U.S. Cellular loses 80K subs in Q1, says it is moving beyond billing system errors

U.S. Cellular (NYSE:USM) in the first quarter continued to lose postpaid customers, but the carrier insisted that it is making progress in reducing churn and getting over the billing system errors that plagued it during the second half of 2013.

The carrier, the fifth-largest facilities-based U.S. operator, reported higher churn for the period--but U.S. Cellular CEO Ken Meyers said the company is "currently seeing improvements in both voluntary and involuntary churn from peak levels back in 2013 and early 2014."

Meyers said that the company has "made significant progress to return service levels to our normally high standards following the billing system conversion." Meyers also said the new billing system, for which Amdocs is the main vendor, has allowed U.S. Cellular to "deliver more products and services that meet our customers' needs" like its Shared Connect shared data plan, new no-contract Simple Connect Plans and device financing services.

Meyers said on the company's earnings conference call that U.S. Cellular's strategy for returning to subscriber growth is simple: higher gross additions and lower churn. He said that before U.S. Cellular started selling Apple's (NASDAQ: AAPL) iPhone in November 2013, U.S. Cellular customers cited device selection as the No. 2 reason they left the carrier. Without providing specific figures, Meyers said that metric has since dropped by 75 percent.

In addition to getting back to subscriber growth, Meyers said the company needs to drive revenue growth. He said adding the iPhone has accelerated smartphone penetration and that its shared data plans are being "well received" and "should let us capitalize on skyrocketing data consumption."

The carrier also announced in April that it will be adding more than 1,200 LTE cell sites in 2014 and expanding its existing LTE service in 13 states. By the end of 2014, the company has said more than 93 percent of U.S. Cellular customers will have access to LTE. The network expansion will add LTE coverage in Kansas, Missouri, Nebraska, Oklahoma and North Carolina and also bring additional LTE service to areas in Iowa, Illinois, Maine, South Carolina, Tennessee, Texas, Virginia and Wisconsin. Some of the new cities that will receive LTE speeds are Oklahoma City, Emporia, Kan., and areas of Door County, Wis.

Interestingly, Meyers also said he expects U.S. Cellular to participate in both the AWS-3 spectrum auction scheduled for this fall and the incentive auction of 600 MHz broadcast TV spectrum set for mid-2015. While the draft rules for the incentive auction could potentially benefit U.S. Cellular by limiting how much low-band spectrum Verizon Wireless (NYSE: VZ) and AT&T (NYSE: T) can bid on, Meyers noted that the rules are not yet final. "It's really difficult right now, while the rules are still evolving, to have any specificity about where we'll play and how," he said.

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

Subscribers: In total, for all its markets, U.S. Cellular lost 93,000 postpaid subscribers in the first quarter, more than the 33,000 it lost in the year-ago period or the 71,000 it lost in the fourth quarter of 2013. The company gained a net total of 13,000 prepaid customers in the quarter, weaker than the 31,000 prepaid customers it gained in the year-ago period but an improvement from the 26,000 prepaid customers it lost in the fourth quarter of 2013.

U.S. Cellular ended the first quarter with a total of 4.68 million total customers.

Smartphones: U.S. Cellular sold 467,000 smartphones in the first quarter, which represented 73 percent of all devices U.S. Cellular sold in the first quarter, compared to 79.6 percent of all devices sold in the fourth quarter, and 61.7 percent in the year-ago period. U.S. Cellular said 53.1 percent of its postpaid customers carried a smartphone at the end of the first quarter, compared to 50.8 percent at the end of the fourth quarter and 43.5 percent at the end of the first quarter of 2013.

The company said that LTE smartphones made up 85 percent of its smartphone sales in the first quarter and that 82 percent of the smartphones on its network are now LTE devices.  

Churn: U.S. Cellular's postpaid churn rate was 2.3 percent, up from 1.7 percent in the year-ago period and 1.9 percent in the fourth quarter of 2013.

Meyers said that voluntary churn, or customers leaving of their own accord, appears to have peaked in the fourth quarter. He said billing issues still remain with some customers but that is also improving. Involuntary churn, in which U.S. Cellular is shutting off service of non-paying customers, increased in late 2013 and early 2014.  

CFO Steve Campbell said that U.S. Cellular has returned to enforcing normal billing collections and at this point has worked through the majority of its collections backlog. He said the carrier is seeing involuntary churn steadily decline from a peak in February.

ARPU: U.S. Cellular's postpaid average revenue per user was $57.59, up from $54.85 in the year-ago period.

Financials: The carrier's total revenue for the quarter was $925.8 million, down 14 percent from $1.08 billion in the year-ago period. Service revenues were $853.6 million, also down 14 percent year-over-year from $996.3 million. The company's net income was $19.48 million in the quarter, compared to $4.91 million in the year-ago period. 

For more:
- see this release
- see these slides (PDF)

Special Report: Wireless in the first quarter of 2014

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