T-Mobile Lacks Direction And Loses More Customers

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1 Communications Workers of America Contact: Tony Daley or T-Mobile Lacks Direction And Loses More Customers On August 5, 2010 T-Mobile USA s ( T-Mobile ) parent, Deutsche Telekom ( DT ), reported second quarter 2010 earnings. DT emphasized T-Mobile s net addition of 106,000 postpaid ( contract ) customers and an increase of $0.70 in data Average Revenue Per User ( ARPU ) from $10.90 in the first quarter 2010 to $11.60 in the second quarter. While these "positive" trends provide some hope for investors who are waiting for a T-Mobile turnaround, T-Mobile continues to face significant challenges in from high contract churn rate and their ongoing confusion and lack of strategy regarding a 4G data network. Contract Subscribers Grow But Pre-paid Plummets While T-Mobile surprised some analysts with 106,000 in net additions of postpaid customers, it still lost 93,000 customers overall due to a net decline of 199,000 prepaid customers. While the company portrays its growth in contract subscribers as a positive indicator, the reality is much less clear. T-Mobile engaged in a very aggressive and costly acquisition campaign, centered around its two-for-one Father s Day promotion. The company s effort to buy customers led to a 22.2% increase in its customer acquisition costs. A competitive wireless market continued to hamper T-Mobile USA Inc. (DTEGY) during the second quarter as the nation s fourth largest wireless operator said it lost 93,000 customers during the quarter on top of the 77,000 subscribers the carrier lost during the first three months of the year. 1 -Morgan Stanley More broadly, as evidenced by much larger net contract customer gains by its key rivals, T-Mobile s customer gains in the second quarter 2010 may have been a case of the company benefiting from larger market trends. As a Wall Street Journal article observed, T-Mobile USA's contract customer gain is still far behind that of Verizon, whose wireless arm gained 665,000 contract customers in the second quarter. AT&T gained 496,000 contract customers. 1 In fact, of the four major wireless carriers, T-Mobile is the only one to post net customer losses in Q Post-paid Customer Churn Significant T-Mobile continues to lose valuable prepaid customers at a higher rate than the competition. While Verizon, AT&T and Sprint continued their progress in reducing prepaid churn, T-Mobile remains stuck at an unacceptably high (and costly) level. As a recent Goldman Sachs' analysts 1 Deutsche Telekom s Net Profit Slides, Wall Street Journal, August 5, Pre-Paid Undermines T-Mobile USA s Q2 Results, RCRWireless.com, August 5, 2010, available at 1/?utm_source=rss&utm_medium=item&utm_campaign=rss.

2 report notes, T-Mobile s churn is "somewhat in contrast to the churn improvement seen across the US market in Q2 reporting for the other large US mobile operators." 3 Data ARPU Growth Positive, But Insufficient While T-Mobile did manage to grow its data ARPU, the improvement is modest and fails to close the gap with other carriers. As noted above, data APRU was up $0.70 versus Q1/10, which is an 18% increase. However, as can be seen from the chart below, the company badly lags its key competitors. TMUS Data ARPU Still Lags Badly $18.00 $16.00 $ $12.00 / 1 2, Q $10.00 U P R A $8.00 a ta D $6.00 $4.00 $2.00 $0.00 Verizon Sprint AT&T T-Mobile 2Q10 $17.37 $17.55 $16.61 $11.60 Sources: Company data, Goldman Sachs calculations Clearly, T-Mobile has a long way to go to pull within range of its key competitors, who aren t sitting still and are investing enormous sums in 4G while T-Mobile lacks strategic direction and appears content to market its HSPA+ network s short-lived speed advantage. Dramatic Decline in Capital Expenditures T-Mobile continues to drastically cut capital expenditures, which declined 32.0% versus the same quarter in For the first half of 2010, T-Mobile's capital expenditures dropped an even steeper 38.5% compared to the first half of the previous year. As can be seen in the chart below, T-Mobile's capital expenditures climbed steadily from the beginning of 2008 through mid-2009 and then dropped steeply. 3 DT reports robust 2Q10 numbers, in-line with our expectations but ahead of consensus, Hugh I. McCaffrey and Katherine Ward, Goldman Sachs & Co., August 5, 2010.

3 $2,500 TMUS Capex Has Dropped Sharply Over the Past Year $2,000 s n $1,500 ilio M $ $1,000 $500 $0 H1/08 H2/08 H1/09 H2/09 H1/10 $1,703 $1,911 $2,178 $1,459 $1,336 Source: Deutsche Telekom financial reports T-Mobile appears to be boosting cash flow by slashing investment in the future of its network. Comparing T-Mobile s reported "Cash Capex" and "Cash Contribution" levels illustrates this dynamic. These measures, disclosed for all reported Deutsche Telekom segments, appear to be key metrics to the company, to the point that its financial filings contain both "as reported" and "adjusted" numbers. The chart below uses the adjusted metrics. The chart below illustrates how T-Mobile s growing capital expenditure during 2008 and the first half of 2009 ate into the company's operating cash flows. Beginning in the second half of 2009, however, T-Mobile slashed its capital expenditures and, as a consequence, its operating cash flows (cash contribution) rose commensurately. TMUS Operating Cash Flows Have Been Boosted by Reductions in Capex Adj. Cash Capex Adj. Cash Contribution $1,703 $1,354 $1,911 $1,240 $2,178 $1,459 $1,481 $1,482 $1,336 $808 H1/08 H2/08 H1/09 H2/09 H1/10 NB: Deutsche Telekom defines Cash Contribution as EBITDA less Capex Source: Deutsche Telekom financial reports Deutsche Telekom needs to ensure that its US subsidiary invests significantly more than it has in the past if it hopes to compete with Verizon and AT&T, particularly as they roll out their 4G LTE wireless broadband products.

4 Still No 4G Plans and Inconsistent Answers From Management T-Mobile s leadership has yet to provide customers and investors with a roadmap for a nextgeneration data network. Industry watchers are suggesting T-Mobile is poised to repeat its disastrous 3G rollout that fell years behind the competition. "In the not-too-distant future they're going to be playing catch-up again," according to an analyst at London-based research company Informa Telecoms & Media. 4 Perhaps most concerning is the different messages coming from T-Mobile and DT. At a recent press conference DT CEO Rene Obermann commented "With HSPA+ we're in a very good position, we still have plenty of capacity, so we are competitive." 5 Obermann s lack of urgency doesn t reflect the significant risks posed by falling behind its competitor s data offerings. Outgoing T-Mobile CEO Robert Dotson appears to have a different perspective on the problem. Rather than downplay the significance of a 4G Network, Dotson is telling the media that the company can t get access to a spectrum to provide the 4G service. 6 This difference of opinion between T-Mobile and DT management underscores the risks created by not having a clear strategy for a 4G data network. T-Mobile needs to develop a plan for 4G service and aggressively peruse it or risk becoming a budget carrier that can t compete with the top-tier operators. Is DT Giving Up on T-Mobile? A recent Wall Street Journal article, spurred by T-Mobile s Q210 earnings report, raised the ongoing uncertainty about the company's future, arguing that the company s campaign to buy customers might be a good bet if the growth initiative transforms T-Mobile USA into a business that could be sold or floated. But it s a big if. 7 With DT s recently announced stock buyback and T-Mobile slashing capital expenditures by one-third along with its campaign to buy new customers, the company appears to be moving to curry favor with its shareholders and dress up T-Mobile for some sort of transaction. If that is management s intention, they need to move quickly. T-Mobile is loosing market share and falling farther behind its competitors, making it a less attractive asset every quarter. Goldman Sachs analyst Hugh I. McCaffery recently wrote that DT needs to make significant investments in the T-Mobile business: "In US mobile, we believe price competition at the low end, increasing smartphone competition in the mid end and VZW s launch of LTE ( 4G ) services through 2H2010 will: (1) necessitate further commercial investment from T-Mo USA if 4 T-Mobile Looks To Lag In Offering 4G Service, Businessweek, August 10, 2010, available at 5 T-Mobile Looks To Lag In Offering 4G Service, Businessweek, August 10, 2010, available at 6 T-Mobile May Be The Last Big 3G Telecom Provider Standing, GoingLTE.com, August 17, 2010, available at 7 Size Matters for T-Mobile, But at What Cost? Wall Street Journal, August 5, 2010.

5 it is to remain competitive; and (2) highlight the longer-term investment required in the US if T- Mo USA is to achieve scale." 8 If DT management can t move decisively, they may be left with no other choice than to sit and watch a valuable subsidiary wither away. 8 "Mean reversion as operating environment worsens: Conviction Sell," Hugh I. McCaffrey, Goldman Sachs, August 10, 2010.