T-Mobile (NYSE:TMUS) Continues to Make Noise as the Uncarrier
These days, rival carriers don’t find T-Mobile US Inc (NYSE:TMUS) such an easy subject to understand like they did in the past. From being a target, T-Mobile has become the hunter, and competitors are feeling the heat.
About Uncarrier program
Through its Uncarrier initiative, T-Mobile has abolished restrictive contracts and introduced a handset leasing strategy. The company uses its Uncarrier strategy to convince customers that they can get out of punitive plans in rival networks and enjoy better services at attractive prices.
Because of the Uncarrier strategy, T-Mobile has been able to make significant gains at various levels. The company has been able to accelerate its subscriber growth, increase customer retention and improve revenues.
The impact of Uncarrier strategy:
T-Mobile reported in the latest quarter that it added a total of 2.1 million subscribers during the quarter while its churn rate fell to an all-time low of 1.3%. In the same quarter last year, T-Mobile added 1.5 million subscribers. The churn rate a year ago was 1.5%.
Buoyed by the success of its Uncarrier program, T-Mobile raised its subscriber win target. The company hopes to add between 3.4 and 3.9 million postpaid customers by the end of this year. The previous target for the full-year was between 3 and 3.5 million postpaid subscribers.
On the earnings front, the company reported better than expected revenue and EPS. Revenue rose 14% year-over-year to come in at $8.18 billion, ahead of the consensus estimate of $7.94 billion. EPS game in at $0.42, better than the consensus estimate of $0.18 for the quarter.
More than just competitive pricing:
It is important to point out that T-Mobile US Inc (NYSE:TMUS)’s Uncarrier program isn’t just about competitive pricing, but everything that adds value to subscribers. If it is about enticing customers with competitively priced plans, everyone is doing it, and Sprint Corp (NYSE:S) is especially on the forefront because it is actually offering more competitive wireless plans.
In the case of T-Mobile, the success comes from several sources, which include effective marketing campaigns, network upgrade and continued innovation, among others. These are allowing the company to steal subscribers from Verizon Communications Inc. (NYSE:VZ), AT&T Inc (NYSE:T) and Sprint.
The free cash flow question
Questions have been raised about T-Mobile’s profitability and the cash flow story. There is a feeling that the company is losing a lot more money than it is able to gain, a matter that could soon come to haunt it and slow down its progress.
Profitability: In the latest quarter, T-Mobile earned a profit of $361 million, which was 7.7% short of $391 million profit reported a year earlier. Well, to clear the air on this issue, it is worth pointing out that there were certain one-time gains that pushed up T-Mobile’s profits last year. Additionally, while profits may have dropped year-over-year, it can clearly be seen that the company caught Wall Street by surprise by reporting better profits than analysts estimated.
Free Cash Flow: Free cash flow is also not a major concern when you come to understand what T-Mobile is trying to do. Among other things, fears about cash shortage at T-Mobile stem from the company’s high capital spending, which is putting pressure on free cash flow.
Certainly, T-Mobile is spending a lot on capital expenditures that include network upgrades and spectrum acquisition. The company also loses money by paying for early termination for customers that defect from rival networks.
In the short-term, T-Mobile might face some cash squeeze, but there is no guarantee that would happen because in any case the management has demonstrated disciplined cash administration. Perhaps, in the worst case scenario, T-Mobile may be forced to issue debt, raising its already bloated debt position of about $25 billion.
However, it is important to point out at this juncture that as T-Mobile invests in network upgrades and wins more subscribers, cost per customer is also falling. This should provide immediate relief, given the rapid pace at which the company is getting customers to defect to its network from rival networks.
T-Mobile overtakes Sprint
Among other baits to get subscribers defecting from rival networks, T-Mobile pays the cost for early termination of their existing contracts. The company also promises subscribers more freedom and choice in its network. These initiatives require time and cost money to implement, but the strategies and many others are working well for T-Mobile and the latest quarter results are a testimony. T-Mobile overtook Sprint as the U.S. third-largest phone carrier.
While Sprint only added 675,000 new customers in the last quarter, T-Mobile added 2.1 million subscribers in the quarter. As such, T-Mobile ended the quarter with a total of 58.9 million subscribers compared to Sprint’s 57.7 million subscribers.
The development is evidence enough that T-Mobile’s Uncarrier efforts are coming to something exciting, and the management of the company will certainly press harder going forward.
The combination of strong marketing initiatives, attractive pricing and better network quality should enable T-Mobile to gain more subscribers and improve revenues. These strategies are already in use and the results are great. However, these same scripts can be applied over and over again with even greater success.
T-Mobile US Inc (NYSE:TMUS) could attract a premium buyout offer. The company is building a valuable business that makes it an attractive asset for foreign telecom companies seeking to expand in the U.S., remember Iliad? U.S. cable companies looking for a mobile footprint may also find T-Mobile a perfect fit. It has been cited that DISH Network Corp (NASDAQ:DISH) could be interested in T-Mobile, and such a deal would be perfect in many ways. For example, the spectrum that DISH holds would be useful for T-Mobile’s network upgrade.
The issues of a potential buyout and the continued subscriber gain are going to keep T-Mobile’s shares moving up despite the free cash flow overhang.
T-Mobile US Inc (NYSE:TMUS) looked into its industry and discovered that customers weren’t getting better deals from the providers. It occurred to T-Mobile that customers stuck with certain carrier networks not necessarily because they like what they get but because they have to. For that reason, the management figured out that T-Mobile could take advantage of the shortcomings of its rivals and present itself as the better option. That led to what has become widely known as T-Mobile’s Uncarrier program.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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