T-Mobile US, Inc. annual report, FY2019

T-Mobile US, Inc. — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; the filing also provides unaudited fourth-quarter results. T-Mobile provides wireless service and devices under the T-Mobile and Metro by T-Mobile brands, serving 86.0 million total customers at year-end. It launched a nationwide 5G network in December 2019, reporting coverage of more than 200 million people.

Financial and operating results

MetricFY 2019FY 2018Change
Total revenue$45.0 billion$43.3 billionUp 4%
Service revenue$34.0 billion$32.0 billionUp 6%
Operating income$5.7 billion$5.3 billionUp 8%
Net income$3.5 billion$2.9 billionUp 20%
Diluted EPS$4.02$3.36Up 20%
Adjusted EBITDA (non-GAAP)$13.4 billion$12.4 billionUp 8%
Operating cash flow$6.8 billion$3.9 billionUp 75%
Free cash flow (non-GAAP)$4.3 billion$3.6 billionUp 22%

Adjusted EBITDA margin was 39% of service revenue, unchanged year over year; net income margin on service revenue was 10%, versus 9%. Revenue growth reflected a larger customer base, partly offset by lower postpaid phone and prepaid ARPU. Equipment revenue declined 2% to $9.8 billion. Postpaid phone ARPU was $46.04, down 1%; prepaid ARPU was $37.95, down 2%.

Cash and equivalents were $1.5 billion at year-end, versus $1.2 billion a year earlier. Debt and financing lease liabilities were $27.3 billion, excluding tower obligations; tower obligations were $2.2 billion. Total current assets of $9.3 billion were below current liabilities of $12.5 billion. Cash purchases of property and equipment were $6.4 billion. Free cash flow is a company-defined non-GAAP measure that includes proceeds from receivable securitizations; it also included $442 million of merger-related payments in 2019.

Fourth quarter: Revenue was $11.9 billion, operating income $1.2 billion, net income $751 million, and diluted EPS $0.87, compared with $11.4 billion, $1.1 billion, $640 million, and $0.75, respectively, in Q4 2018. The filing does not provide Q4 cash-flow figures in the supplied text.

Material changes versus the prior period

  • Total customers increased 8% to 86.0 million; branded customers rose 7% to 67.9 million. Branded postpaid phone net additions were 3.1 million, while prepaid net additions were 339,000.
  • Postpaid phone churn improved to 0.89% from 1.01%; prepaid churn improved to 3.82% from 3.96%.
  • Operating cash flow rose partly because working-capital cash outflows were lower. Capital spending and spectrum purchases remained substantial; the company spent $842 million on mmWave spectrum in 2019.
  • Reported results were affected by adoption of the new lease standard, which increased 2019 net income by approximately $175 million after tax. The 2019 income statement was not restated on the new basis, limiting direct comparability with 2018.

Outlook, commentary, and risks

  • Management expected 2020 branded postpaid phone ARPU to be generally stable, within plus or minus 1% of 2019, and forecast 2020 cash property-and-equipment purchases of $5.9–$6.2 billion, including capitalized interest.
  • The proposed all-stock Sprint merger remained pending at the filing date. Management expected it could close in early 2020, but state antitrust litigation was awaiting a court ruling and California utility review remained pending. The contemplated DISH prepaid-business divestiture and other regulatory commitments were part of the transaction arrangements.
  • Merger completion, financing, integration, expected synergies, and the combined company’s higher debt were material uncertainties. T-Mobile estimated combined-company debt of approximately $69–$71 billion after the transaction, excluding tower obligations and operating lease liabilities.
  • Other risks include intense price competition, spectrum availability and network capacity, 5G deployment execution, cybersecurity and customer-data incidents, billing-system implementation, regulatory and privacy requirements, and customer credit and device-financing losses. The company disclosed customer-information incidents in 2018 and 2019, which it said it did not believe were material.
  • Merger-related costs were $620 million in 2019, versus $196 million in 2018. The company also reported $1.2 billion of interest-rate-lock derivative liabilities and $632 million of collateral transfers at year-end.
  • Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2019; the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  • Subsequent merger developments: closing status, legal and regulatory outcomes, divestiture terms, financing costs, and actual debt and integration performance.
  • Whether 2020 ARPU and capital-spending expectations were achieved, and how 5G investment translates into customer retention, revenue, and returns.
  • Underlying cash generation: distinguish operating cash flow and free cash flow from securitization proceeds, working-capital changes, and merger payments.
  • Debt and liquidity exposure, including lease obligations, tower obligations, interest-rate hedges and collateral needs, plus the planned adoption of the new expected-credit-loss standard.
  • Comparability of 2019 and 2018 results following lease-accounting changes, and the sustainability of earnings growth excluding merger costs and other identified unusual items.