Telephone and Data Systems, Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
TDS is a U.S.-only diversified telecommunications company serving approximately 6 million connections. Its principal businesses are 83%-owned UScellular, a wireless operator, and wholly owned TDS Telecom, which provides broadband, video and voice services. The filing reports unaudited results for the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenues | $1.315 billion | $1.318 billion | Flat |
| Operating income | $95 million | $110 million | Down 14% |
| Operating margin | 7.2% | 8.3% | Down 1.1 percentage points |
| Net income | $72 million | $71 million | Up 1% |
| Net income attributable to TDS shareholders | $61 million | $59 million | Up 3% |
| Net income attributable to common shareholders | $44 million | $57 million | Down 23% |
| Diluted EPS | $0.37 | $0.48 | Down 23% |
| Adjusted EBITDA | $372 million | $383 million | Down 3% |
| Adjusted OIBDA | $325 million | $338 million | Down 4% |
| Capital expenditures | $242 million | $197 million | Up 23% |
Net income benefited from a $20 million reduction in interest expense and higher equity earnings, which largely offset higher operating expenses and income taxes. Preferred share dividends increased to $17 million from $2 million because Series UU and Series VV preferred shares were outstanding for the quarter.
Net cash provided by operating activities was $381 million, compared with $165 million in the prior-year quarter. Free cash flow, defined by TDS as operating cash flow less cash paid for property, plant and equipment, was $110 million versus negative $55 million. The improvement principally reflected a $125 million federal tax refund related to a 2020 net operating loss carryback.
Segment Performance and Material Changes
- UScellular: Revenue declined 1% to $1.010 billion. Service revenue increased 2% to $787 million, but equipment sales declined 12% to $223 million. Operating income fell 15% to $71 million and Adjusted EBITDA declined 4% to $289 million. Retail connections decreased to 4.83 million from 4.90 million, while postpaid churn increased to 1.30% from 1.12%.
- UScellular customer trends: Postpaid ARPU increased 4% to $49.71 and ARPA increased 4% to $129.93. Postpaid gross additions fell 12%, and total postpaid net losses increased to 44,000 from 6,000, reflecting aggressive competition, higher defections and lower demand for certain internet-related products.
- TDS Telecom: Revenue increased 1% to $251 million. Broadband connections rose 6% to 495,200, while total connections remained approximately flat at 1.20 million because of declines in legacy voice, video and commercial CLEC connections. Operating income declined 11% to $28 million, while Adjusted EBITDA increased 3% to $83 million.
- Investment program: TDS Telecom capital expenditures increased 50% to $105 million, primarily for fiber deployment. UScellular capital expenditures increased 10% to $137 million, primarily supporting network modernization and 5G deployment.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $549 million at March 31, 2022; cash, cash equivalents and restricted cash totaled $596 million.
- TDS and UScellular had unused borrowing capacity of $549 million and $590 million, respectively. TDS had $399 million available under its revolving facility; UScellular had $300 million available.
- Long-term debt, net increased to $3.567 billion from $2.928 billion at December 31, 2021. Principal borrowings during the quarter included $550 million under term loans, $150 million under UScellular’s export credit facility and $60 million under a secured receivables repurchase agreement.
- UScellular had $400 million outstanding under its receivables securitization facility and $60 million under the repurchase agreement. In April 2022, it repaid $50 million under the receivables securitization facility.
- Approximately 60% of long-term debt was fixed-rate and 40% variable-rate. TDS reported compliance with applicable financing covenants as of March 31, 2022.
- Full-year 2022 capital expenditure guidance was $700 million to $800 million for UScellular and $500 million to $550 million for TDS Telecom.
Outlook, Commentary, Risks and Unusual Items
- Management expects continued UScellular investment in 5G, network capacity, information technology and fixed wireless and other new services. TDS Telecom plans continued fiber expansion and broadband capacity upgrades.
- UScellular expects inbound roaming revenue to continue declining during 2022. Competitive pricing and promotional activity could pressure revenue, margins and customer retention.
- Device component shortages, supply-chain disruption and labor constraints may delay equipment availability and increase costs.
- UScellular paid approximately $561 million for wireless spectrum licenses during the quarter. Auction 110 licenses were granted by the FCC on May 4, 2022; the filing states that licenses from Auction 107 are not expected to be accessible until late 2023.
- TDS identified significant risks from competition, spectrum availability, technology deployment, financing and leverage, interest-rate exposure, regulatory support, cybersecurity, supply-chain disruption and economic conditions. The company reported no material changes to the risk factors disclosed in its 2021 Form 10-K.
- Pending False Claims Act litigation relating to UScellular’s participation in prior FCC spectrum auctions remained unresolved. TDS stated that it cannot predict the outcome and believes the arrangements complied with applicable law and FCC rules.
Important Facts for Investors to Verify
- Whether UScellular can stabilize postpaid connections and churn amid heightened industry competition.
- The sustainability of improved operating cash flow after excluding the $125 million federal tax refund.
- Progress and returns from the combined $1.2 billion to $1.35 billion 2022 capital expenditure program, including 5G and fiber deployment.
- Debt growth, variable-rate exposure and access to financing as interest rates and capital-market conditions change.
- The timing and economic benefits of newly acquired spectrum, including the expected late-2023 access date for Auction 107 spectrum.
- Potential effects of supply-chain constraints, equipment availability, roaming declines and promotional discounts on future margins.
- The outcome and potential financial impact of the pending False Claims Act proceedings and other legal or regulatory matters.