T-Mobile Earnings Preview: Strong Subscriber Growth To Continue

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T-Mobile US

T-Mobile U.S. (NASDAQ:TMUS), the third largest wireless carrier, is slated to publish its Q2 earnings on Wednesday, July 27. We expect the carrier’s results for the quarter to be driven by its growing postpaid and prepaid subscriber base and potentially lower cost inflation. Below we take a look at some of the key factors to watch when T-Mobile reports earnings.

We have a price estimate of $46 for T-Mobile, which is roughly in line with the current market price.

Postpaid Subscriber Growth Momentum To Continue

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Postpaid phone users are the most valuable subscribers for wireless carriers, and T-Mobile captured more than 100% of the industry’s net postpaid adds during Q1, driven by its innovative promotions and value pricing. Moreover, T-Mobile is absorbing many of the feature phone subscribers who have been leaving its larger rivals Verizon and AT&T in recent quarters. During Q1, the carrier added a total of 877k postpaid phone subscribers. We expect this trend to largely continue into Q2, given that T-Mobile raised its guidance for branded postpaid net adds for FY’16 to 3.2 to 3.6 million, from its original guidance of 2.4 to 3.4 million adds.

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Prepaid Business Could Grow On Metro PCS Strength 

T-Mobile’s prepaid business could also remain strong, driven by promotional activities under the MetroPCS brand, which is benefiting from prepaid customer attrition at Sprint. U.S. carriers are becoming increasingly interested in prepaid wireless in a saturating wireless market, as prepaid plans increasingly shift to monthly billing cycles, while the gap between prepaid and postpaid ARPU narrows. During Q1, the carrier’s prepaid net adds came in at about 807k (up 10x year-over-year), while Sprint lost about 264k prepaid users.

Margins Could Expand On Higher User Base And Slower Cost Growth

We expect T-Mobile’s postpaid ARPU to remain relatively flat on a year-over-year basis, on account of higher family plan penetration and promotional activity, while prepaid ARPU could remain under pressure amid promotions under the MetroPCS brand. That said, it’s likely that the carrier’s adjusted EBITDA margins will expand, driven by lower cost of equipment (due to higher uptake for handset leasing) and also as cost of services grow at a slower pace compared to revenues. During Q1, for instance, T-Mobile’s revenues grew by 11% y-o-y, while its cost of services (excluding depreciation) increased by about 2%.

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