That iPhone you purchased at T-Mobile is helping the company to sell debt that will generate cash streams for the company.
Apple’s iPhone, once the jewel that carriers sold below cost to lure subscribers into contracts, is now an asset T-Mobile US and its peers are seeking to exploit as a new funding source.
T-Mobile, based in Bellevue, may sell debt backed by customer payments on iPhones and other equipment as a way of reducing its financing costs, Chief Financial Officer Braxton Carter said in an interview. The company, along with Sprint and AT&T, already uses bank loans backed by service fees to bolster cash.
Selling phones through installment-plan financing has helped fuel a 7.5 million jump in T-Mobile’s postpaid subscribers, which total 28.3 million, making T-Mobile the fastest growing of the four major U.S. wireless carriers. Now it may turn to some of the $4.9 billion worth of phones it has sold to generate cash streams to pay investors, Carter said.
“We will start fairly small,” Carter said by telephone. “We are looking at a tranche this year.”
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All of the big carriers are likely to use equipment as collateral for financing in 2015, Jefferies Group equity analyst Mike McCormack wrote in a February research report.
Wireless carriers used to lock customers into two-year contracts by selling phones below cost. Mobile operators now spread the full cost of the phone over 24 monthly payments. The popularity of the no-money-down offers has given the carriers a new revenue stream that can be sold to raise cash.
‘“It’s fairly attractive if we can fund capital into the business at a reasonable cost,” Carter said. T-Mobile’s weighted cost of capital is about 6 percent, while securitization of receivables runs about 3 percent, he said. “It’s one of the tools in the tool kit for a company that’s in a consumer business with significant amount of receivables.”
Most T-Mobile customers are eligible to buy an iPhone with no money down, according to an offer on Apple’s website. That plan is available to about 92 percent of subscribers and offers an opportunity for frequent upgrades.
Securitizing those contracts is a logical next step for the company, according to McCormack. It parceled out wireless-service revenue receivables last year.
“Historically the customer put down $200 for a $650 iPhone and the company would eat the difference,” he said. “Now there’s a cheap way to free up cash flow and use it as working capital.”
Growth push
In March 2013, T-Mobile became the first carrier to use financing combined with lower-priced service plans. The offer took hold with consumers as T-Mobile sacrificed profit to gain market share. Larger rivals have been forced to respond, and industry margins have been squeezed.
A potential drawback to phone financing is the risk that users won’t pay their bills as agreed, McCormack said. T-Mobile set aside $106 million for credit losses in its equipment installment plan last quarter, adding to reserves that totaled $433 million on March 31, according to a company filing on Tuesday.
To boost subscriber growth, the carriers need to widen their range of potential users. In the fourth quarter, T-Mobile changed its credit qualifications for new customers, making it easier to get new phones while possibly increasing the risk of nonpayment. Of T-Mobile’s phone-finance customers, 48 percent were characterized as having subprime credit at the end of the first quarter, according to a regulatory filing.
One way T-Mobile evaluates credit quality is by considering an unblemished bill-paying history with the company, T-Mobile CEO John Legere said in a January blog posting. Customers who have paid their phone bills on time for 12 consecutive months qualify for the company’s best deals, regardless of third-party credit scores.
Among the other major carriers, AT&T CFO John Stephens said during a Jan. 27 conference call to discuss fourth-quarter 2014 results that the company also plans to securitize receivables this year.
Verizon Communications CFO Fran Shammo told analysts on a Jan. 22 conference call that the company is considering securitization for its “installment sales.”
And Sprint has a program in place that it may expand to lease receivables and installment billing, according to analyst McCormack.
Jefferies analysts estimated the top four wireless carriers will help finance more than $37 billion in customer purchases throughout 2015. That may create a balance of $29 billion in cumulative receivables that could rise to $40 billion in two years, they said.
“Carriers aren’t banks. This is a way to get their money back quickly and not have to worry about financing your iPhone,” said Roger Entner, an analyst with Recon Analytics based in Dedham, Mass. “It lets carriers concentrate more on their service business.”