美國無線通訊 (USM) 2014 Q2 法說會逐字稿

Event ID Greetings, and welcome to the TDS and US Cellular second quarter operating results conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Jane McCahon, Vice President of Corporate Relations TDS. Thank you, ma'am. You may begin.

Thank you LaTanya. Good morning everybody and thanks for joining us. I want to make you all aware of the presentation that we have prepared 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 Corporate Controller, from US Cellular, Ken Meyers, 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 TDS and US Cellular Investor Relations websites. Please see the websites for slides referred to on this call, including nonGAAP reconciliations. The information set forth in the presentation and discussed during this call contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Please review the Safe Harbor paragraphs in our press releases and the extended versions included in our SEC filings. Shortly after we released our earnings and before this call, TDS and US Cellular filed their Forms 8-K including today's press releases, and the SEC Form 10-Q.

Taking a quick look at our upcoming conferences, TDS will be presenting at the Drexel Hamilton Conference on September 3rd in New York, and will be hosting an Analyst and Investor Visit during CTIA on September 10th. We will also conduct our annual European Road Show from September 29th through October 3rd. Please let us know if you would like information about any of these events. And keep in mind that we have an open door policy, so that if you are in the Chicago area and would like to meet with us and members of management, the IR team will try to accommodate you, calendars permitting. Before we turn the call over to Ken, Doug Shuma will review second quarter accomplishments at the enterprise level, Doug.

Thanks, Jane. Turning to slide four, we continue to execute on our capital allocation strategy, and review our portfolio to optimize performance. In the quarter we returned value to our shareholders in the form of $17.3 million in TDS share repurchases, another $14.5 million in dividends. US Cellular repurchased $6.3 million of its shares. As you probably saw last week both TDS and US Cellular filed amendments to their credit facilities to increase their leverage covenants. Due to our conservative approach to funding the business, and maintaining strong levels of liquidity, we felt this change was necessary due primarily to the temporary costs associated with the billing system. As a result of the change our current debt-to-EBITDA test will increase to 3.75 times, but ultimately reduce back to the 3.0 level in 2017. As our business units work to grow profitably, and earn their cost of capital over time, TDS Telecom identified four small non-strategic ILECs that it did not believe could meet return objectives. During the quarter we entered into agreements to sell the four companies and expect the transaction to close in the third quarter.

Also during the quarter TDS purchased two small tuck-in cable companies in its Baja markets. Vicki will provide additional details. US Cellular continues to look for opportunities to monetize it's non-strategic assets. As we have previously-announced, US Cellular has already sold more than $400 million of non-strategic spectrum. Given the significant current valuation of spectrum, US Cellular is continuing to look to monetize other non-operating spectrum, subject of course to anti-conclusion rules associated with the upcoming auctions. After the sale of the non-core towers, we're making very good progress and hope to launch it in the second half of this year, but do not have any further details at this point.

Before I turn the call over to Ken, I wanted to comment on our preliminary thoughts regarding the recent transaction announced by Windstream. Anyone who has known TDS over the years would agree, we are all about minimizing taxes. As such, this is a very interesting deal and one we will examine. We need to gain a deeper understanding of how this would apply to our specific circumstances and financials, and more importantly, the implications for operating and strategic flexibility. As you have heard us say in the past, we consider our network assets very strategic. Clearly we need additional time to evaluate, so we won't have any more to say on the matter at this time. And now I will turn the call over to Ken Meyers.

Thanks, Doug. Good morning. And thank you for the opportunity to talk about the progress we're making against our two most important strategic priorities for this year, turning around customer growth metrics and driving revenue growth. As we have discussed and shown on slide six, driving subscriber growth is our top priority. This is a function of both increasing gross adds and managing churn. We continue to have real success attracting new customers to US Cellular. Core postpaid gross additions for the second quarter increased 15% over last year, with June being the first positive month of postpaid net additions since 2012. And we continued that positive trend in postpaid growth again in July.

Take a few minutes to talk about some of the factors that are helping us win over, and in many cases win back customers to US Cellular. The biggest year-over-year improvement comes as you would expect from the addition of the iPhone to our device line up. We continue to like the mix of iPhones in our sales, representing about 32% of Smartphone sales this quarter. In fact we have already fulfilled our first year commitment to Apple. As you may recall in October of 2013 we launched our share of data plans, which we called Share Connect. We now have 22% of our postpaid customers on these plans, up from 13% in the first quarter. And average devices per account rose sequentially from 2.39 to 2.46 devices per account. We have seen great takes rates on these plans, reflecting the underlying trend of Smartphone adoption, which when combined with the strong growth in data consumption has increased average revenue per user and average revenue per account.

On April 7th, we introduced our equipment installment plans. Steve will provide additional information on the accounting details and the impact on our financials in a moment. But the key point is we have seen steady adoption of these plans since introduction. 15% of our Smartphones sold to customers in the second quarter were on equipment installment plans, and that rate increased throughout the quarter. For June this metric increased to roughly one out of every four Smartphones sold to our customers. While the sales team is having success filling the top of the funnel, other parts of the organization are intensely focused on serving our customers and thereby reducing churn. We're making good progress along that front also.

As you can see from the churn chart on slide nine, voluntary churn continues to improve as customer service levels have returned to our traditional high standards. And we have the products and pricings our current customers want. Involuntary churn customers we're shutting off for not paying their bills have also continued to improve, and is approaching more normal historical levels. Improved churn combined with the success we are having attracting new customers, allowed us to stabilize and begin to grow our customer base again. I'm very proud of our June results and the momentum which continued into July. Two months do not guarantee that we have reversed the customer trend, but it's a pretty good start, and one we're excited about in terms of the direction we're heading. Slide seven. In order to improve margins we must not only turnaround subscriber results, we must also drive additional revenue growth on top of that. In the iPhone and other new LTE devices to our Smartphone portfolio has accelerated smartphone penetration, now at 55%. And over 85% of those Smartphones have LTE.

Our Shared Connect data plans are being well received by our customers. It is going to allow us to capitalize on sky rocketing data consumption. Devices provide an opportunity to increase usage and thus revenue per account without significant subsidies. All of these activities are translating additional data usage and with core postpaid average revenue per units up 4% over last year despite the volatile pricing environment. Speaking of pricing, we will continue to adjust the pricing environment to ensure our customers get not only a great network experience in all of our markets, but also receive a very competitive value. Adoption of equipment installment plans will shift revenue from service to equipment, so more of our discussion going forward will be on total revenue. All-in-all I feel like we're making progress. We still have much to accomplish in terms of financial performance, but stabilizing our customer base was job one, and our entire organization should be proud of the results of their efforts to date to make this happen. And now let me just turn the call over to Steve Campbell. Steve.

Thank you Ken, and good morning everyone. As I begin my comments, I want to highlight that the year-to-year comparability of the financial statements contained in our press release is impacted by two significant transactions that occurred in 2013. The deconsolidation of the New York One and Two partnerships in April, and the divestiture of the Chicago St. Louis, and other midwestern markets in May. Therefore to facilitate your understanding of our business performance for the second quarter, we're including in today's presentation and will focus primarily on comparative operating and financial results for the core markets where we're now focused. These results presented for the core markets remove the impacts of the aforementioned deconsolidation and divestiture transactions.

So beginning with customer results shown on slide eight, in the core markets postpaid gross additions for the second quarter of 2014 were 190,000, and increase of 25,000, or 15% compared to a year ago. Postpaid churn for the quarter was 1.7%, up from 1.6% last year. Resulting in a net loss of 26,000 customers for the quarter, quite an improvement of 27,000 from last year's results. I will talk more about postpaid churn in a minute. In the prepaid segment there was a net loss of 4,000 customers, down from net additions of 8,000 last year. The decline here resulted primarily from lower gross additions in the national retail channel.

For retail customers in total there was a net loss of 30,000 customers this year, compared to a net loss of 45,000 last year. The improvement reflects the increase in postpaid gross additions that I mentioned previously. I want to say a few more words about postpaid churn in the core markets. The chart on slide nine shows postpaid churn for the period beginning in January of 2013 and continuing through the end of the second quarter of this year. As you can see, churn continued on a downward trend in the second quarter. Voluntary churn shown by the green line has improved steadily since the fourth quarter, and is now below last year's level. Involuntary churn shown by the purple line spiked in the first quarter of this year as we resumed our normal collection practices following the billing system conversion, which is now trending lower now that we have worked through the collections backlog. As Ken discussed, the net result of these improvements was a turn to positive postpaid net additions in June, and preliminary results for July are positive as well.

Slide 10 shows the trends in Smartphone sales and penetrations in the core market. During the second quarter we sold 460,000 Smartphones, which represented 79% of total handsets sold, and 73% of total devices sold. A year ago smartphones from 66% of the total units sold. Smartphone penetration increased to 55% of our postpaid subscriber base, up from 46% a year ago. So we still have a substantial number of postpaid customers with basic phones, which provides us with a good opportunity to upgrade these customers to Smartphones, and drive additional data usage revenues.

We're also seeing good progress in the adoption of 4G technology. At the end of the second quarter 85% of all Smartphones on our network were 4G capable. This is an important point. It means that 85% of our smartphones are providing customers with a high speed 4G experience on a Best-in-Class network. We expect that the higher smartphone penetration when combined with our Shared Connect data plans, will allow us to capitalize on the continuing growth in data consumption. The penetration on these plans is now 22%, up from 13% last quarter, and we're pleased the with results that we're seeing with respect to the mix of shared data packages being selected by customers.

These activities are translating into increased ARPU. As shown on Slide 11, postpaid ARPU in the core markets grew by 4% year-over-year to $56.82, despite the recent volatile pricing market and the new equipment plan offerings in the second quarter, which caused a modest shift from service revenue to equipment revenue. Looking ahead we believe there's considerable uncertainty regarding future pricing moves. As Ken said earlier, we will continue to adjust to the pricing environment to ensure that our customers get not only the best network experience in all of our markets, but also very competitive value. Also continuing customer adoption of equipment installment plans in the future will shift revenue from service to equipment.

Turning now to our financial performance. Total operating revenues in the core markets for the second quarter were approximately $958 million essentially flat year-over-year. As to the components, service revenues were approximately $844 million, down $24 million, or 3% from last year. The majority of this reduction occurred in retail service revenues as the impact of the smaller customer base and the introduction of equipment installment plans offset the growth in ARPU that I just mentioned. Importantly, service revenues are almost flat with the previous quarter, and we expect them to grow as we begin to rebuild our customer base.

Inbound roaming revenues decreased $4 million, or 7% to primarily to lower roaming rates. Other revenues declined by approximately $3 million, reflecting lower ETC revenues due to the FCC's phase down of Universal Service Fund support. As mentioned last quarter, the FCC indicated at its open meeting in April, that it intends to delay the next step in the previously-announced phase down of USF support, which was scheduled for July 1st. While it completes its work on the phase 2 mobility fund. We don't yet know any of the particulars of the FCC's plans, so we can't predict either how long the there will last, or how the FCC will structure and administer the mobility fund. Equipment revenues increased by $30.7 million, due primarily to the new equipment installment plans.

Slide 13 shows additional financial information for the core markets. In summary, adjusted income before income taxes for the second quarter of 2014 was $122 million. The decline of approximately $68 million year-over-year reflects the impacts of the smaller customer base, the decline in ETC revenues, the continuing rollout of LTE into the network, and the continuing migration of our customer base to 4G LTE smartphones. As I mentioned a minute ago, service revenues decreased by about $24 million year-to-year. The other major factor in the year-over-year change was loss on equipment, which had approximately $158 million, increased $25 million or 19%. LOE was driven by the continuing shift in mix of sales of Smartphones overall, and sales of higher cost 4G devices including iPhones, and of course by industry competition.

Some of the upward pressure on LOE was offset by the impact of the equipment installment plans, which favorably impacted equipment revenues in the second quarter. Overall on a net basis the average loss per unit sold increased by 27% from $197 to $251 this year. We expect that equipment pricing will continue to be very aggressive across the industry in the coming months, and that our costs will be impacted by the continuing shift in mix to Smartphones overall and to 4G devices. However, we expect to offset the subsidiary somewhat through programs such as the equipment installment plans. SG&A expenses were up $11 million in the quarter, about 3% primarily due to higher bad debt expense.

Slide 14 shows financial performance for the total Company on an as-reported basis, and doesn't reflect any adjustments to the 2013 figures to eliminate the effects of the deconsolidation and divestiture transactions. Continuing on Slide 15, total Company consolidated net loss was $18.8 million, or $0.22 per diluted share versus net income of $143.4 million, or $1.69 per diluted share last year, which included the gain from the divestiture. Adjusted free cash flow for the second quarter was $19 million. Cash flow from operating activities was $149 million, down from $225 million last year due to lower operating income.

Reimbursements of costs related to the Sprint divestiture transaction were approximately $23 million. We are including the reimbursements here because the costs to which they relate are included in cash flows from operating activities shown just above. This provides a better matching and representation of actual cash flows from operating activities. In the statement of cash flows, the reimbursements are record as proceeds from divestitures. Cash use for additions to property plant and equipment in the quarter was $153 million, reflecting significant expenditures for our LTE network, as well as for additional billing system enhancements, and the purchase of an office building in Tulsa Oklahoma, that houses one of our customer care centers.

Slide 16 provides an overview of how we're accounting for equipment installment plans. At the left of the slide we show the portion of total plan revenue that is recognized at the time of sale depending on whether the plan involves an upgrade option, along with whether we impute interest depending on the term of the plan. We're establishing an allowance for potential bad debts based on our historical experience, and depending on their credit worthiness customers may be asked to make a deposit. At the right we've indicated the directional impacts of the installment sales as a plus or minus on the income statement and cash flow statement for the full year. These impacts are based on comparisons between how we account for installment plan sales and subsidy model sales. During the second quarter we had about 90,000 installment transactions, for which we recognized just over $30 million of equipment revenue.

At June 30th our balance sheet reflected approximately $44 million of Accounts Receivable, a portion classified as short-term and the remainder as long-term, and $16 million of deferred revenue related to these transactions. I want to make just a couple of other comments about US Cellular's balance sheet. Overall, the balance sheet is very sound and we have significant liquidity and financial flexibility, together with expected cash flow from operations to meet our anticipated financing needs. As Doug briefly mentioned earlier, we recently amended the leverage coverage ratio covenant in our revolving credit agreement so as to create additional flexibility. Cash collections improved during the second quarter, and customer Accounts Receivable are down nearly $100 million for 24% from the year-end level.

At June 30th cash and short-term investments totalled $444 million, and we have about $280 million of unused borrowing capacity under our revolving credit agreement. Additionally, as Doug mentioned we continue to assess opportunities to monetize non-strategic spectrum holdings, and are starting to get some traction on the monetization of the towers in the divested markets. Slide 17 shows our 2014 full year guidance. As you know, we didn't provide guidance earlier this year, given the high degree of uncertainty in a couple of areas, for example industry pricing and churn. We didn't feel that we could provide guidance with a high degree of confidence. However, at this time as we have begun to stabilize the subscriber base through improving gross adds, churn that is more reflective of historical results, and improvements in customer service levels, we feel that we are now in a position to provide guidance.

To be clear we still believe that there's a high degree of uncertainty regarding the competitive environment and the potential impacts on our results. However, we do feel that we have better visibility now, and want to be as transparent as possible with investors. So with that said, we expect total operating revenues of $3.9 billion to $4 billion. Note that we are now providing guidance for total revenues rather than service revenues, given the effects of equipment installment plans. We expect adjusted income before income taxes of between $350 million and $450 million. And finally, the previous guidance for capital expenditures of approximately $640 million is unchanged. Now I will turn the call over to Vicki Villacrez. Vicki.

Okay. Great. Thanks Steve. Good morning everyone. Starting on Slide 19 at TDS Telecom we continue to execute on our strategic priorities to drive growth in areas that will enable us to be successful and improve our returns. To this end a number of transactions were entered into during the second quarter which I will highlight in my overview. First our wireline segment had another solid quarter. We are very pleased with the uptake of IPTV, and are ahead of schedule with our roll outs of new market this year. We have completed the build-outs of the majority of our broadband stimulus market, and are seeing strong broadband growth. Cost reductions had a meaningful impact on our overall profitability, driving a 14% increase in adjusted income before income taxes.

This is the fifth consecutive quarter the wireline has increased its adjusted income before income taxes year-over-year, as the entire organization continues to stay focused on cost improvement activities. As a result of continually reviewing all of our operations, we agreed to sell four small ILEC territories, including three Missouri locations and one in Oregon. Our costs and demographic metrics in these markets did not support the capital investment required to be the most competitive data service provider in these markets going forward.

In our cable operations, we are continuing to work to upgrade our video products with about 20 new channel launches across various Baja markets. Additionally, to drive broadband penetration we adjusted our pricing to be more competitive, including new emphasis on our 50 megabit product as our lead promotional speed, and 100 megabits as a premium service. During the quarter we acquired two markets passing approximately 9,700 homes in Lovington and Socorro, New Mexico, which are near several existing Baja markets. We plan to upgrade video services and add Internet service options to customers in both markets through the build-out of fiber to the home networks.

These tuck-ins acquisitions will allow us to leverage our cable infrastructure, and we will continue to look for similar opportunities. The acquisition of Bend Broadband of central Oregon based cable operation, which includes data center operations, remains on schedule to close in the third quarter. And we are meeting regularly with management to ensure a smooth transition. Our hosted and managed services business, OneNeck IT Solutions continues to make progress on its mission to cross-sell our full suite of IT Solutions to mid-market customers. One that generated a 7% growth in recurring hosted revenues in the quarter.

Moving to second quarter operating results on Slide 20, we had a very good quarter. Excellent results from our wireline, as expense reductions more than offset declines in wholesale and regulatory revenues. Cable operations are positioned for growth, and HMS produced 64% growth in total revenues, and 19% growth in service revenues, as we continue to integrate acquisitions. On a consolidated basis telecom revenues increased 21%, driven from both the Baja cable acquisition and the MSN acquisition. Adjusting for the impacts of these acquisitions revenues were down 1% year-over-year. Adjusted income before income taxes, which is essentially operating cash flow for telecom grew 18% year-over-year, or $11.3 million to $72.9 million in the quarter, primarily driven by $8.2 million of increased contribution from the wireline operations, and the $4.4 million contribution from the Baja acquisition. Without the effects of acquisitions the business grew its adjusted income before income taxes 10%.

Looking at wireline results which are shown on slide 21, growth in data and IPTV on the residential side and Managed IP on the commercial side offset the decline in legacy voice services. Whole revenues declined 4% primarily as a result of the changes in the regulatory recovery and continued declines in minutes of use. As a result total wireline revenues declined less than 1%. However, due to cost control initiatives SG&A declined 16%, and cost of services declined 2% from the same period last year. As a result operating cash flow margins in the wireline improved 550 basis points, which drove a 14% increase in adjusted income before income taxes.

In the quarter despite our very high ILEC residential broadband penetration of 71%, we added 4,200 broadband net adds. This growth was driven by new data services launched in stimulus markets, as well as triple-play sales in IPTV markets. We are nearly complete on our broadband stimulus, providing service in 42 of the 44 markets enabling 30,000 service addresses for high speed data. As shown on Slide 22, residential broadband customers are increasingly choosing higher speeds in our ILECs, with 38% choosing speeds of 10 megabits or greater, which is up from 31% last year, driving increases in our average revenue per connection.

We have been very pleased with the overall IPTV uptake and average revenue per connection results to-date. IPTV connections grew over 73%, adding 7,700 subscribers compared to the prior period. Some of this success is attributable to our Fiberville marketing campaigns. The preorder service and advance of turn up accelerating the early take rates we are seeing. And our newer fiber markets we are offering up to 300 megabit data speeds, and in two markets we began offering 1 gigabyte service. 97% of our IPTV customers are taking a triple-play bundle. In the table on the right, average revenue per connection, average revenue per residential connection increased 2% primarily reflecting increases from the IPTV rollout, and price increases for higher speed data services.

On the next slide our commercial voice and data communications solution ManagedIP increased connections 19% year-over-year, resulting in commercial revenue growth of 1%. We continue to target larger customers, commercial customers which results in higher connections per customer, and higher revenue per connection. As you look at the cable segments on Slide 24, these results reflect Baja's third full quarter of operations, which was acquired on August 1st, 2013. Since we have owned Baja we have seen annualized growth of 8% in both voice and broadband connections, more than offsetting the decline in video connections. Revenues held steady with Q1 of this year at $22.5 million, and adjusted income before income taxes was $4.4 million.

Turning to the HMS segment on slide 25, we continue to focus on the organic growth of recurring service revenues which includes co-locations, cloud application management, and our managed hosting services. Growth in these key revenues was 7% for the quarter. The acquisition of MSN, our Denver-based solutions provider acquired on October 4th, 2013 increased revenues by $27.7 million. Cash expenses grew 71% as MSN added $27 million, and 2.5% without the acquisition, resulting in a decrease to ABEC compared to second quarter last year. This was primarily due to higher commissions, due to higher sales volume compared to last year, which are recognized and paid upfront when contracts are signed, lower equipment sales and lower margins on sales, as well as higher consulting and legal fees associated with one-time project activity in the first half of this year.

Slide 26 shows we have adjusted our guidance for adjusted income before income taxes upwards by $10 million. To reflect the success of our current results through June. As a reminder, we will update 2014 guidance for the Bend Broadband acquisition after it closes. Now I will turn the call back over to Jane.

Thanks Vicki. LaTanya, we would like to open it up for questions at this point.

Thank you. (Operator Instructions). One moment while we poll for our first question. Our first question comes from Simon Flannery with Morgan Stanley. Please proceed with your question.

Thank you very much, and nice job on the turnaround in the adds and the churn. I guess on that topic, Ken, can you just talk about is it reasonable to expect that churn will return to historic levels over the second half of the year, given the trends you are seeing here, or do you think we might be in a we might be in a little lull here before the iPhone6, so that we're kind of, people aren't really switching carriers right now? And then secondly, you recut your credit facility. Can you just talk about your interest in AWS3? Is that something that you're likely to be a participant in? Thanks.

Good morning, Simon. Thanks for the question. A couple of things. So talking about there, well, I think there as little. I wouldn't call it a lull in competitive activity out there. When I think about our case what we have is all the things that we have been working on over the last couple of quarters we're trying to come to fruition, where the billing system that caused some angst for us is much, much improved now. We've got multiple, we have got over 80%, almost 90% of our customers with LTE. We've got the iPhone that has further rounded out our device portfolio. Each one of those items caused churn, and what we're seeing is just all of those being eliminated one after another. So I'm not viewing it as a lull. I've been surprised before, but I'm not viewing this as a lull, but rather as an expectation of what we need to deliver going forward.

In terms of the AWS3, I expect that we will be there. We have been at most auctions in the past. As we continue to try to ensure that our customers are getting a very strong network experience, we're going to want to make sure that we have got adequate spectrum to provide them both the speed and capacity that we hope they need going forward with this explosive data growth.

Okay. Just a quick follow-up on that. How are your roaming relationships developing on LTE, are those rates where you want them to be?

We don't have an LTE roaming agreement in place yet. There is a lot of complexity to getting roaming with LTE working, and we have been doing a lot of testing with all of the major carriers on that, and we continue to work toward and agreement. I'm hopeful we will have one by the end of the year, which is kind of been my goal for the last six months, but we don't have one yet.

Thank you.

Our next question comes from Ric Prentiss with Raymond James. Please proceed with your question.

Thanks. Good morning.

Hi Ric.

Hey. A couple of questions. First obviously turning around net adds was a critical first step here. You mentioned connected devices are now up to I think I heard 4.5%. How many tablet sales were there in the quarter, and what are you seeing as far as demand for tablets?

Tablets grew 12%, probably 12% to 13% of our total postpaid gross adds, were in the tablet area themselves. We're seeing nice demand for them. My own opinion is as we're continuing to churn, I like them, I want this, but I don't want to focus solely on those. I think of every postpaid handset I can add now is a future account that I can add a tablet to later, as opposed to just doing all tablets, and kind of confining it to the customer base we have now. So we're trying to actually push both of them and kind of comfortable with where we're at right now.

We made a big turn in that area, though.

And you touched on another point which I think is important for the industry to embrace is what is ARPU, what's the right revenue metric. Tablets would I assume pull down the reported ARPU, if you look at it just as a lower priced monthly subscription, but would increase if you looked at it on a revenue per account basis, because usually it done by attaching it. How do you think about reporting of ARPU and looking at the different and then equipment installment plans obviously moving things as well?

Yes. So I start with the objective is to drive revenue period. End of story, right? And there are a lot of different levers that we are pulling, and as you pull those they're going to manifest themselves in different metrics you look at. It's not about driving the metric as much as it is driving the revenue, and the metric is just a device to help us understands where it's moving. So with respect to handset I am very interested in the average revenue per unit or customer coming out of that, and with the continued explosive growth in data, on an apples-to-apples basis I'm looking for that to grow. Now at the end of the day depending on what happens with EIP, that number is going to shift a little bit, but by looking at it all-in I'm still looking for it to grow. I'm not going to get hung up on some consolidated metric like ARPU starts to move a different way, if it's because of the good news that you're adding more connected devices and its diluting it, so I really focused on total revenue, and looked at each product independently.

Great. And on my other question which is EIP is such a huge swing to revenue and also reported EBIT. In your 2014 guidance what assumption have you made I think I heard 15% of Smartphones were on EIP in the quarter, June was up to about 25%, but what are assuming EIP looks like the rest of the year in your guidance?

Ric, it's Steve. We're assuming for the second part of this year that EIP sales will be about 25% of the gross add number.

If revenues would go up higher than that, then revenues would go up and I would go up based on your slide?

It would, yes.

Okay. Thanks.

Our next question comes from Michael Rollins with Citi Investment Research. Please proceed with your question.

Hi. Thanks for taking the questions. I had two questions. First question is can you compare the cost per sub, the cost of acquisition per sub however you want to define it, what you're seeing in the market versus what your expectations are? Are you able to do it for at or better than maybe what you expected, or are you finding the competitive environment is causing that number to climb. And then the second thing is, Ken, now that you're at the helm of US Cellular, are you taking any different approaches in the way that you give guidance, in terms of looking at the potential benefits of EIP, and maybe trying to be a little bit more conservative on the outlook for cash flow, or are you taking the same type of approach, which is more of the base case I think is what you have done historically? Thanks.

Wow. So a couple of parts to that. The first question had to do with costs per add, and any major shifts there, and what I would say is with nothing has shifted dramatically in the marketplace around the costs to add a customer from I call it a competitive standpoint. Clearly, Mike, as you think about a customer that comes through on an equipment installment plan because they're paying for that piece of equipment, the cost per add is very different, albeit it part of it has to do with a revenue shift. So if I look at it on a net-net basis I don't think it's that dramatic. One. Two, as we start talking about adds and everything else, clearly the other difference is some of the adds are now connected devices. They have a different and lower incremental cost on them, because of a different subsidiary model. So again, it gets back to almost a little bit of the question that was asked earlier. It's more of a product-by-product look, but I have not seen anything that has dramatically shifted within the products a big difference.

Second thing with respect to guidance are we being more conservative? I don't know that I would say we're being more conservative. I think that clearly there's a lot of change going on, and earlier this year there was so much going on that we did not think that there was enough confidence within a meaningful range to give guidance. A big part of that had to do with where we were in customer growth at the time. We are now we think the picture is a little bit clearer. We still have the same risk around competitive things, but I still think of it as a base case, not more or less conservative than in the past.

Thanks for that, Ken. Appreciate it.

Our next question comes from Phil Cusick with JPMorgan. Please proceed with your question.

Hi guys. Thanks. I guess just following up you just said EIP mix assumed for the second half. Is that because July was at that level, or do you really anticipate no real expansion and availability, or you're pushing EIP harder at customers?

We aren't pushing them harder than the other. We have taken this approach of being a retailer, and making sure that we have whatever the customers have. We saw explosive growth in that in the first quarter, and that 25% was our most recent data point, and that's what we have used to estimate where we think of the rest of the year goes, to the extent that changes dramatically we'll let you know. That's our best estimate at this point.

Okay and as I think about churn it looks like voluntary could be actually down year-over-year in the chart that you showed, and involuntary still up a little bit. Do you anticipate involuntary coming down further, or do you think we're back to sort of a normal level?

No. I think we would expect it to come down a bit further from where it was in the second quarter.

Okay. And then do you think voluntary is still coming down here, as you look at the potential for churn out there in the base, or do you think this is about as good as we can get for a while?

I like the word potential. I believe there is potential to continue to improve churn and we're actively working to do that.

And as you look at July, you said you're positive on subscribers is that gross adds continuing to ramp-up here? Because it seems like we're still at a fairly low level versus where you have been historically?

I'm not really prepared to go into a great amount of detail about July, Phil, but to say that all of the things that we saw going on through the second quarter that got us to turn in June continued into July, and the July, too, was positive.

Okay. And then last thing you talked about a potential set tower sale. Is the Sprint deal done, so you know what those towers are going to look like?

Yes, Phil. It's Doug. We have made substantial progress with Sprint. We're not quite done yet, which is why I'm not quite ready to tell you when it's going to be launched.

Okay. Go ahead, Ken.

We're getting much closer.

You are closer. Alright. I appreciate it, thanks, guys.

Our next question comes from Sergey Dluzhevskiy with Gabelli and Company, please proceed with your question.

Good morning guys. A couple of questions if I could. One, on the profitability side for US Cellular. Obviously, have been declining you are making progress on the customer acquisition and customer growth, and potentially this could translate into revenue improvements, but 2014 is going to be another year where profitability is going to be lower than the previous year. Could you talk a little bit about your outlook for-profitability going forward, at what point do we see an inflection point in margins, and obviously you would want to see customer growth, but you also want to make sure that this is profitable revenue growth as well?

I agree, Sergey, but as we talked about this is a year that we have got, the year of the impact of the iPhone all year going through our customer base that we haven't had in the prior years, and so from day one here, the job has been turning customer growth around first, because you think about the last some period of time, as customers have shrunk you have lost revenue, and we need to choose between growing revenue in order to grow profitability. Yes, there is stuff that we can do on the margins on the cost side, but right now for the rest of this year, the focus is going to be continuing to grow the revenue base.

Alright. In terms of, one question on use of cash. So TDS agreed to sell Airadigm PCS licenses to US Cellular for about $110 million. How should we think about the use of the profits from this transaction? Is this an opportunity for a more meaningful buyback for you guys?

Yes, Sergey. The number is $91 million, not $110 million.

Okay.

So we're going to continue with our current philosophy of the 25/75% investing in our business, versus returns to shareholders. I think we saw an increase in our share buybacks this past quarter, and depending on market trends and needs for other purposes, whether it be acquisitions, I wouldn't think anything special is going to happen with that $91 million.

Okay. Finally, on the TDS Telecom side you mentioned that you're divesting four small ILECs. What are the revenues and EBITDA for those ILECs, and what are the approximate profits that you expect?

Yes Sergey. These ILECs are very small they're very immaterial to the overall business less than 0.5%. $3.4 million on the revenue side.

Okay. Thank you.

Our next question comes from Arun Seshadri with Credit Suisse. Please proceed with your question.

Yes. Hi thanks for taking my questions. First, I wanted to ask in terms of the SG&A, the higher bad expense, I mean the bad debt expense, any thoughts on the outlook for that?

Yes. This is Ken. Let me just say that I think, part of that is what I'm going to call transitional, in that we just started rolling out the equipment installment plans, and because of that you are recording a large receivable now, that has almost part of it has a two-year life average call of the year, right? So we wouldn't have been conservative in setting up the reserve for those longer-term receivables which historically are not part of the business model.

Okay. Got it. So is that going to result in sort of your year-over-year comparison continuing to be weak for the near-term?

I think this number as you first build-up your EIP program, and until we have enough experience to bring that down, you will see some year-over-year pressure in that number.

Okay. Great. Thanks. And then as far as the debt issuance potential at USM, how should we think about this, and how should we expect you to potentially fund your participation in the upcoming spectrum options?

Right now US Cellular has got $400 million of cash on its balance sheet, it has got an unused revolver on top of that, and we have got some non-strategic spectrums that we are looking at liquidating as well, and potential power transactions, so between those I think that we have got sufficient liquidity for any needs over the next 12 to 18 months.

Okay. Great. Thanks. And then finally in terms of you mentioned to a response to a previous question, potential for further, any leverage you can pull on the cost side. Any additional color you can give on that?

Not at this time yet. I think that we're still going to focus on the revenue side for the rest of this year, but the opportunities I suggest exist in various areas.

Okay. Thank you.

Our next question comes from Barry Sine with Drexel Hamilton. Please proceed with your question.

Good morning. On the wireless side I guess for Ken, I wanted to ask about any promotional activity that you did in the quarter that may have impacted gross adds? Obviously you have a superior network and I guess you price accordingly, but have you done any promotional pricing off of the published rates, and then also in terms of activity? There are a number of carriers in the wireless industry doing buyout your contract plans, and for you guys so you have had higher churn in the past, but now you're in a much better position with competitive handsets, plans, and a network. So anything along those lines in terms of a buyout your contract, either as a formal program or occasional promotional activity?

Good morning, Barry. So I don't think there are any special off the rate sheet kind of promotional activities. Like everybody else we certainly have save programs or whatever for our customers, to make sure that we have got them on the right rate plan. One of the things that we do regularly as part of our service is take our customers through what rate plans they're on now and how they may be better served by some other offer that we already have out in the marketplace. The other part of the question, the buyout. Interesting. We have that available. It is not moving the needle a lot in terms of take rates with customers, but it's a barrier remover for those that want to come back.

Okay. And then you talked about on the prepaid side activity at some of the national retailers. Could you shed a little more light on that what is going on? I remember a year or so back when you had talked a little more enthusiastically at programs at retailers like WalMart. What is currently going on and why is that negatively impacting adds?

Well, I think on the prepaid side I will let Jay talk about it a little bit, but for us we need to make sure that we've got distribution that is local and convenient to customers wherever they're at, and that we've got all of the different products that they may want. Prepaid happens to be one that now there's a meaningful segment that wants it, and quite frankly want it on our network, so we've got it out there. We aren't necessarily satisfied with where it's at right now, and we're going to continue to keep tweaking that product as we go forward. I think that it has got a place in our portfolio, but we have got to continue to work on it.

I think the main thing there relative to prepaid in the national retailer, we have been transitioning out of U prepaid product into our phone in the box in our national retailers, and that has really just completed in this quarter, so we've got that done, as well as working through some connectivity issues with our national retailers.

So that U prepaid product was really more of co-branded product. It didn't just carry our name, and as we make this transition the US cellular name and, therefore the reputation for the network will be stronger in the local marketplace.

And my last question a follow-up on the ILEC sales. Obviously fairly minimal in the quarter, but is that an ongoing program that you're starting to look at the ILEC portfolio, and perhaps cull out some other properties you may own?

Well, this transaction I said was very small. We serve a large number of ILEC markets, and they're all very, very different. Where right now our priority is to invest in our most attractive markets, where we can make the economics make sense for fiber investments. But that's not all of our markets, and some of our very, very small markets are benefiting right now from our RUS stimulus programs, but without that support, we have several markets that we cannot make the economics work. To provide further broadband speeds or IPTV going forward. So in this case, the logical buyer was a nearby ILEC that can leverage our cost structure, and this is a constant process of looking across our entire footprint, and if there is a market that we don't think we can make a return on, we will look at that.

Okay. Those are my questions. Thank you.

(Operator Instructions). Our next question comes from Kevin [Mandino] with RGG Capital. Please proceed with your question.

Just more of a long-term macro picture. You talked about the future uncertainty in pricing, you've talked in the past about being a follower. Clearly with all of the M&A that is going on in your industry, starting with Leap Wireless, all of the things that AT&T and Verizon have done over the year, obviously recently with Windstream, Sprint, and T-Mobile, I guess I ask the question if you think about your business and you look over the last ten years, the return to shareholders is zero. The return in the last five years is also zero, versus 150% for the S&P. I just wonder in my head what you think about that, and sort of why you anticipate your current strategy is a better strategy to creates value for shareholders, than taking part in M&A which has obviously been very rampant in your industry? Thank you.

Okay. Ken Meyers. I am here, LaTanya. Hold on. This is Ken Meyers.

Oh, I'm sorry.

I understand the question. I think we have said we take the long-term view to this industry. I don't see anything that's changing around that. We have felt constantly talked about how we try to set expectations, in terms of what we're going to deliver from and operational standpoint, and that in our current plans and the controlled situation we're in, we don't talk about promises around M&A activity involving this. That's not something that has been part of our strategy for the last 20 some years.

We have no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Well, thank you for joining us this morning, and please let us know if you have additional questions.

This concludes today's teleconference, you may disconnect your lines at this time, and thank you for your participation. Have a great day.