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Telephone and Data Systems Inc. (TDS - Analyst Report) reported third quarter 2013 loss of 9 cent per share, wider than the Zacks Consensus Estimate of 7 cents loss per share and dropped drastically from earnings per share of 27 cents in the year-ago quarter.

Revenues dropped 14% year over year to $1,180.98 million in the reported quarter, and missed our projection of $1,190.0 million. The company reported operating loss of $33.1 million against operating income of $55.5 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 17.6% to$939.2 million in the third quarter from $1,140.4 million in the year-ago quarter.

Retail service ARPU (average revenue per user) was $50.92, higher than $50.59 in flat with the year-ago quarter. Post-paid churn remained unchanged from the year-earlier quarter at 1.7% due to severe competitive pricing.

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.

TDS Telecom (Wireline)

Revenue from the wireline segment dropped 1% year over year to $181.8 million. Revenues from Cable were $14.4 million and HMS revenues came in at $38.7 million.

At the end of the quarter, the company had 599,900 wireline residential customers, 372,400 wireline commercial customers and 146,900 cable connections, bringing the total subscriber base to 1.12 million.

Liquidity

Telephone and Data Systems exited the quarter with cash and cash equivalents of $711.1 million compared with $740.5 million at the end of fiscal 2012. Long-term debt was $1,721.1 million compared with $1,721.6 million at year-end 2012.

Guidance

For fiscal 2013, Telephone and Data Systems expects total operating revenue of $4,555–$4,645 million. Of this, U.S. Cellular revenues are expected at $3,590–$3,640 million and TDS Telecom revenues at $920–$960 million.

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

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

Our Analysis

We expect Telephone and Data Systems to rebound in the coming months based on its favorable offerings, high sales of Google Inc.’s Android-based smartphones, bundled and unlimited service plans, the launch of Long Term Evolution services and the growing popularity of the Belief project.

However, fierce competition from major market players such as AT&T Inc. (T - Analyst Report) and heavy investment in an uncertain market condition may limit any upside to the company’s earnings. Further, regulatory issues regarding Universal Service Fund are also likely to weigh on the company’s near-term growth.

Telephone and Data Systems currently holds a Zacks Rank #5 (Strong Sell).

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