T-Mobile US, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 19, 2015. The filing is an annual report, not a standalone fourth-quarter filing. Unless stated otherwise, financial figures are in U.S. dollars.
Business context and reporting period
T-Mobile provides wireless voice, messaging, data, devices and related services under the T-Mobile and MetroPCS brands. It reported 55.0 million customers at year-end, up from 46.7 million in 2013. The 2013 comparison is affected by the MetroPCS combination, which closed April 30, 2013; 2014 includes a full year of MetroPCS operations, while 2013 includes its results only after the combination.
Key financial and operating metrics
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Total revenue | $29.564 billion | $24.420 billion | Up 21% |
| Service revenue | $22.375 billion | $19.068 billion | Up 17% |
| Operating income | $1.416 billion | $996 million | Up 42% |
| Net income | $247 million | $35 million | Diluted EPS: $0.30 versus $0.05 |
| Adjusted EBITDA | $5.636 billion | $4.885 billion | Up 15%; non-GAAP measure |
| Adjusted EBITDA margin | 25% | 26% | Calculated against service revenue |
| Operating cash flow | $4.146 billion | $3.545 billion | Up from prior year |
| Property and equipment purchases | $4.317 billion | $4.025 billion | Network investment |
| Spectrum and other intangible asset purchases | $2.900 billion | $381 million | Primarily spectrum acquisitions |
| Cash and cash equivalents | $5.315 billion | $5.891 billion | At December 31 |
| Total debt | $21.960 billion | $20.189 billion | Excludes the separate tower-related financial obligation |
Net cash used in investing activities was $7.246 billion, while net cash provided by financing activities was $2.524 billion. The company also reported a $2.521 billion long-term financial obligation related to its tower transaction. Branded postpaid phone net additions rose to 4.886 million from 2.006 million, and postpaid phone churn improved to 1.58% from 1.69%.
Material changes versus the prior comparable period
- Service and total revenue grew alongside customer additions, MetroPCS expansion and higher device sales. Equipment sales increased 35% to $6.789 billion; device sales volume rose 48%.
- Branded postpaid revenue increased 9%, but postpaid ARPA declined 4% to $108.95 per month, chiefly reflecting lower-priced Simple Choice plans and promotions. Simple Choice reached 89% of postpaid customers, compared with 69% a year earlier.
- Operating expenses increased 20% to $28.148 billion, including higher equipment costs, selling and administrative expense, and depreciation. Cost of equipment sales rose 38%; selling, general and administrative expense rose 20%.
- Adjusted EBITDA margin declined to 25% from 26%, despite higher Adjusted EBITDA, reflecting expense growth and equipment-sale economics.
- Operating cash flow increased, but capital and spectrum spending also rose substantially. The company reported $4.317 billion of property and equipment purchases and $2.900 billion of spectrum and other intangible asset purchases.
- Reported operating results included an $840 million gain on spectrum disposals, primarily non-cash, and $299 million of MetroPCS combination costs, largely network decommissioning. These items affect comparisons of reported earnings.
Outlook, management commentary, risks and contingencies
- Management expected Adjusted EBITDA to continue improving in 2015 and anticipated further branded postpaid net customer additions. No specific full-year Adjusted EBITDA guidance amount is provided in the filing.
- 2015 cash capital expenditures for property and equipment were forecast at $4.4 billion to $4.7 billion, excluding spectrum purchases. The LTE coverage target was 300 million people by year-end 2015, versus 265 million at the end of 2014.
- The company expected at least $1.5 billion of annual run-rate operating and capital expenditure synergies from the MetroPCS combination by 2016. Additional network decommissioning costs of $500 million to $600 million were expected, with most anticipated in 2015.
- Management said first-quarter 2015 Adjusted EBITDA would be affected by a substantial investment to accelerate customer growth and a non-cash Data Stash accounting impact estimated at $100 million to $150 million. The initial 10 GB Data Stash revenue deferral was expected to reverse during 2015.
- T-Mobile won AWS spectrum licenses in a January 2015 auction for $1.8 billion; it expected to pay the remaining $1.4 billion in March and receive the licenses in the second quarter, subject to regulatory approval. Other pending spectrum transactions were also subject to approvals and closing conditions.
- Key risks include intense price competition and margin pressure; the cost and availability of spectrum; network capacity, execution and technology deployment; customer growth and retention; cybersecurity and system outages; supplier concentration; and implementation of a new billing system, with its first release scheduled for 2015.
- The company had $5.6 billion of Deutsche Telekom senior reset notes with interest-rate resets scheduled from April 2015 through April 2016. Higher reset rates could increase debt service. Debt agreements impose restrictive covenants; the company reported compliance at year-end.
- In the fourth quarter of 2014, T-Mobile settled FTC, FCC and state Attorneys General matters concerning unauthorized third-party premium SMS charges (“cramming”). It accrued $24 million for customer refunds and a further $29 million for anticipated settlements in 2014; the settlements required customer relief, government payments and business-practice changes.
- T-Mobile reported various litigation, including patent claims. It did not consider recorded accruals for those matters material, but said unfavorable outcomes could affect results or cash flows in a particular period. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2014.
Fourth-quarter 2014 snapshot
Unaudited fourth-quarter revenue was $8.154 billion, operating income was $433 million and net income was $101 million. Basic and diluted EPS were each $0.13. Results included $168 million of MetroPCS combination costs and a $70 million gain on spectrum disposals.
Most important facts for investors to verify
- How much of revenue and customer growth reflects underlying performance versus the full-year inclusion and expansion of MetroPCS.
- Whether postpaid customer growth and lower churn can be sustained while ARPA and Adjusted EBITDA margin remain under pressure.
- Cash funding needs for planned network investment and spectrum purchases, including the $1.8 billion AWS auction commitment and pending spectrum transactions.
- The timing and total cost of MetroPCS network decommissioning, and whether expected combination synergies are achieved.
- Debt-service exposure when Deutsche Telekom reset notes reprice, and the effects of debt covenants on financial flexibility.
- Execution and customer impacts of the billing-system transition, as well as outcomes and payments under the cramming settlements and other legal proceedings.