T-Mobile US, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial figures below are in billions unless stated otherwise.
Business context and reporting period
T-Mobile completed its all-stock Sprint merger on April 1, 2020, and combined the companies under the T-Mobile brand nationwide on August 2. Sprint results are consolidated from the merger date, so reported comparisons with 2019 are not like-for-like. On July 1, T-Mobile sold the Boost Mobile and Sprint prepaid businesses to DISH for $1.4 billion, subject to a working-capital adjustment; related results are presented as discontinued operations for the nine-month period.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $19.27 | $11.06 | $48.06 | $33.12 |
| Operating income | $2.57 | $1.47 | $4.92 | $4.49 |
| Net income | $1.25 | $0.87 | $2.31 | $2.72 |
| Diluted EPS | $1.00 | $1.01 | $2.06 | $3.15 |
| Operating cash flow | $2.77 | $1.75 | $5.17 | $5.29 |
| Capital expenditures | $3.22 | $1.51 | $7.23 | $5.23 |
| Adjusted EBITDA (non-GAAP) | $7.13 | $3.40 | $17.81 | $10.14 |
Q3 operating margin was approximately 13.3%, versus 13.3% a year earlier; net margin was approximately 6.5%, versus 7.9%. Adjusted EBITDA margin, which the company calculates using service revenue, was 50% versus 39% in Q3 and 49% versus 40% for the nine-month periods. These comparisons reflect the merger’s effect on reported scale and mix.
- Revenue mix: Q3 service revenue was $14.14 billion, including postpaid revenue of $10.21 billion; equipment revenue was $4.95 billion. Postpaid growth primarily reflected Sprint customers acquired in the merger. Prepaid revenue was essentially flat.
- Profit and costs: Q3 operating income rose 74% year over year, while nine-month net income fell 15%. Higher depreciation, interest, integration and merger costs weighed on results. Nine-month results also included $418 million of impairment expense: $218 million for Layer3 goodwill and $200 million for postpaid billing-system software.
- Cash flow: Reported free cash flow was $352 million in Q3 and $182 million for nine months. Nine-month free cash flow excluding the $2.34 billion gross settlement of interest-rate swaps was $2.53 billion; this is a non-GAAP measure. Nine-month operating cash flow included substantial working-capital uses and merger-related cash costs.
- Debt and liquidity: At September 30, cash and cash equivalents were $6.57 billion. Debt on the balance sheet totaled $66.77 billion, including affiliate debt; the company reported $69.2 billion of debt and financing-lease liabilities excluding tower obligations. A $5.5 billion revolving facility had no borrowings outstanding. Current liabilities slightly exceeded current assets ($19.84 billion versus $19.47 billion).
- Other balance-sheet changes: Assets rose to $192.44 billion from $86.92 billion at year-end 2019, largely reflecting the Sprint acquisition and acquired spectrum. Operating lease right-of-use assets and liabilities also increased substantially; a September tower lease modification added $11.0 billion to each.
Material changes versus prior periods
- Q3 revenue increased 74%; nine-month revenue increased 45%. The acquired Sprint business is a major driver, and the periods are not directly comparable.
- Nine-month operating income increased 10%, but net income decreased 15%, principally reflecting higher interest expense and other expense following merger financing, partly offset by higher operating income.
- Nine-month postpaid phone net additions were 1.394 million, down from 2.120 million. Total postpaid net additions were 3.868 million, up from 3.201 million, led by connected-device additions. Q3 postpaid phone churn was 0.90%, compared with 0.89%; prepaid churn improved to 2.86% from 3.98%.
- Q3 postpaid phone ARPU increased 5% to $48.55; postpaid ARPA rose 1% to $133.03. These operating metrics include merger-related customer-base and classification changes.
Outlook, management commentary, and risks
- Management expects merger synergies and cost efficiencies from combining networks, systems, retail operations and back-office functions, while anticipating elevated integration and restructuring costs initially. Restructuring is expected to continue over three years, with substantially all costs incurred by fiscal 2023; $580 million was recorded in the first nine months of 2020.
- The company emphasized nationwide 5G deployment and integration of Sprint’s network. Nine-month property and equipment purchases were $7.23 billion. No specific earnings or revenue guidance was provided in the supplied filing text.
- Management said available funding is expected to cover anticipated liquidity needs, subject to uncertainty from the pandemic, integration costs and potential spectrum purchases. The company may issue additional debt for general purposes, spectrum acquisitions or refinancing. It reported compliance with restrictive debt covenants at quarter-end.
- COVID-19 effects included $458 million of incremental employee, dealer-commission and cleaning costs for the first nine months; these costs were not significant in Q3. Management cited potential pressure on customer additions and device sales, higher bad debt, and supply-chain disruption.
- Other key risks include realizing merger synergies, network and systems integration, competition and pricing pressure, high capital requirements, debt service and refinancing, customer credit losses, cybersecurity, regulatory obligations and litigation. Regulatory merger commitments include extensive 5G and coverage build-out obligations; failure to meet them could result in penalties.
- Subsequent to quarter-end, T-Mobile reported a $200 million agreement to resolve an FCC investigation; SoftBank agreed to indemnify the settlement. It also issued additional secured notes and entered into a $5.0 billion secured term-loan commitment.
Important facts for investors to verify
- Assess comparable post-merger operating performance using pro forma disclosures, customer trends and the effect of the prepaid divestiture—not reported revenue growth alone.
- Track realized merger synergies against integration, restructuring and network-investment costs, including the expected timeline and total cash impact.
- Reconcile debt, lease and tower obligations, interest costs, maturities and subsequent refinancing activity; confirm covenant headroom and liquidity after capital spending.
- Evaluate cash conversion and free cash flow, including the effects of working capital, receivables sales, capital expenditures and the one-time interest-rate-swap settlement.
- Monitor customer additions, churn, ARPU and bad-debt allowances, noting pandemic effects and changes in customer definitions after the merger.
- Review the final purchase-price allocation, impairment assumptions, DISH-related commitments and indemnification, and progress against regulatory 5G and coverage commitments.