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

Welcome, everyone, to the next session of the 2021 Barclays Global TMT Conference. I'm Kannan Venkateshwar, Telecom, Cable and Media Analyst here at Barclays. I'm delighted to have with me today, Peter Osvaldik, Chief Financial Officer at T-Mobile. Peter, welcome to the conference. Great to have you here with us.

Well, thanks for having us over. We really enjoy participating. Always a great conference.

Thank you. And before we start off with the questions, maybe you want to get the safe harbor out of the way, Peter?

Oh, sure. Of course. Let me do the formal lawyer talk. So before we jump in, of course, I may make some forward-looking statements, which may involve a number of risks and uncertainties, so we just guide you to look at all of our filings. And of course, given that it's the quiet period, I will not be able to speak about Auction 110. That's it.

Great. It's all downhill from here. Maybe one of the important topics to address upfront is, of course, the convergence discussion between wireless and cable. I mean, it's affecting both sides from an industry structure perspective, and the valuation that investors are starting to assign. And if you look at Europe, fully converged markets tend to have low return on capital to some extent. But your bottom line, to some extent, and free cash flow is independent of top line. So if you could just help us provide your perspective on how you see this evolution impacting your strategy going forward in terms of convergence? And how do you expect unit versus price to drive your top line growth dynamics on the consumer side?

Yes. Well, absolutely. And it's exactly us executing on our strategy that we've laid out. There's really no change for us. If you think about the story of T-Mobile pre the merger, all of that success was really brought on without a network advantage, right, and primarily in the top markets. And now that you see the transition from 4G to 5G and post merger, with the amount of network spectrum and the rollout that's most important because you can have the spectrum, but if you don't actually roll it out, you're not providing the goodness to consumers. The amount of spectrum that we're putting to work out there just creates a tremendous amount of capacity for us. So I hear and I've heard a lot about what's convergence here? What about cable? What about wireless? I keep going back to what cable has been in this market for quite a bit of time, and I think we've publicly said before, I think they had gained more traction and had more early success in making some inroads than anybody gave them credit for. And then they settled, right? And for the last couple of years, they've settled right in that 10% of SOGA market share, a little bit less in Q3, but that's really where they're hovering. And so in terms of our strategy, they're in the run rates, they've been competitive. For us, it's heads down on the differentiation that we have as T-Mobile, right? And the ability to roll out this network, which is just going at a tremendous pace. You heard us obviously announced earlier in December that we've already reached the 200 million covered POPs with ultra capacity, and on our way to 250 million by the end of next year and 300 million covered POPs with 200 megahertz of mid-band spectrum by the end of 2023, which just brings such a tremendous amount of opportunity for us. And it happens to coincide with the very large growth opportunities, right? And I know we'll get into those a little bit later, smaller markets, rural areas, our fixed broadband offering, what we intend to continue doing in enterprise and government, where we've enjoyed great success since the merger. As well as the ability to defend because we'll have the best value proposition with the best 5G network, where our core strength has been up until now. So I think the strategy for us is to continue executing exactly the way we've been going. And you know when you think about cable and convergence, the issue is they don't have owner's economics on the wireless side. And they'll be riding on Verizon's 5G network, so be it called, which is tremendously undifferentiated relative to where we are already from a mid-band perspective, and of course, where we're going. So very, very excited about the prospects, and we continue to execute against those.

That's great. Maybe we could talk about some of these growth opportunities that you just touched on briefly. So if you look at your top line opportunities, I mean, you have fixed wireless, like you mentioned, you have rural enterprise, small and medium-sized businesses, and the churn opportunity at Sprint and of course, the Magenta MAX upgrade opportunity. So when you put all these together, your top line growth framework definitely has more levers than many others in the industry have. But despite this, when we look at your guidance framework, it doesn't look very different on the top line growth side versus your peers. So is this conservativeness? I mean you do tend to guide conservatively. But are there other components that we need to consider with respect to long-term growth? I mean, what's baked into these numbers?

Yes. And I think you're right. When you step back and look at the relative Analyst Days that were presented, the way we always frame it and the way we always plan to execute isn't with inclusive of unknown use cases. You saw some of the competitors. What was included in their top line growth aspirations and guides was inclusive of things like 5G use cases that don't exist yet, mobile edge compute, that's not out in force, right, network slicing, private networks, et cetera. And so the way we always approach providing guidance is it's a balanced mix. And are there upside opportunities to that guidance that we laid out at Analyst Day? There are absolutely upside opportunities if we go execute against all of these growth opportunities that we have, whether it's smaller markets and rural areas where the goal was to get to a 20% market share. And we'll talk about why that's perhaps something that we could aspire to go beyond during this horizon of what we gave at Analyst Day. And the primary reason there is the network. And as I mentioned, we're going to go to 300 million covered POPs with 200 megahertz of depth of mid-band spectrum. And we just surpassed 200 million and the 200 million to 300 million delta is 5x the geographic land mass. That's a lot of build-out to do. So when you look 2 years ahead of us, the competition has no announced plans to get beyond 200 million covered POPs with mid-band. And that 100 million covered POPs that is that 5x geographic area, just happens to correspond with smaller markets and rural areas as we define it, which is 40% of the U.S. population, where we have a low to mid-single teens or low to mid-teen digit share at the moment, which was really on the back of the national advertising that we have done, people that knew us. But now that you come into each of those areas as you build out this network, what you're going to have is such a tremendous competitive advantage of you have a mid-band multi-hundred gigabit or megabit speed network running against what is essentially LTE. And so as you go into these places, you bring the network, we're starting to bring the distribution following, of course, the network build as we always do at a time when 5G is becoming more and more relevant to consumers and a bigger differentiator, we see a tremendous amount of opportunity and room to run there. You see enterprise and government, that's another one where we're a single-digit share. And again, had aspirations to get to 20% in the course of Analyst Day. Well, that's another area where we're seeing tremendous success. Certainly, in the government space, you see us done tremendous things over the course of the pandemic and our ability to respond quickly in the capacity that this network is generating and you're already starting to see. But the interesting thing about enterprises is they test. They test then they learn. And that's how they make buying decisions. And you saw us announce a partnership with Alaska Airlines, where they're moving all of their lines, not just phone, but all of those other 5G use cases, baggage handling everything to be on the T-Mobile network after a long series of torture tests. And so now we work with the majority of all the major airlines in the U.S., think about that. All the people that are moving around. They have needs all throughout the country, and it's not just phone, it's underweighing, it's baggage handling, it's everything. After torture test, they pick T-Mobile in the 5G network that we're bringing. So there's another opportunity area. And of course, high-speed Internet, you talked about that. That's something that we just commercially launched in Q2 of this year. And yet we also announced that we just surpassed our year-end target of 500,000 net adds. And so a lot of room to run in there. And of course, that network that's already built in the amount of spectrum that we're putting to work. Because remember, we're already putting almost 100 megahertz of spectrum to work in that 200 million covered POPs. Well, that's the amount that AT&T and Verizon will get of C-band combined until you get to the end of 2023. So that with the value proposition that T-Mobile brings allows us to defend the great market share that we've built to date in some of the more dense urban to top 25, 50 markets. So I think there's a lot of room for us to run. And of course, all those edge cases or the other things that are coming with 5G that will come as the ecosystems develop, those are all upsides to the plan because we didn't include it in the plan that we guided. So very, very excited about the opportunity to run.

Got it. That's great. I mean -- and just given all these new sources of growth, I guess, when we look at the look at your growth relative to the setup for next year for the industry as a whole. I mean 2021 has been highly unusual in terms of trends. We are seeing 9 million subs this year. What do you think the normal cadence of growth could be for the industry as a whole, especially when some of these macro tailwinds we are seeing this year start fading? And then within that, when you look at your share of gross additions, is that something that you try to manage the business towards? Is that something that we should focus on as investors in terms of goalpost?

Yes. Well, from an overall industry perspective, you're right. 2021 has certainly shown to be some outsized growth from a net adds perspective. And it's hard to dissect all of it because not everybody discloses everything that we do. So I think it's important to look at the underlying trends of what's happening. And we certainly -- Q3 wasn't a phenomenal quarter for us. And a lot of our growth areas, we already said in smaller markets and rural areas, the third new accounts came from there. We had another record quarter from enterprise and government. And we had, from a net account addition perspective, which is probably a great way to look at it, lines, it's hard to know exactly what's happening with all of the lines, but net new account relationships, true new T-Mobile accounts, that was the highest Q3 we've had in 7 years. And that's with dragging around the Sprint churn that I know you want to get to a little bit later and talk about. So we would see a tremendous amount of great momentum on that Magenta brand. That will be offset for this period of integration to some degree with the Sprint trend that was always planned and that we're accelerating because we see so much goodness coming from that as we get to the end of this integration journey. But I feel, from an industry perspective, things will, at some point, normalize a little bit below 2021. So the question then becomes, Who is best positioned to continue to achieve growth, real profitable growth? Right? New account additions, ARPA expansion. And for all the reasons that I just laid out in terms of what the network that we're building brings us from a value proposition and what tremendous opportunities we have from a growth potential because we're underpenetrated that the others don't. That's where we're focused on, right? I think there's a lot of room to run for T-Mobile. We approach every quarter as we always have, right? We set guidance out there. And our goal internally is to always drive profitable growth. It's not chasing every end net add, it's making sure that we deliver the growth in the company in a profitable way that drives enterprise value creation for shareholders. So yes, I see it normalizing at some point, but I'm very optimistic about we have the product set to continue to deliver profitable growth.

And maybe, I mean, we can touch on the Sprint migration process a little bit. It looks like it's getting squeezed into a tighter time frame, which has caused a higher amount of churn right now, and may keep churn higher through '22. But at the same time, I think last quarter, you gave this number of 1.2 million net adds adjusted for this impact. So as we look at the second half of next year, once your migration is closer to getting them, is there a reason why we shouldn't use this 1.2 million as a benchmark for some kind of growth that you want to aspire towards?

Yes. Well, yes, that was a very exciting number. And we wanted to pull apart exactly what's happening because again, the Magenta brand, even before we reach all of these underpenetrated segments with the network buildout that's going rapidly, is already performing tremendously well. I think Mike, earlier this week, talked a little bit about how tremendous of a response on the Magenta brand we've seen from MPI on the iPhone as well as Black Friday, a lot of great things happening there. And then when we looked at Sprint, when we laid out Analyst Day, remember, we took on a merger with a base that was churning at over 2% in that last kind of reported quarter before we took them on. And the goal underpinning what we put out there at Analyst Day was to cut the gap between T-Mobile and Sprint by half, right? Not even achieving Magenta levels of churn, which we're very, very excited about how that's developing. And so as we continue down this path with the bill that's ahead of schedule, and we just said this is the right time to accelerate through integration as much as possible because we are dragging around that higher churning Sprint base. And the quicker we get through that and bring everybody over to the T-Mobile value proposition, the more that, number one, becomes a tailwind to us, to your exact point, right? And one, becomes a headwind to growth that right now because of that higher churning base is going to some of the competition. So as we looked at it, and because of all the programs that we've put in place today, and I said, absolutely, it's the right thing to do to accelerate this integration as much as possible. And we think that actually, on an absolute basis, we'll have fewer disconnects than what we planned for underpinning those Analyst Day guidance, but it's going to be compressed into a shorter period of time. And as we think about the journey, it certainly begins with the network, right? So you've seen us build the network. We talked and gave some of the stats around 53% of Sprint customers are now originating on the T-Mobile network. We're handling 90% of the traffic, but that's going to continue on. And the goal and the acceleration is to get all of the traffic over to the T-Mobile anchor network, which continues to get built, of course, by June 30 or mid next year. So that's one step in the journey and a very, very important step is to get everybody over on to the Magenta network and the traffic, allows all the decommissioning the synergy capture. And then there's other elements of the journey that are ongoing that we're very hyper focused on as well. One of those is rate time migration. So moving customers on to their target rate plans because as we design this merger, we were able to do something that we hadn't been able to do before, and that's disconnect network traffic migration from billing migration from brand migration. And the ultimate goal is let's get everybody with the network on to Magenta with the handsets that they need, with the destination rate plans that they'll be on. And then the actual billing conversion will happen seamlessly for the customer, and that will happen after network decommissioning is done. For the most part, we'll be into it quite heavily by mid-next year. So we're going through that process now. The network is getting decommissioned. You see us very hyperactive in ensuring that we're getting the right handsets to customers and getting them out of some of the painful constructs like leasing, and we're doing a tremendous job there. In fact, I believe we'll probably wind up on the lower end of our guidance range for lease revenues. We continue to bring customers over to the T-Mobile EIP constructs and get them into compatible handsets. So that's a tremendous focus point over the course of next year as well. And then, of course, you have the remainder of the rate plan migrations, which will happen to get people ready and groomed and then delivery of the rest of the value proposition, T-Mobile TEX, Team of Experts, the award-winning customer service model that is being rolled out as well. So it's not that we get to mid next year, the decommissioning of the network is done, and there's a cliff. It's going to be a journey. I suspect to be a declining journey in terms of the impact of Sprint throughout the course of next year, and that's why we're doing it. It will be lower disconnects in our current view now than what we laid out at Analyst Day. But again, accelerated. And for what we're seeing in terms of the cohorts of customers that are coming over to Magenta in full, that's -- and we're in the beginning journeys of that, but they have the entire value proposition, the compatible handsets, Team of Experts, network, they are churning at levels very similar to pure Magenta customers. So that's what gives us the confidence to go after this even quicker and we're very excited about getting through this next year.

Got it. And in terms of the churn cadence itself, you mentioned there won't be a cliff, and it will be more of a gradual process as we go through this next year. But one of the difficult parts of integrations in the industry tends to be the billing system migration, and that's more towards the end of next year. So as we think about it, I mean, is it fair to think about the cadence from a churn perspective remaining elevated and potentially even picking up in the second half? Or should we see a gradual moderation irrespective of the billing system migration?

Yes. Well, that's the beauty of what we were able to achieve because, yes, you're right, the billing system migration has been so painful in other integrations. And that's why we disconnected it, and that's why the work is get the traffic on the T-Mobile network, get those rate plans on the Sprint biller but get customers into the target rate plans that then will convert effectively in a way that's very seamless to the customer. The goal isn't here's your ending bill and here's a new bill and here's confusion and all of that. No, that's going to be seamless to you. So I think the largest elements of how to decrease the churn are going to be the network, as we said, and get that through and done by the middle of next year. Then all the focus around ensuring that the compatible handsets are in the base and you're on those target rate plans. So that, that actual billing conversion process itself on the tail end, that's not meant to be the highest impacting thing. And that will go likely into -- a little into 2023 as well, right? But that's not to us going to be the largest churn driver after we've delivered all these other components throughout the course of '22.

Got it. And one that -- looking at some of the stuff you've done near term with respect to promotions or how you approached the competitive set recently, you require an upgrade to Magenta MAX for the handset promotions, unlike some of your peers, of course. And when you think about it, it feels like your network costs are coming down because of the pace at which you're deploying your spectrum. At the same time, you also have synergies that you can invest back into the business as you go into next year. And so now, on the contrary, I mean, when I think about the way you guys are managing promotions, there seems to be this optimization for not just volumes, but also EBITDA relatively early into the cycle. So despite having some of these cost levers, it looks like EBITDA is a bigger part of your thought process despite the merger being in an early phase. Could you help us understand, first of all, is that the right way to think about how you're approaching the market? And secondly, why not take this opportunity and use some of these levers to push unit growth a lot more aggressively?

Well, as I've said, it's really us continuing to execute on the strategy of this management team, which is it's not growth at all costs, right? It's the real growth, profitable growth that's going to translate into what is the real value driver for shareholder value creation in our minds, which is free cash flow. And when you look at the course of the plan that we put out there, we'll have the highest conversion of service revenue into free cash flow in this industry. And that is ultimately how you create value for shareholders, delivering the cash. When we look at each independent quarter, we have internal goals, of these, are how many net additions and account additions, the real account additions that we want relationships that we're establishing that will grow over time with increased ARPAs, you add, whether it's more phones or a lot of the exciting nonphone things that are already here and coming. And so the way we approach it is always from a profitability perspective. Yes, we can always go chase another net add in every single quarter, but that's not the way we've ever approached it since this merger started because it's really diligent, balanced growth, and we're delivering growth. While dragging around the Sprint churn, the highest churn in the industry, we're still delivering the kind of growth that we are, while also delivering the highest EBITDA and free cash flow growth and the CAGR that we put out there from a free cash flow perspective to 2024 is mid-40s, tremendously exciting. So we think that's the right way to approach it. Not go depress your margins to try to drive growth at all costs. And look, we have, again, the reason we're able to do that and why we're so excited about getting through the integration so quickly and why the Magenta brand is doing what it's doing is because we have a network that is from a 5G perspective, as the dawn of 5G is here, and is already here from a killer app perspective from the phone and becoming more and more relevant to consumers. We have a complete advantage and will continue to be years ahead in all of the public deployments that we've put out there, as targets versus AT&T and Verizon. So as you get people onto these plans like Magenta MAX, they see the power of what 5G really can be in a T-Mobile network, you get engagement. You get -- that we talked about some of the data usage that we're seeing, 35 gigs a month. But that translates into engagement, a lot more engagement with video, TikTok, all sorts of things that shows you the power of the network. While others in the industry are spending a lot of money and maybe even on lower rate plans because why would I try to sell you a higher rate plan, I don't really have a 5G network to compete with T-Mobile. So seed great 5G handsets into the hands of what I would call our future potential customers because of the network and the experience that they can have with that handset is here at T-Mobile. So that's how we approach every single one and why we believe that's the right way to approach it and let the network speak for itself, and you see the trends that we're seeing underneath it.

Got it. So I guess when we think about your growth algorithm, it's not completely SOGA driven or a share of net add driven. I mean, that's part of the equation, but you're really not optimizing for that, just looking at the next few years. And so from a trend line perspective, when we think about how to model your customers or subscriber trends over time, it's not SOGA that it's a benchmark. It's basically a penetration of these new segments, which may lead to SOGA, but that's not what we're optimizing for.

Yes. But we have, just to be clear, we have very much an aspiration to continue to drive profitable growth into this company. And we have all the tools and opportunities that others don't to do it. We just do it very rationally, right? And to drive, not only the tremendous growth and you saw what we did in Q3, as well as the quarters before, but to also drive profitability along with it and that free cash flow unlock.

Sounds good. On fixed wireless, obviously, you're already more than your 500,000 goal for this year and it looks like you're getting a lot of success versus cable companies. And it's still relatively early here. And so maybe if you could help us understand your go-to-market strategy here. Because for the most part, cable can match and exceed E1 speed. And so -- and then when -- from a network perspective, there is an ability, because of the amount of spectrum you're deploying, your marginal cost, because you're using excess capacity, can be pretty low. So when you look at your go-to-market strategy, is this an opportunity for you to maybe optimize price further? I mean you took down price recently by a small amount. But is there an opportunity to maybe take advantage of this excess capacity and price it better to drive more volumes? Or is this something that you're going to gradually grow cadence off in the coming quarters?

Yes. Well, it is such an exciting opportunity and exactly for the reasons you stated. Unlike other -- whether it's fiber builds out there and other things that you see that have to achieve mid-30s, mid-40s percent penetration for breakeven, you've got effectively a product here where we're building out the wireless network already to support mobile wireless plan. And that means the marginal cost with excess capacity, which exists in a lot of places already and will exist in even more places as that build continues. And Neville and his team do the great work that they're doing, is effectively nothing, right? Yes, of course, there's some sales cost and some incremental servicing costs, but you're driving a lot of great -- even new accounts into the business. And it's not just in cable territory. Of course, it's in cable, and it's exciting because you see customers coming over, NPS scores are tremendously up relative to their previous provider. You see Readers Choice Awards in PC Mag, where we won that recently. We didn't get the very top, that would be like Google Fiber, but above the cable companies. right? And so there's so much excitement. And then you have a lot of areas where this wireless network is going to provide us the ability to deliver fixed broadband where cable even isn't currently, right? So it's such a lot of opportunity in different demographics, different geographies because the network build is so broad-based that we feel very comfortable about the 7 million to 8 million target by the end of 2025, which is still mid-single digits from a total household penetration. So what we're seeing in terms of -- again, we launched it in Q2, already surpassed our year-end goal of 500,000. The customer response makes us very convicted that everything that we're doing to date is the right way to go approach the growth in this business.

I think we had just 1 minute left, but I have to ask you the mandatory question on capital returns. Now one of the biggest stories, of course, is your cash flow growth in the coming years. And it's a great part of the story. I mean you also have operating leverage from synergies kicking in. And you've framed this as a $60 billion return of capital bounded within your leverage framework of course. So given the mid-20 service margins that Mike has talked about -- cash service margins that Mike has talked about for the business in '24 and low cost of debt, why not keep your leverage slightly elevated and take advantage of the disconnect in the market right now on the stock price?

Yes. Well, it's -- I always love hearing those numbers, right? And what this plan, which is the plan that you just told me is so great, but there's even upside opportunities to achieving this plan, right? Whether it's growth or whether it's getting through the Sprint integration and reducing that churn even faster. It's so tremendously exciting and why we approach every quarter the way we do because that free cash flow unlock is what drives the ability to do shareholder returns. And right now, the focus, as you would expect from us is build the network, that's the product differentiator that allows potentially even more outsized growth than what we laid out there, all the opportunities we talked about and get through integration, right, and accelerate that integration because of the goodness that we see on those Sprint customers coming over. So that's the focus and the framework right now. And of course, in the context of that being the primary focus as we see the plan developing and if we're able to outachieve the plan that we've laid out for ourselves, we'll certainly talk about what's the right timing and consider other things such as share price and leverage and cost of capital. But it's such a tremendous unlock. It's a very exciting time. And to your point, it was only '23 through '25. This machine keeps delivering after '25 as well. And so that's the promise, and that's what we're hyper focused on providing for shareholders and why we're so differentiated in this industry.

Got it. That's great. On that note, Peter, that's all we have time for, but thanks so much for joining us this evening. It was great to have you.

Thank you. Thank you for having us, as always. Appreciate it very much.