T-Mobile US, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. The quarter ended June 30, 2020. T-Mobile completed its all-stock Sprint merger on April 1, 2020; Q2 results include Sprint from that date, while the prior-year comparison reflects standalone T-Mobile. Accordingly, reported growth is not directly comparable and includes the acquired business. On July 1, 2020, after quarter-end, DISH acquired the Boost Mobile and Sprint prepaid businesses.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | 17,671 | 10,979 | 28,784 | 22,059 |
| Service revenue | 13,230 | 8,546 | 22,076 | 16,937 |
| Operating income | 820 | 1,541 | 2,359 | 3,017 |
| Continuing operations income (loss) | (210) | 939 | 741 | 1,847 |
| Net income, including discontinued operations | 110 | 939 | 1,061 | 1,847 |
| Adjusted EBITDA, non-GAAP | 7,017 | 3,461 | 10,682 | 6,745 |
| Adjusted EBITDA margin | 53% | 40% | 48% | 40% |
| Net cash from operating activities | 777 | 2,147 | 2,394 | 3,539 |
| Free cash flow, excluding gross interest-rate-swap settlement payments, non-GAAP | 1,441 | 1,169 | 2,173 | 1,787 |
Q2 basic and diluted EPS were both $0.09; continuing-operations EPS was a loss of $0.17. The $320 million of after-tax income from discontinued operations contributed to reported net income.
- Cash and liquidity: Cash and cash equivalents were $11.1 billion at June 30, versus $1.5 billion at December 31, 2019. Current assets were $24.3 billion and current liabilities $23.2 billion.
- Debt: Reported debt totaled $72.5 billion at June 30, including affiliate debt. Management reported debt and financing lease liabilities of $75.0 billion, excluding $3.1 billion of tower obligations. The merger substantially increased borrowings.
- Investment and cash flow: Q2 property-and-equipment purchases were $2.3 billion. Reported free cash flow was negative $902 million for Q2 and negative $170 million for the six months, including $2.3 billion of gross cash payments to settle interest-rate swaps. The company’s adjusted free-cash-flow measure excludes those settlement payments.
Material changes versus the prior comparable period
- Q2 revenue rose 61%, primarily reflecting Sprint consolidation, higher postpaid customer counts, and increased device leasing revenue. Postpaid revenue increased 77%; prepaid revenue declined 3%.
- Operating income fell 47% and continuing-operations results moved from income to loss. Higher depreciation and amortization, interest expense, integration and restructuring costs, and impairment charges outweighed revenue growth.
- Adjusted EBITDA more than doubled, but this non-GAAP measure excludes merger-related costs, COVID-related costs, impairment and other items; it should not be read as GAAP profit.
- Operating cash flow fell 64% in Q2. Management cited the swap settlement and working-capital outflows, as well as lower net income.
Outlook, commentary, risks and unusual items
- Merger and integration: Management expects network, back-office, IT and retail efficiencies and synergies, but provided no quantified synergy target or earnings guidance in the supplied filing text. Integration costs and near-term capital spending are expected to remain significant. The company unified the brands and retail operations under T-Mobile on August 2, 2020.
- COVID-19: Management expects the pandemic to continue adversely affecting the business, liquidity, financial condition and results for the remainder of 2020 and thereafter. Identified risks include weaker customer additions and device sales, higher bad debt, added operating costs, supply-chain disruption and network pressure. Q2 included $341 million of incremental COVID-related employee, dealer-commission and cleaning costs.
- Unusual charges: Q2 impairment expense was $418 million: $218 million for Layer3 goodwill and $200 million for capitalized billing-system software. Q2 merger-related costs were $798 million, including restructuring and transaction costs. The filing also reports $776 million of Q2 interest expense, compared with $182 million a year earlier.
- Prepaid divestiture: At June 30, $1.9 billion of assets and $606 million of liabilities were classified as held for sale. The July 1 sale to DISH generated $1.4 billion, subject to a working-capital adjustment. T-Mobile will provide network services to DISH’s prepaid customers under an agreement lasting up to seven years.
- Debt and liquidity outlook: Management said existing funding sources should meet anticipated operating liquidity needs for the next 12 months and longer term, excluding potential spectrum or other acquisitions. Debt agreements contain restrictive covenants; the company reported compliance at June 30. Future borrowing, interest costs and refinancing remain important considerations.
- Contingencies and governance: The company recorded an accrual for an FCC customer-information privacy notice but did not state its amount in the supplied text. It disclosed other legal and regulatory matters, including inherited Sprint Lifeline issues, and said outcomes could affect a particular period. Following the SoftBank share transactions, Deutsche Telekom had voting control over approximately 52.4% of shares as of August 3, 2020.
- Controls: Management concluded disclosure controls were effective at quarter-end, but plans to exclude acquired Sprint from its 2020 internal-control assessment because of the acquisition’s scale and integration complexity.
Important facts for investors to verify
- How much of revenue and Adjusted EBITDA growth reflects Sprint consolidation versus organic customer, pricing and usage trends; note that acquired Sprint contributed $6.3 billion of revenue and $15 million of operating income in the reported post-merger period.
- Underlying cash generation after merger, COVID-related and integration spending, capital expenditures, and the swap settlement; review the company’s non-GAAP free-cash-flow reconciliation.
- Debt maturities, interest expense, refinancing plans and covenant headroom, including the effect of post-quarter debt redemptions.
- Progress and cost of Sprint network, billing-system and operational integration, realization of expected synergies, and any changes to the preliminary acquisition valuations.
- COVID-19 effects on customer payments, bad-debt allowances, customer additions, device sales and supplier availability; also track the DISH transition and remaining spectrum-sale conditions.