T-Mobile US, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Unaudited results are not necessarily indicative of full-year performance.
Business context
T-Mobile provides branded postpaid and prepaid wireless services, as well as wholesale network services and device sales and leases. The company continued its network build, including deployment of 600 MHz spectrum and preparation for 5G. Its proposed all-stock merger with Sprint remained subject to regulatory approval and other closing conditions.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $11.080 billion | $10.455 billion | +6% |
| Service revenue | $8.277 billion | $7.806 billion | +6% |
| Operating income | $1.476 billion | $1.282 billion | +15% |
| Net income | $908 million | $671 million | +35% |
| Diluted EPS | $1.06 | $0.78 | Up $0.28 |
| Operating cash flow | $1.392 billion | $770 million | +81% |
| Free cash flow (non-GAAP) | $618 million | $668 million | -7% |
| Adjusted EBITDA (non-GAAP) | $3.284 billion | $2.956 billion | +11% |
Operating margin was approximately 13.3%, versus 12.3%. The company reported net income margin of 11%, versus 9%, and Adjusted EBITDA margin of 40%, versus 38%; the latter two are calculated against service revenue, and Adjusted EBITDA is non-GAAP.
Revenue growth reflected higher branded postpaid, equipment, wholesale, roaming and other service revenue. Branded postpaid revenue rose 8%; branded prepaid revenue declined 1%. Postpaid phone ARPU decreased 1% to $46.07, while prepaid ARPU decreased 3% to $37.65. Total customers increased 10% year over year to 81.3 million. Q1 net customer additions were 1.65 million, including 1.019 million branded postpaid additions; branded prepaid additions fell to 69,000 from 199,000.
Cash and cash equivalents were $1.439 billion at March 31. Cash used in investing was $966 million, including $1.931 billion of property and equipment purchases, partly offset by $1.157 billion of proceeds related to receivables securitization. The filing reports total debt of $25.8 billion, excluding tower obligations. Tower obligations were $2.244 billion. The balance sheet also recorded $11.541 billion of operating lease liabilities and $2.135 billion of financing lease liabilities.
Material changes and accounting comparability
- Operating income increased by $194 million, despite $113 million of merger-related costs. Net income included $93 million of merger costs after tax.
- Lower interest expense and affiliate interest expense supported earnings growth; together they declined by $129 million, partly reflecting prior debt redemptions/refinancing and higher capitalized interest.
- Operating cash flow improved by $622 million, with higher net income and a more favorable working-capital comparison contributing. Free cash flow nevertheless fell 7%, mainly due to higher network investment and lower securitization-related proceeds.
- The company adopted the new lease accounting standard on January 1, 2019 using a modified-retrospective approach; prior periods were not restated. Adoption added substantial lease assets and liabilities and changed presentation of certain tower and lease items, limiting direct balance-sheet and expense comparisons. Management estimated a $175 million increase in 2019 net income from the standard’s cumulative effects, including tower accounting and presentation changes.
Outlook, risks and unusual items
- Management expected full-year 2019 branded postpaid phone ARPU to be generally stable versus 2018. It forecast cash property and equipment purchases of $5.8–$6.1 billion in 2019, including capitalized interest, for 600 MHz deployment and 5G preparation.
- The Sprint merger was expected to receive federal regulatory approval in the first half of 2019; regulatory review remained ongoing. The companies’ stockholders had approved the transaction. Risks include delayed or denied approvals, imposed conditions, financing and integration challenges, and failure to realize expected benefits. A specified credit-rating-related termination scenario could require T-Mobile to pay Sprint $600 million.
- T-Mobile expected its existing funding sources to cover anticipated operating liquidity needs for the next 12 months, while noting potential additional borrowing for spectrum or other assets and substantial incremental debt if the merger closes. It was in compliance with debt covenants at quarter-end and had no borrowings outstanding under its $2.5 billion DT revolving facility.
- A $600 million affiliate-held note redemption was scheduled for April 28, 2019, at a 104.666% redemption price, plus accrued interest; the redemption premium was $28 million.
- Receivables sale arrangements had derecognized $2.5 billion of net receivables. The disclosed maximum exposure to loss was $1.1 billion, which the company said is a severe hypothetical measure, not an expected loss.
- Litigation and regulatory matters were ongoing. Recorded accruals were not considered material, and management did not expect the matters to materially affect financial position, but unfavorable outcomes could materially affect results or cash flows in a particular period.
Important facts for investors to verify
- Progress and final conditions for Sprint merger approval, financing, closing, and integration; assess the stated merger benefits against execution and regulatory risks.
- Whether postpaid growth and low churn persist, and whether ARPU stability offsets prepaid ARPU declines and competitive promotions.
- Network capital spending, free-cash-flow generation, and the extent to which receivables sales support reported liquidity and cash flow.
- Debt and lease obligations, planned affiliate-note redemption, and the effect of any merger-related borrowing on interest costs and covenant capacity.
- How the newly adopted lease accounting affects year-over-year comparisons and the company’s estimated 2019 earnings benefit.