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1 Thing T-Mobile Doesn't Want You to Know About Its Second-Quarter Results

By Adam Levy - Updated Jul 27, 2017 at 5:07PM

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Sometimes a new customer isn't really a new customer at all.

T-Mobile (TMUS -0.85%) reported its second-quarter earnings results last week, and it blew away analysts' expectations. While analysts expected a slight decrease in additions compared to last year (607,000), T-Mobile managed to add 786,000 net new subscribers. Last year, the company added 646,000 subscribers in the second quarter.

But not all subscribers are created equal. That's evidenced in the downtick in average revenue per subscriber at T-Mobile. Last quarter, T-Mobile generated just $47.01 per month from each postpaid subscriber. That's down from $47.11 in the second quarter last year and $48.19 in 2015.

One explanation could be the launch of DIGITS last quarter. DIGITS allows users to use multiple numbers on one device or use a single number to ring multiple devices. Subscribers to T-Mobile's ONE Plus plan get a free DIGITS line, and additional lines cost $10 per month. And while these are virtual phone lines, T-Mobile still counts them as individual subscribers. Jonathan Chaplin of New Street Research estimates T-Mobile added 200,000 DIGITS lines last quarter.

DIGITS logo

Image source: T-Mobile.

It's getting harder to add new customers

If you back out Chaplin's estimate for DIGITS subscribers from T-Mobile's postpaid additions, the wireless carrier would have fallen short of analysts' expectations. And it's important to note analysts were already expecting T-Mobile to report fewer additions than last year.

T-Mobile has managed to add so many customers in a relatively short amount of time by offering better value than AT&T (T 0.17%), Verizon Communications (VZ -0.13%), and Sprint (S). Despite fierce competition from all three, T-Mobile has been exacting in its strategy and executed things extremely well. But it's getting harder for it to keep up the pace it set over the last four years.

The biggest change in recent history is the switch to unlimited data plans. T-Mobile's announcement of its new unlimited plan prompted everyone in the industry to follow suit. But T-Mobile now finds itself with less room to improve value for customers and increase prices. Case in point: T-Mobile's porting ratio with Verizon fell to a three-year low last quarter following Verizon's introduction of its unlimited plan.

A new way to keep existing customers

While DIGITS may obscure T-Mobile's true net addition results, the service provides yet another reason for customers to join or keep their service with T-Mobile. None of T-Mobile's major competitors offer a similar service, although there are third-party services that work with any carrier. The convenience and ease of signing up directly through a wireless carrier, however, makes it more appealing for T-Mobile subscribers.

Considering DIGITS subscribers, by their nature, have at least two phone numbers with T-Mobile, it makes the customers even stickier. There are real switching costs since competitors don't offer the same service, and subscribers may have to leave their virtual numbers in limbo if they switched. That should lead to higher retention rates among DIGITS customers.

T-Mobile is already exhibiting improved retention as is. Its 1.1% churn rate in the second quarter is a company record, and comparable to AT&T and Verizon. It's still too early to see an impact on churn from DIGITS, but it should help continue the trend for T-Mobile.

So, while DIGITS may have inflated T-Mobile's postpaid net addition numbers and caused its ARPU to come down slightly, it's not a bad thing that lots of people are signing up for the service.

Adam Levy owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.

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Stocks Mentioned

T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
TMUS
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Verizon Communications Inc. Stock Quote
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Sprint Corporation Stock Quote
Sprint Corporation
S
AT&T Inc. Stock Quote
AT&T Inc.
T
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