Telephone and Data Systems, Inc. — Q1 2023 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 84%-owned UScellular wireless operations and wholly owned TDS Telecom broadband, video and voice operations. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the same period in 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenues | $1,303 million | $1,315 million | (1%) |
| Operating income | $29 million | $95 million | (70%) |
| Operating margin | 2.2% | 7.2% | Down 5.0 percentage points |
| Net income | $12 million | $72 million | (84%) |
| Net income attributable to TDS shareholders | $8 million | $61 million | (87%) |
| Net loss attributable to TDS common shareholders | $9 million loss | $44 million income | Not meaningful |
| Diluted EPS | $(0.08) | $0.37 | Not meaningful |
| Adjusted EBITDA | $321 million | $372 million | (14%) |
| Adjusted OIBDA | $272 million | $325 million | (16%) |
| Capital expenditures | $343 million | $242 million | 42% |
Operating expenses increased 4% to $1,274 million, driven mainly by higher selling, general and administrative costs, depreciation and asset-disposal losses. Interest expense rose to $53 million from $33 million due primarily to higher variable interest rates and increased borrowings. Income tax expense declined to $13 million from $37 million because of lower pretax income. TDS received a $57 million federal tax refund in April 2023 related to a 2020 net operating loss carryback.
Cash flows from operating activities were $46 million, compared with $381 million in Q1 2022. Free cash flow, defined by TDS as operating cash flow less property, plant and equipment additions and software license payments, was negative $293 million versus positive $108 million. Cash, cash equivalents and restricted cash declined to $309 million at March 31, 2023, from $399 million at December 31, 2022.
Long-term debt obligations totaled $3.743 billion, excluding certain debt-related adjustments and receivables-securitization presentation differences. Approximately 50% of long-term debt was fixed-rate and 50% variable-rate. At March 31, 2023, TDS had $299 million of undrawn revolving capacity and UScellular had $560 million of undrawn capacity across its facilities. Management stated that TDS and UScellular were in compliance with applicable financial covenants.
Material changes versus the prior comparable period
- UScellular revenue declined 2% to $986 million and operating income declined 63% to $26 million. Adjusted EBITDA fell 13% to $252 million.
- UScellular retail connections declined to 4.693 million from 4.830 million. Postpaid handset losses improved to 25,000 from 36,000, while total postpaid losses improved to 24,000 from 44,000. Total churn improved to 1.27% from 1.30%.
- UScellular postpaid ARPU increased 2% to $50.66, and ARPA increased 1% to $130.77. Inbound roaming revenue fell 58% to $9 million.
- UScellular selling, general and administrative expense increased 6%, including advertising and workforce-reduction costs. Q1 included $10 million of severance and related expenses for a reduction in workforce effective in Q2.
- TDS Telecom revenue increased 1% to $253 million, but operating income declined 72% to $8 million and Adjusted EBITDA declined 17% to $69 million as expenses increased faster than revenue.
- TDS Telecom service addresses increased 8% to 1.5 million, and 1Gig+ service availability increased to 67% of the footprint from 62%. Total connections declined 3% to 1.167 million, while broadband connections increased 4% to 515,400.
- Capital expenditures increased substantially, including UScellular spending of $208 million versus $137 million and TDS Telecom spending of $130 million versus $105 million.
- Debt increased during the quarter through $100 million borrowed under the TDS revolving agreement, $100 million under the TDS export credit facility and $115 million under UScellular’s receivables securitization agreement.
Guidance, outlook, risks and unusual items
For full-year 2023, UScellular expects capital expenditures of $600 million to $700 million, primarily for 5G deployment, network capacity and information technology. TDS Telecom expects capital expenditures of $500 million to $550 million, primarily for fiber expansion, infrastructure upgrades and broadband growth. TDS expects to fund capital expenditures primarily through operating cash flow, existing cash and additional debt financing as needed.
UScellular expects inbound roaming revenue to continue declining during the remainder of 2023. Management also expects aggressive promotional activity by wireless competitors to continue, which could pressure revenue, customer additions and operating income. UScellular is continuing mid-band 5G deployment, but a portion of its spectrum is not expected to be available until late 2023.
Key risks include intense wireless and broadband competition, customer churn, declining roaming revenue, interest-rate exposure, substantial indebtedness, reliance on capital markets and regulatory support, execution risks associated with network and fiber deployment, spectrum availability, cybersecurity threats, supply-chain disruption and litigation. TDS reported no material changes to the risk factors in its 2022 Form 10-K.
UScellular expects approximately $139 million of remaining payments related to relocation and accelerated relocation incentive costs associated with Auction 107 spectrum. The spectrum is not expected to be accessible until late 2023. A False Claims Act matter involving prior FCC auctions was dismissed in March 2023, but plaintiffs appealed. A putative securities class action was filed against TDS, UScellular and certain individuals on May 2, 2023; the potential financial impact was not determinable at filing.
TDS repurchased 290,900 common shares for $3 million during the quarter and had approximately $135 million remaining under its repurchase authorization. The common dividend was $0.185 per share, and preferred share dividends totaled $17 million.
Important facts for investors to verify
- Whether the negative free cash flow and increased capital spending persist through 2023.
- UScellular’s ability to stabilize retail connections, improve profitability and manage competitive promotions.
- The timing and commercial benefits of mid-band 5G spectrum becoming available late in 2023.
- Future roaming revenue trends and the effect of declining roaming rates.
- Debt refinancing needs, variable-rate exposure, covenant headroom and the March 2024 maturity of the UScellular receivables securitization agreement.
- Execution of TDS Telecom’s fiber expansion plan and whether broadband growth offsets declining voice, video and commercial connections.
- Cash requirements for dividends, network investment, spectrum-related obligations, VIE funding and other commitments.
- Developments and potential financial exposure from the appealed False Claims Act proceedings and the securities class action filed after quarter-end.