T-Mobile US, Inc. (NASDAQ:TMUS) Q1 2024 Earnings Call Transcript

T-Mobile US, Inc. (NASDAQ:TMUS) Q1 2024 Earnings Call Transcript April 25, 2024

T-Mobile US, Inc. beats earnings expectations. Reported EPS is $2, expectations were $1.87. T-Mobile US, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] You may also submit a question via X by sending a post to @TMobileIR or @MikeSievert using the $TMUS. I would now like to turn the conference over to Mr. Jud Henry, Senior Vice President, Strategic Advisor Investor Relations for T-Mobile US. Please go ahead, sir.

Jud Henry: Welcome to T-Mobile’s First Quarter 2024 Earnings Call. Joining me on the call today are Mike Sievert, our President and CEO; Peter Osvaldik, our CFO; and as well as other members of the senior leadership team. During this call, we will make forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review. Our earnings release, investor fact book and other documents related to our results, as well as reconciliations between GAAP and non-GAAP results discussed on this call can be found in the Quarterly Results section of the Investor Relations website. With that, let me turn it over to Mike.

Mike Sievert: Okay, thanks, Jud. Good afternoon everybody, welcome. If you’re viewing online, you can see that I’ve got a good part of the senior team here. We’re coming to you from Bellevue, Washington today and we’re looking forward to a great discussion. And as you can see from our Q1 results, we are off to a great start in 2024. The year is unfolding right in line with what we expected across the board, and in fact better in some areas, and we’re increasing our guidance for the year accordingly. I’ll briefly touch on a few highlights and then we’ll get right to your questions. First, a comment on growth. We continued to take share in Q1 just as expected with postpaid phone net adds that were right in line with Q1 last year, while industry net adds were lower by a double digit percentage.

Our best value best network proposition continues to resonate in the market with our postpaid phone gross adds up year-over-year for the fourth consecutive quarter, even while industry gross adds were down. And we matched our best ever Q1 postpaid phone churn showing that customers love the Un-carrier value proposition and network. Second, a comment on those lowest ever postpaid upgrades for phones in Q1. I think this metric showcases our ongoing winning formula by demonstrating that customers choose to stay with T-Mobile for the best-in-class value and network they enjoy, which is the only retention strategy that drives profitable growth over the long-term. The network is an increasingly powerful part of our customers loyalty, as three quarters of our postpaid phone customers already have a 5G smartphone and they’re having a differentiated experience on the T-Mobile network.

It also demonstrates how we put our investments where they can have the greatest customer impact, letting natural customer demand drive the pace of upgrades. Overall, from consumers in major metros to smaller markets and businesses, from large enterprises to SMBs, T-Mobile’s durable, differentiated growth momentum continues across the segments, and the most exciting part is that there are still many years of market leading growth runway ahead for our core business. Okay, let’s talk broadband. Home broadband customers love a great value on a great network too. That’s been the formula that’s made us the fastest growing broadband provider for the past two years, and we did it again in Q1 as our 405,000 nets are expected to represent a higher share of industry broadband net adds than even a year ago, and are expected to be more than half of all nets from the major providers once again.

Our broadband strategy is unfolding exactly the way we said it would and we now proudly serve over 5 million High Speed Internet customers. And as we previously announced, we’re also growing the value of that customer base, successfully sunsetting our Launchera [ph] promotions and attracting customers at our nominal price points. In addition, our new rate plans for home mesh networks and for on the go usage are just the latest ways we intend to continue to enhance the value of this space and find new ways to serve customers better. Okay, let me comment on fiber. I’ve been saying for a while that smart fiber partnerships would allow us to profitably serve even more broadband customers and today we announced a joint venture with EQT that will acquire Lumos.

Consistent with everything we’ve said for the last year, this JV is the latest example of a capital light model and we’re excited to have such great and experienced partners. EQT is one of the leading infrastructure investors across the U.S. and Europe and brings a wealth of knowledge to the table. The Lumos management team under Brian Stading is outstanding and has years of experience building fiber in an efficient, cost effective and targeted build model. We’re really excited to be able to accelerate what Lumos has already been doing to reach more and more households in the years ahead. Together, we target 3.5 million homes passed by 2028 and T-Mobile expects to invest about $950 million upon close, which we expect less than a year from now, and another 500 million between 2027 and 2028 to get there.

T-Mobile will be a 50% owner of Lumos and will own the customer relationships, including their existing fiber customers at close, as Lumos will convert to a wholesale model. This is exactly the type of value creating investment that we had contemplated within our strategic envelope of funds that we set aside back when we shared the current stockholder return program with you last fall, and we expect to remain on track as it relates to our stockholder return ambitions.

Ultra Mobile: Financially, in Q1 we again showed how T-Mobile translates profitable growth into market leading consolidated service revenue growth and core adjusted EBITDA growth that was double the rate of our principal competitors and T-Mobile again delivered the highest free cash flow margins in the industry. So to wrap up, our model is working. It’s consistent and our confidence in it only builds with each passing quarter of success. We remain focused on continuing to take share in wireless and broadband while delivering industry leading growth in service revenue, profitability and cash flows. I couldn’t be more excited about what’s ahead for T-Mobile, and I want you to know that we plan to have a Capital Markets Day this fall where we look forward to going deeper with you on topics like the big opportunities that we see coming, how we’re seizing them, and how that will translate into enormous value creation for our company in the years ahead.

And I think you’re going to see once again that in many ways, we’re just getting started. Okay, Peter, over to you to talk about our key financial highlights and an update on our guidance.

Peter Osvaldik: Well, thank you, Mike. All right, as you can see, we kicked off 2024 with great momentum. Mike already highlighted our best-in-class growth in both the top and bottom line and how our industry leading conversion of service revenue to adjusted free cash flow continues to differentiate T-Mobile. So let me jump into our updated expectations for how that growth will continue in 2024, starting with customers where we now expect total postpaid net customer additions to be between 5.2 million and 5.6 million, up 150,000 at the midpoint. We now expect full year postpaid ARPA to grow up to 3% in 2024, a further acceleration of the growth we saw in 2023 from both the continued execution of our strategy to win and expand account relationships and as we anticipate taking further rate plan optimization actions within the base.

There is no change in our expectations for postpaid phone net adds from our original guidance last quarter, with Q1 strong growth coming in as we expected, and because we anticipate slight year-over-year headwinds to postpaid phone net adds in in Q2 and Q3 related to those rate plan optimizations which are accretive to the business on an all-in basis. Core adjusted EBITDA is now expected to be between $31.4 million and $31.9 billion, up 9% year-over-year at the midpoint. And as I mentioned on the last earnings call, we expect our industry leading service revenue growth to accelerate at a higher rate in 2024 than we delivered in 2023, even with the discontinuation of the Affordable Connectivity program that appears imminent at this point in time and is contemplated within the increased guidance.

We continue to expect cash CapEx to be between $8.6 billion and $9.4 billion as we deliver a capital efficiency unmatched in our industry on the back of our network integration and 5G leadership. Lastly, we now expect adjusted free cash flow, including payments for merger related costs, to be in the range of $16.4 billion to $16.9 billion. This is up 23% over last year at the midpoint and five times the expected growth rate of our next closest competitor, thanks to our margin expansion and capital efficiency, and does not assume any material net cash inflows from securitization. This also represents an adjusted free cash flow to service revenue margin, which is multiple percentage points higher than peers. So in closing, we continue to expect 2024 to be another year of differentiated profitable growth as we continue to extend our network leadership and further scale our unique growth opportunities.

We expect this to continue to translate into industry leading growth in service revenue, core adjusted EBITDA and free cash flow, along with the highest adjusted free cash flow margin in the industry, unlocking shareholder value. I couldn’t be more excited about the continued enormous value creation opportunity that we have in front of us for years to come. Okay, before we open it up for Q&A, I just want to take a moment to announce a changing of the guard in our investor relations leadership. After eleven years and an unbelievable 44 earning cycles in IR, I’m tremendously excited for Jud to take on a broader role within our finance organization and I’m equally excited to introduce Kathy Au as our new SVP of Investor Relations.

MoffettNathanson: And with that, I’ll now turn the call back to Jud to begin his last Q&A. Jud?

Jud Henry: Thanks Peter. All right, let’s get to your questions. You can ask questions via phone by pressing star, then 1, and via X by sending a post to @TMobileIR or @MikeSievert using $TMUS. We’ll start with a question on the phone. Operator, first question, please.

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Q&A Session

Operator: And the first question comes from Michael Rollins with Citi. Please go ahead.

Michael Rollins: Thanks and good afternoon and congrats, Jud on the new role. Just a couple questions, if I could. So first, you mentioned that you may be taking some pricing actions, and that could affect some of the subscriber performance in 2Q, 3Q. Can you unpack the plan of how you’re approaching those actions and how to think about the net benefits? And then just secondly, taking a step back, if you can give us an update on how you’re seeing the competitive landscape, how you’re seeing the switcher pool, and how T-Mobile is navigating some of these changes with the industry seemingly having lower upgrades, lower churn. Thanks.

Mike Sievert: Okay, great. Well, why don’t I jump in and I’ll give a comment on or a lack of a comment on the first question, and then I’ll hand it to Jon Freier for the second one. No, we’re not really going to announce any particular plans today. I will tell you that nothing we do is going to question or challenge our longstanding strategy of being the value leader in this market. But surely over the span of many years, what that means kind of changes over time. Costs have risen, changes have happened in a broader industry context, and we’re going to jealously guard that value leadership. And I think customers understand that if there are changes around the margins once every many years, in a world where costs change, they’ll understand and accept that we’ve actually made changes here and there over the past six months.

We’ve understood what that looks like and what that takes and there may be more changes, particularly with older rate plans, but we’re not here to announce anything. I will tell you that all the outcomes that we see from all of that on the customer side as well as on the ARPA side and on the EBITDA and revenue side, are contained within the guidance that Peter just shared. Do you want to add anything to that first question before we go to the second one?

Peter Osvaldik: I think you got it.

Mike Sievert: Okay. Competitive context on what are we seeing on upgrades? What’s driving that? What’s happening with the competition? Jon?

Jon Freier: Yes, you bet. So I’ll tell you a little bit about what’s happening competitively. It’s been an intense competitive environment in the marketplace, but it’s been generally consistent as you look at this overall competitive intensity. And for our business, we continue to have these differentiated growth opportunities, whether that be smaller markets in rural areas, whether that be within our High Speed Internet or in our overall enterprise and government space that Callie can talk about in just a few moments as well. And so during that overall competitive context, we have these unique growth vectors that we continue to be underpenetrated on, driving a lot of good success so far, but continue to have a lot of Runway in front of us.

So while that competitive environment is intense, sometimes one competitor is leaning in, sometimes one competitor’s leaning out. We’re always navigating that. Things are always changing. Sometimes it’s a little bit more device oriented. Sometimes it might be more rate oriented in terms of how the competitive environment is unfolding, but we’ve navigated that for years and years now and continue to be very comfortable with how that overall competitive environment is playing out. With respect to upgrades, we continue to meet the natural demand of upgrades. As you can see, the upgrade rate is a low 2.4% at the same time, when we’re matching the best Q1 postpaid phone churn performance in the company’s history. We’ve been more targeted and surgical with some of our upgrade offers for sure, but the overall natural demand and the upgrade cycle is lengthening.

It’s really kind of the best of both worlds when you have customers that are staying at incredible rates, record low rates, and not staying for free devices, exclusively. They’re staying for this differentiated value proposition, the network and the overall experience, something we’re very, very pleased with how it’s unfolding.

Mike Sievert: I’d just add one last thing. As I said in my prepared remarks, 75% of our customers have 5G devices and those customers are having a very differentiated experience with T-Mobile’s lead in 5G and we can talk more about that, I hope, during the call. I’m so pleased with what’s happened. We continue to extend our lead. And so the impetus when you’re having a fantastic experience on your phone to prematurely swap it out just isn’t there. And they’ll do it in a stepwise way. They continue to do it. And you can tell we’re upgrading people fast enough by the fact that all those people have 5G phones, which is right at or even above competitive benchmarks. So our customers continue to upgrade at just the pace that we think is appropriate.

Michael Rollins: All right, great.

Jud Henry: Operator, next question please.

Operator: The next question comes from John Hodulik with UBS. Please go ahead.

John Hodulik: Great. Thanks, guys. Maybe first on the Lumos transaction, first of all, should we expect similar deals in other parts of the country? And you talked about 3.5 million homes passed. Is that about, I mean, that’s just in one small part of the country. Should we expect something similar as we look at the rest of the U.S.? And then in the release today, you guys had a line about not being able to meet all the demand for broadband with your fixed wireless network. Can you talk a little bit about how much growth there is left there and if you’re seeing capacity constraints in any particular areas? Thanks.

Callie Field: What kind of partner ecosystem are you building to execute on your strategy?

Mike Sievert: Love it. Let’s go straight to Callie.

Callie Field: Okay. Well, thanks John for the question. We saw very strong growth in Q1, outpacing our benchmark competitor again in postpaid phone nets. And to comment a little bit on the question that Jon was answering in the business category, if we’re seeing pressure in that category, I think it might be us. And one of the interesting things I think that’s going on in our business right now is that not only are we delivering on top line growth, but also on CLV growth across all segments. And in enterprise, we just delivered our strongest postpaid nets ever in the history of the company. We also delivered our lowest churn in enterprise. In SMB, we had our highest ever port ratios and were net positive for seven consecutive quarters.

So we’re really liking the pace of the business. We’ve really graduated from just being a price comp to really a solution oriented sale for customers. And we see that with partnerships with Dialpad AI, with delivering Mission Critical Push-to-Talk. And I know you also asked who are some of the partners that we’re working with in building our ecosystem. Obviously, we’re partnering with the largest OEMs, working with Ericsson and Cisco, as well as industry segment experts like OCS when it comes to serve our government customers. So really building out our ecosystem, that allows us to really focus on enterprise solutions, enabling them to innovate and to love their customers at scale. I will mention just a couple of key wins in the Advanced Network Solution business.

You might have read about our partnership agreement with Delta, where they named us as their preferred wireless provider, but we’re also deploying a 5G hybrid network solution at their Atlanta headquarters, which we’re really excited about.

SASE:

Mike Sievert: It’s really interesting, when you hear us talk about enterprise, how different it is from four or five years ago. I mean, we were trying our best to sell SIMs to companies that would take meetings with us, like the Procurement Department. And what’s happened in this 5G strategy as it’s unfolded is Callie and team have built solutions to some of the most pressing connectivity problems that enterprises of all kinds face. And suddenly we’re in strategic conversations because we have capabilities like network slicing, like SIM-based security and many other emerging 5G capabilities that are way out in front. And that’s not just getting us revenues in those advanced 5G services, but it’s also winning us all those smartphones that we used to struggle so hard and back then have to price so hard to win.

So it’s been this really nice evolution. Make no mistake, we love low prices and we’re going to be the value leader here. But today we’re solving some of the most complicated connectivity problems that enterprises and organizations face, and that is a great place to compete.

Callie Field: Yes, thank you, Mike. I totally agree.

Jud Henry: Okay. All right, let’s try this again. Operator, can we get a question?

Operator: Sure. The next question comes from John Hodulik with UBS. Please go ahead.

Jud Henry: Hey, John.

John Hodulik: Okay, great. Thanks, guys. Hey, how are you guys?

Mike Sievert: Good, hey John.

John Hodulik: So I have a couple questions on the Lumos transaction. So first of all, should we just think of this transaction as sort of a one off, or should we expect other deals similar to this in other regions? And then of the 3.5 million homes you guys are talking about passing, how big could that get over the next five years? So that’s first. And then second of all, in the release, you guys talked about not being able to fulfill the demand that you’re seeing in broadband on the fixed wireless side. How much growth is still left in fixed wireless? And are you seeing areas today where you’re running out of capacity? Thanks.

Mike Sievert: Okay, let’s start with the second one. All along, if I were to remind all of our listeners, I know you know this. Our fixed wireless strategy has always been about selling excess capacity where we predict normal cell phone usage won’t suck up that 5G capacity and so this gives us the opportunity to serve broadband customers. And now at scale, we’re serving millions and millions of them under this strategy. We had originally said we saw this strategy leading to about 7 million to 8 million total customers in terms of opportunity. We don’t have any updates on that. I’ve said several times we’re working on thinking about examining ways that we could try to extend that, and we haven’t drawn any conclusions yet. We have to make sure it’s done in an economic way and we have to make sure it’s done in a way that customers will love and they have a fantastic product experience.

That being said, what’s interesting about fiber? Fiber, can be a strategy that relieves some pressure on the 5G network and extend the TAM and if you think about it. Because some customers will, where we offer fiber in the future, will be able to naturally graduate up to fiber, which is really a totally separate category. And that obviously opens up an opportunity for their neighbor to then become a 5g customer, so there’s some TAM expansion there. And then, to your point, even in places where Lumos currently operates, we have a long waitlist of people who applied. They put their address in our system. They applied to be a fixed wireless customer, and we haven’t accepted them yet because their address isn’t one of those places that I described where we have the predicted excess capacity.