CY 1Q19 Sprint Prepaid: Another Down Quarter & Stealing for Postpaid

Sprint prepaid has recovered from the previous quarter's 173,000 net losses with only 14,000 losses in CY1Q19. Statistically, they seem to be on the mend.  Sprint management has continually citing Boost Mobile's performance and doing heavy competitive lifting against stronger competitors Metro by T-Mobile and AT&T's Cricket.  It's no surprise that some T-Mobile and AT&T's net gains came from Sprint prepaid losses.  

However, this is disingenuous as Sprint's prepaid numbers should have formally shown better results.  There has been an on-going assignment of better performing (stable paying) subs to Sprint's non-branded postpaid category, thereby enhancing the postpaid number count. For CY1Q19, prepaid to postpaid migrations totaled 129,000.  On the postpaid side,  the company lost 189,000 phone subs. Without that 'help' from prepaid, the postpaid optics would have worse. Back in CY4Q18, with 173,000 prepaid losses, 107,000 migrated to the postpaid bucket. Then, Sprint posted 26,000 postpaid phone net losses. So the take away is that while prepaid performance is bad, postpaid is in rougher shape without its prepaid unit. 

By no means is Sprint the only carrier using prepaid to postpaid migration accounting to help its postpaid optics. T-Mobile is also expanding its postpaid numbers with this approach, piling onto the string of phenomenal postpaid growth quarters.  For 1Q19, 120,000 prepaid migrated to postpaid. What's important here is that they would have beaten AT&T for the 1Q19 prepaid title if they didn't do the migration. These migrations allowed T-Mobile to report 656,000 net phone adds. In 4Q18, there were 160,000 prepaid to postpaid which allowed T-Mobile to break one million phone net add mark.  Optics is everything in pushing your message.

Looking at churn, Sprints low 4% churn is highest of the big four prepaid competitors. T-Mobile is at 3.85% and America Movil is at 3.7% in the quarter and AT&T's Cricket reported to be sub 3%. On the other end of the spectrum, the non-competitive Verizon prepaid unit has continually lost prepaid subs and doesn't report its churn.  Churn has a lot to do with volatility or stability of the operating unit.   

Why it matters:  Without prepaid to postpaid migration accounting, Sprint prepaid appears to be staying somewhat lockstep against competitors in acquiring customers.  Since this accounting practice has been in place for many quarters, it's likely that prepaid numbers will continue to assist any Sprint postpaid 'recovery.'

There has been continuous talk about T-Mobile and Sprint shedding its prepaid assets as one or one of several conditions of regulatory approval.  It's no surprise, if that is the case, that Boost is the sacrificial lamb with its 8.8 million subs versus the more successful T-Mobile's 21.2 million.  T-Mobile can argue that they can keep its own prepaid unit as a counterweight to America Movil's 21.6 million count.  America Movil management has also publicly stated that they'd be willing to look at adding subs from any merger shedding. However, that would put them squarely ahead as the prepaid giant with close to 30 million subs.  How well would those optics look?  Yet with all this conjecture, we won't know until a decision happens in June or July.

   

1Q19 America Movil USA Prepaid – Recovering and Shifting

America Movil with over 21.6 million subscribers is the largest US prepaid player in 1Q19, closely followed by T-Mobile (21.2M), AT&T (17.2M), Sprint ([CY 4Q18] 8.9M) and finally Verizon (4.48M). With many prepaid operating brands absorbed throughout the years and the backing of its Mexican-based parent, the company is still a prepaid force but has ceded prepaid leadership to AT&T and T-Mobile.   To put it in perspective, America Movil USA reached its corporate high of over 26 million subscribers in 4Q14.

Similar to Sprint, its bet on lifeline services (SafeLink) has punished its subscriber base count with continued losses.  Partially offsetting this downward pressure has been the shift from non-recurring plans, such as pay as you go, to higher ARPU bearing monthly plans.  Chiefly, Straight Talk (available at Walmart  and ~43% of its overall base) has been its growth engine for many quarters while the other brands have declined. To understand the significance of Straight Talk and SafeLink, the two are highlighted in quarterly earnings reports along with an Other Brands category (~44% of the base).  

For the quarter, there seems to be a recovery of sorts, relative to the big losses in 2017 and 1H18.  With only 89,000 net losses, the company contrasts that to 1Q18's 371,000 losses and 1Q17's 1.3 million. The focus on the higher-ARPU bearing Straight Talk with 175,000 additions has helped its ARPU rise for the quarter to $26, contrasting to 1Q18's $24, 1Q17's $23 and 1Q16's $21.  Another provided metric, churn is now at 3.7% where in previous quarters were north of 4%.

Why it Matters: From the above chart, the truly bad days seem to be behind the company but SafeLink will likely continue to contribute to the losses. Though losses are less for the quarter, the US business unit's EBITDA margins is a measly 6.2% compared to the high 20s to low 40s of other America Movil's business units. Also, rewinding four years, the US business unit's 1Q15's EBITDA margin was 11.7%.  This suggests that it's been a truly competitive prepaid environment and the biggest MVNO is just getting by. 

There have been suggestions that America Movil may be in a position to acquire a spun off Sprint prepaid unit as a possible condition of a T-Mobile/Sprint go-ahead. America Movil management has indicated receptiveness to that as buying companies to increase the US opportunity has always been in the playbook. By no means are they the default winner as there are other parties vying for a parted out Sprint prepaid unit, if the occasion arises. We'll know in June/July?

1Q19 T-Mobile Prepaid -– Slipping and Sliding in the Postpaid Shadow

T-Mobile has outperformed its rivals for many quarters. Postpaid growth has been its consistent flagship that many focus on. To complement the postpaid rocket ship, MetroPCS’ expansion perhaps put the cherry on top. Today, postpaid is still growing but prepaid has been slipping since 2Q17, when AT&T prepaid pushed ahead. Throughout the quarters, questions were asked about why prepaid has slowed. Many times, the corporate answer is that the lines are blurring between prepaid and postpaid. However, T-Mobile had made it easier for those who were deemed less than prime customers to access postpaid plans, thereby adding them to the postpaid count.  Those prepaid to postpaid migrations have been highlighted consistently for many quarters. We all get it, postpaid customers bear higher revenue, they tend to churn less and more are more stable.  To be sure, the goodies of T-Mobile Tuesdays and free Netflix are also nice value draws.

Still, prepaid to postpaid migration takes away from the Metro by T-Mobile subscriber base and its posted revenues.  With this, there has to be tension between Dallas-based Metro (and its dealers) and corporate in Seattle.  The halcyon monster growth quarters from 2Q15 to 1Q17 are over while postpaid continues its march. In 1Q16, the prepaid group posted a record high 807,000 net adds but in 3Q18, it had dropped to a low of 35,000.  By the way, at the end of that quarter, Metro by T-Mobile rebranding was rolled out.   Perhaps reinforcing MetroPCS was T-Mobile would help.    4Q18 was ‘okay’ but 1Q19’s 69,000 contrasted starkly against 1M+ postpaid net adds. To add salt to the wounds, 120,000 net prepaid customers migrated to branded postpaid.

Is the prepaid group slipping?  From the growth view, yes. Yet the argument in a decreasing churn trend could be pointed as progress. In the last 4 quarters, the highest churn at 4.12% (3Q18) has dropped to 3.85%, lower sequentially (3.99%) and even YoY (3.94%).  That’s progress, right? BUT, AT&T’s Cricket Wireless is sub 3%, an astounding feat for prepaid. 

However, ARPU has slipped to $37.65 from $38.90 YoY and also sequentially.  Some can argue this is inconsequential yet from an overall prepaid revenue contribution, 1Q19’s $2.38B contrasts with 1Q18s $2.4B.  But postpaid continues to deliver with upward trends in net additions, revenue and low churn. 

Why it matters:  Perhaps the company is paying attention.  There is that thorny prepaid group integration task if and when the Sprint acquisition happens. To that end, longtime MetroPCS head Tom Keys is moving out of that role to work on the integration and transition task. After that, Mr. Keys will be retiring (likely with a non-compete).      Metro staff will have  new corporate EVP bosses in the form of Jon Frier (sales) and Matt Staneff (marketing) based in Seattle.  This is a rub for dealers as they’ve had deep and trusting relationships with the Dallas-based Keys.  How will their voices be heard when these EVPs have a bigger ball of wax to run, given the corporate focus on postpaid?   

Dealer performance and happiness in the end affects T-Mobile’s prepaid numbers.  T-Mobile corporate will have to navigate their distribution’s discontent and concern in making or losing money.  Presumably Mr. Keys will advocate for the brand that he has helped built and we shall see what develops.  Will Seattle drive new prepaid (non-loss leader) promotions to bring the prepaid group back?  We shall see. 

Afterthought: What if the Sprint deal fails? What will Tom Keys do and will the Dallas to Seattle reporting and control structure remain in place?

1Q19 AT&T Prepaid Returns to the Pole Position

Last quarter, AT&T ceded its prepaid net add position to T-Mobile. AT&T had led five out of the last eight quarters.  With the acquisition Leap Wireless and its Cricket brand, AT&T slowed the MetroPCS juggernaut that had been dominating the prepaid sector since T-Mobile bought them. Both companies had a similar playbook, de-commission the old CDMA network and expand brand and distribution beyond the old regional footprints.  For people playing wireless industry Trivial Pursuit, MetroPCS’ kickoff expansion was coined “Apollo 15.”  To put it in a competitive context, from 1Q15-4Q18, AT&T and T-Mobile accounted for over 10 million net additions while competitors were in negative territory.  

Company	Prepaid Net Additions / Losses
AT&T	5.24M
T-Mobile	5.14M
Sprint	-1.66M
Verizon	-1.48M
America Movil	-4.33M

Fast forward to 1Q19 results, we find that even with 96,000 net adds (85,000 were phone net adds), AT&T won out against T-Mobile’s 69,000.  This is a recovery of sorts against a shocking 4Q18 in which AT&T seemed to have lost its growth mojo. 

Looking at the drop in growth seems somehow disturbing after so many go-go quarters.  Is prepaid plateauing, especially since all other prepaid competitors have loss subscribers (Sprint hasn’t reported yet as of this writing)?  It may be but there are some silver linings: 1) Some solace for the prepaid group as their 85,000 phone adds beat their postpaid brethren.

2) In his prepared remarks, Chairman Stephenson reiterated the company’s strategy to focus on the high-value prepaid segment but divulged (for the first time in my recollection) that Cricket “had its lowest ever quarterly churn rate of less than 3%, down more than 60 basis points year-over-year. Prepaid revenue growth was solid, up more than 6%. We now have more than 10 million Cricket subscribers, double what we had when we acquired the company in 2014 with more than 17 million total prepaid customers under the umbrella of AT&T.”

Why it matters:  Chairman Stephenson’s unveiling of prepaid metrics (prepaid churn and ARPU are not publicly available metrics) suggest tremendous stability in the Cricket base.  For long-time industry watchers, prepaid churn ranged in the mid 4% to 5%. Therefore, churn less than 3% is a tremendous achievement. Moreover, stating there are over 10 million Cricket subscribers since the 2014 acquisition, out of the over 17 million prepaid base gives context on Cricket’s explosive performance.

Growth and acquiring switchers is an expensive game. For 4Q18 earnings, AT&T cited a competitor’s loss-leading handset promotion which took a toll on its branded prepaid. With its debt paydown targets from the Time-Warner acquisition, the company is unlikely to respond to any loss-leading promotion. This has been articulated in both the prepaid and postpaid side. As a result, explosive growth may not be on the horizon in the near term, barring extreme competitive circumstances. 

Caveat: If postpaid distribution will expand under FirstNet, prepaid may ride its coat tails.

1Q19 Verizon Prepaid – Sustained Losses but It’s OK?

It’s almost like a broken record that the Verizon prepaid group continues to lose subscribers quarter after quarter. In fact,  the company has lost subscribers for the last six quarters. In tracking over 17 quarters, 14 have been losses.  

Here’s the breakdown for year ending:

2015 – 551,000

2016 – 133,000

2017 – 43,000

2018 – 757,000

These for years total over 1.48 million lost subscribers.  Add 1Q19’s 176,000 losses and the tally is over 1.6M. In late January, following the Verizon earnings call, I noted these continued losses and CFO Ellis then paid lip service to note that they’re going to evolve their offerings over time. For this quarter, CFO Ellis noted that the quarter’s losses were better than 1Q18’s -355,000, seemingly putting a "it's not that bad" spin on things.  The party line had always been allowing the shedding of low (profit) and price sensitive customers with the retention of high-value monthly plan subscribers who don’t mind paying premium for the Verizon brand/coverage.  That thought is also goes hand in hand with migrating the voice/text phone-only people off or help transition them to smartphone plans.

Why it still doesn’t matter: Verizon is first and foremost a postpaid company with marketing and retention dollars better served on the postpaid side. Prepaid is highly contested as two  players have dominated prepaid over last 3 years years, AT&T (Cricket) and T-Mobile (Metro by T-Mobile). The two have taken the lion’s share of the prepaid net additions and they will continue to do so as their distribution into non-urban areas expand.    At the end of 1Q19, Verizon’s retail base was close to crossing 118M.  The 4.48M prepaid count is just 3.8% overall. Then there’s the revenue.  If Verizon’s prepaid ARPU is in mid-high 30s and its postpaid ARPA in the $130s (no apples-to-apples, I know), one can see why prepaid just isn’t a huge priority.