I reiterate my bullish thesis on T-Mobile (NASDAQ:TMUS). The company has been modestly growing its subscriber matrices given its competitive pricing plans, ETF (early termination fee) and Simple Choice plan. Moreover, the company's top-line and bottom-line results benefited in 1Q14 with its industry leading year-over-year smartphone subscriber growth and synergies attained from the MetroPCS integration. Also, I believe the company's ARPU and EBITDA will benefit from the ongoing growth investments in coming quarters. Furthermore, the Sprint (NYSE:S) and TMUS merger is expected to turn a new corner in the competition in the North American Telecom Sector.
Top-Line Success Story
The North American Wireless Industry is dominated by four major carriers, AT&T (NYSE:T), Verizon (NYSE:VZ), S and TMUS. On the basis of wireless subscriptions, T-Mobile has been constantly increasing its share of subscription in recent quarters, as shown by the chart below.
In this highly saturated Telecom Industry, all carriers have been actively taking pricing initiatives to grow their wireless subscriber base. TMUS' Un-carrier 4.0 "ETF" have brought favorable results for the company; TMUS added 1.3 million branded postpaid subscribers in 1Q14. Also in 1Q14, TMUS experienced postpaid additions of 600,000 with its new pricing initiatives, introduced under the More Value Share Plan. On the other hand, VZ extended the reduced monthly pricing for customers enrolled under its EDGE program, but the company only added 539,000 postpaid connections in 1Q14. I believe the acceleration in TMUS subscriber base is due to the strong ETF plan. Moreover, the strong uptake of the ETF plan also enabled the company to outpace its peers with a well-built smartphone subscriber growth in 1Q14, as shown in the chart below.
Source: Companies Quarterly Earnings Report
TMUS' Uncarrier strategies have remained key drivers of the company's subscriber growth. The company has recently introduced its Uncarrier 5.0 strategy, which allows customers to take the iPhone5s on a 7-day free trial. I believe with this initiative, TMUS will let customers judge the competitive edge of the company's services over its peers. Also, the strategy will drive more customers towards T-Mobile stores, increasing the company's subscriber base.
In addition, to serve the increasing demand of music streaming by mobile users, the company has announced the "Music Freedom" program to provide customers with high-speed music streaming with no extra charges. I believe with the recent increase in the number of people who stream music on their phones, TMUS' Music Freedom program will portend well for its subscriber base growth and will allow the company to improve its churn. Although TMUS has been consistently improving its churn; in 1Q14, TMUS' churn rate was 1.5% as compared to 3.3% in the same quarter the previous year. Going forward, as the company remains focused on improving its subscriber base by introducing its Uncarrier strategies, the company's churn will keep on improving.
Furthermore, the industry leading subscriber growth of TMUS did well to grow its top line and moderate its ARPU decline. The company ended 1Q14 with a revenue growth of 47% year-over-year, mainly due to the inclusion of MetroPCS' results. The integration of MetroPCS expanded TMUS' presence to 30 new markets. Moreover, the integration of MetroPCS' business will drive the company's top-line growth in coming quarters. On the other hand, the continuous adoption of ETF and the Simple Choice plan, to address competition, will keep ARPU pressurized in the near term. But I believe that as soon as the company completes the migration of customers to the Simple Choice plan, the declining ARPU will start to stabilize. Going forward, the company plans on bringing price changes by increasing the price of its unlimited 4G offers, and the cutting down of unlimited discounts to affinity customers will portend well for ARPU in the future.
The LTE Spectrum Race, winners and losers
LTE network coverage is a major growth driver for telecom companies. By using the combination of 5MHZ of its 700MHZ spectrum and 20MHZ of its AWS spectrum for LTE, TMUS now covers 230 million POPs. The company faces tough competition from VZ, which now covers 306 million POPs by using 10MHZ of its 700MHZ and 20MHZ of its AWS spectrum for LTE. Moreover, T is also adding to the competition, as it now covers 290 million POPs by using 10MHZ of its 700MHZ and AWS spectrum for LTE. TMUS has sensed the competition heat and is adding density to its spectrum by acquiring new low-band spectrum from small companies to increase its market presence in metropolitan areas.
Going forward, by utilizing these newly-acquired spectrums and integrating MetroPCS spectrums, TMUS will witness an increase in terms of POPs covered by its LTE network. Also, TMUS still tops its competitors by delivering the highest 4G-LTE speed, as shown in the chart below.
Source: Company's Quarterly Earnings report
T-Mobile and S Merger
There is a lot of speculation in the U.S. Telecom Sector about the TMUS and S merger. I believe there's a lot of upside potential if the merger takes place. If it succeeds, the combined new company will reduce the number of major carriers from four to three, which will boost competition, thereby increasing price wars and shifting the focus of carriers on quality of services. In addition, the combined company will observe an increase in LTE network coverage, as a result of spectrums combination. I believe if this merger takes place, TMUS and S will be in a better position to address the intense competition.
TMUS is decently moving ahead in the sector. The company's growing subscriber base and increasing smartphone penetration is adding to its top-line growth. I believe the company is nicely placed amongst its peers through its effective Uncarrier strategies. Moreover, increasing smartphone penetration and expected synergies from MetroPCS will positively affect the company's performance in the long term.
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