T-Mobile US, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Amounts are in U.S. dollars. The interim statements are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $19.632 billion | $20.120 billion | Down 2% |
| Service revenue | $15.546 billion | $15.128 billion | Up 3% |
| Operating income | $3.397 billion | $1.806 billion | Up 88% |
| Net income | $1.940 billion | $713 million | Up 172% |
| Diluted EPS | $1.58 | $0.57 | Up |
| Operating cash flow | $4.051 billion | $3.845 billion | Up 5% |
| Capital expenditures | $3.001 billion | $3.381 billion | Down 11% |
| Adjusted Free Cash Flow | $2.401 billion | $1.649 billion | Up 46% |
Service revenue growth reflected higher postpaid revenue, up 6% to $11.862 billion, partly offset by lower prepaid revenue, down 2%, and wholesale and other service revenue, down 14%. Total revenue fell mainly because equipment revenue declined 21%, reflecting fewer device sales and a continuing shift from device leasing to installment plans.
Operating expenses declined 11% to $16.235 billion. Lower service and equipment costs and depreciation helped lift operating income; cost reductions also reflected fewer merger-related costs. Net income included $268 million of after-tax merger-related costs, compared with $1.1 billion in Q1 2022. Approximate operating margin rose to 17.3% from 9.0%; GAAP net margin rose to 9.9% from 3.5%.
Non-GAAP Adjusted EBITDA was $7.199 billion, up 4%; Core Adjusted EBITDA was $7.052 billion, up 9%. Adjusted EBITDA margin was 46%, unchanged, while Core Adjusted EBITDA margin increased to 45% from 43%. These measures exclude certain costs and should be considered alongside GAAP results. Adjusted Free Cash Flow includes $1.345 billion of proceeds related to beneficial interests in securitization transactions; the company notes those proceeds are offset in operating cash flow.
Cash, debt and capital allocation
Cash and cash equivalents were $4.540 billion at March 31, 2023, versus $4.507 billion at year-end 2022. Total debt was $74.745 billion, including $5.215 billion short-term debt; debt increased from $71.960 billion at year-end. The company reported $77.2 billion of debt and financing lease liabilities, excluding tower obligations. Tower obligations were a further $3.897 billion. The $7.5 billion revolving credit facility was undrawn, and T-Mobile reported compliance with restrictive debt covenants.
Q1 financing cash outflow was $2.273 billion, including $4.619 billion of common-stock repurchases, partly offset by $3.013 billion of net debt issuance proceeds. The company repurchased 32.96 million shares at an average $144.57 per share. Up to $6.2 billion remained in the $14 billion repurchase program at quarter-end; another $757 million of shares were repurchased through April 21.
Business developments, outlook and risks
- Postpaid accounts grew 5% year over year to 28.813 million. Total customers increased 5% to 114.917 million. Q1 net customer additions were 1.319 million, down 4%; postpaid net account additions declined 18% to 287,000. Postpaid phone churn improved to 0.89% from 0.93%; prepaid churn increased to 2.76% from 2.67%.
- Management forecast 2023 merger synergies of $2.6–$2.7 billion in SG&A reductions, $3.1–$3.2 billion in cost-of-service reductions, and approximately $1.6 billion in avoided network expenses. It expected lower 2023 capital expenditures than in 2022 and substantially all remaining projected merger-related costs—approximately $600 million, excluding capital expenditures—to be incurred by year-end, with cash payments extending beyond 2023.
- Management said principal funding sources should cover anticipated operating liquidity needs for the next 12 months and longer term, excluding potential acquisitions, spectrum purchases and shareholder returns. T-Mobile does not intend to pay cash dividends in the foreseeable future.
- The proposed acquisition of Ka’ena Corporation, including Mint Mobile, has a maximum purchase price of $1.35 billion; the estimated upfront payment is approximately $950 million before adjustments. It is subject to regulatory approval and expected to close by year-end 2023. T-Mobile expects to shift those customers from wholesale to prepaid, increasing prepaid revenue while reducing wholesale revenue.
- The Wireline Business sale for $1, with a related $700 million IP-transit services agreement, was expected to close in early May 2023, subject to remaining conditions. The disposal group was held for sale; Q1 included a $42 million gain, primarily from a lower estimated cost to sell.
- A planned $3.5 billion purchase of 600 MHz spectrum was divided into tranches; the first closing was anticipated in mid-to-late 2023 and the deferred licenses in 2024, subject to regulatory approvals. Separately, DISH had an option to buy certain 800 MHz licenses for approximately $3.6 billion, with completion targeted by July 1, 2023, subject to FCC approval.
- Cybersecurity is a significant risk. A January 2023 incident involved customer account data associated with approximately 37 million current postpaid and prepaid accounts. Litigation and regulatory inquiries may lead to significant costs, and management could not predict their outcome or full effect on customer behavior. For the August 2021 breach, a proposed $350 million class settlement remained subject to final court approval; the company also committed to $150 million of incremental security spending in 2022 and 2023. T-Mobile recorded $50 million of insurance reimbursements in Q1 and said additional losses from related proceedings were reasonably possible.
- Other risks include competition, economic and interest-rate conditions, substantial indebtedness, spectrum availability and regulatory approvals, integration execution, and legal or regulatory proceedings. Management reported effective disclosure controls at quarter-end and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether customer growth, postpaid revenue and service-revenue trends continue, particularly as net additions normalize and prepaid ARPU declines.
- How much of the sharp year-over-year earnings improvement reflects sustainable operating performance versus lower merger-related costs and prior-year device-sale comparisons.
- The quality and repeatability of Adjusted Free Cash Flow, including the role of receivables securitization proceeds and future network investment.
- Debt, lease and tower-obligation levels alongside buybacks, spectrum commitments, the Mint acquisition and remaining merger costs.
- Final approval and costs of the August 2021 breach settlement, developments from the January 2023 incident, and any resulting customer, regulatory or insurance impacts.
- Completion and financial effects of the Wireline sale, spectrum transactions and proposed Ka’ena/Mint acquisition.