It has been about a month since the last earnings report for United States Cellular (USM - Free Report) . Shares have added about 18.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is U.S. Cellular due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
U.S. Cellular Q2 Earnings Top Estimates, Revenues Flat
U.S. Cellular reported robust second-quarter 2020 financial results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Consistent 5G deployments, accretive customer connections and churn rate mitigation strategies on the back of network modernization efforts drove U.S. Cellular’s quarterly performance.
On a GAAP basis, net income in the June quarter was $68 million or 78 cents per share compared with $31 million or 35 cents per share in the year-ago quarter. Backed by network modernization efforts, the two-fold rise in earnings despite flat revenue trajectory can be primarily attributed to lower operating expenses. The bottom line beat the Zacks Consensus Estimate by 55 cents.
Quarterly total operating revenues amounted to $973 million, flat year over year. The top line surpassed the consensus estimate of $912 million. While revenues from service dropped 0.5% year over year to $753 million, the same from equipment sales increased 1.9% to $220 million. Although social distancing measures due to coronavirus fears are leading to less store traffic, the company witnessed a substantial low churn rate with increased demand for connected devices. This eventually benefitted subscribers with advanced network infrastructure. Also, the company is focused to accelerate further growth opportunities with 5G deployments into additional markets on the back of incremental network investments, while addressing the accretive networking demands of customers.
Total operating expenses declined 2.4% year over year to $920 million, primarily due to lower SG&A expenses and cost of equipment sold. Operating income was $53 million compared with $30 million in the prior-year quarter. Adjusted EBITDA in the first half of 2020 came in at $560 million whereas adjusted OIBDA was $466 million.
While total cell sites in service were 6,673 at the end of the reported quarter compared with 6,535 a year ago, company-owned towers were 4,208 compared with 4,116. As of Jun 30, postpaid ARPU increased to $46.24 from $45.90 and postpaid ARPA (average revenue per account) rose to $120.70 from $119.46. Postpaid churn declined to 0.89% from 1.23% reported in the year-ago quarter. Prepaid ARPU increased to $34.89 from $34.43, while prepaid churn fell to 4.05% from 4.20%.
Cash Flow & Liquidity
During the first six months of 2020, U.S. Cellular generated $692 million of net cash from operations compared with $476 million in the year-ago quarter. For the same period, the company’s non-GAAP free cash flow totaled $221 million compared with $194 million in the prior-year quarter.
As of Jun 30, the wireless telecommunications service provider had $418 million in cash and equivalents with $1,625 million of net long-term debt. Notably, U.S. Cellular repurchased 803,836 shares for $23 million in the first half of 2020.
2020 Guidance Reiterated
Despite uncertainties pertaining to the coronavirus pandemic, U.S. Cellular kept its guidance for 2020 unchanged. The company continues to expect service revenues in the band of $3,000-$3,100 million. Adjusted EBITDA is projected in the range of $900-$1,025 million. The company anticipates adjusted OIBDA in the band of $725-$850 million. Capital expenditures, too, were unchanged and are expected between $850 million and $950 million.
U.S. Cellular continues to strengthen its customer base while improving churn management and enhancing brand positioning. With focus on the cost structure, the company is making efforts to provide essential products and services. Markedly, the company witnessed year-over-year rise of 72% in data traffic, thereby meeting increased network demands in this hour of crisis. U.S. Cellular’s supply chain and logistics were also in full swing with store traffic improving gradually.
Progressing with 5G and network modernization initiatives, the company aims to attract new customers by providing superior quality network and national coverage. The company also announced Phase 2 of multi-year 5G network expansion in 11 states. It is currently working with three equipment and software vendors — Ericsson, Nokia Corporation and Samsung. Despite uncertainties stemming from COVID-19 pandemic, U.S. Cellular is focused to create an enhanced network experience and generate new revenue opportunities that could positively impact U.S. Cellular’s profitability in the near term.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted 9.65% due to these changes.
Currently, U.S. Cellular has a strong Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, U.S. Cellular has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.