T-Mobile Earnings: Solid Customer Additions Haven’t Boosted Growth, but Cash Flow Is Strong

T-Mobile TMUS continues to perform well, driving solid margin gains and cash flow growth while taking wireless customer share. Our fair value estimate remains $165 per share. While we believe T-Mobile shares are undervalued, we prefer Verizon and AT&T based on valuation.

T-Mobile added 760,000 net postpaid phone customers during the second quarter, besting Verizon (8,000 net additions), AT&T (326,000), and Comcast (316,000). The firm’s new Go5G rate plans have been successful, as management claims it has seen steadily improving porting ratios (customers leaving versus those coming) with each of its rivals, including the cable companies. The rate of customer defections (churn) was also the lowest in company history and the best in the industry, though all the big three carriers are performing very well on this metric.

While T-Mobile has talked up offers that allow customers to break phone contracts with other carriers and upgrade devices quickly, the market isn’t moving in that direction. Only 2.6% of T-Mobile postpaid customers upgraded during the quarter, a record low and the lowest among the big three. Service revenue per postpaid phone customer remains stagnant, sitting slightly below $49 per month for the past year. Management continues to expect this metric will remain flat for the time being, based on customer mix (or those on third-line free promotions). We suspect some of the stagnation is due to customers have who have traded down to cheaper rate plans that don’t include phone subsidies. The net result is that wireless service revenue growth continues to slow, up 2.8% year over year, while the cost of phone subsidies has dropped sharply.

The “core” adjusted EBITDA margin, which excludes integration costs, expanded more than three percentage points from a year ago to 46.6% of services revenue. With the Sprint integration largely complete and capital spending declining sharply, year-to-date free cash flow has grown to $5.3 billion from $3.4 billion a year ago.