Why Investors Should be Wary of Wireless Service Net Additions

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Not all wireless connections are created equal. Any of the four major carriers in the U.S. will tell you so. Postpaid subscribers are generally considered more valuable than prepaid subscribers since they pay more for service and don't cancel their subscriptions as much. Phone subscribers are more valuable than tablet or connected device subscribers since phone service costs more than just mobile internet service.

When AT&T (T 1.02%), Verizon (VZ 1.17%), T-Mobile (TMUS -0.06%), and Sprint (S) report their quarterly results, it's in their best interests to make their net adds look as strong as possible. The metric is often highlighted in earnings reports and used by analysts as a quick takeaway to gauge individual company's results against the rest of the industry. That's why individual investors need to be critical of the net additions numbers carriers like to highlight -- and find out what they're sweeping under the rug. 

When do you have to report a subscriber loss?

Sprint's management says it added 173,000 postpaid phone subscribers during its fiscal first quarter -- its highest in nine years. But if you dig into the company's operating metrics -- which it releases alongside its earnings report every quarter -- you'll find that Sprint's postpaid phone connections increased just 6,000.

The discrepancy lies in Sprint's recategorization of some of its customers.

Shentel operates the Sprint brand in certain areas as an affiliate. When it bought nTelos earlier this year, Sprint agreed to transfer the subscribers that currently live in nTelos' operating region to Shentel in order to maintain its affiliate relationship.  That includes 186,000 postpaid subscribers and 92,000 prepaid subscribers. As a result, those 186,000 postpaid subscribers and 92,000 prepaid subscribers disappeared from Sprint's operating metrics, but it didn't have to report them as a net loss.

AT&T is playing a similar game

Sprint isn't the only company to do something like this. AT&T doesn't include customers who switch from its consumer mobility segment to its business solutions segment as a net loss for its consumer mobility, but the numbers still show up in its total subscribers.

AT&T and Sprint don't count those subscribers as a net addition in the business solutions or affiliate net adds numbers, so it balances out. Still, those numbers are important because the carriers don't generate as much revenue from those subscribers.  Sprint's wholesale and affiliate revenue totaled $158 million despite ending the quarter with 14.5 million connections in the category. Sprint's 30.9 million postpaid customers generated $4.8 billion in revenue last quarter.

Likewise, AT&T's consumer customers often switch to their employer's phone plan in order to receive a discount on phone service. AT&T doesn't generate the same amount of revenue and feels pressure on margins as customers switch from consumer plans to enterprise plans.

Mix matters, too

AT&T prefers to highlight its total wireless subscriber net additions at the top of its earnings releases, but AT&T is losing more of its most valuable subscribers and making up for it with lower valued subscribers.

Last quarter, AT&T said it gained 2.1 million wireless subscribers, and that broke down as such:

Data source: Company quarterly filing.

As you can see, AT&T's subscriber growth is mostly coming from prepaid and Mexican consumers, and its connected device business. Those all have lower average revenue per connection than postpaid phone subscribers, where AT&T continues to bleed customers.

Verizon, meanwhile, boasted 615,000 postpaid subscriber additions at the top of its second-quarter earnings report, but it gained just 86,000 postpaid phone customers. Sprint saw all of its growth come from its lower-value affiliates segment last quarter as a result of its new agreement with Shentel.

The only company telling it like it is

T-Mobile is the most straightforward in reporting its net additions, which shouldn't be a surprise considering its numbers are largely the best in the industry. The vast majority of its postpaid net additions last quarter came from phone connections. Its postpaid business is growing faster than its prepaid business. And while it's gaining subscribers as it sells access to its network via wholesale agreements, it's not entirely reliant upon that avenue for subscriber growth.

It's hard to blame the wireless carriers for trying to put their best feet forward. Management faces tremendous pressure to show improving net additions every quarter because the metric is used as an industry barometer. As such, they tend to mislead investors -- highlighting what's working and ignoring what's not. That's why it's important to find out what management doesn't want to tell investors.