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TELEPHONE & DATA SYSTEMS INC /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
Telephone and Data Systems, Inc. ("TDS") is a diversified telecommunications
company providing high-quality telecommunications services to approximately
5.8 million wireless customers and 1.0 million wireline customer connections at
March 31, 2012. TDS conducts substantially all of its wireless operations
through its 84%?owned subsidiary, United States Cellular Corporation
("U.S. Cellular"), provides wireline services through its incumbent local
exchange carrier ("ILEC"), competitive local exchange carrier ("CLEC") and
Hosted and Managed Services ("HMS") operations under its wholly owned
subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). TDS conducts
printing and distribution services through its majority?owned subsidiary,
Suttle-Straus, Inc. and provides wireless services through its 63%-owned
subsidiary, Airadigm Communications, Inc. ("Airadigm"), a Wisconsin-based
service provider. Airadigm operates independently from U.S. Cellular and at
this time, there are no plans to combine the operations of these subsidiaries.
Suttle-Straus and Airadigm's financial results were not significant to TDS'
operations in the three months ended March 31, 2012.
The following discussion and analysis should be read in conjunction with TDS'
interim consolidated financial statements and notes included in Item 1 above,
and with the description of TDS' business, its audited consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the TDS Annual Report on Form 10-K ("Form
10-K") for the year ended December 31, 2011.
OVERVIEW
The following is a summary of certain selected information contained in the
comprehensive Management's Discussion and Analysis of Financial Condition and
Results of Operations that follows. The overview does not contain all of the
information that may be important. You should carefully read the entire
Management's Discussion and Analysis of Financial Condition and Results of
Operations and not rely solely on the overview.
Historically, TDS has reported the following business segments: U.S. Cellular,
ILEC (which included HMS operations), CLEC, and Non-Reportable Segment which
includes Suttle-Straus and, in 2012, Airadigm. TDS' Corporate operations and
intercompany eliminations have been included in "Other Reconciling Items" for
purposes of business segment disclosure. As a result of recent acquisitions and
changes in TDS' strategy, operations, personnel and internal reporting, TDS has
reevaluated its reportable business segments during the quarter ended March 31,
2012. TDS' business segments as of March 31, 2012, are U.S. Cellular, CLEC,
ILEC, HMS and the Non-Reportable Segment. Periods presented for comparative
purposes have been re-presented to conform to this revised presentation.
U.S. Cellular
U.S. Cellular provides wireless telecommunications services to approximately
5.8 million customers in five geographic market areas in 26 states. As of March
31, 2012, U.S. Cellular's average penetration rate in its consolidated operating
markets was 12.4%. U.S. Cellular operates on a customer satisfaction strategy,
striving to meet or exceed customer needs by providing a comprehensive range of
wireless products and services, excellent customer support, and a high-quality
network.
Financial and operating highlights in the three months ended March 31, 2012
included the following:
† Total customers were 5,837,000 at March 31, 2012, including 5,570,000
retail customers.
† In late March 2012, U.S. Cellular, in conjunction with King Street
Wireless L.P., began offering fourth generation Long-term Evolution ("4G LTE")
service; as of March 31, 2012, the 4G LTE network covered approximately 25
percent of U.S. Cellular's customers. 4G LTE enhances the wireless experience
by significantly increasing both the speed and data capacity available compared
to 3G networks. See Note 10 - Variable Interest Entities (VIEs) in the Notes to
the Consolidated Financial Statements for additional information about King
Street Wireless.
† Retail customer net losses were 34,000 in 2012 compared to net losses of
31,000 in 2011. In the postpaid category, there was a net loss of 38,000 in
2012 compared to a net loss of 22,000 in 2011. Prepaid net additions were 4,000
in 2012 compared to net losses of 9,000 in 2011.
† Postpaid customers comprised approximately 94% of U.S. Cellular's retail
customers as of March 31, 2012. The postpaid churn rate was 1.6% in 2012
compared to 1.4% in 2011.
† Postpaid customers on smartphone service plans increased to 34% as of
March 31, 2012 compared to 20% as of March 31, 2011. In addition, smartphones
represented 54% of all devices sold in 2012 compared to 42% in 2011.
† Service revenues of $1,023.8 million increased $38.7 million
year-over-year, primarily due to continued growth in both data revenues from
U.S. Cellular customers and inbound data roaming revenues.
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† Additions to Property, plant and equipment totaled $201.3 million,
including expenditures to construct cell sites, increase capacity in existing
cell sites and switches, deploy 4G LTE equipment, outfit new and remodel
existing retail stores, develop new billing and other customer management
related systems and platforms, and enhance existing office systems. Total cell
sites in service increased 3% year-over-year to 7,875.
† U.S. Cellular continued its efforts on a number of multi-year initiatives
including the development of a Billing and Operational Support System ("B/OSS")
with a new point-of-sale system to consolidate billing on one platform; an
Electronic Data Warehouse/Customer Relationship Management System to collect and
analyze information more efficiently and thereby build and improve customer
relationships; and a new Internet/Web platform to enable customers to complete a
wide range of transactions and to manage their accounts online.
† In March 2012, U.S. Cellular sold the majority of the assets and
liabilities of a wireless market for $49.8 million in cash net of working
capital adjustments. In connection with the sale, a $4.2 million gain was
recorded in (Gain) loss on asset disposals, net in the Consolidated Statement of
Operations.
U.S. Cellular anticipates that its future results will be affected by the
following factors:
† The impact of the Belief Project on long-term profitability. Under the
Belief Project, U.S. Cellular offers several innovative services, including no
contract after the first contract; simplified national rate plans; a loyalty
rewards program; overage protection, caps and forgiveness; a phone replacement
program; and discounts for paperless billing and automatic payment. U.S.
Cellular believes that offering these services will increase postpaid gross
additions over the next several years and contribute to incremental growth in
average revenue per customer and improvement in the postpaid churn rate. As of
March 31, 2012, 3.3 million new and existing customers had subscribed to Belief
Plans;
† Continued uncertainty related to current economic conditions and their
impact on customer purchasing and payment behaviors;
† Relative ability to attract and retain customers, including the ability to
reverse recent customer net losses, in a competitive marketplace in a cost
effective manner;
† Effects of industry competition on service and equipment pricing and
roaming revenues as well as the impacts associated with the expanding presence
of carriers and other retailers offering low-priced, unlimited prepaid service;
† Potential increases in prepaid customers, who generally generate lower
ARPU, as a percentage of U.S. Cellular's customer base in response to changes in
customer preferences and industry dynamics;
† A change in the nature and rate of growth in the wireless industry,
requiring U.S. Cellular to grow revenues primarily from selling additional
products and services to its existing customers, increasing the number of
multi-device users among its existing customers, increasing data products and
services and attracting wireless customers switching from other wireless
carriers rather than by adding customers that are new to wireless service;
† Continued growth in revenues and costs related to data products and
services and lower growth or declines in revenues from voice services;
† Rapid growth in the demand for new data devices and services which may
result in increased cost of equipment sold and other operating expenses and the
need for additional investment in network capacity;
† Costs of developing and enhancing office and customer support systems,
including costs and risks associated with the completion and potential benefits
of the multi-year initiatives described above;
† Continued enhancements to U.S. Cellular's wireless networks;
† Uncertainty related to various rulemaking proceedings underway at the
Federal Communications Commission ("FCC"), including uncertainty relating to the
impacts on universal service funding, intercarrier compensation and other
matters of the Connect America Fund & Intercarrier Compensation Reform Order and
Further Notice of Proposed Rulemaking issued by the FCC on October 27, 2011;
† The FCC's adoption of mandatory 4G roaming rules which will be of
assistance in the negotiation of data roaming agreements with other wireless
operators in the future; and
† Exclusive arrangements between manufacturers of wireless devices and other
carriers, or other economic or competitive factors, that restrict U.S.
Cellular's access to devices desired by customers.
See "Results of Operations-U.S. Cellular."
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2012 U.S. Cellular Estimates
U.S. Cellular's estimates of full-year 2012 results are shown below. Such
estimates represent U.S. Cellular's views as of the date of filing of TDS'
Quarterly Report on Form 10-Q ("Form 10-Q") for the quarterly period ended March
31, 2012. Such forward?looking statements should not be assumed to be current as
of any future date. U.S. Cellular undertakes no duty to update such information
whether as a result of new information, future events or otherwise. There can be
no assurance that final results will not differ materially from such estimated
results.
The following is unchanged from guidance as disclosed in TDS' Annual Report on
Form 10-K for the year ended December 31, 2011.
2012 Estimated Results (1)
Service revenues $4,050-$4,150 million
Operating income $200-$300 million
Depreciation, amortization and accretion expenses, and net
gain or loss on asset disposals and exchanges and impairment
of assets (2) Approx. $600 million
Adjusted OIBDA (2)(3) $800-$900 million
Capital expenditures Approx. $850 million
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(1) These estimates are based on U.S. Cellular's current plans, which include
a multi-year deployment of 4G LTE technology which commenced in 2011. New
developments or changing conditions (such as customer net growth, customer
demand for data services or possible acquisitions, dispositions or exchanges)
could affect U.S. Cellular's plans and, therefore, its 2012 estimated results.
(2) The 2012 Estimated Results do not include any estimate for unrecognized
net gains or losses related to disposals and exchanges of assets or losses on
impairments of assets (since such transactions and their effects are uncertain).
(3) Adjusted OIBDA is defined as operating income excluding the effects of
depreciation, amortization and accretion (OIBDA): the net gain or loss on asset
disposals and exchanges (if any); and the loss on impairment of assets (if any).
This measure also may be commonly referred to by management as operating cash
flow. This measure should not be confused with Cash flows from operating
activities, which is a component of the Consolidated Statement of Cash Flows.
Adjusted OIBDA excludes the net gain or loss on asset disposals and exchanges
(if any) and loss on impairment of assets (if any) in order to show operating
results on a more comparable basis from period to period. TDS does not intend
to imply that any of such amounts that are excluded are non-recurring,
infrequent or unusual and, accordingly, they may be incurred in the future. TDS
believes this measure provides useful information to investors regarding TDS'
financial condition and results of operations because it highlights certain key
cash and non-cash items and their impacts on cash flows from operating
activities.
U.S. Cellular management currently believes that the foregoing estimates
represent a reasonable view of what is achievable considering actions that U.S.
Cellular has taken and will be taking. However, the current general economic and
competitive conditions in the markets served by U.S. Cellular have created a
challenging environment that could continue to significantly impact actual
results. U.S. Cellular expects to continue its focus on customer satisfaction by
delivering a high quality network, attractively priced service plans, a broad
line of wireless devices and other products, and outstanding customer service in
its company-owned and agent retail stores and customer care centers. U.S.
Cellular believes that future growth in its revenues will result primarily from
selling additional products and services, including data products and services,
to its existing customers, increasing the number of multi-device users among its
existing customers, and attracting wireless users switching from other wireless
carriers, rather than by adding users that are new to wireless service. U.S.
Cellular is focusing on opportunities to increase revenues, pursuing cost
reduction initiatives in various areas and implementing a number of initiatives
to enable future growth. The initiatives are intended, among other things, to
allow U.S. Cellular to accelerate its introduction of new products and services,
better segment its customers for new services and retention, sell additional
services such as data, expand its distribution channels, enhance its Internet
sales and customer service capabilities, improve its prepaid products and
services and reduce operational expenses over the long term.
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TDS Telecom
TDS Telecom seeks to be the preferred telecommunications solutions provider in
its chosen markets serving both residential and commercial customers by
developing and delivering high-quality products that meet or exceed our
customers' needs and to outperform the competition by maintaining superior
customer service. TDS Telecom provides voice, high-speed data, and video
services to residential customers through value-added bundling of products. The
commercial focus is to provide advanced IP-based voice and data services to
small to medium sized businesses. In addition, TDS Telecom seeks to grow through
strategic acquisitions, as demonstrated by the three HMS companies that TDS
Telecom purchased in 2011 and 2010 which provide colocation, dedicated hosting,
hosted application management and cloud computing services. TDS Telecom's
strategy encompasses many components, including:
† Delivering superior customer service;
† Developing a product portfolio targeted to our chosen customers;
† Investing in networks and deploying advanced technologies;
† Advocating with respect to state and federal regulations for positions
that support its ability to provide advanced telecommunications services to its
customers; and
† Exploring transactions to acquire or divest properties that would result
in strengthening its operations.
TDS Telecom is faced with significant challenges, including growing competition
from wireless providers, wireline providers (other CLECs and cable providers)
and other HMS providers, changes in regulation, technologies such as Voice over
Internet Protocol ("VoIP") and uncertainty in the economy. These challenges
could have a material adverse effect on the financial condition, results of
operations and cash flows of TDS Telecom in the future.
† Operating revenues increased $5.2 million or 3% to $204.1 million in 2012.
The increase was primarily due to the acquisition of OneNeck IT Services
Corporation ("OneNeck"), an HMS company, partially offset by a decrease in
revenues due to the decline in ILEC and CLEC physical access lines and a decline
in revenue received from regulatory recovery mechanisms.
† Operating expenses increased $24.3 million or 15% to $191.0 million in
2012 primarily due to operating costs associated with the acquisition of OneNeck
coupled with the impacts of discrete expense reductions recorded in 2011
including insurance proceeds, the refund of certain prior year regulatory
contributions and the settlement of a legal dispute.
TDS anticipates that TDS Telecom's future results will be affected by the
following factors:
† Continued uncertainty related to current economic conditions and the
challenging business environment;
† Continued increases in competition from wireless and other wireline
providers, cable providers, and technologies such as VoIP and third-generation
("3G") and fourth-generation ("4G") mobile technology;
† Continued increases in consumer data usage and demand for high-speed data
services;
† Continued declines in physical access lines;
† Continued focus on customer retention programs, including discounting for
"triple-play" bundles including voice, DSL and Internet Protocol television
("IPTV");
† The effects of expansion of IPTV to additional markets in 2012;
† Continued growth in hosted and managed services;
† Continued focus on cost-reduction initiatives through product cost
improvement and process efficiencies;
† The Federal government's disbursement of Broadband Stimulus Funds to bring
broadband to rural customers;
† Uncertainty related to the National Broadband Plan and other rulemaking by
the FCC, including uncertainty related to future funding from the USF, broadband
requirements, intercarrier compensation and changes in access reform; and
† Potential acquisitions by TDS Telecom, including additional potential
acquisitions of HMS businesses.
See "Results of Operations-TDS Telecom."
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2012 TDS Telecom Estimates
TDS Telecom's estimates of full-year 2012 results are shown below. Such
estimates represent TDS Telecom's view as of the filing date of TDS' Form 10-Q
for the quarter ended March 31, 2012. Such forward-looking statements should not
be assumed to be current as of any future date. TDS undertakes no duty to update
such information whether as a result of new information, future events or
otherwise. There can be no assurance that final results will not differ
materially from these estimated results.
The following is unchanged from guidance as disclosed in TDS' Annual Report on
Form 10-K for the year ended December 31, 2011.
2012 Estimated Results (1)
TDS Telecom Operations:
Operating revenues $810-$840 million
Operating income $55-$85 million
Depreciation, amortization and accretion expenses, and net
gain or loss on asset disposals and exchanges and loss on
impairment of assets (2) Approx. $190 million
Adjusted OIBDA (3) $245-$275 million
Capital expenditures $150-$180 million
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(1) These estimates are based on TDS Telecom's current plans, which include a
multi-year deployment of IPTV that commenced in 2011. New developments or
changing conditions (such as costs to deploy, agreements for content or
franchises) could affect TDS Telecom's plans and therefore, its 2012 estimated
results.
(2) The 2012 Estimated Results do not include any estimate for unrecognized
net gains or losses related to disposals and exchanges of assets or losses on
impairments of assets (since such transactions and their effects are uncertain).
(3) Adjusted OIBDA is defined as operating income excluding the effects of:
depreciation, amortization and accretion (OIBDA); the net gain or loss on asset
disposals and exchanges (if any); and the loss on impairment of assets (if
any). This measure also may be commonly referred to by management as operating
cash flow. This measure should not be confused with Cash flows from operating
activities, which is a component of the Consolidated Statement of Cash Flows.
Adjusted OIBDA excludes the net gain or loss on asset disposals and exchanges
(if any) and loss on impairment of assets (if any) in order to show operating
results on a more comparable basis from period to period. TDS does not intend
to imply that any of such amounts that are excluded are non-recurring,
infrequent or unusual and, accordingly, they may be incurred in the future. TDS
believes this measure provides useful information to investors regarding TDS'
financial condition and results of operations because it highlights certain key
cash and non-cash items and their impacts on cash flows from operating
activities.
The foregoing estimates reflect the expectations of TDS Telecom's management
considering its strategic plans and the current general economic conditions. In
this challenging business environment, TDS Telecom will continue to focus on
revenue growth through new service offerings as well as expense reduction
through product cost improvement and process efficiencies. In order to achieve
these objectives the company has allocated capital expenditures for:
† Process and productivity initiatives;
† Increased network and product capabilities for broadband services;
† The expansion of terrestrial TV (IPTV) to additional markets;
† Success-based spending to sustain managedIP growth;
† Development of HMS products and services; and
† TDS Telecom will fund its share for projects approved under the Recovery
Act to increase broadband access in unserved areas. Under the Recovery Act, TDS
Telecom will receive $105.1 million in federal grants and will provide $30.9
million (a portion of which is included in 2012 estimated capital expenditures)
of its own funds to complete 44 projects. Under the terms of the grants, the
projects must be completed by June of 2015.
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Cash Flows and Investments
As of March 31, 2012, TDS and its subsidiaries had the following: Cash and cash
equivalents totaling $639.1 million; Short-term investments in the form of U.S.
treasury securities, corporate notes and certificates of deposit aggregating
$230.0 million; Long-term investments in the form of U.S. treasury securities
and corporate notes of $50.3 million; and borrowing capacity under their
revolving credit facilities of $699.6 million. Also, during the three months
ended March 31, 2012, TDS and its subsidiaries generated $282.2 million of Cash
flows from operating activities. Management believes that cash on hand, expected
future cash flows from operating activities and sources of external financing
provide substantial liquidity and financial flexibility and are sufficient to
permit TDS and its subsidiaries to finance their contractual obligations and
anticipated capital and operating expenditures for the foreseeable future.
See "Financial Resources" and "Liquidity and Capital Resources" below for
additional information related to cash flows, investments and revolving credit
agreements.
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