The fourth largest wireless provider in the U.S., T-Mobile (TMUS, Financial), released its third quarter 2014 earnings result on October 27. The 2.3 million subscriber addition is the key highlight of the quarter. However, despite such phenomenal customer addition, the carrier’s earnings failed to top analyst estimates. The national telecom provider is known for its aggressive approach to catch up with its bigger rivals. Is such aggressive approach bearing results for the company? Is it a good time to consider T-Mobile in your portfolio? A closer analysis of the third quarter’s performance would provide a clearer view of where T-Mobile is headed.
A snapshot of the quarter numbers
T-Mobile's revenue for the third quarter came in around $7.35 billion, a rise of 9.9% from a year ago quarter. However, analysts had expected the revenue to inch closer to $7.47 billion, i.e., a rise of 16%. The carrier registered a loss of $0.12 a share compared with a profit estimation of $0.05 a share. This is attributable to a $731 million non-cash gain that the telecom provider had recorded and given effect in the second quarter.
Data taken from Morningstar
The chart above show the revenue curve that shot up to $24 billion in 2013 from around $5 billion in the previous year. The company is spending enormously on property and equipment to ramp up its network infrastructure and compete with the likes of Verizon (VZ, Financial), AT&T (T, Financial), and Sprint (S, Financial). In the third quarter, T-Mobile spent $1.1 billion compared with $940 million in the year ago quarter.
Historic subscriber growth – crushing competition
"Despite our competitors' best efforts, the Un-carrier revolution made huge advances in the third quarter with record net new customers,"
– said T-Mobile chief executive John Legere. CFO Braxton Carter also had something to speak about the achievement that the company made in this regard. With great pride he said that this was the best ever quarter in the history of the company considering the “branded postpaid net additions.”
The company’s un-carrier approach of attracting customers have indeed worked in its favor, as visible in these essential metrics. While other national carriers lock subscribers in a two-year contract, T-Mobile avoids this approach. The company’s strategy is to aim at such frustrated customers who are annoyed of the plans and contracts that traditional carriers offer, and the company has been successful in bringing such subscribers under its umbrella. It’s visible in T-Mobile's incredible subscriber addition.
T-Mobile retail shops, Photo from Wikimedia Commons
The telecom player expanded its postpaid customer base by 1.4 million users during the period. Branded postpaid net adds saw phenomenal improvement – the carrier added 1.2 million connections in the third quarter, which is twice of what it witnessed in the second quarter.
Going on to the prepaid segment, we see that the company again delighted its investors by leading the industry numbers when it recorded an unbelievable net add of 411,000 connections. This is more than four times of what T-Mobile had reported in the previous quarter. In the past six quarters, the company has added as many as 10 million customers under its network – now that’s an astounding number. The best part is that these customer gains have started showing up in the company’s financials. The company’s service revenue spiked 10.6% year-over-year to $5.7 billion.
While subscriber base is improving at an extremely competitive rate, T-Mobile also experienced an increase of 4.2% to $61.59 in the average billings per user (ABPU) for branded postpaid connection. So increase in subscriber base together with rising billing has accounted for the revenue growth during the quarter. All this testifies that T-Mobile's aggressive strategy of offering plans at much cheaper rate compared with its larger national competitors is bearing fruit for the company.
Parting thoughts
T-Mobile may be the smallest of all the national carriers in the American economy, but it offers growth like no other player. The company’s un-carrier approach of identifying customers’ pain point and offering a solution is its tactic of broadening subscriber base, which is precisely its selling point. Being a smaller company compared with its fellow players, there is greater volatility, but at the same time there’s more upside potential. The company is outgrowing its rivals, offering a perfect platform for investors who are looking for good returns. Long term investors can keep T-Mobile on their radar.
