T-Mobile US, Inc. quarterly report, Q2 FY2017

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T-Mobile US, Inc. — Q2 2017 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2017. Unless noted, amounts are in U.S. dollars; financial statement amounts are in millions. Comparisons are with 2016, adjusted retrospectively for an accounting reclassification of EIP imputed interest from interest income to other revenue; the change did not affect net income or EPS.

Business context and operating results

T-Mobile provides wireless services, devices and related products. Management attributed growth principally to customer-base expansion, Un-carrier promotions and the MetroPCS brand. In January, the company introduced Un-carrier Next, including T-Mobile ONE plans with taxes and fees in the advertised price, Kickback credits and a price guarantee for current T-Mobile ONE customers.

  • Q2 revenue: $10.213 billion, up 10%; service revenue was $7.445 billion, up 8%, and equipment revenue was $2.506 billion, up 15%.
  • Q2 earnings: Operating income was $1.416 billion, up 70%; net income was $581 million, versus $225 million. Net income attributable to common stockholders was $567 million, or $0.68 basic and $0.67 diluted EPS.
  • Q2 profitability: Adjusted EBITDA, a non-GAAP measure, was $3.012 billion, up 19%. Adjusted EBITDA margin was 40%, versus 37%; net income margin was 8%, versus 3%.
  • First-half revenue and earnings: Revenue was $19.826 billion, up 10%; operating income was $2.453 billion, up 23%; net income was $1.279 billion, up 82%. Adjusted EBITDA was $5.680 billion, up 6%, with margin of 38%, versus 40%.
  • Customer indicators: Total branded customers reached 56.451 million, up 7% year over year. Q2 postpaid phone net additions were 786,000; postpaid phone churn improved to 1.10% from 1.27%. Postpaid phone ARPU was $47.01, essentially flat; prepaid ARPU was $38.65, up 2%.

Cash flow, capital spending, debt and liquidity

  • Q2 cash flow: Operating cash flow was $1.829 billion. Cash purchases of property and equipment were $1.347 billion, leaving free cash flow of $482 million, up 15% year over year. For the first half, operating cash flow was $3.542 billion and free cash flow was $667 million, versus $109 million in 2016. Free cash flow is a non-GAAP measure defined as operating cash flow less property and equipment purchases.
  • Investment: First-half investing cash outflow was $8.683 billion, including $5.805 billion of spectrum and intangible-asset purchases and $2.875 billion of property and equipment purchases. The company paid the remaining $5.8 billion for its $8.0 billion winning bid for 1,525 600 MHz licenses; it expects to begin network deployment in the second half of 2017.
  • Cash and working capital: Cash and equivalents fell to $181 million at June 30 from $5.500 billion at December 31, 2016, largely amid spectrum spending and debt repayments. Current assets were $6.780 billion and current liabilities $8.828 billion.
  • Debt: Total debt was $28.494 billion, excluding $2.606 billion of tower obligations; $14.766 billion of debt was owed to affiliates, principally Deutsche Telekom (DT). Debt increased from $27.786 billion at year-end. The company issued debt and refinanced or redeemed notes during the period, including $4.0 billion of DT term loans and $4.0 billion of DT notes to help fund the spectrum purchase. It reported compliance with debt covenants.
  • Funding outlook: Management expected existing funding sources to cover anticipated business liquidity needs for the next 12 months, excluding liquidity potentially needed for spectrum or other asset acquisitions. It expected 2017 cash property and equipment purchases of $4.8–$5.1 billion, excluding capitalized interest, leases, leased-device transfers and spectrum purchases.

Changes, outlook and notable items

  • First-half net income benefited from $281 million of tax benefits from reducing state deferred-tax valuation allowances and $60 million of excess share-based payment tax benefits. The effective tax rate was 17.0%, versus 37.3% in the prior-year period.
  • Prior-year first-half results included $636 million of pre-tax spectrum disposal gains, compared with $38 million in 2017. This makes year-over-year comparisons of first-half earnings and adjusted EBITDA less representative of underlying operating trends.
  • Management expected full-year 2017 branded postpaid phone ARPU to be generally stable versus 2016, with quarterly variation related in part to customer migrations to T-Mobile ONE. No broader earnings or revenue guidance is stated in the provided filing text.
  • Management cited competition, network quality and expansion, spectrum availability and cost, technology changes, cybersecurity, suppliers, regulation, litigation, labor matters, debt service and credit-market conditions among risks that could affect results. It reported no material change to previously disclosed risk factors.
  • Ordinary-course litigation includes patent matters. Accruals were not considered material; management did not expect the proceedings overall to materially harm financial position, but an unfavorable outcome could materially affect results or cash flows in a particular period. Receivables-sale arrangements had $1.2 billion of stated maximum hypothetical loss exposure, which the company said was not expected exposure and whose triggering circumstances it considered remote.
  • The company expected adoption of the new revenue standard in 2018 to have a material financial statement impact, particularly involving installment-plan accounting, contract acquisition costs and bill credits. It also expected the 2019 lease standard to materially increase recorded assets and liabilities.

Most important facts for investors to verify

  • Whether customer additions, churn and service-revenue growth remain strong amid increased competition, and whether postpaid ARPU tracks management’s stable-2017 expectation.
  • Cash generation and liquidity after the 600 MHz purchase, planned network spending and the sharp decline in cash; confirm the timing and sources of any additional funding.
  • Debt levels, refinancing costs and related-party funding exposure to DT, including the outstanding revolving facility and future maturities.
  • How much reported earnings growth reflects sustainable operating performance versus the state tax valuation-allowance release, share-based tax benefits and prior-year spectrum gains.
  • Execution and returns from 600 MHz deployment, and the eventual effects of revenue- and lease-accounting changes and receivables-sale arrangements.