On Dec 13, we retained our Neutral recommendation on
Telephone & Data Systems Inc.
). The company reported disappointing third quarter results, with
earnings and revenues missing the Zacks Consensus Estimate and
deteriorating year over year.
Within the wireless segment, higher churn in the post-paid
segment, increased equipment subsidies and investments in network
upgrade would continue to affect results. Further, access line
losses due to wireless substitution and other alternative
services remain detrimental to growth.
However, these headwinds can be largely mitigated by several
initiatives taken by the company like increasing handset
offerings and expansion of Long Term Evolution (LTE) technology
in the wireless business. Currently, the Zacks Consensus Estimate
for the company is pegged at a loss per share of 53 cents. The
company carries a Zacks Rank #3 (Hold).
Telephone and Data Systems continues to produce strong results
from bundled and unlimited service plans, smartphone upgrades,
expansion of the handset portfolio (including Android-powered
devices), and innovative programs like battery swap and overage
In addition, opportunities in hosted managed services, deeper
penetration of its commercial services like managed IP, and the
rollout of broadband in rural markets as part of the broadband
stimulus program will also fuel the company's growth. Moreover,
the company's Triple-Play offering that bundles voice, high-speed
data and video through its partner
Dish Network Corp.
) services are also gaining traction, helping it to compete with
cable TV operators.
On the wireless front, the company's subsidiary
United States Cellular Corporation
) is focusing on increasing revenues as well as pursuing and
implementing cost reduction initiatives in several areas to
enable future growth. The initiatives include introduction of a
new billing system, expansion of distribution channels as well as
improving cost and profitability by managing equipment subsidies
and data delivery cost.
Moreover, U.S. Cellular has instituted several marketing
initiatives like four new bundled services that offer unlimited
Internet and messaging plans with most popular features, at
Moreover, the company is gaining significantly from its "Hello
Better" campaign that focuses on customer services. The
introduction of a new billing system, expansion of distribution
channels, continuous rollout of 4G LTE, enhancement of LTE
handsets and closing of various spectrum transactions would also
accelerate the company's growth.
However, Telephone and Data Systems' wireless business faces
significant challenges from an intensely competitive environment,
which has been heightened by consolidation of the larger national
carriers. Further, the acquisition of relatively smaller carriers
like MetroPCS by
), mega merger of
) with Japanese telecom company SoftBank, and the pending
acquisition of Leap Wireless by
) can have a material impact on the business operations of
Telephone and Data Systems.
Further, the company continues to be susceptible to aggressive
pricing by larger rivals which have greater financial, technical,
marketing and distribution resources. A highly competitive market
has resulted in higher post-paid churn for the company.
Moreover, higher smartphone subsidies continue to affect its
margins. The expanded iPhone distribution and aggressive
promotion by competitors including, 4G LTE devices and services
are also expected to remain detrimental to the company's
subscriber accretion and retention.
Thus, we remain Neutral over the near-term prospects of
Telephone & Data Systems.
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