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United States Cellular Corp. (USM), a subsidiary of Telephone and Data Systems Inc. (TDS), reported fourth quarter 2012 loss per share of 47 cents, against the Zacks Consensus Estimate of profit of one cent. Comparing with the prior-year quarter, the result declined from earnings per share of 3 cents.

Fourth quarter revenues of $1,115.2 million missed the Zacks Consensus Estimate of $1,136.0 million but grew 1.4% from $1,099.6 million in the year-ago quarter, driven by data revenues and smartphone sales.

For 2012, the company earned $1.30 per share, on revenue of $4,452.1 million.

Revenue, ARPU & Churn

Quarterly Service revenue dropped 7.8% year over year to $1,008.9 million. Revenues from Equipment sales escalated 52.7% year over year to $106.3 million. Smartphone sales remained strong and represented approximately 63% of all sold devices. Further, 75% of the smartphone sales were driven by 4G devices.

The reported quarter’s retail service ARPU (average revenue per user) improved to $50.94 from $49.78 in the year-ago quarter on the back of successful adoption of smartphones and data plans. Post-paid churn increased to 1.8% from 1.6% in fourth quarter 2011 due to severe competitive pricing.

Subscriber Statistics

U.S. Cellular witnessed subscriber loss of 4,000 retail customers compared with loss of 13,000 in the year-ago quarter. The company exited 2012 with a retail customer base of 5,557,000 compared with 5,608,000, a year ago. Post-paid customer losses totaled 41,000, while prepaid business registered an addition of 37,000 customers.

Liquidity

U.S. Cellular generated $899.3 million in cash flow from operating activities in 2012 compared with $987.9 million a year ago. During 2012, capital expenditures amounted to $826.4 million, while free cash flow was $72.9 million.

Guidance

For fiscal 2013, U.S. Cellular expects Service revenue in the range of $3,600–$3,700 million. Adjusted income before income taxes is estimated in the range of $765–$865 million and capital spending will be approximately $600 million.

Our Analysis

Although U.S. Cellular continues to invest heavily in upgrading wireless services, we believe that hefty capital expenditures will likely remain detrimental to its financial position in the near term. Further, spending on network integration, a competitive market, intense pricing and regulatory pressures might weigh on the stock.

U.S. Cellular – which completed a spectrum swap with Verizon Communications (VZ) and struck a $480 million deal with Sprint Nextel Corp. (S) – carries a Zacks Rank #4 (Sell).