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United States Cellular Corp. (USM - Analyst Report), a subsidiary of Telephone and Data Systems Inc. (TDS - Analyst Report), reported first-quarter 2014 loss per share of 51 cents, much wider than the Zacks Consensus Estimate of a loss of 41 cents. The bottom line also showed a marked deterioration from the year-ago quarter’s earnings of 16 cents per share.

First-quarter revenues of $925.8 million beat the Zacks Consensus Estimate of $923.0 million but decreased 16.8% from $1,081.7 million reported in the year-ago quarter. Quarterly Service revenues fell 14.3% year over year to $825.6 million. Revenues from Equipment sales also decreased 15.4% year over year to $72.2 million. Smartphone sales remained strong and represented approximately 73.0% of all sold devices. Total cell sites in service were 6,975 as compared to 6,165 in the first quarter of 2013.

Operating Expenses and Income

During the first quarter of 2014, total operating expenses declined 15.0% to $918.0 million, while operating income rose to $7.8 million from $1.5 million in the first quarter of 2013.

ARPU & Churn

The reported quarter’s retail billed ARPU (average revenue per user) increased to $53.93 from $51.13 in the year-ago quarter. Post-paid churn increased to 2.3% from 1.7% in the first quarter of 2013 due to severe competitive pricing. Prepaid churn also increased to 6.9% from 6.2% in the year-ago quarter. The company expanded its 4G LTE (Long Term Evolution) network to 93% of its customers in the first quarter of 2014.

Subscriber Statistics

U.S. Cellular witnessed net subscriber loss of 80,000 retail customers compared with loss of 51,000 in the year-ago quarter. The company exited the quarter with a retail customer base of 4,684,000 compared with 5,736,000, a year ago. Post-paid customer losses totaled 93,000, while prepaid business registered an addition of 13,000 customers.

Liquidity

U.S. Cellular exited first-quarter 2014 with cash and cash equivalents of $398.5 million compared to $342.1 million at the end of 2013. Long-term debt at the end of the year increased marginally to $878.1 million from $878.0 million at the end of 2013.

The company generated merely $63.5 million in cash flow from operating activities in the first quarter compared with $223.6 million a year ago. During the reported period, capital expenditures amounted to $109.5 million, while free cash flow was a negative $46.0 million.

Guidance

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

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 acting as a potent headwind. Heavy capital expenditures on LTE expansion, intense pricing competition from big players in the market and subsidies are some other headwinds facing the company. U.S. Cellular presently carries a Zacks Rank #4 (Sell).

Other stocks like Shenandoah Telecommunications Co. (SHEN - Snapshot Report) with a Zacks Rank #1 (Strong Buy) and Level 3 Communications Inc. (LVLT - Snapshot Report) with a Zacks Rank #2 (Buy) are worth considering within this sector.

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