United States Cellular Corp. (USM), a subsidiary of Telephone and Data Systems Inc. (TDS), reported first quarter 2011 earnings per share of 40 cents a penny short of the Zacks Consensus Estimate. Earnings plunged 26% year over year on subscriber loss due to competitive pricing.
Net income attributable to shareholders declined 28% year over year to $34.1 million in the reported quarter.
First quarter revenues of $1,057.1million surpassed the Zacks Consensus Estimate of $1,042.0 million and increased 3% from $1,023.9 million in the year-ago quarter driven by strong sales of smartphones.
Revenue, ARPU & Churn
Service revenue inched up 2% year over year to $985.1 million in the first quarter. Revenues from Equipment sales were up 22% year over year at $72 million on a surge in smartphone sales, representing approximately 42% of all sold devices.
The reported quarter’s retail service ARPU (average revenue per user) was $47.65 compared with $46.98 in the year-ago quarter. Post-paid churn remained flat year over year at 1.4%.
Subscriber Statistics
U.S. Cellular registered a net loss of 39,000 customers during the first quarter (which deteriorated from 6,000 net gain registered in the year-ago quarter), bringing its total subscriber base to 6.03 million. The company exited the quarter with a retail customer base of 5.7 million compared to 5.8 million in year-ago quarter. Approximately 1.8 million new customers adopted the Belief plans.
Liquidity
U.S. Cellular generated $201.8 million in cash flow from operating activities in first quarter 2011 compared with $152.3 million in the year-ago quarter and spent $95.9 million in capital expenditures as against $121.5 million in the comparable quarter. This resulted in free cash flow of $105.9 million in the first quarter versus $30.7 million in the year-ago quarter.
The company exited the first quarter with $421.3 million in cash and cash equivalents, compared with $289.7 million in the year-ago quarter.
Guidance
For fiscal 2011, U.S. Cellular maintained service revenue estimate in the range of $4,000–$4,100 million and operating income estimate in the range of $185–$285 million. The company projected capital expenditures of approximately $750–$800 million, up from previous projection of $650 million.
Our Analysis
U.S. Cellular remains focused on building network capacity by expanding the 3G network and deploying fourth generation (4G) Long-Term Evolution (LTE) technology. The Belief Plan is also expected to enhance long-term profits along with reduced churn and higher gross subscriber additions for the company. U.S. Cellular remains well positioned to tap the growing smartphone demand by offering premium handsets. The company is now planning to launch at least 13 new smartphones in this year.
However, the company faces strong margin pressure given the increased smartphone subsidies along with other related costs. Additionally, U.S. Cellular remains highly exposed to strong competitive pricing pressure from telecom giants like AT&T (T) and Verizon Communications (VZ) that is creating a significant dent in customer base and leading to poor profitability for the company.
We currently have a long-term Underperform rating on U.S. Cellular. The company holds a short-term (1–3 months) Zacks # 3 (Hold) Rank.
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