Telephone and Data Systems, Inc. — Q1 2024 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. This unaudited filing covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total operating revenues | $1.262 billion | $1.303 billion | (3%) |
| Operating income | $67 million | $29 million | Higher |
| Income before income taxes | $58 million | $25 million | Higher |
| Net income | $38 million | $12 million | Higher |
| Net income attributable to TDS shareholders | $29 million | $8 million | Higher |
| Net income attributable to common shareholders | $12 million | $(9) million | Improved |
| Diluted earnings per common share | $0.10 | $(0.08) | Improved |
| Adjusted EBITDA | $366 million | $321 million | 14% higher |
| Adjusted OIBDA | $318 million | $272 million | 17% higher |
| Cash flow from operating activities | $224 million | $46 million | Higher |
| Free cash flow | $(20) million | $(293) million | Improved |
| Capital expenditures | $219 million | $343 million | (36%) |
Revenue declined because UScellular revenue decreased 4% to $950 million, primarily from lower retail connections and equipment sales. TDS Telecom revenue increased 5% to $266 million. Consolidated operating expenses fell 6% to $1.195 billion, driven by lower equipment costs, selling, general and administrative expenses, and asset-related losses.
Consolidated operating margin was approximately 5.3% versus 2.2% in the prior-year quarter. Net margin was approximately 3.0% versus 0.9%. These comparisons are based on reported GAAP figures; Adjusted EBITDA and Adjusted OIBDA are non-GAAP measures.
Segment developments and material changes
- UScellular: Retail connections fell to 4.487 million from 4.693 million. Postpaid handset gross additions declined 32%, and postpaid net losses increased to 44,000. Total churn improved to 1.22% from 1.27%, while postpaid ARPU increased 3% to $51.96.
- UScellular operating income increased to $51 million from $26 million, and Adjusted EBITDA increased 8% to $272 million. Lower equipment costs, employee-related expenses, commissions and advertising more than offset lower revenue. Q1 2023 included $10 million of severance and related expenses.
- UScellular completed decommissioning of its 3G CDMA network during Q1 2024. Reported postpaid net additions exclude a one-time removal of 11,000 CDMA-dependent connections.
- TDS Telecom: Revenue increased 5% to $266 million and operating income rose to $27 million from $8 million. Adjusted EBITDA increased 38% to $95 million. Residential broadband connections increased 6% to 547,900, while total connections were essentially unchanged at 1.162 million.
- TDS Telecom service addresses increased 12% year over year to 1.7 million, and 73% of the footprint offered 1 Gigabit or higher service versus 67% a year earlier. Fiber expansion and price increases supported revenue growth, while commercial, legacy voice and video connections declined.
- Capital expenditures declined in both segments: UScellular to $131 million from $208 million and TDS Telecom to $87 million from $130 million.
Liquidity, debt and cash flow
- Cash, cash equivalents and restricted cash increased to $278 million at March 31, 2024, from $270 million at December 31, 2023. Cash and cash equivalents alone were $249 million.
- Operating cash flow was $224 million. Investing cash outflows were $246 million, including $235 million for property, plant and equipment. Financing cash inflows were $30 million, including new borrowings, partly offset by debt repayments and $39 million of dividends.
- TDS had $199 million of undrawn capacity under its revolving credit agreement. UScellular had $610 million of available capacity, including $310 million under its receivables securitization agreement, subject to collateral requirements.
- At March 31, 2024, outstanding borrowings were $200 million under TDS’s revolving credit agreement and $140 million under UScellular’s receivables securitization agreement. TDS borrowed $100 million and UScellular borrowed $40 million during the quarter.
- Approximately 50% of TDS’s long-term debt was fixed-rate and 50% variable-rate. Scheduled principal payments on long-term debt totaled $4.123 billion, with a 6.7% weighted-average stated interest rate.
- TDS stated that it was in compliance with applicable financial covenants at March 31, 2024. The consolidated leverage covenant tightened to 4.00-to-1.00 beginning April 1, 2024, and to 3.75-to-1.00 beginning April 1, 2025.
- In May 2024, after the quarter end, TDS entered into a $375 million unsecured term loan facility, drew $300 million less original issue discount, and retained the ability to draw an additional $75 million through November 2025. The facility bears interest at SOFR plus 7.00% and matures in May 2029.
Guidance, outlook, commentary and risks
- UScellular expects 2024 capital expenditures of $550 million to $650 million, primarily for network capacity, coverage, mid-band 5G deployment and information technology.
- TDS Telecom expects 2024 capital expenditures of $310 million to $340 million, primarily for fiber deployment, broadband growth, infrastructure maintenance and state broadband and E-ACAM requirements.
- Management acknowledged that TDS has incurred negative free cash flow and may continue to do so. TDS Telecom has slowed fiber deployment and reduced or deferred planned capital expenditures to lower funding needs.
- UScellular expects aggressive wireless promotions and pricing pressure from traditional carriers and cable wireless providers to continue, potentially affecting revenue, margins and customer additions.
- TDS and UScellular are reviewing strategic alternatives for UScellular. TDS incurred $11 million of related third-party expenses in Q1 2024, including $7 million at UScellular. The filing states that the outcome and financial impact cannot currently be predicted.
- Principal risks include competition, customer churn, roaming costs and revenues, spectrum availability, technology deployment, network execution, cybersecurity, regulatory support, interest rates, access to capital, leverage and the potential need to reduce investment or dividends.
- The filing reports no material changes to previously disclosed risk factors, no material changes in legal proceedings, and effective disclosure controls as of March 31, 2024.
Important facts for investors to verify
- Progress and outcome of the UScellular strategic alternatives review, including related expenses and any effect on TDS’s capital allocation, liquidity or dividends.
- UScellular’s ability to stabilize retail connections, handset additions and revenue amid sustained pricing and promotional competition.
- Compliance with tightening leverage covenants after the May 2024 term loan and the effect of the facility’s SOFR plus 7.00% interest rate.
- Whether projected 2024 capital expenditures and the slower TDS Telecom fiber rollout are sufficient to support broadband growth and E-ACAM obligations.
- Future free cash flow, debt maturities, refinancing requirements and the continuing ability to fund dividends and network investment.
- Actual results versus the disclosed 2024 capital expenditure ranges of $550 million to $650 million for UScellular and $310 million to $340 million for TDS Telecom.