U.S. Cellular Lags on Q3 Earnings

Zacks

United States Cellular Corp. (USM), a subsidiary of Telephone and Data Systems Inc. (TDS), reported third-quarter 2013 loss per share of 12 cents, much below the Zacks Consensus Estimate of earnings of 13 cents. Comparing with the prior-year quarter, the results deteriorated from earnings per share of 42 cents.

Quarterly revenues of $939.2 million missed the Zacks Consensus Estimate of $941.0 million and declined 17.6% from $1,140.4 million in the year-ago quarter.

Revenue, ARPU & Churn

Service revenues dropped 16.8% year over year to $862.3 million. Revenues from Equipment sales also decreased 26% year over year to $86.2 million. Smartphone sales remained strong and represented approximately 65.2% of all sold devices.

The reported quarter’s retail service ARPU (average revenue per user) was $50.92, higher than $50.59 in the year-ago quarter. Post-paid churn remained unchanged from the prior-year quarter at 1.7% due to severe competitive pricing.

Subscriber Statistics

U.S. Cellular witnessed post-paid subscriber loss of 60,000 compared with a loss of 38,000 in the year-ago quarter. Prepaid customer losses totaled 11,000 versus the addition of 57,000 customers in the prior-year quarter. The company exited the quarter with a retail customer base of 4,875,000 compared with 5,808,000 a year ago.

Liquidity

U.S. Cellular generated $296.2 million in cash flow from operating activities in the first nine months of 2013 compared with $608.8 million in the comparable year-ago period. During the third quarter, capital expenditures amounted to $239.3 million, while free cash flow was $351.4 million.

Guidance

For 2013, U.S. Cellular expects Service revenues of $3,590–$3,640 million. Adjusted income before income taxes is estimated in the range of $600–$700 million and capital spending will be approximately $735 million.

Our Analysis

Higher churn in the post-paid segment remains the primary concern for U.S. Cellular with lower high-margin roaming revenues also acting as a headwind. Furthermore, a higher mix of smartphones and increased subsidies on 4G LTE devices will continue to affect the company’s expenses. Heavy capital expenditures, spending on network integration, a competitive market and intense pricing and regulatory pressures vindicate our bearish stance on the stock.

U.S. Cellular – which operates in the U.S. telecom market with Verizon Communications Inc. (VZ) and AT&T Inc. (T) – carries a Zacks Rank #5 (Strong Sell).

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