Telephone and Data Systems (TDS)

Telecommunications services provider Telephone and Data Systems (NYSE:TDS) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 8.6% year on year to $1.15 billion. Its GAAP loss of $0.09 per share was significantly below analysts’ consensus estimates.

Company Overview

Operating primarily through its majority-owned subsidiary UScellular and wholly-owned TDS Telecom, Telephone and Data Systems (NYSE:TDS) provides wireless, broadband, video, and voice communications services to 4.6 million wireless and 1.2 million broadband customers across the United States.

Terrestrial telecommunication companies face an uphill battle, as they mostly sell into a deflationary market, where the price of moving a bit tends to decrease over time with better technology. Without dependable volume growth, revenue growth could be challenged. Unfortunately, broadband penetration in their core US market is quite high already. On the other hand, data consumption from streaming entertainment and 5G expansion could provide a floor on growth for the next number of years. As if that wasn't enough to worry about, competition is intense, with larger telecom providers and hyperscalers expanding their own networks.

TDS competes with national wireless carriers including Verizon Communications (NYSE:VZ), AT&T (NYSE:T), T-Mobile US (NASDAQ:TMUS), and Dish Network (NASDAQ:DISH). In the broadband and video space, TDS faces competition from cable providers like Comcast (NASDAQ:CMCSA) and Charter Communications (NASDAQ:CHTR), as well as regional telecommunications companies.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $4.86 billion in revenue over the past 12 months, Telephone and Data Systems is one of the larger companies in the business services industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because it’s challenging to maintain high growth rates when you’ve already captured a large portion of the addressable market. For Telephone and Data Systems to boost its sales, it likely needs to adjust its prices, launch new offerings, or lean into foreign markets.

As you can see below, Telephone and Data Systems’s demand was weak over the last five years. Its sales fell by 1.6% annually, a poor baseline for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Telephone and Data Systems’s recent performance shows its demand remained suppressed as its revenue has declined by 5.2% annually over the last two years.

This quarter, Telephone and Data Systems missed Wall Street’s estimates and reported a rather uninspiring 8.6% year-on-year revenue decline, generating $1.15 billion of revenue.

Looking ahead, sell-side analysts expect revenue to decline by 2.3% over the next 12 months. While this projection is better than its two-year trend, it's hard to get excited about a company that is struggling with demand.

Telephone and Data Systems was profitable over the last five years but held back by its large cost base. Its average operating margin of 3.8% was weak for a business services business.

Looking at the trend in its profitability, Telephone and Data Systems’s operating margin decreased by 3.4 percentage points over the last five years. Telephone and Data Systems’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, Telephone and Data Systems generated an operating profit margin of 3%, down 2.8 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Telephone and Data Systems, its EPS declined by 24% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

We can take a deeper look into Telephone and Data Systems’s earnings to better understand the drivers of its performance. As we mentioned earlier, Telephone and Data Systems’s operating margin declined by 3.4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Telephone and Data Systems reported EPS at negative $0.09, down from $0.10 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Telephone and Data Systems’s full-year EPS of negative $1.05 will reach break even.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Telephone and Data Systems has shown poor cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.6%, lousy for a business services business.

Taking a step back, an encouraging sign is that Telephone and Data Systems’s margin expanded by 4 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Telephone and Data Systems’s free cash flow clocked in at $57 million in Q1, equivalent to a 4.9% margin. This result was good as its margin was 5.8 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Telephone and Data Systems historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.2%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Telephone and Data Systems’s ROIC averaged 1.6 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Telephone and Data Systems’s $5.10 billion of debt exceeds the $348 million of cash on its balance sheet. Furthermore, its 27× net-debt-to-EBITDA ratio (based on its EBITDA of $178 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Telephone and Data Systems could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Telephone and Data Systems can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We struggled to find many positives in these results. Its revenue missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 3.3% to $36.37 immediately after reporting.

Updated: May 22, 2025 at 11:57 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Telephone and Data Systems, you should also grasp the company’s longer-term business quality and valuation.

We cheer for all companies serving everyday consumers, but in the case of Telephone and Data Systems, we’ll be cheering from the sidelines. For starters, its revenue has declined over the last five years, and analysts don’t see anything changing over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

Telephone and Data Systems’s EV-to-EBITDA ratio based on the next 12 months is 3x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $51.50 on the company (compared to the current share price of $33.83).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.