T-Mobile US, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unless otherwise noted, financial amounts are in U.S. dollars. Comparisons are with Q1 2013, but are affected by MetroPCS being included only after its April 2013 combination with T-Mobile.
Business context and operating performance
T-Mobile reported strong customer growth amid continued investment in its network and customer offers. Management attributed improved customer additions and churn partly to its Un-carrier proposition. MetroPCS results materially affect year-over-year comparability, particularly prepaid revenue and customer counts.
- Total customers reached 49.1 million, up 44% year over year; net additions were 2.391 million versus 579,000.
- Branded postpaid net additions were 1.323 million, compared with net losses of 199,000 a year earlier. Postpaid churn improved to 1.5% from 1.9%; prepaid churn was 4.3% versus 7.0%.
- Postpaid ARPU declined to $50.01 from $54.07, while postpaid average billings per user rose to $59.54 from $57.28, reflecting increased equipment-installment billings.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $6.875 billion | $4.677 billion |
| Service revenue | $5.337 billion | $4.005 billion |
| Operating income (loss) | $(28) million | $379 million |
| Net income (loss) | $(151) million | $107 million |
| Diluted earnings (loss) per share | $(0.19) | $0.20 |
| Adjusted EBITDA (non-GAAP) | $1.088 billion | $1.178 billion |
| Adjusted EBITDA margin | 20% | 29% |
| Cash provided by operating activities | $759 million | $909 million |
| Property and equipment purchases | $947 million | $1.076 billion |
- Revenue rose 47%, with service revenue up 33%. Branded postpaid revenue increased 6%; branded prepaid revenue increased substantially, principally because MetroPCS results were included in 2014 but not 2013.
- Operating expenses increased 61% to $6.903 billion. Equipment costs, selling and administrative expenses, and depreciation and amortization all increased. Management cited MetroPCS inclusion, higher smartphone sales, promotional and commission costs, and LTE network investment.
- Adjusted EBITDA fell 8% despite approximately $250 million attributed to MetroPCS. Management cited equipment-sale losses, higher selling costs, and approximately $100 million of early-termination-fee reimbursements under Un-carrier phase 4.0.
- Cash and cash equivalents were $5.471 billion at quarter-end, down from $5.891 billion at December 31, 2013. Current assets were $12.957 billion and current liabilities $6.110 billion.
- Reported borrowings included $14.331 billion of long-term debt, $5.600 billion of long-term debt to affiliates, $151 million of short-term debt, and $309 million of current payables and short-term debt to affiliates. These figures exclude the $2.504 billion long-term financial obligation. The company reported compliance with debt covenants.
- Cash flow from operations less property and equipment purchases was approximately negative $188 million, calculated from the reported figures. Net cash used in investing activities was $965 million and in financing activities $214 million.
Material changes, outlook, and risks
- Spectrum: In April 2014, after quarter-end, T-Mobile paid Verizon approximately $2.4 billion in cash and transferred AWS and PCS spectrum for 700 MHz A-Block licenses. The licenses cover more than 150 million people in 23 markets. T-Mobile expected to recognize the acquired licenses at fair value and a non-cash gain after valuation was finalized in Q2. The transaction was funded with cash on hand.
- Capital spending outlook: Management expected 2014 cash capital expenditures for property and equipment of $4.3–$4.6 billion, excluding spectrum purchases. No specific revenue or earnings guidance is provided in the supplied filing text.
- Receivables factoring: A new two-year revolving arrangement has a $500 million maximum funding limit. Q1 net cash proceeds were $434 million; $546 million of net receivables had been derecognized by quarter-end. The company retains servicing duties and certain repurchase and credit-loss exposure; disclosed maximum exposure was $279 million and was characterized as a severe hypothetical, not expected loss.
- Installment-plan exposure: Net equipment installment plan receivables were $3.086 billion, up from $2.546 billion at year-end; the allowance for credit losses was $97 million. Growth in installment sales and receivables is relevant to cash flow and credit quality.
- Other items and risks: Early-termination-fee reimbursements reduced revenue and Adjusted EBITDA by approximately $100 million. A MetroPCS-related stockholder lawsuit was settled and dismissed in April 2014. The company also described ordinary-course litigation and regulatory matters, including third-party billing inquiries; outcomes may be adverse. Management said risk factors had not materially changed from the 2013 Form 10-K.
Important facts for investors to verify
- How much of reported growth in revenue, customers, and prepaid performance reflects MetroPCS inclusion rather than underlying comparable growth.
- Whether customer additions and churn improvements can persist while postpaid ARPU and Adjusted EBITDA margin remain under pressure.
- The final valuation, non-cash gain, network benefits, and cash impact of the April spectrum transactions.
- Trends in equipment-installment receivables, delinquencies, allowances, and factoring-related recourse or exposure.
- Execution of the $4.3–$4.6 billion capital expenditure plan and the resulting effect on operating cash flow, liquidity, and debt.
- The reconciliation and limitations of non-GAAP Adjusted EBITDA, and the potential financial effects of litigation and regulatory proceedings.