United States Cellular Corp. (USM Quick QuoteUSM - Free Report) – a subsidiary of Telephone & Data Systems Inc. (TDS Quick QuoteTDS - Free Report) – posted strong financial results in the second quarter of 2016. Both the top and the bottom line outpaced the respective Zacks Consensus Estimate.

In second-quarter 2016, GAAP net income came in at $27 million or 32 cents per share compared with a net income of $19 million or 23 cents in the year-ago quarter. Quarterly earnings per share of 32 cents were well ahead of the Zacks Consensus Estimate of 17 cents.

Quarterly revenues of $980 million were up 0.4% year over year and ahead of the Zacks Consensus Estimate of $969 million. Quarterly Service revenues decreased 8% to $762 million. Revenues from Equipment sales were up a substantial 44% to $218 million.

Smartphone sales retained its strength and represented 77% penetration among postpaid customers, up from 69% recorded in the year-ago quarter. Total cell sites in service were 6,324 compared with 6,223 in the year-ago quarter. Smartphones sold, as a percentage of total handsets sold, constituted 91% against 87% in the prior-year quarter.

Operating Expenses and Income

In the second quarter of 2016, total operating expenses inched down 1% to $962 million. Moreover, the company reported an operating income of $18 million, up a whopping 125% year over year.

Cash Flow

In the quarter under review, cash from operations came in at $98 million compared with $168 million in the prior-year quarter. Quarterly adjusted free cash flow was $25 million compared with $32 million in the year-ago quarter.

Liquidity

United States Cellular exited the second quarter with cash and cash equivalents of $621 million compared with $715 million at the end of 2015. At second-quarter end, total debt was $1,634 million versus $1,640 million at the end of 2015. The debt-to-capitalization ratio at the end of the reported quarter was 0.31, flat with the end-2015 figure.

US CELLULAR Price, Consensus and EPS Surprise

US CELLULAR Price, Consensus and EPS Surprise | US CELLULAR Quote

ARPU & Churn

Quarterly postpaid ARPU (average revenue per user) decreased to $47.37 from $53.62 in the prior-year quarter. Postpaid ARPA (average revenue per account) was $124.91 versus $133.85 in the year-earlier quarter. Postpaid churn fell to 1.20% from 1.34% recorded in the second quarter of 2015. Prepaid ARPU decreased to $34.58 from $35.98 in the prior-year quarter. Prepaid churn decreased to 4.86% in the reported quarter from 5.22% a year-ago.

Subscriber Statistics

United States Cellular exited the second quarter with a subscriber base of 4,973,000 compared with 4,779,000 at the end of the year-ago quarter. Postpaid subscriber base was 4,490,000 compared with 4,324,000 at the end of the prior-year quarter. Meanwhile, prepaid subscriber base totaled 413,000 compared with 368,000 at the end of the year-ago quarter. In the reported quarter, United States Cellular added a net of 36,000 postpaid subscribers compared with 17,000 in the year-ago quarter. The company also gained 14,000 prepaid customers in the same quarter compared with 8,000 in the prior-year quarter.

Guidance

U.S. Cellular reaffirmed its guidance for 2016. The company expects total operating revenue in the band of $3,900–$4,100 million. Adjusted EBITDA is expected at $725–$850 million while capital expenditure is estimated at around $500 million. The company projects operating cash flow in the range of $525--$650 million.

Zacks Rank & Other Key Picks

U.S. Cellular currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector are Cincinnati Bell Inc. and Telecom Italia S.p.A. . Both stocks carry a Zacks Rank #2 (Buy). 

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