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Telephone And Data Systems Inc  (NYSE:TDS)
Q4 2018 Earnings Conference Call
Feb. 22, 2019, 9:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the TDS and U.S. Cellular Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

And with that, I would now like to turn the call over to Jane McCahon. Please go ahead.

Jane W. McCahon -- Senior Vice President, Corporate Relations and Corporate Secretary

Thank you, Julie, and good morning everyone, and thanks for joining us. I'd like to make you all aware of the presentation we have 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 from U.S. Cellular, Ken Meyers, President and Chief Executive Officer; Steve Campbell, Executive Vice President and Chief Financial Officer; Mike Irizarry, Executive Vice President and Chief Technology Officer. From TDS Telecom is 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 website. Please see the websites for slides referred to on this call, including non-GAAP reconciliations. We provide guidance for both adjusted operating income before depreciation and amortization, or OIBDA; and adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, to highlight the contributions of U.S. Cellular's wireless partnerships.

As shown on Slide 2, the information set forth in the 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 paragraph 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 their SEC Forms 8-K, including today's press releases and in addition the SEC Forms 10-K have been filed.

In terms of our upcoming IR conference schedule, Slide 3, we'll be attending the Raymond James Institutional Investors Conference on March 5th in Orlando and I'm doing a Non-Deal Roadshow with B. Riley FBR in Los Angeles and San Francisco on March 27th and March 28th.

Turning to Slide 4. It's been a while since we updated our progress against our goal that we articulated back in 2013, which says we intent to invest heavily in our businesses to improve their overall competitiveness and sustainability, while at the same time, providing a return to our shareholders. The ratio we stated called for TDS to return $1 to shareholders for every $3 invested back in the business at the TDS level. Given that we have not made any significant cable acquisitions for a number of years, you can see that our returns to shareholders had exceeded that planned ratio. And to that end this morning, we announced that we yet again raised our dividend for the 45th consecutive year.

On the accounting side of the house, we adopted ASC 842 for Leases on January 1, 2019. We will gross up the balance sheet by about $1 billion and are not expecting any impact to the income statement from its adoption.

Before I turn the call over, I want to remind everyone that even though FCC Auction 101 has ended, we are unable to respond to any questions related to any FCC Auctions until the end of Auction 102.

And now, I'll turn the call over to Ken Meyers. Ken?

Kenneth R. Meyers -- President and Chief Executive Officer

Thanks, Jane. Good morning. I appreciate everyone spending a bit of time with us today. Our remarks this morning will primarily focus on our annual results, highlighting our key achievements in 2018. Steve, will then cover fourth quarter operating and financial results. I'll then turn to our strategic priorities for this year and Mike Irizarry, will discuss our 5G plans. We'll finish with Steve discussing guidance for 2019.

That said, I can't, but help myself from highlighting the successes in the fourth quarter. We reported 20,000 new handset connections along with a 2% increase in operating revenues and a 12% increase in adjusted operating income before depreciation and amortization. Even with all the fourth quarter promotional spending, it was a really good quarter and a great launching point for 2019.

Looking back at the full year, we made significant progress on our goals, Slide 6. As I've been saying all year, the shift in the basis for competition away from service pricing to device promotion has been a healthy one for the industry and one that's necessary as we look to provide the added capacity into our networks to satisfy the growth in data usage(ph)buzzed by unlimited plans and to fund upcoming investments in 5G.

To start, we accomplished our top priority, which was to protect and grow our customer base. Postpaid handset churn remained low, indicating exceptional levels of customer loyalty and effective promotions helped grow our handset base. Much of our success is due to the introduction of our total plans, which included unlimited options. Customers love the simplicity of that offering. And as Steve, will cover later, our growth in total handset customers is just part of the story, as we also continued to migrate customers from feature phones to smartphones, which on average produced a higher revenue. 2018, was the first full year of selling our total plans and the unlimited options now represent 27% of our postpaid connection base. Continuing customer adoption of unlimited plans has helped drive the increases in ARPU, which we have seen over the back half of the year.

We also succeeded in driving additional revenue sources such as device protection and accessories and roaming revenue, which increased to 20%. For the second year in a row, we tightly managed cost throughout the Company, generating over $200 million in savings over two years and we believe we have more opportunities yet in 2019.

Of particular note was our ability to manage network cost given the impact from increased data usage. To put this into perspective, for the full year, data usage grew 46%, while systems operations expenses grew just 4%. All in, adjusted earnings before income taxes and depreciation and amortization for 2018 increased 17% over the previous year. And the associated margin expanded by more than 300 basis points. Our commitment to exceptional customer service and the quality of our network has always distinguished U.S. Cellular from its competition.

In 2018 we continued to invest in our network for capacity and now we have VoLTE commercially deployed in Iowa, Wisconsin, California, Washington and Oregon. We will complete New England and the Mid-Atlantic areas in 2019. All in all, 2018 was a very successful year with free cash flow increasing significantly to $197 million.

Now let me turn the call over to Steve Campbell. Steve?

Steven T. Campbell -- Finance, Chief Financial Officer And Treasurer

Thank you, Ken, and good morning everyone. I'll begin my comments today by talking about postpaid connections shown on Slide 7 of the presentation. Total postpaid gross additions for the fourth quarter of 2018 were 179,000, reflecting nice sequential growth for the third quarter in a row. Following a similar pattern, total postpaid net additions also improved significantly over the course of the year with 6,000 net additions for the fourth quarter. We ended the year with 4.5 million postpaid connections which represented 90% of our total retail base. The majority of the improvement in both gross and net additions over the course of the year is related to handsets, which have been an area of particular focus for us. So let's review that activity next.

Postpaid handset gross additions and net additions for the fourth quarter of 2018 were 136,000 and 20,000, respectively. Again, note the nice trend of improvement over the course of the year. In addition to the net growth in handset connections, we continued to have handset customers upgrading from feature phones to smartphones. And that helps to drive more service revenue given that ARPU for a smartphone is running about $22 more than for a featured phone. Including the feature phone upgrades, total smartphone connections increased by 49,000 during the fourth quarter and 138,000 for the full year. These upgrades in the handset growth contributed to growth in service plan revenues.

Along with the growth in gross additions that we've achieved, postpaid churn has consistently been at a low level over the course of the past year as you can see on Slide 9. Handset churn depicted by the blue bars was 1% for the fourth quarter of 2018, the same as for the year-ago quarter. Churn for connected devices was 3.2%, still somewhat elevated as the heavily discounted tablets sold in connection with various past promotions continued to roll out of contract. Total postpaid churn combining handsets and connected devices was 1.29% for the fourth quarter of 2018, about the same as it was a year ago.

Now let's turn to the financial results. Total operating revenues for the fourth quarter were about $1.1 billion, up $22 million or 2% year-over-year. Retail service revenues, the blue portion of the bars, increased by 2% to $663 million. The increase was due primarily to higher average revenue per user, which I'll say more about later. Inbound roaming revenue, which is included in the grey portion of the bars was $38 million. That was an increase of 10% year-over-year driven by higher volume.

Equipment sales revenue, the green portion of the bars increased by $23 million or about 9% to $297 million. Factors that drove higher revenues in this area included an increase in the average revenue per device sold and the impact of the new accounting standard. Partially offsetting these increases was the impact of a decrease in the number of devices sold.

Now I want to come back for just a minute to postpaid revenue on Slide 11. Here, note the nice consistent upward trends over the five quarters shown. The average revenue per user shown at the left in blue was $45.58 for the fourth quarter, up $1.46 or 3% year-over-year. That increase was driven by several factors, including shifts and mix to handsets and higher priced service plans, higher device protection revenue and the impact of the new accounting standard. We also saw a 7% increase in average billings per user to $60.46. This metric includes equipment installment billings to show the total amount billed to customers every month. Equipment installment billings per user shown in grey, continued to grow due to increased penetration of installment contracts within our base, as well as an increase in the average billings per EIP contract. On a per account basis, average revenue and average billings grew by 1% and 5%, respectively year-over-year.

Let's move next to our profitability measures. Adjusted operating income before depreciation and amortization was $170 million, up 12% from a year ago. Correspondingly, the margin as a percent of total operating revenues increased by more than a percentage point from 14.8% to 16.2%. For those watching service revenue margins, the current quarter result was 22.6%, up 2.5 percentage points from the margin of 20.1% a year ago. As I commented earlier, total operating revenues of $1.1 billion increased by $22 million or 2% year-over-year.

Total cash expenses were $881 million, up only $4 million or less than 1% year-over-year. The main area of increase was system operations expense. But two things to keep in mind here. Excluding roaming expense, system operations expense went up by 7%, actually much less than the 38% growth in total data usage on our network. And roaming expense was pretty flat year-over-year as the impact of a 28% increase in off-net data usage was offset by lower rates.

Shown next is adjusted earnings before interest, taxes, and depreciation and amortization. This measure incorporates the earnings from our equity method investments along with interest and dividend income. Adjusted EBITDA for the fourth quarter was $213 million, up 13% from a year ago. Most of that improvement is due to the increase in adjusted operating income before depreciation and amortization which I just covered. We also saw increases in equity and earnings of unconsolidated entities and interest income.

Now let's turn to Slide 14, where we show our full year financial results. First, I want to point out that the adoption of the new accounting standard for revenue recognition had very little impact on our 2018 results, and therefore, on the year-to-date comparisons. For 2018, total operating revenues were reduced by about 0.3% and adjusted operating income before depreciation and amortization was reduced by about 1%. And fortunately, this is the last time that we'll need to talk about this issue.

As reported under the new standard, total operating revenues were up 2% year-over-year. On the other hand, total cash expenses were down 1% year-over-year. Excluding cost of equipment sold which was down partly as a result of a decrease in unit sales year-over-year, the other categories of expense in aggregate were held flat despite a 46% increase in data usage on our network, a 36% increase in off-network data usage and other inflationary pressures on other categories of costs and expenses. Driven by increased revenues and reduced expenses, adjusted operating income before depreciation and amortization, grew by 17% year-over-year. Adjusted EBITDA also grew by 17% year-over-year.

Now I'll turn the call back to Ken for a minute.

Kenneth R. Meyers -- President and Chief Executive Officer

Thanks, Steve. I'm sure everybody else is going to miss the whole discussion of rev-rec accounting as much I did going forward. Well, I want to turn the discussion now to 2019 strategic imperatives, which actually are very similar to those in '18, because why change something that's working pretty well right now.

Let me start by hitting with the first big change though. We are aggressively investing in the future competitiveness of U.S. Cellular. In the past, we may have called ourselves fast followers but I wouldn't call as leading edge either. We will not let ourselves or our customers to be left behind with the turn to 5G. Rather I would categorize our 5G network strategy as being in-step with the rest of the industry. Investments that we're making now to ready our network for 5G will also provide benefits such as increased capacity and speed.

Our first 5G markets will be using our 600 megahertz spectrum with the expectation that we'll be able to augment that in the future with mid and high-band spectrum. Mike will talk more about our plans in a few minutes.

In 2019, we will also continue to work to strengthen our customer base through both customer growth and increased royalty. We are targeting to continue to grow and set customers in 2019, while connected devices primarily the old(ph)Pen E tablets will continue to churn. Additionally, we will be expanding our footprint and edging out into Northern Wisconsin and Sioux City, Iowa late in the year. At the same time, we're looking to increase revenues from other services like fixed wireless. Lastly, we will continue to reduce costs throughout the organization. We've been quite successful in this area over the last two years and plan to continue those efforts in 2019.

Mike, would you spend a few minutes talking about our network plans?

Michael S. Irizarry -- Executive Vice President and Chief Technology Officer Engineering and Information Services

Thanks, Ken, and good morning. First, a key underpinning to our strategy is network quality, ensuring our customers have a great experience whenever and wherever they use their devices. To meet this objective in 2019, we need to continue to invest in capacity to meet their ever-growing demands for data. Second, we need to continue our deployment of Voice over LTE. As Ken stated earlier, we've commercially deployed VoLTE in Iowa, Wisconsin and Northwest markets and plan to roll out VoLTE in our New England and Mid-Atlantic markets this year. By the way, we are very proud of the job our associates across the organization are doing with the deployment. It's a real team effort.

We're also working with multiple carrier partners on LTE and VoLTE roaming to ensure our customers have a great experience wherever they use their devices. And our roaming and teams have made great progress in this area. While much of this is a continuation of work performed in 2018, this year we are also starting a multi-year project to modernize our whole network so it is ready for 5G NR. The modernization project will use various technologies, including 4x4 MIMO, LAA, 256 Quam and LTE-M to bring LTE advanced features to our customers. These features improve coverage, throughput and capacity of the network.

The modernization will support and utilize our existing low band and mid-band spectrum holdings. The equipment being deployed is an enabler for supporting future 5G bands too. We will start the deployment in our largest markets and look to commercially launch these services and 5G in those markets in 2020. By the way, the multi-year approach has served us well with previous technology deployments, specifically 4G and 3G. The work involved includes replacing the base stations with software-upgradable base bands. This means new

5G features can be incorporated with simply new software rather than a hardware replacement. It also involves moving the radios up the tower, which improves coverage and there are some minor software upgrades to our core network. We are very excited about this initiative and the foundation that puts in place for us moving forward.

And now, I'll turn it back to Ken.

Kenneth R. Meyers -- President and Chief Executive Officer

Thanks, Mike. One last comment before I hand this off to Steve. I want to say that none of the great results of 2018 would have been possible without the dedication of our management team and our associates. I'm impressed every day with their passion for excellence that enhances the experience for our customers, our communities and drives Company's success.

Now, let me turn the call back to Steve to talk about the guidance.

Steven T. Campbell -- Finance, Chief Financial Officer And Treasurer

Okay. Thanks, Ken. The guidance for 2019 and the comparative results for 2018 are shown on Slide 16 of our presentation. Before I get into the numbers, let me address the apparent disconnect between the revenue and earnings growth rates implied by the guidance. Historically, we and the industry guided on service revenues that's what drove earnings and cash flow since equipment sales were a wash item or in fact a loss item. With the introduction of equipment financing plans, the new revenue recognition rules and past pricing changes, service plan revenue fell and total operating revenues was a more accurate measure of the Company's growth rate.

Well, it looks like we're coming full circle now. Service revenues are starting to grow at least on a year-over-year basis and equipment revenue is more of a wash or flow-through item again. And so while our total operating revenue guidance of $4.1 billion to $4.3 billion implies a growth rate of just under 6% at midpoint, our service revenue growth rate is currently expected to be more in the range of 1% to 2%, reflecting the impact of some growth in the customer base and a bit of ARPU growth, offset by pricing changes on roaming. We expect adjusted operating income before depreciation and amortization to grow similarly to a range of $725 million to $875 million and adjusted EBITDA to a range of $900 million to just over $1 billion. Impacting expenses will be the network modernization project, anticipated continuation of growth in customer usage and promotional costs.

For capital expenditures, the estimate is a range of $625 million to $725 million. This is a substantial increase in the pace of activity for our engineering organization. And given potential supply chain issues and competing industrywide demand, it may turn out to be not fully achievable this year. Accordingly, we'll be monitoring it closely and we plan to update you each quarter.

Now I'll turn the call over to Vicki Villacrez for the review of TDS Telecom. Vicki?

Vicki L. Villacrez -- Senior Vice President, Finance and Chief Financial Officer

Okay. Thank you, Steve, and good morning, everyone. Overall, we are also pleased with the progress we made in 2018 and feel we are well-positioned to advance our strategic objectives in 2019. Today, before I review the fourth quarter results, I would like to cover a few of our accomplishments, as well as our objectives for next year.

The achievements which are shown on Slides 18 and 19 paves the way for the 2018 results. First, we completed construction of our initial fiber market in Sun Prairie, Wisconsin, which added 10,000 service addresses to our footprint, as we began our out-of-territory fiber construction in five new communities in Wisconsin currently targeting roughly 20,000 new service addresses. We also began expanding fiber in our existing market to cover an additional 40,000 service addresses within our ILEC footprint. By the end of 2018, we had deployed fiber to the home to 26% of our wireline service addresses, up from 24%, all of which was on a bigger base.

Also in 2018, we made substantial progress on our network construction under both the A-CAM and state broadband programs, a part of which is also fiber-to-the-home. Together, these programs will bring upgraded service to an additional 170,000 service addresses in the most rural areas of our market.

All year, we've been advocating for full funding of the A-CAM program and recent actions by the FCC have further closed the gap on the digital device by extending the A-CAM support for an additional two years. It is expected to provide a stable $80 million per year in revenue support for another 10 years. We are very pleased with that the FCC shares the objective that data services are just as vital to rural communities as they are to urban and suburban areas.

And finally, our Cable segment continues to drive strong results, as we execute on our broadband strategy. Earlier in the year, we completed the rollout of our 600 megabit speeds across much of our cable footprint and launched 1Gig services in a test market as the first phase of fiber-to-the-home to be utilized in new subdivisions. As a result, for the full year, this focus on improving our service offerings drove a 12% increase in revenue, which along with good expense control resulted in a 29% increase in adjusted EBITDA and a 410 basis point expansion in margins to nearly 31%.

Looking ahead to 2019, on Slide 20, our objectives to build on the strategic priorities we have already put in place to continue to grow revenue, improve the customer experience and increase operational effectiveness. 2019 will also be heavily focused on executing our fiber deployment strategy, as we have identified a number of new markets for fiber build within and outside our existing territory to drive further growth.

First, we are planning on more fiber expansion in 2019 outside of our current footprint and in addition to the new locations that are currently being built. More specifically, we have targeted fiber construction in Mid-Central Wisconsin to create a substantial regional cluster that incorporates several ILEC markets we currently serve in the area. And second, we are also targeting fiber construction in an attractive growing community that has the potential to be the first of several to create another regional cluster outside of Wisconsin. Both of these opportunities are included in our capital guidance and are expected to substantially grow our footprint over time. 2019 also includes continued fiber construction within our current ILEC markets. When completed and combined with our out-of-territory builds, our goal is to cover approximately 34% of our footprint with fiber-to-the-home by year-end.

Our A-CAM projects will continue to remain a large focus in 2019, as we look to meet our first FCC service obligation by the end of 2020. In our cable business, we expect to build on a momentum in 2019 to further increase broadband penetration to drive revenue growth. A key part of that strategy is to continue to upgrade the network to DOCSIS 3.1 to further increase speed capabilities and enhance the customer experience.

Lastly, and to the benefit of both wireline and cable customers, we expect to launch our cloud TV platform called TDS TV+ in the second half of the year. Video is important to our customers and they tell us so. More than half of our customers surveyed in our newest fiber market in Sun Prairie, they told us they choose TDS because we had a competitive video offering. Overall, we remain very pleased with our cable and fiber investments and we'll continue to evaluate growth opportunities including acquisitions throughout the year. Obviously 2019 is going to be a year heavily focused on execution, building our foundation for revenue growth in 2020 and beyond.

Switching to our quarterly results on Slide 21. TDS Telecom grew consolidated revenues 1% due to strong growth in cable revenues, which was partially offset by the continued decline in wireline revenues. Cash expenses increased 5% mostly in our wireline operations, which resulted in adjusted EBITDA decreasing 3% in the quarter. Capital expenditures increased substantially to $91 million due to our fiber initiatives that still left us under our capital guidance for the year.

Now let's turn to our segments, beginning with Wireline on Slide 22. We continue to meet the demands of our customers for higher broadband speeds and IPTV services by leveraging the fiber deployments we have made.

Our network investments are driving positive results as shown in the metrics on the bottom of the slide. Wireline residential video connections grew 11%, adding 5,400 connections compared to the prior year. And on average, our IPTV markets continue to achieve about 30% video penetration levels. Over 80% of our IPTV customers are on triple play bundles. In addition, churn on these bundles continue to remain very low. Our residential customers continue to choose higher speeds of up to 1 Gig in our fiber markets and approximately one-third of all our customers are now taking 50 megabit services or greater, that's compared to a 25% a year ago, helping to drive a 3% increase in average residential revenue per connection.

Looking at the Wireline financial results on Slide 23; total revenues decreased 2%. However, residential revenues increased 2%, due primarily to growth from video and broadband connections, as well as growth from within the broadband product mix. Partially offsetting this growth is a 6% decrease in ILEC residential voice connections as we expected. Commercial revenues decreased 8%, primarily driven by lower CLEC sales as we refocus to pursue commercial fiber opportunities primarily in Wisconsin. Wholesale revenues decreased 1% due to continued declines in special access and other regulatory revenues, partially offset by increased support received under the A-CAM program. In total, A-CAM support was $21 million in the quarter and $86 million for the year.

Wireline cash expenses increased 6% due to higher video programming fees and contractor charges related to network maintenance including weather-related repair costs. As a result, Wireline adjusted EBITDA decreased 13%.

Turning to Slide 24, our Cable segment continued to perform very well. Total cable connections grew 7% to over 336,000 driven by a 9% increase in total broadband connections. As a result, broadband penetration increased 300 basis points to 43% in these growing markets. On Slide 25, total cable revenues increased 11% to $60 million driven primarily by growth in residential connections. Cash expenses increased 1% due to increased cost of providing legacy service, primarily higher video programming costs. Lower employee-related expenses and general and administrative expenses compensated for the increased service costs. As a result, cable adjusted EBITDA increased $6 million to $20 million in the quarter expanding margins to 33.1%.

Now I'll turn to our guidance shown on Slide 26. We are forecasting combined Wireline and Cable revenues of $900 million to $950 million compared to $927 million in 2018. For Wireline, the growth in broadband and video and contributions from new fiber market are more than offset by the continued declines in commercial revenues and residential voice revenues. We also expect total wholesale revenues to decrease with continued declines in special access and intercarrier compensation as A-CAM funding is expected to remain equal to our 2018 level. We expect cable revenue growth in the high single digits, reflecting continued strong growth in broadband.

Adjusted EBITDA is forecast to be within a range of $290 million to $320 million compared to $313 million in 2018. Contributions from Wireline, broadband and IPTV growth initiatives and cable as well as cost reductions will help offset pressures in the legacy wireline business and expected fiber expansion costs. Capital expenditures, including carryover of $35 million from 2018 fiber builds are expected to be between $300 million and $350 million in 2019, compared to $232 million in 2018.

While we underspent our capital guidance in 2018, we intend to partner with both national and regional fiber builder contractors to be able to meet this aggressive capital expansion this year. Wireline CapEx guidance includes $155 million dedicated to in and out of territory fiber deployment, as well as $40 million in success-based spending for both Wireline and Cable and $30 million earmarked for A-CAM program.

I'd like to close by saying that the investments we are making are intended to be transformative to the Company and its future. And I'd like to thank all of our employees for their hardwork toward these long-range projects and at the same time, staying focused on providing excellent customer service.

Thank you. And I'll now turn the call over to Jane.

Jane W. McCahon -- Senior Vice President, Corporate Relations and Corporate Secretary

Thanks. And briefly, I'd like to say a few words on our HMS business before we go to questions. Equipment revenues were up in the quarter with some slight -- with total operating revenues declining slightly as service revenues declined due to churn and compression. OneNeck continued to add -- to make good progress on sales adding new logos in the quarter and we are pleased to see strategic revenues like cloud revenues grow. OneNeck continues to implement additional cost saving program to improve its cost structure in 2019.

And now, Julie, we'd like to open the call for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) Your first question comes from Philip Cusick with JPMorgan. Please go ahead, your line is open.

Timothy Reid -- JP Morgan -- Analyst

Hi, this is Reid for Phil. Thanks for taking my question. On the USM side, if you could expand on the additional opportunities and cost savings you mentioned, recognizing the data consumption growth. How are you seeing your network investments coming through and helping the cost to service side. And then maybe how has the success been on the unlimited payback plans? Thanks.

Kenneth R. Meyers -- President and Chief Executive Officer

Okay. Let's start with -- as we start the modernization, there's actually some costs associated with that, that go through the P&L as you got -- about a third of our sell sides that we lease so you have modifications, there's actually some cost there. But what it does is have significant impact on reducing the cost per bit going forward. Additionally, what the team is actually done over the last year is change a lot of the backhaul cost structure in the business, which has been a huge, huge savings for us. Going forward, there is actually a internal team, it's led by Steve Campbell that's going through the whole organization.

And so there isn't an area that, that isn't being looked at as we do the cost work. And with the add savings in each functional area over the last two years, I would expect there is still opportunity in all the functional areas going forward yet. With respect to the unlimited plans with payback, we're real pleased with it. The unlimited offering we have out there comes with payback. And so, what it really is, it removes a barrier to people that are on the fence, do I need unlimited or not. Well, if you don't need it, you don't pay for it. But what we see is they quickly continue to adapt their lifestyle and their usage pattern and grow to where they need it. We aren't seeing a lot of a credits related to that, but it's only -- again, it's only been out there a short period of time. I'd like to see six months before we really start talking about a lot of numbers around it.

Timothy Reid -- JP Morgan -- Analyst

Great, thank you.

Operator

Ric Prentiss with Raymond James. Please go ahead, your line is open.

Ric Prentiss -- Raymond James -- Analyst

Thanks. Good morning, everybody.

Kenneth R. Meyers -- President and Chief Executive Officer

Hi, Ric.

Ric Prentiss -- Raymond James -- Analyst

Hey. Couple of quick ones first actually. Ken, on Slide 8, you showed obviously really nice progression in the net adds on postpaid phones. But also it does show 1Q '18 was negative and 1Q '18 had kind of lower gross adds. I understand the goal for the year is to add handset growth. But is there some seasonality we should be aware of as we look into 2018 -- sorry 2019?

Kenneth R. Meyers -- President and Chief Executive Officer

Yeah. And I think if we look back over the last many years, the combination of fourth quarter being strong and we call it the old sales pull through combined with a heavy leaning toward prepaid of market in the first quarter. And historically, we've seen an iconic device that gets launched right at the end of the third -- the first quarter which tend to kind of delay things in the quarter. So we've seen a lot of seasonality in the last few years. And I don't -- if I think about prepaid this year, I think about delayed tax returns, I think about a launch that isn't going to be available for another couple of weeks, it kind of shapes up the same way.

Ric Prentiss -- Raymond James -- Analyst

Okay. And obviously, sitting here in February, you've got a pretty good view of what 1Q's looking like. Okay. I think, Steve, you also mentioned, when you were talking about the revenue growth rate for service revenues something about price changes for roaming. Could you elaborate a little bit on that?

Steven T. Campbell -- Finance, Chief Financial Officer And Treasurer

Yeah. What we've seen use rates per megabyte coming down as we've continued to negotiate better rates in those contracts. So in terms of data, the growth is, as we've said, pretty explosive 30%, 40% per year. But rates per megabyte as we've transitioned from 3G to predominantly 4G and even a little bit of VoLTE now, the rates are much lower. So, we'll get the benefit of that going forward.

Kenneth R. Meyers -- President and Chief Executive Officer

And that's really consistent -- that's consistent with what we've been talking about in the cost to produce the megabit, right? Now when we think about all the sales we saw last year, it's costly for us to produce and therefore being sold and purchased among carriers at a lower price.

Ric Prentiss -- Raymond James -- Analyst

Okay, and --

Steven T. Campbell -- Finance, Chief Financial Officer And Treasurer

That -- I just wanted to add. Of course, that has an impact on roaming revenue too. We're seeing a lot higher usage, but those rates since they're generally reciprocal are coming down. And so in my guidance comments, I mentioned, that when you look at the growth rate in service revenue, we'd expect there to be some downward pressure on roaming revenue as a result of the lower rates.

Ric Prentiss -- Raymond James -- Analyst

Right. But I say it's reciprocal. Okay, two more quick ones from me. Any evidence of T-Mobile building out into your markets or AT&T, FirstNet?

Kenneth R. Meyers -- President and Chief Executive Officer

Yeah, there is activity, I'd call on the construction side that we've seen for the last couple of years. In the marketplace, we haven't seen any change in dynamics at all at this point. And more importantly, what they're doing is what we continue to do to make sure that our networks are strong and vibrant that we're doing work on customer relations strengthening both the offering in our relationship with our customers. So, they're going to do what they're going to do. We're going to worry about our customers.

Ric Prentiss -- Raymond James -- Analyst

Makes sense. Final one from me. A lot of color on 5G, I appreciate that, Mike touched on it. When you think about launching 5G in you larger markets using the low band 600 megahertz first. What kind of speeds can you produce with the 600 megahertz. And then what could you get the speeds up to on a fixed wireless basis if you augment with mid and high band? Just trying to understand what type of 5G flavor we're thinking off?

Kenneth R. Meyers -- President and Chief Executive Officer

Oh, man. What a complex multi-part question, because it depends upon -- in different markets, we've got different portfolios of spectrum, especially when we talk about a fixed wireless device that's bigger in size, can put more antennas and everything else. We can use more of it, aggregate more of it. You're going to have license assisted LAA available. So as we think about early fixed wireless, we are still -- to be clear, we're still talking about more of a rural play, where we're at the end of the line from a cable perspective. But as we start to augment it with mid-band and high-band, then I think we're talking about a more suburban fixed wireless, but that's probably a couple years off.

Ric Prentiss -- Raymond James -- Analyst

Okay. And with the 600, what kind of speed could you get off at 600?

Kenneth R. Meyers -- President and Chief Executive Officer

Depends how -- you're talking network dynamics, I'll fill there.

Michael S. Irizarry -- Executive Vice President and Chief Technology Officer Engineering and Information Services

Right, you need signal strength, whether using an external tenor(ph)or not. I mean, the way we're thinking about it, we're going to do it together with LTE-Advanced. So 5G and 600 with LTE-Advanced features, LAA, what Ken mentioned, will give a nice pickup to the customers in terms of speed of what they're getting now.

Ric Prentiss -- Raymond James -- Analyst

Okay. Obviously, a lot of interest on what 5G will look like in fixed wireless. So look forward to, you guys starting to roll it out.

Kenneth R. Meyers -- President and Chief Executive Officer

Thanks.

Operator

Simon Flannery with Morgan Stanley. Please go ahead, your line is open.

Simon Flannery -- Morgan Stanley -- Analyst

Great, thank you. Good morning. Just continuing on the 5G if I could Ken. When you talk about the CapEx plan for this year, I think you talked about some potential supply chain issues. But should we think about this as being a one, two year build? Or how long do you think it will take to kind of get the network 5G ready? And then, we've talked about fixed wireless, is there -- is that the main use case that you see for 5G? Or this augmenting capacity for traditional mobile services, B2B. What are the other use cases that you're interested in right now? Thank you.

Kenneth R. Meyers -- President and Chief Executive Officer

Okay. Let's go to the first one, which was on --

Simon Flannery -- Morgan Stanley -- Analyst

CapEx.

Kenneth R. Meyers -- President and Chief Executive Officer

Yeah. So this year, as I said, we really got three things in there. You've got continuation of VoLTE, you've got capacity and you've got 5G. By the end of this year, most of the VoLTE stuff is done. But as we push 5G throughout the whole network, we'll probably be up holding out higher levels than we've historically run for the next(ph)two years. One, now why do it? Lots of reasons. First, it absolutely has a change in the cost of usage going forward off it by itself.

But what's interesting is, when we started down this path with 5G as an industry, we believe talked about revenue. We're closer to doing it, we switched, we're starting to talk about cost. And that's because some of the revenue is a little bit longer developing what we see today. And what I see today at least is one fixed wireless is a consumer product that is near to mid-term, as in terms of -- from time to rollout to when you start -- you can start to deliver. I mean, once we start turning on 5G, you'll be able to do some fixed wireless at a decent competitive speed right away to get go. A lot of the other things, you had longer -- the industrial stuff or the government stuff, there's a longer lead time sales cycle, right? And we're starting to work on those now but there are longer lead time.

And I was recently in a meeting where people were talking about this. And there was this discussion of the lower visibility of kind of the revenue side right now and one of the people in the room pointed out that conversation isn't a lot different than the conversation that we had when we started the 3G to 4G conversion, that it wasn't really clear what it was. But if you were to look back today at all the businesses that have been enabled by that technology change, pre 4G, you didn't talk about Uber and Lyft and data usage at the levels that we've seen. And what 5G does is, it gives us a whole new technology base that is going to both change the consumer experience, as well as enable a lot of industrial and societal changes going forward. So I'm excited about it.

Simon Flannery -- Morgan Stanley -- Analyst

Great. That's very helpful. Thank you.

Operator

Zack Silver with B. Riley. Please go ahead, your line is open.

Zack Silver -- B. Riley -- Analyst

Okay, great. Thank you for taking my question. The first one on U.S. Cellular is, can you help us size what the agile opportunity is in Sioux City in Northern Wisconsin. And as you kind of go forward with your VoLTE rollout, do you see potential opportunities to kind of expand your existing footprint?

Kenneth R. Meyers -- President and Chief Executive Officer

So, first off, if look at that one, I don't know, under 0.5 million people live in the areas that we'll be building out right now. But it's something we haven't done in quite a few years and these are both markets that are immediately adjacent to very strong high market share market. So we think it's just unnatural. But there are other areas where we have licenses that could not be built out with a voice product before VoLTE. Quite frankly, there wasn't CDMA which we use for voice available for 600 and 700. We will continue to look at other adjacencies with our licenses though it's not in our planning to be looking at keep thinking on core Phoenix, but something that is completely outside of our current footprint just because there is a license for sale there. We'll stay close to where we're at.

Zack Silver -- B. Riley -- Analyst

Got it. Thanks, Ken. And then one on the TDS side for Vicki. Can you talk about -- maybe give us an update on how the penetration rates are tracking in the new Madison markets. And then I guess, the second one would be, how do you -- are you seeing anything developing in the cable M&A pipeline?

Vicki L. Villacrez -- Senior Vice President, Finance and Chief Financial Officer

Sure. First, let's talk about our out-of-territory fiber builds, and I'll start with Sun Prairie. We're just a little over a year into that market, and as I said, we're really pleased with the results we're seeing there. They're exceeding our business case and our expectations in those markets. So broadband penetration is exceeding 50% and video penetration is roughly around 25%. And we're also really pleased with our commercial successes that we're seeing in those markets.

So I said, right now, we're currently under way building in five new communities around the Dane County area. We expect to begin to launch the first of those five markets in March. And right now, we've been doing the same kind of pre-selling that we did in Sun Prairie and we're seeing very similar reaction from the markets that we saw in Sun Prairie. So that's giving us confidence that we're going to be successful in those markets as well. And then of course, I also announced that we are expanding our capital in 2019 to include, the beginning of building on some new regional areas in Mid-Central Wisconsin as well as looking at an opportunity outside of Wisconsin. So more to come as we move forward there.

The other question was around cable acquisitions. We certainly are keeping our pipeline active and looking at opportunities as they come. But having said that, we definitely have to make the price work, the acquisition has to work and fit well strategically within our footprint. And this is why we like our fiber deployment strategy. It gives us growth choices and we think of the fiber investment like we would in acquisition. And without any viable acquisitions in cable at this point in time, we're going to continue to move forward on our broadband fiber deployment strategy.

Zack Silver -- B. Riley -- Analyst

Okay, great. Thank you very much.

Operator

Sergey Dluzhevskiy. Please go ahead, your line is open.

Sergey Dluzhevskiy -- Gabelli Research -- Analyst

First question for Ken on the fixed wireless. And you already talked a little bit about fixed wireless, but maybe if you could elaborate what fixed wireless means for you right now, I guess on 4G and where do you see it going on the 5G? Looking at your markets, where you think it would be most relevant and what kind of opportunity in terms of revenues you see for fixed wireless use case down the road?

Kenneth R. Meyers -- President and Chief Executive Officer

Hello, Sergey. Today, fixed wireless is a stand-alone product in the more rural areas, and currently it is only operating off of a internally -- internal to the house antenna device. We are in the process of actually doing field testing around external mount antennas which make it actually improve coverage, improve speed and makes it truly much more of a fixed wireless application. We'll be continuing those field installation trials over the next couple of months. And then as we complete our modernization -- network modernization program in '19, we'll be meaningfully increasing the speed and performance as well as the coverage that will be available there.

So I see -- late this year is when we probably get to step on the gas there a little bit more when the modernization work takes place. It is primarily a broadband or data product today. We don't have a, our own separate video. I mean, our customers are used to getting most of this over the top anyhow. But as the market opportunity evolves, as the network improves, then we'll be looking at other video opportunities. And quite frankly when we do that, we've got a company in house that's doing it well today.

Sergey Dluzhevskiy -- Gabelli Research -- Analyst

Great. And as a follow-up to previous question on other 5G use cases. So fixed wireless is obviously something that you see as near to medium term opportunity. Out of I guess, dozens of other use cases that are out there, longer term, which ones, maybe if you could name one or two that you think could be most relevant to your markets and will be coming after fixed wireless? Which ones are closer to us rather then more in the future?

Kenneth R. Meyers -- President and Chief Executive Officer

Oh, you are asking me to you know kind of throw a dart here. The fact of the matter is that, dense high use areas, I think are what -- are going to be the first to move. And so I think about our footprint and all the universities that we have, the arenas that go with those universities, those are probably some of the early fertile grounds.

Sergey Dluzhevskiy -- Gabelli Research -- Analyst

Great. And my last question is for Vicki. You mentioned that you are planning to build a new cluster in Mid-Central Wisconsin and also outside of Wisconsin. Could you maybe tell us more about those markets, about their characteristics, what do you like about them? And maybe also for markets outside of Wisconsin, how different or how similar are they to the market that you already pursued?

Vicki L. Villacrez -- Senior Vice President, Finance and Chief Financial Officer

Sure. Let's start with the Mid-Central Wisconsin cluster. Number 1, we've got several small ILECs in the area and that is allowing us to really cluster and leverage some of our employees and our presence and our brand in those areas, but we're really targeting markets that are contiguous, they have growth characteristics and they have nice demographics that I think our superior services that we'll be providing with fiber appeal to them, and so that is the focus in Mid-Wisconsin. And I think we've been working upfront with some of the cities to get their support and understand that these areas or are underserved, they do not have upgraded services and there is no current fiber over build presence in that area.

As I think about outside of Wisconsin, and I'm not going to really disclose that right now as you can understand. I don't want to tip my hand from a competitive standpoint but equally, we are looking for attractive growing areas. So if you think about some of the cable markets and the acquisitions we made there, these are in communities that are growing at a faster rate than the average growth rate, household growth rate in the US and have the similar -- and even higher attractive demographics that will buy up our premium services that we're providing. So we'll share more as we move forward in 2019.

Sergey Dluzhevskiy -- Gabelli Research -- Analyst

Thank you.

Jane W. McCahon -- Senior Vice President, Corporate Relations and Corporate Secretary

So, operator, we have time for one more quick question.

Operator

Your next question comes from Michael Rollins with Citi. Please go ahead, your line is open.

Michael Rollins -- Citi -- Analyst

Hi, thanks for taking the question. A couple if I could.

Jane W. McCahon -- Senior Vice President, Corporate Relations and Corporate Secretary

Mike, you got to be quick.

First, what are you seeing -- so what are you seeing from your customer behavior with respect to the proportion of mobile data traffic that's on your network versus the roaming networks? And is that changed much over the last few years?

Kenneth R. Meyers -- President and Chief Executive Officer

No. Yes, it's definitely, Mike. We've talked about for years how, I don't know 5%, 6%, 7% of our customers usage was off-network. And as their total usage has increased -- and that -- it goes back to way back when in -- in with voice, then when data came along, it's about the same thing. And now with data exploding, it's still about the same thing. In the other words, so our address -- our customer base hasn't changed that much in terms of who they are and how they're using it in terms of the amount of travel they do hasn't changed at all. They still travel, they still take vacations, they still go to different cities for business but it's staying down in that single-digit terms of total percentage of uses. But clearly as usage -- data usage is up 46% year-over-year, you'd see their usage off-network up the same way.

Michael Rollins -- Citi -- Analyst

Thanks very much.

Kenneth R. Meyers -- President and Chief Executive Officer

Thank you. Appreciate your time to everybody.

Operator

I will turn the call back over to the presenters.

Jane W. McCahon -- Senior Vice President, Corporate Relations and Corporate Secretary

We'd like to thank everybody for their time today, and look forward to speaking with you soon.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.

Duration: 64 minutes

Call participants:

Jane W. McCahon -- Senior Vice President, Corporate Relations and Corporate Secretary

Kenneth R. Meyers -- President and Chief Executive Officer

Steven T. Campbell -- Finance, Chief Financial Officer And Treasurer

Michael S. Irizarry -- Executive Vice President and Chief Technology Officer Engineering and Information Services

Vicki L. Villacrez -- Senior Vice President, Finance and Chief Financial Officer

Timothy Reid -- JP Morgan -- Analyst

Ric Prentiss -- Raymond James -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Zack Silver -- B. Riley -- Analyst

Sergey Dluzhevskiy -- Gabelli Research -- Analyst

Michael Rollins -- Citi -- Analyst

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