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

Great. Good morning. And before we begin, disclosures are available at the registration desk. For those of you I haven't met, I'm Mike Rollins, I cover communication services and infrastructure for Citi. And it's a real pleasure to welcome the T-Mobile team back to the conference. So to my right, we have Chief Operating Officer, Jon Freier; Chief Financial Officer, Peter Osvaldik; and Chief Commercial Officer, André Almeida.

Thank you.

Thank you guys for being with us today, for having us.

Great. Thank you for having us.

So maybe just to get started. Peter, some recent news for you. You announced you'll be retiring at the end of your contract mid next year. Just maybe share with us why now.

Sure. And let me -- before I jump in, of course, we're going to make forward-looking statements subject to risks and uncertainties, speak about non-GAAP financials, and please refer to our SEC filings for risks and the reconciliations. Sorry, I have to do that or I get in a lot of trouble. I think it's important partly to always frame up what's a motivator of individual decisions. And for me, retirement, kind of, goes way back to I immigrated with my parents to this country when I was six from a communist country. We definitely lived very frugally. I'm more than grateful for all the opportunities that I've had and been given. And also then for me, what was really important, and I started talking to Mike Sievert about this about 3.5 years ago, is I'd like to step away from the totality of the corporate world. Otherwise, I'd be right here and focus on things like family, philanthropy, start giving back as a result of all the luck that I've been given. And that wasn't a very successful discussion. As you can see, Mike is a great salesman. And so here I was. But we did put in place a 3-year contract with the intent that it would be a retirement post then. And then when we knew that there was a CEO transition happening, I had worked with Srini in the context of the Board, knew him well. I was super excited to have him join. I think he's exactly the right person for this next era of growth, which is going to be even more exciting. I'm sure we'll talk about that a lot. And so it was -- I convinced my family and we extended a year -- but that's, kind of, been like it. We've chatted a lot. Srini has tried to get another extension out of me. And if I was staying anywhere, it would definitely be right here because you can see -- we love the team. We actually love working together and how we tackle problems, and that's a big part of -- if you're working long hours, you better like the people you're working with and be successful. So that was primarily the motivator. But there were 2 things as I step back that we'll get into today that were very important for me. One of those being the business had to be in a place that I saw a massive opportunity for the next 5 and 10 years to continue the growth that we've been seeing. And the second one, of course, is you've got to have the right person to come in and be the successor. And I think in Jessica, we found somebody absolutely fabulous. Yes, outside of a telco, but a lot of parallels in terms of thoughtful capital allocation, the way we do it around spectrum and network builds -- she's very much a proponent of the culture. I think these guys have spent a lot of time with her to make sure she meshes because of how we work together. And she brings also, just as importantly, more than just the CFO skill set. She's been a President at GE Vernova, scaled smaller scale businesses to something more significant, was focused on AI adoption. And so those are the things that I think really endeared her, too. This is going to work great because we work as one team. It's a lot different than other teams in the telco space. I think Jessica is going to be fabulous. So those were the motivators for me. I know we'll get into the business side of it a little bit more. I'm not going to pop up anywhere else. I can guarantee you that, not in a full-time role. Else I'd be right here.

Well, we're glad you're here and take advantage of your insights along the way. So maybe that takes us to maybe the wireless industry backdrop. And it feels like this industry has traded one uncertainty for another, right? The question of what DISH is going to do into the industry to Starlink. And so how do you view the possibility of competition expanding in this category over the next 5 years? And how does that inform T-Mobile's operating and financial strategies? You look across all the things you do from the mobile value proposition, convergence, broadband costs, et cetera?

Yes. Well, I definitely acknowledge the overhangs that are sitting on the industry. But from where we're sitting, we don't see those as being the real overhangs and so it really hasn't changed the nature of how we're operating or what the strategy is. And we'll get into DISH, obviously, and EchoStar, that's put to the side and bed, and we'll get, I'm sure, into SpaceX in a little more detail as to why we're so convinced that this really isn't a competitive threat, particularly in the wireless space. So what we're continuing to focus on is what sounds really simple, but is actually uniquely differentiated. And we keep repeating it because it's really just a consistent approach to deliver the best network, the product at the best value, what you get for what you pay and make sure you're doing it with a focus on the best customer experiences. And when you focus on those 3 things, which are really actually difficult to achieve, and there's very few instances where you have the best product at the best value with the highest customer NPS score as we do in this industry, but we're leveraging those to really focus on where the growth opportunities are for T-Mobile. And if you think about the core business itself, one of the things that we've been able to unlock with the leadership in 5G and the consumer perception around network quality starting to dramatically change and will be a tailwind for a long time is what we call network seekers. And we've, kind of, sized this opportunity based on all of our work at about 20 million families and accounts -- sorry, business accounts. So that's accounts, not lines, obviously, way more than that in terms of lines, but 20 million accounts where their top motivator for switching and selecting a wireless provider is network quality. Of course, they want value and they want the experience, but the top motivation is network quality. That's exactly where we're going. We're there. The consumer sentiment is catching up. We've got all the ingredients to continue this leadership across not only the balance of 5G, but also accelerated into 6G that's going to be a tremendous tailwind for us. Of course, you've got beyond just network seekers, the continued opportunity in smaller markets and rural areas, which are about 40% of the U.S. population that we're now roughly last reported at about a 24% share that includes the UScellular acquisition, but continue to see significant growth with what Jon and team are doing there. That's the core business. We've got T-Mobile for Business, where we were always a stalking horse, kind of, not taking seriously in enterprise and government. But when you suddenly bring completely differentiated network capabilities that do more than connectivity, but they solve real business problems. We got a lot of examples around. PGA is a great recent one that we did. And now suddenly, they don't have to show up at courses for weeks in advance and run cabling everywhere and be stuck with, "this is the place I've got to take my camera shots from." No, I can actually have a 5G network slice, quality of service that's guaranteed, come in there, change the angle. So you've solved the problem for me, you've taken cost out of my business. That means not only will I pay you for that, but I can then give you the core connectivity side of the house. You've got broadband, both fixed wireless, which we'll get into a little bit more today, such a tremendous opportunity. We took this business from nothing 5, 6 years ago to now total broadband is near 10 million subscribers, and fixed wireless being the main portion of that on a product where the network technology and the CPE technology is rapidly evolving and now on our latest gen device delivering download speeds over WiFi near fiber-like with a trajectory of the tech going like this. So we put out guidance around 15 million 5G broadband subscribers by 2030, 3 million to 4 million fiber subscribers. And that didn't include, of course, the benefit that we can get from any incremental spectrum acquisition. That's all incremental fallow capacity. So that's a fabulous continued growth avenue for the business. And then you've got what really, really excites me are 2 adjacencies. So you're going to continue to see tremendous growth from there. Again, differentiation is the big driver, but 2 fabulous growth opportunities, one being financial services. And you may ask yourself, well, why in the world is T-Mobile getting into financial services? Well, the reality is we have relationships with a trusted brand with 1/3 of Americans. We have data that can actually create differentiated and beneficial credit decisioning on our existing customers. We've proven that to ourselves over and over again. And of course, we have distribution, both in the form of physical distribution, but now on T-Life, 30 million monthly active users that go there for way more than account maintenance. It's Magenta Status, all the benefits. It's becoming a lifestyle app and it allows you to have interaction and touch points with customers that trust you. So what we did in financial services, and if you think about financial services, it's actually an industry ripe for disruption. And you have great ideas from certain fintechs out there that are trying to disrupt this massive industry, their biggest problem is customer acquisition cost. If it costs you as much as it does for a new fintech with great ideas to acquire a customer, then the economic model just won't work to create differentiated products. So what we did is to say, well, let's test our thesis that we can dramatically lower our CAC as a result of the relationships that we have, digital and physical and start with a co-branded credit card. And it, while never achieving what we want because we always want more and we're never satisfied, is one of the most successful co-branded launches that Capital One has ever seen. And so the thesis is proving out on CAC and just wait, there's going to be a lot more disruption as a result of that in financial services. And then the last one to me that can really, really -- as I think about 2030 to 2035, it's physical AI, where network leadership, including into the 6G space, suddenly AI, if you believe that AI is going to move from where it is today into the physical realm, then networks and particularly T-Mobile, who's so far advanced in terms of technology, are suddenly going to be at the center of value creation around physical AI. We can actually -- the famous mobile edge compute that never came to be from Verizon's billion guidance way back in the day is actually, in a way, a little bit different because it's going to be way more tech-oriented and advanced, going to come to fruition. You can actually help and offload some of the processing from physical AI units onto the edge of the network with a universal clock that allows them to see, as Dr. Saw would say, space-time coherency. That means you don't have to put as much GPU processing power on the unit. It doesn't drain as much battery. You're suddenly creating value for the manufacturers of physical AI because you're offloading processing. The clouds can't do it. Too much latency, too far away. They don't operate on a universal clock. It's just -- to me, this is going to be a TAM expansion for the industry and us as a leader since we're multiyears ahead of the runway, that could be even bigger than the entirety of the core wireless businesses today. So there's so much opportunity ahead of us. And it's heads-down continued strategic focus because we don't really actually see disruption from SpaceX. I know we'll get into that a little bit later. But sorry, I get really excited about all the opportunity ahead of us.

We are done.

No.

All right.

That's all we have.

There's a lot to unpack there. So maybe -- because -- and we got a lot of things to get through today, as you mentioned. So maybe just one more quick one to bring it to the numbers. Do all these opportunities give you an opportunity to sustain mid-single-digit top line service revenue growth and then grow the EBITDA, grow the free cash flow underneath faster? That...

Yes. And without issuing multiyear guidance here, absolutely. And I think it also because of other ways that we're approaching, for example, efficiencies from a customer centricity lens means margin expansion on top of the service revenue growth.

So convergence is a big topic, and T-Mobile's had a differentiated perspective on how you're looking at convergence relative to the industry. And so André, I'll throw this to you. Of course, welcome feedback from all 3 of you. But if your competitors are more successful with these offers, what are the impacts to the industry? Does it shrink the switcher pool? Does it shrink the revenue pie? And what does it mean for T-Mobile?

So first, you said it, so I don't need to repeat it, but we have never subscribed to the theory of convergence as a stand-alone, sort of, market-defining force. And the reality and the concrete of what's happened over the last 5 or 6 years, which is how long convergence has been available widely in the market. If you think about 85% of U.S. households have access to at least one convergent option for more than 5 years. And throughout that time frame or any time frame you want to split the numbers, we've led in mobile growth, broadband growth, service revenue growth, ARPA expansion growth, financial success. So we don't subscribe to the principle not because we have a conceptual problem against it. It's just we don't see it. And I don't think anyone actually sees them because if you would, just think about cable as being one of the first comers into convergence, their results from both a financial and churn perspective have not gone positively, I would say, over the last 5 years. So we just don't see those forces playing through. What we do see playing through is just the strength of our -- as Peter said, our advantage in terms of technology, our investment into features around 5G and what that has brought to us in terms of our ability to continuously grow the market. And if anything, we're more excited now, just given what we've seen also others say about how they look at their network investment in the future than we've ever been before. So to answer directly to your question, do we see like CLVs or ARPAs or pool, we don't see it, right? We -- you saw our results last quarter, 277,000 net accounts, ARPA growing 2% year-on-year, 3.7% organically. I think it's the 18th quarter in a row where we've led the industry in broadband net adds. So I just -- we can discuss conceptually and theories around this, but the reality of the numbers seems -- points and it is clear that that's not happening.

Just following up on that with -- you mentioned the success you're having growing broadband. Curious, and you're welcome to throw in, I think, the movie term for this is Easter eggs. Feel free to throw in some Easter eggs of how the fiber business is performing relative to the fixed wireless business and what you're seeing from each of those?

Yes, we're so far away from Easter. But let's start with, I would say, the first part of it is the way we look at the business, right? And so we look at broadband overall. We actually don't have this logic of how does fiber perform against FWA because we see them as complementary products and complementary strategies within the market. We have -- and we have talked about it extensively, a close to nationwide coverage of FWA and have invested in fiber in areas where we believe that the shareholder returns are significant and are outsized. Two, FWA, and Peter has mentioned it, has been -- we were always very hopeful and we were always very, I think, strategically convinced that it was a great product and it would be a market-changing force unlike convergence. But if anything, we've been positively surprised with how fast the technology has evolved from mobile networks being able to provide broadband services because that wasn't something that both from a radio access network and from a device perspective, that wasn't something that was in focus either of the large RAN manufacturers or the large CPE manufacturers 5 years ago. I think we -- just given our size, our scale, but also what happened afterwards with players like Jio stepping in also in FWA, this is an industry that has developed significantly, and it has evolved leaps and bounds faster than what you see in DOCSIS, even what you see in fiber. Now, obviously, fiber being optical cables are, sort of, from a data transmission perspective, it will always be the best technology. But Peter mentioned a couple of things that -- a couple of numbers that I think are very interesting. Number one, in our latest generation routers and with the advancements we've made in our mobile network, today from a WiFi experience perspective, in our latest gen routers, the average download speeds of FWA are very close to fiber, which means that from a lived experience, but from a customer perspective, FWA is now one of the fastest broadband products in the market, right? Think about it. 5 years ago, when we started to launch the product, there was always a comment and the concern that this was very focused on the low-end segment of the market, right? And therefore, it would have a natural limit. As the technology has evolved, this has become a product that can serve any family in America. And therefore, it's really, really exciting if you think about what's still ahead of us, right? As the product keeps getting better and better, we have more -- if you think about it, it's a bit counterintuitive. We have more customers in the network and the product is better, performs better on average than it did a year ago and 2 years ago and 3 years ago. So that's, I think, one piece for us that's very, very important. We're obviously extremely excited about the future of 5G broadband and FWA. The second thing you mentioned fiber, right? So again, as I said, fiber for us is a complementary product. And one of the reasons why it's complementary is the way we look at FWA is as fallow capacity model. And that means that specifically, when we add a fiber customer in a specific area, we're actually freeing fallow capacity in FWA to sell to other customers. So it actually is really complementary. So we're not competing these 2 technologies. Whenever we sell a fiber customer, that means we can sell FWA. The radius of sales in wireless are usually larger than the sales of fiber. So we're actually freeing capacity elsewhere. Now, the way we've always been very clear on how we look at fiber, right? We look at fiber as one way -- not as a strategic necessity of hitting a certain number of homes or a certain number of customers. It's an opportunity to generate outsized financial growth and outsized returns for our shareholders. So your point is how do we look at these? Yes, when there are opportunities, not just to acquire companies, but also the way we look at our own expansion within the assets we already have, we look at it, does it generate returns for our shareholders because we're not bound or held by we need to hit a certain number of homes. We've said, sort of, what our targets are. But again, those are subject to being able to deliver financial returns.

One more on this. So the team expressed its interest in the upper C-band on the 2Q earnings call. When you look at the opportunities from that, is it really about turbocharging fixed wireless? Or is it about something more than that?

I think we can let -- do you want to start...

No. I mean the thesis around fixed wireless continues to be, as André said, a fallow capacity model. So what we look at in terms of any, sort of, spectrum acquisition, third party or an upcoming spectrum auction, be it C-band 2.0 or 2.7, is what does it do for the mobile business? And yes, there's a little bit of a catch-22 in your logic of, yes, but if you have more fallow capacity, you get more 5G broadband, and that's true, and that's part of the thought process. But it isn't -- we are in no place buying spectrum or rolling out network CapEx simply for the purpose of fixed wireless. It is a fallow capacity model. That's what makes it so marginally attractive.

Jon, coming over to you, maybe we could talk about the latest rate plan updates that you've implemented, front book, back book and the decision -- significant decision to extend the EIP plans to 3 years.

Yes.

What that means for you?

Absolutely. So we did take a series of actions this summer around really, kind of, simplifying a long tail of legacy plans. And we took these plans and updated them and moved people from 3G and 4G-like plans to today's modern and contemporary 5G plans. So we went through that effort, kind of, announced it at the end of June, started rolling that out to customers throughout July, a little bit of August. And all of that has gone exactly how we thought it would go. And there was some temporary churn associated with that, as Peter mentioned in the Q2 earnings results, and that's reflected in the 250,000 overall postpaid account net additions for Q3. And all of that's gone incredibly well. What we try to do on these things is give a more for more. So we want to give customers even more value, even more capability because what you're enjoying on your 5G device today is certainly different than what you enjoyed on a 3G or 4G device years and decades ago. So that's number one. And number two, it's easier for our frontline to serve customers that like if you're somebody that's starting with T-Mobile either in retail or in customer care, and I'm having to learn 15 years of rate plans that change every 2 to 3 years, that's really difficult to serve customers in that way. And it also contributes to how we digitalize, moving everything to a T-Life-centric environment that we can digitalize and digitalization is foundational to simplification and the rate plan lineup. So that's gone extremely well. We worked with our customers to work them through that, and that's gone as we planned. On EIP 36 -- or we launched some new Experience 2.0 plans that basically birth 36-month financing. One of the things that we try to do as a company is really listen to customers and help them in every way that we can and pay attention to what they need and as the market changes. These devices today that Apple, Samsung, Google are making are incredible devices. They last longer. Customers are enjoying them longer. You can see with our upgrade rate, we have a little bit less of an upgrade rate than our competitors. We think that's attributed to the overall network performance associated with those devices. So what we wanted to do is to be able to have a 36-month agreement, lowers the monthly payment for customers on EIP across 36 months versus 24 months. And then the big innovation is bringing EIP Flex to the market. Because when you really think about some of the pain points that are out there, prime families, near-prime families, families of 4 switching to T-Mobile, you're still at hundreds of dollars out of pocket between sales taxes, between what we call device connection charges. All those things are like big dollars out of pocket, it's a pain point. And what we try to do is take out every morsel of friction in the switching process. And that was a huge piece of friction for prime, near-prime families. And we addressed that. And so we launched that at the beginning of August. That's gone incredibly well. Our teams are really excited about that. Customers are loving it, and that's just the latest innovation that we brought to the marketplace.

So we're about 3 hours and 45 minutes away from the next smartphone cycle, but who's counting?

Exactly. There's a little company in Cupertino. Is that what you're -- yes.