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

Okay. Good afternoon. My name is Colby Synesael. I'm the telecom services and communications infrastructure analyst at Cowen. Welcome to Day 3 -- actually, the final presentation of our Virtual TMT Conference. For this presentation, we saved the best for last, we have T-Mobile. And from T-Mobile, we have the company's CFO, Peter Osvaldik, and the company's EVP of Consumer Markets, Jon Freier. We have 30 minutes for this fireside chat. I've gone and prepared a whole bunch of questions, more than we'll need for 30 minutes. But to the extent you have your own questions, please feel free to use the chat function. And where I see appropriate, I will try to insert those in as well. So with that, guys, thanks so much for being here. Really appreciate it.

Thank you, Colby.

So for the first question, I wanted to kind of just start off talking about the postpaid industry phone adds that we saw in the first quarter. So industry postpaid phone growth saw record year-over-year growth. What we calculate is 3.2%, with T-Mobile leading the way with 773,000 net adds. I think you had some time to kind of digest what actually occurred. I'm just curious if you think we saw anything like a pull forward relative to the first quarter, whether you think that the growth that we saw really across the industry is sustainable as we go into the second quarter and beyond?

Well, absolutely, and thanks for having us. So let me start with the legalese. Let me get that out of the way quickly. But before we get started, I wanted to mention that today, we'll make some forward-looking statements that involve a number of significant risks and uncertainties and encourage you to review the risk factors set forth in our SEC filings. So thank you for that formality. And Q1, again, was just an amazing demonstration of us executing against our ambitions, which you know and you've heard us say are delivering industry-leading growth, delivering substantial enterprise value while also positioning ourselves for the long-term success of the company. And not only was it a beat-and-raise quarter for us, but just as importantly, it was one where we beat against consensus on the key metrics that we look at, right, service revenue, customers. And also what was equally impressive is we were the only ones to decrease churn sequentially. And that was on the Sprint base as well as the Magenta base. So certainly having an impact from a customer perspective. If we look at Q1, the industry definitely continued to grow, right? And while we can't speak to everything that everybody else is saying, we certainly have a lot of take on what drove the quarter-to-quarter growth. And I think for that, Jon, who has just a tremendous scope of role here for us, leading our consumer markets, which is just massive. Maybe I'll pass it over to you and just give some perspectives.

Yes. Thank you, Peter. Yes. Like Peter said, Q1 was an incredible quarter. It was really kind of the tale of 2 tales as we saw, right, which you had the first half of the quarter that was coming out of the depths of the pandemic and very tough times out of the holiday season to the second half of the first quarter, which we saw a lot of stimulus that was happening to the marketplace. So for us, as we think about Q1, we are just incredibly delighted to be that industry leader once again for postpaid phone net adds. And as we think about Q2, we're seeing continued momentum in network performance and perception metrics, fueling churn improvement and gross adds. We launched Magenta MAX, which is the industry's truly unlimited rate plan that's really working off of that 2.5 gigahertz mid-band spectrum that's driving those incredible speeds on 5G. We launched that in late February, and we're continuing to be very pleased with how Magenta MAX has resonated in the marketplace, great differentiation. Also, one of the things, remember, too, that back in Q1, that was one of our highest T-Mobile for Business phone net add quarters that we've ever seen. So great business performance in Q1 as well. And then we saw in Q1 a doubling of our postpaid phone net accounts from Q4, which was incredible to see. And it's hard to know in terms of -- at the industry level, if those trends will sustain or not for our business. We feel great about what's happening within the business. We feel great about the tailwinds that will continue to drive. And then just remember, we've got a couple of very strategic areas that are differentiated from our competition. First is we've got this huge opportunity in smaller markets and rural areas throughout the country. It's about 40% of the marketplace, 40% of the population, 40% of the household. And we have roughly a share in the low teens. And we have an ambition to grow that to 20% plus. And then also from an enterprise perspective, that's something that we've historically under-indexed in. So even when you look at stimulus or not, clearly, there was a stimulus effect in Q1. But even coming out of that, when you're thinking about reopening and if you're thinking about the growth vectors that we still have in front of us, we feel great about our prospects.

Yes. I'd say I think the second half, in particular, what we're certainly optimistic about, more of the country opening up and driving switching behavior back to norms. As Jon said, we definitely saw a stimulus impact in Q1, right? That was absolutely...

[indiscernible] on the earnings call.

Yes, absolutely. And you saw that across bad debt, you saw that across cash in the system. And so I think my prediction would be, as you think about Q1 to Q2, that stimulus effect probably dragged some into Q1. So I'm not sure as an industry we'll see the normal Q1 to Q2 bump that we've generally seen, but time will tell, right? So hard to tell at this moment.

It sounds like for T-Mobile specifically, because you have your own opportunity sets, as you talked about rural, you talked about business, you still feel very good about your own momentum.

Yes. We feel good about Q2 and again, delivering against our ambition of leading the industry from a profitable growth perspective. But again, there's no doubt we saw some Q1 benefits from stimulus as well.

Shifting over to ARPU. So one of the bigger surprises from earnings was you said that first quarter is expected to be the low watermark for ARPU in 2021. Given you're still moving higher ARPU Sprint subs to lower ARPU T-Mobile plans, that's I guess where the surprise is, can you talk about what you've been seeing from an ARPU perspective when you migrate some from Sprint to T-Mobile plans?

Yes. And so first, let's -- if we step back and look at the mid- and long-term plans that we shared at our Analyst Day, that was really built on -- through 2023, generally seeing that 1% sequential dilution each year on ARPU. And more importantly, really what the service revenue growth and the result in growth there was focused on ARPA and expanding relationships and monetizing those relationships. In Q1, we saw exactly what we said at Analyst Day, which is as we move many of the customers on the Sprint base to their target rate plans, which is still in the Sprint billing system, but then enables us to have very seamless conversion into the T-Mobile billing system later, a very no-touch customer experience. We did that for the majority of customers in Q1. And as we did that and as we shared, we were always going to err on the side of the customer. And so we saw that sequential roughly 1% dilution in ARPU. There's a little bit more to come, to your point. We didn't do all of the customers. There's still more to go there. But offsetting that is certainly the positivity that we've seen from initiatives like Magenta MAX, which is truly differentiated and really the industry's only unlimited plan, truly unlimited plan and allowing us to demonstrate the power of this 5G network as Neville and team rapidly roll it out. So that's one of the main reasons that has definitely helped us see the low point -- low watermark in Q1 for this year and start seeing ARPU growth through the remainder of the year.

Okay. Shifting over again and talking about EBITDA. Last quarter, you raised '21 EBITDA guidance by $150 million, which largely reflects the 1Q beat. You mentioned you didn't increase it more because you expect to ramp up investments in the second quarter and beyond, including things like business and WFX and rural distribution as well as likely a step-up in bad debt. Can you talk a little bit more about what these investments are going to actually entail? What actually is in that that's going to be where the money goes?

Sure. Absolutely. And I know you have some questions later on that you want to ask deeper around small markets in rural America, so we'll kind of save some of that for later. But absolutely, as we've always said, 2021, going back again to our 3 core ambitions, and one of those is to lay the foundation to enable the success that's embedded in the LRP and unlock the free cash flows. And that involves investments in what are the significant addressable markets for us primarily. And so as we look to the remainder of the year, there's a few main categories. One, of course, it begins with the network, right? So we continue to invest in the network, building out the network, and that comes with some OpEx expenses before you get all the benefits of the decommissioning and the synergies resulting from there. We have small markets in rural America, which, again, I'm sure we'll talk about a little bit later and the distribution expansion that goes along with that, both from a store perspective as well as our hometown expert program that Jon has put in place. On T-Mobile for Business, to really attack that enterprise opportunity, we're expanding in a business sales force perspective, hiring more there to allow penetration and get the funnel going as well as system and capabilities. When you look at Sprint, in particular, the Sprint customer base, we're also investing heavily in tech. Our team of experts, our innovative customer care model that's healthy, part of the playbook that's taken us from worst to first in terms of churn on the Magenta base, and that's the same thing that we're investing into in the Sprint customer base to help drive down churn. But most importantly, again, all of these investments, as you say, are really embedded in the guidance that we provided and then enable that free cash flow and service revenue expansion in the future times. And from -- I think from a competitive perspective, certainly, as you said, it's -- we -- you've seen us operate now. Everybody has seen us operate in periods of hyperintense competition and periods of completely shut down countries. And we know how to flex and how to deliver against the ambition no matter the macro environment around that. So of course, we have embedded some prudence in the plan and some capabilities. And if switching should pick up like we anticipated to do in the second half of the year, we're there to capitalize on it given we're the share taker.

And to that point, we saw Verizon earlier this week adjust its promotional plans. And to the extent that, that has a positive impact for Verizon, but perhaps at the expense of somebody like T-Mobile, does your guidance give you the wiggle room to respond to that without necessarily having to adjust down some of your profitability metrics?

Yes, we're very prudent in how we plan and giving us the flexibility. But remember, it's not all about responding like-for-like from a promotional intensity perspective in exactly the same construct. We have a differentiated 5G network. As 5G is becoming a more and more important consideration point for customers and switching, we're able to offer things like we've talked about, Magenta MAX, which nobody else in the industry can offer because they don't have a network capacity to do it from a 5G perspective, right? And we also have the tailwinds as we're coming into areas that are underpenetrated for us that we don't have castles to protect around, small markets in rural America, a large enterprise, bringing innovative things. Business is an area -- Jon's here to definitely talk about consumer and all the great things there. But in business, the things that we've just launched offer to large enterprise just amazing things that they've never had before, right? So many of them are still on metered plan, capped plans, have massive departments or third parties managing their actual wireless plans to try to make sure they don't get overages as data gets used, things like that. Those are complete new innovations that we're bringing into the enterprise space, much like we disrupted consumer. And so you have these areas of growth opportunities for us as well that the others don't have. So between all of those factors, we're very confident in the guidance and why we also raised guidance in Q1 from a postpaid consumer perspective despite what you see in the industry from an AT&T at that point and Verizon now reacting.

Let's shift over and talk about the rural opportunity a little bit, Jon. So Jon, at the Analyst Day, you guys outlined a target of nearly 20% rural market share by 2025 versus low teen today, which is also something you referenced already. And you mentioned the winning formula at the time, best 5G network, distribution, value, customer experience. When I think of those different ingredients, it feels like distribution is kind of the key one. Where are you in building out the distribution? What inning, to use that old analogy, are we in? And is it more than that? I mean, I know that there's this other thing. I mean, maybe getting a little bit more depth behind some of those things.

Yes, you bet, Colby. Like I mentioned just a little while ago, this is a huge opportunity for us. It's 40% of the entire marketplace when you think about smaller markets and rural areas, just a little bit north of 150 -- excuse me, north of 54 million households and about 140 million people across the country. So it's huge. And we're in that low teens from a market share perspective. And for us, this is in the very early innings of our game plan here. So we have an ambition to get to nearly 20% by the end of 2025 in terms of the market share position. And what we have here is we have an opportunity to bring to smaller markets and rural areas something that they've never seen, which is the best network and the very best value because what you've had to do in this industry up until now is make a choice between 1 of the 2. If you want the very best network, then you're getting not the very best value. If you want the very best value, then you have to make a trade-off in network. And what this company and our overall approach represents in smaller markets or rural areas, frankly, all across the country, but more acutely in smaller markets, in rural areas is to not have to make that choice. No company has been able to do what we're going to go and do. And then when you take what we're incredibly known for, this best-in-class customer experience, it's really -- that's what's made us so incredibly successful with multiple J.D. Power award wins year after year after year. You put all of that together, and we think we have a winning combination here. When you think about distribution, yes, we're going to open up a couple of hundred new brick-and-mortar stores this year throughout rural America. If people follow me on Twitter, @JonFreier, shameless plug, I've put a lot of those out there and celebrate all of the openings that we have. So we're opening up a couple of hundred. We're going to have hundreds more throughout this 5-year ambition. And then, of course, one of the things too that I talked about on the Analyst Day is that we are going into Walmart as well. So we'll go into about 2,200 Walmarts, but about 1,000 or so -- a little less than 1,000 in smaller markets and rural areas. Walmart is the premier shopping destination in smaller markets and rural areas. So if you're not there, then you're missing out. So we've already made an agreement with Walmart. We're going to be bringing that distribution to market, hopefully, very, very soon towards the end of the year. And we've got a big opportunity. So we're in the early innings of this game. We've got -- we know how to build distribution. We've done that very rapidly in the past, particularly in suburban areas in the top 100 markets. And we're in the very early innings, and we're pleased with where we are so far.

And let me just add because one of the things -- Jon and his team certainly aren't going to go build distribution in terms of any of the innovative models that he's coming up with in areas where we don't have the network, right? So bring the network in and bring something differentiated. And that's where -- if you step back and look at what 5G is and how the network builds really compare. I mean, right now, certainly for our extended range product, we're already covering 295 million POPs. But it's really our ultra capacity, mid-band driven game-changing speeds of 5G, where it's so differentiated -- not just already where -- our plan is to cover 200 million POPs by the end of this year and do it with 100 megahertz of bandwidth. But if you look at '22 and '23, '23, our target is 300 million POPs. That's a significant portion and it includes many rural areas. And when you compare that to where AT&T and Verizon has said they're going, I think AT&T has said around 200 million POPs and Verizon is slightly shy of that. Well, that 100 million POPs is so much of this rural area that's covered where you will have such differentiation from a network experience perspective that when Jon then is building up the distribution, the being famous for network, the consumer perception, it's based on something truly tangible and something fully differentiated relative to the competition. So that's what we're very excited about.

Where does digital fit in with this? I mean during the pandemic, digital I think became more important than it had been before. Any sense what percentage of gross adds digital is bringing in these days and where that plays in all this?

Do you want to talk about digital?