Analysts: T-Mobile's strong Q2 subscriber numbers likely to boost revenue, crimp earnings and margins

T-Mobile US' (NYSE:TMUS) pre-release yesterday of its second-quarter subscriber numbers--which showed strong momentum, especially in postpaid subscribers--prompted financial analysts to raise their expectations for the carrier's revenue in the period. However, analysts also think T-Mobile's EBITDA and margins could come under pressure as a result.

T-Mobile said it added 2.1 million total customers in the second quarter, including 1 million postpaid customers. The company said it notched 760,000 postpaid phone net customer additions during the quarter, up 31 percent year-over-year, and its branded postpaid mobile broadband net customer additions were 248,000, down compared to last year, but up 85 percent sequentially. T-Mobile also said it added 178,000 branded prepaid customers, lost 33,000 M2M customers during the quarter and added 919,000 MVNO customers. The carrier said it ended the second quarter with 58.9 million total customers.

Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein wrote in a research note that the numbers beat their estimates and the consensus Wall Street estimates "across the board," including Wells Fargo's estimate that T-Mobile would have 1.2 million total net customer additions in the second quarter and 768,000 postpaid net adds. As a result, they now think T-Mobile will report $8.02 billion in second-quarter revenue, compared to a previous estimate of $7.92 billion. They now also expect T-Mobile will have $32.93 billion in total revenue in 2015, up from a prior estimate of $32.67 billion.  

J.P. Morgan analyst Philip Cusick raised his target for T-Mobile's second-quarter revenue to $8.04 billion, up from a previous estimate of $7.89 billion. And Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata think T-Mobile will report $7.94 billion in revenue, compared to a previous estimate of $7.82 billion.

The downside of all the growth is that T-Mobile's second-quarter earnings and margins are likely to be lower than expected, thanks in part to higher promotional activity during the period. "Elevated marketing spend and ongoing promotional activity will likely be a near-term headwind to margins," the Wells Fargo analysts noted. "Recent promotions have included the 2 lines for $100 of unlimited LTE data and the 4 lines for $100 of 2.5 GB/line."

Wells Fargo now thinks T-Mobile will report second-quarter EBITDA of $1.68 billion, down from a $1.72 billion prior estimate, and an EBITDA margin of 21 percent, down from 21.7 percent before. Cusick is more optimistic on T-Mobile's margin prospects and says it will be 28.6 percent, down from his previous estimate of 29 percent.

Cusick also lowered his EBITDA expectation for T-Mobile's second quarter down slightly to $1.74 billion from $1.75 billion, while the Jefferies analysts now think it will be $1.79 billion, down from their previous estimate of $1.83 billion.

Where the analysts do seem to agree is that T-Mobile's new "Jump On Demand" program will boost the carrier's EBITDA. Under the program, customers make monthly device payments and can upgrade their phones up to three times per 12 months but need to turn in their phones when they do upgrade.

"We have not yet updated our model for TMUS leasing but would expect it to boost T-Mobile's EBITDA going forward as the cost of the phone is capitalized and depreciated instead of expensed," Cusick wrote in a research note.

The Wells Fargo analysts forecast T-Mobile's margins will grow in the second half of the year and that it "should also receive an EBITDA boost from its recent JUMP! On-Demand initiative to lease smartphones to its customers."

The Jefferies analysts expect the phone leasing program will boost T-Mobile's EBITDA by around $260 million in 2015 and $1.6 billion in 2016.

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