T-Mobile US, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial figures are in billions unless otherwise stated. Comparisons are year over year unless noted. Nine-month comparisons are affected by MetroPCS results being included only from May 1, 2013 in the prior-year period.
Business context and operating performance
T-Mobile’s wireless growth strategy continued to emphasize its “Un-carrier” offers, customer additions, device financing, and network investment. It ended September with 52.9 million customers, up 13% from December 2013.
- Q3 net customer additions were 2.345 million, versus 1.023 million; nine-month additions were 6.206 million, versus 2.732 million.
- Q3 branded postpaid phone churn improved to 1.6% from 1.7%; prepaid churn improved to 4.8% from 5.0%.
- Branded postpaid phone ARPU fell 5% to $49.84 in Q3, while branded postpaid ABPU rose 4% to $61.59, reflecting higher equipment installment plan billings. Simple Choice plans represented 84% of branded postpaid customers, compared with 61% a year earlier.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $7.350 | $6.688 | $21.410 | $17.593 |
| Service revenue | $5.684 | $5.138 | $16.505 | $13.899 |
| Operating income | $0.049 | $0.297 | $0.983 | $0.857 |
| Net income (loss) | $(0.094) | $(0.036) | $0.146 | $0.055 |
| Adjusted EBITDA | $1.346 | $1.344 | $3.885 | $3.646 |
| Adjusted EBITDA margin | 24% | 26% | 24% | 26% |
- Q3 revenue increased 10%, led by branded postpaid and prepaid growth; service revenue rose 11%. Q3 operating income declined 84%, and the company reported a net loss. Higher operating costs, depreciation, MetroPCS network decommissioning charges, and interest expense weighed on results.
- Nine-month revenue increased 22% and net income rose to $146 million. Operating income growth included a $770 million gain on spectrum disposals, primarily associated with Verizon transactions; this non-cash item is important when assessing underlying performance.
- Nine-month operating cash flow was $2.791 billion, versus $2.541 billion. Investing cash outflow was $5.440 billion, including $3.018 billion for property and equipment and $2.390 billion for spectrum licenses and other intangible assets. Financing cash inflow was $2.545 billion. Cash declined $104 million to $5.787 billion.
- At quarter-end, total current assets were $13.295 billion and current liabilities $8.605 billion. Balance-sheet debt comprised $1.168 billion short-term debt, $16.284 billion long-term debt, and $5.600 billion long-term debt to Deutsche Telekom affiliates. The filing reports $2.510 billion of long-term financial obligations separately.
- Accounts receivable included $3.963 billion of net equipment installment plan receivables, up from $2.546 billion at year-end 2013. T-Mobile also sold $719 million of net service receivables through its factoring arrangement by quarter-end; it received $456 million in net cash proceeds during the nine-month period.
Outlook, material developments, and risks
- Management expected available funding sources to meet anticipated liquidity needs for the next 12 months. It forecast 2014 cash capital expenditures for property and equipment of $4.3–$4.6 billion, excluding spectrum purchases.
- T-Mobile expected an additional $150–$200 million of MetroPCS network decommissioning costs in Q4 2014, with further site decommissioning planned for 2015–2016; costs for those later periods were not estimable.
- In September, the company issued $1.3 billion of 6.000% senior notes due 2023 and $1.7 billion of 6.375% notes due 2025. In October, it redeemed $1.0 billion of 7.875% notes due 2018, recording a $37 million non-cash gain on extinguishment.
- Following its Verizon spectrum transaction, T-Mobile recorded spectrum licenses received at a fair value of $4.5 billion and a $731 million non-cash gain for the nine months. Other spectrum transactions with estimated aggregate fair value of about $0.4 billion were pending regulatory and customary approvals, with closings expected in Q4 2014 or Q1 2015.
- In October, T-Mobile made a refundable $0.4 billion deposit related to a potential asset purchase.
- In the FTC premium-SMS billing matter, T-Mobile had recorded a $24 million Q2 revenue reduction for its customer refund program and accrued a further $29 million in Q3 for anticipated settlement payments. Settlement discussions with the FTC, FCC, and state Attorneys General were ongoing. The filing cautioned that an unfavorable resolution of legal or regulatory proceedings could materially affect results or cash flows in a particular period.
- Other notable exposures include customer credit risk on installment receivables, factoring-arrangement recourse and servicing obligations, competition, network execution and spectrum needs, interest-rate exposure, and debt covenants. The company said it was in compliance with restrictive debt covenants at quarter-end.
Most important facts for investors to verify
- Whether customer additions and churn improvements can be sustained while postpaid phone ARPU declines and promotional activity continues.
- How much of nine-month operating performance depends on the $770 million spectrum gain, and how margins develop as costs grow faster than Q3 revenue.
- Installment-receivable growth, delinquencies and credit-loss allowances, plus the economics and recourse exposure of factoring receivables.
- Actual network decommissioning costs, full-year capital expenditures, and the timing and conditions of pending spectrum and potential asset transactions.
- Final costs and business-practice changes arising from the premium-SMS investigations and FTC litigation, and the company’s ability to fund investment and debt obligations.