Sprint divestiture and NY1 and NY2 deconsolidation.

We think these pro formas should be useful to you.

Both companies have also filed the Form 10-Qs for the quarter.

On slide three you will see a number of your upcoming conferences including Wells Fargo and UBS in New York and Citi in Las Vegas.

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 meet with members of TDS corporate, US Cellular or TDS Telecom the IR team will try to accommodate you, calendars permitting.

As many of you know, US Cellular selected a new President and CEO in June, Ken Meyers who was previously CFO of TDS.

We are pleased that the succession planning process enabled a smooth transition to a leader with tremendous company and industry experience, not to mention which is financial understanding.

Before we discuss the business results, though, Ken will outline how we will fulfilling the CFO responsibilities at TDS.

Ken?

Thanks, Jane.

First and foremost, let me say how you honored I am to be leading US Cellular.

I will talk about the opportunities and challenges we see and our plans to address them in a moment.

First through, during my five years as TDS's CFO, we focused on building talent and expertise, throughout the Finance organization.

Following my transition, that preparation enabled us to tap the bench and allow three key members of TDS's senior management to step up and fulfill my prior responsibilities.

Peter Sereda, TDS's Senior Vice President and Treasurer, Doug Shuma, Senior Vice President and controller, and Jane McCahon, Vice President, Corporate Relations and Corporate Secretary will now jointly carry out those responsibilities and will report to TDS's CEO Ted Carlson.

Doug Shuma has been designated Chief Financial Officer and will be certifying the SEC filings.

They each bring substantial expertise in their field and independent thinking.

We are confident they will enable TDS to continue to take the meaningful and decisive actions necessary to build a strong sustainable business for the long-term.

In terms of interaction with the financial community, Jane will continue to lead those efforts, and Doug will take a lead role in the quarterly earnings process and call, and Doug and Pete both will participate in investor conferences and meetings as schedules permit.

Now, I will turn the call back to Jane to talk about our share purchase announcement, and then Doug will review the accounting impacts of several of our strategic initiatives.

Jane?

Thanks, Ken.

Turning to slide five.

As you saw this morning, we announced that the TDS board has authorized another $250 million share repurchase program.

In our meetings and calls with investors over the past few months, a strong case was made for the Company to resume share repurchases.

The Company has executed meaningful repurchase programs in the past, but has not been active recently due you to blackouts surrounding many of the initiatives we have undertaken.

We believe share repurchase at attractive valuations, in combination with our regular quarterly dividends, are an effective way to return value to TDS shareholders over time.

We have also spoken about our need to invest back into the businesses in order to generate sustainable long-term growth and profitability.

We have identified cable broadband and hosted and managed service businesses as sectors we believe we can leverage our current operations to add higher growth rates and better returns over time.

So our intent is not to do one or the other, either investing in the business or with share repurchase exclusively, but to balance our acquisition program with our desire to return value to shareholders.

So for the next several years we expect the approximate balance to be about three quarters of available resources to acquisitions and that, of course, is assuming we can find attractive deals on the right economic terms, and one quarter to shareholders through both the regular dividend and share repurchase.

In any given period this may not be the exact allocation but we wanted to articulate this to you as our overall intention.

Also, our process to monetize nonstrategic assets continues and got off to a strong start with the announcement of the sale of some AWS spectrum to T-Mobile on very attractive terms.

Other spectrum transactions may be of smaller sizes, so we might not be announcing each one separately, but every quarter we will update you on the aggregate sales.

We continue to work on how you best to monetize the nonstrategic towers, which is a bit more complex process in the spectrum but moving along.

Now I would like to turn the call over to Doug Shuma to walk you through the significant items that are affecting our results.

Doug.

Thanks, Jane.

Good morning.

The significant items that Jane referred to are shown on slide six.

First is the Sprint transaction that closed in May.

US Cellular received $480 million of cash and recorded a pretax gain of $266 million in the second quarter.

We expect to pay approximately $130 million in cash taxes on gain later this year.

Going forward, we will continue to accelerate depreciation each quarter into early 2014 on the network assets we are operating on behalf of Sprint.

In the second quarter, that accelerated depreciation was approximately $50 million and should continue at about that level through the back half of 2013.

In addition, sprint is reimbursing US Cellular up to $200 million for certain network decommissioning costs, including cell site lease rent, and back haul payments, as well as the cost to actually decommission the network.

We would expect the majority of the decommissioning to occur in late 2013 and 2014.

Some portion of this $200 million will be reflected additional gain on sale as the reimbursements come due.

However, there are other costs that we are not being reimbursed for including the cost of store closings, certain employee termination costs, and other contract termination costs.

Most of these exit costs have already been recorded, but we expect additional minor amounts in the second half of 2013.

As to NY1 and NY 2 -- after the deconsolidation in the second quarter, the Company retains the same percentage ownership in the partnerships and will continue to report the same amount of income from the partnerships, except that the Company now records such income differently.

Beginning in the second quarter of 2013, the income is now reflected in equity and earnings of unconsolidated entities rather than in the various line items of the statement of operations.

Also, concurrent with the deconsolidation, US Cellular recognized a one-time noncash pretax gain of $18.5 million the second quarter.

Lastly, US Cellular has signed an agreement to sell nonstrategic spectrum in the Mississippi Valley for $308 million.

We expect this transaction to close in the second half of 2013 at which point a gain will be recorded.

US Cellular expects to pay $96 million in cash taxes related to this sale.

In addition, sale of nonstrategic spectrum in St.

Louis has been approved by the board.

Going forward, we will look for additional opportunities to monetize additional spectrum and towers.

We expect the monetization activities to carry over into 2014.

Now, I will turn the call back to Ken.

Thanks, Doug.

Good morning, again.

And thanks for your time today.

There is a lot going on at US Cellular to reposition the company for future growth and I'm excited to be part of that change.

I'm impressed with the steps taken to date and we will be focusing our energies over the next few quarters on completing that process.

As I sit here today, about one month into the job, I do not contemplate major changes to the operating strategy.

We are, and I expect us to remain, a regional carrier focused on mid-sized and rural markets.

We will offer a full array of products and services and our primary focus will continue to be on what we historically defined as a post-pay customer, one who places value on the reliability of our high quality network and the special commitment to customer satisfaction that our associates deliver.

This morning I would like to talk with you about our immediate priorities and they are many.

We have started a number of significant strategic actions that we now need to complete so we can accelerate growth in the future.

These include launching our new billing system, expanding our distribution, continuing our 4G/LTE rollout, expanding device line-up, and wrapping up in divestiture transaction.

I'm happy to report we completed the conversion onto our new billing and operational support system.

All customers were converted as of last week, and the system is now up and running.

It went about as well as can be expected, which means it had more customer impact than I would like.

Our stores and call centers were negatively impacted for a few days, and we were not able to provide the type of service our customers had grown to expect.

We are now where we expect to be, but a few days later than planned.

We have talked about the significant resources, financial and human, that have been focused on this project for the past several years, and we are looking forward to the capabilities and efficiencies that it will provide us going forward.

More specifically, it provides us the flexibility to offer newer services and products faster, including shared data and equipment billing options.

Distribution continues to get stronger.

Besides the addition of Wal-Mart, we are working to strengthen both our agent channel, where we have some real strong and committed partners, while also working on arrangements with other large retailers to meet our customers' desired shopping choices.

More to come on this in future quarters.

We remain committed to network quality as the most important driver of customer satisfaction and carrier selection.

We are not only on target to reach our original target of bringing 4G/LTE to some 87% of customers by year end but now that will include band 12 and band 5. The later band will facilitate the introduction of Apple devices later this year.

Speaking of which, we are actively planning for a very exciting second half from a device portfolio standpoint.

We have a strong relationship with Samsung, which is driving continuous innovation in the smartphone and tablet space, and Motorola, which has a promising device road map, including the Motorola X announced yesterday.

Churn is a major concern for us and not having the iPhone has been a major contributor churn.

Given Apple's strong market share performance in the US, we would expect to see improvement in churn and gross additions with the launch.

I know mentioning Apple products will lead to the inevitable question of when.

All I can say on that topic is that we expect to launch those products before year end.

In May, we closed our transaction to divest the underperforming markets that people have already spoken about, which generated significant cash proceeds.

Our board declared a $5.75 per share special dividend cash dividend which was paid just before the end of the quarter.

As Jane mentioned, we recently entered into a transaction to free up about $308 million of value from some AWS licenses not core to our strategy, and work remains underway to potentially monetize additional nonstrategic spectrum and towers before year end.

Individual future transactions are not currently expected to reach the size of the most recent AWS transaction.

Operationally we are now in a position to focus on our core markets, mainly suburban and rural, to achieve the kind of penetration and profitability we believe it possible.

As a result of the divestiture, the support organizations of US Cellular were recently resized.

While our associates understood the need for the change it was not an easy task given the strong sense of team that our culture builds.

We are also continuing our efforts to identify and reduce costs throughout the organization.

Looking at the competitive landscape, consolidation, pricing moves, new approaches to device subsidies all make for are a dynamic marketplace.

Loss in equipment is a significant expense for the industry and US Cellular.

We are looking hard at ways to manage it while balancing those potential steps with our continuing drive to increase smartphone penetration, especially with 4G/LTE smartphones.

With the successful conversion of our billing system, will be offering share data before year end, enabling us to better monetize the explosive growth in data usage as well as the growing demand for connected devices.

I will let Steve cover the second quarter financial performance.

Hopefully Doug's overview gave you a sense the extraneous items impacting the first half results and those we expect in the back half.

I would like to end with a word of thanks to the entire US Cellular team for welcoming me back into the organization.

Steve?

Thank you, Ken.

And good morning, everyone.

I'm going begin my comments with a few thoughts about US Cellular's core market results for the quarter.

And those results reflect the trends that we have seen over the past several quarters.

Note that for comparison purposes, the core market data shown on the next several slides of our presentation excludes the NY1 and NY2 markets which were deconsolidated dated in early April.

So, beginning on slide nine, postpaid gross additions in the core markets were 165,000, nearly flat versus last year.

Postpaid churn for the quarter was 1.64%, Flat on a sequential basis but up a bit from 1.44% last year, resulting in a postpaid net loss of 53,000 customers for the quarter.

Prepaid net additions in the core markets were 8,000, down 15,000 from 23,000 last year.

Total net retail customer losses in the core markets were 45,000, compared to 7,000 last year.

Slide ten shows the trends in smartphone sales, penetration, and postpaid ARPU in the core markets.

During the second quarter we sold 446,000 smartphones which represented 66% of total devices sold.

This compares to the second quarter of 2012 when we sold 410,000 smartphones, or 52% of the total units sold.

374,000 or 84% of the smartphones sold this quarter were 4G/LTE devices.

And now smartphones represent 46% of our postpaid subscriber base compared to just 36% for the same period last year.

While the overall cost to subsidize smartphones, especially the 4G/LTE devices, is greater, we expect that the higher ARPU from smartphone users as well as the migration of data usage off our 3G network onto the 4G/LTE network will benefit our results over time.

As you can see on the graph at the far right, postpaid ARPU increased about 1% over last year to $54.44.

Turning to service revenue in the core markets on slide 11.

In the core markets, second quarter service revenues were $866 million, a decline of about 2% from last year.

Retail service revenues were $763 million, up slightly compared to the prior year.

Inbound roaming revenues decreased $12 million, or 16% year-over-year, to $62 million as an increase in data usage was offset by lower voice usage and lower rates for both data and voice.

Lower rates also drove $16 million reduction in outbound roaming expenses, despite significantly higher outbound data usage.

Other revenues were about $42 million.

In this category, ETC revenues declined $8 million due to the phaseout of universal service support.

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

Now let's look at total company performance.

Service revenues were $911 million, down about 12%, and the majority of this decrease is related to the divestiture and deconsolidated markets.

System operations expense of $192 million decreased $51 million, or 21% year-over-year.

Approximately half of the decrease, about $25 million, was due to a decline in roaming expense due to lower rates and a very slight decrease in off-network usage.

The rest of the decrease was due primarily to the divestiture transaction and deconsolidation of the NY1 and NY2 markets.

Loss on equipment for the quarter was $133 million, up $16 million, or 14%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 40% year-over-year due primarily to the shift in mix to smartphones and in total we sold 14% more smartphones.

We expect that 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, including Apple products later in the year.

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

In fact, 40% of our data traffic is now on our 4G/LTE network.

As we successfully migrate even more customers to 4G, we expect lower capital expenditures for the legacy networks and we have reflected that expectation in our 2013 capital expenditures guidance.

SG&A expenses were $404 million for the quarter, down $31 million as we aggressively reduce our expense levels to align with our reduced revenues.

The NY1 and NY2 deconsolidation accounted for about 11 of the decrease in costs.

Operating income for the quarter was $219 million, compared to $84 million a year ago.

This year's number includes $200 million of income net for divestiture transaction-related items, which are shown on the next slide.

In the quarter we recognized a $266 million gain on sale of business, as well as $50 million of accelerated depreciation, amortization, and accretion, and $16 million of contract termination and other costs, which are shown in gain/loss on 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 totaled $45.3 million, including earnings of approximately $20 million related to our interest in the Los Angeles partnership, up from $19 million last year, and $8.6 million related to the NY1 and NY2 partnership interests.

This line item also includes the one-time gain of $18.5 million recorded at the time of the deconsolidation of the NY1 and NY2 partnership interests.

Net income attributable to US Cellular shareholders totaled $143.4 million, or $1.69 per diluted share, versus $52.7 million, or $0.62 per share, in 2012.

Our effective tax rate for the quarter was 45.7% compared to 36.9% last year, with the rate being higher this quarter as a result of the tax impacts of the one-time gain we recognized when we deconsolidated NY1 and NY2.

For the quarter, we generated cash flow from operating activities of $225 million, up from $155 million last year.

Cash used for additions to property, plant, and equipment in the quarter was $172 million, reflecting significant expenditures related to our 4G/LTE network deployment including the 850 megahertz band expansion, as well as for our multiyear enablement initiatives, primarily our billing system conversion.

Free cash flow for the quarter was $53 million.

US Cellular's balance sheet remains sound and we have significant liquidity and financial flexibility, together with expected cash flow from operations and funds available under our revolving credit facility to meet our expected financing needs.

At June 30, cash and short-term investments totaled $578 million, and we have about $280 million of unused borrowing capacity under our revolving credit agreement.

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

As shown on slide 15, we are providing visibility to our estimates for our core markets because this is where we will be most focused going forward as well as for the divestiture markets.

Our guidance for the core markets is unchanged from what we communicated last quarter, whereas the guidance for the divestiture markets has been updated to reflect actual results through the date of the closing and the fact that the transaction closed sooner than previously anticipated.

Of note, we have a number of initiatives over the next six months into which we don't have precise visibility, such as the timing and results of launch of Apple products, which could cause our actual results to differ materially from this guidance.

Now, I will turn the call over to Vikki Villacrez to talk about TDS Telecom.

Okay.

Thank you, Steve.

Good morning, everyone.

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

With respect to IPTV, we launched service in one of three new markets where we will be leveraging existing fiber infrastructure and building new you fiber to the home.

Also we have been focused on driving deeper penetration into our existing IPTV markets.

At June 30, we had 10,500 IPTV customers, and have passed approximately 85,000service addresses, up from approximately 65,000 at year end.

We are seeing steady increase in our IPTV ARPUs, and have reached a 12% penetration across our 11 markets, which includes our more established Tennessee trial markets.

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

95% of our TDS customers are taking all three of the services -- video, data, and voice -- at an average price of $140 about per month on a triple play package.

We continue to make excellent progress on our broadband stimulus projects and expect to turn up services in a majority of these markets this year, which will enable 21,000 additional households in 2013 with data services.

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

Our HMS business making solid progress towards become the end-to- end solution provider for our midmarket customer 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 the hosted application management services, and would expect that to translate into increasing revenues as we move through 2013.

Turning to slide 19.

On August 1 TDS acquired substantially all of the assets of Baja Broadband for $267.5 million in cash.

We are excited about this acquisition because of the potential to increase commercial and residential penetration in the Baja markets and ultimately achieve higher returns over the long-term.

When you look at the number of homes passed versus the current penetration, you can see there is significant room to grow, and with 96% of the network DOCSIS 3.0 we have the ability to deliver higher margin data services without significant long-term capital investments.

Additionally, the Baja markets have attractive demographics in terms of population growth and household income.

On slide 20, we show Baja revenue opportunities on both the consumer and commercial side.

We intend to leverage our existing consumer marketing, product and development, and management teams to grow consumer revenue over the next couple of years.

Also we are projecting strong revenue growth in the commercial space.

Leveraging our existing commercial platform we are planning to introduce a robust commercial offering that includes many of our successful products, including managed IP.

Turning to slide 21.

We highlight some of our expected operational synergies, including leveraging the TDS Telecom platform for delivery of voice, the use of the 10 gig network for internet connectivity, and the use of TDS back office for security and payment processing.

We are very bullish on our ability to achieve our objectives with Baja, and will look for additional opportunities in the cable space that will enable us to leverage our capabilities and infrastructure further.

Moving to our quarterly results.

As shown on slide 22, on a consolidated basis, revenues are up 7% on the effects of the Vital acquisition which is included in our hosted and managed services segment.

Cash expenses up 9% for the period.

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

Overall, adjusted income before income taxes increased 3%.

Turning to slide 23.

I will discuss the ILEC and the 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.

Residential revenues declined 2% due mainly to a reduction of the CLEC residential connections, which we no longer sell to.

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

Turning to slide 24.

ILEC residential broadband connections increased 1% year on year to an already high penetration rate to reach 68% of primary residential lines at the end of the period.

75% of these customers are taking speeds of 5 megabits, or greater up from 67%a year ago, and 31% are taking speeds of 10 megabits or greater, up from 21%.

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

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

On slide 25, 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.

72% of our residential customers on a double or triple play bundle, up from 69% last year.

Triple play subscribers now represent nearly 32% of the ILEC residential customers.

And again, as we have discussed churn on our triple play customers continues to remain very low.

On the commercial side, ILEC and CLEC together, slide 26, we saw 50% growth year-over-year in our flagship commercial voice and data communications solutions managed IP, which outpaced our losses in legacy physical access lines and data connections.

Turning to the HMS segment on slide 27, The Vital acquisition increased revenues by $17.8 million, and cash expenses by $17.2 million, which includes transition costs.

As a reminder, Vital revenues consist of mainly equipment sales which can fluctuate significantly quarter to quarter and have lower margins.

Growth in HMS revenue, excluding acquisitions, is modest due to a decline in equipment sales.

We are pleased, however, with the strong growth if our recurring revenue streams being generated by our core product offerings including collocation, cloud, and managed and hosted application services.

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

Moving on, on slide 28, we have adjusted our revenue guidance upwards $35 million to reflect the acquisition of Baja and have tightened the range $10 million to reflect first half results providing a range of $890 million to $930 million.

This revenue guidance reflects our best estimate for regulatory items at the same amount as were originally forecast.

There is still pending rule making, as a reminder, on a number of issues which could positively or negatively impact results.

We have increased adjusted income before income taxes up $10 million for Baja to $230 million to $260 million.

We have increased our outlook on capital spending from $155 million to $165 million, to reflect the impacts of addition capital required to complete plant upgrades at Baja.

As a result of increased capital guidance and coupled with the effects of Baja, we are increasing our guidance on depreciation and amortization to $205 million, subject to adjustment after the purchase accounting is completed.

Accordingly, operating income remains $25 million to $55 million, reflecting the higher depreciation and amortization.

Now, I will turn the call over to Jane.

Thanks.

As we open up the call for questions, I would like you to know that Dave Kimbell, US Cellular's EVP and CMO, and Mike Irizarry, our EVP and CTO, are also in the room to answer questions with us.

So operator, we can open up for that that the point.

Thank you.

(Operator Instructions).

Our first question today from Michael Rollins from Citi.

Please proceed with your questions, sir.

Good morning and thanks for taking my questions.

Two questions, if I could.

The first question is with respect to your capital allocation strategy.

So in the commentary you talked about a balanced strategy and when I think of the word balanced I think of something near 50/50.

The Company has decided to go with the three quarters towards investment, the one quarter towards the return for shareholders.

Can you talk a little bit more about how the management and the board coalesced around that split in allocation and maybe talk about how you guys are perceiving value?

Are you looking at just sort of the return on the investment you are buying?

Are you looking at it relative to where your own company is treading in the marketplace?

Just a little bit more color on that would be great.

And then just a follow-up.

You mentioned the possibility of additional noncore monetization, and the tower subject has come up.

And I was just wondering how you are thinking about that.

Are you referring to just the towers in the divested market or is there the possibility to consider monetization across the whole tower portfolio?

And thank you for taking those questions.

Thanks, Mike.

It's Jane.

I think in terms of coming up with the 75/25 balance it was really looking at the kind of long-term strategy for the business.

And looking at where we thought from a size and scale standpoint, we wanted our investments in cable and HMS to grow over the years in order to make the kind of contribution we feel will build long-term value.

And then looking at the resources and proceeds of the business from the sale of some of these nonstrategic assets, and making a judgment as to what we think that balance should be for the right long-term growth and sustainability of the business.

So it was really looking out over a three, four, five year period, how big do we think cable and HMS could be.

What do we see as available resources that we can also return to the shareholders?

And it is a judgment call.

And in terms of the towers, it is absolutely a right now we are focused on those towers in the divestiture market and that is where our focus is at this point.

Thanks very much.

Thank you.

Our next question is coming from Simon Flannery from Morgan Stanley.

Please proceed with your question.

Great, thanks very much.

Good morning.

Just continuing on the if you will use of cash.

I mean you have got about $1.3 billion in consolidated cash and investments right now.

Even if you net the Baja purchase and full buyback, and take the proceeds in for the spectrum for the towers, you're still over $1 billion dollars of cash resources.

Does that imply that you are looking for more acquisitions in the cable and HMS space, and that we should be -- that that is the weigh you are going to expand?

Or are you going to be perhaps investing more from a CapEx point of view and things like that data centers?

I guess it is the what is the right cash balance here?

And in terms of the buyback, perhaps you can remind us of what your philosophy here is on sort of timing for the programs and what you done in the past.

Thanks.

Okay.

Let's start with the last one first.

I think in terms of historic buybacks this is our third $250 million -- fourth $250 million authorization.

The first two were accomplished relatively quickly.

The third one, if you recall, was not fully executed on because it expired during a blackout period.

And so our approach to this would be to begin modestly.

We really want to maintain as much financial flexibility as we can in terms of as we look at acquisitions and buybacks so I think again we did not put an expiration date on it purposely to allow us as much financial flexibility as we can.

In terms of cash balances, it is anticipating further acquisitions in the cable space.

Also, we want to make sure we have available resources to participate in any spectrum auctions for US Cellular.

That is an area where while we are divesting nonstrategic spectrum in the nonoperating markets, we are very interested in participating in those auctions going forward.

So, considering all of those things.

Great.

Thanks, Jane.

Thank you.

The next question is coming from Ric Prentiss from Raymond James.

Please proceed with your question.

Thanks.

Good morning.

Good morning.

A couple of questions.

First back to Mike's question on the towers.

Kind of in the bucket one bucket two you mentioned, right now looking at bucket one which is the Midwest towers.

What would cause you not to sell bucket two or what might cause you to sell bucket two?

What kind of differentiator is there between the two sets of towers?

Ric, Ken.

Good morning.

What we said historically and still are saying is that the towers in terms of where we are right now rolling out new technologies remain a strategic asset as far as we are concerned.

The towers we are selling, which are in the divested markets, no longer carry that label, strategic, so we are looking at options to monetize those.

What I think I have said in the past, and I remain there is that we don't have any current plans with respect to our core tower portfolio, but as we go through this process, one of the things we are doing is we are doing is also a learning exercise, too.

And there may be information that comes out of it that we haven't considered before that may impact how we think about towers, but right now, our focus is just on the nonstrategic towers.

All right.

And on the potential to grow bigger size and scale on the cable broadband and HMS side, how should we think about what might be of interest to you?

Is it geographically based, is it price based, is it the CapEx has been spent on the asset already like you mentioned Baja needs $5 million maybe to get to up to where you want to see it?

How should we think about what makes an asset attractive to you in those spaces?

Vicki, would you like to start?

Sure, I would be happy to start with that.

Certainly from the cable side, very, what makes cable so attractive to us is number one, it is a natural extension of our business and the services that we already provide today.

And we are looking for opportunities where we see high potential really to grow.

As in the Baja acquisition, you can see the markets are very attractive markets in terms of size and demographics, plus penetrations are below industry levels.

Yes, it is upgraded with DOCSIS 3.0, and so Baja is very well positioned to grow broadband and high-margin broadband services.

But we will also look at plant that is not necessarily upgraded if we can make the economics work.

We are looking to grow returns and we are looking to get our returns exceeding our cost of capital, and so we will continue to look for opportunities, wherever that might be.

And then HMS same thing.

We are looking to grow our HMS to be a meaningful addition to our growth portfolio.

We are very bullish on our -- on the performance of our acquisitions so far, and especially the growth that we are seeing in the recurring revenue streams and so will continue to look for more opportunities to grow that business as well.

Okay.

And then one operational question, if I could.

US Cellular, you have been seeing an increase in smartphones, you're up to now I think it was 45% in the core with 66% or so sales being smartphones in the quarter, but the ARPU is still pretty low compared to a lot of others in the industry.

Can you talk about as you look at the iPhone coming, LTE coming, what are your thoughts as far as ARPU and when customers are picking a carrier is it network, is it devices, is it price?

Rick, it's Ken.

Actually I'm pretty pleased with the growth that we are seeing in ARPU.

Obviously you got is a mix effect going on in terms of the various different components, whether they be connected devices, whether they be handsets, whatever.

But in addition to the growth that we are actually seeing in ARPU year-over-year you also have the impact of our rewards points which I think this quarter probably what was it, Steve, about $0.75 of --

Order of magnitude, I think.

-- of deferral that had we had been accounting for that differently you would have seen that flow right through.

So with the growth in data that we are seeing I'm pretty happy with the progression we have seen.

We obviously are believers in monetizing data and we'll have the ability to do that through shared data type plans later this year now that we have the billing system conversion for us behind us.

So I'm pretty happy with what we are seeing.

And see a long runway there?

Yes.

Okay.

Thanks.

Our next question comes from Sergei Dluzhevskiy from Gabelli & Company.

Please proceed with your question.

Good morning, guys.

Two questions.

One on spectrum.

You own some 700 megahertz A block spectrum if a number of markets, and obviously there is some interferences issues with TV Channel 51.

So I was wondering if you could share your thoughts on those interferences issues how serious you think they are, and in your opinion, what is the time table in terms of resolving those issues, and when do you think this spectrum could become useable?

And also is my second question is on your thoughts on the M&A environment and M&A activity in the wireless space.

Obviously we have saw with a number of deals and the most recent one is AT&T/Leap.

I was wondering how you think the recent deals are going to be pertaining to your competitive environment in your markets in the near term?

Good morning.

This is Mike Irizarry, the CTO.

I will take the first question around the band 12, the lower chunk of that spectrum.

We actually have that deployed in a number of our markets and it is working very well for us.

We have done a number of baseline drives and investigation on interference, and we see no operational impediments to using the spectrum that we have in that part of the band in our markets going forward.

We have it in our devices and we are quite pleased with the performance of it.

I do think that the 600 megahertz auction that the FCC is looking at might free that band up in other area of the country, perhaps for other carriers, but with regards to our portfolio and the use of that spectrum we are pleased with the performance of it in our markets.

Sergei, it's Ken.

A lot of activity in the M&A space.

The way that we currently think about it is with respect to the AT&T and Leap transaction, the way that probably impacts us is that we complete with AT&T more than we compete with Leap historically.

If they were to expand the prepaid offering via Leap in other markets, we would see some action in the prepaid arena but historically that isn't a major part of our business.

So I don't expect a significant impact from what I have seen so far.

Okay.

Thank you.

The next question today is coming from Kevin Roe from Roe Equity Research.

Please proceed with your question.

Thank you, and good morning.

Ken, congratulations on the new position.

Two questions.

First on the -- both of them wireless.

First on net additions.

You mentioned you have the iPhone coming, shared data, installment equipment plans, do you think the new initiatives will be enough to turn postpaid net adds to positive?

That is my expectation.

And that that would be around the iPhone launch specifically?

That will be the combination of them.

The question the implied question is, is the one question and since I don't have information I can share about what the iPhone launch is, I'm not going to put a quarter or date on that right now.

And so expectation to turn positive and stay at that level for let's say for 2014?

That is the expectation.

Very good.

And secondly, on wireless on margins, given the divestiture of noncore assets and underperforming markets, does this new US Cellular, in your opinion, have the ability to drive margins back to where they were a couple years ago, if you could comment just in general on the long-term potential for the new US Cellular?

I'm not going to Kevin, one month in make a long-term statements like that.

We will.

We will get there, right.

But you know, short-term, the challenge is going through the LTE migration with smartphones.

A big cost.

Expensive.

Very enabling devices.

But we want to get as many of our customers on to that LTE network as soon as possible.

That is obviously got a front-end cost but as we monetize more of that data and continue to manage the rest of our costs, it is the expectation that margin goes up, that is why we are in the business.

Very good.

Thanks.

(Operator Instructions).

The next question comes from Phil Cusick from JP Morgan Chase company.

Please proceed with your question.

This is Eric Daniels sitting in for Phil.

A couple of questions, if I can.

Postpaid add and churn were a little weaker this quarter than I expected.

Have you guys held back on promotions in any way in anticipation of the iPhone launch, or have you experienced heightened competition, in particular from the likes of T-Mobile as they start offering the iPhone?

And secondly seems like the industry is moving in two different directions with T and Verizon going to the data sharing direction and Sprint and T-Mobile the unlimited direction with the unbundling of handset subsidy.

What are your thoughts and which direction can we expect US Cellular to pursue?

Hi, Eric.

This is Dave Kimbell.

On the kind of performance and promotion question in the second quarter, we had a strong portfolio promotions throughout the quarter, strong portfolio device launches and in particular Samsung devices.

It was a highly competitive period as well, particularly with Samsung devices.

So no, it wasn't that we pulled back in anticipation of anything else that we are doing later in the year -- just, I think, consistent with recent trends and we were aggressive in continuing to drive our business forward.

As we think about pricing structures going forward, there has been a lot of disruption in the space as some of the competitors are trying out different things.

As Ken said in his remarks, we are moving towards a shared data platform that we will be launching in September, and for us that is a key part of our future going forward.

We see that as a way to continue to drive ARPU growth that Ken mentioned, to gain incremental connections with our current customers and attract new customers.

We are certainly watching and monitoring what is going on in the business, in the industry.

We think it is interesting there is new options that give new choices and potentially different ways to manage our expense related to that.

And our billing system, as is that comes online will give us a lot more flexibility and capabilities to offer new products.

We will be looking at those but our future, certainly going into the balance of this year and into 2014, will be focused on a shared data foundation.

Great.

And one question on the TDS side if I may.

Does the company have a time frame in mind or a target for when the HMS business could potentially more than offset the decline in the legacy business?

Sure.

I will take that question.

Our plans are calling for significant growth.

I think last year if you look at 2012, we had lower sales than expected in part due to the economy.

HMS business also has a long sales to bill cycle.

Six months or more in some cases to a year.

We are really excited about the sales pipeline we have seen in the first half of this year.

We are looking to see improvement on the second half of this year and that is going to translate to nice revenue growth going forward.

As that continues to grow and pick up, that is our strategy to offset our legacy declines.

Great.

Thank you very much.

Okay, Kevin, I think we are out of time.

We have reached the end of the question and answer session.

I will turn the floor back over for further or closing comments.

We'd like to thank you for joining us today, and to follow up, just please contact us with any other questions.

Thanks so much.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.

We thank you for your participation today.