Telephone and Data Systems Inc. (TDS) reported a first quarter 2013 earning of 1 cent per share, missing the Zacks Consensus Estimate of 2 cents. Earnings for the quarter dropped from 48 cents per share earned in the year-ago quarter.

Revenues remained flat year over year at $1,308.6 million in the reported quarter, missing our projection of $1,312.0 million. Operating income was $7.2 million compared with $93.6 million in the year-ago quarter.

U.S. Cellular (Wireless)

Revenues from the company’s wireless subsidiary U.S. Cellular Corp. (USM) declined 1% year over year to $1,081.7 million in the first quarter.

Total retail service ARPU (average revenue per user) improved to $51.13 from $50.52 in the year-ago quarter on the back of successful adoption of smartphones and data plans. Post-paid ARPU was $54.85 compared to 54.00 in the year ago quarter. Churn rates increased to 1.7% from 1.6% in first quarter 2011 due to severe competitive pricing.

U.S. Cellular witnessed subscriber loss of 1,000 retail customers compared with 16,000 losses in the year-ago quarter. The company exited the quarter with a retail customer base of 5,225,000 compared with 5,210,000 a year ago. Post-paid customer losses totaled 32,000, while prepaid business registered an addition of 31,000 customers.

TDS Telecom (Wireline)

Revenue from the wireline segment grew 6% year over year to $217.1 million.

In the reported quarter, incumbent local exchange carriers (:ILEC) high-speed data customer base (residential and commercial) grew 1.2% year over year to 240,300. However, ILEC physical access lines (residential and commercial) slid 5.2% year over year to 476,100.

The competitive local exchange carrier (:CLEC) high-speed data customer base (residential and commercial) declined to 18,100 from 23,800 in the year-ago quarter. CLEC physical access lines (residential and commercial) declined to 152,700 from 180,700 in the year-ago quarter.

Liquidity

Telephone and Data Systems exited the quarter with cash and cash equivalents of $766.7 million compared with $740.5 million at the end of fiscal 2012. Long-term debt was $1,721.3 million compared with $1,721.6 million at year-end 2012.

Guidance

For fiscal 2013, Telephone and Data Systems expects total operating revenue of $4,515–$4,685 million. Of this, U.S. Cellular revenue is expected to be $3,620–$3,740 million and TDS Telecom revenue will be $850–$900 million.

Adjusted income before income taxes is expected in the range of $595–$715 million for U.S. Cellular, $220–$250 million for TDS Telecom and $810–$960 million for the company.

Capital expenditure will be approximately $735 million for U.S. Cellular and $155 million for TDS Telecom, netting $900 million.

Our Analysis

We expect Telephone and Data Systems to rebound in the coming months based on its favorable offerings, high sales of Google Inc.’s (GOOG) Android-based smartphones, bundled and unlimited service plans, the launch of Long Term Evolution services and growing popularity of the Belief project.

However, fierce competition from major market players such as AT&T Inc. (T) and heavy investment in an uncertain market condition may limit any upside to the company’s earnings. Further, regulatory issues regarding Universal Service Fund are also likely to weigh on the company’s near-term growth.

Telephone and Data Systems currently holds a Zacks Rank #3 (Hold).