Business Context and Reporting Period
Telephone and Data Systems, Inc. (TDS) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022, compared with the corresponding 2021 periods. TDS operates in the United States through 83%-owned UScellular, a wireless carrier, and wholly owned TDS Telecom, a broadband, video and voice provider. The businesses serve approximately 6 million connections nationwide.
Financial Results and Key Metrics
| Metric | Q3 2022 | Q3 2021 | Change | 9M 2022 | 9M 2021 | Change |
|---|---|---|---|---|---|---|
| Operating revenues | $1,392 million | $1,328 million | +5% | $4,056 million | $3,957 million | +3% |
| Operating income (loss) | $(11) million | $69 million | N/M | $147 million | $237 million | -38% |
| Net income (loss) | $(10) million | $47 million | N/M | $101 million | $152 million | -33% |
| Net income (loss) attributable to TDS common shareholders | $(25) million | $28 million | N/M | $35 million | $105 million | -66% |
| Diluted EPS | $(0.22) | $0.24 | N/M | $0.30 | $0.89 | -66% |
| Adjusted EBITDA | $271 million | $341 million | -21% | $987 million | $1,069 million | -8% |
| Adjusted OIBDA | $227 million | $290 million | -22% | $853 million | $923 million | -8% |
| Capital expenditures | $305 million | $279 million | +9% | $938 million | $726 million | +29% |
Approximate consolidated operating margins were negative 0.8% in Q3 2022 versus 5.2% in Q3 2021, and 3.6% for the first nine months of 2022 versus 6.0% in the prior-year period. These calculations are based on reported operating revenues and operating income.
Segment Performance
- UScellular: Q3 revenue increased 7% to $1,083 million, driven primarily by a 32% increase in equipment sales and higher other service revenue. Operating loss was $15 million versus operating income of $45 million. Nine-month revenue increased 2% to $3,120 million, while operating income declined 42% to $96 million. Adjusted EBITDA declined 22% in Q3 and 9% year to date.
- UScellular operating trends: Retail connections declined to 4.757 million from 4.909 million. Q3 postpaid net losses were 31,000 versus 8,000, and total postpaid churn increased to 1.42% from 1.15%. Postpaid ARPU increased 4% to $50.21. Bad-debt expense increased to $42 million from $13 million in Q3 and to $93 million from $34 million year to date.
- TDS Telecom: Q3 revenue increased 2% to $256 million, while operating income declined 63% to $10 million. Nine-month revenue increased 1% to $763 million, while operating income declined 30% to $61 million. Broadband connections increased 4% to 506,500, but total connections declined 2% to 1.181 million due primarily to legacy voice, video and commercial CLEC losses.
Cash Flow, Liquidity and Capital Structure
- For the nine months, operating cash flow was $901 million versus $863 million. Cash paid for property, plant and equipment was $794 million, producing reported non-GAAP free cash flow of $107 million versus $137 million.
- Cash, cash equivalents and restricted cash totaled $481 million at September 30, 2022, including $442 million of cash and cash equivalents.
- Undrawn borrowing capacity was $399 million at TDS and $690 million at UScellular, including revolving, receivables securitization and repurchase facilities.
- Long-term debt, net increased to $3.608 billion from $2.928 billion at December 31, 2021. Separately, scheduled long-term debt obligations totaled $3.497 billion, excluding certain items noted by the company. Approximately 60% of long-term debt was fixed rate and 40% variable rate.
- TDS borrowed $300 million under term loans; UScellular borrowed $500 million under term loans and $150 million under export credit financing. UScellular had $200 million outstanding under its receivables securitization facility and $60 million under its repurchase agreement.
- Management stated that TDS and its subsidiaries were in compliance with applicable financial covenants at September 30, 2022 and expects existing liquidity, financing capacity, tax refunds and operating and investing cash flows to meet foreseeable needs.
Material Changes Versus the Prior Comparable Period
- Revenue growth did not translate into earnings growth because operating expenses increased faster than revenue, particularly equipment costs, selling and administrative expenses, depreciation and network-related investment.
- UScellular experienced materially higher churn, customer net losses, promotional activity, equipment costs and bad-debt expense. Inbound roaming revenue declined 43% in Q3 and 36% year to date; the company expects continued year-over-year declines for the remainder of 2022.
- TDS Telecom revenue growth was offset by higher employee, vehicle, programming, storm-repair, marketing and software costs, resulting in lower operating income and Adjusted EBITDA.
- Interest expense declined to $46 million from $54 million in Q3 and to $118 million from $193 million year to date, primarily due to refinancing and debt issuance-cost effects.
- The 2021 comparative periods included a $9 million UScellular out-of-period regulatory-fee revenue error; management determined it was not material to the affected periods.
- The company received a $125 million federal tax refund during the first quarter of 2022 related to a CARES Act net operating loss carryback. The prior-year nine-month tax rate also benefited from the expiration of state tax statutes of limitations, which did not recur.
- TDS repurchased $26 million of its common shares during the first nine months and had $152 million remaining under its authorization at September 30, 2022. It paid $114 million of dividends to TDS shareholders during the period.
Guidance, Outlook, Risks and Unusual Items
- Full-year 2022 UScellular capital expenditures were expected to be $700 million to $800 million, primarily for network modernization, 5G deployment, coverage, capacity and information technology.
- Full-year 2022 TDS Telecom capital expenditures were expected to be $500 million to $550 million, primarily for fiber deployment, network upgrades, broadband capacity and A-CAM-related requirements.
- UScellular expects access to spectrum acquired in Auction 107 only in late 2023 and expects approximately $185 million of relocation-related costs through 2024. It also was the provisional winning bidder for $3 million of Auction 108 spectrum, subject to FCC grant.
- Key risks include intense wireless and broadband competition, promotional pricing, higher churn, roaming revenue declines, supply-chain and labor constraints, rising bad debts, technology deployment execution, spectrum availability and costs, interest-rate exposure, substantial indebtedness, regulatory support changes, cybersecurity incidents and litigation.
- Private-party False Claims Act litigation concerning UScellular participation in prior FCC spectrum auctions remained pending. TDS stated that it could not predict the outcome and believed its arrangements complied with applicable law and FCC rules.
- Management reported effective disclosure controls as of September 30, 2022 and no material changes in internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Whether UScellular can stabilize retail connections, churn and bad-debt trends while maintaining equipment promotions.
- The effect of continued roaming revenue declines and competitive pricing on UScellular margins and cash generation.
- Execution and funding of the combined $1.2 billion to $1.35 billion full-year capital-expenditure outlook, including fiber and 5G deployment.
- Variable-rate debt exposure, refinancing requirements and the availability of UScellular’s receivables-backed facilities.
- Timing and cost of Auction 107 spectrum relocation and access, and the status of Auction 108 licenses.
- Whether reported free cash flow remains positive after elevated capital expenditures, spectrum-related payments and dividends.
- Potential outcomes of the pending False Claims Act litigation and any related regulatory or spectrum obligations.