T-Mobile US, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016; filed October 24, 2016. Amounts are in U.S. dollars. Financial comparisons are with the corresponding 2015 periods unless noted.
Business context and reporting period
T-Mobile provides wireless services, devices and related offerings. During the quarter it introduced T-Mobile ONE and ONE Plus unlimited plans. A September 1 transaction transferred marketing and distribution rights for certain co-branded customers to an MVNO partner; 1.365 million postpaid phone customers and 326,000 prepaid customers moved from branded to wholesale reporting. The filing says this transfer improved reported postpaid phone churn.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $9.246 billion | $7.849 billion | $27.067 billion | $23.806 billion |
| Service revenue | $7.133 billion | $6.302 billion | $20.599 billion | $18.265 billion |
| Operating income | $989 million | $513 million | $2.860 billion | $1.227 billion |
| Net income | $366 million | $138 million | $1.070 billion | $436 million |
| Net income attributable to common stockholders | $353 million | $125 million | $1.029 billion | $395 million |
| Diluted EPS | $0.42 | $0.15 | $1.24 | $0.48 |
| Adjusted EBITDA (non-GAAP) | $2.630 billion | $1.908 billion | $7.843 billion | $5.113 billion |
| Operating cash flow | $1.740 billion | $1.531 billion | $4.533 billion | $3.181 billion |
| Free cash flow (non-GAAP) | $581 million | $411 million | $690 million | $(112) million |
Q3 net income margin was 5% versus 2%; Adjusted EBITDA margin was 37% versus 30%. For the nine months, the respective margins were 5% versus 2% and 38% versus 28%. These margins use service revenue as the denominator; Adjusted EBITDA is a non-GAAP measure.
Growth reflected higher branded postpaid and prepaid service revenue, equipment revenue and customer numbers. Total customers reached 69.4 million, up 13% year over year; total branded customers were 52.5 million. Q3 postpaid phone churn was 1.32% versus 1.46%, and prepaid churn was 3.82% versus 4.09%. Postpaid phone ARPU was $48.15, broadly flat year over year; prepaid ARPU was $38.01, up 1%.
Cash and cash equivalents were $5.352 billion at September 30, 2016, versus $4.582 billion at December 31, 2015. Total debt was $27.8 billion excluding tower obligations, including $325 million of short-term debt; tower obligations were $2.629 billion. Capital expenditures for property and equipment were $3.843 billion for the first nine months. Operating cash flow less those purchases produced reported free cash flow of $690 million.
Material changes versus prior periods
- Q3 revenue increased 18% and nine-month revenue increased 14%. Service revenue rose 13% in both periods, primarily on customer-base growth; equipment revenue rose 38% in Q3 and 16% year to date.
- Operating income and net income increased substantially, but results included spectrum-disposal gains of $199 million in Q3 and $835 million year to date. Net after-tax gains were $122 million and $511 million, respectively.
- Adjusted EBITDA increased 38% in Q3 and 53% year to date. Higher service revenue and spectrum gains helped; higher selling, general and administrative costs partly offset growth.
- Depreciation and amortization rose 36% in Q3 and 41% year to date, largely because of leased devices under JUMP! On Demand and LTE network investment. Interest expense also increased with higher third-party debt.
- Reported Q3 and nine-month operating cash flow increased 14% and 43%, respectively. Year-to-date free cash flow improved from negative $112 million to $690 million, while property and equipment purchases increased 17%.
- The year-to-date effective tax rate was 37.8%, compared with 12.3% in 2015, when discrete tax benefits lowered the prior-year rate.
Outlook, management commentary, risks and unusual items
- Management expected 2016 cash capital expenditures for property and equipment of $4.5 billion to $4.7 billion, excluding capital leases, leased devices transferred from inventory and spectrum purchases. The filing gives no specific full-year revenue or earnings guidance.
- Management said existing principal funding sources were expected to meet anticipated liquidity requirements over the next 12 months, excluding additional liquidity needs for spectrum acquisitions. The company was in compliance with debt covenants at quarter-end.
- A refundable $2.2 billion deposit was made in June for a potential asset purchase. The filing does not identify the asset or provide a clear expected closing date. Separately, a $420 million spectrum purchase covering approximately 11 million people was subject to regulatory approval and customary conditions.
- During and after the quarter, a handset OEM recalled certain smartphones. T-Mobile recorded no revenue for affected device sales, impaired devices to net realizable value and recorded an OEM reimbursement offset to the equipment-sales loss.
- Receivables-sale arrangements provided liquidity and involved $2.4 billion of derecognized net receivables. T-Mobile retained servicing and certain repurchase and credit-loss exposure; the disclosed maximum exposure was $1.1 billion, which the company said was not an estimate of expected loss.
- Potential risks include intense wireless competition; network capacity, quality and technology execution; spectrum availability and cost; cybersecurity and supplier disruptions; debt repayment and refinancing; regulation; and litigation. Management said ordinary-course litigation was not expected to materially affect financial position, though unfavorable outcomes could materially affect results or cash flows in a particular period.
- Long-term debt purchase options with majority shareholder Deutsche Telekom included up to $2.0 billion of 5.3% notes and up to $2.0 billion of 6.0% notes, subject to specified election deadlines and terms. These were options, not all completed borrowings at quarter-end.
Most important facts for investors to verify
- How much reported earnings and Adjusted EBITDA growth depended on spectrum gains, and how performance looks excluding those gains.
- Whether the $2.2 billion potential asset purchase and the $420 million spectrum transaction closed, and their eventual cash and strategic effects.
- Actual full-year property and equipment spending against management’s $4.5 billion to $4.7 billion outlook, alongside spectrum spending and free cash flow.
- Debt levels, interest costs, any exercise of Deutsche Telekom note options, and the company’s ability to fund network and spectrum needs.
- Trends in customer additions, churn and ARPU, taking account of the MVNO transfer and its effect on reported customer classifications and churn.
- Resolution and reimbursement of the recalled-handset matter, and actual losses or liquidity effects from receivables sales, EIP credit quality and related exposures.