United States Cellular Corp. (USM), a subsidiary of Telephone and Data Systems Inc. (TDS), reported fourth quarter 2010 earnings per share of 8 cents, which came nowhere near the Zacks Consensus Estimate of 26 cents per share. Lower subscriber growth due to competitive price offerings by larger rivals led to the quarter’s disappointment.
However, earnings were in line with the year-ago quarter and net income improved 4% year over year to $6.8 million. The improvement in net income can be credited to strong penetration of smartphones, higher data growth as well as successful adoption of Belief plans (launched in October 2010).
For the full year, earnings plunged 35% year over year to $1.53 per share. Net income was $132.3 million, indicating a fall of 36% from the prior year.
In the reported quarter, revenues stood at $1,063.2 million, missing the Zacks Consensus Estimate of $1,072.0 million and flat with the year-ago quarter. In 2010, revenues dipped 1% year over year to $4.18 billion.
Revenue, ARPU & Churn
Service revenue inched up 1% year over year to $991.9 million in the fourth quarter. For the full year, service revenue remained flat year over year at $3.9 billion. Revenues from equipment sales were down 5% year over year at $71.2 million in the reported quarter and 8% year over year at $264.7 million in 2010.
The quarter’s retail service ARPU (average revenue per user) was $47.41 in the fourth quarter compared with $47.07 in the year-ago quarter. Post-paid churn improved 10 basis points to 1.5% from 1.6% in the year-ago quarter.
Subscriber Statistics
U.S. Cellular registered a net loss of 31,000 customers during the quarter (which deteriorated from 10,000 net gain registered a year ago), bringing its total subscriber base to 6.07 million. The company exited the quarter with a retail customer base of 5.73 million compared to 5.74 million in year-ago quarter. Approximately 1.2 million new customers adopted the Belief plans.
Liquidity
U.S. Cellular generated cash flow from operating activities of $874.3 million in fiscal 2010 compared to $881.8 million in fiscal 2009, and spent $583.1 million in capital expenditures compared to $546.8 million last year. This resulted in free cash flow of $291.2 million in 2010 versus $335.1 million in 2009.
The company exited FY10 with $294.4 million in cash and cash equivalents, at par with the prior year level.
Guidance
For fiscal 2011, U.S. Cellular projected service revenues of $4,000–$4,100 million, operating income of $185–$285 million and capital expenditures of approximately $650 million.
Our Analysis
U.S. Cellular focuses on various opportunities to increase revenues through the expanded 3G network and the potential launch of Long-Term Evolution technology, offering premium handsets and pursuing cost-reduction initiatives. It also offers an array of smartphones.
Further, the new “The Belief Project” is expected to enhance long-term profits along with reduced churn and higher gross subscriber additions. The company also plans to incorporate 4G services in its network.
Despite these efforts, the company faces strong competitive and pricing pressure, which is affecting its customer accretion. Additionally, it also remains challenged by lower cost service plans offered by some of its competitors.
We are currently maintaining our long-term Neutral recommendation on U.S. Cellular supported by the Zacks # 3 Rank (Hold).
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