T-Mobile US, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet figures are as of March 31, 2015. Comparisons are with Q1 2014 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated.
Business context
T-Mobile provides wireless services to postpaid, prepaid, and wholesale customers. Management emphasized customer growth and retention through its Un-carrier offers, network investment, and expansion of LTE coverage. The company reported 56.8 million customers at quarter-end, up from 49.1 million a year earlier.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $7.778 billion | $6.875 billion |
| Service revenue | $5.819 billion | $5.337 billion |
| Operating income (loss) | $117 million | $(28) million |
| Net loss | $(63) million | $(151) million |
| Net loss attributable to common stockholders | $(77) million | $(151) million |
| Adjusted EBITDA (non-GAAP) | $1.388 billion | $1.088 billion |
| Adjusted EBITDA margin | 24% | 20% |
| Operating cash flow | $489 million | $759 million |
| Cash capital expenditures for property and equipment | $982 million | $947 million |
Revenue increased 13%; service revenue rose 9%, led by branded postpaid revenue growth of 9% and branded prepaid growth of 12%. Equipment sales increased 28%, reflecting higher device volumes and average revenue per device. Operating expenses increased 11%, including higher equipment costs, selling and administrative expenses, and network decommissioning costs. Basic and diluted loss per share were both $0.09, versus $0.19 in the prior-year quarter.
Adjusted EBITDA increased 28%, which management attributed to service revenue growth, partly offset by promotional and other growth-related costs and a $112 million non-cash Data Stash revenue deferral. Management said the deferral was expected to reverse fully during 2015. Branded postpaid phone churn improved to 1.30% from 1.47%; branded prepaid churn increased to 4.62% from 4.34%. Total net customer additions were 1.818 million, compared with 2.391 million.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $3.032 billion, down from $5.315 billion at December 31, 2014. Total assets were $56.558 billion.
- Current assets were $11.635 billion and current liabilities were $8.649 billion.
- Reported short-term debt was $467 million; long-term debt was $16.261 billion and long-term debt to affiliates was $5.600 billion. Long-term financial obligations were an additional $2.523 billion.
- Net cash used in investing activities was $2.692 billion, including $1.696 billion for spectrum licenses and other intangible assets and $982 million for property and equipment. Financing activities used $80 million.
- Operating cash flow fell to $489 million from $759 million. Management cited working-capital movements, including vendor-payment timing and growth in equipment installment plan (EIP) receivables, which are collected over up to 24 months.
- Net EIP receivables were $4.842 billion at quarter-end. T-Mobile had derecognized $677 million of net service receivables through its factoring arrangement and disclosed a $457 million maximum exposure to loss under that arrangement; the company said this was a severe hypothetical exposure, not expected loss.
- Management said available funding sources were expected to cover anticipated liquidity needs for the next 12 months. The company reported compliance with restrictive debt covenants at quarter-end.
Material changes, outlook, and notable items
- T-Mobile won AWS spectrum licenses covering approximately 97 million people for an aggregate bid price of $1.8 billion. It paid $1.4 billion in Q1, with the remaining amount represented by a 2014 deposit; licenses were received in Q2 2015.
- Management expected Adjusted EBITDA to continue improving in 2015 and anticipated further branded postpaid net customer-addition growth. It targeted LTE coverage for 300 million people by year-end, versus 275 million at March 31.
- Management forecast 2015 cash capital expenditures for property and equipment of $4.4 billion to $4.7 billion, excluding spectrum purchases.
- Q1 included $128 million of MetroPCS business-combination costs, primarily network decommissioning. The company expected an additional $375 million to $475 million of network decommissioning costs, mostly through the remainder of 2015; related accrued liabilities are expected to be paid over lease terms extending through 2028.
- March initiatives included Un-carrier for Business, Un-contract, and Carrier Freedom. The company also described Data Stash, which provides qualifying customers an initial 10 GB LTE allotment and allows eligible unused high-speed data to roll over.
- Risks highlighted include intense wireless competition, acquisition and retention execution, spectrum availability and cost, network capacity and technology investment, cybersecurity and network disruptions, regulation, supplier disruptions, labor matters, litigation, and tax changes. T-Mobile reported no material change to the risk factors in its 2014 Form 10-K.
- The company disclosed ordinary-course litigation, including patent claims; it had accrued certain matters it considered probable and estimable, but said unfavorable outcomes could affect results or cash flows for a particular period. It did not expect the proceedings, individually or collectively, to materially affect financial position.
Important facts for investors to verify
- Whether revenue and customer growth translate into sustained operating profitability and cash generation, given the Q1 operating cash-flow decline and continuing investment needs.
- How much of Adjusted EBITDA growth is sustainable after the Data Stash deferral reverses and promotional, customer-acquisition, and decommissioning costs evolve.
- Actual 2015 network capital spending, spectrum spending, LTE coverage progress, and the timing and total cost of MetroPCS network decommissioning.
- Credit performance and cash conversion of the $4.842 billion net EIP receivable balance, along with the costs and continuing exposure associated with factoring receivables.
- Debt service and liquidity implications of reported debt and other financial obligations, and any changes to covenant compliance or funding assumptions.