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ILEC 3Q11 Results Summary: Telephone & Data Systems

Despite Sub Losses U.S. Cellular Turns Down iPhone  

After a less than stellar 2010 for TDS Telecom (NYSE:TDS) during which operating income and cash flow fell and its top line dipped, the company has shown some resilience in the first nine months of the year, thanks in part to a string of acquisitions. 

In 2010 and during the first half of 2011, TDS sought out acquisitions that would expand its business-centric services. Most recently, it closed on its $95m purchase of OneNeck IT Services on July 1, 2011, which followed its acquisitions of data center operators VISI for $18m in March 2010, and TEAM Technologies for $47m in December 2010.

These acquisitions drove TDS Telecom’s growth in 3Q11, as its data revenue, which includes its take from data center and managed service operations, was up 48%, or $15.43m YoY. During the quarter TDS continued to deploy its hosting and managed service capabilities to new markets. Specifically, it expanded its managedIp branded product, a hosted IP-based communications solution, in Oklahoma and Kentucky. The service is delivered to businesses over a private, secure, and dedicated network “hosted” at a TDS data centers. 

On the wireless side, TDS Telecom’s majority owned U.S. Cellular (NYSE:USM) made news during the TDS conference call for something that it’s not doing. While the iPhone has sparked wireless growth at Verizon since its 1Q11 release, U.S. Cellular recently chose not to bring the iPhone into its smartphone stable. 

Mary N. Dillon, president and ceo of U.S. Cellular commented on this decision during TDS’ earnings call. “While we have the opportunity to add the iPhone to our device line-up, the terms were unacceptable from a risk and profitability standpoint and would have forced us to compromise on our commitment to offering and unparalleled customer experience.” Dillon later added that they “decided that it (iPhone) didn't make sense for our business economically, and so we're focused on really playing to our strength and feel that we're in a competitive position.”

While Dillon did not provide details on the costs associated with bringing the iPhone to U.S. Cellular, it surely would have been an expensive proposition. Sprint, after adding the iPhone to its roster last month, stated that it will take two years for the iPhone to pay off. U.S. Cellular has tried to distinguish itself from the big players like AT&T and Verizon with outstanding customer service, and Dillon’s comment suggest that the company felt paying for the iPhone would have forced it to sacrifice in that area. 

With or without the iPhone, U.S. Cellular needs to find a way to stabilize its subscriber losses. It lost 23k retail customers in the third quarter and its retail service revenues were relatively flat at $871m. On the upside, inbound roaming revenues increased $35m or 48% YoY to $108m.

Dillon remains upbeat that its roster of smartphones, sans iPhone, will generate more customers and higher ARPU. When asked to predict when net subscriber gains would be delivered, Dillon was not making any promises. “Well, I can't. I don't have a crystal ball. I mean we're focused on it. We believe it will happen over the next several quarters. Stay positive.”

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