Why T-Mobile Is Beating AT&T and Verizon

NEW YORK (TheStreet) - T-Mobile US (TMUS) shares were surging 8.1% to $31.67 following news that larger rival Sprint (S) was prepping plans to propose a buyout of the carrier as its impressive subscriber growth for the first-quarter shows that consumers are digging its offerings.

T-Mobile, known for its "Un-carrier" initiatives, has been aggressively trying to grab market share by eliminating consumer "pain points," specifically the issue of locking customers into two-year contracts like Verizon (VZ), Sprint and AT&T (T). T-Mobile has been rolling out programs to entice customers to switch their carrier, with the latest three offerings announced in April, where the company under the "Simple Starter," "Tablet Freedom" and "Overage Freedom" - eliminated all domestic overage charges for consumers, even those on legacy plans. T-Mobile had announced in March 2013 its "Simple Choice" plan that offered no annual service contract and low out-of-pocket costs on smartphones.

The company must be doing something right, given its impressive first-quarter subscriber growth.

T-Mobile reported first-quarter earnings results earlier this morning in which it boasted 2.4 million total net customer additions for the three months, which included more than 1.8 million branded net customer additions, making it the "fastest growing wireless company in America," it said in its earnings release. T-Mobile ended the quarter with 49.1 million customers, it said. On the other hand, the company experienced "record low" churn of 1.5%, down 20 basis points from the fourth quarter and down 40 basis points from the year-earlier period.

"A year ago I promised that we would bring change to what I called this arrogant U.S. wireless industry. We are delivering on that promise and our results reflect the growing customer revolution that we've ignited," said John Legere, President and CEO of T-Mobile. "We are now approaching 50 million customers, added 2.4 million net new customers in the first quarter alone, and posted our fourth quarter of consecutive service revenue growth, while once again adding more net new postpaid customers than the rest of the industry combined!"

T-Mobile actually posted a net loss of $151 million, or 19 cents a share, for the three months ending March 31, compared to a profit of $106 million, or 20 cents a share in the year-earlier quarter, according to its quarterly filing. However, revenue at the Bellevue, Wash.-based company rose 47% to $6.87 billion year over year. Analysts surveyed by Yahoo! Finance were expecting a loss of 10 cents a share on revenue of $6.92 billion.

Adjusted EBITDA came in at $1.1 billion, down 12.2% sequentially, which it attributed to increased equipment sales due to the "significant acceleration in customer growth and the success of its Un-carrier 4.0 - Contract Freedom offer." Adjusted EBITDA margin was 20% compared to 24% in the fourth quarter of 2013.

Exactly one year after T-Mobile completed its acquisition of MetroPCS, the company said it's making rapid progress on expanding and integrating it. T-Mobile has added 30 new markets in which the MetroPCS brand operates, and opened nearly 2,200 distribution points in these new markets as of March 31. T-Mobile has switched roughly 53% of MetroPCS customers to its network. The company started selling T-Mobile-compatible devices to MetroPCS customers in the second quarter of last year. More than 50% of the MetroPCS spectrum has been re-farmed and integrated into the T-Mobile network as of the end of the first quarter.

T-Mobile expects branded postpaid net additions between 2.8 million and 3.3 million for the full year and adjusted EBITDA to be in the range of $5.6 to $5.8 billion, it said.

"T-Mobile reported strong 1Q14 results with postpaid net adds 26% greater than our estimate. EBITDA came in slightly below due to success based costs. We believe investors should take a cue from consumers and buy T-Mobile," Credit Suisse analyst Joseph Mastrogiovanni wrote in an early note. The analyst has an "outperform" rating on T-Mobile.

That said, the first quarter is likely a "high watermark" for subscriber additions, Mastrogiovanni penned.

"We expect subscriber growth from ETF to slow throughout the rest of the year, as this is likely to have a high early adopter impact and then a slowdown (you either break your contract as soon as you can or you've decided to stick with your current carrier)," the note says. "We have already heard evidence of this from the other carriers which indicated that their own subscriber trends improved toward the end of 1Q. We have a hard time imagining another Uncarrier initiative having the same level of success as ETF, but TMUS has surprised us before. However, we think the results of ETF reflect the demand for T-Mobile's services or, at a minimum, the dissatisfaction with the other carriers, which likely means strong momentum should continue. T-Mobile's new guidance implies an average of ~575k adds/quarter for the rest of the year."

--Written by Laurie Kulikowski in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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