Array Digital Infrastructure, Inc. (AD) Earnings Call Transcript & Summary

And with us today, we have Ted Carlson; Vicki Villacrez; Doug Chambers; and Jane McCahon from TDS and U.S. Cellular. Thank you all for joining us this year at the conference.

Thank you, William.

Thanks for having us.

Thank You. Maybe just to kick it off with some overall questions that we started a lot of these sessions with the topic of 2020 being COVID. Just overall, maybe for you, Ted, how have you seen COVID affect the overall TDS business? And any specific changes or changes in behavior for the broader telecom sector that you see related to COVID that are worth highlighting.

Well, I think COVID-19 has really made clear the importance of the services that we provide to our customers and, of course, to their families. And then to the businesses and institutions like schools, libraries and hospitals and local governments and the communities we serve. The wireless and wireline internet availability are both essential services that all participants in our greater society rely on. And voice, video and text or data are all essential. And since these services are even more essential when people are working from home or going to school at-home, the customers have tended to increase their speeds and the data allowances that they want. And the customers, in addition, have reduced their bad debts and their propensity to churn. I think that COVID, from a business standpoint, in terms of our internal operations has shown us that we can successfully conduct most all of our business remotely, with many of our own team members working from home. Our enterprise was prepared from an IT standpoint, very well prepared. And within a matter of weeks, was able to accommodate many, many of our team members from -- for working at home. Those team members who do not physically have to interface with the customers. Because of the national recognition of wired and wireless broadband, as being critical to our society and essential to how we live our lives, I think, there's considerable enthusiasm, and I hope it continues, in Congress, to close the digital divide, the divide that exists today between rural and urban areas and, of course, between lower-income and higher-income areas. So those are some of the things that I would point out. I think that, if anything, this pandemic has highlighted how important broadband is to our national success and our national togetherness, if that's the right way to think about it. But as a nation, I don't think we can function well together unless we have both wired and wireless internet delivered to almost everybody on a high-quality basis.

Thank you, Ted. As we just think through each of your business segments, maybe if you or Vicki, you want to comment on, in particular, how have you seen the consumer side on the wireline versus enterprise versus carrier segments hold up? And then maybe a similar question for you, Doug, on the wireless side as well. How have you seen customer behavior change, if at all, over these last, call it, 9 months in this COVID period?

Sure. Absolutely. I'll jump in here. This is Vicki Villacrez. Good afternoon, everyone. As Ted said, the pandemic certainly has underscored the importance of broadband, especially in the home. And at TDS Telcom, we're seeing an acceleration of broadband adoption across our markets in wireline and cable. During the third quarter, we reported significant broadband growth, 8% and 9% growth in broadband connections on a same-store basis over the third quarter. And this is -- this adoption and growth is coming from the accelerated adoption in the home, as Ted had talked about, a significant portion of the U.S. has now moved to a work-at-home environment. And at the same time, we've been seeing growth in our video connections as well as a slowing in cutting the voice chord as low as 2% in the third quarter. From a commercial perspective, for us, commercial is primarily small business customers. We've not seen elevated churn. But right now, this is a watchpoint as we are watching our commercial customers and their ability to sustain and survive during this pandemic. We've also seen in the business, a reduction of costs during this pandemic. We have significantly lowered our spending from lower travel and entertainment, office expenses, building expenses and higher productivity. This has also accelerated a focus on customer self-serve and remote assistance techniques. So now we are seeing more customers using online support, again, underscoring the importance of broadband connectivity across both in the home and in the business.

That's very helpful. I appreciate it, Vicki. And Doug, maybe similar question to you on the wireless side.

Yes. Sure, William. From the wireless side, talking about consumer, it's been largely neutral. Store traffic has been down due to the pandemic as well as the switcher pool. By the same token, our churn has been down as a result of that. So our consumer pool has held up very well. On the business side, it's in a net positive. Business and governments, schools have been adding hotspots and routers at a rate that certainly exceeds the prior year and reflects the conditions of the pandemic. So gross additions and revenues in the business side have really benefited from COVID-19. And from the carrier side, for us, that really means roaming and inbound roaming. And that's been a negative overall from the pandemic less customers are roaming into our territories from other carriers. We have a number of other things going on within inbound roaming as well as the Sprint, T-Mobile merger where Sprint is migrating traffic to T-Mobile as well as just general rate decreases, which we also get a benefit on the outbound side. Lot of our agreements are reciprocal. So we're also realizing an expense saving from those rate decreases. So net-net, we've added postpaid connections during 2020. So that -- when you blend that all together, COVID-19 has not had a negative impact on our customer additions, and we've had a positive impact throughout the year. On the P&L side, the other thing I would highlight is, we have got a very good experience with bad debt expense. Bad debt expenses, well below prior year, below our expectations, the pandemic has caused consumer savings rates to rise, the federal stimulus upfront employment, certainly, help. Customers are paying their bills. We have less write-offs, and we're really seeing the benefits of that.

That's very helpful. Thank you, both. And as you think about some of these trends, taking a step back on expectations for '21 and going forward, as we -- vaccine comes out, economy continues to reopen. One of these -- do you have a sense of what's more temporary versus, what do you think potentially is the beginning of a new normal on some of the trends that you're talking about?

Well, let me just jump in here at the beginning and let Vicki and Doug amplify it. I think that people having realized how important both wireless and wireline broadband is, I think, we may see a permanent step down in the churn rates on the wireless side and in the bad debt rates on the wireless side. And I think that once people have subscribed on the wireline side, where they didn't subscribe before, they've taken higher data packages, I don't think they're going back. But those are some initial impressions from me. We ought to hear from Vicki and Doug.

Yes. I think that from a long-term impact from COVID, I think you're seeing new and emerging trends that are coming out during COVID that will stick long after the pandemic is over. For example, you're seeing the acceleration of broadband adoption, certainly. And I think if you're a fiber company, you're going to be perfectly positioned to take advantage of that growth. And with the pandemic, more and more people are working from home. And I see that trend continuing. I think that people are learning, companies are learning, businesses are learning that they can operate more effectively and efficiently in some areas of the business in a work-at-home or a virtual environment or a less-costly environment. And so I think you're going to see that happen. Also, there is a migration of population. People are moving out of cities, people are moving from the Coast inland. People are moving to more rural areas where they have recreation, outdoor recreation and living space in their own backyard. And I think that at TDS, we're perfectly positioned to capture and leverage that growth from those new and emerging trends.

Yes. I would just highlight, in addition, maybe the one that's front, center and the obvious one is just the acceleration of the importance of the digital channel. That's been an evolution for years. COVID just accelerated that and really has made a lot more customers more reliant on the digital channel permanently. So when we think of all the -- we have a digital channel, but like everybody else, it's a journey. And we have a lot more we need to enable wireline, pickup, in-store, allowing for self-activation, changing device ownership online between account lines. And so we have shifted some of our investment in 2021 to invest more in our digital channel because further enablement of that channel is just so critical, while we're in the pandemic and as we emerge from it. So that's really, I think, a key action stuff for us coming out of the COVID-19 pandemic.

Thank you. And then someone along those lines may as you think about... [Technical Difficulty]

That's me. Sorry.

No worries. As we think about the competitive intensity of this past year, have you noticed any differences versus prior years as well as tied to that sort of expectations going forward?

Well, from an enterprise standpoint, I would say no, but I think that again, Doug and Vicki should answer for their respective businesses.

Certainly. I agree with Ted. We are really pleased with our results so far this year and especially in the third quarter. We reported both top line and bottom line growth on a same-store basis in the mid-single digits. And as I talked about, we grew our routing connections at the high single-digit rate. So we were really pleased with those. And we're seeing customers picking higher speeds, and this is driving our average revenue per connection. From a competitive standpoint, I think the competitive intensity is really around the landscape for deploying fiber. It's more about the velocity and the speed to market right now, as I talked about, broadband adoption is accelerating. So we're keenly focused on other fiber over builders and where they are going. For us, market selection is a key success factor for us as we think about the new fiber markets we're going into. And so that's where our [indiscernible].

Yes. The wireless side, I don't know if I'd characterize. I don't think I see a change in competitive intensity. It was very high last year. It remains very high. We're used to competing in a very highly competitive environment. As I indicated earlier, we've grown our postpaid connections during 2020. We've grown our ARPU. So we're very pleased with the way we're competing. Obviously, 5G is a new competitive front. We will have 5G over low-band in all markets by the first quarter of 2021. So we're competing well with respect to rolling out 5G and feel really good about that. And yes. I mean, it just remains a very competitive environment, and I don't think that's really changed from 2019 to 2020.

Prefect. Thank you both. I mean maybe, Doug, just sticking with you for a few minutes as we talk about wireless and then particularly around 5G. You mentioned -- I thought you just said the rollout of 5G over low band in all your markets. But when did you say, end of Q1 next year?

Yes. We'll have it in all our markets by Q1 of 2021, and that set ubiquitous coverage to all our markets, but there'll be a 5G presence in all our markets. And we're focused on the highest traffic areas first, then expanding out from there.

And then just how do you see overall the time line for full rollout of 5G over the next few years in your types, and more rural markets?

Right. It's multiyear. We started in 2019 over the low band. Continued in 2020. That will continue for 2021 and beyond. And we have the layer cake strategy that our competitors too are aware. We're also rolling 5G out of 1 millimeter-wave. We're starting that in 2021, including doing fixed wireless trials and learning about that product. And eventually, we believe big band is important to the portfolio as well. So it's really a multiyear 5G strategy, and it's about having a robust 5G product, in rural areas, in dense areas throughout our footprint to provide speed, capacity, coverage. And remember that 5G also reduces the cost per bit. So it's a key enabler from a cost standpoint as well.

That's helpful. I mean, how overall do you feel about -- as you continue this rollout in relation to how do you feel about your spectrum position to enable all of this?

We feel like we're in a really solid spectrum position. We obviously at the low band and are rolling that over 600 megahertz. We acquired significant millimeter-wave holdings in the recent auctions. So we have a nice portfolio there. Just a little bit of CBRS, and we were in a quiet period with respect to the upcoming Auction 107. So I can't comment on that. But we feel good about where we're at. There's more work to do, but we're in a good place.

Got it. And then along those lines, I mean, with 5G continuing to roll out, how do you see it potentially impacting the ARPU trends within the business?

Yes, that's a good question. A lot of unknowns there. I don't think there's an obvious pass -- path upward for ARPU, but there are -- there's some potential there that it could take that path. What we're focused on right now is through the combination of our mobility business and moving people up the value stack that we offer there. Our fixed wireless product, head office, with other opportunity, with certainly ARPU opportunities, with increasing penetration on our device protection plan. We still have more feature phones. We can convert to smartphones. So we have a lot of ARPU opportunity. We also were under-indexed in the business and government. We think there's a lot of opportunity to grow our base in that sector. We also have a lot of opportunity in prepaid, where we can grow our market share of that product, which we also believe is under-indexed as far as where we could be. So we have a lot of service revenue opportunities. ARPU is just one component of that. And I would say, my assessment of how much ARPU comes from 5G is really uncertain at this point.

That's helpful. I appreciate all that color. And then maybe lastly, just you mentioned fixed wireless a little bit. Can you just talk a little bit about the fixed wireless product you're rolling out? How do you see it complementing the broader portfolio?

Sure. And so I just want to point out, flag it into that. We already have a fixed wireless product over 4G LTE that we offer in areas that -- it's primarily a product that appeals to customers that don't have access to cable or fiber, and we can deliver 4G fixed wireless access. And small upgrade of our revenue base, but it's growing nicely, and we'll continue to offer that. The millimeter-wave fixed wireless product, again, we're doing trials in 2021, so we can learn from that, in 3 markets. We're going to be competing against cable, so we're going to see how effectively we can do that. The really nice part about the private is that, it's going to ride off of the mobility investment we're making in areas strategically. So that we don't have a certain hurdle rate for our market penetration we need to achieve. The contribution margin for customer one is already going to be fairly high based on the investment we're making for mobility anyway. And that will really help the business case for fixed wireless access in various markets. And like I said, 2021 is going to be a year of learning, and we're going to leverage that to see how far we take the product.

That's very helpful. I appreciate the color there. Maybe switching gears a little bit to Vicki and TDS Telecom side of the business. Can you maybe talk a little bit. Hey, you mentioned earlier on the fiber expansion strategy. Can you just give us some color on what's transpired within 2020? What your plans for that are in 2021 as well?

You bet. We've been very pleased with our fiber expansion strategy. It's both fibering within our footprint and then fibering outside of our footprint and entering into new markets. And that's really been our growth engine that we've seen, and it's been a big part of driving the results that was included here. And over time -- we're very bullish on the strategy. And we like it. We have embarked on a growth strategy that involves buying cable acquisitions and we certainly still are looking at any and all cable acquisitions that might be a strategic fit going forward. But we really like the fiber going for their expansion into new markets because it's something -- it's a growth strategy that we can pay investments in and we control and we can choose the markets we enter, and we could build a beautiful fiber network from the ground up. And so this year, we're positioned to deliver probably about around 70,000 to 75,000 new fiber service addresses. Our goal is to try to double that, more than double that next year. And so we've just embarked on this strategy over the last couple of years. As I look at the successes, we've got a number of successes already under our belt, wealth and our initial pilot markets. We're nearly completed with our Central Wisconsin -- Wisconsin cluster that centered in Dane County, Wisconsin, near our headquarters. [Technical Difficulty] with our current ILEC book and we are very pleased with the results. We're seeing anywhere from the 30%, 40% and up to 50% broadband penetration in some of those markets. And so it's meeting our threshold for making these investments. We've also are well on our way with construction, other cluster, Central Wisconsin as well as new markets that are out in the state of Idaho and Washington. So Spokane, Washington and Coeur D'Alene, Idaho, Meridian, Idaho. Those are growing markets that are very attractive and meet our criteria for growth. So we're really excited about this opportunity.

That's helpful. And I thought I heard you mention, can you maybe just repeat again. What have you seen in the penetration in some of your earlier markets, reach?

Yes. So certainly in our trial market and then another market that's already been up and running fully launched in 18 months. We're seeing near -- just near and over 50% broadband penetrations in those markets. Our earlier markets that are 9 months to the launch time frame, they're ranging between 30% and 40% broadband penetration.

That's great. Thank you for that. And how -- maybe just as we think about it, I mean, how big of an opportunity could this be? I mean it sounds like you're ramping it up aggressively with nearly doubling the homes passed. That you mentioned for next year, just overall, I mean, how big of an opportunity -- can you help give us a sense of just how big of an opportunity this could be for TDS?

Well, the U.S. has a long way to go before it -- the U.S. has only got about 30% of its footprint fibered up. So there's a lot of opportunity out there. And so it can be as big as we want to make it. We have been working to scale up our business. We've been working to scale up our ability to construct at a faster pace. Last year, our capital investment was more than 3x the year before. And this year, we're going to exceed what we spent last year. So I expect that we'll continue to be on this path for some time as we continue to hit these financial results that we're expecting out of these investments. We'll continue to do this. I mean, over time, we'd love to see this as a meaningful game changer for our business and transforming our business, and I'd love to see us more than double our business over time.

That's great. And then -- sorry, go ahead.

I was just going to add one other comment about the strategy that's really important and that is the concept of clustering. Market selection is really important to the success of this strategy. And we're selecting markets that are not only growing and have -- and are not currently served by fiber today, where customers don't have a lot of choice for good superior services. We're looking for markets that have a clustering concept. And so where there's one, there's several more growth expansion so that over time, we can edge-out in existing clusters as well as establishing new footholds -- a whole new geographical foothold.

Appreciate that color. And as you just think about continue shifting more of the base to fiber or more of your sub mix to fiber, how do you anticipate that affecting the ARPU going forward, your ARPU rates going forward?

If you just look at the results for this year, our revenue per connection has been on a trajectory of growth in the mid-single digits, driven by both price increases and higher product mix. Price increases because we are providing a very superior service. And the higher product mix, more customers and certainly accelerated with the pandemic, more customers are taking higher broadband speed to meet their growing broadband needs. And I expect that -- I really expect that to continue. Just for example, I guess, just to illustrate, for example, across our wireline residential base, 38% of our broadband customers are now taking 100 megabit speeds or greater, and that's 31 -- compared to 31% a year ago. So we're at across our entire wireline footprint more than 1/3, we were at the [ 34% ] of our service addresses are now fibered up. And what that means is in our fiber markets, we're offering 1-gig speed. And that continues to now be a growing product for us. Over 12% of our customer base is now taking a 1-gig product.

Got it. No, that's incredible take-up and penetration within that. I mean as you just think about, the overall competitive dynamics, clearly, you guys are expanding. Have you seen any shift in what other carriers are doing in some of your legacy footprint? Have you seen people encroaching and looking to overbuild you? Just any comments along that? And I don't know if that's for Vicki or Ted, if you have other comments along those lines, let us know.

Well, I would say that we certainly are watching fiber overbuild move, just as we're making these moves. And as we look at our legacy ILEC, many of them are very, very rural. In fact, our competitive footprint, 30% of our wireline footprint does not have cable competition. And so as we watch that, we are watching and we do have some fiber overbuild activity, but it's very, very small. And where we can't upgrade with fiber or make the economics work in those markets, we compete on price.

That's helpful. And then -- and maybe first to you, and then we'll ask the same question to Doug. But Vicki, I know you mentioned the increase in CapEx spend this year versus last year. Just any comments on how you see your capital spend evolving over the next few years? As it sounds like you continue to have a massive expansion opportunity for these fiber build outs?

We have every incentive, every incentive to generate as much cash flow as we can and to reduce maintenance -- maintenance or legacy spending in certain places to put it -- redeploy back into fiber. We need fiber in all our markets. And where we can make the economics work and we can get smarter and better about that, that's our incentive. As Ted talked about, over -- everyone needs better broadband connectivity to be successful. And so we feel very strongly about that mission, and we are working with the federal government. We're working with the state and in places where we can't make the economics work today to upgrade the copper facilities or to roll out fiber. We are partnering and getting support and help to do that because we are committed to bringing the best broadband service we can to all our markets.

And then, Doug, maybe a similar question on the wireless side, how do you see your capital spend evolving over the near and medium term?

Right. So we're in an investment cycle here with 5G, as we talked about earlier. And certainly, higher expense in 2020, 40% of that was related to 5G rollouts, and we are completing our VoLTE rollout in 2020. So that then goes away in 2021 for the most part. And we expect, again, this 5G rollout between low-band and millimeter-wave and potentially mid-band the last several years. That being said, we're also focused on capital efficiency and doing that rollout in a measured way, so we can manage capital in a rational manner. So I would say that's how we look at it. We're certainly focused on getting 5G out to our markets being competitive, but also doing it very capital-efficient way.

I appreciate it. And maybe just overall for both of you. As you think through the M&A strategy, obviously, TDS has been a prolific acquirer over the years. It's -- any comments on the M&A strategy going forward?

I'll jump in.

I'll just make a comment.

Okay, Ted.

And then Vicki and Doug can answer it. I think there is an opportunity for us to acquire more cable companies. We really like what we've been able to acquire are the ones we've acquired, have been in high-growth areas, a lot of single-family homes. They are doing very, very well for us. And we like to acquire more properties like that. Now there are not many like that, that come to market. And of course, when they do come to markets, there's other people that want to buy them. So -- but we'll be in the mix because we like what we're doing in the cable world. On the wireless side, I think there might be an opportunity for some of those companies, smaller companies that acquired equipment from the Chinese vendors. And as you know, those vendors are off-limits now. And that's the equipment is going to have to be replaced. So there's a decision to be made about, should we stay in because we don't have the advantage that we had before. Now some of the equipment from the Chinese vendors was priced 20%, 30% below what they could have been bought for, without equipments could have been bought for from others. So that business model has changed. So that might present some opportunities in the upcoming months or years.

I appreciate that. And then maybe along these lines, sort of how do you think through M&A in relation to other uses of capital? It sounds like there is significant opportunity for organic investment, inorganic investment, but also other return of capital strategies, how do you think through all of that?

Well, we're a disciplined buyer. And Vicki should talk about how she looks at cable acquisition versus additional fiber investments. On the U.S. Cellular side, we have not only opportunities to -- well, not -- I shouldn't call them opportunities, they're necessity, right, to invest and roll out 5G, but we do have opportunities there to invest in building more towers, and Doug might comment on some of those opportunities.

Certainly, from -- on the acquisition side, whether you're buying or you're building out fiber, our discipline -- we're very disciplined, as Ted said. And our discipline and due diligence is the same, where we do the research into the market, we visit the market. We walk the market. We build detailed business cases with DCF models to make sure that we can earn a return. So whether it's an acquisition or making a longer-term investment into fiber deployment. We're looking at the return on the investment. And that really -- that discipline guides our decision-making.

Yes. I would say for towers...

I'm sorry. And I would just comment and close that up by saying that at the -- we're a long-term investor, and we are building value for the long-term with all of the investments we're making.

Yes. We think that the towers, in our strategy when we build out our network is we always look when we're putting a new cell sites, for coverage or capacity is to build first, that's our preference. The long-term economics are generally better for a build. It also affords the opportunity to lease that space to other carriers as well. So that's a revenue opportunity. So that is our focus. We're not always able to build, go where we can, we do that. And in addition, we're looking -- we have a lot like other wireless carriers, we have a lot of higher rent sites right now that we lease, and we're looking for opportunities to over time get off some of those and build our own towers to defray those costs. So we're really bullish on our tower portfolio and looking for opportunistic ways to expand that.

I appreciate it. Maybe just along those lines, Doug, are there any -- do you have a sense of -- with the continued rollout of 5G, what does that mean for the tower portfolio? Is there meaningful additional bills that need to occur to support that? Or generally, are you comfortable with the tower portfolio you have today?

Well, that partially depends on how the spectrum portfolio looks a year, 2 years from now. So we're certainly comfortable with the tower portfolio we have and lease sites, but that's an ever-changing landscape. So there's cases we need to densify for capacity and coverage, and that will continue to be a trend. So I think it's always evolving, and there's always the need for more sites every year. It's just a matter of how many. Now that's the cost for us, but also an opportunity as carriers are looking for additional sites, that's a lease-up opportunity for the towers that we own. So yes, there's 2 sides to that.

Understood. And maybe just we'll end it. Ted, any final comments for you just on the overall plan sort of over the next few years, how do you continue to see the broader TDS and telecom landscape continue to evolve?

Well, I think that notable is the shift for more growth at U.S. Cellular, LT, Therivel who is our new CEO, has made that a central part of his mission. The other piece of that, of course, is improving the return on capital at U.S. Cellular. And that also is central to this plan for U.S. Cellular. So those, I think, are very good things for the business. And we explain the U.S. Cellular very good set as it continues to have a great network, roll out 5G and have what we believe is the best culture, the best customer-focused culture in the industry. On TDS Telecom side, we have a great opportunity. It's a national opportunity. We're not going to take care of all of it, the fiber of the United States. But we're going to pick areas that we think are very attractive, and fiber them up really well and get high penetration rates. So we're enthusiastic about that, but we can't do it all. So there's plenty of room for others in the fiber world, too.

Excellent. Appreciate it. And with that, I'd like to thank you all for participating this year in the conference and looking forward to continuing this discussion next year.

Thank you.

Thank you, William.

Thank you.