HALF MOON BAY, Calif.--T-Mobile US (NYSE:TMUS) continued to roar ahead in terms of subscriber growth in the third quarter. T-Mobile also hit its year-end LTE coverage milestone of 250 million POPs a couple of months ahead of schedule. However, T-Mobile's earnings took a hit in the quarter, in part because of the surge in subscribers and higher expenses.
Speaking here at Re/code's Code/Mobile conference ahead of the company's earnings release, T-Mobile's brash and profane CEO summed up his thoughts on the quarter: "We absolutely kicked the sh-t out of the industry," John Legere said.
Indeed, T-Mobile reported its best quarter ever of branded postpaid net subscriber additions and outpaced AT&T Mobility (NYSE: T) and Verizon Wireless (NYSE: VZ) in terms of total subscriber additions. Sprint (NYSE: S) has not yet reported third-quarter results.
T-Mobile increased its guidance for total branded postpaid net additions for 2014 to between 4.3 million and 4.7 million, up significantly from the prior guidance of 3 million to 3.5 million. Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote in a research note that the new target is narrowly above Wall Street's forecast of 4.2 million and "still conservative" compared to their forecast of 4.9 million. The guidance implies branded postpaid net adds of 700,000 to 1.1 million in the fourth quarter, which they said is a "conservative target."
T-Mobile also said it expects adjusted EBITDA to be in the range of $5.6 billion to $5.8 billion, which is unchanged from prior guidance. "Given the expected customer growth momentum, the company anticipates an adjusted EBITDA at the very low end of the range," T-Mobile said. During the company's earnings conference call, T-Mobile executives reiterated in general that the carrier is working to gain subscribers while maintaining its financial performance, and that T-Mobile's overall strategy isn't to dramatically lower prices for customers but to provide innovative services at reasonable prices.
Interestingly, Legere obliquely addressed potential T-Mobile merger and acquisition activity. He said that other, unnamed players might use T-Mobile's network to enter the wireless industry. "There are multiple paths for us, both organic and inorganic," he said, without providing much additional detail.
Here is a breakdown of T-Mobile's third-quarter results:
Subscribers: T-Mobile ended the third quarter with 52.89 million total wireless customers. T-Mobile has added more than 10 million total customers during the past six quarters. In the third quarter T-Mobile added a total of 2.345 million total subscribers.
T-Mobile added nearly 1.38 million total branded postpaid subscribers in the quarter, the bulk of which, 1.17 million, were postpaid phone customers. The branded postpaid net adds were up significantly from the 648,000 the company had in the year-ago period. The company also had 204,000 mobile broadband postpaid net additions in the third quarter.
T-Mobile also notched 411,000 branded prepaid net customer additions in the third quarter, up more than four times versus the second quarter and up from just 24,000 in the year-ago quarter.
The carrier also added 22,000 M2M customers and 333,000 MVNO customers in the third quarter.
Financials: T-Mobile said total revenue in the quarter came in at $7.35 billion, up 9.9 percent from $6.69 billion in the third quarter of 2013. Service revenue totaled $5.68 billion in the quarter of 2014, growing 10.6 percent from $5.14 billion in the year-ago period.
However, rising expenses took a toll on T-Mobile's finances. The company posted a net loss of $94 million, wider than the $36 million net loss in the year-ago period.
Adjusted EBITDA for the quarter $1.346 billion, down 7.2 percent from $1.451 billion in the second quarter of 2014 and flat compared to the $1.344 billion in the third quarter of 2013. T-Mobile said its EBITDA margin was 24 percent in the third quarter, down from 26 percent both in the second quarter and the year-ago quarter.
New Street Research analyst Jonathan Chaplin wrote in a research note that he had expected adjusted EBITDA of $1.52 billion and Wall Street was expecting $1.5 billion. He attributed around 75 percent of the miss to stronger than expected gross subscriber additions.
LTE: T-Mobile said it is now on track to cover 260 million POPs with LTE by the end of 2014 and 280 million by mid-2015. In a company blog post, T-Mobile CTO Neville Ray said the company expects to hit the 300 million covered POP mark by the end of 2015.
T-Mobile will be expanding LTE deployments in 700 MHz A Block and 1900 MHz PCS spectrum alongside its AWS LTE buildout.
T-Mobile is also continuing to deploy what it calls "Wideband LTE," or deployments of at least 15x15 MHz. The company recent did so in Connecticut and the Greater San Francisco Bay Area. That brings the current number of markets with T-Mobile Wideband LTE to 19--the company is aiming for at least 26 Wideband LTE markets by the end of 2014.
In terms of its 700 MHz A Block spectrum, T-Mobile now owns or has agreements to own 700 MHz A Block spectrum covering 176 million POPs, or around 55 percent of the U.S. population. The spectrum covers more than 70 percent of the company's existing customer base. T-Mobile's first 700 MHz sites are already on air and several Band Class 12 capable handsets are available in the market, including the Samsung Galaxy Note 4. T-Mobile said it will continue to aggressively deploy 700 MHz sites going forward and that more Band 12-capable handsets will become available in the rest of 2014 and first half of 2015.More than 50 percent of the markets covered by the company's A Block spectrum are free and clear and ready to be deployed, though the remaining markets are encumbered by Channel 51 broadcasts, generally limiting T-Mobile's ability to use the spectrum until after the incumbent broadcasters are relocated. However, the company has already entered into agreements to relocate broadcasters to new frequencies in six markets covering more than 17 million POPs, making those markets available for launch in 2015.
T-Mobile currently owns an average of 82 MHz of spectrum across the top 25 markets in the U.S. This is comprised of 9 MHz in the 700 MHz band, 30 MHz in the 1900 MHz PCS band, and 43 MHz in the 1700 MHz AWS-1 band.
During the company's earnings conference call, Ray said that T-Mobile users on average consume roughly 2 to 3 GB per month. He said that the addition of all the new customers recently onto T-Mobile's network has resulted in a "marginal decrease in speeds" but that T-Mobile is working to increase its network capacity and speed through the deployment of new spectrum, and that in general the carrier expects to be able to keep pace with subscribers' data demands.
MetroPCS: T-Mobile said the MetroPCS customer base continues to rapidly migrate off the carrier's legacy CDMA network. At the end of the third quarter of 2014, 78 percent of the total MetroPCS customer base was already on T-Mobile's GSM/HSPA+/LTE network, compared to 67 percent and the end of the second quarter. Further, around 63 percent of the MetroPCS spectrum on a MHz/POP basis has already been refarmed and integrated into the T-Mobile network at the end of the third quarter, compared to 60 percent at the end of the second quarter of 2014. Additionally, MetroPCS expanded into another 10 markets in the third quarter, bringing its total market count to 55. New MetroPCS markets include Chicago, St. Louis, Minneapolis, Kansas City and Salt Lake City. MetroPCS added 900 new points of sale in the third quarter; the company now has roughly 11,000 MetroPCS points of sale nationwide.
Smartphones: T-Mobile said it sold a total of 6.9 million smartphones in the third quarter, up from 6.2 million in the second quarter and 5.6 million in the year-ago period. Smartphones comprised 93 percent of total phone sales in the third quarter. At the end of the third quarter of 2014, 84 percent of the total branded postpaid phone customer base used smartphones, up from 77 percent in the third quarter of 2013. T-Mobile said it "has seen tremendous demand for the new iPhones" and that the launch of the iPhone 6 and iPhone 6 Plus was T-Mobile's biggest launch ever.
Churn: Branded postpaid churn was 1.6 percent, compared to 1.7 percent in the year-ago period. Branded prepaid churn was 4.8 percent, down from 5 percent in the year-ago quarter.
ARPU: Branded postpaid phone ARPU was $49.84 in the third quarter of 2014, up 1.1 percent from $49.32 in the second quarter and down 5.3 percent from $52.62 in the third quarter of 2013. T-Mobile said the year-over-year decline primarily due to the continued growth of no-contract Simple Choice plans and promotions for services, including the "4 for $100" family plan offer.
T-Mobile said 84 percent of the branded postpaid customer base was on a Simple Choice plan at the end of the third quarter, up from 80 percent at the end of the second quarter and 61 percent from the year-ago period. T-Mobile continues to expect 85 and 90 percent of its branded postpaid customers to be on the plans by the end of 2014.
Branded prepaid ARPU was $37.59 in the third quarter, up from $37.16 in the second quarter and up 5.3 percent from $35.71 in the third quarter of 2013.
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