T-Mobile adds 126K subs in Q3, banks on prepaid

T-Mobile USA added net subscribers in the third quarter, breaking with its trend of customer losses in the first two quarters of this year. While the company's growth relied on higher prepaid subscriber additions, T-Mobile went out of its way to emphasize that postpaid remains the carrier's core business.

The results are sure to hearten T-Mobile parent Deutsche Telekom, which said its main priority remains closing the sale of T-Mobile to AT&T (NYSE:T) for a proposed $39 billion. The Department of Justice has sued to block the deal on antitrust grounds, and a trial is scheduled to begin Feb. 13. Deutsche Telekom CEO Rene Obermann declined to comment on the lawsuit but said he remains confident that the deal will be approved because "after all, the sale is positive for the U.S. mobile communications market and consumers."

For the quarter, T-Mobile reported net income of $332 million, up slightly from $320 million in the year-ago period. T-Mobile said it booked "employee-related" costs of $51 million related to the AT&T deal in the quarter. Total revenue clocked in at $5.2 billion, down from $5.4 billion in the year-ago period. Service revenues totaled $4.67 billion, down from $4.71 billion in the year-ago period.

Here is a breakdown of T-Mobile's key quarterly metrics:

Postpaid subscribers: T-Mobile added a total of 126,000 customers in the third quarter, down from net customer additions of 137,000 in the year-ago period but up from total net losses of 50,000 subscribers in the second quarter. However, the company, which served 33.7 million total subscribers at the end of the quarter, continued to lose postpaid customers. T-Mobile reported net postpaid losses of 186,000 in the quarter, an improvement from the 281,000 postpaid customers it lost in the second quarter, but far greater than the 54,000 postpaid subscribers it lost in the third quarter of 2010.

In a statement, T-Mobile CEO Philipp Humm noted that launches of Apple's (NASDAQ:AAPL) iPhone 4S by the three other Tier 1 carriers could contribute to future postpaid churn, which will "continue to be an area of concern."

Prepaid subscribers: Prepaid was the main bright spot for T-Mobile in the quarter. The company said prepaid net customer additions, including MVNO customers, were 312,000 in the quarter, an improvement from 231,000 net prepaid customer additions in the second quarter of 2011, and 190,000 net prepaid customer additions in the year-ago period. T-Mobile has been pushing hard for prepaid customers, and recently unveiled new "Monthly 4G" plans as well as a plan sold primarily through Walmart focused on users who want mobile data and texting more than voice.

In a company blog post, Mike Katz, T-Mobile's vice president of marketing and head of prepaid, explained the company's focus on the prepaid segment. "No annual contract plans are another way we can fuel the mass adoption of mobile data by making it affordable and accessible for everyone," he wrote. "With the economy the way it is, there's a lot of interest and appetite for prepaid service--it's a growth area for our industry. However, when we talk to competitors' prepaid customers they tell us that they feel like they're making a trade-off in order to be on prepaid. We want to take the compromise out of prepaid, so customers don't have to make tradeoffs on network coverage, handset selection or data speed."

However, Katz also wrote that "postpaid is our core business. Our postpaid customers have the advantage of hardware discounts and our best ever family plan." On the other hand, he wrote that "we've always had a prepaid offer as another way for our customers to pay for T-Mobile service and get many of the benefits of T-Mobile even if they don't, for whatever reason, want to or are unable to sign up for a contract term. Whether prepaid or postpaid, it's a great time to be a T-Mobile customer."

Churn: Blended churn, reflecting both contract and prepaid customers, increased to 3.5 percent in the third quarter, up from 3.3 percent in the second quarter and 3.4 percent in the year-ago period. T-Mobile said the sequential and year-on-year increase in blended churn was primarily driven by higher churn from MVNO customers. Postpaid churn was 2.4 percent, flat from both the second quarter and year-ago quarter. Prepaid churn, however, jumped to 7.2 percent from 6.6 percent in the second quarter, though it was flat with the year-ago period, and T-Mobile said the sequential increase in prepaid churn was driven primarily by higher MVNO deactivations.

ARPU: The company's average revenue per user was $53, flat with the second quarter and up from $52 in the third quarter of 2010. Prepaid ARPU came in at $18, flat from the second quarter but down from $19 in the year-ago period.

Data: T-Mobile's data service revenues totaled $1.4 billion in the third quarter, up 12 percent from the year-ago period. T-Mobile said 10.1 million customers were using smartphones enabled for the company's 3G/HSPA+ network at the end of the third quarter of 2011. This represents a net increase of 40 percent, or 2.9 million customers, using smartphones from the third quarter of 2010.

For more:
- see this release
- see this T-Mobile blog post
- see this WSJ article (sub. req.)

Special Report: Wireless in the third quarter of 2011

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