T-Mobile US, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. T-Mobile provides wireless services and devices under T-Mobile and Metro by T-Mobile in the U.S., Puerto Rico and the U.S. Virgin Islands. It ended the year with 79.7 million total customers.
Financial and operating highlights
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $43.31 billion | $40.60 billion | +7% |
| Service revenue | $31.99 billion | $30.16 billion | +6% |
| Operating income | $5.31 billion | $4.89 billion | +9% |
| Net income | $2.89 billion | $4.54 billion | -36% |
| Diluted EPS | $3.36 | $5.20 | -35% |
| Adjusted EBITDA (non-GAAP) | $12.40 billion | $11.21 billion | +11% |
| Net cash from operating activities | $3.90 billion | $3.83 billion | +2% |
| Free cash flow (non-GAAP) | $3.55 billion | $2.73 billion | +30% |
Adjusted EBITDA margin was 39% of service revenue, up from 37%; net income margin was 9%, down from 15%. The filing does not present a single consolidated gross-margin measure.
Q4 2018: Revenue was $11.45 billion, operating income $1.14 billion, net income $640 million and diluted EPS $0.75. Q4 2017 net income included a substantial one-time tax benefit; quarterly comparisons should be read in that context.
Balance sheet and liquidity (December 31, 2018): Cash and cash equivalents were $1.20 billion; current assets $8.28 billion and current liabilities $10.27 billion. Total debt was $27.55 billion, excluding $2.56 billion of tower obligations; stockholders’ equity was $24.72 billion. Capital expenditures for property and equipment were $5.54 billion. The company reported compliance with its debt covenants and said expected funding sources should meet anticipated liquidity needs for the next 12 months and longer term, excluding potential spectrum purchases or other assets.
Material changes and drivers
- Customer growth strengthened: total branded net additions rose 10% to 4.92 million. Branded postpaid net additions increased 23% to 4.46 million, while prepaid additions declined 46% to 460,000. Postpaid phone churn improved to 1.01% from 1.18%.
- Revenue growth reflected customer-base expansion, equipment sales and roaming. Branded postpaid phone ARPU fell 1% to $46.40; prepaid ARPU was $38.53, down slightly.
- Operating income benefited from $398 million of net impact from adopting the new revenue standard. Higher expenses, $196 million of Sprint-transaction costs and the absence of 2017 spectrum-disposal gains partly offset growth. Hurricane insurance recoveries net of costs contributed $158 million in 2018, versus a net hurricane cost of $201 million in 2017.
- Net income fell primarily because 2017 included a $2.2 billion tax benefit from the Tax Cuts and Jobs Act. 2018 net income also included a $295 million positive impact from the new revenue standard and a $180 million negative after-tax impact from Sprint-transaction costs.
- Revenue recognition changed in 2018 under ASC 606; prior-year figures were not restated. The change increased 2018 reported revenue by $358 million, operating income by $398 million and net income by $295 million versus the prior accounting standard. A separate cash-flow accounting change reclassified securitization-related cash receipts from operating to investing activities; comparisons of cash flow and free cash flow require attention to that presentation.
Outlook, risks and unusual items
- Management expected full-year 2019 branded postpaid phone ARPU to be generally stable versus 2018. It forecast 2019 cash purchases of property and equipment of $5.4–$5.7 billion excluding capitalized interest, or $5.8–$6.1 billion including it.
- T-Mobile was building toward a nationwide standards-based 5G network in 2019. It reported 4G LTE coverage of more than 325 million people and 600 MHz deployment in over 2,700 cities and towns across 43 states and Puerto Rico.
- The proposed all-stock Sprint merger remained subject to regulatory approvals and other closing conditions. The companies anticipated approval in the first half of 2019. T-Mobile had committed financing of up to $30 billion for the transaction; management estimated combined-company debt of approximately $75–$77 billion, excluding tower obligations. Financing availability, approval conditions, integration costs, customer retention and projected synergies were significant uncertainties. Certain circumstances could trigger a $600 million payment to Sprint if T-Mobile terminated the agreement over the specified credit-rating condition.
- Key ongoing risks include intense price competition and pressure on margins; the cost and availability of spectrum; execution and cost risks in 5G deployment; cyber and data-security incidents; implementation of a new billing system; regulatory and litigation exposure; and substantial debt service and restrictive covenants. An August 2018 security incident involved unauthorized access to some customer contact information; the company said it did not believe the incident was material.
- Adoption of the new lease standard began January 1, 2019. Excluding a possible change in accounting for a previously failed tower sale-leaseback, T-Mobile estimated increases of $8.5–$9.4 billion in assets and $8.2–$8.9 billion in liabilities at adoption. The tower sale-leaseback conclusion remained under review.
Important facts for investors to verify
- Regulatory status, closing terms, financing and updated debt estimates for the proposed Sprint merger.
- Underlying earnings and cash generation after separating the effects of ASC 606, the 2017 tax benefit, hurricane recoveries and transaction expenses.
- Progress against 2019 5G deployment plans and capital-expenditure guidance, alongside network quality and spectrum-clearance milestones.
- Debt maturity, interest-cost and liquidity exposure, including tower obligations and the effect of financing receivables through securitization arrangements.
- The final accounting and balance-sheet effects of the new lease standard, especially the tower sale-leaseback assessment.