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Telephone and Data Systems Inc. (TDS - Analyst Report) reported fourth quarter 2013 loss of $1.52 per share against the Zacks Consensus Estimate of a loss of 49 cents. The bottom line also deteriorated from a loss of 39 cents per share in the year-ago quarter. Shareholders reacted negatively to the news as the stock fell 8.17% on Wednesday trade on NYSE.

Revenues increased 12.1% year over year to $1,183.5 million in the reported quarter but missed our projection of $1,207.0 million. Operating loss for the quarter was $20.9 million compared with $35.4 million in the year-ago quarter.

For 2013, the company reported $1.65 loss per share (versus our estimate of earnings of 39 cents), on revenues of $4,901.2 million.

U.S. Cellular (Wireless)

Revenues from the company’s wireless subsidiary United States Cellular Corp. (USM - Analyst Report) declined 19.1% year over year to $902.7 million in the fourth quarter.
Total retail service 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 prior-year quarter.

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.

TDS Telecom (Wireline)

Revenues from the wireline segment grew 23% year over year to $271.9 million.

At the end of 2013, the company had 592,900 wireline residential customers, 373,100 wireline commercial customers and 147,400 cable connections, bringing the total subscriber base to 1.11 million. The company lost 7,000 wireline residential customers from last quarter. Commercial and cable connections witnessed a marginal rise of 700 and 500 customers respectively.

Liquidity

Telephone and Data Systems exited 2013 with cash and cash equivalents of $830.0 million compared with $740.5 million at the end of 2012. Long-term debt was $1,720.1 million compared with $1,721.6 million at year-end 2012.

In 2013, operating cash flow was $494.6 million as compared to $1,105.2 million in the previous year. Capital expenditure was $883.8 million, while free cash flow was $389.2 million.

Share Repurchase

The company repurchased 134,303 shares in the fourth quarter of 2014 for an aggregate amount of $3.9 million.

Guidance

For fiscal 2014, TDS Telecom expects total operating revenue of $1,050–$1,100 million. Adjusted income before income tax is expected in the range of $250–$280 million and capital expenditure is forecasted around $200 million.

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

Our Analysis

TDS currently carries a Zacks Rank #5 (Strong Sell). Access line losses due to wireless substitution and other alternative services remain detrimental to growth. Further, higher churn in the post-paid segment, increased equipment subsidies and investments in network upgrade would continue to affect results. These negatives vindicate our bearish stance on the stock.

Better-ranked stocks within this sector are Level 3 Communications Inc. (LVLT - Snapshot Report) and Telecom Italia S.p.A. (TI - Snapshot Report) with Zacks Rank #2 (Buy)

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