Poor financial results continue to plague personal communications services operator Aerial Communications Inc., and its spinoff from parent company, Telephone and Data Systems Inc., is moving slower than anticipated. Analysts believe TDS may be better off selling the company.
Aerial Communications Inc. added just 15,000 subscribers during the quarter, compared with 20,000 customers the previous quarter.
“Slower-than-anticipated growth in the higher value post-pay customers, a segment Aerial targeted, was the primary reason behind our disappointing net acquisitions for the second quarter,” J. Clarke Smith, Aerial’s vice president of finance and administration, said in a conference call. “While this segment improved our customer mix and improved our financial fundamentals, sufficient growth needs to be re-established. The situation was compounded by little net growth and continued high churn in prepay.”
The company had hoped its pursuit of high-end users would push customer growth during the quarter, but analysts criticize the carrier for continually changing what type of customers it is targeting.
“They’ve changed their focus so many times, that I have a tough time telling what their focus is today,” said David Freedman, wireless analyst with Bear, Stearns & Co. “A while back they decided to focus on the high-end user … They have not demonstrated that the programs have worked to date.”
Going forward, Smith said Aerial will modify its prepaid plans to attract and retain more appealing customers by offering different denominations of prepaid cards with varying expiration dates. To combat the high churn in prepaid and expense of signing up customers, Aerial is offering a $99 starter kit that includes a $45 prepaid card. This move should make prepaid plans profitable for the company despite the high prepaid churn rates, which reached 10 percent during the second quarter.
“We have a program to add high-volume third-party retail outlets to the distribution mix,” said Smith. “There will be more of an emphasis on attracting a wider variety of customers in both the prepay and postpay market. We’ll take an aggressive targeted approach to chosen market segments as well as selected use of competitive promotions … We are preparing to introduce our answer to the one-rate plans that will make us more competitive with higher ARPU customers.”
Aerial said its post-pay churn decreased during the quarter and average revenue per user increased to $51 from $49 in the previous quarter. Net loss per share was 78 cents compared with a loss of $1.25 for the second quarter 1998. Service revenue for the quarter was $47.8 million, a 66-percent increase from 1998.
TDS said it hopes to spin off Aerial by year’s end, a process the company had hoped to complete during the third quarter. Aerial has continually dragged down TDS’s financial results.
“We are progressing somewhat more slowly than we had originally hoped,” Sandra Helton, executive vice president, finance and chief financial officer of TDS, said of the spinoff plans. “The pace is restrained by the involvement of TDS’s board of directors, their respective special committees, Sonera Corp., which is Aerial’s strategic partner, and all their respective advisers. But we are progressing.”
Helton said TDS will file with the Internal Revenue Service for the tax-free spinoff in the coming weeks. And TDS will provide interim financing to Aerial until it secures bank debt and high-yield-bond financing for the company this fall. TDS said it continues to consider other alternatives as it pursues the spinoff.
Analysts say an outright sale of the company might make more sense because of the delay of the spinoff. TDS has been looking to rid itself of troublesome Aerial for more than a year and pursued a spinoff when it was unable to come up with a tracking stock that offered a reasonable valuation. The process also has been hampered by Sonera, which is concerned over its investment in Aerial and has threatened to sue the company if certain terms are not renegotiated. Analysts say a sale of Aerial would have to be favorable enough to compete with the tax-free nature of a spinoff. Sonera already has declined to purchase Aerial under its right of first refusal clause.
TDS
TDS attributed gains of $328 million in the second quarter to the AirTouch Communications Inc. and Vodafone Group plc merger completed at the end of June. TDS said it will exchange its 5.2 million AirTouch common shares for about 2.6 million Vodafone AirTouch plc American Depository Receipts plus about $6.6 million in cash.
Net loss excluding gains from asset sales was $343,000 in the second quarter compared with $19.2 million in the second quarter of 1998. Second-quarter results, said TDS, reflect Aerial losses, which reduced net income by $43.1 million.
Due to operating improvements in all three business units, TDS reported diluted loss per share of 1 cent, compared with a loss per share of 32 cents the previous year. Net loss associated with Aerial’s operations reduced earnings per share by 71 cents in the quarter, compared with 77 cents in second-quarter 1998.
Revenue grew 24 percent from second quarter of 1998 to $552 million, fueled by the double-digit growth in the company’s telecommunications businesses.
U.S. Cellular
TDS’s cellular subsidiary United States Cellular Corp. added 94,000 customers, ending the second quarter with 2.4 million customers. Service revenues increased 24 percent while operating cash flow increased 28 percent.
Net income increased 43 percent to $38.5 million from $26.9 million in 1998, primarily due to improvements in U.S. Cellular’s operating results. Earnings per share increased 42 percent to 44 cents from 31 cents in 1998.
“Roaming revenue increased 40 percent on a year-over-year basis,” said Kenneth Meyers, executive vice president of finance with the rural cellular company. “We’ve seen a faster acceptance of digital services, resulting in a higher cost per gross add. This trend will continue over the next few quarters.”
