July 27, 2016
As anticipated, T-Mobile (NYSE:TMUS) continued to lead all carriers in postpaid subscriber growth by a long shot in its most recently reported quarter.
Though postpaid subscriber additions didn't reach the one million mark as it did in the year-ago quarter, T-Mobile's customer growth was still well ahead of AT&T (NYSE: T), Sprint (NYSE: S) and Verizon (NYSE: VZ) combined and it showed remarkable growth in prepaid customer additions as well. T-Mobile's postpaid phone additions managed to beat Wall Street estimates while both service and total revenues rose annually.
Wells Fargo analyst Jennifer Fritzsche called T-Mobile's numbers "solid" and pointed toward the importance of free cash flow in T-Mobile's near-term future.
"While gross adds for the industry were slow overall (and growth driven more by lower churn), TMUS lead the industry by a wide margin in handset adds," said Fritzsche. "The Free Cash flow metric is becoming increasingly meaningful for TMUS and (depending on the auction spending) is a metric which should see a significant ramp in 2017. Free cash flow expectations for the remainder of 2016 should largely depend on the amount of working capital outflows from handset purchases and its spend in the upcoming broadcast auction."
Subscribers: T-Mobile added a whopping 890,000 net postpaid customers (including 646,000 postpaid phone adds) in the second quarter. But that total, higher than the postpaid adds of AT&T, Sprint and Verizon combined, was down quarterly and annually, a decline that T-Mobile attributed to an "absence of iconic device launches in the period." In all, T-Mobile added 1.9 million net customers -- driven by prepaid and wholesale adds -- to raise its total customer count to more than 67 million. T-Mobile said that, since the launch of the first Un-carrier initiative in the first quarter of 2013, it has added 24 million customers on a pro forma combined basis. T-Mobile said its branded postpaid phone churn was at a "record-low" of 1.27 percent, down from 1.33 percent during the previous quarter.
Financials: T-Mobile's second-quarter service revenues jumped 12 percent year-over-year to $6.9 billion while total revenues climbed about 13 percent year-over-year to $9.2 billion, increases both attributed to growth in the carrier's subscriber base. Postpaid phone ARPU hit $47.11 in the second quarter, up 1.9 percent over the previous quarter but down 2.2 percent year-over-year. T-Mobile posted $2.5 billion Adjusted EBITDA, up 35.6 percent year-over-year. Free cash flow for the quarter was $419 million, compared to an outflow of $30 million in the second quarter of 2015.
Network: T-Mobile's LTE network now covers 311 million people and its 700 MHz Extended Range LTE network now covers more than 200 million people in 350 markets. T-Mobile said its recent deals to buy more 700 MHz A-Block spectrum licenses will boost its coverage from 210 million POPs to 269 million POPs. Though T-Mobile's LTE network continues to expand, capex mostly held steady at $1.3 billion during the quarter.
Prepaid: T-Mobile CEO John Legere called MetroPCS the "primary attack dog" in competing against AT&T, Sprint and Verizon, and that aggressive description was reflected in the prepaid carrier's impressive growth. T-Mobile's branded prepaid net customer adds reached 476,000, up 167 percent year-over-year, which was largely driven by MetroPCS.
Outlook: T-Mobile raised its forecast for full-year postpaid net customer additions to between 3.4 and 3.8 million, up from 3.2 to 3.6 million. The carrier narrowed its full-year Adjusted EBITDA outlook from previous guidance range of $9.7 to $10.2 billion to $9.8 to $10.1 billion. Included in the guidance was an aggregate impact from leasing and Data Stash that T-Mobile now expected to hit $0.8 to $1.0 billion in 2016.
Summary: T-Mobile's shares rose slightly in early morning training on another seemingly successful quarter marked by continued strong customer growth and rising revenues. As T-Mobile continues to grow, analysts like Craig Moffett say it's no longer sensible to think of T-Mobile as an acquisition target and, in the cast of Sprint, T-Mobile could now be considered a potential buyer.
"For the record, we've never thought T-Mobile would be acquired. But more importantly, we've never though that one need to think it would be in order to want to own the stock," said Moffett. "T-Mobile's remarkable growth rate -- service revenues were up 12.1 percent from a year in today's report in a market that is down year-over-year -- and free cash flow trajectory make the case without one having to believe it will be acquired."