Telephone and Data Systems Inc. (TDS) announced third-quarter 2010 earnings per share of 38 cents, which was above the Zacks Consensus Estimate of 36 cents and year-earlier earnings of 34 cents. The improvement in earnings was attributable to TDS Telecom’s data revenue growth.

Net income jumped 10.6% year over year to $40.6 million. Revenues rose 0.69% year over year to $1,266.4 million.

U.S. Cellular (Wireless)

Revenues from the company’s Wireless subsidiary U.S. Cellular (USM) increased 0.32% year over year to $1,060.7 million. Service revenues dipped 0.04% year over year to $983.5 million.

Retail service ARPU (average revenue per user) increased to $47.12 from $46.97 year over year. Inbound roaming ARPU increased to $3.97 from $3.73 in the year-ago quarter. Post-paid churn remained low at 1.6% compared with 1.7% in the year-ago quarter.

The U.S. Cellular losses of 41,000 total customers in the quarter (up from 24,000 net losses in the year-ago quarter), brought the total subscriber base to nearly 6.1 million (including retail customers of 5.75 million).

TDS Telecom (Wireline)

Revenues from the Wireline segment upped 3% year over year to $202 million. In the reported quarter, incumbent local exchange carrier (ILEC) high-speed data customer base grew 11.5% year over year to 225,400 while ILEC equivalent access lines remained flat at 773,800 and physical access lines dropped 4% to 517,000.

Liquidity

Telephone and Data Systems exited the quarter with $779 million of cash and short-term investments compared with $784.3 million at the end of fiscal 2009. Long-term debt remained almost flat year over year at $1.49 billion.

The company generated free cash flow of $278.6 million compared with $349.3 million in the year-ago quarter. Capital expenditure increased to $35.5 million from $450.6 million in the comparable quarter last year.

Outlook

Based on third-quarter results, Telephone and Data Systems reiterated its 2010 outlook for the Wireless segment. However, Service revenues are expected to decrease to $3,925–$3,975 million as against $3,925–$4,000 million estimated previously.

Operating income is expected to be in the range of $200–$250 million. Depreciation, amortization and accretion expenses are expected to be approximately $600 million, while capital expenditure is estimated at $600 million.

Telephone and Data Systems expects Wireline revenues in the range of $785–$800 million and operating income between approximately $90 million and $105 million. Depreciation, amortization and accretion expenses and capital expenditures are expected to be approximately $175 million and $155 million, respectively.

Our Analysis

The company is pursuing several initiatives to reinvigorate growth. These include expansion of its 3G network, increasing premium handset offerings and the potential adoption of Long-Term Evolution (LTE) in the wireless business and aggressive deployment of Triple-Play bundled wireline services.

However, future free cash flow levels are expected to be pressured due to incremental investment in business operations. Moreover, declining roaming revenue may continue to strain wireless service revenue in the upcoming quarters.

Telephone and Data Systems Inc. currently retains a Zacks #2 Rank (short-term Buy rating). We are also maintaining our long-term Neutral recommendation on the stock.

 
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