Jan Dawson Chief Analyst

(408) 744-6244 jan@jackdawresearch.com

@jandawson

US wireless market trends for Q1 2014

Contents

• Financials - revenues, profitability, capital intensity

• Subscribers - total subs, net adds, churn

• Device trends - subsidies, penetration

• Conclusions

Wireless revenues

0

10,000

20,000

30,000

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Tracfone Verizon

Source: Company reporting, Jackdaw Research analysis

Revenue growth

Source: Company reporting, Jackdaw Research analysis

Year on year wireless revenue growth

-10%

0%

10%

20%

30%

40%

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile TracfoneVerizon

EBITDA margins

Source: Company reporting, Jackdaw Research analysis

0%

10%

20%

30%

40%

50%

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Tracfone Verizon

Operating margins

Source: Company reporting, Jackdaw Research analysis

-10%

0%

10%

20%

30%

40%

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Tracfone Verizon

Capital intensity

Source: Company reporting, Jackdaw Research analysis

Wireless capital intensity

0%

10%

20%

30%

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Verizon

Total subscribers

Source: Company reporting, Jackdaw Research analysis

0

30,000

60,000

90,000

120,000

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Tracfone Verizon (retail only)

Subscriber breakdown

Source: Company reporting, Jackdaw Research analysis

0

30,000

60,000

90,000

120,000

AT&T Sprint T-Mobile Tracfone Verizon

Postpaid Prepaid Connected Wholesale

Total net adds

Source: Company reporting, Jackdaw Research analysis

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Tracfone Verizon

Net add breakdown

Source: Company reporting, Jackdaw Research analysis

Net add breakdown for Q1 2014

-1,000

0

1,000

2,000

3,000

AT&T Sprint T-Mobile Tracfone Verizon

Postpaid Prepaid Connected Wholesale

Net adds by device

Source: Company reporting, Jackdaw Research analysis

Postpaid net adds by device type

-1,000

-500

0

500

1,000

1,500

AT&T Sprint T-Mobile Verizon Wireless

Phone Tablet

Note: Sprint and Verizon phone net adds are derived from total postpaid net adds and tablet net adds. Verizon added 866k 4G smartphone net adds in the quarter but lost significant 3G and feature phones

Churn - postpaid

Source: Company reporting, Jackdaw Research analysis

0%

1%

2%

3%

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Verizon

Churn - prepaid

Source: Company reporting, Jackdaw Research analysis

0%

2%

4%

6%

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

Sprint T-Mobile Tracfone

Gross adds vs losses

Source: Company reporting, Jackdaw Research analysis

AT&T gained vs. lost subscribers

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

Lost Gained

Gross adds vs losses

Source: Company reporting, Jackdaw Research analysis

Sprint gained vs. lost subscribers

0

1,000

2,000

3,000

Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

Lost Gained

Gross adds vs losses

Source: Company reporting, Jackdaw Research analysis

T-Mobile gained vs. lost subscribers

0

500

1,000

1,500

2,000

2,500

Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

Lost Gained

Gross adds vs losses

Source: Company reporting, Jackdaw Research analysis

Tracfone gained vs. lost subscribers

0

1,000

2,000

3,000

4,000

5,000

Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

Lost Gained

Gross adds vs losses

Source: Company reporting, Jackdaw Research analysis

Verizon Wireless gained vs. lost subscribers

0

1,000

2,000

3,000

4,000

5,000

Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

Lost Gained

ARPU - postpaid

Source: Company reporting, Jackdaw Research analysis

$50

$55

$60

$65

$70

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T SprintT-Mobile Verizon (ARPA/connections per account)T-Mobile ABPU

Verizon doesn’t report ARPU so we use a calculation which is roughly but not entirely equivalent. T-Mobile ARPU doesn’t include equipment payments so we’ve included a second metric - average billings per user

ARPU - prepaid

Source: Company reporting, Jackdaw Research analysis

$0

$10

$20

$30

$40

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

Sprint T-Mobile Tracfone

Smartphone sales

Source: Company reporting, Jackdaw Research analysis

% of postpaid phone sales that were smartphones

60%

70%

80%

90%

100%

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Verizon

Smartphone sales

Source: Company reporting, Jackdaw Research analysis

Number of smartphones sold (m)

0

3

6

9

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Verizon

Smartphone penetration

Source: Company reporting, Jackdaw Research analysis

% of postpaid base on smartphones

0%

30%

60%

90%

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Verizon

Smartphone upgrades

Source: Company reporting, Jackdaw Research analysis

% of base upgrading in quarter

0%

2%

4%

6%

8%

10%

12%

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Verizon

Note: Sprint and T-Mobile had identical numbers in Q4 2013 and Q1 2014. Hence, the lines representing them in the chart overlap each other during those two quarters.

Equipment revenue

Source: Company reporting, Jackdaw Research analysis

0

750

1,500

2,250

3,000

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

AT&T Sprint T-Mobile Tracfone Verizon

Sprint data

Source: Company reporting, Jackdaw Research analysis

0

500

1,000

1,500

2,000

0%

10%

20%

30%

40%

50%

Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014

Percent of hardware cost covered by revenue Wireless subsidy

T-Mobile data

Source: Company reporting, Jackdaw Research analysis

0

350

700

1,050

1,400

0%

30%

60%

90%

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

Value & Simple Choice as % of postpaid baseEquipment sales revenues financed on EIPEquipment sales revenue % on EIP

Conclusions• Carriers have an increasingly diverse mix of net adds

• Only T-Mobile had a significant number of postpaid phone net adds

• Tracfone dominates prepaid net adds

• AT&T dominates connected device net adds

• Sprint and T-Mobile share wholesale net adds

• Verizon really struggled this quarter in postpaid

Conclusions• Subsidy shifts are having a major impact already

• Only Sprint and T-Mobile have been really transparent about these changes

• T-Mobile has seen the vast majority of purchasing shift to equipment installment plans (86%)

• Sprint has seen subsidy reduce by 70% year on year

• AT&T is starting to change reporting to account for subsidy payments and 40% of gross adds/upgrades were on NEXT

Conclusions• T-Mobile’s efforts are really paying off - significant growth in

subscribers compared to other carriers

• However, it is coming at a significant cost in margins - EBITDA and operating margins both down significantly over the past few quarters

• TMO had the highest growth and lowest operating margins of any of the big five operators in Q1 2014

• Verizon and AT&T continue to be significantly more profitable than the others, Sprint continues to languish

Conclusions• T-Mobile’s efforts are really paying off - significant growth in

subscribers compared to other carriers

• However, it is coming at a significant cost in margins - EBITDA and operating margins both down significantly over the past few quarters

• TMO had the highest growth and lowest operating margins of any of the big five operators in Q1 2014

• Verizon and AT&T continue to be significantly more profitable than the others, Sprint continues to languish

Conclusions• T-Mobile’s gross adds have really taken off, and churn has come

down - twin keys to net add growth

• Tracfone had the highest gross adds in Q1 2014 - but also the highest overall churn

• Even at their low churn rates, AT&T and Verizon’s scale means they have to generate significantly higher gross adds to match net adds of T-Mobile

• Verizon quickly began addressing issues that caused losses of 3G and feature phone customers, meaning churn and net adds should rebound in Q2 2014

Conclusions• Capex spiked for both T-Mobile and Sprint in

2014, to well above 15%, but both are settling down again now

• AT&T’s capital intensity is consistently higher than Verizon’s

• Sprint’s dipped in Q1 2014 but should increase later on in the year according to its guidance

Jan Dawson Chief Analyst

(408) 744-6244 jan@jackdawresearch.com

@jandawson

Thank you