T-Mobile US, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unless stated otherwise, financial amounts are in U.S. dollars. Comparisons are with Q1 2015; balance-sheet comparisons are with December 31, 2015.
Business context and operating performance
T-Mobile attributed growth to its Un-carrier initiatives, MetroPCS promotions, customer growth, and network investment. Total customers reached 65.5 million, up 15% year over year, including 2.2 million net additions during the quarter. Branded postpaid phone churn was 1.33%, versus 1.30%; branded prepaid churn was 3.84%, versus 4.62%, with the filing noting a methodology change affected prepaid churn comparisons.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $8.599 billion | $7.778 billion | +11% |
| Service revenue | $6.578 billion | $5.819 billion | +13% |
| Operating income | $1.103 billion | $117 million | +$986 million |
| Net income (loss) | $479 million | $(63) million | +$542 million |
| Net income (loss) attributable to common stockholders | $465 million | $(77) million | +$542 million |
| Diluted EPS | $0.56 | $(0.09) | Improved |
| Adjusted EBITDA (non-GAAP) | $2.749 billion | $1.388 billion | +98% |
| Adjusted EBITDA margin (non-GAAP) | 42% | 24% | +18 percentage points |
| Operating margin (calculated) | 12.8% | 1.5% | Improved |
| Operating cash flow | $1.025 billion | $489 million | +$536 million |
| Capital expenditure cash purchases | $1.335 billion | $982 million | +36% |
| Free cash flow (non-GAAP) | $(310) million | $(493) million | Improved by $183 million |
Service revenue growth reflected higher branded postpaid, prepaid, and wholesale revenue. Branded postpaid phone ARPU was $46.21, slightly below $46.43; branded prepaid ARPU was $37.58, slightly below $37.81. Branded postpaid ABPU rose 2% to $61.90.
Balance sheet and liquidity
- Cash and cash equivalents were $3.647 billion and short-term investments were $2.925 billion at quarter-end, together $6.572 billion; cash declined $935 million from year-end.
- Total debt was approximately $26.5 billion, excluding $2.640 billion of tower obligations. The filing reports $20.505 billion of long-term debt, $5.600 billion of affiliate debt, and $365 million of short-term debt.
- Total assets were $63.063 billion; total stockholders’ equity was $17.104 billion. Current assets were $13.344 billion and current liabilities were $9.369 billion.
- Investing cash outflow was $1.860 billion, including $1.335 billion for property and equipment and $594 million for spectrum licenses and other intangible assets. Financing cash outflow was $100 million.
- The company reported no outstanding borrowings under its $500 million Deutsche Telekom revolving credit facility and compliance with restrictive debt covenants at March 31, 2016.
Material changes and unusual items
- Operating income included a $636 million spectrum-disposal gain from a transaction with AT&T; management said the gain contributed $406 million to the increase in net income after tax. The gain materially boosted reported operating income and Adjusted EBITDA.
- Adjusted EBITDA also benefited from lower equipment costs as more devices were leased through JUMP! On Demand. Lease revenue was $342 million, while related device depreciation was $403 million; leasing shifts device costs from equipment expense to depreciation.
- Depreciation and amortization rose 43% to $1.552 billion, including $403 million of depreciation related to JUMP! On Demand devices and increased LTE network investment. SG&A rose 16% to $2.749 billion, largely from customer-growth commissions and employee costs.
- Interest expense increased, reflecting higher third-party debt and reduced capitalized interest. The effective tax rate was 36.2%, versus 39.4%.
- Net receivables of $1.7 billion had been derecognized through revolving receivables-sale arrangements. The company’s disclosed maximum exposure to loss related to those arrangements was $689 million; management said the severe hypothetical circumstances underlying that amount were remote and it was not an expected-loss estimate.
Outlook, risks, and contingencies
- Management forecast 2016 cash capital expenditures for property and equipment of $4.5 billion to $4.8 billion, excluding capital leases, leased devices transferred from inventory, and spectrum purchases.
- Management expected principal funding sources to cover anticipated liquidity needs over the next 12 months, excluding additional liquidity that might be needed for spectrum acquisitions. It could seek additional debt to pursue spectrum purchases and auctions.
- After quarter-end, T-Mobile USA issued $1.0 billion of 6.000% senior notes due 2024 on April 1 and agreed on April 25 to a potential sale of up to $1.35 billion of similar notes to Deutsche Telekom. It had also agreed in March to a potential $2.0 billion issuance of 5.300% notes due 2021 to Deutsche Telekom; the company could elect not to issue these notes.
- Management cited competition, network capacity and quality, spectrum availability and cost, technology changes, cybersecurity, litigation, regulation, supplier disruptions, labor matters, and debt repayment and financing conditions as risks. It reported no material changes to the risk factors in its 2015 Form 10-K.
- Ordinary-course litigation includes patent claims. The company said recorded accruals for certain matters were not material; although it did not expect litigation to materially harm financial position, an unfavorable outcome could materially affect results or cash flows in a particular period. In the Prism patent case, a jury found for T-Mobile; an appeal deadline was May 6, 2016.
- No specific earnings or revenue guidance was provided in the filing. The company said it was evaluating the impact of forthcoming revenue-recognition and lease accounting standards.
Most important facts for investors to verify
- How much of the quarter’s earnings and Adjusted EBITDA improvement is repeatable apart from the $636 million spectrum gain and device-leasing accounting effects.
- Whether operating cash generation can support the planned $4.5–$4.8 billion of 2016 property and equipment spending, spectrum purchases, and ongoing debt obligations.
- Customer growth, postpaid churn, ARPU trends, and the economics of JUMP! On Demand and EIP receivables, including credit losses and the use of receivables sales.
- Execution and financing of post-quarter debt commitments, future spectrum transactions, and the impact of higher interest expense.
- Developments in litigation and other contingencies, as well as the assumptions behind receivables-sale and JUMP! program exposures.