T-Mobile US Inc Has No Problems Gaining Customers, but It's Struggling to Keep Them

By Markets Fool.com


Source: T-Mobile.

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T-Mobile has had no trouble stealing customers away from AT&T and Verizon . The Un-Carrier announced preliminary earnings results for its fourth quarter recently, and says it added 2.1 million new subscribers last quarter. That brings T-Mobile's total subscriber count up to 55 million.

While T-Mobile has had no problem attracting new customers with its low prices and customer-oriented Un-Carrier announcements, keeping them is a different story. The wireless provider still suffers from a relatively high churn rate compared with AT&T and Verizon. A recent survey by Consumer Intelligence Research Partners gives us some insights into why people leave their wireless carrier, with the headline tidbits being that customers move from AT&T and Verizon because of cost, and switch from Sprint and T-Mobile because of network quality.

Feeling the churn
Take a quick look at how T-Mobile's postpaid customer churn rates for the first nine months of 2014 stack up against the competition.

Carrier

Q1 2014

Q2 2014

Q3 2014

T-Mobile

1.5%

1.5%

1.6%

AT&T

1.1%

0.9%

1.0%

Verizon

1.1%

0.9%

1.0%

Sprint

2.1%

2.1%

2.2%

Source: Company earnings releases

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Despite the pressure T-Mobile put on AT&T and Verizon last year with its Un-Carrier initiatives -- including introducing "Data Stash" late in the year to allow people to carry forward their unused data from month to month -- both of the larger carriers are doing quite well to keep their customers. In fact, AT&T boasted its best-ever postpaid churn rate in the second quarter, and a record low for the third-quarter period last year.

Overall, however, industry churn is at an all-time high, according to T-Mobile CFO Braxton Carter. And with more customers switching carriers, T-Mobile is grabbing a disproportionate number of those customers.

As a result, T-Mobile added an estimated 8.3 million net new subscribers last year. In the first year or so of the company's Un-Carrier marketing strategy, T-Mobile actually lowered its churn considerably. However, churn levels seem to have leveled off around 1.5%, still a long way from the 1% churn rate of industry leaders.

So what's holding back T-Mobile from lowering its churn rate even more?

No bars in the bar
The biggest reason customers leave T-Mobile, according to the CIRP survey, is that the company's mobile network doesn't offer the coverage customers need. Almost 40% of departing customers identify the network as their reason for switching services.

But T-Mobile is working quickly to fix the problem. Last year, the company had the fastest-growing network of any of the national carriers, expanding to 260 million PoPs, or points of presence. The goal for 2015 is to reach 300 million PoPs by the end of the year, which is equivalent to what AT&T and Verizon have today.

On top of that, T-Mobile is rolling out the 700 MHz spectrum it acquired from Verizon last year (starting with major markets), which offers better service inside buildings. The company acquired similar spectrum from Triad 700 in September that covers 2.43 million additional PoPs.

Additionally, the carrier continues to improve upon its industry-leading network speeds, rolling out Wideband LTE in 120 markets last year that provide downlink speeds of up to 100 megabytes per second.

Unlike AT&T and Verizon, T-Mobile isn't believed to be bidding billions of dollars in the current AWS-3 spectrum auction, which has brought in total winning bids of over $45 billion so far. T-Mobile is expected to have spent just around $1 billion for select licenses. (We won't know the exact details until all of the licenses are auctioned off.) Instead, it seems to be holding on to some cash for the 2016 600 MHz spectrum auction.

In the meantime, investors should expect T-Mobile to continue spending money on building out the spectrum licenses it currently owns. The company's accelerated rollout of its network in 2014 coupled with its low-price promotions caused its profits to lag. In the third quarter, the company posted a loss of $0.12 per share.

Free cash flow took a nosedive last year, too, as the company expanded its network. But CFO Braxton Carter expects that to turn around in 2015. He forecasts that the company will be cash flow-positive for 2015. Expect T-Mobile to use some of that cash flow to try to outbid Verizon and AT&T in 2016 and build out a network that keeps its new customers from leaving.

The article T-Mobile US Inc Has No Problems Gaining Customers, but It's Struggling to Keep Them originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.