(Source: T-Mobile)
T-Mobile's plan to offer users cheaper upgrades, lower contracts is paying off

In Q1 2013, following its merger with MetroPCS, America's fourth place carrier T-Mobile USA tacked on 3,000 postpaid customers, its first growth since 2010.  The carrier -- majority owned by Deutsche Telekom AG (ETR:DTE) -- announced its Q2 results this week and they're quite impressive.

I. T-Mobile Surges on Customer Gains

Leading the way is a net addition of 688,000 branded postpaid customers (the results include MetroPCS results for May and June).  Of those additions 685,000 came from the core T-Mobile brand.

The net postpaid add count was just narrowly behind that of America's top wireless carrier, Verizon Wireless (a joint venture between Vodafone Group Plc (LON:VOD), Verizon Communications Inc. (VZ)), who added 941,000 net postpaid subscribers in Q2.  Sprint Nextel Corp. (S), by contrast, lost 1.05m subscribers -- which analysts said mostly fled to T-Mobile.

T-Mobile USA store
T-Mobile added on more than a half million subscribers. [Image Source: Bloomberg]

T-Mobile and MetroPCS also added 412,000 prepaid customers, bringing its total net customer additions to 1.1 million.  The carrier's postpaid subscriber churn, a measure of the number of customers leaving, was relatively low at (versus 2.63 percent for Sprint and 0.93 percent for Verizon Wireless).  T-Mobile now has 44 million customers, just behind Sprint's 55 million.

T-Mobile plane
[Image Source: Juergen Lehle]

T-Mobile lacks the marketing of industry giants AT&T, Inc. (T) and Verizon Wireless, but its "uncarrier" strategy arguably offers the most competitive model in the industry.

II. Frugal, But Still Profitable

The carrier pocketed $1.1B USD in total profit before tax, interest, and depreciation (EBITDA) from its MetroPCS and T-Mobile brands.  It also saw revenue per user (ARPU) increase to $35.97 USD, a rise of 29 percent, which was due mostly to the inclusion of MetroPCS data.  T-Mobile's ARPU is still nearly three times less than Verizon Wireless's ARPU -- $109.67 -- but that's simply a reflection of the company's two strategies.  

T-Mobile has finally found success acting as a budget carrier who reduces its own expenses to turn a modest profit.  Verizon, by contrast turns larger profits by charging customers much more for their equivalent contracts, while offering them phones up front -- sort of like the mortgage broker of the phone world.

T-Mobile President and CEO John Legere (left) [Image Source: Forbes]

CEO John Legere remarks:

T-Mobile’s Un-carrier approach has clearly resonated with consumers. By fixing the things that drive them mad, like contracts and upgrades, and freeing them from the two-year sentences imposed on them by our competitors, they are choosing the new T-Mobile in unprecedented numbers.  We are just beginning and we will continue to apply this innovative thinking to the Un-carrier offers we create and to the internal operations of our company, which taken together are driving significant shareholder value creation.

By not subsidizing phones, T-Mobile avoids paying inflated fees to devicemakers, while passing along those savings to customers at lower rates.  T-Mobile even softens the blow of hardware costs via a clever financing strategy, by giving customers phones with only a small upfront cost (similar to its subsidized competitors) with the remain cost spread out over monthly payments.  (Customers are also free to buy the devices in full up front.)

Its customers are not bound by their monthly contracts and are free to leave at any time, yet have the convenience of a normal postpaid contract.

Perhaps best of all, T-Mobile's recently announced "JUMP" program allows users to pay a $10 USD monthly fee that both offers free device replacement, and a free trade-in upgrade every six months.  AT&T, for example, only offers yearly upgrades and forces you to pay your remaining installation payments on the device that you traded in; T-Mobile voids the remaining payments on your old device, potentially saving you hundreds of dollars.

II. iPhone, LTE are Key Wins for T-Mobile

Despite being the last carrier to acquire the Apple, Inc. (AAPL) iPhone, T-Mobile still saw a nice bump from the popular smartphone, which launched on its network in April.  The T-Mobile iPhone 5 is offered for $99 USD, plus a $20 USD/month repayment charge.  T-Mobile said that iPhones accounted for 29 percent of its added subscriber sales.  T-Mobile also reported "strong sales" of Samsung Electronics Comp., Ltd.'s (KSC:005930Galaxy S IV, although it declined to give exact numbers.

In total smartphones accounted for 86 percent of T-Mobile's unit sales.  The carrier sold 4.3 million smartphones to customers.

iPhones helped drive new T-Mobile subscriptions.

More good news came on the LTE front.  While T-Mobile funneled $1.1B USD into rolling out the fourth-generation wireless technology, it was pleased to announce that the deployment was ahead of its previously announced schedule, a nice surprise.  The LTE network now covers 116 metro areas and 157 million customers, almost up to the 157 cities Sprint supported at the quarter's end.

U.S. Cellular Corp. sold T-Mobile USA an additional 10 MHz band of Advanced Wireless Services (AWS) spectrum covering a number of central and southeastern markets.  T-Mobile says that spectrum will allow 32 million more people in 29 markets to be covered by LTE.

A year ago, bleeding customers, some feared T-Mobile was headed for a market exit.  Now the carrier looks invigorated and profitable, leaving rival carriers scrambling to keep up with its aggressive mobile strategy.

Source: T-Mobile USA [earnings release]

"I mean, if you wanna break down someone's door, why don't you start with AT&T, for God sakes? They make your amazing phone unusable as a phone!" -- Jon Stewart on Apple and the iPhone

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