T-Mobile: free to lose

It should be a simple matter of arithmetic, yet companies manage to turn free cash flow into a fuzzy number. FCF, canonically, is the cash generated from a company's operations less its capital investments. It is "free" because the company can use this cash how it will - on dividends, debt reduction, share buybacks, or buying another company.

By its own reckoning, T-Mobile's first quarter FCF was $400m, one of many sterling results in its earnings report, released on Tuesday. But its version of capital investment does not include the $1.7bn it spent on spectrum in a government auction. Whether spectrum purchases should be treated as capital investment is not an academic debate. Consumers are moving to T-Mobile in droves and those subscriber gains have sent its shares up 40 per cent since September. But a bigger company needs more spectrum to keep customers happy, and another auction looms. The much larger Verizon and AT&T always come to auctions with wallets open: they spent $28bn between them at the last one. So T-Mobile's spectrum investments are hardly discretionary (or "free," if you prefer). They are a necessary cost of doing business, and there will be plenty more of them.

The US mobile market is not growing much. That implies that T-Mobile's big subscriber gains have come directly from its rivals Verizon, AT&T and Sprint. In the first quarter, T-Mobile added nearly 1m contract subscribers, while AT&T and Verizon had declines.

At the same time, the new subscribers have not been added at the cost of profits - an accomplishment, as a growing wireless customer base often comes from irrational pricing. The company raised its forecast of new subscribers this year from 3.2m to as high as 3.5m while keeping its profit forecast constant.

T-Mobile is doing well, then. But it does not yet, in any meaningful sense, generate free cash. Competing in wireless is expensive, for incumbents and challengers alike.

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