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T-Mobile (TMUS) Down 4.1% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for T-Mobile (TMUS - Free Report) . Shares have lost about 4.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is T-Mobile due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

T-Mobile Q3 Earnings Surpass Estimates, Revenues Grow

T-Mobile delivered solid third-quarter 2019 results, with record-high service revenues of $8.6 billion. The company continues to successfully translate customer growth into industry-leading service revenue with 1.7 million total customer net additions. Both the top line and the bottom line increased on a year-over-year basis.

Net Income

Net income for the September quarter was $870 million or $1.01 per share compared with $795 million or 93 cents per share in the year-ago quarter. The year-over-year improvement was largely attributable to top-line growth.

Adjusted earnings per share came in at $1.16 compared with 93 cents reported in the year-ago quarter, beating the Zacks Consensus Estimate by 19 cents.

Revenues

Quarterly total revenues increased 2% year over year to $11,061 million driven by growth in service revenues, partially offset by a decrease in equipment revenues due to a decline in the number of devices sold. The top line, however, lagged the consensus estimate of $11,308 million.

Segment Results

Total Service revenues were up 6.4% to a record high of $8,583 million compared with $8,066 million in the prior-year quarter, primarily driven by a surge in branded postpaid revenues and customer base growth. T-Mobile led the industry for the 22nd consecutive quarter in year-over-year service revenue percentage growth. Within this segment, branded postpaid revenues were $5,746 million, up 9.6% year over year. The U.S. wireless carrier registered 1.1 million branded postpaid net additions and 754,000 branded postpaid phone net additions in the quarter, down 5,000 and 20,000, respectively, partially offset by record low churn rate. Branded postpaid phone average revenue per user (ARPU) was flat at $46.22. This was primarily due to higher premium service revenues coupled with growth of new customer segments and rate plans, offset by a reduction in regulatory program revenues from the continued adoption of tax inclusive plans and the impact of the ongoing growth in Netflix offering.

Branded prepaid revenues were $2,385 million, down 0.4% year over year. Branded prepaid ARPU was $38.16, down 0.5%, mainly due to dilution from promotional rate plans and growth in Amazon Prime offering, partially offset by the removal of certain branded prepaid customers. Wholesale revenues were $321 million, down 5% while roaming and other service revenues were $131 million, up 47.2%. Revenues from Equipment totaled $2,186 million, down 8.6% year over year. Other revenues were $292 million, down 23.6%.

Other Details

T-Mobile recorded third-quarter adjusted EBITDA of $3,396 million, up 4.85% from $3,239 million in the prior-year quarter on the back of higher service revenues. However, this was partly offset by higher selling, general and administrative expenses, and higher cost of services expenses. Total operating expenses increased from $9,399 million to $9,590 million year over year. Operating income increased to $1,471 million from $1,440 million backed by top-line growth.

Cash Flow & Liquidity

T-Mobile generated $1,748 million of net cash from operations, up 91% from $914 million in the year-ago quarter. This increase was primarily driven by lower net cash outflows from changes in working capital and higher net income. Free cash flow was $1,134 million, up 27% from $890 million. As of Sep 30, 2019, the company had $1,653 million in cash and cash equivalents with $10,956 million of long-term debt.

Outlook

Owing to such impressive third-quarter results, T-Mobile has offered a bullish guidance for full-year 2019 with expectation of branded postpaid net customer additions of 4.1-4.3 million (up from the previous guidance of 3.5-4 million). Adjusted EBITDA is expected to be in the range of $13.1-$13.3 billion (up from the previous guidance of $12.9-13.3 billion), which includes leasing revenues of $550-$600 million. Cash purchases of property and equipment, including capitalized interest, are anticipated to be in the range of $6.35-$6.45 billion (up from the prior guidance of $5.8-$6.1 billion).

The higher capital expenditure guidance reflects the rapid rollout of 600 MHz spectrum, thereby accelerating plans to launch the first nationwide 5G network with more than 200 million purchase option prices with compatible smartphones this year.    

Going Forward

T-Mobile has cleared most of the regulatory and shareholder approvals for its pending merger with Sprint. Strong customer growth continues to accelerate and benefit from the investments in network and customer experience with the launch of America’s first nationwide 5G network in 2019, in collaboration with the introduction of the compatible 5G smartphones and Sprint spectrum, forming the foundational 5G coverage layer for a new T-Mobile. The company boasts one of the fastest LTE networks in the industry, covering almost 200 million people across 8,300 cities and towns in 48 states, including Puerto Rico.

Covering more than 26 million compatible devices with 600 MHz, T-Mobile is building standard-based 5G across the country. The company has introduced 5G millimeter wave network in six cities including New York and Los Angeles, in conjunction with the launch of its first 5G handset — Samsung Galaxy S10 5G.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, T-Mobile has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, T-Mobile has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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