|By Business Wire||
|November 21, 2012 12:53 PM EST||
Fitch Ratings has affirmed the 'BBB' Issuer Default Ratings (IDRs) and long-term debt ratings of Telephone and Data Systems, Inc. (TDS) and its subsidiary United States Cellular Corp. (USM). USM's ratings consider the consolidated ratings at Telephone and Data Systems, Inc. (TDS). The Rating Outlook on both entities is revised to Negative from Stable.
The affirmation reflects TDS' solid financial profile that has afforded the company some flexibility to withstand operating challenges at its current rating category. TDS has a good cash position, undrawn committed revolver lines, no material maturities in the next 20 years and a significant level of other assets that could be monetized.
The revision in Outlook reflects Fitch's longer-term concerns with the wireless operations. Postpaid subscriber additions at USM have been under material pressure for nearly three years. During 2012, the company reported postpaid net losses that are materially worse than Fitch expectations. USM has begun to improve traction with share gains and positive year-over-year postpaid gross addition trends during the past couple of quarters. However, churn has increased approximately 20 basis points as a result of the competitive intensity, lack of iPhone, and economic environment.
USM has taken steps to address these operational shortfalls with the divestiture of the Chicago and St. Louis markets, new branding campaign, targeted churn initiatives and broader third-party distribution. The sale of the wireless markets to Sprint Nextel will benefit the company's operating profile by improving profitability and cash flows, reducing capital spending, and improving past negative subscriber trends. As a result, the sale of these underperforming markets should provide better transparency with USM's operations in its remaining more mature markets where the company has achieved better penetration.
However, the sale of wireless assets also represents a retrenchment of its strategic plans and USM's inability to compete against the national operators despite being in the Chicago market for over 10 years. The competitive environment will also only get more challenging in the future. Verizon Wireless and AT&T Wireless have continued to strengthen their position against the rest of the industry through spectrum acquisitions and increased subscriber penetration to drive greater revenue and cash flow share. Verizon Wireless' early advantage with 4G LTE coverage and new share data plans has resulted in material share gains during 2012. T-Mobile and Sprint have also taken significant steps to improve their competitive positions longer term.
USM's increased distribution through Walmart should help further improve USM's gross addition trends as the company was more heavily reliant on distribution through company-owned stores versus its national peers. Fitch believes USM could pursue other initiatives to broaden its distribution mix although subscribers acquired through third-party channels are typically less profitable, with higher churn characteristics. Fitch also believes the lack of iPhone distribution creates a material competitive disadvantage relative to the national operators.
USM also has exposure longer term to declines from ETC revenues, which is a higher margin revenue source. USM had received in excess of $150 million of ETC revenue at its peak. Going forward, ETC revenue subsidies received by USM are subject to reform plans by the FCC, as payments are scheduled to be reduced 20% annually. These reductions began in mid-2012.
Longer term, Fitch believes TDS' ability to grow revenues and cash flows while competing effectively against much larger national operators is key to maintaining its investment grade ratings. Fitch acknowledges the steps the company has taken to improve its operating profile and profitability. However, Fitch remains concerned with the company's scale and competitive position. A failure by TDS to demonstrate the ability to sustain improved operating performance across its wireless and wireline segments would lead to a negative rating action.
TDS' has good financial flexibility because of its cash, committed credit lines and other assets. At the end of third-quarter 2012, TDS' consolidated cash balance was approximately $589 million. TDS also has $181 million of added liquidity in longer-dated treasury or treasury-backed securities. TDS and USM maintain approximately $700 million of undrawn revolver capacity, principally through TDS' $400 million revolving credit facility and USM's $300 million revolver, which both mature in December 2015. The principal covenant contained within the facility is a consolidated leverage ratio of 3.0x, which allows the company considerable flexibility.
Consolidated free cash flow (FCF) which had previously been at least $200 million the past three years was a deficit of $86 million for the last 12 months. This was due in part to capital spending that has peaked at over $1 billion as a result of USM's LTE expansion, growth related to wireline projects and the new wireless billing system. Looking forward, Fitch expects FCF levels in 2013 could be flat to moderately negative due to the continued high level of capital investment, decommissioning costs related to the Chicago/St. Louis markets and higher cash tax payments in 2013 as the benefit for bonus depreciation reverses. TDS will benefit by avoiding the significant capital investment that would have been required in the Chicago/St. Louis markets.
TDS does not have any significant maturities until after 2030. For the last 12 months, TDS' consolidated leverage of 1.4x and interest coverage of 11.0x were strong for its rating category, as ratings remain constrained by subscriber trends, competitive environment and lack of wireless scale.
TDS has other sizable assets that could be monetized, including USM's cellular towers and a 5.5% minority interest in Verizon Wireless' Los Angeles partnership, although a sale of the partnership interest could potentially affect the ratings depending on the use of the proceeds. The cash generation from these assets accounts for a material portion of its cash from operations at approximately 10%.
TDS has been active with share repurchase programs at both TDS and USM in the past. As of Sept. 30, 2012, TDS and USM had not repurchased any shares. TDS' current share repurchase program expired in November 2012. Fitch expects TDS' board will authorize a new share repurchase program. USM has authorized up to 1.3 million shares to be repurchased on an annual basis.
WHAT COULD TRIGGER A RATING ACTION
Negative: The ratings have a Negative Outlook. Future developments that may individually or collectively lead to a negative rating action include:
--A further erosion in the operating performance of the wireless segment due to negative postpaid subscriber trends associated with competitive pressure on churn or gross additions. Fitch must see an improved performance in gross addition and churn trends that can be sustained over this Outlook period as the company has taken initial steps to improve this deficiency.
--TDS must demonstrate progress toward improved profitability across the wireline and wireless operations that can be sustained for the longer term. A failure to accomplish this would be a further concern.
--Negative growth trends in Wireless revenue if ARPU growth slows and/or wireless net additions are negative thus further pressuring cash flows.
--Improvement in future FCF expectations beyond 2013.
--TDS undertakes more aggressive share repurchase activity, potentially from shareholder pressure, thus weakening its liquidity position.
Positive: Fitch believes that competitive factors, current subscriber trends and the company's relative position in the wireless industry would not likely allow for a positive rating action at this time.
Additional information is available at 'www.fitchratings.com'.The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Global Telecom Companies: Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
SYS-CON Events announced today that Peak 10, Inc., a national IT infrastructure and cloud services provider, will exhibit at SYS-CON's 18th International Cloud Expo®, which will take place on June 7-9, 2016, at the Javits Center in New York City, NY. Peak 10 provides reliable, tailored data center and network services, cloud and managed services. Its solutions are designed to scale and adapt to customers’ changing business needs, enabling them to lower costs, improve performance and focus inter...
May. 4, 2016 11:00 AM EDT Reads: 1,395
Increasing IoT connectivity is forcing enterprises to find elegant solutions to organize and visualize all incoming data from these connected devices with re-configurable dashboard widgets to effectively allow rapid decision-making for everything from immediate actions in tactical situations to strategic analysis and reporting. In his session at 18th Cloud Expo, Shikhir Singh, Senior Developer Relations Manager at Sencha, will discuss how to create HTML5 dashboards that interact with IoT devic...
May. 4, 2016 11:00 AM EDT Reads: 1,374
We’ve worked with dozens of early adopters across numerous industries and will debunk common misperceptions, which starts with understanding that many of the connected products we’ll use over the next 5 years are already products, they’re just not yet connected. With an IoT product, time-in-market provides much more essential feedback than ever before. Innovation comes from what you do with the data that the connected product provides in order to enhance the customer experience and optimize busi...
May. 4, 2016 11:00 AM EDT Reads: 1,272
The increasing popularity of the Internet of Things necessitates that our physical and cognitive relationship with wearable technology will change rapidly in the near future. This advent means logging has become a thing of the past. Before, it was on us to track our own data, but now that data is automatically available. What does this mean for mHealth and the "connected" body? In her session at @ThingsExpo, Lisa Calkins, CEO and co-founder of Amadeus Consulting, will discuss the impact of wea...
May. 4, 2016 10:00 AM EDT Reads: 1,115
So, you bought into the current machine learning craze and went on to collect millions/billions of records from this promising new data source. Now, what do you do with them? Too often, the abundance of data quickly turns into an abundance of problems. How do you extract that "magic essence" from your data without falling into the common pitfalls? In her session at @ThingsExpo, Natalia Ponomareva, Software Engineer at Google, will provide tips on how to be successful in large scale machine lear...
May. 4, 2016 10:00 AM EDT Reads: 1,496
A critical component of any IoT project is the back-end systems that capture data from remote IoT devices and structure it in a way to answer useful questions. Traditional data warehouse and analytical systems are mature technologies that can be used to handle large data sets, but they are not well suited to many IoT-scale products and the need for real-time insights. At Fuze, we have developed a backend platform as part of our mobility-oriented cloud service that uses Big Data-based approache...
May. 4, 2016 09:45 AM EDT Reads: 493
trust and privacy in their ecosystem. Assurance and protection of device identity, secure data encryption and authentication are the key security challenges organizations are trying to address when integrating IoT devices. This holds true for IoT applications in a wide range of industries, for example, healthcare, consumer devices, and manufacturing. In his session at @ThingsExpo, Lancen LaChance, vice president of product management, IoT solutions at GlobalSign, will teach IoT developers how t...
May. 4, 2016 09:45 AM EDT Reads: 478
We're entering the post-smartphone era, where wearable gadgets from watches and fitness bands to glasses and health aids will power the next technological revolution. With mass adoption of wearable devices comes a new data ecosystem that must be protected. Wearables open new pathways that facilitate the tracking, sharing and storing of consumers’ personal health, location and daily activity data. Consumers have some idea of the data these devices capture, but most don’t realize how revealing and...
May. 4, 2016 09:30 AM EDT Reads: 488
Digital payments using wearable devices such as smart watches, fitness trackers, and payment wristbands are an increasing area of focus for industry participants, and consumer acceptance from early trials and deployments has encouraged some of the biggest names in technology and banking to continue their push to drive growth in this nascent market. Wearable payment systems may utilize near field communication (NFC), radio frequency identification (RFID), or quick response (QR) codes and barcodes...
May. 4, 2016 08:15 AM EDT Reads: 989
Artificial Intelligence has the potential to massively disrupt IoT. In his session at 18th Cloud Expo, AJ Abdallat, CEO of Beyond AI, will discuss what the five main drivers are in Artificial Intelligence that could shape the future of the Internet of Things. AJ Abdallat is CEO of Beyond AI. He has over 20 years of management experience in the fields of artificial intelligence, sensors, instruments, devices and software for telecommunications, life sciences, environmental monitoring, process...
May. 4, 2016 08:00 AM EDT Reads: 1,311
You think you know what’s in your data. But do you? Most organizations are now aware of the business intelligence represented by their data. Data science stands to take this to a level you never thought of – literally. The techniques of data science, when used with the capabilities of Big Data technologies, can make connections you had not yet imagined, helping you discover new insights and ask new questions of your data. In his session at @ThingsExpo, Sarbjit Sarkaria, data science team lead ...
May. 4, 2016 08:00 AM EDT Reads: 1,174
The IETF draft standard for M2M certificates is a security solution specifically designed for the demanding needs of IoT/M2M applications. In his session at @ThingsExpo, Brian Romansky, VP of Strategic Technology at TrustPoint Innovation, will explain how M2M certificates can efficiently enable confidentiality, integrity, and authenticity on highly constrained devices.
May. 4, 2016 08:00 AM EDT Reads: 1,253
There is an ever-growing explosion of new devices that are connected to the Internet using “cloud” solutions. This rapid growth is creating a massive new demand for efficient access to data. And it’s not just about connecting to that data anymore. This new demand is bringing new issues and challenges and it is important for companies to scale for the coming growth. And with that scaling comes the need for greater security, gathering and data analysis, storage, connectivity and, of course, the...
May. 4, 2016 07:45 AM EDT Reads: 1,199
The IoTs will challenge the status quo of how IT and development organizations operate. Or will it? Certainly the fog layer of IoT requires special insights about data ontology, security and transactional integrity. But the developmental challenges are the same: People, Process and Platform. In his session at @ThingsExpo, Craig Sproule, CEO of Metavine, will demonstrate how to move beyond today's coding paradigm and share the must-have mindsets for removing complexity from the development proc...
May. 4, 2016 07:00 AM EDT Reads: 849
Manufacturers are embracing the Industrial Internet the same way consumers are leveraging Fitbits – to improve overall health and wellness. Both can provide consistent measurement, visibility, and suggest performance improvements customized to help reach goals. Fitbit users can view real-time data and make adjustments to increase their activity. In his session at @ThingsExpo, Mark Bernardo Professional Services Leader, Americas, at GE Digital, will discuss how leveraging the Industrial Interne...
May. 4, 2016 04:45 AM EDT Reads: 1,344
SYS-CON Events announced today that Ericsson has been named “Gold Sponsor” of SYS-CON's @ThingsExpo, which will take place on June 7-9, 2016, at the Javits Center in New York, New York. Ericsson is a world leader in the rapidly changing environment of communications technology – providing equipment, software and services to enable transformation through mobility. Some 40 percent of global mobile traffic runs through networks we have supplied. More than 1 billion subscribers around the world re...
May. 3, 2016 08:45 PM EDT Reads: 1,301
In his session at @ThingsExpo, Chris Klein, CEO and Co-founder of Rachio, will discuss next generation communities that are using IoT to create more sustainable, intelligent communities. One example is Sterling Ranch, a 10,000 home development that – with the help of Siemens – will integrate IoT technology into the community to provide residents with energy and water savings as well as intelligent security. Everything from stop lights to sprinkler systems to building infrastructures will run ef...
May. 3, 2016 03:15 PM EDT Reads: 1,232
Whether your IoT service is connecting cars, homes, appliances, wearable, cameras or other devices, one question hangs in the balance – how do you actually make money from this service? The ability to turn your IoT service into profit requires the ability to create a monetization strategy that is flexible, scalable and working for you in real-time. It must be a transparent, smoothly implemented strategy that all stakeholders – from customers to the board – will be able to understand and comprehe...
May. 3, 2016 12:30 PM EDT Reads: 1,216
You deployed your app with the Bluemix PaaS and it's gaining some serious traction, so it's time to make some tweaks. Did you design your application in a way that it can scale in the cloud? Were you even thinking about the cloud when you built the app? If not, chances are your app is going to break. Check out this webcast to learn various techniques for designing applications that will scale successfully in Bluemix, for the confidence you need to take your apps to the next level and beyond.
May. 3, 2016 12:15 PM EDT Reads: 1,607
SYS-CON Events announced today that Fusion, a leading provider of cloud services, will exhibit at SYS-CON's 18th International Cloud Expo®, which will take place on June 7-9, 2016, at the Javits Center in New York City, NY. Fusion, a leading provider of integrated cloud solutions to small, medium and large businesses, is the industry's single source for the cloud. Fusion's advanced, proprietary cloud service platform enables the integration of leading edge solutions in the cloud, including cloud...
May. 2, 2016 10:00 AM EDT Reads: 2,714