Edited Transcript of TMUS.OQ earnings conference call or presentation 25-Apr-19 8:30pm GMT – Yahoo Finance

RICHARDSON Aug 24, 2020 (Thomson StreetEvents) -- Edited Transcript of T-Mobile US Inc earnings conference call or presentation Thursday, April 25, 2019 at 8:30:00pm GMT

UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group and Telco & Pay TV Analyst

Citigroup Inc., Research Division - MD & U.S. Telecoms Analyst

* Michael L. McCormack

Guggenheim Securities, LLC, Research Division - MD & Telecommunications Senior Analyst

* Philip A. Cusick

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

Good afternoon. Welcome to the T-Mobile US First Quarter 2019 Earnings Call. (Operator Instructions) I would now like to turn the conference over to Mr. Nils Paellmann, Head of Investor Relations for T-Mobile US. Please go ahead, sir.

Yes, thank you very much. Welcome to T-Mobile's First Quarter 2019 Earnings Call. With me today are John Legere, our CEO; Mike Sievert, our President and COO; Braxton Carter, our CFO; and other members of the senior leadership team.

Let me read the disclaimer. During this call, we will make forward-looking statements that include projections and statements about our future financial and operating results, our plans, the benefits we expect to receive from the proposed merger with Sprint and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of our management and subject to significant risks and uncertainties outside of our control that could cause our actual results to differ materially, including the risk factors set forth in our annual report on Form 10-K and our quarterly report on Form 10-Q.

Reconciliations between GAAP and the non-GAAP results we discuss on this call can be found in the quarterly results section of the Investor Relations page of our website.

In addition, in connection with the proposed transaction, on July 30, 2018, we filed a registration statement on Form S-4 with the SEC related to the merger. The registration statement became effective on October 29, 2018, and is available on the new T-Mobile website, contains important information about T-Mobile and Sprint, the merger and related matters. With this, let me turn it over to John Legere.

Okay, well done, Nils. Good afternoon, everyone. Welcome to T-Mobile's First Quarter 2019 Earnings Call and Twitter Conference, coming to you live from Bellevue, Washington.

T-Mobile is off to a fast start in 2019, and I could not be more excited about the state of our business and the opportunities ahead. We have a lot to cover today, so let's start with our incredible results. The 2 carriers reported earlier this week and one of the big cable giants reported this morning. So most of the cards are on the table for Q1, and I have to say, I really like our hand. In a quarter where Verizon had 44,000 postpaid phone losses and AT&T lost 55,000 postpaid phone customers for a total combined loss of 99,000, Comcast added 170,000, below expectations, I might add, and even with Charter and Sprint left to report, T-Mobile still took an estimated 88% of the industry's postpaid phone growth.

We also put up a customer growth number that accelerated year-over-year, extended our streak of more than 1 million total nets per quarter to 6 years and delivered an all-time record low postpaid phone churn result of 0.88%. Oh, by the way, that churn number is better than AT&T and within 4 basis points of Verizon's.

On top of that, we delivered our best ever Q1 financial results. So if I sound a little fired up about my team and about my business, it's because I am. I've seen certain comments recently about our business. Can the momentum continue? Can they keep their eye on the ball and manage the business, while planning for a massive merger? Can they take care of customers and deliver incredible results? My friends, the answer is yes. I would also like to give a big shout out to our incredible employees who made all of this possible. There are a lot of numbers to unpack, so let's dive right in. First, let's talk customers.

We added 1.7 million total net customers extending our winning streak to 24 quarters in a row with more than 1 million net adds, and we added 656,000 branded postpaid phone customers, capturing an estimated 88% of the expected industry postpaid phone growth, including cable, and delivering almost 4x more postpaid phone net additions than Comcast, the next closest competitor. In fact, we expect to be the only major wireless carrier with positive postpaid phone net adds this quarter. And our growth in postpaid phone nets accelerated year-over-year, despite lower industry switching volumes.

We also had strong total branded postpaid net additions of over 1 million, once again supported by continued strong growth in wearables. These wireless customers are coming and staying longer than ever before. In Q1, we had all-time record low branded postpaid phone churn of 0.88%, down 19 basis points year-over-year. Not only is this an all-time record low, it's also lower than AT&T for the second quarter in a row. Branded prepaid net customer additions were 69,000, and we're pleased with our performance in the quarter.

Next, I've got to highlight our very strong financial results.

Total revenues increased by 6% year-over-year to $11.1 billion, a record high for Q1. Service revenues hit record highs, reaching $8.3 billion, growing by 6% year-over-year and branded postpaid revenues grew by 8.3%.

We hit a record high adjusted EBITDA of $3.3 billion, up 11% year-over-year with a 40% adjusted EBITDA margin. Net income was a Q1 record of $908 million, up 35% year-over-year, and fully diluted EPS came in $1.06, up 36%. Our momentum continues to be fueled by investments in new geographies, underpenetrated segments and customer care, and we're not stopping there. We continue to make moves that lay the foundation to increased competition in a converged 5G world and as we join forces with Sprint.

First, we launched our home Internet pilot. We expect to deliver speeds of up to 50 megabits per second initially and paving the way for a 5G experience of up to 1 gigabit per second. If ever there was a business that could use a good Un-carrier-ing, it's this one. No annual service contracts, no hidden fees and no equipment costs. Sound familiar? You probably also noticed we took a next step in the TV space with the launch of TVision Home. This product starts as an upgraded and rebranded Layer3 TV, launching in 8 big cities, but core to our strategy is that TVision will be mobile-based and work with apps, hardware and services that people already use, so we will have more to say about TV later this year.

And we continued to launch innovative new products for customers, too. Just last week, we introduced T-Mobile MONEY, a no-fee interest-earning mobile-first checking account for the millions of under-banked Americans tired of bank fees. As more and more Americans manage their money on their smartphones, we saw an opportunity as the Un-carrier to address another consumer pain point and create a new value proposition.

Also, we continued to expand our 4G LTE coverage and deliver industry-leading network performance. Our network now covers approximately 326 million Americans with 4G LTE. And now we have 600 megahertz and 700 megahertz low-band spectrum deployed to 304 million people across the country. In terms of 4G LTE speeds, for 21 quarters in a row, we delivered the fastest combined average of download and upload speeds.

Our engineering team is hard at work, building the foundation for America's first real nationwide 5G network with an aggressive build-out of 600 megahertz spectrum, which we expect to be ready next year as well as millimeter wave. Our 600 megahertz LTE deployment is on equipment that's 5G-ready, and we continue to make incredible progress since getting our hands on the spectrum. Almost 3,500 cities and towns in 44 states and Puerto Rico are live with LTE on 600 megahertz today, well ahead of expectations. And we have 40 600 megahertz capable devices in our lineup today, including the new iPhones.

We plan to launch 5G on 600 megahertz as soon as we have compatible smartphones in the second half of this year. And if our merger with Sprint is approved, we will get access to unmatched available mid-band spectrum for 5G, which will result in a uniquely powerful 5G network with 8x the capacity by 2024 of the combined stand-alones today and 15x average speeds by 2024 versus today.

We certainly watched Verizon's 5G launch experiment on millimeter wave spectrum in tiny pockets of 2 cities with interest. Not surprisingly, customers are having a hard time finding a signal. And probably not just because Verizon won't publish a coverage map, and I won't even get into that trickery AT&T is using with customers on 5G E. While they both are pursuing 5G BS, we think 5G should be for everyone, everywhere. Having 5G on 600 megahertz in terms of coverage and adding Sprint's spectrum for broad capacity will be a true game changer and will turn new T-Mobile into the undisputed 5G leader, not only in the U.S. but around the world.

We remain very confident in our outlook for 2019, and it's reflected in our guidance that Braxton will review in a minute.

Okay. Let me give you a quick update on the progress of our pending merger with Sprint. Nearly 1 year ago to the day, we announced our groundbreaking merger. We spent the last 12 months sharing our story and laying out the facts and proof about how the new T-Mobile will deliver the nation's first broad and deep nationwide 5G network, supercharge competition in wireless and beyond and create thousands of American jobs starting on day 1. We continue to work through the regulatory review process and believe that we're in the final innings of a process that we have a great deal of respect for.

We've completed a number of major milestones, and we remain optimistic and confident that with the substantial facts and the record before them, the regulators will recognize that this merger is good for consumers. We continue to have a productive dialogue with both federal and state regulatory authorities, so I wanted to highlight a few milestones since our last earnings call.

On March 6, we made a filing with the SEC laying out our plans to bring competition to the home broadband market with a target to serve 9.5 million U.S. households by 2024. On April 4, the FCC resumed its nonbinding shot clock, which now stands at day 143, which is currently expected to conclude on June 3. At the state level, we've received 16 of the required 19 State Public Utility Commission approvals, including the New York PSC. We're making progress in the process with California PUC having reached an agreement with the California Emerging Technology Fund on April 8.

On January 30, we announced plans following the closing of the merger to build 5 new T-Mobile customer experience centers, creating at least 5,000 American jobs. We've announced 3 locations to date, including Overland Park, Kansas, Greater Rochester area of upstate New York and Kingsburg, California area. I can't wait to create the new T-Mobile and truly take it to the entrenched players in wireless, cable and beyond.

Make no mistake, opponents of this transaction are desperate to maintain the status quo, all to the detriment of their customers and for their own benefit. New T-Mobile will be the #3 wireless player with the #1 network and will aggressively compete by giving more to customers, all while asking them to pay less. On the regulatory front, I'm pleased with the progress we have made on our merger and the process so far, and I still expect regulatory approval from the DOJ and the FCC in the first half of this year.

Okay, to wrap up, I couldn't be more excited about our performance in Q1 2019, and our guidance shows that we expect our momentum to continue in 2019. The combination with Sprint means that we will be able to create a future that is even more exciting for American consumers.

Okay, Braxton, you're going to take us through the financial results, the details of our guidance. So let's take a closer look.

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Braxton Carter - EVP, CFO, [4]

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Hey, thanks, John, and I'm so excited to be here for another amazing quarter at T-Mobile. Net income amounted to $908 million and diluted earnings per share at $1.06, up 35% and 36% year-over-year, respectively.

Net income benefited from higher operating income and lower interest expense. The effective tax rate amounted to 24.5%. The tax rate was lower in Q1 due to higher excess tax benefits related to our equity compensation and lower state taxes.

For 2019, as a whole, we continue to expect the effective tax rate in the range of 26% to 27%. Note that net income and EPS were fully burdened by the Sprint merger-related costs of $93 million and $0.11 per share after taxes, respectively, in the first quarter. These costs, $113 million before taxes are excluded from adjusted EBITDA.

Adjusted EBITDA amounted to a record $3.3 billion, up 11% and included leasing revenues of $161 million versus $171 million in the prior year. The adjusted EBITDA performance is a reflection of strong cost management. Cost of service as a percentage of service revenue decreased by 170 basis points year-over-year, despite the rapid rollout of 600 megahertz spectrum. The year-over-year decrease was primarily due to lower lease expense associated with adoption of the new lease standard and lower regulatory program costs, offsetting the higher cost from the network bill. While cost of services decreased this quarter, we still expect significant increases in future quarters due to the ramp up in our 600 megahertz build-out.

SG&A as a percentage of service revenues increased by 110 basis points year-over-year. Excluding the Sprint merger-related cost, SG&A decreased by 30 basis points year-over-year, despite the headwind from the amortization of commissions from the new revenue recognition standard relative to last year.

Free cash flow decreased by 7% year-over-year to $618 million, primarily due to a 41% increase in cash CapEx. As we had flagged in our last earnings call, we expect CapEx to be front-end-loaded this year. Also, free cash flow in Q1 included $34 million in merger-related cash costs. Excluding these merger-related costs, free cash flow would have been $652 million.

Branded postpaid phone ARPU amounted to $46.07 in Q1, down 1.3% year-over-year. The decrease was primarily due to a reduction in regulatory program revenues from the continued adoption of tax inclusive plans, a reduction in certain nonrecurring charges and the growing success of new customer segments and rate plans, including T-Mobile for Business as well as the impact on the ongoing growth in our Netflix offering, partially offset by higher premium service revenues per subscriber and the net reduction in promotional activities.

The impact of the ongoing growth in our Netflix offering decreased postpaid phone ARPU by $0.27 year-over-year. For full year 2019, we still expect branded postpaid phone ARPU to remain generally stable compared to the full year 2018 with a range of plus or minus 1%.

Even with the year-over-year ARPU decrease, growth in branded postpaid revenues accelerated to 8.3% in Q1 compared to an 8% growth in Q4. This was partially offset by branded prepaid revenues, which decreased 0.7% due to slower customer growth and the impact of promotions.

In terms of customer quality, our results in the first quarter continued to be strong. Total bad debt expense and losses from sale receivables were $108 million or 0.98% of total revenues compared to $106 million or 1.01% in the first quarter of 2018.

So let's get to 2019 guidance. We expect branded postpaid net customer additions to now be between 3.1 million and 3.7 million, significantly up from our prior guidance of 2.6 million to 3.6 million. This guidance takes into account our long-term strategy to balance growth and profitability, a continuation of the lower switcher volume we've seen in recent quarters and our pursuit of growth adjacencies.

We expect adjusted EBITDA to be in the range of $12.7 billion to $13.2 billion, unchanged from prior guidance. This guidance takes into account leasing revenues of $600 million to $700 million in 2019. It also takes into account our network expansion and particularly the 600 megahertz and 5G rollouts.

Pre-close merger-related costs are still expected to be $350 million to $500 million in 2019, depending on timing of the potential close. For Q2 alone, we expect Sprint merger-related costs of $200 million to $250 million, a significant increase from Q1. These costs will be excluded from adjusted EBITDA but will impact net income and cash flows.

We target cash CapEx of $5.4 billion to $5.7 billion, excluding capitalized interest, which is expected to amount to approximately $400 million in 2019. This was also unchanged from our prior guidance. CapEx will continue to be front-end loaded with Q2 expected to be a slight step down from Q1 levels.

Finally, we expect free cash flow to increase at a 3-year CAGR of 46% to 48% from full year 2016 to full year 2019, unchanged from our prior range. Our free cash flow CAGR guidance does not assume any material net cash outflows from securitization going forward and it excludes merger costs from a cash basis.

Well, let's get to your questions. As during last quarter's earnings call, I would ask you to focus your questions on our operational results. Also, we cannot answer any questions related to the current millimeter wave auctions due to the quiet period around these auctions. You can ask questions via phone or via Twitter. We'll start with a question on the phone. Operator? First question, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Philip Cusick of JPMorgan.

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Philip A. Cusick, JPMorgan Chase & Co, Research Division - MD and Senior Analyst [2]

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Two simple ones, if I can. Mike, can you talk about where we are on the process of expanding the 4G network and distribution, to areas where you don't have 700 megahertz spectrum? And then Braxton, can you talk about just simply what was EBITDA growth on an (inaudible) just for ASC 606 and lease accounting?

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Michael Sievert - President & COO, [3]

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Phil, on the first one, I think we've reported in the past, we've done a major distribution expansion, and this generally followed the expansion of the network. It's fairly agnostic to low-band versus mid-band. What it looks at is whether or not in that marketable area, we have sufficient coverage and enough households to be able to get 2-wall indoor coverage. And if we have enough households in that area with very high-quality coverage, then we launch distribution, and that can be through low-band, mid-band or a combination thereof. And so the POP coverage flows and then the distribution coverage flows. We've now got distribution coverage to well north of 265 million people, and that's a big milestone from when we started talking about this a couple of years ago and told you about geographic expansion. And that says 2 things. Number one, the geographic expansion is starting to work because this is an initiative that we've been talking about for some time. We told you it takes 12 to 18 months for those stores to become productive, we're starting to see some of the results of that, which is terrific. And second, there's a lot of runway left. As we create more and more conditions where that's the case, particularly in the context of the new T-Mobile, where we can create a game-changing experience in more rural areas, there's lots of runway left in both scenarios.

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Philip A. Cusick, JPMorgan Chase & Co, Research Division - MD and Senior Analyst [4]

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Can you help range some of the impact there, Mike, for this quarter or for the last few quarters?

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Michael Sievert - President & COO, [5]

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Only to say, it's contributing, and that it takes 12 to 18 months for those stores to start producing. And that our experience has been that the most productive expansion investments we've made have been in greenfield areas, pretty intuitive, small towns, suburban fringe, those areas have outproduced the expansions we did to add density in the urban cores. Our urban cores are our most productive areas by far, but, of course, there's cannibalization effect as you add distribution density in those areas. And so, from a future investment standpoint, you'll probably see us focused more on suburban fringe and greenfield markets.

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Braxton Carter - EVP, CFO, [6]

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Phil, I think one of the things that we really pride ourselves is transparency and providing investors with all the tools to truly understand the underlying momentum of the business. The new lease standard is fairly de minimis to the overall results and rev rec certainly has several moving items with it, but not overly material. I would just point you to our Q and to our fact book for quantification of those items.

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Operator [7]

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We'll take our next question from Michael Rollins of Citi.

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Michael Ian Rollins, Citigroup Inc., Research Division - MD & U.S. Telecoms Analyst [8]

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Two, if I could. First, talk a little bit more about what you're seeing on the ARPU front and the competitive environment for pricing more broadly? And second, can you give us an update on how you're thinking about bundles within the category, especially in the context of your current Netflix promotion and what you're starting to launch with Layer3?

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Michael Sievert - President & COO, [9]

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So a couple of things. One is, overall, this was another quarter of pretty good competitive intensity, and everybody has different lens on it. I can tell you that in a quarter where we think we took 88% of all of the postpaid phone net adds and help to drive AT&T and Verizon both into negative territory, it shows that whether it's -- you define it as a more modestly competitive quarter or whether you define it as a more intensely competitive quarter, I would imagine it sure felt intense over there at those places. For us, it was just another quarter of delivering what you've come to expect us to deliver regardless of the conditions. So really pleased with that. And then, Michael, you had a second question, it was about -- oh, it's about bundling. Listen, bundling, it depends on what you mean by bundling. If what you mean by bundling is that we'll give you a decent deal on the core product only if you buy a bunch of other stuff you don't really want, no, we're not going to do bundling. That's the game plan that AT&T pursues. You can only get a fair deal a lot of the time depending on how they pulse their promotions on their core wireless product, when you take a bunch of crap and satellite TV that you don't want. Now on the other hand, if you're asking, are we going to plunge ourselves into home broadband with a disruptive offer in the new T-Mobile? Absolutely, we are. Are we going to augment that with TV offers that range from full-line cable TV replacement to more disruptive lower-price offers? Absolutely, we're going to do that. Are we going to offer those in concert with wireless and create value propositions that are attractive to consumers? Yes, that's what the Un-carrier does. So it all comes down to what do you mean by bundling.

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John Legere - CEO, [10]

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Well, he was confused. He was referring to what AT&T does, which is bungling.

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Braxton Carter - EVP, CFO, [11]

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Mike, let me add a couple of things on the ARPU. I think, first and foremost, you're seeing very clearly that we're reiterating our guidance relating to ARPU. And if you look back the last 2 years, we've been at the low end of that guidance, obviously, and the underlining theory here, with the Un-carrier, we have much more terminal value unlock by not trying to monetize the existing customer base, but by scaling this business, which we've done exceptionally well at over the last 6 years, and ultimately, that's what's creating value. The progress in service revenues and the significant increases in service revenues, you would not be that if you had a strategy of monetizing and raising ARPUs, you're certainly going to have less volume and the way that we translate that into profitability and then free cash flow, it's a much more powerful way to build the business. And our strategy here has been the same strategy that we've been executing really through the whole life of T-Mobile. But it's important to note that we're bounding it. There is always a balance between the growth and profitability, and that's why I think the guidance that we just reiterated today on ARPU is so important.

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Edited Transcript of TMUS.OQ earnings conference call or presentation 25-Apr-19 8:30pm GMT - Yahoo Finance