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United States Cellular Corp. (USM - Analyst Report), a subsidiary of Telephone and Data Systems Inc. (TDS - Analyst Report), has reported second quarter 2012 earnings per share of 62 cents, below the Zacks Consensus Estimate of 69 cents and the year-ago earnings of 88 cents.

Net income attributable to shareholders also decreased 29.7% year over year to $52.7 million in the reported quarter.

Second quarter revenues of $1,104.4 million were above the Zacks Consensus Estimate of $1,094 million and also grew 2.6% from $1,076.2 million in the year-ago quarter driven by data revenues and smartphone sales.

Revenue, ARPU & Churn

Quarterly Service revenue upped 3% year over year to $1,029.7 million. Revenues from  Equipment  sales inched up approximately 1% year over year to $74.7 million. Smartphone sales remained strong and represented approximately 51.9% of all sold devices versus 39.6% in the year-ago quarter.

The reported quarter’s retail service ARPU (average revenue per user) was $50.99 compared with $48.28 in the year-ago quarter. Post-paid churn deteriorated to 1.6% from 1.4% in the year-ago quarter due to competitive pricing.

Subscriber Statistics

U.S. Cellular marked a net subscriber loss of 28,000 retail customers compared with 58,000 net loss in the year-ago quarter. Total subscriber base went down to 5,799,000 from 5,968,000 in the year-ago period. The company exited the quarter with a retail customer base of 5,542,000 compared with 5,644,000 in year-ago quarter. The company added 238,000 customers in its Belief plan in the second quarter.

Liquidity

U.S. Cellular generated $412 million in cash flow from operating activities in the second quarter compared with $438 million in the year-ago quarter. Capital expenditures were $183.2 million as against $162.1 million in the comparable prior-year period. The company reported free cash flow of a negative $65.7 million versus a positive $36.0 million in the year-ago quarter. The company’s debt-to-equity ratio was 23.1% compared with 23.9% at year-end 2011.

Guidance

For fiscal 2012, U.S. Cellular maintained all its previously projected estimates. The company expects revenue in the range of $4,050–$4,150 million and operating income in the range of $200–$300 million. Adjusted OIBDA is estimated in the range of $800–$900 million. Capital expenditure is expected to be approximately $850 million.

Our Analysis

U.S. Cellular managed to benefit from the growing demand for smartphones that is driving growth in data services and post-paid customer addition. Additionally, the company’s increased investments in advanced network technology deployment along with its foray into Long-Term Evolution (LTE) services will also bode well despite several integration problems, intense competition from peers like MetroPCS Communications, Inc. , pricing, regulatory pressures and economic uncertainty.

We recommend a long-term Outperfrom rating on U.S. Cellular supported by a Zacks #2 Rank (Buy).

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