T-Mobile US (NYSE:TMUS) may have raised its expectations for postpaid subscriber growth for 2015 for the third time this year when it reported third-quarter earnings yesterday, but that did not stop investors from shaving nearly 7 percent off the company's stock price yesterday. Wall Street analysts mostly agree that investors have concerns about T-Mobile's momentum slowing down and its average revenue per user, but said generally the company is doing fine.
T-Mobile's shares dropped by 6.8 percent at one point yesterday morning before recovering a little ground yesterday afternoon. What was the cause for concern? On one front, it was because on Sept. 18, T-Mobile CEO John Legere had indicated at an investor conference that T-Mobile already had added at least 760,000 postpaid phone customers in the third quarter.
"We all did some quick math to estimate what they would be at by quarter end assuming the same pace and arrived at ~900K," New Street Research analysts Jonathan Chaplin, Spencer Kurn and Vivek Stalam said in a research note. "They fell slightly short, which suggests quite a meaningful slowdown in the last couple of weeks. This is the first sign of slowing momentum at TMUS, and the equity has been fueled by strong momentum, so investors are understandably concerned."
T-Mobile wound up adding 843,000 postpaid phone customer additions, by far the most in the industry (Verizon Wireless (NYSE: VZ) added 430,000 such customers in the quarter while AT&T Mobility (NYSE: T) lost 545,000, which it said were mostly feature phone customers).
Legere said yesterday on the company's earnings conference call that "it's pretty hard to call our postpaid numbers a decline or a slowdown" and that August was a "gigantic" month thanks to a promotion that offered four lines with 10 GB each of data for $120 per month in service pricing. That promotion ended in early September, though T-Mobile revived it earlier this month.
T-Mobile management "blamed it on natural seasonality in 3Q, on plan changes, and on a pause in customer activity ahead of the iPhone launch. More importantly they have talked to strong trends in the first part of 4Q15. All plausible; nevertheless, these are all things management knew when they gave guidance at the end of the quarter; they usually set guidance they can beat; it is possible that they were surprised," the New Street analysts said.
The New Street analysts also said that it's important to remember how competitive the industry has been lately on price. "It is possible that Sprint is recovering at TMUS's expense -- a fact borne out by the porting data mentioned on the call," they said. "This doesn't mean TMUS won't continue to take share for years to come; it reminds us that they are in a nasty, highly competitive sector, where success is fragile."
T-Mobile reported that branded postpaid phone ARPU was $47.99 in the third quarter, down 0.4 percent from $48.19 in the second quarter of 2015 and down 3.7 percent from $49.84 in the year-ago period.
Jefferies analysts Mike McCormack and Scott Goldman said in a research note that after growing slightly in the second quarter, ARPU "disappointed" with a quarter-to-quarter decline and a year-over-year loss acceleration. "While we do not expect this trend to continue, and management expects flattish ARPU in 4Q, continued promotional activity should be watched closely," they said.
"TMUS missed slightly on ARPU and guided to flattish ARPU next quarter," the New Street analysts said. "They were supposed to be through the re-pricing with the prospect of ARPU growth as usage grows; however, Sprint and VZ made aggressive price moves during the quarter and these may be taking a toll."
The analysts struck a negative tone for the whole industry's finances. "Again, the ARPU trend at TMUS is not that concerning; it just reminds us that the sector sucks and that their revenue and EBITDA growth is contingent on there not being another leg down in pricing from here. Investors had thought that the worst was behind us on the pricing front and the moves at VZ and Sprint are cause for concern."
However, Legere was upbeat and while T-Mobile thinks ARPU will be flat in the fourth quarter, he noted that the average number of customers on an account of just under 2.5 has been growing, and that average billings per account is at "all-time high for us. And I think that's the most important some of the way we've run our business has caused an expansion in the family programs broader number of accounts, flatter ARPU but broader and stronger all-time high in the average billing per account."
Indeed, branded postpaid ARPA was $115.10 in the third quarter, up 1.4 percent from $113.50 in the second quarter of 2015 and up 4.8 percent from $109.80 in the third quarter of 2014. Branded postpaid ABPA, which takes into account device billings per account, was a record $154.56 in the third quarter, up 1.5 percent from $152.31 in the second quarter and up 11.4 percent from $138.73 a year ago.
"They're at all-time record highs and what that means is that our customers are paying more for their services at T-Mobile now in at any point in the company's history," T-Mobile COO Mike Sievert said on the call, according to a Seeking Alpha transcript. "That's a really important for everybody to understand. Now that's not because we're jacking up our prices; it's because our customers are more involved with our services, buying more from us, paying us more than at any point in our company's history.
Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein said in a research note that T-Mobile's stock drop was "largely due to customer growth expectations being too high, even with TMUS leading the industry in postpaid phone net adds for the 7th consecutive quarter."
"There were several positive takeaways from the quarter, including meaningful positive [free cash flow] generation, expanding margins and continued progress with its network expansion," they said. "In our view, TMUS's brand strength and customer growth, coupled with improving fundamentals, could make it an attractive candidate for any future industry consolidation."
- see this Seeking Alpha transcript
T-Mobile's Legere expects 'dark horse' companies like Google and Comcast to bid in 600 MHz auction
T-Mobile now expects to add 3.8-4.2M postpaid subs in 2015, hits 300M POPs with LTE coverage
T-Mobile brings back promotional $120/month plan for 4 lines, each with 10 GB of data
T-Mobile CFO on 600 MHz incentive auction: 'Dynamics are positive,' carrier could have up to $10B to spend
Analyst: T-Mobile likely gained most subs in Q3 and AT&T fared poorly, based on social media mentions of switching
T-Mobile's Legere: We'll have at least 2.1M net adds in Q3