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United States Cellular Corporation (NYSE:USM)
Q2 2020 Earnings Call
Aug 7, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jake and I will be your conference facilitator today. At this time, I would now like to welcome everyone to the TDS and U.S. Cellular Second Quarter 2020 Operating Results Conference Call. [Operator Instructions]

At this time, I will turn the call over to our host, Jane McCahon. Ma'am, please go ahead.

Jane McCahon -- Senior Vice President, Corporate Relations

Thank you, Jake. Good morning, and thank you all for joining us today. We want to send out our very best wishes that you and your families are well. We've worked hard to prepare our materials and remarks for today to share with you the strength of our businesses and provide insight into what we believe, well, to be some of the most significant opportunities and challenges we'll face in the coming months.

Please let us know if we can do anything to provide more timely and important information. I want to make you all aware of the presentation we've prepared to accompany our comments this morning, which you can find on the Investor Relations section of the TDS and U.S. Cellular websites.

With me, today and offering prepared comments are from TDS, Pete Sereda, Executive Vice President and Chief Financial Officer; from U.S. Cellular, LT Therivel, President and Chief Executive Officer; Ken Meyers, Senior Advisor to the CEO; Doug Chambers, Senior Vice President and Chief Financial Officer; and Mike Irizarry, Executive Vice President and Chief Technology Officer. From TDS Telecom, Vicki Villacrez, Senior Vice President of Finance and Chief Financial Officer.

This call is being simultaneously webcast on the U.S. Cellular and TDS Investor Relations website. Please see those 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.

TDS and U.S. Cellular filed their SEC Forms 8-K, including the press releases and Forms 10-Q yesterday. As shown on Slide 2, the information set forth in the presentation and discussed during this call contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Please review the safe harbor paragraphs in our press releases and the extended version, included in our SEC filing. We have updated our safe harbor statements to include specific risks related to COVID-19 and its impacts on our businesses and provided that here specifically on Slide 3.

In terms of our upcoming IR schedule, Slide 4, we will be virtually attending the Morgan Stanley's Corporate Access Day on August 13th and then doing a Virtual Morgan Stanley Non-Deal Roadshow on August 20th, which will include a fireside chat and our open-door policy is now more of a open phone or a open video policy, so please reach out to us and we can arrange them.

Before turning the call over, I'd like to remind everyone that due to the FCC's Anti-Collusion Rule, we will not be responding to any questions related to the FCC auctions and spectrum strategy.

Now, I'd like to turn the call over to Pete Sereda. Pete?

Peter L. Sereda -- Executive Vice President and Chief Financial Officer

Thanks, Jane, and good morning, everyone. I'm going to make some brief comments about the balance sheet and actions we've taken during the COVID-19 crisis to protect ourselves, financially. But before doing so, I'd like to highlight the strong operational and financial results of both business units during the quarter. The pandemic has highlighted the criticality of our products to our customers and the teams have stepped up and continued to deliver on their typically outstanding service levels.

Now to the balance sheet. As we've talked about before, maintaining financial flexibility is one of the pillars of our corporate strategy. Over the years, we have worked to retain relatively low leverage levels, long-dated debt maturities, sufficient undrawn revolving credit facilities and significant cash balances, while at the same time making sure we have the financial resources we need to fund our businesses.

As you can see on Slide 5, at June 30th, TDS had $1.7 billion in available funding sources, including cash and cash equivalents, available credit facilities, undrawn term loans and the undrawn portions of our EIP securitization. We took a number of steps earlier this year to solidify our overall liquidity and feel confident we are in a stable and sound position for the rest of the year. We also repurchased a little over 500,000 TDS common shares at favorable prices during the quarter, balancing the need to retain liquidity with a pricing opportunity offered by the market.

As this is our practice, we will look to take advantage of favorable market conditions to augment our balance sheet going forward. We believe we have additional access to the debt capital markets both retail and institutional as well as other conventional debt sources. If it were necessary, we believe, we would also have a number of potential additional funding sources, including some related to our own towers and wireless partnerships, although we would view such financings less favorable -- less favorably than straight debt for costs and operational reasons.

Finally, as you can see from the chart on the right side of the page, most of our existing debt is very long-dated with essentially no near-term maturities pressuring our liquidity position.

I will now turn the call over to Ken.

Kenneth R. Meyers -- Senior Advisor to the CEO

Thanks, Pete. Good morning. I'd be lying if I told you this wasn't a bittersweet moment for me. I'm so proud to have worked for TDS and U.S. Cellular for over 30 years, by my count -- actually, by Jane's count. I've been involved in reporting for some 136 quarters, with many of you on the receiving end of some those, maybe even many of those or maybe just feeling that way.

I want to acknowledge, I've learned a lot from you and will miss the exchange of ideas and information. And I want you to know that I'm confident that I am leaving the organization in great hands. U.S. Cellular has an exceptionally talented management team and the most customer-focused associates in the industry. And now, has a new leader with the skills and experience to move the company forward.

As I look back at the first half of 2020, I'm thankful that I could report -- that we've survived one of the most unprecedented events in our country's history and we are in a strong position going forward. Thanks in large part to our resilient, focused and caring organization. And before I turn the call over for the last time, I want to thank all of our associates for their contributions in serving our customers. I'm humbled to have worked with you and which -- and wish each of you much success going forward.

LT, it's all yours.

Laurent Therivel -- President and Chief Executive Officer

Thanks, Ken. And Ken, thanks for all the sound advice and counsel that you've provided during this transition. Good morning, everybody, it's a pleasure to be with you. Given that I started this job just on July 1st, I'm going to share some of my initial impressions, but for the most part, I'm going to be in listen mode today. Doug Chambers is going to -- are going to -- is going to walk you through our results for the quarter. And this has been a challenging few months for everyone but I have to say, I'm proud to be part of this industry and I'm particularly proud to be part of this company.

The pandemic has validated that what we do is truly essential, connecting family, friends and commerce and this is a particularly exciting time to be in wireless, especially as we embark on 5G. As you know, we've already launched some initial markets on 5G and we're going to provide some more details on that later in the call.

My first month at U.S. Cellular has been full of learning and listening and I feel it's been a seamless and effective transition. Over the past few weeks, I traveled to several of our various locations, met with many of our associates, of course, in the safest manner possible and I'm consistently inspired by our customer-centric culture and the high levels of engagement that we have across the entire company. The flexibility and resiliency that our associates have displayed throughout this pandemic are tremendous and it's clear to me that our focus on the customer and our high quality network are critical to growing this business.

And speaking of network, I'm pleased to report that our network strength was recently recognized as we won another J.D. Power Award. This recognition validates for me that our network modernization strategy is working. I want to talk for just a minute about why I joined this company. It's a strong company, tremendous corporate culture, it is also a company with incredibly valuable assets, spectrum, towers, distribution, and our assets have both significant financial value and operational importance. And my goal is to build on that strong culture and that strong assets in order to drive strong growth.

Let me be very clear, I was hired to lead U.S. Cellular into the future to grow this business. I'm going to be very focused on building value for all of our constituents. Over the coming months, my leadership team and I are going to be developing a strategy aimed at doing what is best for U.S. Cellular to continue to be a formidable competitor over the long-term. Let me touch briefly on the quarter. Many aspects of our second quarter performance were impacted by the pandemic, yet we were able to generate very solid results.

I'm extremely proud of what the team has accomplished and the results are really a testament to Ken and his leadership. Doug is going to take you through the details in a moment. And looking forward to the rest of the year, we're going to build off these strengths, we'll also intensifying our focus on community specific campaigns and delivering the products and services and solutions that our customers want. I'm looking forward to reporting on our progress throughout the back half of 2020 and getting to know all of you, our investors and our analysts. I want to thank you for your support.

Now, I'm going to turn the call over to Mike Irizarry, he is going to update you on our latest 5G initiatives. Mike?

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

Thanks, LT, and good morning. Network quality is foundational to U.S. Cellular. Our goal is to ensure our customers have a great experience, whenever and wherever they use their devices. As most of you know, Iowa and Wisconsin were phase one of our multi-year 5G network expansion. And last week, we announced our next phase. Phase two will begin in the second half of 2020 and we will deploy in 11 states or about 10 million PoPs. We are working with three equipment vendors and we are continuing to expand the number of 5G devices. We've been very pleased with the performance of phase one. Customers are receiving an improved customer experience, our 5G deployment improves average and peak speeds for our 5G and our 4G customers.

In addition to improved customer experience and new revenue opportunities, we expect 5G to carry traffic more efficiently, improving the cost to deliver a bit. And this efficiency enables us to get the most out of our spectrum portfolio. We expect to begin deploying our Millimeter wave spectrum in 2021 to improve speed and capacity in denser areas of our footprint. Further, we expect to conduct trials of our Millimeter wave fixed wireless service in 2021 in CLEC markets.

I will now turn the call over to Doug Chambers. Doug?

Douglas W. Chambers -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Mike. Turning to Slide 8. First, let me briefly provide a COVID-19 update. First, our entire organization has been incredibly resilient as we successfully managed through continuing uncertainty. We have maintained our work-at-home program for those where it is feasible and while we are working on a return to office plan, we have not set a timetable for doing so. On the retail front, our stores are opened and largely back to normal hours. We continue to follow important safety steps to keep our frontline associates and customers safe. As expected, the pandemic led to reduced store traffic levels in the quarter. However, each metric has shown steady improvement off the post-pandemics lows. Recently, store traffic has been running about 20% below prior year levels.

Finally, our supply chain remains fully functional and our inventory levels are good. Turning to Slide 9. Even with all this disruption, we are still executing on our strategic priorities. As I will detail in a moment, subscriber results benefited from very low churn and strong connected device additions in the quarter. Revenue growth in the quarter was impacted by reducing roaming -- reduced roaming revenue, which was partially due to decreased mobility of wireless users during the pandemic. Also, as an additional way to help our customers, we removed caps on data usage and waived overcharges, which had a negative impact on ARPU in the quarter.

We signed the FCC's Keep Americans Connected Pledge, where we committed to not disconnect customers who are experiencing COVID-19 related challenges for non-payment through June 30th. We had about 56,000 subscribers sign up for the pledge with 39,000 remaining at June 30th. This [Technical Issues] amount of paid subscribers is less than we anticipated at March 31st and resulted from proactively working with pledge customers to administer collections and enroll them in payment arrangements. As a result, we decreased our estimate of bad debts expense related to the pledge in the second quarter. Overall, despite some negative impacts to revenue and expenses as a result of the pandemic, we continue to control cash expenses, which decreased 3% year-over-year.

From a network standpoint, we engineer our network for peak usage periods and the network continues to perform well. To-date, COVID-19 has increased data traffic about 20%-25% and our network has been able to handle that extra demand. Throughout the quarter, we continued our network modernization and 5G efforts and we will be finishing our VoLTE deployment this year. Our expansion markets in Iowa and Northern Wisconsin are doing well. And as LT highlighted, we won another J.D. Power Award.

Let me touch briefly on postpaid connections results during the second quarter shown on Slide 10. Postpaid handset gross additions decreased primarily due to mobile switching activity and decreased store traffic due to the impacts of COVID-19. Partially offsetting this was an increase in demand for connected devices. Total smartphone connections increased by 11,000 during the quarter and by 64,000 over the course of the past 12 months that helps to drive more service revenue given that smartphone ARPU is about $21 higher than feature phone ARPU.

As mentioned, we saw connected device gross additions increased by 9,000 year-over-year. This was driven by gross additions of Internet products such as hotspots and routers as a result of an increase in demand by customers seeking wireless products to meet their need for remote connectivity due to the impacts of COVID-19. During Q2, we saw an average decline in store traffic of around 35% with the larger drop in traffic at the beginning of the quarter and the end of the quarter. Decrease in store traffic had a negative impact on gross additions and accessory margin although connected device activity remained stronger than the prior year.

Next, I want to comment on postpaid churn rate shown on Slide 11. Currently, as you would expect, churn on both handsets and connected devices is running at very low levels. Postpaid handset churn depicted by the blue bars was 0.71%, down from 0.97% a year ago. This was due to mobile switching activity, resulting in a decrease in defections as customers' shopping behaviors were altered due to the overall COVID-19 crisis as well as reduction in non-paid defections related to the FCC pledge. Postpaid churn combining handsets and connected devices was 0.89% for the second quarter of 2020 also lower than a year ago.

Now let's turn to the financial results on Slide 12. Total operating revenues for the second quarter were $973 million, flat year-over-year. Retail service revenues decreased by $4 million to $658 million. The decrease was due to a decline in the postpaid subscriber base, partially offset by higher average revenue per user, which I'll cover on the next slide. Inbound roaming revenue was $41 million that was a decrease of $3 million year-over-year driven by lower rates, partially offset by higher data volume. Other service revenues were $54 million, that was an increase of $3 million year-over-year attributable to a 16% increase in tower rental revenues. Finally, equipment sales revenues increased by $4 million or 2% year-over-year due to the increase in devices sold, partially offset by a decrease in the average selling price and a decrease in accessory sales.

Now a few more comments about postpaid revenue shown on Slide 13. Average revenue per user or connection was $46.24 for the second quarter, up $0.34 or approximately 1% year-over-year. At a per account basis, average revenue grew by $1.24 or 1% year-over-year. The increase was driven by several factors, including having proportionately less tablet connections, which on a per unit basis contributed less revenues in smartphones, an increase in regulatory recovery revenues and increased device protection revenues. As part of caring for our customers during the COVID-19 crisis, beginning in March, we elected to waive overage charges and we also waived late fees and other fees in conjunction with the FCC pledge. These waived charges partially offset the increase to ARPU.

Let's move next to our profitability measures on Slide 14. First, I want to comment on adjusted operating income before depreciation, amortization and accretion and gains and losses. To keep things simple, I'll refer to this measure as adjusted operating income. As shown at the bottom of the slide, adjusted operating income was $235 million, an increase of $23 million year-over-year. As I commented earlier, total operating revenues were $973 million, flat year-over-year. Total cash expenses were $738 million, decrease in $23 million year-over-year. Total system operations expense increased year-over-year.

Excluding roaming expense, system operations expense increased by 3%, mainly driven by increases in cell site rent expense and non-capitalized cost to add network capacity, while total data usage on our network increased by 72%. Roaming expense decreased 2% year-over-year due to lower rates, partially offset by a 42% increase in off-net data usage. Cost of equipment sold decreased by $6 million or 3% year-over-year, primarily due to a lower average cost per device, a decrease in accessory sales and a decrease in charges recorded to reduce inventory to its net realizable value. These decreases were partially offset by the increase in the volume of devices sold.

Selling, general and administrative expenses decreased 6% year-over-year, driven by a decrease in bad debts expense, advertising and employee-related expenses. The decrease in bad debts expense resulted from decrease in our estimated allowance for bad debt in the second quarter of 2020 related to our participation in the FCC pledge. As I mentioned earlier, this decrease was driven by overall favorable experience in both administering collections from the FCC pledge customers and enrolling them in payment arrangements.

Shown next is adjusted EBITDA, which starts with adjusted operating income and incorporates the earnings from our equity method investments along with interest and dividend income. Adjusted EBITDA for the quarter was $280 million, a 9% increase year-over-year due to the improvement in adjusted operating income as well as an increase in equity and earnings of unconsolidated entities, partially offset by a decrease in interest income.

Slide 16 provides our guidance for the year and for comparison, we're also showing 2019 actual results. For purposes of developing our guidance, we assumed that our markets will remain out of lockdown for the remainder of the year and an improvement to a more normal state by late Q3 2020. I want to take a moment to remind everyone that our guidance is on service revenues not total operating revenues, which includes both service revenues and equipment sales. Variations in equipment sales typically have a corresponding impact on cost of equipment sold and as a result, are less impactful to our profitability measures.

Therefore, we believe that service revenues are the more meaningful revenue measure for guidance purposes. For total service revenues, we have maintained a range of $3.0 billion to $3.1 billion. We have also maintained our adjusted operating income and adjusted EBITDA ranges of $725 million to $850 million and $900 million to $1.025 billion respectively.

For capital expenditures, we are maintaining our guidance range of $850 million to $950 million. We continue to make good progress on our key projects such as VoLTE deployments, 4G LTE network modernization and 5G, and do not currently anticipate a major disruption to any of them. As we've highlighted throughout the call, there remains a good deal of uncertainty related to potential business outcomes for the year. COVID-19 has an impact on service revenues, handset subscribers, gross additions and defections, roaming activity and operational costs.

In addition, impacts related to the ongoing pandemic on the economy and society, including additional governmental response to the pandemic are still not entirely clear. This level of uncertainty factored into our decision to maintain our existing guidance at this point of time.

I will now turn the call over to Vicki Villacrez. Vicki?

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

Okay. Thank you, Doug, and good morning, everyone. Overall, we are very pleased with our results for the first half of the year and our ability to quickly and effectively respond to the COVID-19 pandemic. We grew both revenue and adjusted EBITDA in the second quarter and made progress on advancing our fiber deployment strategy.

Let me first begin by giving an update on the actions that we have taken in the quarter. In accordance with the FCC pledge, we did not disconnect customers due to non-payment and we agreed to waive late payment fees for customers impacted by the pandemic. As a result of both these actions, we recorded a reserve of $2 million in the quarter. In advance of processing non-pay disconnect, which we began in July, early indications suggested about 70% of our customers are prioritizing their services and making arrangements to stay connected.

In addition to the FCC pledge, we also offered a free 60-day broadband promotion, contributing to our growth and we are now seeing the majority of these customers paying for these services. From an operational perspective, our highest priority is keeping our employees and customers safe. To that end, we continue to operate in a work at home environment wherever possible and have expanded safety protocols for frontline workers, including the direct sales force as they return to selling door-to-door in the second quarter.

From a product perspective, we are pleased to report that we have expanded our launch of our cloud TV product called TDS TV+ to additional cable and wireline markets, including our Wisconsin out-of-territory clusters and expect to complete those rollout in the third quarter. Additionally, we plan to roll out TDS TV+ to our new fiber market, Coeur d'Alene, Idaho in the fourth quarter. This is a really great product and while it is still early in its launch, we are focused on ensuring its success across our markets.

From a network perspective, the current prices continues to reaffirm the importance of high-speed Internet and how important not only our investments have been, but also our continued efficacy on behalf of rural America. As a result of driving fiber deeper into our market, we have robust networks, which continue to remain very stable and meet our customers' need. From an out-of-territory perspective, pre-sales continue to exceed our expectations. We are currently installing service in our Wisconsin and Idaho clusters. We remain focused on construction throughout these communities and we are working toward commencing construction in Spokane, Washington, where we recently launched pre-sale activity. Overall, we remain committed to achieving our strategic priorities through the second half of the year as outlined on Slide 19.

Now, let me highlight our financial results for the quarter as shown on Slide 20. Consolidated revenues increased 3% from the prior year, primarily due to the cable acquisition, which closed at the end of last year. It also reflects organic increases in broadband and video from our fiber expansions in wireline and continued growth in cable residential ARPU and broadband subscribers. Again, these increases were partially offset by the reserve related to the FCC pledge. Cash expenses increased 2%, including the acquisition and were flat without. As we have seen meaningful favorability on employee expenses in the quarter and other cost-saving initiatives, offset by increased plant and maintenance expense.

Adjusted EBITDA increased 2% to $83 million due to these increases in operations, partially offset by lower interest income in the quarter. Capital expenditures increased 7% to $75 million as we continued to invest in our fiber deployment. I will cover our total fiber program in more detail in a moment, but for now, let's turn to our segments, beginning on wireline on Slide 21. Broadband residential connections grew 6% as we continue to fortify our network with fiber and expand into new market. At the onset of the pandemic, we saw an initial surge in demand, which has subsided to expected growth levels. Also contributing to this growth is customers not disconnected due to the FCC pledge. In June, we were excited to return our direct sales force to selling door-to-door and we saw an immediate impact on our new fiber market sales.

From a broadband speed perspective, we are now offering up to 1 gig broadband speeds in our fiber markets. Across our wireline residential base, essentially, one-third of all broadband customers are now taking 100 megabit speeds or greater compared to 26% a year ago. This is helping to drive a 4% increase in average residential revenue per connection in the quarter.

Wireline residential video connections grew 9% compared to the prior year. Video is important to our customers, approximately 40% of our broadband customers in our IPTV market take video, which for us is a profitable product. Our strategy is to increase this metric as we expand into new markets the value of these services and through the launch of our new TDS TV+ product. Our IPTV services in total cover one-third of our wireline footprint, leaving opportunity to further leverage our investment in video.

Slide 22 shows the progress we are making this year on our multi-year fiber program, which includes our in and out-of-territory fiber build. As a result of this strategy over the last several years, 265,000 or 33% of our wireline serviced addresses are now served by fiber, which is up from 27% a year ago. This is driving revenue growth, while also expanding the total wireline footprint 3% to 810,000.

Our current fiber plans include roughly 320,000 serviced addresses that will be built over a multi-year period. Year-to-date, we have completed construction of 25,000 fiber addresses, and overall take rates are generally exceeding expectations in these areas that we've launched to-date. We are expecting our fiber service address delivery to more than double in the second half of the year, as we continue launching new markets. However, as we discussed last quarter, we are seeing some delays in construction, but at this point, we still expect to deploy at a pace that is within our capex guidance for the year. For example, slower municipality permitting as well as electric utility dependencies associated with the aerial portion of our fiber build, continue to be a major watchpoint for us. In some cases, we are pivoting to buried alternatives where it makes economic sense.

Looking at wireline financial results on Slide 23. Total revenues decreased 2% to $169 million, largely driven by the continued decline in CLEC commercial revenues and a decline in wholesale revenues. These declines in commercial and wholesale revenues are offsetting strong growth in residential revenue, which increased 6% due to growth from video and broadband connections as well as growth from within the broadband product mix, partially offset by a 3% decrease in residential voice connection.

Commercial revenues decreased 10% to $38 million in the quarter, primarily driven by lower CLEC connections. Wholesale revenues decreased 6% to $46 million due to retroactive ATM[Phonetic] funding in 2019 and decreased access revenue. Wireline cash expenses decreased 2%, this was driven by lower employee expenses, the capitalization of new modems, previously expensed and reduced cost of legacy services, partially offset by higher video programming fee. In the quarter, maintenance expense also increased partly due to storm damage in several markets. In total, wireline adjusted EBITDA decreased 4% to $59 million.

Moving to cable on Slide 24. Cable total revenues increased as customers continue to value our broadband services. Total cable connections grew 12% to 378,000, while -- which included 31,000 from the acquisition and a 9% organic increase in total broadband connections. On an organic basis, broadband penetration continued to increase, up 220 basis points to 46%. On Slide 25, total cable revenues increased 16% to $71 million, driven in part by the acquisition. Without the acquisition, cable revenues grew 7%, driven by growth in broadband connections from both residential and commercial customers.

Our focus on broadband connection growth and fast reliable service has generated a 25% increase in total residential broadband revenue, including organic growth of $4 million or 15%. Also driving the revenue change is a 6% increase in average residential revenue per connection, driven by higher value product mix and price increases. Cash expenses increased 13%, due primarily to costs related to the acquisition, or 4% excluding acquisition due to increased employee expense to support the growth. As a result, cable adjusted EBITDA increased 20% to $24 million in the quarter, improving margin by 130 basis points to 34%.

On Slide 26, we provided our 2020 guidance, which is unchanged from the guidance we shared at the beginning of the year. We are pleased with our results in the first half of the year and even with some uncertainty related to the pandemic in the second half of the year, we remain committed to our strategic goals and financial objectives. Our fiber builds are expected to ramp up in the second half of the year and we currently expect to be within the guidance range. I look forward to updating you in the third quarter.

And now, I'll turn the call back over to Jane.

Jane McCahon -- Senior Vice President, Corporate Relations

Thanks, Vicki. And before opening the call to questions, I'd like to remind everyone once again that due to the FCC's anti-collusion rules, we will not be responding to questions related to any FCC auctions or spectrum. And Jake, now we'd like to open up the call for questions.

Questions and Answers:

Operator

Thank you so much. [Operator Instructions] And we have a question from Ric Prentiss.

Ric Prentiss -- Raymond James & Associates -- Analyst

Yes, good morning. Hope you, employees and families are doing well as your business has during COVID-19.

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

Good morning, Ric.

Ric Prentiss -- Raymond James & Associates -- Analyst

Hey. First, congrats, Ken, it's been great working with you. I think I did 84 of those earnings calls with you and welcome LTE to the public universe.

Kenneth R. Meyers -- Senior Advisor to the CEO

Pleasure.

Ric Prentiss -- Raymond James & Associates -- Analyst

First question I have, I want to look at on the wireless side, on the Keep Americans Connected side. So do I understand it right that, at June 30th, 39,000 subscribers that are on the numbers that are in keep America connected and how do you think that plays out through the quarter as far as what you think you'll be able to convert those to current pay or at least with pay plans?

Douglas W. Chambers -- Senior Vice President, Chief Financial Officer and Treasurer

Yes. Ric, so far -- this is Doug Chambers. So far that's going quite well toward -- really as of last week, we had close to 80% of those customers were either current or they were on payment plans. Those payment plans range from two to 12 months, so that will play out over time. But so far, we're very pleased with our ability to keep those customers from canceling or suspending.

Ric Prentiss -- Raymond James & Associates -- Analyst

Great. And I think one of the things that surprised me in the quarter, roaming -- inbound roaming revenues came in better than we thought. We have been concerned with stay-at-home orders and people not traveling, it might fall off more. Could some of that also be that people are working from home and that's kind of where your coverage is in suburban rural America? How should we think about trends as we look into the second half of the year on inbound roaming?

Douglas W. Chambers -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah, I think we have a number of things that work. First of all, your roaming -- inbound roaming usage both sequentially and year-over-year was up, all right. And it would probably been even more, if not for COVID-19, so certainly, as we go into the third quarter, we have seasonality, we expect increases there and just general increases as customers consume more data. That's tempered a little bit with COVID-19. So I would say, we'll continue to see increases in usage but remember here that's offset with lower rates. So that's what we're looking at and it is a lot of unpredictability obviously with the pandemic moving.

Ric Prentiss -- Raymond James & Associates -- Analyst

Okay. And then, can you talk a little bit about the RDOF, I know it's an FCC auction, but it doesn't involve the spectrum and any thoughts on what the prospects are for RDOF or what it might mean for the landline side of the business?

Laurent Therivel -- President and Chief Executive Officer

Hey, Ric, it's LT. Unfortunately, we can't address the questions about the RDOF because we're in a quiet period for that as well. So it's just like spectrum.

Ric Prentiss -- Raymond James & Associates -- Analyst

Okay. And was there a deposit made for the RDOF or it's really just you receive funds, there have been no deposit, you're just in a quiet period?

Laurent Therivel -- President and Chief Executive Officer

Just a quiet period.

Ric Prentiss -- Raymond James & Associates -- Analyst

Okay. I figured that might be the case. And last one for me. Can you kind of update us -- and maybe LT, I know you're listening and learning, but as we think about 5G, what do you see as some of the top use cases and business cases in U.S. Cellular territory for 5G?

Laurent Therivel -- President and Chief Executive Officer

Yeah, Ric. Thanks for the question. So I mean, initially, when you think about 5G, there's going to be a huge benefit on the cost side, cost per gig. It's going to become a lot more efficient to manage traffic and if I look at the -- just the past quarter with the pandemic, I -- we just briefly covered this in our comments, but I don't want to leave it unsaid. Data traffic up over 70% and the mix of that traffic, right shifting from -- if you think about customers who want to be covered where they work, live and play. Big shifts from work to live and play. And so, managing that traffic and managing the cost of that traffic is going to be critical and 5G is going to help us a great deal there.

Talking about use cases, initially, you can think about the use cases as being around high-speed Internet and providing fixed wireless broadband connections to our customers. We think there is a significant opportunity there and you can expect to see that portion of the business continue to grow. And in fast forward truly long run, autonomous car, AI and facilitating some of those really high-speed low latency use cases is going to be critical and from that perspective, do we expect to see near term monetization of those? No, but it's going to be table stakes having a strong 5G presence.

And then in the midterm, you can expect to see use cases around business and business solutions think, connected health, connected education. We are going to be ramping up our presence on the business side, when I talk and I'm sure I'll get questions about priorities moving forward and certainly around topline growth business being a component of that top-line growth. Those connected manufacturing, connected health, those kinds of use cases are going to be enabled by 5G. I think those will be starting to take shape in the coming years and I think we're well-positioned to take advantage of them.

Ric Prentiss -- Raymond James & Associates -- Analyst

Great. Thanks. Again, Ken we will miss you, enjoy your retirement. LT, looking forward to working for a long time.

Kenneth R. Meyers -- Senior Advisor to the CEO

Thanks, Ric.

Laurent Therivel -- President and Chief Executive Officer

Thank you.

Operator

Thank you. We have a question from Phil Cusick.

Phil Cusick -- J.P. Morgan -- Analyst

Hi, thanks. Ken, [Technical Issues] thanks for all your help and LT welcome aboard. Can we sort of summarize just to go back to Ric's question on the pledge. Do you think -- what do you think about the sustainability of growth in the third quarter on postpaid phones? You've got extremely low churn in the quarter, I would assume that will pick up, I'm curious what you're seeing in terms of the pace of customers coming in as we begin the third quarter?

Laurent Therivel -- President and Chief Executive Officer

So Phil, this is LT, I'll cover the very high level and then, I'll pass it to Doug for a little bit of the detail. I mean, the -- from a traffic perspective, we're now looking at year-over-year traffic in the stores being down around 20% and that's slow improvements over time. I expect that to continue to steadily improve as we get into the back half of the year. And so, I would expect steady improvement, steady slow improvements from the gross add in the switching perspective. The key is going to be continuing to keep churn under control and making sure that we have strong performance in terms of hanging on to those customers that are interested in switching. And so, one of the things we're going to be watching very, very carefully is the switching and the churn dynamics to make sure that we don't see a spike in the back end of the year on that. Doug, I don't know if you want to add any more detail.

Douglas W. Chambers -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah, I would just say, though it relates to the pledge customers, at June 30th, that 39,000 that were on the pledge, that's less than 1% of our postpaid base. So while, not negligible, it's a manageable number and some of those customers will churn off and so we expect to see a slight tick up in the involuntary churn in the latter half of the year. But as I mentioned earlier, we are having good experience with having those customers on payment arrangements and it certainly exceeded our expectations from where we were at in the March pledge. So, so far, so good on that.

Phil Cusick -- J.P. Morgan -- Analyst

Okay. Mike, capex running pretty low versus your guide. What's your thought on ramping pretty quickly into the back half?

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

Good morning. Capex, I think, Doug gave the guidance for the year, we're going to stick to that. Our initiatives, VoLTE and 5G, we're sticking to the plan, we are on track and fully expect to complete those as we stated early in the year.

Phil Cusick -- J.P. Morgan -- Analyst

Okay. And Vicki, I heard your comments about ramping fiber deployment in the back half. Can I follow-up on your comment around commercial revenue from here? And didn't seem like it's for a real challenge. What's happening with those as we get through the quarter?

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

So on the commercial side, our commercial revenue losses have been primarily all due to the CLEC declines that we have been seeing and I expect those trends to continue in the second half of the year, which have all been incorporated into our guidance. As you know, our focus is really been on our fiber deployment strategy. There is opportunities as we continue to look across our markets, to continue to fortify parts of our business with the fiber. But you'll see the CLEC declines continue.

Phil Cusick -- J.P. Morgan -- Analyst

Okay, thanks, guys.

Operator

Thank you. We have a question from Simon Flannery.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Good morning. And Ken, best wishes for the future, you will be missed. LT, welcome. It'd be great if you could talk a little bit about what attracted you to U.S. Cellular? You've been in the industry for a while and you looked at the landscape and I think there is a concern in some parts about regional players in this environment. You've obviously talked about some of the growth opportunities, but it'd be great to see what's the potential you see in your role. And then, more specifically on fixed wireless, you see an opportunity there. Can you help us a little bit with what the product is going to look like in terms of speeds? We've obviously seen a success of 1 gig over on the TDS side and as size that addressable market for you. Thanks

Laurent Therivel -- President and Chief Executive Officer

Yeah, Simon. Thanks for the question. So let me start kind of what drew me to the company, I would point at a few things. The first is, just the culture and the people Ken talked about in his exiting comments. This is a very special place and I've been blown away by the team, by the folks I get to work with and by the truly long-term view in terms of investment and in terms of how we think about assets and opportunities. It's a special place. I couple that culture with the assets that we have in place. So strong spectrum position, strong tower position, strong distribution position. And so, I put those two things together in terms of strong culture and we've seen that in terms of just the results here in the quarter, couple that with a really strong set of assets and I think we have a significant growth opportunity. And you mentioned regional players, I actually view the opportunity for us is that we can be more granular, we can be more targeted, we can be more community-focused. I think that ability to be at the targeted and be the nimble is what can help us grow in the future. And so, I couple those, the culture of the assets, and then, really the opportunity for growth is what drew me to the company and it's what I'm excited about.

Talking through the fixed wireless opportunity. Let me break out in general how I think about it. This is a -- there's a beautiful thing about this product is that it's a great way to monetize excess capacity. And so, where you have excess capacity on the LTE side, which is what we're monetizing today, we're seeing good revenue opportunities and there -- and we're able to help customers and get customers connected in areas where maybe cable either doesn't address or has very limited presence.

And Mike talked a little bit about the 5G rollout, rolling out Millimeter wave. So as we start to densify the network with Millimeter wave, that's going to create incremental opportunities for capacity and excess capacity to go monetize. And so, you can expect to see a higher speed product brought to the market, price point to be determined. Some of that will obviously vary based on competitive circumstances, but the thing I love about that product is that ability to monetize excess capacity at the same point, build productive customer relationships. So what you see is even right now as we have the fixed wireless broadband product on LTE, as you add customers a lot of times those customers then also bring with them postpaid lines. And so, it's an attractive opportunity not just to grow that product line, but you're growing the business with it too.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Any sort of sizing as this hundreds of thousands of potential households or what's the right way to think about the opportunity?

Laurent Therivel -- President and Chief Executive Officer

I'm going to punt on that one a little, Simon, and only from a timing perspective, both my time with the company, and also, I want to let the -- kind of what's called the competitive and the network environment shape itself out. So that's something I'm happy to provide some guidance in the future calls Let me punt on that one for now got it.

Simon Flannery -- Morgan Stanley -- Analyst

Got it. Great, thanks for the color.

Operator

Thank you. We have a question from Sergey.

Sergey Dluzhevskiy -- GAMCO Investors, Inc. -- Analyst

Good morning, guys. First of all, Ken, congratulations on your retirement and best wishes, and LT, congratulations on becoming CEO of U.S. Cellular. My first question is for LT. If you could talk a little bit about your top priorities or top objectives as the new CEO over the next 12 to 18 months?

Laurent Therivel -- President and Chief Executive Officer

Sure. Sergey, nice to meet you. So there is a Wall Street Journal article out this morning entitled, congrats you're the new CEO, maybe someday, you'll get to meet your employees. And so, that's a little bit of the circumstance I am in right now. So right now, I have a pretty near-term priority around trying to get creative in ways to meet the team, get to know the organization, get to know the culture. Coupled with that, I have a near-term priority just around the health and safety of our team and the health and safety of our customers. And so, just making sure that we're keeping our team safe and then, our store environment is a health -- is a safe one for our customers.

Now, I'm thinking your question is probably a little bit more longer-term and so, let me talk about that for a bit. You look at the near-term priority, let's call it mid-term priority, but we've got to drive -- start driving topline growth. And so, driving that topline growth, I think is going to be accomplished via both organic, kind of think blocking and tackling of continued good work and driving gross adds and keeping churn down as well as starting to expand our presence in some of these areas where we currently have a presence but the presence maybe a little bit limited. And I would point to things like our prepaid business as well as our B2B segment. So you can expect to see increased focus in those areas.

One of the things, I'm interested in exploring as well is the opportunity for more robust partnerships. So whether that partnership is on the product side, around the infrastructure side, I think we have some opportunities there. And finally, I have a priority of funding that growth, we're going to have to continue to get disciplined around margin and around capex efficiency. So you can expect to see continued action on the opex and the capex side to make sure that we create room to fund that growth moving forward. I pointed those three, Sergey, hopefully that is helpful in laying out a little bit of structure.

Sergey Dluzhevskiy -- GAMCO Investors, Inc. -- Analyst

Great, thank you. And my second question, is probably both for LT and for Doug Chamber as it's in regards to towers. So just I guess big picture, LT, you're coming from an organization that I think sold most of its towers, you're coming into an organization that has a significant tower portfolio, I think top five tower portfolio. So maybe if you could share your thoughts on how you plan to maximize the value of this sizable tower portfolio kind of taking into consideration the company's strategic and operational priorities, but also considering current tower valuations in the U.S. and the fact that you do have a large tower portfolio?

And for Doug, I think you guys have been working with an outside firm to better market this tower portfolio. So could you provide maybe a brief update on that front? And have you seen an improvement in lease-up rates and any kind of financial operating metrics in regards to tower portfolios if you could share?

Laurent Therivel -- President and Chief Executive Officer

So Sergey, thanks for the question. So broadly, right, I would point you back to my opening comments around being hired to grow with the business. And we have, as you said, a significant, quite attractive tower portfolio and I think that gives us a level of operational flexibility and I plan on taking advantage of that operational flexibility to help grow the business. The second piece though is that we also need to be working on sweating those assets, right. And so, we have an opportunity, I think to maximize the value from that tower portfolio not necessarily based on an acquisition, but based on actually going off and monetizing those and making sure we sweat those assets carefully as that's going to be a secondary priority for me.

Does that mean that we will never look at transactions on those towers or financing on those towers? No, I mean, I think that's something we'll continue to evaluate in the future. Pete referenced in his opening comments around opportunities around financing. But I'm going to tell you, it's not my top priority, my top priority is using those towers and the operational flexibility that they give us to grow the business.

Doug, let me hand it to you to answer the second portion of this question.

Douglas W. Chambers -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah, Sergey. So the partnership started really in the first quarter of FY'19, so we are about 18 months into it. It's going quite well as I mentioned during my comments, total revenue year-over-year grew 16% and that's really due to both volume increase, nearly 6% increase in number of tenants in our towers, as well as average rate increase. So that's all going very well. I will tell you in the first half of 2020, due to COVID there is a little bit of slowdown in applications that may play out into 2021, but so far, so good and we really experienced nice growth.

Sergey Dluzhevskiy -- GAMCO Investors, Inc. -- Analyst

Great. And my last question is for Vicki. Obviously, you had very strong broadband connection growth both on the wireline side and on the cable side. Could you talk a little bit about kind of the demand, how the gross additions and net additions are tracking maybe which speeds are customers primarily picking up? And also, just in general, obviously, the pandemic provided the boost to your performance, but also, what other kinds of factors do you think contributed to the growth in broadband connections in the quarter?

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

Yeah, sure. Thank you, Sergey. Yeah, we are really pleased with our second quarter. I'd characterize it as having -- early on, we had an initial surge of demand in reaction, I think to the pandemic, as people moved into the work-at-home environment. We had -- not only did we have the strong growth in connections across both wireline and cable, 6% at wireline and 9% on a same-store basis on the cable side, we also increased our residential ARPU. They were up significantly across both businesses and what's driving that is consumers calling in for higher speed products. So we had product mix increases in our ARPUs in the second quarter as well as the year-over-year price increases that went into effect in January. So really strong and after the initial surge, I would also say that our growth right now has kind of leveled off, but at our expected growth expectations and we expect this to continue through the year.

Fiber...

Sergey Dluzhevskiy -- GAMCO Investors, Inc. -- Analyst

Great.

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

Of course is really the driver behind a lot of the growth within our wireline side of the house. Our out-of-territory, a new market, and then, our investment in DOCSIS 3.1 that's providing 1 gig speeds in our cable markets. Predominantly, most of our customers are on the 100 to 300 megabit product and services that they are on. But certainly, seeing the customer base starting to drive up to high -- to taking 1 gig speed.

Sergey Dluzhevskiy -- GAMCO Investors, Inc. -- Analyst

Great, thank you.

Jane McCahon -- Senior Vice President, Corporate Relations

Jake, we will take one more question, please.

Operator

Yes, ma'am. Our next question comes from Michael Rollins.

Michael Rollins -- Citigroup -- Analyst

Hi, thanks and I want to also extend my thanks and best wishes to you, Ken, and welcome, LT. Just really into some of the discussion during this call, as you develop the go-forward strategy to grow the company, are you going to stick with the traditional tools in the toolbox like distribution, advertising and pricing or is there an opportunity to contemplate more expansive options that would range from some kind of alignment with the national carrier be the partnership alliance for affiliation? And related to that question, and given what you were describing about fixed wireless, is U.S. Cellular considering tearing down the walls of identifying itself as just a wireless business? And is it possible that the company is developing a more comprehensive broadband business and may even take a page from TDS telecom and maybe even deploy fiber to the home or to businesses in the markets that you serve? Thanks.

Laurent Therivel -- President and Chief Executive Officer

Yeah, Michael. Thanks for the question. So I would highlight in the near-term, we have plenty on our plates in terms of driving organic growth and I think we have a lot of opportunity in driving organic growth. And by organic, by the way, I mean your definition of, let's call it the traditional methods of optimizing distribution, optimizing marketing and so on. In the long run, I think there is a lot of opportunities to get creative with those partnerships that you highlighted. I'll point you to a deal that I actually drove in my previous role as CEO of AT&T Mexico, where we saw in -- I would argue quite creative deal with Telefonica in Mexico around infrastructure sharing and network sharing and so on. Now obviously, the Mexican market and the market here in the U.S. both competitively from a network perspective, entirely different, so don't take that as anything more than directional.

But I think there's a lot of opportunity to be creative and expansive in the way that we think. The great position that we're in here and I have to give Ken and Steve Campbell, a lot of credit, is that we're in a very strong operational and financial position, we have a healthy balance sheet, we have a disciplined approach and that's a luxury for a guy like me. And when I think about the opportunities that that creates in the long run. So near-term, I would argue is going to be just Chris[Phonetic] blocking and tackling. Long-term, I'm certainly open to a whole variety of different ways to create opportunities. And quite frankly to make sure that we keep serving our customers. The appetite that our customers have for high-speed data, Vicki went through on the wireline side, what they're seeing, over 70% increase in our network on the mobility side is a fairly insatiable appetite for data. I think it's going to create a lot of opportunity for us in the long run. So thanks for the question, I very much appreciate it.

Michael Rollins -- Citigroup -- Analyst

Thanks.

Operator

Are there any other concluding remarks?

Jane McCahon -- Senior Vice President, Corporate Relations

Yeah. We would just like to thank everyone for joining us today and look forward to some follow-up conversations.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Jane McCahon -- Senior Vice President, Corporate Relations

Peter L. Sereda -- Executive Vice President and Chief Financial Officer

Kenneth R. Meyers -- Senior Advisor to the CEO

Laurent Therivel -- President and Chief Executive Officer

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

Douglas W. Chambers -- Senior Vice President, Chief Financial Officer and Treasurer

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

Ric Prentiss -- Raymond James & Associates -- Analyst

Phil Cusick -- J.P. Morgan -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Sergey Dluzhevskiy -- GAMCO Investors, Inc. -- Analyst

Sergey Dluzhevskiy -- GAMCO Investors, Inc. -- Analyst

Michael Rollins -- Citigroup -- Analyst

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