T-Mobile US (NYSE:TMUS) and AT&T Mobility (NYSE:T) are likely to be the winners in the first-quarter race to score new subscribers and hold onto existing ones, as churn becomes a key area of focus in the industry, according to a research report from analysts at investment bank Jefferies.
In a research note, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote that carriers are adding subscribers at rates that are closer to their historical averages. However, they think churn will be a crucial metric to watch this quarter, with AT&T and T-Mobile recently highlighting better-than-expected trends and Sprint and Verizon Wireless likely to report slightly higher churn.
The analysts also think it is becoming increasingly difficult and "hazy" to directly compare their estimates about the performance of the carriers to those of their peers in the financial analyst community as equipment installment plans and device leasing plans continue to grow in popularity.
AT&T said earlier this month it expects to add around 400,000 postpaid customers in the first quarter, which would be a weaker performance than the year-ago period and below many analysts' expectations--but the carrier also expects to see its postpaid churn improve. AT&T said that its postpaid churn is running lower on both a year-over-year and sequential basis. The carrier's postpaid churn was 1.07 percent in the first quarter of 2014 and 1.22 percent in the fourth quarter of 2014.
The Jefferies analysts wrote that they believe "AT&T has taken a less aggressive stance in 1Q, seemingly favoring profitability and [free cash flow] over incremental market share. Nevertheless, we reduce postpaid handset adds (shifting more adds to tablets), our ARPU decline is now 11.5%, relatively in line with the Street." The analysts also think that AT&T's service revenue will fall below Wall Street expectations.
At its latest "uncarrier" event last week, T-Mobile's management disclosed that the carrier expects to report postpaid churn for handset subscribers of 1.4 percent--the Jefferies analysts said this is better than they expected. T-Mobile also expects to capture around 26 percent of the industry's gross subscriber additions in the first quarter, and to steal away two customers for every one it loses, the Jefferies analysts noted. They expect T-Mobile to add 1.1 million postpaid handset customers and 300,000 prepaid subscribers in the first quarter.
Other financial analysts are roughly in line with those predictions. Wells Fargo analyst Jennifer Fritzsche earlier this month increased her estimate of how many postpaid customers T-Mobile will add in the first quarter to 1.03 million; meanwhile, Credit Suisse analyst Joseph Mastrogiovanni thinks T-Mobile will add 1 million postpaid customers in the quarter.
As Sprint, the Jefferies analysts are forecasting the company to lose 355,000 handset subscribers in the first quarter "as the initial shock of last quarter's promotions wears off." Since Sprint introduced the aggressive "Cut Your Bill in Half!" offer in December targeting Verizon and AT&T, the analysts noted, both Verizon and T-Mobile have introduced competing offers. Verizon now offers two lines and 6 GB of data for $100, while T-Mobile offers two lines and unlimited data for the same amount.
"We maintain our postpaid net add and ARPU estimates, and are concerned Street consensus is overly optimistic," the analysts wrote of Sprint. "However, we lower our Sprint prepaid net add expectations to 301K from 470K given T-Mobile's refreshed MetroPCS and T-Mobile prepaid pricing in the quarter."
However, the analysts see Sprint meeting Wall Street's consensus estimate of quarterly EBITDA of around $1.67 billion, "particularly as the company benefits from leased device accounting and incremental cost cutting; we estimate that last quarter's $1.3bn EBITDA included ~$600mn of leased equipment benefit."
In February Verizon cut pricing on most of its More Everything shared data plans by $10, and despite some uncertainty, the Jefferies analysts wrote that they are maintaining their churn estimate of 1.10 percent, which would be up slightly from a year ago.
Yet the analysts also think Verizon will add only 711,000 postpaid customers in the first quarter, below the consensus forecast of 752,000. The analysts think Verizon's average revenue per account will fall 0.9 percent, worse than Wall Street's expected 0.4 percent decline. They also think Verizon will have 35 percent of its smartphones sales on its Edge EIP program, which would be up from 25 percent in the first quarter.
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