Second-quarter earnings dazzle at T-Mobile US, but its spending projections are a further worry for kit vendors.
Screened on YouTube from New York, the latest earnings update from T-Mobile US had the look of a tech-era Last Supper, with its long table of 5G disciples and background magenta paint. But in place of the glum talk about betrayal were ear-to-ear smiles, satisfied executives and industry-leading numbers. The rate of postpaid phone growth was the highest in nearly three years, said Mike Sievert, T-Mobile’s impressive CEO. Among its achievements, T-Mobile crossed the 100-million threshold for the overall number of postpaid customers it serves.
Subscriber gains, which no longer come as any kind of surprise to longstanding T-Mobile watchers, allowed the US mobile operator to report a 4% year-over-year increase in service revenues, to about $16.4 billion, for the recent second quarter, with total sales up 3%, to almost $19.8 billion. Even better were the profitability metrics. Adjusted earnings (before interest, tax, depreciation and amortization) rose 9%, to nearly $8.1 billion. T-Mobile’s adjusted free cash flow rocketed 54%, to about $4.4 billion.
Telcos aren’t known for performing this well (especially on the opposite side of the Atlantic), and T-Mobile’s share price was up 2.4% on the Nasdaq shortly after the market opened thanks partly to some positive changes to full-year guidance, which included raising the outlook for free cash flow by $150 million (at the midpoint), to $16.8 billion. That share price is now a third higher than it was this time last year.
5G lead
For lovers of 5G, T-Mobile’s unwavering ability to humiliate AT&T and Verizon, its two big rivals, on subscriber growth is only to be expected. A recent assessment by Opensignal, a well-regarded monitor of network performance, put T-Mobile ahead of both competitors on 5G coverage experience with a score of 7.7 (on a 10-point scale), compared with AT&T’s 6.3 and Verizon’s 5.9.
More glaring was the gap between T-Mobile and the others on 5G availability, measuring “what proportion of time people have a network connection, in places they most commonly frequent.” T-Mobile came in at 67.9% on average. AT&T managed only 11.8%, while Verizon was on a lousy 7.7%. That gulf between one player and the other two on such a seemingly important metric may terrify investors in AT&T and Verizon.
Of course, most customers do not care if they are on a 5G or 4G connection, provided the smartphone works and allows them to access all the services they need. T-Mobile’s success probably owes more to canny marketing, competitive pricing and attention to customer services. But the 5G availability lead cannot hurt, especially when Verizon is basing its “value proposition on having the nation’s best 5G network,” in the words of Craig Moffett, the senior managing director of MoffettNathanson Research.
T-Mobile is happy to crow about that lead, too, noting it “swept every category for overall network performance in the latest third-party reports.” The big difference, as far as Moffett is concerned, is T-Mobile’s deployment of lower spectrum bands – much better for penetrating inside buildings and providing good wide-area coverage – than either of its competitors now use.
According to the operator, 87% of all its 5G traffic is now carried at sites where equipment supports all three of the 600MHz, 1.9GHz and 2.5GHz spectrum bands. AT&T and Verizon, by contrast, rely partly on airwaves in much higher ranges, including frequencies in and around the 3.5GHz band. Often described as a sweet spot for 5G, combining decent propagation with sufficient capacity, this “C-band” has come in for heavy criticism from Moffett. “Put simply, C-band isn’t very good spectrum,” he said in a research note issued earlier this month.
Capex crunch
That didn’t stop AT&T and Verizon from splurging almost $78 billion on C-band and adjacent spectrum licenses. Debt levels have soared and both telcos are now under pressure to close those 5G gaps with T-Mobile, having burnt through stockpiles they built up after the pandemic. AT&T, moreover, has decided to replace Nokia, which has historically supplied a third of the AT&T footprint, as a radio access network (RAN) vendor under a $14 billion contract with Ericsson, its other RAN vendor.
It expects to pump between $11.5 billion and $12.5 billion into capital investment during the final six months of 2024, up from the $11.2 billion it spent in the same period last year. Verizon thinks second-half spending will rise to between $8.9 billion and $9.4 billion, from $8.7 billion last year. But it’s a different story at T-Mobile. Slashing outlook by $100 million (at the midpoint of the guidance range), it plans to spend about $4.2 billion between July and December, compared with $4 billion in the year-earlier period. The midpoint guidance levels imply increases of $800 million at AT&T and $450 million at Verizon, but just $200 million at T-Mobile.
Peter Osvaldik, T-Mobile’s chief financial officer, boasted “unmatched capital efficiency” on today’s call with analysts. “While our longer-term expectations continue to be in the $9 to $10 billion range annually, as we discussed before, 2024 is a bit lower given certain capital-efficient network activities such as spectrum refarming and deploying additional 2.5GHz licenses from Auction 108, benefiting from the significant 5G radio deployments during our merger integration,” he said, referring to a previous frequency sale and the $26 billion merger with Sprint in 2020. Site upgrades and build activity is planned in the fourth quarter, he said.
There is a troubling read-through from all this for Nokia, which lost out to Samsung on a 5G contract with Verizon back in 2020 before last year’s upset at AT&T. Those developments make T-Mobile its only big 5G customer in the US market. And T-Mobile, having raced ahead of the other two, is spending far less and under little immediate pressure to do otherwise. Capital expenditure fell from $14 billion in 2022, to $9.8 billion last year, and a dip below the $9 billion mark is now forecast for 2024.
But it’s great news for T-Mobile investors, and partly why free cash flow is high and rising. The metric that still dazzles is postpaid phone additions, up 777,000 in the second quarter to give T-Mobile more than 77.2 million customers in total. AT&T could boast only 419,000 over the same period and now serves fewer than 72 million customers, while Verizon managed just 148,000. With a customer base of 93 million across the consumer and enterprise sectors, it remains by far the biggest player. But T-Mobile is quickly catching it up.
