TDS' 3Q Profit Plummets

Telephone and Data Systems (TDS - Analyst Report) announced third-quarter 2009 earnings per share of 33 cents, which fell behind the Zacks Consensus Estimate of 47 cents and the year-ago quarter EPS of 87 cents. Net income (attributable to TDS) tumbled 65% year over year to $35.6 million as profit dipped at the company's wireless subsidiary U.S. Cellular (USM - Analyst Report).

The Chicago-based company reported operating revenue of $1,258.7 million, reflecting a 4% year over year drop as a result of declines across its wireless and wireline businesses.

U.S. Cellular (Wireless)

Net income sank 60% year over year to $35.6 million, due to lower revenue and increased operating expenses. Operating revenue declined 3% over the prior-year quarter to $1,058 million as a result of a 3% year over year decline in service revenues that registered $984.9 million in the quarter. The unit continues to experience lower roaming revenue, offset by healthy data revenue growth (up 34% year over year).

US Cellular lost 24,000 customers during the quarter, bringing the total subscriber base to 6.13 million. The entity remains susceptible to aggressive product/pricing strategies by larger rivals such as AT&T (T - Analyst Report) and Verizon (VZ - Analyst Report), contributing to sustained customer defection.

TDS Telecom (Wireline)

Operating revenue in the wireline segment declined 5% year over year to $196.5 million, as data revenue growth was more than offset by the decline in voice and network access revenues. The segment faces competition from incumbent local exchange carriers (ILECs) and contends with the ongoing wireless substitution trend and Internet phone service offerings by cable operators.

TDS Telecom reported 14% growth in ILEC data revenue that registered $26.2 million. ILEC high-speed data customer base grew 18% year over year, reaching 202,100 at the end of the quarter. ILEC equivalent access lines declined by 1,000 lines from the year-ago quarter to 772,700, while physical access lines declined 5% year over year to 539,400 lines.

Outlook

The company has reaffirmed its 2009 outlook with respect to the wireless segment. Projected service revenue of the wireless segment remains at $3.9-$3.95 billion with expected operating income of $300-$375 million. Depreciation, amortization and accretion is expected to be approximately $600 million with a capital expenditure target of $575 million, both kept unchanged.

Operating revenue for the wireline segment is expected between $775 million and $800 million for 2009. Operating income forecast for the segment has been lowered to $80-$95 million from $85-$105 million. Guidance for depreciation, amortization and accretion is raised to $170 million (from $165 million) while capital expenditure target remains at $125 million.

Prospects in wireless are expected to be driven by continued coverage expansion of 3G network and premium handset offerings that are expected to strengthen data revenue per user. Moreover, U.S. Cellular is evaluating potential adoption of Long Term Evaluation ("LTE"), a 4G wireless technology.

On the wireline front, TDS Telecom is aggressively rolling out "Triple-Play" offerings that bundles voice, high-speed data and Dish Network TV services, in an effort to fend off cable competition. Moreover, plans are in place to launch 25 megabit/second or faster broadband services in the key markets in 2010.

Although TDS' ongoing business initiatives look promising, we feel high cost associated with expansion of wireless network may drag near-term earnings and constrict free cash flow. U.S. Cellular's high-margin roaming revenue also remains under pressure. Moreover, TDS is expected to remain challenged by subscriber retention problems amid a volatile economy and highly competitive environment.