U.S. Cellular (NYSE:USM) continued its momentum of positive, if modest, subscriber growth in the second quarter, building on a strong end of 2014. The carrier is also on the cusp of implementing its first LTE roaming agreement.
Subscriber growth, especially in the postpaid market, is a relatively new phenomenon for U.S. Cellular, one of the last remaining Tier 2 carriers. The company managed to grow its postpaid customer base in 2014, the first time it had been able to do so since 2009.
During the company's earnings conference call, U.S. Cellular CEO Ken Meyers said that the company saw a "significant improvement in postpaid churn," and its lowest quarterly churn since the first quarter of 2007. Although he said gross subscriber additions were lower than the company wanted, in part due to competitive pressures and partly because of lower traffic to its retail stores and electronics stores that sell wireless generally, he said he was pleased with the progress the company is making.
Meyers said U.S. Cellular has completed its first LTE roaming agreement, though he declined to reveal the carrier partner. He said the companies are in the implementation phase of the deal and the respective engineering teams of the companies are working together. U.S. Cellular customers will be able to start benefiting from expanded LTE roaming in the next 60 to 90s days, he said. The partner is likely a Tier 1 carrier, so U.S. Cellular customers will get access to a more robust and nationwide LTE network. Meyers said he expects U.S. Cellular customers to see benefits more than he expects U.S. Cellular to reap inbound roaming revenue.
Meyers said that the agreement is the first of multiple LTE roaming deals the company is working on.
Here is a breakdown of U.S. Cellular's key quarterly metrics:
Subscribers: U.S. Cellular added 17,000 net postpaid customers in the second quarter, compared to a net loss of 26,000 postpaid subscribers in the year-ago period. It was the company's fourth-straight quarter of postpaid subscriber gains. In terms of postpaid subscribers, the company lost 26,000 feature phone customers, but gained 7,000 smartphone customers and added 26,000 postpaid connected devices, which are mainly tablets.
The carrier also added 8,000 net prepaid customers, compared to losing 4,000 a year ago. At the end of the second quarter U.S. Cellular had 4.779 million total customers, and 4.692 million total retail customers.
Financials: The company said total revenue increased 2 percent year-over-year to $976 million. Service revenues slipped 2 percent to $824 million, but equipment revenue was up a whopping 32 percent year-over-year to $151 million, reflecting more customers who are choosing equipment installment plans (EIPs) to finance their device costs.
Adjusted EBITDA was $207 million in the quarter, up 61 percent from $129 million in the second quarter of 2014. U.S. Cellular reported net income of $19.4 million in the second quarter, compared to
The carrier also increased its full-year estimates for operating cash flow and adjusted EBITDA for 2015.U.S. Cellular now expects adjusted EBITDA in 2015 of $600 million to $700 million, up from its previous guidance of $580 million to $680 million. The company also now expects operating cash flow for the year of $440 million to $540 million, up from earlier guidance of $400 million to $500 million.
Smartphones: Smartphone sales made up 86.7 percent of total handset sales in the first quarter, up from 85.7 percent in the first quarter and 79 percent in the year-ago period. The company said 69.1 percent of its postpaid customer base now has a smartphone, up from 66.9 percent in the first quarter and 58.4 percent a year ago.
U.S. Cellular said 42 percent of the postpaid phones it sold during the quarter were on equipment installment plans, compared to 39 percent in the first quarter.
Meyers said consumers are going to continue to adopt what plans work best for them, whether it is EIP or traditional two-year contracts with subsidized devices. Meyers said U.S. Cellular is not pushing one over the other, but that EIP programs are probably more attractive to consumers and businesses that want to buy high-end smartphones and less appealing to those who want lower-cost devices.
LTE and spectrum: U.S. Cellular is continuing to deploy its LTE network and aims to have 98 percent of its customers covered with LTE by the end of 2015. The carrier said 83 percent of its data traffic rides on its LTE network. By comparison Verizon Wireless (NYSE: VZ) said earlier this month 87 percent of its traffic is now over LTE. On average, U.S. Cellular customers use more than 1.45 GB of data per month.
Meyers said 94 percent of customers' smartphones are LTE-capable, and 87 percent of the company's cell sites have LTE access.
Regarding next year's planned incentive auction of 600 MHz broadcast TV spectrum, Meyers said it remains an incredibly complex auction but that everyone in the wireless industry realizes that more spectrum will be needed to cope with data demands. He said he is "hopeful that we're going to see a good auction from the standpoint of meaningful participation from the broadcasters."
Churn: U.S. Cellular reported postpaid churn of 1.34 percent, down from 1.73 percent a year ago and 1.48 percent in the first quarter.
ARPU: The carrier said postpaid average revenue per user was $53.62, down 6 percent from $56.82 a year ago. However, when adding in monthly EIP billings, ARPU increased 1 percent to $57.43 from $57.01 a year ago.
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