T-Mobile US, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods unless noted. Amounts are in U.S. dollars. T-Mobile operates as a single wireless communications segment.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Change | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|---|
| Total revenue | $11.061bn | $10.839bn | +2% | $33.120bn | $31.865bn |
| Service revenue | $8.583bn | $8.066bn | +6% | $25.286bn | $23.803bn |
| Operating income | $1.471bn | $1.440bn | +2% | $4.488bn | $4.172bn |
| Net income | $870m | $795m | +9% | $2.717bn | $2.248bn |
| Diluted EPS | $1.01 | $0.93 | — | $3.15 | $2.62 |
| Adjusted EBITDA (non-GAAP) | $3.396bn | $3.239bn | +5% | $10.141bn | $9.428bn |
| Operating cash flow | $1.748bn | $914m | +91% | $5.287bn | $2.945bn |
| Free cash flow (non-GAAP) | $1.134bn | $890m | +27% | $2.921bn | $2.332bn |
Q3 operating margin was approximately 13.3% (2018: 13.3%); net margin was 7.9% (2018: 7.3%). Adjusted EBITDA margin was 40% in both Q3 periods and nine-month periods. EBITDA excludes merger-related costs and other specified items; free cash flow is a company-defined non-GAAP measure.
- Service growth reflected a larger branded customer base, including postpaid phone, connected-device and wearable growth. Branded postpaid revenue rose 10% in Q3; branded prepaid revenue was approximately flat. Equipment revenue fell 9%, primarily on fewer device sales and lower lease revenue.
- Operating expenses rose 2% in Q3 and 3% year to date. SG&A increased 6% and 8%, respectively, including higher merger costs and commission amortization. Q3 2018 operating results included $138m of hurricane-related net reimbursements; there was no significant hurricane impact in Q3 2019.
- Operating cash flow improved largely because working-capital cash outflows were lower. Nine-month property and equipment purchases were $5.234bn; spectrum and other intangible asset purchases were $863m. Free cash flow also benefited from higher operating cash flow, partly offset by higher capital spending and lower securitization proceeds.
- At September 30, cash was $1.653bn and total current assets were $8.458bn versus current liabilities of $12.869bn (current ratio approximately 0.66). Total debt was $25.4bn, excluding $2.241bn of tower obligations. The balance sheet also recorded $12.846bn of operating lease liabilities and $2.453bn of financing lease liabilities.
- Cash and cash equivalents increased from $1.203bn at year-end 2018. The company reported $475m of short-term vendor financing debt and no outstanding borrowings under its $2.5bn DT revolving credit facility. It reported compliance with debt covenants at quarter-end.
Material changes and operating measures
- Ending customers totaled 84.183m, up 9% year over year. Branded postpaid customers grew 11%; wholesale customers grew 17%. Postpaid phone churn improved to 0.89% from 1.02%; prepaid churn was 3.98% versus 4.12%.
- Branded postpaid phone ARPU was $46.22 in Q3, essentially flat year over year; nine-month ARPU declined 1% to $46.13. Prepaid ARPU was $38.16 in Q3, also approximately flat, and declined 2% for the nine-month period.
- On July 18, certain prepaid products shifted to an MVNO partner, reducing reported branded prepaid customers by a 616,000-customer base adjustment; subsequent activity is reported as wholesale customers.
- T-Mobile adopted the new lease standard on January 1, 2019 without restating prior periods. Adoption added substantial right-of-use assets and lease liabilities and changed presentation of certain tower and co-location items, limiting direct balance-sheet and income-statement comparability with 2018. Management estimated the standard would increase 2019 net income by $175m overall.
Outlook, transactions and risks
- Management expected the proposed Sprint merger could close in early 2020, subject to remaining conditions. The FCC approved the merger on October 16, 2019; state attorneys general litigation remained pending, with trial set for December 9, 2019. The DOJ consent decree was subject to judicial approval.
- Under the related agreement, DISH is to acquire Sprint’s prepaid business after the merger for $1.4bn, subject to adjustment and closing conditions. A later spectrum transaction is contemplated for approximately $3.6bn, subject to additional conditions. The merger, divestiture, approvals, financing and expected synergies are uncertain; failure to meet certain rating conditions could trigger a $600m payment to Sprint in specified circumstances.
- Merger-related costs were $159m in Q3 and $494m for nine months, compared with $53m and $94m in 2018. The company had amended merger financing commitments; committed transaction financing and closing remain subject to conditions.
- Management projected 2019 branded postpaid phone ARPU down approximately 0.7%–0.9% versus 2018. 2019 cash property and equipment purchases were forecast at $5.9bn–$6.0bn excluding approximately $450m capitalized interest, or $6.35bn–$6.45bn including it; both ranges were raised from prior guidance, reflecting faster 600 MHz deployment and preparation for nationwide 5G.
- A $9.6bn-notional interest-rate hedge liability was valued at $1.4bn at quarter-end. Settlement could require a cash payment or receipt based on its fair value; T-Mobile said it expected liquidity to be sufficient and might provide collateral if the termination date were extended.
- Receivable-sale arrangements provided liquidity but involved continuing servicing and certain repurchase or credit-loss exposure. Maximum disclosed exposure was $1.2bn; management said the severe hypothetical circumstances underlying that figure were remote. The company estimated adoption of the new credit-loss standard in 2020 would increase its allowance by $70m–$90m and accumulated deficit by $50m–$70m.
- Other stated risks include higher combined-company leverage (estimated at $69bn–$71bn after the merger, excluding tower obligations and operating lease liabilities), integration and divestiture execution, debt-service and rating risks, competition, network investment, spectrum access, cybersecurity, litigation and regulatory outcomes.
Investor verification priorities
- Track merger litigation, remaining regulatory and judicial approvals, closing timing, DISH divestiture conditions and committed financing terms.
- Reconcile cash flow and free cash flow, including working-capital swings, capital expenditure, securitization proceeds and merger-cost payments.
- Assess debt and fixed obligations together: third-party and affiliate debt, tower obligations, lease liabilities, hedge collateral exposure and anticipated merger borrowings.
- Monitor customer additions, churn, ARPU trends and the prepaid-to-wholesale reporting change; distinguish underlying performance from the 616,000-customer adjustment.
- Evaluate the effect of lease-accounting adoption and merger-related costs on year-over-year comparability, reported earnings and management’s non-GAAP measures.