United States Cellular Corp. (USM), a subsidiary of Telephone and Data Systems Inc. (TDS) has reported first quarter 2012 earnings per share of 73 cents, 32 cents ahead of both, the Zacks Consensus Estimate and the year-ago earnings. The outperformance was driven by strong demand for smartphones and data services.
Net income attributable to shareholders also increased 77.7% year over year to $62.5 million in the reported quarter.
First quarter revenues of $1,092.1 million were ahead of the Zacks Consensus Estimate of $1,086 million and increased 3.3% from $1,057.1 million in the year-ago quarter driven by strong smartphone sales.
Revenue, ARPU & Churn
Quarterly Service revenue upped 4% year over year to $1,023.8 million. Revenues from Equipment sales were down 5.1% year over year at $68.3 million primarily due to lower total equipment transactions, although smartphone sales remained strong and represented approximately 54.1% of all sold devices versus 42.5% in the year-ago quarter.
The reported quarter’s retail service ARPU (average revenue per user) was $50.52 compared with $47.65 in the year-ago quarter. Post-paid churn deteriorated to 1.6% from 1.4% in the year-ago quarter due to competitive pricing.
Subscriber Statistics
U.S. Cellular marked a net subscriber loss of 34,000 from retail customers compared to 31,000 net loss in the year-ago quarter. Total subscriber base went down to 5.8 million from 6.0 million in the year-ago period. The company exited the quarter with a retail customer base of 5.6 million compared with 5.7 million in year-ago quarter. The company added 211,000 customers in its Belief plan in the first quarter.
Liquidity
U.S. Cellular generated $257 million in cash flow from operating activities in first quarter compared with $258 million in the year-ago quarter Capital expenditures were $201.3 million as against $96 million in the comparable prior-year period. The company reported free cash flow of $47.8 million versus $136.7 million in the year-ago quarter.
Guidance
For fiscal 2012, U.S. Cellular maintained all its previously projected estimates. The company expects revenue in the range of $4,050–$4,150 million and operating income in the range of $200–$300 million. Adjusted OIBDA is estimated in the range of $800–$900 million. Capital expenditure is expected to be approximately $850 million.
Our Analysis
U.S. Cellular managed to benefit from the growing demand for smartphones that is driving growth in data services and post-paid customer addition. Additionally, the company’s increased investments in advanced network technology deployment along with its foray into Long-Term Evolution (:LTE) services will also bode well despite several integration problems, intense competition from telecom giants like AT&T (T) and Verizon Communications (VZ), pricing, regulatory pressures pertaining to Universal Service Fund and economic uncertainty.
Consequently, we recommend a long-term Neutral rating on U.S. Cellular supported by a Zacks #3 Rank (Hold).
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