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

Hi, everyone. Good morning. I am Mark Schilsky, Citi's TMT sector specialist. Obviously, not Mike Rollins. I'm pinch-hitting for him today. Welcome to day 2 of Citi's Global TMT Conference. Today, we're going to be talking about TDS. We've got Kris Bothfeld, the CFO of TDS Telecom, and I've got Doug Chambers, Interim President and CEO of the newly minted Array Digital Infrastructure. So we're talking about both companies today. Thank you, both for coming. The deal, the T-Mobile, U.S. mobile deal closed August 1. So we've been about a month past. So Kris, if you want to give us a quick update, just remind everyone what happened, you learned anything in the incremental month since then, and then we'll take it from there.

Yes. Maybe I can take that one. That impacts our business more so. So as Mark said, we closed the deal with T-Mobile to sell our wireless operations on August 1. Array always a tower business embedded within our UScellular wireless business. Now we're a separate Array business. We own 4,400 towers. We're the fifth largest tower company, and we are solely focused on towers at this point. And we are very operationally focused right now. We have a lot of exciting opportunities ahead of us operationally and 4 key areas of focus. One is we have pending spectrum sales, $1 billion sale with AT&T, $1 billion with Verizon, focused on getting those through regulatory approval and close, we're confident we'll do that. We have remaining spectrum. We have -- we sold 70% of our spectrum through deals that have closed with T-Mobile or the pending deals I just spoke of, but we also have remaining spectrum, including C-Band. We're going to -- we are opportunistically monetizing that. We're ensuring that we extract the maximum value we can. We have time. The C-Band does not have build requirements until 2029 first build, 2031 second build. So we feel good about the fact we're well positioned to sell that spectrum and have time to do it. Third thing, colocation growth. So we're doing quite well from a colocation growth perspective. In Q2, we grew revenues 12%. Some of that's application fees, even taking that out, we grew revenues 7%. Our colo apps in the first half of 2025 are up over 100% year-over-year. We're doing really, really well operationally. From a colo growth standpoint, we brought sales in-house in the fourth quarter of 2024. It's been a huge tailwind with respect to customer relationships. We have MLAs with all 3 major carriers. We're very easy to do business with. And of course, the other thing with colo growth is T-Mobile has committed to 2015 colocations with us. And we're currently working through that with them. That's a lot of work for me and my team. It's great work. It's going to increase our cash revenues in the order of magnitude of 50% from the level where we are now. So very excited about that. And the fourth thing I'll say is we're really focused on our ground leases. One is in the normal course, buying that land, gaining control of it as well as extending our leases. It's always been a focus. We're doubling down on that. The other opportunity we have is because of the fact we're no longer a wireless carrier, and after T-Mobile completes their integration, we will have between 800 and 1,800 naked towers, that gives us the opportunity to go to our landlords, seek rent abatements, sequence rent reductions. We're going to do that. And after we finish that process, we'll have optionality as to what to do with the naked towers, hold on to them for future co-locations, we may decommission some, sell, give away. That really depends on where we end up with our rent abatement program. So operationally, a lot in front of us, but a lot of great opportunities and things are going very, very well for us here in 2025.

And then -- so at TDS Telecom, we're on a path to transform into a fiber-centric company. And earlier this year, we came out with new bold fiber goals. So we're planning to double our fiber footprint from where we ended at the end of 2024, around 900,000 addresses to 1.8 million addresses over the next roughly 5 years or so. And just yesterday, we passed a really significant milestone for the company as we transform into a fiber company, and we surpassed 1 million fiber addresses. So there's only a handful of companies in the U.S. who have passed this milestone, and we're really excited and really excited about the momentum we have with this program going into the second half of the year.

All right. Perfect. Doug, let's continue with you. So you mentioned spectrum sales, AT&T, Verizon, you even have some that has not been sold. Can you talk about the timing for that, the level and then when those deals are done and what are you doing with the cash?

So the AT&T deal, $1 million, we expect it to close before the end of this year. The gating item is regulatory approval from the FCC. As I mentioned, we're optimistic we'll receive that. And we do expect our Board of Directors to declare a dividend, a special dividend after that AT&T sale. The Verizon pending spectrum sale, that's also $1 billion spectrum sale. We expect that to close in the third quarter of next year. That sale is -- needs the T-Mobile spectrum lease we have in place for a year to expire. So therefore, that one needs to close later. When we receive that $1 billion, which we expect, we also expect our Board of Directors to declare a special dividend for those funds. And so similar to the T-Mobile deal we just closed in this year plus span, we're returning a lot of funds to shareholders.

Right. And then you still have a chunk of spectrum left to potentially sell?

We do. And it's -- as I mentioned in my initial comments, it's primarily our C-Band spectrum. And we feel really good about the marketability of that spectrum. It's beachfront, mid-band spectrum. All the carriers can use that spectrum. There's an established equipment ecosystem for that spectrum. And I mentioned the build deadlines. We have time. We're not in a rush to sell it. We're not a wireless carrier. We'll sell it as soon as we're able. But certainly, we'll wait for the right value before we agree to sell it.

And then assuming that it does get sold, should we assume that the base case is it also would result in a special dividend?

I would expect the Board to declare a special dividend, correct?

Okay. Perfect.

We have -- our business generates sufficient cash. We have plenty of liquidity. So we don't have sort of a need for that level of funding at this juncture.

Right. And so the deal closed August 1. We're going to get kind of like, call it, normalized financials, I believe, on Q3 when we get that. Can you walk us through that? So you talked about you're now the fifth largest tower company. Do you comp yourself to Crown Castle, American Tower? How do you think about disclosures to investors? Is it going to look a lot the same? Could you give us any preview on what that will look like in Q3?

Sure, sure, happy to. We are now a tower company, and we're going to provide tower companies disclosure. Through the second quarter of this year, we're primarily a wireless company, and our financial statements look like wireless company financial statements. We did provide insights into our tower business, tenancy ratio and the like. We're converting to full tower company reporting, things like AFFO, showing adjusted EBITDA for our tower segment, all the metrics related to tendency rate and so forth. And then showing the impact of the T-Mobile transaction. I will say in our financial statements, there's going to have to be a story we have to tell related to certain items that are nonrecurring. For example, we're incurring wind-down costs as we complete the full divestiture of our wireless operations. Those are temporary costs, but they'll be in our financial statements for a period of time. Likewise, we have start-up costs. As we ramp up this T-Mobile MLA, it's a lot of temporary work for our business for a period of 1, 2, maybe 2.5 years. That's going to be in the financial statements. And the other thing longer term that I mentioned we're working on is all of our naked towers and working on that ground lease expense over time. That's not going to move right away because T-Mobile has interim leases. And until they cancel those interim leases, we're not going to be able to abate rent substantially. But as those interim leases start to be canceled by T-Mobile, we'll have that opportunity to address ground rents.

All right. Perfect. And then can you talk a little bit about capital structure, capital return, what are your medium, long-term plans for that?

Yes. We have a leverage ratio target right now of 3x, and we're satisfied at that level. And one thing about being at that level, it gives us future flexibility to extend. I mean, right now, as I mentioned, our sole focus is operations, and we have a lot in front of us. So we're not looking at any substantial inorganic growth or other transactions. But being at 3x affords us the ability in 2, 4, 6 years. If we decide to do something, we have flexibility to move that upward if we need to.

Are you at 3x like post deal? Or what are you today?

3x.

Yes, you are...

Yes.

And also -- so capital return, what are your priorities there for shareholders?

Well, it's really -- as I mentioned, our focus is we're -- just speaking about a dividend. So what we're doing is, I mentioned we have a series of special dividends. We have the one we just declared here in August. We'll have the AT&T dividend. And then, as I mentioned, I expect our Board to declare a dividend from Verizon. As we generate cash from operations over the next 1.5 years, that cash can be subsumed in the dividends that we declare the special dividends. Once we get past the special dividends, I expect our Board to declare a regular recurring dividend much like the other tower companies do. We're going to be a cash-flowing company, and we -- I expect our Board to return most of that cash to shareholders, but I wouldn't expect that regular recurring dividend to be instituted until late 2026 or early 2027.

All right. Perfect. And then as you mentioned earlier, you were for a long time, just a wireless company, gone to T-Mobile. Anything from a strategic standpoint that changes now that, that retail wireless business is gone or status quo, like how should we think about that going forward, if any material change?

Yes. I would say no major strategy changes, but there are some important things that we've done over the last year. I mentioned bringing our sales in-house and having that team report directly to me as opposed to outsourcing sales. We've seen substantial dividends from that in our business and the relationship building that's going on. And we're really -- because of that, that's one of the drivers of the increase in our colo app. So that's a significant operational improvement that we've made. I'd also cite the fact that being a separate tower company is a slight tailwind. There's no more perception of us also being a carrier, so that is helpful. And also focus. Organizationally, I'm not saying we weren't focused on UScellular, but there is no more wireless company. We have our people solely focused on making our tower companies succeed. And we have the right people in place. We've built a lean organization. We rely on TDS for a lot of shared services like finance, IT, and HR and other administrative services. And so we are really well equipped for future success.

Perfect. And then nothing is, again, relatively new company. Where are you in terms of the management team, you're Interim President and CEO, just what's the timing to have like, let's call it, a permanent management team in place at all levels?

Well, I would say we have a permanent team in place. Under me, I have 4 direct reports that are not interim. They are the right people. I'm Head of Operations. My Head of Sales had a legal and my Head of Finance that report to me are all people that are permanently there, and they run the business and they're very high-performing people. My role, I'm here until the Board will assess it over time, and we'll see how that plays out. But right now, I'm the guy.

Okay. Sounds good. Kris, I'm going to pivot to you. I asked the strategy question of Doug, but same thing. So you're one of the larger fiber companies out there. Has anything changed as a result of this deal? Or it's still, again, status quo and like how do you look out over the next several years in terms of what your plans are?

I'd say not a change in strategy, but if anything, kind of doubling down on our existing strategy. So we're really bullish on our fiber program. And really with additional proceeds from the sale, what we're looking to do is, one, accelerate our existing program, build programs that we have in flight. So we have 2 big build programs, our expansion program where we've gone out into brand-new communities that we've hand selected based on their growth characteristics, competitive landscape, among other factors. So we're continuing to build those out and want to accelerate those builds. And then the other big program is our EA-CAM program. So this is in our more rural areas in our incumbent footprint, converting those existing copper addresses to fiber addresses, also great economics with that program, and we're looking to accelerate that. So first and foremost, accelerating our existing plans. We're also looking at additional organic edge-out opportunities. So we handpicked those expansion markets because of great kind of clustering and growth characteristics, and we see significant opportunity to continue to expand those clusters. So we're currently evaluating all of that across our footprint. And then lastly, M&A. So with M&A, I do want to say that our focus is going to be on highly synergistic opportunities that are adjacent to our existing strategic clusters. And I'll also say that any additional organic or inorganic opportunities, we're going to be very financially disciplined, business case driven, anything would have to make economic sense and also be a really good, great strategic fit. So again, we're just very bullish on the fiber program, and we think that there's a lot more opportunity ahead, and we're still kind of evaluating and we plan to share more in the upcoming quarters on any updates to those plans.

Yes. So have you been explicit in the past in terms of what your annual passing looks like and how -- when you said accelerate, like how much?

Yes. So this year, we're committed to 150,000 addresses. And we have to increase that at a slight clip to hit our 1.8 million in kind of that 5-year time frame. So that's the context of what we came out kind of pre-deal close. So now we're evaluating that, and we haven't shared any updated goals beyond that. But kind of on that 150,000 to 200,000 addresses.

Did your plans change at all, by the way, post one big beautiful bill as a result of some of the cash tax savings that I assume you're going to get as a result of that?

So not yet, that also will go into the -- factor into the analysis. Yes, we're very pleased with that legislation. It's definitely going to help us advance our goals and then also help as we take on additional opportunities. It will provide material cash tax savings over the upcoming years, not as much so in 2025, but definitely in 2026 and beyond.

You mentioned EA-CAM and can you talk about potential opportunities there as well as BEAD and is one materially larger or better than the other?

Yes. So EA-CAM, so we actually accepted EA-CAM in all of our states. So it's over 20 states, all of our states except for one. And what that means is that those areas are actually not BEAD eligible. So we will not be participating in BEAD. EA-CAM is the program that we've chosen. And we really love this program because not only did it extend our regulatory revenue, so it's approximately $90 million annually that we receive in revenues, and it was extended an additional 10 years by accepting this enhanced EA-CAM program. So that's one great benefit. And then we're going to be bringing fiber to approximately 300,000 addresses in our footprint. And that includes not only the EA-CAM-eligible addresses, but also ones that will pick up along the route as we get to those more rural areas. But even those rural addresses represent roughly 1/3 of our incumbent footprint. And there's no other gig capable provider in those areas. So we expect like 65% to 75% penetration in those areas. So it's a really good business case to not only extend the regulatory revenues but also have very high penetration rates in some of these rural communities in the future.

I think can we talk a little bit about mobile? I actually do want to talk about fixed wireless. Like so how do you view fixed wireless as -- I'm going to characterize it as a potential threat?

I'd say not a material threat to our fiber or cable businesses in the long run. Definitely, in the -- right now, where we see it as the biggest threat is actually in our DSL footprint, as you can imagine. But again, with this EA-CAM program, we're going to be bringing significant fiber to these areas. And we do believe that once we bring fiber there, we can win back those customers. It's a superior -- it's absolutely the superior technology, fastest speeds, symmetrical speeds, reliability. And so -- and with EA-CAM and our fiber investments, we're actually going to minimize our copper footprint to just -- to less than 5% in the future. So we -- so across our landscape, we actually don't view it as a material threat.

And then is there a meaningful price difference between your standard offerings in fiber versus fixed wireless in a lot of your footprint?

It's very competitive, yes.

Yes. Okay. And then recently, I think you announced TDS Mobile. Could you walk us through what that looks like and what the strategy is to roll that out?

Correct. So we do believe that offering a fixed mobile offering is very important to achieve our penetration targets. We have high penetration goals, and there's a segment of the customer base that really values that bundle. And so we're very pleased that we initially launched our MVNO that we call TDS Mobile at the end of 2024 to select markets. We really wanted to take a phased approach to work out the kinks and make sure we have a great customer experience. And just recently, we launched across all of our footprint. So now we do offer a converged mobile fixed bundle across our entire footprint. And we're very excited because that allows us to offer the same product as our competitors. And then in some areas like in our cable markets, it's actually a differentiator against our competition. It also should help us attract customers and also retain customers because we see that customers who are part of a bundle have lower churn characteristics. So we're very excited. One more thing regarding the rollout is we are planning on doing kind of a more full holistic marketing and advertising push in a couple of months to end the year.

Right. Do you have a target penetration rate for TDS Mobile amongst your footprint?

So we're just getting started is what I would say, but everything that we -- some of the analysis that we had done prior to launching is that really like 1 in 10 gross adds should probably take the mobile bundle.

Right. And I know the rollout is new, so it's like it's really hard to ask exactly what the churn improvement characteristics are, but like give us a sense for how much better churn has gotten once someone takes...

It's too new, but we do -- we offer video, voice. And so what we tend to see is that customers who are single play versus double play or triple play, I mean, it's meaningful churn benefits like 30 to 50 basis points. So we do expect meaningful churn, but it's too early to really say if we're seeing that on the mobile side. That's our thinking.

Okay. And then can we just talk briefly about ACP. I mean that was really a 2024 event, but like is there any sort of tail of that? Is that done? Is that in the rearview mirror or that's still potentially impacting your...

That's a review mirror. That was kind of Q2, Q3 last year, and now that's behind us.

Okay. I think you talked about obviously ramping up fiber investments. Your CapEx intensity is reasonably high. Can you talk about is there a longer-term -- medium- to long-term target for CapEx intensity or CapEx dollars? And does that ramp down eventually? Because I'm sure a lot of your shareholders are excited about the future possibilities of free cash flow ramping, but could you walk us through that, your thoughts there?

Yes. So what I'd say about capital is -- obviously, I'm not going to give any specific guidance beyond 2025. But as we have EA-CAM obligations that we need to meet, we're going to continue to ramp up our expansion program builds. And as we look to take advantage of additional edge-out opportunities, we do expect to increase our capital from this year to next year and plan to keep it elevated for a few years as we really accelerate and build out those programs. But from a free cash flow perspective, what I would say is that after our build what we see is in a given market, once our build completes, we generate positive free cash flow. So when we're heavy in those build years, we expect a drag on free cash flow. However, once those -- more and more of those builds complete, we expect to turn free cash flow positive. And then we also have a transformation program that we've recently launched that's really focused on trying to streamline processes, find efficiencies in our business and we expect that to also help improve margins and free cash flow over time.

Sure. And obviously, the deal just closed in August, business delevered meaningfully. So where are you today? What's your long-term target? And then you mentioned M&A earlier, like talk a little bit more about your strategy there and like where could that leverage go if you found the right dealer deals?

Yes. So what I'd say is we recently announced that we have -- at the TDS level, have paid off almost all of our debt. We have a small portion of debt still left, and we still have our preferreds. But we really like this because it gives us, in the near term, a lot of balance sheet strength, flexibility as we continue to evaluate these additional opportunities. And so in the near term, we're going to kind of stay at the overall TDS consolidated level around 1.5x leverage. But again, that's in the near term, and we'll continue to evaluate over time.

Right. But we should expect at the TDS Telecom level, leverage at some point in the future is going to go up. I mean you are a telecom company, right, running unlevered is probably inefficient.

Correct. Yes. I'll just say that we're continuing to evaluate that. I'm just going to comment kind of on where we are in the near term. And yes, we have a lot of great opportunities ahead, and we'll talk more about that in the future.

Sure. And then along with that, Doug talked about a recurring dividend in the future. You talked about capital return plans, again, medium to long term, what your plans are down the road?

So on the Q2 call, really, what we shared is that there's a handful of key priorities from a use of proceeds perspective, one, advancing the fiber program. Also with that includes potentially some M&A opportunities, more focused on the fiber side and again, very highly synergistic opportunities and then third, return to shareholders. So definitely, that's -- there'll be more to come is what I would say. We're still -- the deal just closed, and we're evaluating a lot of opportunities.

Sure. I think just talk a little bit about margin opportunities. Do you think today's EBITDA margins are appropriate for the business? Like are there efficiencies you can find? Like what are you kind of looking to target in the future to kind of potentially get those margins up?

Yes. I would say, no, we have a lot of opportunity and really kind of -- I touched on this a little bit in one of my earlier comments, but I'll say it again. So as we transform into a fiber-centric company, like fiber networks are absolutely the most efficient networks to run. So we're going to see a lot of nice margin improvement just from that kind of network transformation. But then we also have a business transformation program that's all the back office, like IT systems. We have like 3 different systems today. We're getting that to 1 system. There's a whole set of initiatives to really streamline operations, enhance elements of the customer experience, drive more to the web and more digital transformation. So all of that, we expect meaningful margin improvement over time.

Sure. And I feel like I'm obligated to ask a question about AI, just how are you utilizing it in your business, whether to generate revenue or to lower OpEx or both?

Yes, I'd say both. So I would say we're just scratching the surface right now on AI capabilities. I think that there's significant opportunity to streamline our operations, help drive margin improvement. So that's on the OpEx side. And then, yes, on the revenue side, I mean, I think that new AI applications are going to drive the need for even more fiber in the future, which could help on the revenue side as well.

Doug, same question to you on AI.

Yes. I mean, in our wireless business, we're using it extensively for things like network management and customer care. On the tower side, I would say there's less current uses that we have in our business right now, but a lot of opportunity. We have obviously 4,400 towers. It's 4,400 payments coming in every quarter, our ground lease payments. So we have a lot of opportunity and we're looking at our operational systems that we have in place, our lease administration system as well as our operational project planning system that we have in place. And that's one of the things that we're focused on is how we can use AI to enhance efficiency.

All right. Perfect. And then, Kris, can you talk a little bit about macro? Have you seen any noticeable change in customer payment behavior as inflation cut into the ability for your customers to pay? Are people potentially down trading? Are you seeing any of that?

We haven't seen any impacts from the economy this year. The great thing about our product is that it's highly desirable and it's sort of recession resistant. So no, our churn is actually down year-over-year. Some of that is due to kind of the ACP headwinds kind of being behind us. But no, we haven't seen any changes, material changes due to the macro economy this year.

Sure. And then I did want to talk a little bit about -- so we talked about FWA earlier, but anything notable with cable -- with overbuilders anywhere in your footprint, anything that's noticeably changing in the competitive landscape?

Yes. So what I -- because you're talking about overbuilders, I'll go right there. So in our cable markets, the vast majority of our cable footprint had very low like fiber. So that was the perfect opportunity for an overbuilder to come in and overbuild those markets. So we are seeing pickup in pace of overbuilder activity in our cable markets. But the thing is that it's still just introducing one more gig capable competitor. So instead of us having the vast majority of the market share and being the only gig-capable provider in the area, we now face another competitor. And so just that other competitor coming in and offering choice, we're seeing declines in our market share and our net adds this year. And we expect that to continue for the next couple of years, but we do expect that to stabilize after those builds are complete and we kind of hit that new equilibrium. So that's in the cable market. But what I will say, too, is we have a very competitive product in our cable footprint, gig speeds. We just launched TDS Mobile. That's a differentiator against a lot of the overbuilder competition in cable. We can get aggressive on price if we need to, where there's more fiber competition. And we also will do things like automatic speed upgrades to also help kind of stem those cable losses. In our incumbent footprint, what -- I touched on it earlier, really where we're seeing more of the competition is in our DSL areas. But again, we're going to be bringing a lot more fiber to those areas. So that's more of a near term versus a longer-term risk. And then in our expansion markets, we handpicked these markets for their favorable competitive characteristics. And really, it had very LEC fiber, and we specifically picked kind of Tier 2, Tier 3 cities that we thought would be low priority for the LEC to upgrade. And so far, we've seen that play out, and we are pleased with our competitive landscape in that area. And one other thing I'll say is that because we are planning to accelerate our fiber builds in those markets, that should even further solidify us being first to fiber and making it a lot tougher for the economics to work for the LEC to upgrade.

And one more competition question in the last, say, a year. I started to get questions about Starlink satellite-based broadband. Just any thoughts on how that potentially impacts you in the medium to long term. Do you see that as a potential threat?

I'd put it right. I'd have a very similar answer to fixed wireless in that we just do not view it as a material threat, especially in the long run.

Yes. Doug, does like Starlink or any satellite-based company impact your business in any obvious way?

No, not substantially. I mean, obviously, the terrestrial networks, when you think about capacity, you're still king, and it's not really impacting colocations and rural edge-outs and things that we're seeing in our business. In fact, rural edge-outs are part of the tailwind we're experiencing now particularly with T-Mobile and what they're doing. And it's not just them, but other carriers. And so I would say no.

All right. And I just want to talk business, SMB, in particular, just could you just walk us through real quick what that opportunity in fiber looks like, what your penetration rates are like how do you think about that? Could that be like a meaningful tailwind for the business?

Yes. So SMB, I do think that it's an opportunity. We're definitely under-penetrated in that segment, really we are very focused on kind of residential first in our markets. But SMB, a lot of SMB is very much resi like. And so we are launching some more aggressive offers there, and we think that we can drive some improved penetration rates there.

Okay. We only have a small amount of time left. Is there any questions from the audience? No, if not, I guess last one for me is just, again, a lot has been going on with the company. You have some -- you're going to probably provide incremental disclosures for Array. Just any future plans to do something more than just an earnings call, whether it's an Investor Day or some sort of way to just kind of reframe and kind of reintroduce yourselves to the investing community. Is there any potential plans for that? How do you think about that?

We don't have any current plans for that. We're going to -- one of our goals on our third quarter earnings call is to give a really clear view of the tower business with tower company reporting and a detailed understanding of nonrecurring costs and what's going on in the business. And we've been very transparent with our strategic priorities. So something we'll consider in the future, but we have no current plans to do that. And again, we're going to provide very fulsome disclosure as part of our third quarter earnings call.

And I'd say for third quarter, we also plan on just continuing to try to tell our story better about us being a fiber company and not just a telco -- an old school telco. So we plan on providing more penetration metrics and things like that over time. And then once we have evaluated all these additional opportunities that I talked about, more likely that would be kind of the Q4 call, we plan on kind of sharing what those updates are.

Okay. Sounds great. I look forward to it. All right. Kris, Doug, thank you so much.

Yes, thank you.

Thank you, everyone.