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Telephone and Data Systems Inc. (TDS - Analyst Report) reported a fourth quarter 2012 loss of 39 cents per share as against the Zacks Consensus Estimate of profit of 4 cents. The result was also much wider compared with loss of 6 cents per share in the year-ago quarter.

Revenues increased 2.2% year over year to $1,346.2 million in the reported quarter, missing our projection of $1,363.0 million. Adjusted OIBDA was $193.3 million compared with $215.4 million in the year-ago quarter.

For 2012, the company earned 75 cents per share, on revenue of $5,345.3 million.

U.S. Cellular (Wireless)

Revenues from the company’s wireless subsidiary U.S. Cellular Corp. (USM - Analyst Report) rose 1.4% year over year to $1,115.2 million in the fourth quarter.

Total retail service ARPU (average revenue per user) improved to $50.94 from $49.78 in the year-ago quarter on the back of successful adoption of smartphones and data plans. Post-paid ARPU increased 2.2% year over year to $54.56. Churn rates increased to 1.8% from 1.6% in fourth quarter 2011 due to severe competitive pricing.

U.S. Cellular witnessed subscriber loss of 4,000 retail customers compared with 13,000 losses in the year-ago quarter. The company exited 2012 with a retail customer base of 5,557,000 compared with 5,608,000 a year ago. Post-paid customer losses totaled 41,000, while prepaid business registered an addition of 37,000 customers.

TDS Telecom (Wireline)

Revenue from the wireline segment grew 7.1% year over year to $221.5 million.

In the reported quarter, incumbent local exchange carriers (ILEC) high-speed data customer base (residential and commercial) grew 1.0% year over year to 240,200. However, ILEC physical access lines (residential and commercial) slid 5.0% year over year to 457,700.

The competitive local exchange carrier (CLEC) high-speed data customer base (residential and commercial) declined to 19,400 from 25,600 in the year-ago quarter. CLEC physical access lines (residential and commercial) declined to 160,100 from 189,100 in the year-ago quarter.

Liquidity

Telephone and Data Systems exited 2012 with cash and cash equivalents of $740.5 million compared with $563.3 million at the end of fiscal 2011. Long-term debt was $1,721.6 million compared with $1,529.9 million at year-end 2011.

In 2012, capital expenditure was $264.6 million, while free cash flow was $23.9 million.

Guidance

For fiscal 2013, Telephone and Data Systems expects total operating revenue of $4,660–$4,830 million. Of this, U.S. Cellular revenue is expected in the range of $3,765–$3,885 million and TDS Telecom revenue will be $850–$900 million.

Adjusted income before income taxes is expected in the range of $780–$900 million for U.S. Cellular, $200–$250 million for TDS Telecom and $995–$1,145 million for the company.

Capital expenditure will be approximately $600 million for U.S. Cellular and $155 million for TDS Telecom, netting $765 million.

Our Analysis

We expect Telephone and Data Systems to rebound in the coming months based on its favorable offerings, high sales of Google Inc.’s Android-based smartphones, bundled and unlimited service plans, the launch of Long Term Evolution services and growing popularity of the Belief project.

However, fierce competition from major market players such as AT&T Inc (T - Analyst Report) and heavy investment in an uncertain market condition may limit any upside to the company’s earnings. Further, regulatory issues regarding Universal Service Fund are also likely to weigh on the company’s near-term growth.

Telephone and Data Systems currently holds a Zacks Rank #5 (Strong Sell).

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