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US Cellular (USM) Down on Q1 Earnings and Revenue Miss

United States Cellular Corp. USM -- a subsidiary of Telephone & Data Systems Inc. TDS -- posted dismal first-quarter 2016 results, following which the stock lost over 12% on the NYSE.

In first-quarter 2016, GAAP net income came in at $9 million or 10 cents per share compared with a net income of $160 million or $1.89 in the year-ago quarter. Quarterly earnings per share of 10 cents failed to beat the Zacks Consensus Estimate of 23 cents.

Further, revenues of $958 million were down 0.7% year over year and also lagged the Zacks Consensus Estimate of $972 million. Quarterly Service revenues decreased 8.2% to $760 million. Revenues from Equipment sales were up 44.5% to $198 million.

Smartphone sales retained its strength and represented 75% penetration among postpaid customers, up from 67% recorded in the year-ago quarter. Total cell sites in service were 6,306 compared with 6,219 in the year-ago quarter. Smartphones sold, as a percentage of total handsets sold, constituted 92% against 86% in the prior-year quarter.

Operating Expenses and Income

In the first quarter of 2016, total operating expenses inched up 34.1% to $959 million. Moreover, the company reported operating loss of $1 million, in contrast to the operating income of $250 million recorded in the prior-year quarter.

Cash Flow
    

In the quarter under review, cash from operations came in at $163 million compared with $255 million in the prior-year quarter. Quarterly adjusted free cash flow came in at $62 million compared with $155 million in the year-ago quarter.   

Liquidity

U.S. Cellular exited the quarter with cash and cash equivalents of $772 million compared with $715 million at the end of 2015. At first-quarter end, total debt stood at $1,637 million as against $1,640 million at the end of 2015. The debt-to-capitalization ratio at the end of the reported quarter was 0.31, flat with the end-2015 figure.

ARPU & Churn

Quarterly postpaid ARPU (average revenue per user) decreased to $48.13 from $54.87 in the prior-year quarter. Postpaid ARPA (average revenue per account) was $125.36 compared with $134.94 in the year-earlier quarter. Postpaid churn fell to 1.28% from 1.48% recorded in the first quarter of 2015. Prepaid ARPU decreased to $35.51 from $35.72 in the prior-year quarter. Prepaid churn decreased to 5.37% in the reported quarter from 5.76% a year-ago quarter.

Subscriber Statistics

U.S. Cellular exited the first quarter with a subscriber base of 4,926,000 compared with 4,775,000 at the end of the year-ago quarter. Postpaid subscriber base was 4,454,000 against 4,307,000 at the end of the prior-year quarter. Meanwhile, prepaid subscriber base totaled 399,000 compared with 360,000 at the end of the year-ago quarter. In the reported quarter, U.S. Cellular added a net of 45,000 postpaid subscribers compared with 9,000 in the year-ago quarter. The company also gained 12,000 prepaid customers in the same quarter, similar to the prior-year quarter figure.

Guidance

U.S. Cellular reaffirmed its guidance for full-year 2016. The company expects total operating revenue in the band of $3900–$4,100 million. Adjusted EBITDA is expected at $725–$850 million while capital expenditure is estimated at around $500 million. The company projects operating cash flow in the range of $525--$650 million.

Zacks Rank & Other Key Picks

U.S. Cellular currently carries a Zacks Rank #2 (Buy). Other favorably ranked stocks in the sector are BCE Inc. BCE and TELUS Corporation TU. Both the stocks sport a Zacks Rank #1 (Strong Buy).  

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TELUS CORP (TU): Free Stock Analysis Report
 
BCE INC (BCE): Free Stock Analysis Report
 
TELEPHONE &DATA (TDS): Free Stock Analysis Report
 
US CELLULAR (USM): Free Stock Analysis Report
 
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