T-Mobile US, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unless noted, amounts are in U.S. dollars; financial statement amounts are in millions. Year-over-year comparisons are affected by MetroPCS results being included only after its April 30, 2013 combination with T-Mobile.
Business context and operating performance
T-Mobile’s wireless growth strategy included its Un-carrier offers, network modernization and LTE deployment, and spectrum expansion. At June 30, the company reported 50.5 million total customers, up 8% from December 31, 2013.
- Q2 net customer additions were 1.47 million, versus 1.13 million a year earlier; first-half additions were 3.86 million, versus 1.71 million.
- Postpaid phone churn was 1.5% in both Q2 periods and 1.5% for the first half of 2014, improving from 1.7% a year earlier. Prepaid churn was 4.5% in Q2, down from 5.4%.
- Branded postpaid phone ARPU fell 9% to $49.32 in Q2; management attributed the decline mainly to the shift to lower-priced Simple Choice plans. Postpaid ABPU rose 2% to $59.79, reflecting higher equipment-installment billings.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $7.185 billion | $6.228 billion | $14.060 billion | $10.905 billion |
| Service revenue | $5.484 billion | $4.756 billion | $10.821 billion | $8.762 billion |
| Operating income | $962 million | $181 million | $934 million | $560 million |
| Operating margin | 13.4% | 2.9% | 6.6% | 5.1% |
| Net income (loss) | $391 million | $(16) million | $240 million | $91 million |
| Adjusted EBITDA (non-GAAP) | $1.451 billion | $1.124 billion | $2.539 billion | $2.302 billion |
| Adjusted EBITDA margin | 26% | 24% | 23% | 26% |
| Operating cash flow | — | $1.729 billion | $1.715 billion |
- Q2 total revenue increased 15%; service revenue increased 15%. First-half totals increased 29% and 23%, respectively. Branded prepaid revenue grew substantially, partly reflecting MetroPCS comparability and growth.
- Q2 operating income included a $731 million non-cash gain from spectrum transactions. Without treating this unusual item as recurring, reported operating income and earnings growth should be viewed in context.
- First-half investing cash outflow was $4.275 billion, principally $2.367 billion for spectrum and other intangible assets and $1.887 billion for property and equipment. Cash capital expenditures for property and equipment were lower than the prior-year first half ($1.9 billion versus $2.1 billion).
- Cash and equivalents were $3.080 billion at June 30, down from $5.891 billion at December 31, 2013. Total current assets were $9.896 billion and current liabilities $7.131 billion.
- At June 30, balance-sheet debt included $5.600 billion owed to affiliates, $14.369 billion of long-term debt, and $272 million of short-term debt. The company reported compliance with restrictive debt covenants. Long-term financial obligations were a separate $2.502 billion.
Material changes, outlook and risks
- In April, T-Mobile paid Verizon $2.4 billion in cash and transferred spectrum licenses in transactions that added 700 MHz A-Block, AWS and PCS licenses. It recorded the received 700 MHz licenses at $3.7 billion fair value and recognized a $517 million gain; a separate license exchange generated a $214 million gain.
- Management expected 2014 cash capital expenditures for property and equipment of $4.3 billion to $4.6 billion, excluding spectrum purchases. It stated existing funding sources were expected to meet anticipated liquidity needs for the next 12 months; no earnings or revenue guidance was provided in the supplied filing text.
- After quarter-end, T-Mobile began decommissioning the MetroPCS CDMA network and certain redundant cell sites. It expected $250 million to $300 million of decommissioning costs in the second half of 2014; costs for additional sites planned for 2015–2016 were not yet estimable.
- The company recognized an estimated customer-refund cost as a reduction to service revenue for its premium-SMS billing program. The FTC sued on July 1, 2014, and the FCC and other agencies opened inquiries. T-Mobile said possible additional losses were reasonably possible but could not be estimated; it was defending the matters.
- Net equipment-installment-plan receivables were $3.583 billion, up from $2.546 billion at year-end; the gross balance included $1.892 billion classified as subprime. Management also reported $298 million of handset-upgrade guarantee liabilities. These balances expose results to customer credit and trade-in assumptions.
- A receivables factoring arrangement generated $468 million of net cash proceeds in the first half; $611 million of net receivables had been derecognized by June 30. The disclosed $440 million maximum exposure to loss is a severe hypothetical amount, not management’s expected loss.
- Management cited competition, spectrum availability and cost, LTE deployment and network quality, integration and execution, litigation and regulation, and interest-rate changes among risks. It said disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Assess how much reported earnings and operating-margin improvement depends on the non-cash spectrum gains, and review the company’s Adjusted EBITDA reconciliation.
- Separate underlying customer and service-revenue growth from MetroPCS comparability effects; track postpaid ARPU, customer additions and churn alongside equipment-installment billings.
- Monitor cash depletion, spectrum and network investment, the $4.3–$4.6 billion capital-expenditure outlook, debt service and covenant flexibility.
- Evaluate EIP receivable growth, subprime exposure, credit-loss allowances, factoring costs and continuing involvement in sold receivables.
- Follow the premium-SMS refund program and FTC/FCC proceedings, plus actual timing and cash costs of network decommissioning.