T-Mobile closes in on third place, charges customers less than half what Verizon does, on average

T-Mobile U.S. Inc. (TMUS) posted an incredible quarter in terms of subscriber growth in Q1 2014.  Versus bigger rivals Verizon Wireless (owned by Verizon Communications Inc. (VZ); number one in U.S. wireless market; 539k net adds in Q1), AT&T Inc. (T) (number two in wireless market; 575,000 net adds in Q1), and Sprint Corp. (S) (number three in the wireless market; 565k net losses in Q1), it wasn't even close.  T-Mobile U.S. shattered records adding 2.4 million net customers
I. America's Fastest Growing Carrier
T-Mobile U.S. had never before added even 2 million customers in a quarter -- to say it shattered its previous growth record is a bit of an understatement.  And what makes its growth particularly impressive and surprising is the fact that it did it at a time when it's finally forced Verizon and AT&T to get more competitive on the pricing front.
The carrier saw 1.8 million branded additions, including 1.3 branded postpaid additions -- nearly tripling AT&T and Verizon's postpaid add totals for the quarter.  Tablet adds continue at a steady pace, contributing 67,000 postpaid adds (T-Mobile only last year began to offer tablet data services).

Financials are looking healthy as well, with revenue rising to $6.875B USD for the quarter.  Earnings before tax, interest, depreciation, and amortization (EBITDA) fell slightly to $1.088B USD (down from $1.469B USD), but that seems a relatively small price to pay for such incredible, unprecedented growth.
One cause of the EBITDA drop was an uptick in smartphones, which set a sales record for T-Mobile, moving 6.9 million units.  T-Mobile makes a bit less money up front on smartphone sales.  T-Mobile's Jump! early upgrade program is another expensive incentive, but is very popular with 5.3 million enrolled users.

T-Mobile Jump
The biggest cause of the dip, though, was a temporary and beneficial one -- T-Mobile's program to pay customers early termination fees (ETFs) for those who switch from Verizon, AT&T, and Sprint.  T-Mobile says roughly 21 percent of postpaid gross adds (roughly 275,000 customers) took advantage of the promotion, indicating T-Mobile is successfully convincing customers to ditch their more expensive contracts on other carriers.

II. Incredible Evolution

T-Mobile's "rock star CEO" John J. Legere, cheered the earnings, remarking:

A year ago I promised that we would bring change to what I called this arrogant US wireless industry. We are delivering on that promise and our results reflect the growing customer revolution that we’ve ignited.

We are now approaching 50 million customers, added 2.4 million net new customers in the first quarter alone, and posted our fourth quarter of consecutive service revenue growth, while once again adding more net new postpaid customers than the rest of the industry combined!

T-Mobile continues to lead the way in budget value with an ARPU (average revenue per users) of $50.01 USD for postpaid users in Q1 -- down more than four dollars from a year ago.  That means that over the life of a plan, T-Mobile customers pay less than half of what they do on Verizon, on average.  Verizon posted an ARPA (average revenue per account -- a different figure) of ~$160 USD in Q1, up 6.3 percent from Q1 2013.  Verizon no longer reports ARPU, but given that ARPA was up, ARPU was likely up or similar to Q1 2013, which saw an ARPU of $107.15 USD. 

T-Mobile John Legere
T-Mobile CEO John Legere has transformed his company into America's hottest cellular service.
[Image Source: CNET]

Perhaps the most impressive part of T-Mobile's earnings was its incredibly low churn level.  Verizon in Q1 saw overall postpaid churn of 1.07 percent, while AT&T saw total retail churn of 1.07 percent.  By contrast T-Mobile's postpaid churn came in at 1.5 percent.  
While that may sound like a resounding win for Verizon and AT&T, it's actually a major victory for T-Mobile which traditionally was a percentage (100 basis points) or more higher than the top carriers.  This wasn't necessarily a historic black mark on T-Mobile; budget carriers traditionally have much higher churn.  Sprint, for example, in Q1 saw postpaid churn of 2.18 percent, which is more typical.  The fact that T-Mobile's churn is so low for a budget carrier is yet another sign of the company's incredible recent success.
It's hard to deny that T-Mobile appears to be the most popular carrier in the U.S. market currently, with strong customer satisfaction, a strong brand, and incredible growth.  
Looking ahead there's cause to concern of what effects a potential merger with Sprint via a Softbank Corp. (TYO:9984) bid could bring.  Deutsche Telekom AG (ETR:DTE) who owns roughly 67 percent of T-Mobile U.S. shares, is eager to sell the carrier, whose share prices are up 88 percent on a year-to-year basis.
SoftBank's Son
Softbank CEO Masayoshi Son is eager to get his hands on T-Mobile and merge it with Sprint.
[Image Source: Reuters]

But those concerns don't change the fact that T-Mobile has made incredible progress since last year's merger with MetroPCS and Mr. Legere's appointment to the CEO spot in Sept. 2012.  T-Mobile has gone from struggling to the hottest player in the market an unexpected and incredible evolution.

T-Mobile ended the quarter with 49.1 million customers, just shy of the 54 million Sprint ended Q1 with.  If Sprint and T-Mobile don't merge, expect T-Mobile to possibly seize third place sometime in 2015.

Sources: T-Mobile [press release], [investor slide deck]

"A politician stumbles over himself... Then they pick it out. They edit it. He runs the clip, and then he makes a funny face, and the whole audience has a Pavlovian response." -- Joe Scarborough on John Stewart over Jim Cramer

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