T-Mobile US, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. Comparisons are against Q1 2017 unless noted. Amounts are in U.S. dollars.
Business context and performance
T-Mobile provides wireless services and sells or leases devices. It reported 74.0 million total customers at quarter-end, including 59.9 million branded customers. Branded customers increased 8% year over year; total net additions were 1.433 million. The company cited growth in business and existing-market channels, connected devices, DIGITS and MetroPCS, alongside improved postpaid and prepaid churn.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $10.455 billion | $9.613 billion | +9% |
| Service revenue | $7.806 billion | $7.329 billion | +7% |
| Operating income | $1.282 billion | $1.037 billion | +24% |
| Net income | $671 million | $698 million | -4% |
| Diluted EPS | $0.78 | $0.80 | -3% |
| Adjusted EBITDA | $2.956 billion | $2.668 billion | +11% |
| Adjusted EBITDA margin on service revenue | 38% | 36% | +200 bps |
| Net income margin on service revenue | 9% | 10% | -100 bps |
| Operating cash flow | $770 million | $608 million | +27% |
| Free cash flow, company-defined non-GAAP | $668 million | $185 million | +$483 million |
Branded postpaid revenue grew 7% and branded prepaid revenue grew 4%. Equipment revenue rose 15%, partly reflecting device mix and revenue-standard accounting; lease revenue declined. Cost of services rose 13%, SG&A rose 7%, and equipment costs rose 6%. Interest expense to affiliates increased to $166 million from $100 million.
Balance sheet, liquidity and debt
- At March 31, cash and cash equivalents were $2.527 billion, versus $1.219 billion at year-end 2017. Total assets were $72.004 billion.
- Total debt was $30.478 billion, excluding $2.582 billion of tower obligations; $26.7 billion of debt was classified as long-term. Cash capital expenditures were $1.366 billion in the quarter.
- Operating cash flow increased, while reported free cash flow benefited from lower property-and-equipment purchases and higher proceeds from securitization beneficial interests. The company adopted new cash-flow presentation rules, reclassifying approximately $1.3 billion of securitization-related inflows from operating to investing activities in Q1 2018 and retrospectively in Q1 2017.
- Receivables-sale arrangements provided a source of liquidity: $2.7 billion of net receivables had been derecognized. The company retained servicing and other exposure; its disclosed maximum exposure to loss was $1.3 billion, which management said was not an estimate of expected loss.
- The company said existing funding sources were expected to meet anticipated operating liquidity needs for the next 12 months, excluding potential spectrum or other asset acquisitions. It reported compliance with debt covenants at quarter-end.
Changes, outlook and notable items
- Accounting comparability: T-Mobile adopted the new revenue standard on January 1, 2018; prior-year results were not restated. For Q1 2018, adoption increased reported revenue by $47 million, operating income by $95 million, net income by $71 million and diluted EPS by $0.08 compared with the prior standard. Management said the capitalization benefit to operating income was expected to moderate in 2019 and normalize in 2020.
- Profit comparison: Net income declined despite higher operating income, primarily because Q1 2017 included a $270 million tax benefit from a state deferred-tax valuation allowance reduction. Q1 2018 included a $210 million income tax expense.
- Management outlook: The company expected full-year 2018 branded postpaid phone ARPU to be generally stable versus 2017, excluding the new revenue standard’s impact. Expected 2018 cash purchases of property and equipment, excluding capitalized interest, were $4.9–$5.3 billion, including 5G deployment; spending was expected to be front-loaded.
- Hurricanes: Puerto Rico hurricane-related costs reduced Q1 operating income by $36 million and net income by $23 million. Further expenses were expected in 2018; the company also expected additional insurance recoveries. It received $94 million of insurance reimbursements during the quarter.
- Acquisitions and unusual items: T-Mobile acquired Layer3 TV for $318 million and the remaining interest in Iowa Wireless for $25 million. Iowa Wireless generated a $25 million bargain-purchase gain and a $15 million gain on the previously held interest. SG&A included an approximately $40 million FCC settlement related to local ring-back tones in rural areas.
- Proposed Sprint combination: On April 29, 2018, after quarter-end, T-Mobile agreed to an all-stock combination with Sprint, subject to approvals and other conditions, with closing expected in the first half of 2019. The filing described up to $38 billion of committed debt financing, conditional on closing. T-Mobile estimated combined-company indebtedness of approximately $75–$77 billion, excluding tower obligations, based on estimated year-end 2018 balances. The filing highlights regulatory, financing, integration, credit-rating and execution risks; specified minimum credit ratings are a closing condition, and certain termination circumstances could require a $600 million payment to Sprint.
- Capital returns: T-Mobile repurchased $666 million of its stock in Q1. On April 27, the board authorized a total program of up to $9 billion, with the additional $7.5 billion contingent on termination of the Sprint agreement and abandonment of the transaction. Deutsche Telekom separately purchased shares in the market; T-Mobile received no proceeds from those purchases.
- Contingencies: The company reported ordinary-course litigation, investigations and proceedings. It had accrued amounts for certain matters that it did not consider material, but said unfavorable outcomes could materially affect a particular period’s results or cash flows.
Important facts for investors to verify
- How much of revenue, operating income and EBITDA growth reflects underlying performance versus the new revenue standard’s accounting effects.
- Whether customer growth and churn trends persist, and how lower postpaid ARPU and device-leasing revenue affect revenue quality and cash collections.
- Cash generation after network investment, the use and sustainability of receivables-sale funding, and the company’s exposure to credit losses on receivables.
- Debt refinancing and interest costs, including post-quarter note redemptions and any financing required for the proposed Sprint transaction.
- Whether the Sprint transaction secures required regulatory approvals, meets its credit-rating condition, obtains financing on acceptable terms, and delivers forecast integration benefits without materially increasing execution risk.
- Actual 2018 capital expenditures, hurricane-related costs and recoveries, and the status and potential impact of litigation and regulatory matters.