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Morningstar | T-Mobile Posts Record Customer Loyalty, Buoying Revenue Growth

T-Mobile delivered standout customer loyalty metrics during the first quarter, reflecting the firm’s solid execution over the past several years around customer service and network improvement, coupled with consistent pricing. On the negative side, the rate at which the firm is attracting new customers slowed considerably and the prepaid business continues to struggle. We don’t expect to significantly change our $77 fair value estimate.

Our view of T-Mobile’s competitive position rests, in large part, on the fate of its planned merger with Sprint. The firm remains resolute that it can demonstrate the public benefits of the merger to the U.S. Federal Communications Commission and the U.S. Justice Department, despite recent news reports that regulators plan to nix the deal. However, management’s rhetoric seemed a bit more muted that usual, restricted primarily to reiterating its arguments. We still believe it isn’t possible to peg the probability of the deal passing with any confidence; we maintain that we’d rather hold T-Mobile than Sprint at this point.

The pace of customer defections among T-Mobile’s postpaid customer base dropped to the lowest level on record at 0.88% per month, down from 1.07% a year ago, besting AT&T during the quarter, and nearly matching Verizon. Despite the sharp drop in churn, net postpaid phone customer additions increased only modestly versus a year ago (650,000 versus 617,000) as the firm’s share of new customer decisions across the industry seems to have taken a step down. In addition, revenue per phone customer declined 1.3% year over year, which is somewhat concerning. Still, management increased its customer growth expectations for 2019 and maintained its view that revenue per customer will be stable over the course of the year. Wireless service revenue also continues to grow nicely, up 6% despite another quarter of weak prepaid customer growth and a sharp drop in revenue per prepaid customer.

From an industry perspective, both AT&T and Verizon saw increases in customer churn during the quarter, meaning that the two firms had more customers up for grabs during the quarter than a year ago. Yet, T-Mobile’s gross postpaid phone customer additions declined 4% year over year. The prepaid businesses at these three carriers were all weak during the quarter. Sprint has yet to report earnings, but we doubt the firm saw much change in its fortunes this quarter. It seems the two industry giants are doing a better job of attracting new customers, even if it means stealing accounts from one another in the process.

T-Mobile’s profitability included several moving parts, including accounting changes and costs related to the Sprint transaction. Adjusting for these items, we estimate margins were roughly stable year over year, with EBITDA totaling around 37% of service revenue. Rising network costs tied to the deployment of small cells and 600 MHz spectrum offset benefits from scale and likely lower customer acquisition costs. Capital spending increased 37% year over year to $1.8 billion, but the firm still expects to spend $5.4 billion-$5.7 billion in 2019, up from $5.2 billion in 2018, with payments weighted toward the front of the year. We have to wonder if T-Mobile will end up increasing its capital budget for the year if the Sprint merger fails. Even with the step up in planned spending, T-Mobile would still invest less per customer and a lower percentage of serving revenue in 2019 than at any point over the last five years despite all of the technological upgrades it is undertaking.