T-Mobile’s Churn Rate in 1Q17—The Immanent Threat
T-Mobile’s postpaid phone churn in 1Q17
T-Mobile (TMUS) expects its postpaid phone churn to increase, mainly due to the continued competitive intensity in the postpaid space and more aggressive promotional offers from competitors—specifically, from the introduction of new unlimited plans in 1Q17.
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Any increase in churn rate is negative for telecom companies, because the companies then have to deal with additional acquisition costs associated with customers, which has a further negative impact on companies’ operating margins. For this reason, a rising churn rate can be a cause of concern for investors.
That said, T-Mobile’s postpaid phone churn of 1.28% in 4Q16 was lower than the comparable figure of 1.46% in 4Q15. T-Mobile’s ongoing improvements to network quality were a major driver of the customer retention advancements.
The main reason for TMUS’s lower postpaid phone churn rate was due to its MVNO (mobile virtual network operator) transaction. Back in 3Q16 (on September 1, 2016), T-Mobile completed a transaction with one of its MVNO partners that entailed transferring 1.4 million subscribers to wholesale.
Among the top four largest US mobile players, Verizon Communications (VZ) continued to have the best postpaid phone customer retention in 4Q16. In calendar 4Q16, Verizon and Sprint (S) saw postpaid phone churn rates of 0.90% and 1.57%, respectively, while AT&T (T) reported a postpaid phone churn rate of 0.98% during the last quarter of 2016.
Another metric to consider, of course, is porting ratio, which measures net subscriber additions against net losses. T-Mobile’s postpaid porting ratio was 1.55x in 4Q16—about flat with 3Q16.
Now let’s discuss valuations.