Telephone & Data Systems (TDS) Q3 Earnings Beat, Shares Down

Telephone and Data Systems, Inc. TDS reported impressive third-quarter 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Network modernization initiatives, accelerated 5G deployments and accretive subscriber base along with augmented footprint in international markets drove its performance. However, the quarterly performance failed to impress the market as its shares declined 2.5% to close at $17.18 on Nov 6, probably due to uninspiring guidance.

Net Income

Net income in the September quarter was $78 million or 66 cents per share compared with $18 million or 15 cents per share in the year-ago quarter. The more than four-fold rise in earnings despite flat revenue trajectory can be primarily attributed to lower operating expenses. The bottom line surpassed the Zacks Consensus Estimate by 40 cents.

Telephone and Data Systems, Inc. Price, Consensus and EPS Surprise

Telephone and Data Systems, Inc. price-consensus-eps-surprise-chart | Telephone and Data Systems, Inc. Quote

Revenues

Quarterly total operating revenues remained flat at $1,324 million. The top line beat the consensus estimate of $1,298 million.

Segment Results

By segments, operating revenues from U.S. Cellular slipped 0.4% to $1,027 million, primarily due to a decline in the average postpaid subscriber base. Lower data rates, along with a decrease in new smartphone unit sales, also contributed to the year-over-year decline. Total operating expenses decreased to $962 million from $1,011 million due to lower depreciation and amortization expenses. Operating income increased to $65 million from $20 million in the year-ago quarter. Postpaid average revenue per user improved to $47.10 from $46.16, while average revenue per account rose to $123.27 from $119.87. Prepaid average revenue per user increased to $35.45 from $34.35 in the prior-year quarter.

Operating revenues from TDS Telecom were $247 million, up 6.9% year over year primarily driven by higher cable and wireline revenues along with augmented fiber footprint in the international markets. Higher broadband connections were also a major supporting factor. Revenues from wireline were $173 million, up 2.4%, mainly driven by accretive video connections with multiyear fiber footprint expansions. Cable revenues were $74 million, up 19.4% year over year. The upside was primarily driven by the acquisition of Continuum in North Carolina with incremental growth in residential connections and broadband subscribers.

Cash Flow & Liquidity

During the first nine months of 2020, Telephone and Data Systems generated $1,166 million of net cash from operating activities compared with $874 million in the year-ago period. During the same time frame, free cash flow (non-GAAP) totaled $252 million compared with $243 million a year ago. As of Sep 30, 2020, the company had $1,076 million in cash and cash equivalents with $2,970 million of net long-term debt.

2020 Guidance Revised

TDS Telecom and U.S. Cellular have issued an updated guidance for full-year 2020.

For 2020, guidance for total operating revenues from TDS Telecom is unchanged and is expected in the range of $950-$1,000 million. Adjusted EBITDA is projected to be $305-$325 million compared with prior expectation of $290-$320 million. Capital expenditure outlook is unchanged and is estimated in the band of $300-$350 million. Adjusted OIBDA is anticipated to be $300-$320 million compared with previous guidance of $280-$310 million.

For 2020, total service revenues from U.S. Cellular are expected in the range of $3,025-$3,075 million compared with prior outlook of $3,000-$3,100 million. Adjusted EBITDA is projected to be $975-$1,050 million versus prior projection of $900-$1,025 million. Capital expenditure view is unchanged and is estimated in the band of $850-$950 million. Adjusted OIBDA is anticipated to be $800-$875 million compared with prior expectation of $725-$850 million.

Backed by diligent execution of operational plans, TDS Telecom continues to maintain a strong balance sheet with conservative financing strategy. Despite the lower store traffic owing to COVID-19 crisis, the company is currently focused on attracting new customers, adopting cost-saving initiatives, fiber fortification programs, network infrastructure advancement and steady 5G developments with robust demand for wired broadband services. With disciplined cable acquisitions, TDS Telecom aims to generate lucrative revenues with fiber deployment in out-of-territory expansion markets and rollout of TDS TV+, a Cloud TV platform, in its cable and wireline segments coupled with accretive connections in fixed wireless, prepaid and postpaid services.

Zacks Rank & Other Stocks to Consider

Telephone and Data Systems currently sports a Zacks Rank #1 (Strong Buy).

Some other top-ranked stocks in the broader industry are Pampa Energia S.A. PAM, American Water Works Company, Inc. AWK and Portland General Electric Company POR. While Pampa Energia sports a Zacks Rank #1, American Water Works and Portland General Electric carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Pampa Energia delivered a trailing four-quarter positive earnings surprise of 154%, on average.

American Water Works delivered a trailing four-quarter positive earnings surprise of 2.5%, on average.

Portland General Electric delivered a trailing four-quarter positive earnings surprise of 98.1%, on average.

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