Telephone and Data Systems, Inc. (NYSE:TDS) Q3 2023 Earnings Call Transcript

Another important highlight this quarter is that TDS Telecom elected to participate in the federal enhanced ACAM program in 24 states. This program will provide us with revenue support through 2038 in return for us delivering increased speeds of 100 megabits down and 20 up to about 270,000 locations. As a reminder, the existing ACAM program provided $82 million a year through 2028. The new program increases the revenue amount to approximately $90 million per year beginning in 2024 and extends to 2038. Therefore, we expect to receive a total of about $1.3 billion of E-ACAM revenue support over the next 15 years. We anticipate this program will help to accelerate the delivery of higher speed broadband to various rural high-cost areas that we serve.

This is a fantastic outcome for TDS Telecom and our customers. Now let’s jump into our quarterly results starting on Slide 15. As you just heard with our successful fiber service address results, we have increased our fiber service address goal to 200,000 this year. We are really proud that we have developed a strong competency in managing builds and navigating challenges. Longer term you can see where we are and our scorecard. We are targeting 1.2 million marketable fiber service addresses by 2026. We ended the quarter with 709,000. So we’re making good progress. We are also targeting 60% of our total service addresses to be served by fiber by 2026. We ended the quarter with 44%. This reflects progress in growing fiber through our expansion markets, as well as fibering up our incumbent markets.

Specifically by 2026, we plan to serve half of our ILEC addresses with fiber. At the end of the quarter 40% of our ILEC with fibered up. And finally, we are expecting to offer speeds of one gig or higher to at least 80% of our footprint by 2026. We finished the quarter with 69% at gig speed. We continue to believe these long term targets are achievable. Although our address delivery numbers may fluctuate from year-to-year, depending on a number of factors, our 2026 goals remain front and center throughout the organization. And we are pleased with the results of our fiber builds to-date. We continue to achieve the broadband penetration that are projected in our business cases. On Slide 16, you can see that we are growing our footprint with an 11% double digit growth in total service addresses year-over-year.

Shown on the graph on the right, we see increasing demand for higher broadband speeds, with 75% of our customers taking 100 megabits per second or greater, up from 69% a year ago. We continue to increase the availability of gig plus speeds and we’re now even offering 8 gig speeds in certain markets. Customer take rates of these speeds are growing with 14% of our customer base on 1 gig or higher at the end of the quarter. Our broadband investments are driving positive results, including a 10% increase in total residential broadband revenue. As shown on Slide 17, we experienced a 5% increase year-over-year in total broadband residential connections. Average residential revenue per connection was up 3% due to price increases in product mix partially offset by promotions.

As shown in the chart on the right we had another quarter of 4% growth in residential revenues, with expansion market residential revenues increasing to $20 million in the quarter. This aligns with our expectation of steady revenue growth following the timing of service address delivery as penetration ramps in these new markets. Residential wireline incumbent and cable revenues were flat as a decline in video and voice connections was offset by price increases in growth and broadband connections. Our wireline incumbent, which includes our ILEC market is facing increasing competitive pressures. We consider capital prioritization and expected economic returns as we respond to competition in select ILEC markets with fiber builds. The E-ACAM program will provide funding to help us defend these markets.

As expected, commercial revenues decreased 12% in the quarter, primarily driven by lower CLEC connections. And lastly, wholesale revenues decreased 3% for the quarter, primarily due to lower special access revenue. On Slide 18, you can see our quarterly performance. Operating revenues were flat in the quarter as the growth in residential revenue was offset by the decline in commercial and wholesale. Cash expenses decreased modestly in the quarter. This decrease is a result of our intense focus on cost efficiencies and disciplined spending. As a reminder, the expense results shown here include the cost to initially launch our fiber markets, which are incurred upfront and prior to generating revenues. Adjusted EBITDA was up 3% in the quarter as a result of the decrease in cash expenses.

Capital expenditures of $172 million were up modestly from the prior year due to our investments in fiber. Keep in mind that these investments support our multi-year strategy and our goal of increasing free cash flow and return on capital over the long run. Slide 19 shows our 2023 guidance. We are keeping our revenue guidance range unchanged from last quarter. Although we expect to be towards the low end of our range of $1.03 billion to $1.06 billion. Even though we are expecting to deliver more fiber addresses than originally planned this year, the majority will be launched in late 2023 and it will take time for penetrations and revenues to build. Adjusted EBITDA is expected to remain between $270 million and $300 million in 2023. As we look forward, we are still on track to have our expansion communities launched this year.