T-Mobile US (NYSE:TMUS) exceeded Wall Street's expectation in terms of its revenue and earnings in the second quarter, and analysts think it has enough momentum to carry it through the end of 2015. However, the same analysts also have questions about whether T-Mobile needs to diversify its business in the next few years and if it will merge with another company.
"While it clearly has momentum entering the back half of 2015 (and in our view, perhaps the best CTO in the business), we do have some concerns about the company's ability to continue to differentiate its service during a period when we are on the cusp of much service differentiation in the wireless market," Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein wrote in a research note.
Verizon Wireless (NYSE: VZ) will soon launch its over-the-the-top mobile video service, which will reportedly be called Go90, and there is speculation that now that AT&T (NYSE: T) has officially closed on its $49 billion acquisition of DirecTV (NASDAQ: DTV), it will soon make a similar move. The Wells Fargo analysts wrote that "the 'stickiness' of customers to those two carriers could become more meaningful."
Both Verizon and AT&T reported better-than-expected churn (Verizon's retail postpaid churn was 0.90 percent, its lowest in three years, and AT&T's postpaid churn was 1.01 percent), the analysts noted. That indicates "the sky is not falling in on their respective wireless businesses (as much as [T-Mobile CEO] John Legere may like people to believe)."
"These two carriers seem more focused on deepening their data devices into their base," the analysts wrote. "While they are willing to cede some handset share, we think such a move is the better longer term strategy given where we expect the wireless industry is going. TMUS's ability to steal handset gains--while a positive near term headline--may not help it participate in where the puck is going."
On T-Mobile's earnings conference call, Legere said that Verizon and AT&T may be adding more tablet and connected car customers than T-Mobile, but those subscriptions carry much lower average revenue per user than smartphones do. In any event, he said "we have shown our ability to target tablets when we choose to and we're very confident that we can use that going forward."
T-Mobile COO Mike Sievert said that T-Mobile's competitors are struggling to attract postpaid phone customers. T-Mobile added 760,000 such customers in the second quarter, while Verizon added 321,000 and AT&T lost 322,000. Sprint (NYSE: S) reports its earnings Aug. 4.
"They've turned their intention to lower value types of products that they can acquire," Sievert said, according to a Seeking Alpha transcript. "And I'll be doing the same thing if I was there. So, it's really a matter of what they can do. They hit this kind of terminal size where their phone churn, although the churn rates are fairly good, some of the best in the industry, their size is churning out so many customers that we are feeding on, others are feeding on. That they just can't out run that with their gross adds."
Regarding Verizon's video service, Legere snarked: "I'm not sure if you interviewed 10 young millennials in Times Square as to how panting they are for Go90, or whatever that item is, that's coming from Verizon in the future. I am not sure. Let's wait and see."
Legere added that more content providers, including video content providers, are taking their content mobile. "And one of the things I would say is, getting the video and content to the mobile subscriber is as hard as a things that for those players to do, without someone like us, as it is for us to go there," he said. "So we are moving in that direction. And that opens up obviously, a huge amount of inorganic options and partnership options for the company. And when you combine those with what I think we've demonstrated, our standalone business model is scalable, and has legs, and been successful over the period of time into the future. Those two together I think, bode extremely well for T-Mobile."
T-Mobile CTO Neville Ray added that it's not clear customers are demanding a T-Mobile-branded, curated video experience. He said "if our customers want us to be in the video business curating and picking video, and if we can add value to that by being both in the content and into network, with synergies between the two for efficiency sake or value sake, then we'll do it. But the question really is what do customers really want? And do they want us in that business?"
The question of whether T-Mobile will be bought by or merge with another telco keeps simmering. "Given Softbank's ownership of Sprint and AT&T and Verizon's size, we believe T-Mobile remains the only large scale acquisition opportunity in the U.S," Credit Suisse analyst Joseph Mastrogiovanni wrote in a research note. "Potential suitors include Dish, an attractive partner because of its spectrum, U.S. cable companies and foreign telco/ cable companies. Recall, Iliad made a play for T-Mobile last year."
During the call, Legere added: "I think I have always thought and said that in several years, we will think back and think it was completely humorous that we believed that the wireless industry was four-carriers, and a structure that needs to be protected, because ultimately both Google, Comcast other players are going to migrate into the space."
He said T-Mobile is partnering with Google (NASDAQ: GOOG) on its Project Fi MVNO and noted that they partnered on the first Android phone. "And we're looking forward to seeing what they choose to do in the future and hope that they do it with us," he said.
Regarding Comcast (NASDAQ: CMCSA), he said that "as the cable players try to create and use Wi-Fi as a capability to serve their subscribers, you know that a partnership of sorts between a cable player with Wi-Fi and broadband in the home and a player like T-Mobile is better, you just know that."
Legere said it would be logical for T-Mobile to partner with a cable player like Comcast.
"So, you know who knows that the industry structure will migrate such that those come together," Legere said. "But it's just logical; if you step back and start from a consumer and then the consumer says, 'Hey, wait a minute. I have Comcast and I have T-Mobile. Why don't these guys do something together to provide a seamless set of capabilities to us?' And then certainly some of the evolution of what's happening in unlicensed and etc. is going to provide something. So that's the way I think about it. And I think that will be in several years a big question of not if, but when, and I look forward to that as well, I think it provides great options for our customers."
- see this Seeking Alpha transcript
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