Bottom Line Miss for U.S. Cellular

United States Cellular Corp. ( USM - Analyst Report ) , a subsidiary of Telephone and Data Systems Inc. ( TDS - Analyst Report ) , has reported third quarter 2012 earnings per share of 42 cents, below the Zacks Consensus Estimate of 61 cents and the year-ago earnings of 73 cents.

Net income attributable to shareholders also decreased 43.0% year over year to $35.5 million in the reported quarter.

Third quarter revenues of $1,140.4 million were above the Zacks Consensus Estimate of $1,125 million and also grew 3% from $1,110.4 million in the year-ago quarter, driven by data revenues and smartphone sales.

Revenue, ARPU & Churn

Quarterly Service revenue remained flat year over year to $1,036.4 million. Revenues from Equipment sales escalated 41% year over year to $104 million. Smartphone sales remained strong and represented approximately 53% of all sold devices versus 39% in the year-ago quarter. Further, 40% of the smartphone sales were driven by 4G devices.

The reported quarter’s retail service ARPU (average revenue per user) was $50.83 compared with $48.82 in the year-ago quarter. Post-paid churn increased to 1.7% from 1.5% in the year-ago quarter due to competitive pricing.

Subscriber Statistics

U.S. Cellular marked a net subscriber gain of 19,000 retail customers compared with 23,000 net losses in the year-ago quarter. Total subscriber base went down to 5,808,000 from 5,932,000 in the year-ago period. The company exited the quarter with a retail customer base of 5,561,000 compared with 5,621,000 in year-ago quarter.

Liquidity

U.S. Cellular generated $608 million in cash flow from operating activities in the third quarter compared with $738 million in the year-ago quarter. Capital expenditures were $199 million as against $248 million in the comparable prior-year period. The company reported free cash flow of $15.3 million versus $103.8 million in the year-ago quarter.

Guidance

For fiscal 2012, U.S. Cellular expects service revenue in the range of $4,075-$4,125 million, up from the previous estimate of $4,050–$4,150 million. Operating income range has been reduced to $200-$250 million from the previous expectation of $200–$300 million range.

Adjusted OIBDA is estimated in the range of $800–$850 million compared to the previously projected $800–$900 million. Capital expenditure estimate remains unchanged at 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, pricing, regulatory pressures and economic uncertainty.

We recommend a long-term Outperfrom rating on U.S. Cellular. For the short-term (1-3 months) the stock has a Zacks #1 Rank (Strong Buy).