T-Mobile adds 723K subs in Q2 despite shaky economy

T-Mobile impressed analysts with its second-quarter results today, reporting 723,000 net postpaid phone additions – and lower churn than Verizon for the first time ever.

“Our relentless focus on putting customers first delivered yet another outstanding quarter for T-Mobile with industry leading postpaid and broadband customer growth, including our highest ever postpaid account adds in company history,” said T-Mobile CEO Mike Sievert in the earnings release (PDF). “This momentum fueled our growth strategy and allowed us to raise guidance across the board yet again – further proof that our commitment to addressing customer pain points in this challenging macro-economic environment is working.”

During the conference call with analysts, Sievert was characteristically upbeat, a stark contrast to his biggest rivals, particularly Verizon, whose CEO was sounded downright apologetic last week when reporting dismal second-quarter results.

After years of dominating the wireless industry with its network quality prowess, Verizon is getting pummeled by myriad reports declaring T-Mobile the winner in the 5G network race. Combined with its reputation as the carrier with the lowest prices, T-Mobile is seizing the moment and making the most of its hard-fought standing.  

In the second quarter, service revenues of $15.3 billion grew 6% year over year. Net loss of $108 million decreased year over year due to merger related costs and other special expense items amounting to $1.9 billion. Free cash flow of $1.8 billion grew 5% year over year.

Postpaid phone churn was 0.80% in the second quarter compared with 0.93% in the prior quarter and 0.87% in the year-ago quarter. Last week, Verizon reported postpaid phone churn of 0.81%; consumer wireless postpaid churn was 0.93%.

T-Mobile’s prepaid churn was 2.58% in the second quarter, which compares with 2.67% in the first quarter and 2.62% in the year-ago quarter.

Sprint network shutting down

T-Mobile said it achieved a significant milestone with the shutdown of the Sprint network. Nearly two-thirds of the 35,000 targeted sites had been decommissioned as of the end of the quarter, and the company expects to complete pretty much all the decommissioning by the end of the third quarter.

Based on where it’s at in executing the Sprint combination, T-Mobile said it’s raising its merger synergies guidance range to $5.4 billion to $5.6 billion in 2022, up from the previous range of $5.2 billion to $5.4 billion.

Across the board, T-Mobile raised its 2022 guidance, with postpaid net customer additions now expected to be between 6.0 million and 6.3 million, an increase from the prior guidance of 5.3 million to 5.8 million.

ARPU tells the story  

In a quarter where its biggest rivals AT&T and Verizon raised prices, T-Mobile reported postpaid phone ARPU of $48.96, which was more than the $47.45 reported in the prior quarter.

In fact, “T-Mobile beat and raised on every key metric,” wrote Wall Street analyst Craig Moffett of MoffettNathanson. “And they are doing so without the excessive promotionality of their peers; notably, they are the only player growing service revenue faster than total revenue. That is, they are growing the business that actually counts, not just pushing through more handset sales at zero margin.”

While some analysts will focus on T-Mobile’s strong growth in fixed wireless access (FWA) and others prefer to focus on T-Mobile’s growth in postpaid phones, Moffett said the most important metrics are ARPU and margins.

AT&T and Verizon are raising prices but neither materially grew postpaid phone ARPU in the second quarter, Moffett said, noting that T-Mobile isn’t raising prices in the same way and yet they just posted the industry’s best ARPU growth. He noted that T-Mobile’s branded postpaid phone ARPU of $48.96 was 2.8% better than last year and 1.75% better than the StreetAccount consensus of $48.13.

That said, T-Mobile’s FWA additions of 560,000 topped even the more optimistic projections, he said.

Moffett reiterated that there are only two sources of differentiation in wireless: network quality and price. In 5G, T-Mobile dominates in both, he said, and struggles at AT&T and Verizon are not warning signs but signal that T-Mobile’s strength is growing.

New Street Research analyst Jonathan Chaplin noted that T-Mobile’s share of postpaid phone disconnects is 31% compared to 35% a year ago. He figures that T-Mobile’s share of net adds among the big three lands at 47%, up from 37% a year ago. “We expect this to improve further as legacy Sprint churn continues to dwindle, and as households become more price conscious,” he wrote in a report for investors Wednesday.

He said T-Mobile also escapes some of the cost pressures seen by others because it doesn’t have a wireline network. That means T-Mobile doesn’t have as many people in trucks doing broadband installations, exposed to gas prices and other cost pressures.

“We think inflation could actually help T-Mobile,” Chaplin wrote. “As Verizon and AT&T scramble to offset inflation by taking up price, it will heighten the value discrepancy between T-Mobile and peers while giving T-Mobile easy fodder to market their value proposition. Inflation may help drive share gains.”