T-Mobile Earnings: Strong Customer Growth Comes at the Expense of Pricing

T-Mobile TMUS delivered another solid quarter, with continued market share gains and margin expansion. Management also provided a high-level view of 2024, indicating that it should meet profitability expectations presented at its 2021 investor day and that capital spending may decline modestly versus 2023. We had expected greater margin expansion next year. We suspect management plans to prioritize customer growth over price increases to a greater degree than we’d assumed, offsetting some of the benefits from the recent workforce reduction. We are maintaining our fair value estimate at $165 per share.

T-Mobile added 850,000 net postpaid phone customers during the third quarter, likely again leading the industry by a considerable margin, since Comcast and Charter have yet to report earnings. Service revenue per postpaid phone customer increased 0.1% versus a year ago. The firm again claimed that a shifting customer mix, especially toward the enterprise market, put pressure on this metric. Still, with the introduction of the higher-end Go5G plans, we’re a bit surprised revenue per customer has shown more movement. Management seems reluctant to take any steps that could dent customer growth. T-Mobile continues to offer the cheaper Magenta plans and the third-line-free promotion. Also, the firm backed off a recent effort to move customers from older plans, claiming the initiative was only a trial, and the customer response was overly negative.

Service revenue growth accelerated to 3.6% year over year from 2.8% last quarter and would have been about 4.6% absent the sale of Sprint’s fixed-line business. The core adjusted EBITDA margin, which excludes integration and severance costs, expanded four percentage points from a year ago to a record 47.4% of services revenue. Profitability improved despite a diminishing tailwind from the decline in customer phone upgrades. T-Mobile has generated $9.3 billion of free cash flow thus far in 2023, up from $5.5 billion last year.