T-Mobile USA Q1 2011: Income Dives As Nearly 1m Subscribers Jump Ship

T-Mobile USA has announced its Q1 2011 results, and the numbers don't look great. Net customer losses hit 99,000 while revenue flatlined from Q1 2010 at $4.63bn; however, despite ARPU (average revenue per user) remaining steady at $46, overall income dived from $362m in Q1 2010 to $135m in Q1 2011.

That contrasts sharply with Verizon and AT&T, both of whom had relatively strong first quarters. T-Mobile did see data revenue rise 20-percent compared to the same period a year ago, though that's less than the 22.3- and 23.9-percent rise of Verizon and AT&T respectively. Part of the reason for T-Mobile's declining income is that the cost of acquiring each customer rose, up $10 year-on-year to $310 per subscriber, which the carrier reckons was predominantly down to increased 4G and device advertising.

That advertising does seem to have worked somewhat, with a net increase of nearly 1m smartphone customers and 3G/4G smartphones now accounting for 27-percent of T-Mobile's total customer base. We're wondering if AT&T is beginning to regret that $39bn acquisition plan.

Press Release:

T-Mobile USA Reports First Quarter 2011 Results

Service revenues in the first quarter of 2011 at $4.63 billion, consistent with the first quarter of 2010

Contract ARPU $52 in the first quarter of 2011, up from $51 in the first quarter of 2010

Blended data ARPU of $13.10 in the first quarter of 2011, up more than 20% from the first quarter of 2010

9.1 million customers using 3G/4G smartphones as of the first quarter, a net increase of nearly 1 million customers in the first quarter of 2011

OIBDA of $1.19 billion in the first quarter of 2011, down from $1.39 billion in the first quarter of 2010 driven primarily by investment in customer loyalty initiatives and customers upgrading to smartphones

America's largest 4G network currently covers over 200 million people in 170 markets; the network is being upgraded to even faster speeds (42 Mbps); these faster speeds will cover more than 140 million people by mid-2011, with the first markets already launched

BELLEVUE, Wash.–(BUSINESS WIRE)–T-Mobile USA, Inc. ("T-Mobile USA") today reported first quarter of 2011 results. In the first quarter of 2011, T-Mobile USA reported service revenues of $4.63 billion, consistent with the first quarter of 2010, and OIBDA of $1.19 billion, compared to $1.39 billion reported in the first quarter of 2010. The number of customers using smartphones continued to increase significantly during the quarter, driving growth in blended data ARPU. Blended data ARPU in the first quarter of 2011 was $13.10, up more than 20% from the first quarter of 2010. Net customer losses were 99,000 in the first quarter of 2011 compared to 77,000 net customer losses in the first quarter of 2010.

"The loaded T-Mobile G2x with Google is the fastest, smoothest Android smartphone available today."

"We continue to drive our strategy and lay the foundation for improved future performance and have seen some positive trends in the quarter as evidenced through data ARPU growth rates," said Philipp Humm, President and CEO of T-Mobile USA. "The success in our data business has been driven by our 4G network message, our compelling 4G device offerings and our attractive data plans; however, we still have challenges facing our business as evidenced by high contract churn and contract customer losses in the first quarter of 2011."

"The first quarter shows a mixed picture with positive trends in the development of data ARPU. Our deal with AT&T announced a few weeks ago will not change the focus of our US business. Until the closing of the deal, T-Mobile will continue to challenge its competitors and compete aggressively in the US market," said René Obermann, CEO of Deutsche Telekom.

Customers

T-Mobile USA served 33.63 million customers (as defined in Note 3 to the Selected Data, below) at the end of the first quarter of 2011, down from 33.73 million at the end of the fourth quarter of 2010 and 33.71 million at the end of the first quarter of 2010.

In the first quarter of 2011, net customer losses were 99,000, compared to net losses of 23,000 in the fourth quarter of 2010 and 77,000 in the first quarter of 2010.

Contract customer losses were the primary driver for the sequential and year-on-year change in net customers.

Contract net customer losses were 471,000 in the first quarter of 2011, compared to 318,000 net contract customer losses in the fourth quarter of 2010, and 118,000 net contract customer losses in the first quarter of 2010.

Sequentially and year-on-year, the decline in net contract customers was driven primarily by fewer contract gross customer additions and continued high contract churn due to competitive pressures.

Connected device net customer additions, included within contract customers (as defined in Note 3 to the Selected Data, below), were 192,000 in the first quarter of 2011 compared to 113,000 in the fourth quarter of 2010 and 165,000 in the first quarter of 2010. Connected devices totaled 2.1 million at March 31, 2011.

Prepaid net customer additions, including MVNO customers (as defined in Note 3 to the Selected Data, below), were 372,000 in the first quarter of 2011, compared to 295,000 in the fourth quarter of 2010 and 41,000 in the first quarter of 2010.

Sequentially and year-on-year, prepaid net customer additions increased due in part to the growth in customers purchasing prepaid monthly unlimited plans.

MVNO customers continued to grow, totaling 3.2 million at March 31, 2011, and made up a significant portion of net prepaid customer additions in the first quarter of 2011.

Churn

Blended churn (as defined in Note 2 to the Selected Data, below), including both contract and prepaid customers, was 3.4% in the first quarter of 2011, compared to 3.6% in the fourth quarter of 2010 and 3.1% in the first quarter of 2010.

The sequential decrease in blended churn was driven primarily by seasonally higher churn in the fourth quarter of 2010 due to the holiday season, as in previous years.

Year-on-year, the increase in blended churn was driven primarily by higher contract customer churn.

Contract churn was 2.4% in the first quarter of 2011, down from 2.5% in the fourth quarter of 2010, but up from 2.2% the first quarter of 2010.

The year-on-year increase in contract churn was driven by continued competitive pressures in the US wireless industry.

Prepaid churn decreased in the first quarter of 2011 to 6.7% from 7.5% in the fourth quarter of 2010 and 6.8% in the first quarter of 2010.

The sequential and year-on-year decrease in prepaid churn was driven primarily by lower branded prepaid churn resulting from the growth in prepaid monthly unlimited customers.

OIBDA and Net Income

T-Mobile USA reported OIBDA (as defined in Note 6 to the Selected Data, below) of $1.19 billion in the first quarter of 2011, compared to $1.34 billion in the fourth quarter of 2010 and $1.39 billion in the first quarter of 2010.

Sequentially and year-on-year, OIBDA fell due to increased investment in customer loyalty initiatives and customers upgrading to smartphones (as defined in Note 11 to the Selected Data, below). Additionally, OIBDA decreased in the first quarter of 2011 as a result of higher operating expenses for advertising and the continued expansion of our 4G network.

OIBDA margin (as defined in Note 7 to the Selected Data, below) was 26% in the first quarter of 2011, down from 29% in the fourth quarter of 2010 and 30% in the first quarter of 2010.

Net income in the first quarter of 2011 was $135 million, compared to $268 million in the fourth quarter of 2010 and $362 million in the first quarter of 2010.

Sequentially and year-on-year, net income decreased due primarily to higher retention equipment subsidies related to customer loyalty initiatives and customers upgrading to smartphones, as described above. In addition, compared to the first quarter of 2010, depreciation expense increased $84 million due primarily to continued investment in our network.

Revenue

Service revenues (as defined in Note 1 to the Selected Data, below) were $4.63 billion in the first quarter of 2011, down from $4.69 billion in the fourth quarter of 2010 and consistent with $4.63 billion in the first quarter of 2010.

Service revenues in the first quarter of 2011 were positively impacted by data revenue growth, driven by the adoption of mobile broadband data plans, the revenue contribution from providing handset insurance services (which commenced in the fourth quarter of 2010), and higher prepaid revenues from the growth of monthly unlimited plans. These revenue growth drivers were more than offset, compared to the fourth quarter of 2010, by voice revenue declines related to net losses of branded customers.

Year-on-year, quarterly service revenues were consistent due primarily to data revenue growth and from directly providing handset insurance services which offset voice revenue declines.

Total revenues, including service, equipment, and other revenues were $5.16 billion in the first quarter of 2011, down from $5.36 billion in the fourth quarter of 2010 and $5.28 billion in the first quarter of 2010.

Equipment revenues decreased sequentially and year-on-year due primarily to lower handset sales volumes.

ARPU

Blended Average Revenue Per User ("ARPU" as defined in Note 1 to the Selected Data, below) was $46 in the first quarter of 2011, consistent with the fourth quarter of 2010 and first quarter of 2010.

Contract ARPU was $52 in the first quarter of 2011, consistent with the fourth quarter of 2010 and up from $51 in the first quarter of 2010.

Year-on-year contract ARPU increased as data revenue growth and handset insurance revenues more than offset lower voice revenue.

Prepaid ARPU was $19 in the first quarter of 2011, consistent with the fourth quarter of 2010 and up from $18 in the first quarter of 2010.

Data service revenues (as defined in Note 1 to the Selected Data, below) were $1.33 billion in the first quarter of 2011, up 20% from the first quarter of 2010. Data service revenues in the first quarter of 2011 represented 29% of blended ARPU, or $13.10 per customer, up from 28% of blended ARPU, or $12.80 per customer in the fourth quarter of 2010, and 24% of blended ARPU, or $10.90 per customer in the first quarter of 2010.

9.1 million customers were using smartphones enabled for the T-Mobile USA 3G/4G network (as defined in Note 11 to the Selected Data, below) such as the T-Mobile® myTouch® 4G, T-Mobile® G2® with Google™, and the Samsung Galaxy S™ 4G at the end of the first quarter of 2011. This was a net increase of 11% or nearly 1 million customers using smartphones from the fourth quarter of 2010.

3G/4G smartphone customers now account for 27% of total customers, up from 24% in the fourth quarter of 2010 and over 15% in the first quarter of 2010. In addition, 3G/4G smartphones accounted for over 75% of equipment sales revenue in the first quarter of 2011 and fourth quarter of 2010.

In the first quarter of 2011, the increase in the number of customers using smartphones and the continued upgrade of the network were driving Internet access revenue growth with the increasing adoption of mobile broadband data plans.

CPGA and CCPU

The average cost of acquiring a customer, Cost Per Gross Add ("CPGA" as defined in Note 5 to the Selected Data, below) was $300 in the first quarter of 2011, up from $290 in the fourth quarter of 2010 but down from $310 in the first quarter of 2010.

Sequentially, CPGA increased in the first quarter of 2011 due primarily to higher marketing costs associated with advertising our 4G network and strong device lineup.

Compared to the first quarter of 2010, CPGA decreased due primarily to lower commission expense and a shift in customer additions toward MVNO customers and connected devices.

The average cash cost of serving customers, Cash Cost Per User ("CCPU" as defined in Note 4 to the Selected Data, below), was $25 per customer per month in the first quarter of 2011, up from $24 in the fourth quarter of 2010 and $23 in the first quarter of 2010.

The sequential and year-on-year CCPU increase was due primarily to a higher equipment subsidy loss from customer loyalty promotions and programs. Additionally, the equipment subsidy loss increased due to customers upgrading to smartphones and the cost of directly providing handset insurance services.

Capital Expenditures

Cash capital expenditures (as defined in Note 8 to the Selected Data, below) were $749 million in the first quarter of 2011, compared to $828 million in the fourth quarter of 2010 and $666 million in the first quarter of 2010.

Sequentially, the decrease in cash capital expenditures was a result of lower network capital expenditures partially offset by payment timing differences.

Compared to the first quarter of 2010, cash capital expenditures increased due primarily to network coverage expansion and the upgrade to HSPA+ 42, which will double the theoretical download speed of T-Mobile USA's 4G network.

To further boost the value provided to customers through its 4G mobile broadband network, T-Mobile USA is doubling the speed of its 4G network in 2011 to achieve theoretical download speeds of 42 Mbps. T-Mobile USA customers in Las Vegas, New York and Orlando were the first in the USA to experience the increased 4G speeds, followed closely by Chicago and further expansion of the New York network into Long Island, NY, and Northern New Jersey. By mid-2011, T-Mobile USA expects more than 140 million Americans in over 25 markets to have access to these increased 4G speeds.

T-Mobile USA currently offers its customers America's largest 4G network with HSPA+ service available in 170 markets reaching over 200 million people.

T-Mobile USA Recent Highlights

On March 20 2011, Deutsche Telekom AG and AT&T Inc. entered into a definitive agreement under which AT&T will acquire T-Mobile USA from Deutsche Telekom in a cash and stock transaction valued at approximately $39 billion, subject to adjustment in accordance with the agreement. The agreement has been approved by the Board of Directors of both companies, and is expected to provide an optimal combination of network assets to add capacity and provide an opportunity to improve network quality in the near term for the customers of both companies. In particular, the transaction is important to address spectrum constraints and gives T-Mobile USA customers a clear path to take advantage of new generation LTE (Long Term Evolution) services. The transaction is expected to close in the first half of 2012, subject to regulatory approvals and other closing conditions. As part of the transaction, Deutsche Telekom will receive an equity stake in AT&T that, based on the terms of the agreement, would give Deutsche Telekom an ownership interest in AT&T of approximately 8 percent and one seat on the AT&T Board of Directors.

In the first quarter of 2011, T-Mobile unveiled a broad lineup of leading devices including the new Dell™ Streak™ 7 – the first 4G tablet in the U.S., the Galaxy S™ 4G – the fastest 4G smartphone running on America's Largest 4G network, the T-Mobile myTouch® 4G, the T-Mobile G2® with Google™, and mobile broadband products such as the Rocket™ 2.0 Laptop Stick and the Dell™ Inspiron™ Mini 10 4G netbook. In addition, T-Mobile recently launched the T-Mobile Sidekick® 4G™ by Samsung, the T-Mobile G2x™ with Google™ by LG, and the T-Mobile G-Slate™ with Google™ by LG.

On January 6, 2011, at the 2011 International Consumer Electronics Show, T-Mobile USA President and CEO Philipp Humm highlighted the company's network leadership, supported by Nielsen data confirming that T-Mobile USA delivered on average the fastest wireless data performance in the top 100 U.S. markets during the second half of 2010.

On January 6, 2011, T-Mobile USA Chief Operations Officer Jim Alling announced a new structure for T-Mobile USA's field teams designed to shift business responsibility and accountability closer to customers. Twenty-three geographic regions will each be led by a Vice President General Manager (VP GM) with full profit and loss accountability. Each VP GM will have direct responsibility for all sales across all channels in a region, including business sales.

On March 16, 2011, T-Mobile USA was recognized by the Ethisphere Institute as one of the 2011 World's Most Ethical Companies, which marks the third consecutive year that T-Mobile USA has received this distinction. This is a significant achievement and recognition of the compliance/ethics/governance program at T-Mobile USA, showing commitment to ethical leadership and corporate social responsibility. T-Mobile USA was also the only US wireless telecommunication service provider listed this year.

On April 26, 2011, T-Mobile USA's G2x with Google by LG was named the best Android smartphone in America by PC Magazine. According to the publication, "The loaded T-Mobile G2x with Google is the fastest, smoothest Android smartphone available today."

T-Mobile USA is the U.S. wireless operation of Deutsche Telekom AG (OTCQX: DTEGY). In order to provide comparability with the results of other US wireless carriers, all financial amounts are in US dollars and are based on accounting principles generally accepted in the United States ("GAAP"). T-Mobile USA results are included in the consolidated results of Deutsche Telekom, but differ from the information contained herein as Deutsche Telekom reports financial results in Euros and in accordance with International Financial Reporting Standards (IFRS).

This press release includes non-GAAP financial measures. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information provided in accordance with GAAP. Reconciliations from the non-GAAP financial measures to the most directly comparable GAAP financial measures are provided below following Selected Data and the financial statements.