The U.S. wireless industry has become increasingly competitive over the past few years. T-Mobile (NASDAQ: TMUS) is largely to thank for that since the company started its Un-Carrier branding about four years ago. T-Mobile has successfully attracted the lion's share of new wireless subscribers in that time, but it looks like the competition is finally starting to catch up.
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With its fourth-quarter earnings release, T-Mobile provided guidance for 2.4 million to 3.4 million postpaid net adds this year. Analysts were projecting 3.33 million before the announcement. T-Mobile also guided for adjusted EBITDA between $10.4 billion and $10.8 billion this year, compared to analysts' expectations of $10.9 billion.
With Sprint (NYSE: S) and Verizon (NYSE: VZ) increasing their aggressiveness in the market, is T-Mobile's growth finally going to start slowing down?
Image source: T-Mobile.
The same guidance as last year
T-Mobile provided the exact same range for its postpaid net adds at the beginning of 2016. It regularly increase its full-year guidance every quarter as it continued to outperform, and it ended the year with 4.1 million net additions. Management made it clear to analysts that its outlook is on the conservative side, and it expects to at least meet, if not exceed that range.
T-Mobile has been historically conservative with its guidance since beginning its turnaround story in 2013. The company has yet to miss to the downside of its own projections since John Legere took over as CEO. So, the fact that analysts were expecting net adds near the very top of T-Mobile's guidance isn't a huge concern. Even the EBITDA guidance coming in below expectations shouldn't worry investors.
But the competition is much stronger this year
Verizon has been a big "donor" of wireless subscribers to T-Mobile over the last few years, as Legere would put it. But it's finally starting to get serious about T-Mobile, and it started offering its own unlimited plan earlier this month. The new plan competes directly with T-Mobile One, T-Mobile's unlimited plan and currently the only option for new subscribers.
In fact, because of T-Mobile's decision to move to a single plan option, customers may pay less for Verizon than T-Mobile depending on what service plan they choose. Verizon also started offering better value individual line options last year.
Meanwhile, Sprint seems intent on undercutting T-Mobile's pricing on everything it does. T-Mobile introduces an unlimited data plan for $70 per month; Sprint will give you unlimited data for $60 per month.
The strategy is working to some degree. Sprint has added 910,000 postpaid phone subscribers over the last year. However, Sprint has seen its average revenue per user fall significantly, reaching $49.70 last quarter. That's down from $58.90 two years ago.
The increasingly intense competition combined with its own success over the last few years could result in slower subscriber growth this year. Still, there's a lot of room between 4.1 million and 3.3 million. Net adds could decline 20% year over year, and T-Mobile would still come in at the high end of its outlook.
Focusing on free cash flow
If there's one positive point in T-Mobile's outlook, it's the company's high expectations for free-cash-flow growth. Management expects to grow free cash flow at an annual rate of 45% to 48% over the next three years. Meanwhile, Sprint is still producing negative cash flow, and Verizon's free cash flow remained flat after adjusting for a shift in its accounting of equipment installment plans.
T-Mobile's free cash flow growth will come largely as the result of slowing down its capex spending. Management expects operating cash flow to grow between 15% and 18% per year. T-Mobile can certainly afford to take its foot off the gas with capex, though. Its network was recently rated on par with Verizon's in OpenSignal's latest survey. T-Mobile has just a few bits of spectrum to deploy in Chicago during the first half of the year before it can really concentrate on growing free cash flow.
Free cash flow growth can give T-Mobile the flexibility to adapt to the competitive environment as it sees fit. No, the competition isn't getting to T-Mobile. It's still doing exactly what it wants to do.
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