5 Reasons T-Mobile Will Continue Outpacing the Competition's Revenue Growth
Image Source: T-Mobile.
T-Mobile (NASDAQ: TMUS) management expects 2017 to be another year of solid revenue growth for the third-place carrier. "We're looking at another year of very significant value creation," CFO Braxton Carter said at a recent investors conference hosted by Citi.
Carter expects T-Mobile's service revenue -- the money customers pay for their plans -- to grow in the double digits, yet again, in 2017, which will ultimately translate into a sustainable ramp up in cash flow. Meanwhile, T-Mobile's competitors have seen service revenue decline. AT&T's (NYSE: T) service revenue declined 0.9% in the third quarter,Verizon's (NYSE: VZ) fell 5.2%, and Sprint's (NYSE: S) fell 6.8%. Comparatively, T-Mobile increased service revenue 13.2% in the third quarter.
Here are five reasons why T-Mobile expects that trend to continue.
1. Subscriber base keeps growing
The easiest way to increase service revenue is to bring on more subscribers. Over the past few years, no wireless carrier has done a better job than T-Mobile. In 2016, T-Mobile added 8.2 million total customers, 3.3 million of which are the extremely high-value postpaid phone subscribers. In fact, T-Mobile boasts that it captured over 100% of the postpaid phone net additions across the industry in both 2016 and 2015. (Other carriers -- specifically AT&T -- lost postpaid phone subscribers during those years.)
There's no indication that the trend is slowing in 2017. If anything, T-Mobile stands to gain from the expiration of Sprint's "Cut Your Bill in Half" promotion for its earliest sign-ups. CEO John Legere has already noted an increase in switchers from Sprint to T-Mobile in the fourth quarter. AT&T and Verizon's split focus on wireless and media ensures T-Mobile will be able to fill in more pain points and continue funneling customers away from the larger carriers.
2. All In will set the stage
T-Mobile's most recent Un-Carrier move, announced at CES earlier this month, is to include taxes and fees in its pricing. It's also doing away with its Simple Choice plans with data buckets, and only offering its unlimited data T-Mobile One plan. Carter believes the latest move, dubbed All In, "will set the stage for very nice front-end growth" in 2017.
T-Mobile is betting on a simple pricing structure to front-load its subscriber growth in 2017. If Carter is correct, it would result in sustained service-revenue growth throughout the year.
3. Increasing revenue per user
The other benefit of getting rid of Simple Choice plans is that customers will be forced to choose T-Mobile's more expensive plan. During the third quarter, when T-Mobile introduced its T-Mobile One plan, it saw a 2.2% sequential increase in average revenue per postpaid phone subscriber. And Carter points out the new service plan was only available for one month that quarter.
While including taxes and fees in its new pricing seems like it could be a price cut, T-Mobile has also done away with its $5 per-line autopay discount. Effectively, it's replacing one pricing promotion with another. As a result, the new All In promotion shouldn't impact average revenue per user (ARPU) on T-Mobile One accounts very much.
T-Mobile currently has the lowest ARPU in the industry for postpaid phone subscribers, as seen in the table below.
*Includes lower-value connections like tablets and IoT devices.Source: Company earnings reports.
There's clearly room for T-Mobile to increase its ARPU, but it's also been able to put pressure on its competitors' ARPU. The result is a growing T-Mobile customer base that's also paying more per month, on average.
4. Geographical expansion
T-Mobile dramatically improved its network coverage in 2016, but its retail footprint hasn't quite caught up with its network. Carter says the company plans to open 1,000 new T-Mobile stores by mid-2017.
Since T-Mobile's marketing campaigns are all done on a nationwide scale, it already has strong brand recognition in those areas, which generally have lower competition. Carter estimates the additional stores will reach 30 million to 40 million potential customers, which could add meaningful growth to its subscriber base.
5. Getting into business
When it comes to grabbing share of the enterprise market, Verizon and AT&T are dominant forces. Carter says, "We still index very low on B2B [business to business]." T-Mobile has taken less than 5% of the marketplace.
AT&T counts 50 million postpaid connections in its Business Solutions segment. In fact, AT&T's business customers outnumber its retail wireless customers.
While business customers are harder to convert than retail customers due to the need to convert so many people at once, T-Mobile is much better positioned to win these valuable contracts than just two years ago. It may be a slow process, but investors should look for enterprise customers to add meaningfully to service revenue in 2017 and beyond.
Overall, T-Mobile is poised for another strong year of service-revenue growth as its competitors struggle to tread water.
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Adam Levy owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.