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

We are live.

Hi, welcome. Thanks for joining us. My name is Phil Cusick. I cover the comm services and infrastructure space here at JPMorgan. I want to welcome T-Mobile's CEO, Mike Sievert; CFO, Braxton Carter; and President of Technology, Neville Ray. Gentlemen, welcome, and congratulations again on your call. And in honor of Braxton's hat, I wanted to wear my own hat just for a few minutes. Guys, thanks very much for your time.

[indiscernible] coming in and out of your background there.

I don't think the background works very well with this.

Well, Phil, I think you look fantastic. I'm going to have to get you a magenta one to wear. How about that?

I've been waiting for a good hat.

Mike, given these unprecedented times, can you talk about what T-Mobile is doing to address this for customers and employees, just to kick us off?

Yes, of course. We're a couple of months into this now. And one of the things that happened in early March -- and it might have been because Seattle was the early epicenter here in the U.S. with all the early cases and deaths and stuff, we jumped in right away. We took this very seriously. We immediately took actions to simultaneously keep our customers safe and our employees safe and keep our operations going. So I think many of you know by now some of the actions that we took, including right away setting all customers on our main brands who might not have had unlimited. We set their rate plans to unlimited. We actually added 10 gigs per month of hotspot data to every customer account so that they could use their phones as a hotspot to be able to connect laptops and other devices. We immediately engaged at a much higher level with school districts through our EmpowerED program to connect hundreds of thousands of kids for free across the country and ramped up our efforts there. We closed at some points at the earliest points of the crisis, upwards of 80% of our retail stores immediately, and then began transitioning everyone to a work-from-home environment. It's absolutely astonishing. Over the last month, we were able to transform 15,000 domestic customer care workers at our customer experience centers, what we call our care experts, to work from home, 92% of our workforce. And so it's just -- and we might not have been as far along on that as some other companies because of our unique and differentiated team of experts approach, which really does rely on teams of people working together to capture customer problems and solve them in real time. So we were coming from behind on work from home and got it all done, call routing technology, monitoring customer privacy and security being first and foremost. So just so proud of the team. This is -- I know all of our competitors are doing some similar things. But first and foremost, we want to make sure that our customers were safe and our employees were safe. And secondly, they were getting great service from us, not just in customer service, but -- and since Neville's here, I know in a minute he'll talk about it, but on the network. And through it all, our network has performed spectacularly. And one of the things that we did in early March was immediately used a special authorization from the FCC to transmit on all of the nation's low-band 600 megahertz spectrum, not just that owned by us, which has been helpful to manage loads through the crisis.

Neville, do you want to follow up there?

No, I mean -- I think as Mike said, I mean, the addition of that additional spectrum was just the right thing to do. We saw great collaboration from all of the 600 megahertz holders, and the FCC's support was key. And so as Mike said, the network has been doing very well. We've seen material increases in usage. I mean things like messaging were 50%, 70% higher; education tools, hundreds and hundreds of percent in growth. So we've seen the nation really take up usage in the home environment, which is primarily where we've seen our activity. Mobilities kind of created on the network, to be honest, is starting to come back now. But we've seen incredible usage, and the networks performed incredibly well. So super proud of the team. And we'll talk later, Phil. I mean we've been able to thankfully continue to advance and improve the quality of the network. We've still been out there building, doing work on our network, maintaining it, adding capacity, adding spectrum to it throughout the COVID crisis. And that's been a key element of our ability to continue the level of performance that we've delivered.

Okay. Mike, you're still operating the legacy Sprint and T-Mobile brand separately. How should we think about day 1 of bringing those brands together under one roof with a unified go-to-market strategy?

Yes. We're presenting them separately to consumers, but we're running them in a unified way. So we've already implemented our management structure at the highest levels so that we're able to look left to right across all of our postpaid and prepaid businesses for both consumer and business. On the business side, day 1 has largely already arrived. So Mike Katz and team are now pursuing a unified strategy behind the T-Mobile brand, by and large, to engage with enterprise customers, large and small public sector customers. So we started into that last week. Very proud of the team for how quickly they've moved. On the consumer side, we've always been planning a summer time frame. With COVID-19, we moved it out into the midsummer instead of the early summer. And this is when we will essentially be advertising one flagship postpaid T-Mobile brand as well as operating a unified fleet of retail. And the retail piece is why we slowed down just a little bit. So midsummer time frame. We haven't talked about the date exactly yet, but that's when we have a -- we present a unified value proposition behind the flagship postpaid T-Mobile brand, and that value proposition will be able to be activated by a fully trained, fired-up team of people across all of our retail fleet, which will be branded T-Mobile.

And can you give us a hint of what that might look like versus the current T-Mobile offer? Do you think that will be [ sustainable ]?

Yes. No, I'll just lay out the offers for you right now. So we'll preannounce them by a couple of months and...

Do you have a table?

Yes. Our approach -- listen, we've got a winning strategy at T-Mobile. We intend to do more of what's gotten us here so far, just with the advantages of fantastic scale and with the advantage of some huge investments that ultimately will allow us to have the best network in the country by far. But how we've presented value propositions is something I feel that we're the best at. And so it's really about listening to customers, solving the things that frustrate them, making sure that whether it's for individual customers or families or segment by segment, that they look what we offer and they think, now that's a great deal. And it's not just about prices. If you look at our 7 years, it's never been just about -- but we have great prices. And it's about what you get for what you pay and how we solve your problems and what extra we're able to do for you, and people love it. And that's what the Un-carrier has always been about, and T-Mobile is the Un-carrier. The new T-Mobile is just the Un-carrier supercharged. You've heard us say that for a couple of years. That's how we'll be presenting ourselves.

Yes. Mike, when you arrived, the company was 12% market share, scrapping newcomer. Now you're a nearly 30% market share incumbent in a slower growing industry, with Cable and DISH may be coming up as incumbents. How does that change how you go to market? And how do you think competition changes in the next few years?

See, I think we are the insurgent. I think we are the competition. And that's our mindset every day when we come to work. It's how do we change the game and be able to rescue people from AT&T, Verizon and Big Cable. And nothing's changed about that, except for the fact that across the span of all the success we've had for 7 years, so many tens of millions of customers either, a, never really seriously considered us because they just weren't thinking about T-Mobile, maybe they didn't know if we had a network that was competitive; or b, seriously considered us and were concerned that we were coming from behind compared to Verizon, let's say, on network. Now suddenly, we're going to be able to simultaneously offer people something nobody's ever offered in this category, both the best value and the best network. And that's really important because those are the 2 things that motivate customers, not only to switch but to stay or leave. And so I'm really excited. I think we are the insurgent. We are the competition. And nothing's changed about that, we're just a little bigger now.

Okay. Braxton, you've hinted many times at your synergy guide of $6 billion over 3 or 4 years as conservative. And it really only provides about -- when we think about mid-40s EBITDA margins versus your peers' are a lot higher. You highlighted recently that your MetroPCS synergies came in 50% higher than the original estimate. Is that a good way to think about the T-Mobile's and Sprint synergies?

Yes. You know what? You're absolutely right. I mean you know our playbook. In 7.5 years, we've never committed anything to The Street where we haven't achieved or significantly overachieved. We're not in the business of hyping. We're in the business of delivering. I think that credibility really means a lot. With the last 2 years to prepare for this and, Phil, more importantly, now that we've gotten full visibility inside Sprint past the merger, we're highly convinced that the opportunity is significantly more than $43 billion net NPV. That's both from a hard cost synergy standpoint, but it's also because we are extremely conservative in the way that we position cost to achieve. The playbook that we're doing is exactly the playbook that we did on the acquisition of Metro. A very successful integration, we overachieved by 50%, as you mentioned, and we did it 1/3 faster than we said we were going to do. Now what we have here is 2/3 of these synergies are network related. And there's significant opportunity there from a cost to achieve standpoint. The first thing I would point out is there is nothing embedded in those numbers relating to the call option that Charlie Ergen has on 20,000 of our sites. And whatever number of those sites he ends up taking will certainly be a reduction of cost to achieve significantly enhancing. The other thing, and Neville was extremely successful at this, is working with the tower companies in a win-win situation and really optimizing the whole shutdown of the network. But remember, we're building 15,000 additional sites, and that's a lot of future business that's at stake. And reaching agreements with people in the tower space is definitely going to be part of the strategy. One thing I'm super excited about, though, is we're seeing some very, very strong procurement opportunity now that we have full access to all the contractual. And on top of aggregation of volume, and a lot of what we do is very sensitive to aggregation of volume, we're seeing some fairly significant rate differential that we're certainly attacking full force and taking the low-hanging fruit and we'll continue working that for a period of time, but we're super pumped. One last thing, Phil. A follow-up from the earnings call. Our total weighted average cost of debt, and we got $63 billion of net debt at opening, is 5.9%. So I wanted to follow back up with you on that number. Now certainly, we have the opportunity to continue rationalizing the structure. We inherited quite a bit of high-cost debt, and there are significant refi opportunities that are out there that we'll be taking advantage of absolutely. But wanted to follow up with you on that point.

Thank you. Neville, maybe it's a good point to follow up there, where -- one, what have you discussed with the tower company so far? That was an interesting comment. And then two, we know that you've done a lot of work of getting ready for 2.5 on the T-Mobile network. How should we think about the cost to achieve that's already been spent in getting that ready for the 2.5?

Yes. So we hear a couple of things there, Phil. I mean the tower company discussion has obviously started, right, but it's early days. And as Braxton has said, there's a lot of opportunity out there, not just in building new sites but in terms of the overlay of 2.5 gigahertz spectrum, the work we're doing on 600. So there's a lot of activity, and those discussions have -- they're underway. And we're looking to drive some healthy competition between those folks. But there's a big opportunity for those that want to partner effectively with us. So that work has started. I mean on the synergy delivery kind of overall and where we are with 2.5, I just back up to it's kind of this 1, 2, 3 thing, right? It's a 3-step program. I mean, one, I've got to build the network and get primarily radio put onto existing sites. That's the main focus of the team and the activity and especially the 2.5 you mentioned. As we do that, we can migrate customers across. And in contrast to Metro, 80% plus, Phil, of the Sprint customer base have a compatible phone with our LTE network. So I mean that number was effectively 0 when we started with MetroPCS. So we have a high number of customers that we can migrate at pace as we ready the network for them. And then as we move them, obviously, we're in a position to decom sites, and that drives the whole synergy curve. So where are we? I mean I'm delighted with the progress we've made. We didn't sit idle, right, for the pendency period of the deal. Braxton, Mike gave me the okay to move ahead with some work at risk, right, in terms of the long pole in the tent piece of getting a site upgraded. I can have radio and antennas to a site in single-digit days, 5 to 10. But what takes the months is getting the permitting and approvals and the lease, obviously, in place to make that work happen. So we actually started a bunch of that work in earnest last year. And you've seen the results, we came out screening fast before 1 day of close. We were already -- we've already built some sites with 2.5 radio in Philly, and we've just added New York to that mix. And there's going to be a lot of that activity at a furious pace as we move through the balance of the year. Thousands of sites will get upgraded in 2020. So we're moving incredibly fast, I think faster than our competition believe we would. We took the time during the pendency of the deal to make sure we could take some of these long pole items, take care of those and make sure we could start fast. And so the 2.5 piece, off to the races. We're seeing great speeds, great performance. And this is where we add on top of what's -- the U.S. has one nationwide 5G network today, it's T-Mobile's. And the other guys are scrambling furiously to catch just that nationwide low-band footprint, whatever means they can. AT&T is building furiously. Verizon's betting on DSS. But those guys are finally -- for it's taken a long time, Phil. We've been getting even on LTE, and we've taken the leadership position on 5G. And so that low-band layer is moving fast across the country, continues to expand. The 2.5 comes on top. And that's really going to deliver an incredible 5G experience. We're seeing speeds 600, 700 megabits per second in Philly and New York. We are going to make sure we lay down the U.S.'s most transformative 5G network at pace. So I'm super excited about what we're seeing. Philly, I can't resist it. If I compare the square miles of 5G, we put down just with mid-band, Phil, in Philly in a month, that's 2.5x all of the millimeter wave footprint that Verizon's put down inside the last 18 months. And so if you think about 5G availability, capability, we've got a leadership position. And the team plan is to accelerate that and move at pace through 2020 and '21, get that 2.5 on the radios on the sites, get the experience moving and start to migrate and ultimately deliver the synergies that Braxton talked to. So there's a lot in there. But goodness, we're busy, and we are incredibly excited. I'd just remind us all, we have 3x the sub-6 gigahertz spectrum that Verizon has post this transaction, 2x what AT&T has. That's an incredible set of assets for us to go and drive the next level of competition that Mike talked about in this industry here in the U.S. So a lot to get done, a lot to execute, but we know how to do it, and we are off to a quick start.

You can tell that he's excited about this stuff. I am, too. And if you think about -- it's fascinating to watch this unfold because our competitors obviously spent a lot of time trying to convince everybody that 5G was synonymous with millimeter wave. And we've always been fans of millimeter wave as an augment. In fact, we have more millimeter wave spectrum than AT&T. And we have more deployed in, in New York City, for example, than anyone. But it's great as an augment to what Neville just laid out as our primary strategy of low- and mid-band spectrum, especially if you can dedicate massive swaths of mid-band. And it works even if the wind's not blowing in the proper direction or there's a leaf or perhaps a pane of glass in the way or something like that. And millimeter wave, it's great as an augmentation, obviously, because you've got the underlying there to establish a 2-way connection. So just fantastic progress. And what I'm hopeful now a few weeks in, we're able to look at all this and say, a couple of things might unfold. One, there's a chance we can move faster or to a greater extent on synergies than we were hoping. We're not ready to re-guide for you on our $43 billion. That's a massive goal. We're heads down looking at how to accomplish it. But our aspirations have always been to figure out how to get you what we promised faster and to get it bigger. And so that's what we're trying to do. And then secondly, we see near-term opportunities to tune up and improve the business. And particularly, things like the churn on the Sprint side of our business, which has always been for years #4 out of 4, we see a chance to improve that because not only is Neville a little ahead of schedule, but in the meantime, we're transmitting using essentially roaming, even though we're one company, big improvements for Sprint customers already, and that's really delighting them. So we'll see what happens, but it'd be really great if we can see faster progress on making our whole customer base happy than we had modeled.

Okay. So 2 quick follow-ups for Neville, and then I want to go to exactly that. Neville, the 15,000 sites you're going to build, are those mostly 2.5 sites, just fill-in sites?

So the additional sites come a little later in the program, Phil. So this is where we continue to expand our network reach and capability. And the end ambition over the coming years is about 85,000 macro sites. So that's an up from where we are today. So many of those sites will come online a little later. The immediate and initial push -- I mean we have a tremendous network. It's nationwide today. The immediate push is to make sure we've got our 5G footprint with both breadth and depth with 2.5 across as many sites as we can make happen. We're not going to get -- we've got about 65,000 macros today as the old T-Mobile. Obviously, bigger macro portfolio now as a combined business. And we're going to roll 2.5 out to a big percentage of those. But we need to get that first 25,000, 30,000 done fast inside the next 18 months to 2 years. And as we do that, I mean, that takes care of the lion's share of the U.S. population, the major metro areas where we really want our 5G experience and presence to be felt.

Okay. And that's the...

We're not leaving rural behind either, though. I mean we are very focused on that rural experience, too.

Okay. I think you said yesterday 1,000 sites a month of putting 2.5 on your network. Is that accelerating from here, it sounds like?

That's right. I mean -- so we made our start in New York and Philly with what we had lease and permit ready. Obviously, we have a lot of jurisdictional work coming through now. It's a great thing. Even during the COVID pandemic period here, we've been able to continue to process our permits and get to work. And so we're building 2.5 at a good pace. That volume will be about 1,000 sites a month where we're adding the radios and antennas. I'm not building sites, right? I'm adding radios and antennas to existing facilities. At that rate, there will be 1,000 a month as we exit Q2. I'm hopeful I can turn it up from there. The good news is our teams are working very safe and healthy. We've got great vendor support. Supply chain is solid. I mean there's many good things out of the -- I look at the last 2 months, and I think we're all surprised ourselves at how effectively we've been able to get work done. I mean we're very grateful for the [ federal ] air cover. We're a critical service that people need, and so we've been provided the authority to do the things we need to do, whereas many other companies haven't, quite frankly. So I mean that's been a blessing. And as I said, making sure our teams are in -- safety and health of our teams are paramount, same for our vendor partners. But we are out there and have been all the way through the pandemic, building, adding that capacity and adding sites and working with the jurisdiction so we have all the necessary approvals. So, so far, so good, Phil, and we are ramping in this environment, not actually slowing down in any manner or form.

Okay. Mike, to follow up on what you just said, Sprint's 1Q subscriber results were released recently, and they were even worse than we were expecting. Things haven't been great. It sounds like you hope to get churn down in the next couple of months as you provide people a better network. Should we think about the second quarter as sort of a lost quarter for Sprint with new offers not coming out until August otherwise?

Well, Braxton and I gave you a guide on total subscribers last week. And our view then was it would be somewhere between 0 and 150,000 on the postpaid side, which is certainly not what our -- people who watch our company are accustomed to. And I hope we can beat it. But what -- our view is that we'd rather focus on getting these companies put together in a really high-quality way and handling this COVID crisis in a very high-quality way for our customers and our team while focusing on all the things that Neville just said that are about real enterprise value creation. And -- so that's what our guide sort of reflected. That being said, we'll have to see how it all goes. But we can't guide you on quarter-by-quarter, play-by-play Sprint churn. But I personally believe that the data shows that value and network are the key drivers of churn, and we're providing our Sprint customers with value and network. And we've been, through a journey on T-Mobile, watching churn over a period of a few years go from 2.5% in 2012 and even in early 2013, it was nearly that, to the best in the industry in some quarters, consistently at or better than AT&T's recently. And once -- a couple of those quarters, we even caught Verizon's. So we're within a couple of bps now of industry best. And we did that with value and network. And even then, we had a lot of room to go on network as we've just been discussing our aspiration. So look, the more we can give those kinds of benefits to Sprint customers and we can get behind a unified value proposition and get a lot of these Un-carrier benefits in people's hands, they're going to be excited. It turns out these Sprint customers are pretty smart shoppers because they have some of the lowest prices in the industry. We're going to honor those plans. But what they're going to get for that lowest price is the best network. So it turns out they're pretty smart shoppers. We just have to remind them of that.

Mike, we've seen you go after a number of subsegments over the years, over 55s the military side. How should we think about you going after enterprise? And maybe in an accelerated way as you get the Sprint network under your belt, there's some Sprint expertise on enterprise, are you going to keep those guys and sort of turbocharge them with a new network? Or is there really a new effort that's going to happen here?

Yes. And we've begun that. We have a great integrated team now with leadership that came from both sides of our former companies, led by Mike Katz on the business side. And we're really focused. I mean, I think there's a great opportunity. This is one of those businesses where, give or take, 90% of the customers aren't with us. They're with AT&T and Verizon paying too much. And this connection is so important for companies. And let's face it, the more the economy shifts and people are looking for savings, are they going to be able to drop this category? Will they drop the category? I don't think so. This is really important to businesses. But what they may do is reassess whether there's ways they can save. And our view is we can help. And we can help if you give us the entire thing, but frankly, we can help reprice your relationship with AT&T and Verizon, too, if you give us half. So there's lots and lots of opportunity out there for us, remembering that 90% of the customers, give or take, are with the other guys.

Yes. You mentioned Sprint customers are good shoppers, and yet your revenue per user is lower at Sprint. Now Braxton, you've said you don't expect that to come down -- or Sprint revenue to come down over time. Yesterday, you mentioned that you do expect some ARPU conversions. Should we think about that as pushing more devices into the Sprint's accounts? Or Sprint accounts spending less over time?

Yes. That's a really good question. And when you look at a new combined go-to-market offering for the new T-Mobile, that's going to be patterned off what T-Mobile has done in the past. We're the innovator. We've driven all the innovation in the entire industry in the last 7.5 years. That's who we are, and that's what our DNA is. And by definition, you're going to have migration off of legacy Sprint plans over to the new T-Mobile plans as we go through this migration period. But you bring up a really important point. When you really dive down and start unpacking the ARPUs, the number of lines per account at T-Mobile is significantly higher than at Sprint. We're at 2.7, and Sprint is at 2.3. And remember, for years, our philosophy and all of our flows really coming from AT&T and Verizon, both of which are way over 80% in family plans. And we were very successful in gaining share there. So when you look on a per sub base versus the discounted lines, we all know that the CLV and value creation is higher with the family plans, that's something you have to take into account here. And Phil, you've also seen that we made very specific disclosures relating to we will have significant material opening adjustments to the Sprint subscriber base to conform to the T-Mobile policies and business rules in place. So let me give you one example, and it's just a difference in philosophy. What Sprint was doing is if they gave any credit on a device, be it lease, be it EIP, and we all know that they were very heavily weighted towards EIP -- I mean leasing, because they gave credit, they made the case that those are really postpaid subs. That's not the business rules and the practices that we have at T-Mobile. If you score as a prepaid customer, you are a prepaid customer. And we'll be making a normalization to the T-Mobile business rules. There are many, many, many other examples. We're working through it at this point. It's not possible to quantify it. One of the biggest antitrust issues was sensitive customer information, but we will have this fully done and unpacked and presented in the second quarter earnings call.

Okay. We're running out of time. But Mike, I wanted to hit one more subject, if I can. You've committed to the FCC that you'll launch a fixed broadband product to millions of homes. Does this still make sense given the rapidly increasing data demand from customers as they're stuck at home? And I assume you'd be taking care of these customers on mid-band network. Neville, is there enough capacity in the network to really take care of customers economically who are using maybe 50% more data than you had modeled a couple of years ago?

Yes and yes. That's the beauty of this network. It's the highest capacity wireless network that's ever been built. And as you know, we have a fully funded business plan where we intend to plow $40 billion into capital over the next 3 years, $60 billion over 5 years. So we're all over it. And that's not to say we plan to offer broadband everywhere. We can delight millions of people with a high-capacity, lower-priced service, understanding that there are plenty of places where we're going to have to prioritize our mobile users and we won't be able to qualify. We've talked in broad terms about how we think we will be marketing in about half of U.S. ZIP codes. And then within that, we're going to focus on specific neighborhoods and households where we know that no normal modeling of mobile use will result in mobile demand exceeding our supply. And in those areas, which is a lot of areas, we're going to approve applicants for household service. And so essentially, we'll be selling our excess supply. Where we believe we will have more than any foreseeable growth forecast on mobile, we can turn around and offer that in a capital-free business model, already fully funded by the mobile business and, therefore, something we can offer at a lower price. And that's assuming massive amounts of usage, terabyte-style usage profiles. And we don't know what the long term is going to be when it comes to home broadband versus mobile. We know that right now, during social distancing, consumption is way up. Of course, it is. But I don't know that we should expect that, that's a long-term trend. And what's an easy mistake in any business is to take a current and accidentally extrapolate it to the future. Remember, the broad trends are very simple. All commerce and communications of all types are leaving their former linear formats and coming to the Internet, and the Internet is going mobile. And we've seen big upticks in both mobile and home usage over the last a couple of months during social distancing, but the broad trend is towards eyeball time towards mobile. And so we're in the right business. [indiscernible]

Right. I'd just add quickly, Phil, right? If you look at the volume of spectrum that we have, right, under 3x and the 2x compared to Verizon and T, and then you think about us having the largest macro network in the U.S., which is clearly we're there today, right, with the combined businesses, and then you think about the pace at which we're moving that spectrum to 5G and all of the spectral efficiency benefits that come from that, we are going to have, by far and away, the most efficient factory in the U.S. 5G is absolutely about generating great new consumer experiences, but we're going to have an incredible factory that can spin off tons and tons of capacity and create the best output from that set of spectrum assets. That's the whole goal. And this stuff is just -- I talked about it so many times over the last 2 years. And the physics come through and that enables us, I think, to compete in this broadband space. I think the competition there is more required now than ever, and we're going to have the network to go do it. It's going to take some time, obviously, to build this capacity, but the opportunity for us to go and displace and be disruptive in that cable space and everywhere else is incredibly real for us with the asset base that we have.

Good. Well, it sounds really exciting. Thanks very much, guys. Thanks for joining us. And everyone, have a great day.

Thanks, Phil.

It's been a pleasure, Phil.