United States Cellular (USM 5.33%) Q2 2022 Earnings August 5, 2022 at 10:00 a.m. ET
Contents:
Prepared Remarks:
Good morning. My name is Chris and I am your conference operator today. At this time, I would like to welcome everyone to TDS and the U. See the article : The Texas GOP has adopted a resolution rejecting the 2020 election results.S. Cellular’s second quarter 2022 operating results.
[Operating Instructions] Thank you. Colleen Thompson, vice president, corporate relations. You can begin.
Colleen Thompson – Vice President, Corporate Relations
Good morning and thank you for joining us. We would like to bring all of you to the attention of the presentation we have prepared to accompany our comments this morning, which you can find on the investor relations sections of TDS and the U.S. The Cellular Sites. Joining me today and offering prepared comments are TDS’s Vicki Villacrez, executive vice president and chief financial officer; From us.
Cellular, LT Therivel, President and CEO; Doug Chambers, executive vice president, chief financial officer and treasurer; and from TDS Telecom, Michelle Brukwicki, senior vice president of finance and chief financial officer. This call will be webcast simultaneously on TDS and the U.S. Cellular’s investor relations website. Please see the websites for slides referenced in 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 the U.S. Cellular’s wireless partnerships. TDS and U.S. Cellular filed its SEC Forms 8-K, including the press releases and our 10-Qs yesterday.
As shown on Slide 2, the information presented 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 sections of our press releases and the expanded version included in our SEC filing. And as always, our open door policy can now be an open door, phone or video policy, so please get in touch if you are interested in speaking with us. Before I turn the call over, I want to remind everyone that due to the FCC’s anti-collusion rules related to Auction 108, we will not be answering questions related to spectrum auctions.
I will now turn the call over to Vicki Villacrez. Vicky?
Vicki Villacrez — Executive Vice President and Chief Financial Officer
OKAY. Thanks, Colleen, and good morning everyone. Starting with Slide 3, you can see that both of our business units are executing on a strategic priority and are well positioned to take advantage of growth opportunities to improve their competitive position. This includes investing back into the networks to drive future growth in revenue and returns.
U.S. Cellular continues its network modernization and multi-year 5G deployment, and TDS Telecom expands into new markets and increases the number of fiber service addresses. Both companies are effectively managing inflation and supply chain pressures through a range of mitigation measures and expect to meet their financial obligations this year. We remain pleased with the strength of our balance sheet to support the investment needs of both companies through significant long-term maturities and relatively large liquid holdings.
Our balance sheet strength also positions us well to weather the rate hikes we are currently seeing. I would like to emphasize that during the quarter we bought back a modest amount of shares in both companies. As a result, we have spent nearly $40 million on share buybacks this year, $20 million and $19 million on TDS and U.S., respectively. Cellular.
And now I will turn the call over to LT.
LT Therivel — President and CEO
Thank you, Vicki. Goodmorning everybody. At the U.S. At Cellular, our mission has always been to keep customers connected to the people and places that matter most.
And as shown on Slide 5, you can see some of the strategic priorities that support this mission. Skip to slide 6. You can see the strategies we’ve developed to drive revenue growth and increase return on capital. Let me start with arrears and I’ll take you back to the first quarter.
As I explained during the first quarter earnings call, we identified some specific areas of subscriber pressure where we saw opportunities for improvement. And it was noticeable churn and add-a-line. And this led to a series of regional tests and trials during the second quarter. And as a result of these trials, we launched our new campaign at the end of June, and it was any phone free for everyone, and that’s for new and existing customers.
Now, because of the timing of when we launched this campaign, it had little impact on subscriber results for the second quarter. But we believe this will meaningfully address a number of the subscriber challenges we identified earlier this year. And while it’s early, so far, we’re happy with the results. We have seen a significant increase in add-a-line and upgrade activity, and we expect that upgrade activity to result in improved churn downstream.
And thanks to the trials that we ran, we are able to structure this offering in a way that we believe will drive positive subscriber results in the second half of the year, but with a cost pressure that we believe is manageable. And this offering structure, combined with our ongoing spending discipline, enables us to maintain our profitability outlook for the year even with these aggressive campaigns. In fact, we will maintain all of our guidance, which Doug will discuss further later in the presentation. We also demonstrated our commitment to caring for our customers in difficult economic times when we announced that we would not raise prices on existing price plans through at least the end of 2023.
Overall, we believe these actions will not only help us improve churn, but also allow us to go on the offensive. This sets us apart from several other carriers that have taken various actions during the quarter. And it’s still early in our marketing efforts, but we’re seeing almost 20% of new ads, specifically sites, where price guarantee is the reason to switch. And so overall, I’m pretty encouraged by the financial results for the quarter.
Postpaid ARPU grew 5% year over year, representing by far one of the highest increases in the industry this quarter, despite the headwinds of a strong promotional environment. We also continue to maintain cost discipline across the organization, which has allowed us to launch some aggressive campaigns and make investments in key growth areas of the business while still maintaining our operating cash flow guidance. I mentioned investment in growth areas, and halfway through the year we see positive momentum in a number of these areas. Fixed wireless continues to grow.
We have seen a gross increase of 23% year over year. Importantly, we now offer unlimited fixed wireless across our entire footprint, which gives us additional sales opportunities and simplifies operations. Expanding this product helps us build what I call distribution muscle in the space as we continue to expand the 5G millimeter wave footprint, but we also plan to launch this product in the midband in late 2023 or early 2024 , when that spectrum disappears. Tower also produced another strong quarter of double-digit revenue growth, up 13%, driven primarily by an 18% increase in the number of co-locators.
The Tower team has done a great job of streamlining our processes so we can get more tenants onto our towers faster. We also achieved an important milestone in our business and government segment by signing our first two private network agreements. This is in addition to over 25 customized IoT deals we have signed in the past 18 months, both of which are helping us build a strong foundation for emerging revenue growth in this B2B segment. I want to briefly comment on the macro environment, I think that is on the minds of many of our stakeholders.
I am concerned about the economy and the risk of a recessionary environment. And I am also concerned about inflation and the macroeconomic factors that will affect both our customers and our partners. However, I believe we are well positioned to weather these challenging economic conditions. Many of our supplier contracts are long-term with fixed prices, and our cost optimization program continues to deliver strong results.
Additionally, just our broader sector has traditionally weathered challenging economic environments very well, I don’t see that changing. So, to sum up, I am pleased with our financial results. I am encouraged by the momentum in our growth areas, but we still need to improve postpaid results. We have a lot of focus on this.
We have a number of initiatives underway that we believe will improve that trajectory while striking the right balance between financial results and subscriber results. So I’ll now turn the call over to Doug, who will take you through the financial results in a little more detail. Doug?
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
Thank you, LT. Good morning. Let’s start with a review of customer results on Slide 7. Postpaid handset gross additions decreased by 7,000, mainly due to continued aggression in the competitive environment.
Postpaid phone net inflows fell by 30,000 driven by lower gross additions and an increase in churn, which I’ll discuss in a moment. We saw gross shipments of connected devices decline by 6,000 driven by lower watch and tablet sales, partially due to global supply constraints. This was partially offset by an increase in fixed wireless gross surcharges. As LT mentioned earlier, we had another strong quarter in fixed wireless, and we now have a base of 57,000 customers with this product, up 36% year-over-year.
Next, let’s go to postpaid. The postpaid churn rate shown on Slide 8. Postpaid handset churn increased over the prior year, driven by higher voluntary churn as a result of increased switching activity and continued aggressive competition in the industry. Involuntary attrition also rose in the quarter, as unpaid attrition rose to pre-pandemic norms.
Postpaid handset shipments drove the increase in total postpaid shipments as shipments for connected devices were largely flat year over year. Moving to slide 9. Prepaid gross admissions decreased by 9,000 and prepaid net subsidies decreased by 14,000. Both declines were due to continued aggression in the competitive environment, including an increased presence of competing brands in the national retail channel.
Now let’s turn to the financial results, starting on Slide 10. Total operating income for the second quarter was up 1% year-over-year. Retail service revenue improved by 2% primarily due to higher average revenue per user, which I will discuss in a moment. Inbound roaming revenue fell 36% due to lower rates and data volume.
The biggest driving force behind this drop in interest rates is renegotiation of terms with other companies, which of course also benefits our roaming expenses. Other service income increased 5% due to higher tower rental income. Finally, revenue from the sale of equipment increased by 2% due to an increase in the average price per unit sold for new smartphone sales, partially offset by higher advertising activity. Go to slide 11.
The average turnover per user and the average revenue per account increased by 5% and 4% year over year. The increase was primarily driven by a favorable plan and product offering mix and increase in cost recovery premiums and an increase in unit protection revenue. These were partially offset by an increase in promotional costs. Currently, 34% of our handset customers are in our two highest tiers of unlimited plans, and we are focused on continuing to grow this percentage to further improve ARPU and to provide our customers with the increased value of these plans.
As you can see on Slide 12, and as mentioned by LT earlier, we continue to see steady growth in tower rental income driven by an increase in our tower rental. Our overall financial results for the quarter are shown on Slide 13. For this discussion, I will refer to adjusted operating income before depreciation and amortization as adjusted operating income. As I commented earlier, total operating income was up 1% year over year.
LT mentioned our spending disciplined cost optimization program and how we are doing relatively well through this very inflationary environment. That is reflected in our cash costs, which excluding the impact of the cost of equipment sold decreased by 1%. Total system operating costs decreased by 6% primarily due to a decrease in roaming costs. While our off-net data usage increased year over year, our costs fell by 35%.
Cost of equipment sold increased 7%, driven by an increase in average cost per unit of sales of new smartphones. Selling, general and administrative expenses increased 2%, mainly driven by an increase in accounts receivable due to an increase in write-offs related to higher unpaid departures, as well as a shift to more expensive units that result in higher write-offs per unit. account. Our guidance includes our expectation that bad debt expense will continue to increase in the remainder of 2022 compared to the prior year as inflation, increased and lack of government stimulus, among other factors, negatively impact customer payment behavior compared to 2021 .In general, the level of bad debt expense in 2022 is on track to be closer to the pre-pandemic levels we experienced in 2019.
Adjusted operating income increased 2% Adjusted EBITDA, which incorporates earnings from our equity method investments, along with interest and dividend income, decreased 2% primarily due to decreases in earnings from our equity method investments driven by higher network costs and certain underlying operating companies. Capital expenditure has increased, mainly driven by the timing of expenditure in 2022 compared to the previous year. To slide 14. I will cover our guidance for the full year 2022.
Our guidance range for total service revenue, adjusted operating income and adjusted EBITDA remains unchanged. This reflects our estimates of low single-digit growth in retail service revenue, continued decline in high-margin roaming revenue and the expectation of a continued highly competitive and advertising-focused environment. In addition, it also incorporates our near-term expectations related to inflationary pressures. In terms of capital expenditures, we also maintain our guidance range as our investments in 5G and network modernization targeted millimeter wave rollout and initial preparation for our mid-band spectrum rollout remain on track.
I will now turn the call over to Michelle Brukwicki. Michelle?
Michelle Brukwicki — Senior Vice President of Finance and Chief Financial Officer, TDS Telecom
Thanks, Doug, and good morning everyone. We are pleased with our results at TDS Telecom for the second quarter and through the first half of the year, and we are on track with our financial outlook. We remain committed to our primary strategic objective of driving growth and improving returns by investing in our flagship product, high-speed broadband. We are directing our investments to expand our fiber footprint in new and existing markets and to improve our product offerings.
These investments drive connectivity and revenue growth. This quarter, we added 17,000 salable fiber service addresses to our footprint. Overall, we generated residential revenue growth of 5% this quarter, driven by an 11% increase in broadband revenue. We are very pleased that we have achieved superior market share in our established markets where we have invested in fiber and we are seeing strong broadband penetrations in our launched expansion markets.
In addition, we continue to drive faster speeds in our more rural established markets by building to meet our A-CAM obligations and using government broadband subsidies. In May, the SEC issued a notice seeking comments on a proposed expansion of the A-CAM program, which we fully support. We expect an expansion program to provide additional years of revenue support in return for deploying higher broadband speeds. We look forward to working through the comment process with the SEC and hope to have a final rule later this year.
Expanding the current federal A-CAM program first and then pursuing BEAD program funding would give TDS Telecom the best opportunities to take fiber deeper into communities. Like LT, let me comment on the macroeconomic environment, as it is the most important for all of us. Inflation and supply chain challenges are worrying. But we have dealt with these challenges successfully.
And as a result, our strategic plans and guidance have not changed. Inflationary increases have been managed through a combination of price increases, process improvements and cost discipline. And like the U.S. Cellular Many of TDS Telecom’s contracts are long-term with fixed prices.
To reduce longer lead times, we have placed orders early and are working with suppliers to ensure our necessary allocation of key components at acceptable prices. Therefore, we remain well positioned to handle these challenging economic conditions. Returning to slide 17, we highlight the accomplishments we have achieved this quarter.
Year to date, we have completed the construction of 39,000 marketable fiber service addresses, and deployed 17,000 in the quarter. We currently serve 34% of our total footprint with fiber. And as we’ve previously shared, we expect to serve approximately 60% of our total footprint with fiber by 2026. In line with our growth targets, service addresses grew 7% year over year.
In the second quarter, we increased our availability of 1 gig speeds to 63% of our total service addresses, up from 56% a year ago. We also continue to see positive trends in our broadband penetration rates for markets that have been fully launched for more than 12 months, and we still expect 40% to 50% consumer penetration in a steady state. Our delivery of service addresses is close to what we had planned for mid-year. We are still working hard to reach our target of 160,000 service addresses by 2022 with the expectation of increasing in the second half of the year.
As we previously mentioned, we continue to deal with a variety of industry-wide headwinds, including inflation and supply chain, as well as a number of local challenges such as permitting complexity and contractor labor shortages. We are pleased to have a broad pipeline of markets that give us flexibility to manage our bills. It is important to remember that this is a long-term strategy. And while delivery of service addresses may change between years, we are still confident of reaching our goal of 1.2 million fiber service addresses by 2026.
On Slide 18, you can see the growth in the broadband connection across all markets. Total residential broadband connections grew 5% in the quarter as we continue to strengthen our network with fiber and expand into new markets. We are on track in our network construction under the A-CAM program, which is also helping to drive growth in our established markets. Shown in the graph to the right, we see continued demand for higher broadband speeds, with 68% of our customers taking 100 megabits per second. second or more, up from 63% a year ago.
Our 1-gig product, along with our 2-gig product in certain markets, are important tools that will allow us to defend and win new customers. In areas where we offer 1 gig service, we see 23% of our new customers taking this superior product. Our focus on fast, reliable service has generated an 11% increase in total residential broadband revenue, which includes a cost recovery fee implemented in the second quarter for broadband subscribers. On Slide 19, total operating income increased 2% year-over-year, mainly driven by residential income growth, which increased 5% across all markets.
As shown in the chart on the left, revenue from the expansion market increased year over year by the time of delivery of service addresses. Residential fixed line revenue rose 2% year-on-year due to price increases and growth in broadband connections, offset by a decline in video and voice connections. Likewise, revenue from cable residential increased by 3% due to a price increase and an increase in broadband connections, also partially offset by a decrease in video connections. Commercial revenue fell 6% in the quarter, primarily driven by lower CLEC connections, and wholesale revenue fell 1%.
Price increases and overall product mix changes led to a 3% increase in average housing turnover per connection. Let me now summarize the overall financial results for the quarter as shown on Slide 20. As we just mentioned, revenue was up 2% over the prior year as growth from our fiber expansion an increase in broadband subscribers and average residential income per connection exceeded the declines we experienced in our old business. Cash expenses increased 4% year over year due to increases to support current and future growth, which is not yet reflected in our revenue.
And as a result, adjusted EBITDA fell 2%. Investments increased 21% from last year as we continue to increase our investment in fiber deployment and focus on broadband growth. Moving to Slide 21. We have presented guidance that is unchanged from what we previously shared.
We expect capital expenditures and spending to increase in the second half of the year as we continue to develop our fiber deployment in new markets, and we expect to end the year within the forecast range. I would like to thank all our employees for their dedication to the success of TDS Telecom. Our positive quarterly results are a product of your hard work. And with that, I look forward to updating you in the third quarter.
I will now turn the call back over to Colleen.
Colleen Thompson – Vice President, Corporate Relations
Thank you Michelle. Chris, we’re now ready for questions.
Questions & Answers:
Thank you. [Operating Instructions] Our first question today is from Ric Prentiss with Raymond James. To see also : Ubisoft has reportedly delayed the next Assassin’s Creed game until spring 2023. Your line is open.
Ric Prentiss — Raymond James — Analyst
Vicki Villacrez — Executive Vice President and Chief Financial Officer
LT Therivel — President and CEO
Ric Prentiss — Raymond James — Analyst
Hello. Busy day with earnings so sorry it’s been on a few calls. LT, I think you were obviously talking to the competitive community, but can we dig a little bit deeper. Please help us understand, is there a possibility to return to positive postpaid phone add-ons? And what does it take? Does it require larger switcher pool? Should it lower churn? Does it require more aggressive local bidding? Just want to help us understand the way back to positive postpaid phone add-ons? And then also how much room do you have on your ARPU level moving feature phone to smartphone? Is there a thought that there will be price increases?
LT Therivel — President and CEO
Thanks, Rick. I think it’s cheating to just say yes, yes, yes and yes and move on to the next question. So I’ll try to give you a little more color. But generally it’s everything you list.
Do I see a price to — do I see a path to positive postpaid net inflows to consumers? Yes I do. What does it take? I think the biggest step that will take in the near term is an improvement in churn. When I look at voluntary attrition, that’s where we saw the majority of our pressure in the first quarter. And we — the offering that we’ve launched here is specifically designed to address that.
One of the things that we saw as we — over the last couple of years is that we’ve seen a larger and larger percentage of customers that are out of contract. And non-contract customers depart at a significantly higher rate than non-contract customers. And then the goal is how we get the customers back into contract. And that was one way with the offer we made.
We think it specifically addressed that issue and we’re seeing really good results. So we see significant upgrades. We see that the ratio between voluntary dropouts and gross supplements improves significantly. The other way you get to positive net adds on the growth side of the equation, and we were light on add-a-line, and so this offering specifically addresses the add-a-line opportunity, and we see add-a-line performance increases significantly.
So I think the execution of this offer continues the momentum that we’re seeing, and then that has to translate into attrition reduction, and that takes some time. But you don’t see churn immediately dive, do you? What we expect to see is a steady improvement in departures during the second half of the year. So we should start to see some benefit from this in the third quarter, and we’ll hopefully see more benefit in the fourth quarter. The second thing you need to see is that you need to see improvements in the growth areas of the business.
And so, for us, B2B rolls up to postpaid nets that add high-speed internet, we count as a connected device that rolls up in net add-ons. And so we’ve got to continue the momentum that we’re seeing in high-speed Internet, very optimistic about what we’re seeing from that product so far. Net adds — I’m sorry subs up 23% — gross adds 23%, excuse me. We are up to almost 60,000 customers on that product, and that is exclusively on LTE.
And so, I mean, we have a few millimeter wave cities that we started up in the second quarter, but the vast majority of the growth that we’re seeing in high-speed Internet is just on the low-band product that we’re continuing with LTE. And then as we expand the millimeter wave, and I would argue much more substantively, as we fire up the mid-band spectrum in late 2023 early 2024, that will contribute to our results. And finally B2B. We see good momentum on the business side of the equation.
It’s being held back a bit because we’re still seeing COVID-related disruptions. So thanks to the EDU hotspot, cut off some government programs that were fired up during the COVID, during the pandemic that were receiving grants. Those grants have gone away. One of the things we’re watching very closely is our customers switching to another provider, which means there’s a problem with our value proposition in B2B, or they’re just disconnecting because they’re not getting a subsidy anymore , and it is much more the latter.
And so it’s really a combination of all the things that I think will contribute to the momentum. Finally, as you know, I mean, we don’t operate in a vacuum. It’s an aggressively competitive environment out there. But I see some possibilities.
AT&T and Verizon both raised rates in the second quarter. We made a commitment to our customers, we didn’t want to, and it’s meaningful to them. And then we see a lot of customers come into the store and specifically refer to that price guarantee as a reason to come in. And by the way, that’s before we even put TV advertising behind us, which we didn’t — really did. will only be launched in July.
So much of the momentum is positive. I am optimistic that we are heading in the right direction. But what will it take to achieve positive net consumer benefits for the company as a whole, it will require everything firing on all cylinders.
Ric Prentiss — Raymond James — Analyst
Large. And to ask a follow-up question about high-speed fixed wireless access, can you start deploying and will you start deploying C-band radios even before it’s cleared so you’re able to get started when Are the satellite guys getting their jobs done?
LT Therivel — President and CEO
The simple answer is yes, Rick. I’ll let Mike give a little more detail about operationally how we do that?
Mike Irizarry — Executive Vice President, Chief Technology Officer
Yes, Rick. We’re actually starting that work this year to create the designs, the implementation designs, identify needs at the sites, drive all the issuing POs, so we can start the implementation next year. We are also working with the FAA to make sure we are ahead of any requirements that they have beyond what has already been identified. So we feel good about our plans and our preparation for C-band and being able to activate it when we feel it’s necessary.
LT Therivel — President and CEO
Yes. The goal Rick is to — once that spectrum is cleared, we’ll be able to flip a switch and have meaningful mid-band spectrum availability across a large portion of our footprint. Mike rolls it out.
Ric Prentiss — Raymond James — Analyst
Of course. The same Verizon and especially T-Mobile had great success with the early phase of fixed-wireless mid-band access. Do you have any goals you’d like to share with us in terms of where you think the market can go as far as customizing it for you?
LT Therivel — President and CEO
I’m not ready to share measurements yet, only because it’s still early days in millimeter wave. I would like to see more momentum behind the millimeter wave product before we get into target. What I can tell you is that we really have two sweet spots of markets that we’re targeting, because again, we’re not doing it in a vacuum. The first sweet spot without infrastructure funding will be suburbs or call it dense rural I realize I may sound a bit more of an oxymoron but true but there are non-dense rural and there are denser rural, suburban or denser rural , where fiber is not present.
Where you have enough customer density to make the economics of the product work, but you’re not competing against fiber. That’s the good place and we think we have a lot of room to run right now with geographies like that. With infrastructure funding, my aim is to cover every square centimeter of our footprint if we can. That is the promise of IIJA combined with fixed wireless.
I’ve spent a lot of time talking to people in D.C. on talking to governors with the concept that it’s very difficult to roll out fixed wireless in an economical way to really sparse rural areas. But it’s a lot more economical than trying to do it with fiber. And so if we are going to connect these rural areas, we have to do it with IIJA funds.
And if we can get that funding, now suddenly we can start connecting areas that have never been connected before or at best have satellite or at best have really, really towards DSL. And so that will open up a whole other universe for us to sell to. Of course, the uncertainty of how this funding will come in also makes it difficult to set specific targets.
Ric Prentiss — Raymond James — Analyst
Makes sense. Appreciate it. Everyone, have a good time.
LT Therivel — President and CEO
The next question is from Sergey Dluzhevskiy with GAMCO Investors. Your line is open.
Sergey Dluzhevskiy — GAMCO Investors — Analyst
Thank you. Good morning guys. LT, my first question is on prepaid. Could you tell us a bit about your prepaid strategy in the medium term? What types of moves have you already implemented that seem to be working for you, what else could you do on prepaid and in terms of market share where you are in your markets? And what kind of share are you targeting in the medium term and prepaid?
LT Therivel — President and CEO
Thank you Sergey. The prepaid strategy, I would really break it down into a few different categories. The first category is distribution. So two years ago we weren’t particularly focused on prepaid business, and we’ve changed that over time.
We have a — we’ve signed a manager specifically responsible for running this. And one of the most important things on our plate is to create increased distribution in the prepaid space. The most obvious one is Walmart. We have expanded our footprint in Walmart, but so have many of our competitors.
And so the competitive environment within Walmart is obviously a key driver of prepaid growth, particularly in the markets that we serve, but there are others as well. And then signing up a lot of places that are traditional prepaid distributors requires a very different operating model. This is a very different model to what we are used to, but it is one we need to get good at. And so we’re building out our distribution in many of these areas, signing up prepaid specific distribution partners, that growth happens over time.
It doesn’t happen overnight. But I’m pleased with how our manager there Megan Quatrini is driving an increase in prepaid distribution. The second piece is around the product. You must have a competitive product.
It must be priced competitively. It must be structured competitively and it must have increases that are convincing to customers. We have made ongoing adjustments to the prepaid product. And once again, this is an area where I believe our regional structure benefits us.
I talked about trying different pricing and promotion levels in our different regions in my initial comments. At the time I mostly referred to postpaid, but we do exactly the same with prepaid. So we have the opportunity to test different structures, see what works for customers, see what works at different times. The big opportunity for us in our footprint appeals to migrant workers.
These price points are very specific and they are specific to a very specific period. And then we have to get good at the product part of it. And the last piece, and this is where I think I see the biggest opportunity, is around customer lifecycle management, reaching out to customers in a way that’s compelling after they join us, when their eligibility expires , get them to resume, get them to resume at a higher dollar value so ARPU expands. I see a lot of benefits there.
It is a very data-driven part of the business. That means you have to put the systems in place, the structure is in place, to be able to consume that data and use it intelligently. We are investing in that. So I also see our customer lifecycle management improving over time.
As for the details of the goal, we have not published it. What I can tell you is much more than what we have today. We have developed our prepaid business. I still see a lot of opportunity there, but again, we’re generally way back in the envelope.
Our market share in that business is about half of postpaid. And so we see a lot of room to drive on the prepaid side via the three mechanisms I described.
Sergey Dluzhevskiy — GAMCO Investors — Analyst
Understood. Large. Regarding the performance of the tower business, how would you characterize the performance of the tower business over the past year compared to your expectations, is the number of co-locators per tower increased a little, but it is still about 0.5 per tower. And I know tower deals are somewhat lumpy and you’ll probably see some revenue from this later this year.
But I guess what has to happen for you to see a change in this business over the next two years. And as you operate this business more as a stand-alone tower company, what is your position on placing this business in a separate segment under the US Cellular umbrella?
LT Therivel — President and CEO
Two things need to happen for us to see a step change in this business. The first is that we must continue to improve our co-location speed. I think the team has put in place a number of, call it, operational streamlining mechanisms to just make it easier for people to work with us. We weren’t particularly open for business a few years ago, and now we are.
And I’m very pleased with how that team has created a structure that makes it easier for co-locators. Cycle times have generally improved consistently quarter after quarter after quarter. And then we just have to make it easier to cooperate with us. I am very encouraged by the revenue growth we have seen so far this year.
As you mentioned, this is lumpy, right? It’s a messy business. You’re going to see — some quarters you’ll see 13%, some quarters you’ll see 9%. We aim for continued low double-digit revenue growth in that business. That’s the first piece.
And the other piece is more towers. The best way to achieve that, and sorry, I’m a broken record on this, I’ll take you back to that infrastructure finance opportunity. It costs a lot of money to put a tower in rural America back in the envelope $600,000, $700,000 to build a tower. And we’ve been investing in rural America for a long time.
This is not me. This is the business. Business is good for that. We have been focused on rural areas for a long, long time.
And if there was an obvious naval economic positive place to put a tower, we would do it. I think we have an opportunity to build some new towers to improve our current tower rental profile. We have some really high-rise rental towers and we can build new towers to be placed there. We have the opportunity to put some towers in place to reduce our roaming exposure, but in general the big opportunity is new towers to improve coverage, and it is very difficult to do without any subsidy, to do it on an independent basis financial basis is challenging.
And so the reason I’m encouraged by the fact that IIJA allows wireless and allows fixed wireless is if we can get states to shift some of their infrastructure dollars toward fixed wireless, we can put new towers in place for to cover those consumers in the fixed wireless companies, but we can triple the revenue, right? We have an income opportunity with fixed wireless. But then we also have — because of the infrastructure subsidy that comes with that tower, we have the opportunity to improve our wireless operational metrics, improved coverage, improved customer experience, improved NPS, improved gross margin, improved churn. And then there is a third component, which is that we can also drive colocation income. Almost by definition if we put a tower in rural America because there isn’t a tower there before and it will also be attractive to our competitors to co-locate on that tower.
And that’s why the infrastructure bill is so important, because it’s another opportunity to jumpstart that business to kind of take it to the next level. We don’t need to have that. I am very encouraged by the momentum we are seeing. And if we can just continue the colocation momentum that you mentioned, our colocation rates are still significantly below some of the industry leaders.
And so we have an opportunity to grow that over time, but that IIJA opportunity is — it can really kick it into overdrive.
Sergey Dluzhevskiy — GAMCO Investors — Analyst
Large. And my last question is probably for Vicki, but also for LT. So you obviously have a large portfolio of various infrastructure and investment assets across both companies. But a lot of it sits in US Cellular and you don’t get much credit for it.
So a particular asset or group of assets are the wireless partnerships that you get cash distributions from. Recently, another consolidated telco agreed to sell its wireless partnership stake to Verizon for about 11.5 times last year’s cash distributions. If I put the kind of multiple on cash distributions that US Cellular received, we could get a $2 billion valuation of those partnership interests for you. So my question is, what are your thoughts on servicing value from these wireless partnerships? And more generally, what types of moves on the financial engineering front would you be open to that would help highlight the value of these assets and other infrastructure assets that you have or investment assets and surface value without meaningful sacrifices to your strategic and operational priorities ?
LT Therivel — President and CEO
So I’ll have Doug talk to the questions about the wireless partnership. And then maybe Vicki can give your perspective on Sergey’s broader question. Doug?
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
Yes, Sergey. So the investment partnerships obviously generate a nice cash flow for us every year in the neighborhood of about $180 million. One of the challenges we have in selling these interest rates is that they have a very low tax base. So there are the proceeds before tax and the proceeds after tax, and they are significantly different based on the low tax basis of the investments.
That’s not to say we never wanted to entertain — an offer that was very attractive. But it’s a barrier, and we’ve looked at it in the past and that kind of — there’s a more compelling reason to hold on to the investments as opposed to selling them on — on an after-tax basis. Regarding both the investments and other assets like towers and highlighting their value, we try to do that here through our earnings calls that give you insight into what’s happening with the towers. Of course, we report investments on adjusted EBITDA to highlight the value they bring to the business as well as cash flow.
So we do a lot of that. Certainly we will explore more over time, but nothing is planned right now.
Vicki Villacrez — Executive Vice President and Chief Financial Officer
Yes. So Sergey, thanks for that question. From a broader perspective, I’m almost 90 days in and I’ve spent a lot of time focusing on the companies and the business needs and their long-term strategies. And first and foremost right now, my first priority is to make sure I’m able to fund the needs that LT and Michelle have for the 5G rollout.
We paid for our spectrum. We have the 5G building ahead of us. You’ve heard LT talk about another, a series of growth opportunities that we finance for long-term growth. And at TDS Telecom, we currently have an opportunity to finance our fiber construction.
And so my first priority is to make sure that we are able to take advantage of them. Second, I want to make sure that I have enough flexibility across my balance sheet to be able to fund the needs of the business and leave enough capacity and leverage to take advantage of opportunities as they come along. And through that I look across our assets. You talked about the towers.
Would we consider reporting our towers separately? Today, right now, we’re reporting our tower revenue to show the double digit low single — the low double digit growth that LT was talking about. If it becomes a larger and larger part of our portfolio, we may consider providing additional information to show the value more clearly to investors as it becomes a more meaningful part of our revenue growth. In terms of the partnerships, I — just to add to what Doug has already said, we recognize that our Verizon partnership value — are very valuable, all of our partnerships are very valuable. And I must have a specific need for a source of funding needed in the business before I consider a transaction.
And that transaction would require a very high multiple, as you said. And therefore always look at our entire portfolio and possible sources of funding in the future.
Sergey Dluzhevskiy — GAMCO Investors — Analyst
Colleen Thompson – Vice President, Corporate Relations
Yes. Chris, we’re ready for the next question.
The next question is from Michael Rollins with Citi. Your line is open.
Hello. Thank you for taking the questions. First question straight on to the tower discussion. When you look at your direct tower expenses, has the external income that you report from towers exceed the direct tower expenses? So before you even consider what the allocation of rent could be from you being the anchor tenant, is it breakeven or better? And then you shift gears a little bit to other possible needle moving options for US Cellular and TDS.
Just curious if there’s a more strategic update on network sharing capabilities or other things or other ways you could think of to manage the business and operations over time? Thanks.
LT Therivel — President and CEO
Thanks Mike. I’ll have Doug talk about your tower question and I’ll address the network sharing afterwards.
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
Yes. Good morning, Mike. On the towers, the additional direct costs that we incur from co-location are very small. So our incremental margin on colocations is over 90%.
So what you see in the way of revenue growth is straight to the bottom line and operating cash flow growth. So that’s why we feel really good about that revenue and that revenue growth is really important for our profitability.
Michelle Brukwicki — Senior Vice President of Finance and Chief Financial Officer, TDS Telecom
Sorry, just to follow up on that tower point for one more second. In a situation where you had these direct rental costs, you might own some of the land, you rent some of the land, you have utility costs. If you just add all of these costs together and forget for a moment about the incremental option, does the third party rental offset your costs? In other words, that it is a business that is already break-even or better on a direct profitability basis?
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
Yes it does — the short answer is Mike, it doesn’t quite offset our costs. Of course, remember that these costs are incurred for our operating business and for our mobility and fixed wireless connections and all our products. So the short answer is no, it doesn’t – it’s not at a level where it outweighs all these costs.
Perfect. I was just curious. Thank you.
LT Therivel — President and CEO
Mike, let me address network sharing. I will expand on your question a little bit. In the long run, what we are committed to doing is to have a meaningful expansion of the return on capital in this business. It is the financial measure of success we have established for ourselves.
We have a mission to connect people, and the only way to achieve that mission is through a lot of investment. The only way to invest a lot is if we get a healthy return. And then we have a goal to expand the return on capital. Most of the mechanisms that we’ve talked about so far are to expand the yield side of that equation, drive revenue, drive profitable revenue, expand OCF and thus improve return on capital.
I see an opportunity to improve capital efficiency. I think I won’t beat the IIJA horse to death anymore, but I think it’s a meaningful opportunity to improve capital efficiency over time. If we can get infrastructure dollars to support our capital expenditures, that means we can improve return on capital. Network sharing is another big one.
I have talked about this in previous calls. I don’t think it makes sense to build four or five duplicative 5G networks in rural America. And if you think about 6G or 7G, what that’s mostly going to involve is denser network builds to get capacity and to get intelligence closer and closer to the user, which is very capital intensive and which is very capital intensive, it’s hard to justify when you have really low customer density. So I think network sharing is going to be a necessity in the long, long run, and we’re pursuing conversations to that end.
I feel very good about our ability to hit our financial projections and continue to move toward doubling the return on capital without such a deal. So we don’t need to have such an agreement to continue to expand the return on capital. But in terms of a needle puller on capital efficiency, I think network sharing is a big one. And I think we have an opportunity.
I think we are good. We are a very realistic partner for others to work with. And we have those conversations. I have talked about it in previous calls.
These things don’t move fast. But I think there is a good opportunity there.
And one last question on the subject of DISH. They have signed some agreements with a few of the other national wireless carriers. Historically, you, your company and the regions you operate in have been able to sign agreements with various national carriers to your point about the sensibility of how much construction should really be in some of these rural markets. Have you already entered into an IMVNO or other type of roaming agreement with DISH? And maybe you can elaborate on the possibilities beyond just some of the tower comments of the past?
LT Therivel — President and CEO
Yes. So we have — as I mentioned, our biggest opportunity with DISH that we’ve entered into so far is our tower MLA. I can’t talk more specifically about that, but we are optimistic about the possibility of supporting them. I think we have a good opportunity to work with DISH.
Likewise, we have a good opportunity to work with anyone who wants to expand their affiliation within some of the areas in which we operate. But beyond that, I can’t go into detail on any specific deals, Mike.
The next question is from Simon Flannery with Morgan Stanley. Your line is open.
Simon Flannery – Morgan Stanley – Analyst
Thank you and good morning. LT, could you just talk a little more about the new campaigns. It sounds like they have a good influence. Help us understand how the accounting will look like for these campaigns? How much of the cost should you take upfront? And how long do you want to amortize most of it over? And then in terms of the partnerships, just going back to that, it looked like equity and earnings were down about 21% year over year.
I don’t know if there’s any kind of one-timers running it, or has there been any change that we — probably going forward from here?
LT Therivel — President and CEO
Yes, Simon, I’m thinking in terms of the revenue potential of those promotions, right? I talked a little bit earlier about the increased upgrade momentum that we’re seeing, the increased add-a-line momentum. One metric we track quite closely is the ratio of gross additions to voluntary defects. We see improvements there. So I’m optimistic that it will have the long-term impact that we want to have on upgrade, on churn, on add-a-line. Let me let Doug talk specifically about how the cost of that promotion is managed and then he can answer your second question as well.
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
Hello, good morning, Simon. That is, in terms of taking the campaigns into account. Consider that 40% of the cost of the campaign is recognized up front, on day one if you will, and then about 60% is recognized in service revenue over the contract period, which is 36 months. So that’s how you think about the spread of income.
Remember also, offsets for revenue withdrawals and gross allowances and things that we get from the campaign. So it’s all offsets, even when you think about the total cash flow from operations. Then move on to your question about stock earnings and whether they are down. The biggest single item was in L.A.
partnership starting in January this year. The Verizon Holding company initiated a spectrum with the partnership, it will — our share of the lease is about $15 million a year. So we incur that beginning, this year, which was not present last year. In addition to that charge for the quarter, just different operating items that are different partnerships, including increased bad debt costs and increased network costs and things like that across the board.
But the biggest single item is the new spectrum lease.
Simon Flannery – Morgan Stanley – Analyst
OKAY. So that’s probably a good running speed, right?
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
It is. Yes, it will be 20 years $15 million per year.
Simon Flannery – Morgan Stanley – Analyst
OKAY. And then the 60%, over 36 months, is that a contradiction?
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
Simon Flannery – Morgan Stanley – Analyst
Yes. OKAY. Large. And then just one, the last one.
The cost of service in wireless was strong. You talked about some of the roaming reductions and usage and things like that. How should we think about it going forward? Is there more to come?
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
Yes. We’re — I mean, Mike and the team have done a great job managing it. And when I talk — when we talk about our cost optimization program, that’s been the area where we’ve made the most progress and have some big wins. That said, going forward as we do our 5G rollout, we also have pressure there as we incur more sell-side rental backhaul and so on to put millimeter wave and midband on our cell sites.
So I wouldn’t look for a continued decline. I would see — it will increase over time, but we’re certainly looking to mitigate that through our cost optimization program.
Simon Flannery – Morgan Stanley – Analyst
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
We have no further questions at this time. I will turn it over to Colleen Thompson for any closing comments.
Colleen Thompson – Vice President, Corporate Relations
Okay. Large. Thank you, everyone, for your time today. Again, please contact IR if you have any further questions and have a great weekend.
Call participants:
Colleen Thompson – Vice President, Corporate Relations On the same subject : VELD Music Festival in Toronto to host Alesso, Armin Van Buuren, Martin Garrix [Giveaway].
Vicki Villacrez — Executive Vice President and Chief Financial Officer
LT Therivel — President and CEO
Doug Chambers – Executive Vice President, Chief Financial Officer and Treasurer, U.S. Cellular
Michelle Brukwicki — Senior Vice President of Finance and Chief Financial Officer, TDS Telecom
Ric Prentiss — Raymond James — Analyst
Mike Irizarry — Executive Vice President, Chief Technology Officer
Sergey Dluzhevskiy — GAMCO Investors — Analyst
Simon Flannery – Morgan Stanley – Analyst
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