T-Mobile US (NYSE:TMUS) rolled to another strong quarter of subscriber growth in the third quarter, making good on executives' promises that the carrier would continue the momentum generated by its new no-contract plans, handset upgrade program and aggressive new style.
Click here for key slides from T-Mobile's third quarter earnings presentation.
The carrier added more than 1 million new subscribers in the quarter and continued its strong growth in postpaid net additions. As some analysts had predicted, T-Mobile also led the industry for the second straight quarter in net phone subscriber additions, with 643,000. (AT&T Mobility (NYSE:T) reported 363,000 net subscriber additions in the third quarter, relying on tablets and smartphones to offset feature phone losses. Of the 927,000 net retail postpaid additions Verizon Wireless (NYSE:VZ) had in the third quarter, the company said 481,000 were phones and 370,000 were Internet devices, including tablets.)
"This is not a one-time blip," T-Mobile CEO John Legere had declared on the company's second-quarter earnings conference call in August, when T-Mobile reported 1.1 million customer additions, including 688,000 postpaid additions. The carrier's new third quarter results seemed to bear that out.
Looking to the full year, T-Mobile said it now expects branded postpaid net additions for 2013 to be between 1.6 to 1.8 million, up from its prior guidance of 1 million to 1.2 million. The carrier also now expects the penetration of the Value/Simple Choice plans in its branded postpaid base to be between 65 percent and 75 percent by the end of 2013, up from its prior guidance of 60 percent to 70 percent.
Here is a breakdown of T-Mobile's key quarterly metrics:
Subscribers: T-Mobile ended the third quarter with more than 45 million customers, an increase of 1.023 million customers from the end of the second quarter of 2013. T-Mobile added 672,000 branded net customers during the quarter, and branded postpaid net customer additions came in at 648,000, which T-Mobile said reflected continued low branded postpaid churn and significantly higher gross additions. The branded prepaid business returned to growth with 24,000 branded prepaid net customer additions in the third quarter.
T-Mobile also counted 344,000 MVNO additions and 7,000 M2M connection additions in the quarter. MVNO additions were up 189 percent year-over-year.
In the second quarter, T-Mobile reported 678,000 total branded net customer additions for the quarter, including branded postpaid net additions of 688,000 and branded prepaid net losses of 10,000.
Analysts at Jefferies noted that branded postpaid net customer additions of 648,000 "are not necessarily remarkable when viewed only in the [quarter-over-quarter] context of 688k in 2Q. The real point here is, of course, that it elevates the 2Q turnaround to something of a trend. After all, T-Mobile US has lost 199k branded contract subscribers as recently as 1Q13, and 530k on average during the prior seven quarters."
"We have underestimated both the strength and the sustainability of TMUS' recovery," New Street Research analyst Jonathan Chaplin wrote in a research note. "Subscriber trends have beaten our estimates by a wide margin for the last two quarters and we see these trends continuing into the fourth quarter, helped further by recently launched tablet plans. The news is not all good: ARPU continues to decline at a faster than expected rate as subs move to value plans, and EBITDA remains pressured when you adjust for value plan accounting."
LTE: T-Mobile said its LTE network now covers 203 million POPs in 254 metro areas. In October the company completed the previously announced acquisition of 10 MHz of AWS spectrum from U.S. Cellular (NYSE:USM) for $308 million. The AWS spectrum covers a total of 32 million POPs in 29 markets in the Mississippi Valley region, including St. Louis, Nashville, Kansas City, Memphis, Lexington, Little Rock, Birmingham, New Orleans, and Louisville. T-Mobile expects to use the spectrum to bolster its LTE network.
Additionally, T-Mobile said it has already combined MetroPCS' LTE spectrum (mostly likely AWS airwaves) in Las Vegas with T-Mobile's network and spectrum, doubling the LTE spectrum deployment and dramatically increasing data speeds for both T-Mobile and MetroPCS customers with capable devices. The company expects to repurpose additional MetroPCS LTE spectrum in other cities, including New York City, before the end of the year, thereby expanding the channel size of T-Mobile's LTE network to at least 10x10 MHz in 40 out of the top 50 markets by year-end. T-Mobile expects to start deploying 20x20 MHz LTE widely next year.
T-Mobile now has LTE service in 94 of the top 100 markets and plans to eventually cover 90 percent of the top 25 markets with 20x20 MHz LTE. T-Mobile CTO Neville Ray said that rollout will include "substantial" deployments in 2014, and will be contingent on how quickly T-Mobile can repurpose MetroPCS' AWS spectrum. In trials of 20x20 MHz LTE, Legere said T-Mobile is seeing peak downlink speeds of 147 Mbps and uplink speeds of up to 40 Mbps, though those are likely going to be substantially reduced in real-world conditions.
Smartphones: T-Mobile said total smartphone sales, including sales to branded prepaid customers, were a record 5.6 million units in the third quarter, up from 4.3 million in the second quarter and 2.3 million in the year-ago period. In the third quarter, smartphones represented 88 percent of total units sold, up from 86 percent in the second quarter. T-Mobile said this represents a penetration of 78 percent of the total branded customer base, up from 74 percent at the end of the second quarter.
T-Mobile CMO Mike Sievert said on the earnings conference call that 15 percent of the company's smartphone sales were Apple (NASDAQ:AAPL) iPhones, or around 840,000. That compares to the 903,000 iPhones T-Mobile sold in the second quarter, its first quarter of availability on the carrier. Sievert said T-Mobile could have sold more iPhones in the third quarter, but supplies were constrained at launch for the iPhone 5s and 5c. He said the carrier is working to meet demand now. However, Sievert and Legere said that while T-Mobile is clearly benefiting from having the iPhone in its lineup, its smartphone growth is balanced.
MetroPCS integration: On July 25, the company announced the strategic expansion of the MetroPCS brand with the planned launch of 15 new geographic markets--the carrier said it launched more than 1,300 distribution points in these new markets by the end of the third quarter. The company expects to launch the MetroPCS brand in 15 additional markets on Nov. 21, bringing the total number of expansion markets to 30 by the end of this month. The new markets will include Cincinnati and Columbus, Ohio; Denver; Phoenix; Pittsburgh and Portland, Ore.
The company began selling T-Mobile-compatible devices to MetroPCS customers in the second quarter through MetroPCS-branded distribution points, and the carrier said it has already transitioned more than 1.5 million new and existing MetroPCS customers to the T-Mobile network.
ARPU: Branded postpaid average revenue per user decreased quarter-over-quarter by $1.40 to $52.20, down from the $57.35 the carrier reported in the year-ago period. T-Mobile blamed the decline on the continued popularity of its Value and Simple Choice plans, which are cheaper than traditional plans bundled with a discounted handset. Branded prepaid ARPU for the third quarter of 2013 decreased quarter-over-quarter by $0.26 to $35.71 on a pro forma combined basis, the carrier said.
T-Mobile CFO Braxton Carter said the company expects to see ARPU stabilize in the second half of 2014. He said eventually the company expects to see 85 to 90 percent of its subscribers move to its Value/Simple Choice plans.
Churn: T-Mobile reported branded postpaid churn of 1.7 percent for the quarter, up slightly from 1.58 percent in the second quarter, which T-Mobile said was due to seasonal factors. But that number was down significantly from the 2.3 percent the carrier reported in the third quarter of 2012. Branded prepaid churn was 5 percent in the quarter, down from 5.4 percent in the second quarter and 6.4 percent in the year-ago period.
Financials: T-Mobile's total revenues increased by 7.4 percent quarter-over-quarter to $6.68 billion, primarily due to the inclusion of MetroPCS results for the full quarter and higher equipment revenues due to record smartphone sales. Service revenues for the third quarter grew by 8 percent quarter-over-quarter to $5.13 billion, primarily due to growth of the company's subscriber base and the inclusion of MetroPCS results for the full quarter. The company's adjusted EBITDA grew by 6.2 percent over the second quarter to $1.34 billion. T-Mobile reported a net loss of $36 million for the quarter compare to a loss of $7.74 billion in the year-ago period when it incurred a massive non-cash related to the MetroPCS deal.
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