Company Overview and History
Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications company that has been at the forefront of providing high-quality communications services to customers nationwide. With a history spanning over a century, TDS has evolved to meet the changing demands of the industry, driving innovation and maintaining a strong competitive position.
Founded in 1969, TDS has a long history of serving rural and underserved communities across the United States. The company has successfully navigated through various challenges and technological changes in the telecommunications industry. In its early years, TDS focused on building its local telephone business, providing essential communications services to customers in its service areas. Despite facing competition from larger national providers, TDS managed to establish itself as a trusted provider in its local markets.
As the industry evolved, TDS expanded its offerings to include wireless services through the formation of United States Cellular Corporation (UScellular) in 1983. UScellular has grown to become one of the largest regional wireless carriers in the country, serving customers across 21 states. Over the years, UScellular has had to navigate competitive pressures from national carriers, as well as changes in wireless technology, including the transition to 4G and 5G networks.
Alongside its wireless business, TDS has also grown its wireline operations through TDS Telecom. TDS Telecom has focused on providing high-quality broadband, video, and voice services to residential and commercial customers, primarily in smaller and mid-sized communities. The company has had to address industry-wide challenges, such as the shift from traditional landline services to broadband and the rise of competitive cable and fiber providers.
Throughout its history, TDS has demonstrated its ability to adapt to industry changes and maintain its position as a leading regional telecommunications provider. The company has made strategic investments to enhance its network capabilities, expand its service offerings, and deliver a superior customer experience. TDS has also navigated through various regulatory and legislative changes that have impacted the industry, demonstrating its resilience and ability to operate successfully in a dynamic environment.
Business Segments
Today, TDS operates through its two primary subsidiaries: United States Cellular Corporation (UScellular) and TDS Telecom.
UScellular
UScellular, an 83%-owned subsidiary, is a wireless carrier that serves approximately 4.5 million retail connections across 21 states. The company has a strong focus on providing a high-quality network, outstanding customer service, and competitive devices, plans, and pricing. In recent years, UScellular has made significant investments in its 5G network infrastructure, enhancing both coverage and capacity to meet the growing demand for data services.
As of September 30, 2024, UScellular served customers with 4.50 million retail connections, including 4.00 million postpaid and 0.50 million prepaid connections. The company operates in 21 states with approximately 4,200 associates. UScellular's strategy is to attract and retain customers by providing a high-quality network, outstanding customer service, and competitive devices, plans and pricing - all provided with a community focus. In addition to its wireless services, UScellular leases tower space to third-party carriers on UScellular-owned towers.
TDS Telecom
TDS Telecom, a wholly-owned subsidiary, is a provider of broadband, video, and voice communications services to residential, commercial, and wholesale customers. The company operates in 32 states, serving over 1.1 million connections. TDS Telecom's strategy has been to invest heavily in fiber deployment, both in its expansion markets and in its incumbent markets, to deliver high-speed internet and bundled services to its customer base.
As of September 30, 2024, TDS Telecom had 1.14 million total connections, including 552,700 broadband, 122,100 video, and 271,300 voice connections. The company continues to focus on driving growth by investing in fiber deployment, primarily in its expansion markets, as well as in its incumbent and cable markets.
Financials
The company's financial performance has been mixed in recent years. For the fiscal year 2023, TDS reported total operating revenues of $5.16 billion, a slight decrease from the previous year's $5.41 billion. Net income for the year was a loss of $500 million, impacted by various one-time charges and impairments. However, the company's adjusted EBITDA, a key metric used to measure profitability, remained relatively stable at $1.25 billion. Operating cash flow for 2023 was $1.14 billion, while free cash flow was -$199 million.
For the third quarter of 2024, TDS reported total operating revenues of $1.224 billion, a 4% decrease compared to the same period in 2023. Net income for the quarter was a loss of $83 million, significantly lower than the previous year due to a $136 million wireless spectrum license impairment charge. This non-cash impairment charge was related to the company's review and preparation of the September 30, 2024 financial statements. Despite the net loss, operating cash flow increased by 5% to $307 million, and free cash flow saw a substantial 65% increase to $101 million.
Looking at the performance of individual segments for the third quarter of 2024:
UScellular's total operating revenues were $922 million, a 4% decrease compared to the same period in 2023. This decline was primarily driven by a 3% decrease in retail service revenues, which was partially offset by a 2% increase in tower revenues. UScellular's operating income for the quarter was $90 million, compared to $57 million in the prior year period. Adjusted EBITDA was $269 million, up 3% year-over-year.
TDS Telecom's total operating revenues were $263 million, a 2% increase compared to the same period in 2023. This growth was driven by a 5% increase in residential revenues, partially offset by a 4% decrease in commercial revenues. TDS Telecom's operating income for the quarter was $10 million, compared to a loss of $9 million in the prior year period. Adjusted EBITDA was $83 million, up 21% year-over-year.
Overall, TDS's consolidated operating income for the third quarter of 2024 was $80 million, compared to $48 million in the prior year quarter. Adjusted EBITDA, a non-GAAP measure, was $349 million, up 6% year-over-year.
Liquidity and Strategic Transactions
As of September 30, 2024, TDS had a strong liquidity position with $451 million in cash and cash equivalents. The company also had $399 million available under its $400 million revolving credit facility and $448 million available under its receivables securitization agreement. The debt/equity ratio stood at 0.804, while the current ratio was 1.590 and the quick ratio was 1.438.
Alongside the proposed UScellular sale, TDS has also been actively monetizing its remaining spectrum assets not included in the T-Mobile transaction. In October 2024, the company announced the sale of certain wireless spectrum licenses to Verizon and other smaller network operators for a total of over $1 billion. These strategic transactions have strengthened TDS's balance sheet and provided the company with additional financial flexibility to invest in its core TDS Telecom business.
TDS Telecom has continued to make significant strides in its fiber deployment strategy. As of the third quarter of 2024, the company had expanded its fiber footprint to reach 886,000 marketable service addresses, with 50% of its total service addresses now served by fiber. This focus on fiber has enabled TDS Telecom to deliver higher-speed broadband services and drive growth in its residential and commercial customer base.
The company's efforts to streamline its portfolio and focus on its core TDS Telecom business have been well-received by investors. In the third quarter of 2024, TDS Telecom reported a 2% increase in total operating revenues, driven by a 5% growth in residential revenues. Adjusted EBITDA for the segment also saw a 21% year-over-year increase, reflecting the company's operational efficiency and the benefits of its fiber expansion strategy.
Strategic Developments
One of the notable developments in 2024 was TDS's decision to explore strategic alternatives for its UScellular subsidiary. In May 2024, the company announced that it had entered into a definitive agreement to sell UScellular's wireless operations and select spectrum assets to T-Mobile for $4.4 billion. This transaction, which is expected to close in mid-2025, will allow TDS to unlock the value of its wireless assets and focus on its TDS Telecom business, which has been a growth driver for the company.
Outlook and Future Prospects
Looking ahead, TDS remains cautiously optimistic about its future prospects. For the full year 2024, the company has narrowed and raised the guidance ranges for UScellular:
- Service revenues are expected to be between $2.95 billion and $3.0 billion - Adjusted operating income before depreciation and amortization is projected to be $800 to $875 million (previously $775 to $875 million) - Adjusted EBITDA is forecasted to be $970 million to $1.045 billion (previously $940 million to $1.045 billion)
TDS Telecom's 2024 financial guidance remains unchanged from the previous quarter. The company has also lowered its capital expenditure guidance for UScellular to $550 to $600 million for the full year 2024, previously trending toward the lower end of $575 to $625 million.
Despite the challenges faced by the broader telecommunications industry, TDS has demonstrated its ability to adapt and evolve. By strategically diversifying its portfolio, investing in high-growth areas, and optimizing its operations, the company is well-positioned to navigate the changing industry landscape and deliver value to its shareholders. As TDS continues to execute on its strategic initiatives, investors will be closely watching the company's progress and its ability to capitalize on the emerging opportunities in the dynamic telecom market.