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

But not on $50 billion of C-band. What's the TAM expansion out of all of this in your mind? And is it sufficient for the industry to earn a return on $100 billion of C-band spectrum plus tens of billions of dollars of network expansion in radios and infrastructure to support a bunch of opportunities that I think at this point, we're all scratching our heads over? Sure they're starting to show some promise, but that's a big nut, right?

Yes. No, well, it is. I don't think they had a choice, right? I mean you saw what happened with the merger, and you saw our ability to quickly roll out the network that we did as well as the spectrum bandwidth that we did and are continuing for the benefit of consumers, so they didn't have a choice. Let me maybe contextualize it in the form of how we look at 5G and all of the investment that we've done in the network and building it out. And there are use cases that are here and now. Certainly, things like our ability to upsell into our highest tiered rate plans, whether that was Magenta MAX before or Go5G Plus now and the capacity that the network in 5G actually generates allows that. So that's one way to think about the monetization opportunity. The second for us, in particular, with the fallow capacity model is fixed wireless. I mean we have a business now that at the end of the last quarter is 3.2 million subs, generating ARPUs near postpaid phone levels. That's been an amazing opportunity to monetize. And yes, all of these other things are coming. There's no doubt there's so much R&D money being spent into the wearables category, other connected devices, those things will come. And I think that will be an interesting play for the industry in total. Like I said in the business in enterprise space, we're starting to see displacement of, for example, Wi-Fi-based solutions because you can bring more security, better connectivity, without handoffs. And so that's an interesting TAM expansion. Is that going to pay off all $50 billion of their investment? No. But it's just another area that does. And all of these things, I think, accrete up to a very interesting opportunity for the industry, and of course, us very uniquely positioned in there and demonstrating it.

Well, it's a lot easier when in retrospect, it's sort of extraordinary that you -- what you paid for all of Sprint with more spectrum than anyone got in C-band auction was half of what Verizon alone paid for C-band. So it's -- in retrospect, that looks like an extraordinarily attractive acquisition of spectrum let alone the customers that you got out of that relationship. You mentioned fixed wireless. I'm going to come back to that in a second, but I want to drill down on what you said about the new plans that you've introduced because you've introduced the Go5G plans. I think it's fair to say that at least compared to the Magenta plans that used to run with a third free line, this is something of a price increase, with a clear trade-off, however, that now you're subsidizing devices more frequently. You used to run your forever upgrade program with iPhones, but postpaid upgrade rates across the industry are down and yours are down, I think, the most despite running shorter -- or running shorter EIP terms. Talk about that, if you will. What are you seeing with respect to customers holding on to their devices? And what made you decide that there is at least a meaningful segment that says we really need to refresh devices every 2 years?

Well, it's 2 things. One, first off, Go5G Plus is really -- it sits alongside Magenta MAX and similarly would Go5G sits alongside Magenta. So those plans continue to exist. What we did was, as you saw, the natural flow in customer demand, quite a different approach, the Un-carrier approach to the customers. As you have 60% of your new customers self-selecting into your highest-tier rate plan, that tells you something. And that's where we saw the opportunity to say, "Well, let's take the power of the network and add even a little bit more, pack in some value and, of course, the promise that you will have same as new." That doesn't mean a fully subsidized phone necessarily. It just means you'll have the same as new customers coming in. That's the value proposition here. And put it alongside our Magenta plans and allow customers to continue to self-select. And we're seeing great traction and the combined Go5G Plus and Magenta MAX attach rates are right where they were for just Magenta MAX, of course, skewing again, to Go5G Plus. And so that's the market and consumers telling you that they value the network proposition that we have, the value proposition that we have and are selecting into there. From an upgrade rate perspective, there are a couple of things have happened for us. One, we had a lot of postpaid upgrade pull forward with the Sprint network transition that happened last year. And so naturally, that pulled forward some upgrades that probably would have happened this year. I see this year being a lower upgrade rate cycle for us. And so you'll probably even see less equipment revenue than we did last year, which is fine, as we all know, that's not where margins happen in this industry at service revenue. But we're meeting customers where they want to be met from a demand perspective. And again, I think it comes down to customers on our 5G network, and we said we have about 60% of the postpaid phone base with a 5G device are actually getting a 5G mid-band experience. And so they're able to feel the power of this network and don't need to upgrade as frequently. There's definitely, on an industry-wide perspective, a different dynamic happening. I mean it's interesting to see AT&T's customers have a 50% higher likelihood and propensity and desire to switch, except they've been locked into 3-year agreements and similarly with Verizon. And I can see the play why when your only proposition is device subsidies. Of course, you want to lock in customers and then you can make your unilateral price increases on them and that's why you have such a high propensity to switch of that customer base, which is why we introduced with the Go5G Plus the concept of Phone Freedom. And how do we actually create a vehicle for those unsatisfied AT&T customers to come over and take their 5G handset and actually use it on a network that can deliver.

Is there anything you can share with us about the early reaction you've had to those -- to the new plans?

I would say we're very pleased with the early reaction, but it's early. And so I'm not ready to share anything yet.

And I'll put you on the spot a little bit because it's still quite new, but Verizon introduced what they described as a -- not just a set of pricing plans, but I think they would describe it more grandly as a sort of reorientation of their entire consumer unit around these new plans. What's your first day competitive analysis of those plans? And how do you think it -- you and the industry respond?

Well, we're very comfortable with our strategy and the plans that we just put in place, and that's in reaction to what customers were telling us. I don't know. It's really hard for me to fathom how they sat around for probably months and months and said they were going to have this major announcement and then can't really tell you, is it a price increase? Is it a price decrease? Is it what's happening here? I really don't know. But I'll let them continue on with that proposition. It's still, when you look at it on a comparative basis, whether it's that entry-level plan compared to T-Mobile Essentials, you get a better value on T-Mobile. And so that's basically what we always look at is how do we ensure that we keep this customer value proposition and the fame for customer value that we're known for while continuing to increase our network equities. And that's -- so we always look at it on a relative basis, do we feel the value is here. We absolutely do. And so good luck to them. Again, this industry is always competitive. The more you get customers talking and considering switching because, obviously, not all Americans think about this category like I do every single day. But when they do and you start creating a moment of switching consideration, we're the beneficiary of that. So happy to have it.

So it certainly seems from the outside looking in that your new plans, irrespective, obviously, you didn't know where Verizon was going to come out. But you had a long, long history of AT&T running very aggressive handset promotions to the point where it become clear they weren't going to stop. Is it fair to say that, that was an important part of the handset renewal part of the Go5G Plans that you introduced that you have now neutralized that free handset for anyone from AT&T?

Yes, we're always looking at -- again, it's a matter of based on what the competitive dynamics are in the industry and sometimes they manifest themselves differently. As we said, sometimes it's on the service rate plan perspective, sometimes it's in the device side. How do we make sure that we're offering a value proposition that customers will flock to. Now it doesn't mean necessarily that we need to match on every single element. And AT&T, as they brought back device subsidies a little while back now, when you don't have the network to compete on and you don't have the value proposition beyond subsidies, I understand why they did what they did, again, to walk customers down and the new price increases on them. We have a lot more to the value proposition than just a device subsidy. And so that's why, first, you've seen us be very rational from like an upgrade perspective and what we've done on the retention side. But if customers choose this plan, they'll have that option. That doesn't mean as you bring customers on board to these plans, you typically never see if you're switching 3 lines that you actually take advantage of device subsidies on all 3 lines, right? So I always have to think about these headline numbers that you see are quite different than what the actual dollars spent from a device subsidy perspective are.

Is it fair to assume that the customer lifetime value proposition for the account is improved even though the -- because essentially, you've taken ARPU higher and you've taken subsidy higher, but you've probably also extended customer life and the net of all of that is an improvement to customer lifetime value?

Yes, you're absolutely right. And importantly also, because we launched it with Phone Freedom and the Go Back Guarantee is that we're stimulating more switching as well into T-Mobile.

I know as much as the industry loves to talk about ARPA, I'm still an old ARPU guy. So forgive me that I'm still focused on ARPU. You saw better-than-expected ARPU growth last year, but what looked like -- I mean, I remember at your guidance back in your Analyst Day, it had been for something slightly below 0. It then looked like it was going to switch to 1% positive maybe. Now it's kind of moderated again. Where are we in that? And remind us, again, was that driven by rate plan mapping for the Sprint customers and 55-plus lines and that sort of thing? How did we get to the ARPU dynamics that we're seeing right now? And where do I -- where should we think ARPU goes from here for you guys?

Yes. Well, I love that you're an ARPU guy, but as we've said, we are really focused from an enterprise value creation on accounts and ARPA expansion over time. And our guidance continues to be that we anticipate ARPA expansion of about 1% this year relative to last. The problem with ARPU is that it's very much a single unit rate-driven metric and doesn't necessarily represent what you're doing from a value creation. And some of the things that you mentioned are exactly those. For example, our ability to go into the 55-plus segment with a segmented strategy there that results in lower ARPUs than what our blended average is, but actually higher CLVs. Those customers tend to be more prime. They tend to have longer tenure. They tend to have lower servicing costs. And so while if you were hyperfocused on an ARPU dynamic, you'd say, well, that's not good. Those customers have a slightly lower ARPU than the blended basis, but the actual customer CLV is higher than the blended basis. Similarly, in the enterprise and government space, I mean, yes, those customers, because of the nature of how much they're buying, have a lower ARPU, but create tremendous CLV perspective. You also see, with our ability to take fixed wireless proposition in our postpaid film proposition, that's something that you would then allocate from a rev rec perspective between the 2. And so that might put an ARPU pressure relative to what the average baseline is, but you brought on an account that's actually very ARPA accretive and very CLV accretive to the enterprise as a whole. And so that's why we're just not hyperfocused on ARPU, but it really is an ARPA play. So we continue, as I've said before, to anticipate ARPU to be essentially flat sequentially. I mean is there some upside opportunity later? Yes, potentially some upside opportunity with things like Go5G Plus, that's a front-book change. It's not a let's go unilaterally lock customers and put price increases on them, but it's really an ARPA, it's land-and-expand strategy for us.

Do you think just given the network improvements that you've had even if I just think of them on a relative basis, the network improvements you've had, do you think that the value differential or price differential that you've got between AT&T and Verizon narrows over the next 5 years, which is to say you can now recoup some of that as in higher pricing because your network is better? Or do you continue to say I want to keep that differential and take it as faster market share growth instead?

Yes. Certainly, for now, the strategy is to keep a value differential. Yes, network equities are continuing to increase, and we're starting to see more and more, as we spoke about earlier, network seekers come to T-Mobile. But we want to, for now, jealously guard that customer value proposition because what it does is it creates switching and it allows us to capture a significant amount of true switchers as shown by postpaid net accounts. Now that everybody discloses postpaid net accounts, but you see what we're able to capture from a true account switching perspective that you can then expand again that ARPA strategy. And so for now, we're looking to really maintain that customer value differential and the proposition that can come in the form of different things than just pricing, right? It's what we actually pack into the plans, some of which actually aren't that expensive to T-Mobile because of our unique place. Mobile without Borders and the ability for travelers particularly with our relationships with Deutsche Telekom, that's one of the best kept secrets for travelers, and we still get so many, so many notes from customers once they understand what that value that we can bring is relative to getting massive roaming bills if you're traveling in Europe, for example. So there's -- it's about a value pack plan, not just price, but value different and everything we're able to pack...

How do cable operators factor into that? They're pricing so aggressively, as you've said, like freeze and easy way to gain customers, and they are now out with offers that, for a lot of lines, are free. You've seen that in the industry before. Does that really inform the way you think about your pricing strategy though? Are they starting to affect the way the big 3 price?

Certainly not for us. I mean they've been in the run rate for a while. I guess one could argue, particularly, with Charter that they've gone very deep into this first-line free exploding promotion. We still maintain what we're seeing from an info perspective is that most of this is coming from Verizon in the prepaid space. We think we're very well positioned for value seekers. We're very well positioned with T-Mobile Essentials, for example, or very low-priced plans that allow us to compete there. Also, as we've talked about on our Q1 call, is a lot of this hasn't seemed to impact the incumbents from a net perspective. It's hard to understand because the port/non-port ratio has changed so dramatically and the majority of, for example, Charters grow, has been in the non-port space, which could make sense if you're really pulling out of prepaid, but it certainly hasn't impacted our growth and our ability to actually translate that growth into industry-leading profitability and service revenue. That's the most important play on this. Like they've been in the run rate. We're continuing to be very confident in our play because it is the value proposition, the network proposition, these differentiated market opportunities. And you saw that play out in Q1. We showed the industry-leading postpaid service revenue growth, and we arrived at the station with what we promised at Analyst Day, which is the ability to convert that service revenue into free cash flow. We're at the highest conversion in the industry of service revenue to free cash flow. And remember, free cash flow continues to expand beyond this year for us.

The reason I brought up the cable operators is because their offers are now very much converged offers, at least in the eyes of the consumer of offering them together as a bundle. Your fixed wireless business, would you describe that as it is part of a convergent strategy for T-Mobile? Or is it part of a capacity utilization strategy where I can pick up some extra money, but I'm not fundamentally pivoting the company towards selling a bundle of fixed and mobile together?

Yes. It's not a convergent strategy in that we haven't seen evidence in the U.S. at least, that convergence is anything more from a cable perspective than a discount. And we already have customer value leadership in the industry and great low price plans for true, just value seekers. So for us, fixed wireless was really an ability to monetize the massive excess capacity we're creating with this network and create very high margin-accretive customers now at 3.2 million as of the end of last quarter, again, with ARPU profile, since you're an ARPU guy, that are near postpaid phone levels. And yet the equipment, the handset equivalent or CPE is much lower priced and it just provides a great value prop for customers. And so for us, it's how do you monetize very smartly excess capacity in the network.

So the usage though is typically 50x or so a postpaid customer. Mike on your conference call said that as you think about your runway to the 7 million to 8 million you talked about that additional capital investment may be required to go beyond that. Can you talk about that? How likely is it that fixed wireless becomes a driver of incremental capital spending? And how do you think about the ROI for that investment?

Well, it's something that we're investigating. It's not necessarily that it will happen. But if there are smart ways for us to utilize our spectrum assets for the benefit of consumers in an ROI-accretive way, again, a way that would be accretive to what we put out at Analyst Day. If we're going to put any capital investment in the space, it has to come with returns that are in excess of what we put out at Analyst Day. So it's areas we're investigating whether it's usage of millimeter wave, whether it's something different from a network perspective that you can do a more simple point-to-multipoint architecture. We have a lot of spectrum assets we can put to work for the benefit of consumers. And so of course, as you'd expect, we're investigating it, but there's no conclusions drawn in that regard. And if we did that, it would have to be accretive to what we've done.

So I want to finish with a few big picture questions. It's been, what, 3 years since the Sprint merger. You've continued to gain share in mobile. But now we're also seeing real cash flow generation that you promised. That has unlocked the buybacks, which are running ahead of your plan, which I think you have said $60 billion through 2025. Are there any potential investment opportunities that would change that trajectory? I'm thinking probably the obvious one would be spectrum that would say, here's an opportunity for us to meaningfully invest, but it's going to mean a divergence from that $60 billion target?

Well, spectrum is an interesting one, but we have made room for spectrum in the plan. So even when we said there's a potential of up to $60 billion in share buybacks or capital returns, as you saw, I mean, we played in C-band smartly, we've played in 3.45 smartly. We had our Columbia Capital pending purchase that's out there. We played in Auction 108 smartly. And none of that has impacted the potential of $60 billion. Whether there'd be another opportunity? Well, you'd expect us to be looking at those, but right now, there's really nothing significant that we see on the horizon. But to the extent there's something that does come to play, that could be a higher enterprise value creation formula than some portion of the share buybacks, of course, we'd investigate it, but we're not there yet. And the beauty of it is, again, as you said, it's up to $60 billion through the end of 2025 and '26, '27, which seems to be coming faster than I anticipated, we're sitting here in '23 is this cash flow generation machine just continues on with continued growth and aspirations there.

One of the most common topics in the hallways here of the conference off the stage is what happens to DISH Network, where you have an upcoming spectrum transaction with them that I'll invite you to just talk about a little bit, but also there may be an opportunity for spectrum from Sprint to be available on the market -- from DISH to be available on the market. Can you just talk about that, and how, as an observer of the developments at DISH, T-Mobile is sort of positioning to say there may -- what those opportunities might be?

Yes. Well, as regarding our 800 megahertz potential transaction, that really sits in Charlie's court. He has the option. He has to decide what to do with it, and we're there to fulfill the obligations based on whatever he decides.

Can you share what your expectation is for what happens there?

Well, remember, what we put in Analyst Day is that we assumed no proceeds from this transaction. And to the extent that there are proceeds and if Charlie does exercise this option, then that's upside from a cash perspective and gives us strategic optionality there. In regards to DISH itself, we're here to be a continued partner to DISH. We're here to support them. We obviously have an MVNO relationship with DISH. And I would have to leave everything else for Charlie to comment on. But DISH is a great fourth player right now, again, with the network partnership that we have as they continue to build out. And I think Charlie is going to make a run at it. So...

I'll finish up with a question that I'm sure you think about every day, and that is that with success comes higher expectations. And with a higher stock price over these last few years comes higher expectations. Where are the places where you think expectations are still too low? And I'm not talking about this year's guidance. I'm thinking, as you think longer term for why the stock price isn't higher, what are the places that you think the market is missing for the long-term trajectory of this business?

I think there's a few, and you alluded to some of them earlier. When you think about our underpenetrated growth opportunities, whether that's enterprise, government or 40% of the population in smaller markets and rural areas or even top 100 and the greatness that we're seeing with network seekers starting to come to T-Mobile in and of itself per network is, there's no reason we can't run beyond 20% penetration rates in those areas. And so I think there's upside there for continued growth beyond what we gave in '25. There's also that free cash flow machine that continues to generate. And as you think about this company from a free cash flow perspective, that's one place. I think many investors I'm hearing from are saying, when you think about the share buybacks, the free cash flow generation and as you think about the company and the value that it's creating from a free cash flow perspective, that continues on beyond '26 with more growth aspirations on the top line, that's probably the place where I get most excited about. So our job is to continue to grow, go beyond those 20% penetration rates, maintain what is now that most -- the highest conversion of service revenue into free cash flow because that's the ultimate value creation for a company, whether that's in the form of shareholder returns, whether that's in the form of additional investment opportunities. When you're rolling in that $18-plus billion a year free cash flow generation, it's a great place to be. That gives you a lot of strategic alternatives.

Is there any appetite for a regular dividend? Or do you think that return of cash through share repurchases is the more attractive?

I think certainly, for now, return through share repurchases makes a lot of sense. In the future, I don't know. Of course, all of that would be subject to Board discussions and deliberations. But the beauty of it is we have a business that's tremendously healthy. We're here delivering against those free cash flow goals, and that allows us all of those opportunities in the future.

Well, I thank you for being here. As I said, 10 years running. I hope it's another 10 years, and I really enjoy these conversations. So thank you very much.

Thank you so much, Craig. Thank you.

All right. Well done.