T-Mobile US, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results are compared with the corresponding 2018 periods unless noted. Amounts are in U.S. dollars.
Business context and operating performance
T-Mobile provides branded postpaid and prepaid wireless services, wholesale network access, and device sales and leases. During the quarter, it introduced TVision Home, launched T-Mobile MONEY nationwide, and rebranded T-Mobile ONE plans as Magenta and Magenta Plus. Management attributed service growth to customer-base expansion, low churn, new customer segments and connected-device growth.
- At June 30, T-Mobile reported 83.1 million total customers, up 10% year over year, including 44.6 million branded postpaid customers, up 11%. Q2 net additions were 1.75 million.
- Postpaid phone churn was 0.78%, down 17 basis points year over year; prepaid churn was 3.49%, down 32 basis points.
- Postpaid phone ARPU decreased 1% to $46.10; prepaid ARPU decreased 3% to $37.46. Management cited promotional plans, included benefits such as Netflix and Amazon Prime, and lower regulatory and non-recurring charges as factors.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $10.98 billion | $10.57 billion | $22.06 billion | $21.03 billion |
| Service revenue | $8.43 billion | $7.93 billion | $16.70 billion | $15.74 billion |
| Operating income | $1.54 billion | $1.45 billion | $3.02 billion | $2.73 billion |
| Net income | $939 million | $782 million | $1.85 billion | $1.45 billion |
| Diluted EPS | $1.09 | $0.92 | $2.14 | $1.69 |
| Adjusted EBITDA (non-GAAP) | $3.46 billion | $3.23 billion | $6.75 billion | $6.19 billion |
| Operating cash flow | $2.15 billion | $1.26 billion | $3.54 billion | $2.03 billion |
| Free cash flow (non-GAAP) | $1.17 billion | $774 million | $1.79 billion | $1.44 billion |
- Q2 revenue rose 4%, service revenue 6%, operating income 6%, and net income 20%. For the first half, revenue rose 5%, operating income 10%, and net income 27%.
- Adjusted EBITDA margin, defined on service revenue, was 41% in Q2, unchanged year over year, and 40% for the first half versus 39%. Net income margin on service revenue was 11% in Q2 versus 10%, and 11% for the first half versus 9%.
- Operating cash flow increased substantially, with management citing improved working-capital movements and higher net income. Free cash flow also benefited from lower debt-extinguishment payments, partly offset by higher capital spending and lower securitization-related proceeds.
- Investing cash outflow was $1.62 billion in Q2 and $2.58 billion for the first half. Property-and-equipment purchases were $1.79 billion and $3.72 billion, respectively; first-half spectrum and intangible purchases were $850 million.
- Cash and equivalents were $1.11 billion at quarter-end. Total debt was $25.2 billion, excluding tower obligations; this includes $14.0 billion of long-term debt to affiliates. Tower obligations were $2.25 billion.
- Adoption of the lease accounting standard added substantial reported right-of-use assets and liabilities: $10.44 billion of operating lease assets and $12.41 billion of operating lease liabilities at June 30. Financing lease liabilities were $2.28 billion. Prior periods were not restated, so balance-sheet comparisons are affected.
Material changes, outlook and notable items
- Postpaid growth drove service-revenue gains; prepaid revenue was nearly flat as customer growth was offset by lower ARPU. Wholesale revenue grew 14% in both the quarter and first half. Q2 equipment revenue fell 3%, mainly reflecting fewer devices sold.
- SG&A rose 11% in Q2 and 10% in the first half, including merger costs of $222 million and $335 million, respectively. First-half operating cash flow and earnings comparisons also reflect working-capital movements and the adoption of the new lease standard.
- Management expected full-year 2019 postpaid phone ARPU to remain generally stable, within plus or minus 1% of 2018. It forecast 2019 cash purchases of property and equipment, excluding capitalized interest, at the very high end of $5.4–$5.7 billion; including capitalized interest, at the very high end of $5.8–$6.1 billion.
- T-Mobile redeemed $600 million of senior reset notes held by Deutsche Telekom in April, paying a $28 million premium; it also recorded an $11 million gain from writing off embedded derivatives. The company won 2,211 millimeter-wave spectrum licenses for an aggregate $842 million.
- The company estimated that 2019 lease-standard adoption would increase net income by $175 million, among other income-statement effects. Management cautioned that interim results are not necessarily indicative of full-year results.
- The proposed Sprint merger remained subject to regulatory approvals and litigation. Management expected final federal approval in Q3 2019 and anticipated closing in the second half of 2019. A lawsuit by 13 state attorneys general and the District of Columbia sought to block the deal. On July 26, 2019, after quarter-end, T-Mobile, Sprint and DISH announced a proposed prepaid-business and spectrum divestiture; the DOJ filed a proposed consent decree, subject to court approval. The merger agreement’s outside date was extended to November 1, 2019, or January 2, 2020 in specified circumstances.
- Management said operating liquidity sources were expected to cover anticipated needs for the next 12 months, excluding potential spectrum or other asset acquisitions. The company was in compliance with debt covenants at June 30. Completion of the merger would materially increase debt; the filing estimated combined-company indebtedness of approximately $69–$71 billion, excluding tower obligations and operating lease liabilities.
- Other risks include merger approval, litigation, integration and divestiture execution, financing availability, higher post-merger leverage, competition, network deployment, cybersecurity, spectrum access and ordinary-course legal proceedings. Management stated that recorded accruals for ordinary-course litigation were not material individually or in aggregate, while an unfavorable outcome could affect a particular period.
Most important facts for investors to verify
- Merger and divestiture status, remaining regulatory and court approvals, litigation outcomes, closing conditions and any associated commitments or costs.
- Whether customer additions and low churn continue to offset declining postpaid and prepaid ARPU, and the effects of the July 2019 prepaid-customer reporting reclassification.
- Cash-flow quality: working-capital effects, capital spending, securitization proceeds and the distinction between GAAP operating cash flow and non-GAAP free cash flow.
- Debt and liquidity, including affiliate debt, lease liabilities, the $1.1 billion interest-rate-lock derivative liability, and the expected financing and leverage consequences of the merger.
- Progress against 2019 capital-expenditure and ARPU expectations, and the comparability effects of lease-standard adoption and merger-related costs.