T-Mobile US, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This annual filing also reports unaudited fourth-quarter results. Unless noted otherwise, financial figures are in U.S. dollars.
Business context and performance
T-Mobile provides wireless service, devices and related offerings through its T-Mobile and MetroPCS brands. Its strategy centers on simplified plans, customer-focused promotions and continued LTE network expansion. The company reported more than 71 million total customers at year-end and described itself as the fastest-growing U.S. wireless company by customer growth in 2016.
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $37.242 billion | $32.053 billion | +16% |
| Service revenue | $27.844 billion | $24.821 billion | +12% |
| Operating income | $3.802 billion | $2.065 billion | +84% |
| Net income | $1.460 billion | $733 million | +99% |
| Diluted EPS | $1.69 | $0.82 | Up |
| Adjusted EBITDA (non-GAAP) | $10.391 billion | $7.393 billion | +41% |
| Operating cash flow | $6.135 billion | $5.414 billion | +13% |
| Free cash flow (non-GAAP) | $1.433 billion | $690 million | +108% |
GAAP operating margin was approximately 10.2% of total revenue; net income was approximately 3.9% of total revenue. The company’s Adjusted EBITDA margin was 37% of service revenue, versus 30% in 2015; its disclosed net income margin, also measured against service revenue, was 5% versus 3%.
Fourth-quarter 2016 revenue was $10.175 billion, operating income $942 million, net income $390 million and diluted EPS $0.45. In fourth-quarter 2015, those figures were $8.247 billion, $838 million, $297 million and $0.34, respectively.
Financial position, liquidity and debt
- Cash and cash equivalents were $5.5 billion at year-end, compared with $4.582 billion a year earlier. Current assets were $14.217 billion and current liabilities $9.022 billion.
- Total debt, excluding tower obligations, was $27.786 billion, up from $26.243 billion; tower obligations were a further $2.621 billion. Long-term debt was $27.432 billion, including capital leases.
- Cash purchases of property and equipment were $4.702 billion. The company also used $3.968 billion for spectrum licenses and other intangible assets, including a $2.203 billion refundable deposit for a potential asset purchase.
- At year-end, T-Mobile had a $2.5 billion revolving credit facility with Deutsche Telekom and no borrowings under it. Management said existing funding sources were expected to meet anticipated operating liquidity needs for the next 12 months, excluding potential spectrum acquisitions.
- The company reported compliance with restrictive debt covenants. It has never paid common-stock dividends and did not expect to pay them in the foreseeable future.
Material changes versus 2015
- Service revenue growth reflected a larger average branded customer base. Equipment revenue rose 30%, driven in part by $1.2 billion more lease revenue from JUMP! On Demand and increased device sales.
- Operating expenses rose 12%. Depreciation and amortization increased 33%, including $1.5 billion of depreciation on leased devices; selling, general and administrative expense increased 12% to support customer growth and retention.
- Reported operating income and Adjusted EBITDA benefited from $835 million of gains on spectrum disposals, versus $163 million in 2015. Net income included $509 million of net, after-tax spectrum gains, versus $100 million in 2015.
- Net customer additions were 8.173 million, slightly below 2015. Branded customer additions increased to 6.605 million, while branded postpaid additions declined 9% to 4.097 million. Prepaid additions increased 91% to 2.508 million.
- Branded postpaid phone churn improved to 1.30% from 1.39%; branded prepaid churn improved to 3.88% from 4.45%. The September 2016 transfer of 1.365 million postpaid phone and 326,000 prepaid customers to an MVNO partner improved reported postpaid churn and shifted those customers’ future revenue to wholesale.
- Effective tax rate rose to 37.3% from 25.1%, reflecting higher pretax income and the absence of certain 2015 tax benefits.
Outlook, commentary and notable items
- Capital spending: Management expected 2017 cash property-and-equipment capital expenditures of $4.8–$5.1 billion, excluding capitalized interest, leases, leased devices and spectrum purchases. Spending was expected to be front-loaded as the 700 MHz build-out neared completion.
- Network and customers: LTE coverage reached 314 million people; the company targeted 320 million by year-end 2017. It was participating in the FCC 600 MHz incentive auction, and spectrum purchases could require substantial additional cash and borrowing. Management expected wholesale net additions to be significantly lower in 2017.
- Products: T-Mobile ONE launched in September 2016. In January 2017, the company announced that advertised T-Mobile ONE prices would include monthly service fees and taxes, alongside a price guarantee and a bill credit for qualifying low-usage lines.
- Debt after year-end: In January 2017, T-Mobile USA borrowed $4.0 billion under a secured Deutsche Telekom term loan facility, principally to refinance existing term loans and potentially redeem callable high-yield debt. The company also announced redemptions of $1.0 billion of 2020 notes and $500 million of 2018 notes.
- Unusual items: A handset manufacturer recall led T-Mobile to stop recognizing revenue on affected device sales and impair devices; the manufacturer agreed to reimburse direct and indirect costs. The $2.203 billion asset-purchase deposit was refundable, but the filing does not establish the outcome of the potential purchase.
- Accounting and controls: The company expected a 2017 reclassification of $0.2–$0.3 billion of imputed EIP interest into other revenue and Adjusted EBITDA. It anticipated a material financial-statement impact from the revenue-recognition standard expected to take effect in 2018. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Key risks include intense price and service competition, spectrum availability and cost, network capacity and technology investment, cyberattacks and service disruptions, billing-system implementation, reliance on key suppliers, substantial indebtedness and interest-rate exposure, regulation, and litigation. The company said ordinary-course litigation accruals were not material, but adverse outcomes could affect results or cash flows in a particular period.
Most important facts for investors to verify
- How much of 2016 earnings and EBITDA growth was recurring versus attributable to spectrum-disposal gains and other adjustments.
- Whether customer growth and churn trends remain strong after accounting for the MVNO customer transfer and its effect on reported churn and wholesale revenue.
- Cash generation after network and spectrum spending, and the effects of EIP receivable sales, working-capital movements and device leasing on reported cash flow.
- The cost and financing of spectrum acquisitions, including the potential asset purchase associated with the refundable deposit and the 600 MHz auction.
- Debt service, refinancing plans and leverage after the January 2017 borrowing and announced note redemptions.
- Execution of the LTE expansion, billing-system transition and revenue-accounting changes, along with associated costs and customer or control risks.