Can U.S. Cellular survive long term as a regional player against four much stronger national carriers in the same region? by David Dixon, FBR & Co.
1. The 4 US national carriers are: AT&T, Verizon, Sprint and T-Mobile USA.
2. U.S. Cellular, is a regional wireless carrier which owns and operates the fifth-largest wireless telecommunications network in the United States, serving 4.9 million customers in 426 markets in 23 US states as of the first quarter of 2016. The company has its headquarters in Chicago, Illinois.
3. The Chicago White Sox (MLB-American League) play there home games at U.S. Cellular Field, formerly Comiskey Park. This author attended a White Sox-Cubs game there in July 2005.
U.S. Cellular has retained most of its subscribers in recent years, but the question remains how it will compete against four national carriers with nationwide LTE coverage that will likely extend to the U.S. Cellular region. The company has refocused on its strength as a core rural market operator, but the increasing pace of technology adoption suggests that U.S. Cellular will be challenged to keep pace with its larger competitors.
A greater alignment with AT&T through interoperability may help lower device costs. An LTE roaming agreement with AT&T or Sprint could benefit both companies as follows:
(1) AT&T and Sprint would avoid the deployment cost of a separate rural LTE network where it makes less economic sense (AT&T does not have 700 MHz LTE A block in rural areas, and Sprint has a limited network presence in the region), while AT&T and Sprint customers would benefit from additional coverage as their respective bases are seeded with 700 MHz LTE Band 12 devices over time;
(2) U.S. Cellular would benefit in urban areas by relying on the AT&T network or Sprint network where it has not deployed an LTE network. However, one-sided LTE roaming costs are likely to be high, which may pressure EBITDA more than expected. Yet a reciprocal LTE roaming agreement with Sprint should not be ruled out and is, in our view, more likely than an acquisition of the company as Sprint focuses its capital spending in urban areas.
We see greater than generally expected declines in high-margin roaming revenues as Sprint seeks to regain owner economics through a comprehensive roaming-reduction plan that includes additional geographic coverage. An overbuild by Sprint would pressure EBITDA.
We believe T-MobileUSA (TMUS) aggressive rollout of extendedrange LTE on 700 MHz may have driven the acceleration in roaming revenue declines. TMUS recently acquired 12 MHz of 700 MHz A-block spectrum from Leap Licenseco, Inc. in the Chicago metropolitan area. We expect this spectrum to be put into use very quickly, which could further weigh on USM’s high-margin roaming revenues.
2Q16 Results Recap:
- Consolidated revenues were $980.0M (+0.4% YOY), with company-defined adjusted EBITDA of $218.0M, versus consensus of $211.7M, and EPS of $0.32, versus consensus of $0.28.
- Total net customer adds were 50,000 (+100% YOY), composed of postpaid net adds of 36,000 (+111.8% YOY) and prepaid net adds of 14,000 (+75.0% YOY).
- Postpaid churn was 1.20%, and prepaid churn was 4.86%