T-Mobile Profit Up 27% as Account Churn Rises: Rapid Earnings Reaction
Key Points
Free cash flow rose only because T-Mobile spent $369 million less on capital projects, and its guidance indicates that spending will climb back to about $2.4 billion in Q4.
Each billing account now pays about $6.29 more per month than a year ago, and a slightly larger share of accounts leaves each month, with churn at 1.09% versus 0.97%.
T-Mobile (NASDAQ:TMUS) grew third-quarter net income 27% to about $3.5 billion. Shares rose about 2% in pre-market trading Thursday but were about flat at midday. The catch is that T-Mobile is growing profit by earning more from each account while adding fewer accounts and losing more of them.
Key Numbers
- Postpaid ARPA (average monthly revenue per account): $155.73, up 4% year over year
- Postpaid net account additions: 274,000, down from 396,000 a year ago
- Postpaid account churn (monthly): 1.09%, up from 0.97% a year ago
- Diluted EPS: $3.22, up 34% year over year
What It Means
The profit jump is mostly operating leverage. A wireless network costs about the same to run whether an account pays a few dollars more or less, so extra revenue per account drops straight to profit. The year-ago quarter also carried a $278 million impairment charge, which flatters the comparison, and buybacks largely explain why earnings per share (EPS) grew faster than net income.
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The weak spot is retention. Churn rising alongside ARPA is a warning sign in wireless, because it often means higher bills are pushing some customers out. Full-year guidance for net account additions implies roughly 230,000 in the fourth quarter, below the third quarter's pace. The release also gives no postpaid phone figures, the industry's standard yardstick.
Cash isn't keeping up with earnings. Operating cash flow slipped even as net income climbed, and adjusted free cash flow grew only because capital spending fell 14%. The guidance "raise" mostly narrows ranges; the top of the outlook for Core Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came down.
What to Watch Next
Watch account churn: if it stays above 1% while ARPA keeps climbing, higher prices may be costing T-Mobile customers. Also watch whether free cash flow keeps growing, since full-year guidance implies capital spending rebounds to about $2.4 billion in the fourth quarter.
Sharice Wells has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.