Analysts: Despite promotions, Verizon, AT&T, T-Mobile and Sprint posted record-low churn in Q2

Despite a flurry of promotions during the second quarter, the four Tier 1 carriers saw their lowest postpaid churn rates on average, according to analysts at Wells Fargo. That led to a sharp jump in net subscriber additions compared to the second quarter. 

Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein said in a research note that the average postpaid churn among Verizon Wireless (NYSE: VZ), AT&T Mobility (NYSE: T) T-Mobile US' (NYSE:TMUS) and Sprint (NYSE: S) was slightly under 1.20 percent in the quarter, which they said was "lowest it has ever been across these carriers."

Postpaid net subscriber additions grew by 22.2 percent from the first quarter to the second quarter, but the improvement was largely driven by that low churn relative to gross additions. Gross additions grew only 1.1 percent sequentially.

Verizon said retail postpaid churn was 0.90 percent, its lowest postpaid churn rate in three years, down from 1.03 percent in the first quarter and 0.94 percent in the year-ago period. AT&T said postpaid churn was 1.01 percent, up from 0.86 percent in the year-ago period. T-Mobile's branded postpaid phone churn was 1.32 percent in the second quarter, down from 1.48 percent in the year-ago period and up slightly from 1.30 percent in the first quarter. Sprint said postpaid churn was 1.56 percent in the quarter, a record low, compared to 2.05 percent for the year-ago period and 1.84 percent for the first quarter. 

Verizon leaned on its 10 GB/$80 shared data plan promotion through the second quarter. During the second quarter T-Mobile launched its "Never Settle Trial," wherein T-Mobile is offering Verizon customers the opportunity to try T-Mobile's network and service for up to two weeks at no cost. And Sprint continued to reimburse all of the costs for a customer to switch over, including their Early Termination Fees and any remaining payments on equipment installment plans.

Despite all of that, the Wells Fargo analysts noted, EBITDA margins across the carriers grew 3.3 percent year-over-year on average. "This margin expansion was due to lower gross add growth across the industry, a continued shift away from device subsidies, and some incremental benefit from leasing programs initiated at TMUS and Sprint," they said.

In the last week or so, the market has shifted even more on the handset front, with Verizon eliminating two-year contracts and subsidized smartphones for new customers and Sprint announcing it will move exclusively to a phone leasing model by year-end. Yet T-Mobile and AT&T remain far ahead of them in terms of moving their subscriber bases off of subsidized phones and to equipment installment plans (EIPs).

"As the carriers make this transition, the impact has been a headwind to service revenues as carriers offer discounted service pricing and a tailwind to equipment revenues," the Wells Fargo analysts note. "While this move may hurt near-term service ARPU (avg. revenue per user), we see a longer-term benefit."

T-Mobile has migrated its entire "Simple Choice" customer base to the EIP mode and at the end of the second quarter, 93 percent of T-Mobile's branded postpaid customer base was on a Simple Choice plan. AT&T has 64 percent, or 36.9 million, of its postpaid smartphone subscribers on no-subsidy Mobile Share Value plans.

"By reaching a critical mass of subscribers on EIP, TMUS and AT&T were able to grow ABPU (average billings per user), which measures the average monthly service revenue and EIP billings per user," the analysts noted.

AT&T's ABPU grew 3.3 percent sequentially and 6.1 percent year-over-year, while T-Mobile's ABPU jumped 3.9 percent sequentially and 5.9 percent year-over-year.

Verizon had 16 percent of its postpaid customer base on an EIP program at the end of the second quarter, while Sprint has 31 percent of its postpaid base on either EIP or leasing. Verizon will likely grow that number now that it no longer offers two-year contracts for new customers. "This transition, along with their high concentration of tablet additions, should continue to pressure VZ and Sprint's average billings per user," the analysts said.  

Special report: How Verizon, AT&T, T-Mobile and Sprint stacked up in Q2 2015

Related articles:
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Sprint loses No. 3 carrier spot to T-Mobile in Q2, but points to signs of turnaround
T-Mobile's Legere open to partnering with Google, Comcast as more firms get into mobile
AT&T adds fewer postpaid subs in Q2 than expected as it loses 322K postpaid phone customers
Verizon beats T-Mobile in postpaid net adds in Q2, thanks to tablets


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