Why T-Mobile's Postpaid Phone Subscribers Declined by 514,000 Last Quarter

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Once again, T-Mobile (NASDAQ: TMUS) reported an industry-leading number of postpaid net adds in the third quarter. Its 851,000 net postpaid phone additions marks 11 straight quarters T-Mobile has led the major wireless carriers. The Q3 numbers were reported Oct. 24.

But investors who looked over the company's reported operating metrics for the quarter may have noticed that the number of postpaid phone subscribers on T-Mobile's books actually declined 514,000. That's a pretty big discrepancy that needs some delving into. Fortunately for us, T-Mobile was very forward in detailing what exactly is going on here.

"The MVNO transaction"

In T-Mobile's press release and 10-Q filing with the SEC, it makes reference to an "MVNO transaction" and details the impact on its operations. MVNO stands for mobile virtual network operator and T-Mobile is referring to a deal it struck with Tracfone to transfer over its Walmart Family Mobile sub-brand. T-Mobile previously accounted for those subscribers as branded customers, but with Tracfone now operating the brand, they'll be moved to its wholesale line.

T-Mobile details all the accounting on its operating metrics release. Specifically, it's moving 1.365 million postpaid phone customers and 326,000 prepaid phone customers to Tracfone. (Not all of these are Walmart Family Mobile customers, but the vast majority are.)

The company's transparency is quite welcome, considering its competitors' similar disclosures, or lack thereof. Sprint (NYSE: S) relegated a similar deal to a footnote in its earnings release, and AT&T (NYSE: T) completely ignores customers who switch from its retail wireless service to its enterprise service when counting net adds.

Why T-Mobile is distancing itself from Wal-Mart

T-Mobile partnered with Wal-Mart (NYSE: WMT) in 2010 to establish the Walmart Family Mobile brand. At that time, Wal-Mart's 5,000-plus stores offered a valuable geographic footprint for T-Mobile. It allowed it to reach customers in more rural areas where it didn't have many storefronts.

But T-Mobile is aggressively expanding the number of stores it operates for both its flagship "Magenta" and MetroPCS brands. This year alone, the company plans to open 1,000 MetroPCS stores and 400 T-Mobile stores. The 400 new T-Mobile stores will reach an additional 30 million to 40 million people.

T-Mobile isn't the only company adding new stores. AT&T plans to open 900 stores for its prepaid Cricket Wireless brand this year, and Sprint added over 1,400 new stores last year with its co-branded RadioShack stores. Even so, T-Mobile clearly feels its physical footprint is large enough that it can go without directly selling phones through Wal-Mart.

How the move will affect T-Mobile's results going forward

Walmart Family Mobile customers are typically lower-value customers than those in T-Mobile's flagship brand or its MetroPCS prepaid brand. T-Mobile is giving up some of the revenue those customers generate in its deal with Tracfone, but it received some capital to deploy on real estate, spectrum, or other capital expenses. (The companies didn't reveal the details of the transaction.)

T-Mobile noted in its earnings release that had the transaction gone through at the beginning of the quarter instead of Sept. 1, its postpaid phone churn would have been 1.20% for the quarter. That's a 12-basis-point improvement over its reported results.

Additionally, Walmart Family customers also had lower average revenue per account than T-Mobile brand customers. As a result, T-Mobile will see a modest boost in APRU. That will offset the negative impact of more family plans in T-Mobile's base.

While the deal will have an overall net positive impact on T-Mobile's operating metrics, it's hard to know the real value it's getting out of the MVNO transaction without the exact details of the agreement. With the strong net additions T-Mobile reports every quarter, it won't take long for the company to make up the difference.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends T-Mobile US. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.