T-Mobile (NASDAQ:TMUS) reported better-than-expected earnings results for the fourth quarter, but fell short on revenue. Cash flow continues to boom, as does EBITDA, but management's outlook for 2 million to 3 million net postpaid subscriber additions and light EBITDA growth in 2018 disappointed some investors. T-Mobile consistently puts out extremely conservative guidance, though, so expect the results to come in at the top of the range or above it when 2018 is all said and done.
After the mixed report, T-Mobile's management held a conference call to discuss the results with analysts and provide additional details about the business. Here are the most important takeaways for investors.
Business accounts are becoming more important
T-Mobile has historically been underrepresented in the enterprise market. That remains a big opportunity for the carrier as it expands its network nationwide, and it's already making very good progress.
Over 20% of the company's 3.6 million postpaid net adds in 2017 came from business customers.
But COO Mike Sievert is excited about the continued growth potential in the business category. "We're just getting started," he said on the earnings call. "We actually aren't deep yet in being able to offer a broad range of solutions to these customers, and they're now coming for us asking for us to have a significant seat at a more strategic table with them."
Importantly, Sievert believes the increase in business-customer activations is a good sign for T-Mobile's consumer wireless business because business customers are more likely to take the time to test the service and network quality across competitors.
There's still room for geographic expansion
T-Mobile did a tremendous job of opening new stores last year -- 1,500 new T-Mobile stores opened their doors last year and an additional 1,300 MetroPCS stores opened in new locations.
"As we move into 2018, the distribution expansion will be two things," CEO John Legere told investors. "One is, the stores that we've opened in the last year, they don't get up to speed yet. So it'll be well into the end of this year before those stores are fully productive." The second is that the new stores the company opens this year will be "focused on where the network's deployed where there's no competition."
T-Mobile's network footprint still outpaces its retail footprint. Management says its network covers 320 million people, but its stores only cover about 260 million. Those 60 million people will be the target of T-Mobile's next set of stores while it ramps up the growth of its recently opened stores.
Improving market penetration of the newer batch of stores to reach levels comparable to those of older cohorts will continue driving subscriber growth and boosting profit margins.
A "motherload" of cash is expected
Management raised its guidance for the rate of free cash flow growth between 2016 and 2019 from a range of 45% to 48% to between 46% and 49%. T-Mobile doesn't expect tax reform to have a major impact on its capital expenditures, but it does expect the tax changes will help push back the time when the company becomes a meaningful taxpayer from 2020 to 2024.
"We have a motherload of cash coming." CFO Braxton Carter said. "What's happening between '17 and '19 is almost $10 billion worth of cash generation."
T-Mobile approved a $1.5 billion share buyback at the end of last year, and management has already gone through more than half that amount in about two months. The expected growth in free cash flow over the next several years gives the company flexibility for more mergers and acquisitions, like its recent Layer 3 acquisition, or upping its capital-return program for shareholders.
A wireless leader
T-Mobile is best-positioned among the four major wireless carriers to grow both its subscriber base and its cash generation over the long term. While others may provide more stable cash flow while producing modest subscriber and revenue growth, only T-Mobile is able to provide a meaningful growth story.