Telephone and Data Reports Loss

Zacks Equity Research

Telephone and Data Systems Inc. (TDS) has reported fourth quarter loss per share of 6 cents per share, far below the Zacks Consensus Estimate of 29 cents earnings per share. Results also deteriorated from 12 cents per share earned in the year-ago quarter.

The quarterly earnings were impacted by a $7.2 million expense related to share consolidation as well as $6 million in tax-related adjustments

For the full year, the company generated earnings per share of $1.83 compared to $1.31 a year ago. The growth was driven by strong inbound roaming revenue and cost reduction initiatives along with solid growth in high-speed data services.

Revenues increased 4% year over year to $1,316.7 million in the reported quarter, surpassing the Zacks Consensus Estimate of $1,312 million. Adjusted OIBDA improved to $215.4 million from $212.3 million in the year-ago quarter.

For fiscal 2011, revenues increased 3.4% year over year to $5,180.5 million and adjusted OIBDA improved to $280.4 million from $275.0 million.

U.S.Cellular (Wireless)

Revenues from the company’s wireless subsidiary U.S. Cellular Corp. (USM) upped 5% year over year to $1,110.4 million in the fourth quarter. Service revenues grew 4% year over year to $1,030 million on account of higher inbound roaming and retail service revenues along with higher smartphone sales that drove data revenues.

Total service ARPU (average revenue per user) improved to $49.78 from $47.41 in the year-ago quarter on the back of strong adoption of smartphones and data plans. Post-paid ARPU increased to $53.35 from $50.90 in the year-ago quarter while deteriorating to 1.6% from 1.5% in fourth quarter of 2010 due to severe competitive pricing.

U.S. Cellular lost 13,000 net retail customers in the reported quarter, bringing the total subscriber base to nearly 5.89 million (including 5.6 million retail customers). Retail customer losses were 20,000 in the post-paid while prepaid business registered an addition of 7,000 customers.

TDS Telecom (Wireline)

Revenue from the wireline segment grew 4% year over year to $206.8 million, as data revenue growth was partly offset by the decline in voice and network access revenue.

In the reported quarter, incumbent local exchange carriers (:ILEC) high-speed data customer base grew 4.7% year over year to 238,400. However, ILEC equivalent access lines and physical access lines slid 1.7% and 5.0% to 754,400 and 482,000, respectively.

The competitive local exchange carrier (:CLEC) high-speed data customer base and CLEC equivalent access lines also declined to a respective 28,900 and 317,500 from 33,100 and 335,400 in the year-ago quarter.

Liquidity

Telephone and Data Systems exited the fourth quarter with $563.3 million of cash and cash equivalents compared with $341.7 million at the end of fiscal 2010. Long-term debt increased to $1,529.9 million from $1,499.9 million at year-end 2010. Free cash flow was a negative $53.5 million, down from $74.3 million in the year-ago quarter.

Guidance

For the wireless segment, Telephone and Data Systems Service expects service revenue in the range of $4,050–$4,150 million and operating income in the range of $200–$300 million. Adjusted OIBDA is estimated in the range of $800–$900 million. The company’s capital expenditure is expected to be approximately $850 million.

For the wireline segment, the company expects total revenue of $810–$840 million, adjusted OIBDA of $245–$275 million and operating income of $55–$85 million. Depreciation, amortization and accretion as well as capital expenditures are estimated to be approximately $190 million and $150–$180 million, respectively.

Our Analysis

Telephone and Data Systems continues to benefit from its several growth initiatives like 3G network expansion, increasing handset offerings, adoption of the Long-Term Evolution (:LTE) technology in the wireless business, and aggressive deployment of Triple-Play bundled wireline services. Further, “The Belief Project” is expected to enhance long-term profits by reducing churn and adding subscribers.

Moreover, expansion into the rapidly developing managed hosting and cloud service offerings also provide long-term growth prospects for the company. However, fierce competition and heavy investment in an uncertain market may limit any upside to the company’s earnings. Further, regulatory issues regarding Universal Service Fund are also likely to weigh on the company’s near-term results restricting revenue growth.

We are currently maintaining our long-term Neutral rating on Telephone and Data Systems supported by a Zacks #3 Rank (Hold).

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