T-Mobile US, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; comparisons are with the third quarter and nine months ended September 30, 2014, unless noted. Amounts are U.S. dollars; financial amounts are in millions except per-share data and customer metrics.
Business context
T-Mobile provides wireless services and devices across postpaid, prepaid and wholesale markets. It reported 61.2 million total customers at September 30, 2015, up 11% from December 31, 2014. Its strategy emphasized customer growth, Un-carrier offers, network upgrades and device financing and leasing.
Financial and operating results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $7,849 | $7,350 | $23,806 | $21,410 |
| Service revenue | $6,302 | $5,684 | $18,265 | $16,505 |
| Operating income | $513 | $49 | $1,227 | $983 |
| Net income (loss) | $138 | $(94) | $436 | $146 |
| Net income (loss) attributable to common stockholders | $125 | $(94) | $395 | $146 |
| Adjusted EBITDA (non-GAAP) | $1,908 | $1,346 | $5,113 | $3,885 |
| Adjusted EBITDA margin | 30% | 24% | 28% | 24% |
| Diluted EPS | $0.15 | $(0.12) | $0.48 | $0.18 |
- Q3 revenue grew 7%; nine-month revenue grew 11%. Branded postpaid revenue rose 14% in Q3 and 13% year to date; branded prepaid revenue rose 6% and 8%, respectively.
- For the nine months, operating cash flow was $3,181 versus $2,791; property and equipment purchases were $3,293 versus $3,018. Free cash flow, a non-GAAP measure defined as operating cash flow less property and equipment purchases, was negative $112 versus negative $227.
- Cash and cash equivalents were $2,633 at September 30, 2015, down from $5,315 at year-end 2014. Current assets were $12,656 and current liabilities $8,843.
- Balance-sheet debt comprised $114 short-term debt, $16,442 long-term debt and $5,600 long-term debt to affiliates. The company also reported a $2,528 long-term financial obligation. Debt covenants were reported as satisfied.
- Branded postpaid phone churn improved to 1.46% in Q3 and 1.36% for the nine months, versus 1.64% and 1.53%. Postpaid phone ARPU declined 4% in Q3 and 5% for the nine months; postpaid ARPA increased 5% and 3%, respectively.
Material changes versus prior periods
- Profitability improved substantially: Q3 operating income was $513 versus $49, and net income was $138 versus a $94 loss. Nine-month net income increased to $436 from $146.
- Adjusted EBITDA increased 42% in Q3 and 32% for the nine months. Management attributed improvement to service-revenue growth, cost control and lower Q3 equipment losses, partly offset by higher SG&A.
- Nine-month SG&A increased 14% to $7,434, while cost of services declined 5% to $4,170. Equipment-sales costs rose 8% to $7,325 for the nine months, despite a Q3 decline.
- Prior-year nine-month results included a $770 gain on spectrum-license disposals, including a $731 non-cash gain from Verizon transactions; the 2015 period recorded $24 of gains. This affects year-over-year comparability.
- Cash declined as investment outlays exceeded operating cash generation. Investing cash use was $5,238; financing used $625 in 2015, compared with $2,545 provided in 2014, when the company issued $2,993 of long-term debt.
Outlook, commentary, risks and unusual items
- Management expected Adjusted EBITDA to continue improving in 2015 and projected 2015 cash property-and-equipment expenditures of $4.4 billion to $4.7 billion. It said existing liquidity sources should meet anticipated needs over the next 12 months; it also anticipated possible debt issuance in 2015 and 2016 to support spectrum purchases. No specific revenue or earnings-per-share forecast is provided in the filing text.
- Management said LTE coverage reached 300 million people, meeting its year-end target, and described ongoing deployment of 700 MHz spectrum. The company acquired AWS licenses covering about 97 million people for $1.8 billion.
- Network decommissioning costs were $193 in Q3 and $355 for the nine months, primarily related to MetroPCS network and redundant-site closures. Management expected another $125–$225 of costs, mostly through the remainder of 2015. The MetroPCS CDMA network ceased use in Q3.
- In September, vendor Experian disclosed a breach affecting records of approximately 15 million individuals and organizations, including some T-Mobile customers and applicants. Data included personal and credit-assessment information; Social Security and ID information was encrypted, though Experian believed encryption may have been compromised. T-Mobile said its own systems and network were not involved and did not expect a material financial impact, but acknowledged potential privacy, litigation, regulatory and reputational risks.
- A patent case brought by Prism Technologies was at trial. Prism claimed damages of up to $114.9; T-Mobile said loss was not probable or reasonably estimable and did not expect a material adverse effect.
- Planned spectrum exchanges with Verizon and AT&T were subject to regulatory approval and other conditions. The company expected non-cash gains on closing: Verizon transaction expected in Q4 2015 and AT&T transaction in Q1 2016.
- Prepaid churn was reported using a revised methodology; historical restatement was not practicable. The company also noted device leasing can shift revenue recognition over the lease term and increase near-term operating cash needs as customer payments are collected over time.
Important facts for investors to verify
- Whether customer additions, churn and postpaid ARPU trends support continued service-revenue and Adjusted EBITDA growth.
- Cash generation versus planned capital spending, spectrum commitments and the decline in cash balances; also assess debt maturities, interest costs and access to financing.
- The scale and collectability of equipment installment plan receivables: net EIP receivables were $4,771, with a $137 allowance for credit losses, and confirm performance as leasing grows.
- Developments and potential costs from the Experian breach and Prism litigation, along with the actual outcome of the Verizon and AT&T spectrum exchanges.
- Further MetroPCS decommissioning costs and the effects of prepaid churn methodology changes and Data Stash revenue deferrals on comparisons.