Executive Summary / Key Takeaways

• UScellular is undergoing a fundamental transformation driven by the pending sale of its wireless operations and select spectrum assets to T-Mobile (TMUS), alongside other spectrum divestitures to Verizon (VZ) and AT&T (T), expected to close in mid-2025.
• The company's recent performance reflects this transition, with wireless revenue declines offset by cost optimization efforts and growth in the Towers segment, which is poised to become the core of the remaining business.
• The Tower segment demonstrated 6% growth in third-party revenue in Q1 2025, benefiting from new colocations and escalators, and is expected to be significantly strengthened by the Master Lease Agreement with T-Mobile post-transaction close.
• While not providing 2025 guidance for the current structure due to transaction uncertainty, management anticipates lower capital expenditures focused on mid-band 5G capacity additions and expects substantial proceeds from the divestitures, potentially leading to special dividends.
• Key risks include the uncertainty of transaction closing, integration and separation costs, ongoing competitive pressures in the wireless market (particularly from cable MVNOs), and the successful monetization of remaining spectrum assets.

A Regional Player's Pivot: Reshaping the Future

United States Cellular Corporation, operating as an 83%-owned subsidiary of Telephone and Data Systems, Inc. (TDS), has historically served as a regional wireless provider across 21 states, building a network of towers and cell sites to connect customers. Its strategy centered on delivering a high-quality network, strong customer service, and competitive offerings with a local focus. Over the years, this involved significant capital investments, including the deployment of 5G technology, initially focusing on broad low-band coverage and more recently shifting to mid-band spectrum to enhance speed and capacity to meet growing data demands. The company also saw success in areas like fixed wireless and explored opportunities in the business segment, such as private cellular networks.

However, operating as a regional player in the intensely competitive U.S. wireless market has presented persistent challenges. UScellular has faced aggressive pricing and promotions from national carriers like AT&T, Verizon, and T-Mobile, as well as increasingly formidable competition from cable wireless companies leveraging MVNO models and high WiFi offload rates. These larger competitors benefit from greater scale, more developed networks, and lower costs per subscriber, putting pressure on UScellular's revenues and requiring significant promotional spending to attract and retain customers. This inherent scale disadvantage has been a key factor influencing the company's strategic direction.

In response to these dynamics and to unlock value, TDS and UScellular initiated a review of strategic alternatives in August 2023. This process culminated in several significant announced transactions that are poised to fundamentally reshape the company. The most impactful is the agreement to sell UScellular's wireless operations and select spectrum assets to T-Mobile, announced in May 2024 and expected to close in mid-2025, contingent on regulatory approvals. This transaction is framed as being in the best long-term interest of customers, providing access to greater scale and a more competitive network, while also strengthening the remaining UScellular business. Following this, agreements were reached in late 2024 to sell additional spectrum licenses to Verizon and AT&T, contingent on the T-Mobile closing, aimed at opportunistically monetizing valuable spectrum assets.

Performance in Transition: Wireless Headwinds, Tower Strength

The company's financial performance in the first quarter of 2025 reflects the ongoing challenges in the wireless market and the strategic shift underway. Total operating revenues decreased by 7% year-over-year to $864 million, primarily driven by a 3% decline in retail service revenues and a substantial 24% drop in equipment sales. The decrease in service revenue stemmed from a lower average number of postpaid and prepaid connections, while equipment sales suffered from a decline in smartphone upgrades and a lower average selling price. Management noted that aggressive promotional activity across the industry, including from cable wireless players offering bundled plans and device promotions, continued to pressure results.

Despite the top-line pressure in wireless, UScellular demonstrated continued discipline on the expense side. Total operating expenses decreased by 6% to $844 million. This was largely due to a 3% decrease in system operations expenses, benefiting from the shutdown of the 3G CDMA network in the prior year, and an 18% decrease in the cost of equipment sold, mirroring the decline in equipment sales volume. Selling, general, and administrative expenses saw a slight decrease, although costs related to the strategic alternatives review partially offset broader cost optimization efforts. This expense management helped mitigate the impact of revenue declines on profitability, with operating income decreasing by 30% to $20 million and Adjusted OIBDA for the wireless segment declining by 7% to $182 million.

In contrast to the wireless segment, the Towers business showed continued positive momentum, providing a glimpse into the potential core of the future company. Third-party tower revenues increased by a healthy 6% year-over-year to $27 million in Q1 2025. This growth was attributed to both new colocations and escalators on renewed leases, demonstrating the underlying demand for tower space. The number of colocations increased, driven by new tenant and equipment change executions. While intra-company revenues from the wireless segment also increased slightly, management highlighted that these would cease upon the T-Mobile transaction closing, leading to a decrease in total tower revenues initially, but with a significant expected increase in third-party revenues recognized under the new Master Lease Agreement with T-Mobile. The Tower segment's operating income was $21 million, with Adjusted OIBDA/EBITDA at $33 million, showing stable profitability.

Overall consolidated results saw total operating revenues decrease by 6% to $891 million, while total operating expenses decreased by 5% to $850 million. Consolidated operating income was $41 million, down 19% from the prior year. Adjusted OIBDA decreased by 6% to $215 million, and Adjusted EBITDA decreased by 7% to $254 million. Cash flow from operations remained positive at $160 million in Q1 2025, though down from $203 million in the prior year, impacted by changes in working capital related to bonus payments and timing of vendor payments.

Capital expenditures saw a significant 60% reduction year-over-year in Q1 2025, totaling $53 million, aligning with the strategy to moderate spending after the primary 5G coverage build-out.

Technological Foundation and Future Potential

UScellular's network strategy has centered on evolving its technology to meet increasing data demands and compete in the market. Following the initial low-band 5G coverage rollout, the focus shifted to deploying mid-band spectrum, which offers a better balance of speed and coverage, to enhance capacity. This investment aims to improve the customer experience for both mobility and fixed wireless services. The company has also explored advanced network capabilities for business use cases, such as private cellular networks for manufacturing and utilities, and partnerships leveraging its network architecture for enhanced privacy and security.

However, the scale required to fully capitalize on these technological advancements and compete head-to-head with national carriers has been a challenge. The competitive landscape analysis highlights that national carriers like AT&T, Verizon, and T-Mobile generally possess more extensive and efficient networks, benefiting from larger scale and greater investment capacity. For instance, comparisons suggest national carriers can offer significantly faster speeds and have lower operating costs per unit due to their scale advantages. UScellular's investment in millimeter wave spectrum, while technologically advanced, faced industry-wide challenges in operationalization, leading to a significant impairment loss in 2024.

Despite these challenges, UScellular's owned tower portfolio represents a critical infrastructure asset with inherent technological relevance. As wireless carriers nationwide face increasing data traffic and a potential lack of new spectrum coming online quickly, densification of existing networks becomes crucial. UScellular's towers, particularly those in its regional footprint, offer differentiated locations that may be necessary for national carriers to fill coverage gaps and increase capacity, providing a long-term demand driver for the Tower business. The Master Lease Agreement with T-Mobile post-transaction is a direct example of this, securing a significant tenant for 2015 incremental towers for an initial 15-year term. The remaining spectrum assets, particularly the C-band licenses, are also considered valuable mid-band spectrum attractive for 5G deployment, offering potential for opportunistic monetization in the future.

Strategic Outlook and Key Considerations

Given the pending transactions, UScellular is not providing traditional financial guidance for 2025 for its current structure. The focus is squarely on executing the closing of the T-Mobile wireless sale and the subsequent spectrum divestitures to Verizon and AT&T, all expected in mid-2025, subject to regulatory approvals and closing conditions. Management has indicated that capital expenditures in 2025 will decline compared to 2024, primarily directed towards completing the mid-band 5G capacity build-out in existing areas.

The strategic outlook for UScellular post-transaction centers on the remaining business, expected to consist primarily of the Tower segment, equity interests in wireless partnerships (which provide predictable cash flows), and retained spectrum assets. The Tower business is anticipated to be the core operational focus, benefiting from the T-Mobile MLA and the long-term industry trend towards densification. Management is working to position this segment to operate as a truly independent entity, which will involve managing separation costs and potentially decommissioning certain towers that do not have colocations.

The divestitures are expected to generate substantial proceeds. While the final net amount is subject to adjustments, including the outcome of T-Mobile's debt exchange offer for UScellular's senior notes, transaction fees, employee-related costs (severance, stock awards), and significant cash income tax obligations related to the gains on the wireless and spectrum sales (estimated ranges), the company anticipates being in a position to potentially declare special dividends to shareholders upon the T-Mobile closing, subject to Board approval. The use of any proceeds received by TDS, the majority owner, could involve debt reduction, funding fiber deployment at TDS Telecom, and potential returns to its own shareholders.

Several risks loom large over this transition. The primary risk is the uncertainty surrounding the closing of the announced transactions, which are subject to regulatory approvals and other conditions. Failure to close these deals would necessitate a significant change in strategy and could have a material adverse effect on the company. Even upon closing, substantial costs related to separation, integration, and decommissioning are expected. The remaining Tower business will need to navigate the competitive tower market and manage its operational structure efficiently. Furthermore, the successful opportunistic monetization of the remaining spectrum assets is not guaranteed and depends on market demand and regulatory factors. The ongoing competitive pressures in the wireless industry, particularly from scaled national carriers and aggressive cable MVNOs, also remain a backdrop, influencing the value and operational considerations of the remaining assets and partnerships.

Conclusion

UScellular stands at a pivotal juncture, poised to transform from a regional wireless operator grappling with scale disadvantages and intense competition into a company primarily focused on its infrastructure assets. The pending sale of the wireless business to T-Mobile and the associated spectrum divestitures represent a strategic pivot aimed at unlocking value and positioning the remaining Tower business, spectrum holdings, and partnership interests for future success. While the current financial performance reflects the challenges in the wireless segment, the underlying strength and growth potential of the Tower business, bolstered by the anticipated Master Lease Agreement with T-Mobile, offer a compelling foundation for the future. The significant proceeds expected from the transactions provide financial flexibility and the potential for substantial shareholder returns. However, the successful execution of these complex transactions, the efficient operation of the remaining business, and the opportunistic monetization of retained assets are critical factors that will determine the long-term investment outcome. Investors should closely monitor the progress towards closing the announced deals and the subsequent strategic direction and financial performance of the transformed entity.