Filing summary
Important identity discrepancy: The supplied metadata names ARRAY DIGITAL INFRASTRUCTURE, INC., but the filing text is for UNITED STATES CELLULAR CORPORATION (U.S. Cellular), an 83%-owned subsidiary of Telephone and Data Systems, Inc. This summary reflects the filing text; verify the intended issuer.
Business context and reporting period
Unaudited Form 10-Q for the quarter and nine months ended September 30, 2010, filed November 4, 2010. U.S. Cellular provides wireless service in 26 states and reported approximately 6.1 million total customers, including 5.75 million retail customers. Its reported results are not necessarily indicative of full-year results.
Financial and operating metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $1,060.8 million | $1,057.3 million | $3,114.5 million | $3,153.8 million |
| Operating income | $59.8 million | $59.5 million | $201.0 million | $316.8 million |
| Net income attributable to U.S. Cellular shareholders | $37.4 million | $34.3 million | $125.5 million | $200.2 million |
| Diluted EPS | $0.43 | $0.39 | $1.45 | $2.29 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $584.0 million | $637.7 million |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $379.7 million | $357.8 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | $204.3 million | $279.9 million |
For the nine months, service revenue was $2,921.1 million, down 1%; data revenue increased 31% to $645.4 million and represented 22% of service revenue. Adjusted OIBDA was $641.8 million versus $748.1 million. Operating margin was approximately 5.6% for Q3 and 6.5% year to date, compared with 5.6% and 10.0%, respectively, in the prior-year periods.
At September 30, cash and cash equivalents were $269.3 million; short- and long-term investments totaled $166.9 million, for combined cash and investments of $436.2 million. Current assets were $1,098.6 million and current liabilities $618.3 million. Long-term debt was $867.8 million, with $91,000 current; the $300 million revolving facility had no borrowings and $299.8 million available. The company reported investment-grade ratings, although Fitch downgraded it from BBB+ to BBB during Q3.
Material changes versus comparable periods
- Year-to-date operating income fell 37%, and shareholder net income fell 37%, despite revenue declining only 1%. Management cited higher costs of serving and retaining customers and investment in multi-year initiatives.
- Year-to-date system operations expense rose 6% and selling, general and administrative expense rose 4%. Retail service revenue declined, mainly from lower voice revenue; data growth partly offset this and the fall in roaming revenue.
- Q3 revenue and operating income were broadly flat year over year; shareholder net income increased 9%. Q3 included a $5.4 million retroactive reduction in eligible telecommunications carrier revenue related to a revised FCC interim cap.
- Retail net additions were 6,000 for the nine months versus a net loss of 2,000 a year earlier. Postpaid customers declined by 56,000, while prepaid customers added 62,000. Postpaid churn improved to 1.5% from 1.6%.
- The company disclosed prior-period corrections for revenue and sales-tax-liability errors, which it assessed as immaterial to each affected period and revised in this filing. It stated that recording the cumulative corrections in Q1 or Q2 2010 would have significantly affected those quarters.
Outlook, commentary, risks and unusual items
- Revised full-year 2010 estimates: service revenue of $3.925–$3.975 billion (previous range $3.925–$4.000 billion); adjusted OIBDA of $800–$850 million; operating income of $200–$250 million; depreciation, amortization, accretion and asset-disposal losses of approximately $600 million; and capital expenditures of approximately $600 million. The latter four estimates were unchanged from prior guidance.
- On October 1, 2010, the company launched The Belief Project, including revised plans, loyalty rewards, overage protections and a phone-replacement program. It targets at least 10% growth in postpaid gross additions over several years. The company expects loyalty-reward accounting to defer some revenue when billed amounts are allocated to points; it did not expect this effect to be significant to total retail service revenue in 2010 or 2011.
- A new Amdocs billing and operational support system is expected to take about two years to implement. Estimated payments are $73 million, with an additional $36.4 million maintenance commitment over seven years beginning in 2013.
- Management highlighted competition, economic uncertainty, pressure on voice pricing and roaming, rising data usage and network costs, and uncertainty over FCC broadband, net-neutrality and universal-service rules. It also cited execution and cost risks for network and systems investments.
- The company said cash, expected operating cash flow and available financing should meet foreseeable needs, but cautioned that economic or credit-market changes could constrain financing and investment. Legal and indemnification outcomes may differ materially from recorded estimates; the filing does not quantify a clear aggregate exposure.
Key facts for investors to verify
- Confirm that U.S. Cellular, rather than ARRAY DIGITAL INFRASTRUCTURE, INC., is the intended filing and issuer.
- Review the prior-period revisions and the reported effects on revenue, sales-tax liabilities, earnings and comparisons.
- Track full-year guidance against Q4 performance, particularly operating income, adjusted OIBDA, service revenue and capital expenditures.
- Assess whether data growth and The Belief Project can offset voice-revenue pressure, customer losses and increased operating costs.
- Check progress, actual spending and expected benefits of the Amdocs system commitment, and monitor FCC/USF developments and the company’s liquidity and credit ratings.