Telephone and Data Systems, Inc. (TDS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining us, and welcome to the TDS and Array Second Quarter 2026 Operating Results Conference Call. [Operator Instructions]. I will now hand the conference over to John Toomey, Treasurer, Vice President and Head of Corporate Relations. Please go ahead.

Good morning, and thank you for joining us. The presentation we prepared to accompany our comments this morning can be found on the Investor Relations sections of the TDS and Array websites. With me today and offering prepared comments are -- on behalf of TDS, Walter Carlson, President and CEO; Vicki Villacrez, Executive Vice President and Chief Financial Officer. On behalf of TDS Telecom, Ken Dixon, President and CEO of TDS Telecom; Kris Bothfeld, Vice President of Financial Analysis and Strategic Planning of TDS. On behalf of Ray Digital Infrastructure, Anthony Carlson, President and CEO of Array. This call is being simultaneously webcast on the TDS and Array Investor Relations website. Please see the websites for the slides referenced on this call, including non-GAAP reconciliations. TDS and Array filed their SEC Forms 8-K, including the press releases earlier this morning. 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 full description of risk factors included in our SEC filings. I will now turn the call over to TDS President and CEO, Walter Carlson. Walter?

Thanks, John, and good morning, everyone. Today, we are pleased to share the second quarter results for TDS and array digital infrastructure. Before we get to those results, I wanted to note that we will not be providing an update today on the status of TDS' previously announced offer to acquire the minority interest of Array in an all-stock transaction. That process is ongoing. TDS will not be commenting further or taking questions on this topic during today's call. Now turning to our 2026 enterprise priorities, we are at the midpoint of the year, and we continue to make steady progress across each of these 5 focus areas. As I've noted previously, our focus remains on advancing our strategy with financial and operational discipline. In addition, both business units continue to advance their individual operational goals. TDS Telecom added meaningful fiber addresses and customers during the quarter. Array increased tower tenancy quarter-over-quarter and has now successfully completed transactions to monetize virtually all of its spectrum outside of the C-band. I continue to be pleased with the progress each business unit is making and by the work underway to strengthen our culture during this period of transformation. I would like to personally thank every associate across the enterprise for their continued commitment and contributions. I will now turn the call over to Vicki.

Thank you, Walter, and good morning, everyone. The transactions we have completed over the past year, including array spectrum sale to Verizon in June, have strengthened our balance sheet and created meaningful capital flexibility. That improved flexibility provides a strong foundation for how we approach capital allocation and strategic opportunities. It allows us to continue to make decisions with a clear focus on financial health, strategic alignment and long-term value. Slide 4 provides an update on our progress. First, TDS Telecom continues to advance its long-term objective of 2.1 million marketable fiber service addresses and delivered approximately 66,000 addresses in the second quarter. The team's execution and momentum in this area drove our decision to increase Telecom's fiber service address and capital guidance for the year. While each market build is evaluated with our traditional financial discipline, our build cadence is not currently constrained by capital. That allows us to accelerate in attractive markets where we can take advantage of the opportunity to be the first to fiber. Our fiber network continues to perform well with consumers, both financially and operationally, and our transition to be fully fiber is the right strategic imperative and one that we believe will provide sustained value to TDS. Second, we remain committed to M&A and are actively evaluating opportunities that align with our strategy in a financially disciplined accretive business case-driven fashion. In mid-April, we announced an agreement to acquire Granite State Communications and are on track for a third quarter close that will add 11,000 fully fiber service addresses to the portfolio. As I've communicated in the past, we are primarily focused on small- to medium-sized opportunities that are either already fibered up or have an accretive economic path to all fiber and support our clustering strategy. Finally, with respect to shareholder returns, TDS continues to pay a modest quarterly dividend and Array issued a special dividend in the quarter of $11 per common share. TDS was not in the market for share repurchases during the second quarter because we were restricted from doing so due to the TDS offer to Array. As of the end of the quarter, we had $520 million remaining under the TDS share repurchase authorization, and we remain committed to executing on that program as business, market and other conditions permit. Across all 3 elements, the company intends to continue to be disciplined, balancing the needs of the business, evaluating future returns and taking into account market and other conditions as we move forward. Thank you. And now I will turn the call over to Ken Dixon to discuss TDS' fiber business.

Thank you, Vicki, and good morning, everyone. TDS Telecom continues to execute on our fiber growth plan. building fiber addresses, driving fiber sales and transforming our operations. This quarter, we again made progress across all 3 priorities. As shown on Slide 6, we delivered approximately 66,000 marketable fiber service addresses in the quarter, bringing us to approximately $106,000 for the first half of the year. This represents the strongest first half delivery in company history and even exceeds what we accomplished in the second half of 2025, which is typically our peak construction period. It reflects both strong execution by our teams as well as expanded construction capacity. We have a robust pipeline of addresses currently under construction. -- positioning us well for the remainder of the year. This pipeline includes a mix of addresses from our fiber expansion in new areas as well as fiber upgrades in our existing markets through our fiber deeper program and federal EA CAM program. As a reminder, we are the largest recipient of ACAM which provides federal support to bring high-speed broadband to hard-to-reach rural areas where it would otherwise not be economical. We are leveraging this support to accelerate our fiber expansion in 22 states, bringing fiber to more than 300,000 addresses in our incumbent footprint. We have already met the 2026 obligations in 3 states and now have the highest crew counts ever in the remaining EA-CAM markets to deliver on our 2026 milestones. In summary, our build teams are delivering at a record pace. This gives us confidence to increase our 2026 guidance for fiber service address delivery to 250,000 to 300,000, increasing our range by 50,000. Turning to sales. We ended the quarter with approximately 15,000 fiber net adds, up 47% year-over-year. As we continue to grow our fiber footprint, we are hyper-focused on converting these new service addresses into customers and improving the overall customer experience. We continue to build out our sales teams across all our markets. These sales teams are focused on both prelaunch sales as well as penetrating new open-for-sale addresses aftermarket delivery. We have significantly expanded our door-to-door sales capacity and we're pleased with the improved performance of our dot-com channel. In our cable markets, we're beginning to see the benefit of expanded sales teams and targeted investment, which are now driving increased gross adds. As I mentioned last quarter, our cable markets are some of the best in the country, and we see significant opportunity to grow here. Overall, we have good sales momentum as we head into the back half of the year. However, we have more work to do. Our operational transformation is centered on efficiency improving the customer experience and simplification. We continue to make progress modernizing our systems and remain on track with our transformation road map, making it easier for customers to do business with us. For example, our technicians now utilize the same platform across all of our markets, which simplifies our back-office processes and provides an improved customer experience. Further, we have several additional enhancements underway that are on schedule to be completed in the back half of the year. We will provide updates on these transformation initiatives as they advance. Turning to Slide 7. Our long-term goals reflect our continued focus on executing our fiber growth strategy that delivers scale, speed and long-term value. We believe fiber is the superior broadband technology, not only for today, but into the future, with the delivery of approximately 66,000 fiber addresses in the quarter. Now we serve nearly 1.2 million fiber service addresses, representing 60% of our total footprint with 80% of addresses capable of gig speeds. I want to take a moment to explain how we think about our footprint competitively. Our expansion markets, which are new geographies that we've entered and continue to build are 100% fiber. In our incumbent markets, we've already overbuilt 52% of our addresses with fiber. And with the assistance of EA-CAM, we plan to deliver another 300,000 addresses with fiber over the next 2 years, further reducing copper in our network. Finally, in our cable markets, 22% of our addresses are already served by fiber and we continue to expand fiber across our footprint where it is economical to upgrade. As I noted earlier, we know there is more work ahead, but the progress we're making gives us confidence in the path forward as we continue transforming into a fiber-centric company. I'll now turn it over to Chris to walk through our second quarter results.

Thanks, Ken. Turning to Slide 8. The chart on the left shows our quarterly fiber service address delivery over the past 6 quarters and reflects the build momentum we are experiencing. As Ken highlighted, our second quarter fiber address delivery more than doubled year-over-year and the first half of 2026 is more than 2.5x our delivery from the first half of 2025. The chart on the right illustrates the continued expansion of our fiber footprint. Over the past 3 years, we have increased the number of fiber service addresses across our markets by approximately 80%, demonstrating steady and meaningful progress. On Slide 9, residential fiber net adds were 15,100 in the second quarter, a 47% increase compared to prior year, driven by continued footprint expansion and ongoing copper to fiber conversions. Residential fiber connections have nearly doubled over the past 3 years, outpacing our fiber footprint growth. We expect continued fiber connection growth as we expand our footprint. Turning to Slide 10. The chart on the left depicts our residential revenue per connection, which increased 1% year-over-year. This growth reflects annual price increases offset by ongoing industry-wide declines in video attachment rates. The chart on the right highlights total residential revenue between copper, cable and fiber. You'll see our fiber revenue is up 13% or $11 million versus prior year, which helps offset the legacy revenue stream pressures we are experiencing. In cable, revenues are down roughly 10% versus the second quarter of 2025. As Ken highlighted, we are increasing investment and sales capacity in our cable markets to stem these declines. Overall, total residential revenue declined $6 million compared to prior year. Roughly $2 million of this decrease reflects the divestitures of primarily copper-based markets. Beyond that, we are continuing to experience faster declines in copper. In response, we are deploying fiber across our ILEC footprint at a record pace to help mitigate those headwinds. Slide 11 summarizes our financial performance. Total operating revenues declined 6% in the quarter or 4% excluding the impact of divestitures. Discrete adjustments to wholesale revenues that benefited 2025 are driving roughly half of the year-over-year decrease. The remaining decline reflects continued legacy revenue stream pressures partially offset by growth in fiber connections and modest improvement in revenue per connection. Cash expenses were flat as savings from ongoing cost management initiatives were offset by costs to support our growing expansion markets and inflationary increases. The decline in adjusted EBITDA for the quarter reflects top line pressure from divestitures as well as legacy revenue streams. Capital expenditures totaled $179 million in the quarter. reflecting higher construction activity and a robust funnel of addresses under construction. Slide 12 reflects our guidance for 2026, which has been updated. We are projecting total telecom revenues of $1 billion to $1.025 billion, down from our prior guidance, primarily due to the headwinds we are experiencing in our copper and cable markets. We narrowed the adjusted EBITDA range to $310 million to $330 million as these legacy revenue challenges are largely falling to the bottom line. As Ken noted, we increased our 2026 fiber service address guidance range by 50,000 and now expect to deliver between 250,000 and 300,000 new fiber service addresses. To support this increased address delivery, we have increased our CapEx guidance range to $625 million to $675 million. Before turning over the call, I want to thank the entire TDS team for their continued execution and focus. Their efforts across fiber delivery, customer growth and operational transformation are critical to the progress we're making toward achieving our long-term objectives. I'll now turn the call over to Anthony.

Thanks, Chris, and good morning. Momentum continued throughout the second quarter with our focus still squarely on fully optimizing our tower operations and monetizing our spectrum. In the second quarter, we saw cash site rental revenue increased 65% versus Q2 of last year. We also continued to demonstrate sequential tower tenancy growth. Finally, we continued advancing our spectrum monetization strategy by closing transactions with both T-Mobile and Verizon during the quarter. Before I get into the details of the quarter, I want to mention the receipt of TDS' proposal to acquire the shares of Array that it does not already own. As previously disclosed, our Board has formed a special committee of independent directors who've retained independent advisers to carefully evaluate the proposal and make a recommendation as to what is in the best interest of Array's shareholders. We won't be commenting further or taking questions regarding the proposal today. Starting with Slide 16, you'll see continued sequential improvement in our tenancy ratio, which increased from 0.98 to 0.96 at the end of the prior quarter. As a reminder, DISH generally stopped making payments under its contracts with us in December. In addition, DISH wireless and other DISH entities have filed for bankruptcy. Arrays ceased recognizing revenue from DISH in the first quarter, and all outstanding 2025 balances have been fully reserved. As a result, DISH colocations are no longer included in our tenancy ratio. Excluding this impact, we are encouraged by the consistent and steady growth in our tenancy ratio. As noted on Slide 17, cash site rental revenue in Q2 increased 55% year-over-year from all customers and when normalized for the DISH impact, this increase was 65%. The addition of T-Mobile interim site revenue drove the year-over-year increase to 81% or 92% when normalized for DISH. As T-Mobile works through its integration process, we will see the interim site revenue decline, which began in the quarter. Importantly, our existing pipeline and application volume remains strong and will drive continued revenue growth both this year and into the next. Turning to Slide 18. Integration with T-Mobile continues to be at the forefront of our focus and strong progress continues to be made. As a reminder, T-Mobile hasn't until January 2028 to finalize its 2015 committed sites under the new MLA. Given the ongoing integration work, we are narrowing our range of projected tenantless towers post T-Mobile integration to 1,000 to 1,700. Our ground lease optimization work remains one of our top priorities. -- and we continue to see notable progress reducing the cash burden of these negative cash flow assets. We still expect this work to be a multiyear effort focused on cost avoidance, lease-up, evaluating long-term demand and decommissioning where it makes sense. This process is well underway and allows us to assess all potential outcomes for the tenant less tower portfolio, including removing from the portfolio subset of sites with no path to economic viability. As shown on Slide 19 and presented in prior quarters, we have reached agreements to monetize roughly 70% of our spectrum holdings. During the quarter, we closed on multiple transactions, including the $168 million sale of the 600 megahertz, 700 megahertz and AWS licenses to T-Mobile in May and the $1 billion transaction with Verizon in June. The remaining transactions with T-Mobile are expected to close by the end of 2026, depending on regulatory approval and closing conditions. As stated in prior quarters, we continue to work to opportunistically monetize our remaining spectrum, primarily C-band. Our C-band spectrum is highly compelling 5G asset with a mature ecosystem ready for carrier deployment and we believe, given no near-term build-out requirements, we have ample time to realize its value. Slide 20 summarizes the results of our partnership or noncontrolling investment interests. As a reminder, 2025 investment income and distributions were impacted by several onetime factors, including the impact of the Iowa partnership selling their wireless operations to T-Mobile and distributions received from Verizon related to their transaction with Vertical Bridge. Equity income for the 6 months ending June 30 was $75 million with the Q1 results elevated due to prior period adjustments recorded by the managers of certain investee entities. Slide 22 summarizes Array's financial results. Revenue growth year-over-year continues to be driven largely by the T-Mobile MLA, but with solid additional growth from our other customers. The prospective classification shift noted in prior quarters related to property taxes and insurance inclusion in our cost of operations rather than SG&A, over over half the year-over-year increase in cost of operations. SG&A expenses continue to include costs to support the wind down of the legacy wireless operations. We have seen a decline in these costs in the first half of 2026. But as we have indicated in the past, we expect these wind-down costs to persist throughout 2026 but at a declining level. Additionally, for the quarter, you'll see elevated strategic alternatives costs relating to the evaluation of the proposal the Array board received from TDS to acquire the remaining public shares of Array. Given the classification of strategic alternatives costs, these are subtracted from a raised calculation of adjusted OIBDA. On Slide 23, we've updated our guidance for total operating revenue, adjusted EBITDA and OIBDA, while guidance for capital expenditures remained unchanged. We have narrowed our total operating revenues range, increasing the low end to $205 million from $200 million, driven by an expectation for higher T-Mobile Entrance site revenue based on the current pace of integrations. The top end of the revenue range remains unchanged. For adjusted OIBDA, we've increased our guidance range to $60 million to $75 million, up from $50 million to $65 million previously. This upward revision reflects the higher revenue outlook combined with expectations for modestly lower operating expenses. The expense benefit is driven in part by lower cost of services, consistent with our current assumptions regarding the pace of T-Mobile integration. Adjusted EBITDA guidance has increased to a range of $220 million to $235 million, up from $200 million to $250 million previously. This increase reflects the higher adjusted OIBDA outlook discussed earlier as well as updated expectations for both equity income and interest and dividend income. With respect to equity income, we've increased our estimate to $145 million from $140 million, reflecting year-to-date performance trends and budgets received from certain partnerships. As a reminder, these are passive investments and our forecasting approach is generally aligned with recent operating trends and partner provided expectations. We've also increased our interest and dividend income estimate to $15 million from $10 million. This revision is primarily driven by a higher cash balance due to timing of cash inflows and outflows related to the spectrum transactions. In closing, we recently marked Array's first anniversary as a stand-alone tower company. I continue to be incredibly proud of the dedication, commitment and hard work our associates demonstrate every day as we execute on our strategy, drive operational efficiencies and deliver growth. I want to personally thank the team for their contributions over the past year. and I'm excited about the opportunities ahead and the continued progress we will achieve together. I will now turn the call back to Walter.

Thank you, Anthony. As I noted in my opening remarks, TDS continues to make solid progress advancing our strategic priorities. Our execution over the first half of alongside the momentum we are seeing across the businesses gives us confidence as we move forward into the year. I'd like to again thank all of the outstanding associates across the TDS enterprise for their continued dedication and hard work in serving our customers and supporting the advancement of our business. Operator, please now open the line for questions.

[Operator Instructions]. And your first question comes from Ric Prentiss with Raymond James.

Thanks for the update. First question is a high-level question, 30,000 -- well, I guess, 300,000 kilometers up the satellite question. Can you elaborate a little bit on, Ken, I think you said you think fiber is a great solution. But can you give us your thoughts on how does satellite reflect into competition for fiber versus copper versus coax. And on the other side, what does it mean for wireless and towers, particularly because I think people view TBS and Array Digital is maybe a more rural type company, so maybe also address kind of the rural aspect.

In the markets where TDS has deployed fiber, we're not seeing a material impact from satellite. As you just saw in our reported marketable addresses and we're seeing strong demand across the business with a nice sequential improvement in our fiber net adds. So we are -- what you're seeing from us is we're increasing the pace of our fiber build. And what we find every day is how important it is for TDS to be first to fiber. So where you're seeing us really deploy the most amount of crews right now, is to our EA-CAM markets where that is obviously copper. And along the route getting to those EA-CAM markets, we have the ability to deploy fiber. So that's where we have record crews right now. And we're in the peak summer months, and we're going to continue to see that build capacity increase. And where we're deploying fiber in those copper markets, we're seeing very strong demand for our products and services. So to us, that's the biggest thing we can do right now in the marketplace is to continue to focus on that copper plant with our fiber build and bring fiber into those respective marketplaces.

Sure. And from the rate perspective, what I'd say is that nothing we have seen or heard suggest anything other than that terrestrial networks are going to be the bedrock mobile data delivery and that macro sites, from our perspective, continue to be the most efficient and reliable way to do that. And as far as macro sites, so we think we'd be a great collection of assets and we are very excited to continue to help our customers deploy their networks on them.

Second question for me. Vicki, I think you mentioned no stock buyback in the quarter because of the restriction with the TDS offer. How should we think about when can you get back into the stock buyback market given what the process might be a related question on a calendar basis and also the quiet period for spectrum transactions with the previous auction, we think ended back on July 13, and another auction, which we're glad to see another auction coming, quiet period probably starts first quarter next year. So how are you thinking about those calendar questions? When can you get back into stock buyback? And is there now kind of an open window for C-band discussions?

Yes. Okay, Rick. Let me just start also big picture. First off, I'd like to say we're really pleased with where we are today. We executed a lot of our transactions. We've got T-Mobile, AT&T, Verizon transactions closed and behind us. We've put in our strong balance sheet, which is giving us a lot of flexibility going forward. Having said that, as you mentioned, we were not in the market for our share buyback program. We are very committed to executing on that program as soon as we're able to do so and the business and market conditions warrant so -- but we have $520 million authorization left as of the second quarter, and we remain committed to executing on that. I can't comment on when I can't speculate on when, as you know, we have -- TDS has a pending offer to Array, and we are not commenting on the timing of that potential transaction.

And then on spectrum?

So in terms of the C-band, we don't have a specific process update to share. What we will say is that we're encouraged by the results of the AWS reaction in terms of the implication it may have for the value of spectrum. -- which we continue to believe is extremely valuable. It's available to deploy now. There's an existing ecosystem for it. and it's adjacent to the upper C band. So that provides the opportunity for easy deployment for whoever acquires the lower end of that range. As you pointed out, we are not in a plant to right now. And as you imagine, we're going to -- whenever permitted by regulation to explore sale and all that sectors parties, but I do again, we're not going to be a forced seller -- we believe the cost of maintaining that spectrum by building it out, it needs to be is very reasonable relative to the overall value of it. And so our position on that has remained unchanged.

It's good to have probably that C2, C3, C4 kind of blocks, which, like we said, kind of can help bridge that gap between lower and upper C-band.

Your next question comes from the line of Sebastiano Petti with JPMorgan.

If you could help us on the TDS Telecom EBITDA guide. I mean it looks like the second half run rate implies a $350 million annualized TDS Telecom EBITDA, I mean what's the confidence underlying that inflection that you're seeing there? Then I have a follow-up.

Yes. Sebastiano. This is Kris. So yes, we did revise our guidance across the board for revenue, adjusted EBITDA, CapEx, service addresses. With respect to adjusted EBITDA, -- we are seeing increased pressure from legacy revenue stream declines, and our adjusted EBITDA was also impacted by divestitures. However, what we are seeing nice momentum is on our fiber revenue growth. we reported residential fiber revenue growth of 13% in the quarter, and we expect that to continue to grow continue to grow as we're even fueling more service address delivery in the back half of the year and expect those revenues to come. And so that's on the top line side in the back half of the year. And then also on the spend side, our transformation efforts, we are seeing savings there, and that's helping to offset the increased costs associated with inflationary increases, increases to support our growing footprint -- and as Ken said, we're also investing a lot more in our sales capacity. So that transformation program is helping mitigate those costs as well. And our midpoint is guiding to a 2% reduction in costs for the full year. So again, it's -- what's driving that turnaround is the fiber revenue growth and our cost transformation program.

And that would imply that goodness would dictate to 2027, right and no reason to think -- not that you're guiding, but no reason to think that momentum and the cost efforts, there's any -- that should persist into 2017. Is that fair, Kris?

Absolutely.

Got it. And I guess for Vicki and the broader TS fiber, I mean, telecom team, Obviously, M&A remains a key focus of yours on the fiber side. To the extent, could you comment on -- what is the -- what are the valuations or the conversations in that market look like? Have they changed at all over the last 6 to 12 months? Obviously, to Rick's question, satellite broadband competition fears remain a bit of an overhang across the broader ecosystem. Not sure if that's dictating to a bid-ask spread occurring on fiber assets. And then to the -- and also another question just on M&A and I guess Anthony, for you, I guess, I don't know Vicki, you've said in the past M&A on the fiber side is the most paramount. But Anthony, how are you thinking about M&A or just overall the landscape on the tower side. Obviously, valuations on the public market side have kind of come in here. I wasn't sure if that's dictating to the private market as well.

Yes. Sabastiano, as you know, we did sign an agreement earlier in the quarter. We expect to close next quarter on a very attractive small tuck-in that's adjacent to our current footprint at tds.com and this was 11,000 fiber service alerts that was for $25 million. So if you do the math, I think that shows that we are really looking for opportunities where we can make the economics work and we can see the growth, the future growth in the footprint as well as in the customers that are being fibered up with our bundled products that Ken and Kris have talked about. So we'll continue to -- and we are actively active in the space in looking for these types of opportunities, both in the small and the medium-sized sector.

And from a rate perspective, we keep an eye on what's going on in the private markets and the prices that we see are a bit high for what we think are other uses of our time and energy. We're laser focused on improving rate operations. across multiple dimensions, including improving our ground lease situation and those are much more attractive uses money at these prices than buying tool in the private market.

Your next question comes from the line of Vikash Harlalka with New Street Research.