T-Mobile takes a beating in Q4 2010; sheds 318,000 contract customers, post-paid churn at 3.6%

The fourth quarter of 2010 — the busy holiday quarter — was not all that fruitful for the U.S.’s forth largest wireless provider. In an earnings call today, T-Mobile posted a nearly flat revenue number — $4.69 billion in Q4 2010 versus $4.71 billion in Q3 of 2010, and $4.65 billion in Q4 of 2009 — and less than stellar customer retention numbers. T-Mo saw net losses of 318,000 customers in Q4, along with a churn rate rising from 3.4% in Q3 to 3.6%. One bright spot on the company’s balance sheet is the 25% jump in “data services revenue” year-over-year.

“I am pleased with the increase in smartphone adoption and our ongoing improvement in data ARPU.  Data growth in the U.S. mobile market continues to accelerate and with the largest 4G network T-Mobile USA is well-positioned to differentiate itself and grow consumer usage,” said René Obermann, CEO of Deutsche Telekom. “We are not satisfied with contract churn, but we expect that the measures presented at the T-Mobile USA Investor Day in January will lead to improvements in 2011.”

T-Mobile’s full press release is after the break.

T-MOBILE USA REPORTS FOURTH QUARTER 2010 RESULTS

• Service revenues in the fourth quarter of 2010 at $4.69 billion, up 0.9% compared to the fourth quarter of 2009
• Blended data ARPU of $12.80 in the fourth quarter of 2010, up 25.5% from the fourth quarter of 2009
• 8.2 million customers using 3G/4G smartphones as of the fourth quarter, a net increase of 1 million customers in the fourth quarter of 2010
• OIBDA of $1.34 billion in the fourth quarter of 2010 was comparable to $1.38 billion in the fourth quarter of 2009
• America’s largest 4G network: T-Mobile USA’s national HSPA+ network now covers 200 million people delivering 4G speeds

BELLEVUE, Wash., February 25, 2011 — T-Mobile USA, Inc. (“T-Mobile USA”) today reported fourth quarter of 2010 results.  In the fourth quarter of 2010, T-Mobile USA reported service revenues of $4.69 billion compared to $4.65 billion in the fourth quarter of 2009, and OIBDA of $1.34 billion compared to $1.38 billion reported in the fourth quarter of 2009.  The number of customers using smartphones continued to increase significantly during the quarter, driving growth in blended data ARPU.  Blended data ARPU in the fourth quarter of 2010 was $12.80, up 25.5% from the fourth quarter of 2009.  Net customer losses were 23,000 in the fourth quarter of 2010 compared to 371,000 net customer additions in the fourth quarter of 2009.

“Our service revenues increased year-on-year in the fourth quarter.  Data ARPU growth rates are outperforming our main competitors as we leverage our 4G network and provide rich and compelling smartphones and data plans.  However, high contract churn and significant contract customer losses in the fourth quarter of 2010 indicate that we still have a fair amount of work ahead of us and that any turnaround will take time.  With the ongoing implementation of our challenger strategy we are laying the foundation for improved performance going forward,” said Philipp Humm, President and CEO of T-Mobile USA.

“I am pleased with the increase in smartphone adoption and our ongoing improvement in data ARPU.  Data growth in the U.S. mobile market continues to accelerate and with the largest 4G network T-Mobile USA is well-positioned to differentiate itself and grow consumer usage.  We are not satisfied with contract churn, but we expect that the measures presented at the T-Mobile USA Investor Day in January will lead to improvements in 2011,” said René Obermann, CEO of Deutsche Telekom.

Customers

• T-Mobile USA served 33.73 million customers (as defined in Note 3 to the Selected Data, below) at the end of the fourth quarter of 2010, down from 33.76 million at the end of the third quarter of 2010 and 33.79 million at the end of the fourth quarter of 2009.
• In the fourth quarter of 2010, net customer losses were 23,000, compared to net additions of 137,000 in the third quarter of 2010 and 371,000 in the fourth quarter of 2009.
• Contract customers were the primary driver for the sequential and year-on-year change in net customers.
• Contract net customer losses were 318,000 in the fourth quarter of 2010, compared to 60,000 net contract customer losses in the third quarter of 2010, and 117,000 net contract customer losses in the fourth quarter of 2009.
• Sequentially and year-on-year, the decline in net contract customers was driven primarily by fewer contract gross customer additions.  Traditional postpay gross customer additions decreased in the fourth quarter of 2010 driven primarily by revised credit standards and competitive intensity.  FlexPay^SM contract gross customer additions also decreased related to competitive intensity.
• Connected device net customer additions, included within contract customers (as defined in Note 3 to the Selected Data, below), were lower in the fourth quarter of 2010 than in the third quarter of 2010 and now total 1.9 million at December 31, 2010.
• Prepaid net customer additions, including MVNO customers (as defined in Note 3 to the Selected Data, below), were 295,000 in the fourth quarter of 2010, compared to 197,000 in the third quarter of 2010 and 488,000 in the fourth quarter of 2009.
• MVNO customer additions were the primary driver of prepaid net customer additions.  MVNO customers totaled 2.8 million at December 31, 2010.
• Year-on-year, FlexPay No-Contract net customer losses were the primary reason for the decrease in prepaid net customer additions.

Churn

• Blended churn (as defined in Note 2 to the Selected Data, below), including both contract and prepaid customers, was 3.6% in the fourth quarter of 2010, up from 3.4% in the third quarter of 2010 and 3.3% in the fourth quarter of 2009.
• The sequential and year-on-year increase was driven primarily by prepaid churn.
• Contract churn was 2.5% in the fourth quarter of 2010, up from 2.4% in the third quarter of 2010 and consistent with the fourth quarter of 2009.
• The sequential increase in contract churn was due primarily to higher churn of connected devices in the fourth quarter of 2010 and competitive intensity.
• Prepaid churn increased in the fourth quarter of 2010 to 7.5% from 7.2% in the third quarter of 2010 and 6.8% in the fourth quarter of 2009.
• The sequential and year-on-year increase in prepaid churn was driven primarily by MVNO customers.

OIBDA and Net Income

• T-Mobile USA reported OIBDA (as defined in Note 6 to the Selected Data, below) of $1.34 billion in the fourth quarter of 2010, consistent with $1.32 billion in the third quarter of 2010 and $1.38 billion in the fourth quarter of 2009.
• Compared to the fourth quarter of 2009, OIBDA decreased slightly due primarily to a higher equipment subsidy loss from more customers upgrading to smartphones (as defined in Note 11 to the Selected Data, below).
• OIBDA margin (as defined in Note 7 to the Selected Data, below) was 29% in the fourth quarter of 2010, up from 28% in the third quarter of 2010 but down from 30% in the fourth quarter of 2009.
• Net income in the fourth quarter of 2010 was $268 million, compared to $320 million in the third quarter of 2010 and $306 million in the fourth quarter of 2009.

Revenue

• Service revenues (as defined in Note 1 to the Selected Data, below) were $4.69 billion in the fourth quarter of 2010, consistent with $4.71 billion in the third quarter of 2010 and up slightly from $4.65 billion in the fourth quarter of 2009.
• Service revenues in the fourth quarter of 2010 were positively impacted by data revenue growth, driven by the adoption of mobile broadband data plans, the revenue contribution from providing handset insurance services, and higher prepaid revenues from the growth of unlimited usage plans.  In the fourth quarter of 2010, T-Mobile USA began directly providing handset insurance services which had previously been provided by a third party.
• Year-on-year, quarterly service revenues increased due primarily to data revenue growth and from directly providing handset insurance services which more than offset voice revenue declines.  The 0.9% increase in quarterly service revenues year-on-year in the fourth quarter of 2010 was an improvement from the 0.5% year-on-year decrease in the third quarter of 2010.
• Total revenues, including service, equipment, and other revenues were $5.36 billion in the fourth quarter of 2010, consistent with $5.35 billion in the third quarter of 2010 but down slightly from $5.41 billion in the fourth quarter of 2009.
• Equipment revenues decreased year-on-year due primarily to lower sales volumes.

ARPU

• Blended Average Revenue Per User (“ARPU” as defined in Note 1 to the Selected Data, below) was $46 in the fourth quarter of 2010, down slightly from $47 in the third quarter of 2010 but consistent with the fourth quarter of 2009.
• Contract ARPU was $52 in the fourth quarter of 2010, consistent with the third quarter of 2010 and up slightly from $51 in the fourth quarter of 2009.
• Year-on-year contract ARPU increased as data revenue growth and handset insurance revenues more than offset lower voice revenue.
• Prepaid ARPU was $19 in the fourth quarter of 2010, consistent with the third quarter of 2010 and up from $18 in the fourth quarter of 2009.
• The increase in prepaid ARPU compared to the fourth quarter of 2009 was due primarily to the growth of customers on unlimited usage plans.
• Data service revenues (as defined in Note 1 to the Selected Data, below) were $1.29 billion in the fourth quarter of 2010, up 25% from the fourth quarter of 2009.  Data service revenues in the fourth quarter of 2010 represented 28% of blended ARPU, or $12.80 per customer, up from 27% of blended ARPU, or $12.40 per customer in the third quarter of 2010, and 22% of blended ARPU, or $10.20 per customer in the fourth quarter of 2009.
• 8.2 million customers were using smartphones enabled for the T-Mobile USA UMTS/HSPA/HSPA+ network (as defined in Note 11 to the Selected Data, below) such as the T-Mobile^® myTouch^® 4G, T-Mobile G2^TM with Google^TM and the Samsung Vibrant^TM at the end of the fourth quarter of 2010.  This was a net increase of 14% or 1 million customers using smartphones from the third quarter of 2010 and more than double the 3.9 million customers as of the fourth quarter of 2009.  3G/4G smartphone customers now account for 24% of total customers, up from 21% in the third quarter of 2010 and 12% in the fourth quarter of 2009.
• While messaging continues to be a significant component of blended data ARPU, the increase in the number of customers using smartphones and the continued upgrade of the network are driving Internet access revenue growth with the increasing adoption of mobile broadband data plans.

CPGA and CCPU

• The average cost of acquiring a customer, Cost Per Gross Add (“CPGA” as defined in Note 5 to the Selected Data, below) was $290 in the fourth quarter of 2010, consistent with the third quarter of 2010 but down from $300 in the fourth quarter of 2009.
• Year-on-year, CPGA decreased in the fourth quarter of 2010 due primarily to the shift in customer base towards MVNO customers and connected devices.
• The average cash cost of serving customers, Cash Cost Per User (“CCPU” as defined in Note 4 to the Selected Data, below), was $24 per customer per month in the fourth quarter of 2010, consistent with the third quarter of 2010 and up from $22 in the fourth quarter of 2009.
• Year-on-year, CCPU was higher due primarily to a higher equipment subsidy loss as more customers upgraded to smartphones and the cost of directly providing handset insurance services.

Capital Expenditures

• Cash capital expenditures (as defined in Note 8 to the Selected Data, below) were $2.8 billion in 2010, compared to $3.7 billion in 2009.
• The primary reason for lower cash capital expenditures relates to the 2009 build-out of the national UMTS/HSPA network.  In 2010 cash capital expenditures were driven by continued network investment including coverage expansion and the upgrade to HSPA+.
• Cash capital expenditures were $828 million in the fourth quarter of 2010, compared to $643 million in the third quarter of 2010 and $697 million in the fourth quarter of 2009.
• Sequentially, the increase in cash capital expenditures was due primarily to the build out of the network, including new cell sites and the HSPA+-enabled 4G network upgrade (as defined in Note 10 to the Selected Data, below).  With the latest expansion, T-Mobile USA’s 4G network is available in more than 100 major metropolitan areas, reaching 200 million people at the end of 2010.
• Year-on-year, the increase in cash capital expenditures was due primarily to payment timing differences.

T-Mobile USA Recent Highlights

• On January 20, 2011 T-Mobile USA and Samsung Telecommunications America (Samsung Mobile) revealed the Galaxy S™ 4G.  Powered by Android™ 2.2, the Galaxy S 4G is  T-Mobile USA’s first smartphone capable of delivering theoretical peak download speeds of up to 21 Mbps, delivering rich entertainment experiences on T-Mobile USA’s 4G network (previous 4G smartphones, such as the myTouch 4G and the G2, were enabled for 14.4 Mbps).  The Samsung Galaxy S 4G is exclusive to T-Mobile USA and went on sale on February 23.
• On February 1, 2011 T-Mobile USA announced that it will introduce the T-Mobile Global for Business^TM plan, a unique approach to international voice and data roaming that reinforces the company’s commitment to support multinational corporations, as well as government agencies and U.S. enterprises conducting business internationally.
• On February 2, 2011 T-Mobile USA and LG Mobile Phones unveiled their Android™ 3.0 (Honeycomb)-powered tablet, the T-Mobile^® G-Slate™ with Google™ by LG.  With a brilliant, high-definition (8.9-inch, 3D-capable multi-touch display, the T-Mobile G-Slate delivers a groundbreaking mobile entertainment experience, including the ability to record 3D and full HD video. The tablet is expected to be available this spring.  T-Mobile USA’s 4G network, America’s largest 4G network™, is currently available in more than 100 major metropolitan areas, reaching 200 million people nationwide.  With aggressive plans to expand and double the speed of its 4G network in 2011, T-Mobile USA expects that 140 million Americans in 25 major metropolitan areas will have access to increased 4G speeds (HSPA+ 42 Mbps) by mid-year 2011.
• On February 3, 2011 T-Mobile USA was awarded the highest ranking for the second consecutive time (and the 11th time in the last 13 surveys) in J.D. Power and Associates’ 2011 Wireless Customer Care Performance Study^SM — Volume 1.
• On February 17, 2011 T-Mobile USA continued its streak of recognition for excellence in customer satisfaction with the fourth consecutive highest ranking in J.D. Power and Associates’ 2011 Wireless Retail Sales Satisfaction Study^SM— Volume 1 results. T‑Mobile USA ranked not only highest overall, but the highest in each area for which the study measured customer satisfaction.

T-Mobile USA is the U.S. wireless operation of Deutsche Telekom AG (OTCQX: DTEGY).  In order to provide comparability with the results of other US wireless carriers, all financial amounts are in US dollars and are based on accounting principles generally accepted in the United States (“GAAP”).  T-Mobile USA results are included in the consolidated results of Deutsche Telekom, but differ from the information contained herein as Deutsche Telekom reports financial results in Euros and in accordance with International Financial Reporting Standards (IFRS).

This press release includes non-GAAP financial measures.  The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information provided in accordance with GAAP.  Reconciliations from the non-GAAP financial measures to the most directly comparable GAAP financial measures are provided below following Selected Data and the financial statements.