Wider Q1 Loss, Revs Miss at Telephone and Data Systems - Analyst Blog

Telephone and Data Systems Inc. TDS reported first-quarter 2014 loss of 42 cents per share against the Zacks Consensus Estimate of a loss of 23 cents. The bottom line also deteriorated from an earnings of 9 cents per share earned in the year-ago quarter.

Revenues decreased 8.6% year over year to $1,196.0 million in the reported quarter but missed our projection of $1,203.0 million. Operating profit for the quarter was $20.7 million compared with $7.2 million in the year-ago quarter.

U.S. Cellular (Wireless)

Revenues from the company's wireless subsidiary U.S. Cellular Corp. USM declined 16.8% year over year to $1,081.7 million in the first quarter but were ahead of the Zacks Consensus Estimate of $923.0 million. Meanwhile, first-quarter 2014 loss per share of 51 cents was much wider than the Zacks Consensus Estimate of a loss of 41 cents. The bottom line also showed a marked deterioration from the year-ago quarter's profit of 16 cents per share.

The reported quarter's retail billed ARPU (average revenue per user) increased to $53.93 from $51.13 in the year-ago quarter. Post-paid churn rose to 2.3% from 1.7% in the first quarter of 2013 due to severe competitive pricing. Prepaid churn also increased to 6.9% from 6.2% in the year-ago quarter. The company expanded its 4G LTE (Long Term Evolution) network to nearly 93% of its customers in the first quarter of 2014.

U.S. Cellular witnessed net subscriber loss of 80,000 retail customers compared with loss of 51,000 in the year-ago quarter. The company exited the first quarter of 2014 with a retail customer base of 4,684,000 compared with 5,736,000, a year ago. Post-paid customer losses totaled 93,000, while prepaid business registered an addition of 13,000 customers.

TDS Telecom (Wireline)

Revenues from the wireline segment grew 2.2% year over year to $177.5 million. Cable operating revenues grossed $22.5 million while HMS revenues improved 7.7% to $63.1 million at the end of the first quarter.

At the end of the first quarter, the company had 593,600 wireline residential customers, 369,800 wireline commercial customers and 149,400 cable connections, bringing the total subscriber base to 1.112 million. The company added 700 wireline and 2,100 cable residential customers over the last quarter while Commercial connections witnessed a loss of 3300 customers.

Liquidity

Telephone and Data Systems exited the first quarter with cash and cash equivalents of $872.9 million compared with $830.0 million at the end of 2013. Long-term debt was $1,720.0 million compared with $1,721.1 million at year-end 2013.

In the first quarter, operating cash flow was $104.9 million as compared with $246.4 million at the end of the previous-year quarter. Capital expenditure was $150.9 million, while free cash flow was a negative $45.9 million.

Share Repurchase

The company repurchased 157,891 shares in the first quarter of 2014 for an aggregate amount of $3.8 million.

Guidance

For fiscal 2014, TDS Telecom expects total operating revenue of $1,050–$1,100 million. Adjusted income before income tax is estimated in the range of $250–$280 million while capital expenditure is forecasted around $200 million.

For 2014, U.S. Cellular expects capital spending of approximately $640 million.

Our Analysis

TDS currently carries a Zacks Rank #4 (Sell). Access line losses due to wireless substitution and other alternative services remain detrimental to growth. Further, higher churn in the post-paid segment, increased equipment subsidies and investments in network upgrade are likely to continue affecting results. These negatives vindicate our bearish stance on the stock.

Other stocks like Shenandoah Telecommunications Co. SHEN with a Zacks Rank #1 (Strong Buy) and Level 3 Communications Inc. LVLT with a Zacks Rank #2 (Buy) are worth considering within this sector.