T-Mobile took $100M hit in Q1 for paying off ETFs of switching customers

T-Mobile US (NYSE:TMUS) acquired the most new subscribers among Tier 1 carriers during the first quarter, partly on the back of the carrier's offer to pay up to $650 in Early Termination Fees to customers who switched to T-Mobile. But the offering clearly cut into T-Mobile's bottom line--the carrier said in a filing that its ETF offer cost it around $100 million in the first quarter.

T-Mobile launched its ETF offer in January. In a recent Securities and Exchange Commission filing, the carrier said the offer was recorded as a reduction in its equipment sales revenues, and had a negative impact on both its revenue and adjusted EBITDA of around $100 million in the quarter.

T-Mobile said around 21 percent of its 1.32 million branded postpaid customer additions in the quarter took advantage of its ETF offer.

Overall, the carrier swung to a net loss of $151 million for the first quarter, down from a profit of $107 million in the year-ago period. The company reported adjusted EBITDA of $1.09 billion for the first quarter, down 26 percent from $1.47 billion a year earlier, including earnings from MetroPCS before the companies merged last year.

T-Mobile executives shrugged off the cost of the ETF offer though during the company's earnings conference call. CFO Braxton Carter said by launching the ETF offering at the beginning of the year, "part of the calculus there is that enhancing growth in the front end of the year will…be accretive to the overall results."

According to a Seeking Alpha transcript of the event, Carter said the ETF offer "will pay massive dividends in the future, given the quality of customers that we're bringing on--remember, we previously talked about two-thirds, roughly two-thirds, of the flow that we're getting on the ETF offer are the very highest credit quality customers that have the longest tenure with us."

Similarly, CMO Mike Sievert said "there are plenty of cynics out there, including our competitors, that would try to convince you that what we're doing is buying growth in an uneconomic way."

Sievert said what the ETF offer is really doing is "bringing in the highest-quality customers in our history at a marginal cost from the Uncarrier 4.0 that's a little bit higher as well but far outweighed by things like superior credit class, superior data attach, higher ARPUs, a more Prime credit--higher EIP attach on these customers as well, which forecasts better churn profiles on them. So we're really, really pleased with the economic system that we have going right now from the uncarrier moves. These are high-quality customers, so they're going to have great returns."

Sprint (NYSE:S) in early April followed T-Mobile's lead and launched its own ETF payoff promotion. Like T-Mobile, Sprint will pay up to $650 to subscribers who switch from another carrier to one of Sprint's new Framily family calling plans. 

While Sprint's ETF payoff promotion is set to end May 8, Sievert made clear that T-Mobile's ETF offer is not a promotion. "When we launch something with an Uncarrier label on it, that's a commitment to a structural change in the value proposition," he said.

T-Mobile CEO John Legere added that "this was not ETF payments for us. This was Contract Freedom. So when you take no contracts and the ability for people at the time to make decisions to move over, we have determined that's it. We will do it forever."

Legere said most competitors' responses "are still time-based, one-off responses to us as opposed to structural changes in the way they serve their customers." He said "it's a strange period where they can't believe that they can't just switch and change the environment. And a temporary ETF that's pulled off the table is going to hurt more in their statement to customers. And it also says that they can't figure out structurally the economics of how to make it work. So these are very positive signs for us, but ours will continue."

For more:
- see this SEC filing
- see this Seeking Alpha transcript

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