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T-Mobile embraces higher churn as it signals more wireless competition

T-Mobile US Inc. had higher than expected churn at the end of 2019, and executives say it is actually a good thing.

While reporting better-than-expected subscriber numbers for 2019, T-Mobile also recently revealed it had seen a 12-basis-point increase in branded postpaid churn during the last three months of the year as compared to the previous quarter, rising to 1.01% from 0.89%. Postpaid subscribers, closely tracked by wireless operators and investors, pay a recurring monthly bill rather than paying for prepaid service. These customers tend to be more profitable than prepaid subscribers as they generally remain with a carrier longer.

While the fourth quarter is typically a higher-churn quarter due to switching during the holidays, the "sharp increase" in the quarter was "a surprise to them as well as us; they had guided to churn improving year-over-year, as it has for the last several quarters," said New Street Research telecom analyst Jonathan Chaplin in a research note.

T-Mobile had reported branded postpaid churn of 0.99% in the year-ago period.

While higher churn typically signals trouble for a wireless operator as it means customers are moving to a competitor, T-Mobile CFO Braxton Carter said at a Jan. 7 investor conference that he actually wishes "churn was a little bit higher" because it means that wireless customers more broadly are shopping around for the best deal.

"The hallmark of this quarter was a more competitive environment with more switching going on. And that's why you saw a 5% increase in our gross adds," Carter said.

T-Mobile added 1.3 million net branded postpaid customers during the last three months of 2019, including 1.0 million branded postpaid phone net additions. Instinet's Jeff Kvaal had expected the company to add 925,000 net postpaid phone lines during the period, while the consensus Wall Street estimate had called for 911,000 net adds.

For the full year, the company added 4.5 million branded postpaid net additions, beating its own increased customer guidance range of 4.1 million to 4.3 million.

According to Carter, the better-than-expected subscriber results were enabled by the higher churn.

"When you have the higher switching pool — i.e., churn's going up across the board — it is much more cost-effective for us to grow and scale this business," the CFO said. "We're the challenger. It's easy math. The more switching, the more efficiently and effectively we could grow, and this was a wonderful quarter from our standpoint."

The subscriber growth comes as T-Mobile continues to work to complete its pending merger with Sprint Corp. A multistate lawsuit led by New York and California is underway in a federal district court in New York. The lawsuit alleges the merger would harm innovation and lead to higher prices for consumers. With approvals already secured from federal regulators, the trial is believed to be the last major regulatory or legal hurdle for the deal. Closing arguments in the case are scheduled for Jan. 15.

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