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

Well, again, we're on track to deliver the increased $7.5 billion run rate synergies and do that in 2024. What we saw in 2022 is that ability to quicken the network decommissioning gave us end-year benefit and that flowed obviously in Q2 and Q3 to the bottom line. And because we are 3 months ahead of schedule, we'll get a benefit in '22. But exiting '22, we effectively thought we'd be in the same kind of exit run rate space. So for 2023, we think it's going to be exactly where we anticipate, and we'll guide this as part of earnings for where we think synergies are going to be on our path again to the $7.5 billion in 2024.

What's happening on the macro front in terms of -- are you seeing any changes in customer behavior, tier downs, changes in payment behavior, anything to give you some indications of a changing economic climate?

From a customer perspective, of course, the period of the pandemic and the stimulus funds brought invol churn and bad debt levels across the industry to phenomenally low levels. I mean, things we hadn't seen before. We had mentioned on the Q3 call, what we saw was a return of invol churn to pre-pandemic levels, and we continue to see that. In fact, Q4 was just a touch better than Q3. So we're not seeing anything there. Remember, and these were pre-pandemic levels for us in the 2019 time frame that were kind of our best in company history. So we're seeing a return to that. We continue to see about that level. We certainly aren't seeing anything with respect to rate plan migrations. We talked about the Magenta MAX take rate continues to be tremendously high. So all of that seems right. Of course, we're very cautious about this and looking at this every single day. We have as many times we've talked before, because of our history, an ability to work with variable income customers in a way that others probably don't. That said, throughout the balance of the last couple of years, because of the network and because of what we've built, we've also attracted a tremendously higher amount of prime consumers into the base. So it's an improvement in terms of the prime consumer mix. It's our ability to work with variable income consumers. And then we've seen exactly what we thought last quarter, which was, yes, kind of a return to that pre-pandemic level, but nothing worse.

What about on the cost side and inflation side? How are you managing that? Is that an incremental headwind in 2023?

Well, this is another place where we're a little bit differentiated. And in the -- the biggest areas of cost in the business, we've been able, before this macroeconomic and inflationary environment hit, we're able to secure long-term agreements. And we needed to do that as part of the merger, both with our OEMs as we went through a very massive network rollout and CapEx is going to step down in '23 relative to '22, which was the peak year for us as we had said. So we locked those down. We locked our two big tower vendors down into long-term agreements with just tremendous rates, including escalators in one case that actually escalate down at a period when inflation was low. And so those are probably contracts that wouldn't be able to be executed today. All of our debt is fixed rate. A lot of our energy contracts are in PPAs and VPPAs, about 2/3 of them. So that effectively locks them. But of course, we've seen it and we talked about, we've seen it on the edges. We've seen it with labor. We've seen it with bad debt. We've seen it with some of the smaller component vendors that we didn't have in long-term arrangements, but that's all embedded in the guide that we had given for 2022. And while, of course, on the edges, it's a headwind for '23 for us. Because of that ability to lock those big vendors down, I don't see it as a big headwind for us.

Just a follow-up to this, and then we'll get into the fixed wireless discussion. So previously in the multiyear guide, I think the objective was to get CapEx to $9 billion to $10 billion in 2023. But you had strong growth, not just in mobile but in fixed. So does the demand environment and the revenue growth that you've experienced impact how you look at CapEx for 2023?

Well, I'm going to resist the temptation to give you all the guidance for '23. But on the CapEx range, we currently still see the $9 billion to $10 billion range as being the right range for 2023. And again, we hit -- you saw us pull forward from outer years into 2022, some of the network build and deliver on just tremendous results, 260 million covered POPs on mid-band and now 323 million on low-band 5G. So that's been an incredible result. And we're going to see that step down. That was the peak year of intensity. We're now on our way to achieve roughly that 300 million covered POPs on mid-band in an approach that's very customer driven, customer-driven coverage is what we're saying, but $9 billion to $10 billion feels like the right range currently.

So let's go to survey results and move over to fixed wireless. So in terms of the number of new subscribers that T-Mobile can add in '23, 3% is 1 million or less; 24% is 1 million to 1.5 million; 48% is 1.5 million to 2 million; and 24% is 2 million to 2.5 million. And so maybe talk about what's driving your fixed wireless growth right now and how you see the opportunity to continue to increase subscriptions for this business?

Yes, absolutely. So as you know, for us, the model is a little bit different with fixed wireless. It's an excess capacity model because of the massive amount of network capacity that's being built here. And we've used many different analogies. My favorite one from Neville is the expressway analogy, where we went from one lane, and we're on our way to a 14-lane highway. We're now at about seven. We're about halfway through that -- when you think about both the breadth of what we've rolled out but also the depth of spectrum. We're at about 120 megahertz rolled out of mid-band spectrum right now, on our way to 200 megahertz by the end of 2023. So that creates a tremendous amount of capacity, an amount of capacity that's just not even with our projected growth in postpaid phone and other connected devices growth in terms of the subscriber growth as well as the per unit growth in data. And we had, long ago, pre-merger, hypothesized how much data growth on a per device unit was going to go, and it's going about how we anticipate it. So we look at every sector on a site, on a sector-by-sector basis, we're modeling out what the projected growth is from postpaid phones, which is what we're protecting at all costs. It's our highest CLV product. And looking at all the other connected devices and saying all of that cannot fill up the capacity that we're generating. That's when we're approving households in those sectors to sell fixed wireless. So there's a couple of things that are happening. One is more of the network, the more of the spectrum is being rolled out. So that's going to continue to increase the amount of available homes that are able to purchase the product, and that's going to happen throughout '23 and beyond as this build continues. The other is we're seeing growth across the board. I mean, it's definitely been majority consumer for us at the moment, but business continues to increase their growth of the high-speed Internet product. We're seeing it spread across rural and urban. Again, I would suspect the mix will shift a little bit more to the rural and suburban or the smaller markets and rural areas as that network build continues to progress there. But that's -- demand is fabulous on this product. When you look at the NPS scores, there's a number of them out there. I'll quote HarrisX for a moment, which puts us 30 points above cable and even 10 points above fiber. And so you're seeing the tremendous demand. And we did something fun. As you would expect, we always try things, and this is a growing business. And one of the things we tried in Q4 given the holiday season and the promotional side of it is our $25 bundled offer. And again, much like on the postpaid phone side, from the HSI side, it was a small minority of activations that actually took that $25 rate plan. And the hypothesis on the test was, could we pull through more phones as well. So we have a certain flow of high-speed Internet-only accounts that presents great opportunity for sales in the future. What we tested this, again, a small minority of activations actually landed on that $25 rate plan, but we did see some interesting incremental phone pull-through. So the demand for the product is really strong. The NPS scores prove that out. And as more capacity continues to build, this is right about the pace that we want to be in that $500,000 mark a quarter.

Well, that rolls right into our next survey question. And so we're going to ask our audience does T-Mobile need to incrementally invest in fixed and mobile convergence? And the choices are no, T-Mobile should remain a wireless pure play for connectivity? Yes, T-Mobile should invest in greenfield fiber access, including the BEAD program? Yes, T-Mobile should partner and invest with regional telcos? Or yes, T-Mobile should begin purchasing regional cable operators. We're going to go to the polls. But before we get to this topic, let's touch on prepaid. What's going on in the prepaid segment, both in terms of the retail business? And then what do you see on the wholesale side in terms of you have more visibility with the roll-off of TracFone and DISH?

Yes. Well, let's start with prepaid. At an industry level, certainly prepaid has been more challenged in 2022. And year-over-year, we think Q4 will be down from an industry perspective. From a switcher perspective, close to 30%. Despite that, we have one of the largest prepaid brands. We continue to show growth. And you saw that with our Q4 results, we had a fabulous year of growth. We had our lowest year of prepaid churn in the company's history. So we're very pleased with how Metro is going despite what's happening there. And I think you see cable's success. It's a little hard to dissect their postpaid phones because what they disclosed is total postpaid, not actually postpaid phone. But as we've said before, we're forecasting that. Certainly, Charter will probably have its best quarter ever. But most of that flow seems to be coming from Verizon and prepaid. And I think when you look at their pricing constructs, it's very analogous sometimes to prepaid. So I think as an industry, that's where prepaid is seeing some flow share go. There's definitely flow share from prepaid into postpaid as well. Although for us, prepaid to postpaid migrations were actually down year-over-year. So we delivered that 927,000 despite actually being lower. So I think that's what's happening in the prepaid market, but we continue to be very pleased with what we're seeing with Metro By T-Mobile as well as some of the T-Mobile Connect brands. On the wholesale front, our strategy has always been, and will continue to be, finding partners that complement us, right? We're not interested in just competing in the same places. Do they have a different customer segment that perhaps they can bring a differentiated strength to? Do they have different distribution? That's how we approach and think about wholesale relationships. On the revenue side, for TracFone, that $750 million that we referenced back in Analyst Day, we had assumed would be and we still expect will be effectively gone by the end of 2023. And then with DISH, you saw us enter into a multiyear agreement that has revenue minimums, albeit at lower levels than what we had forecasted at Analyst Day. And no changes there since we had spoken about that in the last couple of quarters.

So let's go to our survey responses, and 42% of our respondents said, no, you should stay a wireless pure play; 19% actually -- so the next 3 responses are split almost evenly at 19% between the greenfield fiber access, partnering and investing with regional telcos, and beginning to purchase regional cable operations. How are you looking at the importance and/or urgency of having a greater fixed to mobile converged offer in the marketplace?

Well, and you sort of asked about it in two different ways, and we think about it in two. One is we're continuing on our path of fixed wireless and high-speed Internet and achieving that 7 million to 8 million target. And again, that's right around this 500,000 run rate. We're on pace, and that's our goal, and that's embedded in the Analyst Day plans. We have spoken about looking at, are there circumstances under which we might invest incremental CapEx for incremental fixed wireless customers. All of that would have to be accretive to what we gave you at Analyst Day. And that's something we're investigating but have no conclusions for. With respect to fiber, it's really the same as we've been saying for the last couple of quarters. We're openminded. We're openminded in terms of would there be a way for our brand, our distribution, our customer relationships to create a value proposition there that might make sense from an investment perspective, whether it's partnerships or direct investments. Again, that would have to be accretive to what we gave at Analyst Day. But we've made no decisions there at all. But as you'd expect, we're investigating it. That's what you do us -- pay us for as a management team is to make sure we're looking across the horizon and making the right decision. And what that is could be pure play, could be a little bit of investment, could be nothing. I don't know. We're looking at that. No conclusions yet.

What's the -- when you look at those possibilities, what's the end goal? Is it just to simply sell more wireless? Or are there some other opportunities that you're looking at in terms of testing this fiber model?

Again, I think your hypothesis is that we're much further along in the process than we are because we're just looking at things and understanding. For example, one of the things you could ask yourself is with your brand, with your distribution, with your customer relationships, could you achieve higher penetration rates than a stand-alone fiber player? Maybe, maybe not, right? You'd have to convince yourself of that. So that's something you could look at potentially. But again, these are things we're looking at, at a high level. We have some fiber pilots, as you know. So we're understanding some of the dynamics there. But those are the things you'd look at.

And when you think about capacity, whether it's for mobile, whether it's for fixed wireless, so when you started the process, C-band wasn't out there, CBRS wasn't out there, right? So there's more spectrum that's out there now. Maybe millimeter wave, I'm not sure if that was a defined part of the opportunity. Is there a much more expansive opportunity for T-Mobile in fixed wireless because of the deeper spectrum position you had today relative to when you started the merger?

Potentially. Again, right now, our focus is build out all the tremendous capacity because, as you said, it was always Neville's famous layer cake, but millimeter wave was always going to have a place in very dense urban environments or venues. I'm not interested in spending I don't know how many billions of dollars of CapEx to put millimeter wave nodes everywhere and drive 1% of my traffic on it. That's not what -- that strategy is, it's not efficient. Can't help myself sometimes, sorry. But the focus really is how do we drive this plethora of spectrum out there for the benefit of the consumer, bridging the digital divide, driving these under-penetrated growth opportunities for us. And then if it makes sense, to incrementally invest CapEx, densify, maybe with C-band, which we bought some of in very dense urban environments where it makes sense to deploy potentially over and above our 2.5 portfolio, maybe. But again, all of that would have to be incremental to what we've given you at Analyst Day in terms of targets and service revenue, free cash flows, et cetera.

Last survey of the afternoon. How much do you expect for T-Mobile share repurchases in 2023? $10 billion or less; $10 billion to $15 billion; or over $15 billion? So we'll go to the polls on that. Before we just talk about capital allocation in terms of free cash flow or buybacks, any updates just in terms of how T-Mobile is viewing target leverage levels?

There's really no update. Very consistent. We believe the right place for us to be is in that mid-2 space in the midterm itself. So that's the focus and the goal. It's completely consistent with where we are from an IG perspective. You've seen us diversify some of our funding sources that you'd expect. We entered the asset-backed security market with our equipment installment plan receivables. So it continues to be we want to stay at a very healthy level of leverage. We're continuing to grow as a company. We continue to see the free cash flow generation potential that we laid out at Analyst Day, but it's always going to be with a healthy leverage mindset.

We've got our results in. And so 10% is $10 billion or less; 60% is $10 billion to $15 billion; and 30% is over $15 billion. So just a couple of questions on this. How does the rate environment, just higher rates affect the pacing of share repurchases, if at all? And is there any updates from the guidance that you gave for fourth quarter in terms of share repurchases?

Well, I think in terms of guidance on share repurchases, we'll probably update you as part of -- or actually on results, we'll update you as part of earnings. In terms of what's been authorized, there continues to be an authorization of up to $14 billion through Q3 of next year. Anything beyond that would have to be authorized by the Board. We still see confidence in the path of up to $60 billion, which is based off what we expect from a leverage perspective, from a free cash flow generation perspective. We continue to have line of sight to that. But anything beyond the $14 billion would be at the Board's discretion. And I'll update you on actuals as to what we've repurchased. You heard us through October 20, have the $1.5 billion. We had been authorized for up to $3 billion in 2022. We'll give you actuals a little bit later. I don't want to get into the -- like the day-to-day of how we're thinking about share repurchases and volumes. Of course, you have to factor in the rate environment, right? Now I would tell you where the rate environment sits currently vis-a-vis what we believe the shareholder return potential is and where we think the stock price is going based on our belief in the trajectory of the business it continues, from our perspective, to make sense to do. But certainly, if interest rates get to some sky high amount, you always have to factor that calculus in.

And when you say $14 billion through third quarter of next year, you're referring to 2023?

Yes. That was the -- it was -- the Board authorization was up to $14 billion through the end of Q3 of 2023. And that was inclusive of the up to $3 billion in 2022.

And then just a last question. How do you think about dividends versus repurchases? Is that something that you're thinking more about in terms of creating just a regular dividend distribution for investors?

It's something we've talked about. We think right now, this form of shareholder return makes sense for us. We continue to be a very high-growth company. That continues to be our aspiration into 2023 strategically and beyond and delivering on the commitments that we've given you. Is there a potential in the future? Maybe, for a dividend type of structure, but we have to see how things evolve. Of course, that would be fully at the discretion of the Board. But for now, the share repurchase path, we think, makes a lot of sense, and that's how we're going to continue for the time being.

Well, thanks for sharing your time with us today.

Thank you so much.

Thank you.