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

Good morning, all, and thanks for joining us. I'm Jonathan Chaplin from New Street Research. I'm joined by Rüdiger Schicht, Senior Partner from BCG. Neville Ray needs no introduction to this audience. He's the world's most recognizable CTO. Actually, I should say he's the most -- the world's most recognizable president of technology. We at New Street think T-Mobile has 2 avenues for value creation. First, they're going to capture about $7 billion to $8 billion in annual synergies. That's my number, not Neville's. Second, they're going to capture at least 500 basis points of market share over the course of the next few years that will deliver another $7 billion to $8 billion in EBITDA. Neville is at the heart of both value drivers. He's leading the most significant part of the integration process, the network integration. And he's building the network advantage that's going to drive the market share gains. And so Neville, you're on the hook for a lot. Thanks for joining us today.

No, delighted to be here, Jonathan, and look forward to the conversation. Yes, lots to do here at the New T-Mobile. But we're sure at it. So a lot to talk about.

Neville, first, I just want to kick off with a sort of a broad-ranging question that might actually not be entirely fair in that it's not network related. So you've built a phenomenal position, 280 million pops covered with low-band 5G. By the end of the year, 100 million with 2.5. That's just 9 months after close. What do Mike and Matt have to do to make consumers aware of the network you've built? How do you change perception? And what is the organization thinking in strategy? How does it need to evolve, now that you're no longer a scrappy underdog but a network leader?

Well, thanks, Jonathan, great question. I mean, I like to think we're still scrappy, right? That's T-Mobile. We're always going to be fighting away and an entrepreneurial, scrappy business. But to your question. I mean, thank you for the kind of the recognition on our network progress. And we have come a hell of a long way inside a very short period of time post the close with -- of the transaction with Sprint on April 1. And to your question on how do we market and tell the story, Jonathan. I mean, I want it to be understood that we are marketing and telling our 5G story now. And the next chapter in the book is soon to be opened or read. And it's important that folks understand that the coverage leadership that you referenced in the back part of the question there. If you look at 5G leadership in the U.S. today, I mean, it's -- there's no doubt, right, about where T-Mobile is. And we've been building out our low band, our coverage layer on 5G, for many months now, for several years in fact, using 600 megahertz spectrum that we secured in an auction not too long ago, an $8 billion investment for the company. And we've been rolling that out for some time. Every radio we've put out is dual mode, it supports both LTE and 5G. And we've been leveraging that clean kind of fallow spectrum for that rollout for some time. And we launched nationwide 5G about this time, it was December of last year. And now our competition has kind of flipped. And we'll talk later in more detail, I'm sure, about AT&T and specifically Verizon. And they've now flipped to kind of this low-band nationwide story. And recently -- Verizon very recently announced their nationwide footprint. But I think it's important folks to understand there's a huge difference. I mean you referenced the 280 million pops for us on low-band by the end of the year. We're 270 million now. But the geographic coverage, Jonathan, we're at 1.4 million square miles. Now this is a big country, right? But I mean, we've covered almost half of it already with our 5G footprint. And obviously, where there's -- the vast majority of the U.S. population lives. That number in Verizon terms is about 400,000 square miles based on their recently released and then re-released an upgraded coverage map. So that's a gap of 1 million square miles. It's almost 4x in terms of the differential. AT&T, about 600,000 square miles. And so why I mention that? I mean I think it's important. A lot of folks opening up that iPhone 12 box right now, and they're going to be pretty disappointed on those other networks in contrast -- and start contrast to T-Mobile. They're not even going to see a 5G icon. They might see a 5G e-icon from AT&T. I mean, they've been so panicked about low-band and 5G coverage for so long, they kind of head-faked and tried to head-fake their customers into believing they were getting 5G when they're on an LTE network. So I mean, this has been an interesting story for some time. But long story short. We are out there, and we have been messaging our coverage story and our coverage advantage. And of course also the combination with Sprint, if you look at our advertising right now. And so we're telling that coverage story, making sure folks understand that it is a differentiated proposition. Now that said, and I'll shut up in a minute, I promise. I do look at this kind of crazy season that we're seeing. I mean, the Verizon advertising is everywhere. And Jonathan, I mean, you've written, others have written, there's a lot of promise in that Verizon advertising about a breadth of 5G experience in this Ultra Wideband thing that, quite frankly, customers are just not finding and not seeing. And so I think they are really over their skis, right, promising a 5G experience, which, quite frankly, for the vast, vast majority of their customers, does not exist in the U.S. today. And at T-Mobile, we're not going to do that. We've never done that in our past. We've been edgy on our advertising, but I think Verizon is in a difficult position. And I think it will come back to haunt them as their customers buy into iPhones and other 5G products now and they see and open that box and get the experience behind it and can't find Ultra Wideband in most geographies and areas, even where it's advertised. We can talk some more on that. So for us, we want to manage customer expectations carefully. And as you rightly referenced, the big change, the next chapter in the book is our mid-band 2.5 gigahertz spectrum rollout. That program is going really well. I'll repeat your numbers in case people miss them, but I'll give you a quick update. So we're about -- we announced at earnings 30 million pops. We're just under 37 million today. So -- and we'll be about 40 million by the end of the week. 100 million by the end of the year and 200 million for the end of '21. And that's where folks are going to see a really differentiated, high-capacity, high-speed performance layer. And they're going to see it from T-Mobile with broad coverage and ubiquitous coverage very, very fast. And as we get that footprint into a material shape as we close out this quarter, then we're going to go talk about it. And we'll manage customer expectations. And Matt and the team are lining up all the materials we need to not just talk about that externally from an advertising perspective, but to make sure the discussion in our retail channels and our care channels is really vibrant and robust because you're right, this is our time. We've spent a long time leveling the playing field on coverage, LTE coverage with Verizon and AT&T. That was kind of our last 7 years, kind of Un-carrier 1.0. And now we're in this position to move ahead and jump ahead of Verizon and AT&T with a very different 5G strategy, rolling out mid-band at pace on top of a very mature coverage layer that we've been working on for years. And I honestly think the Verizon and AT&T strategies on 5G are in some disarray at this point in time. They've reversed out of prior statements. I now hear Ultra Wideband is for capacity, not coverage. I think that's fresh from their analyst event last week. I mean, your head spins, really. So that said, I mean, we're not going to respond to crazy and wacky advertising from those guys, which we think will hurt them. I mean, we'll start to tell our story as we've got maturity on that footprint and it's ready to put into the hands of our customers. So a lot more to come. And sorry for the long answer. But you know me, I can't help myself. I have all this stuff I want to get out, Jonathan. Sorry.

[ Talking ] but we've only got 3 questions on our list for you because...

I promise that more answers will be quicker.

There's something I just wanted to pull out of what you said, which I think is really important for the audience to hear. And correct me if I'm paraphrasing what you said incorrectly. But you've intentionally not pushed the speed advantage you have over Verizon and AT&T on 2.5 gigahertz yet because you don't have it in enough markets, and you only want to advertise that aggressively once it's in enough markets where enough people are going to experience that. Have I got that correct?

Yes. I think that's fair, Jonathan, right? And I go back to what you guys have on New Street, right, which -- and others have talked about this. I mean, that Verizon Ultra Wideband footprint. You guys have calced, we go out and measure it. It's under 2 million [ square miles ] today, right? So how can you -- when that is way less than 1% of the U.S. population, it's a fraction of the geography in the U.S. Why would you headline advertising and break up every damn football game on a Sunday to tell folks that's -- like 5G is here, 5G is real or whatever the BS is. When the vast, vast, vast majority of your customers can't access it? And they're not going to access it because that footprint is not changing. So we're at 37 million today. So 18x plus. And by the end of the year, we'll be 50x that footprint, 50, 5 0. Then we believe, as we approach that, we're in a position to start really talking about an experience that the customers, in many cases -- and it's not going to be every case, right? You know this math better than anyone, Jonathan. 100 million pops is tremendous progress. I mean, it's something to shout about. But a couple of million? I mean, goodness me. I'm not sure what's going through some of the heads there. But I honestly think it's going to come back to bite those guys. And we're going to be more open, more honest and more deliberate with our messaging with our customer base and make sure that something we shout from the rooftops, many customers agree, not all, but many customers, can experience. And I think that's really important. This -- sorry to go on, Jonathan. But this 5G era, right, has been -- it's now upon us, right? I mean, this iPhone 12 has really brought 5G access to so many customers. So 5G is kind of now happening. And you look at the last couple of years and the overpromise and overcommit and this millimeter wave thing. Don't get me wrong, millimeter wave has its place. But this millimeter wave thing is going to deliver a phone in your hand, wherever you go with multi-gigabit speed. It's mythical. And I think Verizon has spent much of the last 6, 9 months trying to figure out how to get out of that story, even more so now listening to them last week, and tell something that's more pragmatic. But they haven't connected that with our advertising machine for sure.

And Neville, you're hitting an important point. And you laid out, first of all, with which speed you're rolling out, the 2.5. I think that's impressive. What role will millimeter wave play at all in your strategy in the near to midterm? Where would you deploy it? How aggressive will you do that?

Yes. Well, I'm going to actually sound like the Verizon guys last week now. We're going to deploy it as a capacity layer where it's needed. And I'll say this, I mean, the kind of the statement I use on this is millimeter wave is where you finish rolling out the 5G network. It is not where you start, right? You start with a low-band coverage layer. You add your mid-band. I call this the layer cake rate. And then where you need to, you add millimeter wave. And why? Because its propagation characteristics are incredibly limited, despite all the work we've done and the industry has done, in contrast to other spectrum sources. And so for us, I mean, we have -- Rüdiger, We've deployed a bunch of millimeter wave across major cities. I still believe I have one of the largest millimeter wave networks in the U.S. in Manhattan and New York, and we rolled it out some time ago. But we're still learning on the technology. The piece I'm most excited about is to use it in-building and especially in stadiums and venues. We lit up the arena in Vegas recently with millimeter wave. And so we're doing more of that, and that makes sense. I know with the pandemic, this god-awful thing around, those folks aren't in those places. But in those environments where you're going to have 30,000, 40,000 maybe smartphones doing 5G all coming on together, I mean the stuff makes sense. But it's more from a capacity perspective than it is this 5G performance piece. Our 2.5 gig layer, as we roll that out, today has been delivering 200, 300 megabit per second speeds on average. So you can do gig peaks, right? But on average, down around that 300 megs. And as we can commit more spectrum to that as we go through customer migration with the Sprint base, that number gets to about 400 megabits per second, based on our engineering and what we're testing now as we close out the end of the year. So now you have something that is an order of magnitude better than the average LTE experience. And if you look globally, I mean that's kind of what's happening. That's what's happening with 5G. I mean, you see this kind of mid-band rollout, we've done a lot on low band. But most countries, you look at the big Asian markets, it's kind of mid-band rollout, offering something in the hundreds of megabits per second, which is very transformative. I mean, I get excited about what we've done on low band. We've doubled our speeds with low-band 5G and it took -- goodness, It took me, what, 5 years to double the speeds on LTE, and we've doubled the speeds with a 5G layer on top of LTE with dual connectivity in almost the same number of months. And so doubling of speeds is a big deal. To take those speeds up an order of magnitude, I think, is incredibly exciting, and will foster and generate the use case both in consumer and enterprise, with broad mobility and coverage that I think folks are so excited about. To sit there and promise multi-gigabit speed across a broad geography using millimeter wave, guys, it's just mythical. And I think the Verizon team, bullish as they've been on that millimeter wave story and single-threaded for so long, they admitted exactly that last week. They said this is a capacity layer, it was never planned to be a coverage layer. Well, they should go back and play some of the tape from maybe a year ago or 2 years ago when they launched millimeter wave and what they were promising. So I think expectations have been somewhat mismanaged. And back to Jonathan's first point in the first question. I think we've got to be really clear with consumers, what we're delivering and how we're delivering it because this noise and kerfuffle that's out there isn't helpful at this point in time. I get why Verizon's doing it. I mean, they're in a very challenged position right now as we're competing so aggressively and taking customers from them and AT&T. So they've got to fight. But the way they're fighting right now is kind of a little bit of a head-turner for me. So...

And Neville, to get from 40 million pops to 100 million pops on 2.5. 2.5 being where you capture that order of magnitude, improvement in speed. That suggests a huge acceleration in the rollout just in the course of the next few weeks. How do you do it? And then once you've done that, aren't you going to be moving at a pace that would get you to 200 million pops far faster than the end of next year?

Yes. So on the first piece, Jonathan, it's -- I mean, the team came out of the gate in April so fast, right? And the big, big focus -- I mean, we started to build some sites. But the problem we faced in April was we didn't have the permitting backlog, right? We didn't have the permits we needed. And you know the story. But for the audience here. I mean, we can upgrade I want to be clear, and this is again a contrast to the millimeter wave story. I'm hanging radios and antennas on existing infrastructure, right? So my teams and our vendor teams, they get to a site with radio and antennas on existing steel. We're not building new towers, right? We are hanging and upgrading equipment on existing infrastructures, towers, rooftops, wherever it may be. And that work, intense as it is, can typically be completed in 10 business days. A couple of weeks, right? Sometimes, as the site complexity, it goes a little bit longer. But the teams, once they start construction, they're knocking out their sites super, super fast. And why I mention that is because the long pole in the tent is getting the jurisdictional approval to go do that work. And that can take anywhere from 4, 5 months to, in some parts of the country, a year to get those approvals. And we've been working with the FCC, how do we speed this thing up, right, on -- especially on existing infrastructure? I'm not building on greenfield small cells all over god's given earth, right, in the hundreds of thousands. That takes a long, long time to get done. Decades. I'm going on my existing sites, and in some cases, some new sites that we haven't been on before. But I'm adding infrastructure. So what does that all mean, Jonathan? So we've been aggressively driving permitting volumes over the last 5, 6 months. And the good news is despite the pandemic, I mean, it was a little nervous in the first month or 2 because a lot of the building departments in these jurisdictions, they shut it up. But most of them have gone to online processing. They worked through the pandemic, worked effectively with us. And so now I have this huge volume of permits that I'm eating a way into furiously with our build program. And every month now, Jonathan, we're hitting, just on 2.5, we're going into construction on over 2,000 [ sites ] a month. And so that volume has been accelerating as we've gone through the year. Now I have a huge backlog of permits. And I've got a road map and a plan. I've got almost -- not quite, but almost everything I need to go on air to achieve our goal for the end of the year of that into construction soon. If not, most of it is in construction right now. So our numbers are going to move pretty dramatically like week-on-week, month-on-month. Yes, it's the middle of November. Every week, there's going to be a good, strong update from us because we're in construction in huge volumes of sites. So it's kind of there is this hockey stick-shaped profile for stuff coming on air at the end of '20. And then to your question, as we go into '21, my whole goal this year as to -- been to ramp our productivity capability and then to just to level that off and run at this pace of thousands of upgrades per month as we go through 2021. And if you math this out, and I know you do, right, hence your question, it looks like we could do more in '21. But the first 100 million is a certain number of sites. That second 100 million takes more sites, basically, right? I mean, it's not -- you guys know it's not equivalent, right? Pops start to thin. And then the third 100 million takes more sites again. And so what we've been doing in '20 is building a network factory here with -- and it's complex, Jonathan, right? I mean, we've got everything from all of our supply chains with our major vendors, the GCs and contractors that we use to install the equipment, our own teams, our own logistics flows. The team has done an outstanding job to get us to a rate of rollout, which quite frankly, I mean -- and I've been doing this a long time. I've never seen a team executing as well on a build program. I think this is the biggest thing going on globally right now outside probably of China. I don't think there's a level of build out and pace that's underway anywhere like this. So that's super exciting. I think it worries literal crap, excuse the French, out of my competition. And I'm delighted about that. I think that's why their strategies are in some disarray. They're watching what we're doing. I don't think they anticipated we'd be able to move so quickly. And they're incredibly concerned about what customers -- or what customers are going to understand 5G is all about, especially in '21. And it's going to be about those broad availability of really high speeds, great devices are going to be out there, and folks are going to see something finally which is differentiated. And that's going to unleash the innovation and everything I think we're also excited about on 5G, be that business, be that consumer, whatever it might be. Just like LTE, until you got a broad network, the innovation is not going to come. And you can't do it on a hotspot-like network with millimeter wave. Just maybe a corner of a factory someway, yes, you can. But that's not what drives this business. So...

Neville, switching gears to the integration process. I think you said on the call, you've got 15% of the traffic of Sprint customers on your network, on the T-Mobile network. When do you start moving the Sprint customers over? With all of the customers that have T-Mobile-compatible handsets, when do they start moving over en masse? And is that something you can do with a flick of the switch in the network? Or do you need to ship them new SIMs? Or is it more complicated?

Yes. I mean, so a lot to unpack in there, Jonathan, right? But I mean, I just flowed up a little bit, right? So the 3 steps on that migration is, one, to build that capacity, right, on the anchor network, as we call it, the final network. And a big, big part of that program, I've talked about the 5G story, that's what we've talked about for most of the time here. But as I'm rolling that out, I'm building out additional LTE capacity on the anchor network because most of the customers have just LTE-capable handsets right now. So I've been doing this, I call it, the 2-for, the 2-for-1, the 2-for thing. So every dollar that we're plowing into the network is not just delivering on 5G, it's also building that capacity we need for 5G and LTE to support migration. So that work is well underway. The secondary piece then is, now we can move the customers off of the legacy Sprint network and onto the T-Mobile network. And then that third leg of the stool, and you said it in your opening comments, is then we can start to decomm and drive these tremendous synergies. So we have a very different outlook on both rolling out 5G and combination of the 2 companies' networks into 1. So that's kind of -- it's almost -- it's like perfect timing for once. I mean, we litigated this deal and thought a long time to get this deal done. And it came out of the gate, so at almost this perfect time with where 5G is. So we can do all these things, drive all these synergies, combine 2 companies together and have this leading 5G position. And that's in stark contrast to the AT&T and Verizon story. There are no synergies at the end of AT&T and Verizon's rollout. They're doing 5G for 5G's sake. They're scratching around and trying to figure out how they're going to make money out of it. I'm going to -- we're going to make money at T-Mobile by taking share from AT&T and Verizon, by the way. But there's so many pieces that come together in that goodness right now for us. And so to your question on migration. I mean, a good volume of traffic already moved across. Very pleased with that. And there's a strong volume of customers that have already moved across, Jonathan, to your point. We haven't disclosed those counts yet, but there are large volumes of customers we're already moving. And so what we've been doing the last 6 months is building all the tools and capabilities to support that. And you're right, for the vast majority, they have a compatible handset with T-Mobile's network. That number was well north of 80% by the time we closed the transaction and continues to rise. And so what we've done is this thing we call cross-provisioning. And we did this in Metro, which was a very, very successful -- smaller, agreed, smaller customer base, but very successful combination for us. And what we do is basically we make the network agnostic to the biller, if that makes sense. And so as a sprint customer, you can stay on a Sprint bill. But with the SIM change, you are now fully on the T-Mobile network, on the final network. So you get all of that goodness from the network. We can relieve the Sprint network of the capacity that you were using on the Sprint network prior, enabling movement of spectrum and ultimately decommission of sites. But you can maintain that billing relationship on the Sprint side. And why do we do it that way? Because the billing takes time to navigate. There are payment arrangements. There are all these different things. And we've seen way too many transactions, not just in telco, I think all of us, where companies have come together and they've tried to force, first and foremost, that billing consolidation, and it's a nightmare. So we're going to be patient with that billing consolidation. But we make sure, yes, there are an element of synergies around consolidation of the billing platforms ultimately, but it's a very small number in comparison to the network synergies. So network synergies come first, SIM changes, cross provisioning. If you go into a T-Mobile store today or a Sprint store today and you're a new customer, you will be activated, right? So that's out of the gate. New flow is activated on the T-Mobile network. If you come in for upgrade, et cetera, et cetera, and we're reaching out to the Sprint base, you go into our stores, they're going to look to get you a SIM change in a compatible device and onto the anchor network. So our whole retail fleet has been rebranded to T-Mobile. Wherever you go now you're going to get into that discussion and hopefully that movement onto the T-Mobile network. And the retail team is executing really, really well on that already. So we spent about 5, 6 months getting all of that built and making sure that it was a strong and seamless process for our customers, and that's now in place. And so the flow is moving. And I think when we get to, maybe for 4Q earnings, maybe in the investor/analyst event that we'll hold in Q1, we'll provide more detail on that. Peter Osvaldik driving a lot of these pieces and the synergy development. But that's a really strong story. And we're super excited. All of these things are happening faster, from network rollout, migration and ultimately synergy development. We're trying to -- and we are. We're already accelerating all of those key pieces even though we're, what, 8, 9 months into this combination. So all of those things, execution is the key piece now, and we're making real progress.

Neville, it sounded like from the third quarter call that you expect to have at least the network piece done by the end of '22. Is that correct? And can the billing piece -- can the whole project be wrapped up by the end of '22?