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

I'm Phil Cusick. I follow the comms services infrastructure -- and infrastructure space here at JPMorgan. Thanks for joining us. I want to welcome Mike Sievert, the CEO of T-Mobile. Thanks, Mike, for joining us. How are you?

Of course, Phil. Great to be here. Good to see you again.

Excellent. So Mike, you were with us a year ago and took over as President and CEO of T-Mobile at almost the depths of COVID. But lately, it seems like the U.S. is getting better every week. Can you just give us an update on what you've seen in the last few weeks?

Yes. It's what we've seen in the last few weeks is what we've seen in the last year. And I think it's really -- we're all being witness to a validation of T-Mobile's strategy in this marketplace. And you think back 3 years now, 3 years ago, this past month, we announced that we would be merging with Sprint to create the leading 5G company. And back then, we weren't obsessed with media companies or satellite companies or millimeter wave 5G like our competitors were breathlessly talking about. We were focused on getting the crown jewel asset around mid-band 5G, because we understood that the simple basic truth that all content and communications of all kind are leaving their prior linear forms and landing on the Internet. And the Internet is going mobile. And our job was to create the leading pure-play mobile Internet company. And so I think what we're seeing over the past few weeks is that years later, remember, we've put down that stake in the ground in April of 2018 when we announced the merger with Sprint. Years later, our competitors are kind of finally realizing that mobile Internet pure play is a good place to be. The problem is they're years behind us. And we think we have the wherewithal to keep it that way, so that when you fast forward 2 years from now or 4 years from now, they'll still be years behind us. They'll just be similarly 2 years behind because at the rate and pace at which we've established is not going to be something that they can catch up with. And so we can talk more about that later. But to me, that's the main reflection that I think the last few weeks has shown. And I welcome it. I think it's -- this is a great industry. And one of the things that we've kind of come to realize, Phil, is that we've grown up. We're stewards of this industry now. This is our house. We have to make sure to take care of it and it's a profitable industry, a viable industry, and we're leaders in it now. But at the same time, as they now re-pivot themselves as mobile Internet pure plays to try to emulate our strategy, you can expect us to be good stewards of the industry, but never change, bringing pressure and competition, the formula that has always made us work as the Un-carrier.

Has the -- well, let's look at it a different way. There's also been some news around structure of your peers. As you think about media spinouts by Verizon or AT&T, how do you think about the value or not of convergence with content? You've partnered with a bunch of content over time. What makes more sense for you?

Well, again, the market seems to be headed to where we are, which is a partner-oriented strategy. And we think there's a role. We think a mobile Internet company like T-Mobile can add value in your media relationships. And we pioneered that with our partnership with Netflix, our groundbreaking Un-carrier move years ago that everybody has been emulating since. We don't see the need to own all those media assets. We have incredible strengths, thousands of retail stores, tens of thousands of customer-loving sales experts and customer-experienced experts. And we can add value to media companies and to consumers through the strength of our brand and our assets. And that's what our strategy really entails.

Okay. Okay. There's also been a lot of discussion in our conference about convergence. And you talk about the Internet is going mobile, well, at the same time, people want to sell fixed in mobile to their customers. It's not -- this is not a new discussion for you. But how does convergence between fixed and mobile change what makes sense for industry structure over time between fixed and mobile carriers?

I don't think consumers are defining the industry as the way we define the industries. Here in the industry, we tend to define the industry based on what capital did we put in the ground a decade or 2 ago. Did we put copper in or did we put wireless in or coax cable? And so we call it the cable industry or the phone industry, the wireless industry, et cetera. Customers just want a connection. And our job, our mission is to be the best in the world at connecting customers to their world. Now this matters, this convergence question matters because it depends on where you think the industry is going. As I said, I think content and communications lands on the Internet and the Internet increasingly goes mobile. That's why years ago, we created the strategy of being the leading pure-play mobile Internet company for the 5G era. And today, on that strategy, which we've been clear and consistent and never changing from, we're the leaders, and we intend to be the leaders for the duration of the 5G era. And we have the star asset of that era. I wouldn't trade this asset for a cable asset or for the ones that AT&T and Verizon control, because of where the market is moving and what consumers really are demanding. Now that being said, consumers look at what we have to offer, and they're demanding home broadband from us. And we've got the asset to be able to deliver a highly competitive, low-cost, great experience home broadband product to them using our 5G network. And that's, again, thanks to the fact that we've been clear and consistent about the opportunity here and have been building against it systematically and at a pace that's never been seen in this industry before for years now. And so while our AT&T and Verizon competitors are talking about sometime eventually getting to 5G home Internet, we're here today with 30 million homes eligible, and it really just shows the consistency of our strategy. Now cable has gotten in for years now into mobile. And we actually didn't -- I'll be honest, I mean we didn't really adequately forecast their success. When they came -- before they entered, we've kind of side-eyed them and said, yes, they're an MVNO, they'll never be able to really -- but they got after it and very effectively. Since then, there's been no step change or catalyst to believe there's anything else. They've been more successful than we thought in a consistent way that now has been in the run rate for years. Let's face it. It's not a new phenomenon anymore. And their gross ad share isn't really that material. Their net ad share is reasonably material. And as their base grows, unless their gross ad share changes, they'll kind of take their place. And the truth is, without owner economics, they can't compete with us sustainably for our best value position. And our scaled competitors, AT&T and Verizon, have trouble competing with us on the quality of network positioning that we're going to, because of the strength of our network build and the superior assets that we control. So we think we've got it to a place where we can compete on value and win with our Un-carrier brand fame and the reality of our scaled infrastructure and we can compete on quality and product and network with AT&T and Verizon. In fact, we have the opportunity now to be the first company in the history of our industry to be able to simultaneously offer you the best value and the best network. No one's ever been able to offer that before. And it's a big potential tailwind for our ability to continue growing.

So let's continue down that home broadband path. There's an emergency broadband benefit out right now from the FCC. Is that something that could accelerate your home broadband effort? Or is it -- we heard from a couple of people today pretty not very material so far.

Well, it's hard to tell so far, but we are participants on it on the wireless side. And again, consumers don't draw the exact same distinctions that we do. We have tens of millions of customers, many of whom have -- their wireless connection is their only connection. This is not just their primary connection to the world, but their only connection. And they use mobile hotspot features on their smartphones and they use mobile hotspots themselves as their broadband. And only we have the network capacity to be able to serve that with truly unlimited offers that are at scale in the marketplace today across 30 million homes. And that's a real source of strength. We -- this is a bit of a -- it is an important distinction that being in the home broadband market early is going to allow us to get an early incumbent's advantage, because right now, if you're with cable or DSL, somebody is going to show up with a 5G offer, and you're going to decide to switch to it or not. It's going to be lower priced, going to offer a great service, 100 megabits per second or better. And it's going to be something from a brand that loves its customers and wants to satisfy you and treat you right, and you're going to switch to that or not. Okay. So we're going to get some amount of that share. We'll see how much. We've told you 7 million to 8 million in our planning horizon. The guy that comes in 2 years after us, what's he have to do? Because the person has already been offered 5G wireless Internet from a great brand that's famous for loving its customers, he has to be lower priced or better -- a better network offer. He has to be better because he's late. And that's going to be tricky.

Yes. What's the strategy for increasing your availability of that home broadband product versus managing the base and capacity in the network? How dynamic can you between marketing and network capacity and system ability to buy service?

Well, there's 2 numbers that we're trying to manage here as we get started on this journey. One is the eligibility number. That's at 30 million right now. That means there's 30 million addresses right now in our system that if you enter and apply, you're going to get a yes. And so that's fantastic. There's only 130 million households in America. But the other number underneath that moves dynamically, which is the supportability number, which is how many within that 30 million will we approve. Let's say, if you apply in your neighborhood, and we approve you and everybody else in your neighborhood applies, then that sector will saturate and those people will fall off the eligibility number. And so it's all about capacity. And that's why I love our hand of cards, Phil, because we have the highest capacity 5G and we will have the highest capacity 5G for years to come. And it's not just about spectrum. I mean we have the leading spectrum position by far. And that's inclusive of the incredible amounts our competitors spent on C-band. But it's how much of that is deployed on 5G that really starts to become exciting. Just this year, this year, we will move from our current 60 to 80 megahertz deployed in mid-band 5G to 100 megahertz. That's what AT&T and Verizon have available by the end of the year on C-band together, the sum total of them because they took the 60 and the 40. We've got that amount already on a superior piece of spectrum, 2.5 gigahertz that propagates further. And so that's the theme you can expect over the next couple of years. When they get a hold of that second tranche of C-band in the end of 2023, we will already have 300 million people deployed on mid-band with 200 megahertz against 300 million people for whatever that is, 54 billion megahertz POPs. That's going to be double what they can offer in terms of a capacity depth and breadth. And so -- and it really speaks to not just the spectrum position, but the rate and pace of our deployment and our ability to get it all scaled over to 5G, because we have a synergy-backed model and we have fallow capacity and we're actively migrating customers through the integration process. Something they've only started thinking about.

Right. And you've talked about this as an incremental capacity model, which makes a lot of sense to me almost regardless of usage or what the price is. Do you envision the economics being good enough that you eventually put capital into this and augment your capacity for home broadband? Or does this stay in incremental capacity model?

Sure, maybe. But our plan doesn't contemplate that we have to do that. And so the 7 million to 8 million that we forecasted for you as our aspiration in the space within our 5-year planning horizon doesn't assume that we have a material amount of capital dedicated specifically to home broadband. But there are opportunities there. And let's not discount millimeter wave, which I don't mean to discount millimeter wave. We're owners of millimeter-wave. It's just not synonymous with 5G. It takes the whole layer cake. We've been clear about that all along. But we have a great millimeter-wave asset, which we may deploy in some areas in order to provide even greater depth of service for home broadband and mobile users.

Okay. Let's switch gears a little bit to the business side. The corollary to the 30 million homes that you offer home broadband is the company-sponsored broadband product. Maybe talk about that and what the strategy is, how that's different than your regular home products.

Yes. I'm so excited about this. We launched this a couple of months ago, and it's really something that the market is only just now starting to understand the power of it. That's the way enterprise sales cycles work, by the way. You get all kinds of interest, but it takes a little time. And it's going really well. I mean it's very exciting what's happening. This is an offer that costs a little more than consumer home broadband, because it is available literally anywhere, almost anywhere that you apply. It's not using the exact same fallow capacity model. But the product itself limits certain aspects of usage to work use cases. And so between the limited use cases centered around work use cases, meaning it's not for binging Netflix all night long and a price that reflects the wide availability, this is a product we think will be a good margin product, but it allows us to be maybe the only provider that can go to a scaled enterprise and say, look, we will cover virtually all of your employees with the same highly secure solution, no more sharing WiFi with the kids, when you're trying to do important secure work. And that means you have a dedicated product with known capacity and with a security profile that's superior to WiFi networks that are outside the control of a corporate IT department. So it's a very exciting proposition and one that I think is ultimately going to be pretty popular as hybrid work styles take over here as COVID-19 ebbs.

And because this is a business sale product, not for consumers, you don't have to worry about things like net neutrality and allowing all the video products to run through it. Is that right?

Well, it's just -- it's its own product. And it works the way it works. And the trade-off for customers is that they can use it in many more places than we would approve a usage for a consumer offer, which basically contends at the busy hour for all that Netflix streaming that we have to support.

Okay. You've talked about business, small business and enterprise quite a bit. And one conversation I have with investors a lot is what the product is that you're selling people. So to me, it looks like you sell, for the most part, a consumer level with some refinement on top of the type of products, and I make an analogy to where cable started 10 years ago. Do you sort of move gradually up the stack? And are there things that you need to buy or build to move up the stack over time?

Our DNA is more to partner, Phil. I mean we may buy or build more. We have all kinds of aspirations here in the solutions space. But we're not motivated by how do we take this relationship and monetize it with vertical solutions developed by us to try to trap IT departments. Rather, it's how do we have the more strategic conversation with the CIO and the corner office. And we know that being able to offer more than a lower price on mobile phone service is important to be able to have that kind of a relationship. But our tendency on these things is to partner. For example, part of that WFX solutions we were just talking about, we launched a couple of months ago, is a comprehensive solution around telephony for enterprise customers to be able to think about so that you can get -- as again, your workforce is distributed, how do you transfer a call seamlessly between your assistant and you, how do you handle call monitoring, how do you handle unified voice mail systems, how do you handle reception services and all the other kinds of things that a PBX service knows how to do. But we're doing that through a partnership with Dialpad, who we're a part owner of. We don't have to think about for all of these solutions, building them ourselves from the ground up when there are incredible solutions out there that we can partner with. And we're a better partner for most companies because they know that we're not interested in building over them.

So that makes sense. And the third sort of -- I don't want -- the pillar of growth to use a quote from one of your peers, is the small and rural market efforts. Let's continue with your targeting maybe 50 million homes in those smaller and rural markets. You know I've talked about that opportunity for years. What was your market share there 5 years ago when we first discussed it? Obviously, that was premerger, but compared to your low teens share today.

Well, it was single digits. And remember, when you and I started talking about this, we had distribution of only 230 million Americans. We had a network that reached further and you could kind of roam and use casual use, but we had distribution covering 230 million. We moved that through a systematic effort up to 265 million. And now we intend to cover virtually the whole country with distribution because our network will be the demonstrable leader in rural areas. And so it's important that we take a comprehensive left-to-right view. So today, we've grown into the teens, low to mid-teens. And we intend to, in our planning horizon, have a 20 share. And honestly, a lot of people have looked at that aspiration and said it sounds a little conservative because again, you have the best value and the best network and a serious concerted effort, top to bottom on how we think about it in the company. So we are really excited about this. We're very serious about it. It's not an announced flash in the pan thing. It's a concerted multiyear strategy across every element of the product and marketing mix.

Yes. Just an aside while we're talking about that, you talked about the best value and the best network. And for years, you've had the best value, but in not the whole country. And as you expand that, it's going to be interesting. Are you surprised that AT&T and Verizon have increased their capital expenditure guidance pretty dramatically in the last few months? Does that [indiscernible] you at all?

No. No. Not at all. Our internal views were that they were planning to spend that much all along. It's just very hard when you spend $55 billion on spectrum to kind of cop to all the capital on the first day. You kind of let that soak I guess, think about it for a while and then say how much it's really going to cost you. But with C-band as your mid-band strategy, you have to deploy lots of capital. It doesn't propagate nearly as far as the rest of mid-band, and that's just sort of a feature of it. For our part, as you know, we're big fans of C-band, but we only bought it where we were already planning to have a network dense enough to deploy it, meaning we only bought it in the urban areas where our planned density in the merger model already has the ability to take full advantage of C-band with its propagation characteristics. And so there's very little incremental for us to be able to get the full power of it. But we've never thought that was the case for our competitors, who I think have -- it sounds like I'm critiquing their plans, I'm critiquing their past. Their current plans feel like they're serious about this space and we welcome it. I mean we love the competition. Competition tends to favor us when more customers are up for grabs and there's more jump balls and there's more activity in this market, historically, that's always been a good thing for T-Mobile.

We'll leave it to Neville to critique their plans.

Yes.

Quality in rural areas is so market-specific. Is your network, do you think, ready now for that push in rural areas? Or do you need more coverage in densification? Do you need the network to be fully integrated before you really go after that?

Both. In our model -- and again, I can't give too much here because it's competitive, but in our model, we class every location as to the extent to which we have what we call license to win. And there are plenty of places we're not ready yet. We're playing, we're there, but where we know we don't have the full formula in place yet. And so you'll see our strategy bifurcated based on the extent to which we calculate we have the full license to win. And there's a lot of places where that's true today. And remember, we have quietly -- well, everybody has been talking about 5G, 5G everything for 2 or 3 years, consumers have been sort of side-eyeing 5G and waiting. And quietly during that period, without talking much about it, we've caught up with the other guys on LTE, where most customers are today and gotten competitive with them and raised their legacy advantages. Our POP coverages are all about equivalent now. There's some geographic differences for Verizon, but just some geographic differences. On 5G, we're miles ahead, and we all know that network is trending towards 5G. Pretty soon, your 5G footprint will be synonymous with your competitive network footprint. That's just the nature of our industry. And so it's really a great place for us to be, particularly in rural, where we're even further ahead of the rest of the industry. And so we're just -- we know we've got an opportunity here, and that's why we're so serious about it. We want to serve these tens of millions of customers with the best quality wireless experience that's ever been available in their area. And we think they'll notice and appreciate it, especially coming from a company that offers it at the value that T-Mobile does.

Can you give us a little more about that license to win? So you've talked about 50 million homes in rural or small markets. Is it -- how many of those have that license to win today? And what happens when you're at that point?

Well, so we have several classifications and it is within the 50 million and then beyond the 50 million. And as it moves up its capability from a network standpoint, extensive leadership, both LTE and 5G as well as distribution readiness, then how much effort we put into it to go take market share or grow the category correlates. And again, I can't get into too much detail on that today, but that's generally how we think about it. When you step back and look at it from a broad lens, across the 50 million homes, the 40% of this country we're talking about, not far ago, I mean it's lots and lots of places. We expect to go from the mid- to low teens to 20 in the planning horizon. And we think that's very doable with the product superiority that we expect to have.

Is this a big focus for the 10,000 new sites that Neville has talked about building in the next few years?

Of course. Yes. And so again, that only improves the license to win as we move along.

Yes. And how many stores address these homes today? How many more are to come?

It depends. It's hard to say based on how important really will retail wind up being in some of these areas. And again, I think COVID has changed the appetite of wireless consumers for digital, and we're taking that very seriously. We have a very innovative model for the smaller communities around hometown experts that we're very excited about. And then we have partnerships as well. We're expanding into big-box retailers that have never been a big part of our formula before, like Walmart and Best Buy. And in particular, Walmart, very important for rural communities. And so it's a mix, but think hundreds of stores, for sure, where we can have, now that we've been able to create a master brand for postpaid and prepaid with Metro by T-Mobile, we can also have a concerted effort. It's more capital efficient from a store standpoint across prepaid and postpaid.

Okay. A couple of things to follow up there. You talked about the hometown experts. Is this the guy who shows up the football game with a setup tent, and he's got 3 phones and he's trying to sell them to his buddies? What is this?

Well, it's an available expert in your area that marketing will be able to introduce you to. And so the last mile problem in wireless and one of the reasons why wireless consumers have always rejected digital at a higher rate than other categories is they want that accountability of that service person that I contact that, okay, you're going to make this work, right? We're good, like you're sending me out with this iPhone work in the way, okay, good. Let's work on that. They want that relationship. And so that's why they troop into retail stores. And so having someone local who's an expert, who's available, yes, to let them know about the value proposition, but also to make sure that they get activated. And that person doesn't have to do all the work, but they will make sure it gets done. And it's a relationship. So -- but the marketing mix we're going to explore, it could be fascinating the kinds of things that we do to enable our hometown experts to really be able to make a difference in their communities and make sure that their communities know about T-Mobile.

Okay. The corollary to you having low teens share in 50 million homes is that you must have 40%-plus share in the remainder of the country, your sort of historical urban strength. Can you defend that share as cable and maybe eventually DISH come in and probably play pretty hard in those markets?

Absolutely. The way I think about it is we've gotten to a 40% share or whatever you call it, somewhere in the 30s, in a world where cable is already in the run rate. I mean they -- like I said, they came out much more successfully than I had predicted, but have run at a pretty consistent rate ever since then. And so they're in the run rate. And the way I look at it is we're offering in the future not just the best value and a great customer experience, but the best network as well. And we got here without the second part. And so I think we're going to be able to defend and maybe extend our lead in these markets because we have a far superior value proposition now. Remember, there are tens of millions of people that haven't switched to T-Mobile yet, because they like what we're saying, they'd love to save some money, they love -- they've heard how we treat customers. But they're just not sure we offer the best network. And for them, that's the most important thing. And those people are now up for grabs as they start to rapidly understand how far ahead we are on the network front.

The Sprint customer base has been migrating over. You've talked, I think, about half the traffic at Sprint is now on the T-Mobile network. Do these things also run together that the rural base is improving and the Sprint customers coming over? What's the point at which you're pretty much done? And what impact have you seen from Sprint customer churn over the last year you've been working on this as they've moved to the T-Mobile network?

Well, I'd like to get it done next year. And what we're finding is that as Sprint customers land on the destination new T-Mobile network, Net Promoter Scores double and churn falls. And so we're executing a playbook that is the same one we executed for T-Mobile, which is offer a great network experience, offer all the advantages and benefits of the Un-carrier, our innovative team of experts approach loving our customers and caring for them and watch them become more satisfied. And so the churn profile of our business is a real potential tailwind, because we're the only ones in Q1 that had improvements in churn, and that's for a reason. We're dragging around this higher churning Sprint business, but we have a formula that we're confident in as to how to satisfy them and retain them. And so you'll see that gradual improvement as we get them landed on the T-Mobile network and eventually onto the biller with the full Un-carrier stack, the right plans, taxes and fees included, get them to Netflix and the T-Mobile Tuesdays and the team of experts and all the stuff that T-Mobile customers love, and you're going to see the predictable result. Right now, the Magenta T-Mobile brand is the lowest churning brand in all of wireless. And there's a reason for that. They're starting to understand that they get to keep this value, but now they have the best network.

Is there a customer quality difference in there? Is it just the way they've been treated in their experience over time? Do they have different credit metrics or something like that?

The Sprint customers versus the T-Mobile customers?

Yes.

Not as different as you would think. But yes, there are some differences and you have a blend. Some Sprint customers have been with us for years, and they're just loyal to the Sprint brand and great payers, long-term postpaid people got involved in wireless years ago. Some of them a little higher ARPU, meaning they're more involved with our products. And then you have some of the customers that were acquired before the merger more recently that have a little bit of a mixed profile. And you blend it all together, it looks pretty good. I mean it's a good customer base of people that really like their -- what they're hearing as they get introduced to the new T-Mobile.

Okay. And we're coming toward the end. I wanted to hit quickly, you've talked about Magenta MAX, and I don't think it's gotten much discussion on your conference call so far. But that's a higher ARPU product. What's the movement there been so far? And what's driving those people upward?

Well, it's -- we're delighted. It's really a showcase about what you can do with the highest capacity 5G network. And one of the questions I've gotten for years as we planned this mid-band-centric 5G mobile Internet pure play is, "Okay. Well, Mike, how are you going to monetize 5G?" And I've always thought it was kind of a crazy question because 5G is just the next G, I mean we have to do it. Our capital profile is reasonably consistent over time. So monetization of it, it's the same game plan we've always had, which is grow our company, grow our share and move people up the experience curve with us. What Magenta MAX does is that last thing, it allows them to deepen their relationship with us. And it showcases what -- it's the only true unlimited plan in the industry. And there's a lot of people out there that really love that idea. And so I'm really excited. It's very -- it's really just the beginning. We have lots of other cool ideas in this space, too. And so far, the uptake on it has been very good and certainly is a potential tailwind on our ARPU trends over time. I think we had indicated in Q1's call that we expected the Q1 ARPU to be the low watermark for the year that we see an improving trend for the balance of the year so that we'll be within that 1% overall. And then we said at our Analyst Day, we see potential for our long-term trend of flat to down 1% to kind of turn and flatten out, and we see a potential there from 2023 and beyond as we get through the major parts of our integration, which is affecting all of this.

Okay. And running out of time, maybe we'll sort of finish where we started, which is the industry overall seems very strong and the consumer has money in their pocket. First quarter, we saw record industry phone adds. And I'm curious if you see any reason why that shouldn't continue for the rest of the year as well as where do you think these customers are coming from? You look at sort of the demographic base, it seems like it's getting harder to find where that incremental postpaid phone customer is going to come from.

Well, I can't speak broadly for the industry. But as it relates to T-Mobile, a couple of things. One is Q1 and beyond is, we think, very much affected by stimulus. And so that piece, our competitors, I think, talked about suddenly they were more competitive, but I think they also now understand, a lot of that was, actually and is, stimulus driven. But the second dynamic is very interesting, which is the reopening. And I'm personally very bullish on this. I think T-Mobile is a -- is one of the best positioned companies around the reopening because, again, our business is switching. And when they're switching in the industry, well, that's when we thrive. And there hasn't been. We've been able to lead the industry on postpaid phone and on service revenues, et cetera, in a muted switching environment over the last 12 months, 15 months. But going forward, we expect that muted switching environment to abate, and we're already starting to see that. And so as traffic reemerges and things start to get back to normal and people have a pent-up demand for that new phone, they've got a little cash in their pocket. It's a great time to be at T-Mobile. And so we're bullish on that.

Good. Well, it's a good place to drop. But Mike, thanks very much for your time. Nice to see you again.

Great to see you as always, Phil.

See you soon. Thanks, everybody.

Cheers.