T-Mobile US, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The quarter ended March 31, 2020. Results cover T-Mobile on a standalone basis and do not include Sprint. T-Mobile completed its all-stock Sprint merger on April 1, 2020; subsequent merger and financing events are discussed as subsequent events.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $11.113 billion | $11.080 billion | Up $33 million; essentially flat |
| Service revenue | $8.713 billion | $8.277 billion | Up 5% |
| Operating income | $1.539 billion | $1.476 billion | Up 4% |
| Net income | $951 million | $908 million | Up 5% |
| Diluted EPS | $1.10 | $1.06 | Up $0.04 |
| Operating cash flow | $1.617 billion | $1.392 billion | Up 16% |
| Free cash flow (non-GAAP) | $732 million | $618 million | Up 18% |
| Adjusted EBITDA (non-GAAP) | $3.665 billion | $3.284 billion | Up 12% |
Adjusted EBITDA margin, measured against service revenue, was 42%, versus 40%. Net income margin on service revenue was 11% in both periods. Equipment revenue fell 16% to $2.117 billion, while branded postpaid revenue rose 7% to $5.887 billion. The filing attributes the equipment decline chiefly to lower device sales and average selling prices amid COVID-related store closures and weaker demand.
Balance sheet and liquidity
At March 31, 2020, cash and cash equivalents were $1.112 billion, compared with $1.528 billion at year-end 2019. Current assets were $9.487 billion and current liabilities $14.756 billion. Total debt and financing lease liabilities were $27.1 billion, excluding tower obligations; the filing states $22.9 billion was classified as long-term debt. Property and equipment purchases were $1.753 billion. Investing cash use was $1.580 billion, including $580 million of net collateral transfers related to derivatives.
After quarter-end, the merger added Sprint debt and financing lease liabilities. The company reported approximately $69.0 billion of combined indebtedness, including financing leases and excluding tower and operating lease liabilities. It drew $19 billion on a bridge facility and $4 billion on a term loan on April 1, then issued $19 billion of secured notes on April 9 and used proceeds and cash on hand to repay and terminate the bridge facility.
Material changes versus prior year
- Service revenue growth, largely associated with a larger branded customer base, was offset by lower equipment revenue, leaving total revenue nearly unchanged.
- Operating income and net income increased modestly; Adjusted EBITDA grew faster, reflecting service revenue growth and lower net losses on equipment sales, partly offset by higher service and SG&A costs.
- Branded postpaid phone customers increased 8%, but total branded net additions fell 40% to 649,000. Postpaid phone churn improved to 0.86% from 0.88%; prepaid churn improved to 3.52% from 3.85%.
- Cash flow from operations rose, while investing and financing cash use increased. Free cash flow benefited from lower capital spending, partly offset by lower proceeds from receivable securitization transactions.
Outlook, risks, contingencies, and unusual items
- COVID-19: The filing says the pandemic is expected to adversely affect business, liquidity, financial condition, and results for the remainder of 2020 and thereafter, but does not provide a quantified forecast. Q1 included $117 million of incremental COVID-related costs; management also cited lower customer additions, customer concessions, higher delinquency and expected credit losses, and potential supply-chain disruption. Adjusted EBITDA excludes the incremental COVID costs.
- Merger and divestiture: Management expects merger benefits and synergies, including network and 5G benefits, but cautions that integration, costs, timing, and realization are uncertain. The planned sale of Sprint’s prepaid business to DISH for $1.4 billion, subject to adjustment and closing conditions, was expected around mid-2020. A separate transaction contemplated approximately $3.6 billion for certain 800 MHz spectrum licenses, subject to later conditions.
- Debt and investment: Increased post-merger debt raises interest and refinancing obligations and may constrain flexibility. The filing says significant near-term capital expenditures are expected for integration and that debt covenants and ratings could affect financing access. Before the merger, management expected available funding to meet anticipated needs, but warned projections could change.
- Credit losses: Adoption of the expected-credit-loss standard on January 1 increased the allowance by $91 million, reduced net deferred tax liabilities by $24 million, and increased accumulated deficit by $67 million. The company also recorded $113 million of bad debt expense in Q1, versus $73 million a year earlier.
- Other unusual items and contingencies: Merger-related costs were $143 million, versus $113 million. A $2.3 billion interest-rate-lock derivative liability was settled after quarter-end; the company paid an additional $1.1 billion net cash at termination. The FCC proposed a penalty concerning customer-information privacy; an accrual was recorded, but the filing text does not provide a clear value. Various litigation matters remain, and the company says some unfavorable outcomes could materially affect a period’s results or cash flows.
- Controls and commitments: T-Mobile reported effective disclosure controls as of quarter-end. It disclosed an unremediated Sprint internal-control material weakness related to Lifeline subscriber usage and noted potential additional integration-related control weaknesses. Merger-related regulatory commitments include 5G build-out, coverage, and other obligations; failure to meet them may result in penalties.
Most important facts for investors to verify
- Combined-company debt, interest costs, liquidity, and covenant headroom after the merger and subsequent refinancing.
- Whether Sprint integration delivers expected network, customer, and cost benefits, and the timing and cash cost of that integration.
- COVID-19 effects on customer additions, churn, collections, bad debt, device sales, and capital spending.
- Completion and financial terms of the DISH prepaid-business divestiture and related spectrum and network-service arrangements.
- Progress remediating Sprint’s material weakness and the status and potential cost of the FCC privacy matter and other contingencies.
Adjusted EBITDA and free cash flow are non-GAAP measures; the filing cautions that they should not be viewed as substitutes for GAAP results.