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

Unlike some of your peers, who are taking those things away. Do you think there's value for customers in having like an a la carte menu rather than a preselected bundle?

I don't think it's a bad idea. I mean, I -- if Verizon had slashed their prices when they took out all those goodies, and then allowed you to pay to buy the goodies back, that would have made more rational sense, I think, to consumers. But instead, they kind of just sort of took them out, didn't reduce the prices and said, "Look, we're giving you choice now." And consumers probably see through that. They're hoping consumers won't see through that, but we'll see.

Yes, we'll see. So far in 5G, there haven't been a lot of applications that really take advantage of that. So we've got fixed wireless, which has been a great use of the capacity. But we haven't seen applications that are really driving people to super fast speeds and super low latency. What do you see as you tour the Apple skunkworks and the Samsung skunkworks that gets you excited?

Well, let me first like slightly disagree with the premise just for the fun of it. If you go back to some of the things I said, the typical Magenta MAX user is using 4x more data. They're using more gaming, they're using more video, they're using more social media, they're engaging in higher kind of bit rate things in all those activities. And that's not like 40%, that's 4x. And it's not in -- across a decade, it's across the last 3 or 4 years. And so it's profound. And it's all driven by a 5G network that allows that. And it's causing them to run up our rate card. Our most popular plan now being our most expensive plan. So it's great for them. It's great for us. Customers on our lowest price plans are getting 4x more data per dollar they spend than they were just 3 or 4 years ago. These are 5G dividends for them and for us. And so I was saying this 2 or 3 years ago and people weren't listening, the smartphone is the killer app of the 5G era. Our customers are experiencing data speeds that are 10x faster than they were before the merger, and they're using that by buying up our rate card, having wireless become more important in their life and using more data. That solidifies their relationship with us in very significant ways. So that's one thing. Secondly, you mentioned it. Fixed wireless is a fantastic phenomenon, and we're still in the early innings of it. I love the fact that a lot of people are now believing that their best strategy is to cast dispersions on fixed wireless and sort of try to downplay it. It says we've got their attention. And I also will remind everybody that we're not -- this particular model on fixed wireless, we will take it into high single-digit penetration, and we don't have illusions that it's going to take over half the market. But for the market we're trying to serve, it's a highly profitable, accretive incremental business with little to no capital allocated. So it's a beautiful thing. And then finally, to your question, yes, we are seeing cool things. I think actually in the early days, those things will not be dramatically more consumptive than smartphones, but they have the potential to be, things like wearables, interactive devices. Certain 5G models also require the movement of lots of data back and forth, not so much [ degenerative ] AI kind of text, most of that processing is in the cloud, but the 5G stuff -- or the AI stuff you're seeing around video and around photos is much more consumptive. So there's lots of stuff sort of in the labs that's hitting, but I wouldn't expect something over the next 12 months to come out and say, "Aha! There it is."

This is the one.

"There it is, the 5G answer we've all been waiting for." That's right in front of your face right now.

Okay. Interesting. Sorry, as you think about those things that you can see coming, are they really sort of niche products over the next few years?

Well, a lot of times what happens is things come out in their niche in the first year or 2. But then they start to take off. My personal view is that there's a lot of room for innovation in this market. The smartphone is now a 15-year-old idea. AI is showing us we have -- there's a better way to interact with our technology. And things are going to start moving in this industry. And I think it's going to be very positive. So -- but at the same time, big discontinuous things like AI are usually simultaneously going to be more earthmoving than most people realize and affect things differently than most people realize and not live up to the hype in the next 24 months.

Right. We've seen this. Let's switch gears a little bit. And I think as we go back to where we started, which is the competition in the industry, one thing that I have been surprised by, and you and I talked about this a year ago, was that in your legacy markets, the markets where you have rounding maybe to 40% penetration or 40% market share, you're still growing subscribers. Just help us think about how that is being driven, and how you're defending those very high penetration markets against competitors.

In the top 50 markets we're the leader. In the top 100 markets, we're one of the leaders. It's always been a source of strength for us. We got there by being a value player. But today, we're growing because we're winning with prime credit network seekers and that's just a new phenomenon for us over the last couple of years. It was an aspiration we had, and most people didn't believe we could grow. They were asking us if we would be able to defend our castle there. We're growing, and it should be obvious why. Like I said a minute ago, tens of millions of people never really gave us a good look in the big cities. They were worried there would be a trade-off. These are the people who don't buy on value, they buy on network. They want the best network. And, increasingly, we're finding ways to convince them that's us. It is us, mathematically, but we need to convince them, and that's starting to take root. And so we're growing -- and you see it in those stats that I talked about with our prime base being at an all-time high, as evidenced by our bad debt rates being low and lower than our competitors, both nominally and as a percent of revenue. Those are signs that it's not that we're starting to sort of win a few people, but overall, the quality of our base is improving and is actually better than our competitors, and that gives us room to run in those top 100 markets.

Well, let's talk about -- sticking with the top 100, but the enterprise space has always been a source of strength for AT&T and Verizon. Can you talk about where your sort of strengths are as you enter that space, whether you're starting SMB and sort of moving upward? Are there particular industries that you're targeting? And why?

We've been reasonably strong on run rate in SMB for a while. So the real focus, as we talked about in our business plan with the market a couple of years ago, is enterprise and government. And our aspiration was to move north of 20% within the planning horizon 2025, and that's very much on track. Big enterprises want a reliable provider with innovative technology, who'll solve their problems. They don't want risks. They want solutions that are easy to manage. In some of those areas, we've been coming from behind, including even the solutions on how to manage your relationship with us and so forth. But as the pieces in our business plan hit, we're seeing the business respond. And that's really gratifying. As I talked about in Q1, we outpaced Verizon on business nets. We outpaced them on business phone nets. We outpaced them on churn. And these are -- and we don't -- I'm not trying to disparage them, I'm just saying we have always held them as this great benchmark, and we can't be a leader unless we chase them. And we're a competitive company, so we like to go do that. And so our teams got a little spring in their step that we're seeing validation from customers. This could be a leading indicator for top 100 markets. Because what happens is businesses don't go on reputation. They check out 100 phones for some weeks and compare side to side, and then they come back and make a decision. And that does two things. One, it makes sure that we're winning on network, which I think then does give you a little bit of a headlight into how we will win prime network seekers on the consumer side. But also, it protects the value of that customer account. We are not, by and large, winning based on slashing prices the most. And we're winning because they want the best network. We have value. We're going to come in with a great value, but they -- enterprises want the best network for their customers. And with the speed and capacity of this 5G network being so far ahead of AT&T and Verizon, and being outlooked to be so far ahead of them for years to come, we're winning business, and we're winning them at accretive values that allows us to make money.

I thought the AAA win was particularly instructive. Out in the middle of nowhere, that thing better work that people will notice.

Absolutely.

Well, let's talk about the middle of -- well, nowhere maybe. The smaller and rural markets where you've been building market share. You and I started talking about this again maybe 10 years ago, and it was a future plan. But where are we in that process now in terms of the -- you talk about intent to or license to fight -- license to [ wins ] something like that...

License to play, license to win. Exactly. So what we do with the 775 markets that we -- that make up 40% of the U.S., where when we started this journey in 2021, we had a low double-digit market share. I mean if you think about this, we're a scaled competitor, #2 in customers in the country, and in 40% of the country, we have a low double-digit market share, like not even teens 2 years ago. Today, it's 16.5%, and we're on our way to the 20% we promised in 2025. And it doesn't stop there, we don't think. So what we did with the 775 markets is we class them all based on our relative network competitiveness. And a few years ago, most of them were not licensed to play. We just really weren't competitive there, and now we are. And so -- and then you get license to win where you get even more of the homes passed with 2-wall indoor coverage, strong signal, and that's when you start to bring in your marketing, your distribution, your whole formula for winning. And what we find is in the 2/3 of the markets where we're fully competing license to play or above, our [ SOGAs ] are fantastic, well into the mid-30s. We're winning market share. We're making our way towards that 20%, and everything is on track. And we're doing it in a really value-accretive way for our company. So we're not trying to go there and change the competitive dynamic around price. We're trying to go there and change the competitive dynamic around quality, maintaining that price leadership we've always had.

As we see capital spending come down in the next couple of years or come down this year, how should we think about the pace of expansion into those rural areas? Can that accelerate as you have more money that's not being used for the integration? Or is this just a steady progress?

Steady progress. And by that, I mean the network is now largely built. From here, we go grab pockets of opportunity. And that's a great place to be. We will end 2023, this year, with 300 million people reached by our ultra-capacity 5G network, and an average of 200 megahertz of 5G dedicated to those 300 million POPs. No one is talking about doing anything like that even 2 years from now. So we remain more than 2 years ahead of our competitors. And the key place where that difference has landed this year is smaller markets in rural areas because we hit the big cities a couple of years back. And so with each passing quarter, you see a step-change in our ability to compete in smaller markets and rural areas, but that's kind of in the run rate. And so that's -- this $9 billion to $10 billion capital picture, for us, feels like a run rate number that allows us to not only lead now, but to stay ahead for years to come in the 5G race.

Does fixed wireless sort of help you go into those new smaller markets as well?

Absolutely. There's very much a land-and-expand thing happening. Some customers are discovering our brands through fixed wireless, which is a wonderful new thing that was -- we didn't have that on our way up in the top 50 markets as a tool. And in fact, this last quarter, 40% of our fixed wireless net additions, or gross additions, I should say, came from smaller markets and rural areas. And so it just kind of shows what's happening there.

What's the level of bundling you see in those fixed wireless customers versus mobile? Are they pretty much all the same customer base?

No, it's across the board. And for us, we're happy to serve them either way. If they're T-Mobile customers, and they're adding to the relationship, that's fantastic for ARPA. If they are competitive customers and they're being introduced to T-Mobile through fixed wireless, also great because it allows us to show them how strong the signal is in their own neighborhood. And of course, it's just a matter of time then before they at least consider us for the family. And so to us, it's a great strategy either way.

Okay. Let's sort of finish up with the cash flow and balance sheet. The cash flow of the company right now being used to buy back stock, how do you think about this, long term? And are there other things that you would like to do with this cash?

Well, our job is to create a business model in this planning period through '25 that, as we talked about a couple of years ago when we laid out these aspirations, has the ability from cash flow and debt capacity to support up to $60 billion in buybacks through '25. And we believe that model is very much on track. You can see it in our execution. Now we've been running at a good pace on buybacks, but that's because we think our stock is of relative value right now. And so our Board has been very supportive of moving as quickly as our debt capacity allows because we believe strongly in this cash flow story. I mean you think about how it doesn't stop. We're growing at 75% cash flow growth year-over-year this year because we're kind of putting -- we're now achieving the post-merger run rate promise of this business. It steps up again next year. In '25, we talked about an aspiration of $16 billion to $18 billion and then beyond. And so it continues to grow. And then, of course, that opens up lots of optionality to us as a Board as to what to do with that cash. Right now, in the very near term, to us, it looked like the best opportunity is simply to take a big piece of that value and return it to shareholders who've been with us on this ride for over a decade and have believed in our story, and that's what we're embarked upon. So right now, we've approved this $14 billion of purchases, and we're executing against it. And we will weigh the whole rest of the picture like you would expect a Board to do, but you understand our policy.

What is the leverage policy of the company? Like where do you want to keep -- have that balance sheet?

Mid-2s.

Mid-2s.

And so to us, that feels like a great responsible place to be. Of course, you can always look at that as the interest rate environment changes, et cetera. But that feels like a great place to be. And we're a little above mid-2s right now. But as you know, the EBITDA capacity is rapidly growing. We were 9% this year on EBITDA. We see a strong year in '24. And so as EBITDA continues to grow, not only do we get more debt capacity, but the leverage begins to take care of itself.

So I think most of the things we've talked about today, people in this room understand, and yet the stock has been stuck in the, let's call it, $1.35 to $1.50 range for quite a while. Our -- investors in this room are frustrated. Are you frustrated with that? Are you sort of happy to roll the stock in and be buying it while it's...

I mean we're a buyer. So I mean it's an interesting thing. I mean, of course, we're happy to be buying it at these prices and -- but on the other hand, no. I mean, over the long haul, our job here is to create value, and that's what's going to happen, in my opinion. And we don't get too hung up on any particular week or any particular quarter. You look at the price today, okay? That's obviously not where I think a lot of investors wanted to be. 3 weeks ago, it was at $1.50. So I mean I don't get too hung up on that. What I'm focused on is creating a business with rapidly expanding cash flow, with the superior cash flow per revenue dollar in the industry, which is already true in '23, and then continues to expand from there. So if we have a company with the best top line growth and with the best cash flow growth and the superior cash returns per revenue dollar and a model and a management team with a track record that you can rely on, the rest kind of will take care of itself over time. There are certain bumps that you see along the way, that have nothing to do with us or our performance. You can't get too hung up about that.

It's a good place to leave it. Mike, thanks very much.

All right.

Thanks, everybody.