Telephone and Data Systems, Inc. 2023 Q2 Form 10-Q Summary
Business context and reporting period
TDS is a U.S.-only diversified telecommunications company serving approximately 6 million connections through its 83%-owned UScellular wireless segment and wholly owned TDS Telecom broadband, video and voice segment. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenues | $1,267 million | $1,349 million | $2,570 million | $2,664 million |
| Operating income | $33 million | $63 million | $62 million | $158 million |
| Operating margin | 2.6% | 4.7% | 2.4% | 5.9% |
| Net income | $0 million | $39 million | $12 million | $111 million |
| Net income attributable to TDS common shareholders | $(19) million | $18 million | $(29) million | $61 million |
| Basic EPS | $(0.17) | $0.15 | $(0.25) | $0.53 |
| Adjusted EBITDA | $307 million | $345 million | $628 million | $716 million |
| Capital expenditures | $278 million | $391 million | $621 million | $633 million |
Six-month cash flow from operating activities was $514 million, down from $734 million. Free cash flow was negative $135 million versus positive $205 million in the prior-year period, reflecting $629 million of property, plant and equipment spending and $20 million of software-license payments.
At June 30, 2023, cash and cash equivalents were $251 million, or $293 million including restricted cash. Long-term debt, net, was $3.872 billion and current debt was $60 million. TDS had $274 million of available undrawn capacity under its revolving credit agreement; UScellular had $625 million of available undrawn capacity after covenant restrictions. Approximately 50% of long-term debt was fixed-rate and 50% variable-rate.
Material changes versus the prior comparable period
- Consolidated revenue declined 6% in Q2 and 4% year to date, driven primarily by lower UScellular equipment sales, retail service revenue and inbound roaming revenue.
- Operating income declined 47% in Q2 and 61% year to date. Higher interest expense, primarily from increased variable rates, further reduced pretax earnings.
- UScellular revenue declined 7% in Q2 and 5% year to date. Retail connections fell to 4.656 million from 4.786 million, although total postpaid churn improved to 1.21% from 1.30%.
- UScellular postpaid handset net losses were 28,000 in Q2 and 53,000 year to date, reflecting intense industry competition. Postpaid ARPU increased 1% in Q2 and 2% year to date.
- TDS Telecom revenue increased 1% in both periods, but operating income fell 71% in Q2 and 72% year to date as service, selling, general and administrative, and depreciation expenses increased.
- TDS Telecom broadband connections increased 5% to 523,600, while total connections declined 2% to 1.167 million due to legacy voice, video and commercial connection losses.
- UScellular recorded $9 million of severance and related workforce-reduction costs in the first quarter. TDS received a $57 million federal tax refund in the second quarter related to a 2020 net operating loss carryback.
Guidance, outlook, risks and unusual items
- Expected 2023 capital expenditures are $600 million to $700 million for UScellular and $475 million to $525 million for TDS Telecom. Spending is directed toward 5G, mid-band spectrum deployment, fiber expansion and network infrastructure.
- Management expects negative free cash flow to continue and may reduce or defer capital expenditures to manage funding needs.
- UScellular expects inbound roaming revenue to continue declining during the rest of 2023 due to lower roaming rates. Promotional intensity from wireless carriers and cable-company MVNOs is expected to remain elevated.
- On August 4, 2023, after quarter-end, TDS and UScellular announced a process to explore strategic alternatives for UScellular. The filing states that no outcome is assured and that the process could divert management attention, increase expenses, affect personnel and customers, and create stock-price volatility.
- UScellular had approximately $185 million of expected spectrum-relocation costs through 2024; $10 million of invoices outstanding at June 30, 2023 were expected to be paid in August. The related spectrum is not expected to be available until late 2023.
- The UScellular receivables securitization facility had $240 million outstanding and matures in March 2024 unless extended. TDS reported compliance with applicable debt covenants at June 30, 2023.
- Standard & Poor’s retained TDS’s BB issuer rating in June 2023 but revised the outlook to negative. Pending legal matters include appeals in False Claims Act litigation and a putative securities class action; outcomes cannot presently be predicted.
Most important facts for investors to verify
- Whether the UScellular strategic-alternatives process produces a transaction, divestiture or other actionable outcome, and the resulting effect on TDS leverage, liquidity and valuation.
- UScellular subscriber trends, churn, pricing pressure, equipment sales and the timing and economics of mid-band 5G deployment.
- TDS Telecom’s ability to convert fiber and broadband connection growth into operating-income and cash-flow improvement.
- Actual free cash flow, capital-expenditure pacing and funding requirements relative to the stated 2023 capital-expenditure ranges.
- Refinancing or extension of the UScellular receivables securitization facility and compliance with progressively tighter leverage covenants.
- Interest-rate sensitivity, credit-rating developments and the sustainability of common and preferred dividends amid negative free cash flow.