What happened
Shares of U.S. telecom operator T-Mobile (TMUS -0.16%) rose 13.9% in February, according to data from S&P Global Market Intelligence. The jump was a bounce-back from a tumultuous January in which many top tech stocks sold off.
T-Mobile reported fourth-quarter earnings at the beginning of the month, showing strong results. More importantly, management also issued strong guidance that soothed nerves over increased competition in the U.S. telecom market.
So what
In Q4, T-Mobile reported revenue growth of 2.2%, which missed analyst expectations, but earnings per share of $0.34, which handily beat expectations. While 2.2% revenue growth doesn't seem like much, investors should note that total revenue for telecom companies isn't that relevant. That's because of significant hardware sales and leases, which phone companies often sell at heavy discounts to generate recurring service revenue.
For T-Mobile, service revenue growth came in at a higher 5.5%, more than twice the pace of overall revenue growth. The company also added 1.75 million postpaid customers and 844 million postpaid phone net additions in the quarter, which were strong key metrics.
As most people who follow earnings reports know, perhaps even more important is the 2022 guidance. For 2022, management expects 5,000 to 5,500 postpaid customer net additions, compared with just under 5,500 during each of the past two years. Core adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is expected to grow 10% at the midpoint of guidance, compared with 15.7% last year. Free cash flow (FCF) is projected to rise to between $7.1 billion and $7.6 billion, up 30% at the midpoint.
Those would be very impressive results, especially with the hypercompetitive state of the U.S. telecom industry today. Additionally, T-Mobile has a history of guiding conservatively and then beating expectations, so these growth projections were certainly welcome news.
Image source: Getty Images.
Now what
T-Mobile has surged ahead of competitors in deploying stand-alone mid-band 5G services, which could explain the strong results and outlook. Additionally, T-Mobile is still integrating Sprint's network and customer base almost two years after closing the Sprint acquisition. However, much of the integration will be behind the company by the end of this year, so investors should see more merger synergies come to fruition as the year progresses. Hence, the strong profit and FCF growth.
Investors should also expect that cash flow figure to grow well beyond this year as well. At its 2021 Investor Day a year ago, T-Mobile management projected $13 billion to $14 billion in FCF in 2023, which would be nearly double this year's projections. At a $154 billion market cap today, investors are still getting a strong value, even after February's run.
