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T-Mobile US, Inc. (TMUS - Snapshot Report) reported second-quarter 2014 earnings per share of 48 cents, which outpaced the Zacks Consensus Estimate of 12 cents and improved significantly from the year-ago quarter’s loss of 2 cents. 

Total revenue increased 8% year over year to $7,185 million in the second quarter, but missed the Zacks Consensus Estimate of $7,063 million. The growth was aided by higher equipment and service revenues buoyed by growth in customer addition.

Adjusted EBITDA was $1,451 million, up 15% from $1,265 million in the second quarter of 2013. Adjusted EBITDA margin was 26%, up 100 basis points (bps) year over year. 

Service revenues of the company increased 7.1% year over year to $5.5 billion. Revenues from Equipment were $1.6 billion, up 16% year over year. 

The company sold 6.2 million smartphones in the second quarter, representing 93% of total phone sales. Smartphone penetration increased to 84% of total branded customers at the end of the quarter. 

Subscriber and Churn Rate

At the end of the second quarter, T-Mobile US had a subscriber base of 50.5 million. The company had 24.5 million branded post-paid customers and 15.6 million branded prepaid customers. As of the end of the second quarter, the company had 4 million and 6 million customers under M2M and MVNO, respectively.

The company’s 4G LTE base increased to 233 million people in the quarter covering 325 metro areas. 

Post-paid churn was flat year over year at 1.5%. 

Liquidity and Capital Expenditure

Cash and cash equivalents amounted to $3.1 billion against $5.9 billion in 2013. Long-term debt was $14.4 billion against $6.3 billion in second-quarter 2013.

The company recorded cash capital expenditure of $940 million in the second quarter, down from $1.1 billion in the year-ago period. Free cash flow was $511 million in the second quarter of 2014, up from $154 million in the second quarter of 2013.

Guidance

For 2014, the company projects adjusted EBITDA in the range of $5.6 billion to $5.8 billion. Cash capital expenditures are expected in the range of $4.3 billion to $4.6 billion. Net customer addition is expected in the range of 3.0 to 3.5 million. In addition, the penetration of Simple Choice plans in the branded postpaid base is projected between 85% and 90% by the end of 2014.

Our Take

T-MobileUScurrently has a Zacks Rank #3 (Hold). We believe the company has an attractive fundamental outlook based on increasingly favorable growth prospects for its Wireless business. Growth in branded customers, 4G expansion, smartphone sale and incorporation of MetroPCS’ prepaid business will not only support top line growth in the coming quarters but will also provide a better competitive position against the likes of AT&T, Inc. (T - Analyst Report), Verizon Communications Inc. (VZ - Analyst Report) and Sprint Corporation (S - Analyst Report). However, factors like increased debt levels and capital expenditure keep us cautious regarding the stock.

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