For months, financial analysts have been worried that T-Mobile US' (NYSE:TMUS) surging subscriber growth would hinder its profitability. They're no longer quite so concerned.
T-Mobile reported fourth-quarter revenue that beat analysts' expectations. The company posted fourth-quarter adjusted EBITDA of $1.75 billion, which was 4.2 percent ahead of what analysts at Credit Suisse had expected and 7.8 percent better than analysts' consensus, according to Credit Suisse. Moreover, the company had full-year 2014 EBITDA of $5.636 billion, which hit the low end of the company's targeted range of $5.6 billion to $5.8 billion.
Now, analysts are feeling rosy on T-Mobile's financial prospects for 2015. MoffettNathanson analyst Craig Moffett wrote in a research note that "a certain amount of skepticism" was warranted around T-Mobile last year, especially amid intense competition in the market and rising costs for spectrum. However, he wrote T-Mobile "has fundamentals on its side for 2015" and that the carrier will increasingly see costs savings from shutting down MetroPCS' CDMA network.
"Our guidance is, we won't stop," T-Mobile CEO John Legere told USA Today. "We've become the player that is competing on brand with the bigger players having to compete on price to hold their base."
T-Mobile expects to have 2015 adjusted EBITDA of $6.8 billion to $7.2 billion, which implies 21 to 28 percent year-over-year growth, according to Wells Fargo analyst Jennifer Fritzsche. "This growth is driven by multiple factors, including the ramping up of MetroPCS decommissioning synergies, a focus on family plan activations, which tend to have lower customer acquisition costs and lower churn than single-line plans, and greater operating leverage as TMUS grows the scale of its business," she wrote in a research note. "This growth, along with the moderation of working capital investment required for its EIP receivables, should allow TMUS to generate meaningful [free cash flow] in 2015."
T-Mobile expects to have between 2.2 million and 3.2 million postpaid net subscriber additions in 2015, and some analysts said that both T-Mobile's guidance on 2015 net additions and EBITDA are lower than they expected. Yet New Street Research analyst Jonathan Chaplin noted that T-Mobile has a habit of being conservative in its guidance. "To put this in perspective, guidance at the beginning of 2014 was 2-3 million for adds (they reported 4.9 million)," he wrote in a research note. "They lowered EBITDA guidance during the year; however, if you adjust for much stronger than expected adds they would have beaten this too."
On the carrier's fourth-quarter earnings conference call, T-Mobile CFO Braxton Carter said that the company "definitely" expects to generate positive free cash flow in 2015, which he called a "milestone."
"And I think it's a testament to the whole thesis that we've had with uncarrier: Turn this into a significant growth platform leading to double-digit revenue, service revenue, reoccurring service revenue increases, which is now resulting in significant double-digit increases in the EBITDA and brings us fully levered operating free cash flow positive," he said, according to a Seeking Alpha transcript of his remarks.
"While 2015 EBITDA guidance was softer than our expectations, it was related to a more robust subscriber outlook. Furthermore it implies a strong exiting EBITDA run rate into 2016, as synergies are realized," Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote in a research note.
They noted that T-Mobile's 2015 EBITDA guidance implies a "material" spending on marketing in the first quarter. Indeed, Carter said "adjusted EBITDA in the first quarter of 2015 is expected to be significantly impacted by a large investment to front-end growth in 2015 just as we did in 2014."
Based on a history of T-Mobile providing conservative guidance, the Jefferies analysts think T-Mobile's 2015 EBITDA will be $7.3 billion and that the company will add 4 million net postpaid customers. However, not everything is sunshine, according to Jefferies.
"Aside from the temporary deferred revenue impact of the Data Stash promotion, the company continues to run the ARPU dilutive 1 0GB 4-for-$100 family plan," they noted. "Management believes that the promotion attracts higher-end family plan subscribers that are less likely to churn, offering a better subscriber lifetime value even though they have lower ARPU. We are lowering branded postpaid handset ARPU expectations from $48.28 to $47.46, down 4% Y/Y due to the promotion."
Carter said multiple times that T-Mobile will not raise additional cash through equity and will be able to fund future spectrum purchases in the 600 MHz incentive auction through free cash flow and debt. "Management indicated that it could take leverage up to nearly 4.0x without receiving a credit rating downgrade," Credit Suisse analyst Joseph Mastrogiovann wrote in a research note. "This would imply T-Mobile could raise nearly $10 billion through a debt offering at the end of 2015. Recall, the Incentive Broadcast Auction is targeted for an early 2016 start. Following the AWS-3 auction, we believe this timeline has become more realistic."
- see this USA Today article
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