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

Good morning, everybody and thank you for joining us for the 11th Annual MoffettNathanson's Media and Communications Conference and thank you to those who are joining by webcast. This is our Murderer's Row this morning of really great companies and great conversations. And T-Mobile is another company that I'm happy to say has appeared at every MoffettNathanson's conference we've ever had. And I was just saying to Peter that his Magenta T-shirt for those of you that are only listening on the web and don't get to see it is good but it's not as good as the old feather, the Magenta feather boa that Braxton wore 1 year, maybe 10 years ago. So I want to start. First, thank you for being here.

I want to start with where I almost always start, which is thinking about the sustainable growth rate of the phone market and really thinking about this top-down And as you know, I tend to think of prepaid and postpaid together. So help us think about why it is that we're still seeing such a divergence between the industry growth rate and the population growth rate over a couple of years.

Absolutely. And thank you for having us. It's wonderful to be at the conference every year. I guess I need to wear a feather boa or something unique. Do you want to start with the -- I'll be making forward-looking statements, subject to risks and uncertainties as well as maybe discussing non-GAAP items and refer you to our filings for that. Craig, I think we've talked about this a few times. And the answer is we can't explain all of it. I think prepaid and postpaid together is the right way to think about it. There are certainly legitimate areas that go beyond just population expansion that have driven some of the growth, certainly, age demographics, both up and down in age, business formation. Those are things that drive a little bit more than just population growth as the overall growth perspective. I think there's also a little bit of a question of -- well, not everybody actually discloses the postpaid phone component. So how much of cable's total net SAR postpaid phone versus others that may help normalize some of this as well. But what we've always said all along is there will be a period of time where things start slowing down. And we saw that a little bit of moderation in the latter half of last year and we saw more of that in Q1 of this year, postpaid phone or plus whatever else is in cables numbers, total nets for the industry were down double digits. And within that, what we said would always happen is because of our unique combination of the best value, the best network and the underpenetrated market segments that we're allowed to play in, we would be the outperformer in that. And what you saw basically flat year-over-year postpaid phone nets from us, higher percentage of total net adds even as the industry went down. So I think we'll see continued normalization for the balance of this year and ultimately something lower than what we saw in the pendency of the last few years but we have the sustainable playbook that allows the outsized growth to continue.

I want to dig into that because what -- as we think about that market growth rate as the framework for the size of the pie, I've historically thought about your market share in context of small markets, rural and we'll talk about business later, you've now disclosed your market share in rural, small and rural, as having increased from 13% to 17.5% now. Is the North Star for that market share eventually 30%? Is it 40%? And do you see cable as a real competitor in those markets, particularly for the value segment of those markets?

Yes. And just to remind, the way we segment things, we sort of say smaller markets and rural areas but really it's our top 100 markets and everything else outside of those top 100, the smaller markets and rural areas, which is about 40% of the U.S. population. So it's a very large cohort to play in. And ultimately, what you've seen now, as the network has expanded distribution has followed and the value proposition continues, is our share of switchers in those markets, they're actually double that 17.5%. So there's a lot of room to run being one of those underpenetrated market segments for us. What the ultimate end goal is, certainly, one could see that at a minimum, it should be our fair share, about 1/3 of the pie. And I think when you see those dynamics of where we are, the growth, as well as the share taking of switchers, there's certainly room to believe that we're going to continue to run long beyond that 2025 goal of 20%.

One of the great tricks that I and every other consultant in their consulting days used to always do was, never compare yourselves to your average because your average includes your below average market. So only compare yourself to your above-average markets. And your goal is, therefore, your, call it, 36% or 37% market share in urban. Is that a fair way to think about it that your fair share is actually well above 30%.

Yes. Well, you'd do well on the management team at T-Mobile because certainly, what we look at aspirationally, whether it's within smaller markets or rural areas or even our top 100 markets, we're sitting in New York, which is a very, very strong market for us. I'm not going to throw out the exact percentage but it's significantly higher than mid-30s. And why can't that be the aspirational view for us? That's exactly how we think about it. But we also have to be prudent in terms of how many switchers do you natively have in a quarter, in a year, how do you increase that pool over time? But yes, we think there's more room to run than just divided by 3 or 4, however you think of cable.

So everybody is raising their numbers now. So that's good, that's...

Long term. Sure.

Just going back to the rural markets for a second. How do you think about the customer lifetime value of those customers? I would guess that they might be -- they tend to have lower disposable income, although they -- you could argue they also have lower cost of living. But is the customer lifetime value of those customers consistent with the customer lifetime value of customers you get in the top 100?

Yes. And again, because you're talking about 40% of the U.S. population, it's a very large cohort. So while there are some small differences on the revenue and the cost side of the equation, actually from a customer lifetime value perspective, it's remarkably similar. And perhaps you'd expect that when it's 60% and 40%, to your point of averages, to get there. But the other thing that you have there is, in many of these smaller markets and rural areas, there really wasn't healthy competition until T-Mobile and the merger came and we could build the network out. And so you come in with value leadership and people actually might be willing to buy up our rate card because it's still a better value proposition than what they're currently faced with.

So I think in some ways, we've maybe, we, meaning the audience for your disclosures and things have become almost too comfortable thinking about rural, urban and -- or top 100, non-top 100 as the framework because there's an infinite number of other segmentation approaches that you could take to the market, whether it's ethnicities or demographics. For example, it's my understanding that you've always significantly over-indexed in the Hispanic community. Can you talk about some of those other segmentation approaches that you use internally to say, here's untapped potential for us that we can be growing faster because we can do better in X,Y,Z segment?

Yes. We approach it in a number of ways. I mean some of it you see expressed in our rate card or unique discounts where 55+ is an affinity group. That's a very value-accretive affinity group. So we have a specific rate card structure for them, military, first responders. So you see age demographics come into play. You see things like that. But we're also always looking at what is the value equation. In some cases, it's not on the rate card. So you might look at affinity groups around travel, where one of the still great kept secrets of T-Mobile is, if you're an international traveler, nobody is better for you than what we can offer through our partnership with Deutsche Telekom and others. If you look at the value that we pack into Magenta Status or T-Mobile Tuesdays, whether it's MLB TV, whether it's unique things like Domino's, I mean, we broke Domino's, so there was a cohort of pizza lovers that really appreciated the value segment there. So we're always looking at what's the right way to approach distinct cohorts, whether it's demographic or others? And how do you best do that? It could be a rate card, affinity group. It could be the value that we pack into our ongoing rate plan offerings, our Magenta Status offering. So there's a lot of focus on that.

And psychographics, I would think, too, right, because -- which is another fancy word for getting to the value proposition that you have for customers. You were the value brand for so long that I wonder how you think about retraining your customer base to think of you not just as the value brand, although I know that you guys want to keep your value brand positioning but how you get customers to think of you? No, we're actually the premium brand also, we're the best network.

Yes. Well, first off, yes, you're right. We're absolutely going to regard that value leadership, right? I mean that is really what made T-Mobile. We have the assets in place, the balance sheet in place to really guard that over the long term. And it's what has led over many, many years and continues to lead into outsized share taking and outsized service revenue production in the postpaid space. So we're going to jealously guard that. With regards to network equities, it's no secret that we've come from way beyond, right? Verizon was the leader as you moved from 3G to 4G and our leadership in terms of the actual network capabilities from 4G to 5G has now afforded us to start moving those network equities up in the minds of consumers. Business is different. They buy differently, large enterprise, government. I think we're already leading the mind share there. Consumers, we've started to see a steady increase in network perception. And that takes time to change. And it's actually one of the things that gets us really excited. So we've delivered all of this growth while being the value leader and starting to gain from a network equity's perception perspective and there's so much more room to run. And that's -- whether that's word of mouth. I mean, people still shop via word of mouth. As you continue to experience the network in better and better ways, when people have their shopping moment, first and foremost, they're going to go to friends and family. And that's where you get word of mouth. They're also going to look at research. And it's just the fact that when you look at third-party reports, we are the leader from a network perspective. First, the 5G and then overall network leadership as well as now reliability that's come into play as well. So it's a really great time. We'll partner -- we'll continue to partner with, I think, ways to demonstrate to consumers that this network is a vastly different network than it was and it is in a leadership perspective. And a lot of that can come in the form of partnerships with businesses. What we did with F1 in Las Vegas. If you know what the airlines have done, we are a very big category leader in airlines. How do you actually demonstrate to consumers via partnership messaging around the power of the network from the people that need it most and our most discerning and focus on SLA. So there's a lot of runway there and it's one of the things, like I said, that really gets us excited.

So let's talk about that. You -- in Q1, you disclosed that you delivered the lowest enterprise churn ever and your strongest postpaid net adds in SMB, you were net positive, 7 consecutive quarters. Talk about the SMB segment for a minute and the enterprise segment and maybe government, just as I think of them as both together and separate, what does that trajectory look like for you? Is it -- with your 5G investments, are you still just in the first inning there? Or is that now sort of a mature flywheel that the perception of your network has sort of caught up?

I think the perception is definitely caught up and more. And you can see that in terms of the discussions that we're having are no longer with just the procurement office, T-Mobile of old being the stalking horse bid. And now it's really with CIOs solving business problems. And in each of those areas, we're seeing great momentum there. You mentioned enterprise, large enterprise, our best total postpaid nets quarter, lowest postpaid phone net adds SMB. We had our seventh now consecutive quarter of postpaid porting positivity in that space. And it all starts with the network. So what we focus on there is not individual, how do we disclose the actual market share but how is this business overall contributing to T-Mobile, where we've had great success. Some of it has been a little bit clouded in the total postpaid nets number by, as you know, some of the lower ARPU educational deactivations coming through. And Q2 is probably the last quarter of that where we're going to see that. And so I'd expect postpaid other net adds in the $500,000 category for Q2 but those are lower ARPU as they roll off and really the flywheel of business in terms of value creation across all of the segments, whether it's continued group in micro, SMB, large enterprise, government, has just been a fabulous contributor.

And when you land a big account like Delta, what is it they're focused on? What's the sale process? And what's the selling point? Is it the network? Is it 5G connectivity and speed superiority?

It's, you know, it's absolutely all centered around the network but it's centered around the network and how our unique 5G leadership position in terms of capabilities can help solve their business problems. And I can look different for Delta Airlines, a Boston Children's Group, a Formula One. But what it does is, take advantage of the ability to do unique things on a much broader scale than what the competition can do vis-a-vis slicing, vis-a-vis actually building a private and then hybrid network, whether it's first responders and others where we can do end-to-end encrypted push-to-talk for mission-critical applications. So the ability with CIOs to say what is it that is a business problem that we can help solve via 5G and its capabilities, it's what's then getting you the postpaid phone business too. And I think this is an area that's a little bit underappreciated still for the overall industry is just the fact that the TAM is expanding. We talk a lot and spend a lot of time talking about postpaid phone and that's important. It's a very large category, very high customer lifetime values. But we're now actually with 5G being able to replace traditional connectivity, for example, from WiFi or things that weren't able to be done via WiFi and it's expanding the pie. Now that may also come with some postpaid phone business, like in the case of Delta that we recently announced, that you're asking about or can come with just great value accretive postpaid other or other connections that help the whole industry and is also a great flywheel for us in terms of growth.

So I want to touch on prepaid before we start talking about ARPU and some other interesting topics. But you've now completed the acquisition of Ka'ena, the Mint Mobile, Ultra and Plum. Talk about, first, how many subscribers that adds? And then what your vision is what those brands bring to the table that you didn't already have?

Yes. Well, first, we just closed. So we now have access to all the subscriber data. And of course, we've got to run it through all of our subscriber reporting rules. So I don't have a number to disclose here. We're just getting working on that. We'll certainly do that as part of Q2, as a base adjustment, of course. And all of this was fully contemplated in the guidance that we gave. But what's probably most exciting.

And they're all growing, right? They're all growing...

Yes. They're growing businesses and it's businesses that are in segments that -- because we have the strong partnership with Mint, Ultra and Plum, it's something that we service through our wholesale. And so it's segments of the prepaid section, whether it's digital, direct-to-consumer, whether it's really focused on international value that I think are going to be a tremendous complement for us. And also it's going to bring capabilities that we can use in the -- whether it's the Metro or the T-Mobile prepaid brands around really world-class digital capabilities, that certainly Mint has and has done a fabulous job about it. We'll bring a lot of scale opportunities. But these brands, much like Metro has operated so successfully as a brand within a big umbrella but a brand with still that entrepreneurial spirit, that's how Mint and Ultra will continue to operate as well.

Does Ryan Reynolds, by the way, stay connected to it? Are you going to disclose that Ryan Reynolds is about to be your new spokesperson?

It's not like that's the only question we get. Forget about the business, all that, have you met Ryan and is he going to stay on? He will stay connected to the business. Certainly, there's so much creative work there that he's done so fabulously. So we'll continue to have a relationship with Ryan.

And the ACP question that sort of hangs over all of -- I wouldn't assume that those brands, just by nature of being prepaid, bring some additional exposure to ACP. Where are you with respect to ACP and remediation for the customers that are going to be impacted and how should we be thinking about that?

Yes. Well, I wouldn't say the acquisition has any incremental ACP exposure because we'd always said we service a lot of these customers through key wholesale partnerships and are certainly working with them around how do you make sure especially in the mobile space versus broadband where it's such a critical connection that you can continue to serve customers. Customers aren't just going to -- on ACP, are not going to flee this category at a 100% rate. They need that critical connectivity. So whether it's through our prepaid brands, whether it's capturing, maybe people falling off of broadband, or through our wholesale partnerships. Our job is certainly to make sure that customers, if and when they fall off of ACP depending on what the government ultimately does, have a way towards low-cost alternatives to keep critical connectivity. So I don't see a change in the risk profile over what we stated at earnings. It's contemplated within the guidance range that we gave for core EBITDA. We don't have any postpaid customers on this, so it's not within -- it wouldn't impact any of our postpaid net add guidance. But we'll have to continue to see.

So let's talk ARPU now. You guided to about 0.5% postpaid phone ARPU growth for the year and said that's going to be weighted second half. Let's unpack that for a second. First, how do we think about ARPU growth with respect to pricing actions, with respect to mix and premium unlimited and then some dilution that comes from rapid growth in the business segment and that sort of thing. So put all that together or maybe unpack it and take it apart for us.

Yes. It's -- as we always say and to your point, it's very much a mix-driven metric. Why we're so hyper-focused on ARPA, where we're now -- actually increased and have increased that guidance year-over-year to grow 3%. But if you focus on ARPU, it's a number of factors. Yes, there are some, call it, price actions in terms of rate plan optimization that we highlighted we will be making. Those will have more of a second half of the year impact. We haven't announced anything here as we sit in mid-May. We do anticipate that it will happen in Q2 and drive a couple of basis points of churn headwind as we had mentioned on the call. But -- so you'll see a little bit of that, that's embedded in the guide. And then you see continual great uptake in terms of our top-tier Go5G Plus and Go5G Next rate plans from an unlimited perspective that drive up ARPU. Those also come with great content features that are another way to segment customers is, of course, which content elements do they love. Those are contra revenue for us. That's not all consistent in the industry but those reduce our ARPU, don't reduce necessarily everybody's ARPU in the industry. You've got specific cohorts, again, 55+, military that bring great value but also have a discounted rate card, yet tremendous customer CLVs with lower servicing costs, lower bad debt, longer life, 10 years and, of course, business, as you say. Those are elements. They don't pay. When you're buying thousands of lines, you're not paying obviously a consumer rack rate, yet you're driving tremendous value accretion, both through that postpaid phone category but also those other connections that we spoke about that are increasing the overall value creation.

Just to pin down this -- the premium mix for a second. Since you introduced Go5G Plus, you've consistently said about 60% of net adds or new accounts are coming in on premium unlimited. Is that kind of where we should think about eventually the whole base sort of titrates up to 60%?

It's hard to know. Certainly, if that was to happen, it would be over a very long tenure. And yes, we continue to see great flow on Go5G Next and Plus that still continues to be at or above 60% of new accounts coming in. The base is still under 30% when you think about top tier unlimited plans. That would include our previous Magenta MAX plans. So there's a lot of room to run there, where it ultimately ends, I don't know.

You mentioned a second ago the rate optimization for the second quarter. Is that -- first, is that a meaningful driver of this year's ARPU guidance and it's certainly included there. And should -- is this, in some ways, a redo of the rate optimization of old plans to new plans that you were going to take last year that eventually got pulled back?

No. So it's not a meaningful driver of ARPU. It's one of the contributors. But it really -- we're going to continue to approach this just like we approach that -- jealously guard that value leadership. So are there rate plan optimization on the edges that can be done and will be done, of course. Does -- what value leadership looks like for the consumer over the course of a 10-year arc change over time? Yes. But we're going to jealously guard that value leadership here and really have customer centricity in mind. And I'll remind you that that's really the formula that has led to outsized service revenue production. I mean, when you look at postpaid service revenue growth in Q1, we delivered 6.5% year-over-year, which is significantly above the competitive set. So this is the formula that's really working for us and that consumer centricity lens but of course, optimization on the edges will be how we go forward.

And so the bottom line that I think everybody is most focused on is just, do you think the competitive environment is conducive to price realization at the moment?

I think obviously, the competitors have increased prices numerous times. Again, we're just going to focus on making sure we lead with customer value leadership in mind. That's what drives the share taking. That's what drives the outsized service revenue growth in this industry and ability to actually translate that into profitability, which is an important element. And that's the lens through which we're going to continue to focus on this.