Business Context and Reporting Period
Company: United States Cellular Corporation (USM), an 80.9%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).
Reporting Period: Quarterly Report on Form 10-Q for the period ended September 30, 1999.
Operations: USM owns, operates, and invests in cellular markets across the United States. As of September 30, 1999, the Company held interests in 180 markets (26.2 million population equivalents), with 139 majority-owned and managed markets consolidated into operations.
Key Financial Metrics (Nine Months Ended Sept 30, 1999)
| Metric | 1999 | 1998 | Change |
|---|---|---|---|
| Total Operating Revenues | $1,060.1 million | $849.2 million | +25% |
| Service Revenues | $1,023.9 million | $821.2 million | +25% |
| Operating Income | $220.1 million | $145.8 million | +51% |
| Operating Margin | 21.5% | 17.8% | +370 bps |
| Net Income | $279.8 million | $197.9 million | +41% |
| Diluted EPS | $3.03 | $2.17 | +40% |
| Operating Cash Flow | $386.0 million | $293.5 million | +31% |
| Cash and Equivalents | $184.0 million | $52.0 million | N/A |
| Long-Term Debt | $543.9 million | $531.5 million | +2.3% |
Customer Metrics: Customer base grew 22% to 2.45 million. Market penetration increased to 9.87%. Average monthly revenue per customer was $49.06.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 22% increase in customers and a 38% surge in inbound roaming revenue. Local retail revenue rose 21%.
- Non-Operating Gains: Net income was significantly impacted by a $259.5 million gain on the sale of cellular investments, primarily resulting from the AirTouch Communications/Vodafone merger. Excluding these gains, net income would have been $119.6 million ($1.34 EPS).
- Expense Increases: Operating expenses rose 19% to $840.0 million. Marketing costs increased 20% due to customer acquisition and a rebranding effort (United States Cellular to U.S. Cellular). General and administrative expenses rose 25% due to staff expansion and start-up costs for new communications centers.
- Rate Pressure: Average revenue per minute of use declined for both local retail and inbound roaming due to competitive pricing and "one rate" programs offered by other carriers.
Guidance, Outlook, and Risks
- Outlook: Management expects service revenues to continue growing in late 1999 and 2000, but anticipates slower customer growth due to increased competition from PCS operators. Average monthly revenue per customer is expected to decrease for the full year 1999 compared to 1998.
- Capital Requirements: The 1999 construction and system expansion budget is approximately $300 million. Anticipated remaining capital spending for 1999 is $57 million, plus $23 million for a pending acquisition.
- Liquidity: The Company has $184 million in cash and a fully available $500 million Revolving Credit Facility. Management believes internal cash flows and external financing are sufficient for short- and long-term needs.
- Year 2000 Issue: The Company has completed renovation and validation of mission-critical systems. Total direct costs are estimated at $4–5 million, with $3.5 million incurred through September 30, 1999. Risks include potential service disruptions if vendor systems fail.
- Market Risk: The Company holds $504.2 million in marketable equity securities (primarily Vodafone ADRs). A 10% decline in share prices would reduce the portfolio value by $50.4 million.
Investor Verification Checklist
- Quality of Earnings: Verify the sustainability of earnings by excluding the $160.2 million after-tax gain on investment sales from net income analysis.
- Customer Growth vs. Revenue: Monitor the divergence between customer growth (22%) and revenue growth (25%) as average revenue per minute continues to decline.
- Capital Expenditures: Confirm that the $300 million capital budget is being met without diluting operating cash flow margins.
- Competition: Assess the impact of new PCS entrants on churn rates (currently 2.0%) and market penetration in key clusters.
- Year 2000 Contingency: Review the status of vendor readiness and the Company's contingency plans for potential network inter-operability failures.