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posted: 5/3/2014 1:01 AM

T-Mobile adds 1.3 million customers as Sprint pursues deal

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Bloomberg News

T-Mobile US Inc. added more subscribers in the first quarter than AT&T Inc. and Verizon Communications Inc. combined, heightening the carrier's allure as Sprint Corp. pursues a merger.

Promotions and cheaper plans helped T-Mobile add 1.3 million new monthly subscribers in the period, topping the 998,000 projected by analysts and the 1.16 million customers that AT&T and Verizon added combined. The subscriber growth came at a cost: T-Mobile's fourth quarterly loss in a row.

Sprint plans to push forward with a bid for T-Mobile after meeting with banks to make debt arrangements for that offer, Bloomberg News reported yesterday, citing people with knowledge of the situation. T-Mobile Chief Executive Officer John Legere is delivering on a promise to shake up the U.S. wireless industry. The fourth-largest U.S. carrier has been on a campaign to lure customers away from larger rivals by providing financing for phones, cheap international rates and as much as $650 to people who switch service.

"T-Mobile's current subscriber momentum is undeniable," Craig Moffett, founder of research firm MoffettNathanson LLC, said in a note. "Competitively, the change is mind- boggling."

Shares of T-Mobile rose 7.1 percent to $31.36 at 1:13 p.m. New York time. Earlier, the stock climbed as much as 10 percent, the biggest intraday gain in more than four months, after the earnings release and report about Sprint's plans for a bid.

'Arrogant' Industry

T-Mobile now expects to add 2.8 million to 3.3 million branded contract customers by the end of the year, the Bellevue, Washington-based company said today in a statement. In February, T-Mobile had raised its new customer forecast to between 2 million and 3 million.

"A year ago I promised that we would bring change to what I called this arrogant U.S. wireless industry," Legere said in the statement. "We are delivering on that promise and our results reflect the growing customer revolution that we've ignited."

Masayoshi Son, CEO of SoftBank Corp., which owns about 80 percent of Sprint, is expected to make a formal bid for T-Mobile in June or July, one of the people said. Deutsche Telekom AG owns about 67 percent of T-Mobile.

T-Mobile's Legere is the leading candidate to run the combined company, one of the people said. Sprint, run by CEO Dan Hesse, had a net loss of monthly subscribers in the first quarter.

Twitter Outreach

In an interview with Emily Chang on Bloomberg Television, Legere was asked how he'd run the combined company differently. He said he would be more closely in touch with subscribers, as he currently is on social media, frequently responding to customers' complaints on Twitter.

T-Mobile's aggressive marketing is forcing the industry to mimic its plans and start moving away from reliance on discounted phones and long-term contracts. Still, its subscriber gains, driven by cheaper service plans, are coming at the price of higher costs that are taking a hit on profit.

"Right now, it is all about net subscriber growth," said Colby Synesael, an analyst with Cowen Group Inc. "The big debate is about sustainability and how long they will be able to keep it up."

Adjusted earnings before interest, taxes, depreciation and amortization will be $5.6 billion to $5.8 billion for the full year, the company said. T-Mobile had previously forecast as much as $6 billion.

Net Loss

The company reported adjusted Ebitda of $1.09 billion for the first quarter, down 26 percent from $1.47 billion a year earlier, including earnings from MetroPCS Communications Inc. before the companies merged last year.

T-Mobile swung to a net loss of $151 million, or 19 cents a share, from a profit of $107 million, or 20 cents, a year earlier.

The high costs of acquiring so many new customers also narrowed margins and reduced the average revenue collected from each customer. T-Mobile posted a wireless margin of 20 percent, down from 29 percent a year ago. The average estimate was for 22.43 percent, based on a Bloomberg survey of eight analysts.

"T-Mobile's low margin is a clear advantage that allows them to compete effectively for market share," Synesael said in an interview.

Consumers continued to benefit as the average T-Mobile phone bill for contract customers fell to $50.01 from $54.07 last year. Analysts expected $50.05, according to a Bloomberg survey.

T-Mobile's performance easily topped AT&T, which gained 625,000 monthly subscribers -- almost three times the amount analysts were expecting.

Verizon has tried to stay out of the price cutting battle by relying heavily on network quality to keep customers in the fold. The company lost 138,000 monthly phone customers in the first quarter, a deficit more than offset by new tablet users, giving Verizon a total net gain of 539,000 contract customers.

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