U.S. Cellular’s Business Is Struggling, but Monetizing Assets Could Bring Greater Shareholder Value

Equity Analyst

Matthew Dolgin

U.S. Cellular faces challenges that are a byproduct of its small regional scale in an industry that has come to be dominated by gigantic national wireless carriers. We think its core wireless business will continue to be challenged as a result. However, we’re optimistic about some of the other levers the firm is looking to pull in its operations, and U.S. Cellular holds assets that we think have significant value, including its portfolio of over 4,000 towers and a 5.5% stake in Verizon’s Los Angeles wireless business.

U.S. Cellular offers wireless service in parts of 21 states, with much of its footprint outside urban areas. The firm used to have more dominant spectrum holdings in its markets, and in many it did not face each of the biggest competitors. That has changed, however, and it now generally competes with Verizon, AT&T, and T-Mobile in all its markets. While U.S. Cellular says its network quality remains superior in many areas and its local focus is beneficial, we don’t think either factor offsets its challenges. We expect it will need to continue to offer better prices and promotions than competitors and will be challenged to outearn its cost of capital.

With that said, we see several potential upsides for U.S. Cellular’s business and stock. The firm has begun to roll out fixed-wireless broadband service, which is a new and potentially meaningful revenue stream. We’ve generally been skeptical about the ability of fixed wireless to compete with good fixed-line broadband alternatives, but U.S. Cellular can opportunistically deploy fixed wireless where good alternatives aren’t available. The service should bring little incremental cost, making it low risk. The firm is also making a renewed push to colocate other carriers on the towers it owns, again opening up a high-margin revenue stream.

In addition to the Los Angeles partnership, which typically distributes nearly $100 million annually to U.S. Cellular, other assets offer support to a challenged business, including spectrum licenses and the customers U.S. Cellular has, as well as other partnerships and investments that generate significant cash.

Business Strategy & Outlook

U.S. Cellular does not have an economic moat, in our view. Generally, economic moats for the biggest telecom firms are built on cost advantages and the efficient scale that stems from the cost of building an expansive network. U.S. Cellular is at a disadvantage to its bigger peers due to its much smaller size and lack of national operations. Its operating performance in recent years exemplifies those disadvantages, and consolidation within the U.S. wireless industry has made its position worse. 

U.S. Cellular has always been a regional wireless carrier. Its business was predominantly weighted to more rural areas, and it was an original recipient of the initial wireless spectrum the Federal Communications Commission distributed, free of charge, in the 1980s. With the initial spectrum, U.S. Cellular had a position that gave it an advantage in many of its geographies relative to bigger national competitors as the wireless industry developed. Over time, the biggest competitors consolidated the industry, giving them a national presence, numerous spectrum bands were auctioned, giving them opportunities to procure spectrum in areas they were originally lacking, and technological advances have and will continue to allow carriers to more efficiently use their spectrum. U.S. Cellular now competes against each of the big three national competitors in most of its markets, and we don’t believe advantages it may have once had remain.

Without a spectrum advantage, a moat would need to rely on moat sources standard in the industry, but those don’t apply to U.S. Cellular. Its small size and disjointed, regional network keep it from having a cost advantage. Verizon, T-Mobile, and AT&T can leverage their fixed costs and marketing expenses over much larger customer bases. AT&T has the added benefit of offering fixed-line service in some of the largest markets U.S. Cellular serves, including Milwaukee and Oklahoma City. As AT&T upgrades this network with fiber, it will have the ability to efficiently increase the density of its wireless network while offering a wide range of services to households. 

We estimate that U.S. Cellular’s postpaid phone customer penetration, as a percentage of the total population in its markets, is just over 10%. It had 3.7 million postpaid phone customers (5 million total customers, including prepaid and other connected devices) at the end of 2022. In contrast, Verizon, T-Mobile, and AT&T generally sport postpaid penetration rates in the 20%-30% range over their entire U.S., and they have postpaid wireless phone customer bases of 93 million, 73 million, and 70 million, respectively. The dynamic shows up in the firms’ margin profiles. U.S. Cellular, where the wireless business makes up well over 90% of total revenue, maintains an EBITDA margin around 20%. Verizon and AT&T, the two competitors we rate as having cost advantages, have had wireless EBITDA margins above 40% each year during that span (and consolidated EBITDA margins above 30%). T-Mobile, which is more of a pure wireless carrier like U.S. Cellular, has had an EBITDA margin in the mid-30% range each year since 2020, the year it acquired Sprint.

With a disadvantage in the current environment, the efficient scale inherent in the telecom industry doesn’t help U.S. Cellular. The efficient scale should keep new competitors from coming in (with the exception of Dish Network, which is entering the wireless business as a regulatory byproduct of the T-Mobile/Sprint merger and has collected a significant spectrum position over many years), as the enormous cost to build a network and gain share makes it unlikely a new entrant could earn economic profits in an industry that already generates slim excess returns on invested capital. However, the primary threat to U.S. Cellular doesn’t come from new entrants that could be dissuaded from building a network as much as it does from existing competitors that already have scale.

None

Economic Moat

United States Cellular

United States Cellular Corp. engages in the provision of wireless telecommunication services. Its products include smartphones, tablets, vehicle routers, and accessories. It offers Internet plans, prepaid and postpaid plans, and roaming services. The company was founded by Leroy T. Carlson in 1983 and is headquartered in Chicago, IL.

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U.S. Cellular (USM) reports a top-line contraction year over year in the second quarter of 2023, owing to a reduction in total postpaid and prepaid retail connections.

U.S. Cellular (USM) Q2 Earnings Miss Estimates, Revenues Fall

U.S. Cellular and Telephone & Data Systems announced on Friday that their boards were exploring strategic alternatives for U.S. Cellular.

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The stock of U.S. Cellular Corp. USM, +90.67% rocketed 91% on Friday, after the boards of the company and its parent Telephone and Data Systems TDS, +80.76% said they're reviewing strategic options for the company. TDS' stock soared 81%.

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United States Cellular (USM) came out with quarterly earnings of $0.05 per share, missing the Zacks Consensus Estimate of $0.21 per share. This compares to earnings of $0.25 per share a year ago.

United States Cellular (USM) Lags Q2 Earnings and Revenue Estimates

2Q 2023 Highlights* Focused on improving subscriber trajectory to reduce postpaid losses - made progress in reducing postpaid churn Reduced postpaid handset churn 8% Executing on growth initiatives Fixed Wireless customers grew 66% to 96,000   Tower rental revenues grew 10% Reduced debt balance by $150 million in 2Q'23 Launching 5G Mid-Band network - providing low latency and faster speeds Ended June with availability in parts of Illinois, Iowa, Wisconsin, Maine, Missouri, Nebraska, Oklahoma, Oregon, Virginia and Washington * Comparisons are 2Q'22 to 2Q'23 unless otherwise noted CHICAGO , Aug. 4, 2023 /PRNewswire/ -- As previously announced, UScellular will hold a teleconference on August 4, 2023, at 9:00 a.m. CDT. Listen to the call live via the Events & Presentations page of investors.uscellular.com.

UScellular reports second quarter 2023 results

CHICAGO , Aug. 4, 2023 /PRNewswire/ -- The boards of directors of Telephone and Data Systems, Inc. ("TDS") (NYSE: TDS) and United States Cellular Corporation ("UScellular") (NYSE: USM) have each decided to initiate a process to explore strategic alternatives for UScellular. The comprehensive process will explore a range of strategic alternatives.

Telephone and Data Systems and UScellular Announce Exploration of Strategic Alternatives for UScellular

CHICAGO , July 31, 2023 /PRNewswire/ -- Telephone and Data Systems, Inc. (NYSE: TDS) and United States Cellular Corporation (NYSE: USM) will be webcasting their second quarter operating results conference call on August 4, 2023, at 9:00 a.m. central time.

TDS and UScellular to release second quarter operating results and host conference call on August 4, 2023

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CHICAGO, May 16, 2023 /PRNewswire/ -- Telephone and Data Systems, Inc. (NYSE: TDS) and United States Cellular Corporation (NYSE: USM) will present at the 51st Annual J.P. Morgan Global Technology, Media & Communications Conference on May 23, 2023 at 3:15 pm Eastern Daylight Time (EDT).

TDS and UScellular to present at 51st Annual J.P. Morgan Global Technology, Media & Communications Conference

NEW YORK , May 16, 2023 /PRNewswire/ -- The Klein Law Firm announces that it is investigating allegations that United States Cellular Corporation ("UScellular") (NYSE: USM) violated federal securities laws. CURRENT INVESTIGATION DETAILS: After market closed on November 3, 2022, UScellular announced results for the third fiscal quarter ended September 30, 2022, including that service revenues totaled $781 million, versus $788 million for the same period in the previous year, and that net income (loss) attributable to UScellular shareholders and related diluted earnings (loss) per share were $(12) million and $(0.15), respectively, for the third quarter of 2022 compared to $34 million and $0.38, respectively, for the third quarter of 2021.

USM NEWS: The Klein Law Firm Initiates an Investigation Involving Possible Securities Fraud Violations by Officers of United States Cellular Corporation

NEW YORK , May 15, 2023 /PRNewswire/ -- Attention United States Cellular Corporation ("UScellular") (NYSE : USM) shareholders: The Law Offices of Vincent Wong announce that an investigation has commenced into UScellular and certain of its officers and directors regarding potential securities fraud. The investigation concerns, in part, the below: After market closed on November 3, 2022, UScellular announced results for the third fiscal quarter ended September 30, 2022, including that service revenues totaled $781 million, versus $788 million for the same period in the previous year, and that net income (loss) attributable to UScellular shareholders and related diluted earnings (loss) per share were $(12) million and $(0.15), respectively, for the third quarter of 2022 compared to $34 million and $0.38, respectively, for the third quarter of 2021.

USM ALERT: The Law Offices of Vincent Wong Investigate United States Cellular Corporation for Potential Violations of Securities Laws

NEW YORK , May 12, 2023 /PRNewswire/ -- Jakubowitz Law announces that an investigation into potential securities fraud allegations has commenced on behalf of shareholders of United States Cellular Corporation (NYSE:USM). To be contacted by a member of our team, fill out the form: https://claimyourloss.com/securities/uscellular-class-action-loss-submission-form/?from=4 Further details on the investigation: After market closed on November 3, 2022, UScellular announced results for the third fiscal quarter ended September 30, 2022, including that service revenues totaled $781 million, versus $788 million for the same period in the previous year, and that net income (loss) attributable to UScellular shareholders and related diluted earnings (loss) per share were $(12) million and $(0.15), respectively, for the third quarter of 2022 compared to $34 million and $0.38, respectively, for the third quarter of 2021.

USM FRAUD ALERT: Jakubowitz Law is Investigating United States Cellular Corporation in Connection with Potential Violations of Federal Securities Laws

CHICAGO , May 11, 2023 /PRNewswire/ -- Telephone and Data Systems, Inc. [NYSE: TDS] and United States Cellular Corporation [NYSE: USM] announce the following webcasts: UScellular's Annual Meeting of Shareholders is May 16, 2023, at 8:30 a.m. Central time.

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NEW YORK , May 11, 2023 /PRNewswire/ -- Levi & Korsinsky notifies investors that it has commenced an investigation of United States Cellular Corporation ("UScellular" or the "Company") (NYSE: USM) concerning possible violations of federal securities laws. After market closed on November 3, 2022, UScellular announced results for the third fiscal quarter ended September 30, 2022, including that service revenues totaled $781 million, versus $788 million for the same period in the previous year, and that net income (loss) attributable to UScellular shareholders and related diluted earnings (loss) per share were $(12) million and $(0.15), respectively, for the third quarter of 2022 compared to $34 million and $0.38, respectively, for the third quarter of 2021.

USM INVESTOR ALERT: Levi & Korsinsky, LLP Notifies Investors of an Investigation Involving Possible Securities Fraud Violations by Officers of United States Cellular Corporation

NEW YORK , May 10, 2023 /PRNewswire/ -- The Gross Law Firm issues the following notice to shareholders of United States Cellular Corporation: After market closed on November 3, 2022, UScellular announced results for the third fiscal quarter ended September 30, 2022, including that service revenues totaled $781 million, versus $788 million for the same period in the previous year, and that net income (loss) attributable to UScellular shareholders and related diluted earnings (loss) per share were $(12) million and $(0.15), respectively, for the third quarter of 2022 compared to $34 million and $0.38, respectively, for the third quarter of 2021. UScellular also announced that it was reducing the Company's fiscal year 2022 outlook, such that the upper bounds for the ranges of fiscal 2022 guidance concerning service revenues, adjusted OIBDA, and adjusted EBITDA were lowered by $50 million, $75 million, and $75 million, respectively.

INVESTIGATION ALERT: The Gross Law Firm Notifies Shareholders of United States Cellular Corporation of an Investigation and Potential Class Action Lawsuit - (NYSE: USM)

U.S. Cellular (USM) reported lower revenues year over year owing to a reduction in postpaid retail and prepaid connections and lower equipment sales revenues.

U.S. Cellular (USM) Q1 Earnings Lag Estimates, Revenues Down

United States Cellular (USM) came out with quarterly earnings of $0.15 per share, missing the Zacks Consensus Estimate of $0.18 per share. This compares to earnings of $0.57 per share a year ago.

United States Cellular (USM) Q1 Earnings and Revenues Lag Estimates

2023 guidance reaffirmed CHICAGO , May 4, 2023 /PRNewswire/ -- As previously announced, UScellular will hold a teleconference on May 5, 2023, at 9:00 a.m. CDT. Listen to the call live via the Events & Presentations page of investors.uscellular.com.

UScellular reports first quarter 2023 results

CHICAGO , April 28, 2023 /PRNewswire/ -- Telephone and Data Systems, Inc. (NYSE: TDS) and United States Cellular Corporation (NYSE: USM) will be webcasting their first quarter operating results conference call on May 5, 2023, at 9:00 a.m. central time.

TDS and UScellular to release first quarter operating results and host conference call on May 5, 2023

NEW YORK , April 28, 2023 /PRNewswire/ -- Levi & Korsinsky notifies investors that it has commenced an investigation of United States Cellular Corporation ("UScellular" or the "Company") (NYSE: USM) concerning possible violations of federal securities laws. After market closed on November 3, 2022, UScellular announced results for the third fiscal quarter ended September 30, 2022, including that service revenues totaled $781 million, versus $788 million for the same period in the previous year, and that net income (loss) attributable to UScellular shareholders and related diluted earnings (loss) per share were $(12) million and $(0.15), respectively, for the third quarter of 2022 compared to $34 million and $0.38, respectively, for the third quarter of 2021.

USM INVESTOR ALERT: Levi & Korsinsky, LLP Reminds Investors of an Investigation Involving Possible Securities Fraud Violations by Officers of United States Cellular Corporation

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CHICAGO , March 1, 2023 /PRNewswire/ -- Telephone and Data Systems, Inc. (NYSE: TDS) and United States Cellular Corporation (NYSE: USM) are attending the following conferences. Morgan Stanley Technology, Media & Telecom ConferenceWebcast on March 8, 2023 at 4:30 pm ET Douglas W.

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U.S. Cellular (USM) has been upgraded to a Zacks Rank #2 (Buy), reflecting growing optimism about the company's earnings prospects. This might drive the stock higher in the near term.

News for United States Cellular Stock (USM)