美國無線通訊 (USM) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the TDS and U.S. Cellular Third Quarter conference call.

(Operator Instructions) I would now like to turn the conference over to your speaker today, Jane McCahon.

Thank you.

Please go ahead.

Thank you, Jody.

Good morning, everyone, and thank you for joining us.

With me today and offering prepared comments are, from U.S. Cellular, Ken Meyers, President and Chief Executive Officer; and Doug Chambers, Senior Vice President and Chief Financial Officer.

From TDS Telecom, Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer.

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

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

We provide guidance for both adjusted operating income before depreciation and amortization and adjusted earnings before interests, taxes, depreciation and amortization.

To highlight the contributions of U.S. Cellular's wireless partnerships.

As shown on Slide 2, the information set forth in the presentation and discussed during this call contain statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties.

Please review the safe harbor paragraphs in our press releases and the extended version in our SEC filings.

TDS and U.S. Cellular filed their SEC Forms 8-K yesterday, including its press releases, in addition to our SEC Forms 10-Q.

Taking a quick look at the upcoming IR schedule on Slide 3. Ted Carlson, Doug Chambers, and I will be out on the road in New York with Citi on November 14th.

Doug Chambers and I will be doing one-on-ones at the Wells Fargo TMT Conference in Las Vegas on December 3. Ken Meyers, Mike Irizarry, and I will be attending the UBS Global TMT Conference on December 11.

And Ken and I will be attending Citi's 2020 TMT West Conference on January 7. And please keep in mind that TDS has an open door policy.

So if you're in the Chicago area and would like to meet with members of management, the IR team will accommodate you, calendars permitting.

Before turning the call over, I want to remind everyone that U.S. Cellular is registered to participate in the FCC's Auction 103, and due to the anti-collusion rules, we will be unable to respond to any questions related to FCC auctions.

And now I'd like to turn the call over to Ken Meyers.

Thank you, Jane.

Good morning, and thanks for joining us today.

I know the headlines for the quarter looked like another quarter of revenue and adjusted EBITDA growth, albeit with a small loss on postpaid handset additions.

But in fact, it was much, much more than that.

In fact, it was a very busy quarter for us.

First, the quarter started off rather soft, but we picked up nice momentum throughout the quarter as some of the many initiatives we've been working on were implemented and progress was made on others.

Subscriber activity picked up and improved month-to-month with positive net postpaid handset additions in September and again in October.

As we head into the busy holiday season, I like our position and the trends that we are seeing.

In the quarter, service revenues grew 2% driven by positive trends in average revenue per user and roaming revenue.

Operating cash flow or operating income before depreciation and amortization grew 6%.

One of those major initiatives was the completion of a refreshment of our brand and the launch of a new tagline, Bringing Fairness to Wireless.

Our new brand positioning nicely captures all that U.S. Cellular has stood for, for years in a fresher, more modern look designed to broaden our appeal in the marketplace.

This Bringing Fairness to Wireless Campaign is the umbrella philosophy that covers our approach to public policy, the mindsets of our team of incredibly engaged associates and our approach to the marketplace.

Another significant endeavor was work to deliver new web-based technology that powers our online customer activity including via their mobile devices.

This is a major plumbing project that now allows our customers to have a better and faster online experience today and provides the platform for future growth in this channel.

Another unexpected effort resulted in competitive pricing change in the quarter.

The team was able to respond very quickly, limiting the competitive impact of the change.

I must admit, I remain amazed and baffled at the pricing strategies that play in this industry.

Our changes lowered pricing on select plans and implemented congestion-based controls instead of hard caps on unlimited plans.

As previously discussed, customers are continuing to hold on to their expensive devices longer, holding them on equipment sales.

Our upgrade rate remained low at 6% in the quarter.

Also, device protection revenues grew about 10% year-over-year and postpaid subscriber penetration on that product is now at 48%.

Driving revenue remains a strategic priority and is key to our ability to improve profitability.

At the end of the quarter, 71% of our postpaid customer base is on our new total plans, helping to drive a 2% increase in average revenue per user.

Also contributing to that ARPU increase were a higher mix of smartphones relative to the feature phone and connected devices and the growth in the device protection revenues that I mentioned.

The prepaid segment improved, especially average revenue per user and churn, though prepaid still remains just about 10% of our business.

Roaming was the highlight with benefits showing on both the revenue side due to traffic growth and the expense side where total costs fell 9%.

The organization continues to manage its cost.

Again, data usage increased 36% this quarter while true systems operating expense, excluding the roaming benefit I talked about, increased just 2%.

However, we did see higher G&A this quarter as a result of a number of the IT-related projects and higher bad debt expense.

Turning to the network.

Our 5G and network modernization initiatives have been progressing nicely, and we announced that we would launch 5G services in Iowa and Wisconsin during the first quarter of 2020.

Also, as we have readied our network for 5G, customers with 4G devices are experiencing better network quality and improved speeds.

In addition, we will continue to roll out VoLTE technology.

We now reached 67% of our subscribers with VoLTE Services in Iowa, Wisconsin, California, Washington, Oregon, New England and the Mid-Atlantic areas.

We will continue to roll out VoLTE to the remaining markets over the next year or so.

Finally, as you may have heard at the CTIA GSMA show in Los Angeles last week or seen on our recent filings with the SEC, I believe it's critical for the industry to get access to significant amount of mid-band spectrum quickly.

The rest of the world is deploying on mid-band today and failure or delays in deploying mid-band spectrum in the United States will not only impact our customers' ability to roam in other countries, but will severely inhibit carriers' ability to deliver meaningful 5G services outside the larger cities.

While I recognize solutions are not easy, and I applaud the FCC's efforts to navigate the maze of difficult policy and technical issues involved.

It is vitally important that we make even more progress in this area quickly.

With that, let me turn the call over now to Doug Chambers, who will update you on the financial results.

Doug?

Thanks, Ken, and good morning, everyone.

I want to talk first about postpaid handset connections shown on Slide 6. Postpaid handset gross additions for the third quarter were 124,000, down from 133,000 a year ago, due to an aggressive competitive environment that included service plan pricing changes and rich promotional offers for handsets.

Also, in the third quarter of 2018, we saw a onetime increase in gross additions due to the exit of a competitor in one of our key markets.

Postpaid handset net additions for the third quarter were negative 2,000, down from positive 15,000 last year, driven by the decline in gross additions and slightly higher churn.

I'll touch more on churn in a moment.

On a sequential basis, both gross and net additions improved due in part to positive response to our price plan changes, which Ken discussed earlier in his comments, and also to a normal seasonal trend.

In addition to gross additions of smartphones, we continue to have existing handset customers upgraded from feature phones to smartphones.

As you can see on the graph on the right side of the slide, including the upgrades, total smartphone connections increased by 22,000 during the quarter and by 92,000 over the course of the past year.

That helps to drive more service revenue given that ARPU for smartphone is about $22 more than ARPU for a feature phone.

Next, I want to comment on the postpaid churn rate shown on Slide 7. Postpaid handset churn depicted by the blue bars was 1.09% for the third quarter of 2019, higher than last year, driven primarily by aggressive industry-wide competition.

Sequentially, postpaid handset churn increased, partly due to seasonal trends, and we did see an improvement in churn in the last portion of the quarter, which we attribute in part to positive response from our customers to our price plan changes.

Total postpaid churn, combining handsets and connected devices, was 1.38% for the third quarter of 2019, higher than a year ago.

In addition to the uptick in handset churn, connected device churn was also higher year-over-year, primarily as a result of detections of connected wearables.

Now let's turn to the financial results.

Total operating revenues for the third quarter were over $1 billion, up $30 million or 3% year-over-year.

Retail service revenues increased by 1% to $663 million.

The increase was due largely to higher average revenue per user, which I'll cover on the next slide.

Inbound roaming revenue was $54 million.

That was an increase of 9%, driven by higher data volume.

Other service revenues increased by $7 million.

This was driven primarily by an out-of-period accounting adjustment related to tower rental revenues that resulted in $5 million of additional revenue being recognized this quarter.

Finally, equipment sales revenues increased by $15 million or 6%.

This was driven primarily by an increase in the average revenue per device sold, partially offset by a decrease in the number of devices sold.

As I mentioned earlier, there was a decrease in gross additions activity year-over-year and impacted device sales.

In addition, we are continuing to see that existing customers are holding onto their devices for increasingly longer periods, resulting in a slight decrease in upgrade transactions.

Now a few more comments about postpaid revenue shown on Slide 9. Average revenue per user or connection was $46.16 for the third quarter, up $0.85 or 2% year-over-year.

The increase was driven by several factors including a shift in device mix to smartphones, increased device protection revenue and a shift in service plan mix to higher-priced plans.

37% of our postpaid connections are now on unlimited plans versus 23% a year ago.

Partially offsetting these increases were higher promotional sales expenses.

Also, there was a decrease in Universal Service Fund revenues resulting from the FCC's December 2018 ruling that revenues from text and multimedia messaging services are no longer assessable under the Universal Service Fund.

As a result, this year, U.S. Cellular stopped charging customers and will no longer pay the FCC USF fees on these revenue streams.

Because this change also affected general and administrative expense by a like amount, it is neutral to earnings.

Looking through this change, ARPU on a comparable basis increased by $1.21 year-over-year versus the reported increase of $0.85, a pretty strong result.

On a per account basis, average revenue grew by $0.45 year-over-year.

Excluding the USF impact that I just discussed, ARPA increased by $1.39 or 1.2%.

Let's move next to our profitability measures.

First, I want to comment on adjusted operating income before depreciation, amortization and accretion and gains and losses.

To keep things simple, I'll refer to this measure as adjusted operating income.

As shown at the bottom of the slide, adjusted operating income was $208 million, up 6% from a year ago.

Correspondingly, the margin as a percent of total operating revenue was up about 0.5 percentage point to 20%.

For those watching service revenue margin, the current quarter result was 27%, an increase of 1 percentage point year-over-year.

As I commented earlier, total operating revenues increased by $30 million or 3% year-over-year.

Some of that increase in revenues was offset by higher operating expenses, which in total grew by $19 million or 2%.

Total system operations expense was essentially flat.

Roaming expense, which is included here, decreased 9% due primarily to lower rates, partially offset by a 29% increase in off-net data usage.

Excluding roaming expense, system operations expense increased by 2% as a result of increased network maintenance expenses and cell site rents.

Cost of equipment sold increased due primarily to a higher average cost per device sold, partially offset by a decrease in a number of devices sold.

SG&A expenses increased 3% year-over-year, in large part due to higher costs related to information systems initiatives.

Shown next is adjusted EBITDA, which starts with adjusted operating income and incorporates the earnings from our equity method investments, along with interest and dividend income.

Adjusted EBITDA for the third quarter was $256 million, up 5% from a year ago.

Most of the improvement is due to the increase in adjusted operating income.

We also saw an increase in equity and earnings of unconsolidated entities.

Adjusted operating income and adjusted EBITDA do not include depreciation, amortization and accretion expense.

In connection with network modernization and 5G initiatives, we are upgrading several of the network equipment elements.

This results in the recognition of accelerated depreciation on the assets being replaced.

Depreciation, amortization and accretion expense is up 10% for the year-to-date period and we expect a similar increase in our full year results.

Next, I want to cover our guidance for the full year 2019, which is shown on Slide 12.

For comparison, we're also showing our 2018 actual results.

For total operating revenues, we now expect a narrow range of approximately $3.95 billion to $4.05 billion reflecting increased visibility as we move into the last quarter of the year.

For adjusted operating income before depreciation and amortization, we have narrowed the range to $750 million to $850 million.

Correspondingly, we have narrowed the range for adjusted EBITDA to $925 million to $1.025 billion.

For capital expenditures, the guidance is the same as provided in August.

Our expenditures through the third quarter were $467 million.

Now I'll turn the call over to Vicki Villacrez.

Okay.

Thank you, Doug, and good morning, everyone.

I'm pleased to report on our efforts to grow the business by building out new fiber markets.

This transformation demands discipline and a focus on execution, and we are moving steadily towards our strategic growth initiatives as outlined on Slide 14.

At the same time, we continue to promote higher sales and customer satisfaction in our existing markets.

Among our many accomplishments, I'd like to highlight several that occurred during the third quarter.

First, we launched a third new out-of-territory market, advancing our fiber footprint.

Second, we entered into an agreement to purchase another cable company; and third, we enabled DOCSIS 3.1 for an October launch in one of our key cable markets.

You will also notice that the graphic presentation on Slide 14 has been modified to show service addresses by speed to better illustrate the transition of the work we are doing to upgrade our plans with A-CAM, state broadband grants and fiber investments.

Moving to Slide 15.

On a combined basis, total revenues held nearly steady with last year despite challenges in the commercial market and expected reductions in wholesale revenue.

As a reminder, in the third quarter last year, TDS Telecom received an additional $4 million of support revenue provided through the A-CAM program, which was retroactive to January 2017.

Total cash expenses increased 3%, partly as our fiber market launch activity ramps up, but also due to a $2 million of increased legal expense in the quarter.

As a result, adjusted EBITDA decreased 9% to $73 million from a year ago.

Capital expenditures increased 50% to $81 million as we continue to invest in our fiber deployment and rural broadband expansion programs.

We also enabled DOCSIS 3.1 in our band cable market, which allows us to offer 1-gig broadband services.

And finally, we expect our capital spending to be even higher in the fourth quarter due to our fiber deployment strategy in our new markets.

Specifically, in this quarter, we launched our third new out-of-territory fiber market in our Southern Wisconsin cluster.

We are in various stages of construction, and while we've experienced some delays, we expect to launch 4 additional markets in this cluster yet this year and early next year.

As I previously announced, construction is progressing in 2 new out-of-territory clusters, targeting 80,000 total service addresses: One in Mid Central Wisconsin, which is comprised of 8 communities in and around Stevens Point in Wausau and the second one in Coeur d’Alene, Idaho, which includes 3 surrounding communities.

These clusters fit the criteria we are targeting for our growth.

They are underserved for broadband and have attractive demographics with potential for household growth.

As a result of our fiber deployment strategy over the last several years, 29% of our wireline service addresses are now served by fiber.

Fiber enables our ability to provide the services our customers demand including both high-speed broadband and video.

Additionally, we continue to make progress on our network construction under both A-CAM and state broadband programs.

On the A-CAM front, we are on pace to meet our first stated obligations under the program, as we've completed 31,000 of our required 64,000 service addresses with broadband speeds up to 25/3.

As a result, we have reached our first FCC milestone in 10 out of 24 states ahead of our deadline, which is at the end of next year.

We also continue to improve speed capabilities to additional service addresses that are enhanced by our construction under this program.

On the cable acquisition front, TDS entered into an agreement to purchase the assets of Continuum, a broadband, video and voice operator located just north of Charlotte, North Carolina, for a purchase price of $80 million.

Continuum offers high-speed fiber and coax-based services, passing a total of 40,000 locations.

This transaction is expected to close in the fourth quarter of 2019.

Now let's turn to our segments, beginning with wireline on Slide 16.

From a broadband perspective, residential revenues grew 2%, and customers are continuing to choose higher speeds of up to 1 gig in our fiber market.

In total, 28% of all broadband customers are now taking 100 megabit speeds or greater compared to 22% a year ago, driving a 4% increase in average residential revenue per connection in the quarter.

Wireline video connections grew 8% compared to the prior year.

Video remains an important driver of growth in our ILEC markets as we continue to roll out IPTV to more customers.

On average, our IPTV markets continue to hold about 30% video penetration with some markets nearing 50%.

About 80% of our IPTV customers are on triple play bundles as customers find value in taking all 3 services given the rural nature of our geographical footprint and the bundling pricing.

In addition, churn on these bundles continues to remain very low.

Our third quarter results highlight the success of our video strategy and its importance to our customers.

Our plans with regards to the cloud TV platform called TDS TV+ remains an important initiative.

We are now aiming to roll out cloud TV in the first quarter of next year after a successful test market is completed.

Looking at the wireline financial results on Slide 18.

Total revenues decreased 4% to $169 million.

Residential revenues increased 3% due to growth from video and broadband connections as well as growth from within the broadband product mix, partially offset by a 4% decrease in residential voice connections.

Commercial revenues decreased 9%, primarily driven by lower CLEC connections as we continue to execute on a strategy to maximize cash flow in these markets, which are coming under renewed pressure from deregulation.

Wholesale revenues decreased $5 million or 11% compared to 2018.

But as I mentioned earlier, TDS Telecom received an additional $4 million of retroactive A-CAM support revenue last year.

Wireline cash expenses increased 2% due primarily to increases in legal and consulting expenses.

We continue to see reduced cost of providing service for our declining legacy products, partially offset by higher video programming fees.

Employee expenses, while still slightly lower than last year, are increasing as we staff for our new fiber market.

All in, including the discrete items of A-CAM and legal costs discussed earlier that impact year-over-year comparisons, wireline adjusted EBITDA decreased 16% to $52 million.

Moving to cable on Slide '19.

Total cable connections grew 2% to $338,000, driven by a 7% increase in total broadband connections.

As a result, broadband penetration increased 200 basis points to 44% compared to the prior year.

On Slide 20, total cable revenues increased 8% to $62 million, driven primarily by growth in residential connections.

Our focus on broadband growth has led to a 6% increase in average residential revenue per connection.

Cash expenses increased 5% due primarily to additional maintenance in the quarter.

As a result, cable adjusted EBITDA increased 14% to $21 million.

In addition, EBITDA margin increased to 34% from 32%.

On Slide 21, we provided our 2019 guidance, which is unchanged from the guidance we shared at the beginning of the year.

We expect our revenue trends to continue and plan for growth in expenses as we ramp up to launch new fiber markets.

With some of the fiber construction delays we've experienced, we will be challenged to spend all of our capital this year and expect to be at the near to low end of range.

And in closing, I'd like to thank all of our employees for their continued efforts and look forward to updating you in February on our fiber construction and results.

Now I'll turn the call back to Jane.

Great.

And Jody, we'd like to open up the call for questions.

(Operator Instructions) Our first question comes from the line of Philip Cusick of JPMorgan.

And now you're just teasing, Ric.

Maybe we can dig into the wireless momentum during the quarter.

Can you take us, as granular as you can, through the months?

And what changed the things exited better and maybe a little bit of view on has September strength continued in October?

Yes, I would say that June, July -- July, August were just slow, okay.

What changed in September was everything from the launch of the brand refresh, which increased advertising as well as the impact of pricing changes that went in late in August to respond to somebody else's move.

So you had a double there.

The launch of the new iPhone was late in the quarter, had minimal impact, but we saw a carry through right through October just like September.

So it was notably different in terms of store traffic, everything.

And that was driven -- it sounds like more of a gross add issue, but churn was up quite a bit as well.

What's going on there?

What's going on is, if I look at total, we're still getting through the connected device stuff where inexpensive tablets put out a year ago come off their year commitment and people just don't keep those, and you'll continue to see that.

I think the modeling suggests through early part of next year.

Similarly, the watches.

Those 2 nice, they work well, connected to the phone.

Not seeing a lot of stickiness on the revenue side there.

So you're going to continue, I think, to watch us as an industry struggle with the revenue off of some of the, call them, connected devices, call them the accessories, right?

Where the core phone is right there and I don't need it, especially given the way some of the unlimited packages are structured that I can get at that data one way or another.

Right.

And then have you -- last quarter, you called that cable in terms of new competition.

Have you seen that continue?

Or has there been a little bit of a slowdown there since they've been in the market for a while?

I'd say that it's similar.

In fact, it's not increasing.

And then the -- and what it is, if you think about how that's priced, we feel the pressure at our very, very low end customer that isn't using about 1 gig or 2 a month.

Given that the pricing is very low, I'd definitely bundle it in.

It's not something that I'm interested in chasing right now.

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

I guess, our freaky Friday, Bill and I switched places like a Disney movie.

Halloween.

No.

I want to follow-up on some of Phil's questions there.

In prior quarters, you've also mentioned that you were starting to see some win back effort as cable moves in.

Can you update us a little bit on -- are you trying to win back those customers since they are lower usage and lower end customers?

The real low end, we aren't.

There's not a lot of value there.

What we are doing is specifically identifying any that may be more account related or ones that have greater usage where the value proposition that we offer is more compelling.

And we will continue to do that.

We've got an ongoing life cycle management program that we execute against.

Okay.

And Ken, I think in your prepared remarks, you mentioned positive adds in September and October for postpaid, was that postpaid phone or postpaid totals?

Both.

Both were positive in September and October.

So it's good to see the trend on positive postpaid phones.

Okay.

And that you had seen churn improvement later in the quarter with the refresh on the brand and the rate plans back down to a more normal level or just kind of closing the gap, just trying to gauge how much improvement the refresh and the rate plans have had.

You're asking at a level of detail that I don't have in front of me right now, Ric.

That's fine.

And when you talk about the new rate plans, how should we think about that trend on what it means to ARPUs?

Are you expecting that you've gotten aggressive to the point where ARPU upward bias given smartphones and unlimited would start flattening out?

Or is there still the ability to say, "Listen, we've got protection plans.

We've got unlimited.

We've got smartphones." Should we continue to see upward dynamic on ARPU?

Yes, I'm expecting to still, to continue to see the upward dynamic as we continue to manage the base, look at other services that we can put in there like the device protection or whatever.

It is imperative that we continue to grow that revenue.

And all our efforts are aimed at that.

That's what our plans are designed to do.

And Doug called out the change in the USF.

As far as those -- some of those USF fees being lower, both revenue and expense, did that start in the third quarter?

Or was that a previous quarter this year that, that happened?

We've had that all year, first 3 quarters, because it was a December last year event.

And so we'll see that again in the fourth quarter, then the year-over-year effect will go away.

Exactly.

That's [when we get to the lapping] time.

Okay.

And then 1 for Vicki.

Vicki, you mentioned -- called out $2 million I think you said in legal and consulting expenses.

What was that for?

Is that kind of one-off and you're done with that so we can get back to a more normal level, obviously, without the retro from 3Q '18?

Yes.

But both legal and consulting were onetime items.

Legal matter was a onetime payment to resolve commercial litigation.

Okay.

And then, Ken, I know you can't talk on millimeter wave, but any thoughts on the C-band?

You guys were joint signatory on an interesting letter that seemed to build a lot of consensus.

Any thought on can we get C-band action from the FCC this year and get some kind of move forward on an auction process next year?

I can only hope.

You talked about it last week.

I mentioned it here.

Yes, the industry needs mid-band, we need a lot of it, and we need a lot of it right away.

And anything that gets us there is something that we'll support.

If there's a better way to get it, to get more and to get it faster, we'll go there.

I really don't care how we do it.

We just -- I think it's just critical to get it and get it soon.

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

Just following up on Ric's point on C-band and mid-band spectrum.

One of the elements of the filing included reserve prices, and I guess there's always this question of if you have a nationwide reserve price or if there's something that reflects perhaps the greater demand in urban areas so that you're not having to pay the price that New York City might have as a reserve price.

So do you think there's an opportunity there for differential reserve prices, urban versus more regional markets?

And also, how are you thinking about CBRS playing into this mid-band spectrum?

Do you think that's a viable solution?

Or is that really just a kind of indoor and small cell?

And any thoughts on -- given the sort of numbers that are being thrown around by the -- on the satellite side of things, any thoughts about how you would fund your spectrum spend?

Okay, boy, lots of questions there.

Let's start with -- yes, I would fully expect that you'll see, like you have with all spectrum, different prices based upon the demographics of the individual markets that are being licensed.

I mean we all run economic models to decide how much spectrum is worth in various areas, and I don't think that would change.

With respect to CBRS versus the C-band, Mike Irizarry, CTO is in the room, and I'll throw the question to him in just a second, but we're interested in both, okay?

Generically, anything -- any spectrum is good.

But are they -- how are you thinking about it?

Yes, thanks, Ken.

Good morning.

Not -- CBRS is not, in our view, an alternative to C-band.

There's not enough of it.

And currently, the power levels are significantly less than what's planned for C-band.

So while it has a place in our 5G strategy, we view C-band as critical to offering high speed and capacity in the less dense areas.

Great.

And then funding?

Well, funding.

Well, we have in place multiple funding vehicles that have been untapped.

Peter Sereda, CFO of TDS, is actually in the room too.

Pete, you want to talk about funding?

Sure.

Yes.

So we've got a lot of cash on the balance sheet right now.

We've got an undrawn EIP receivable securitization that we put in place a couple of years ago.

So we've got ample capacity to enter that.

We've got open bank lines undrawn.

And we also -- worst case, we have adequate access to the capital markets.

So there's lots of sources for cash to do this.

And our next question comes from the line of Sergey of GAMCO Investors.

First question is for Ken on the tower front.

So I think last quarter you guys have mentioned that you've been working with an outside firm to market the towers to increase lease-up rate.

So could you update us on the progress on that front?

Have you seen an improvement in lease-up rates?

And also kind of looking longer term, maybe over medium term, how do you plan to maximize the value of your sizable tower portfolio considering U.S. Cellular operational priorities, but also taking advantage of a top 5 wireless portfolio in the country that you guys own?

Okay, Sergey.

I'm going to let Doug talk about kind of the progress to date.

Before I throw it to him, let me talk about the backside of that question a little bit.

We have entered into an agreement with the company to put more marketing efforts behind the power portfolio to lease it up more.

However, in doing that, I'm still going to be stubborn and say that, that work is subject to our engineering needs.

As we are doing our network modernization, we are once again moving all over the tower.

We're going with tower top amplifiers on some things.

We're putting MIMO antennas in other places.

And while there is value -- significant value in the towers, the fact of the matter remains that we've got a wireless business that requires us to control that real estate so that we can control the quality of the service, which is what the whole business is based upon.

But we -- but, having said that, we are continuing to try to get more revenue out of that asset.

Doug?

Right.

With respect to the new marketing arrangement, we're about 1 year into that relationship.

And overall, we're very pleased with the results so far.

Some of the accounting under the new arrangement is different and effects the financial statement comparisons, Q3 to Q3, as we work through the transition.

So on a comparable basis, the net contribution to operating income increased 5% year-over-year as it relates to our tower leasing business, and we're continuing to work on driving more growth in the future.

Thanks, Doug.

Great.

And just a quick follow-up on that.

What were tower rental revenues in the quarter?

And what was the growth rate?

$17 million in the quarter.

And the growth rate was -- it was higher than 8% -- or higher than 5%, sorry.

But as I said, it's not comparable based on some of the accounting changes that took place upon the transition to the new service provider.

Great.

Understood.

And another question on the U.S. Cellular side related to the buybacks.

So for the first time, I think, since 2016, you repurchased $21 million worth of USM shares in the quarter.

Could you talk a little bit about the main reasons for this?

Was it just valuation?

Or was there other aspects working?

And in terms -- you've had this program, I believe, since 2009, and you have remaining authorization to buy back over 5 million shares.

So given current valuation, should we expect yourself to get more aggressive on this buyback?

Well, Sergey, this is Peter.

So you know that this program is primarily designed for -- to offset dilution from options and RSUs and things like that so that we can continue to keep our tax consolidation.

So we will -- we have been in the market from time to time, we will be from time to time, to prevent that dilution.

So yes, I guess the answer is over time we will be doing that as situation arises.

Okay.

And the related question for you, Peter, on the TDS front.

So if we mark TDS ownership in U.S. Cellular to market, I think the implied valuation on TDS Telecom is below 3x EBITDA.

So given that valuation, will buybacks become a larger portion of your capital returns in the near term?

Obviously, taking into consideration your overall capital allocation plans, but also given the valuation -- the implied valuation of TDS Telecom.

Well, Sergey, we're not -- as we've discussed in the past, we're not happy with that valuation.

But the reality is, given all the projects that we're working on now, and Vicki talked about the fiber rollouts and everything, I think for the time being we're going to stay put on stock repurchase at the TDS level.

Okay.

And my last question is for Vicki on the cable front.

So obviously, you are in the process of acquiring assets of Continuum in North Carolina.

Could you talk a little bit about what attracted you to this asset?

How does it compare to your prior cable acquisitions?

And also, the company generated $21 million in revenues last fiscal year.

What kind of margins were they generating at that point?

Sure.

Good morning, Sergey.

Cable acquisitions continue to be an important part of our growth strategy in addition to our fiber deployment program.

And as I've talked about in the past, we specifically look for opportunities that meet our target criteria, which are, for example, underserved for broadband, attractive household market growth and a target market that demands premium entertainment services.

And so Continuum, which serves customers just north of Charlotte, North Carolina, meets these criteria and at the same time has a culture that focuses on providing outstanding customer service, which I think aligns really well with TDS' long-standing mission.

So it was just really a great fit.

Continuum has an upgraded network and is offering up to 500 megabit speeds, and in some areas where it has fiber in place, it's offering up to 1 gig speeds, and that's about 10% maybe of the footprint.

So we're really excited to have Continuum join our family of companies.

And when we close, we'll have more information for you about the numbers that we're looking at for guidance next year.

(Operator Instructions) Our next question comes from the line of Zach Silver of B. Riley FBR.

Okay.

I just had 1 for Ken.

You guys towards the end of last year flagged an opportunity to use both the -- to edge out some of the markets, I think you said it was about 500,000 POPs.

We're coming up on the launch of that.

So can you reframe that opportunity for us?

And whether anything has changed on that front in terms of how you see the opportunity and also the timing of that?

Yes, Zach.

Specifically, what you're referring to (inaudible) we had licensed areas immediately adjacent to our current footprint, primarily Northern Wisconsin and Sioux City, Iowa.

We continue to build out those areas.

A couple of zoning challenges probably push us back to the first quarter of next year, but those zoning challenges are behind us now.

And we're continuing to make progress, working on distribution as we speak.

So I'm still excited about the opportunity.

We're probably -- it's going to slip about 3 months, it looks like.

Got it.

And then, I guess, more of a high-level question.

Just with the launch of 5G in a couple of markets coming up, I think someone asked this a couple of quarters ago, but just high level, any updated thinking about how we'll monetize that technology on either the residential or commercial side?

So what's really fascinating to me at least around 5G march that we're on here in the U.S. was a year ago, it was all about use cases and business to business.

And all of that revenue is really long lead time revenue.

The amount of time it takes to bring a city along, a town even along is not measured in months.

And what you've seen in the last year is really the consumer market drumbeat around it.

And of course you've seen a couple of attempts at pricing there, but it's not been real clear that people have unlocked how to capture some of that value.

So that's a watch point.

Now for us, the use case that is consumer and that we're very interested in is the fixed wireless.

And we've been doing that with 4G today, and the capacity pickup that we get with 5G I think lets us compete even better there.

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

Two questions, if I could, please.

The first one is, when you look at your wireless business, it's a portfolio of markets.

Can you share with us just high-level observations of whether you're seeing differences in certain market areas and performance in terms of subscribers and revenue growth versus other areas and maybe what are the common characteristics of where you're outperforming and underperforming?

And then just secondly, just taking a step back, are there opportunities -- strategic partnering opportunities that you see that may be some have used in the past that might be an opportunity for U.S. Cellular and/or TDS to revisit as you think about the dynamics of the industry moving forward.

Thanks, Mike.

Yes.

So with respect to the first one, you're right.

It's a portfolio, just like everybody has a portfolio and different markets have different either underlying economics or different competitive positioning, or in our case, different spectrum and coverage properties.

So there are some markets in our portfolio that are much higher than the 10% prepaid rate that we talk about as a company average, okay?

So there are also some where it's very, very tiny.

And we have historically seen, as an example, very, very strong bad debt results out of what I will call the Mid-America farming markets and your prepaid markets have got the higher churn.

So yes, there's a lot of differences across the portfolio.

And we deploy different strategies to maximize the ore out of what I call each one of those mines.

So in some places, we push prepaid because that's what the economy and the customer base in that market wants.

With respect to looking at how else do you build value in the operation, we are always looking at that.

And as the landscape changes in this industry, potentially again, assuming certain transactions actually move forward or maybe they don't and there's opportunities there, we are looking at analyzed discussing how else could we either use our network or partner up and serve some other network needs.

So yes, we're -- in order to get this where I'd like it to be long term, we need to continue on revenue and cost and that doesn't necessarily have to come out of just our consumer market.

And so when you think about things on a strategic front, is it that the -- some of the transactions or the proposed wireless transaction that's out there is -- until that gets resolved, it's hard for you to take any steps forward strategically, is that the issue right now?

Well, until it's resolved, the interest or the ability of other parties to commit is muddy at best, right?

I mean everybody's got to see where all the pieces fall so you can decide what's the next best move, and everybody is looking at the same board, saying, if this happens, go this way, but if that happens, maybe you go a different way.

We're still waiting for that.

There are no further questions at this time.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.