Telephone and Data Systems (TDS) reported fourth quarter 2010 earnings of 14 cents per share, which fell short of the Zacks Consensus Estimate of 22 cents. However, earnings climbed 27% from 11 cents earned in the year-earlier quarter. Intense competition in both wireless and wireline businesses was responsible for the quarter’s underperformance.

In fiscal 2010, earnings per share were $1.36 compared with $1.72 in the prior year.

Revenues inched up 0.3% year over year to $1,265.8 million in the fourth quarter and could not measure up to the Zacks Consensus Estimate of $1,274 million. Fiscal 2010 revenue also dipped 1% year over year to $4,986.8 million.

Adjusted OBIDA declined to $212.3 million in the reported quarter from $244.4 million in the year-ago quarter. 2010 adjusted OBIDA dropped 10.2% year over year to $1,063.5 million.

U.S.Cellular (Wireless)

Revenues from the company’s wireless subsidiary  U.S. Cellular Corp. (USM) nudged up 0.3% year over year to $1,063.1 million in the fourth quarter. Service revenues upped 0.7% year over year to $991.9 million (comprising 93% of total wireless revenue) on account of higher roaming revenues, partially offset by lower retail service revenue.

Retail service ARPU (average revenue per user) increased to $47.41 from $47.07 in the year-ago quarter. Retail post-paid churn remained low at 1.5% versus 1.6% in the year-ago quarter.

U.S. Cellular lost 31,000 total customers in the reported quarter, bringing the total subscriber base to nearly 6.07 million (including retail customers of 5.73 million). Retail customer losses were 10,000 in the post-paid and 11,000 in the prepaid business.

TDS Telecom (Wireline)

Revenues from the wireline segment upped 3% year over year to $155.6 million, as data revenue growth was partly offset by the decline in voice and network access revenues.

In the reported quarter, incumbent local exchange carriers (ILEC) high-speed data customer base grew 9% year over year to 227,700. However, ILEC equivalent access lines and physical access lines fell 1.1% and 5.3% to 767,200 and 507,700, respectively.

Liquidity

Telephone and Data Systems exited fiscal 2010 with $368.1 million of cash and cash equivalents compared with $671 million at the end of fiscal 2009. Long-term debt increased to $1,499.9 million from $1,492.9 million in the previous year.

Guidance

Telephone and Data Systems provided its fiscal 2011 outlook. In the Wireless segment, the company expects service revenue in the range of $4,000–$4,100 million, adjusted OIBDA between $775 million and $875 million, and operating income between $185 million and $285 million. Depreciation, amortization and accretion expenses are expected to be approximately $590 million, with a capital expenditure target of $650 million.

For the Wireline segment, the company projected total revenue in the range of $780–$810 million, adjusted OIBDA of $260–$290 million, and operating income of approximately $75–$105 million. Depreciation, amortization and accretion as well as capital expenditures are expected to be approximately $185 million and $175–$200 million, respectively.

Our Analysis

We believe Telephone and Data Systems is well positioned for growth based on various competitive offerings, attractive android-based smartphones sales, bundled and unlimited service plans, the expected launch of LTE services in 2012 as well as exceptional services in the form of “The Belief Project”.

However, future free cash flow levels are expected to be under pressure due to incremental investments in business operations. Competition has intensified further with cable operators offering voice telephony service on high-speed Internet links via cable modems (Voice over Internet Protocol) and other Internet-based service providers contending for customers.

We are currently maintaining our Neutral recommendation on Telephone and Data Systems supported by the Zacks #3 (Hold) Rank.

 
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