Evaluating the Earnings Outlook for Telephone and Data Systems (TDS) Amid Declining Revenues and Strategic Divestitures

The earnings trajectory of Telephone and Data Systems (TDS) has become a focal point for investors navigating a complex mix of declining revenues, strategic divestitures, and long-term growth ambitions. With Q1 2025 results undershooting expectations and a projected full-year loss of $0.42 per share, the company faces a critical juncture. Yet, beneath the surface of these near-term challenges lies a strategic overhaul that could either signal a painful but necessary reset or a misstep with lasting consequences.

Earnings Challenges and Structural Pressures

TDS's Q1 2025 performance underscored the immediate headwinds. Revenue fell 8.6% year-on-year to $1.15 billion, missing analyst estimates by $30 million, while GAAP earnings turned negative at -$0.09 per share. The decline was attributed to the absence of contributions from recently divested businesses and ongoing competitive pressures in traditional broadband and wireless segments. Adjusted EBITDA also lagged, with a 14% miss from expectations, and operating margins contracted to 3.2% from 5.8% in the prior year.

The structural shifts are clear: TDS is shedding legacy assets, including copper network infrastructure in Colorado and other regions, to focus on fiber and tower services. These moves, while necessary for long-term alignment with high-margin infrastructure, have created short-term drag. For instance, the absence of divested units contributed to the Q1 revenue decline. Meanwhile, the company's dividend payout ratio has turned negative (-15.2%), raising concerns about the sustainability of its $0.04 per share quarterly payout.

Strategic Divestitures and Liquidity Catalysts

The most significant catalyst for TDS's future lies in its pending sale of US Cellular (USM), its 84% stake in the wireless provider. A $1.2 billion transaction with T-Mobile, expected to close in mid-2025, could provide a liquidity windfall. Management has signaled that proceeds will be allocated to debt repayment, fiber expansion, and potential special dividends. This sale, along with prior spectrum sales to Verizon and AT&T, represents a strategic pivot from low-growth wireless to high-return infrastructure.

The company's $100 million cost transformation program at TDS Telecom further underscores its commitment to operational efficiency. Targeting a 20% reduction in operating and capital expenditures by 2028, the initiative is already generating early savings in 2025. These cost cuts, combined with the divestiture proceeds, could stabilize free cash flow, which improved to $57 million in Q1 2025 from -$11 million in the prior year.

Financial Resilience and Growth Levers

Despite a challenging debt profile—$4.04 billion in long-term debt and $7.68 billion in total liabilities—TDS has taken steps to strengthen its balance sheet. The company's $348 million in cash and equivalents, coupled with $4.87 billion in property, plant, and equipment, provides a buffer. Moreover, the towers business has shown resilience, with 6% year-over-year revenue growth, while fiber expansion is accelerating. TDS added 14,000 new fiber service addresses in Q1 2025, with a target of 150,000 by year-end.

The success of these initiatives hinges on execution. Fiber deployment is capital-intensive, and aggressive competition in broadband markets could pressure margins. However, the shift to fiber aligns with secular trends in demand for high-speed connectivity, particularly in underserved rural areas. If TDS can scale its fiber network efficiently, it could offset revenue declines from divested units and drive long-term margin stabilization.

Investment Implications: Bearish Caution or Turnaround Potential?

The debate for investors centers on whether TDS's current trajectory justifies a bearish stance or signals a potential turnaround. On one hand, the company's earnings outlook remains bleak, with full-year 2025 and 2026 losses projected at -$0.42 and -$0.40 per share, respectively. Analysts are divided, with a “Hold” rating and a wide range of price targets—from $15.56 to $49—reflecting uncertainty. The stock's 8.85% single-day drop after Q1 results highlights market skepticism.

Historical context from past earnings misses adds nuance to this debate. The data reveals a mixed but generally negative pattern: a 50% win rate for 3- and 10-day periods, and only a 33.3% win rate for 30-day periods, suggesting limited upside potential in the short term. While the maximum observed return of 3.05% over 51 days indicates occasional rebounds, the overall trend underscores the risk of underperformance following earnings disappointments.

On the other hand, the strategic divestitures and liquidity gains from the USM sale could catalyze a rebalancing. If TDS successfully executes its fiber expansion and cost-cutting initiatives, it may emerge with a leaner, higher-margin business model. The pending T-Mobile transaction, in particular, could provide the capital needed to accelerate growth in infrastructure while reducing debt burdens.

Conclusion: A Calculated Bet on Structural Reforms

For long-term investors, TDS presents a high-conviction opportunity but requires patience. The company's earnings trajectory is undeniably weak in the near term, and the dividend's sustainability remains questionable. However, the structural shifts—divesting non-core assets, focusing on fiber, and leveraging liquidity from strategic sales—position TDS to capitalize on the infrastructure boom.

A cautious approach is warranted. Investors should monitor the closure of the USM-T-Mobile deal, the effectiveness of cost savings, and the pace of fiber deployment. If these initiatives deliver, TDS could transition from a struggling telecom player to a resilient infrastructure provider. For now, the stock's valuation, trading at a discount to its five-year average dividend yield, offers a margin of safety for those willing to bet on the turnaround.

In the end, TDS's story is one of transformation. Whether it succeeds or stumbles will depend on its ability to execute its strategic vision amid a rapidly evolving industry.