On Dec 5, we retained our Neutral recommendation on
United States Cellular Corporation
), subsidiary of
Telephone & Data Systems Inc.
). Despite gaining momentum in wireless services, the company's
third-quarter top and bottom-line results declined year over year
and missed our projections. Currently, the Zacks Consensus
Estimate for the company is pegged at a loss per share of 35
cents and it carries a Zacks Rank #3 (Hold).
U.S. Cellular has taken a number of strategic actions to
accelerate long-term growth. These measures include introduction
of a new billing system, expansion of distribution channels,
continuous rollout of 4G LTE, enhancement of LTE handsets and
various spectrum transaction deals. The company is also focused
on improving cost and profitability by managing equipment
subsidies and data delivery cost.
Moreover, U.S. Cellular has instituted several marketing
initiatives. One such example is the introduction of four new
bundled services that offer unlimited Internet and messaging
plans with top popular features, at affordable prices. In
addition, the company is gaining significantly from its "Hello
Better" campaign that focuses on customer services. Given these
positives, U.S. Cellular has witnessed substantial branding power
resulting in a flat sequential churn rate.
We believe these initiatives will bring down the retention
cost on existing customers, thereby improving churn rates and the
rate of customer accretion. This will consequently result in
Service revenues of $3,590-$3,640 million estimated for 2013
U.S. Cellular remains optimistic about the growing demand for
smartphone, which has market penetration of 46%, supporting
growth in data revenues. The company expects equipment
pricing to remain competitive given the growing market for
smartphones, which will also lower the equipment sales.
Smartphone sales represent approximately 64% of equipment
sales, and 89% of the smartphones are 4G devices. Over the near
term, rapid transition of the wireless market from the 3G to 4G
LTE space and the demand for 4G devices are likely to remain
high. To tap into this opportunity, the company has introduced a
wide range of 4G LTE devices in 2013 as part of a robust
competitive portfolio that includes top Android devices.
To increase smartphone penetration in the prepaid market, the
company offers its "U Prepaid" service across 400 selected
outlets of Wal-Mart. U.S. Cellular also provides its postpaid
products and services through Wal-Mart's Sam's Club and is
negotiating with other large retailers for product distribution.
Moreover, it started offering Shared Data Plans for consumers and
business to allow customers to flexibly use data services by
choosing any single bucket of data for their smartphones, basic
phones, tablets, hotspots and wireless modems.
We believe that the long-term higher average revenue per user
(ARPU) from smartphone users and full utilization of LTE network
capacity by migration of customers from 3G to 4G networks will
mitigate the operating cost headwinds from higher subsidies on
However,customer churn remains a primary concern for U.S.
Cellular and the absence of iPhone prior to November this year
was a key contributor to this issue. Further, a higher mix of
smartphones and increased subsidies on 4G LTE devices will
continue to affect the company's expenses. We believe that the
aggressive LTE network rollout plan may strain finances, if
capital expenditures exceed management's expectations in order to
keep networking technologically competitive.
Moreover, high costs associated with network integration and
construction of new cell sites, increasing capacity in existing
cell sites and upgrading of wireless technology or spectrum
licensing; are also expected to considerably pressurize the
U.S. Cellular operates in an intensely competitive wireless
market and remains significantly challenged by its competitors'
lower-cost mobile service plans. On a regional level, the
company's immediate competition is from
Leap Wireless International
). Additionally, U.S. Cellular remains susceptible to
aggressive pricing by larger rivals like
If management attempts to raise prices, it may markedly slow
down subscriber growth. As the U.S. wireless market reaches
maturity, pricing strategies will be the most salient customer
retention element. Further, the ongoing consolidation in the
wireless industry through mergers, acquisitions and joint
ventures are stiff challenges.
Weighing these positive and negative factors, we remain
cautious over the near-term performance of the company and thus,
retain our Neutral recommendation.
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