U.S. Cellular (USM), the wireless subsidiary of Telephone and Data Systems (TDS), reported disappointing third-quarter 2009 results with earnings per share of 41 cents, coming in below the Zacks Consensus Estimate of 57 cents. It also declined significantly from the year-ago EPS of $1.02. Net income plunged 60% year over year to $35.6 million as a result of decreased sales and higher operating costs.

Top-line Hit by Lower Roaming Revenue

The Chicago-based carrier reported operating revenue of $1,058 million, down 3% from $1,092 million a year ago. This decline is attributable to lower service revenue, which decreased 3% year over year to $984.9 million due to a 26% year over year reduction in inbound roaming revenues, primarily resulting from Verizon‘s (VZ) acquisition of Alltel.

Decline in roaming revenue was offset by healthy data revenue, which grew 34% over the prior-year quarter to $174.3 million, accounting for 18% of service revenue. Reported ARPU (average revenue per user) of $47.02 reflects a year over year improvement.

Subscriber Losses Continues

U.S. Cellular was hit by weak economic conditions in its service territories and intense competition, as it lost 24,000 customers during the quarter. That brought the total subscriber base to 6.13 million. U.S. Cellular is being challenged by the increasingly competitive domestic wireless market. Competition has increased after the launch of exclusive premium wireless handsets by the top-tier carriers such Verizon and AT&T (T).

The company registered a net loss of 14,000 retail prepaid customer in the quarter, compared to a net loss of 15,000 customers in the prior-year quarter. However, decline in the prepaid segment was partly offset by a net gain of 8,000 subscribers in the postpaid segment. Postpaid customers accounted for 96% of the total retail customers. Postpaid churn increased year over year to 1.7% and remained stable sequentially.

Financial Condition

U.S. Cellular generated cash flow from operating activities of $637.7 million and spent $357.8 million in capital expenditures during the first nine months of 2009, resulting in a free cash flow of approximately $280 million. U.S. Cellular exited the quarter with $404.9 million in cash and cash equivalents and approximately $1 billion in total debt.

Outlook

The company has confirmed its guidance for 2009. Service revenue is projected in the range of $3.9 billion to $3.95 billion. Operating income is forecasted at $300-$375 million. U.S. Cellular continues to expect depreciation, amortization and accretion to be approximately $600 million. The capital expenditure target remains at $575 million. Based on uncertain economic conditions, U.S. Cellular withdrew its net subscriber addition target for the year.

In order to drive wireless growth, U.S. Cellular is expanding its 3G wireless broadband network (based on EV-DO technology) coverage, as it achieved 75% penetration of the postpaid customer base at the end of the third quarter. The company plans to upgrade more than 60% of its total cell sites with 3G EV-DO by the end of 2009, a significant increase from approximately 23% coverage achieved in 2008.

To further drive data revenue, U.S. Cellular is expanding its smartphone portfolio with premium handset offerings, as it recently launched Research In Motion‘s (RIMM) latest CDMA smartphone, BlackBerry Tour 9630. This has enabled the company to join the league of Tier-1 carriers in offering top-notch cellular handsets.

However, U.S. Cellular’s aggressive 3G roll-out plans through 2009 could strain finances if capital expenditures are required beyond management’s expectations. Moreover, a decline in roaming revenues, along with subscriber retention problems, suggests a less optimistic outlook for the remainder of 2009.

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