T-Mobile (NASDAQ: TMUS) turned in yet another quarter with over 1 million postpaid wireless net additions when it reported Q1 earnings at the end of last month. Management estimates the Un-carrier took 88% of all net additions in the industry.
That net addition number was bolstered by a record low postpaid phone churn rate of 0.88%. During the company's earnings call, a couple of analysts hit on the idea that lower churn ought to result in greater net additions if T-Mobile's investments in its network and distribution were paying off in greater gross additions.
There's a limit to how low subscriber churn can go, so what happens when improvement in churn stalls?
CEO John Legere, CFO Braxton Carter, and CTO Neville Ray. Image source: T-Mobile.
Gross additions are going down
T-Mobile lost around 370,000 customers per month in the first quarter last year compared to about 330,000 customers per month this year based on its reported churn rates and subscriber counts. Meanwhile, net phone additions for the first quarter improved just 40,000 on an absolute basis. That means there was a drop in gross additions by about 80,000 subscribers.
While T-Mobile's churn rate continues to improve year over year every quarter, there's a limit to how low investors can expect that rate to fall. Verizon (NYSE: VZ), the industry leader in churn, posted a rate of just 0.84% last quarter. Management thinks it will eventually surpass Verizon's churn rate.
"There is no reason to believe that ultimately when you have a superior network to Verizon, better customer service than Verizon, and lower prices than Verizon, that we shouldn't be able to ultimately achieve churn below Verizon's," President and COO Mike Sievert said.
But as T-Mobile's subscriber base increases, a lower churn rate could still result in a greater absolute number of gross customer losses. It'll need to show greater gross additions to offset those losses, and T-Mobile's investments in distribution and promotion haven't shown up in greater gross additions recently.
Management says it's in control
Management seems much less concerned about shrinking gross additions.
"What we always do through the quarter is we make real-time game day calls, as to what do we need to do to be able to deliver on the aspirations in our business plans, and we always keep growth and profitability in balance," Sievert told analysts. "We certainly have levers we could do that would grow faster, but we're achieving our business plan, which is balanced financial results and customer growth results."
Those levers would presumably be things like promotional deals on discounted service or devices. And to that end, T-Mobile saw its average revenue per subscriber fall about 1.3% to $46.06 in the first quarter. Management attributes that decline to greater adoption of its tax-inclusive plans, reduction in non-reoccurring charges, and greater adoption of its discounted customer segment plans (like 55-plus or military members). It may also be tied to its bundling a Netflix subscription with more customer plans and the recent price hike for the video streaming service. So it seems like T-Mobile is actually pulling a lot of those gross addition levers already.
That said, T-Mobile showed record profitability and cash flow. In other words, it's executing on its larger plan to drive profitability through scale. But for T-Mobile to continue showing improved profitability as it scales, its investments in distribution and its network need to show the potential for more gross additions as churn rates level off. Investors should keep an eye on the balance between churn and gross additions and whether management has as much control over the situation as it implies.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NFLX. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.