T-Mobile US, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Comparisons are with the corresponding 2022 periods. Amounts are in U.S. dollars; financial statement amounts are in billions unless otherwise stated.
Business context and operating performance
T-Mobile operates as a single wireless communications segment, serving postpaid, prepaid and wholesale customers. It continued its nationwide 5G build-out and integration activities following the Sprint merger. The sale of the Sprint Wireline Business closed May 1, 2023.
- At quarter-end, total customers were 117.9 million, up 6% year over year; postpaid customers were 96.3 million, up 7%.
- Q3 postpaid net account additions were 386,000, versus 394,000 a year earlier. Total net customer additions fell 25% to 1.305 million, principally reflecting fewer postpaid-other additions, including education-sector device deactivations.
- Postpaid phone churn improved to 0.87% from 0.88%; prepaid churn was 2.81% versus 2.88%.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $19.252 | $19.477 | $58.080 | $59.298 |
| Service revenue | $15.914 | $15.361 | $47.198 | $45.805 |
| Operating income | $3.596 | $1.281 | $10.786 | $3.796 |
| Net income | $2.142 | $0.508 | $6.303 | $1.113 |
| Diluted EPS | $1.82 | $0.40 | $5.26 | $0.88 |
| Operating cash flow | $5.294 | $4.391 | $13.700 | $12.445 |
| Adjusted free cash flow | $4.003 | $2.065 | $9.281 | $5.472 |
- Q3 postpaid revenue rose 6% to $12.288 billion, supported by higher average postpaid accounts and ARPA. Equipment revenue fell 20% to $3.076 billion, mainly due to fewer device sales and the shift from leasing to equipment installment plans. Total service revenue increased 4%, while total revenue declined 1%.
- Reported Adjusted EBITDA was $7.600 billion in Q3, up 8%; Core Adjusted EBITDA was $7.547 billion, up 12%. Adjusted EBITDA margin was 48%, versus 46%, and Core Adjusted EBITDA margin was 47%, versus 44% (both measured against service revenue).
- Operating cash flow increased 21% in Q3 and 10% year to date. Adjusted free cash flow increased 94% in Q3 and 70% year to date; lower capital spending and higher operating cash flow contributed to the improvement.
- Cash and cash equivalents were $5.030 billion at September 30, 2023, compared with $4.507 billion at December 31, 2022. Total debt was $75.298 billion; debt and financing lease liabilities totaled $77.9 billion, excluding tower obligations. The company also had a $7.5 billion revolving credit facility and a $2.0 billion commercial paper program, neither drawn at quarter-end.
- Capital expenditures for property and equipment were $8.214 billion for the first nine months, versus $10.587 billion in 2022. The filing states that operating cash and other principal funding sources are expected to meet anticipated liquidity needs for operations over the next 12 months, excluding potential acquisitions, spectrum purchases and shareholder returns.
Material changes and unusual items
- Net income rose sharply year over year, but comparison periods included substantial prior-year merger-related costs and a $1.071 billion loss on the Wireline disposal group in 2022. In 2023, merger-related costs were lower; the company also recorded a $25 million disposal-group gain for the nine months.
- Q3 2023 included a $471 million pretax charge for a workforce reduction of approximately 5,000 positions, just under 7% of employees. Substantially all related cash outflows are expected through mid-2024; management expects lower personnel costs in 2024.
- Merger-related costs were $152 million in Q3 and $786 million for the first nine months, versus $1.296 billion and $4.377 billion in the comparable 2022 periods. Management expects approximately $200 million of remaining projected merger-related costs, excluding capital expenditures, by year-end 2023.
- Repurchases totaled $11.0 billion in the first nine months under the 2022 program. A new shareholder-return program authorizes up to $19.0 billion through December 31, 2024, including dividends and repurchases. The company declared a $0.65-per-share dividend payable December 15, 2023.
Outlook, commitments and risks
- Management expects 2023 merger synergies of approximately $2.7 billion from lower SG&A, $3.2 billion from lower service costs and $1.6 billion in avoided network expenses. It expects 2023 capital expenditures to be lower than in 2022.
- Management intends to pay approximately $3.0 billion in additional dividends during 2024 and expects the per-share dividend to grow around 10% annually, with the first increase expected in Q4 2024. Future dividends and repurchases remain subject to board discretion and other conditions.
- The proposed Ka’ena/Mint Mobile acquisition has a maximum purchase price of $1.35 billion; the estimated upfront payment is $1.2 billion before working-capital adjustments. Closing, subject to regulatory approvals, is expected by the end of Q1 2024.
- Significant spectrum transactions remain subject to approvals and timing: $3.5 billion of 600 MHz purchases from Channel 51 and LB License, and a Comcast agreement for $1.2 billion to $3.3 billion, with closing anticipated in the first half of 2028. The amended DISH agreement provides for a $100 million extension fee and an April 1, 2024 deadline to purchase 800 MHz licenses for approximately $3.6 billion.
- Cybersecurity remains a material risk. The 2021 breach settlement provides for $350 million to fund claims and related costs and $150 million of security investment; an appeal concerning attorneys’ fees remained pending. The company also reported unauthorized access to limited account data for approximately 37 million current postpaid and prepaid accounts in the 2023 incident, with related litigation and regulatory inquiries. Management says additional losses are reasonably possible and outcomes are uncertain.
- Other risks cited include competition, debt and financing access, spectrum availability and regulatory approvals, legal proceedings, and compliance with merger-related network and service commitments. The company reported compliance with debt covenants at September 30, 2023.
Important facts for investors to verify
- How much of the reported earnings and cash-flow improvement reflects recurring operations versus lower merger costs, prior-year disposal losses and other unusual items.
- Whether customer-addition trends, particularly postpaid-other and High Speed Internet growth, and postpaid ARPA sustain service-revenue growth.
- Execution and cash requirements for the 5G build-out, spectrum purchases, the Mint acquisition and shareholder-return program, alongside the company’s debt load.
- Progress and final outcomes for the cyberattack settlement appeal, regulatory inquiries and other litigation, including potential additional losses.
- Whether management achieves expected merger synergies and workforce-cost savings while maintaining network investment and customer retention.