Telephone and Data Systems (TDS) announced first-quarter 2010 results with earnings per share (EPS) of 46 cents matching the Zacks Consensus Estimate while falling from 66 cents a year-ago. Net income (attributable to TDS) dipped 34% year-over-year to $49.1 million, impacted by lower revenues.

The Chicago-based operator posted operating revenues of $1,222.6 million, down 2.8% year-over-year, as revenues declined across its wireline and wireless segments. Revenue missed the Zacks Consensus Estimates of $1,255 million.

U.S. Cellular (Wireless)

Revenues from the company’s wireless subsidiary U.S. Cellular (USM) fell 3% year-over-year to $1,024 million. Service revenue decreased 2% to $965.2 million on account of lower voice and roaming revenues, partly offset by healthy data revenue growth (up 28% year over year). Retail service ARPU (average revenue per user) increased to $46.99 from $46.87 a year ago. Expansion of smartphone range helped the carrier to reduce postpaid churn to 1.4% from 1.5% a year ago.

US Cellular added 6,000 customers in the quarter (down from 47,000 net additions a year ago), bringing the total subscriber base to nearly 6.15 million (including retail customers of 5.77 million). The entity remains susceptible to aggressive product/pricing strategies of Tier-1 carriers such as AT&T (T) and Verizon (VZ), resulting in customer defection.

TDS Telecom (Wireline)

Revenues from the wireline segment declined 1.9% year-over-year to $195.5 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 VoIP services from cable operators.

TDS Telecom reported a 13% growth in ILEC data revenue that registered $28.3 million. ILEC high-speed data customer base grew 16% year-over-year to 217,400. ILEC equivalent access lines remained flat at 778,700, while physical access lines declined 5% to 530,400 lines.

Outlook

TDS has released its revised guidance for full year 2010. Operating revenues for the wireline segment has been raised to $760-$790 million from $740-$780 million forecasted earlier. Operating income target has been increased to $80-$105 million from $70-$100 million. Projected depreciation, amortization and accretion remain unchanged at $170 million, while its capital expenditure target has been lifted to $155 million from $140 million.

Service revenue forecast for the wireless segment remains 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, both kept unchanged.

TDS has added adjusted OIBDA (operating income before depreciation, amortization and accretion) forecasts for both wireless and wireline segments. The carrier expects adjusted OIBDA of $850-$950 million and $250-$275 million for its wireless and wireline operations, respectively.

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. Moreover, U.S. Cellular is evaluating the potential adoption of Long-Term Evolution (LTE), a 4G mobile broadband technology.

On the wireline front, TDS Telecom is aggressively rolling out “Triple-Play” offerings that bundle voice, high-speed data and video 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. Moreover, U.S. Cellular’s high-margin roaming revenue remains under pressure. We currently have a Neutral recommendation on TDS.
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