T-Mobile US Inc (NYSE:TMUS) is experiencing strong demand for its Early Termination Fee (ETF) buyout program since launching in early January.
T-Mobile, the country's No. 4 carrier offers to cover the termination fees for individuals as well as up to five lines per family for consumers who leave their carrier. Customers can get up to $650 in credit after trading in their phone.
If it works well, then this would remove the biggest obstacle that had stood in the way of switching to T-Mobile as a recent Nielsen research suggests up to 40 percent of families hold back from switching because of high early termination fees (ETFs).
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Under the new offer, customers from the three leading national carriers must trade in their own smartphone for up to $300 in credit, depending on the phone and its condition. Then they will receive $350 for each line that incurred a termination fee. Crucially, the offer is also being extended to T-Mobile's existing customer base.
T-Mobile estimates that this program will account for 20-25 percent of the first quarter's gross additions, which is expected to be above 750K, and this number could prove conservative given strong ETF trends.
UBS analyst John Hodulik said each gross addition costs T-Mobile an incremental $200 in subscriber acquisition costs (SAC) given the ETF.
However, the higher credit quality of the subscriber and the family plan suggests these subscribers will have meaningfully lower churn than the company's 1.7 percent base in the fourth quarter, giving it time to recoup the higher costs to acquire.
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The company also suggested that subscribers coming in under the ETF promotion have higher average revenue per user (ARPU) than the average postpaid subscriber while the incremental foot traffic in the stores resulting from the program is putting downward pressure on non-ETF SAC.
Meanwhile, the company has seen a 53 percent annual increase in business segment customers (likely off of a very small base) resulting from the international roaming plan. These issues suggest better all-in postpaid economics.
T-Mobile's ETF plan has had a meaningful impact on the competitive landscape and is forcing the national carriers to react. AT&T, Inc. (NYSE:T), in its offering that runs through March 31, is giving $100 in credit to new and existing customers who open a new line of service for each new smartphone, tablet, feature phone, mobile hotspot or Wireless Home Phone they add.
Sprint Corp. (NYSE:S) responded against T-Mobile by introducing new plans, such as its Family Plan. Generally, Sprint has been less aggressive about matching T-Mobile's initiatives.
Meanwhile, Verizon Wireless (NYSE:VZ) has been the least reactionary carrier to T-Mobile's moves as it maintains a reputation in terms of service reliability and network coverage.
The higher credit quality of the subscriber coming in under the ETF plan (and the nature of the promotion itself) suggests it may be driving somewhat higher churn in the first quarter at the other providers, along with lower gross add share as T-Mobile's share rises.
Hodulik noted that this could be fairly dramatic in the first quarter given that it is the seasonally weakest quarter of the year and the fact that the nationals as a group have lost postpaid handset subs in the first quarter for each of the last few years, including over 700K in the 2013 first quarter
For the first quarter of 2014, 500K handset losses among the nationals are expected as postpaid continues to take share from prepaid. T-Mobile is expected to add 3.2 million postpaid subscribers at a lower churn rate of 1.5 percent. It should be noted that T-Mobile added 2 million new branded postpaid customers last year after losing subscribers for four years.
Assuming 500K handset losses and roughly 900K handset gains at T-Mobile suggests that the other three carriers as a group will lose about 1.4 million handsets.
Hodulik said he would bet the majority will come from Sprint given its network posture, marketing spend and lack of aggressive pricing moves.
On the flip side, T-Mobile's gross addition growth plus the incremental $200 cost per gross additions that applies to the 25 percent of gross adds coming from the ETF promotion weighs on profitability. This could push margins in the first quarter to 21.5 percent of sales, down from 28.9 percent reported in the first quarter of 2013.
T-Mobile is also working on its network coverage. Its LTE network covered 209 million POPs in 2013, and expects to cover 250 million by the end of 2014, including some re-farmed 1900 MHz spectrum.
T-Mobile has rolled out 10x10 configurations in 43 of the top 50 metro areas and has its first 20x20 market in Dallas. The company also plans to begin deploying 700 MHz lower A block spectrum it is buying from Verizon by the end of this year because it plans to begin seeding 700 MHz compatibility into handsets by then.
T-Mobile's liquidity remains solid, and management stated it would use debt to fund additional purchases of spectrum in future auctions.
TMUS stock, which gained 54 percent in the last year, trades at about 6 times its estimated 2015 EBITDA and 30.1 times its forward earnings. They traded between $16.01 and $34.10 during the past 52-weeks.
According to a Reuters report, Deutsche Telekom's Chief Executive Tim Hoettges said T-Mobile US is currently valued at $46 billion. Deutsche Telekom holds a 67 percent stake in T-Mobile US.
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