T-Mobile Misses Q3 Estimates with Wider Loss, Revenues Up

T-Mobile US Inc. TMUS reported third-quarter 2014 loss of 12 cents per share which compared unfavorably with the Zacks Consensus Estimate of earnings of 3 cents. The loss also deteriorated a massive 140% from the year-ago quarter's loss. The year-over-year wider loss primarily resulted from the closure of the company's CDMA portion of the MetroPCS network in Las Vegas and Boston.  

Total revenue increased 9.9% year over year to $7,350 million in the third quarter, but fell short of the Zacks Consensus Estimate of $7,513 million. The year-over-year growth was aided by higher equipment and service revenues buoyed by growth in customer addition.

Service revenues increased 10.6% year over year to $5.684 billion. Revenues from Equipment totaled $1.561 billion, up 6.4% year over year.

Adjusted EBITDA was $1.345 billion, flat year over year, but down 7.2% from the second-quarter of 2014. Adjusted EBITDA margin was 24% down 2% year over year.

The company sold 6.9 million smartphones in the third quarter, representing 93% of total phone sales. Smartphone penetration increased to 84% of total branded postpaid customers at the end of the quarter, up 7% year over year, but flat sequentially.

Subscriber and Churn Rate

T-Mobile registered record subscriber growth in the third quarter owing to the success of the Un-carrier initiatives and aggressive promotional activities. At the end of the third-quarter, T-Mobile had a subscriber base of 52.9 million, up from 45 million in third-quarter 2013. The company's branded post-paid customer base escalated 20.9% year over year to 25.9 million while branded prepaid customers rose 7.3% year over year to 16.050 million.

At the end of the third quarter, the company had 4.3 million and 6.7 million customers under M2M and MVNO, respectively.  

Branded post-paid churn declined to 1.6% from 1.7% in the year-ago quarter, whereas branded pre-paid churn dropped 0.2% year over year to 4.8%.

Liquidity and Capital Expenditure

T-Mobile ended the quarter with cash and cash equivalents of $5.8 billion and long-term debt of $16.3 billion.

The company recorded cash capital expenditure of $1.1 billion in the third quarter, up from $1 billion in the year-ago period. Free cash flow was $215 million, up from $327 million in the third quarter of 2013.

Guidance

For 2014, the company projects adjusted EBITDA in the range of $5.6 billion to $5.8 billion and cash capital expenditures of $4.3 billion to $4.6 billion, both unchanged from the earlier provided guidance. However, the company pulled up its net customer addition guidance to 4.3 to 4.7 million from the previous band of 3.0 million to 3.5 million. In addition, the penetration of Simple Choice plans in the branded post-paid base is projected between 85% and 90% by the end of this year.

Our Take

T-Mobile currently has a Zacks Rank #3 (Hold). We believe the company has an attractive fundamental outlook based on increasingly favorable growth prospects in 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 also lend a competitive edge against strong peers like AT&T, Inc. T, Verizon Communications Inc. VZ and Sprint Corporation S. However, factors like increased debt levels and capital expenditure keep us cautious regarding the stock.