Telephone and Data Systems Inc
NYSE:TDS
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Telephone and Data Systems Inc
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Greetings and welcome to the TDS and US Cellular Fourth Quarter Operating Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Jane McCahon. Thank you. You may begin.
Thank you, Matt and good morning and thank you all 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 sections of the TDS and U.S. Cellular websites.
With me today and offering prepared comments are Doug Shuma, Senior Vice President of Finance at TDS; from U.S. Cellular, Ken Meyers, President and Chief Executive Officer; Steve Campbell, Executive Vice President and Chief Financial Officer; and 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. For TDS Telecom, there are just a few small differences between those two metrics.
As shown on slide 2, the information set forth in the presentation 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 paragraphs in our press releases and the extended version in our SEC filings. Shortly after we released our earnings and before the call, TDS and U.S. Cellular filed SEC Forms 8-K, including today's press releases. We will be filing our SEC Form 10-K on Monday.
Taking a quick look at the upcoming IR schedule on slide 3, we will be attending the Morgan Stanley Conference on February 27 and presenting at the Deutsche Bank Conference on March 6. Please let us know if you'd like any additional information about these events. And keep in mind that TDS has an open door policy. So if you're ever in the Chicago area and would like to meet with members of management, the investor relations team will try to accommodate you, calendars permitting.
And as you saw in the press release this morning, our next speaker has decided to retire. Doug has been an integral part of our leadership team at TDS and while we've all tried to talk him out of it, he's not - we've not been very successful. One of his greatest contributions to the company has been to build a strong, deep finance and accounting team, which made identifying his successor Doug Chambers an easy decision. With this much time to plan the transition, we expect it to be seamless.
So Doug, you're not done yet. I'd like to make a few comments.
Thanks, Jane and good morning everyone. Turning to slide 4, beginning with our capital allocation strategy. TDS has continued to follow its capital allocation ratio. However, as we've been unable to find any sizable cable acquisitions that meet our criteria, the percentage of available resources being returned to shareholders is currently over weighted. Since announcing that 3:1 ratio back in 2013, TDS has invested $611 million back into the businesses, primarily through cable acquisitions and has returned $333 million to shareholders by paying $282 million in quarterly dividends and repurchasing $51 million in stock.
We continue to look for additional cable acquisitions and have recently been successful, finding a few nice tuck-ins. Also in 2017, TDS Telecom bought some fiber assets from a small, out of territory utility in Sun Prairie, Wisconsin and is using those assets to overbuild the market with fiber. Early results have been very successful. Given the success and those from the fiber markets we have had in service for a while, we've identified additional opportunities to deploy fiber, both inside and outside of our ILEC footprint.
We view these fiber projects as being very similar to acquisitions as they're truly investments back into our businesses to generate profitable growth and thus we will include them in the calculation of our capital allocation ratio going forward. Today, we declared our dividend, raising the rate 3%. This is the 44th consecutive year that TDS has increased its dividend, a record we're quite proud of.
Now, moving to HMS. As we discussed last quarter, beginning in 2018, the HMS segment is reporting to TDS Corporate and its results will be recorded in the other segment in our financials. We'll continue to update you on what next progress and its guidance will be included in the total for TDS.
As for revenue recognition, effective January 1, we adopted the new revenue recognition accounting standard. Adoption of this accounting principle will cause a cumulative effect adjustment of approximately $175 million to increase retained earnings, will not have a material ongoing impact on our operating results.
Lastly, turning to slide 5, there are a number of special items that impacted TDS' 2017 results. In the third quarter, there was a $262 million non-cash loss on impairment of goodwill. In this quarter, there was a Tax Act, which was signed in December. Due to the enactment of the Tax Act, which reduced the federal corporate tax rate from 35% to 21%, TDS recognized a one-time deferred tax benefit of $327 million due to the revaluation of its deferred tax assets and liabilities at the new corporate rate.
In 2018, we will benefit from bonus depreciation, which allows full expensing of qualified property. As a result of this change, TDS does not expect to incur a significant current federal income tax liability in 2018. Any cash savings from the Tax Act changes will be used to invest in the business and build cash reserves. The majority of these cash tax savings will be realized at U.S. Cellular.
And now, I will turn the call over to Ken.
Thanks, Doug. Good morning. My remarks this morning will primarily focus on our annual results, highlighting our key achievements in 2017. And then I'll turn to our strategic priorities for 2018. Steve will cover the fourth quarter operating and financial results as well as our guidance for 2018.
That said, I can't held myself to spend a quick moment on the successes in the fourth quarter. We continued to add handset customers and did so in a responsible manner. Service revenue showed one of the best year-over-year performances in a long time. Costs continue to be low, all combining to generate a 7% increase in adjusted earnings before interest, taxes, depreciation and amortization. Yes, a good quarter indeed.
Looking back at 2017, we made significant progress building and strengthening our business. To start, we accomplished our top priority, which was to protect and grow our customer base. Much of the success is due to the introduction of our total plans, which included unlimited data options. We launched the plans in February 2017 in a very fast response to the changing marketplace. It's clear that both new and existing customers appreciate simplicity of these plans.
I reflect on the accomplishments for the year, one that rises to the top was that return to positive postpaid handsets, net adds. We did this with a 2% increase in gross adds in spite of a shrinking switching pool and a meaningful improvement in handset churn, which ended the year just under 1%. We need now to leverage those successes in 2018.
As part of our initiative to protect the base, we focused on increasing customer engagement. This was an objective across all areas of the company, from the front line sales and service organizations to the network engineers and we've driven meaningful improvement in this metric. We want our customers to receive great service in the middle of anywhere, both on our network and while traveling and using the network of one of our roaming partners.
Speaking of network, we continue to receive independent third-party recognition for our superior networks' experience. Once again, we were awarded the J.D. Power Wireless Network Quality Award in the North Central region. Note, the North Central region is the only area where we are large enough to be considered for the award. We used the same standards for all of our networks, ensuring our customers have a great experience in each of our markets. Also, I think it's particularly noteworthy that we earned the award while continuing to carefully manage our capital spending, while still addressing the increasing data usage demands from unlimited plans.
Turning to slide 8, given the pricing pressures of the last year, we knew we need to grow other revenue sources and continue to work on our cost structure in order to improve EBITDA and we did both. Accessory sales were up 10% and device protection plans now cover 42% of our base. Additionally, we've positioned ourselves to begin to drive increases in roaming revenue through our Voice over LTE deployments and we continue to rent our own towers, generating $60 million in rental fees, up 5% on a year-over-year basis.
We are also continuing to focus on cost reductions. In 2017, we enacted a number of major cost saving initiatives that impacted almost every category of spending, generating some $100 million in reductions and that program continues into 2018. Together, these efforts produced a modest increase in adjusted EBITDA for the year, even though service revenues and total revenues were down about $100 million.
Turning to slide 9. Our network strategy is a key driver to our customer satisfaction and we work hard to live up to our brand promise of a network that works in the middle of anywhere. Voice over LTE went live in Iowa last year and we recently launched our Wisconsin markets too. We also completed 5G trials using 28 and 15-gigahertz, testing both indoor and outdoor use cases and are now working on a 3.5 gigahertz trial.
At the same time, we aren't waiting for 5G to meet the needs of our customers in our markets. In 2017, we trialed an LTE fixed wireless offering using 4G that functions well and is showing encouraging initial sales and we plan further commercialization of this product in 2018. In 2017, we also improved our spectrum position by purchasing 600 megahertz licenses that essentially cover our entire footprint.
We also completed a number of license exchanges to gain value from some of our non-strategic licenses. As I previously mentioned, our network performance remained strong despite major increases in data usage. To put this into perspective, for the full year, data usage grew 49% and yet capital expenditures came in meaningfully lower than our original guidance. All in all, I think 2017 was a pretty successful year.
Now turning to 2018, I'm optimistic about our opportunities for the year ahead. I still don't like the long-term economics of the unlimited plans and we still have inexpensive tablets that we'll be turning off, however, as you'll see when Steve talks through our guidance, we are targeting a small, single-digit increase in revenue this year. Given the pricing pressures over the last two years, this is a positive development. I'm sure there's still some drag caused by 2017 pricing changes, but we benefit from the revival of handset growth over the last few quarters, the successes in accessory and add-on sales and all the work the team has done on VoLTE deployment and working with other carriers to operationalize LTE and VoLTE volume.
[indiscernible] some fixed wireless and the impact of today's somewhat more stable pricing environment and we could see a return to growing revenues. As evidenced of this currently improved pricing environment, we actually raised prices on an entry-level plan late last year and are testing other contracts in selected markets. Besides growing the top line, we will continue to work to reduce expenditures across the organization.
In fact, we have projects across the enterprise being worked right now and I expect they will generate a similar rate of savings as the one last year. We will also continue to carefully manage our investments of capital, both financial and human. We'll continue to invest in our network to provide additional capacity to meet the growing demands for data services. We'll continue our multi-year VoLTE deployments and finally, we'll be increasing our investment in some digitization projects to ensure customers have a great experience with every interaction.
On the human capital side, we have a special and unique culture at U.S. Cellular that results in a very, very high level of associate engagement. We will continue to invest in our team to ensure that they're able to grow themselves and are prepared to meet the changing needs and expectations of our customers. I'm very proud of what this organization accomplished in 2017 and I'm excited about what our potential is for 2018. The spirit and customer focus exhibited by all associates is extraordinary and I thank them for all of their efforts.
And now, let me turn the call over to Steve Campbell.
Thank you, Ken. Good morning, everyone. I'll start with U.S. Cellular's fourth quarter highlights shown on slide 11 of the deck. As Ken said, overall, it was a good quarter. We achieved growth in both postpaid and prepaid connections and in the postpaid category, a significant improvement in handset net additions year-over-year. We achieved sequential growth in revenues and our first quarterly year-over-year increase in revenues in several quarters.
Our cost management efforts continued to produce good results with cost reductions in most major areas. We achieved increases in both adjusted operating income before depreciation and amortization, which was up 5% from a year ago and an adjusted earnings before interest, taxes, depreciation and amortization, which was up 7% from a year ago. As a result of the Tax Act that was signed into law in December 2017, we recognized a tax benefit of $269 million in the fourth quarter, due to the revaluation of deferred tax assets and liabilities at the new corporate tax rate.
Looking ahead, we believe that we have sufficient financial resources to fund our day-to-day operating needs, our capital expenditure programs and debt service requirements for the coming year. At December 31, cash and short-term investments totaled $402 million. In addition, we have nearly $500 million of total borrowing capacity under our previous revolving credit facility and the new receivables securitization credit facility that we entered into during December 2017.
So now, let's get into some of the details beginning with postpaid connections activity. Postpaid remains the largest and most important segment of our business at about 90% of our total retail connections. We had 177,000 postpaid gross additions for the fourth quarter of 2017. This included 133,000 handset gross additions, which increased by 15% year-over-year. These higher gross additions together with low churn resulted in 18,000 handset net additions.
Overall, including connected devices we achieved 5,000 postpaid net additions for the fourth quarter, better than the net loss of 2000 a year ago. Underneath these totals is the real story. Handset net additions totaled 18,000 compared to a net loss of 25,000 a year ago. That's a swing of 43,000 handset net additions driven by the 15% increase in gross additions and low churn of 1%. In addition to our handset net additions, we continue to have handset customers upgrading from feature phones to smart phones. Including those upgrades, total smartphone connections increased by 62,000 during the fourth quarter of 2017. We ended the quarter with about 5.1 million total connections, which is about 1% higher than a year ago.
The next slide provides some detail on the postpaid churn rate. Handset churn for the fourth quarter was 1%, up only very slightly sequentially, reflecting traditional seasonality and significantly improved from last year's 1.23%. Connected devices' churn was 2.84% for the fourth quarter of 2017, continuing at the elevated levels we've seen over the past few quarters as discounted tablets sold in connection with various promotions continue to roll out of contract.
Now, let's go to slide 14 to look at revenues. Total operating revenues for the fourth quarter were just over $1 billion in both years. They were up 23 million or 2% year-over-year. The increase primarily relates to equipment sales revenues. Retail service revenues shown in the blue portion of the bars decreased by 1%, driven by lower average revenue per user, reflective of industry wide price competition. And I'll take you through the ARPU numbers in a minute.
Equipment sales revenues, shown in the gray portion of the bars, increased 8%, reflecting an increase in the average revenue per device sold and a mix shift to higher-end smartphone devices as well as sales of accessories as Ken referenced earlier. Another note, in the fourth quarter of 2017, we started offering accessories for sale on installment plans.
The next slide provides some additional information related to postpaid revenue. Average revenue per user for the fourth quarter of '17, shown as the blue portion of the bars in the graph at the left, was $44.12. That's down 2% year-over-year, reflective of industry-wide price competition. Given the continuing migration of equipment installment plan pricing, the average billings per user, which includes equipment installment billings, shows the total amount being collected from customers every month. As you see, this more inclusive measure was $56.69 for the fourth quarter, up 2% year-over-year. And similarly, average billings per account shown in the graph at the right also was up 2% year-over-year.
Let's move on to our profitability measures, starting on slide 16. Adjusted operating income before depreciation and amortization for the fourth quarter was $152 million, up 5% from a year ago. Total operating revenues of just over 1 billion increased by 23 million or 2% as I discussed just a minute earlier. Total cash expenses of $877 million increased by 16 million or 2% year-over-year. Note that the overall increase was driven by higher cost of equipments sold, while there were decreases in system operations of 3% and in SG&A expenses of 5%.
There are a couple of items that are particularly noteworthy. First, total data usage on our network grew by 59% year-over-year. Yet, true system operations expense, exclusive of roaming, decreased by 5%. Data roaming usage increased by 52% year-over-year, but due to the shift to 4G and the related rate reductions, data roaming expense grew by only 5%. The average off-net usage per customer is still just over 5% of total usage.
Shown next is adjusted earnings before interest, taxes, depreciation and amortization. This measure incorporates the earnings from our equity method partnerships along with interest and dividend income. In total, $190 million for this year's fourth quarter compared to 177 million last year. Equity in earnings of unconsolidated entities includes $16 million from the Los Angeles partnership in the fourth quarter of this year compared to 14 million in the same quarter last year.
Next, I want to cover our guidance for the full year 2018, which is shown on slide 18. For comparison, we're showing our 2017 actual results. So first for total operating revenues, we expect a range of approximately $3.85 billion to $4.05 billion. Our plans anticipate a more stable rational competitive environment this year. This is obviously not within our control, but we think it's a reasonable assumption at this time, given how the industry is currently behaving.
For adjusted operating income before depreciation and amortization, we expect a range of $625 million to $775 million, reflecting the favorable revenue trend as well as the continuation of cost savings initiatives. That estimate flows through to the estimated range for adjusted EBITDA, which is $765 million to $915 million. To the extent that we achieved different levels of customer growth than currently estimated or if the competitive environment changes to any meaningful degree, we would expect the results to be at the ends of the ranges provided.
For capital expenditures, the estimate is a range of $500 million to $550 million and assumes the continued deployment of Voice over LTE, additional network capacity to accommodate increased usage, enhancements to our retail store network and investments in new and end of life systems platforms.
Now, I'll turn the call over to Vicki Villacrez to discuss TDS Telecom. Vicki?
Okay. Thank you, Steve and good morning, everyone. I'm pleased to start this morning with some highlights of our accomplishments in 2017. Our targeted investments and execution of our strategic priorities, generated solid results and we managed cost across all businesses to improve margins and provide resources for capital investment and future growth.
The achievements, which are shown on slide 20 and 21, paves the way for 2017 results. First, we focused on upgrading our networks across both wireline and cable, using technology including fiber and the full capabilities of DOCSIS 3.0, we improved broadband service and related products in our most competitive markets. In wireline, this allowed us to maintain broadband and grow IPTV connections.
As a result, our wireline full year 2017 residential revenues increased 3%. By the end of 2017, we had deployed fiber to the home to 24% of ILEC service addresses. To further strengthen our broadband offerings, we deployed copper bonding technology to an additional 26% of our ILEC service addresses, which enables broadband speeds of up to 50 megabits.
Second, our IPTV product called TDS TV is an important offering that leverages our high-speed network, improves ARPU and reduces churn. We have launched TDS TV and offer up to 1 gig broadband speeds in 29 markets, enabling 210,000 service addresses, which is roughly 28% of our total footprint. We have been focusing on bundling IPTV and high-speed broadband to drive higher penetration in these markets.
Third, we expect that the FCC's A-CAM offer of 75.1 million annually for 10 years and worked with multiple states to secure additional broadband grants. We launched over 1,400 projects in 2017, all focused on building the infrastructure and the transport and capacity augmentation necessary to begin meeting our build requirements to the outermost areas of our markets.
And fourth, as Doug shared with you, we acquired and successfully overbuilt our first out of territory fiber market to drive future broadband growth. All of these efforts drove an 11% increase in wireline adjusted EBITDA in 2017.
Key accomplishments in our cable segment also led to strong results. First, we increased broadband penetration as a direct result of our network and capacity upgrades. These improvements of a network and product offering, including 300 to 600 megabit broadband speed are driving strong growth in broadband connection. Cable full year 2017 revenues increased 11%.
And second, we closed and integrated three cable acquisitions, InterLinx's Tonaquint Networks, K2 Communications and Crestview Communications, increasing our total connections by 4%.
Looking ahead to 2018, slide 22, our objective is built on the strategic priorities we have already put in to place to grow revenue, improve the customer experience and increase our operational effectiveness. We're planning on more fiber expansion within our existing IPTV market and may add additional markets to that list. After the successful trial of an out of territory fiber overbuild on Sun Prairie, Wisconsin, which is adjacent to our existing wireline footprint, we are moving forward with plans to bring fiber to additional new markets with attractive demographics and where TDS has a strong brand awareness.
In 2018, we are earmarking 60 million in capital to fund these fiber builds. A-CAM, along with the state broadband programs, will enable us to drive fiber deeper into our network, increasing this metric over time. A-CAM will directly benefit approximately 21% of our wireline footprint. So looking back at the graphic on slide 20, we continue to find ways to reduce the percentage of households served by on upgraded copper in our markets.
And to that objective, we remain actively engaged with the FCC and are still advocating the A-CAM be fully funded to the level of its initial offer. This program is critical to our ability to be able to serve the most rural areas of our market. Full funding from the FCC will allow us to provide even faster speeds to our most rural customers, helping to reduce the digital divide.
For cable, we'll look to build on our momentum to further increase broadband penetration to drive revenue and margin growth. A key part of that strategy is to upgrade the network to DOCSIS 3.1 in some of our largest markets to further increase speed capabilities. In addition, we are in the planning phases to build a cloud TV platform for both wireline and cable markets for availability in 2019. Overall, we remain very pleased with our cable investments and continue to evaluate cable acquisitions while maintaining our stance as a discipline buyer.
Now switching to our quarterly results on slide 23. We achieved a 12% increase in adjusted EBITDA by maintaining growth in wireline revenues, coupled with double digit growth in cable revenues. However, HMS revenues were still below last year's and as a result, total telecom revenues declined 3% from the prior period. Capital expenditures in the quarter increased to 76 million as construction of the A-CAM build out accelerated as planned, but are still under our original CapEx guidance for the year in total.
Now, let's turn to our segments. Beginning with wireline on slide 24, we continue to meet the demands of our customers for higher broadband speeds and IPTV services by leveraging the fiber redeployments we've made in our most competitive markets, our ILEC market specifically. In total, about 20% of our network route miles are fiber built as a direct result of our fiber deployment strategy over the last several years.
Our network investments are driving positive results, as shown in the metrics on the bottom of the slide. Wireline IPTV connections grew 7% adding 3,300 connections compared to the prior year and on average, our IPTV markets are reaching 30% penetration levels. 90% of our IPTV customers are on Triple Play bundles. In addition, the churn on these bundles continues to remain very low.
The residential customers continue to choose higher speeds of up to 1 gig in our fiber market and approximately 25% of all customers are now taking 50 megabit services or greater. That's compared to 20% a year ago, driving a 4% increase in average residential revenue per connection.
Looking at the wireline financial results on slide 25, residential revenues increased 1%, due primarily to continued growth within the broadband product mix as well as growth from IPTV connections. Partially offsetting this growth is a decrease in ILEC residential voice connections, which ticked up to 6% in the quarter as we are seeing stronger cable competition in our copper markets.
Commercial revenues decreased 7%, primarily driven by lower CLEC sales, resulting from our strategy to refocus the business on serving customers who do not require leased facilities, which lowers cost and increases profitability for that group. Wholesale revenues increased 9% due to support received under the A-CAM program, partially offset by decreases in other regulatory revenue and lower minutes of use.
So, in total, for the quarter, wireline revenues increased 1% to 176 million. At the same time, wireline cash expenses decreased 5% on lower employee costs and costs of providing services, offset by the growth in IPTV programming costs. As a result, wireline adjusted EBITDA increased 12%, improving margins by 390 basis points to 37.8%.
Turning to slide 26, we were very pleased with our cable segment performance. Total cable connections grew 8% to 315,000 driven by a 9% organic increase in total broadband connections and the acquisition of approximately 12,000 connections at Crestview and K2. As a result, broadband penetration increased 200 basis points to 40% compared to the prior year. These are economically vibrant markets with household growth of 2.5% annually.
On slide 27, total cable revenues increased 10% to 54 million, driven by growth in residential connections. Cash expenses also increased at 6% due primarily to higher programming content costs, legal expenses related to our acquisitions and operating tax adjustments. As a result, cable adjusted EBITDA increased 3 million to 14 million in the quarter, improving margins 300 basis points to 25.6%.
The HMS results are summarized on slides 28 and 29 and are excluded from TDS Telecom's guidance going forward as shown on slide 30. We are forecasting combined wireline and cable revenues of 900 million to 950 million compared to 919 million in 2017. For wireline, we anticipate the growth in broadband and IPTV to be more than offset by the decline in legacy voice and commercial revenues. We expect total wholesale revenues to also decrease due to continued declines in inter carrier compensation rates, lower minutes of use and lower A-CAM transition amount.
We expect cable revenue growth in the low double digits, reflecting continued strong growth in broadband. Adjusted EBITDA is forecast to be within a range of 300 million to 330 million compared to 323 million in 2017. Contributions from wireline growth initiatives and cable as well as cost reductions will help offset pressures in the legacy wireline business.
Capital expenditures are expected to be approximately 270 million in 2018 compared to 201 million in 2017. Wireline CapEx guidance includes A-CAM and state broadband program spending of approximately 40 million, 60 million dedicated to in and out of territory fiber deployments as well as 45 million in success based spending for both wireline and cable.
Before I turn the call back over to Jane, I'd like to close by saying that we are very proud that the investments we have made, both in our networks and the cable companies we have acquired, are performing so well and I'd like to thank all of our employees for their contributions to these successes.
Now, I'll turn the call back over to Jane.
Thanks, Vicki. I'll provide a few comments about the HMS business before we go to questions. First and foremost, we remain committed to the business. With the changing reporting structure, HMS will be able to leverage TDS' corporate IT resources to improve operations and customer service and better position itself for growth.
Speaking to slide 31, while financial performance did not meet our expectations last year, we did see pockets of strength in some key products, specifically double digit revenue growth from our strategic ReliaCloud and related services and from co-location services. We also made important progress on key operational initiatives to improve the speed and quality of services delivered to our customers, which helped drive our NPS score to 47 from 33 in 2016.
This year, we will continue to prioritize projects that improve our customers' experience. To increase sales, we are focused on leveraging data gained through detailed market analysis to target customers that find the highest value in our products and services. We also continue to refine our hybrid IT solution with a quickly evolving IT market and customer needs.
In particular, expansion of our security portfolio and our advisory consulting services designed to help our mid-market customers navigate the complexities of a hybrid IT world and how our solutions fit with their needs, including our on-premise public or private cloud solutions and services. We look forward to reporting progress on all of these objectives.
Now operator, we'd like to open the call for questions.
[Operator Instructions] Our first question is from Rick Prentiss from Raymond James.
First, congrats to Doug. Really have enjoyed working with you. Enjoy retirement, but it sounds like we might get one more earnings call out of you.
Yeah. Feel so, Rick. Thank you.
First question I've got is on the USM side. Obviously, very strong guidance for OIBDA in '18. If we think about the midpoint of the guidance, Steve, you kind of reflected on it a little bit, but how should we think about what your midpoint suggests as far as adds, churn and ARPU trends versus '17 actuals?
So, Rick, you're kind of asking to give you the guidance on all the things we don't give you guidance on in other words. It doesn't make sure I understand the question.
Yeah. Maybe, just as a midpoint, thinking things could continue along, it's at a more stable rational marketplace?
Yeah. I mean the midpoint assumes, we kind of continue to see the stability that we've seen in pricing over the last, I'd say, probably five months now. On the service side, a better environment, little crazy promotions that come and go, but on the service side, we're anticipating and planning on a continuation of that.
And same kind of thought on, the switching pool stays low, no iconic device is really shaking things up. So kind of like a business as usual, stable environment, is that kind of -
Yeah. As we've seen it, even with some iconic launches in the last year, you've seen continued shrinking of the switching pool and I don't know that anything is on the horizon that changes that dramatically. What you're seeing is customers are settling in so to speak. There's a segment of this market that always flips adjacent price, but between the EIP plans out there, the family plans, there isn't as much movement as there used to be, combined with the elongation of the customer relationship. What we're seeing is in our own customers, EIP customers get now to 30 months in terms of keeping their customer, keeping their customer equipment, which is very similar to what we're hearing from our vendor partners of what they're seeing across the whole industry.
Okay. You also called out the tower business as being successful, 5% revenue growth to 60 million. I assume, you haven't seen much from FirstNet yet, but are you open to the FirstNet coming on to your towers and do you think that could be beneficial to that growth rate?
It absolutely could be. We have said that we will work with AT&T, at the same time, we're also working with all of our state customers to make sure they understand that the very pervasive network we've got in places that others aren't. We'll keep delivering that to them until they can meet their requirements to their, call it, their customer base.
The other large project this year is T-Mobile with their 600 megahertz, have you seen any activity from T-Mobile yet or are you anticipating T-Mobile coming on your towers as well?
We have towers in our portfolio and I'm sure that we do business with T-Mobile, just like we do with everybody else. Have not seen a dramatic increase in their activity, one. Two, we're working with them on the roaming side and both to handle some of our traffic as well as to help them handle some of their traffic. At the end of the day, our markets aren't the biggest and therefore, the fastest return on every dollar somebody puts in and I think that as we continue to work for them, work with them, they'll find that they could serve customers without doing huge build ups.
And then obviously that leads the final question, which is T-Mobile on their call, called out they have money for strategic tuck-in acquisitions, but they also called you guys out and Verizon out as far as those markets they might go after where there's only two choices today, Verizon, and USM. I think I know the answer, but let's ask it anyway. Any updated thoughts on possibly considering the strategic tuck-in acquisition as opposed to the, we might overbuild you, stick that T-Mobile alluded to.
I don't know I've ever been called a tuck-in before. It's kind of [indiscernible]. That's a question that goes to the TDS level. That's not one that I get involved at all out here. We are focused on simply driving higher levels of customer satisfaction and higher levels of customer growth there.
Makes sense. Doug, any thoughts before you head out to the sunset, any updates on this?
Yeah. Rick, I'd say the same update you've gotten from me in the past. If the controlling shareholders were to change their position, we would be telling you about it.
Our next question is from Sergey Dluzhevskiy from Gabelli & Company.
Couple of questions. On the wireless side, so obviously U.S. Cellular has made significant progress on cost cutting activities this year and can you mention that the same level of activity is going to continue in 2018? Could you talk a little bit about some of those projects, maybe the largest buckets, of course savings opportunity that you see? And maybe a related question, as you look out over the medium-term, given the competitive environment, given the oppositions and the industry, given factors that you can control, what kind of margins you are targeting for U.S. Cellular over medium term?
So, I'll maybe try it the first way, Sergey. We're actually working diligently to take costs out of all different parts of the business. And when we talk about cost, that's the cost of the network. It's the cost of operating the network. It's the cost of our handsets. It's the cost of running customer service. So we look back last year and we made some real nice progress on some of our key third-party relationships, that as well as some continued investments in technology to make our call centers even more efficient. Going forward, there's a longer list, I don't know that there's any one item that even accounts for probably 10% of that total, rather work being done in every network and every call center and every department across the whole organization.
The margin question is a, as I said last quarter, that's a real tough question right now, just given the pricing environment. At these levels, I think if you look at our service margins, they've improved nicely over the last year. And getting close to where I thought they'd eventually have to be, but because pricing has come down, we actually - getting to mid-20s doesn't give me where I need to be any more, because what's happened to the numerator. So I'm not in a position to give you good margin numbers right now, just given the whole uncertainty around pricing and the uncertainty around when we start to see some of the roaming growth I'm expecting, but I'm really pleased to be looking at a scenario that's look at, even a single digit revenue growth compared to the 3% and 4% and 5% revenue declines we've seen in the past.
And another question, following up on Rich's question on T-Mobile and obviously, they acquired 600 megahertz spectrum in, I think in your top 10 markets, probably 30 to 40 megahertz of that spectrum and they said they're moving aggressively and obviously they're targeting markets where Verizon or one of the big two carriers and maybe U.S. Cellular are probably the only providers. So, I understand that your markets are not the largest, but given the fact that potentially T-Mobile is moving in, could you talk a little bit about how you could be mitigating the impact from this potential negative factor and what else could be done from an operating perspective, given that you may be seeing a new competitor over the next year or two.
Yeah. So there's a couple of things. First of all, there isn't a sizable market that we operate in that doesn't already have Verizon, AT&T, Sprint and probably T-Mobile to, when you talk about things that's sizable, they're there. Okay. So where they aren't is, oh, no, maybe [indiscernible] where the density doesn't have a lot of attractive economics for someone to come in and build a new network. So, I heard that comment too. I'm going to say, there aren't a lot of sizable population pockets where there's only two carriers. At least, I haven't been able to drive through one region.
Having said that, our marketing organization, our sales organization and our service organization are doing a lot to even strengthen our relationships with our customers, including lifecycle management programs. We're constantly in touch with our customer base, the network that we do have has taken some markets, 20, 25 years to build out to all the places that it covers. And that coverage is still a big advantage, but we will continue to play in terms of the competitive marketplace.
And one question on the wireline side for Vicki, you're budgeting additional 60 million for fiber build inside your ILEC territory and outside your ILEC territory, could you talk a little bit about the success that you saw in Sun Prairie that basically led you to potentially trialing and overbuilding more in 2018 and beyond and as you look at this 60 million bucket, what portion do you think is budgeted for out of footprint territory and what are sounds that - characteristics of those markets where you think your efforts will be successful?
Sure. Let me take that in a couple of pieces. First, from the guidance standpoint, Sergey, that higher capital this year is really due to that commitment to further our fiber strategy, as you said, both within and outside of our footprint. So we've earmarked the 60 million additional capital and that's roughly about half, half outside our current footprint and half with inside our footprint. And as you know, our growth in residential revenues that we have reported on all last year is really a direct result of those fiber investments. Also, in wireline, both the results from within our footprint and our fiber investments outside of our footprint.
In Sun Prairie specifically, we purchased a small utility, the fiber access of Sun Prairie utility as they had just begun to build out fiber, higher speed broadband products themselves and we purchased that as a jump start really to overbuild that entire market, which is currently contiguous to our current ILEC footprint in Dane County and we have very strong brand awareness in that market as well as in other markets surrounding Dane County and that is where we are headquartered.
And what we are seeing is that one, this Sun Prairie has very attractive demographics and a certain helpful density that made our economics work for a fiber overbuild and we're seeing the pent up demand in these high in these - is really high in these types of markets and customers are willing to buy the higher premium services. So we're really excited to further expand that strategy in 2018.
We do have time for Simon Flannery from Morgan Stanley.
So again best wishes to Doug. Ken, the industry had a very good quarter in terms of postpaid adds. There's a lot of theories there about the economy, about prepaid migration. I'd love to hear what your thoughts are on both the drivers and also sustainability of the pickup in adds and ARPU looked pretty good this quarter. You'd had a sequential increase there. Perhaps, you can just talk through the drivers on that and how you see ARPU evolving? Thank you.
So I'm going to let Jane talk a little bit about the postpaid, prepaid migration and what we might be seeing there. On the ARPU side, yeah, ILEC. So what you had throughout the year was the growing number of customers on unlimited. So some migration up from old rate plans within our markets up to those, one. Two in late third quarter, early fourth quarter, we actually raised price on one of our entry level plans. So I'd say, those are probably two of the better factors with the bigger one being that migration and step up. The other thing that goes into the calculation there is we talked about how about 42% of our customers now have a device protection plan and so that generates some revenue going through there too.
But Jay, what have you seen on the migration side?
Yeah. On the migration side, we've obviously continued to track that and we actually haven't seen any major shifts one way or the other. It's almost kind of equal and equal out on a regular basis relative to postpaid to prepaid and then prepaid back to postpaid. So obviously, we're tracking that very closely. As Ken mentioned, just to kind of put a date around, we did some pricing changes, actually I think right around September timeframe, right around September timeframe going into fourth quarter.
And additionally, as Ken mentioned, we continue to look at those kind of products and how do we make those products even more valuable to the customer to help drive them into our higher device protection plans and we've just seen great success and great focus. And finally even on that, we continue to utilize our call centers to that opportunity. Every time we have calls into the call center, once we complete a call, we feel very good about that satisfaction of call center as becoming a up and coming revenue generating channel for us with those opportunities.
As you talked about device protection there, Jay, one of the things that we're actually able to lead with was we were able to wrap in AppleCare into our device protection and we were the first -
Yeah. We did that almost about a year or so ago, going into this time, we launched that first here in Asia, actually globally to offer AppleCare incorporated into the actually package itself.
Which really gives a lot of value to the customer and it was very well received.
Thank you. This concludes the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.
We would just like to thank you all for joining us this morning and if you have any follow-up calls, please let us know. Thanks.
This concludes today's teleconference. Thank you again for your participation. You may disconnect your lines at this time.