T-Mobile US, Inc. quarterly report, Q2 FY2016

Full document

T-Mobile US, Inc. — Q2 2016 Form 10-Q

Business context and reporting period. Unaudited quarterly report for the three and six months ended June 30, 2016, with comparisons to the same 2015 periods. T-Mobile reported growth across postpaid, prepaid, and wholesale services, citing Un-carrier initiatives, MetroPCS promotions, and expansion into new markets.

Financial and operating performance

  • Revenue: Q2 total revenue was $9.22 billion, up 13%; service revenue was $6.89 billion, up 12%. First-half revenue was $17.82 billion, up 12%, including service revenue of $13.47 billion, up 13%.
  • Profit: Q2 operating income was $768 million, up 29%, but net income was $225 million versus $361 million; diluted EPS was $0.25 versus $0.42. First-half operating income was $1.87 billion versus $714 million, and net income was $704 million versus $298 million; diluted EPS was $0.81 versus $0.33. First-half results included a $636 million pretax spectrum-disposal gain.
  • Margins and adjusted EBITDA: Adjusted EBITDA, a non-GAAP measure, was $2.46 billion in Q2, up 36%, with a 36% margin on service revenue versus 30%. First-half Adjusted EBITDA was $5.21 billion, up 63%, with a 39% margin versus 27%; the comparison included the spectrum gain. Q2 operating margin was approximately 8.3% of revenue, compared with 7.3% in Q2 2015.
  • Cash flow and investment: Q2 operating cash flow was $1.77 billion; cash purchases of property and equipment were $1.35 billion, leaving Free Cash Flow of $419 million versus negative $30 million. First-half operating cash flow was $2.79 billion, capital spending was $2.68 billion, and Free Cash Flow was $109 million versus negative $523 million. Free Cash Flow is non-GAAP.
  • Cash and liquidity: Cash and equivalents were $5.54 billion at June 30, 2016, versus $4.58 billion at year-end; current assets were $14.28 billion and current liabilities $8.75 billion. The balance included a refundable $2.20 billion deposit for a potential asset purchase. Management said expected funding sources should cover anticipated needs over the next 12 months, excluding additional spectrum needs.
  • Debt: Total debt was approximately $27.4 billion, excluding $2.63 billion of tower obligations, versus approximately $26.2 billion at December 31, 2015. Q2 included issuance of $1.0 billion of 6.000% notes due 2024. The company reported compliance with restrictive debt covenants.
  • Customers and retention: Total customers reached 67.4 million, up 14% year over year. Q2 net additions were 1.88 million versus 2.07 million; branded postpaid phone churn improved to 1.27% from 1.32%, while postpaid phone ARPU declined 2% to $47.11.

Material changes versus the prior comparable period

  • Revenue growth reflected a larger branded customer base. Branded postpaid and prepaid revenues rose 11% and 14% in Q2, respectively; wholesale revenue grew 26%.
  • Q2 net income fell despite higher operating income, primarily as interest expense rose $111 million and income tax expense increased to $147 million from $2 million. Higher depreciation and amortization and selling, general and administrative costs also weighed on earnings.
  • First-half operating results benefited materially from the $636 million spectrum gain from an AT&T transaction. The gain was recorded in Q1 and was absent from Q2.
  • Depreciation and amortization rose 47% in Q2, mainly reflecting leased devices under JUMP! On Demand and LTE network investment. SG&A increased 14%, reflecting customer-growth, commission, and promotional spending.
  • Operating cash flow improved, partly due to increased proceeds from EIP receivable sales. Capital expenditure increased with the LTE build-out. Cash also rose following the sale of short-term investments, which were $2.998 billion at year-end and nil at June 30.

Outlook, commentary, risks, and unusual items

  • Management forecast 2016 cash capital expenditures for property and equipment of $4.5–$4.8 billion, excluding spectrum, capital leases, and leased devices transferred from inventory. No earnings or revenue guidance was provided in the filing.
  • The company made a $2.2 billion refundable deposit in June for a potential asset purchase. The filing does not identify the asset or provide a clear closing timetable for that potential purchase.
  • Pending spectrum transactions include agreements to acquire and exchange licenses, subject to regulatory approval and other conditions; additional gains were expected upon certain anticipated Q3 closings. A separate $420 million spectrum acquisition was expected to close in Q4, subject to approvals.
  • A planned sale of marketing and distribution rights for certain co-branded customers was expected to close late in Q3, subject to approval. Approximately 1.4 million postpaid phone and 0.3 million prepaid customers could be reclassified as wholesale customers, affecting reported churn.
  • Debt-related items include optional note-purchase commitments from majority owner Deutsche Telekom, with deadlines in November 2016, and a $600 million affiliate note whose rate reset from 5.950% to 9.332%. These arrangements and higher debt balances contributed to financing and interest-cost considerations.
  • Receivables-sale arrangements provided liquidity, but T-Mobile retained servicing obligations and certain repurchase and credit-loss exposures. Maximum disclosed exposure to loss was $1.0 billion; the company stated this was a severe hypothetical, not expected loss.
  • Risks cited include competition, network quality and execution, spectrum availability and cost, cybersecurity, supplier and technology disruptions, litigation and regulation, access to financing, debt repayment, and tax changes. The company said ordinary-course litigation could adversely affect results or cash flows in a particular period, although it did not expect material adverse effects on its financial position overall.
  • The company introduced its #GetThanked promotion, including customer stock awards, weekly offers, and free in-flight Wi-Fi. Promotion costs are recorded in revenue or expenses depending on the offer.

Key facts for investors to verify

  • How much of first-half earnings and Adjusted EBITDA growth is sustainable apart from the $636 million spectrum gain and JUMP! On Demand accounting effects?
  • What asset was associated with the $2.2 billion refundable deposit, and what are the closing conditions, timing, and potential cash impact?
  • Whether pending spectrum deals and the co-branded customer transition closed as expected, and their effect on spectrum holdings, customer counts, and churn reporting.
  • How EIP receivable sales, customer credit quality, and the disclosed maximum $1.0 billion exposure evolve; assess cash generation alongside receivables monetization.
  • Debt maturities, optional Deutsche Telekom note commitments, the higher reset-note rate, and planned network investment against the $4.5–$4.8 billion 2016 capital expenditure outlook.