美國無線通訊 (USM) 2015 Q1 法說會逐字稿

Greetings and welcome to the TDS and US Cellular first quarter 2015 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). I would now like to turn the conference over to your host, Jane McCahon, Vice President of Corporate Relations. Thank you, Ms. McCahon. You may begin.

Thank you, Kevin. Good morning everyone and thank you for joining us. I want to make you all aware the presentation we have prepared to accompany our comments this morning which you will find on the Investor Relations section of the TDS and US Cellular websites. With me today and offering prepared comments are -- from TDS, Doug Shuma, Senior Vice President of Finance, from US Cellular, Ken Meyers, President and Chief Executive Officer, Steve Campbell, Executive Vice President - Finance and CFO, 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 other non-GAAP and operating cash flow and adjusted EBITDA reconciliations.

The information set forth in the presentation and discussed during this call contains statements about expected future results and financial results that are forward-looking and subject to risks and uncertainties. Please review the Safe Harbor paragraph in our press releases and the 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 their SEC forms 10-Q. Additionally US Cellular will be filing a form F3 amendment today which basically refreshes our self registration back to $500 million.

We invite you to join us or listen to the webcast of our annual meetings. US Cellular's annual meeting is on May 19th in Milwaukee, and TDS's is on May 21st in Madison. We also ask our shareholders to support our extremely qualified slate of director nominees at both TDS an US Cellular. We will be on the road and reaching out to our shareholders to discuss our progress over the coming weeks.

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 management, the IR team will try to accommodate you, calendars permitting.

I would now like to turn the call over to Doug Shuma for a couple of brief comments.

Thanks, Jane. All of our businesses made good progress executing on their strategic priorities during the first quarter, as you will hear from Ken, Steve, and Vicki. We remain committed to our capital allocation strategy and returned value to our shareholders during the quarter in the form of $15 million in TDS dividends. We did not, however, repurchase any shares in the quarter. As we have always said, our capital allocation strategy reflects a long-term objective and there can or will be short-term swings for a myriad of reasons. That said, we believe we are tracking very closely to our stated 75/25 ratio of investments in the business to value being returned to shareholders. Now, I will turn the call over to Ken.

Good morning. I'm happy to report that 2015 is off to a good start with continued customer growth, albeit it at levels below what I would like, lower churn rates across both post and prepaid product lines, growth in revenues following the turnaround in customer growth last year, and a big jump in operating cash flow. While there are some one-time gains that flow through the income statement and muddy up some comparisons, the company generated positive operating income from its operations during the quarter. Our results this quarter reflect a balance in our desire to grow with our need to improve profitability.

Let me be clear, continuing to drive subscriber growth remains a top priority. However, as you have seen throughout the industry, switching activity has declined, and the American consumer is still being very cautious. So while we continue to position US Cellular in the marketplace with the best value in wireless, we were not overly aggressive in promotions when it became clear to us that the fish just weren't biting this quarter.

Let's review a few highlights from the quarter. While gross additions did not see the level of growth we would like we are pleased with the continued improvement in postpaid churn which declined to 1.48% in the quarter, a four-year low. We view this as evidence of customer satisfaction with our overall value proportion. With 78% of our postpaid customers now under contract, we are optimistic about our ability to maintain and even improve on this churn result. Also during the quarter we saw improvements in prepaid churn, too.

Late in the quarter we repeated a very successful tablet promotion we ran over the holidays, which resulted in connected devices representing 34% of postpaid gross additions in the quarter and 40,000 net adds. Tablet promotions increased our traffic and connected devices. They also generated an incremental connection fee and an opportunity to upsize data buckets and thus data revenue.

We have also had success increasing other high-margin revenue streams such as device protection plans and through accessory sales. Equipment installment plans remain popular. 39% of postpaid devices sold to customers in the first quarter were on equipment installment plans. That wait was muted to some degree again there quarter by the tablet promotion.

Our shared data plans which we called Shared Connect now account for 56% of our postpaid customers, up from 47% at year-end and with the strong tablet sales this quarter average postpaid devices per account rose sequentially from 2.1 devices per account to 2.48. We continue to see strong administrations to these plans, reflecting the underlying of smartphone adoption, the addition of connected devices combined with the strong growth in data consumption. All these activities -- smartphone adoption, increased connect devices, Shared Connect adoption with larger data buckets and EIP uptake offset by to some degree by competitive pricing led to revenue growth of over 4% from last year.

On the network front, 94% of our postpaid customers and 87% of our cell sites now have 4G LTE coverage, and this 4G network is now carrying 81% of our data traffic. We have been very successful migrating customers to 4G LTE. Currently 64% of our total postpaid customers have 4G capable devices and over 90% of the smartphones in service are now 4G-capable. Along that same front we continue to make slow progress on 4G roaming agreements and are getting closer to finalizing a couple of them.

During the quarter we announced that we are terminating our rewards program. This is an excellent example of the work the team is doing to continue to bring to our customers products and services that provide unique value to them. Our recent research showed that this program was not as effective in attracting new customers in today's price-sensitive environment and that our current customers do not rate it highly as a benefit. In fact, many customers have never used their points. Therefore, we decided to discontinue the program, eliminating the cost to operate it and enabling us to redirect resources to other products and services our customers value more. More to come on this over the next few quarters.

Year-over-year growth in customers, managing our promotional activity, increases in EIP adoption, the elimination of expenses related to the billing system conversion last year, and tight spending controls in all other areas combined to generate $167 million of operating cash flow for the quarter. This performance has led us to increase our guidance for 2015 by $50 million. It's a great start to the year.

Looking forward, we do expect switching activity to pick up and we have plans to aggressively migrate our remaining feature phone customers to smartphones. In order to generate the subscriber growth we want we expect acquisition costs to be higher over the remainder of the year.

To summarize, we had a very good start to the year and I would like it take this opportunity to thank all of our associates for their compliment and dedication that they bring to serving our customers every day. We have shown that US Cellular is competitive and relevant in the marketplace and now we are focused op driving growth to achieve our 2015 call -- goals.

So with that let me turn the phone call now over to Steve Campbell.

Good morning. I will begin with a few comments on customer results shown on slide six. Postpaid gross additions for the first quarter of 2015 from 200,000, an increase of 2% from 197,000 a year-ago. Postpaid churn for the quarter was 1.48%, down from about 2.3% last year. I will say more about postpaid churn in a minute. Due to both higher gross additions and improved churn we achieved, postpaid net additions of 9,000 for the quarter, a significant improvement from the net loss of 93,000 postpaid customers a year-ago.

The mix of our postpaid gross and net additions in the first quarter is shown at the bottom of the chart. Gross additions comprised 66% handsets and 34% connected devices. Net additions were driven by Smartphones and to a greater extent by connected devices. Prepaid subscriber results, 12,000 net additions were relatively flat year-over-year while churn improved to 5.8%.

The next slide has a chart showing the trend in the postpaid churn rate over the period beginning in January of 2013 and continuing through March of 2015. As we have been reporting over the past couple of quarters, churn peaked at 2.4% in February of 2014 and has continued on a steady downward trend since that time, decreasing to 1.48% for the first quarter of 2015.

Slide eight shows the positive trends in smartphone sales and penetration. During the first quarter we sold 403,000 smartphones, which represented 86% of total handsets sold driving smartphone penetration to 67% of our base of postpaid handset customers, up from 56% a year-ago. So at the end of the first quarter we still had about one-third of our postpaid customers with basic phones and as Ken said, we intend to work aggressively to upgrade these customers to smart phones and drive additional data usage revenues. During the first quarter we also sold 72,000 connected devices.

As Ken already mentioned, we continued to have good progress in the adoption of 4G technology. On the network front we completed wave four of the deployment early in the first quarter of 2015 and are now covering 94% of our customers. In addition, at the end of the quarter, 64% of our postpaid customers have 4G capable devices. This means that 64% of our customers have devices that are capable of providing them with a high speed 4G data experience on our best-in-class network. We believe that the higher penetration that we're seeing for smartphones and connected devices, when combined with increased adoption of our Shared Connect data plans, is allowing us to capitalize on the continuing growth in data consumption. The penetration on our Shared Connect plans is now 56%, up from 47% last quarter. That increase penetration for smartphones and connected devices and Shared Connect plans is having a positive impact on our revenue trends, as shown on the next slide.

Postpaid ARPU as reported was $54.87 for the first quarter. That's down about 4.7% year-over-year. Although increased smartphone penetration an data usage clearly have had a positive impact on revenue, we've also seen downward pressure associated with both industry-wide price competition over the last few quarters, and discounts on normal service plan pricing for customers who activate their own device or purchase one under an equipment installment plan. These equipment-related discounts which are shown in the table at the bottom of the slide, effectively shift some revenue from service revenue to equipment sales revenue. If normalized for that shift, ARPU for the first quarter increased by 3% year-over-year and was essentially flat sequentially.

Postpaid average revenue per account or ARPA as reported was $134.94, up 2.2% year-over-year. When normalized for the equipment related discounts ARPA grew at the more robust rates of 11%. Also, remember that the ARPU and ARPU metrics shown here are calculated using service plan revenues and, therefore, do not reflects the monthly equipment billings to customers who have equipment installment plans. In the first quarter these equipment billings totaled about $47 million, which is equivalent to $3.66 per average postpaid customer or $9 per average postpaid account.

The next slide in the deck provides some summary statistics related to equipment installment plans. I will highlight a couple of the line items. For the first quarter EIP sales were 39% of total postpaid devices sold and resulted in $68 million of recognized revenue. Both devices sold and the related revenue were negligible amounts in the previous year. EIP-related bad debt expense for the quarter which we determined using our historical accounting method was $5 million. And acknowledging that is still early, we haven't observed any unusual default activity among equipment installment plan customers.

Moving on, total operating revenues for the first quarter were $965 million, up $39 million, or 4%, from $926 million a year-ago. The increase was driven in primarily by higher equipment sales revenues reflecting the growth in equipment installment plan sales. Total service revenues were $828 million, down $26 million, or 3% from last year. The principal factor in the decrease was lower retail service revenues. There was an increase in the number of customers year-over-year, but the impact of that growth was offset by the decrease in reported ARPU discussed earlier. Inbound roaming revenues of $40 million decreased $10 million or 20% due to both lower volumes and rates.

Tower rentals for the quarter, largely representing our remaining tower portfolio following the sale completed in January, were $14 million, up 9% year-over-year. And ETC revenues included in other were flat year-over-year at $23 million as the FCC's phasedown of Universal Service Fund support remains suspended.

Our overall financial performance for the quarter was quite strong as shown on the next slide. Operating cash flow for the quarter was $167 million, up significantly from $79 million a year-ago. Note this this measure excluded the gains associated with the tower sale and license exchange that were mentioned earlier. Several factors contributed to the overall improvement. First as I just discussed in more detail, total operating revenues grew by $39 million or 4% year-over-year. In total, cash expenses of $798 million decreased by $49 million, or 6%, year-over-year. System operations expense increased by $10 million, primarily due to outbound roaming expense. However, more than offsetting that increase, cost of equipment sold fell by 12% driven by lower gross additions and a lower -- that is, improved -- upgrade rate, and SG&A expenses fell by 7% due to lower sales commissions on reduced volume and lower consulting and outsourcing costs related to the billing system conversion last year.

I also want to use this chart to highlight our true operating performance for the quarter. As you can see at the bottom of the slide, our operating income excluding the non-recurring gains in both periods dramatically improved from a loss of $89 million last year to income of $20 million this year.

Adjusted EBITDA, shown next, incorporates the earnings from our equity method partnerships and imputed interest income from EIP transactions. Adjusted EBITDA for the quarter was $209 million, up 79% from $117 million last year, driven largely by the increase in operating cash flow.

Our estimates for full year 2015 are shown on slide 14 of the presentation. For total operating revenues the range remains at $4.0 billion to $4.2 billion. For operating cash flow, we're increasing the range by $50 million at both ends to $400 million to $500 million. This increase balances the positive performance in the first quarter with the fact that we still have an intensely competitive market with a lot of pricing uncertainty, as well as the fact that we believe we will need to be aggressive to achieve our overall subscriber growth goals. In order to generate the growth we want we expect the acquisition costs to be higher over the remainder of the year.

The increase for operating cash flow ripples through not guidance for adjusted EBITDA, which incorporates the earnings from our equity method partnerships and interest income. The updated guidance for adjusted EBITDA is $580 million to $680 million. And finally, capital expenditures are still expected to be about $600 million.

Before I conclude, I want to make just a couple of comments about US Cellular's balance sheet. Overall, I would say the balance sheet is in good shape. We saw continued improvement in both customer accounts receivable and inventory balances over the course of the first quarter. As of March 31, cash and equivalents totaled $307 million -- sorry, $337 million, up $125 million from the year-end level. In addition to the existing cash and equivalents we have about [$280 million] of unused borrowing capacity under our revolving credit agreement, and in January we entered into a new term loan agreement that provides additionally borrowing capacity of $225 million. We believe that these resources together with expected cash flows from operating activity provides sufficient liquidity and financial flexibility to meet our day to day operating needs for the foreseeable future.

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

Okay. Thank you, Steve and good morning everyone. TDS Telecom is also off to a good start as we continue to execute on our strategic priorities and our first quarter performance demonstrates that. For the wireline and cable segments, this means we continue to focus on owning the best pipe in the market and using that advantage to grow high-margin broadband services bundled with videos and voice products. For the HMS segment we continue to execute the vision we have for profitably serving the IT outsourcing needs of midmarket customers.

In our wireline business we have continued our focus on providing high-speed data services and related products which has led to growth in both broadband and IPTV connections. Our IPTV product, called TDS TV, is an important offering that leverages our high-speed network. TDS TV has been launched in 18 markets enabling 142,000 service addresses, or roughly 20% of our total footprint. We are very pleased with the success of our IPTV deployments and will continue to make fiber investments this year to achieve our goal of approximately 25%.

The integration of our cable businesses has been very productive. End broadband performance has been strong and is exceeding our expectations. We are also pleased with Baja's progress, and we continue to increase broadband connections and identify synergy opportunities, giving us confidence in our overall cable strategy, which is based on our belief that it is a natural extension of what we do. Providing broadband, video and voice services to both residential and commercial customers allows us to leverage significant expertise and infrastructure within our organization. In HMS we continue to focus on driving recurring service revenue growth by improving our ability to sell across our entire portfolio of offerings.

Moving to the first quarter results shown on slide 17, TDS Telecom had another good quarter. First we had solid results with our wireline segment which contributed a 2% increase in operating cash flow. Second, cable operations nearly doubled in size with the integration of BendBroadband and grew revenues 2% excluding that impact. And third, HMS total revenue decreased 3% due to lower equipment sales. However, our recurring hosting revenues grew 3%. While the results are less than we had planned we are encouraged by our pipeline and expect these revenue growth rates to improve over the year.

On a consolidated basis TDS Telecom's revenues increased 7% driven primarily from the BendBroadband acquisition on September 1, 2014. Adjusting for the impacts of acquisitions revenues declined $3 million, or 1%, due primarily to lower HMS equipment sales and lower wireline wholesale revenues.

Adjusted EBITDA which is essentially operating cash flow for TDS Telecom grew 10% year-over-year primarily driven by contributions from cable acquisitions. Without the effects of acquisitions, adjusted EBITDA was flat.

Looking at wireline results on slide 18, retail revenue -- which is residential and commercial combined -- was flat year-over-year. Residential revenues grew 3% as growth in broadband and IPTV more than offsets the decline in legacy voice services. Commercial revenues, however, decreased 4% as our managed IP sales did not keep pace with decreases in legacy voice and broadband connections. Wholesale revenues decreased this quarter as a result of continuing decreases in regulatory recovery and lower inter-carrier compensation rates and is line with our expectations.

On a combined basis total wireline revenues declined less than 1% to $176 million in the quarter. However, due to cost control initiatives cash expenses declined 2% from the same period last year. As a result adjusted EBITDA increased 2%.

Turning to slide 19, our strategic focus on broadband and our IPTV product is reflected in our residential customer metrics. Residential broadband customers are increasingly choosing higher speeds in our ILEC markets, with 42% choosing speeds of 10 megabits or greater and 12% choosing speeds of 25 megabits or greater. We continue to be very pleased with the overall IPTV uptake and we are seeing average penetration rates exceeding our expectations. IPTV connections grew 61% adding 9700 subscribers compared to the prior year. We are offering up to 300 megabits data speeds and have launched one gig services in all 18 IPTV markets. These actions are driving 97% of our customers to take all three services, which results in a very low churn rate of roughly 0.5%. Our investments in these market, along with the completion of the broadband stimulus project, have contributed to broadband connection growth over the last four quarters. As you can see in the table on the bottom of the slide, average revenue per residential connection increased 4% to $42 driven by price increases for broadband and video services. Customers are opting for faster broadband speeds and also customers selecting our higher-tiered IPTV packages.

Looking at the cable segment on Slide 20, you can see the effects of acquisitions on the 2015 results which include the combined results of Baja and BendBroadband. The 2014 results reflect only Baja. Total cable connections grew 271,000, primarily due to BendBroadband. On a same-store basis total residential connections grew 7% as growth in broadband and voice were partially offset by a decline in our video connections. Commercial connections grew 1% on a same-store basis. Excluding BendBroadband revenues grew 2% driven by an increase in average residential connections.

Cash expenses increased due to higher plants maintenance and programming content costs. It is our general intent to cover our higher content costs through price increases. The increase in cable adjusted EBITDA was due to our BendBroadband acquisition.

Turning to the HMS segment, on slide 21, we continue to focus on organic growth and our recurring hosting service revenues which was 3% for the quarter. Equipment sales were down $3 million due to the lower spending by existing customers. Cash expenses were down 4% compared to the same period in the prior year, which mainly reflect lower cost of goods sold. Other operating expenses were up slightly, however, that increase does include a $1 million commission related to our recent multiservice contract with the City of Minneapolis. This commission expense is recognized in advance of revenues. This resulted in adjusted EBITDA of $1 million being relatively flat year-over-year.

We have provided our 2015 guidance on slide 22, which is unchanged from the guidance we shared in February. Overall we're pleased with the results of our first quarter and will continue to update you on our successful execution of our strategic priorities throughout the year.

Now I will turn the call back over to Jane.

Thanks, Vicki. Operator, we would like to open up the call for questions now. In addition to our speakers this morning, Jay Ellison EVP of Operations and Mike Irizarry CTO at US Cellular have joined us in the room for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question today is coming from Sergey Dluzhevskiy from Gabelli and Company. Please proceed with your question.

Good morning, guys. A couple questions if I could. The first one is for Doug. TDS didn't repurchase any stock in the first quarter. Could you comment whether there were any timing reasons, maybe related to blackout or when you reported earnings in the quarter or was it any other legal reasons that restricted you buying stock back in the quarter? And also how should we think about your appetite for buybacks for the balance of the year?

Yes. Sergey, as I mentioned in my comments there's always a myriad of reasons we may be in or out of the market. I'm not really going to speak to what those compact reasons might be. As far as the balance of the rest of the year, I think we're sticking to the 75/25 allocation that we have stated over the years and you will see that play out over time.

Okay. And a couple questions for Ken. So on the auction side I guess related to upcoming be broadcasting spectrum auction, given the license owned by wireless industry from the AWS-3 spectrum auction, what are your thoughts on the timing and potential format of the broadcasting spectrum auction? Given what you know now, what are your expectation as far as company participation in that auction?

Well, my crystal ball is probably no better than yours at this point, Sergey. There is a lot of noise, a lot of discussion going on. Everything that I'm hearing says it's still going to happen in 2016, probably second half, but I have no inside track on that whatsoever. We -- historically have participated one way or another in almost every auction out there. We do it through a very disciplined process looking at both what we see as the value of the spectrum as well as other options to meet future capacity needs. I would expect that all of the other things being equal we would participate in a future auction following the same strategy as we have in the past. But my guess is we're at least a year away from any decisions on that front.

Right. And also another wireless question. It seems like your two main wireless competitors, AT&T and Verizon, are increasingly moving towards [converged] services. Do you see a need to partner with wireline or cable providers in some of your markets, maybe in your larger markets, that potentially could help you reduce churn and maybe help counter some of the current moves and maybe future moves by your two larger competitors?

Yes. Great question. A lot of action on the competitive front whether it be pricing or product. We can -- we, too, are looking at all of the different options whether it be a -- a video play or something different that we do with our own services. As I mentioned, yes, I think we will see a couple changes in the next couple of quarters that I really am not ready to talk about yet.

The role of video is an open question. I mean you put a lot of video on our wireless networks and that's go to get either very expensive or very clogged very soon. So I'm not sure where video plays long-term but we will test and continue to evaluate difference products for our customers on a continual basis.

Okay and last question for Vicki or maybe for Doug on the wireline side. So obviously we saw a cancellation of a large deal in the cable industry Comcast/TimeWarner cable and the regulator's position on that particular deal. So what are your thoughts on cable M&A over the next few years in general and how do you think this particular transaction cancellation might impact the pipeline that you may have for cable deals in the next 12 to 18 months?

Okay. So I'll go first and then, Doug, you can comment on if you would like. I think the Comcast/TimeWarner deal -- we don't believe it impacts, it impacts us per se right now. I mean we continue to see good activity, cable activity in our -- in our pipeline. We're actively pursuing additional cable acquisitions that meet our criteria as well as bolt-ons. If the cancellation of this transaction follows and we see other activity, we're hoping that will generate more opportunities for us.

Okay. Thank you.

Thank youment our next question is coming from Rick Prentiss from Raymond James. Please proceed with your question.

Hi. Good morning.

Good morning.

First question is on operating cash flow if I could. Obviously nice to see guidance go up as we're a little light and you talked about it, Ken. But can we talk a little bit about what would it take to hit the high end of that guidance or above and what would happen to cause you to go to the low end of that guidance?

Boy, lots of things can go either way, but in terms of how we're thinking about it right now. As I said good quarter, but I would have liked to have seen more adds and kind of -- the model that you know all too well, growth costs money on the front end whether it be commissions, subsidies, whatever. So if we get the growth that we are targeting I expect to be right in the range on cash flow to the extent that growth turns out to be lighter, growth driven by fewer gross adds, then we could be at the top end. If we get more growth we can push that down. It's all it's all going to the growth is the single variance of what I'm looking at right now. It's just a market where, boy the consumer really is extraordinarily cautious right now, and so we're just going to continue to kind of monitor the market an when we see opportunities I want to be able to move and still be within my guidance and if things change dramatically we'll be talking to you a couple more times this year and change as we go.

Takes sense and the EIP program I think I saw 39% take rate. Just finished on one of your peers, [Intelius]. They were seeing 60%, 65%, even 75% take rate -- 75% when they were incenting it but lately 60% to 65%. What are your thoughts about where EIP heads and what's baked into the guidance?

I'll let Steve talk about how we're thinking about it longer-term for the rest of the year. But I think you touched upon something there which was you can be higher if you incent it. Our approach to the marketplace is what we call relationship-based sales and our sales force is instructed and taught and trained to make sure they explore and understand the customer's needs and then get them in the right product or service. We don't push one product, rate plan, one service over another but make sure that we do a good job of understanding what those customer needs are.

Yes. So Rick as far as the guidance is concerned, as we disclosed in our prepared comments, we were at about 39% for the quarter. Ken had also mentioned that percentage was affected to some degree by that special tablet promotion we were running. So depending on whether similar promotions are running the balance of the year, there would be some impact on that number, but we built the guidance around an assumption of about 45% to 50% for the balance the year.

Okay. That makes sense. And as you think about the turnaround that you have been executing with getting the network in place, the billing system with EIP and shared data, and the iPhone now in place for almost a year and a half, I guess -- subs have improved, revenue has grown, operating cash flow has grown. When we look at kind of the last parts of the turnaround is also free cash flow. What are your thoughts about getting back to free cash flow positive and where that could head and obviously links back to where margins could head.

Boy. You got the subs, you got the rev, you got the cash flow, and now you want more yet. And so do I.

I always want more.

So do I. That's my message to the organization. I would say the big question on operating -- on free cash flow that I want to be careful we're early into it, is really going to be driven by what changes we have to or don't have to make in the network as we move from LTE to voice over LTE. We are doing a three-market commercial test this year. It will be later this year by the time we turn that on and we need to make sure that we have a network in VoLTE world that is the same quality that we have in a CDMA world, CDMA voice world at least. And CDMA has been a wonderful, wonderful technology. To the extent that the difference between those technologies impacts capital spending for a year or two is just uncertain right now, and so more I would say later this year when we start seeing those test results which would help us kind of set the path for our capital going forward. But between now and then the focus on growing both topline and operating cash flow is what we are really centered in on.

Great. Thanks.

Thank you.

Thank you. Our next question today is coming from Philip Cusick from JPMorgan. Please proceed with your question.

Hi this is Eric for Phil. Thanks for taking the questions. Churn has come down quiet nicely this quarter. Do you think there's more room for improvement, or is this the optimal structure level that we can expect going forward?

Well, I've never seen a metric that I said was optimal. I always want more. And one of the big changes we've built over the last year. You go back was it, was it 15 months now, 18 months ago, and we had less than 40% of our customers under contracts. And between changes to our offerings, changes to EIPs, we're up to, gosh, 75% plus of our customers and now or either on EIP plans. And we're seeing really good results in terms of customer satisfaction, all of the drivers. We're seeing customers that had left us in the past coming back to us because of the network quality. So I'm optimistic that we can continue to improve on that metric.

Great. And then CapEx was a lot lower than the $600 million run rate this year. What caused the slowdown there, and do you inspect it to ramp back up later this year and for what reason?

Well, I would say that that's pretty typical in our geographies. Between the northeast up in Maine and New Hampshire and the northwest out in Washington and Oregon, there's not a lot of construction projects going on in January, February and March, so first quarter is typically a little bit lighter and we are not moving off guidance. We still expect to complete all the projects we have laid out for the year.

Got you. And then on the spectrum front, you guys spent a little less than $300 million in the most recent auction. Considering that level of competition and looking forward to the auction next year, do you expect to spend more to get the low bands spectrum that you think you will need? And how much spectrum would you ideally like to get?

Eric, those are unanswerable at this time. Our -- our partner actually invested I think about -- a little bit over $300 million on a net base. $300 million -- almost $340 million, just to kind of get the facts out there. And we constantly are evaluating our spectrum positions. We are working with that partner right now to look at where we sit today and that's more of a market-by-market analysis than it is a general kind of across the board, and our strategy is to make sure that we have access to both high and low band spectrum so we can be prepared for carrier aggregation, which Mike would tell you we're going to be testing later this year. So once we get through that cycle later this year, I think we'll be better positioned to understand where we need it. But as a starting point I would say in most of our markets our -- we start with a low band 850, we have 700 in many of our markets. So right now I'm feeling pretty good about our low band position.

Got it. Okay. And then last question, maybe for Vicki. Considering the performance of the cable assets that you acquired, are you pleased so far and would you be actively looking to do more deals?

Yes, I think I -- I was pretty clear with my comments and the progress that we have seen. We're very pleased with our performance so far. Cable overall in the first quarter was the organic growth in our connections of 7%. It is meeting our expectations. I'm very pleased with our BendBroadband acquisition as well. That's exceeding our expectations, and yes, we -- we are actively pursuing to grow that parts of our business and -- and are pleased with the activity in our pipeline.

Great. Thank you very much.

Thank you. Our next question today is coming from Barry Sine from Drexel Hamilton. Please proceed with your question.

Good morning, folks. I wanted to ask -- as you pointed out there's always a balance between growth and profitability in your business, and it seems as if signaling spend a bit more on customer acquisitions and then I guess low-hanging fruit converting feature phone customers over to smartphone customers. I wonder if you can talk about kind of why you decided to get a bit more aggressive. And what I'm wondering about is if I look across the industry and the big four players, churn seems to be coming down across the industry, so I would think there would be fewer opportunities to poach away customers. I can understand converting the feature phone but if you could kind of comment on that balance where you are in that continuum?

Yes Barry. This is Ken. You're touching upon the uncertainty that's out there for the next nine months. From a strategic standpoint, I would like to get bigger. While we are doing a great job attracting back customers that left -- left us over the last couple of years, mathematically we don't have them all back yet, right? And those are people that know our network, they know our service it's met their needs. We either didn't have the right products or services or disappointed them in the past. So I would like to -- like to get them back. I would like to improve my market share position in some of my markets, but only -- only at a level of spend that is still economical. Now to the extent that the US consumer continues to stay extraordinarily cautious and the switching pool shrinks, we won't have that opportunity. We, therefore, won't spend those marketing dollars and you are going to see a little bit more cash flow. But if I think about long-term I would still like it see the company grow from where it's at today and have built that into our strategies for the year and built that into our guidance. How the year plays out over the next few months? Stay tuned we'll both know.

All right. Thank you very much.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further closing comments.

I'd just like to thank you all for joining us. If you have any follow-up questions please reach out. Thanks.

Thank you. That 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.