T-Mobile reported another “beat and raise” quarter as it gained 1.3 million postpaid subscribers in the second quarter of 2021, ahead of Street estimates of 1.1 million. It also raised 2021 guidance across the board.
Postpaid net phone additions totaled 627,000 for the quarter, which was 2.5 times more than last year’s second quarter but lower than AT&T’s 789,000 net postpaid phone adds during this latest quarter.
T-Mobile’s net income was $978 million, eight times more than a year ago. Postpaid phone churn was 0.87%.
“We delivered our highest ever postpaid account growth at 349,000 and we continue to focus on capturing quality profitable growth,” T-Mobile President and CEO Mike Sievert said in prepared remarks during the company’s earnings call on Thursday. “This quarter’s account growth was our highest ever at least in all the years I’ve been here. That’s over 600,000 net postpaid accounts added year-to-date compared to Verizon, which is still negative for so far this year and AT&T who doesn’t want to share account growth information.”
In addition, he said, T-Mobile is the largest prepaid provider in the country. In the second quarter, it delivered 76,000 net adds, which reflected prepaid churn of just 2.62% at a time when industrywide, postpaid is taking subs away from prepaid.
“All said, T-Mobile had good/upside results although it may not be enough given a history of beat and raises and its already premium valuation to the group,” wrote Cowen analysts, led by Colby Synesael. “That said, we focus on the bigger picture, as the company is in a position to sustain industry leading net adds/top-line growth with meaningful synergy-driven FCF step-ups over the coming years for eventual outsized buybacks that help drive attractive FCF/share growth, and through that lens, we remain bullish” on the long-term thesis.
Last week, AT&T reported a big quarter for wireless subscriber gains, smashing Wall Street expectations with 789,000 postpaid net phone additions and 174,000 in prepaid. A day earlier, Verizon reported adding 275,000 postpaid phones in the second quarter.
All of this growth is raising questions about where it’s coming from. That question came up more than once during T-Mobile’s earnings call.
Source of all this industry-wide growth?
While postpaid taking subscribers away from prepaid explains some of the growth, it isn’t the whole picture. Free phone lines explain some of it.
Sievert stressed that T-Mobile is focused on growing profitable overall account relationships. Accounts are a great metric because they’re a totally new billing relationship, he said, noting it’s probably somebody porting over.
“I heard during the earnings season, one of my competitors sort of said, ‘hey, we’re focused on quality growth and not all accounts are created equal,’” Sievert said. “And what I would say to that is, but service revenues are. And T-Mobile led again… service revenue growth was 10% normalized for some things last year, 6% overall service revenue growth, the best in the industry. And so, look, there’s some prepaid to postpaid transfers going on, there’s some deepening of account relationships … going on. There’s a lot of dynamics, but ... I want to make sure that you’re hearing us focusing on our knitting about growing overall profitable relationships that result in the market’s best service revenue and EBITDA growth.”
T-Mobile EVP and CFO Peter Osvaldik noted that there’s a big transference from the prepaid segment to the postpaid category, and “you’re seeing that happen more from a macro perspective, lots and lots of people from prepaid moving into the postpaid based on the economic realities that you’re seeing in the country, which makes our prepaid growth that much more impressive.”
In a report summarizing T-Mobile’s results, analysts at New Street Research took a stab at analyzing where the new adds are coming from.
The industry added about 8 million retail customers over the last 12 months compared with population growth of roughly 2 million. That kind of growth strikes most investors as too high for a mature market like wireless, wrote New Street’s Jonathan Chaplin.
“This is where the finger pointing starts,” Chaplin said. “Verizon and AT&T accuse T-Mobile of growing with free lines. T-Mobile counters that they are growing accounts, growing share of accounts, and ARPU trends have improved… so how can all the growth be coming from free lines to existing accounts? They point out that Verizon is the one losing accounts (AT&T doesn’t report them).”
New Street's assessment shows T-Mobile is steadily increasing share of accounts, and it’s “certainly doing better than Verizon.” A surge in free lines should show up in lines per account; T-Mobile’s lines per account have dipped this year while Verizon’s are higher and rising, they said.
“We suspect three things are happening at the retail level: 1) free phones and free lines are part of the problem; 2) strong promotions across all three carriers plus cable may be driving a slight acceleration in penetration too (the cost of entering the wireless market has dropped); 3) non-pay disconnects are down for the industry. This reduces a big outflow of subscribers from the industry every quarter, boosting subscriber growth. Much of the strength in postpaid can be explained by the migration from prepaid,” Chaplin wrote.
Asked about the growth, industry analyst Roger Entner of Recon Analytics said it’s a combination of factors, including the age at which many children are getting their first cell phones.
This quarter is a lot “cleaner” than previous quarters, he said, referring to sudden swings and the number of free lines that “magically appear.”
Where are they coming from? Free lines are still part of the mix, but connected devices increasingly are in there as well and there’s a significant shift in prepaid to postpaid, Entner said. The canary in the coal mine is TracFone, which lost about half a million customers in the last quarter.
“I would expect Dish to be savaged as well,” he said, referring to Dish Network’s prepaid subscribers, which the company is due to report early next month. Smaller MVNOs are struggling as well, he said.
There’s also a problem with definitions and U.S. population growth rates. “You have to look at the population growth” starting at the typical age when kids get a cell phone, rather than the birth rates, when parents generally aren’t giving their kids a phone. Along those lines, “we’re seeing an expansion” in the age at which young kids are getting phones, and that contributes as well.