T-Mobile US (NYSE:TMUS) surged back to strong postpaid subscriber growth in the second quarter, thanks in part to the addition of Apple's (NASDAQ:AAPL) iPhone to its lineup. The company's "Un-carrier" strategy of providing cheaper, no-contract rate plans appears to be paying off so far, though the question will be how much momentum T-Mobile can retain throughout the rest of the year. The company promised no letup, and CEO John Legere said the company will unveil "Un-carrier 3.0" proposals to add more pressure to its larger rivals.
Click here for key slides from T-Mobile's second quarter earnings presentation.
The sharp uptick in subscriber growth is the best for T-Mobile in four years, and could have been expected, given the pent-up demand in the carrier's subscriber base for the iPhone, which T-Mobile started selling in early April. T-Mobile parent Deutsche Telekom, which holds 74 percent in the combined T-Mobile and MetroPCS, said it has set aside $668 million this year on improving U.S. customer acquisitions. Legere and other executives said the iPhone was only one factor among many that contributed to positive growth in the quarter, including the new plans, a better device lineup and improvements in the company's network.
Under T-Mobile's new plans, customers can either buy their smartphone outright for the full cost of the device or they can make a down payment and then pay for the remainder of the cost of the device in monthly installments. Additionally, customers can bring unlocked devices to T-Mobile.
"We are in the middle of a massive turnaround in the United States and we want to carry on along this successful course," Deutsche Telekom Chairman René Obermann said in a statement. "We are prepared to spend more on high-value growth this year than previously planned."
"This is not a one-time blip," Legere said on the company's earnings conference call. "Customers are responding extremely well to the moves we are making." Legere said T-Mobile's growth was not driven by the shutdown in the second quarter of Sprint's (NYSE:S) Nextel iDEN network, since many of the remaining customers on that network were business users looking for a push-to-talk solution.
Looking at the full year, the company said it now expects branded postpaid net additions for 2013 to be between 1 million and 1.2 million. Legere said that to get there the carrier will unveil "Un-carrier 3.0" sometime "soon," and while he was vague on what that would entail, he said it "will solve another customer pain point" and will reveal major weaknesses of T-Mobile's larger competitors that they will have to respond to.
"We're determined not to let anyone disrupt our momentum," he said. "We'll continue to disrupt, but we'll do it smartly and profitably."
Here is a breakdown of T-Mobile's key quarterly metrics:
Subscribers: T-Mobile ended the second quarter with around 44 million customers, an increase of more than 10 million customers from the end of the first quarter of 2013, of which 1.1 million were net additions and 8.9 million were acquired customers from MetroPCS, which are included in the operator's branded prepaid customer count. T-Mobile reported 678,000 total branded net customer additions for the quarter, including branded postpaid net additions of 688,000 and branded prepaid net losses of 10,000.
The branded postpaid additions included 685,000 phone customers and that figure is a sharp reversal from the 557,000 postpaid subscribers T-Mobile lost in the year-ago quarter and its 199,000 postpaid net losses in the first quarter of 2013.
The company said its branded prepaid losses, which were a sharp drop off from 202,000 additions in the first quarter and 227,000 additions in the year-ago period, were primarily driven by credit-worthy customers who have historically purchased prepaid products upgrading to T-Mobile's new branded Simple Choice postpaid plans. Excluding these qualified upgrades by T-Mobile customers, the carrier said organic branded prepaid net additions were positive.
T-Mobile also added 133,000 M2M customers in the quarter (compared to 95,000 a year ago) and 319,000 MVNO subscribers (compared to 30,000 in the year-ago quarter).
LTE: The carrier now covers 157 million POPs with LTE and said it will cover 200 million before year end, faster than it had previously expected. T-Mobile said LTE is now available in 73 of top 100 U.S. markets, and that it remains on track to deploy 2x20 MHz LTE in 90 percent of the top 25 U.S. markets using MetroPCS' spectrum in 2014 and beyond. The carrier has adopted a "multi-core" network architecture, so that MetroPCS customers with LTE devices can use T-Mobile's LTE network for data seamlessly without the need to upgrade their phones.
Smartphones: T-Mobile said 21 percent of the carrier's 4.3 million smartphone sales in the quarter, or 903,000, were iPhones. T-Mobile reported on May 8 that it had sold 500,000 iPhones since it started selling the device April 12. T-Mobile said that since the April 12 launch, iPhone sales have accounted for around 29 percent of T-Mobile's branded gross customer additions and upgrade smartphone sales, excluding MetroPCS. The carrier also revealed it sold 600,000 units of Samsung Electronics' Galaxy S4 in the quarter.
In total, T-Mobile said the 4.3 million smartphones sold represented 86 percent of all handset sales, up from 71 percent in the second quarter of 2012. The carrier said 72 percent of its branded postpaid base is now using a smartphone, compared to 54 percent a year ago.
ARPU: T-Mobile said branded postpaid average revenue per user decreased year-over-year by 6.5 percent to $53.60, down from $57.35 in the second quarter of 2012, primarily as a result of increased adoption of Value and Simple Choice plans, which it said deliver lower ARPU due to lower service charges compared to traditional plans bundled with a discounted handset. The plans result in lower monthly service revenues while recognizing higher equipment revenues at the time of sale. While T-Mobile said the year-over-year percentage decline in branded postpaid ARPU was in line with the first quarter of 2013, the sequential decline slowed to $0.47 (down from $54.07 in the first quarter) compared to a sequential decline of $1.40 in the first quarter.
The company expects the penetration of its Value/Simple Choice plans in its branded postpaid base to be between 60 percent and 70 percent by the end of 2013, up from around 50 percent right now.
T-Mobile reported branded prepaid ARPU increased by 29.7 percent year-over-year, up from $26.81, due to the inclusion of MetroPCS results. On a pro forma combined basis branded prepaid ARPU increased by 0.7 percent to $35.97. Sequentially and year-over-year, the ARPU increase was primarily due to the inclusion of MetroPCS customers, who generate higher ARPU than T-Mobile's branded prepaid customers, as well as the growth of monthly prepaid service plans, that include data services and have higher ARPU than other T-Mobile pay-as-you-go prepaid plans.
At the end of the second quarter, total 3G/4G smartphones, including iPhones, used by branded prepaid customers, including MetroPCS, accounted for 11.4 million or 77 percent of total branded prepaid customers.
Churn: The company reported an all-time low branded postpaid churn rate of 1.6 percent for the quarter, down from 2.1 percent in the year-ago period and 1.9 percent in the first quarter of 2013. Branded prepaid churn was 5.4 percent, down from 6 percent in the year-ago quarter and 7 percent in the first quarter.
Financials: T-Mobile reported a net loss of $16 million for the quarter, compared with a year-earlier profit of $207 million, beating Wall Street analysts' expectations, according to the New York Times. T-Mobile financed $811 million of equipment sales revenue on installment plans during the second quarter of 2013, an increase from $298 million in the first quarter of 2013 and $150 million in the second quarter of 2012. Further, the company's adjusted EBITDA margin fell to 24 percent in the second quarter, down from 29 percent in the first quarter and 31 percent in the second quarter of 2012. However, total revenue jumped 27.5 percent to $6.23 billion, up from $4.9 billion in the year-ago period. Service revenue grew 8.6 percent year-over-year to $4.75 billion.
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