Business Context and Reporting Period
Company: United States Cellular Corporation (U.S. Cellular)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: U.S. Cellular is a wireless telecommunications provider operating in 26 states with approximately 6.2 million customers. It is an 80.9%-owned subsidiary of Telephone and Data Systems, Inc. (TDS). The company focuses on contiguous market areas to achieve economies of scale.
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric | 2008 (YTD) | 2007 (YTD) | Change |
|---|---|---|---|
| Total Operating Revenues | $2,098.4 million | $1,906.3 million | +10.1% |
| Operating Income | $236.9 million | $232.0 million | +2.1% |
| Net Income | $143.2 million | $222.0 million | -35.5% |
| Diluted EPS | $1.63 | $2.50 | -34.8% |
| Cash Flow from Operations | $426.8 million | $440.4 million | -3.1% |
| Cash and Equivalents (End of Period) | $101.2 million | $146.1 million | -30.8% |
| Long-Term Debt | $1,007.1 million | $1,002.3 million | +0.5% |
| Revolving Credit Facility Used | $50.0 million | $0.0 million | N/A |
Note: The significant decline in Net Income and EPS compared to 2007 is primarily due to a one-time gain of $131.7 million in 2007 from the sale of Vodafone ADRs, which did not recur in 2008.
Material Changes vs. Prior Period
- Revenue Growth: Service revenues increased 10.3% to $1,949.4 million, driven by a 3% increase in the customer base (to 6.2 million) and a 6% increase in average monthly service revenue per customer ($52.78 vs. $49.60). Data services revenue grew significantly, representing 12% of total service revenues.
- Operating Expenses: Total operating expenses rose 11.2% to $1,861.6 million. Increases were driven by higher system operations costs (due to more cell sites and roaming usage), higher cost of equipment sold (due to more expensive handsets), and increased selling, general, and administrative expenses (marketing and bad debt).
- Investing Activities: Cash used for investing activities increased significantly to $556.5 million (from $256.7 million in 2007), primarily due to $300.5 million in capital contributions to King Street Wireless for FCC Auction 73 licenses and $249.5 million in capital expenditures for network expansion.
- Customer Metrics: Net retail customer additions were 119,000 for the six-month period. Retail postpay churn rate was 1.4% per month.
Guidance, Outlook, and Risks
2008 Full Year Estimates
- Net Retail Customer Additions: 175,000 - 225,000
- Service Revenues: $3,900 - $4,000 million
- Operating Income: $385 - $435 million
- Capital Expenditures: $525 - $575 million
Management Commentary & Risks
- Roaming Revenue Risk: Management anticipates a significant decline in inbound roaming revenues in future quarters due to industry consolidation (specifically the Verizon/Alltel merger), which will reduce the need for other carriers to use U.S. Cellular's network.
- Regulatory Risk: The FCC has imposed an interim cap on the Universal Service Fund (USF) high-cost program, which may reduce support funds for U.S. Cellular. Additionally, a Congressional investigation into USF usage is ongoing.
- Internal Controls: The company disclosed a material weakness in internal control over financial reporting related to the accounting for income taxes, which persisted from the prior year. Management is implementing remediation steps.
- Liquidity: The company maintains a $700 million revolving credit facility with $649.7 million available. Credit ratings are investment grade (Moody's Baa3, S&P BBB-).
Investor Verification Checklist
- Roaming Revenue Exposure: Verify the specific impact of the Verizon/Alltel merger on future inbound roaming revenue projections.
- USF Funding: Monitor the status of the FCC's interim cap on the Universal Service Fund and the outcome of the Congressional investigation.
- Internal Control Remediation: Review progress on fixing the material weakness regarding income tax accounting to ensure future financial statement reliability.
- Capital Expenditure Execution: Confirm that planned capital expenditures ($525-$575 million) are being deployed effectively to support network upgrades and EVDO expansion.
- King Street Wireless: Track the finalization of FCC Auction 73 licenses and any additional capital contributions required for King Street Wireless.