T-Mobile US, Inc. (TMUS) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to day 2 of the European TMT Conference. Sorry, it's virtual this year, and we can't be in Barcelona, but it's my great pleasure to welcome the T-Mobile team. We have Peter Osvaldik, the CFO; Matt Staneff, the Chief Marketing Officer; and Neville Ray, the President of Technology. Welcome, everybody, and thank you for your time today. Before we get started, please note, important disclosures, including the -- are on the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And Peter, I think you have some disclosures, and perhaps you can take us through the key priorities for the company as we look into '21.

Well, absolutely. Thank you, Simon. And yes, it's unfortunate that we're not able to be in Barcelona, but we're extremely excited to be here anyway today, and I'm pleased to join you. Thank you. So yes, let me start with just the good old disclaimer. So today, we will make some forward-looking statements during this conversation, including comments about the benefits we expect to receive from our merger with Sprint. Such statements involve a number of significant risks and uncertainties, including the risk factors set forth in our SEC filings. And of course, in addition, we cannot comment on Auction 107 because the quiet period haven't started. So thank you, again. Yes. Let me start with the key priorities as we head into year-end and into 2021. And really, we're just continuing to execute against our plans with 3 drawn priorities that we played out that we expect to be critical to both the short-term and the long-term success of this company. The first one being to continue to consistently and profitably outgrow the competition. And you saw us continue to deliver on that in Q3, which included a high number of total net additions, a record high number for us as a company. While doing that, we also delivered strong profitability and increased guidance across the board for the second half. Number two is to unlock the value of the synergies faster and bigger than we anticipated. And this goes back to our focus on accelerating synergies beginning in Q2 and continuing throughout the year across both network, retail, marketing and back office, and now forecasting to hit $1.2 billion in synergies for 2020, and we expect to deliver more than $2.4 billion in 2021. And that is on an in-year basis that's for run rate, not the exit. That implies the exit is even higher. And number three, make the necessary investments in the near term to position the company for long-term success. So as Mike always says, it's not robbing from the future to make short-term results for it. And this is a key focus for us across the enterprise. Core to this is, of course, also the network, much like synergy captures where we've accelerated our build, and I'm sure we'll speak more about that later today. But also making investments in growth opportunity areas, both within the core mobile wireless business, but also other key focus areas such as fixed wireless broadband and also focusing on cost transformation opportunities beyond synergies [ themselves ]. So despite all of the macro uncertainty and challenges we've all faced this year, I couldn't be more pleased with how these teams came together and delivered, and we are very excited to continue on this journey in Q4 2021.

Great. And I wonder if you could just move a little bit closer to the microphone. It was just a little bit quiet. That's great. Thank you. So you -- everybody had to deal with COVID. You had to deal with closing a merger on April 1, right in the middle of COVID, and that was -- it's a massive undertaking in any situation. But perhaps talk about what the impact of COVID is right now and how the business model is changing and how you see it changing going forward.

Yes. Let me hand that over to Matt. I think he's in the best position to talk a little bit about what the ongoing impacts are, which are still being faced in the industry.

Yes. Thanks, Peter. Thanks, Simon, for that question. You hit it right on the head. We closed the deal or the merger during the pandemic, and it started with taking care of our employees and taking care of our customers. We did that, like many companies out there, closing retail stores, et cetera. The other thing is we had a game plan that we put together a couple of years ago on integration. And I'm really proud of what the team has done. What you've seen from us is great execution. We stuck to our plan. Neville, I'm sure, will talk to what we've been doing on the network side. As part of our merger, we completed our rebrand on schedule as we've taken the Sprint brand out of the marketplace and focused on postpaid as the #1 flagship brand for us, our T-Mobile in the marketplace. And our results in Q3 speak for it, right? We all know the market has been soft. You can tell in the churn rate of the industry, and competition is down. And what we've shown is time and time again, an ability to succeed in multiple different types of environments. Whether it's a high churn environment, a low churn environment, our team continues to execute and stick to our game plan. And I'll remind you, many of the things that we need to do that are important right now and for the next few quarters are taking care of our Sprint customer base, working on the migration, building out the network, achieving the synergies. That's the lion's share of the focus. We're doing that while continuing to grow through this environment that looks a little different than everyone expected. And when you look at our value proposition in our network, we believe we're very well equipped to succeed in the ever-evolving and changing COVID environment.

And maybe just one follow-up there. What are you seeing in terms of digital transactions? And how that goes forward, both for new customers and for existing upgrades and so forth? It's an area, I think, where the industry has been pretty retail focused. But there's an opportunity to move forward to more digital interactions. How do you see that?

Yes. The trends we've seen are similar to what many companies have seen. As you know, we've been pretty retail focused. We saw a big uptick in digital transactions as well as telesales. We've got an award-winning care team. And they're helping lean in and help serve our customers, both taking care of our base as well as driving new activations. So early on, we saw a pretty big increase in digital. And generally speaking, some of those improvements and gains have maintained into Q3 as retail opened back up. We still like our retail business model. It works well for us, and we've got a very safe environment. We've got a lot of distribution. We're serving customers well. So that's still the focus as we move forward. But what's great about our business model is it's been flexible, and we've adapted to serve customers wherever and however they want to be served by us.

Great. And Peter, back to you. One of the things you teased us with on the earnings call was an Analyst Day in Q1. So perhaps talk about what your objectives are there. And are we going to get an update to your kind of 3-year outlook synergy numbers?

Yes. We're very excited about that, Simon. I'm certainly excited to have you join us. So first off, we felt it was a very natural time to do it, right, after year-end in conjunction with 2021 guidance. And of course, the team right now is just running extremely quickly on integration, adapting our playbook, as we said, in light of the pandemic, and we're really excited to share all that we have going on. And it's going to be multifaceted. One is we want to bring some of our leaders to really start talking about the strategic overview of the business, where we see the growth opportunities for us. But at the same time, we absolutely want to update you on synergies, both in terms of magnitude, which we teased you a little bit with around 2021 as well as timing and an update on the long-term guidance. What do we believe this company can achieve and be beyond synergies? But again, the long-term growth opportunities and the cost transformation opportunities that we see and how that manifest itself and give a little bit of color around, again, updated free cash flow generation and our views towards the use of that cash in the future.

Great. And any more specifics on the timing? I guess you want to probably get earnings and C-band out of the way first.

Yes. And well, I can't speak to C-band, but I can definitely say, we definitely want to get year-end out there, and again, in conjunction with '21 guidance. So we'll give a little bit more color around timing as we get closer to year-end.

Right. Okay. Well, let's dive into the synergies, if we could. Neville, you've obviously done a lot with the MetroPCS integration before, and that went very well. And you seem to be off to a very good start here. But just put this integration in context and what you've achieved so far, what have been the positive surprises, what are the things you're still focused on achieving over the coming quarters.

Yes. I mean, I think, back to kind of the 3 step-story that we like to translate this synergy development opportunity into, Simon. So I mean the first piece is build the capacity on what's going to be the resident T-Mobile network. So collapsing those 2 sets of fixed assets into 1, and that 1 is primarily the T-Mobile network. We started with a lot of new capacity and build on top of it. So the first piece is build that capacity. The second piece, which is now well underway, is migrating the traffic and the customer base across on to that resident network. And as that all happens, then step 3, third leg of the stool, is we can start to decommission sites in great volumes. And during that process, we're moving spectrum, all those different pieces. So it is -- you mentioned MetroPCS. That was a -- seems like a long time ago now, but that gives us a lot of confidence on what we're doing in '20 and in '21. We developed a really strong playbook with Metro. And as you say, we accelerated and overdelivered on synergies. And back to Peter's comments at the beginning, that's exactly our plan here to do those things again. And the good news is that because we had almost a dry run with Metro, we've been spending much of this year post the close of the transaction putting all the tools and capabilities in place. So we're in a great position to accelerate that migration path for our customers, and we can talk later about all the work that's going on in retail and across our channels now so that we can really accelerate. We started that migration work, and we can accelerate it as we go into '21. I mean one quick start there, Simon. We talked about this on earnings, but 15% now -- 15% of the traffic from that Sprint base is now over on the T-Mobile side. So that's a great start on migrating traffic in a very short number of months. I mean we had work to do to get ready for migration. So just on the network piece, I mean, the stats, I think most people are familiar with, but we have tremendous coverage build out there on 5G, 1.4 million square miles, 270 million people covered, Simon, with great 5G service. And that 1.4 million square miles is more than AT&T and Verizon put together. So there is only one 5G leader in the U.S. right now. And then the second and really important piece is adding on this super-high capacity, ultra-high capacity mid-band layer with the 2.5 spectrum that we have. And that piece is moving really well for us. We've said -- I announced this week, 37 million covered POPs. That number is changing almost daily, but it will be 40 million by the end of this week, 100 million by the end of the year and then 200 million for full nationwide high-capacity 5G story by the end of '21. And so that's really important for that synergy delivery because I just -- I always like to say this, Simon. We're doing so many things at once. I mean we're combining the 2 companies together. We're building all this capacity for both LTE and 5G on the resident network. And we're building 5G leadership, all for the same dollar, effectively. So this is an incredible time for us. And then our prize for doing that well and on an accelerated basis is synergy. And that's a very, very stark contrast to what's happening with our major competition here in the U.S., AT&T and Verizon. No pot of gold on synergies coming at the end of all this build activity. So as Peter mentioned, we've got targets on, I'm confident, on a $1.2 billion delivery this year. Half of that is network. Peter can provide more details on the breakdowns, but the good [ news ] is that we're already decommissioning sites in that mix, majority of that mix. But we have already started decom. There will be more decom in '21. And '22 and '23 are the great heavy years, where we can really start to accelerate and pull forward that synergy delivery. So we don't have to wait until '23 and '24 for all of it to happen. We're already building a strong cadence and pace on synergy delivery on network and in other areas of the business. We should touch on that, too. And so I'm delighted with the progress that we've been able to make. And to Matt and Peter's points, at the beginning, the pandemic has been incredibly tough. But I mean, we've been fortunate. Both health and safety of all our employees and all of our vendor partners, too, paramount in our minds from the get-go. And thankfully, on the network side, we've been able to keep our people safe, maintain our network, and then more important synergy story, really accelerate this build on the network as we've moved through the year. And every month, we've been able to create more and more productivity on the network build, whilst at the same time, keeping our supply chain in place, working hand-in-hand with jurisdictions to permitting. I mean there's so many pieces to talk through, Simon. I mean, bottom line, things remarkably have gone incredibly well for us, and we're in a great position as we close out 2020.

All right. That's a great overview. A couple of follow-ups. And one of the things that you announced recently was the master lease agreement with American Tower. So perhaps you can just flesh out what that allows you to do and what that locks in for you.

Yes. I mean, Peter can follow through, too, on kind of financial overview, what we can share. But I mean, the headlines for me, Simon, one, we wanted -- we were a bit of a stalemate with American Tower. And so we had bottleneck upgrade processes on their sites until we could get this deal solidified and done. So that's behind us. And so that's another factor to help us accelerate. We're back and building full bore with American Tower and our other tower partners, by the way, but we had some significant issues that we needed to remediate with American. So that's done. The second piece is we built, first time in my career, and I've been working with American Tower from when they didn't own towers. It's 25 years now one way or another. But here we are, we've structured a 15-year deal with those guys. So building the right level of partnership that protects our business allows us to go execute on our build plan over the coming years, meet all those federal commitments where they intersect with American Tower locations and sites. Future-proof our build for future technology capability that we need on those sites. And all of that in an environment where we have declining rates and escalators. And so all in all, I mean, I think both parties walked away. It's hard to say both parties can walk away from something like this satisfied and happy. We certainly are. And I believe if you ask the American leadership team, they'll say they are too. And we had to get this one done quickly, Simon, one, because we were locked from build, but more importantly, we had a lot of big renewals, large volumes of renewals were coming up next year, and we wanted to navigate through those pieces. And I'd just say we've locked in our synergy development, too. That's the other important piece on those sites. Any other color, Peter, you want to add on that?

Yes. I mean -- and it was just an amazing, I think, deal. Certainly, for us, it was extremely NPV-positive, locking in all that flexibility, as Neville said, for him to go build now and future-proof it over a 15-year period for a massive amount of our tower portfolio. And of course, with a 15-year term, that means there's a lot of straight-lining from an accounting perspective. So you do see some headwinds from an EBITDA perspective into Q4. That's noncash, straight-line lease expense, and it's going to be about $150 million headwind from Q3 to Q4. But the important part of this deal is the long-term lock-in flexibility, defining escalators and really cash savings from day 1 for us. So really, really positive. I'm extremely pleased where we wound up on this. .

Great. And another point, Neville, you mentioned the 15% of traffic going up. And this is for Matt. I think the churn numbers in Q3 were particularly encouraging, given that we were coming out of COVID. But Sprint had historically had churn running close to twice the industry average. So perhaps just reflect on what you're seeing in NPS scores and retention and satisfaction in that base because that's always been a concern about would there be continuation of some of that elevated churn, particularly when you kind of shut the brand down in August.

Yes, Simon, that's great. And I'll remind you that everyone's churn was down in Q3 because of COVID. That effect is definitely there across the industry. We did report 0.90 on voice, and that's the combined T-Mobile and Sprint churn together. And last year, it was 0.89 just T-Mobile. And so when you look at that, we've seen reductions in both our T-Mobile brand and our Sprint brand. And if you go back Q4 last year, Sprint was on around 2% churn. So clearly, there was a big reduction on the Sprint base. This isn't the first time we've done this. If you go back 8 years or more, T-Mobile, it wasn't -- had the highest churn in the industry. And we went to work with our customer base through a formula that we're repeating with the Sprint base. It starts with the network. Neville's talked about all the wonderful things we've done to open up the Sprint base to have access to the T-Mobile network. And we're seeing great results in usage of the T-Mobile network, and it's coming through in satisfaction -- of network satisfaction. That was, by far and away the #1 reason Sprint customers were leaving Sprint or because of the network. But we're taking the full formula as well to the Sprint base. We went to work right away post close, bringing a lot of the Un-carrier goodness to the Sprint customer base. We brought them T-Mobile Tuesdays. We changed the way the eligibility works for offers and deals so that existing customers can get access to those great offers in the marketplace. We launched an Un-carrier move, Scam Shield, which was a very comprehensive solution to stop robocalls and spam calls that were actually spiraling out of control post COVID. And we enabled that for our Sprint customers at the same time. We started doing the things that other carriers don't do for their customers, which is launch these great Un-carrier moves and give them to everybody at the same time for free. And so we're seeing gains there as well in the Sprint base. And then the last thing we've done is we started changing the way we take care of our customers. We have a long track record of award-winning customer service, team of experts, we innovated on that, and you could just look at the plethora of J.D. Power Awards we've won on the consumer and business side in taking care of customers. And we've already seen significant increases in NPS from the Sprint customer base when you put the whole formula together. So I can't forecast where churn is going. But I can tell you, when you look at the progress we're making, the execution we've seen and the leading indicators, we feel good about where we are, very good about where we are and how things will unfold in the coming quarters.

Great. And Neville, following up on your 2.5 rollout comments. I think in the past, you talked about going from 60 to 80 megahertz of spectrum. Where are we in that? And will you take that ultimately to 100 plus? And what about propagation? We get some questions about the ability of 2.5 to go through windows and walls and stuff. Is that something that's easier with things like massive MIMO and new devices?