Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications company that provides high-quality communications services to approximately 6 million connections nationwide. The company operates through its two main subsidiaries, United States Cellular Corporation (UScellular) and TDS Telecommunications LLC (TDS Telecom).
The company aims to provide outstanding communications services to its customers and meet the needs of its shareholders, associates, and communities. TDS has been committed to bringing high-quality communications services to rural and underserved communities, and it continues to make progress on developing and enhancing its Environmental, Social and Governance (ESG) program.
Business Overview
UScellular offers economical and competitively priced service plans and devices to its customers and is focused on increasing revenues from sales of related products such as device protection plans and from services such as fixed wireless home internet. UScellular continues to enhance its network capabilities, including by deploying 5G technology, which helps address customers' growing demand for data services and creates opportunities for new services requiring high speed and reliability as well as low latency.TDS Telecom strives to provide high-quality broadband services in its markets with the ability to provide value-added bundling with video and voice service options. TDS Telecom focuses on driving growth by investing in fiber deployment primarily in its expansion markets and also in its incumbent and cable markets that have historically utilized copper and coaxial cable technologies.
Strategic Alternatives Review
On August 4, 2023, TDS and UScellular announced that the Boards of Directors of both companies have decided to initiate a process to explore a range of strategic alternatives for UScellular. During the three months ended March 31, 2024, TDS incurred third-party expenses of $11 million related to the strategic alternatives review. At this time, TDS cannot predict the ultimate outcome of such process or estimate the potential impact of such process on the financial statements.Financials
For the full year 2023, TDS reported annual net income of -$500 million, annual revenue of $5,160 million, annual operating cash flow of $1,142 million, and annual free cash flow of -$199 million.In the first quarter of 2024, TDS' total operating revenues decreased 3% year-over-year to $1,262 million, with service revenues of $1,044 million and equipment and product sales of $218 million. The decrease in total operating revenues was driven by a 4% decline in UScellular's revenues, partially offset by a 5% increase in TDS Telecom's revenues.
UScellular's service revenues declined 2% due to a decrease in the average postpaid subscriber base, partially offset by a 3% increase in postpaid ARPU. Equipment sales declined 10% due to a decrease in smartphone devices sold as a result of lower gross additions and upgrades. TDS Telecom's revenue increase was driven by a 10% growth in residential revenues, a 3% increase in wholesale revenues, partially offset by a 9% decline in commercial revenues.
Adjusted EBITDA, a non-GAAP metric, increased 14% year-over-year to $366 million in the first quarter of 2024, reflecting strong performance at both UScellular and TDS Telecom. UScellular's adjusted EBITDA increased 8% to $272 million, while TDS Telecom's adjusted EBITDA grew 38% to $95 million.
Liquidity
TDS and its subsidiaries operate capital-intensive businesses and have incurred negative free cash flow in recent periods. As of March 31, 2024, TDS had $249 million in cash and cash equivalents and $199 million of available borrowing capacity under its revolving credit agreement. UScellular also had $310 million of available borrowing capacity under its receivables securitization agreement.In May 2024, TDS entered into a $375 million unsecured term loan credit agreement, with $300 million drawn at closing. The proceeds will be used for general corporate purposes, including the advancement of TDS Telecom's fiber build program.
TDS' long-term strategy has been to re-invest the majority of its operating capital in its businesses to strengthen their competitive positions and financial performance, while also returning value to TDS shareholders primarily through the payment of a regular quarterly cash dividend. However, it is uncertain at this time how the strategic alternatives review for UScellular, TDS' available opportunities to reinvest in its businesses, or TDS' ongoing liquidity needs may impact TDS' long-term strategy, including with regard to the payment of dividends, in future periods.
UScellular Operations
UScellular serves customers with 4.5 million retail connections, including 4.1 million postpaid and 0.4 million prepaid connections, across 21 states. In the first quarter of 2024, UScellular's postpaid handset net losses increased due to lower gross additions as a result of continued aggressive industry-wide competition and a decrease in the pool of available customers. Total postpaid connected device net additions increased due to higher demand for fixed wireless home internet as well as a decrease in hotspot churn.Postpaid ARPU increased 3% in the first quarter of 2024 compared to the same period last year, due to a decrease in promotional discounts, an increase in cost recovery surcharges, favorable plan and product offering mix, and an increase in device protection plan revenues. Postpaid ARPA increased slightly due to the impacts to Postpaid ARPU, partially offset by a decrease in the number of connections per account.
UScellular's operating revenues decreased 4% in the first quarter of 2024, with service revenues declining 2% and equipment sales declining 10%. The decrease in service revenues was primarily due to a decline in the average postpaid subscriber base, partially offset by the increase in postpaid ARPU. The decline in equipment sales was driven by a decrease in smartphone devices sold as a result of lower gross additions and upgrades.
UScellular's adjusted OIBDA, a non-GAAP metric, increased 11% in the first quarter of 2024, reflecting lower operating expenses, partially offset by the decline in operating revenues. The company's cost optimization program continues to deliver strong results, and UScellular expects its full-year 2024 adjusted operating income margin as a percent of service revenues to remain relatively flat despite expected service revenue declines.
TDS Telecom Operations
TDS Telecom serves 1.2 million connections in 32 states and is focused on driving growth by investing in fiber deployment primarily in its expansion markets and in its incumbent and cable markets. In the first quarter of 2024, TDS Telecom increased its service addresses by 12% year-over-year to 1.7 million and offered 1Gig+ service to 73% of its total footprint, up from 67% a year ago.TDS Telecom's residential broadband connections increased by 6% year-over-year, with strong growth in its expansion markets. The company's average residential revenue per connection increased 7% in the first quarter of 2024 due to price increases and product mix changes, partially offset by promotional activity.
TDS Telecom's operating revenues increased 5% in the first quarter of 2024, driven by a 10% growth in residential revenues and a 3% increase in wholesale revenues, partially offset by a 9% decline in commercial revenues. The company's adjusted EBITDA grew 38% in the first quarter, reflecting the benefits of its fiber investments and disciplined expense management.
TDS Telecom is targeting 1.2 million marketable fiber service addresses, with 827,000 reached as of the end of the first quarter of 2024. The company is also aiming to have 60% of its total service addresses served by fiber and to offer speeds of 1 Gig or higher to at least 80% of its footprint, up from 49% and 73%, respectively, at the end of the first quarter.
Guidance and Outlook
For the full year 2024, TDS Telecom's guidance remains unchanged from what was provided in February 2024. The company expects to deliver top and bottom-line growth through increasing fiber penetrations and effective cost management. TDS Telecom is balancing the priorities of its fiber expansion program and the enhanced A-CAM program, carefully planning and engineering both programs to meet its build commitments while also aligning with its financing capacity.At the consolidated level, TDS expects its full-year 2024 adjusted operating income margin as a percent of service revenues to remain relatively flat despite expected service revenue declines, as the company's cost optimization program and the shutdown of its CDMA network are expected to have a positive impact on the cost profile.
Risks and Challenges
TDS faces several risks and challenges, including intense competition, the ability to attract and retain talented associates, the company's smaller scale relative to larger competitors, changes in demand and consumer preferences, the need for access to adequate radio spectrum, and the complexities associated with deploying new technologies.Additionally, TDS' liquidity and access to capital markets could be adversely affected by uncertainty in future cash flows, changes in interest rates, or deterioration in market conditions. The company's significant indebtedness and the restrictions imposed by its debt covenants may also limit its ability to operate its business and make payments on its debt.