U.S. Cellular (USM),a subsidiary of Telephone and Data Systems (TDS), posted third-quarter 2010 earnings per share of 43 cents, which misses the Zacks Consensus Estimate by a penny but increased 3 cents or 7% from the year-ago quarter. Net income improved 9% year over year to $37.35 million driven by increased penetration of smartphones followed by growth in data and roaming revenues.

USM reported revenues of $1,060.7 million, down 0.32% year over year. Service revenues dipped 0.04% to $983.5 million.

Revenue, ARPU & Churn

Data revenue increased 31% year over year to $228.9 million, fueled by increased penetration of smartphone, and accounted for 23% of services revenue. The quarter’s ARPU (average revenue per user) was $47.12 compared with $46.97 in the year-ago quarter. Post-paid churn reduced by 10 basis points to 1.6%.

Subscriber Statistics

U.S. Cellular registered a net loss of 41,000 customers during the quarter (which deteriorated from 24,000 net losses registered a year ago), bringing its total subscriber base to 6.1 million. The company exited the quarter with a retail customer base of 5.75 million.

Financial Condition

U.S. Cellular generated cash flow from operating activities of $180.3 million and spent $124.6 million in capital expenditures, resulting in free cash flow of approximately $55.6 million. The carrier exited the quarter with $269.3 million in cash and cash equivalents and approximately $867.8 million in total debt.

Management Outlook

For full-year 2010, U.S. Cellular projected service revenues of $3,925–$3,975 million, operating income of $200–$250 million and capital expenditures of $600 million.

Our Analysis

U.S. Cellular is one of the largest wireless telecommunications network in the United States and has recently launched its 3G LTE services. The company also plans to launch GSM-based LTE 4G services in the near future. It is also offering a huge range of smartphones, which will likely accelerate data revenue growth.

However, the company remains challenged by the increasingly competitive domestic wireless market and intense pricing pressure, which is affecting its customer accretion. Moreover, declining roaming revenues are expected to weigh on U.S. Cellular’s financial results. The company also remains challenged by lower cost service plans offered by some of its competitors.

U.S. Cellular currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

 
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