Telephone & Data Systems: View Solid, Voice Revenues Soft
On Dec 19, we issued an updated research report on Telephone & Data Systems Inc. TDS. The company has been striving to expand its business in the managed hosting and cloud service market through a new cloud-based storage service and managed IP connections. However, intense competition, roaming revenue-related woes, high costs associated with network integration and construction of new cell sites, aggressive equipment pricing, wireless technology upgrades and spectrum licensing are near-term risks. Year to date, Telephone and Data Systems have underperformed the U.S. Wireline National by 2.20%. These are the primary reasons why Telephone & Data Systems currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Telephone and Data Systems is experiencing strong smartphone demand at its wireless wing – U.S. Cellular. Of the total smartphone sales, nearly 94% are 4G devices. The addition of iPhone and other branded mobile phones like Samsung Note series are driving the company’s revenues. We believe that the long-term higher ARPU from smartphone users and full utilization of LTE network capacity on the back of migration of customers from 3G to 4G networks are expected to mitigate operating cost headwinds stemming from higher subsidies on smartphones. Further, the device installment plan is expected to offset losses from smartphone subsidies.
Also, Telephone and Data Systems has been increasingly focusing on business services like cloud-based back up services and managed IP connections. Notably, managed IP connections have continued to increase. Moreover, the company’s current personal cloud service – younited by F-Secure – has boosted market share and has also helped the company expand cloud services in the retail segment, beyond the conventional enterprise market.
Risks Remain
Telephone and Data Systems is likely to be affected by the amendments in Universal Service Fund (USF) brought in by the Federal Communications Commission (FCC). Presently, U.S. Cellular – subsidiary of Telephone and Data Systems, draws approximately $160 million per year in the form of ETC (Eligible Telecom Carrier) funds from USF, representing a significant revenue contribution. Therefore, the end to this program would certainly prove detrimental to the company’s earning prospects over the coming years.
We believe high costs associated with network integration and construction of new cell sites, aggressive equipment pricing, increasing capacity in existing cell sites, wireless technology upgrades and spectrum licensing will considerably strain the company’s finances. Moreover, the company faces severe competition in the U.S. wireless market, dominated by larger players like Verizon Communications Inc. VZ, AT&T Inc. T and T-Mobile US Inc. TMUS.
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