Wireless customers are often viewed as the most valuable asset a carrier has, though they are often the hardest to quantify. While having more customers usually translates into higher revenues, analysts note the cost of acquiring and servicing those subscribers has to be weighed against how much they spend and for how long to determine the true value of subscribers.
One of the most often-cited subscriber valuations is the lifetime revenue-per-subscriber metric that Nextel Communications Inc. and Nextel Partners Inc. have used to show the benefits of their low churn and high average revenue per user results. Not surprisingly, both companies lead the industry in the LRS metric that divides monthly customer churn, which translates into how long a customers stays with a carrier, into ARPU to determine how much a subscriber pays a carrier over his service lifetime.
“Using LRS is an easy way to take a snapshot of a carrier’s overall revenues by taking into account two important metrics,” said Jeffrey Hines, president of N. Moore Capital Ltd.
Using year-end 2003 results, Nextel led the industry in LRS at $4,386 thanks to its reported 1.6-percent customer churn and $70.17 in reported ARPU, followed closely by Nextel Partner’s $4,250. Nextel Partners reported a similar 1.6-percent churn rate and slightly lower $68 in ARPU for all of last year. Using the same metric, Rural Cellular Corp. was the next-highest placed carrier last year at $2,842, followed by Verizon Wireless at $2,722 and Dobson Cellular Corp. with $2,672 in postpaid LRS last year.
Of the remaining nationwide operators, Sprint PCS posted $2,325 in LRS last year, followed by AT&T Wireless Services Inc. with $2,300, Cingular Wireless L.L.C. at $1,901, and T-Mobile USA Inc. with $1,677. Of the carriers that reported customer churn and ARPU for all of 2003, MetroPCS Inc.-which offers no-contract unlimited calling plans in a handful of markets-brought up the bottom of the list at $819.13 in LRS last year due to its modest $37.68 in ARPU and 4.6-percent customer churn.
While LRS appears to be a simple way to determine customer value and is cited by some analysts in research reports, others note the metric does not take into account other variables that impact a customer’s total value to a carrier.
“LRS is certainly a valid measure of customer value, but it’s missing other aspects that should be factored in,” explained Jonathan Schildkraut, wireless industry analyst at SG Cowen, which adds cost per gross addition and cash cost per user to the LRS formula to provide its own customer valuation that it terms “economic value per subscriber.” The formula subtracts CCPU from ARPU before dividing in customer churn and then takes out CPGA.
“EVS tells you how good a subscriber is by factoring in the cost of acquiring that customer to begin with as well as how much it costs to provide service to that customer,” Schildkraut added.
Using SG Cowen’s EVS formula, Nextel posted $2,464 in EVS last year while Nextel Partners’ $1,133 in EVS witnessed a greater impact compared with LRS due to the carrier’s $43 in CCPU compared with $23 for Nextel. Despite the $2,000 difference in customer valuations between LRS and EVS for Nextel, the carrier still posted the highest EVS of its competitors that report both CPGA and CCPU. With neither Verizon Wireless nor Cingular Wireless reporting those two metrics, Sprint PCS posted the next-highest EVS result of nationwide carriers last year at $704.
Schildkraut noted that while EVS was a more complete way of valuing a customer, the formula does not include other aspects that could be important, including the time value of money.
While these formulas make it relatively easy to compare customer valuations among carriers, some analysts warn in most cases they are too simple and are often highlighted by carriers that likely will produce favorable results from the metrics that are included in the formulas.
“I think for most investors, LRS only takes into account part of the whole picture,” cautioned Albert Lin, telecommunications industry analyst at American Technology Research. “LRS is not far off the mark, but it does not look at the true value of a carrier’s offering.”
Lin noted investors should look at all the financial metrics a carrier provides, including free cash flow, as well as the carrier’s potential to grow its business through the use of more diversified offerings including bundled opportunities.
“Investors will see that Nextel has plenty of wireless assets, but if they dig deeper they will realize they don’t have much of an opportunity to bundle services to support their nationwide wireless network,” Lin said.
Lid added the industry’s focus on single metrics has proven to be troublesome for some operators, citing Sprint PCS’ and AWS’ attempts to ramp up their net additions results by signing credit-challenged customers who ultimately proved unprofitable.
Further clouding the valuation picture is the way in which companies calculate the operating metrics that are included in both LRS and EVS. The Yankee Group recently released a report that found few carriers use the same economic figures to produce often-used metrics, including ARPU, churn, CPGA and CCPU, and investors quickly could lose faith in such metrics unless there is a standard way of reporting those results.
“An apples-to-apples comparison is essential for an industry such as wireless that is mature and can boast that more than 50 percent of all Americans are its customers,” the Yankee Group report noted. “Apples-to-oranges comparisons might have sufficed for fly-by-night operations or garage shops, but these days are over.”
