EX-13 3 TDS10kExhibit13.htm EX-13

 

 


Exhibit 13

 

Telephone and Data Systems, Inc.

 

 

 

Financial Reports Contents

Page No.

 

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1

Executive Overview

1

Terms used by TDS

3

Results of Operations – TDS Consolidated

4

U.S. Cellular Operations

7

TDS Telecom Operations

17

Wireline Operations

21

Cable Operations

25

HMS Operations

28

Liquidity and Capital Resources

30

Contractual and Other Obligations

36

Consolidated Cash Flow Analysis

37

Consolidated Balance Sheet Analysis

39

Application of Critical Accounting Policies and Estimates

40

Other Items

43

Regulatory Matters

44

Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement

46

Market Risk

49

Supplemental Information Relating to Non-GAAP Financial Measures

51

Financial Statements

56

Consolidated Statement of Operations

56

Consolidated Statement of Comprehensive Income (Loss)

57

Consolidated Statement of Cash Flows

58

Consolidated Balance Sheet – Assets

59

Consolidated Balance Sheet – Liabilities and Equity

60

Consolidated Statement of Changes in Equity

61

Notes to Consolidated Financial Statements

64

Reports of Management

105

Report of Independent Registered Public Accounting Firm

107

Selected Consolidated Financial Data

108

Consolidated Quarterly Information (Unaudited)

109

Shareholder Information

110

 

 


Telephone and Data Systems, Inc.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

 

Executive Overview

The following Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with Telephone and Data Systems, Inc.’s (“TDS”) audited consolidated financial statements and notes for the year ended December 31, 2016 and with the description of TDS’ business included herein.  Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented.

This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “intends,” “expects” and similar words.  These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995.  Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements.  See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.

TDS uses certain “non-GAAP financial measures,” and each such measure is identified in the MD&A.  A discussion of the reason TDS determines these metrics to be useful and a reconciliation of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-K Report.

General

TDS is a diversified telecommunications company that provides high-quality communications services to approximately 6 million customers nationwide.  TDS provides wireless services through its 83%-owned subsidiary, United States Cellular Corporation (“U.S. Cellular”).  TDS also provides wireline services, cable services and hosted and managed services (“HMS”), through its wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).  TDS’ segments operate almost entirely in the United States. 

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. 

Throughout 2016, as discussed below, TDS primarily focused on investing in the networks that are the backbone of its commitment to provide outstanding communications services to its customers.  TDS believes these investments will strengthen its competitive position and improve operating performance.  Looking ahead to 2017, TDS will work to build shareholder value by continuing to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused products and services. 


Invest in the business to improve returns and pursue initiatives that align with long-term strategies

Consistent with its strategy, TDS made significant investments in 2016 to improve the performance of its networks.  U.S. Cellular added capacity to its 4G LTE network responding to customers growing use of data and prepared for the commercial launch of Voice over LTE (“VoLTE”) which will begin in 2017.  VoLTE, when deployed commercially, will enable customers to utilize the LTE network for both voice and data services and will enable enhanced services such as high definition voice, video calling and simultaneous voice and data sessions.  The deployment of VoLTE will also expand U.S. Cellular’s ability to offer roaming services to additional carriers.  U.S. Cellular continued to enhance its spectrum position and monetize non-strategic assets by entering into multiple spectrum exchange and purchase agreements with third parties and participating in Auction 1002.

In 2016, TDS Telecom’s Wireline segment completed its planned fiber deployments and now offers IPTV service in 28 markets.  TDS Telecom also worked to enhance network capacity in its Cable segment and completed an analog reclamation project to replace analog video distribution with digital video distribution in order to redeploy available spectrum

Return value to shareholders

Since August of 2013, TDS has invested $581 million, primarily through acquisition of cable companies and returned $263 million to shareholders through payment of $212 million in regular quarterly cash dividends and $51 million of stock repurchases.  During 2016, TDS paid $65 million in regular quarterly cash dividends.  TDS increased the dividend per share paid to its investors by 5% in 2016 which marks the 42nd consecutive year of dividend increases and in February 2017, TDS increased its dividend per share from $0.148 to $0.155There were limited TDS and U.S. Cellular share repurchases in 2016.  There is no assurance that TDS will continue to increase the dividend rate or pay dividends and no assurance that TDS or U.S. Cellular will make any significant amount of share repurchases in the future.

 

Support growth initiatives through sound and disciplined financing strategies.

During 2016, TDS replaced its prior $400 million credit facility that was due to expire in 2017 with a new $400 million credit facility that expires in 2021, and U.S. Cellular replaced its prior $300 million credit facility that was due to expire in 2017 with a new $300 million credit facility that expires in 2021. Borrowings under such facilities may be used by TDS and for U.S. Cellular to fund their operations, acquisitions, current and future spectrum purchases, growth in equipment installment plan receivables and capital expenditures.

Significant Financial and Operating Matters

The following is a summary of certain selected information contained in the comprehensive MD&A that follows.  The overview does not contain all of the information that may be important.  You should carefully read the entire MD&A and not rely solely on the highlights.

  • Net income attributable to TDS shareholders was $43 million in 2016, compared to $219 million in 2015.  The year-over-year decrease was due primarily to a lesser amount of gains from sales and exchanges of businesses and licenses and the impact of revenue recognized from expired rewards points at U.S. Cellular in the third quarter of 2015.  Diluted earnings per share was $0.39 in 2016 compared to $1.98 in 2015.
  • Total additions to Property, plant and equipment were $636 million, including expenditures to deploy VoLTE technology, construct cell sites, increase capacity in existing cell sites and switches, outfit new and remodel existing retail stores, enhance billing and other customer management related systems and platforms, and perform network upgrades and fiber expansion.

Terms Used by TDS

All defined terms in this MD&A are used as defined in the Notes to Consolidated Financial Statements, and additional terms are defined below:

  • 4G LTE – fourth generation Long-Term Evolution which is a wireless broadband technology.
  • 5G – fifth generation 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 federal universal service support mechanism for rate-of-return carriers.
  • Auction 97 – an FCC auction of AWS-3 spectrum licenses that ended in January 2015.
  • 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.
  • DOCSIS Data Over Cable Service Interface Specification is an international telecommunications standard that permits the addition of high-bandwidth data transfer to an existing cable TV (CATV) system.  DOCSIS 3.1 is a system specification that increases data transmission rates.
  • Eligible Telecommunications Carrier (“ETC”) – designation by states for providing specified services in “high cost” areas which enables participation in universal service support mechanisms.
  • 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.
  • 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 postpaid connections and prepaid connections.
  • Smartphone Penetration – is calculated by dividing postpaid smartphone connections by postpaid handset 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 total Wireline residential connections and by the number of months in the period.

Results of Operations — TDS Consolidated

Year Ended December 31,

2016

 

2015

 

2014

2016 vs. 2015

 

2015 vs. 2014

(Dollars in millions)

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

$

3,939 

 

$

3,997 

 

$

3,893 

 

(1)%

 

3%

 

TDS Telecom

 

1,151 

 

 

1,158 

 

 

1,088 

 

(1)%

 

6%

 

All other1

 

14 

 

 

21 

 

 

28 

 

(35)%

 

(25)%

 

 

Total operating revenues

 

5,104 

 

 

5,176 

 

 

5,009 

 

(1)%

 

3%

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

3,942 

 

 

3,684 

 

 

4,036 

 

7%

 

(9)%

 

TDS Telecom

 

1,084 

 

 

1,079 

 

 

1,099 

 

1%

 

(2)%

 

All other1 2

 

18 

 

 

16 

 

 

64 

 

9%

 

(74)%

 

 

Total operating expenses

 

5,044 

 

 

4,779 

 

 

5,199 

 

6%

 

(8)%

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

(3)

 

 

313 

 

 

(143)

 

>(100)%

 

>100%

 

TDS Telecom

 

67 

 

 

79 

 

 

(10)

 

(15)%

 

>100%

 

All other1 2

 

(4)

 

 

5 

 

 

(37)

 

>(100)%

 

>100%

 

 

Total operating income (loss)

 

60 

 

 

397 

 

 

(190)

 

(85)%

 

>100%

Investment and other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

140 

 

 

140 

 

 

132 

 

-

 

6%

 

Interest and dividend income

 

62 

 

 

39 

 

 

17 

 

60%

 

>100%

 

Interest expense

 

(170)

 

 

(142)

 

 

(111)

 

(20)%

 

(27)%

 

Other, net

 

 

 

 

1 

 

 

 

 

(98)%

 

>100%

 

 

Total investment and other income

 

32 

 

 

38 

 

 

38 

 

(16)%

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

92 

 

 

435 

 

 

(152)

 

(79)%

 

>100%

 

Income tax expense (benefit)

 

40 

 

 

172 

 

 

(5)

 

(77)%

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

52 

 

 

263 

 

 

(147)

 

(80)%

 

>100%

 

Less: Net income (loss) attributable to noncontrolling interests, net of tax

 

9 

 

 

44 

 

 

(11)

 

(79)%

 

>100%

Net income (loss) attributable to TDS shareholders

$

43 

 

$

219 

 

$

(136)

 

(80)%

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

$

1,118 

 

$

1,160 

 

$

782 

 

(4)%

 

49%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

$

630 

 

$

759 

 

$

771 

 

(17)%

 

(1)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Represents a non-GAAP financial measure.  Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Consists of corporate and other operations and intercompany eliminations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

In 2015, TDS recognized an incremental gain compared to U.S. Cellular of $12 million on the Tower Sale as a result of lower asset basis in the assets disposed.  In 2014, TDS recognized expenses of $20 million related to exit and disposal activities due to a License Purchase and Customer Recommendation Agreement between U.S. Cellular and Airadigm.  See Note 6 — Acquisitions, Divestitures and Exchanges for additional information related to these transactions.

 

 

2016-2015 Commentary

TDS’ 1% decrease in operating revenues is due primarily to decreased Postpaid ARPU, the impact of $58 million in revenue recognized by U.S. Cellular from expired rewards points in 2015 and a decrease in inbound roaming revenue driven by lower roaming rates.  This was partially offset by increased Equipment sales revenues at U.S. Cellular due primarily to an increasing number of customers choosing equipment installment plans.

2015-2014 Commentary

TDS’ 3% increase in operating revenues was driven by Equipment sales revenues at U.S. Cellular due primarily to an increasing number of customers choosing equipment installment plans.  Cable acquisitions completed in 2014 also contributed to the improvement.

 

2016-2015 Commentary

TDS’ 6% increase in operating expenses was driven by decreased gains on divestiture and exchange transactions.  Such gains were $21 million in 2016 compared to $283 million in 2015.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these gains.

2015-2014 Commentary

TDS’ operating expenses decreased by 8% from 2014 to 2015.  Expenses associated with ongoing operations of TDS, specifically Cost of equipment and products, decreased due primarily to an overall lower average price per unit on a fewer number of devices sold in the wireless operations.  Additionally, effective cost management of Selling, general and administrative expenses contributed to the decline in operating expenses.  In 2014, operating cost improvements were partially offset by additional expenses added to support the newly acquired cable operations.  Further contributing to the improvement was increased gains on divestiture and exchange transactions recognized in 2015.  Such gains were $283 million in 2015 and $129 million in 2014. 

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 $71 million, $74 million and $72 million to Equity in earnings of unconsolidated entities in 2016, 2015 and 2014, respectively.

Interest and dividend income

Interest and dividend income increased due to imputed interest income recognized on equipment installment plans of $51 million, $34 million and $9 million in 2016, 2015 and 2014, respectively.  See Note 3 Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional information.

Interest expense

Interest expense increased over the three year period from 2014 to 2016 due primarily to an increasing level of debt outstanding in each of the respective years.  See Note 11 Debt in the Notes to Consolidated Financial Statements for further information on TDS’ long-term debt.

Income tax expense

The effective tax rates on Income before income taxes and extraordinary items (“pre-tax income”) for 2016, 2015 and 2014 were 43.2%, 39.6% and 3.2%, respectively.  The effective tax rates for 2016 and 2015 are consistent with a normalized tax rate inclusive of federal and state tax.  Discrete items in these years did not have a significant impact on the effective tax rate.  The effective tax rate for 2014 includes tax expense of $38 million related to valuation allowances recorded against certain state deferred tax assets, higher tax expense of $18 million due to the tax effects of a nondeductible impairment of Goodwill, and a tax benefit of $11 million related to a release of valuation allowance on federal net operating losses previously limited under loss utilization rules.  The overall effective tax rate is lower due to the effect of these items combined with the loss in 2014 in Income (loss) before income taxes.  See Note 4Income Taxes in the Notes to Consolidated Financial Statements for further information on the effective tax rate.

Net income (loss) attributable to noncontrolling interests, net of tax

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

Year Ended December 31,

2016

 

2015

 

2014

(Dollars in millions)

 

 

 

 

 

 

 

 

Net income (loss) attributable to noncontrolling interests, net of tax

 

 

 

 

 

 

 

 

 

U.S. Cellular noncontrolling public shareholders’

$

8 

 

$

38 

 

$

(7)

 

Noncontrolling shareholders’ or partners’

 

1 

 

 

6 

 

 

(4)

 

 

$

9 

 

$

44 

 

$

(11)

 

 

 

2016-2015 Commentary

Net income (loss) and Adjusted EBITDA decreased due to lower revenues, partially offset by increased Interest and dividend income related to imputed interest income recognized on equipment installment plans.  Net income (loss) also decreased due to lower gains from sales and exchanges of businesses and licenses and increased Interest expense in 2016.  Such gains and Interest expense are not included as a component of Adjusted EBITDA and, as a result, Adjusted EBITDA did not decrease as much as Net income (loss).

2015-2014 Commentary

Net income (loss) and Adjusted EBITDA increased due to higher revenues and decreased cash expenses in U.S. Cellular’s operations.  U.S. Cellular’s Loss on equipment (Equipment sales less Cost of equipment sold) decreased $292 million from 2014 to 2015 as a result of the continued adoption of equipment installment plans, fewer devices sold, and a lower average cost per device sold.  Net income (loss) also increased from 2014 to 2015 due to an increase in Gain on sale of business and other exit costs at U.S. Cellular, and a Loss on impairment of Goodwill recognized in the HMS segment in 2014.

*Represents a non-GAAP financial measure.  Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.


 

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 Telephone and Data Systems, Inc. (“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 6,300 employees
  • Headquartered in Chicago, Illinois
  • 6,415 cell sites including 4,040 owned towers in service

 


Significant Trends and Developments

U.S. Cellular’s mission is to provide exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the mid-sized and rural markets served.

Network and Technology:

  • U.S. Cellular deployed 4G LTE as a result of its strategic initiative to enhance its network.  4G LTE reaches 99% of postpaid connections and 98% of cell sites.  The adoption of data-centric smartphones and connected devices is driving significant growth in data traffic.  At the end of the fourth quarter of 2016, 79% of postpaid connections had 4G capable devices, with the LTE network handling 91% of data traffic. 

 

  • U.S. Cellular continues to devote efforts to enhance its network capabilities with the deployment of VoLTE technology and plans a multi-year roll out beginning with one market in early 2017.  VoLTE, when deployed commercially, will enable customers to utilize the LTE network for both voice and data services, and will enable enhanced services such as high definition voice, video calling and simultaneous voice and data sessions.  The deployment of VoLTE also will expand U.S. Cellular’s ability to offer roaming services to additional carriers.

 

  • U.S. Cellular is committed to continuous innovation to provide customers in the markets it serves with the latest technology that can enhance their lives and businesses.  During the third quarter of 2016, U.S. Cellular successfully tested 5G technology in both indoor and outdoor environments for the first time.  The company plans additional tests geared towards understanding the propagation characteristics of the new technology and contributing to the development of 5G standards.  When deployed commercially, 5G technology is expected to help address customers’ growing demand for data services as well as create opportunities for new services requiring high speed and low latency.

 


Asset Management:

  • U.S. Cellular continued to enhance its spectrum position and monetize non-strategic assets by entering into multiple agreements with third parties.  Certain of these agreements involve the purchase of licenses for cash, while others involve the exchange of licenses in non-operating markets for other licenses in operating markets and cash.  As a result of the closing of multiple exchange agreements in 2016, U.S. Cellular received $14 million of cash and recognized gains of $19 million. 

 

  • U.S. Cellular participated in FCC Auction 97 indirectly through its limited partnership interest in Advantage Spectrum.  Advantage Spectrum was the provisional winning bidder for 124 licenses for an aggregate winning bid of $338 million, after its designated entity discount of 25%.  Advantage Spectrum’s bid amount, less the upfront payment of $60 million paid in 2014, was paid to the FCC in March 2015.  These licenses were granted by the FCC in July 2016. 

 

  • In July 2016, the FCC announced U.S. Cellular as a qualified bidder in the FCC’s forward auction of 600 MHz spectrum licenses, referred to as Auction 1002, which commenced in August 2016.  The Clock Phase of the auction was completed in February 2017.  See “Regulatory Matters – FCC Auction 1002” for a summary of U.S. Cellular’s participation in Auction 1002.

 

See Note 6Acquisitions, Divestitures and Exchanges for additional information related to these transactions.

 

Products and Services:

  • 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.

 

  • U.S. Cellular continued to leverage competitive value-based pricing for its plans and services, including equipment installment plan offerings.  Effective in September 2016, new postpaid handset sales to retail consumers are made under equipment installment plans only; business and government customers can still purchase equipment under either installment plans or alternative plans that are subject to a service contract.

 

  • U.S. Cellular offers a wide range of accessories, including wireless basics such as cases, screen protectors, chargers, and memory cards as well as an ever growing assortment of consumer electronics such as headphones, speakers, and hands-free devices.  In addition, the company recently introduced an assortment of home automation products (e.g., cameras, sensors, thermostats).

 

  • U.S. Cellular continues to offer device service programs that provide customers a simple process to replace a damaged or defective device through a retail store or via direct mail.  U.S. Cellular also offers its Device Protection+ program which includes overnight delivery of a replacement device for lost and stolen devices.  In 2016, U.S. Cellular launched Device Protection+ Advanced, which includes 100GB of data backup, TechSupport+, and AppleCare services for Apple iOS customers


Operational Overview

 

 

 

 

 

 

 

 

YTD 2016

YTD 2015

YTD 2014

 

 

Postpaid Connections

 

 

 

 

 

Gross Additions

773,000

831,000

940,000

 

 

Net Additions

73,000

111,000

31,000

 

 

Churn

1.31%

1.39%

1.80%

 

 

Handsets

1.18%

1.30%

1.73%

 

 

Connected Devices

2.11%

2.20%

3.01%

 

 

Connections – end of period

4,482,000

4,409,000

4,298,000

 

 

Prepaid Connections

484,000

387,000

348,000

 

 

Retail Connections – end of period

4,966,000

4,796,000

4,646,000

 

 

 

 

 

 

 

2016-2015 Commentary

Postpaid customers comprised approximately 90% of U.S. Cellular’s retail customers at December 31, 2016.  U.S. Cellular believes the decrease in postpaid net additions in 2016 is a result of competitive pressures and aggressive promotional activity in the marketplace.  Postpaid churn declined year over year due to enhancements in the customer experience and improvement in the overall credit mix of gross additions.

2015-2014 Commentary

Postpaid customers comprised approximately 92% of U.S. Cellular’s retail customers at December 31, 2015.  U.S. Cellular believes the increase in postpaid net additions in 2015 is a result of competitive products and services priced to offer the best value to customers, improved speed to market for product offerings, and expanded equipment installment plan offerings.  U.S. Cellular also believes postpaid churn declined from 2014 levels due to an improved customer experience and strong retention programs.

 

 

 

 

2016-2015 Commentary

Smartphones represented 92% of total postpaid handset sales in 2016.  As a result, smartphone penetration increased to 79% of the postpaid handset base as of December 31, 2016 versus 74% as of December 31, 2015.  Smartphone customers generally use more data than feature phone customers, thereby driving growth in service revenues. 

Continued growth in customer usage related to data services and products may result in increased operating expenses and the need for additional investment in spectrum, network capacity and network enhancements.

2015-2014 Commentary

Smartphones represented 88% of total postpaid handset sales in 2015.  As a result, smartphone penetration increased to 74% of the postpaid handset base as of December 31, 2015, up from 65% as of December 31, 2014. 

 

Postpaid Revenue

Year Ended December 31,

2016

 

2015

 

2014

Average Revenue Per User (ARPU) 1

$

46.96 

 

$

54.50 

 

$

56.75 

Average Billings Per User (ABPU) 1,2

$

56.12 

 

$

59.74 

 

$

57.78 

 

 

 

 

 

 

 

 

 

 

Average Revenue Per Account (ARPA) 1

$

124.09 

 

$

136.90 

 

$

133.19 

Average Billings Per Account (ABPA) 1,2

$

148.29 

 

$

150.07 

 

$

135.61 

 

 

 

 

 

 

 

 

 

 

1

The discontinuation of the loyalty rewards points program had the effect of increasing Postpaid ARPU/ABPU and Postpaid ARPA/ABPA by $1.12 and $2.82, respectively, in 2015.

 

 

 

 

 

 

 

 

 

 

2

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.

 

 

 

 

 

 

 

 

 

 

 

2016-2015 Commentary

Postpaid ARPU and Postpaid ARPA decreased in 2016 due primarily to industry-wide price competition, discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal, and the $58 million impact of the discontinuation of the loyalty rewards points program in 2015.  These factors were partially offset by the impact of continued adoption of smartphones and the related increase in service revenues from data usage.

 

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 many 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 in 2016 when compared to 2015 due to increased adoption of equipment installment plans by postpaid customers. Postpaid ABPU and ABPA decreased in 2016 as the increase in equipment installment plan billings was more than offset by the decline in Postpaid ARPU and ARPA discussed above. U.S. Cellular expects the adoption and penetration of equipment installment plans to continue to increase as plan offerings shifted more toward equipment installment plans in the third quarter of 2016 as discussed in the Significant Trends and Developments section within this MD&A.

 

2015-2014 Commentary

Postpaid ARPU decreased in 2015 due to industry-wide price competition and discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal, partially offset by the continued adoption of smartphones and shared data plans.  The increase in postpaid ARPA is the result of increased postpaid connections per account driven by increased connected device penetration. 

U.S. Cellular implemented equipment installment plans on a broad basis in 2014. 


Financial Overview U.S. Cellular

Components of Operating Income (Loss)

Year Ended December 31,

2016

 

2015

 

2014

 

2016 vs. 2015

 

2015 vs. 2014

(Dollars in millions)

  

  

  

  

  

  

  

  

  

  

  

  

Retail service

$

2,700 

  

$

2,994 

  

$

3,013 

  

(10)%

  

(1)%

Inbound roaming

  

152 

  

  

192 

  

  

224 

  

(21)%

  

(14)%

Other

  

178 

  

  

164 

  

  

161 

  

8%

  

2%

Service revenues

  

3,030 

  

  

3,350 

  

  

3,398 

  

(10)%

  

(1)%

Equipment sales

  

909 

  

  

647 

  

  

495 

  

41%

  

31%

Total operating revenues

  

3,939 

  

  

3,997 

  

  

3,893 

  

(1)%

  

3%

  

  

   

  

  

   

  

  

   

  

 

  

 

System operations (excluding Depreciation,

 

 

 

 

 

 

 

 

 

 

 

 

  amortization and accretion reported below)

 

760 

 

 

775 

 

 

770 

 

(2)%

 

1%

Cost of equipment sold

  

1,081 

  

  

1,053 

  

  

1,193 

  

3%

  

(12)%

Selling, general and administrative

 

1,480 

 

 

1,494 

 

 

1,592 

 

(1)%

 

(6)%

 

 

3,321 

 

 

3,322 

 

 

3,555 

 

-

 

(7)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow*

 

618 

 

 

675 

 

 

338 

 

(8)%

 

100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

  

618 

  

  

607 

  

  

606 

  

2%

  

-

(Gain) loss on asset disposals, net

 

22 

 

  

16 

  

  

21 

  

36%

  

(24)%

(Gain) loss on sale of business and other exit

  costs, net

 

 

 

 

(114)

 

 

(33)

 

100%

 

>(100)%

(Gain) loss on license sales and exchanges, net

 

(19)

 

  

(147)

  

  

(113)

  

87%

  

(30)%

Total operating expenses

  

3,942 

  

  

3,684 

  

  

4,036 

  

7%

  

(9)%

Operating income (loss)

$

(3)

  

$

313 

  

$

(143)

  

>(100)%

  

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

49 

 

$

247 

 

$

(47)

 

(80)%

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

$

816 

 

$

852 

 

$

479 

 

(4)%

 

77%

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

$

446 

 

$

533 

 

$

558 

 

(16)%

 

(4)%

  

  

  

  

  

  

  

  

  

  

  

  

  

*    Represents a non-GAAP financial measure. 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 – Primarily amounts received from the Federal USF 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:

2016-2015 Commentary

Total operating revenues

Service revenues decreased as a result of (i) a continued decrease in retail service revenues and resulting ARPU and ARPA primarily driven by industry-wide price competition and discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal; (ii) the $58 million of revenue recognized in 2015 from unredeemed rewards points upon termination of U.S. Cellular’s rewards program; and (iii) a decrease in inbound roaming revenue driven by lower roaming ratesSuch reductions were partially offset by an increase in average connections base and continued adoption of smartphones.

Federal USF revenue remained flat year over year at $92 million.  Pursuant to the FCC's Reform Order (“Reform Order”), U.S. Cellular’s current Federal USF support was to be phased down at the rate of 20% per year beginning July 1, 2012.  The Phase II Mobility Fund was not operational as of July 2014 and, therefore, as provided by the Reform Order, the phase down was suspended at 60% of the baseline amount until such time as the FCC takes steps to adopt an order to recommence the phase down.  On February 23, 2017, the FCC adopted an order concerning the Mobility Fund II and the resumption of the phase down. The text of the order has not been released but the press release issued by the FCC following adoption of the order indicates that the order will establish a Mobility Fund II support mechanism of $453 million annually for ten years to be distributed through a market-based, multi-round reverse auction and that the phase down of unnecessary legacy support from the Federal USF will commence on the first day of the month following the completion of the auction and will conclude two years later. U.S. Cellular cannot predict at this time when the Mobility Fund II auction will occur, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the Mobility Fund II auction will provide opportunities to the Company to offset any loss in existing support.  However, U.S. Cellular currently expects that its legacy support will continue at the existing level for 2017. 

Equipment sales revenues increased year over year due primarily to an increase in average revenue per device sold driven by the increase in sales under equipment installment plans, an overall increase in the number of devices sold, and a shift to smartphones.  Equipment installment plan sales contributed $710 million and $351 million in 2016 and 2015, respectively.  Equipment installment plan connections represented 44% and 27% of total postpaid connections as of December 31, 2016 and 2015, respectively.

System operations expenses

System operations expenses decreased by a modest amount in 2016 when compared to 2015.  U.S. Cellular expects system operations expenses to decrease in 2017 due primarily to lower average rates for roaming usage. 

Cost of equipment sold

Cost of equipment sold increased primarily as the result of a shift to smartphone sales and an overall increase in devices sold, partially offset by a decrease in the average cost per device sold driven by lower cost smartphones and connected devices.  Cost of equipment sold in 2016 included $758 million related to equipment installment plan sales compared to $449 million in 2015.  Loss on equipment, defined as Equipment sales revenues less Cost of equipment sold, was $172 million and $406 million for 2016 and 2015, respectively.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased by a modest amount in 2016 when compared to 2015.  This decrease was attributable to various expense reductions that were partially offset by a $13 million expense recognized in the third quarter of 2016 as a result of the termination of a naming rights agreement.

Depreciation, amortization and accretion expenses

Depreciation, amortization and accretion expenses increased by a modest amount in 2016 when compared to 2015.

(Gain) loss on asset disposals, net

The increase in Loss on asset disposals was primarily driven by more disposals of certain network assets.

(Gain) loss on sale of business and other exit costs, net

The net gain in 2015 was due primarily to a $108 million gain recognized on the sale of towers and certain related contracts, assets and liabilities.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

(Gain) loss on license sales and exchanges, net

The net gains in 2016 and 2015 were due to license exchange transactions with third parties.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information

2015-2014 Commentary

Total operating revenues

Service revenues decreased as a result of (i) a decrease in retail service revenues driven by industry-wide price competition, including discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal; and (ii) reductions in inbound roaming revenue driven by lower roaming ratesSuch reductions were partially offset by an increase in the average customer base, continued adoption of shared data plans, and the $58 million of revenue recognized in 2015 from unredeemed rewards points upon termination of U.S. Cellular’s rewards program.

Federal USF revenue remained flat year over year at $92 million.  

Equipment sales revenues increased due primarily to an increase in average revenue per device sold driven by the increase in sales under equipment installment plans, a shift to smartphones and connected devices and an increase in accessory sales, partially offset by a decrease in the number of devices sold.  Equipment installment plan sales contributed $351 million and $190 million in 2015 and 2014, respectively.  Equipment installment plan connections represented 27% and 12% of total postpaid connections as of December 31, 2015 and 2014, respectively.

System operations expenses

System operations expenses increased by a modest amount in 2015 when compared to 2014.

Cost of equipment sold

Cost of equipment sold decreased as a result of an overall reduction in devices sold and a decrease in the average cost per device sold driven by the lower cost of smartphones and connected devices.  Cost of equipment sold in 2015 included $449 million related to equipment installment plan sales compared to $280 million in 2014.  Loss on equipment was $406 million and $698 million for 2015 and 2014, respectively.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased due primarily to lower agent and retail commission expenses driven by fewer activations and renewals, lower consulting expenses related to the billing system and customer service operations, and lower rates for roamer administration.  Such reductions were partially offset by increased advertising expenses.

Depreciation, amortization and accretion expenses

Depreciation, amortization and accretion expenses remained relatively flat year over year.

(Gain) loss on asset disposals, net

The decrease in Loss on asset disposals was due primarily to fewer write-offs and disposals of certain network assets.

(Gain) loss on sale of business and other exit costs, net

The net gain in 2015 was due primarily to a $108 million gain recognized on the sale of towers and certain related contracts, assets and liabilities. The net gain in 2014 was due primarily to $29 million of gain related to the impact of the sale of certain customers and licenses to Sprint in 2013.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

(Gain) loss on license sales and exchanges, net

The net gains in 2015 and 2014 were due to license exchange transactions with third parties.  See Note 6Acquisitions, 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 offer the best broadband connection in the market in order to capitalize on data growth and customers’ needs for higher broadband 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, application 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. 
  • Wireline operates incumbent local exchange carriers (“ILEC”) and competitive local exchange carriers (“CLEC”) in 27 states.
  • Cable operates primarily in Colorado, New Mexico, Texas, Utah and Oregon.
  • 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.

 

Significant Trends and Developments

Acquisition/ Divestiture

 

  • As a result of continuous assessment of all of its operations, in 2015 and 2014, TDS Telecom divested certain ILEC markets that it considered non-strategic.  On an annualized basis these ILEC divestitures collectively represented approximately 1% of TDS Telecom 2015 Total operating revenues.
  • On September 1, 2014, TDS Telecom expanded its cable operations with the acquisition of substantially all of the assets of a group of companies operating as BendBroadband, headquartered in Bend, Oregon.  As part of the agreement, a Tier III data center providing colocation and managed services and a cable advertising and broadcast business were also acquired.  The operations of the data center are included in the HMS segment.  The operations of the cable and the advertising and broadcast businesses are included in the Cable segment.  Through its Cable operations, TDS Telecom is expanding broadband services while leveraging its core competencies in network management and customer focus.  Additionally, TDS Telecom will continue to pursue cable acquisitions that meet its criteria of having favorable competitive environments, attractive market demographics and the ability to grow broadband penetration.

Technology & Support Systems:

 

  • TDS Telecom’s Wireline segment continues to upgrade and expand its network to respond to the needs of its customers for greater bandwidth and advanced technologies.  At December 31, 2016, fiber has been deployed to approximately 22% of ILEC service addresses.  Fiber technology allows broadband speeds of up to 1 Gigabit per second (“Gbps”).  In non-fiber markets, TDS Telecom has deployed copper bonding technology to increase data speeds up to 50 Megabits per second (“Mbps”) to reach approximately 20% of ILEC service addresses.  TDS Telecom continues to utilize federal and state funding mechanisms in order to extend broadband service to unserved and underserved markets.
  • TDS Telecom’s Cable segment continues to make capacity investments in line with its strategy to increase broadband penetration in those markets.  DOCSIS 3.0 technology is deployed to 95% of service addresses which allows Cable to offer enhanced transmission speedsTDS Telecom is offering 300 Mbps service in its largest markets.
  • In 2016, TDS Telecom’s Cable segment completed a project called “analog reclamation.”  This initiative transitioned TDS Telecom’s analog cable markets to an all-digital video service, which provides an improved customer experience and allows reclaimed spectrum to be used to provide higher broadband speeds.
  • TDS Telecom’s HMS segment offers a full suite of end-to-end IT solutions through its OneNeck IT Solutions brand.  TDS Telecom launched a data center in Colorado and completed a Madison data center expansion in 2015.  TDS Telecom will continue to explore additional facility expansion, reconfiguration and development opportunities.

Products and Services:

 

  • TDS Telecom’s Wireline segment strives to be the preferred broadband provider in its ILEC markets.  As such, TDS Telecom continues to invest to offer higher speed data service.  As of December 31, 2016, TDS Telecom was able to provide broadband service to 95% of its ILEC physical access lines.  At December 31, 2016, 68% of the service addresses in its ILEC markets had 10 Mbps or faster service available and 42% of the service addresses in its ILEC markets had 25 Mbps or faster service available.
  • TDS Telecom’s Wireline segment offers IPTV, branded as TDS TV, in order to leverage its high-speed network.  TDS TV provides customers with connected-home DVRs, video-on-demand (“VOD”) and TV Everywhere.  TDS Telecom has launched TDS TV in 28 markets, enabling 190,000 service addresses, which is roughly 26% of its service addresses.  Where TDS TV is not available, TDS Telecom partners with a satellite TV provider to allow for triple or double play bundling.  TDS Telecom plans modest fiber expansion in 2017.
  • TDS Telecom continues to focus its commercial sales on managedIP.  TDS managedIP is available in Wireline markets that cover 88% of all commercial customers at December 31, 2016 and is also available in certain cable markets.
  • TDS Telecom’s Cable segment seeks to expand broadband services and leverage that growth by bundling with video and voice services.  In addition to providing enhanced broadband speeds through DOCSIS 3.0 technology, TDS Telecom also provides customers with the most up-to-date TV technology through a whole home entertainment solution branded as CatchTV.
  • TDS Telecom’s HMS segment continues to enhance its suite of hybrid-IT solutions including managed services on public clouds, hosted private clouds (TDS Telecom’s enterprise-class ReliaCloud platform) and customer-owned private clouds in addition to colocation services.

 


Financial Overview TDS Telecom

Components of Operating Income (Loss)

Year Ended December 31,

 

2016

 

2015

 

2014

 

2016 vs. 2015

 

2015 vs. 2014

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireline

 

$

698 

 

$

701 

 

$

716 

 

-

 

(2)%

 

Cable

 

 

185 

 

 

175 

 

 

117 

 

6%

 

50%

 

HMS

 

 

273 

 

 

287 

 

 

259 

 

(5)%

 

11%

 

Intra-company elimination

 

 

(5)

 

 

(5)

 

 

(4)

 

(1)%

 

(25)%

 

 

TDS Telecom operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  revenues

 

 

1,151 

 

 

1,158 

 

 

1,088 

 

(1)%

 

6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireline

 

 

618 

 

 

612 

 

 

618 

 

1%

 

(1)%

 

Cable

 

 

183 

 

 

169 

 

 

117 

 

9%

 

45%

 

HMS

 

 

288 

 

 

302 

 

 

368 

 

(5)%

 

(18)%

 

Intra-company elimination

 

 

(5)

 

 

(5)

 

 

(4)

 

(1)%

 

(25)%

 

 

TDS Telecom operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  expenses

 

 

1,084 

 

 

1,079 

 

 

1,099 

 

1%

 

(2)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDS Telecom operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income (loss)

 

$

67 

 

$

79 

 

$

(10)

 

(15)%

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

42 

 

$

46 

 

$

(24)

 

(9)%

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

 

$

298 

 

$

306 

 

$

298 

 

(3)%

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

173 

 

$

219 

 

$

208 

 

(21)%

 

5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numbers may not foot due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Represents a non-GAAP financial measure.  Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.

 

 

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

2016-2015 Commentary

Operating revenues decreased in 2016 as a $15 million decrease in HMS equipment revenues and a $16 million decrease in Wireline commercial and wholesale revenues were partially offset by increases in Wireline revenues from broadband and IPTV and revenues from Cable operations.

Operating expenses increased in 2016 due to higher video programming costs and employee expenses. HMS equipment cost of goods sold decreased $14 million on reduced equipment revenues.

2015-2014 Commentary

Operating revenues increased in 2015 due to $55 million from Cable acquisitions, offset by declines in Wireline commercial and wholesale revenues of $19 million.  HMS equipment sales increased $21 million.

Operating expenses decreased in 2015 due to the impact of an $84 million non-cash goodwill impairment loss in 2014 in HMS offset by a $44 million increase from Cable acquisitions.  HMS equipment cost of goods sold increased $17 million.

 


WIRELINE OPERATIONS

 

 

Business Overview

TDS Telecom’s Wireline business provides broadband, video and voice services.  These services are provided to residential, commercial, and wholesale customers in a mix of rural, small town and suburban markets, with the largest concentration of its customers in the Upper Midwest and the Southeast.  TDS Telecom’s strategy is to offer its residential customers broadband, video, and voice services through value-added bundling.  In its commercial business, TDS Telecom’s focus is on small- to medium-sized businesses and its sales efforts emphasize advanced IP-based voice and data services.

Operational Overview

ILEC Broadband Residential Customers by Speeds

Wireline Residential Revenue per Connection

Residential broadband customers are increasingly choosing higher speeds in ILEC markets with 53% choosing speeds of 10 Mbps or greater, and 22% choosing speeds of 25 Mbps or greater, driving increases in average revenue per connection.

 

Residential Connections

Commercial Connections

Total residential connections increased as a 32% increase in IPTV connections was partially offset by a 3% decline in voice connections.

Total commercial connections decreased by 3% as declines in voice and broadband connections outpaced the 3% growth in managedIP connections.

 

Financial Overview Wireline

Components of Operating Income (Loss)

Year Ended December 31,

 

2016

 

2015

 

2014

 

2016 vs. 2015

 

2015 vs. 2014

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

309 

 

$

297 

 

$

293 

 

 

 

4%

 

 

 

1%

Commercial

 

 

212 

 

 

221 

 

 

229 

 

 

 

(4)%

 

 

 

(4)%

Wholesale

 

 

175 

 

 

181 

 

 

192 

 

 

 

(4)%

 

 

 

(6)%

 

 

Service revenues

 

 

696 

 

 

699 

 

 

715 

 

 

 

-

 

 

 

(2)%

Equipment and product sales

 

 

2 

 

 

2 

 

 

2 

 

 

 

(9)%

 

 

 

7%

 

 

Total operating revenues

 

 

698 

 

 

701 

 

 

716 

 

 

 

-

 

 

 

(2)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Depreciation, amortization and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  accretion reported below)

 

 

258 

 

 

255 

 

 

257 

 

 

 

1%

 

 

 

(1)%

Cost of equipment and products

 

 

2 

 

 

2 

 

 

2 

 

 

 

1%

 

 

 

(5)%

Selling, general and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  administrative

 

 

197 

 

 

194 

 

 

190 

 

 

 

2%

 

 

 

2%

 

 

 

 

 

 

458 

 

 

451 

 

 

449 

 

 

 

1%

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow *

 

 

240 

 

 

250 

 

 

267 

 

 

 

(4)%

 

 

 

(7)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  and accretion

 

 

159 

 

 

166 

 

 

169 

 

 

 

(4)%

 

 

 

(2)%

(Gain) loss on asset disposals,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  net

 

 

2 

 

 

5 

 

 

2 

 

 

 

(62)%

 

 

 

>100%

(Gain) loss on sale of business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  and other exit costs, net

 

 

 

 

 

(10)

 

 

(2)

 

 

 

>100%

 

 

 

>(100)%

(Gain) loss on license sales and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

exchanges

 

 

(1)

 

 

 

 

 

 

 

 

 

N/M

 

 

 

N/M

 

 

Total operating expenses

 

 

618 

 

 

612 

 

 

618 

 

 

 

1%

 

 

 

(1)%

Operating income

 

$

80 

 

$

89 

 

$

98 

 

 

 

(10)%

 

 

 

(10)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

83 

 

$

92 

 

$

104 

 

 

 

(9)%

 

 

 

(11)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA *

 

$

242 

 

$

252 

 

$

270 

 

 

 

(4)%

 

 

 

(7)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

108 

 

$

140 

 

$

136 

 

 

 

(23)%

 

 

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numbers may not foot due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Not Meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Represents a non-GAAP financial measure.  Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.

 

 

 

Residential revenues consist of:

  • Broadband services, including fiber-based and other digital, premium and enhanced data services
  • IPTV and satellite video
  • Voice services

 

Commercial revenues consist of:

  • TDS managedIP voice and data services
  • High-speed and dedicated business internet services
  • Voice services

 

Wholesale revenues consist of:

  • Network access services to interexchange carriers for the origination and termination of interstate and intrastate long distance phone calls on TDS Telecom’s network and special access services to carriers and others
  • Amounts received from Federal and State USF support

 

 

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

2016-2015 Commentary

Total operating revenues

Residential revenues increased in 2016 as growth in data and IPTV connections more than offset the decline in legacy voice connections.  IPTV average connections grew 44% increasing revenues $13 million, while average voice connections declined by 3% decreasing revenues by $3 million.  In addition, revenues increased due to 4% growth in average revenue per residential connection driven by price increases for broadband and video services, growth in customers opting for faster broadband speeds and growth in customers selecting higher-tier IPTV packages.

Commercial revenues decreased in 2016 due to declining legacy voice and data connections offset by increases from 3% growth in average managedIP connections.

Wholesale revenues decreased in 2016 due primarily to the effect of divestitures and a 14% reduction in intra-state minutes-of-use and lower special access revenues.

In January 2017, the FCC finalized its modification of the USF high cost support program.  Under this program, known as A-CAM, effective January 1, 2017 TDS will receive approximately $75 million in annual support which replaces approximately $50 million in annual USF support received in 2016.  In addition, TDS will receive additional transition support payments in certain states.  The A-CAM support comes with an obligation to build defined broadband speeds to reach approximately 160,000 locations.  See “Regulatory Matters – FCC Connect America Fund (CAF).”

Cost of services

Cost of services increased in 2016 due to increased charges related to growth in IPTV and increased employee expenses, offset by reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services.

Selling, general and administrative expenses

Selling, general and administrative expenses increased in 2016 due primarily to an increase in employee-related expenses.

Depreciation, amortization and accretion

Depreciation, amortization and accretion decreased in 2016 due primarily to an adjustment recorded in the second quarter of 2016 for excess depreciation attributable to prior periods.

2015-2014 Commentary

Total operating revenues

Residential revenues increased in 2015 as growth in data and IPTV more than offset the decline in legacy voice services.  IPTV average connections grew 53% increasing revenues $9 million, while average legacy voice connections declined by 4% decreasing revenues by $5 million.  In addition, revenues increased due to 2% growth in average revenue per residential connection driven by price increases for broadband and video services, growth in customers opting for faster broadband speeds and growth in customers selecting higher-tier IPTV packages.

Commercial revenues decreased in 2015 due to declining legacy voice and data connections offset by increases from 8% growth in average managedIP connections.

Wholesale revenues decreased in 2015 due primarily to a reduction in revenues received through inter-state and intra-state regulatory support mechanisms and an 11% reduction in intra-state minutes-of-use.

Cost of services

Cost of services decreased in 2015 due primarily to reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services, offset by increased charges related to the growth in IPTV.

Selling, general and administrative expenses

Selling, general and administrative expenses increased in 2015 due to employee-related expenses and an increase in Federal USF contribution expense.

Gain on sale of business and other exit costs, net

Divestitures of certain Wireline companies resulted in a Gain on sale of business and other exit costs, net in 2015 and 2014.


CABLE OPERATIONS

 

 

Business Overview

TDS Telecom’s cable strategy is to expand its broadband services and leverage that growth by bundling with video and voice services.  TDS Telecom seeks to be the leading provider of broadband services in its targeted markets by leveraging its core competencies in network management and customer focus. 

 

Operational Overview

Cable Connections

Cable connections grew 4% in 2016 with increases in broadband and voice exceeding declines in video.

 

Financial Overview Cable

Components of Operating Income (Loss)

Year Ended December 31,

 

2016

 

2015

 

2014¹

 

2016 vs. 2015

 

2015 vs. 2014

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

147 

 

$

138 

 

$

94 

 

 

6%

 

 

47%

Commercial

 

 

38 

 

 

36 

 

 

23 

 

 

6%

 

 

58%

Total operating revenues