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Telephone and Data Systems Inc. (TDS - Analyst Report) reported second quarter 2013 earnings of $1.42 per share, comfortably surpassing the Zacks Consensus Estimate of 10 cents. Earnings for the quarter improved from 39 cents per share earned in the year-ago quarter.

Revenues of $1,228.2 million in the reported quarter missed our projection of $1,248.0 million. Operating income was $282.3 million compared with $91.1 million in the year-ago quarter.

U.S. Cellular (Wireless)

Revenues from the company’s wireless subsidiary U.S. Cellular Corp. (USM - Analyst Report) declined 10% year over year to $995.1 in the second quarter.

Total retail service ARPU (average revenue per user) was $50.60, almost at same level as $50.99 in the year-ago quarter. Post-paid ARPU was $54.18 compared with $54.42 in the year-ago quarter. Post-paid churn rose to 2.0% from 1.6% in second-quarter 2012 due to severe competitive pricing.

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 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.

TDS Telecom (Wireline)

Revenues from the wireline segment grew 7% year over year to $223.5 million.

In the reported quarter, incumbent local exchange carriers (ILEC) high-speed data customer base (residential and commercial) grew 0.9% year over year to 240,800. However, ILEC physical access lines (residential and commercial) slid 5.3% year over year to 446,300.

The competitive local exchange carrier (CLEC) high-speed data customer base (residential and commercial) declined to 16,900 from 22,300 in the year-ago quarter. CLEC physical access lines (residential and commercial) declined to 146,800 from 173,000 in the year-ago quarter.

Liquidity

Telephone and Data Systems exited the quarter with cash and cash equivalents of $1,246.4 million compared with $740.5 million at the end of fiscal 2012. Long-term debt was $1,720.6 million compared with $1,721.6 million at year-end 2012.

Guidance

For fiscal 2013, Telephone and Data Systems expects total operating revenue of $4,550–$4,690 million. Of this, U.S. Cellular revenue is expected at $3,615–$3,715 million and TDS Telecom revenue at $890–$930 million.

Adjusted income before income taxes is expected in the range of $600–$700 million for U.S. Cellular, $230–$260 million for TDS Telecom and $830–$960 million for the company.

Capital expenditure will be approximately $735 million for U.S. Cellular and $165 million for TDS Telecom, netting $910 million.

Our Analysis

Despite the company’s various competitive offerings, high sales of Google Inc.’s Android-based smartphones, bundled and unlimited service plans as well as the launch of LTE services, we remain concerned about headwinds such as competitive threats from major market players such as AT&T Inc. (T - Analyst Report), stringent regulatory measures and heavy capital expenditures.

Telephone and Data Systems currently holds a Zacks Rank #3 (Hold).
 

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