TracFone Gets Back On Track In Growing Prepaid Market

By Joseph Palenchar On Feb 23 2004 - 8:00am

TracFone Wireless, the prepaid wireless-service provider, is back on track, posting major net-new subscriber gains and revenue growth in 2003 and its first annual net operating income.

The company, founded in 1996 as Topp Telecom, hopes to keep the momentum going with its first national radio campaign, sleeker phones and new airtime plans, one of which reduces consumer costs to 10 cents a minute, including all taxes and fees. The company wants to position itself for best advantage in a market said by the Yankee Group to be growing at a faster rate than traditional postpaid service (see story, p. 14).

"With our new airtime rates, plans and promotions in place for 2004, we're poised for even more growth in the months ahead," said president F.J. Pollak.

TracFone's revenue and subscriber gains followed a year of slow growth in 2002, when the company focused on "getting to positive cash flow," Pollak said. "In 2002, we got to break-even" by reducing costs per gross acquisition (CPGA), in part by negotiating lower handset costs that in turn enabled the company to reduce its handset subsidies, he said. "We're building our brand in lower cost ways than the post-paid carriers," he added.

In calendar 2003, the company posted $18 million in operating profit (earning before interest and taxes, or EBIT) on a 46 percent gain in revenue to $547 million, Pollak said. That compares with an operating loss of $21 million in 2002, according to a quarterly report by America Movil, the Latin American wireless carrier that owns 98 percent of TracFone. Earnings before interest, taxes, depreciation and amortization (EBITDA) hit $35 million in 2003 compared with a $5 million loss in 2002.

The quarterly report also cited other reasons for TracFone's success in generating profit. One was the continued expansion of its digital subscriber base. "Digital interconnection traffic is cheaper than analog," the report said. It also cited "some extraordinary discounts associated with the company having met certain traffic targets."

Pollak also attributed revenue growth to churn management. TracFone averages 4 percent to 4.5 percent churn per month, while the prepaid industry's average is between 9 percent and 10 percent, he said.

Revenues rose in tandem with the 50 percent growth in subscriber base in less than 12 months, to 3 million in early February. In contrast, TracFone's subscriber base grew from 1.89 million at the end of the first quarter of 2002 to reach only 2 million in early 2003, the company said.

The growth helped TracFone maintain its No. 1 marker share in prepaid, having topped other prepaid companies, including carriers themselves, in most quarters since the fourth quarter of 2000, according to Yankee Group statistics. The statistics exclude carriers' hybrid plans, which contain cost-control elements of prepaid plans.

"The majority of growth in 2003 was organic," Pollak said, noting that the number of storefronts selling TracFone phones and service didn't increase dramatically in 2003. Company reports show that TracFone currently sells through more than 60,000 storefronts, the same number cited in an Oct. 23, 2002, press release. The company did, however, "add grocery chains in the last six to eight months and Sam's Clubs late last year," Pollak noted. In January 2000, the company had more than 23,000 storefronts.

Current retailers include Eckerd Drug, Kmart, Lowe's, Office Depot, Office Max, Sam's Club, Staples, Target, Western Union, Wal-Mart and 7-Eleven.

To maintain the growth pace, TracFone launched its first national radio campaign with spots on three syndicated radio shows: Paul Harvey News, Dr. Laura and American Country Countdown. The company is also continuing its national print campaign. In the past, the company did limited radio advertising in select markets and, at one time, did TV advertising.

Lower rate plans and smaller phones are also making their debut. Four new plans offer prepaid cards at rates of 25 cents, 15 cents, 12.5 cents and 10 cents per minute, down from last year's 30 cents, 21 cents, 14 cents and 12.5 cents.

TracFone is also paring the prices and sizes of its digital handsets, which are made by Nokia and Motorola and, unlike other prepaid phones, incorporate software that lets users view used and remaining airtime on the handset display. In 2002, TracFone generally sold its handsets for $69 to $79, Pollak said, but in 2003, prices started at less than $50, and this year, one model is available at $39.95. The selection of lower priced handsets will grow with the addition of a second GSM-network model this year, the company said. GSM handsets are priced lower than TDMA and CDMA models because of the global standard's economies of scale. TracFone began offering GSM prepaid service in limited markets in the fourth quarter of 2003.

TracFone Wireless changed its name from Topp Telecom in 1996 to reflect the brand name of its prepaid service, which requires no annual contracts or activation fees and features off-the-shelf mobile phones.