U.S. Cellular Earnings: Numbers Show Little to Hang Your Hat On

U.S. Cellular’s USM management has pointed to signs that make it optimistic. Not only did first-quarter results not reveal any of those underlying trends, but in some cases, they contradicted the narrative. The two areas of the business that are seemingly performing well—towers and fixed-wireless broadband—are much too small to offset the firm’s declining mobile phone business. Management maintains that its plan is on track and it will get a boost when it can deploy its midband spectrum, but we fear that it is admirably fighting a losing battle against gigantic peers. In the meantime, the network buildout continues to be a drain on cash, and the controlling shareholders don’t seem interested in selling assets that we think have value. We are reducing our fair value estimate to $24 per share from $28.

Total service revenue was down 2.5% year over year, with sales from postpaid and prepaid services shrinking. As recently as last year, the firm highlighted the prepaid market as an area where it could take share, but this quarter was awful. Prepaid churn was high while gross adds were low; the firm lost a net of 23,000 postpaid customers; average revenue per prepaid user was down 4% year over year; and total prepaid services revenue was down 8% year over year.

Management pointed out—and we wholeheartedly agree—that prepaid weakness stemming from customers moving to postpaid plans is a huge positive. However, postpaid performance—including a 1% year-over-year services revenue decline—was not good either, meaning that if a material number of prepaid customers are simply moving to postpaid, then the deterioration in the postpaid business is not improving. The firm lost a net of 24,000 postpaid customers, an improvement from last year’s 44,000 loss. However, the figure includes the 10,000 fixed-wireless customers added in the quarter, and ARPU was roughly flat sequentially after a nice string of continuing expansion each quarter for the last three years.