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U.S. Cellular changes course, will offer iPhone later this year

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U.S. Cellular (NYSE:USM) will launch Apple (NASDAQ:AAPL) products, including the iPhone, later this year, reversing its earlier position. The company said in 2011 that it would not launch the iPhone because it did not make financial sense.

Analyst Simon Flannery of Morgan Stanley estimated the company's deal with Apple is a $1.2 billion, three-year commitment. U.S. Cellular CEO Mary Dillon said that the company is comfortable with this arrangement because its customers are demanding the iPhone and churn will be reduced. "We are confident and comfortable with the estimated range of that commitment," Dillon said on the company's quarterly conference call with investors. She also noted that the company will be able to save money by reducing its spending on legacy networks as it migrates customers from 3G to LTE.

The company did not provide a specific launch date for the iPhone, but said that in order to offer the iPhone and other products, it will refarm its 850 MHz spectrum and launch LTE in Band 5 later this year. U.S. Cellular's LTE network currently is deployed on several different spectrum bands, including partner King Street Wireless' spectrum holdings in the Band 12 Lower 700 MHz A and B blocks and U.S. Cellular's own spectrum holdings in the 850 MHz band and Band 12 Lower 700 MHz A, B and C blocks.

U.S. Cellular executives were cagey when asked if they would launch a CDMA-version of the iPhone. Instead they said they would not provide specifics on the exact devices but hinted that they are leaning toward the LTE devices.

U.S. Cellular will increase its cap ex guidance by $130 million to fund the rollout of LTE in its 850 MHz spectrum. Most of that additional cost will go to new base stations that support Band 5. The company also said that this deployment will not just support the Apple products, but also enable future LTE roaming. 

Some carriers have struggled to sell the iPhone. Cricket provider Leap Wireless (NASDAQ:LEAP) recently said it is seeing an improvement in sales of the iPhone, but the company will not purchase any more devices from Apple beyond its initial $900 million, three-year deal that it made with Apple last June.

U.S. Cellular also said it has converted its first wave of customers to the company's new BSS/OSS system and is on track to launch new products such as shared data plans later this year.

U.S. Cellular said in November it would sell some of its major Midwestern markets and spectrum to Sprint Nextel (NYSE:S) for $480 million as it seeks to streamline its operations. U.S. Cellular has said that it will cut the majority of its retail, engineering and business support workers, or about 1,000 jobs, after the deal closes. The company now expects the deal, which has received FCC approval, to close sometime during the second quarter.

Here is a breakdown of U.S. Cellular's key quarterly metrics:

Smartphones: Smartphones overall represented 62 percent of devices sold. The company the higher subsidies it must pay for LTE smartphones continue to drag on its profits, but its long-term strategy is to balance those costs with growth in average revenue per user and reduced capital expenditures for its legacy networks. The company said 43.5 percent of its postpaid customers now have a smartphone, up from 41.8 percent in the fourth quarter and up from 34.4 percent in the year-ago period.

LTE: U.S. Cellular reiterated that it will bring LTE coverage to 87 percent of its customer base in 2013. The company said that in its core markets LTE smartphones were 76 percent of smartphones sold in the first quarter. The company has said that by the end of the year customers in more than 3,800 additional cities and towns will have access to its LTE. U.S. Cellular said it will deliver LTE to "select cities" in California, Kansas and Nebraska and its existing LTE service will be expanded to include additional cities in Illinois, Iowa, Maine, Maryland, Missouri, North Carolina, Oklahoma, Oregon, Tennessee, Texas, Virginia, Washington, West Virginia and Wisconsin.

Subscribers: U.S. Cellular continues to lose subscribers, dropping 74,000 postpaid customers in the quarter, more than the 41,000 it lost in the fourth quarter and the 38,000 it lost in the year-ago period. Meanwhile, the company reported 23,000 prepaid net subscriber additions, fewer than the 37,000 prepaid additions it had in the fourth quarter but up from 4,000 in the year-ago quarter. Overall, the company lost 51,000 total subscribers and ended the quarter with 5.73 million total customers.

Churn: The company's postpaid churn rate was 1.7 percent, down from 1.8 percent in the fourth quarter and up from 1.6 percent in the year-ago period.

ARPU: U.S. Cellular's postpaid ARPU was $54.85, up from $54.56 in the fourth quarter and $54 in the year-ago quarter.

Financials: Total revenue was $1.08 billion, down slightly from the year-ago period. Service revenue clocked in at $996 million, also down slightly from a year ago. The company reported net income of $4.9 million, down from $62.5 million in the first quarter of 2012.

For more:
- see this release

Special Report: Wireless in the first quarter of 2013

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Sue Marek contributed to this report.