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Telephone and Data Systems Inc. (TDS - Analyst Report) has reported third quarter earnings of 68 cents per share, strongly outpacing the Zacks Consensus Estimate of 34 cents. Results jumped 74% from 39 cents per share earned in the year-earlier quarter.

The outstanding performance were driven by strong inbound roaming revenue and cost reduction initiatives along with solid growth in high-speed data services.

Revenues increased 5% year over year to $1,325.4 million in the reported quarter and strode past the Zacks Consensus Estimate of $1,290 million. Adjusted OIBDA improved to $307.6 million from $276.5 million in the year-ago quarter.

U.S.Cellular (Wireless)

Revenues from the company’s wireless subsidiary U.S. Cellular Corp. (USM - Analyst Report) upped 5% year over year to $1,110.4 million in the third quarter. Service revenues grew 5% year over year to $1,036.6 million on account of higher inbound roaming and retail service revenues along with higher smartphone sales that drove data revenues.

Total service ARPU (average revenue per user) improved to $48.82 from $47.12 in the year-ago quarter on the back of strong adoption of smartphones and data plans. Post-paid ARPU increased to $52.41 from $50.82 in the year-ago quarter and churn improved to 1.5% from 1.6% in the year-ago quarter.

U.S. Cellular lost 23,000 net retail customers in the reported quarter, bringing the total subscriber base to nearly 5.94 million (including 5.6 million retail customers). Retail customer losses were 34,000 in the post-paid and 11,000 in the prepaid business.

TDS Telecom (Wireline)

Revenue from the wireline segment grew 4% year over year to $210.8 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 6% year over year to 239,000. However, ILEC equivalent access lines and physical access lines slid 1.5% and 5.2% to 762,500 and 490,200, respectively.

Competitive local exchange carrier (CLEC) high-speed data customer base and CLEC equivalent access lines also declined to a respective 30,200 and 322,600 from 33,900 and 338,700 in the year-ago quarter.

Liquidity

Telephone and Data Systems exited the third quarter with $599.5 million of cash and cash equivalents compared with $368.1 million at the end of fiscal 2010. Long-term debt increased to $1,528.4 million from $1,499.9 million at year-end 2010.

The company generated free cash flow of $329.9 million, up from $278.6 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 respective bands of $4,000–$4,100 million and $590 for fiscal 2011. The company raised its 2011 adjusted OIBDA guidance to $820–$895 million from $800–$875 million and operating income guidance to the range of $230–$305 million from $210–$285 million. Capital expenditure guidance was reiterated at $750–$800 million.

For the Wireline segment, the company maintained its projected total revenue of $800–$830 million, adjusted OIBDA of $270–$300 million and operating income of $85–$115 million. Depreciation, amortization and accretion as well as capital expenditures also remain unchanged at approximately $185 million and $175–$200 million, respectively.

Our Analysis

Telephone and Data Systems remains well positioned to benefit from its several growth initiatives like 3G network expansion, increasing handset offerings, adoption of the Long-Term Evolution (LTE) technology in the wireless business, and aggressive deployment of Triple-Play bundled wireline services. Further, “The Belief Project” is expected to enhance long-term profits by reducing churn and adding subscribers. Moreover, expansion into the rapidly developing managed hosting and cloud service offerings also provide long-term growth prospects for the company.

We are currently maintaining our long-term Outperform rating on Telephone and Data Systems supported by a Zacks #2 (Buy) Rank.

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