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

All right. Good morning, everybody. It's my great pleasure to welcome T-Mobile. Peter and Neville, thank you for your time today. We look forward to the conversation. Before we get started, please note for important disclosures, see the Morgan Stanley Research Disclosure Website, www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So Peter, if I can start with you, the market reacted very positively to your earnings and to your guide. And I think they detected, you really felt encouraged about the progress on the Sprint integration and the ability to grow top line EBITDA, free cash flow. Perhaps just talk about what the key priorities for you are in 2022?

Absolutely. Well, let me start with the [ legalities ], right? So of course, I can make a number of forward-looking statements. So I just refer you to our SEC filings. The 2022 is going to be much of 2021 and continuing on the momentum that we've gotten in 2021, where we added record postpaid accounts and industry-leading postpaid net additions. And that, of course, translated into industry-leading service revenues and free cash flow that was up almost double year-over-year. And into '22, the priorities remain the same. First and foremost, it's really building the network and continuing on this unprecedented rollout to give us the durable advantage during the 5G era, and that's #1 and foremost. Two is, of course, continuing, as you said, on the Sprint integration. We're very encouraged by the trends we've got. 2022 is the big year for customer migration, getting the network shut down and managing the churn and starting to bring that down and really create the tailwinds for us and headwinds for the competition. So very excited about that. And then, of course, Magenta. The Magenta brand has just been on fire, and we'll get into that a little bit later. But stoking those distinct opportunities and areas of growth that we have, both across what we call smaller markets and rural areas, which is about 40% of the U.S. population as we categorize it. We've got enterprise and government and the continued traction that we're seeing there and of course, fixed wireless or high-speed Internet as we call it, where it's just fabulous what we saw in Q4. Just to think in 3 quarters since launching the product commercially, we were the #1 net adds in the broadband space in Q4. And 2022 will look bigger than 2021 did from that regard. So that's really the priorities we're focused on.

Okay. That's great. We certainly heard a lot about fixed wireless already at the conference. So we'll come back to that. I think one element of the guidance that people were encouraged by was your guidance that of the 5 million to 5.5 million postpaid adds, you saw half of them as being phones. And I think there's been this big concern in the marketplace about a deceleration after some really good growth last year. Help us understand what gives you the confidence to deliver on that?

Yes, absolutely. And over time, I think 2021 was definitely a large year for the industry. And over time, I'd expect that it would normalize more than what we saw in 2021, but it sort of doesn't matter for us because we're the ones who really have the distinct growth opportunities. And again, it begins with what Neville is doing on the network and what we're seeing on the Magenta brand. In Q4, we were #1 in terms of SOGA and also #1 for us as a company ever in terms of SOGA. So exiting with tremendous momentum, and that's across all of these growth opportunities that I spoke of in smaller markets and rural areas where really the network is only in about 1/3 of the space at the moment. We're already seeing 1/3 of our net account production coming out of there and really high-quality accounts. So very excited about continuing the growth there, and we'll talk a little bit more about how the network differentiates us in that area where we have a lot of growth opportunity, but we've already seen our market share grow from 13% to 15% as we exited. And remember, that's on a path to 20% in 2025, that's what underpinned our Analyst Day guidance. The other is enterprise. We've gained significant traction in enterprise and government. And again, everything I can say goes back to the network, but enterprises buy a lot differently than consumers. And they take out a couple of hundred phones and make sure that the network works for them, where they need it, how they need it. And you saw some big, big names choose T-Mobile. I'll take one example, Alaska Airlines. And we're very, very heavy in the airline space. And can you think about -- this is beyond just traditional postpaid phone. Certainly, phone is a big component of it, but it's all the other connectivity solutions that they need under [ WING ] connectivity, where traditional WiFi and other things just haven't served them well. And think about the airlines where talk about a mobility use case, you need this to work everywhere where you go. And they take out hundreds of phones, they tested us against the competition and they chose us as their sole provider. And so this is the kind of traction that we're gaining in enterprise. And we already exited Q4 with a win rate in enterprise and government that will get us to, again, our aspiration of hitting 20% share by the end of 2025. That's if we don't increase it anymore. So very excited there. And we just touched on high-speed Internet where to go in 3 quarters and be the #1 net ad producer is just fabulous for us. And as Neville continues to build the network, particularly as we get ultra capacity, the mid-band layer in smaller markets and rural areas, we're just opening up more and more capacity for high-speed Internet fixed wireless to get after. So that's really the distinction for us is that we have growth opportunities underpinned by the network that others just don't have.

Great. Well, Neville, that's a great pivot to you on the network side of things. I think we're all focused on POPs. I mean that's the easiest way to compare and contrast, but you make the point about spectrum depth and so forth. And I think one of the competitive kind of talking point is a sense that you still got LTE on the 2.5. And help us understand that migration. When do you get that whole band deployed for 5G and get the full benefits from that across the network? And obviously, your POP progression from the [indiscernible], I think, was the last number you gave us?

That's right. Yes. I mean I think [Technical Difficulty]. I mean it's almost 2 years since we combined Sprint and T-Mobile together. And I'd say to you and his team here that everything we said we can do in terms of this network [indiscernible] , we've done and we're ahead of our plan. And what's important in that one is delivering a powerful and compelling 5G coverage experience across the nation to delight our customers that they are [Technical Difficulty] goal and objective for us. And then secondarily, but incredibly important as we combine these networks and we migrate traffic, we're in a position to start decommissioning cell sites. And as Peter said, start cutting down [indiscernible] legacy network. And why is that important? Because it drives just massive synergies for this company. And so we're ahead on that plan, too. We'll touch on that a little bit later. And so great progress, 2 years of a pandemic. Nobody is going to tell you it's been tough, but I'm delighted with our progress and the measures we've taken to navigate and keep our machine running at a phenomenal pace. And I'd say this, I think we're the envy of our competition. There's no doubt. However, you look at competitive moves in terms of the spectrum marketplace, their desire to constantly try and chase our POP numbers, which is kind of the key headline goals we put out there to date. They are fervently trying to catch T-Mobile, which is way out in front in this 5G space. So I'm not going to provide updates on POPs today. Simon will do that when we get to earnings next time around. But we closed the year with 210 million people covered with our mid-band layer. And underneath of that -- underneath of that is our extended range of 600 megahertz low-band footprint, and that was at 310 million. And to put that into scale in terms of the leadership advantage we have, just on extended range, that geographic coverage is almost 5x that offered by Verizon on the DSS and low-band services. So when you look at the -- I'd love to talk about the breadth and then the depth to your question of these 5G services. And of course, we've not had to wait for spectrum. A big part of our combination with Sprint was leveraging this 2.5 gigahertz mid-band spectrum and deploying that at pace. And so as we go through the balance of this year, the intent is to have pretty much all of that spectrum dedicated to the 5G [indiscernible]. And we've made great progress on that as we move through '20 and '21. So the network is really [indiscernible] a lot. I'll give you [indiscernible] If you look at [indiscernible] 5G traffic and the growth on the T-Mobile network, we are very, very close to crossing 50% of our total traffic being 5G. And so if you went back a year ago, the number would probably have been close to [indiscernible] so if you ask about competition, I'd be intrigued by their responses on how much 5G traffic they have on their networks. But we are very close in a very short period of time through half of our traffic being 5G.

And about 1/3 of devices or so?

Over 40% on smartphone -- postpaid smartphone.

Yes. Great. You tweeted the other day your excitement at the upcoming 2.5 auction. So the FCC is scheduled for July. Help us understand the value of that to you specifically versus to others who might be looking for more spectrum because it's sort of an unusual kind of grouping of licenses?

Yes. I mean, obviously, we're looking at the auction. I think there's now a discussion of that happening maybe earlier this year than others had thought, which is a good thing. Bringing more spectrum to this marketplace is key as we've seen really inside the last calendar year, you've seen massive spectrum auctions, the largest in the U.S. history come forward. So for us, I mean obviously, just to be clear for folks, there are 2 types of 2.5 gigahertz spectrum. There's BRS and EBS, and BRS is a national layer for us. We own that. And then you get into the EBS licenses, which are leased. And there's a volume of those -- not -- those licenses will come up for auction midyear. It's primarily rural footprint, though it's been christened white space because it's a lot of white space on the map. So we obviously lease and we now own a large volume of EBS spectrum. But we'll be our usual selves. We'll be disciplined. We'll look where the value is, where the value exists for us. As Peter referenced, there are great opportunities in that space in many of those geographies for fixed wireless. So that's intriguing, but we'll see. I mean, I think there's a lot to learn over the next 3 to 4 months once the rules get finalized and then how we play.

Right. So the network is in a great position if the traffic is coming across. I think one of the things you talked about at the Analyst Day last year was the perception gap. And I was interested that you recently appointed Mike Katz as CMO. Can you just talk us through some of the changes you've made there at the sales and marketing side of things and what the drivers are?

Yes, absolutely. I mean really, it's just a continued evolution. I mean Mike Katz has done a tremendous job for us in enterprise and government space, T-Mobile for Business. And that's just going to continue on. Callie is a phenomenal leader. She was a phenomenal sales leader, many people don't know that as we went through the course of history and then took over customer care and brought an innovative model in the form of tax and that also permeates in business. So that will continue on and be with her in the business group. And Mike Katz is going to take on the larger CMO role, particularly as we do a lot of this expansion into smaller markets, rural area we have a completely differentiated 5G network in a time when 5G is becoming more and more important by the day, both the consumers and businesses. So really rehoning the focus in the CMO org and making sure that we have that brand differentiation continue based on what was built and continue the success. So it's really moving around tremendous leaders, some returning to their roots like Mike Katz, where he was in marketing and others taking on an expanded role. I couldn't be more happy with what we have happening there.

Right. You talked about the Sprint integration at the top. Help us understand, I guess, in 3 weeks, you shut down the CDMA network, that also impacts DISH. And I think you may have a new -- DISH was saying you've got a new relationship with them. Any color there would be great? And then as we go through the summer, the LTE. So it sounds like you feel pretty confident that the churn is now past its peak, but any update there would be great.

Yes, absolutely. And I'll let Neville touch on kind of the DCOM and all of that, but let me start with churn. And we're very confident now. What we said at earnings is we believe that Q4 was the peak in terms of the integration and churn. Remember, what underpinned again our Analyst Day guidance was that in the course of multiple years, what we would be able to do is close the churn gap from Sprint, which was churning at over 2% right before the merger to Magenta. And Q4 absolutely was the peak for us, and we're encouraged by a number of factors. And one of those is, as we see the cohort of customers who are really getting the T-Mobile experience and that means they have the network experience, the full network experience, again, is continuing to improve every single day. They have compatible device. So for some, that means a low-band compatible device, for others that's something different and they're off of the leasing construct that Sprint had and more on to our traditional device financing constructs, which have a path to ownership, of course we're seeing that cohort of customers churn at or below equivalent Magenta levels. And that cohort is growing by the day. So we're very confident. And again, the future casting that we did as part of earnings and Q4 was the high watermark for Sprint churn. Of course, we've got to get through a lot of decommissioning throughout the course of this year, but very confident in what we're seeing there. And before I hand it over to Neville on just CDMA and DCOM, on the DISH side, again, much capacity is being built on here that it makes logical sense for us to have wholesale partners that complement our product suite. And you saw us recently signed an agreement with Google, that's one of those. Of course, we're talking to many. And as DISH said at their earnings, we have reached a tentative agreement that's in front of the DOJ right now. So I can't speak through a lot of the details, but I'm very pleased with where we wound up. I think, settling and putting aside a lot of the disputes and being able to move forward in a very constructive way for a long-term relationship, of course, we have to wait for DOJ approval, and that's when we can give you some more specifics, but very pleased with where we are there. And Neville, do you want to touch on it?

Yes. I will touch on it quickly, Simon, I mean the DCOM process moves into -- obviously, we did DCOM-ed thousands of sites last year. But 2022 is the year where we kind of close out on all of that DCOM activity in it. It's in a peak in midyear.

Still that 80% of the Sprint sites that you originally gave us?

Yes, pretty much And there's a bunch of things we have to do in DCOM. We have to upgrade the sites that we're keeping from the Sprint portfolio. That work is already progressing well, backhaul. I'd say this, though. I mean, the thing is over the 2 years, we've spent a lot of time really understanding information and data about Sprint customer usage on the network though we didn't have access to [ free deal ] for all the good reasons, we all now. And so now we are able to, on a site-by-site basis, measure and quantify customer impact. At what point in time is the T-Mobile coverage and T-Mobile upgrade and the T-Mobile 5G coming to that area where we're DCOM-ing. So this is a very detailed and highly managed process on a site-by-site basis. But this year, there are tens of thousands of sites that we're in a position to DCOM. And that's always been a key underlying thesis on this deal. We still emerge from all of that DCOM activity with the largest network in the U.S. I mean we're going to have materially more macro cell sites than our competition, and that's always been, again, a key part of the thesis to create this density and capacity and capability that's so important with 5G.

And small cells to come?

And small cells, too. And we've always talked about a target range of in the 50,000. There's a lot of work to do to get some legacy small cells upgraded to 5G capability. That's in the plans, but I want to be clear. I mean, this plan is macro based. I mean those are the physics. We are not building 5G on the back of small cell millimeter wave sites. We're doing that where it makes sense. But that traffic, I was intrigued by the Verizon traffic they disclosed on their millimeter wave network last week, it's less than -- way less than 1% of the traffic we carry on our network. And for 33,000 site investment with fiber, that math don't work the way I look at it and the way we run our business. So this is a macro build with large volumes of macro sites, very, very deep mid-band spectrum holdings and all of the benefits on spectral efficiency in 5G that then generate huge capacity for us to go and drive all these growth vectors that Peter outlined.

Great. Well, let's dive into fixed wireless, if we can. Peter, you talked about '22 being a better year than '21. What sounds like from Verizon, they're doubling in Q1 what they did in Q4. And obviously, they have ramped a little bit later, and they've turned on C-band. So they're slightly different phase. But what have you learned so far you've got 600,000-plus as of year-end about the customers? Where are they coming from? Are they -- what's it doing to churn the profitability, et cetera?

Yes. Well, again, and the beauty of this model for us is that because of the massive capacity that's getting built, it's using fallow excess capacity. So tremendously high-margin customers and a really smart way to maximize the return on the network. So that's the first and foremost. The customer acquisition has been spectacular, and it's across the board. It certainly comes from cable territory. It comes from suburban fringe. We see rural. Of course, the rural opportunity will continue to grow, as Neville outlined, where we're going with the mid-band POPs perspective. The customers have been just -- it's phenomenal to see the NPS scores are up 3x over previous providers. We're seeing churn reduction on a quarter-to-quarter basis. This is really something that is also attracting new customers to T-Mobile. Over 40% of the customers are new to T-Mobile accounts and that provides a great opportunity for future cross-sell into postpaid phones. So very excited about what we've been delivering, and I think the runway ahead of us is just tremendous. I'm not ready to give you some stats in terms of guides, but 2022 will be a bigger year than 2021 on this front. No doubt.

I'm guessing Neville will have something to do with how many you add in terms of -- I think you've been very careful about just not flooding the zone with too many subscribers in a particular site. And so perhaps just go through the calculus there in terms of releasing homes and your ability to scale that up to more neighborhoods as time goes on?

There's multiple factors to talk about in there. But I'd say this very -- obviously, we're hugely excited about what's happening. And just to echo Peter's comments, I mean, everybody should know, there is huge demand for this product. There are a lot of very unsatisfied, dissatisfied folks.

And the router supply is good now, is it?

Router supply is good. We're diversifying that element of supply chain. So that piece is good, but huge demand. We win in this business, Simon, because of the capacity that we can generate on this network. And of course, that's some -- we talked about when we were putting these 2 businesses together, if you -- I know you know the stat, but folks may have forgotten it. If you look at standalone T-Mobile and the capacity that it could generate over a 5-year period with its assets, its network, its spectrum and you compare that to what we can now do with T-Mobile and Sprint combined, that multiple is 14, 1-4, 14x. So we've never -- no wireless company has gone through a migration where you've not just increased your capacity by an order of magnitude at 14x. And of course, what's happening, I never touched on our mid-band rollout is going from 210 where we were at the end of last year. We're well on our way to 260 million people covered by the end of this year and 300 million by the end of '23. Our competition has no announced plans to get even closer to that.

The C-band [ and 3 DoD ]spectrum to come?

C-band DoD to come. But in that last, let's call it, 90 million POP, Simon, that's a great opportunity for us as we go in with mid-band to light up massive capacity. The economics are the same on these sites, [ 2.5 ] radio can support up to 200 megahertz of bandwidth. So we can deploy that same radio in the core of Manhattan or in rural Kansas for the same economics effectively. And what happens there, you just net out the wireless traffic and growth and what's left is massive freeboard for other use. 5G growth cases in home broadband, whatever it might be. And so that never existed in an LTE domain. Every carry was just trying to keep up with wireless -- traditional wireless capacity. And so it's important as we -- our plans are to rapidly expand that mid-band footprint into small markets, rural areas and in a very material way. And I think that's going to be super exciting for the team. Peter referenced 40% of the U.S. is small markets, rural areas under that definition. I don't want people to think that's like where nobody lives. It's huge. And we're coming into town with not a 2-lane free way. This is a 10-lane highway we're laying down with massive 5G capacity. It's already happening. Where it's happening, folks' heads just spin off their axis when they compare what they were paying and getting delivered to in those environments with what we now bring.

That sounds like SMB is pretty excited about it as well, right?

Absolutely.

Great. We talked a little bit about supply chain there, but any updates on the macro -- your margin EBITDA growth is strong this year. But what are you seeing on the inflationary side and any kind of things to -- that you're particularly monitoring?

Yes. Well, of course, we continue to monitor supply chain and inflation. But I think the beauty of this business is a lot of the significant costs are embedded in long-term contracts. And Neville was the first mover in terms of the network rollout for 5G, secured significant long-term contracts with the major providers there. We've had tremendous success in the backhaul space as another example, securing 10-gig circuits and for tremendous pricing, high quality, and it's a very competitive space tower agreements you've seen. At this point, we've reached agreement with both Crown Castle and American Tower. So we have really fixed cost basis. Of course, we've seen a little bit of impact here and there on labor and other things, but nothing significant because of the long-term nature of how we've secured these costs.

And how should we think about the low-end consumer with the gas prices spiking here and food and energy inflation? What's your perspective? We've seen industry churn out really great levels even as we've come out of COVID. Any color there on how to [indiscernible] the industry for that?

Tremendously well. I mean when you think about our brand structure, whether it be postpaid or metro and prepaid, where we're one of the largest prepaid providers with tremendous churn and ARPU profiles, providing tremendous value there, but also on the postpaid space. And one of the things I'm most excited about is this opportunity in smaller markets of rural areas. And as you think about consumers and they have to decide, well, where am I going to put my share of wallet? Gas is becoming more expensive. Other things are becoming more expensive. It happens to coincide with one significant growth opportunity for us. We've been historically underpenetrated there. We just talked about how we went from 13% to 15% market share. You're going to come into areas where there hasn't been competition in many cases, right? One of the incumbents, maybe one, maybe both high prices. And by the way, they have no announced plans to go bring mid-band experiences into those areas. So we're going into those areas where the value proposition typically is below theirs because of how we've priced. And two, with a differentiated product, just as 5G is becoming more important. So you're going to be left with a choice. You've got your high gas prices here. And now what do I want my mobile service to look like? Why wouldn't I get the best value and a completely differentiated experience in these places? So it's tremendously exciting for us. Again, that is our job. That's always been the end-carrier philosophy bring the best value. What you get for what you pay, and it's just coming at the right time for us and particularly these growth opportunities for us.

Great. I want to turn to free cash flow, maybe just starting with you, Neville. The guidance has the network integration being complete, the CapEx starts to fall away next year. And it was actually we had Verizon here yesterday talking about that you just don't see anything to really drive CapEx for the next few years from their spectrum. They have guided to this long-term capital intensity at about 12% or so. So do you have the same perspective that once we build these networks that the industry can really move to this new lower plane, which is as low as we've seen in a long, long time?

Yes. I think for us, I mean, for the team here, obviously, we hit a peak in activity this year. And it seems we are going from 210 to 260 doesn't sound like a big increment, but that's another 3x in geographic expansion. So we did 3x this year -- this last year. We have to do 3x again to get to that 260. So a lot of sites coming in, a lot of build, a lot of retain and integration support. So a peak for us. So when we look at '23 and '24, I mean much of what we're doing this year is a pull forward from out the year. So we didn't change our CapEx envelope. Overall, we just pulled forward into '22 to one advantage the position we're in. I mean the other guys are trying to start their engines right on getting these deployment things moving. AT&T has really not even started Simon yet. I mean they're waiting for new radio that's DOD-supported, waiting for handsets. More news yesterday, handsets coming from iPhone. No DoD spectrum support. It's hard being in their position. So for AT&T, I think all that work is ahead. I mean when we talk about industry, I mean, '22 is just starting blocks for them. So '23, '24, '25, they're going to be seeing peaks. And I think for Verizon, I referenced $300 million as our target by the end of '23. Verizon said $250 million, I think, by the end of '24. So there's this conscious decision, I think, in our competition much to what Peter was just saying to not bring this mid-band capability and capacity into more parts of the U.S. That seems to be a very conscious decision, which, I think, is going to be reversed by those guys at some point in time. They will have to.

We saw that a bit with LTE as well?

Right. So I think for us, we are absolutely breaking the back of our deployment this year. And so -- but I look at the other guys and our leadership position on deployment, on performance, whatever it might be, Simon, I think there's a lot of catch-up the other guys have to do yet. So I see them in a different position.

Peter, you get the fun job of deciding what to do with the free cash flow. So what are the gating items to returning capital to shareholders?

Well, yes. And that is an exciting thing to be part of. I mean the free cash flow generation of the business, we talked about how we saw '20 to '21 and what we just guided to is a 30% increase into 2022. And one of the things that's differentiated is, you know us and how we operate as a management team and how we put guidance out there that we intend to meet or achieve and always have. And that's how we build our plans, that's how we communicate and the free cash flow generation potential, which is already starting to get unlocked this tremendous. So we're still very confident about that potential of up to $60 billion from '23 to '25, which we always said, there's a number of factors that we'll look at in terms of the timing of any potential shareholder returns. One of those, of course, is how are we doing against that plan? And are we potentially overachieving against that plan? The other is what there are other opportunities that could be higher from a shareholder value creation perspective, such as spectrum purchases and we talked about the white space auction. So very confident about it. Of course, those are all the factors that we'll consider in terms of timing.

And then the balance sheet as well on the [indiscernible] ?

Absolutely. We're absolutely committed to achieving Corp Family IG Rating and staying in that mid-2x core leverage perspective. And we have absolutely a path to get there. And the free cash flow generation of this business is just tremendous.

Right. Well, unfortunately, we're out of time. Peter, Neville, thank you so much for your time today. Great discussion.

Thank you.

Thanks, Simon.