T-Mobile US, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial amounts are in millions unless otherwise noted. Comparisons are with the corresponding 2016 periods; 2016 results were retrospectively adjusted to reclassify imputed EIP interest income to other revenue.
Business context and performance
T-Mobile provides wireless communications services, including branded postpaid and prepaid offerings, and sells and finances devices. Management attributed growth to customer-base expansion, Un-carrier promotions, and MetroPCS; it also cited competitive pressure, lower postpaid phone ARPU, and hurricane impacts. The company introduced T-Mobile ONE promotions and a Netflix benefit for qualifying family-plan customers.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $10,019 | $9,305 | $29,845 | $27,256 |
| Service revenue | $7,629 | $7,133 | $22,403 | $20,599 |
| Operating income | $1,323 | $1,048 | $3,776 | $3,049 |
| Net income | $550 | $366 | $1,829 | $1,070 |
| Diluted EPS | $0.63 | $0.42 | $2.10 | $1.24 |
| Operating cash flow | $2,362 | $1,740 | $5,904 | $4,533 |
| Free cash flow (non-GAAP) | $921 | $581 | $1,588 | $690 |
| Adjusted EBITDA (non-GAAP) | $2,822 | $2,689 | $8,502 | $8,032 |
- Q3 revenue rose 8%, operating income 26%, and net income 50%; nine-month revenue rose 9%, operating income 24%, and net income 71%.
- Adjusted EBITDA margin, calculated on service revenue, was 37% in Q3 and 38% in the prior-year quarter; nine-month margins were 38% and 39%. Net income margin on service revenue was 7% versus 5% in Q3, and 8% versus 5% for nine months.
- Growth in service revenue was partly offset by higher service costs and SG&A. Q3 equipment revenue increased 9%, while lease revenue declined as the JUMP! On Demand customer base shifted toward EIP financing.
- For nine months, reported earnings benefited from a lower effective tax rate and $289 million of tax benefits from valuation-allowance reductions. Spectrum disposal gains were $67 million, versus $835 million in the comparable 2016 period; net after-tax spectrum gains were $41 million versus $511 million.
Financial position, liquidity, and debt
- At September 30, 2017, cash was $739 million, down from $5.5 billion at December 31, 2016. Current assets were $7.4 billion and current liabilities $8.1 billion.
- Total debt was $28.3 billion, excluding $2.6 billion of tower obligations; $27.7 billion of debt was classified as long-term. Debt to affiliates was $14.6 billion, up from $5.6 billion at year-end. The company reported compliance with debt covenants and no outstanding balance on its $1.5 billion DT revolving facility at quarter-end.
- Nine-month investing cash outflow was $10.1 billion, including $5.8 billion for spectrum licenses and $4.3 billion of property and equipment purchases. Operating cash flow less cash property-and-equipment purchases, the company’s free cash flow measure, was $1.6 billion.
- The company won 1,525 licenses in the 600 MHz auction for $8.0 billion, funded with cash reserves and debt, and began network deployment in Q3. It expected 2017 cash property-and-equipment purchases of $4.8–$5.1 billion, excluding capitalized interest, and expected to be at the high end.
Material changes, outlook, and risks
- Debt refinancing included $8.25 billion of third-party note redemptions and new borrowing from Deutsche Telekom, T-Mobile’s majority stockholder, including $4.0 billion of term loans and $4.0 billion of notes to fund part of the spectrum purchase. Debt restructuring reduced third-party interest expense, while affiliate interest expense increased.
- Management expected full-year 2017 branded postpaid phone ARPU to be generally stable versus 2016, with quarterly variation. It stated that anticipated funding sources, excluding potential spectrum or other asset acquisitions, should meet business needs for the next 12 months.
- Hurricanes affected Texas, Florida, and Puerto Rico. The preliminary impact was $148 million to operating income and $90 million to net income for both the quarter and nine-month period; additional Q4 expense and customer impacts were expected, particularly in Puerto Rico. No insurance recoveries had been recognized.
- The company expected ASC 606 revenue adoption in January 2018 to have a material financial-statement impact, notably from capitalization and amortization of contract acquisition costs; it estimated $450–$550 million of such costs incurred in the first nine months of 2017 may require capitalization. Lease accounting adoption in 2019 was also expected to materially increase recognized assets and liabilities.
- Risks include competition and customer growth trends, network investment and spectrum costs, technology and security issues, natural disasters, debt service and refinancing, regulation, litigation, and supplier disruptions. Ordinary-course litigation was not expected to materially harm financial position, but an unfavorable outcome could materially affect results or cash flows in a period. Management reported effective disclosure controls and no material change in risk factors from the 2016 Form 10-K.
Important facts for investors to verify
- Whether customer additions and prepaid churn trends persist: branded net additions declined 37% in Q3 year over year; postpaid phone churn improved to 1.23%, while prepaid churn increased to 4.25%.
- Whether growth converts to durable cash generation as network spending, spectrum investment, and EIP receivables continue to consume liquidity.
- The quality of earnings comparisons, including reduced spectrum gains, hurricane losses, and the $289 million valuation-allowance tax benefit.
- Debt maturity, interest-rate, and related-party exposure given the increased DT debt balance and affiliate interest expense.
- Final hurricane costs and any insurance recoveries; ASC 606 implementation effects; and the December 2017 mandatory preferred-stock conversion, which could issue at least 32.2 million common shares.