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Morningstar | T-Mobile’s 4Q Financial Match Strong Customer Growth; Management Resolute on Sprint

T-Mobile’s fourth quarter financial results were solid, mirroring the strong customer growth figures it announced on Jan. 9. Postpaid wireless services revenue growth was particularly impressive, accelerating to 8.1%, the fastest pace in nearly two years. In addition to strong customer growth, management made good on its target of keeping revenue per customer roughly stable during the year. Management’s expectations for 2019 are modestly ahead of our projections, but we don’t plan to significantly change our $76 fair value estimate and are maintaining our no moat rating.

Our view of the T-Mobile relies on the outcome of its attempted merger with Sprint. We believe the probability of the deal passing regulatory muster remains too difficult to peg with confidence, thus our assumed 50/50 odds in assigning a fair value estimate. Management struck a highly positive tone concerning approval on its conference call with investors, including a determined rebuttal of recent commentary suggesting that a promise to not raise prices for three years is an indication the firm is now offering concessions out of desperation. We expect T-Mobile will remain resolute in supporting the merger, following the well-established plan it has executed thus far.

T-Mobile’s postpaid customer base ended 2018 9.1% larger than it started the year, far faster than the roughly 1% growth posted by the remainder of the industry in aggregate. As previously reported, the firm added more than 1 million net postpaid phone customers during the quarter. Average revenue per postpaid phone customer declined 0.2% year over year, the best performance of 2018, demonstrating that the firm is serious about balancing growth and profitability. The operating margin expanded to 10% from 9% a year ago, excluding a gain on spectrum sales, with the benefits of lower hurricane costs, new accounting standards, and operating leverage offsetting the cost of adding more customers and merger expenses.

For the full year, T-Mobile generated $3.6 billion of free cash flow, up from $2.7 billion in 2017, as network investment was roughly stable at $5.2 billion. The firm used cash to repurchase $1 billion of shares during the year, with the remainder used to repay debt, close the Layer3 acquisition, and pick up a small amount of spectrum.

Looking ahead, T-Mobile expects to increase network spending to $5.4-5.7 billion in 2019, in line with our expectations, as it continues to deploy its 600 MHz spectrum across the country and ramp up its small-cell buildout. The initial 600 MHz build will use roughly a third of the firm’s holdings in the band to offer LTE services, with the remainder held for its 5G network. T-Mobile doesn’t expect 5G will generate additional revenue from existing customers but that it will enable new service offerings, including in-home Internet access in some areas. The extent of this fixed-wireless offering will depend on the success of the Sprint merger.