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United States Cellular Corporation (USM): Navigating the Competitive Landscape with Resilience
Published on September 24, 2024 | Ticker: USM

United States Cellular Corporation (USM) has demonstrated its ability to navigate the dynamic wireless industry, delivering solid financial results amidst a challenging competitive environment. With a focus on network enhancements, cost optimization, and strategic initiatives, USM continues to position itself for long-term success.

Financial Highlights

For the full year 2023, USM reported annual net income of $54 million, annual revenue of $3.906 billion, annual operating cash flow of $866 million, and annual free cash flow of $128 million. In the first quarter of 2024, the company generated quarterly net income of $24 million, quarterly revenue of $950 million, quarterly operating cash flow of $203 million, and quarterly free cash flow of $61 million.

Business Overview

USM is an 83%-owned subsidiary of Telephone and Data Systems, Inc. (TDS), serving customers with 4.5 million retail connections, including 4.1 million postpaid and 0.4 million prepaid connections, across 21 states. The company operates 6,995 cell sites and owns 4,382 towers, employing approximately 4,300 associates.

USM's mission is to connect its customers to what matters most to them, providing exceptional wireless communication services, enhancing consumer lives, increasing business competitiveness, and improving government efficiency in its markets. The company's strategy focuses on attracting and retaining customers through a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all with a local community focus.

Operational Highlights

In the first quarter of 2024, USM's postpaid handset net losses increased due to lower gross additions, a result of continued aggressive industry-wide competition and a decrease in the pool of available customers. However, the company's total postpaid connected device net additions increased, driven by higher demand for fixed wireless home internet and a decrease in hotspot churn.

Postpaid ARPU increased by 3% in the first quarter of 2024, primarily due to a decrease in promotional discounts, an increase in cost recovery surcharges, favorable plan and product offering mix, and an increase in device protection plan revenues. Postpaid ARPA increased slightly, reflecting the impacts on Postpaid ARPU, partially offset by a decrease in the number of connections per account.

Competitive Landscape and Strategic Initiatives

USM faces intense competition from both traditional carriers and cable wireless companies, which have been aggressive in their promotional offers and pricing to attract and retain customers. The company estimates that cable wireless providers offload approximately 90% of their traffic to WiFi, 10 to 20 percentage points higher than the estimated WiFi offload of USM and other large wireless carriers. This dynamic, along with the cable providers' ability to cross-subsidize their wireless offerings with wireline profits, presents a significant challenge.

To address this competitive landscape, USM is focused on several strategic initiatives. The company is enhancing its network capabilities, including the deployment of 5G technology, with a focus on mid-band spectrum to provide additional speed and capacity. USM is also investing in its fixed wireless home internet business, which has grown its subscriber base by 42% compared to the prior year, ending the first quarter of 2024 with 124,000 subscribers.

Additionally, USM is exploring opportunities in the business segment, partnering with companies like Rockwell Automation and Cape to leverage 5G capabilities for innovative solutions. These enterprise-focused initiatives are expected to help monetize 5G investments and offset the challenges in the consumer market.

Cost Optimization and Financial Discipline

USM's cost optimization program continues to deliver strong results, with a 7% decrease in cash expenses compared to the prior year in the first quarter of 2024. The company expects its full-year 2024 adjusted operating income margin as a percentage of service revenues to remain relatively flat, despite expected service revenue declines, due to the positive impact of the CDMA network shutdown, the 2023 workforce reduction, and other cost-saving initiatives.

In terms of capital allocation, USM's capital expenditures for the full year 2024 are expected to trend toward the lower end of the company's guidance range and be less than 2023 levels. The company remains focused on prudently investing in its network and technology while maintaining financial discipline.

Liquidity

USM operates a capital-intensive business and has incurred negative free cash flow at times in the past. However, the company believes that its existing cash and investment balances, funds available under its financing agreements, and expected cash flows from operating and investing activities will provide sufficient liquidity to meet its day-to-day operating needs and debt service requirements.

As of March 31, 2024, USM had $185 million in cash and cash equivalents and $610 million in available undrawn borrowing capacity from its revolving credit and receivables securitization agreements. The company's debt covenants require it to maintain certain financial ratios, which USM believes it was in compliance with as of the end of the first quarter.

Guidance and Outlook

For the full year 2024, USM's financial guidance remains unchanged from the guidance issued in February 2024. The company expects capital expenditures to trend toward the lower end of its guidance range and be less than 2023 levels. USM remains focused on its cost optimization program, network enhancements, and strategic initiatives to navigate the competitive landscape and drive long-term value for its shareholders.

Risks and Challenges

USM operates in a highly competitive industry, facing challenges from both traditional carriers and cable wireless providers. The company's smaller scale relative to larger competitors, changes in roaming practices, and the ability to attract and retain talent are among the key risks it faces. Additionally, the company's reliance on wireless spectrum, the pace of technological advancements, and potential legal and regulatory changes could impact its business.

Conclusion

United States Cellular Corporation has demonstrated its resilience in the face of a dynamic and competitive wireless industry. By focusing on network enhancements, cost optimization, and strategic initiatives, the company is positioning itself for long-term success. While challenges persist, USM's financial discipline, liquidity position, and commitment to serving its customers position it well to navigate the evolving market landscape.

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