TDS Mission and Strategy

TDS’ mission is to provide outstanding communications services to its customers and meet the needs of its shareholders, its people, and its communities.  In pursuing this mission, TDS seeks to profitably grow its businesses, create opportunities for its associates and employees, and build value over the long-term for its shareholders.  Across all of its businesses, TDS is focused on providing exceptional customer experiences through best-in-class services and products and superior customer service.

TDS’ long-term strategy calls for the majority of its capital to be reinvested in its operating businesses to strengthen their competitive positions and financial performance, while also returning value to TDS shareholders through the payment of a regular quarterly cash dividend and share repurchases. 

In 2017, TDS is working to build shareholder value by continuing to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused services and products.  Strategic efforts include:

• U.S. Cellular continues to devote efforts to enhance its network capabilities.  During the second quarter of 2017, U.S. Cellular commercially deployed VoLTE technology for the first time in one key market and will continue to build out VoLTE services over the next few years.  The next commercial launch is expected to occur in several additional operating markets in early 2018.  VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services, and offers enhanced services such as high definition voice, video calling and simultaneous voice and data sessions.  In addition, the deployment of VoLTE technology expands U.S. Cellular’s ability to offer roaming services to other carriers. 
• U.S. Cellular continues to enhance its spectrum position and monetize non-strategic assets by participating in auctions and entering into agreements with third parties.  In April 2017, the FCC announced by way of public notice that U.S. Cellular was the winning bidder for 188 licenses for an aggregate purchase price of $329 million in the forward auction of 600 MHz spectrum licenses, referred to as Auction 1002.  U.S. Cellular made an upfront payment of $143 million to the FCC in June 2016 and paid the remaining balance of $186 million and was granted these licenses during the second quarter of 2017.  In addition, U.S. Cellular closed on certain license exchange agreements in the six months ended June 30, 2017, and received $15 million of cash and recognized gains of $19 million.  See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these transactions.
• U.S. Cellular is focused on expanding its solutions available to business and government customers, including a growing suite of connected machine-to-machine solutions and software applications across various categories.  U.S. Cellular will continue to enhance its advanced wireless services and connected solutions for consumer, business and government customers.

• TDS Telecom’s Wireline business continues to focus on driving growth in its IPTV, broadband, and managedIP services by leveraging its network investments in fiber and copper bonding.  With support from the FCC’s A-CAM program, Wireline will deploy higher speed broadband services to more rural areas over the next ten years.
• TDS Telecom’s Cable business has continued to make network capacity investments and offer more advanced services in its markets in line with its strategy to increase connections and grow broadband penetration.
• TDS Telecom’s HMS business is focused on growing recurring service revenues through increased sales of IT solutions including hosted and managed services, colocation services, and cloud computing services.

 

Terms Used by TDS

The following is a list of definitions of certain industry terms that are used throughout this document:

• 4G LTE – fourth generation Long-Term Evolution which is a wireless broadband technology.
• Account – represents an individual or business financially responsible for one or multiple associated connections. An account may include a variety of types of connections such as handsets and connected devices.
• Alternative Connect America Cost Model (A-CAM) – a USF support mechanism for rate-of-return carriers, which provides revenue support annually for ten years beginning in 2017.  This support comes with an obligation to build defined broadband speeds to a certain number of locations.
• Auctions 1000, 1001, and 1002 –  Auction 1000 is an FCC auction of 600 MHz spectrum licenses that started in 2016 and continued into 2017 involving: (1) a “reverse auction” in which broadcast television licensees submit bids to voluntarily relinquish spectrum usage rights in exchange for payments (referred to as Auction 1001); (2) a “repacking” of the broadcast television bands in order to free up certain broadcast spectrum for other uses; and (3) a “forward auction” of licenses for spectrum cleared through this process to be used for wireless communications (referred to as Auction 1002).
• Broadband Connections – refers to the number of Wireline customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies or the Cable billable number of lines into a building for high-speed data services.
• Churn Rate – represents the percentage of the connections that disconnect service each month.  These rates represent the average monthly churn rate for each respective period.
• EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document. 
• FCC – Federal Communications Commission.
• Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period.
• IPTV Connections – represents the number of Wireline customers provided video services using IP networking technology.
• Machine-to-Machine or M2M – technology that involves the transmission of data between networked devices, as well as the performance of actions by devices without human intervention.  U.S. Cellular sells and supports M2M solutions to customers, provides connectivity for M2M solutions via the U.S. Cellular network, and has agreements with device manufacturers and software developers which offer M2M solutions.
• ManagedIP Connections – refers to the number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.
• Net Additions – represents the total number of new connections added during the period, net of connections that were terminated during that period.
• OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document. 
• Postpaid Average Billings per Account (Postpaid ABPA) – non-GAAP metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid accounts and by the number of months in the period.
• Postpaid Average Billings per User (Postpaid ABPU) – non-GAAP metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid connections and by the number of months in the period.
• Postpaid Average Revenue per Account (Postpaid ARPA) – metric is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.
• Postpaid Average Revenue per User (Postpaid ARPU) – metric is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.
• Retail Connections – the sum of U.S. Cellular postpaid connections and U.S. Cellular prepaid connections.
• Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.
• U.S. Cellular Connections - individual lines of service associated with each device activated by a customer.  This includes smartphones, feature phones, tablets, modems, and machine-to-machine devices.
• Video Connections – generally, a home or business receiving video programming counts as one video connection.  In counting bulk residential or commercial connections, such as an apartment building or a hotel, connections are counted based on the number of units/rooms within the building receiving service.
• Voice Connections – refers to the individual circuits connecting a customer to Wireline’s central office facilities or the Cable billable number of lines into a building for voice services.
• VoLTE – Voice over Long-Term Evolution is a technology specification that defines the standards and procedures for delivering voice communications and related services over 4G LTE networks.
• Wireline Residential Revenue per Connection – is calculated by dividing total Wireline residential revenue by the average number of Wireline residential connections and by the number of months in the period.

 

Results of Operations — TDS Consolidated

					Three Months Ended								Six Months Ended
					June 30,								June 30,
					2017			2016			2017 vs. 2016		2017			2016			2017 vs. 2016
(Dollars in millions)
Operating revenues
	U.S. Cellular1				$	963		$	992		(3)%		$	1,899		$	1,962		(3)%
	TDS Telecom					281			300		(6)%			580			581		-
	All other2					3			3		-			6			7		(4)%
		Total operating revenues1				1,247			1,295		(4)%			2,485			2,550		(3)%
Operating expenses
	U.S. Cellular					958			962		(1)%			1,840			1,921		(4)%
	TDS Telecom					257			275		(7)%			527			540		(2)%
	All other2					4			5		19%			8			8		(3)%
		Total operating expenses				1,219			1,242		(2)%			2,375			2,469		(4)%
Operating income
	U.S. Cellular1					5			30		(82)%			59			41		45%
	TDS Telecom					25			24		1%			53			41		29%
	All other2					(2)			(1)		>(100)%			(2)			(1)		(1)%
		Total operating income1				28			53		(47)%			110			81		38%
Investment and other income (expense)
	Equity in earnings of unconsolidated entities					33			36		(9)%			65			72		(9)%
	Interest and dividend income1					4			3		15%			8			5		36%
	Interest expense					(43)			(43)		-			(85)			(85)		(1)%
	Other, net					–			1		>100%			1			–		>100%
		Total investment and other income (expense)1				(6)			(3)		(78)%			(11)			(8)		(53)%
Income before income taxes						22			50		(55)%			99			73		36%
	Income tax expense					10			18		(45)%			44			31		43%
Net income						12			32		(62)%			55			42		31%
	Less: Net income attributable to   noncontrolling interests, net of tax					2			4		(49)%			8			6		24%
Net income attributable to TDS shareholders					$	10		$	28		(63)%		$	47		$	36		32%
Adjusted OIBDA (Non-GAAP)1,3					$	243		$	260		(6)%		$	523		$	506		4%
Adjusted EBITDA (Non-GAAP)3					$	280		$	300		(6)%		$	597		$	583		3%
Capital expenditures					$	134		$	142		(5)%		$	230		$	267		(14)%
1	Equipment installment plan interest income is reflected as a component of Service revenues consistent with an accounting policy change effective January 1, 2017.  All prior period numbers have been recast to conform to this accounting change.  See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional details.
2	Consists of corporate and other operations and intercompany eliminations.
3	Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.

 

 

TDS’ 4% decrease in operating revenues for the three months ended June 30, 2017 was due primarily to decreases in retail service revenues at U.S. Cellular and equipment and product sales revenues at HMS.  TDS’ 3% decrease in operating revenues for the six months ended June 30, 2017, was due primarily to a decrease in retail service revenues at U.S. Cellular.  Retail service revenues continue to be impacted by industry-wide price competition.	TDS’ 2% and 4% decrease in operating expenses for the three and six months ended June 30, 2017, respectively, was due primarily to a decrease in Cost of equipment sold, advertising and commission expenses.

 

Refer to individual segment discussions in this MD&A for additional details on operating revenues and expenses at the segment level.

Equity in earnings of unconsolidated entities

Equity in earnings of unconsolidated entities represents TDS’ share of net income from entities in which it has a noncontrolling interest and that are accounted for by the equity method.  TDS’ investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed $17 million and $20 million in the three months ended June 30, 2017 and 2016, respectively, and $33 million and $40 million for the six months ended June 30, 2017 and 2016, respectively, to Equity in earnings of unconsolidated entities.  See Note 7 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

Income tax expense

TDS’ effective tax rate on Income before income taxes for the three and six months ended June 30, 2017, was 45.0% and 44.4%, respectively, and for the three and six months ended June 30, 2016, was 36.3% and 42.3%, respectively.  Due to difficulty in reliably projecting an annual tax rate, TDS calculated income taxes for the six months ended June 30, 2017, based on an estimated year-to-date tax rate. 

The lower effective tax rate for the three months and six months ended June 30, 2016, resulted from a decrease in unrecognized tax benefits due to the expiration of statutes of limitation in certain states in the prior year. 

 

Net income attributable to noncontrolling interests, net of tax

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
(Dollars in millions)
U.S. Cellular noncontrolling public shareholders’	$	2		$	5		$	6		$	6
Noncontrolling shareholders’ or partners’		–			(1)			2			–
Net income attributable to noncontrolling interests, net of tax	$	2		$	4		$	8		$	6

 

Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of U.S. Cellular’s net income and the noncontrolling shareholders’ or partners’ share of certain U.S. Cellular subsidiaries’ net income (loss). 

 

U.S. CELLULAR OPERATIONS

 

Business Overview

U.S. Cellular owns, operates, and invests in wireless markets throughout the United States.  U.S. Cellular is an 83%-owned subsidiary of TDS.  U.S. Cellular’s strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus. 

OPERATIONS

Serves customers with approximately 5.0 million connections including 4.5 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections Operates in 23 states Employs approximately 6,100 employees Headquartered in Chicago, Illinois 6,421 cell sites including 4,044 owned towers in service

 

 

 

Operational Overview

				YTD 2017	YTD 2016
	Postpaid Connections
		Gross Additions:		320,000	412,000
			Handsets	218,000	249,000
			Connected Devices	102,000	163,000
		Net Additions (Losses):		(4,000)	81,000
			Handsets	(9,000)	(17,000)
			Connected Devices	5,000	98,000
		Churn:		1.21%	1.24%
			Handsets	0.99%	1.14%
			Connected Devices	2.45%	1.92%
		Connections – end of period		4,478,000	4,490,000
	Prepaid connections – end of period			484,000	413,000
	Retail connections – end of period			4,962,000	4,903,000
The decrease in postpaid net additions for the six months ended June 30, 2017, when compared to the same period last year, was a result of lower handsets and tablet gross additions, partially offset by a decline in postpaid handsets churn due to improvements in both voluntary and involuntary churn.

 

 

 

Postpaid Revenue

		Three Months Ended							Six Months Ended
		June 30,							June 30,
		2017			2016			2017			2016
Average Revenue Per User (ARPU)		$	44.60		$	47.37		$	45.00		$	47.76
Average Billings Per User (ABPU)1		$	55.19		$	56.09		$	55.49		$	56.08
Average Revenue Per Account (ARPA)		$	119.73		$	124.91		$	120.46		$	125.13
Average Billings Per Account (ABPA)1		$	148.15		$	147.90		$	148.54		$	146.95
1	Postpaid ABPU and Postpaid ABPA are non-GAAP financial measures.  Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of these measures.

 

Postpaid ARPU and Postpaid ARPA decreased for the three and six months ended June 30, 2017, due primarily to industry-wide price competition resulting in overall price reductions on plan offerings.

Equipment installment plans increase equipment sales revenue as customers pay for their wireless devices in installments at a total device price that is generally higher than the device price offered to customers in conjunction with alternative plans that are subject to a service contract.  Equipment installment plans also have the impact of reducing service revenues as certain equipment installment plans provide for reduced monthly access charges.  In order to show the trends in total service and equipment revenues received, U.S. Cellular has presented Postpaid ABPU and Postpaid ABPA, which are calculated as Postpaid ARPU and Postpaid ARPA plus average monthly equipment installment plan billings per connection and account, respectively.

Equipment installment plan billings increased for the three and six months ended June 30, 2017, due to increased adoption of equipment installment plans by postpaid customers.  Postpaid ABPU decreased for the three and six months ended June 30, 2017, as the increase in equipment installment plan billings was more than offset by the decline in Postpaid ARPU discussed above.  Postpaid ABPA, however, increased slightly for the three months ended June 30, 2017, and to a greater extent for the six months ended June 30, 2017, as the increase in equipment installment plan billings more than offset the decline in Postpaid ARPA discussed above.  U.S. Cellular expects the penetration of equipment installment plans to continue to increase over time due to the fact that, effective in September 2016, all equipment sales to retail customers are made under installment plans. 

 

 

 

Financial Overview — U.S. Cellular

					Three Months Ended								Six Months Ended
					June 30,								June 30,
											2017 vs.							2017 vs.
					2017			2016			2016		2017			2016			2016
(Dollars in millions)
Retail service					$	647		$	680		(5)%		$	1,304		$	1,361		(4)%
Inbound roaming						31			38		(18)%			58			74		(22)%
Other1						62			56		9%			124			110		13%
	Service revenues1					740			774		(4)%			1,486			1,545		(4)%
Equipment sales						223			218		2%			413			417		(1)%
	Total operating revenues1					963			992		(3)%			1,899			1,962		(3)%
System operations (excluding Depreciation, amortization and accretion reported below)						189			193		(2)%			364			376		(3)%
Cost of equipment sold						260			262		(1)%			488			518		(6)%
Selling, general and administrative						351			357		(2)%			691			719		(4)%
Depreciation, amortization and accretion						155			154		-			307			307		-
(Gain) loss on asset disposals, net						5			5		6%			9			10		(12)%
(Gain) loss on license sales and exchanges, net						(2)			(9)		81%			(19)			(9)		>(100)%
	Total operating expenses					958			962		(1)%			1,840			1,921		(4)%
Operating income¹					$	5		$	30		(82)%		$	59		$	41		45%
Net income					$	12		$	27		(57)%		$	40		$	37		8%
Adjusted OIBDA (Non-GAAP)1,2					$	163		$	180		(9)%		$	356		$	349		2%
Adjusted EBITDA (Non-GAAP)2					$	198		$	218		(9)%		$	426		$	424		1%
Capital expenditures					$	84		$	93		(9)%		$	145		$	172		(16)%
1	Equipment installment plan interest income is reflected as a component of Service revenues consistent with an accounting policy change effective January 1, 2017.  All prior period numbers have been recast to conform to this accounting change.  See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional details.
2	Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.

 

 

 

 

Service revenues consist of: Retail Service - Charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data services and products Inbound Roaming - Charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming Other Service – Primarily amounts received from the Federal USF, imputed interest recognized on equipment installment plan contracts and tower rental revenues   Equipment revenues consist of: Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors

 

Key components of changes in the statement of operations line items were as follows:

Total operating revenues

On January 1, 2017, U.S. Cellular elected to change the classification of interest income on equipment installment plan contracts from Interest and dividend income to Service revenues in the Consolidated Statement of Operations.  All prior period numbers have been recast to conform to this accounting change.  See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional details. 

Service revenues decreased for the three and six months ended June 30, 2017, as a result of (i) a decrease in retail service revenues primarily driven by industry-wide price competition resulting in overall price reductions on plan offerings; and (ii) a decrease in inbound roaming revenues primarily driven by lower roaming rates.  Such reductions were partially offset by an increase in imputed interest income due to an increase in the total number of active equipment installment plans.

 

Federal USF revenue remained flat at $23 million and $46 million for the three and six months ended June 30, 2017, respectively, when compared to the same periods last year.  See the Regulatory Matters section in this MD&A for a description of the FCC’s Reform Order (Reform Order) and its expected impacts on U.S. Cellular’s current Federal USF support.

Equipment sales revenues increased for the three months ended June 30, 2017, when compared to the same period last year, due to a mix shift from connected devices to smartphones and an increase in the proportion of new device sales made under equipment installment plans versus subsidy plans.  These impacts were partially offset by a reduction in guarantee liability amortization for equipment installment contracts as a result of changes in plan offerings and a reduction in device activation fees.

 

Equipment sales revenues decreased for the six months ended June 30, 2017, when compared to the same period last year, as a result of an overall reduction in the number of devices sold, along with the related impact on accessories revenues, as well as reductions in device activation fees and guarantee liability amortization for equipment installment contracts as a result of changes in plan offerings.  These impacts were partially offset by an increase in the proportion of new device sales made under equipment installment plans and, to a lesser extent, a mix shift from connected devices to smartphones.

 

 

System operations expenses

System operations expenses decreased for the six months ended June 30, 2017, when compared to the same period last year, as a result of (i) a decrease in roaming expenses driven primarily by lower rates for both data and voice traffic, partially offset by increased data roaming usage; and (ii) a decrease in customer usage expenses primarily driven by decreased circuit costs.

Cost of equipment sold

The decrease in Cost of equipment sold for the six months ended June 30, 2017, when compared to the same period last year, was mainly due to a reduction in the number of devices sold, partially offset by a shift in sales from connected devices to higher cost smartphones.  Cost of equipment sold included $200 million and $174 million related to equipment installment plan sales for the three months ended June 30, 2017 and 2016, respectively, and $368 million and $334 million for the six months ended June 30, 2017 and 2016, respectively.  Loss on equipment, defined as Equipment sales revenues less Cost of equipment sold, was $37 million and $44 million for the three months ended June 30, 2017 and 2016, respectively, and $75 million and $101 million for the six months ended June 30, 2017 and 2016, respectively.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased for the six months ended June 30, 2017, due to lower advertising expenses, lower agent commission expenses driven by fewer activations and renewals, lower phone program expenses and the aggregate impact of modest reductions in numerous other general and administrative categories.

(Gain) loss on license sales and exchanges, net

Net gains in 2017 and 2016 were due to gains recognized on license exchange transactions with third parties.  See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.  

 

TDS TELECOM OPERATIONS

 

Business Overview

TDS Telecom operates in three reportable segments: Wireline, Cable and HMS. The overall strategy for the Wireline and Cable businesses is to provide the best broadband connection in the market in order to capitalize on data growth and customers’ need for higher speeds and leverage that growth by bundling services with video and voice.  In addition, through its HMS business, TDS Telecom provides a wide range of Information Technology (IT) services including colocation, cloud and hosting solutions, managed services, applications management, and sales of IT hardware and related maintenance and professional services.

OPERATIONS

TDS Telecom operates in 34 states, and through its Wireline and Cable operations provides broadband, video and voice services to approximately 1.2 million connections. Employs approximately 3,300 employees. Wireline operates incumbent local exchange carriers (ILEC) and competitive local exchange carriers (CLEC) in 27 states. Cable operates primarily in Oregon, Utah, Colorado, New Mexico and Texas. HMS operates a total of eight data centers.  It owns two data centers in Iowa, one each in Minnesota, Wisconsin, Colorado and Oregon and it leases two data centers in Arizona.

 

 

Financial Overview — TDS Telecom

					Three Months Ended								Six Months Ended
					June 30,								June 30,
											2017 vs.								2017 vs.
					2017			2016			2016		2017			2016			2016
(Dollars in millions)
Operating revenues
	Wireline				$	181		$	175		3%		$	360		$	348		3%
	Cable					51			45		12%			100			90		11%
	HMS					51			80		(37)%			122			144		(15)%
	Intra-company elimination					(1)			(1)		12%			(2)			(2)		5%
		TDS Telecom operating revenues				281			300		(6)%			580			581		-
Operating expenses
	Wireline					152			151		1%			302			304		-
	Cable					48			46		5%			95			90		6%
	HMS					58			80		(28)%			131			148		(12)%
	Intra-company elimination					(1)			(1)		12%			(2)			(2)		5%
		TDS Telecom operating expenses				257			275		(7)%			527			540		(2)%
TDS Telecom operating income					$	25		$	24		1%		$	53		$	41		29%
Net income					$	15		$	15		5%		$	33		$	25		32%
Adjusted OIBDA (Non-GAAP)1					$	80		$	79		2%		$	166		$	155		7%
Adjusted EBITDA (Non-GAAP)1					$	82		$	80		3%		$	168		$	156		8%
Capital expenditures					$	49		$	46		6%		$	81		$	88		(8)%
Numbers may not foot due to rounding.
1	Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.

 

 

Three and Six Months Ended Operating revenues decreased for the three and six months ended June 30, 2017, due to lower HMS equipment and product sales revenues offset by higher Wireline support revenue provided through the A-CAM program, IPTV and Cable broadband connection growth, and price increases for video and broadband services.

 

Total operating expenses

Operating expenses decreased for the three and six months ended June 30, 2017, due primarily to lower HMS equipment cost of goods sold offset by higher Wireline and Cable video programming costs.

Capital expenditures

Capital spending will increase throughout the year to support A-CAM build-outs and is expected to be approximately $225 million for 2017.