As an analyst in the wireless industry, I was often asked to compare KPIs (Key Performance Indices - subscriber counts, ARPU, Churn, etc.) of various carriers. Unfortunately, most carriers earnings reports do not provide breakout of KPIs for their prepaid and/or reseller (aka. MVNO) businesses. Unless they are from a pure-play prepaid provider like Virgin Mobile (now less true with their acquisition of Helio) or Tracfone, prepaid KPIs are not easy to come.
In this article, I will share the method I use to estimate prepaid subscriber count, prepaid ARPU, and prepaid churn for AT&t using its latest 4Q 2008 earnings report.
First, you will have to be fairly familiar with AT&T’s Statement of Segment Income — GAAP for the Wireless segment [master.xls]. Under the tab, Wireless Segment, AT&T provides total Subscriber count, Net adds, Postpaid sub count, churn and its ARPU. This is great especially AT&T is doing quite well in its postpaid business. But if you want to get to Prepaid/Reseller ARPU and churn, you’ll have to do some math. Let’s calculate AT&T’s Prepaid + Reseller :
You can download the work file here in Excel format (see the red Wireless Segment tab).
All you need is ONE reasonable assumption, the number of Reseller subscriber in 4Q 2008 to get to the estimated prepaid subscriber count. Fortunately, we can make one fairly easily since most of their reseller subscribers come from the Tracfone, the largest MVNO in the US. As of 3Q 2008, Tracfone reported 10.449M subs. If in 4Q 2008, Tracfone added the same number of subs in as in 4Q 2007, then 10.499M + 711k = 11.16M (see cell I41). AT&T has 77M total subs, 60M postpaid subs, and 11.16M reseller subs (est). So AT&T prepaid subscriber count is 77M - 60M - 11.16M = 5.7M. We will use this estimate for the rest of the calculation.
To estimate the churn, you first calculate the number of disconnects for total subscribers and postpaid subscribers using the reported churn rate (see row 53-55). As you can see, it looks like the disconnects for Prepaid + Reseller segement would have to be 1.479M for AT&T to have a consolidated total churn of 1.6%. Hence, the Prepaid + Reseller churn is about 3.1%. [Gut check: Tracfone's last reported churn rate was 3.6% in 4Q 2007 and 3.8% in 3Q 2008.] If AT&T’s composite Prepaid + Reseller churn is 3.1% and the Reseller churn (Tracfone’s churn) is ~3.8%, the true AT&T Prepaid churn rate is likely lower than 3%. This would be quite good for US Prepaid providers.
Estimating ARPU can be done in a similar fashion. The only thing you need to do is read the Investor Briefing (the pdf file they released). It states that the Postpaid ARPU was $59.59 in 4Q 2008. With that plus the total service revenue, you can back out the postpaid only service revenue which you can use to calculate the remainder of the service revenue for the prepaid and reseller segments. The Prepaid + Reseller service revenue was 955M so using the Prepaid + Reseller subscriber count for 3Q and 4Q we calculated earlier, you can estimate the ARPU. It turns out the Prepaid + Reseller ARPU was about $19.27. The true Prepaid-only ARPU for AT&T is likely to be much higher. Tracfone (reseller) reports ARPU of $11 in 3Q 2008. Don’t forget that this is at the retail level. As a wholesaler (AT&T in this case), the ARPU AT&T takes is likely in the $4-6 range depending on the price of the wholesale minute which can range from $0.03-0.08 per minute based on a Tracfone average of 78 MOU (minutes of use).
I hope this has been helpful in estimating AT&T’s prepaid KPIs . All of these estimates are done using assumptions and should be use for “back-of-the-envelope” calculations only.
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Virgin Mobile’s recent earning report and the associated announcements point towards a renewed future for prepaid and MVNO wireless programs in the U.S.
While many key components contribute towards the recent surge in this wireless segment, the current economic conditions certainly play an important role on several fronts.
Consider the recent flat monthly prepaid or pay as you go rate products announced by Virgin, Boost and others. But many existing prepaid customers, who make up the majority of Virgin subscribers, spend less than half of the going flat rate plans recently announced for their wireless voice and data needs. Therefore, there is little chance in this economic climate that these subscribers would upgrade their plans and double their monthly spend. Perhaps the silver lining is that some of the lower end of the postpaid subscribers would be encouraged to sign for plans that offer ‘unlimited’ minutes for a flat monthly rate.
Another economic climate contributing factor could be lower churn specifically from ‘switchers,’ who may think twice about an incremental spend on a new handset. Witness Virgin’s quarterly (period ending December 31, 2008) churn drop to 4.8% from 5.1%. The annual churn rate for 2008 compared to 2007, however, rose to 5.2% from 4.9%.
While much is being made about Virgin’s recent quarterly financial performance, especially about the growth in service revenue, the company should also be given credit for dramatically reducing its CPGA (Cost Per Gross Addition). While quarterly and year-over-year gross addition were roughly the same, the company reduced its quarterly CPGA to $101.93 from $120.68 for the same quarter in 2007 or improving a key metric for prepaid MVNOs by more than $17 million.
And while monthly ARPU (Average Revenue Per User) in 2008 increased by $0.78 over the same quarter in 2007, there was a corresponding increase in CCPU (Cash Cost Per User) of $2.22. For the full year, while CCPU was down, so was ARPU.
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Three Months Ended Year Ended
December 31, December 31,
——————– ——————–
2008 2007 2008 2007
——— ——— ——— ———
(Unaudited) (Unaudited)
Gross additions 960,421 957,541 3,305,857 3,384,460
Churn 4.8% 5.1% 5.2% 4.9%
Net customer additions 216,005 209,669 119,237 511,796
End-of-period customers 5,380,310 5,085,886 5,380,310 5,085,886
ARPU $ 21.14 $ 20.36 $ 20.30 $ 21.24
CCPU $ 13.99 $ 11.77 $ 12.74 $ 13.05
CPGA $ 101.93 $ 120.68 $ 108.68 $ 111.66
Free cash flow $ 25,720 $ 11,206
Unlevered cash flow $ 57,776 $ 62,657
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