T-Mobile US, Inc. quarterly report, Q3 FY2022

T-Mobile US, Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022; comparisons are with the same 2021 periods unless otherwise noted. Amounts are in U.S. dollars. The interim statements are unaudited.

Financial performance

Metric	Q3 2022	Q3 2021	Year to date 2022	Year to date 2021
Total revenue	$19.477 billion	$19.624 billion	$59.298 billion	$59.333 billion
Service revenue	$15.361 billion	$14.722 billion	$45.805 billion	$43.406 billion
Operating income	$1.281 billion	$1.584 billion	$3.796 billion	$5.829 billion
Net income	$508 million	$691 million	$1.113 billion	$2.602 billion
Diluted EPS	$0.40	$0.55	$0.88	$2.07
Operating cash flow	$4.391 billion	$3.477 billion	$12.445 billion	$10.917 billion
Capital expenditures	$3.634 billion	$2.944 billion	$10.587 billion	$9.397 billion
Free cash flow (non-GAAP)	$2.065 billion	$1.559 billion	$5.472 billion	$4.534 billion

Postpaid revenue rose 7% in Q3 and 8% year to date, driven by higher average postpaid accounts and ARPA. Total service revenue increased 4% in Q3 and 6% year to date. Total revenue was nearly flat year to date as equipment revenue declined 17%, partly reflecting the shift from device leasing to equipment installment plans and changes in device sales and promotions.

Net income fell 26% in Q3 and 57% year to date. Operating income declined 19% and 35%, respectively. The Q3 comparison included a $1.071 billion loss on the Wireline disposal group; year-to-date results also included a $477 million Wireline impairment. Merger-related costs were $1.296 billion in Q3 and $4.377 billion year to date. These items materially affect comparisons with 2021.

Management-reported non-GAAP Adjusted EBITDA was $7.039 billion in Q3, up 3%, and $20.993 billion year to date, up 2%. Core Adjusted EBITDA was $6.728 billion in Q3, up 11%, and $19.809 billion year to date, up 11%. Q3 Adjusted EBITDA margin was 46% and Core Adjusted EBITDA margin was 44%; year-to-date margins were 46% and 43%, respectively. These measures exclude specified items and are not substitutes for GAAP results.

Cash, debt and liquidity

• Cash and cash equivalents were $6.888 billion at September 30, 2022, versus $6.631 billion at December 31, 2021.
• Total debt was $73.727 billion, including $7.398 billion of short-term debt and $1.495 billion of long-term debt to affiliates. Debt and financing lease liabilities totaled $76.6 billion, excluding tower obligations; tower obligations were $3.970 billion.
• Operating cash flow increased 14% year to date. Investing cash use was $10.206 billion, including $10.587 billion of property and equipment purchases and $3.319 billion of spectrum license and intangible asset purchases, partly offset by securitization-related proceeds.
• Free cash flow, a company-defined non-GAAP measure, includes proceeds related to beneficial interests in securitization transactions. It rose 21% year to date to $5.472 billion.
• The company reported no borrowings under its $5.5 billion revolving credit facility at quarter-end. An October 17, 2022 amendment increased the facility to $7.5 billion. The company said it was in compliance with restrictive debt covenants at September 30.
• In October, T-Mobile issued $750 million of asset-backed notes secured by EIP receivables. The filing also reports subsequent share repurchases of $815 million through October 20.

Business changes and operating trends

• Postpaid net account additions were 394,000 in Q3, up 47%; total customer additions were 1.732 million, up 31%. The company attributed growth primarily to its market expansion strategy and High Speed Internet.
• At September 30, total postpaid customer accounts were 28.212 million, up 5% year over year. Total customers were 111.755 million, up 5%; reported totals reflect adjustments related to legacy network decommissioning and other changes.
• Postpaid phone churn improved to 0.88% from 0.96% in Q3. Postpaid ARPA increased 2% to $137.49; postpaid phone ARPU increased 2% to $48.89.
• T-Mobile retired the legacy Sprint CDMA network in Q2 and the LTE network in Q3 2022, while continuing network integration and 5G expansion. It reported that substantially all targeted Sprint macro sites had been decommissioned by quarter-end.

Outlook, risks and unusual items

• Management expected 2022 Merger synergies of $2.4 billion in SG&A reductions, $2.0–$2.1 billion in cost-of-service reductions, and $1.3 billion in avoided network expenses. It expected total 2022 Merger-related costs of $4.8–$5.0 billion and approximately $1.1 billion of remaining integration and restructuring costs, substantially all by the end of 2023.
• The company said it expected principal funding sources to cover operating liquidity needs for the next 12 months, excluding liquidity that might be needed for spectrum acquisitions, other long-lived assets, or stockholder returns. It expected capital expenditures related to integration efforts to decline after 2022, with future investment including recently acquired spectrum.
• The planned sale of the legacy Sprint Wireline Business to Cogent is expected to close in the second half of 2023, subject to conditions and approvals. The stated purchase price is $1, but T-Mobile also committed to a $700 million IP transit agreement and recorded a $1.071 billion pre-tax disposal-group loss. The sale was not classified as a discontinued operation.
• The proposed settlement of the August 2021 cyberattack class action remained subject to final court approval. If approved, it calls for $350 million in payments and $150 million of incremental data-security spending in 2022 and 2023. T-Mobile recorded a $400 million pre-tax charge in Q2 and recognized $50 million of insurance reimbursements through Q3; regulatory inquiries and other claims could result in additional costs.
• Other risks cited include competition, supply-chain constraints, inflation and interest rates, macroeconomic uncertainty and credit losses, spectrum costs, substantial indebtedness and access to financing, merger integration, and litigation and regulatory matters. Management noted increased credit-loss activity amid normalization from pandemic-era levels and economic uncertainty.
• The board authorized a share repurchase program of up to $14 billion through September 30, 2023. T-Mobile repurchased $669 million through quarter-end; the program is discretionary and may be suspended or changed. The company stated that it does not intend to pay cash dividends in the foreseeable future.

Most important facts for investors to verify

1. How much of the decline in GAAP operating income and earnings is attributable to the Wireline disposal charge, impairment, merger integration costs, and other unusual items—and how much reflects recurring operating trends.
2. Whether operating cash flow and free cash flow remain durable as network investment, merger-related payments, working-capital needs, and receivables securitization change.
3. Progress on merger synergies, remaining integration costs, and the expected timing and scale of post-2022 capital expenditures.
4. Final approval and ultimate costs of the cyberattack settlement, along with potential regulatory penalties, opt-outs, appeals, and insurance recoveries.
5. Execution and economics of the Wireline sale, including the $700 million IP transit commitment, and the planned $3.5 billion 600 MHz spectrum purchase expected to close in 2023 subject to approvals.
6. Debt maturities, borrowing costs, covenant headroom, and the balance between spectrum investment, debt service, and the authorized buyback program.