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T-Mobile US, Inc. (TMUS - Snapshot Report) reported second-quarter 2013 earnings results, which include business results of MetroPCS after its acquisition on Apr 30. The company reported adjusted earnings per share of 3 cents, failing to meet the Zacks Consensus Estimate of 7 cents.

Adjusted EBITDA of T-Mobiledecreased 16% year over year to $1.1 billion. Combined adjusted EBITDA (including adjusted EBITDA of MetroPCS) was $1.3 billion, down from $1.8 billion in the year-ago quarter. The company generated adjusted EBITDA margin of 24% that deteriorated 700 basis points (bps) year over year. The decline was mainly due to lower service revenues, increased customer acquisition expenses owing to growing handset sales and increased promotional activities.

Total revenue increased 27.5% year over year to $6.2 billion and surpassed the Zacks Consensus Estimate of $6.1 billion. Service revenues were $4.8 billion, up 8.6% year over year with the inclusion of $723 million from MetroPCS service revenues for the month of May and June. Excluding the favorable impacts of MetroPCS, the company registered a decline in its service revenues owing to decreased branded post-paid revenue (down 11.6%) offset by increased data revenues and branded prepaid revenues (up 200%).

Equipment revenues for the quarter were $1.4 billion against $435 million in the year-ago quarter. The growth was mainly attributable to rising handset sales and higher rate of handset upgrades by existing customers. In the second quarter, the company introduced the Apple Inc.’s (AAPL - Analyst Report) iPhone 5 and the Samsung Galaxy S4 both of which contributed to its revenue growth.  In addition, handsets sold in the quarter generated higher revenue per unit of sales mainly from higher sales of smartphone, which represent higher average revenue per unit sold in comparison to other handsets.

Operational Metrics

In the second quarter, branded average revenue per user or (ARPU) was $46.67 compared with $51.45 in the year-ago quarter. Branded cost per user (CPU) decreased 7.1% year over year to $26.00.

Branded cost per gross addition (CPGA) declined 22.4% year over year to $326. Churn (customer switch) was 3%, up 10 bps from second quarter 2012.

Subscriber Statistics

As of Jun 30, 2013, the total subscriber base comprised 44 million customers, which included 8.9 million customers acquired from MetroPCS and subscriber addition of 1.1 million. The company added 601,000 branded customers bringing the total branded customers base to 35.7 million. At the end of the quarter, the company had a wholesale customer base of 8.3 million, with 452,000 net customer addition.

Liquidity

T-Mobile US ended the second quarter with cash and cash equivalents (inclusive of short-term investment) of $2,362 million compared with $423 million in a year-ago quarter. Cash from operating activities was $806 million, down from $879 million in the year-ago quarter. Long-term debt was $6.2 billion as opposed to no debt at the end of Dec 31, 2012. Capital expenditures increased 95% year over year to $1.1 billion in the reported quarter.

Guidance

For fiscal 2013, T-Mobile US expects adjusted EBITDA in the range of $5.2 billion to $5.4 billion. Pro forma cash capital expenditures are estimated at $4.2 billion to $4.4 billion. On a reported basis, the company projects EBITDA in the range of $4.7 billion to $4.9 billion and cash capital expenditures of $4.0 billion to $4.2 billion.

T-Mobile US expects branded post-paid net addition of 1.0–1.2 million in 2013.

Our Analysis

We believe that T-Mobile US remains well established to solidify its position in the U.S. market with the acquisition of wireless service provider MetroPCS. The synergies arising from this acquisition along with data revenue growth will propel growth going forward. In addition, higher smartphone penetration will drive subscriber addition, fending competition against tier 1 carriers like AT&T, Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report).

T-Mobile US has a Zacks Rank #3 (Hold).

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