T-Mobile US, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results. T-Mobile USA and MetroPCS combined on April 30, 2013; MetroPCS results are included only from May 1 through June 30, and prior-period comparisons are therefore not fully like-for-like.
Business context and performance
T-Mobile reported approximately 44.0 million customers at quarter-end. Its strategy centered on no-contract Simple Choice plans, equipment installment plans, network modernization and LTE deployment. The MetroPCS combination added scale and spectrum; Deutsche Telekom received approximately 74% of the combined company’s fully diluted shares.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $6.228bn | $4.883bn | $10.905bn | $9.917bn |
| Service revenue | $4.756bn | $4.381bn | $8.762bn | $8.825bn |
| Operating income | $181m | $452m | $560m | $949m |
| Net income (loss) | $(16)m | $207m | $91m | $407m |
| Adjusted EBITDA | $1.124bn | $1.338bn | $2.302bn | $2.612bn |
| Adjusted EBITDA margin | 24% | 31% | 26% | 30% |
Q2 operating margin was approximately 2.9% versus 9.3% a year earlier; net margin was approximately (0.3)% versus 4.2%. Adjusted EBITDA and its margin are non-GAAP measures; the filing calculates the margin using service revenue.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1.715bn, down from $1.909bn. Property and equipment purchases were $2.126bn, versus $1.286bn.
- Investing activities provided $262m, principally reflecting $2.144bn of cash acquired with MetroPCS, offset by network investment. Financing activities used $9m.
- Cash and cash equivalents were $2.362bn at June 30, up from $394m at year-end, substantially reflecting acquired MetroPCS cash.
- Debt included $11.2bn of notes payable to Deutsche Telekom and approximately $6.3bn of MetroPCS long-term debt assumed. The company also reported $2.479bn of long-term financial obligations. A $500m Deutsche Telekom revolver had no borrowings outstanding; vendor financing outstanding was $193m.
- Management said available funding sources were expected to meet anticipated liquidity needs for the next 12 months. The company forecast 2013 cash capital expenditures for property, equipment and spectrum of $4.0bn–$4.2bn.
Material changes and management commentary
- Q2 revenue increased 28%, but service revenue growth was much more modest. Branded postpaid revenue fell 12% as postpaid ARPU declined and average postpaid customers were lower; branded prepaid revenue rose sharply, substantially reflecting MetroPCS consolidation.
- Equipment sales more than tripled year over year, driven by higher handset sales and the shift to plans where customers pay separately for devices. Equipment costs and customer acquisition expenses also increased, contributing to lower operating income and Adjusted EBITDA.
- Management reported 688,000 branded postpaid net additions in Q2, versus losses of 557,000 a year earlier, and postpaid churn improved to 1.6% from 2.1%. Branded postpaid ARPU declined to $53.60 from $57.35.
- Management said nationwide LTE coverage for 200 million people in more than 200 metropolitan areas remained on target for year-end 2013. The planned network modernization investment was approximately $4bn; MetroPCS customer migration was expected to finish by the end of 2015.
Risks, contingencies and unusual items
- The company cited risks from competition and pricing pressure, integration and synergy execution, network upgrades and migration, spectrum access and cost, customer credit and equipment installment receivables, supplier dependence, cybersecurity, regulation and litigation.
- Debt and related covenants constrain financial and operating flexibility; variable-rate exposure could raise debt service costs. Deutsche Telekom is both controlling shareholder and a significant creditor.
- Six putative stockholder suits and a separate federal action challenged the MetroPCS transaction. Management said it intended to defend the cases and did not expect them to materially adversely affect financial position, results or cash flows; outcomes remain uncertain.
- Q2 included $26m of MetroPCS transaction costs and $23m of restructuring costs. The unusually high 395.2% quarterly effective tax rate reflected nondeductible costs and retroactive Puerto Rico tax-rate changes.
- Disclosure controls were deemed effective. Integration of the companies’ financial-reporting controls was ongoing after the merger, and the company planned to report on the combined entity’s internal-control assessment in its next annual report.
Important facts for investors to verify
- Separate underlying performance from MetroPCS acquisition effects, including the impact on customers, revenue, EBITDA and cash.
- Track whether postpaid additions and improved churn persist, and whether lower postpaid ARPU is offset by customer growth and device economics.
- Compare actual LTE/network capital spending and MetroPCS integration progress with management’s stated timelines and expected benefits.
- Review debt service, variable-rate exposure, affiliate financing terms and covenant restrictions alongside cash generation and the $4.0bn–$4.2bn 2013 capital expenditure forecast.
- Monitor equipment installment receivable growth and credit losses, transaction litigation, and the completion of financial-control integration.