TDS Earnings Disappoint - Analyst Blog

Telephone and Data Systems (TDS) announced second-quarter 2010 earnings per share (EPS) of 38 cents, which was well below the Zacks Consensus Estimate of 48 cents and earnings of 60 cents in the year-ago quarter. Earnings were affected by stiff competition from wireless and wireline businesses as well as the uncertainty in consumer and business activities.

Net income plunged 39% year-over-year to $40.3 million, due to lower revenues. Revenues dropped 1% year-over-year to $1,232.2 million owing to lower voice revenues.

U.S. Cellular (Wireless)

Revenues from the company’s Wireless subsidiary U.S. Cellular (USM) slipped 1% year-over-year to $1,029.9 million. Service revenues dipped 0.2% year-over-year to $972.6 million on account of lower voice and roaming revenues, partly offset by healthy data revenue growth.

Retail service ARPU (average revenue per user) remained almost flat year-over-year at $46.81. Inbound roaming ARPU declined to $3.30 from $3.35 in the year-ago quarter. Post-paid churn remained low at 1.4% due to expanded 3G network, compared with 1.7% in the year-ago quarter.

U.S. Cellular lost 3,000 customers in the quarter (better than a net loss of 88,000 customers in the year-ago quarter), ending the quarter with a total subscriber base of nearly 6.14 million (including retail customers of 5.77 million).

TDS Telecom (Wireline)

Revenues from the Wireline segment grew 2% year-over-year to $199.2 million, as data and revenue growth was partly offset by the decline in voice revenues. The segment faces competition from incumbent local exchange carriers (ILECs) and contends with the ongoing wireless substitution trend and VoIP services from cable operators.

In the reported quarter, ILEC high-speed data customer base grew 13% year-over-year to 223,200. However, ILEC equivalent access lines and physical access lines fell 0.4% and 4.2% to 779,200 and 525,000, respectively.

Liquidity

Telephone and Data Systems exited the quarter with $757.7 million of cash and short-term investments compared with $784.3 million at the end of fiscal 2009. Long-term debt remained almost flat year-over-year at $1.5 billion.

The company generated free cash flow of $120.3 million compared with $95.1 million in the year-ago quarter. Capital expenditure increased to $171.3 million from $125.6 million in the comparable quarter last year.

Outlook

Based on disappointing second-quarter results, Telephone and Data Systems reduced its 2010 outlook for the Wireless segment. Service revenues are expected to decrease to $3,925 million – $4,000 million from $3,975 million – $4,075 million estimated previously.

Operating income is expected to be in the range of $200 million – $250 million, down from the previous expectation of $250 million – $350 million. Depreciation, amortization and accretion expenses are expected to be approximately $600 million, with a capital expenditure target of $600 million, both kept unchanged.

For the Wireline segment, the company reiterated its outlook for 2010. Telephone and Data Systems expects revenues to be in the range of $760 million – $790 million and operating income to be approximately $250 million – $275 million. Depreciation, amortization and accretion as well as capital expenditures are expected to be approximately $170 million and $150 million, respectively.

Our Take

The company’s prospects in Wireless are expected to be driven by the continued coverage expansion of its 3G network and premium handset offerings that are expected to strengthen data revenue per user. Moreover, the U.S. Cellular is evaluating the potential adoption of Long-Term Evolution (LTE), a 4G mobile broadband technology. On the Wireline front, TDS Telecom is aggressively rolling out “Triple-Play” offerings that bundle voice, high-speed data and video services, in an effort to fend off cable competition.

Although the company’s ongoing business initiatives look promising, we feel high costs associated with the expansion of its Wireless network may drag near-term earnings and constrict free cash flow. Moreover, declining roaming revenues may continue to strain wireless service revenues in the upcoming quarters.

We currently maintain our Neutral recommendation on TDS supported by the Zacks #3 (Hold) Rank.
 
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