NEW YORK ( TheStreet) -- T-Mobile (TMUS) - Get Report is expected to report a strong second quarter on Thursday after announcing three weeks ago that it's adding handset customers at a faster pace than competitors.
But opinions about whether brisk new business translates into bigger profits at T-Mobile are mixed. When T-Mobile gains customers, it usually does so because it undercuts competitors' prices, and this can lead to margin erosion.
T-Mobile is expected to generate earnings of 18 cents a share on $8 billion in revenue for the second quarter, according to Thomson Reuters consensus.
On July 9, T-Mobile stated that it added 2.1 million total new customers in the second quarter, up 41% for the year. Verizon (VZ) - Get Report added a similar number of new customers, but T-Mobile distinguished itself with more new handset customers, 760,000, whereas Verizon's new customers came largely from tablets.
Whether a telecom sells more handsets than tablets matters. Research firms like IDC have reported declining tablet sales in the last few quarters, making handsets seem like the better long-term growth prospect.
Despite T-Mobile's good news, its stock traded flat following its announcement, opening the next day at $39.16 a share. It now trades 6% lower and closed on Tuesday at $36.92 per share.
Still, analysts expect T-Mobile's shares to rise and the company to report a good quarter. They believe the company's margins will improve, if not now, then soon as T-Mobile gains market share.
"We believe that T-Mobile is in a unique position as both a margin improvement and a share gain story," wrote Amir Rozwadowski, analyst at Barclays, in a note in mid-July.
A few analysts, including UBS's John Hodulik, predicted that T-Mobile would beat its own estimates for winning new customers this year. Last quarter, T-Mobile predicted it would win 3 million to 3.5 million new customers in 2015. It's the middle of the year, and T-Mobile has already added 2.1 million new customers, so it is on track to beat its forecast.
Even so, some take a cautious view of T-Mobile because of concerns about profitability as it undercuts prices. Jennifer Fritzsche, senior analyst at Wells Fargo, lowered her second quarter margin estimates to 21% from 21.7% the day after T-Mobile announced its customer gains.
Though this seems like a small drop, T-Mobile recorded 24% adjusted EBITDA margins in the first quarter, up from 20% in the first quarter of 2014. Verizon, meanwhile, recorded a 56% EBITDA margin on services revenue and 44% on total revenue in the second quarter.
The customer additions beat Wells Fargo's estimates, and consensus estimates on Wall Street, Fritzsche noted, but T-Mobile's promotions should put pressure on margins, which Fritzsche predicted would improve in the second half of the year as the company focuses on profitability and cash flow. Wells Fargo has a market perform rating on T-Mobile.
A spokesperson for T-Mobile declined to comment.