Telephone and Data Systems (TDS) has reported second quarter earnings of 87 cents per share, strongly outpacing the Zacks Consensus Estimate of 34 cents. Results jumped 129% from 38 cents per share earned in the year-earlier quarter.
The outstanding performance were driven by strong inbound roaming revenue and cost reduction initiatives.
Revenues increased 4% year over year to $1,279.6 million in the reported quarter and strode past the Zacks Consensus Estimate of $1,266 million. Adjusted OBIDA improved to $323.6 million from $277.9 million in the year-ago quarter.
U.S.Cellular (Wireless)
Revenues from the company’s wireless subsidiary U.S. Cellular Corp. (USM) upped 4% year over year to $1,076.2 million in the second quarter. Service revenues grew 3% year over year to $1,002 million (comprising 93.1% of total wireless revenue) on account of higher inbound roaming and retail service revenues.
Total service ARPU (average revenue per user) improved to $55.69 from $52.71 in the year-ago quarter on the back of strong adoption of smartphones and data plans. Post-paid ARPU increased to $51.81 from $50.55 in the year-ago quarter and churn remained unchanged at 1.4%.
U.S. Cellular lost 58,000 net retail customers in the reported quarter, bringing the total subscriber base to nearly 5.97 million (including retail customers of 5.6 million). Retail customer losses were 41,000 in the post-paid and 17,000 in the prepaid business.
TDS Telecom (Wireline)
Revenue from the wireline segment remained flat year over year at $198.9 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 5.5% year over year to 235,600. However, ILEC equivalent access lines and physical access lines fell 1.9% and 5.5% to 764,600 and 496,300, respectively.
Competitive local exchange carrier (CLEC) high-speed data customer base and CLEC equivalent access lines also declined to a respective 31,500 and 328,700 from 35,000 and 343,100 in the year-ago quarter.
Liquidity
Telephone and Data Systems exited the second quarter with $584.4 million of cash and cash equivalents compared with $368.1 million at the end of fiscal 2010. Long-term debt increased to $1,530.4 million from $1,499.9 million at year-end 2010.
The company generated free cash flow of $64,625 million, down from $120.4 million in the year-ago quarter.
Guidance
For the Wireless segment, Telephone and Data Systems reiterated the expected service revenue and depreciation, amortization and accretion expenses in the range of $4,000–$4,100 million and approximately $590 million, respectively, for fiscal 2011. The company raised its 2011 adjusted OBIDA guidance to $800–$875 million from $775–$875 million and operating income guidance to $210–$285 million from $185–$285 million. Capital expenditure guidance was reiterated at $750–$800 million.
For the Wireline segment, the company projected total revenue in the range of $800–$830 million (up from $780–$810 million), adjusted OIBDA of $270–$300 million (up from $260–$290 million), and operating income of $85–$115 million (up $75–$105 million). Depreciation, amortization and accretion as well as capital expenditures remain unchanged at approximately $185 million and $175–$200 million, respectively.
Our Analysis
Telephone and Data Systems is pursuing several initiatives to reinvigorate growth, including the expansion of its 3G network, handset offerings and the potential adoption of Long-Term Evolution in the wireless business, and aggressive deployment of Triple-Play bundled wireline services. Further, the new service –– The Belief Project –– is expected to enhance long-term profits along with reduced churn and higher subscriber additions.
However, intense competition in both wireline and wireless businesses, stringent regulatory measures, continuous decline in roaming revenue and higher operating expenses associated with the expansion of its wireless network might limit the upside potential of the stock.
We are currently maintaining our long-term Neutral rating on Telephone and Data Systems. For the short term (1–3 months), the stock retains a Zacks #4 (Sell) Rank.
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