Business context and reporting period
T-Mobile US, Inc. is a wireless communications provider operating as one reportable segment. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Amounts are in U.S. dollars.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $10.839 billion | $10.019 billion | $31.865 billion | $29.845 billion |
| Service revenue | $8.066 billion | $7.629 billion | $23.803 billion | $22.403 billion |
| Operating income | $1.440 billion | $1.323 billion | $4.172 billion | $3.776 billion |
| Net income | $795 million | $550 million | $2.248 billion | $1.829 billion |
| Diluted EPS | $0.93 | $0.63 | $2.62 | $2.10 |
| Adjusted EBITDA | $3.239 billion | $2.822 billion | $9.428 billion | $8.502 billion |
| Net cash from operations | $914 million | $1.252 billion | $2.945 billion | $2.966 billion |
| Free cash flow | $890 million | $921 million | $2.332 billion | $1.588 billion |
- Adjusted EBITDA margin was 40% of service revenue in Q3, versus 37% a year earlier; nine-month margin was 40%, versus 38%.
- At September 30, cash and equivalents were $329 million, down from $1.219 billion at December 31, 2017. Current assets were $7.286 billion and current liabilities $8.572 billion.
- Total debt was $27.4 billion, excluding $2.565 billion of tower obligations; $14.6 billion of debt was owed to affiliates. The company reported no outstanding borrowings under its revolving credit facility at September 30.
- Capital expenditures for property and equipment were $4.357 billion for the first nine months. Management expected 2018 cash purchases, excluding capitalized interest, to be at the high end of a $4.9–$5.3 billion range.
- At September 30, the company had 77.249 million total customers, up 9%; branded postpaid phone churn was 1.02%, compared with 1.23%.
Material changes versus the prior comparable period
- Q3 revenue rose 8%, operating income 9%, net income 45%, and Adjusted EBITDA 15%. For the first nine months, revenue increased 7%, operating income 10%, net income 23%, and Adjusted EBITDA 11%.
- Service revenue growth reflected a larger branded customer base, lower churn, connected-device growth and wholesale activity. Equipment revenue rose 13% in Q3, partly reflecting a higher average device price and accounting changes, while device sales volumes declined.
- Branded postpaid phone ARPU fell 2% to $46.17 in Q3; branded postpaid ABPU fell 4% to $57.69. Management attributed pressure to tax-inclusive plans and customer mix, among other factors.
- Operating cash flow declined 27% in Q3 and 1% year to date, mainly due to working-capital outflows. Year-to-date free cash flow rose 47%, supported by higher proceeds from securitized-receivable interests.
- Comparability is affected by adoption of the new revenue standard on January 1, 2018, using a modified retrospective method; 2017 figures were not restated. The new standard increased reported Q3 operating income by $136 million and net income by $101 million, and nine-month operating income by $315 million and net income by $234 million.
Outlook, management commentary, risks and unusual items
- Management expected full-year 2018 branded postpaid phone ARPU to be generally stable versus 2017, excluding the effect of the new revenue standard. No broader quantified revenue or earnings guidance is provided in the supplied filing text.
- The proposed all-stock merger with Sprint, announced in April 2018, was expected to close in the first half of 2019, subject to regulatory approval and other conditions. The FCC paused its review clock in September for further review. T-Mobile cited a nationwide 5G network and increased competition as expected benefits.
- The merger financing commitment had been reduced to $30 billion and was contingent on closing. T-Mobile disclosed potential financing fees of up to approximately $275 million for a closing on or after January 29, 2019, rising to approximately $340 million on or after April 29, 2019. In specified circumstances involving failure to meet credit-rating conditions, T-Mobile could owe Sprint $600 million if it terminates the agreement.
- Merger-related costs were $53 million in Q3 and $94 million for the first nine months. The company also disclosed possible additional consent payments if the merger closes, including $20 million to Deutsche Telekom and up to $95 million to third-party noteholders; these amounts had not been accrued at September 30.
- Hurricane-related insurance reimbursements, net of costs, increased Q3 operating income by $138 million and nine-month operating income by $172 million. These were significant contributors to year-over-year comparisons. A $63 million reimbursement receivable was collected in October.
- Other notable items included $40 million of FCC settlement expense related to local ring-back tones in rural areas during the first nine months, and gains from the Iowa Wireless acquisition. Debt refinancing reduced interest expense, while debt-redemption losses affected other expense.
- The company identified risks including merger approval, financing and integration; competition; network investment and execution; cybersecurity and data privacy; regulation; and litigation. It disclosed an August 2018 incident involving unauthorized access to certain customer contact information, which it said did not involve payment-card information, financial data, Social Security numbers or passwords and was not believed material.
- Ordinary-course litigation was not considered material individually or in aggregate based on recorded accruals, but the company cautioned that unfavorable outcomes could materially affect results or cash flows in a particular period.
- Adoption of the new lease standard was planned for January 1, 2019 and was expected to have a material effect through recognition of right-of-use assets and lease liabilities. The filing also notes that the 2018 revenue-standard transition benefit from capitalized contract costs was expected to moderate in 2019 and normalize in 2020.
Most important facts for investors to verify
- Progress, conditions, regulatory review and financing for the Sprint merger, including potential termination, consent and financing costs.
- How much reported earnings growth reflects underlying operations versus the revenue-standard transition and hurricane insurance recoveries.
- Cash conversion and liquidity, including working-capital trends, capital spending and reliance on receivables-sale arrangements; reported free cash flow includes securitization proceeds under the company’s definition.
- Debt levels and refinancing exposure, including affiliate debt, merger-related borrowing plans and the expected impact of the new lease standard.
- Customer growth and retention alongside ARPU and ABPU trends, device sales volumes, network build-out and cybersecurity or regulatory developments.