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

Good morning, everybody. Tim Horan, the cloud and communications analyst here at Oppenheimer. My pleasure to host T-Mobile's CFO, Peter Osvaldik. Peter has had a very, very busy morning, but he has kept his commitment, which we greatly appreciate. But I think he's about to write a $3.5 billion or $3.6 billion cheque or so for some spectrum. So Peter, thank you very much for attending and not canceling on us, and love to be able to write those sized cheques myself, but that must be kind of fun.

Can you talk about what spectrum you're buying here and maybe why and what's it mean for the company?

Yes, absolutely. And such a pleasure to always join you here, Tim, for this conference, hoping in person maybe next year, looking forward to that. I mean just before I start, let me give the typical disclaimers. I may speak about forward-looking statements subject to risks and uncertainties and just refer everybody to our 10-K and risk factors. Similarly, obviously, probably refer to non-GAAP measures and refer you to reconciliations there. And we're in the middle of Auction 108, so I can't comment on that. So yes, our announcement this morning really recited around the purchase of 600 megahertz spectrum from Columbia Capital. And this was a spectrum portfolio that we have been leasing at a very small rate of dollars and the lease was coming up. And so it has presented an opportunity for us to purchase the spectrum. And what we're buying and it's $3.5 billion. And yes, that's a large cheque to write definitely. But we're buying a set of licenses that we've been in use through the lease. It covers about a 108 million POPs critically large cities for us. You've got the Bostons, the LAs, the Chicagos of the world, and actually covers 45% of our postpaid base. So we're very excited about it. The spectrum ranges from 10 to 30 megahertz depending on the market. But you should continue to see us as we've played in the past, which is be very opportunistic disciplined and strategic with what spectrum purchases we're making. And this 600 portfolio, as you know, we're very differentiated from a 5G perspective. And the low-band layer definitely creates a portion of that. We're the only ones with a low-band 5G dedicated network, now covering 320 million POPs with extended range 5G. So you see us utilize this for that versus the competition that's doing more DSS. And also, we're doing a lot of carrier ag with the mid-band layer to enhance the coverage. And so that's another strategic advantage of using 600 in that space as well. We couldn't be more pleased with this. In terms of timing of payment, though, what's going to happen is you're going to go through the typical FCC approval process and then our payment is due after that. And so likely to happen in that mid- to late 2023 time frame. So again, no immediate cash impacts from it really strategic for us in terms of continuing our 5G network advantage and servicing our customers the right way. So a very exciting day for us in terms of being able to purchase that.

And can you just talk about how much you pay per megahertz POP and compared to what you paid historically? And are there different things you can do with the network now that you own it versus what you were doing from a lease perspective?

Yes. I mean, from -- if you look at historically and maybe what the 600 auction back in the day brought, certainly, this is a little bit of a premium to that. As you'd expect, I mean, spectrum values have gone up, use has just gone up our ability to utilize it in a different way in the 5G world is definitely there. And I'm sure we would have bought a lot more of it, had we had the opportunity in the mean back during the 600 auction, but we're very excited now to be able to add to our strategic holdings with us. In terms of utilization of it, no, I mean, we've been using the 600 in all of our 5G technologies, just allows us now to continue it, own it and continue providing that leadership experience to our customers and our future customers.

And do you have an exact average of what the megahertz was for POP?

I don't. I don't -- just a -- it's again, $3.5 billion, 17 PEAs and ranges from 10 to 30 megahertz in there. So...

Great. Great, right. So switching gears, maybe a little bit more to -- you've done a great job continuing to take market share here. Can you talk a little bit about why you think you're gaining share? I personally just help people when the price is right and the network is great. So -- but I know oversimplifying things, what do you think is the main reason for the share gains continuing?

Well, I think you've simplified it, but it's exactly right for both consumers and businesses. our ability in the combined company with what we're doing from a network deployment perspective, which is really completely differentiated from a 5G perspective. And now also begin to be differentiated from an overall network perspective. So we're translating that 5G leadership into overall network leadership, and you see a number of third parties recognize that. But it is -- you're creating a different opportunity for customers and enterprises and SMB than they've had in the past, where you've always like historically had to make a trade-off between the price you pay and the network that you get. And we're completely busting through that barrier as some carriers always do and really getting rid for customers that age-old trade-off and now you can get the best value and the best network. And you see that resonating in the growth that we're seeing and it's growth across all of the segments of opportunity that we've highlighted for you. So I think you're not really oversimplifying it because that's what consumers are looking for, right? They want a quality product and they wanted a great value and certainly in these times, more so than probably in the last few years. So that's really it, Tim.

And as you probably have a whole team looking at pricing and relative pricing and taxes and fees. And we do -- we try to do it. But I'm sure you have a lot more people working on it than we do in studying it every day, can you talk about, on average, how do your prices compare to your peers? And our consumers get that message?

I think consumers absolutely got it. If you look back over the course of the last little bit, industry service pricing really hasn't changed in terms of the offer to rate card too significantly. Now we've heard what AT&T and Verizon have done in terms of raising prices on legacy plans and fees. But when you look at headline new acquisition, a rate plan pricing, it hasn't really changed much recently? I mean, you have Verizon introducing their $30 rate plan, and we can get more into impacts from that. But you're right. We continue to have a value umbrella relative to our peers. And it's more than just pricing, as you say, but it's really everything that you get from a features perspective in our rate plans and the network that you get as part of that. So it's not just the product and the network itself, but it's also things like our Netflix offering, our mobile hotspot offerings, the combination between high-speed Internet and Magenta MAX. So there's a whole bundle of value that consumers see can see and I think that drives a lot of the switching activity.

Yes. I would add the international simplicity.

Well, absolutely. I mean the series of un-carrier moves that we just made, like you said, with coverage beyond which is now giving high-speed data in 210 countries around the world, which is completely differentiated from what the competition can do. Our ability to connect you in air. That's our mission is to connect customers to their world and you see that in the form of the value and the un-carrier moves that we're making and are differentiated out there.

And to get that high-speed data globally, on which plans do you need to be on for that?

There's a number of plants that included. So... yes.

And so I guess, to that point, also somewhat on the pricing front, where are you with migrating customers up to the higher-end plans where you can get a lot more of the features and functionality? And is that an important driver you think of ARPU in the next few years?

Yes. That's just such an exciting development. And we talk about how we approach things versus maybe how competition approaches things and how it manifests itself from a customer value perspective. Where -- we saw Verizon and AT&T raising prices and raising fees on their customers in this time of potential recessionary impacts and certainly high inflation impacts, and we did what we always do, which is do an un-carrier move, and we introduced price low. And for consumers, what that really means is they don't have to worry about us going back and raising prices on them in periods of inflation, and it's exactly what you'd expect from us. What it doesn't mean though is -- it doesn't mean that customers in looking at what the network provides and what the value and the rate plans are, won't self-select into this higher tier rate plan. And we've had tremendous success, as you mentioned, with our highest tier rate plan that we call Magenta MAX now over 60% of customers switching, new customers coming to T-Mobile are self-selecting into Magenta MAX. And the base is just a little bit over 15%. So there's a lot of opportunity and room to run there in continuing to penetrate the base through a self-selection process into Magenta MAX. And that's been a big driver for what we've seen with ARPU. Historically, this has always been a company that had a 1% dilution baked into the plan. And that's what underpinned our Analyst Day guidance as well from a service revenue perspective, and to now be sitting in a year through offering this value and having customers select because of the network quality and the value embedded in Magenta MAX, that top-tier plan and being able to increase guidance for ARPU year-over-year, it's just a great position to be in, and we definitely feel like we have room to run there in the base.

And I know it's a little complex, but do you have a sense of if a customer is taking Magenta MAX, how much more is paying in ARPU versus your average ARPU now?

Yes. It we certainly do. I mean, there's a lot of factors over customer coming in. Are they multiple lines are there in our smaller markets and rural areas where we have some promotional elements ongoing. Are they bundling with high-speed Internet and getting a slight discount. So it's very much variable. But it is critically a contributor to what we've seen from an ARPU guide perspective and being able to go up. But the exact ARPU of customers coming in, I haven't disclosed.

No, I know it's quite complicated. I guess the question is, it seems like it's sustainable, but only 15% of the base on this plan and 60% taken. It seems like it's a tailwind for quite a few years here ahead do you now?

Yes, I think, it's absolutely a tailwind. But as we expand into other segments, so for example, T-Mobile for Business and as you're penetrating deeper into, for example, the enterprise and government space, you have high CLD customers coming in. I give you business beyond just the phone connectivity element of it. typically ARPUs are much lower than consumer ARPUs in that enterprise space, you're buying a large number of plans. You've got other connectivity and so that's another depressor to ARPU. So you have to factor in all of those things as you think about what the potential trajectory is for ARPU in the coming years, but the tailwind from Magenta MAX definitely helps.

So how sustainable do you think the market share gains are? I mean they've been probably lasting, I guess, at this point, 7 or 8 years pretty regularly. You think it's sustainable, I guess?

Well, for us, it is because we have a differentiated set of growth opportunities because of the underpenetrated markets that we were in with the network build and what we've been able to unlock there, that really unlocks this opportunity set for us. And again, you've heard us talk about the segments, but just to remind everybody, one of those are smaller markets and rural areas where -- by the way, we categorize things, that's 40% of the American population, where we haven't been competitive before. And now with the network build and where we're going, both from a 5G extended range and a 5G ultra capacity on the mid-band layer and really bringing a differentiated experience to a lot of these smaller markets and rural areas that's significant room to run for us. And our Analyst Day ranges and guide was that we get to 20% penetration by the end of 2025 from a market share perspective. So that just leaves more room to run even beyond that and continued growth. And the other one is enterprise and government, where again, we are underpenetrated and you've seen us make tremendous inroads in government and enterprise and on the strength of the value proposition and the network technology that is differentiated and you're starting to see more enterprises and governments understand that. And that's another run rate for us that others don't have, utilizing the excess capacity model for high-speed Internet and achieving our 7 million to 8 million target in that same Analyst Day planning window. That's huge tailwinds and potential growth from a service revenue perspective. And really a new 5G use case that expands the TAM of the whole industry beyond just phones and connected devices. We also have aspirations to continue to grow in the top 100 markets, where we are always strong, and that's at 60% of the rest of the consumer base, not in smaller markets and rural areas. But with the strength of the network, we're seeing way more network seekers come in. And that wasn't the past for T-Mobile. If we're honest with ourselves, the strength in those top 100 markets historically for us has been on price, right, where you have value seekers coming in that mentally decided, "Hey, I'm willing to make a trade-off on network to get a better price." And because now with what we've done with the combined assets and the ultra capacity rollout of the 5G network, that trade-off is gone. And so now the question is how much more can you grow in top 100 is you're getting network seekers coming into T-Mobile. And we've seen our prime customer penetration rate increase in top 100, obviously, Magenta MAX continues to grow in top 100 and the usage of that plan and the connections that consumers have with us and the usage of the network just demonstrates think there's room to run there from a top 100 perspective. So there's a lot of opportunities that we have to continue sustained growth that others in the industry don't have.

So just switching gears, and I'll come back to the share gains and the market competition, but just switching gears a little bit on to the network side. Obviously, the 600 megahertz and the 2.5 gigahertz have been game changers for your network. But where -- can you talk a little bit more qualitatively where customers are seeing the biggest benefit? Is it from in-building coverage or penetration? Is it rural coverage? Is it more consistency? Do the speeds really matter? Is it all the above? Or where do you think customers are more happy now than they were maybe 5 years ago?

Yes. I mean, certainly for us, as you say, it begins with what we've been able to do with the network. And as this massive rollout has come for both from a the extended range, the low-band 5G network extended range now covering 320 million people. And that low-band layer has a number of strategic advantages for us in the way that we use it because we have dedicated low band to 5G. We're not using dynamic spectrum sharing, as I mentioned, upfront with the Columbia Capital purchase. And that provides not only reach, coverage but also in building penetration as well improvements. And we've been rolling that out at a rapid pace. As you've seen now with 320 million covered POPs. And then you follow that on with the mid-band layer, which is really a game changer from an experience, a speed perspective and opens up so much of the frontier of what 5G can be. And we're a 235 million covered pops there as of our earnings report. On our way to 260 million covered POPs by the end of this year and 300 million covered POPs by the end of next year. So that's the coverage story. But the other element that's important is just how much spectrum we're dedicating. So you've got the coverage, but you've also got the amount of megahertz that we're dedicating to this where we're over 100 megahertz in that mid-band layer already on our way to 200 megahertz by the end of next year. So when you take that, the breadth of coverage and the depth of the spectrum that we're deploying, that's what creates all of that tremendous capacity. So we see it with customers across the board, whether it's in consumer, again, we talked about Magenta MAX plan and how much more interaction and usage we're seeing with Magenta MAX customers than we are with historically 4G and LTE customers. So you know they're getting value from that. You see it in the enterprise and government space and our ability because we are the only ones with a 5G stand-alone core, we're the only ones with really the breadth of this 5G network. Now we're able to deploy solutions in the 5G advanced network services space that didn't exist as an opportunity before. Now recently, we just did a partnership with SailGP, real revenue-producing opportunities where we have a 5G advanced network solution in place that demonstrated significant latency benefits versus both WiFi, what they previously used but also CBRS. And again, that's the strength of the 5G network that Neville and his team have built. But you see that open up things that never could have been done from a wireless perspective before, now are possibilities and in fact, improvements over experiences, whether it's WiFi or other things. And because of that, that opens up strategic opportunities for discussions with large enterprises on other connected solutions. So that's been a tangential benefit for us. as we get more and more traction with the C-suite and the strategic discussions for people that understand that this network is very differentiated. That's another area of opportunity. And then high-speed Internet, right? I mean that's just -- for us, that's a fallow capacity model that has opened up tremendous vector of growth, as we said. And those are -- in the past, there's been this, and there continues to be a perception issue with high-speed Internet and can fixed wireless really compete. I'll tell you, our 5G download speeds and the latest third-party reports are actually faster than the medium download speeds of Comcast and Charter. So despite all of that rhetoric, you're paying for this gigabit speed tiers, the actual live experience for customers based on third-party reports, is that it isn't. Those speed tiers are on average under 200 megabits a second, which is right where we're at. Our average 5G download speeds were 187. So there's so much goodness, I think, for customers in terms of live experience that 5G is bringing. It's an exciting world, and that's what drives a lot of the share take.

And is there any measurement that customers like more than another? Is it just consistency? Is it the coverage because I would assume customers can't really use the level of speeds and capacity that you're deploying right now, but maybe I'm wrong about that.

Well, it's all of the above, Tim, right? They want coverage. But no doubt about it, right? And that's again where you see particularly as a new technology is coming in, they expect 5G to give better service. Well, you better get it in the places that you want. And our coverage advantage from a 5G perspective is we believe some balance above where AT&T and Verizon are even on a combined basis, actually. The other is, of course, reliability. They want a reliable network, and you've seen us win third-party awards for reliability as well. And then speed as well speed is important. There's a lot more use cases where speed is a dictator for people, whether it's again high-speed Internet or that's an opportunity and they want the feeds. But it's more and more mobile gaming and all of these things are taking off video streaming, multiple devices, hotspot usage. They want coverage, they want performance and they want reliability. And that's really what they get with T-Mobile. And that's evidenced by the subscriber gains that we're getting.

And so I think you're going to have, well, a 14-fold increase in capacity. And I think you said on the call that you're about halfway there. Did I hear that right?