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TDS Remains Neutral

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On Dec 13, we retained our Neutral recommendation on Telephone & Data Systems Inc. (TDS - Free Report) . The company reported disappointing third quarter results, with earnings and revenues missing the Zacks Consensus Estimate and deteriorating year over year.

Within the wireless segment, higher churn in the post-paid segment, increased equipment subsidies and investments in network upgrade would continue to affect results. Further, access line losses due to wireless substitution and other alternative services remain detrimental to growth.

However, these headwinds can be largely mitigated by several initiatives taken by the company like increasing handset offerings and expansion of Long Term Evolution (LTE) technology in the wireless business. Currently, the Zacks Consensus Estimate for the company is pegged at a loss per share of 53 cents. The company carries a Zacks Rank #3 (Hold).

Why Neutral?

Telephone and Data Systems continues to produce strong results from bundled and unlimited service plans, smartphone upgrades, expansion of the handset portfolio (including Android-powered devices), and innovative programs like battery swap and overage protection.

In addition, opportunities in hosted managed services, deeper penetration of its commercial services like managed IP, and the rollout of broadband in rural markets as part of the broadband stimulus program will also fuel the company’s growth. Moreover, the company’s Triple-Play offering that bundles voice, high-speed data and video through its partner Dish Network Corp.’s (DISH - Free Report) services are also gaining traction, helping it to compete with cable TV operators.

On the wireless front, the company’s subsidiary United States Cellular Corporation (USM - Free Report) is focusing on increasing revenues as well as pursuing and implementing cost reduction initiatives in several areas to enable future growth. The initiatives include introduction of a new billing system, expansion of distribution channels as well as improving cost and profitability by managing equipment subsidies and data delivery cost.

Moreover, U.S. Cellular has instituted several marketing initiatives like four new bundled services that offer unlimited Internet and messaging plans with most popular features, at affordable prices.

Moreover, the company is gaining significantly from its “Hello Better" campaign that focuses on customer services. The introduction of a new billing system, expansion of distribution channels, continuous rollout of 4G LTE, enhancement of LTE handsets and closing of various spectrum transactions would also accelerate the company’s growth.

However, Telephone and Data Systems’ wireless business faces significant challenges from an intensely competitive environment, which has been heightened by consolidation of the larger national carriers. Further, the acquisition of relatively smaller carriers like MetroPCS by T-Mobile USA (TMUS - Free Report) , mega merger of Sprint (S - Free Report) with Japanese telecom company SoftBank, and the pending acquisition of Leap Wireless by AT&T Inc. (T - Free Report) can have a material impact on the business operations of Telephone and Data Systems.

Further, the company continues to be susceptible to aggressive pricing by larger rivals which have greater financial, technical, marketing and distribution resources. A highly competitive market has resulted in higher post-paid churn for the company.

Moreover, higher smartphone subsidies continue to affect its margins. The expanded iPhone distribution and aggressive promotion by competitors including, 4G LTE devices and services are also expected to remain detrimental to the company’s subscriber accretion and retention.

Thus, we remain Neutral over the near-term prospects of Telephone & Data Systems.

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