Telephone and Data Systems (TDS) announced fourth-quarter 2009 results with earnings per share (EPS) of 15 cents beating the Zacks Consensus Estimate of 14 cents.

Net income (attributable to TDS) for the quarter was $16.5 million as against a net loss of $168.9 million ($1.49 per share) reported a year ago, which was hit by heavy impairment charges. For full year 2009, EPS of $1.77 missed the Zacks Consensus Estimate of $1.84 while exceeding the year-ago EPS of 80 cents.

The Chicago-based operator reported operating revenue of $1,262.8 million for the quarter, reflecting a modest year-over-year decline. For full year 2009, revenue fell 1% to $5,020.7 million. However, the quarterly and annual revenues exceeded the Zacks Consensus Estimates of $1,244 million and $5 billion, respectively.

U.S. Cellular (Wireless)

The company’s wireless subsidiary U.S. Cellular (USM) posted a net income of $12.4 million in the quarter compared to a net loss of $200.1 million reported a year ago. The unit recorded impairment charges of $386.7 million in the year-ago quarter, which impacted the bottom-line.

Operating revenue grew 1% year-over-year to $1,061 million. Service revenue increased 1% to $986.3 million. The unit continues to experience lower roaming revenue, offset by healthy data revenue growth (up 34% year over year). Average monthly ARPU (average revenue per user) increased to $53.55 from $52.71 a year ago, while postpaid churn remained flat at 1.6%.

US Cellular added 10,000 customers during the quarter, bringing the total subscriber base to 6.14 million (including retail customers of 5.74 million). The entity remains susceptible to aggressive product/pricing strategies of its larger rivals like AT&T (T) and Verizon (VZ), contributing to sustained customer defection.

TDS Telecom (Wireline)

Operating revenue in the wireline segment declined 3% year-over-year to $198 million, as data and network access revenue growth was partly offset by the decline in voice revenues. The segment faces competition from incumbent local exchange carriers (ILECs) and contends with the ongoing wireless substitution trend and Internet phone service offerings of cable operators.

TDS Telecom reported a 12% growth in ILEC data revenue that registered $27 million. ILEC high-speed data customer base grew 17% year-over-year, reaching 208,300 at the end of 2009. ILEC equivalent access lines declined by 800 lines from the year-ago quarter to 775,900, while physical access lines declined 5% year-over-year to 536,300 lines.

Outlook

The company has released its guidance for 2010. Service revenue for the wireless segment has been projected at $3.975-$4,075 million, with an expected operating income of $250-$350 million. Depreciation, amortization and accretion is expected to be approximately $600 million, with a capital expenditure target of $600 million.

Operating revenue for the wireline segment is expected between $740 and $780 million. Forecasted operating income for the segment is $70-$100 million. Projected depreciation, amortization and accretion is $170 million for the year while capital expenditure target has been set at $140 million.

The company’s prospects in wireless are expected to be driven by the continued coverage expansion of its 3G network and premium handset offerings that are expected to strengthen data revenue per user. Roughly 75% of wireless customers had access to the 3G network at the end of 2009. Moreover, U.S. Cellular is evaluating the potential adoption of Long-Term Evolution (“LTE”), a 4G wireless technology.

On the wireline front, TDS Telecom is aggressively rolling out “Triple-Play” offerings that bundle 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 costs associated with the expansion of its 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.

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