T-Mobile US, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context and performance
T-Mobile operates as a single wireless communications segment. It completed the sale of its wireline business on May 1, 2023, and continues integrating the Sprint merger while investing in its nationwide 5G network.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $19.2 billion | $19.7 billion | $38.8 billion | $39.8 billion |
| Service revenue | $15.7 billion | $15.3 billion | $31.3 billion | $30.4 billion |
| Operating income | $3.8 billion | $0.7 billion | $7.2 billion | $2.5 billion |
| Net income (loss) | $2.2 billion | $(108) million | $4.2 billion | $605 million |
| Diluted EPS | $1.86 | $(0.09) | $3.44 | $0.48 |
| Adjusted EBITDA (non-GAAP) | $7.4 billion | $7.0 billion | $14.6 billion | $14.0 billion |
| Core Adjusted EBITDA (non-GAAP) | $7.3 billion | $6.6 billion | $14.4 billion | $13.1 billion |
| Adjusted Free Cash Flow (non-GAAP) | $2.9 billion | $1.8 billion | $5.3 billion | $3.4 billion |
Q2 service revenue increased 3% year over year, while total revenue declined 3%, mainly as equipment revenue fell 23%. Adjusted EBITDA rose 6% and Core Adjusted EBITDA rose 11%; disclosed Core Adjusted EBITDA margin was 47%, up 4 percentage points. For the first half, Core Adjusted EBITDA rose 10%, with margin of 46%, up 3 points. Results benefited from lower merger-related costs and operating expenses; Q2 2022 included a $477 million impairment charge and a $400 million cyberattack-related legal charge.
Cash flow, debt and liquidity
- Six-month operating cash flow was $8.4 billion, up 4%. Cash purchases of property and equipment were $5.8 billion; reported investing cash outflow was $3.2 billion.
- Cash and cash equivalents were $6.6 billion at June 30, 2023, compared with $4.5 billion at year-end 2022. The company reported $2.1 billion of cash and cash equivalents, including restricted cash and cash held for sale, at period-end change.
- Total debt was $77.9 billion, up from $72.0 billion at year-end 2022. MD&A reported total debt and financing lease liabilities of $80.3 billion, excluding tower obligations. Tower obligations were $3.9 billion. The weighted-average effective interest rate on debt was approximately 4.0% for the first half.
- There were no borrowings under the $7.5 billion revolving credit facility at June 30. A commercial paper program of up to $2.0 billion was established July 25; none had been issued as of July 27. The company stated that available funding should cover anticipated operating liquidity needs for the next 12 months, excluding potential acquisitions, spectrum purchases and shareholder returns; it was in compliance with debt covenants.
- Share repurchases totaled $8.3 billion in the first half. The company reported $2.7 billion remaining under its authorization at June 30 and repurchased a further $552 million through July 21.
Operating trends and material changes
- Postpaid revenue increased 5% in Q2 and 6% in the first half, attributed to more average postpaid accounts and higher postpaid ARPA. Postpaid ARPA was $138.94 in Q2, up 1%.
- Postpaid net account additions were 299,000 in Q2, down 21% year over year; total net customer additions were 1.685 million, down 6%. Postpaid phone churn improved to 0.77%; prepaid churn increased to 2.62%.
- Prepaid revenue declined 1% in Q2; prepaid ARPU declined 2% to $37.98. Wholesale and other service revenue declined 13%, reflecting lower MVNO and wireline revenue, including the wireline sale.
- Equipment revenue fell as device sales and leased-device revenue declined. Management cited higher prior-year Sprint migration upgrades, longer device lifecycles and a continued shift from device leasing to installment plans.
- Operating expense fell 19% in Q2 and 15% in the first half, reflecting lower merger-related costs, merger synergies, and the absence of the prior-year impairment, partly offset by network site costs and other spending.
Outlook, contingencies and risks
- Management expects 2023 merger synergies of approximately $2.7 billion from SG&A reductions, $3.2 billion from cost-of-service reductions and $1.6 billion from avoided network expenses. It expects substantially all remaining projected merger-related costs, approximately $400 million excluding capital expenditures, by year-end 2023; related cash payments will extend beyond 2023.
- Management expects 2023 capital expenditures to decline from 2022, while continuing 5G investment and anticipating future deployment of C-band and 3.45 GHz spectrum. The filing provides no clear numeric full-year revenue or earnings guidance in the supplied text.
- The planned Ka’ena/Mint Mobile acquisition, expected by year-end 2023 subject to regulatory approvals, has a maximum purchase price of $1.35 billion, with an estimated upfront payment of approximately $950 million. The $3.5 billion 600 MHz license purchase is also subject to regulatory approvals, with closings anticipated in late 2023 and 2024.
- The proposed $3.6 billion DISH 800 MHz spectrum sale remained uncertain: DISH had not made the required FCC filing by July 27, 2023. T-Mobile had agreed, at the Department of Justice’s request, not to terminate the agreement until on or about August 11 while alternatives were discussed.
- The August 2021 cyberattack class settlement received final court approval on June 29, subject to potential appeals. It provides for $350 million for claims and related costs and $150 million of incremental security spending; the company warned that additional losses, regulatory outcomes and legal costs remain uncertain. The January 2023 API incident affected data from approximately 37 million current postpaid and prepaid accounts and is subject to consumer claims and regulatory inquiries.
- Other disclosed matters include ongoing litigation and regulatory proceedings, purchase commitments, spectrum and tower obligations, and merger integration risks. Management cautioned that adverse legal or regulatory outcomes, cyber incidents, competition, financing conditions and execution challenges could affect results and cash flows.
Important facts for investors to verify
- Whether service-revenue and Core Adjusted EBITDA growth can continue as postpaid account additions moderated and equipment revenue declined.
- Cash generation after capital spending, working-capital movements, merger-related payments and substantial share repurchases; note that Adjusted Free Cash Flow is a non-GAAP measure.
- Debt maturities, refinancing costs and the effect of higher average debt and interest rates on future interest expense.
- Regulatory progress and final economics for the DISH and 600 MHz spectrum transactions, as well as timing and cost of the Mint Mobile acquisition.
- Appeals, claims, regulatory inquiries and incremental costs related to the 2021 and 2023 cyber incidents, including the adequacy of insurance recoveries.