T-Mobile US Inc. (TMUS) has shown a solid financial performance and substantial subscriber growth over the last few years. It is instigating an intense price war in the telecom industry by launching a number of products targeting value consumers. However, this is not the full story and we believe this intense price competition is due to other ulterior motives. There is also speculation that T-Mobile is purchasing spectrum from Verizon (VZ), which will further strengthen its network offerings. An unnamed source told Reuters that T-Mobile has set aside $3 billion to buy unused spectrum from Verizon. Verizon is also interested in selling off some parts of 700 MHz band spectrum. This deal, if goes through, will be beneficial for TMUS in enhancing the reach and power of its network.
T-Mobile posted revenues of $6.7 billion in the quarter ended September 2013. $5.1 billion was generated from services and $1.5 billion from equipment. The revenue recorded an increase of 36% compared to the corresponding quarter of 2012. The increase was 8% when compared to the previous adjacent quarter, i.e. June 2013.
The total revenue was $5.1 billion for the year ended 2012 whereas the company posted revenues of around $14 billion in the three quarters of 2013, with the results of one quarter still pending.
EBITDA: T-Mobile posted an EBITDA of $1.3 billion in the recent quarter as compared to $1.2 billion in the quarter ended September 2012. This is a growth factor of approximately 8%. However, with revenues increasing by 36%; the earnings did not increase in line, indicating high operating costs for the current quarter.
EPS: T-Mobile posted a loss of $0.049 per share as compared to a substantial loss of $14.4 per share posted in the same quarter last year.
In Annual terms, earning and net income is improving year on year and the company managed to achieve a net income CAGR of 27% (2008-2012). The trend is expected to continue in the future.
Cash flow situation
The cash and cash equivalents balance of the company stands at $2365 million as compared to $394 million in December 2012. This clearly indicates that the cash situation has been improving since December 2012. The current ratio is 1.45 compared to an industry average of 1.12, indicating that there are no liquidity problems. The company's cash flow statement indicates a $3 million increase in the net cash position at the end of the current quarter. This is also because T-Mobile does not have any dividends obligations on common stock. Industry average yield stands at 1.06%. The company is not paying dividend while most of its competitors in the telecom wireless communications industry pay substantial dividends.
T-Mobile recorded a subscriber growth of 2.3%, ending the quarter with 45 million customers. This allowed the company to beat expected phone customer acquisition for the previous two years. It added more than 1 million net customers, including 648,000 branded postpaid net customer additions. While its biggest rival, Verizon Wireless reported a bigger overall subscriber growth number of 927,000, T-Mobile blew past the No. 2 U.S. mobile provider AT&T Inc. (T), which added 363,000 subscribers, and Sprint Corp. (S), which lost 360,000. Smartphone sales increased by 1% during the most recent quarter, taking the T-Mobile's U.S. smartphone sales share to 13.2%. T-Mobile is closing in on Sprint Corp., which holds 14.6% share of the U.S. smartphone sales. Note that Sprint now has the financial backing of Softbank (OTCPK:SFTBF) group and the airwaves from Clearwire (CLWR).
Drivers of the performance
T-Mobile merged with MetroPCS in mid 2013. Since then, the company has seen an improvement in its performance; both in terms of financials and in terms of customer acquisition.
The company has been aggressively marketing its services by offering new and innovate packages on a low cost basis. The following are some unique offers launched by the company in the recent past.
Un-carrier incentives T-Mobile offered Simple choice, JUMP®, unlimited data and revolutionized tablet plan in this incentive.
Simple choice offers no annual contract and device financing with EIP (equipment installment plan).
JUMP® offers frequent device upgrades and attractive rates.
Tablet plan T-Mobile offered tablets with life time data plan with 200MB free data every month.
MetroPCS On July 25, 2013, T-Mobile announced the strategic expansion of the MetroPCS brand with the planned launch of 15 new geographic markets. It has already launched more than 1,300 distribution points in these new markets at the end of the third quarter 2013. The planned expansion will increase the geographical presence to a total of 30 markets by the end of November. The company began selling T-Mobile compatible devices to MetroPCS customers in the second quarter through branded distribution points and has already transitioned more than 1.5 million new and existing MetroPCS customers to the T-Mobile network. This development helped T-Mobile to increase revenues.
Smartphones The launch of Apple's (AAPL) iPhone S and iPhone C and Samsung's (GM:SSNLF) Galaxy S4 was also a feature of the smart phone industry this year. Combined with T-Mobile's un-carrier incentives, these smart phones assisted T-Mobile to increase its subscriber base and revenues.
According to Reuters, T-Mobile is offering 66.15 million common shares. It will use the proceeds to secure spectrum, i.e. airwaves, to bolster its wireless capacity. Deutsche Telekom (OTCQX:DTEGY), which owns 74% of T-Mobile, announced on Twitter that its stake would be cut to 67%. The share price is anticipated to decline after this development because of investor concerns over dilution. The offering will not send any bad signals to the market regarding the worth of the shares, but it is expected that T-Mobile will use the proceeds to expand its spectrum. Therefore, this activity of raising finance will not have a substantial effect on the current share price.
Back in 2011, AT&T tried to acquire T-Mobile but the deal failed because the Department of Justice deemed that it will affect the competitiveness of the industry by positioning AT&T as a dominant player. Furthermore, T-Mobile has signed a merger deal with MetroPCS. However, since than the dynamics of the industry have changed and any such deal would be examined in an entirely new light. With the waning margins and increasing foreign investment (Softbank and Sprint) the prospects of a T-Mobile sale are much brighter. Even if AT&T doesn't get consent from the authorities, foreign companies have also shown interest in taking this deal.
Price earnings ratio of the company is 47.20x which is very high when compared to industry average of around 19x. PEG ratio of the company stands at 38 indicating price paid by investors is disproportionate to the growth estimates. The P/E in this case is irrelevant for valuation purposes because the investor is not valuing the earnings actually but the future growth in subscriber base and network quality. P/S ratio, on the other hand is more relevant in the case of TMUS and we will use P/S ratio for the valuation purposes.
This price target indicates that the share price have little growth prospect for now.
T-Mobile has been showing better results in the last two quarters and is now in a better position to compete with the big players of the market. The revenues of the company have been increasing in the recent past, primarily due to the merger with MetroPCS; with the un-carrier incentives also playing a vital part in the increasing revenues and subscriber base. Earnings did not increase in line with revenue because of high operating costs in the most recent quarter but at an annual run-rate, T-Mobile's earnings are growing.
Since the merger, T-Mobile is not paying dividends and it seems to have no intention of doing so in the near future. It is offering shares to raise finance which will help in the management of subscriber growth via an expanded spectrum. So, with satisfactory financial and business performance and future plans to expand its spectrum, T-Mobile is in a position to compete with Verizon and AT&T. Low cost strategy, i.e. cheaper call rates and service charges provides a competitive advantage for the company.
While the price competition has the obvious intention of increasing subscribers and driving revenue growth, the company might have an ulterior motive for this strategy. Price based competition positively impacts the top line but ultimately weakness the bottom-line and is bad for the entire industry. This price based competition will likely increase the pace of consolidation in the U.S. telecom industry and force players like AT&T, Verizon etc. to buy off small industry players. This strategy of only focusing on revenue and subscriber growth will allow T-Mobile to garner a higher price in such a scenario because ultimately existing subscribers are the most attractive part of any telecom acquisition deal. Therefore, we believe this subscriber growth has made T-Mobile a hot acquisition target for major telecom players. If we look at P/S for an indicator of acquisitive value, TMUS is trading at much lower P/S as compared to competitors. The company is effectively using cash meant for dividends to grow subscribers.