United States Cellular Corp. (USM), a subsidiary of Telephone and Data Systems Inc. (TDS) has reported third quarter 2011 earnings per share of 73 cents, breezing past the Zacks Consensus Estimate of 55 cents. Earnings also registered a massive 66% growth from 44 cents in the year-ago period, driven by increased smartphone sales that led to high data and roaming revenues along with lower churn rates.
Net income attributable to shareholders shot up 62% year over year to $62.1 million in the reported quarter.
Third quarter revenues of $1,110.4 million surpassed the Zacks Consensus Estimate of $1,089.0 million and increased 5% from $1,060.8 million in the year-ago quarter driven by strong smartphone sales.
Revenue, ARPU & Churn
Service revenue upped 5% year over year to $1,036.6 million. Revenues from Equipment sales were up 4% year over year at $73.8 million thanks to a surge in smartphone sales, which represented approximately 39.9% of all sold devices versus 23.6% in the year-ago quarter.
The reported quarter’s retail service ARPU (average revenue per user) was $48.82 compared with $47.12 in the year-ago quarter. Post-paid churn improved to 1.5% from 1.6% in the year-ago quarter.
Subscriber Statistics
U.S. Cellular marked a better quarter compared to the prior-year quarter as net subscriber loss from retail customers of 23,000 showed a considerable improvement from 25,000 net losses in the year-ago quarter, with the total subscriber base touching 5.94 million. The company exited the quarter with a retail customer base of 5.62 million compared to 5.75 million in year-ago quarter. There were approximately 2.8 million customers under its Belief plans.
Liquidity
U.S. Cellular generated $354.1 million in cash flow from operating activities in third quarter 2011 compared with $180.3 million in the year-ago quarter and had $248 million in capital expenditures as against $124.7 million in the comparable quarter last year. The company generated free cash flow of $106.1 million versus $55.6 million in the year-ago quarter.
The company exited the third quarter with $505 million in cash and cash equivalents compared with $269 million in the year-ago quarter.
Guidance
For fiscal 2011, U.S. Cellular maintained its Service revenue estimate in the range of $4,000–$4,100 million and raised its operating income estimate to the range of $230–$305 million from $210–$285 million. The company’s capital expenditure projection remained unchanged at $750–$800 million.
Our Analysis
U.S. Cellular remains well positioned to benefit from the favorable response to Belief Project as well as the growing demand for smartphones that is driving growth in data services. Additionally, the company’s increased investments in advanced network technology deployment along with its expected foray into Long-Term Evolution (LTE) services in 2012 are also expected to bode well despite several integration problems, intense competition from telecom giants like AT&T (T) and Verizon Communications (VZ), pricing, regulatory pressures and economic uncertainty.
Consequently, we recommend a long-term Neutral rating on U.S. Cellular supported by a Zacks #3 (Hold) Rank.
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