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

All right. Well, welcome, everyone, to the afternoon of Day 2 of Communacopia. I am Brett Feldman, the firm's U.S. telecom and cable analyst. I'm excited to welcome back in our virtual format, Mike Sievert, the President and CEO of T-Mobile; Pete Osvaldik, the CFO; and Neville Ray, the President of Technology. The 3-headed-beast guys, welcome, and great having you here with us today.

Great to be here, Brett.

All right. Well, Mike, this is not your first Communacopia. It is your first Communacopia as CEO of T-Mobile. You're now a few months into the job. You're also a few months into the integration of Sprint and we're all a few months into a pandemic. So with that kind of as the backdrop, what are your key operating priorities for the company for the remainder of this year to position the company for the long term?

Brett, obviously, this has been a crazy year that's unfolded in so many ways that none of us could have predicted. It doesn't change what's important around here, though. And for me, I know our management team, myself as the leader of the company and our company overall, we're going to be measured this year and next year and the year after that on a few simple things. And I think of 3. First and foremost, are we consistently outgrowing this market? This is a growth company and we have all the assets we need to outgrow the market. So that's first and foremost. Second, are we unlocking the value of our new massive scale by delivering on our synergies faster and potentially bigger than promised? So if we can translate the synergy potential of this business into enterprise value for our shareholders. Very simple. And thirdly, are we doing those 2 things without borrowing from tomorrow? Are we setting up this company for long-term success? Those are the 3 things we'll be measured on, and you'll see us systematically clipping away priorities against all 3 of those objectives as we execute.

That's a great setup. And so let's go into one of them, which is the integration of Sprint. We noted you're about 5 months into that integration process. Can you give us an update on some of the key integration milestones you've achieved so far? And then just as we keep track of this going forward, other than just counting the achievement of hard-cost dollar synergies, what are the things can we keep an eye on to see that you're on pace or maybe ahead of pace?

Yes. You're looking for the leading indicators. Well, first of all, I'll set this up and I want to get both guys into this. We're running well ahead of schedule on the key indicators that we look for. And you can separate it into a couple of things. First and foremost, as you know, the synergy story of this business is about network. And it's about getting customers migrated from the Sprint network to the destination new T-Mobile network, but several things have to happen before that can happen at scale, and we're running well ahead of schedule on those things. So I want Neville to talk about that because it's so exciting. And then secondly, the rest of the operation, getting selling unified, getting the back office unified, getting those run rate synergies put into the business. And as we talked about in our Q2 disclosure, we took some decisions and some risks to move faster than our deal model anticipated so we could get some of that behind us. We need to unlock the run rate synergies in part because due to COVID, there are other pressures, and we want to outrun those pressures with synergy execution. So let's talk about both of those things, first and foremost, the network, Neville.

Yes. Thanks, Mike. So I mean, Brett, we're off to a great start. So as Mike outlined, the very first step for us is to start building out this new T-Mobile network and combine the 2 customer bases with the best damn 5G network experience they can have with a lot of capacity, a lot of performance and a lot of speed. And as we build that network out, migrate customers across you-know-what pace. We talked at earnings about the volume of traffic that we've already migrated, Sprint postpaid traffic that we've already migrated onto the new T-Mobile network. And that number is now north of 10% and growing on a regular and continual basis. And that's key. That's pretty remarkable stat considering how little time we've had post the completion of the deal to get that moving. We've been leveraging and driving performance for that Sprint customer base at a rapid pace. We opened up roaming and leverage of using the T-Mobile network for LTE. We've also now provided full access for our 5G network. We can talk about later as we go through the call on progress on that front, but moving at a real great pace, and so driving a great performance for Sprint customers. Come over to the T-Mobile site. So we're off to a great start, and I'm really pleased with the progress we've made to date.

Great. Peter?

Thanks, Neville. And absolutely, network drives the majority of the synergies. We're equally as focused on the back office, the sales and distribution. That's $2 billion of the $6 billion run rate synergies and you see us accelerate that. We talked about that in Q2. First, just around organizational design, right, where initially, that was going to be an 18-month process and we accelerated it. And that has a couple of benefits, certainly unlocking the synergies earlier, attacking those headwinds that Mike talked about, but also bringing role clarity, right, which is so important during this time. And unification of teams. For example, we unified our enterprise go-to-market team and we're seeing benefits coming out of that as functioning as one team. The other thing we did is executed brand unification. You saw us come together and rebrand thousands of stores, and in the midst of that, of course, accelerate the store rationalization as well. And what an accomplishment when you think about -- in the midst of everything else that we did, we unified the brand, rebranded everything and rolled out all the tools that we need out there to serve all our customers everywhere. And so I can tell you, on all the other fronts outside of network, we're laser-focused on how to bring them forward and how to potentially accelerate and deliver more.

That's great. I'm going to follow up on that point around rebranding because it wasn't just that you rebranded the business over the summer, you actually really began the process of reengaging your consumer marketing efforts, not just because you had completed the deal but because you were kind of coming out of the initial lockdown phase. You had the $25 a line promo out there as one of the early examples. Can you give us an update on how consumers have responded to some of your new promotional offers as one unified brand? And maybe any insight as to whether it's helped improve the retention of the Sprint base, maybe seeing Sprint customers formally migrate into T-Mobile plans, things like that?

Well, Brett, you saw our Q2 results, which are indicative of how we were performing right after the merger was created. And we went out right away with a strong message to the customer base that they can have both. They can have the best value in this industry and be with a company that will lead in the 5G era. And that's what our advertising talks about. And we doubled down with some great offers to reinforce our value proposition based on the incredible capacity of this network that we're building. And it's working. You saw in Q2 that we delivered more net postpaid phone customer net additions than 3x more than AT&T and Verizon combined. And so this long track record that T-Mobile has established of leading the industry in growth remains our ambition. And it's very important to our overall story that we're able to grow service revenues through growing customer base by both growing this industry and taking share. And you saw that yet again. And I'll tell you this. One of the things we've been very clear on over the years is that in a period of incredible competitive intensity or in a period when people are retrenching, it doesn't matter. And we feed on churn in this industry. And what we saw in Q2 was the lowest churn in the industry's history, and yet we still performed. As the share taker, we rely on churn. And so one of the things that we're proud of is that this company is fast, it's nimble, it's responsive, and you saw that in spades in Q2.

Now on your second quarter call, you expressed a great deal of confidence that your original synergy estimate of $43 billion on an NPV basis is something that you think can ultimately be higher and maybe achieved faster. Can you give us any context as to why you have that confidence? And maybe anything you've learned about the Sprint business since you acquired it? And a common way to get this question is investors are saying, "Well, what am I thinking about? Is it a higher run rate? Is it lower integration costs? Is it time to achieve?" Where do you think you can outperform?

Well, as I said in my setup around the things that I know we're going to be measured by, our aspiration is that it should be both. Peter and Neville both talked about how we came out of the gates just with speed and execution, trying to see if we can outrun the time frames in our business plan. But also the question is whether or not we can get a bigger overall result. And for example, we found, when we closed, you asked about what we found? Largely, things were -- everything was in line with expectations when we put these companies together and did the purchase price accounting released, as you saw when we released the numbers. Some of the network run rate costs were higher than we would have expected. And it just shows the power of the scale of our business that we were able to reach this huge milestone agreement with American Tower over the past few days after a long negotiation, and the scale of our business has enabled us to achieve something there that gives us incredible potential and answers one of the big questions that a lot of people have around the company, which is, do you have everything you need to deliver on this plan for the long haul? And we showed with that agreement, yes, we do. And that obviously is a key ingredient for us to be able to deliver on the synergies and the value creation that comes from those synergies over time. So -- and if you want, we can give you some additional color on how we think about that deal, but it's an important part of the overall equation. And the last thing I'll say, and you asked about what we find, and I know this is a little bit qualitative but it's important to a company like ours. We differentiate around experience and experience comes from culture. And one of the big surprises for me, and I don't know why it was a surprise, but you tend, as competitors, to look over with and side-eye your competitors. We found a Sprint employee base that is incredible. They want to win, they love their customers. They want to be a part of a winning team. There's incredible talent and we're in the process of unleashing that faster than expected, as Peter talked about, by moving quickly to get our organization aligned. So all kinds of things from cost run rates to cultural pieces that we've had to put together to make sure that we've got the potential, over time, to outperform this business plan.

Well, actually, my next question was going to be on the American Tower agreement that you announced yesterday. It's a 15-year agreement to American Tower. It's a $17 billion contract. Obviously, very meaningful to them. How does this fit into your integration road map? You had used the word accelerate your 5G deployment in the release. What are you accomplishing here?

Well, it's better for us right away, and it's better for us over the long haul. And for us, the term of this agreement is a real source of strength. This is the first time we've ever done a major agreement where the escalators deescalate over time, where this gets better, and better, and better with age. So we've taken something that we know we can perform with and locked it in for years to come, removing a major variable. Neville, do you want to add to the -- on the topic?

Yes, Mike. I mean, a couple of quick thoughts. To the synergy momentum, Brett, a big piece for us is building this network out at a material pace. And you've already heard me talk about we're adding radio now at a pace of 700-plus sites a week so 100-plus sites a day. So what does that mean? That means we're rolling out and completing and perfecting and baking that layer cake as I'd like to call it, on low and mid-band spectrum. And we are literally off to the races. There will be thousands of sites benefiting from that mid- and low-band combination on 5G this year, 40 of the major metros across the U.S. we are building in. And so that 5G experience markedly different from what's out there on LTE today, 8 to 10x the speeds is going to be available for customers with 5G phones this year. Now there was a lot of talk and discussion over the last 2, 3 months on what's happening with the tower companies. And we were very clear. We were building. We're in negotiation with folks and I'm very pleased to have the American Tower deal locked down and done. As Mike said, it gives us long-term certainty on our path forward. I can now accelerate that mid-band and low-band build with American Tower in a way that pre deal, I couldn't. So that puts more wind in my sails as we look to aggressively roll this network out. And we traded, as Mike referenced, we traded rate for term, and so both businesses benefit here. We have a great long-term arrangement. It locks in a big material percentage and portion of the synergies that we have committed to deliver. And we're very confident on delivering. And to your question, both in terms of the volume of synergies, but also now the pace of delivery, the time to achieve, that's a key element that we can focus and push on harder now with the American deal in the bag. So very pleased to see the progress there. That accelerates our build, that accelerates migration and ultimately accelerates the decomm and the synergies on the network that we're so confident in delivering on. So another week on, a great deal in the bag and more confidence this week than we had prior.

Yes. And Neville, and I wanted to follow up on that, if you don't mind, and you still obviously have a lot of site solutions you have to solve as you go through the integration. And this is sort of the context of the question. When I think about what you were doing before the merger and you were adding sites to your network either for coverage or for capacity, the network kind of told you where it needed sites, and it didn't give you a ton of flexibility about location. You now have more sites than you need. That's actually part of what the efficiency process of this merger is about. Do you find that, that shift in the dynamic is giving you more ability to weigh the cost of the locations you picked as opposed to literally just the locations of the locations you pick?

Absolutely, Brett, right? I mean, now we have a site base well over 100,000 sites. And we've been very clear with everybody, we don't need them all, right? We literally don't. We have a lot of co-located facilities with the legacy Sprint network. We have a very, very strong coverage network on the T-Mobile side. And so having that flexibility to make decisions, to drive some competition between our landlords, be they tower guys or others, as to the final sites that we select into this network is always going to be driven by radio. We're going to select the best sites that give us the best performance. That's absolutely key. But we now have the opportunity and flexibility because of the volume of sites that we have that we don't need ultimately to make some calls and to generate some competition in the space. And that's key. That's very rare when you have those opportunities. We had it in metro. We have it now again in much higher volume with this combination and this deal. And as you said, we have a ways to go. We have one deal done. We have more to do, and we have a lot of private landlord work to work through as we navigate our build, both our build and our decommissioning over the coming months and years.

Great. Pete, the third part of the synergy NPV equation is cost to achieve the synergies. You had guided to $15 billion of total cost to achieve the synergies in order to get to that $6 billion run rate. You're only going to spend about $800 million to $1 billion of that this year. Can you give us some insight into when that spending is really going to scale? And do you have any visibility into potentially doing this more cost efficiently?

Peter, before you answer, I just have to say, Brett, this is a great day because you just asked us why we're not spending enough, which I think is fantastic. I hope you represent the sentiment of our investors. The bottom line is that a lot of these costs are back-end loaded because they're related to the actual decommissioning that Neville talked about, which is the last step to happen in a multi-step process. So our run rate isn't indicative of our progress because so much of the spending actually goes on the books at the end. Peter, do you want to talk about it?

Yes. That's exactly it, Brett. When you think about how the process is going to work, right? You've got to build -- do the overlay, get the capacity, then work on the customer migration process, and then the decomm starts, which is the majority of the cost to achieve is the decommissioning of the cell sites, the payout of those leases. And so yes, that's not something that's going to happen in large scale in 2020. But you'll see those -- the pace of those costs start increasing in '21 and '22. And as I said before, really, we're laser-focused in all areas to try to both accelerate the synergy capture and potentially overachieve it. And we'll certainly be looking at cost to achieve and in that capacity as well, what can we do? How can we leverage the scale that Mike talked about? You saw ATC, it's just one of the areas. So we're really excited about it and certainly owe you an update, as we said, as the time comes post the one data point that we have out there with Q2 earnings.

All right. Well, then, let me approach this from a slightly higher-level standpoint then. When the merger closed in April, the new company on a pro forma basis, had just generated an EBITDA margin in the high 30s in 2019. That's kind of what you guys reported in the pro forma disclosures. That was about 15 percentage points lower than AT&T's mobile EBITDA margins. I use them as an example because you have essentially the same run rate of service revenues and more customers than AT&T. If you merely achieve the synergies that you've targeted, which are pretty significant, there's still going to be a pretty sizable gap in what your margins are versus what your closest peers' margins are. And so the question we get is, what do you see as the primary opportunities to scale margins above and beyond the hard-cost dollar synergies you've identified with this merger?

I can start. I'll tell you, there's a lot more to our plan than synergies. As I talked about, our job is to outgrow the competition, unlock the synergies bigger and hopefully sooner, translate that to enterprise value, translate our scale advantages to enterprise value and then set the company up for the long term. And when we do all those things, what we told the Street at the beginning and what we mentioned again recently was we see a business with service revenues over the long haul in the $67 billion to $70 billion range, revenue CAGRs 2% to 4%. We see EBITDA margins in the mid-50s, and we see the cash flow implications of that flowing through the business. So it's an incredibly attractive pure model. And there's a lot more to it than synergy achievement, to your question. This is a scale business with abilities to unlock cost-effectiveness from that scale. But one thing you have to keep in mind is that it's also a growth company. And with a growth company, we'll have a superior terminal value and we'll be buying that growth over time. And so it's just a different profile. We're going to have a denser network. We're going to have a superior asset base. We're going to have faster growth, and those things make for a more valuable company with longer runway to be able to generate ongoing performance gains. But that may be different than having an aspiration to be in the 60s like Verizon. I don't know how long Verizon will hold on to the 60s. That's not my job. I know they're about to plow massive, massive amounts of money into spectrum to try to catch up. So there will be implications on their business. But our job is to grow our business into the mid-50s and to unlock all the cash flow implications of that for our shareholders with this pure-play wireless model and a superior asset base.

Great. One of the things that we have flagged as an opportunity to drive margins higher above and beyond the synergies is to bring down the churn of the Sprint base. Prior to the merger, the Sprint postpaid phone subscriber base was churning at almost like exactly twice the rate of the T-Mobile base. What is the outlook for being able to bring that down? Do you think it's plausible that it could end up being T-Mobile-like -- that customer base can be T-Mobile-like in churn? And what's the game plan for getting there?

Of course, listen, churn is, first and foremost, driven by network and it's secondarily driven by value. And that's true for all the carriers. The #1 reason why people leave is network-related. Secondly is to seek better value. This company will be positioned to deliver the best network and the best value simultaneously, for the first time in history. And so we see benefits not just in Sprint churn, but in T-Mobile churn over time for that. This is historic that a company has been able to put together an asset base that, combined with a legacy brand that's so well-known for putting customers first, treating them right and giving them a better value. Now at the beginning of the 5G era, we have the opportunity to lead on the network front the way Verizon did in the 4G era. They got out in front of everybody in 2010, and they put down a marker and became famous for being a company that had the best network in the 4G LTE era. We've been chipping away at that, to your point. We will lead the 5G era. We're positioned to lead. They're going to spend the next year or 2 retooling their strategies to try and emulate what we're doing. Verizon got out so early saying, 5G is about millimeter wave. And they're in the process now of kind of retooling. You see them talking about changes. And prediction for you is very simple, AT&T and Verizon are going to spend the next year spending tens of billions of their shareholders' dollars, stressing out their balance sheets to get an asset base that still isn't as good as T-Mobile's. And then finally, after all that action and no synergies to pay for it, will be on a strategy that's 2 to 3 years behind T-Mobile's or more. And that's a great place for us to be as it relates to being able to get out the gates and lead in the 5G era and delight customers to the premise of your question.

Yes. And I want to come back and talk a little bit about network. When we were talking about that structure, that margin difference that existed at the point at the merger closing, I think a lot of investors understand that as long as you're growing faster, you're just going to spend a bit more money to facilitate that, and that's fine. I get a lot of questions around network. In other words, to what extent do you see T-Mobile being positioned with network cost efficiencies that your peers don't have? And are there any inefficiencies, such as the fact that you don't own wireline assets to the same degree that makes it a little bit more challenging to scale margins?