T-Mobile (NASDAQ: TMUS) has done a great job building out its network. By the end of this year, management expects to close the coverage gap between its network and Verizon's. Verizon is widely regarded as having the strongest network in the industry.
But T-Mobile's distribution footprint hasn't quite kept pace with its network buildout over the last five years. While the company is opening storefronts as fast as possible, there's still a big gap between the number of people its stores reach and the number of people covered by its network.
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As of the end of the fourth quarter, management says the T-Mobile network covers approximately 322 million people. Its stores, however, only reach about 260 million people. That gap is a tremendous opportunity for T-Mobile to take market share.
T-Mobile's penetration rate
As of the end of the fourth quarter, T-Mobile had almost 55 million phone subscribers on its network between its T-Mobile and MetroPCS brands. That's just 17% of the people its network covers, but it's 21% of the people covered by its distribution footprint.
If T-Mobile can achieve that 21% penetration rate as it builds out its storefronts to reach the additional 62 million people covered by its network, the company could theoretically add another 13 million subscribers.
T-Mobile notably added a ton of new stores last year. It opened 1,500 T-Mobile stores and 1,300 MetroPCS stores, bringing the combined total to 16,400. Stores take a while to ramp up traffic and conversions, so at least 17% of T-Mobile's stores aren't running at full efficiency. As such, CFO Braxton Carter says there are probably closer to 100 million people that the company is still not reaching with its retail distribution footprint. That means there's potential to add 21 million new customers, based on the existing penetration rate of T-Mobile's distribution footprint.
As T-Mobile adds more rural storefronts, it doesn't face the same level of competition it faces in its long-standing urban stores. While all four major carriers have a presence in nearly every major metropolitan area across the United States, only one or two carriers might have a retail presence in some of the markets T-Mobile is currently expanding to.
As such, T-Mobile may be able to win a much greater share than it has historically. That means it could very well win much more than the 21 million new subscribers estimated by its current penetration rate.
That reduced level of competition also means T-Mobile may be able to reduce its competitive intensity. The company has been fairly aggressive over the last five years in its efforts to grow its subscriber base. It might not have to offer as many device discounts or bundling incentives to get new customers to sign up, which would ultimately benefit the company's profit margin and cash flow generation.
Overcoming its biggest disadvantage
Carter has said T-Mobile's biggest disadvantage is its scale. As it builds out stores and brings in new customers, that puts it well on its way to growing to a comparable size as Verizon or AT&T.
It still has a long way to go. AT&T has over 79 million branded phone customers, 64 million of whom are valuable postpaid subscribers. Verizon doesn't break out phone customers, but it counts over 116 million total connections on its network. T-Mobile is sitting at 55 million phone subscribers and 72 million total connections.
Scale means the ability to generate higher operating profit margin for a wireless carrier. That's why Verizon's wireless EBITDA margin is historically the highest in the industry by a wide margin. It came in over 40% last year. T-Mobile, by comparison, reported an adjusted EBITDA margin of just 36%.
As T-Mobile expands its retail footprint and brings in millions of new customers, its margin should expand, and cash flow growth will continue to skyrocket.
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