T-Mobile US, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. T-Mobile provides wireless voice, messaging and data services to postpaid, prepaid and wholesale customers; it reported approximately 58.9 million customers at quarter-end.
Financial performance and position
| Metric | Q2 2015 | Six months 2015 | Comparison |
|---|---|---|---|
| Total revenue | $8.18 billion | $15.96 billion | Up 14% and 13%, respectively, year over year |
| Service revenue | $6.14 billion | $11.96 billion | Up 12% and 11% |
| Operating income | $597 million | $714 million | Down 38% and 24% |
| Net income | $361 million | $298 million | Down 8% and up 24% |
| Adjusted EBITDA | $1.82 billion | $3.21 billion | Up 25% and 26%; non-GAAP |
| Adjusted EBITDA margin | 30% | 27% | Up from 26% and 23% |
| Diluted EPS | $0.42 | $0.33 | Compared with $0.48 and $0.30 |
Revenue growth reflected higher branded postpaid and prepaid revenue and device sales. Postpaid phone ARPU fell 2% in Q2 and 5% in the first half, while postpaid ARPA rose 6% and 3%. Equipment revenue increased 20% and 24%, alongside higher device volumes and EIP financing. Branded postpaid phone churn improved to 1.32% for Q2 and 1.31% for the first half; prepaid churn worsened to 4.93% and 4.78%.
The decline in operating income largely reflects the prior-year $731 million spectrum-disposal gain, versus a $23 million gain in the first half of 2015. Higher equipment costs, SG&A and MetroPCS decommissioning costs also weighed on results. First-half net income benefited from a $39 million income tax benefit, compared with $184 million tax expense in the prior-year period; management attributed the lower effective tax rate to discrete tax benefits, including state and local law changes and federal tax credits.
For the first half, operating cash flow was $1.65 billion, down from $1.73 billion. Property and equipment purchases were $2.17 billion, up from $1.89 billion; free cash flow was negative $523 million, compared with negative $158 million. Investing cash outflow was $4.03 billion, including $1.84 billion for spectrum and other intangible assets. Cash and cash equivalents were $2.64 billion at June 30, down from $5.32 billion at year-end 2014.
At June 30, current assets were $11.66 billion and current liabilities $8.26 billion. Reported short-term debt was $386 million, long-term debt $16.39 billion and long-term debt to affiliates $5.60 billion. The company said it was in compliance with debt covenants and expected its principal funding sources to cover anticipated liquidity needs for the next 12 months.
Material developments and outlook
- T-Mobile paid $1.4 billion in the first quarter for AWS spectrum licenses won at auction for a total bid price of $1.8 billion; the licenses were received in Q2.
- Management expects 2015 property and equipment cash capital expenditures of $4.4–$4.7 billion and said it expects Adjusted EBITDA to continue improving in 2015. LTE covered 290 million people, with a target of 300 million by year-end.
- Management expects an additional $350–$450 million of MetroPCS network decommissioning costs, substantially all recognized through the remainder of 2015. First-half expense was $162 million; the accrued liability at June 30 was $314 million.
- July 2015 service and plan initiatives included Mobile without Borders, an expanded family data plan and additional Music Freedom offerings. A July agreement to exchange spectrum licenses with Verizon is subject to regulatory approval; T-Mobile expected a non-cash gain on closing, anticipated in Q4 2015.
- Device installment plan receivables, net, totaled $5.11 billion. Under its revolving receivables factoring arrangement, T-Mobile had derecognized $795 million of net receivables; its disclosed maximum exposure to loss was $499 million, which the company said was not an estimate of expected loss and that the severe circumstances behind it were very remote.
- Risks identified include intense wireless competition; ability to fund network investment and obtain spectrum; technology, network and cybersecurity disruptions; regulatory changes; litigation; and execution of growth and acquisition strategies. The company reported ordinary-course litigation, including patent cases; it did not consider recorded accruals material, but noted unfavorable outcomes could materially affect a particular period’s results or cash flows.
Most important facts for investors to verify
- Whether revenue and Adjusted EBITDA growth can persist while postpaid phone ARPU declines and prepaid churn rises.
- How device subsidies, promotions, EIP receivables and credit losses affect cash generation and earnings quality.
- Whether capital spending, spectrum purchases and projected decommissioning charges remain within management’s outlook, and whether LTE expansion delivers expected customer and network benefits.
- The cash-flow and funding implications of negative free cash flow, factoring activity, debt and affiliate interest costs.
- Actual closing, regulatory approval and gain recognition for the Verizon spectrum exchange, and any material developments in litigation or other contingencies.