T-Mobile US, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
T-Mobile reports a single operating segment, providing wireless and wireline communications services. Sprint has been consolidated since its acquisition closed April 1, 2020; therefore, the six-month 2021 comparison with 2020 is affected by Sprint being included for only part of the prior-year period. Q2 2020 includes Sprint results for the full quarter. The prior-year comparison also reflects pandemic-related store closures and costs.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Total revenue | $19.950B | $17.671B | +13% |
| Service revenue | $14.492B | $13.230B | +10% |
| Operating income | $2.106B | $0.820B | +157% |
| Net income | $0.978B | $0.110B | +$0.868B |
| Diluted EPS | $0.78 | $0.09 | Increase |
| Adjusted EBITDA (non-GAAP) | $6.906B | $7.017B | -2% |
| Core Adjusted EBITDA (non-GAAP) | $5.992B | $5.596B | +7% |
| Core Adjusted EBITDA margin (non-GAAP) | 41% | 42% | -1 percentage point |
| Operating cash flow | $3.779B | $0.777B | +$3.002B |
| Free cash flow, excluding gross swap-settlement payments (non-GAAP) | $1.671B | $1.441B | +16% |
Operating margin was approximately 10.6% versus 4.6%. Net margin was approximately 4.9% versus 0.6%; Q2 2020 net income included $320 million from discontinued operations, while continuing operations reported a $210 million loss. Adjusted EBITDA margin was 48% versus 53%.
Revenue growth reflected higher postpaid service revenue, wholesale revenue—particularly under the DISH network agreement—and equipment sales. Device sales and costs both rose with higher volumes and a greater high-end device mix. Postpaid phone ARPU was $47.61, down 1%; postpaid ARPA was $133.55, up 2%.
Financial position, liquidity and capital
- Cash and cash equivalents were $7.793B at June 30, 2021, down from $10.385B at December 31, 2020. Current assets were $20.570B and current liabilities $21.837B.
- Total debt, including debt to affiliates, was $75.270B; the company separately reported total debt and financing lease liabilities of $77.7B, excluding $2.919B of tower obligations. The filing reports a weighted-average debt interest rate of approximately 4.1% for Q2.
- The company issued $9.8B of senior notes and redeemed or repaid debt with an aggregate principal amount of about $5.5B during the first half. It reported compliance with restrictive debt covenants.
- The $5.5B revolving credit facility had no outstanding balance. Management said principal funding sources were expected to cover anticipated operating liquidity needs for the next 12 months and longer-term needs, excluding potential spectrum or other asset acquisitions.
- Cash used in investing activities was $2.083B in Q2 and $13.322B for the first half. First-half spending included $8.9B for spectrum and $6.5B for property and equipment. The company expects most remaining network-related capital expenditures to occur in 2021 and 2022, with requirements expected to decline thereafter.
Material changes and management commentary
- Q2 service revenue increased 10%; postpaid revenue rose 5%, prepaid revenue 5%, and wholesale revenue 129%. The company attributed postpaid growth to more average accounts and higher postpaid ARPA, and wholesale growth principally to DISH and other MVNO relationships.
- Q2 operating income improved substantially, but Adjusted EBITDA fell 2%. Management cited higher equipment and service costs; Core Adjusted EBITDA increased 7%, supported by service and equipment revenue growth and lower SG&A excluding specified merger and pandemic costs.
- Postpaid phone net additions were 627,000 and total postpaid net additions were 1.276 million. Postpaid phone churn increased to 0.87% from 0.80%; prepaid churn declined to 2.62% from 2.81%.
- Management continued merger integration and restructuring to capture efficiencies. First-half merger-related costs were $909M. Restructuring plan expenses incurred to date were $1.142B; additional accelerated lease amortization was $384M in the first half. Substantially all restructuring costs are expected by the end of fiscal 2023.
- Cash flow comparisons were affected by a one-time $2.3B gross payment to settle interest-rate swaps in Q2 2020. Operating cash flow and free cash flow comparisons should be considered in light of that prior-year payment and working-capital movements.
Outlook, contingencies and notable items
- The filing provides no quantified company-wide revenue or earnings guidance. Management said additional debt issuance during 2021 could be considered for spectrum, asset purchases, or refinancing.
- T-Mobile won 142 C-band licenses for $9.3B, excluding relocation costs, and expected a further $1.2B of relocation costs through 2024. The FCC issued the licenses on July 23, 2021.
- On July 1, 2021, the company closed the Shentel wireless-assets acquisition. Approximately $1.9B was consideration for the assets, within approximately $2.0B of total cash transferred for the acquisition and related transactions. Purchase-price allocation was not yet complete; the acquired business’s results were not expected to be material.
- Merger-related regulatory commitments include extensive 5G build-out and coverage obligations. Failure to meet required time frames could result in fines, penalties, or other actions. The company also identified integration execution, customer retention, competition, spectrum availability and cost, cybersecurity, pandemic effects, debt service, and litigation as risks.
- Ordinary-course litigation and investigations remain ongoing. The filing says the ultimate resolution is not expected to materially adversely affect financial position, while some unfavorable outcomes could materially affect results or cash flow for a particular period. A June 2021 shareholder and derivative action concerning merger-agreement changes and SoftBank share transactions has an uncertain outcome.
- The company stated it had never paid cash dividends and did not intend to do so in the foreseeable future. It reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much revenue and cash-flow growth is recurring versus affected by merger comparisons, equipment sales, working capital, and the prior-year swap-settlement payment.
- Whether integration and restructuring deliver expected savings on schedule, and the remaining cash and lease-related costs.
- Capital spending, C-band relocation costs, and the effect of spectrum investment on leverage and future cash generation.
- Debt maturities, refinancing needs, interest costs, and available liquidity after the Shentel acquisition and spectrum spending.
- Progress against 5G and other regulatory commitments, and developments in litigation and other contingencies.