T-Mobile (NASDAQ:TMUS) managed to outperform its rivals Verizon (NYSE:VZ) and AT&T (NYSE:T) in the third quarter despite a few headwinds in its business. The Un-carrier added 1.979 million postpaid subscribers in Q3, including 679,000 postpaid phone subscribers. Both numbers led the industry.
Despite T-Mobile's excellent results, it still has several opportunities to continue adding subscribers over the next few years. Here are five reasons why:
1. Improving Sprint customer churn
T-Mobile's postpaid phone churn rate in the third quarter was 0.9%. That's higher than AT&T (0.69%) and Verizon (0.63%) by a wide margin.
Instead of this being a weakness, investors should see it as an opportunity. In the quarters leading up to its acquisition of Sprint, T-Mobile managed to produce churn rates on par with AT&T and Verizon. The addition of Sprint, and its high-churn customer base, has been a drag on T-Mobile's overall churn. Sprint's churn rate in the first quarter was 1.89% versus T-Mobile's 0.86% rate.
As T-Mobile transitions Sprint customers to its superior network, it should see improvements. Offering Sprint customers the same perks as T-Mobile customers and unifying the brand should stabilize the customer base as well. Bringing the Sprint churn rate more in line with the rest of the industry will increase net additions for T-Mobile.
2. Increasing industry churn
While T-Mobile works to bring churn among the old Sprint customer base more in line with its peers, the company could benefit from a return to more customer switching across the industry. T-Mobile is still a share taker when subscribers switch carriers. But subscribers have been hesitant to go out and switch carriers amid the COVID-19 pandemic. Churn rates have declined significantly in the last two quarters.
When switching activity returns to normal, T-Mobile is well-positioned to win customers. It has a leading position in 5G, it has increasing brand strength, and the consolidation of Sprint and T-Mobile stores gives it a broad retail presence to compete with AT&T and Verizon.
3. Enterprise accounts
T-Mobile has been touting its opportunity to win business subscribers for years. Even after the Sprint acquisition brought its retail customer market share in line with AT&T and Verizon, it still significantly lags the two competitors on enterprise connections.
Businesses have much longer lead times than consumers. As a result, the shift to T-Mobile from Verizon or AT&T will take much longer. As of today, T-Mobile has less than 10% market share, according to CEO Mike Sievert.
If T-Mobile can bring its market share in enterprise and government connections in line with its retail connections, it could add millions more subscribers over the next few years.
4. Small towns and rural markets
T-Mobile has historically lagged the competition in rural markets. Its spectrum assets previously lent themselves to building dense networks suitable for higher-population metropolitan areas. But it's seen a reversal in its 5G network build-out, which relies primarily on low-band spectrum that's able to travel longer distances.
The company currently covers 1.4 million square miles with its 5G network, reaching 270 million people. T-Mobile CTO Neville Ray estimates Verizon's 5G network covers about 400,000 square miles. That gap, in rural areas, is T-Mobile's opportunity to win subscribers it's never appealed to before.
5. Home internet
The final opportunity for T-Mobile to add subscribers is through its forthcoming home internet service. It's just starting to roll out the offering, focusing primarily on rural areas. Last month, it expanded coverage to 450 cities and now covers 20 million households. Over the next few years, as it builds out capacity on its 5G network, T-Mobile plans to offer home internet service to about 50% of the United States.
The addition of home internet service to its lineup should help T-Mobile attract and retain subscribers. It brings T-Mobile's offerings more in line with AT&T and Verizon, both of which have millions of internet subscribers already. T-Mobile is hoping to win over their old DSL subscribers with its faster speeds.
Growing the pie
T-Mobile is still extremely focused on its ability to scale and grow connections as it takes on AT&T and Verizon. It previously said its lack of scale was its biggest disadvantage, but it now sports a customer base similar in size to its competitors following the Sprint merger. Still, the benefits of scale remain and ultimately should produce strong operating leverage on the high fixed costs of building out a wireless network.
If T-Mobile continues to outpace the telecom industry in net additions, it should produce stronger operating margin and free cash flow over time.