It has been about a month since the last earnings report for T-Mobile (TMUS - Free Report) . Shares have added about 5.1% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is T-Mobile due for a pullback? 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 Q1 Earnings Beat Estimates, Revenues Miss
T-Mobile reported mixed first-quarter 2020 results, with the bottom line beating the Zacks Consensus Estimate and the top line missing the same. The Bellevue, WA-based company completed its merger with Sprint on Apr 1 to form the revamped T-Mobile.
The national wireless carrier’s net income in the March quarter was $951 million or $1.10 per share compared with $908 million or $1.06 per share in the year-ago quarter. The upside was driven by higher operating income, partially offset by higher income tax expenses. Adjusted earnings per share came in at $1.23, which beat the Zacks Consensus Estimate by 23 cents.
Quarterly total revenues inched up 0.3% year over year to $11,113 million. This was driven by growth in service revenues, offset by decline in equipment revenues impacted by reduced demand from social distancing rules and retail store closures arising from COVID-19. The top line lagged the consensus estimate of $18,968 million.
Total Service revenues increased 5.3% year over year to $8,713 million. This represents T-Mobile’s best quarterly performance ever as it led the industry for the 24th consecutive quarter in year-over-year service revenue percentage growth. Within this segment, branded postpaid revenues were $5,887 million, up 7.2% year over year. The company recorded 777,000 branded postpaid net additions and 452,000 branded postpaid phone net additions in the reported quarter.
Branded postpaid phone average revenue per user (ARPU) declined to $45.80, down 1% year over year. This was primarily caused by an increase in promotional activities, which include growth in Netflix offering and reduction in regulatory program revenues from the adoption of tax inclusive plans.
Branded prepaid revenues were $2,373 million, down 0.5% year over year. Branded prepaid ARPU increased 1% to $38.11 primarily owing to the removal of certain branded prepaid customers associated with products currently offered by an MVNO partner. While wholesale revenues were $325 million, up 6.9%; roaming and other service revenues were $128 million, up 36.2%. Revenues in Equipment totaled $2,117 million, down 15.9% year over year. Other revenues were $283 million, down 1.4%.
T-Mobile recorded adjusted EBITDA of $3,665 million compared with $3,284 million in the prior-year quarter. The upside was driven by higher service revenues and lower net losses on equipment sales, partially offset by higher cost of services and SG&A expenses. Total operating expenses declined to $9,574 million from $9,604 million in the year-ago quarter. Operating income improved to $1,539 million from $1,476 million in the prior-year quarter.
Cash Flow & Liquidity
In the first quarter, T-Mobile generated $1,617 million of net cash from operations compared with $1,392 million in the year-ago quarter driven by higher net income, adjusted for non-cash income and expenses. Free cash flow in the quarter was $732 million compared with $618 million in the prior-year quarter, led by higher net cash provided by operating activities as well as lower cash purchases of property and equipment.
As of Mar 31, the company had $1,112 million in cash and equivalents with $10,959 million of long-term debt compared with the respective tallies of $1,528 million and $10,958 million at the end of the prior quarter.
Due to uncertainties related to COVID-19, the New T-Mobile has provided guidance only for the second quarter. The company expects to guide the remainder of 2020 on its second-quarter earnings call. It expects postpaid net customer additions between 0 and 150,000. This reflects the ongoing impact of the pandemic including retail store closures partially offset by lower churn.
T-Mobile is unable to guide net income. Adjusted EBITDA is anticipated between $6.2 billion and $6.5 billion, which include leasing revenues of $1.3-$1.4 billion. Cash purchases of property and equipment, including capitalized interest of about $100 million, are estimated between $2.3 billion and $2.5 billion. Free cash flow, including payments for merger-related costs and COVID-19 related costs but excluding $2.3 billion in gross payments for the settlement of interest rate swaps, is projected between $1.3 billion and $1.5 billion.
T-Mobile has started deploying 5G sites in Philadelphia and New York City using Sprint’s 2.5 GHz mid-band spectrum on its 5G network. In December 2019, T-Mobile launched a nationwide 5G network, which is currently live in 49 states and Puerto Rico, with Alaska set to launch in May 2020.
After launching a nationwide 5G network in December 2019, the company expanded its 5G footprint across an additional 1,600 sites in first-quarter 2020 and ramped up pace to 1,000 sites in April. T-Mobile’s 600 MHz 5G currently covers 215 million people including the cities of Detroit, St. Louis and Columbus. More than 50 million New T-Mobile devices have access to the 600 MHz LTE network. T-Mobile covered 327 million people at the end of the first quarter of 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -52.32% due to these changes.
At this time, T-Mobile has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise T-Mobile has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.