T-Mobile US, Inc. — Q1 2017 Form 10-Q Summary
Reporting period: Three months ended March 31, 2017; unaudited. Unless stated otherwise, amounts are in U.S. dollars. Comparisons are with Q1 2016, as adjusted for an accounting presentation change.
Business context and operating performance
T-Mobile provides wireless communications services, equipment and related products. Management attributed service-revenue growth primarily to customer-base expansion, Un-carrier initiatives, MetroPCS performance and higher postpaid and prepaid ARPU.
- Customers at quarter-end totaled 72.6 million, up 11% year over year. Total branded customers rose 9%; wholesale customers rose 19%.
- Net customer additions were 1.142 million, down from 2.221 million. Branded additions declined 30%; wholesale net losses increased, partly due to MVNO partners deemphasizing Lifeline.
- Postpaid phone churn improved to 1.18% from 1.33%; prepaid churn increased to 4.01% from 3.84%.
- Branded postpaid phone ARPU rose 3% to $47.53; prepaid ARPU rose 3% to $38.53. Postpaid ABPU was essentially unchanged at $61.89.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $9.613 billion | $8.664 billion | +11% |
| Service revenue | $7.329 billion | $6.578 billion | +11% |
| Operating income | $1.037 billion | $1.168 billion | -11% |
| Net income | $698 million | $479 million | +46% |
| Net income attributable to common stockholders | $684 million | $465 million | +47% |
| Diluted earnings per share | $0.80 | $0.56 | +$0.24 |
| Adjusted EBITDA (non-GAAP) | $2.668 billion | $2.814 billion | -5% |
| Operating cash flow | $1.713 billion | $1.025 billion | +67% |
| Free cash flow (non-GAAP) | $185 million | $(310) million | +$495 million |
- Adjusted EBITDA margin was 36%, down from 43%; net income margin was 10%, up from 7%. Margins are as reported in the filing and use service revenue as the denominator.
- Operating expenses rose 14% to $8.576 billion. Higher equipment costs and SG&A, plus much lower spectrum-disposal gains, more than offset revenue growth. Equipment sales cost rose 13%; SG&A rose 7%.
- Cash purchases of property and equipment were $1.528 billion. Investing cash outflow was $1.550 billion. Financing provided $1.838 billion, including $5.495 billion of debt proceeds and $3.480 billion of debt repayments.
- Cash and cash equivalents were $7.501 billion at quarter-end, versus $5.500 billion at year-end 2016. Current assets were $15.899 billion and current liabilities $15.285 billion.
- Total debt was $30.247 billion, excluding $2.614 billion of tower obligations. Short-term debt was $7.542 billion; long-term debt was $13.105 billion, plus $9.600 billion owed to affiliates. The filing says the company was in compliance with restrictive debt covenants at March 31.
Material changes, outlook and management commentary
- Revenue growth reflected higher branded postpaid and prepaid service revenue and equipment sales. Postpaid phone revenue increased 10%; prepaid revenue increased 14%. Equipment revenue increased 10%, while equipment sales costs rose faster, contributing to greater equipment losses.
- Operating income declined despite revenue growth, in part because spectrum gains were $37 million versus $636 million in Q1 2016. Net income increased principally because of a $270 million state deferred-tax valuation-allowance benefit and $56 million of excess tax benefits on share-based payments. The effective tax rate was a 15.0% benefit versus a 36.2% expense in Q1 2016.
- The company retrospectively reclassified EIP imputed discount from interest income to other revenue: $62 million in Q1 2017 and $65 million in Q1 2016. This changed presentation, not net income or EPS.
- Management expected full-year 2017 postpaid phone ARPU to be generally stable versus 2016, with quarterly variation. It expected 2017 cash capital expenditures for property and equipment of $4.8–$5.1 billion, excluding capitalized interest, leases, leased devices and spectrum purchases. Management stated existing funding sources, excluding potential spectrum acquisitions, should meet anticipated operating liquidity needs for the next 12 months.
- After quarter-end, the FCC announced T-Mobile won 1,525 licenses in the 600 MHz auction for $8.0 billion. The remaining $5.8 billion was due by May 11, 2017; the company planned to use cash and $4.0 billion of notes to Deutsche Telekom (DT) toward the purchase. It also reported subsequent debt redemptions and planned issuances to DT.
- Key risks identified include wireless competition, network quality and investment needs, spectrum access and cost, technology and supplier disruptions, cybersecurity, litigation and regulation, labor matters, debt service and credit-market conditions. The company reported no material changes to its previously disclosed risk factors and no material expected adverse effect on financial position from its litigation matters, while noting an unfavorable outcome could affect results or cash flow in a particular period.
Important facts for investors to verify
- Whether customer-addition trends, particularly lower branded additions and wholesale losses, persist, and how churn and ARPU develop.
- Whether operating profitability and Adjusted EBITDA recover as equipment costs, promotions, SG&A and network spending evolve; distinguish recurring performance from prior-year spectrum gains.
- How much of the net-income increase is attributable to the one-time tax valuation-allowance release and share-based tax benefits, and whether further valuation-allowance releases occur.
- Funding and completion of the $8.0 billion 600 MHz purchase, related DT financing, subsequent debt redemptions, and the impact on leverage, interest expense and liquidity.
- Progress against the $4.8–$5.1 billion cash capex outlook, network deployment plans and related financing needs.
- Effects of receivables-sale arrangements, including $95 million of Q1 losses on receivable sales and the disclosed $1.1 billion maximum exposure to loss, which the company says is not its expected loss.