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T-Mobile Sacrifices Costs for Customers

Sarah Thomas
5/1/2014
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T-Mobile's "uncarrier" moves paid off in the first customer as it managed to add 2.4 million new customers, including 1.3 million postpaid subscribers. But the additions came at a cost.

T-Mobile US Inc. lost $151 million, or 19 cents a share in the first quarter, as it stepped up its promotional efforts, compared to a $106 million profit at 20 cents a share in the year-earlier quarter. Its shares, however, were up 7.5% to $31.50 in early market trading on Thursday.

The share climb was a reflection of the net additions, as well as the revenue bump T-Mobile received from closing its purchase of contract-free operator MetroPCS. Revenue in the first quarter grew 47% to $6.9 billion. Without MetroPCS's results in the mix, revenue would have risen 19%. T-Mobile also managed to add 465,000 prepaid customers with help from MetroPCS.

The first quarter was T-Mobile's fourth consecutive quarter with over 1 million net additions, and the first time it's ever passed the 2 million mark. It was clear from Verizon Wireless and Sprint Corp. (NYSE: S)'s earnings last week that the promotional moves in the market being made by the self-proclaimed "uncarrier" were having an effect. Only AT&T Inc. (NYSE: T), its biggest target, has yet to feel the squeeze. (See Sprint: LTE TDD Speed Boost Coming Soon, Verizon Loses Its Postpaid Net Add Crown, and AT&T Gets 81% of Subs Off Unlimited Data.)

T-Mobile is now approaching 50 million customers, closing the gap on potential merger partner Sprint, which ended the first quarter with 54 million customers. T-Mobile says it plans to add 2.8 to 3.3 million branded contract customers by the end of the year. (See T-Mobile Pours Cold Water on Sprint's Spark.)

— Sarah Reedy, Senior Editor, Light Reading

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JCfti
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JCfti,
User Rank: Light Beer
5/1/2014 | 1:49:05 PM
Re: Sprint merger?
The network side is the crucial piece to me.  With no-contract service plans, the customer can too easily switch if it isn't happy with the coverage. Just pay off any device contract and take that phone to AT&T or sell it and get a new one from VZ or Sprint.  Their churn rate is down which speaks well to the work on that front (or customer confusion on device vs service contracts). They have little margin for error, but so far it appears to be working

 
Sarah Thomas
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Sarah Thomas,
User Rank: Blogger
5/1/2014 | 1:40:46 PM
Re: Sprint merger?
Good points, JC. I think the spectrum acquisitions from Verizon and MetroPCS will really help it as it finishes out its LTE buildout and improves the network. Once it gets all its customers on LTE, that will improve their experience for them, helping with retention, and help with costs since it's more efficient.
JCfti
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JCfti,
User Rank: Light Beer
5/1/2014 | 1:36:55 PM
Re: Sprint merger?
If the short-term customer acquistion costs are more related to paying off ETFs and offering trade-in incentives versus discounting plans, the hope would seem to be that over time TMO recoups these costs and gains customers 'hearts and minds."   So when a customer's new device contract runs outs or they want to buy a new phone or tablet they would choose TMO. That seems to be the gamble that they are making.  On the network side, they are making strides in providing customers a good experience, and have plans to address its biggest hurdle, the ubiquity of its network coverage (see its plans for the 700 MHz A Block it just closed on and the 2G Edge to 4G LTE conversion plans, as well as expected participation in 600 MHz)  

So, yes they have short-term hurt, but it seems with a longer-term plan in place. If it will work is still an open question. Also could be a ploy to be a more attractive take-over purchase.  They appear to have a good game plan either way at this point. 
Ariella
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Ariella,
User Rank: Light Sabre
5/1/2014 | 12:50:39 PM
Re: Sprint merger?
@Sarah I'd go with short-term landgrab on this.
Sarah Thomas
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Sarah Thomas,
User Rank: Blogger
5/1/2014 | 12:04:54 PM
Re: Sprint merger?
But, might add, wouldn't exceptional growth like this suggest T-Mo doesn't really need to combine with Sprint? It's already encouraging competition in the market, something it is very proud of. I guess it goes back to what Carol and Phil have brought up, whether its pricing moves are sustainable or if this is just a short-term landgrab.
Sarah Thomas
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Sarah Thomas,
User Rank: Blogger
5/1/2014 | 12:04:00 PM
Sprint merger?
Legere was, of course, asked about consolidation in the industry, and he said it's a matter of when, not if. This comes right after a report in Bloomberg last night that Sprint is getting its finances in order to announce an acquisition this summer. Here's the article: http://www.bloomberg.com/news/2014-04-30/sprint-said-to-plan-t-mobile-bid-after-pushing-banks-for-funding.html

And, here's what Legere said (paraphrased): 

"This is the start of competition, and, again, don't confuse yourselves, the big are still the biggest. These are big huge people who are probably calculating ways they can protect their 55% in growing EBIDTA margins...

 

It's matter of when, not if. It's not just among the 4 you see, but multiple other tangential players sitting on the periphery of the industry looking in. we've been consistent on that with no clear statement on timing. Otherwise, there are multiple paths we need to look very hard at from the standpoint of capital and deployment. But when you are growing like we are, we think it's a good hand to play."
Phil_Britt
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Phil_Britt,
User Rank: Light Sabre
5/1/2014 | 11:16:10 AM
Re: Q1 call
I have to agree with Carol. Businesses cannot win by continuing to discount prices -- look at the airlines. They would try to undercut each other to win additional customers, only to declare bankruptcy multiple times.

Now they only rarely cut prices -- and charge for things that used to be free -- and are profitable. Telecom is a different industry, but business is business.
Sarah Thomas
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Sarah Thomas,
User Rank: Blogger
5/1/2014 | 10:50:20 AM
Re: Q1 call
That is certainly a valid concern and came up on the call, but T-Mobile CMO Mike Sievert says it's not so (of course): 

"There are plenty of cynics including our competitors that will convince you we're buying growth in a non-economic way, but the opposite is true. Bringing in the highest quality customers in our history at a marginal cost that is a little higher as well. High quality customers with great returns."
Carol Wilson
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Carol Wilson,
User Rank: Blogger
5/1/2014 | 10:45:13 AM
Re: Q1 call
Okay, showing my age here, but once upon a time, upstart long-distance competitors essentially "bought" customers and grew themselves almost into bankruptcy. Is there any clear strategy for how T-Mobile avoids that trap?
Sarah Thomas
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Sarah Thomas,
User Rank: Blogger
5/1/2014 | 9:40:12 AM
Q1 call
Q&A time on the earnings call. They are mainly talking up the growth -- more than all the other carriers combined, Legere says.
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