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

Good afternoon, everybody. Tim Horan, the communications and cloud analyst here at Oppenheimer and our 23rd Annual Conference that we've been holding in Boston basically for, I think -- of the 23 years, except the last 2. Hopefully, next year, we'll be back. I'm pleased to be hosting here one of our basically top picks over the last decade in the communications space, T-Mobile. We have the CFO, Peter, who's going to have a fireside chat. We don't have any presentation. I already have a few questions here on the Wall Street webcasting. Feel free to kind of fire away with questions, and I have a lot of them already. I'm going to do my best to go through them. Thanks so much for being here, Peter, really appreciate your time.

Absolutely. I know this one is close to my heart because it was the first one I did as T-Mobile CFO. So I always enjoy coming to this conference.

Awesome. I really appreciate it. So I just started telling, I normally keep these things high level and long term. And my first 2 questions are really a little bit more around the short term here and the quarter. But one of the #1 questions we've been getting, and no one seems to have a great answer on it is, the industry saw a really, really strong postpaid phone subscriber adds. Do you guys have any insight on why that is? I mean I think historically, last maybe 3, 4 years, we were adding like 6 million postpaid phone adds. We think we're on track to add like 9 million this year, which is a pretty big step-up.

Yes, absolutely. And before I jump into that, of course, I may make some forward-looking statements. So ask everybody to look at the risk factors in our filings. And of course, can't comment on Auction 110 given that it's a quiet period. But it's an excellent question, and one of the things -- of course, the industry is growing, and that's great for all players and especially great for T-Mobile, given the profitable share taker. And it's really hard to talk from a total industry perspective exactly what everybody is seeing, but I'm certainly happy to speak to what we're seeing. And there's a number of things, I think, driving the success that we've seen. One of those, of course, is churn. And we saw the biggest sequential improvement in postpaid phone churn in Q2 after being the only ones to improve phone churn in Q1. So, obviously, churn obviously gives you tailwinds from a net adds perspective. Continued perception on our end in both network performance as well as perception metrics and great response to accretive offerings that really demonstrate the power of this network, such as Magenta MAX. So success, in that front, has the been driving demand. Certainly, T-Mobile for Business and government continues to be very, very successful as one of our growth aspirations and initiatives, and Q2 was no different. We had a lot of key wins in key industries, airlines, automotive, retail, government, second quarter in a row now with more phone net adds than Verizon and also the fifth consecutive quarter with more total postpaid net adds than Verizon. And I think -- and this one is an industry-wide phenomenon and certainly one that we see, but continue to see prepaid to postpaid migrations across the industry. And hypothesis is, partly, it has to be fueled by stimulus and enhanced unemployment, improving credit, I mean definitely, customers are healthy out there, and we see some of that migration happening. And you saw at some of the prepaid, primarily prepaid players, reported as well and perhaps saw a little bit of drag, makes it all more impressive for us as the largest prepaid player in the space with Metro that also saw growth. And I think maybe the important thing that we learned in all of this is, if you step back and away from line counts is maybe a better metric that we focus on is postpaid accounts versus lines, right, because that represents the real customer relationship. And on that front, we delivered 349,000 postpaid accounts in Q2, which was our highest quarter ever, and that's over 600,000 in total for the year. I think Verizon is still negative for the year. AT&T won't report the stat for some reason. But that's where we can really look to how are you growing those account relationships. And at the same time, we are also growing postpaid ARPA, which is the foundation of our plan and longer-term growth strategy. So that's kind of how we're looking at it and thinking about it.

Very good. Your full share bounce around -- it does bounce around from quarter-to-quarter. You've been incredible flow share over the last decade. But I think you were just a little bit below trend here this last quarter. I think you have an awful lot of control on that. Would you like to see that flow share increase in the second half? Any thoughts where you kind of like it to go over the next couple of years?

Yes. And again, I think Q2 was perhaps a great highlight of the differentiation between T-Mobile and our playbook and maybe how some others in the industry played it because as we've always said, we're focused on delivering consistent profitable growth. And again, still continuing to lead the industry for the first half in postpaid phone adds, and we just talked about the success in postpaid accounts with our highest quarter ever, but that's really what we're focused in. And that was, of course, on the back of the sequential churn decline both on the Magenta as well as Sprint based, but remember, we're still dragging around the highest postpaid phone churn in this industry as we continue progress with the Sprint base, which if you put that into context that even it is a more impressive result in terms of what we delivered in the context of the total industry. But even more important as we're always committed to is we do that growth, but we do it in a profitable way. And you saw us deliver and lead the industry in service revenue growth, profitability, cash flow. And you can always, to your point, a little bit in control of it. Absolutely, you can always go through more money at anything on a quarterly basis. So of course, that n+1 gross add gets more and more expensive as you know deplete the switching pool. We're always focused as a management team around what are our internal targets and aspirations and how do we gain that growth in a profitable manner. And that's why you see that growth actually translate into margins as well as profitability and cash flow. Others maybe approach it differently, spending very heavily on customers. And not only did you see them take a hit on their margins, but in some cases, like AT&T's case, you see a lot of this getting hung up on the balance sheet, where I believe now they have over $4 billion of future amortization of promotional expense hung up on the balance sheet. So you see margin depression as well as all of this stuff that's future amortization. That's not the way we play it. It's really a game of we're going to grow in a profitable manner and you see us demonstrate that in Q2. As it plays out in the whole year, we do expect the second half to have a little bit more flow share than the first half. And you saw us increase our postpaid phone net guidance to between $5 million to $5.3 million. And we noted that we do expect that there would be a higher mix of phones in the second half than the first half for us.

Great. And when you talk to your competitors and you look at the cable industry, everybody wants to ramp up flow share here. I'm measuring it by phone net adds. Yes, I guess do you think there's enough room to go around? I mean the cable guys, in particular, really seen they've ramped up a lot the last couple of years. And in conversations with them, they seem to really want to kind of ramp up here. Like, who do you think is going to end up being a share loser here, I guess?

Yes. One, as you said, it's a great industry because it is a growing industry, right? I know there's questions around just how much and how much was pulled forward or pulled back. But in totality, it is a growing industry. And competition has been around since the dawn when we started this. And cable, and I think you heard Mike give them some kudos in our Q2 call. They probably were more successful off the bat when they entered into the game than we anticipated. But since then, they've been at about a consistent 10% flow share of gross adds in the industry. It's kind of in the run rate. Certainly, we've seen what they've done from a competitive perspective. You see our results and the nature of the competition as it always exists and how it manifests itself might be different on a quarter-to-quarter basis but it's always there. You see the results that we're able to give. And frankly, it's hard to tell where they will go because as you think into the future, as 5G becomes more and more important, and I'm sure we'll get into network and our competitive advantage there a little bit later, I think they might be hampered by the fact that they don't have owners' economics. And beyond that, that they will be riding on another 5G network that will be inferior, not only to what we currently have but for the duration of the 5G era. So -- but again, we're very happy in this industry. We're very happy with what we see from a competitive perspective. We know how to play in the game, and we're going to continue to deliver on what our ambitions are, which is the profitable growth side of this.

You bring up a great point, right? It's all about growing the revenue and growing the margins. And I guess on that point, the key issue is, I think you're guiding -- we have estimates next year around $58 billion of revenue you're doing and you're guiding for $70 billion in 2026 or about $12 billion of incremental growth. And I think when you look at the free cash flow, we have -- you're guiding to $18 billion in 2026 of free cash flow, which is also about a $12 billion increase from our estimates, give or take here a little bit more. Can you give us a little bit of color on how do you get an incremental $12 billion in this industry? Maybe what percentage comes from fixed wireless, maybe from enterprise or other products and services? And I do know you have a massive amount of unused wireless capacity out there. So it gives you a lot more flexibility.

Yes. So let me -- I think a number of factors to unpack there in terms of the long-term guide and the excitement of really how it translates into this massive free cash flow generation of this business. And then I think part of the question was why you have this much service revenue and how does that really fall into free cash flow. So let me start with just service revenue. And it certainly is driven by a lot of our ambition in terms of areas of expansion and expanding our addressable markets that we've talked about, which is fueled of course, by the network capacity as well as the expansion that's going to happen over the course of the next couple of years. But starting there, home broadband is certainly a big monetization play for us. We started our pilot earlier on, we announced commercial launch to 30 million homes earlier in Q2. We're still on target to achieve about 500,000 new customers by the end of this year, on towards an aspiration of 7 million to 8 million customers by the end of 2025. And we said that will be an ARPU profile, very similar to a postpaid phone consumer, very accretive, of course, to free cash flow and margins because it is running on the back of the build that we're doing for them over the first place. So the incremental cost associated with that is very well. And so that 7 million to 8 million customer profile at a postpaid phone ARPU level is very beneficial to the bottom line. And tremendous success even to date there, great feedback from customers on those who have switched, but also now third parties. We saw PCMag come out, whether it's the Readers Choice Award, who had ranked us in our home broadband solution higher than all cable providers across multiple categories. So I got to tell you, we're very excited about scaling this opportunity as the network and the capacity grows. The other one that we've spoken about is smaller markets in rural areas, which is really 40% of the U.S., a 50 million household opportunity for us, one that we have a very low teen share currently and have aspirations to get to about a 20% share. And so that's not only an investment of distribution that we're making as well as innovative new distribution mechanisms, like hometown experts, but also on the back of where the network is going and the massive build that we're going to have. And that's one I've got to tell you that is just so exciting of an opportunity to me in the context of the network and what it can do for consumers and helping bridge the digital divide and really get the service that they deserve. Now when you think about the targets that we put out there, we're striving to reach 300 million POPs with the ultra capacity, mid-band, game-changing speeds by the end of 2023 with 200 megahertz bandwidth on that. Our competition is at somewhere between 175 million to 200 million POPs depending on Verizon or AT&T in that same time frame. Or when you think about where that incremental 100 million comes from, in many cases, it's exactly in these areas. So you're going to be left as a consumer with, on one hand, the ultra capacity, game-changing speeds and a true 5G experience as more and more use cases come on. Or you're going to be left with effectively it might feel like today, it's LTE environment. So that's an area of, I think, a lot of opportunity for us where the network will be so differentiated. A third area that we've spoken about is enterprise. Again, another place where we have a high single-digit share currently and also striving to be about a 20% share in the large enterprise space as well as government. And seeing a lot of traction there, we talked about the success that we've already seen in Q2, again from T-Mobile for Business, but that's another area where it used to be where the network was and where T-Mobile perception was. We weren't really a player in large enterprise and government. Well, that's completely different now. And we'll continue to be, again, just as we continue to dominate throughout the 5G era, where large enterprises, we're seeing success there because they buy differently. They go out, they test the network, it needs to meet their needs from a reliability, coverage, bandwidth perspective and its phones and other products and services as well, as well as, of course, what will come with 5G in terms of mobile edge, private networks and all of those use cases. But that's an area of tremendous growth opportunity for us as well, and we're a real player in that space, and we're bringing the same disruption to business, the large enterprise, government and businesses that we did in the consumer space so long ago. You're still stuck in some cases as an enterprise with data buckets and pools and trying to manage all this, bringing simplicity, a great value proposition, the T-Mobile customer care element of it, and it's really resonating with businesses. So that's a long-term growth strategy for us.

Give a rough idea how many subs are in that enterprise government sector in total? I think you said you have 10% market share, I think.

Yes. Yes. We haven't really laid out all of those elements separately, so I'm not going to do that here. But certainly, it is what kind of ladders up to all of our aspirations in the service revenue space in the mid and short term and long term as well.

I mean adding that up on the top of my head, yes, that gets you to an incremental $12 billion of revenue, just...

Absolutely. Absolutely, right? And we did talk -- other elements of 5G use cases that some of our competition, I think, has hung their plans on, such as mobile edge, virtual networks, AR, ER. Well, those are all areas where we've got great traction, just like others do with sitting with Fortune 50 companies, 500 companies, really doing test cases, use cases and these things will develop. And what better network to be on than one that's -- one the only stand-alone 5G core at the moment, also have a very distributed core that allows for low latency combined with that stand-alone architecture. And the use cases that we're seeing, the pilots that we're seeing, I think there's very, very interesting things coming. As this whole industry in 5G matures, all of that is upside to our plan. I think we shared at our Analyst Day that we know those things are coming, but we're a prudent management team that puts out targets that we strive to achieve and beat, and this is an area that's too new. And while it will be coming and it will be the best network to have it on, those are all upsides to the plan. So yes, there's a lot of ways to achieve that, for sure.

While we're on the topic of growing revenue. One of your competitors pointed out the fact that the FCC coverage map has you maybe not as much coverage as you guys kind of show on your own websites or they were kind of touting that. I'm not sure if you looked at the FCC coverage map. But I guess, can you talk about how accurate your maps are? Really, where you are with the rural coverage at this point?

Yes. I mean, with the rural coverage, if you look at -- on the 5G space, which is the up and coming, more and more important to consumers over 300 million covered POPs on low band, right? And more importantly, the 165 on mid-band, which is growing to grow at a 200 million by the end of this year and 300 million covered POPs, as we said, by the end of 2023. And maps are -- if we feel very confident in what we're putting out there, it's very much drive source, data source, maybe just as importantly as to look at -- every one of us is going to tout our maps and say we're the best, but what's coming from third parties? And when you look at both on the 5G as well as 4G, where that was one of the important things that we've invested in, absolutely, 5G is a tremendous opportunity in front of us and our goal is to lead for the duration of that but we've also closed the gap on 4G and LTE, where still the majority of the traffic sits and you look to third parties who have validated that, both in terms of coverage, speed, reliability. So that's what I always point to is, the live customer experiences validated by third parties, not ones that we pay for, but third parties, crowd sourced from billions of measurements as the gold standard to look at and validates where we sit, both from a 4G perspective and how we dominate in the 5G arena already while we continue this deployment machine and reach the targets on 5G that we're striving for.

And while we're just talking about the incremental revenues, the fixed wireless, you seem to be much more gung-ho about it on this quarterly call or talked about it a little bit more. I know you've been very optimistic about it, but now you have some trials out there and you're actually deploying stuff. I mean, do you have enough -- I know your goal here is 7 million or 8 million subs in 5 years. But it seems like the demand is virtually insatiable, given what the cable guys are charging, what you're charging and how you can easily bundle it in with your customers. I mean, can the network support 10 million subs in 5 years? Is that the gating factor? Or what do you think will be the gating factor?

Well, it's -- there's a number of variables, of course, in terms of what things look like 10 years from now. One of those is what usage trends will work like? What will other use cases on the network look like? How much will phone data usage go up? But the exciting part here is this network capacity is obviously going to be massive, right? We said 14x what the stand-alone company would have been able to produce. When you think about what we're building, it's not just a breadth but it's also the number of lanes on the highway, where we're going to be sitting at not only the 300 million covered pumps with ultra capacity, but also 200 megahertz of mid-band spectrum there. So it's a tremendous amount of capacity that we're creating on the network. And it's a mobile-first network, right? That is our bread and butter. That's how we're winning. When you think about home broadband, that is the way to monetize the excess capacity and the massive capacity that's being created by Neville and his team. Will there be more capacity and opportunity, I mean, in 10 years? I believe so. But you have to see...

I mean, in 5 years, can you get to 10 million subs. I know your goal is 7 million to 8 million. I mean, is there upside to that? Or what's the bottleneck or the gating factor for that 7 million to 8 million in 5 years?

I think as always, Tim, we put out prudent plans out there. So what the ultimate end max capacity go is, I don't think I could share that with you today. But our job is to achieve and hopefully exceed the plans that we put in front of you. So -- and that's 7 million to 8 million, to your point, it's still a fairly small percentage of the total population. So we're looking at it as a great opportunity. We're certainly going to strive to overachieve it. But I'm not willing to commit to how much more or what more or what the capacity is at the moment.

Got it. And so I kept interrupting you, sorry. But I guess almost all those revenues falling down to free cash flow, can you give us a little bit more color how you accomplish that?

Yes. Well, it's certainly when you look at how it all translates into free cash flow, there's a number of factors offsetting it. All that service revenue growth, tremendous benefit to free cash flow. But there's a couple of other things. One of those is our path to unlocking synergies, right, and ultimately hitting the $7.5 billion of run rate synergies. Now of that, a portion is $2 billion of the $7.5 billion is avoided. So that's not something that you see in the run rate quarter-to-quarter that will build in terms of synergies, but we will hit the full run rate of synergies. That's another element that, of course, expands margins and unlocks free cash flow. When you look at CapEx because the guide you were referring to is '21 through to the long term, the CapEx guide for '21 that we just raised was $12 billion to $12.3 billion. And we stated in the longer term because we're in such a massive expansion mode at the moment, CapEx would likely be in that $9 billion to $10 billion range in the long term. So you have a lower amount of CapEx. You have the higher synergies. And offsetting, of course, the higher synergies and the service revenue growth is our expectation that by that long-term 2026 guide that we gave, that we'd be a full federal income tax cash payer. So that's, of course, the drag on free cash flow. But all of those coming together will lead to what is just an amazing amount of free cash flow generation that this business is going to provide.

Very good. Very good. We do have a lot of questions from the audience, and I'll go through in a few minutes. But one, I think one criticism that people have had on your network longer term or weighs back a bit was the voice quality and maybe the voice coverage wasn't as good as some of your peers. I know you're doing a bunch of things from an engineering perspective to improve the voice quality of the network and maybe 5G ends up solving that problem. Can you get into a little bit more detail what you're doing to improve voice quality?

Yes. We've always been hyper focused on this. The first to deploy HD voice and satisfaction levels are tremendously high. And I always look to say the proof point of network performance is churn, right? Network performance is still a top driver of churn in this industry, as it should be. Consumers should expect the best in terms of product that we give you and then wrap around, of course, all of the value of customer service and experience proposition. We think voice is the least forgiving, right? People want to be able to make calls. They don't want their calls to drop. They want to have coverage. And it's, again, as I said, the primary driver of churn. So when you look to churn performance in the industry, that should be a great indicator of customer satisfaction with the network. And the Magenta churn is the best churn in the industry. Of course, on a blended basis with Sprint that we continue to improve on as well, we are the highest churn in the industry. But the Magenta base that has the full value proposition of the network, customer care and everything else that we wrap around it, has the lowest churn in the industry. So that's a great gauge to me of how customers vote with their voice in terms of churn. And we talked, of course, a little bit more about what about third parties. And we've closed the gap on 4G and LTE, while simultaneously expanding the gap on 5G and you see those third-party reports coming out, and those include reliability, coverage, speeds, open signal lots. It's a great way to look and gauge as to what's happening from a network quality perspective. So -- and on top of that, of course, our plans in terms of the ultimate network consolidation include building about 10,000 new sites to improve coverage to get to that ultimate target of roughly in the mid-80,000 range of macro sites. So always a focus point here. It's what we believe in and selling the best product with the best value proposition to consumers.

And have you talked about where -- how many of those 10,000 have you built out already? And can you just remind us, you have an awful lot of that 2.5 megahertz mid-band spectrum? This initial build, how much of that spectrum you're actually building and when will you build out the rest of it?

Yes. So right now, we're sitting on about 80 megahertz nationwide average on the anchor network of the 2.5 gig, on our way to about 100 megahertz by the end of this year. And by the end of '23, as I mentioned, as we not only expand the coverage POPs as we have there, the goal is to have 200 megahertz of mid-band fully deployed on the anchor network. And we're doing that as we're, of course, re-farming. As we're building the network, as we start migrating Sprint traffic onto the T-Mobile anchor network and you saw us report that we've already hit 80% of traffic on the T-Mobile network of the Sprint base, that allows us to start decommissioning sites, which we've already begun. We have over 3,000 sites decommissioned through the end of Q2 on a rate of 7,000, 8,000 sites by the end of this year. The goal is to have all of the traffic moved by mid-2022 and site decommissioning by end of 2022. So that will allow us to bring in and continue to fully re-farm that 2.5 spectrum onto the T-Mobile network. So that's kind of where we sit at the moment. We haven't talked about how much of that 10,000 we're already in the build process or how that sits. But still the target network is sitting on a macro basis in that mid-80,000 to 85,000 range as a target.

Great. So I have about 50 questions here in respect to the audience. I'm going to try to go through a few. I did see a headline, I apologize I didn't get to read it, but there was a headline that T-Mobile is going to do a new fiber broadband pilot program in New York City. I don't know, is that a -- did you guys put that press release out? And if you can give us any more color, that would be great.

Yes. Well, it's just a very small pilot that we're targeting in New York, right now, so not a significant amount. Certainly, our premier and our flagship focus from a home broadband perspective is our fixed wireless play that we've talked about today. And if we have more to share on that pilot program or anything beyond that later, we'll be happy to do so. But right now, just a very small pilot that we're focused on.

And have you looked at some of the millimeter spectrum to do point-to-multipoint or some of the other unlicensed bands to do point-to-multipoint for broadband?