Entries in U.S. Cellular:USM (5)

Monday
Nov282011

ILEC 3Q11 Results Summary: Telephone & Data Systems

Despite Sub Losses U.S. Cellular Turns Down iPhone  

After a less than stellar 2010 for TDS Telecom (NYSE:TDS) during which operating income and cash flow fell and its top line dipped, the company has shown some resilience in the first nine months of the year, thanks in part to a string of acquisitions. 

In 2010 and during the first half of 2011, TDS sought out acquisitions that would expand its business-centric services. Most recently, it closed on its $95m purchase of OneNeck IT Services on July 1, 2011, which followed its acquisitions of data center operators VISI for $18m in March 2010, and TEAM Technologies for $47m in December 2010.

These acquisitions drove TDS Telecom’s growth in 3Q11, as its data revenue, which includes its take from data center and managed service operations, was up 48%, or $15.43m YoY. During the quarter TDS continued to deploy its hosting and managed service capabilities to new markets. Specifically, it expanded its managedIp branded product, a hosted IP-based communications solution, in Oklahoma and Kentucky. The service is delivered to businesses over a private, secure, and dedicated network “hosted” at a TDS data centers. 

On the wireless side, TDS Telecom’s majority owned U.S. Cellular (NYSE:USM) made news during the TDS conference call for something that it’s not doing. While the iPhone has sparked wireless growth at Verizon since its 1Q11 release, U.S. Cellular recently chose not to bring the iPhone into its smartphone stable. 

Mary N. Dillon, president and ceo of U.S. Cellular commented on this decision during TDS’ earnings call. “While we have the opportunity to add the iPhone to our device line-up, the terms were unacceptable from a risk and profitability standpoint and would have forced us to compromise on our commitment to offering and unparalleled customer experience.” Dillon later added that they “decided that it (iPhone) didn't make sense for our business economically, and so we're focused on really playing to our strength and feel that we're in a competitive position.”

While Dillon did not provide details on the costs associated with bringing the iPhone to U.S. Cellular, it surely would have been an expensive proposition. Sprint, after adding the iPhone to its roster last month, stated that it will take two years for the iPhone to pay off. U.S. Cellular has tried to distinguish itself from the big players like AT&T and Verizon with outstanding customer service, and Dillon’s comment suggest that the company felt paying for the iPhone would have forced it to sacrifice in that area. 

With or without the iPhone, U.S. Cellular needs to find a way to stabilize its subscriber losses. It lost 23k retail customers in the third quarter and its retail service revenues were relatively flat at $871m. On the upside, inbound roaming revenues increased $35m or 48% YoY to $108m.

Dillon remains upbeat that its roster of smartphones, sans iPhone, will generate more customers and higher ARPU. When asked to predict when net subscriber gains would be delivered, Dillon was not making any promises. “Well, I can't. I don't have a crystal ball. I mean we're focused on it. We believe it will happen over the next several quarters. Stay positive.”

Thursday
Nov102011

Wireless Subscriber Trends in 3Q11: Big 3 Still Rule the Roost

And the Winner is…..AT&T Mobility

I have to hand it to AT&T…though Verizon Wireless is generally considered the “quality network” leader and was expected to start handing AT&T its hat once it obtained the iPhone last February, AT&T has fought back admirably and was in fact the top-growth company in the third quarter in terms of both gross and net subscriber additions. AT&T added 2.1m net new customers in the quarter, bringing its total to 100.7m. Churn was a respectable 1.28% and gross additions approached 6m.

Verizon Wireless, already the nation’s largest wireless service provider, added 1.4m net new customers; based on churn of 1.26% monthly, Verizon added almost 5.5m gross new customers. And Sprint Nextel, which continued to rail against AT&T’s planned acquisition of T-Mobile USA in the quarter, added just under 1.3m net new customers. T-Mobile USA hasn’t released its third quarter results yet, but based on comments in parent Deutsche Telekom’s third quarter report we know that T-Mo lost subs in the quarter. T-Mo’s revenue fell by 3.3% in the quarter YoY; since it also reported that growing data revenue led to an increase in average monthly ARPU, we can assume that subscribers fell by more than the 3.3% revenue decline.

And then there’s everyone else. The subscriber numbers are an order of magnitude smaller when we look at MetroPCS, Leap Wireless, U.S. Cellular…MetroPCS grew its base by a paltry 69k, blaming the slower growth on “seasonal factors” and the “weak economy.” Leap Wireless managed to add 10k net new customers which actually gave the stock a boost considering the big sub losses Leap had been reporting. And U.S. Cellular lost another 145k in the quarter, its biggest quarterly loss this year.

Notably, Clearwire added nearly 1.9m net new customers in the quarter. The vast majority of Clearwire’s customers are of course wholesale customers actually added by its estranged step-parent Sprint Nextel. In fact, it looks to me that without the Clearwire 4G sales, Sprint wouldn’t have grown its base at all in the quarter, though the details get murky. Sprint reported a modest decline in postpaid retail subscriber and boasted strong prepaid net adds, but ongoing losses from its Nextel/iDEN side of the business offset much of those gains. Sprint also said that results at its prepaid subsidiaries Virgin Mobile and Boost improved in the quarter.

So, AT&T and Verizon are (not surprisingly) dominant again, particularly in the postpaid segment. Sprint appears to be winning prepaid share, perhaps from T-Mo, but also from Leap and MetroPCS. Sprint’s release of the new iPhone 4s in mid-October, combined with its unlimited data plans, could help it fight back in terms of market share for post-paid customers in the fourth quarter. Remember that neither AT&T nor Verizon offer unlimited data plans any longer.

If we include Clearwire in the mix, AT&T, Clearwire, Verizon and Sprint accounted for 32%, 28.5%, 21.2% and 19.3% of the total net additions in our sample for the quarter—leaving the “also-rans” with negative market share. But considering that Clearwire’s subscribers are also Sprint subscribers, I took a look at market shares excluding Clearwire. In this scenario, AT&T grabbed nearly 45% of net adds; Verizon got just under 30% and Sprint garnered about 27%. Once again, the other public companies lost share to the big three.

I think the biggest takeaway from this exercise is the fact that AT&T continues to be VERY dominant in terms of wireless market share—which could make it tough to get court approval for the pending T-Mo buy. But with T-Mo losing subs, it’s still a mystery to me why AT&T even wants it. Of course, the substantial breakup fee that it will owe to DT is no doubt a factor, but, as I’ve written before, there are better ways for AT&T so spend $39b!

Thursday
Aug042011

Wireless 2Q11 Results: The "Also Rans"

Stocks Tank on Market Share Miseries and Rising Costs

Last week I commented on the similarities in results and management comments regarding strategy between AT&T and Verizon.  Since then, all of the major wireless service providers, with the exception of United States Cellular, have reported their results. And to a one, the stocks in those publicly traded operators have since plummeted--between 25%-44%. Ouch!

Granted, it's a tough market out there in general this week (as I write this, the Dow Jones Industrial Average is down 300 points), but what really boggles my mind is, What were the Wall Street folks expecting? Is it really such a surprise that AT&T and Verizon added millions of customers while everyone else struggled?  Hello?

While executives from Sprint, MetroPCS, Leap Wireless and Clearwire have all tried to focus on how “their businesses are executing according to plan,” I don’t buy it—and obviously investors don’t either. They’re all working on improving margins, bulking up on their smartphone offerings, figuring out their LTE deployments, etc. But the bottom line is that Verizon and AT&T are running away with the market and they both reported record low churn levels in the second quarter. Their customers aren’t leaving.

Sprint, which was a turnaround story for most of the past three years, did manage to add more than a million new customers in the quarter—but they were lower value prepaid or wholesale customers. Sprint lost more than 100k of the more valuable postpaid contract customers.

Of the seven major wireless service providers who have already reported their second quarter results, Verizon and AT&T accounted for more than half of reported net additions—and if you consider that Sprint’s 1.1m net adds can largely be attributed to Clearwire’s 1.5m net adds, then those customers are actually double counted in my chart. Pull Clearwire out of the mix and the duopolists accounted for 75% of net adds reported to date.  And considering that United States Cellular has lost customers in each of the past four quarters, it’s unlikely that adding its results into the mix will change the overriding fact that the wireless market in the U.S. has become a clear duopoly.

The even bigger problem for the ‘also rans’, and what I believe investors are reacting so violently to, is the rapidly growing cost of providing data service to wireless customers.  Even AT&T and Verizon have acknowledged the problem by instituting tiered plans—it’s just too costly to provide unlimited data service over 3G, or even 4G, networks in the YouTube era. And it’s only going to get tougher. But AT&T and Verizon have the bulk and scale to weather the changing economics of the business.  Heavily leveraged MetroPCS, Leap and Clearwire may not. And Sprint is really just treading water…

Notably, I really don’t believe the pending merger between T-Mobile and AT&T changes much. Yes, it will make AT&T that much bigger, but T-Mobile has also been struggling to maintain its 33.6m subscriber base for some time.  It’s competing largely with Sprint and the smaller carriers for budget-conscious customers, while Verizon and AT&T dominate in the postpaid category.  So maybe AT&T does a little better in that category after (if) the deal closes—but maybe AT&T just increases its prices for the T-Mobile subscribers (in a slow, creeping manner).  That could actually be a good thing for Sprint/MetroPCS/Leap—but in the long run, those rising network costs combined with a falling net present value per subscriber may make the economics untenable.  It's 'back to the future' and the duopoly wireless business of 1984 is where we're headed.

Wednesday
May112011

4Q10 ILEC Quarterly Review - Telephone & Data Systems

TDS’ Carlson Stubbornly Insists the Company Doesn’t Need to Consolidate

TDS Telecom (NYSE:TDS) and majority-owned U.S. Cellular (NYSE:USM) each had a tough year in 2010.  The top line fell, cash flow and operating income fell, and connections fell…yet speaking at a recent Credit Suisse investor conference, president/ceo Ted Carlson made it very clear that the company does not intend to sell, neither 81% owned U.S. Cellular, nor its wireline assets.

Carlson believes that both of its major segments are poised to grow and create value for investors from what he sees as substantial upside still ahead.  And outstanding, highly concentrated, local customer service will be how the companies distinguish themselves from the major players like AT&T,  Verizon and the cablecos. 

Additionally, Carlson indicated that U.S. Cellular doesn’t need additional spectrum in order to remain competitive as its rivals deploy LTE, although it would be open to acquiring more in some markets:

“We don’t think that we have a spectrum problem. We always have the opportunity to do other creative things, offload to WiFi. We also anticipate that LTE is more efficient and we’ll be turning up several markets this year. Next year we’ll have a significant roll out.  We always have the opportunity to split cells in the more urbanized areas where an issue might arise.

“We’re not going to hit a wall, though we are looking for more spectrum.  We have enough to roll out LTE, though in some places it’s more of a challenge.  We’d have to do a 3 by 3 channel initially in Chicago, but the vendors have provided for that in the standard, it just means we won’t have a 5 by 5 channel at first.”

Carlson indicated that the company wouldn’t be interested in working with Lightsquared or Clearwire, noting that its reputation for “outstanding network quality” might be compromised if it entered into a network sharing agreement.  He also pointed out the challenges of finding handsets that work across numerous spectrum bands.

On the wireline side, TDS is focused on improving its broadband speeds, deploying IPTV and Carlson indicated that TDS might be seeking a “third leg for the business.” Pressed as to what that third leg might be, he hedged: “Utilities, tower industry, fiber…there’s a whole range of things we could look at.”  He added that the company doesn’t intend to sell its tower portfolio; it prefers to maintain control of the structures and rent them to other tenants.

The ceo acknowledged that the companies’ assets are not getting due credit in the equity markets and added, “That’s why we’re buying our stock back.”  

Tuesday
Nov302010

Phone Numbers: 2010 Goodwill and Intangible Asset Impairments

No Impairments, only Purchase Adjustments, Recognized During 2010

Every November we review the goodwill and intangible assets fair value reporting of the public ILECs.  Public companies are required to test the carrying value of goodwill and intangible assets on at least an annual basis.  Goodwill is generally defined as the cost of an acquisition in excess of fair value of the tangible and intangible assets acquired.  Since 2002, accounting rules have required that companies, at least once a year, determine the fair value of their assets and operations and compare that value to their carrying value (think book value) as reflected on the financial statements.  If the test determines the fair value is below the carrying value, the asset is impaired (think write-down) and the company must reduce the carrying value to fair value.  If the fair value of the asset is determined to be above the carrying value of the asset, nothing further is needed. 

Without putting too fine a point on it, companies “test” the carrying value of goodwill and intangible assets through standard valuation practices– namely discounted cash flow analysis and comparison with guideline public companies.  Back in the mid 2000’s, with record high stock prices and a very active deal market, values increased.  Once the Great Recession hit we saw many companies forced to write-down the value of assets purchased during the boom years. 

Last year when we analyzed goodwill and intangible asset impairments, we were surprised to find fewer asset impairments than we expected.  Internally, we speculated we would see another round of impairments as a result of testing conducted in 4Q09 and the first half of 2010 due to the continuing economic uncertainty.  The group as a whole reported $52.65m in impairments in 2007, $540.78m in 2008 and $37.5m in 2009.

But, in the first nine months of 2010 only two of the public ILECs reported adjustments to goodwill or intangible assets, and neither of those represented impairments.  AT&T (NYSE:T) reported $191m reduction of goodwill related to its acquisition of Centennial in November 2009.  This reduction was not an impairment but, rather, an adjustment to the preliminary purchase price allocation.  Plainly speaking, AT&T revised upward the value of some of the assets acquired once the deal closed, resulting in a lower goodwill number on the purchase price allocation reported on AT&T’s 3Q10 form 10-Q. 

Similarly, Cincinnati Bell (NYSE:CBB) reported a $1.9m adjustment to goodwill as a result of changes to the preliminary purchase price allocation related to its acquisition of CyrusOne Networks.  Aside from the adjustments to goodwill by AT&T and CBB, no goodwill or intangible asset impairments were reported by the public ILECs during the first nine months of 2010. 

In the full year 2009, only three companies reported impairments– AT&T reported $18m impairment to the carrying value of wireline licenses the company no longer plans to use.  And Telephone & Data Systems (NYSE:TDS) reported a $14m impairment to wireless licenses held by subsidiary U.S. Cellular (NYSE:USM).  2009 was the second year in a row USM wireless licenses were impaired– in 2008 TDS reported a $414m impairment, $387m of which was an impairment to wireless licenses held by USM.  TDS explains the impairment as a result of deterioration in credit markets, resulting in use of a higher discount rate in USM’s fair value calculation.  TDS also recognized $27.7m impairment charge on the consolidated level in 2008 to account for USM share repurchases because TDS’ ownership percentage increased as a result of the repurchases. 

Finally, D&E Communications, since acquired by Windstream (Nasdaq:WIN), reported an impairment to franchise intangible assets as a result of impairment testing conducted in April 2009.  The company explained the impairment as being “the result of an increase in the discount rate from 9.75% to 12.65%” used to calculate the fair value of the franchise intangible asset.  WIN has been very active on the deal front over the last year and a half, and the goodwill and intangible assets related to those deals now make up 48% of total assets on WIN’s balance sheet.  Going forward it will be interesting to see if the values of these acquisitions hold up, or whether WIN will see impairments at some point in the future. 

Because stock prices have not yet rebounded to their previous highs, and with access line trends putting downward pressure on revenues, we expected goodwill and intangible asset testing conducted in late 2009 and the first nine months of 2010 to prove out our expectation that values have continued to fall.  But, with very few impairments reported, we were curious as to why not?  Since we routinely calculate the implied business enterprise value (BEV) of the public companies for the Public Values charts at the back of this newsletter, we thought we might gain some insight by analyzing the trend of common valuation multiples–BEV to TTM revenue and BEV to TTM OIBDA– over the last few years. 

What this analysis shows is values have indeed come down considerably from mid-late 2007.  At September 30, 2007, the median BEV to TTM revenue multiple was 2.96x, meaning a hypothetical company that generated $100m in revenue would have been valued by the public markets at approximately $296m.  Fast forward to September 30, 2008 and 2009 and that value falls to $236m and $211m, respectively.  A very similar trend is evidenced by the BEV to TTM OIBDA multiples.  The median multiple fell from 7.58x OIBDA at September 30, 2007 to 6.02x and 5.98x at the same date in 2008 and 2009, respectively. 

More recently, both median revenue and OIBDA multiples at September 30, 2010 were slightly higher than 2009 figures, meaning that, for the time being anyway, values have stabilized and may be creeping higher, albeit at lower levels than in 2007. 

For example, Ntelos(Nasdaq:NTLS) revenue multiple dropped from 4.23x at September 30, 2007 to 1.6x  at September 30, 2009, and on the same date in 2010 had edged higher to reach 2.0x.  Qwest’s (NYSE:Q) revenue multiple tells a similar story, with BEV falling from 2.2x revenue at September 30, 2007 to 1.42x, 1.47x and 1.91x at September 30 of 2008, 2009 and 2010, respectively. 

Shenandoah Telecom’s (Nasdaq:SHEN) multiples tell a slightly different story, however, with BEV falling from 3.37x revenue at September 30, 2007 to 3.15x in 2009 and continuing to drop to 2.23x revenue at September 30, 2010, exactly at the median for the group as a whole. 

The BEV to TTM revenue multiples at a couple of ILECs actually came in higher at September 30, 2010 than at the same date in 2007.  Alaska Communications’ (Nasdaq:ALSK) BEV came in at 3.4x revenue, up from 3.09x at September 30, 2007.  Similarly, Consolidated Communications’ (Nasdaq:CNSL) September 30, 2010 BEV was 3.36x revenue, up from 3.23x at the same date in 2007.  Revenue multiples at both ALSK and CNSL were lower during 2008 and 2009. 

So, although values haven’t rebounded as much as many would have liked, they seem to have stabilized.  Furthermore, cash flow projections used during impairment testing in the dark days of the recession were possibly overly pessimistic, leading to lower valuations and larger impairments than may have been necessary (in hindsight).  Now, although access line losses continue to put downward pressure on revenues, with stabilizing values, it seems the impairments of these assets in the past were enough that there is still “water under the boat.”