(USM) U.S. Cellular in Neutral Lane

U.S. Cellular Corporation (USM), the sixth largest wireless telecom operator in the U.S., continues to expand its advanced data services by incorporating fast, high-quality 4G Long-Term Evolution (LTE) technology. Additionally, the booming smartphone market has encouraged the company to diversify its related offerings work on the introduction of a 4G enabled smartphone.

However, competitive pricing, which resulted in subscriber loss, has taken a major toll on the company’s earnings. As a result, first quarter earnings fell 26% from the year-ago level. Further, U.S. Cellular’s capital intensive nature of business and various regulatory issues lead to our cautious outlook.

Over the years, U.S. Cellular has successfully acquired wireless licenses in areas adjacent to already established coverage regions. These enable the company to build contiguous operating markets, which in turn provide extended in-network capabilities for customers.

U.S. Cellular’s advancement in 3G Evolution-Data Optimized (EV-DO) has materially increased the throughput of data transmissions on its network compared to offerings of other nationwide cellular carriers. Currently, the company covers approximately 98% of its customers with its 3G network.

U.S. Cellular is evaluating the adoption of LTE technology to cater to the demand for 4G services. U.S. Cellular plans to deliver LTE services by November 2011 through nearly 1,250 cell sites to more than 25% of its subscriber base across 24 markets. The initial deployment of the 4G LTE will be in states such as Iowa, Wisconsin, Maine, North Carolina, Texas and Oklahoma.

Further, an anticipated spectrum swap with Verizon Communications (VZ) will provide U.S. Cellular with 13 lower 700 MHz B-Block licenses and 5 lower 700 MHz C-Block licenses in Idaho, Illinois, Indiana, Kansas, Nebraska, Oklahoma, Oregon and Washington.

The company remains optimistic on the growing demand for its smartphones. In first quarter, smartphone sales represented approximately 42% of equipment sales and are expected to drive revenue ahead.

U.S. Cellular continues to expand its smartphone and tablet arena and plans to launch its first 4G enabled smartphone packed with Android 2.3 operating system this year. Recently, the company introduced two new mobile tablets and entered the Windows 7 platform with four new HTC smartphones.

U.S. Cellular has instituted several marketing initiatives, including the introduction of four bundled services that offer unlimited Internet and messaging plans with most popular features at affordable prices. In October 2010, U.S. Cellular launched “The Belief Project,” which focuses on price plans and handsets as well as provides a compelling high-value portfolio of products and services.

In the first quarter, U.S. Cellular had approximately 1.8 million customers under its Belief plan. Further, the project is expected to have a positive impact on long-term profitability by increasing post-paid subscribers at least 10% over the next several years and contributing to growth in average revenue per customer.

However, we believe U.S. Cellular will face significant challenges ahead. Most of the regional markets are extremely competitive as is evident from consolidation of several large carriers. Companies like AT&T (T), Sprint Nextel (S) and Verizon have participated in several merger and acquisition deals that resulted in Tier-1 carrier expansion into larger geographical markets.

As a result, pricing strategies have become highly competitive and any rise in prices may result in a considerable slowdown in subscriber growth. As the U.S. wireless market reaches maturity, pricing strategies will be the salient customer retention element.

U.S. Cellular remains challenged by lower-cost mobile service plans from competitors. Company like MetroPCS (PCS) has revised their service plans (“Wireless for All”), which start at $40 per month and include all taxes and regulatory fees. This plan may appear more appealing to cell phone users than U.S. Cellular’s $70 Primary Plus plan launched in November 2010.

While U.S. Cellular has effectively transformed its wireless network from the CDMA technology to faster versions, such as EV-DO, the aggressive network rollout plan may strain finances moving forward. Moreover, high costs associated with customer acquisition and retention are expected to weigh on its margins.

The company’s high-margin roaming revenues remain under pressure. While this is an industry-wide trend, it is likely to impact U.S. Cellular more, given the company’s strong reliance on roaming fees and pricing factors.

Consequently, we reaffirm our long-term Neutral recommendation on U.S. Cellular. The company also holds a Zacks #3 Rank (Hold).

METROPCS COMMUN (PCS): Free Stock Analysis Report

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