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US Cellular to join iPhone Club

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In an attempt to revive its declining postpaid business, small wireless carrier, United States Cellular Corp. (USM - Free Report) has tied up with Apple Inc. (AAPL - Free Report) to sell the latter’s iPhone starting this year.

Though U.S. Cellular has not divulged the date and the specifications of the model, the fifth-largest U.S. carrier promised to buy $1.2 billion worth of iPhone over a period of three years. U.S. cellular is the only major U.S. wireless carrier that does not offer the iPhone.    

Previously, U.S. Cellular had rejected the offer to sell the iconic smartphone as it believed that the phone is too expensive in comparison to other smartphones and the carriers will have to absorb a lot of cost in the form of subsidies.

However, the absence of iPhone has impacted U.S. Cellular badly as it continued to face customer churn and lost 268,000 customers or 5% of its contract-based customers in the last 18 months. In its recently concluded quarter, U.S. Cellular, a subsidiary of Telephone and Data Systems Inc. (TDS - Free Report) , missed the Zacks Consensus Estimate on both the fronts.

Added to the iPhone woes the company faces major competition from all the remaining four major U.S. carriers that have been offering contract-based iPhones for the last four years. Significantly, U.S. Cellular’s nearest rival,T-Mobile US Inc. (TMUS - Free Report) started selling the no-contract iPhone range from its stores last month.

U.S. Cellular exited the first quarter with a retail customer base of 5,225,000 and has lost 32,000 postpaid customers. However, Smartphone sales remained strong and represented approximately 62% of all sold devices. Further, 76% of the smartphone sales were driven by 4G devices. This shows that the demand for smartphone remains strong in the U.S. 

Meanwhile, the Chicago-based company expects to cover almost 87% of its customers with 4G LTE by 2013 and is also expanding its network capacity.  We believe that the iPhone launch together with the network expansion bodes well for U.S. Cellular and will allow the company to boost its top line. Nevertheless, the high burden of subsides remains the short-term concern which could impact the telecom operator’s margins.

Currently, U.S. Cellular holds a Zacks Rank #3 (Hold). 

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