United States Cellular Corp. (USM) is a subsidiary of Telephone and Data Systems Inc. (TDS) and remains the sixth largest wireless telecom operator in the U.S. by customer base with 6.1 million subscribers in 26 states.
The company has witnessed strong penetration of smartphones, higher data growth as well as successful adoption of “The Belief Project” last year. We believe U.S. Cellular’s focus on expanding the 3G network and the potential launch of Long-Term Evolution (LTE) technology bode well for future growth. Further, the Belief plan is expected to enhance long-term profits, reduce churn and lead to subscriber additions.
However, U.S. Cellular faces intense competition and pricing pressure, which is affecting its customer accretion. Additionally, the capital intensive nature of business and various regulatory confinements may also have adverse effects on the company’s performance.
Driven by strong demand of smartphones and associated data services, U.S. Cellular is aggressively deploying the EV-DO technology and services in additional markets aiming the massive revenue opportunity that can be tapped through the roll-out of advanced features and data services.
U.S. Cellular is expanding its smartphone and Tablet arena by launching high-performance Android-based phones. The company believes strong demand of smartphones propels growth in associated data services. Hence, U.S. Cellular is aggressively deploying the EV-DO technology and services in additional markets aiming the massive revenue opportunity that can be tapped through the roll-out of advanced features and data services.
In 2011, the company looks forward to expanding its advanced data services by incorporating fast, high-quality 4G services. It is currently evaluating the adoption of LTE to cater to services enabled by the 4G wireless technology. U.S. Cellular plans to launch the LTE network in 2012, with trial in one market in late 2011. To support capital intensive network development, U.S. Cellular expects to invest approximately $ 650 million in 2011.
However, the company remains challenged by significant competitive pressure from telecom giants like AT&T Inc. (T), Verizon Communications Inc. (VZ) and Sprint Nextel Corp. (S). U.S. Cellular continues to be susceptible to aggressive pricing by larger rivals. If management attempts to raise prices, it may result in a considerable slowdown in subscriber growth. As the U.S. wireless market reaches maturity, pricing strategies will be the most salient customer retention element.
We believe U.S. Cellular’s aggressive network roll-out plan may strain finances. Moreover, high costs associated with customer acquisition and retention is expected to weigh on margins.
Further, the company’s high-margin roaming revenues remains under pressure. While this represents an industry-wide trend, it is likely to impact U.S. Cellular more than other rivals, given the company’s strong reliance on roaming fees and pricing factors.
Consequently, we are maintaining our long-term Neutral recommendation on U.S. Cellular supported by the Zacks #3 Rank (Hold).
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