U.S. Cellular Corp. Earnings Call Nuggets: Financial Guidance and ARPU

United States Cellular Corporation (NYSE:USM) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Financial Guidance

Richard Prentiss Jr – Raymond James: A couple of questions I’d like to start on the whole USF excess items. On the U.S. Cellular side, I think I heard you say you expect $16 million in the ETC to affect in July. Was that an annual number or is that the half year effect?

Steven T. Campbell – EVP, Finance, CFO and Treasurer: That’s the half year effect. As we understand the order, we start to see a reduction of 20% per year effective July 1st. So roughly about 10% of our revenue for this year, what was in the range of about $160 million, so that’s how we are forecasting the $16 million, so half year effect.

Richard Prentiss Jr – Raymond James: Then on the TDS side, you mentioned briefly the negative effect of the USF excess, can you quantify for us how much of is in the ILEC and in the CLEC as far as the impacts?

Vicki L. Villacrez – VP, Finance and CFO, TDS Telecom: As Dave said it is difficult for us to say what level of support we might receive under the new arrangement and what the impact of the order may from a long-term perspective, but based on what we know today which is not a complete picture, as you know there is a number of issues related to the rate of return carriers that impact us, that have not yet been resolved. So, having said that, we do expect to lose about $3 million of USF support, that’s primarily related to the flash cut of our safety-net funding, and that’s a year-over-year number.

Steven T. Campbell – EVP, Finance, CFO and Treasurer: So, Ric, it’s Steve, I want to add to my earlier response too, because something Vicki said triggered an idea with me, which is the reduction that we are projecting for ETC of course doesn’t assume at this point any receipt of funds under the new mobility funds that have been created. That would still be somewhat uncertain as to what we would get under those funds, if anything. So, we haven’t built that into our forecast at this point.

Richard Prentiss Jr – Raymond James: So, that was the – on the TDS side, the $3 million USF, there is further cuts on the access side too, right?

Vicki L. Villacrez – VP, Finance and CFO, TDS Telecom: Yeah, there will be further cuts on the access side. Right now, as we look at the access revenue and the wholesale revenue as they declined this year, we are expecting some further cuts next year, as well as a number of companies that won’t qualify for the high-cost loop support. So, overall, we could be – it could be in the tune of up to about $15 million. Again, our strategy is around the IPTV and super high-speed data growth, as well as HMS to try to offset those revenue declines.

Richard Prentiss Jr – Raymond James: Right, but that $15 million is baked into your guidance?

Vicki L. Villacrez – VP, Finance and CFO, TDS Telecom: Yes, it is.

Richard Prentiss Jr – Raymond James: Then switching gears going back to wireless, I think, you mentioned that you expect a new iPhone launch or a new iPhone launch is assumed in your guidance. Is that a second half, fourth quarter, just trying to gauge when we should expect and obviously it’s not from Apple, it’s just your assumption, but just trying to gauge when do you think that might affect you?

Mary N. Dillon – President and CEO: Yeah, we don’t have a specific timing assumption built in. We’re just presuming that at some time in 2012, there’s likely to be another iPhone launch.

ARPU

Philip Cusick – JPMorgan: So I guess start on ARPU. First, can you talk about the loyalty points, I think you said $0.23. Is that sort of incremental drag versus the third quarter number or is that the total drag you are experiencing now? And at what do you expect that’s more of a steady state run rate?

Steven T. Campbell – EVP, Finance, CFO and Treasurer: Phil, it’s Steve. So the number that I quoted was actually $0.73 that didn’t come through.

Philip Cusick – JPMorgan: Probably my handwriting now yours.

Steven T. Campbell – EVP, Finance, CFO and Treasurer: And that’s actually the net drag on the fourth quarter, that’s not a comparative number. That’s simply what the impact on the fourth quarter number would be. As far as when we would get to a steady state, I mean as we grow the base, as customers continue to reward points, I think first of all we’ve had the plans in place about a year now, so we may be getting to the point where you could say year-on-year we’d be getting to steady state, but assuming that we continue to grow the base, which is our intention, we think that there could actually be some increase in that number over time.

Philip Cusick – JPMorgan: And in terms our ARPU creation and given the acceleration in the fourth quarter, it seems like this ramp up could go through 2012. Is that fair or do you expect to sort of get to a steady state on smartphones and then sort of stall out?

Steven T. Campbell – EVP, Finance, CFO and Treasurer: No, I think it’s fair to say that we believe that we will have incremental or incremental growth in ARPU as we go into and through 2012. I think when you look at our smartphone penetration where we are at today at roughly 30% of our base, we feel like we’ve got quite a bit of headroom there actually when you compare that to what (indiscernible) and other carriers have. So, we think there is still ample room for growth in ARPU as a result of smartphone penetration.

Philip Cusick – JPMorgan: Great. Then if we can get into the margins a little bit, or I guess the costs, can you help us think about how you expect to see cost of service to ramp through this year, and between the LTE network build and what sounds like a little bit of a ramp in your own roaming costs, how should we look for that to grow?

Steven T. Campbell – EVP, Finance, CFO and Treasurer: Well, again, I think, it’s somewhat implied by our guidance. You see certainly at the midpoint of the range, we’ve got about 1% overall growth in service revenues, where ARPU growth will drive some of that. We expect continuing growth in roaming as we said, although more modest than we saw in 2011, but when you look at our guidance on operating cash flow at the midpoint to the high end, you see a number that’s somewhat flat to some growth. So, I think, in terms of overall costs, you’ve got some competing things there. For one thing, there are added costs associated with the LTE deployment, but another factor is that this is a big year for us in terms of progress on our major enablement initiatives. So, there is going to be a significant increase in operating expenses associated with the development and testing and so forth on the billing system. Also remember that that $16 million of ETC revenue is merely – virtually 100% margin and falls to the bottom line. So I think we have got some competing things going on there in terms of margin contribution.

Mary N. Dillon – President and CEO: In addition, of course, we are focused very keenly on managing costs across everything we do. So whether it’s continued focus on having smartphones at sub 200 price points in the portfolio, data management things within our network, Wi-Fi offload, compression, continuing to look at the ability to be more efficient and effective with that marketing spend. So while we of course have costs, we are now also looking to manage costs and continue to manage costs across the businesses as well.

Philip Cusick – JPMorgan: Just maybe one last one, given where we are higher CapEx, Lower margins in 2012, when do you think U.S. Cellular can get back to sort of cash generating mode? Is that possible in ’13 or is it a little optimistic?

Kenneth R. Meyers – EVP and CFO, Telephone and Data Systems, Inc: I’m going to step it on this one. ’13 is definitely a possibility. I think there are two huge unknowns at that point in time that (cloud) the picture. One is going to be the continued evolution of the product set with more and more smartphones driving the handset costs, it drives the revenue which is great but it’s got the front-end costs and that is going to affect margins this year and quite frankly the more it effects FX margins this year, the less next year. To the extent that it takes a little bit longer, it is going to flow into next year. Following up on the sale of the smartphone is the (mix, lots of) data growth that it has got a double effect on our network right now. One effect is the Company is rapidly pushing out LTE now and building that into the network. It’s got double operating costs because they are doing that, but we’ve got the expense or the capital expense of putting that out there. At the same time, we still have bulk of our customers, all of our customers today sitting there on EVDO using the data products and so you’re investing in effect for two networks at the same time. So, depending upon the pace of the first one, I think it’s going to have a big impact on whether it’s ’13 or not.

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