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United States Cellular Corp. (USM - Analyst Report), a subsidiary of Telephone and Data Systems Inc. (TDS - Analyst Report) reported fourth quarter 2013 loss per share of $1.85, much wider than the Zacks Consensus Estimate of a loss of 80 cents. Comparing with the prior-year quarter, the bottom line deteriorated from loss per share of 47 cents.

Fourth quarter revenues of $902.7 million missed the Zacks Consensus Estimate of $936.0 million and decreased 19.1% from $1,115.2 million in the year-ago quarter, affected by divestment transaction and the deconsolidation of certain partnerships in 2013. Shareholders reacted negatively to the news as the stock plunged 9.63% in Wednesday trade on NYSE.

For 2013, the company posted loss of $1.71 per share (lower than our estimate of an earnings of 36 cents), on revenues of $3,918.8 million.

Revenue, ARPU & Churn

Quarterly Service revenues dropped 18.2% year over year to $825.1 million. Revenues from Equipment sales also decreased 27.0% year over year to $77.6 million. Smartphone sales remained strong and represented approximately 79.6% of all sold devices. Total cell sites in service were 6,975 as compared to 8,028 in the fourth quarter of 2012.

The reported quarter’s retail billed ARPU (average revenue per user) declined to $50.25 from $50.94 in the year-ago quarter. Post-paid churn increased to 1.9% from 1.8% in fourth quarter 2012 due to severe competitive pricing. Prepaid churn also increased to 8.3% from 5.8% in the year-ago quarter. The company expanded its 4G LTE (Long Term Evolution) network to nearly 90% of its customers in 2013.

Subscriber Statistics

U.S. Cellular witnessed subscriber loss of 97,000 retail customers compared with loss of 4,000 in the year-ago quarter. The company exited 2013 with a retail customer base of 4,774,000 compared with 5,798,000, a year ago. Post-paid customer losses totaled 71,000, while prepaid business registered a loss of 26,000 customers.

Liquidity

U.S. Cellular exited 2013 with cash and cash equivalents of $342.1 million as compared to $378.4 million in 2014. Long-term debt at the end of the year declined marginally to $878.0 million from $878.9 million at the end of 2012.

The company generated $290.9 million in cash flow from operating activities in 2013 compared with $899.3 million a year ago. During 2013, capital expenditures amounted to $717.9 million, while free cash flow was a negative $426.9 million.

Guidance

For 2014, U.S. Cellular expects capital spending of approximately $640 million.

Dividend

In 2013, the company returned $482.0 million to its shareholders through a special dividend.

Our Analysis

Higher churn in the post-paid and pre-paid segments remains the primary concern for U.S. Cellular with lower high-margin roaming revenues also acting as a headwind. Heavy capital expenditures, spending on network integration, a competitive market and intense pricing and subsidies are some other headwinds for the company.

However, we expect U.S. Cellular to register further growth in smartphone sales as it continues to launch new devices to support the transition of the wireless market from 3G to 4G. U.S. Cellular carries a Zacks Rank #2 (Buy).

Other stocks worth considering within this sector are Level 3 Communications Inc. (LVLT - Snapshot Report) and Telecom Italia S.p.A. (TI - Snapshot Report) which carry the same rank as U.S. Cellular.

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