U.S. telecommunications industry had a disappointing 2017 and continues to struggle due to cut-throat pricing competition resulting in lower ARPU (average revenue per user), margins and low free cash flow. However, one national wireless carrier, T-Mobile US Inc. (TMUS - Free Report) , is flying high despite all the turbulence.
Recently, T-Mobile US revealed its preliminary subscriber statistics for 2017. The company added a net 5.7 million customers in 2017, which includes 3.6 million net customer additions in the lucrative postpaid segment. Notably, postpaid customers are those who are billed monthly and considered more profitable to telecom operators. Of the 3.6 million net additions, 2.8 million were postpaid phone additions and 0.8 million were from connected devices like tablets.
T-Mobile exited 2017 with a total of 72.6 million customers. It was also the fourth consecutive year when the company added more than 5 million subscribers. In the fourth quarter of 2017, the company added a net 1.9 million postpaid customers, making it the 19th straight quarter of more than 1 million net subscriber additions. Customer churn, in fourth-quarter 2017 was 1.18%, indicating an improvement of 10 basis points year over year and 5 basis points sequentially.
We believe that T-Mobile US’s dream run is likely to continue in 2018 because of a few macro-industry related and company-specific factors. Here are those.
The U.S. economy is on solid ground. Strong GDP growth supported by encouraging labor market, retail sales and industrial production data has accelerated economic activities. Consumer spending has increased, driven by encouraging economic conditions and strong government outlays.
President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the U.S. economy. The proposal to reduce corporate tax rate from 35% to 20% faced by telecom carriers would be immediately accretive to cash flow. Trump’s tax proposal will result in a huge windfall for telecom operators. The carriers can utilize this money for 5G network R&D and its deployment.
The telecom industry is highly capital-intensive in nature. Therefore, the immediate expensing of investment in all tangible, intangible and real property (other than land) would significantly benefit telecom carriers. This would encourage telecom operators to increase investment for capital expenditure. Trump has stated that he wants to do away with nearly 75% of all governmental regulations during his term as the President. A new Federal Communications Commission (FCC), headed by Ajit Pai, exercising lesser restrictions, certainly augurs well for the ISP (Internet Service Providers) industry.
The wireless service business model of T-Mobile US hinges on its “Un-Carrier” value proposition and its strategic marketing efforts. The U.S. wireless market is highly competitive with the presence of mobile behemoths such as Verizon Communications Inc. VZ, AT&T Inc. T and Sprint Corp. S. Despite this, T-Mobile US’s “Un-Carrier” service which was launched in March 2013 to offer a series of price concessions like no annual service contract, equipment instalment facility, free international data roaming, to name a few, helped the company establish a strong foothold. Offers like unlimited data download and international roaming facility, coupled with no annual service contract, garnered significant market traction.
T-Mobile US is making its unlimited postpaid wireless service, T-Mobile ONE, more attractive with the inclusion of services from online video streaming service provider, Netflix Inc. with no extra charges along with unlimited data for just $40 per line for a family of four (inclusive of all taxes and fees). The offer is open to both existing and new customers. Subscribers, who already have a Netflix account, can also avail this offer.
T-Mobile US' innovative network expansion methodologies and improvement plans, stellar network performance, deployment of LTE-U technology and offering of attractive unlimited data are key factors for its growth. This is further supported by improving scale, healthy free cash flow generation, strong liquidity and valuable spectrum assets that also provide credit support.
T-Mobile US plans to launch its own streaming TV service in 2018. Meanwhile, the company’s recent deal to acquire Layer3 TV will boost its streaming service. Layer3 TV brings TV, streaming online video content and social media content under one umbrella. Moreover, it runs its own private IP network to directly serve users’ content and manage bandwidth, without bandwidth throttling. Layer3 TV can also transmit HD video at a bandwidth of less than 4 megabits per second.
On Nov 10, 2017, T-Mobile US’ rating was upgraded to Ba2 (in certain metrics) by credit rating agency, Moody’s Investors Service. Moreover, the company’s rating outlook has been confirmed stable. Moody's upgraded T-Mobile US' corporate family rating (CFR) to Ba2 from Ba3. The company’s probability of default rating was upgraded to Ba2-PD from Ba3-PD, its senior secured rating to Baa2 from Baa3 and its senior unsecured rating to Ba2 from Ba3. The Speculative Grade Liquidity Rating (SGL-1) was affirmed.
The U.S. telecom market continues to witness intense pricing competition, as success largely depends on technical superiority, quality of services and scalability. Moreover, the U.S. wireless industry is likely to get competitive in 2018 with the entry of cable MSOs (multi service operators) in this space. In order to stay abreast of competition, existing players need to be constantly on their toes and come up with innovative products to gain from the industry’s growing momentum.
Technological upgrades and breakthroughs have resulted in cutthroat price competition. Product life-cycle and upgrade-cycle have been reduced drastically as several firms are constantly coming up with new products and services. Increasing competition is compelling players to offer heterogeneous and bundled services to retain their position in the space.
The online TV streaming service market is already saturated with the existence of a number of large players. Establishing a foothold in this market may not be an easy task for T-Mobile US. Netflix and Amazon.com are the two leading Internet TV streaming service providers. Statistics reveal that Netflix has more than 100 million subscribers and Amazon has an estimated 60 million Prime TV customers.
Price Performance and Zacks Rank
In the past year, T-Mobile US’ shares have gained 11.7% against the industry’s decline of 4.2%. While T-Mobile US offers several growth catalysts in the long-term buoyed by favourable economic and industry-related factors as well as its own marketing superiorities, we believe investor’s should also take care of any near-term fluctuations in stock price due to growing competition and increasing saturation of the U.S. wireless market. T-Mobile US carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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