Telephone and Data Systems Inc
NYSE:TDS
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Telephone and Data Systems Inc
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Good morning. My name is Jessie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the TDS U.S. Cellular Second Quarter Conference Call. [Operator Instructions].
Jane McCahon, you may begin your conference.
Thank you, Jessie. Good morning, and thank you for joining us. I want to make you all aware of the presentation we've prepared to accompany our comments this morning which you can find on the Investor Relations section of the TDS and U.S. Cellular websites. With me today and offering prepared comments are, from U.S. Cellular, Ken Meyers, President and Chief Executive Officer; Steve Campbell, Executive Vice President and Chief Financial Officer; from TDS Telecom, Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer.
This call is being simultaneously webcast on the TDS and U.S. Cellular Investor Relations websites. Please see the websites for slides referred to on this call, including non-GAAP reconciliations. We provide guidance for both adjusted operating income before depreciation and amortization, or OIBDA, and adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, to highlight the contributions of U.S. Cellular's wireless partnerships.
As shown on Slide 2, the information set forth in the presentations and discussed during this call contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Please review the safe harbor paragraph in our press releases and in the extended version in our SEC filings.Shortly after we released our earnings and before the call, TDS and U.S. Cellular filed their SEC Form 8-K, including today's press releases, in addition to our SEC Forms 10-Q.
Taking a quick look at the upcoming IR schedule, Slide 3. We'll be attending Oppenheimer's Annual Technology, Internet & Communications Conference in Boston on August 7, and Morgan Stanley's Corporate Access Day on August 9 in New York. Please let us know if you'd like information about these events. Also keep in mind that TDS has an open-door policy so if you are in the Chicago area and would like to meet members of management, the Investor Relations team will try to accommodate you, calendars permitting.
Before turning the call over, I want to remind everyone that due to the FCC's anti-collusion rule, we will not be responding to any questions related to FCC auctions.
And now I'll turn the call over to Ken Meyers. Ken?
Thank you, Jane, and good morning, and thanks for joining us today. Let me start by saying I'm very pleased with the second quarter results and how the first half of the year has come together as we continue to execute our customer satisfaction strategy. Increased revenues, combined with cost reduction efforts, produced strong increases in profitability for the quarter, leading us to raise our full year 2018 guidance.
Let's start with customer results. Now when reviewing year-over-year results, I want to remind everyone that second quarter of 2017 was the first full quarter that we're selling our Total Plans, which include unlimited options, so we're up against a strong comparison that metric. That said, we produced 5,000 handset net adds in the quarter. While still below the pace I would like to see, this is a significant improvement over Q1, and we have now grown our handset base in 4 of those last 5 quarters. Sequentially, gross and net adds improved and postpaid handset churn results were a low 0.92%. Looking back, I'd say the quarter started out a little slow for us and improved as we went along. Customers, both new and existing, continue to appreciate the simplicity of the Total Plans. And today, 57% of our postpaid customer base are on them. Competitively, I'd call the environment still aggressive, although the focus of competition has now shifted back to device-related pricing, buy-one-get-one-frees and other types of discounts. Service plan pricing has remained relatively steady, and you see the positive impact of that starting to show in the average revenue per unit and total revenue.
Industry-wide switching activity during the quarter was still low but the rate of decline slowed somewhat, impacted by equipment installment plans and customers keeping their devices longer. Our average customer now holds onto a device for 30 months. And industry information suggests this could lengthen out some more yet. So going into the year, our strategic priorities included growing revenues and reducing spending to improve profitability. We saw growth in revenues due to a larger customer base, continued adoption of equipment installment plans which drives equipment revenues and increases in other revenue streams like device protection plans, accessories, roaming and tolerance. When looking at these improvements, remember our results in 2018 are after changes for the new revenue recognition rules, while 2017 is not. Our application of those rules changes and reduces 2018 revenue and adjusted operating income a bit when compared to the same results under last year's rules. Steve will cover this in more detail later.
Over the rest of the year, we plan to continue with targeted promotions and programs to achieve our top strategic priorities of attracting new customers and protecting our customer base. To that end, the SMB and government sales force is now continuing to make progress. Both a small piece of our overall business today, we are pleased with its recent success closing some larger deals as they sell IoT solutions that help local governments operate more efficiently and small businesses compete more effectively. Enterprise wide, the organizations continues to focus on cost reduction initiatives, producing great results. Cash costs are down across the board. For example, this quarter, system operations expense was actually down modestly despite data usage increasing 45% year-over-year, reflecting work done across many areas by our engineering and purchasing teams. Speaking of our engineering team, our network strategy is a key driver to our customer satisfaction and the foundation of our value proposition in the small cities, suburban and rural markets we serve.
Our network continues to perform well, even with increasing usage. 20% of our postpaid customers are now on unlimited plans and customers on these unlimited plans now use an average of over 8 gigabits per month. We expect data usage to continue to drive capital investment required for this growing capacity. The spend is still within our expectations but most definitely a watch point. Operationally, we accomplished a number of initiatives this quarter. Voice over LTE is up and running in Iowa and Wisconsin. And this quarter, we launched Voice over LTE in California, Oregon and Washington. Additionally, we agreed to work on our Voice over LTE networks in New England and the Mid-Atlantic. Also, late in the quarter, we launched the Apple Watch. Though it did materially impact the quarter, it does competitively strengthen our device offerings.
In prior quarters, we conducted several 5G trials with our vendor partner using pre-standardized equipment. Those tests focused on better understanding the propagation characteristics of millimeter wave spectrum. This quarter, we tested performance using 3.5 gigahertz spectrum. Our next series of trials will be using 3GPP standardized based equipment and will be focused on better understanding the benefits of beamforming with millimeter wave frequencies as well as 5G core capabilities such as network slicing. And you can ask Mike any question you got on that later. We are also conducting work to understand the economic opportunity of various 5G use cases represent for us in our markets. Understanding these use cases is an important in determining what spectrum bands our carrier needs and critical when evaluating upcoming spectrum auction opportunities.
Before wrapping up, I want to share that, in July, U.S. Cellular won another J.D. Power Award for Highest Network Quality Performance among Wireless Cell Phone users in the North Central Region. It's the strength of our network and the commitment to providing exceptional customer service that allowed us to win this award yet again. The hard work from every associate in every part of U.S. Cellular drove our performance and get the entire team should be proud of these results as I am. All-in, the combination of our revenue growth and cost initiatives resulted in a 25% increase in operating earnings before interest, taxes, depreciation and amortization. That's really impressive. What's really impressive to me is how broad-based the improvement was. Not just one metric, it's revenue growth from many sources and cost reductions from across-the-board work. These results over the first half provide us the basis to both increase guidance as well as narrow ranges. With that, let me turn the call over to Steve Campbell. Steve?
Thank you, Ken, and good morning, everyone. Let's begin by talking about connections. Overall, we ended the quarter with approximately 5.1 million total connections, that's about 1% higher than a year ago.
Slide 6 of our presentation focuses on the postpaid category, which remains the largest and most important part of our business at just under 90% of our total retail connections. Postpaid gross and net additions for the second quarter of 2018 were 146,000 and negative 13,000, both down a bit year-over-year. But remember, as Ken said earlier, the second quarter of 2017 was a strong one, having been the first full quarter that we were selling our Total Plans with the unlimited options. On a sequential basis, gross and net additions both improved significantly, and we added 5,000 handset connections in the second quarter after losing 16,000 in the first quarter. Perhaps a little less visible but nonetheless important to our success, is that we continue to have handset customers migrating from feature phones to higher-revenue smartphones. Smartphone ARPU is running about $20 more per month. Including the upgrades, total smartphone connections increased by 38,000 during the second quarter of 2018. The all-in or total postpaid churn rate for the second quarter was very good at 1.19%. The next slide breaks that down in more detail.
Churn for handsets was 0.92%, essentially the same as last year's 0.91% and better sequentially than the 0.97% level in the first quarter. Churn for connected devices was 2.85%, still elevated as the discounted tablets sold in connection with various promotions continue to roll out of contract, and we expect that to continue for the near future. Now let's go to the financial results for the second quarter, beginning with a brief review of the impact of the new revenue recognition accounting standard. As a reminder, U.S. Cellular adopted the new revenue recognition accounting standard, ASC 606, effective as of January 1st of this year using a modified retrospective approach. Under this approach, the new accounting standard is applied only to the most recent period presented and the cumulative effect of the accounting change related to prior periods is reflected as an adjustment to the beginning balance of retained earnings. As a result, our reported results for both the first and second quarters of this year include the impacts of ASC 606 on our 2017 results are not adjusted and they remain as previously reported.
Slide 8 of the presentation shows the impact of adopting ASC 606 on the second quarter 2018 results. To orient you, the leftmost column of numbers, labeled results under prior accounting standard, show U.S. Cellular's results presented on the previous basis of accounting. The center column shows the adjustments resulting from the adoption of ASC 606, and the column to the far right shows our second quarter 2018 results as they are being reported in accordance with the new standard. As you can see, the adjustments are relatively small. The most notable impacts are related to a shift in revenue from service revenues to equipment sales, driven primarily by two factors, first, a reallocation of revenue from service to equipment for sales made under the traditional subsidy model; and second, no longer recognizing imputed interest income on equipment installment plans. And there were other smaller impacts on cost of equipment sold and selling, general and administrative expenses. Overall, ASC 606 has not had a significant impact on our financial results.
For the second quarter, the net impact to total operating revenues was approximately $8 million, or less than 1%, while total cash expenses were virtually unchanged. The impact to adjusted operating income before depreciation and amortization was a reduction of $9 million or about 4%. And for the year-to-date period through June, the impacts were roughly the same percentage magnitude. If you'd like more information related to our adoption of the new accounting standard, please refer to note 2 to the financial statements, which is included in our Form 10-Q quarterly report filed earlier today. Now let's move to total operating revenues for the quarter. Total operating revenues for the second quarter were $974 million, that's up $11 million or 1% year-over-year. But for the impact of the new accounting standard, total operating revenues would have been up another 1%.
Retail service revenues, shown in the blue portion of the bars, increased by 1% to $652 million. There was a favorable impact of $12 million driven by increases in both the number of connections and the average revenue per user but that effect was partially offset by the impact of adopting the new accounting standards. I'll say more about ARPU in a later slide. Inbound roaming revenue, which is included in other service revenue in this chart, was $39 million, up 26% year-over-year. Key drivers included a 28% increase in the amount of 3G traffic, which still carries relatively higher rates as well as a significant increase in the amount of 4G traffic. As I look forward, roaming revenue will continue to be difficult to forecast and it'll be subject to fluctuations from period-to-period given that it is dependent both on the pace of which other carriers migrate to 4G LTE and VoLTE as well as on uncertain customer usage patterns.
Next, equipment sales revenues, shown in the gray portion of the bars, increased $10 million or 5%. Factors that served to increase revenues included an increase in the average revenue per device sold, a mix shift to higher-end smartphone devices and higher sales of accessories, along with the impact of new accounting standard. Partially offsetting was the impact of a decrease in the volume of devices sold. Moving on. Slide 10 provides some additional revenue information related to postpaid revenue. The average revenue per user for the second quarter of 2018, shown as the blue portion of the bars in the graph at the left, was $44.74, up $0.14 year-over-year. That increase was driven by higher device protection plan and regulatory recovery revenues and was partially offset by the impact of the new accounting standards, which, in fact, reduced ARPU by $0.41.
Average billings per user, which includes equipment installment billings, shows the total amount billed to customers every month. As shown on the chart, equipment installment billings per user continued to grow along with the penetration of installment contracts within our base. This more inclusive measure of revenue being realized from customers was $57.75 for the second quarter, up 5% year-over-year. And note the nice upward trend over the 5-quarter period. Average billings per account, shown on the graph on the right, increased about 3% despite a small decrease in average revenue per account, resulting from having fewer connections per account as a result of the tablet churn I discussed earlier. So with that, let's move next to our profitability measures. The headline is that operate -- adjusted operating income before depreciation and amortization for the second quarter was $205 million, up 26% from a year ago. Correspondingly, the margin as a percent of total operating revenues, increased by more than 4 points from 16.9% to 21%. And for those watching service revenue margins, the current quarter result was 27.7%, up almost 6 points from the margin of 22% a year ago. Total operating revenues of $974 million increased by $11 million or 1% year-over-year. Combined with the higher revenues, there was a decrease in total cash expenses of $31 million or 4% year-over-year across all of the major categories. Almost 2/3 of the overall decrease was due to lower cost of equipment sold, driven by a reduction in the number of total devices sold.
SG&A expenses decreased about 2% as a result of lower commissions, advertising and bad debts expenses. System operations expense decreased by $2 million or about 1% year-over-year. That seems like a small change but there's a lot more to the story. Total data usage on our network grew by 45% year-over-year. However, system operations expense for our network, exclusive of roaming expense, went up by only 2%, mainly driven by standard network maintenance. As Ken said earlier, the ability to contain network costs reflects the good work being done by our engineering and procurement teams across many areas. Data roaming usage increased by 38% year-over-year. Due to the shift to 4G and the related rate reductions, data roaming expense went down by 9%. The average off-net usage per customer is still currently about 5% total usage per customer. Shown next is adjusted earnings before interest, taxes and depreciation and amortization. This measure incorporates the earnings from our equity method investments, along with interest and dividend income. Adjusted EBITDA for the second quarter was $248 million, up 25% from a year ago. Equity in earnings of unconsolidated entities includes $20 million from the Los Angeles partnership in the second quarter of this year compared to $17 million in the same quarter a year ago.
Next I want to cover our guidance for the full year 2018, which is shown on Slide 13. And for comparison, we're also showing our 2017 actual results. As Ken mentioned earlier, we've updated the guidance from that provided in May. The updated guidance reflects some upward movement in light of the strong first half results and some tightening of the ranges as we progressed further into the year.
For total operating revenues, we now expect a range of approximately $3.925 billion to $4.025 billion. We've raised the lower end of the range while narrowing it. For adjusted operating income before depreciation and amortization, we've raised the range at both ends and narrowed it to $700 million to $800 million. Similarly, we've raised and narrowed the range for adjusted earnings before interest, taxes and depreciation and amortization to $850 million to $950 million. And for capital expenditures, the range remains unchanged at $500 million to $550 million.
Finally, a couple comments about our cash position and liquidity. At June 30, cash and cash equivalents totaled approximately $600 million. In addition, we have nearly $500 million of total borrowing capacity under our existing revolving credit and receivable securitization facilities. So with that, I'll turn the call over to Vicki Villacrez to discuss TDS Telecom. Vicki?
Okay. Thank you, Steve, and good morning, everyone. Overall, our results in the quarter and through the first half of the year are in line with expectations as we're working through our growth initiatives and cost management efforts. As you know, we're making significant investments to increase fiber deployment, first, by overbuilding in new markets where TDS has strong brand awareness; and second, by continuing to expand fiber and other technologies in our existing markets. These investments will position us for future revenue growth.
In wireline, we've been operating in our first out-of-territory market, Sun Prairie, Wisconsin, for about 1 year now and continue to see very strong growth. We've announced plans for a new fiber construction in several corridors within Madison and five communities near Madison and have begun work in several of these markets. On a combined basis, these markets represent roughly 18,000 service addresses, targeting both residential and commercial services. And we've begun pre-selling in these new markets and are very pleased with our results so far, which are similar to what we saw early on in Sun Prairie. For example, McFarland, which is the first market preparing to launch service in November, has reached its preregistration targets in 3 neighborhoods already and has reached over 50% of our required threshold to ensure we earn a targeted return on investment. We are also purchasing and building out a cloud TV platform, which we expect to launch in the latter half of 2019 across both our wireline and cable markets.
We continue to see growth in video and bundles, which supports our belief in its value and will continue to evolve our product offering to meet customer demand. For example, in our new out-of-territory fiber market, over half of our customers told us they chose TDS broadband services because we had a video product. Cloud TV will further strengthen our video product by introducing a new platform that provides a better user experience. It also supports the delivery to various consumer devices, reducing the cost of upgrading set-top boxes and reduces CPE CapEx spending overall going forward.
In addition, in our out-of-territory builds, our fiber deeper spending is also included in the $60 million we earmarked in our guidance at the beginning of the year. We estimate we'll cover an additional 40,000 service addresses within our ILEC footprint through our fiber builds in 2018 and into 2019.
Finally, we are progressing on our construction projects under the A-CAM and state broadband programs, which, together, will bring upgraded service to an additional 170,000 service addresses.
Last quarter, I commented that we continue to advocate to the FCC for further funding of the A-CAM program. And I can update that the FCC has authorized and issued an order for TDS Telecom to receive additional $3 million of support per year for 10 years, retroactive to January 2017, which we'll begin receiving next quarter. This order does not increase the service address obligation, but it does increase the speed required of the current addresses under the A-CAM program.
With that update, I'll move to the financials on Slide 16 and discuss TDS Telecom's wireline and cable results for the second quarter. On a combined basis, revenue held even with last year. Cable revenues increased 12% but wireline revenues declined 4%. Cash expenses increased 4%, which included a $3 million severance charge across both wireline and cable. Wireline cash expenses were flat due to cost reduction efforts and cable expenses grew 12%. Overall, adjusted EBITDA decreased by 8%.
Capital expenditures in the quarter were up from last year at $46 million due to our fiber initiative and the A-CAM build out. We expect our capital spending to increase substantially through the second half of the year to support full programs as well as cloud TV.
Now let's turn to our segments, beginning with wireline on Slide 17. We continue to meet the demands of our customers for higher broadband speed and video services by leveraging the fiber deployments we have made in our select ILEC markets. In total, about 21% of our network route miles are fiber built as a direct result of our fiber deployment strategy over the last several years, resulting in 24% of our wireline service addresses served by fiber.
Our network investments are driving positive results as shown in the metrics on the bottom of slide. Wireline residential video connections grew 12% compared to the prior year. And on average, our IPTV markets continued to achieve about 30% penetration, ranging from 20% to 60% by market. About 90% of our IPTV customers are on triple play bundles. In addition, churn on these bundles continue to remain very well.
Our residential customers continue to choose higher speeds of up to 1 gig in our fiber market and approximately 28% of all customers are now taking 50-megabit services or greater. And that's compared to a 22% a year ago, helping to drive a 2% increase in average residential revenue per connection.
Looking at the wireline financial results on Slide 18. Total revenues decreased 4% to $174 million. Residential revenues decreased 1%, primarily due to a 7% decrease in ILEC residential voice connections, which was offset by continued growth from video and broadband connections as well as growth from within the broadband product mix. Also contributing to the decrease was the impact from a discontinued customer loyalty program, which increased revenues by $2 million in 2017. We continue to see declines at both commercial and wholesale revenue. Commercial revenues decreased 8%, primarily driven by lower CLEC sales as we refocus to pursue commercial fiber opportunities, primarily in Wisconsin. Wholesale revenues decreased 5% due to the continued declines in special access services as customers transition from the higher-cost T1 services to IP-based services.
Wireline cash expenses were flat as lower employee cost and reduced cost of legacy services were offset by the growth in video programming costs. In the second quarter, as part of our continued focus on cost reductions, we recorded over $2 million of severance expense, which will lower our cost of wireline labor in the future. Primarily as a result of the declining commercial and wholesale revenues, wireline adjusted EBITDA decreased 12% to $59 million.
Now turning to Slide 19. We continue to be very pleased with our cable segment performance. Total cable connections, which were impacted by 2 small tuck-ins, grew 9% to $324,000, driven by a 14% increase in total broadband. As a result, broadband penetration increased 200 basis points to 41% compared to the prior year.
On Slide 20, total cable revenues increased 12% to $57 million driven primarily by growth in residential connections. Cash expenses increased 12% due primarily to acquisitions, higher programming content cost, IT-related expenses and severance. As a result, cable adjusted EBITDA increased 10% to $16 million in the quarter.
Okay. So moving on to Slide 21. We have provided our 2018 guidance, and we are reaffirming the guidance we shared in May. While A-CAM funding will improve, Q3 revenues trends will remain in the second half of the year. As I mentioned earlier, our capital spending will increase throughout the year to support fiber build out and cloud TV. And while we are not changing our $270 million guidance at this time, we are seeing signs we might be light on our spending by year-end and will evaluate our guidance in the third quarter and update you, if needed, at that time.
Okay. So now I'll turn the call back over to Jane.
Briefly on Slide 22, I'll provide a few comments about our HMS business before we go to questions.
In terms of results, OneNeck continued to experience some declining revenues, mostly on equipment sales from existing customers and lower adjusted EBITDA. However, year-to-date bookings for monthly recurring revenue remained up year-over-year and the team has completed several projects intended to enhance customer experience. So now, Jessie, we'd like to open the call for questions.
[Operator Instructions]. Your first question comes from Rick Prentiss with Raymond James.
Some questions, first on the wireless side. Ken, you mentioned how you moved beyond just the Midwest. Iowa, Wisconsin now have the VoLTE. On the West Coast, California, Oregon, Washington, with New England and Mid-Atlantic to come. What percentage of your POPs do you now have VoLTE offered in? And what should we think of heading towards end of '18 and '19?
So I don't have the POPs. We can get that back for you. I would say that by the end of '19, we'll have most of all of our markets covered with it. 90 is the number that the other end of the table just came through it.
I'm sorry, what was the number?
End of '19 we'll be at 90%.
90%, okay. And at least a kind of the roaming question. Obviously really nice improvement in roaming year-over-year, up 26%. You pointed out 3G traffic. But it sure seems like GSM operators, once you have the VoLTE in place, could be a noticeable improvement to roaming. How much have you already seen? And how should we think about how that could come in to the results with some high margins?
Great question, Rick. We actually have agreements in place across-the-board and starting to move at market-by-market, at least 1 of the GSM carriers onto our network. We're seeing nice traffic there. I continue to expect that to build over the next couple of years. The haul up we want to be careful of though is that we still have a very nice chunk of 3G-related roaming that's at a higher price. And as that migrates from 3G to 4G, we won't see the same revenue growth on in that piece. But overall, the plan when we talked about going to VoLTE was that we thought it would increase our addressable market on roaming, and that's exactly what we're seeing.
Okay. And the flip side of that question is have you seen any overbuilding yet with T-Mobile with the 600-megahertz spectrum they bought or AT&T FirstNet? What are the kind of the signs you're seeing out there?
We haven't seen any what I'd call market-level impacts yet. We're seeing activity as we're -- Iowa Wireless has told its customers it's shutting down its network. I'd expect that fourth quarter we'd probably see T-Mobile, third quarter, fourth quarter, start to market there more effectively. Right now, it's been more of an opportunity for us as their customers are reevaluating what their options are. So I'm thinking -- I'm expecting we see some but still later in the year.
Okay. And final question for me. You touched on it a little bit, 5G testing. As you think about millimeter wave, mid-band maybe like C-band and CBRS, how are you thinking about how those would fit into your footprint, use cases and appetite for auctions?
So with respect to that last word, auctions, we're going to avoid any questions around auctions per se. As we think about it -- Mike's here. Mike, why don't you share a little bit of our thinking on it?
Yes. Thanks, Rick. So I think Ken mentioned it earlier. We've been spending a lot of time trying to understand what 5G use cases represent the greatest opportunity for us. And frankly, the use cases that you focus on really drive how you think about the spectrum that you might need. So if you wanted to cover this full range of 5G use cases that are talked about, you would probably need a good amount of low-band, mid-band, a.k.a the C-band and millimeter wave. On the other hand, if you weren't interested in some of the higher-speed use cases, lower-latency use cases, you might consider foregoing a lot of millimeter wave or cut back on the amount you want there. So we're still working on getting clarity around the use case, and then that'll then form how we think about what we need for spectrum.
Do and you think you'll be able to share with us some of those use cases, thoughts as we go through the rest of this year into next year?
As we get more clarity around it, I think we will be able to. I think the one thing that is of note and that is how fast the movement around 5G and the industry is learning of its capabilities is really moving. I'd say that our own thinking 6 months ago around millimeter was really in rural areas. I don't know. But some of the recent work that Mike and team have been seeing is showing paths for it to better coverage than we originally thought with that spectrum. So there's a lot of research, testing and learning going on right now. And more to be done before we finalize overview on that, but it's moving fast.
Your next question comes from Philip Cusick with JPMorgan.
Ken, can you update us on your cost cutting efforts? And what type of programs are you running this year? What do you see in terms of opportunity?
Yes. So this is a enterprise-wide initiative that Steve, the CFO, has been leading that has looked at all parts of the organization. I think, I -- our own internal scorecards, we drove out about $100 million last year in various areas. We've got similar targets for this year and I think we are well on our way toward that, and we don't see it stopping at the end of this year. This is an ongoing program and so we'll be continuing to work on this, not only on things that effect this year but things that effect next year, too.
And sort of similar potential volumes over the next few years do you think? Is it big numbers?
No, no. I've given you this year's targets and last year's. Next year's we're still working on.
Okay. And can you expand on your comment about IoT sales to small business and government? What type of products are those? And would those benefit from a 5G or they just fine with 4G?
So we stood up this with direct sales force or government and business sales force now about two years ago. We've taken some time to get the right people in place and get the training and everything else as well as the products and services. And now they're starting to have a impact in our markets, as I said, really leading more with IoT devices. And most of the applications today do not require 5G. They work very effectively on our current network. And they are everything from things that help the County Highway Department run their trucks more effectively -- efficiently, I guess, as well as working with industrial company utilities and monitoring devices for them. Especially given our more less densely populated areas, it really helps them save cost as they can automate more of that work.
That's interesting. And is that sales force having any success selling mobility to SMB and government or is that just really early on?
Oh, no. Absolutely. We just don't lead with that. Everybody's got that. We're more focused on how we help them compete, how we solve their problems. And then the handset business is an extension off of that as opposed to going in and trying to sell what they already have.
Your next question comes from Sergey with GAMCO Investors.
Could you talk a little bit about maybe what you're seeing from cable companies in your markets in terms of their mobile offerings? You probably have a large overlap with Charter but maybe you have some Comcast as well. So maybe your thoughts on their mobile products right now and where do you think it could go in your markets in a year or 2?
So Sergey, it's nice talking to you again. I didn't know we'd be talking to you given your change in roles. But Comcast, I think the number's like 13% of our market has some Comcast presence -- 8 per -- oh, 8%, I'm being corrected. You've got to speak up. 8% not 13%. And single-digit numbers, not single-digit percentage. Very, very small activity on that side. As you know, Charter just launched at the end of the quarter. So no impact to date that we've seen. I'm expecting that we'll see some -- from what I've seen so far, they aren't out selling mobile to sell mobile, they're selling mobile to help drive their bundle. So we could see some impact in Wisconsin. But it's nothing yet. So I'm expecting that they will get some share going forward. I think about next year or the year after that we, in fact, take some out of the switcher pool but nothing that I can point to yet.
Okay. And a question on fixed wireless technology. This is probably both for the U.S. Cellular guys and for TDS Telecom. So Ken, if you could talk about your thoughts on fixed wireless use case for 5G? Or maybe fixed wireless on LTE that you might be using in some of your markets. What kind of opportunity you see there? And on TDS Telecom, maybe if Vicki could talk a little bit about the risks from 5G in your markets? And also how are you preparing for potentially Verizon and other carriers launching fixed wireless solutions?
So let me now start. There are two different products for two different markets. The -- we have a 4G fixed wireless product out there today that is really aimed at the more rural areas where you don't have cable or any other competitive product. And it's a nice product, it drives nice incremental sales. Interestingly, for about 25% of the new adds that come in taking that fixed wireless coming with it, bring a handset line with them. It's actually driving usage in parts of the network that aren't as challenged in terms of capacity as some of our city centers. So I like it. Nice product. For a 5G, that's one of the use cases we're looking at, and it would be something we'd look at in much more densely populated areas than the current one. That's under the theory that it's more of a millimeter wave product in terms of getting enough speed, you need more spectrum. Or as I said, our understanding of that performance of millimeter keeps changing. So too early to decide that one. But it's one we're looking at.
Yes. And Sergey, from a telecom perspective, the majority of our markets are very rural, and we're not seeing any elevated wireless substitution at this time. It certainly is a strategic watch point as the use cases start to develop. But the average usage per month per user in many of our markets is typically 10x that of wireless and that demand curve keeps increasing. So as we monitor the trends, we looked to the bottom decile or 2 of usage and that may be the most susceptible, but we haven't seen anything meaningful yet. And you also are going to have the topography and foliage interference that will cause challenges with that deployment. So 5G may change that but we believe it's a long ways away from the market.
Okay. Great. And another question on the wireline side in terms of fiber build. You mentioned that you're building in Wisconsin, so that's outside of your ILEC market. Could you maybe compare that market to Sun Prairie, what are some of the differences that you are seeing? And maybe just talk in general about your strategy for out-of-footprint build? What are some of the characteristics that you're looking at for those markets? And maybe where else you are going, if anything has been announced already?
Okay. Sure. So let me just start recapping our success that we've seen with our Sun Prairie market, which is really our first out-of-territory build. As I said, we're really pleased with that success. We have been able to achieve 46% broadband penetration and 24% for video. Our take rates are exceeding our experience in some of our more attractive ILEC fiber markets, where we are the incumbent telco company. And that's because Sun Prairie is a large market, good density and better demographics compared to many of our ILEC fiber markets. So we really like that kind of target and that's what we're looking as we look at the next 4 markets, which are all in the Dane County area where we are currently headquartered. So as of May, we began pre-selling in all 4 of those new fiber markets, 2 more recently than the other 2. But we're already seeing really strong results that looked very similar to what we experienced in our Sun Prairie market. And so we are excited with this strategy, it's important to our future growth and we certainly have earmarked about half of our capital spending on fiber and half of that $60 million in 2018, and we'll update you as we go into 2019 on what that strategy will look like.
Great. And last question, maybe for Jane, on HMS. Obviously, I mean, equipment revenues are still a drag but you're seeing some progress on the service side. At what point do you guys would need to make a decision whether this is going in the right direction and you need to continue investing in this or maybe it's time to exit this business? I guess, what are some of the benchmarks you have set for this business and some of the things that you're looking for to make the determination?
I would say that, Sergey, we really remain pretty optimistic that we are in the right market with that business, serving mid-market customers. I think we're looking -- we moved that under corporate. And Kurt Thaus, our CIO, is working with Terry Swanson, the CEO there. And they've done a lot of work looking at the product set and making sure we've got that right portfolio. So things like building an emphasis on security products, which our customers are asking more and more about and aligning that colo and cloud product with that. So we still see a lot of room there and at this point, are certainly looking to operate that business and get it back on a growth trajectory.
[Operator Instructions]. The next question comes from Simon Flannery with Morgan Stanley.
It's Spencer for Simon. Just a couple of follow-ups on your earlier comments. On net adds, your net adds in the industry as a whole had been really strong this quarter and over the past few quarters, really. What do you think is driving that industry strength and how much of that is sustainable? And then separately, on the balance sheet, based on your current 2018 guidance, I think, net leverage is about 1.3x, which is lower than a lot of your peers. Could you talk about balance sheet optionality and any updated thoughts around leverage?
So I'll start with the second part of that question first. We're comfortable with where we are on our leverage right now. We don't have any financing needs in the near term, and I don't see any change there. We've got some lines available to us should we wind up being at whether it be from spectrum or whatever. But right now, we're fine. And the adds, I don't know that I'd speak at the industry level in terms of how sustainable growth is. We like it. I talked about how we started off the quarter slow and moved slow and things have picked up. I like that. I like what I'm seeing. I think we've got continued opportunities in some of our markets, especially as we continue to move customers, as Steve mentioned, from...
Feature phones.
Feature phones. Thank you. I lost the words. Feature phones to smartphones as well as continue to broaden our addressable market. We've been doing a lot of work to broaden our appeal to some of the segments that we haven't been as strong in and what we're doing in the SMB space is quite an example of that. So we've still got some more room to grow, I think.
Okay, then some of the, I guess, promotions of your peers, the military and some of -- targeting seniors. Is that having any outsized impact on you or is it pretty neutral?
I wouldn't call it outsized at all as evidenced by the churn rate that you've seen.
There are no further questions. I'll turn the call back to the presenters.
Very good. Well, thank you for joining us this morning, and we look to any follow-up calls or questions you may have. Have a great day.
This concludes today's conference call. You may now disconnect.