Telephone and Data Systems, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications company that operates in two main segments: UScellular, a mobile wireless provider, and TDS Telecom, which provides high-speed data and fiber services in small to mid-sized communities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

TDS operates through two main segments: UScellular and TDS Telecom. UScellular provides mobile wireless services, while TDS Telecom offers broadband and fiber services. Both businesses mainly serve small to mid-sized markets across the U.S.

UScellular

  • Provides postpaid and prepaid mobile services to retail and business customers, selling devices and accessories.
  • Its focus is on high-quality networks and customer service.
  • The strategy aims at maximizing long-term value by concentrating on rural and underserved areas.

TDS Telecom

  • Focuses on delivering high-speed internet, voice, and video services.
  • Serves residential and business customers, primarily in rural and smaller metropolitan markets.
  • Emphasis on fiber-optic upgrades.
  • The strategy emphasizes providing reliable, high-capacity networks.

Revenue Distribution

UScellular contributes to more than half of the revenue. As of September 2024, it contributed $714 million (69%) and TDS Telecom $322 million (31%) in combined revenues for three months ended Sep 30. Therefore, UScellular is a major revenue contributor. TDS relies on its wireless segment for a significant portion of its revenues, while the telecom operations segment is also important.

Industry Landscape and Competition

The telecommunications industry is intensely competitive, characterized by rapid technological changes and evolving customer preferences. In both mobile wireless and broadband services, TDS faces challenges from larger national players with superior financial resources and established operations. Key trends include the increasing demand for high-speed internet and mobile data, the proliferation of 5G and fiber technologies, and the growing trend of consolidation within the industry, meaning more competitors are competing for market share.

What Makes TDS Different

TDS differentiates itself through a commitment to serving smaller and often underserved communities, offering a high-quality network, and providing personalized customer service. The focus of both UScellular and TDS Telecom is that they are competing to establish their business model on providing high-quality service in geographies that most larger companies ignore. However, most of these areas are already served, or are being encroached upon, by other wireless/telecom operators so it remains an issue. Furthermore, TDS isn’t a cutting-edge technology innovator, and, they often play catch-up with new technologies which can present a significant business disadvantage.

Margin Analysis

Operating margins at UScellular have been relatively stable, with increases in subscriber revenues being offset by competition in the wireless markets, whereas, operating margins for TDS telecom have shown some increase due to higher-margin fiber expansion. In recent earnings calls management have stated that they plan to try and maintain high margins while lowering capital expenditures.

Financial Analysis The following is a summary of key financial aspects of TDS:

Income Statement Analysis

  • Operating Revenue: Revenue for the latest quarter ended September 30, 2024 was $1,036 million, which is an increase compared to the prior year. However, this isn’t the recent trend. Their 9 months numbers show 3.72 Billion for 2023 but only 3.12 for 2024, reflecting a decline.
  • Operating Expenses: Both segments faced increased operating expenses this year. System operating expenses increased in USCellular driven by labor and customer support expenses. TDS Telecom also had an increase, in part, due to increased broadband cost of service and personnel expenses.
  • Net Income: Reported net loss attributable to TDS common shareholders was $40 million in the past 9 months. In Q3 2024 their diluted loss was $0.29 compared to diluted gains of $0.11 in 2023, and, their 9 months numbers show a net loss of $40 million compared to a net gain of $60 million in 2023. These results reflect significant losses for the company and don’t instill optimism.
  • EBITDA: UScellular has shown decreasing EBIDTA. The operating cash flows have also fallen, primarily due to decreased revenues.

Balance Sheet Analysis

  • Assets: The balance sheet showed property and equipment (PP&E) of $10.02 billion. Cash and cash equivalents at $258 million (as of September 2024) down from $362 million at year-end 2022, and the change in total assets from $13.02 billion to $12.24 billion reflects a shrinking total assets figure and may signal problems with liquidity.
  • Liabilities: Total long-term debt is around $4 billion, and although this is quite high, it hasn’t changed much over the last few years, indicating stability.
  • Equity: Total shareholder equity at $6.81 billion. It’s important to monitor these balances and the change in liabilities and equity going forward.

Cash Flow Analysis

  • Operating activities: Net cash provided by operating activities was $933 million in the most recent 9 months. However, given the large negative net losses mentioned above, it remains important for the company to maintain consistent positive cash generation in the long run.
  • Investing Activities: Cash outflow of $465 million mainly due to capital expenditures.
  • Financing Activities: Positive cash inflow of $171 due to an increase in long term borrowing. In the long term these borrowing rates can be an issue given the rising rates environment.
  • Free cash flow: Free cash flow is negative in the most recent 9 months.

Recent Concerns / Controversies

  • Declining Subscribers: UScellular has been consistently losing subscribers over the last few quarters, leading to a contraction in revenue.
  • Competitive Pressure: Both segments are facing higher competitive pressure from other market players.
  • Rising costs: Operating costs have been increasing on multiple fronts with little or slow improvements on the revenues side.
  • Debt burden: Although stable, the overall long term debt and debt to equity is high given current cashflows and lack of profitability.

Moat Rating

2/5

  • Intangible Assets- TDS has a recognizable brand presence in the markets it operates in but lacks unique and proprietary technologies.
  • Switching Costs: The switching costs for customers are moderate. While there is some friction in switching plans, contracts, and devices, there are no large switching costs to prevent churn to other players.
  • Network Effect: While the network effects do exist in the cell phone business, it’s limited since they are not a large and unique provider, also, a competitor can also come in and build its own infrastructure to compete.
  • Cost Advantages: A degree of scale and a strong commitment to offering services in the areas where they are but there aren’t unique or proprietary resources that allow for considerable cost advantages.
  • Size Advantage- TDS is not the largest player in the market and lacks an absolute size advantage over the competition.
  • Overall: Given the above weaknesses in each of the categories, I give it a moat rating of 2/5. They have a moat but it is very easily eroded, especially given current business realities.

Business Resilience

TDS faces both financial and competitive issues that affect its resilience:

  • High reliance on its wireless segment is risky given the current market trends and the competition that they are facing.
  • Their financials show very limited ability to handle downturns given their lack of profits and overall negative cashflow.
  • Competitor growth in its focus area of small to mid-sized markets is putting pressure on their business.
  • They need to make significant improvements on the profitability front, which has so far proved difficult, to be able to better navigate market headwinds.

Understandability Rating

3/5 The business model is relatively straightforward - providing telecom services. However, the analysis of industry dynamics and financial analysis can be complex, making the understandability score a 3. Their latest 10-Q and investor call had too many complex metrics and business dynamics to give the rating a lower rating.

Balance Sheet Health Rating

3/5 TDS has a moderate level of debt and a decent level of assets, but the current performance and the contraction in cash shows it to be a concern and puts pressure on the balance sheet. However, there are no major near term maturities and the current debt is still manageable. Thus, the balance sheet health gets a 3.

These documents along with the information in the other financial reports, and earnings call, form the basis for this report. The conclusion is the company is facing considerable business difficulties with its financial health remaining vulnerable. It needs to turn this around to be a compelling long term investment.