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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 2013 earnings per share of 6 cents, against the Zacks Consensus Estimate of a loss of 14 cents. Comparing with the prior-year quarter, the results declined from earnings per share of 73 cents.

First-quarter revenues of $1,081.7 million missed the Zacks Consensus Estimate of $1,094.0 million and declined 1% from $1,092.1 million in the year-ago quarter.

Revenue, ARPU & Churn

Quarterly Service revenues dropped 3% year over year to $996.3 million. Revenues from Equipment sales escalated 25% year over year to $85.4 million. Smartphone sales remained strong and represented approximately 62% of all sold devices. Further, 76% of the smartphone sales were driven by 4G devices.

The reported quarter’s retail service ARPU (average revenue per user) improved to $51.13 from $50.52 in the year-ago quarter on the back of successful adoption of smartphones and data plans. Post-paid churn rose to 1.7% from 1.6% in first-quarter 2011 due to severe competitive pricing.

Subscriber Statistics

U.S. Cellular witnessed subscriber losses of 1,000 retail customers compared with a loss of 16,000 in the year-ago quarter. The company exited the first quarter with a retail customer base of 5,225,000 compared with 5,210,000, a year ago. Post-paid customer losses totaled 32,000, while the prepaid business registered an addition of 31,000 customers.

Liquidity

U.S. Cellular generated $223.6 million in cash flow from operating activities in the first quarter compared with $257 million a year ago. During the first quarter, capital expenditures amounted to $118.4 million, while free cash flow was $72.6 million.

Guidance

For fiscal 2013, U.S. Cellular expects Service revenues of $3,620–$3,740 million. Adjusted income before income taxes is estimated in the range of $595–$715 million and capital spending will be approximately $735 million.

Our Analysis

Although U.S. Cellular continues to invest heavily in upgrading wireless services, we believe that hefty capital expenditures will likely remain detrimental to its financial position in the near term. Further, spending on network integration, a competitive market, intense pricing and regulatory pressures might weigh on the stock.

U.S. Cellular – which operates in the U.S. telecom market with Verizon Communications (VZ - Analyst Report) and Sprint Nextel Corp. (S - Analyst Report) – carries a Zacks Rank #3 (Hold).

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