Q3 2020 T-Mobile US Inc Earnings Call

[music].

[noise] [noise].

[music].

Please standby.

Good afternoon, welcome to the T Mobile third quarter 2020 earnings call. Following opening remarks, the earnings call will be open for questions via the conference line by pressing the star fell by one.

Your Twitter by sending a tweak to T mobile I R.

Mike Sievert, using cash tag team and you.

I would now like to turn the conference over to Mr., Jud, Henry Senior Vice President and head of Investor Relations for T Mobile us.

Please go ahead Sir.

Thanks for joining us for our T. Mobile's third quarter 2020 earnings call with me today are Mike Sievert, our president and CEO.

No Ray our president technology.

Not stand apart Chief marketing officer and of course, Peter as Baltic our CFO as well as other members of the senior leadership team.

During this call will make forward looking statements may include projections and statements about our future financial and operating results.

Plans the benefits, we expect to receive from our merger with spreads our business operations in light of called the 19 out. There's other statements that are not historical facts such statements are based upon the current beliefs and expectations of our management.

Subject to significant risks and uncertainties outside of our control that could cause actual results to differ materially, including the risk factors set forth in our filings with the SEC.

Conciliations between GAAP and non-GAAP results, we discuss on this call can be found on the quarterly results section on the Investor Relations Web page.

I also want to remind everyone that the results prior to the second quarter of 2020, and our earnings materials represent the historical results of Standalone T mobile prior to our merger.

I would also like to note that we are currently in a quiet period for auction one of seven and will therefore be very limited in any comments that we can meet make related to that with that let me turn the call over to Mike. Thanks, John Great job.

Synergy backed model, allowing us to pursue both simultaneously versus the age old tradeoff of going after growth versus preserving margins in a given period are operating momentum didn't just deliver growth and profitability. It deliberate amazing progress on our network I'll show I will share more with you in a moment.

About all that but the country has never seen anything like this network Bill which is tracking well ahead of schedule is clearly beginning to differentiate T mobile as the Bonafide network leader of the five T error.

I'm, just so proud of the team for being able to execute at such an incredible level in a highly competitive marketplace, while simultaneously driving integration faster and better than expected to capture our merger synergies and deliver value for all shareholders and customers.

We're working hard to go Big and go fast and we expect to realize over $1.2 billion of synergies in 2020 way ahead of our plan and we're only a few months in.

Breaking it down we expect to achieve more than 600 million in network synergies primarily from avoided site builds an early decommissioning and at the same time, we expect to realize about 500 million from streamline marketing efforts under one flagship Brandon with expedited retailed rationalization.

And we're now done with the initial process to evolve our organizational structure to become one team that's organized to deliver results for the business, which is expected to enable about 100 million a back office synergies this year alone.

Last quarter I told you I was even more confident in our synergy plans that I was before the merger and that continues to hold true. These early results in 2020 demonstrate our focus on lightning fast execution.

Also like to announce we plan to host an analyst day in the first quarter. Shortly after we report our year end results, where we're going to share with you more details on synergies and our outlook for the business in the next few years and just to leave you with a little bit of a teaser we expect synergies in 2021, including cost avoidance synergies to be more than double what they were in.

2020, so stay tuned for more.

Coming back to our strong customer results for a minute I also Wanna add some important context to what we delivered first the industry continued to feel the impact of COVID-19 in Q3 with a much slower switching environment than a year ago as a sure take her that is it clear headwind to grow up and yet we still let the industry and.

[noise] paid groats ads for phones and met ads. This is particularly exciting when you consider that we also essentially retired the sprint brand for new customers at the beginning of August which immediately shut off a certain flow of gross at so are two three results reinforce this team's execution and the growing strength of the team.

Well brand to capture what we did in the market during what I would describe as a transition court.

We continued to see very strong growth in postpaid other devices, including continued traction and T. Mobile for business. This quarter. This reflects how we were the most responsive carrier to the needs of school districts nationwide as they've increased availability of digital learning solutions due to the greater demand for remote learning. This fall. We also saw particular.

Strong growth in enterprise and government and recognition of our amazing customer service just continued to roll in for four years in a row now businesses of all sizes have ranked the Uncurl your number one and wireless satisfaction and the annual J D power U S business wireless satisfaction study.

We think we have about an eight or nine sure.

In this market and among enterprises large enterprises and governments attached a lot of sure taking potential it's going well and like the saying goes we're just getting started.

Next I wanted to touch on our investments to expand our five G network leadership as you know we are miles ahead of the competition at the dawn of five G era, and we're well positioned to stay ahead.

Two things that matter when it comes to unlocking the potential of five G and I'll tell you now T mobile is far and away the clear leader on both the first one is coverage having reliable five G service, where you live work and play coverage is king we have America's largest five G network that.

Covers 270 million people across 1.4 million square miles that you know we provide more geographic coverage right now than a T N T and Verizon combined on five G to be more precise are five G coverage is double AT&T and 3.5.

Five times horizons, they claimed to be nationwide, but they really only cover a fraction of the geography that T mobile does.

And showed up late to the party by using dynamic spectrum sharing to avoid being the only carrier without quote nationwide five G coverage when the iPhone 12, lunched, because they're sharing spectrum between L. T E. N. Five G. There are five G median speeds and availability overall are the lowest of the big three and not much better than L.

T well, our five G speeds on low band extended range five G. R twice as fast as L. T E. Thanks to our dedicated 600 megahertz spectrum.

Okay. The second element that really matters is the high capacity high speed capabilities enabled by bigger channels of spectrum founded Midband and high band. This altra high capacity five G. As we're exciting things can happen and that's why are two and a half gigahertz Midband spectrum is the real goldilocks band for five G.

Because it has both massive capacity and it has reach measured in miles from our towers not meters like the other guys. We now have two and a half gigahertz deployed and over 400 cities and towns covering over 30 million Americans and we're targeting more than a thousand so.

Cities and towns covering 100 million people with our Midband high capacity five G coverage by year and that's just two months away with plans to have nationwide five G on two and a half gigahertz by the end of next year.

Hi capacity five G is delivering average download speeds of around 300, Megabits per second and gigabit peak speeds and that will continue to grow.

For all the crawling to Verizon is done around their high capacity solution Ultra wideband one hand. It was recently estimated that it only covers an estimated 2 million people. This aligns with the recent Uccle report, which shows a Verizon customers only connected to the ultra wideband five G less than 1% of the time.

Said simply are fast five G reaches 15 times more people than verizon's today and could reach 55 zero 50 times more people by the end of this year or five G network is well ahead of the competition and it just keeps getting better.

That's T mobile we showed we can deliver incredible growth in fact Ah highest subscriber growth in our history, while simultaneously, beating expectations on service revenue EBITA and D. P S and increasing guidance across the board, including your cash flow.

Simultaneous growth and profitability fuelled by the rapid and faster than expected unlocking of synergies a gift, which will keep giving for years to come are from being distracted by the merger we're already putting the results of our integration to work as a source of strength, we did at all while pulling away from the pack.

On what really matters network and the customer experience setting the stage for T mobile growth leadership in this market for the duration of the five G era.

Only one company will be positioned to provide the best network and the best value in the five G era, and that's T mobile the benefits of all of that to our stakeholders. It's just an exciting story it's rapidly unfolding.

Okay now I'm Gonna ask Peter odds of all like to take us through the financials and our guidance Peter taken away.

Thanks, Mike as you can clearly see from our results, we deliberate a quarter would record setting customer grope, while simultaneously posting strong financial results and this profitable girls, that's what's up for an even stronger second half and we originally expected. So as Mike mentioned, we're raising guidance across the board as we continue to.

Cute on our proven playbook of delivering growth and profitability alright.

Alright, let's go ahead and jump right into the financial details for the quarter.

Total service revenue rid of 14.1 billion continued girlfriend postpaid and an increase in wholesale revenues as a result of the N B a no agreement with dish following the sale of the spring prepaid customers on July 1st recalled that the revenue attributable sprint prepaid customers was reflected in discontinued operations and.

Q2 results and therefore, you see a sequential increase in recorded wholesale service revenue in Q3 [noise].

Cost of services of 3.3 billion increase sequentially driven by higher site costs due to the volume of upgrades, we have completed as well as higher merger related costs, partially offset by additional synergies captured looking into the queue for we expect a full quarter impact of increased non-cash lease expense from a town.

Her agreement signed that September, which will impact cost of services by approximately 150 million sequentially.

Again this is non-cash and is partially offset by continued synergy realisation.

SG&A expenses of 4.9 billion, we're down sequentially, primarily due to lower merger related costs.

As much of those costs for severance and transaction related in queue too.

Additionally, we also had lower bad done and sales expenses, along with additional synergies captured in Q3.

We expect seasonally higher sales costs in the fourth quarter related to the iPhone launch an holiday promotional environment.

Keeping net income of 1.3 billion and diluted earnings per share of one dollar were impacted by 208 million and 17 cents a merger related costs respectively.

Just it EBITDA amount that to 7.1 billion, which increase sequentially, primarily due to higher postpaid service and equipment revenues, partially offset by higher cost of equipment sales and cost the services.

Net cash provided by operating activities totaled 2.8 billion, which includes 379 million for merger related costs.

Cash purchases of property and equipment, including capitalized interest of 108 million amounted to 3.2 billion as we accelerated the build out of our nationwide five G network and ramp network integration activities.

Free cash flow was 352 million already achieving the low end of our second half guidance, even with higher capital spending.

Postpaid ARPA or average revenue per counts amounted to $133.03 and postpaid phone or poo was 48 55.

The sequential increase in postpaid phone or if it was primarily driven by higher premium service revenues and we expect queue for the trend closer to Q2 levels with promotional activities.

And I have to mention the ongoing work done to significantly improve our capital structure and strengthen our balance sheet.

Last month, we issued nearly 9 billion a secured notes with an average rate of 2.99% and an average 10 or 23.4 years collectively since the merger clothes, we have more than doubled the average maturity of our portfolio from 4.3 to 9.2 years.

And lowered the average cost of that from approximately 5.7% to approximately 5.1%, excluding the non-cash amortization of swamps.

Okay, Let me come to our guidance, which we are raising across the board as both growth and profitability were much stronger than originally anticipated again, we wanted to provide this guidance and prioritize transparency even during these uncertain times while ranges for Q4 can be inferred we are upgrading our guidance in the context of our previously provided.

Right at the second half of 2020 outlook.

We had originally guidance to 1.7 to 1.9 million postpaid met as in the second half of 2020, well, we check that off the list in Q3 alone. So in the queue for exclusive we're providing postpaid phone guidance will look to continue to lead the industry in postpaid phone growth and expect postpaid phone customer edition.

Between 600 and 700000 in the fourth quarter also for Q4, we expect a more balanced mix of postpaid phone and postpaid other net additions relative to the extended educational opportunities that we saw in Q3.

Just did EBITDA is now expected to be in the range of 13.6 that 13.7 billion for the back half of 2020.

1 billion original second half guys and includes leasing revenues of 2.5 to 2.6 billion.

The implied queue for guide reflects our expectations for seasonally higher costs related to the iPhone lunch and holiday promotional environment as well as the non-cash straight line lease expense impact from a recent power agreement.

Cash purchases of property and equipment, including capitalized interests are expected to be between six seven and 6.9 billion at the high end of our prior guidance driven by strong momentum on our network deployment.

That's a question after that operator said that four times I was just gonna think everybody and then the call [laughter].

My My My My question is about your if I do go to market strategy. So I I think you guys have at the moment the advantage with two 2.5 gigahertz as you I think you made it and I think everybody on Nicole understands got advantage and I'm wondering if if the consumer market I understand that.

The the advantage that you have and how you drive that message into the market.

Uhm over the over the <unk> as we sort of and to verify G era posted mon should be iPhone.

Yeah. So you know what the adults and that's a real tailwind for investors because perception by by definition lags reality and so to me that's a big exciting part of the story, we've done such a great job over the past seven eight years reinforcing with innovative breakthrough one carrier.

[noise] moves our value proposition.

To your point, we haven't trained those same engines to the same extent on our network story and now we have a network story that it's just phenomenal and it's about to get a lot better as I talked about right now we've got 30 million people with our highest capacity highest speed five G 270 million overall with fuzzy but that.

[noise] going got 30 millions going to 100 at the same time. The other guys are nearly standing still on their highest capacity five G. It's just gonna be such a stark reality that consumers are finally going to have to pay attention because millions of people are going to have one of these I found 12, and there with T mobile, they're gonna actually find hi could.

<unk> five G and get hundreds of Megabits per second per second and their friends are gonna be jealous and not only that they're gonna be seeing our story unfold on T. V. As you know synergies mean Ah Ah cut in advertising and marketing, but that's versus pro forma combined right now or see them. All night stand up is investing more in the T Mo.

<unk> brand than ever before in our history, even none of those synergies and and those network equities, while it's mostly a tailwind for investors, mostly an opportunity for improvement we're confident in our ability to market around here, but by the way there's already some progress Mad you Wanna talk about how the brands doing yeah. The brand. That's a great question by the way I Love I Love. The fact that we're asking about how we're gonna get.

Great. Thanks, guys.

Jonathan.

Great to hear from you.

Operator, why don't we go back to the phone for the next question.

Certainly our next question will come from Phil Cusick with JP Morgan.

Hey, Thanks, Mike I thought I was maybe missed by Q there from that.

Maybe if you could just.

Thanks for the guide, which have says a lot about your view of competition in the fourth quarter, but talk more about how you see the market. Following some more aggressive promotions. This year than last do you worry about the rationality of the industry from here.

Then can you talk about churn as well in the sprint customer base, what has that done versus the T. Mobile base over the last few months and how are you doing with mailing those customers down. Thank you.

You bet, it's great to hear from you felt yeah I am first of all if you look and I'll ask Matt to pile in on this if you look at the promotions in the industry actually to us they look a lot like last years.

There's some obviously some changes around the margin footprint, the phones underlying or a little bit more expensive from Apple, but generally speaking, we see a promotional environment a lot like last years, it feels really intense but that's because it's the fourth quarter and it's because there's a big iPhone here. So.

Generally speaking I don't see a trend line there that's that's it all concerning as it relates to churn now there is a trend line I love to talk about.

So what's your first and we've already seen changes in the offers that were announced and have been announced and we have a new preorder starting just even tomorrow on the iPhone. So you know, it's it's an evolving dynamic in the marketplace, but as as Mike said, you know when you look at it apples to apples when you look at the true comparison of the phone and the plan in the network experienced we think largely speak.

King golfers about the same with one caveat, there's more aggressive base offers and retention offers out there in the marketplace and I just got to ask why is that the case when you. When you look at the marketplace and the dynamics. We're here, we're very positioned to succeed like we always are and I'll just remind you again, it's the the corner keyboards, a bit more back end loaded.

Typically speaking versus you know at the early days of an iPhone much we're very well set up to succeed and we think we've got a very good game plan a disciplined gang gang plan to continue to our momentum and and and wind chair.

Real benefit.

Benefit because we're able to unlock the value of those synergies and invest them in growth and still deliver the financial performance in period as I said in my prepared remarks.

Thanks, Kevin.

Cool all right operator, we're on a roll, let's just keep going through the phone.

And Meanwhile to ask Peter to scan across Twitter and see what he sees.

Our next question comes from John Hodulik with yes.

15% of the sprint postpaid traffic already on the T Mobile network.

So we're building out that capacity you heard Mike talk about all of the work we have ongoing upgrading the network migration is in full swing and what follows on migration of course is what is the common synergy acceleration. So we've already scored some dijkum activity inside 2020, but we will start to really ramp and excel.

Despite all the merger and other distractions to be sure. It was here in time for our five G broadband lines and your question. That's a big piece of what it's about we're coming soon with home broadband we're serious about home broadband it's gonna be an important way that we grow this business and make money and you have to have the full suite of services to really be able to serve customers. There to your question I also think there's.

Potential benefits on the mobile side, you know customers count on us for their connectivity they love our brand we're able to deliver in this product a great simple elegant solution that we're investing in because you're a T mobile customers. So they get a great value and we're just smashing a bunch of the pain point in this industry. In this industry is so full of them and you know as we talked.

[noise] about at our lunch. So we're very excited we're just getting started one of the other things I've talked about for a long time as we also intend to be a great partner to media companies and an ally because we're not a media company, where a pure play network and connections company and so that's obviously got a big future for us as we as the squirrel just continues to move towards an O T T.

Okay.

Really cost effectively because the networks basically already built in there are places all across this country, where no normal amount of mobile usage will soak up all of that massive capacity and that's where it will be able to offer incredible deals on five G powered home Internet and you don't need a ditch dug to your house you don't need to use old D. S. L.

In terms of access to offers and promotions and the ability for sprint customers to upgrade a fun when they want to not be beholden to other you know issues with the legacy products, we were still using a blend as we do it team other ones as we have done it T mobile, but the the progress we're making is is really good in it and.

Over time, it's gonna blended match that.

For Hey, what's going on like kind of the first question I think for for Nebel just in terms of.

The synergies overall and.

When you're all done with this and hopefully it all happen sooner than later, how many of those sprints sites will ultimately survive and how quickly can you get that 15% of traffic up to.

I don't know pick a number 60 80 per cent of like what what should we think about timing on that.

The remarkable I didnt anticipate we'd have made that much progress.

40 <unk>.

Offers.

It wasn't with you do it the old fashioned way or are they walking into stores or do you think that maybe you're starting to see evidence that there's a permanent shift towards digital transactions that might be a little more recurring cost benefits over time. Thanks.

EBITDA as we down approximately 500 million for next quarter.

So there is.

About $150 million of fee.

Straight line adjustment for the tower deal that you guys did but can you kind of give us some color about what the puts and takes are about what makes that quarter happened because it sounds like.

It's going to be a lot better than this guidance.

We expect the competitive intensity had what I call maintain or through the M.T.I. cycle, which in prior years might have looked at a little different as it build through Q4 and so while this one might have come off you know on some parents is a stronger our point of view as you know from a year on year. When you look at the quarter as a whole it's exactly there.

And we're very well positioned to succeed in this thing and we think we're going to see some some some great outcomes, especially when customers start get these I phones in their hands.

You know and see the experience that you have with with the with the Amazing network we're building.

That's great. Thanks, I'm Gonna go to Twitter next because of some great questions developing I by the way I'm. So happy to see all the interest in T mobile for business Bill how always great to hear from you on every report they'll says at T. Mobile business has increased share what areas have performed well and how did the integrated sprint legacy products and services and sales force contribute which verticals are.

Offering the best traction so that's a great question and lets kinda I also throw it.

Let's do the one Roger enter haven't heard from you know, while Roger grade to great to hear from you.

Could you Roger says at Mike Sievert could you break down subscriber growth between consumer and business government also have you started with project 10 million and if yes, how many households are using it now.

So the short answer is yes, not only have we started on it but we re crafted it was originally conceived as a totally free program to invest in the homework cap what we find this year instead as a schoolwork gap. So we added an actual paying service I'm highly subsidized still accretive to.

Like many many many jurisdictions in public sector I think both hands to answer. Your question you remember I was talking last time at this call about how we got started fast with our day one for T mobile for business and we are absolutely seeing the synergy benefits of doing that yeah. There was there was there was a great team at sprint.

Credible team really.

<unk> had a great set of relationships and now we've empowered them with a network with a network now that is that is second to none, especially as we move into this five G era, and we've really seen the benefits of bringing this team over enabling them and unleashing them to sell the T mobile network pay off for us across segments. So whether it's small business, which is which is.

Segment that we both companies looked like if the company has had a lot of strength and we continue to see a lot of momentum and small but but.

But particularly in enterprise and government, where Mike mentioned during the call is our biggest opportunity given the sure that we have there, we've particularly disproportionately seen growth across those those two groups and businesses are starting to see their testing us they're recognizing that the network is better they're seeing us in action and seeing the service that we can deliver in service really matters to.

Enterprise and government customers and we're getting chosen more oftentimes not when we're getting in front of customers and get the opportunity to tell our story and demonstrate our services.

My congratulations to the whole T F. B team for an all time record corner for T. F. B, It's just amazing and you know so yes project 10 million was contributing by the way I'm free product project 10 million also out there in volume, helping sell them any school kids in school districts that of course is.

Not in our numbers number that would be reported it as a subscriber but it's just nice to see the difference that our company is able to make with the size and scale of this network. So we're so proud of it Jim Paterson online no stranger to to this company by the way great to hear from you Jim.

Jim says at T. M U S credit report, how will the company ensure an equal or greater five G. In building experience for enterprise customers will team up with like celebrate their in building deployments or rely on existing towers and small cells to provide coverage.

I I turned it to never I'll, just start by saying first of all remember Jim one of the things that makes this company so different isn't it or low bands lower penetrates buildings better reaches further from towers are midband reaches miles not meters and can put very very high capacity experiences into buildings from the macro network.

Arms is going to be in building and that's a great way for us to attack Fiveg experience indoors, especially for the enterprise.

Sounds great I was nice about it though you could never enough time he'll slate of competition. So I know, where it's going to take but we'll do two more if we if we hold ourselves to try and be brief because I want to make sure that we're hitting enough of the people on the phone. So operator, let's go to the phone and we'll do it.

Final two questions.

Thank you. Our next question comes from Craig Moffett with Moffettnathanson.

Hi, Thank you.

I Wonder if maybe we can stay with the business services conversation that you were just having.

You talked about being in the sales process and getting in front of customers I'm not sure that sales process decision, making among particularly enterprise and government customers. He's already based on expectations around fiveg and and what are the applications and it did.

Latency or or I don't see what are the applications in fiveg that you see I'm starting to drive decision, making in the enterprise market.

Yeah, Craig I'll be brief on this one instead of toss it out the answer is yes, but it's not necessarily yet at scale driving our business centered around new applications. That's common what's driving our business right now is reliable high capacity now.

Work leadership on smartphones and there are plenty of other things that we're working with customers on but if you're asking what's contributing to our results and getting us in the door. It's that unlike consumers and this is really interesting because it goes to the premise that we I think the very first question was consumer perception of our network. Unlike consumers businesses test this stuff.

They'll checkout 100 songs and run them through the Ringer for six weeks and then decide you know what when they do that we're winning especially to the premise of your question. When the question is who's got the best Fiveg coverage and capacity and experience because it's just it's not even close right now and they know it's we're pulling further away.

From the pack businesses want their employees connected right now more than they ever have a need that connection to be reliable and they need it right now, especially to be high capacity and that's what we're able to offer. So you know as we just said Mike and team just posted the biggest quarter in our history for TSB were so proud of them but.

This is really more than anything a story about network leadership, we've kind of caught up on on LTV, but the real story is how far ahead, we are for on Fiveg and how well positioned we are to the premise of your question Craig to stay ahead for the duration of the five year.

Let's see is it more second devices as it more younger people et cetera, maybe using some of the money that they're not spending on on other things in this environment. So any color that would be great in any update on the Shannon della negotiations next steps on timing on that thanks.

Sounds great well on the first one you know you have to look underneath everybody's report when you look underneath ours, you saw postpaid bounds again, leading the industry very strong performance on the centerpiece that we've always focused on the prepaid leader T marble continuing to grow from a leadership position, which.

Not something you've been able to see postpaid leaders do reliably in the past. So that's great and then you saw are great outside his performance on postpaid other driven by a number of different dynamics, including those dynamics, you've talked about people, adding to their relationships with us, but also new opportunities and T. F. D. We spent some time on the call talking about so that's what happens when you double click into ours when you double click.

[noise] into our competitors there are some gymnastics a lot of the big numbers have to do with like reversing accruals from prime previous quarters that were too conservative or strange things in the prepaid space, having to do with connected cars had a cruel reversals that when you really look underneath it I don't think crickets growing at all in fact, I think they reduced so you.

Really have to look through the reports right now because covid made things so difficult what you get from US is transparency lots and lots of it you gotta work, a little harder to get underneath the reports of our competitors, but I think you're you're saying because of this public sector dynamic you're also seeing some terrific category gruff.

And then you asked about Chantelle. So do we want to say anything give an update on how that's kind of think we can <unk>.

<unk>, Yeah, I hate to end on no no we have no room for those responses, but yeah. We're following a process. The original agreements that we had with a couple of these partners called for us to have the right to buy and there's a prescribed process on valuation and we're following that process and we just don't have anything to report so I'm ending the call on it.

Comment [laughter], that's great you guys. Thank you for your attention Uhm. We're so proud of the results that the company was able to pose really look forward to talking to you again, when we report the full year and double clicking with a longer conversation with our 2021 analyst stay so stay tuned for all that thanks everybody.

Absolutely. Thank you everyone for joining an operator go ahead and close to call.

Thank you ladies and gentlemen, this concludes the T mobile U S third quarter 2020 or at each call. If you have any further questions you may contact the Investor Relations for me departments. Thank you for your participation you may now disconnect and have a pleasant day.