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United States Cellular Corp. (USM - Analyst Report), a subsidiary of Telephone and Data Systems Inc. (TDS - Analyst Report), reported second-quarter 2013 earnings per share of $1.69, breezing past the Zacks Consensus Estimate of 12 cents. Comparing with the prior-year quarter, the results improved from earnings per share of 62 cents.

Quarterly revenues of $995.1 million missed the Zacks Consensus Estimate of $1,022.0 million and declined 10% from $1,104.4 million in the year-ago quarter.

Revenue, ARPU & Churn

Quarterly Service revenues dropped 12% year over year to $911.0 million. Revenues from Equipment sales escalated 13% year over year to $84.2 million. Smartphone sales remained strong and represented approximately 66% of all sold devices.

The reported quarter’s retail service ARPU (average revenue per user) was $50.60, flattish with $50.99 in the year-ago quarter. Post-paid churn rose to 2.0% from 1.6% in second-quarter 2012 due to severe competitive pricing.

Subscriber Statistics

U.S. Cellular witnessed post-paid subscriber losses of 120,000 compared with a loss of 48,000 in the year-ago quarter. Prepaid customer losses totaled 7,000 versus the addition of 20,000 customers in the prior-year quarter. The company exited the quarter with a retail customer base of 4,968,000 compared with 5,799,000, a year ago.


U.S. Cellular generated $448.6 million in cash flow from operating activities in the first six months of 2013 compared with $412.2 million in the comparable year-ago period. During the second quarter, capital expenditures amounted to $172.1 million, while free cash flow was $52.8 million.


For fiscal 2013, U.S. Cellular expects Service revenues of $3,615–$3,715 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

U.S. Cellular continues to invest heavily in upgrading wireless services and add more smartphones to its network to offer competitive services. Although these developments would remain accretive to the company’s profitability over the long term, we believe heavy capital expenditures will remain detrimental to its financial position in the near term. Further, spending on network integration, a competitive market, intense pricing and regulatory pressures vindicate our cautious stance over the stock.

U.S. Cellular – which operates in the U.S. telecom market with Verizon Communications (VZ - Analyst Report) and AT&T Inc. (T - Analyst Report) – carries a Zacks Rank #3 (Hold).

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