Executive Overview

Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications company that provides wireless, broadband, video, and voice services to approximately 6 million connections nationwide. TDS operates through its subsidiaries UScellular and TDS Telecom.

In the second quarter of 2024, TDS and UScellular modified their reporting structure due to the planned disposal of UScellular’s wireless operations. As a result, UScellular’s operations were disaggregated into two reportable segments - Wireless and Towers.

TDS Mission and Strategy

TDS’ mission is to provide outstanding communications services and meet the needs of its shareholders, associates, and communities. TDS seeks to grow its businesses, create opportunities for its associates, support its communities, and build long-term shareholder value.

TDS’ historical strategy has been to reinvest the majority of its operating capital to strengthen its competitive positions, while returning value to shareholders through regular dividend payments. In 2024, TDS reset its capital allocation approach, reducing dividends to free up capital for its fiber program and other purposes.

Key strategic efforts include:

• UScellular focusing on economical service plans, device protection, business/government solutions, and 5G network enhancements
• UScellular’s Towers segment growing third-party colocations
• TDS Telecom investing in fiber deployment, primarily in expansion markets

Announced Transactions and Strategic Alternatives Review

In August 2023, TDS and UScellular announced a process to explore strategic alternatives for UScellular. In May 2024, UScellular agreed to sell its wireless operations and spectrum assets to T-Mobile for $4.4 billion. UScellular also agreed to sell certain spectrum licenses to Verizon for $1 billion. These transactions are expected to close in mid-2025, subject to regulatory approvals.

The strategic alternatives review process is ongoing as UScellular seeks to monetize additional spectrum assets. TDS incurred $43 million in third-party expenses related to the announced transactions and strategic review in the first nine months of 2024.

Significant Financial Matter

TDS reported a net loss attributable to common shareholders of $86 million for the first nine months of 2024, which included a $136 million non-cash charge related to the impairment of certain UScellular wireless spectrum licenses.

Consolidated Financial Performance

TDS’ total operating revenues decreased 4% to $1.22 billion in Q3 2024 and 3% to $3.72 billion in the first nine months of 2024, primarily due to lower wireless revenues.

Operating expenses increased 6% to $1.30 billion in Q3 2024, driven by the wireless spectrum impairment charge, but were flat at $3.70 billion for the first nine months.

Adjusted EBITDA, a non-GAAP measure, increased 6% to $349 million in Q3 2024 and 12% to $1.07 billion in the first nine months, due to lower operating expenses.

Free cash flow, another non-GAAP metric, was $246 million in the first nine months of 2024, compared to a $12 million outflow in the prior-year period.

UScellular Operations

UScellular’s total operating revenues decreased 4% to $922 million in Q3 2024 and 4% to $2.80 billion in the first nine months, primarily due to lower retail service and equipment sales revenues.

Operating expenses increased 12% to $1.01 billion in Q3 2024, driven by the $136 million wireless spectrum impairment charge. Expenses were flat at $2.80 billion for the first nine months.

Adjusted EBITDA increased 1% to $269 million in Q3 2024 and 8% to $810 million in the first nine months, due to lower operating expenses.

UScellular’s postpaid churn rate improved to 1.25% in Q3 2024, compared to 1.30% in the prior-year quarter. Postpaid ARPU increased 2% to $52.04.

TDS Telecom Operations

TDS Telecom’s total operating revenues increased 2% to $263 million in Q3 2024 and 4% to $797 million in the first nine months, driven by growth in residential broadband revenues.

Operating expenses decreased 1% to $252 million in Q3 2024 and 1% to $741 million in the first nine months, due to lower cost of services and selling, general and administrative expenses.

Adjusted EBITDA increased 21% to $83 million in Q3 2024 and 30% to $269 million in the first nine months, reflecting the revenue growth and expense reductions.

TDS Telecom’s total service addresses grew 9% year-over-year to 1.8 million as of September 30, 2024, with 74% of the footprint capable of 1Gig+ broadband speeds.

Liquidity and Capital Resources

TDS believes its existing cash, available credit facilities, expected cash flows, and potential asset sales will provide sufficient liquidity to meet its operating needs and debt service requirements. However, TDS may require substantial additional funding for capital expenditures, new technologies, fiber deployments, and other purposes.

TDS had $474 million in available undrawn borrowing capacity under its revolving credit and term loan agreements as of September 30, 2024. UScellular had $748 million in available undrawn capacity under its receivables securitization agreement.

Capital expenditures totaled $663 million in the first nine months of 2024, down 27% from the prior-year period. UScellular’s capex is expected to be $550-$600 million for the full year 2024, focused on 5G network deployment and IT upgrades. TDS Telecom’s capex is expected to be $310-$340 million, primarily for fiber expansion and broadband growth.

Outlook and Risks

The announced transactions to sell UScellular’s wireless operations and spectrum assets present both opportunities and risks for TDS. While the transactions could provide liquidity, there is no guarantee they will be completed as planned or that UScellular will be able to monetize its remaining spectrum assets on favorable terms.

TDS faces operational risks including intense competition, its smaller scale relative to larger competitors, technology changes, and difficulties with third-party relationships. Financial risks include uncertainty around future cash flows, liquidity, and access to capital.

Regulatory risks include potential changes to universal service fund support and the ability to pass through various government surcharges and fees to customers. Legal and governance risks include litigation, intellectual property claims, and TDS’ control structure.

Overall, TDS is navigating a period of strategic transition as it seeks to optimize its portfolio and capital allocation, while managing operational, financial, and regulatory challenges in a highly competitive industry.