Jonathan Chaplin: Thanks guys.
Jud Henry: Thank you, Jonathan. All right, operator, next question.
Operator: And the next question is from Simon Flannery with Morgan Stanley. Please go ahead.
Simon Flannery: Great. Thank you. Good evening and best of luck. Jud, thanks for all the help and welcome, Kathy. Peter, I wanted to talk a little bit about margins, if I could. You had nice EBITDA growth of 8% margins up nearly 200 basis points year-over-year. I think in the past you’d sort of suggested the cadence would kind of ramp through the year. So perhaps just talk a little bit about margin trajectory, both this year and just longer term. The opportunity, I think, Mike, you said we’re just getting started here, so talk about the cost side if you could? And then maybe on spectrum, just any update you can give us on the status of the 800 MHz spectrum, given we’ve passed the dish April 1 deadline, what should we expect in coming months from you in terms of auctioning that off to third parties? Thanks.
Mike Sievert: Why don’t you take the first one?
Peter Osvaldik: Yes, absolutely. Thanks, Simon. You know, it’s, it’s a tremendously exciting story, actually. One of the reasons, as you, as we’ve talked about before, is we’ve now achieved, as of Q4 of last year in this tremendously successful merger integration, the run rate synergies, which we, raised a couple times during the pendency of the deal and execution itself. And so now, though, we continue with this guide to see run rates, EBITDA increases that are significant. In fact, quite, you know, similar to what we had during those synergy unlock days. And there’s a couple of things that create that. One is continued outsized profitable share taking, of course, taking those fixed costs and leveraging, the fact that we’re continuing to take outsize share and turning that into outsized service revenue growth.
So when you have postpaid service revenue growth, like we delivered this quarter of 6.5% year-over-year on a lot of fixed cost nature of the base, that obviously gives you leverage. Besides that, we’re going to continue. And really, it’s a culture, it’s kind of a flow of thinking here that we have around continued optimization efficiencies. Where can we extract efficiency out of the business so that we can plow it back into customer acquisition, margin expansion, and most importantly, and we’ve talked about this about, we tend to think about it as service revenue to free cash flow conversion. That free cash flow is what unlocks all the ability for further value creating investments, whether it’s spectrum purchases, whether it’s capital returns.
And so we’re hyper focused on how do we make sure that we create efficiencies in the expense profiles, and how do we make sure that in our CapEx profile, we’re making every single dollar count and delivering the next best tranche of value for us. And I think we have some really bespoke, unique ways that we approach that. But that’s how we continue to see this expansion, particularly in that service revenue to free cash flow play out over a period of time.
Mike Sievert: I hope it doesn’t sound like we’re sort of flogging our book when we say look at cash flow margins. We are, but also I think cash is king. And a view that doesn’t look at cash flow margins would miss the fact that we have, we think, a durably more capital efficient strategy than our benchmark competitors. And therefore, from a geography standpoint, EBITDA margins don’t tell the whole story, even though I’m pleased we’re up 200 bps almost and we’re making great progress there. But the cash margins are the story because they are inclusive of what we think is a durably superior capital investment profile. And we’ll talk a lot more about what we think. Our secret sauce is with you at some point when we have more time.
But this is a strategy we have growing confidence in, that it’s going to be durable. So the second question, around 801st of all, I will just remind you what Peter I know has told people in the past, that we chosen our business plan to be pretty conservative as it relates to how to think about the 800. And what I mean by that is we didn’t include any proceeds from this auction in our financial plan, so they would be found money going into that reserve fund we were talking about a few minutes ago with Jonathan. But secondly, we also did not put the usage of that spectrum into our network planning and capacity plan. And so kind of no matter what happens here with this auction, which has begun, we either get found spectrum and capacity that we get to keep and figure out a way to use.
And this is great spectrum nationwide, contiguous, low ban. Lots of interesting things we can do with it, especially with emerging technologies. But also this auction may conclude successfully. And if it does, we’ll have cash on hand that enhances our profile. So what’s the update? We have commenced. We have interested parties. We have nonbinding indications of interest. There’s reason to believe that we will meet the reserve. So it’s a little too soon. Everything’s non-binding, but we’ll have more to say after we get past kind of the binding parts of this, so stay tuned. But again, whichever way it shakes out for us, it’s a win because of our conservative planning.
Simon Flannery: Great. That’s helpful. Thank you.
Mike Sievert: You bet.
Jud Henry: Great. Operator, next question please?
Operator: The next question is from David Barden with Bank of America. Please go ahead. Mr. Barden, your line is open on our end.
David Barden: Oh, perfect. Thank you so much. Congrats to Jud and Kathy. So I guess my first question would be related to the comments in the results about how going after the business market has kind of impacted the ARPU calculation. And that’s been trending down for a couple of quarters. And so I was wondering if you could kind of maybe unpack the kind of subscriber number that we’re watching evolve here and how it balances between consumer versus business. Obviously, I’m obligated to ask you how free lines and other things contribute to the reported postpaid number. And the second question, if I could, maybe, Mike, just to go back to this Lumos situation, you’re basically saying that today you’re prepared to invest about 1.45 billion between now and 2028 to own 50% of basically 2.5% of the households in America.
And if you got 50% of that, you would have slightly around under, between 1.5%. So what is the point? Like why is it worth the brain damage to spend the money, the years building the organization, to get something that looks realistically so small in the grand scheme? Thanks. Sorry.
Mike Sievert: Yes, thanks, David. Well, let me start with the second one and then I’ll hand it to Peter on the first one. Look, I’m really excited about this because I think we’re getting a lot and enabling this company to accelerate growth. And if you think about close to 1.5 billion spread over in time, 3.5 million passings being the goal for that funding from the capital we put out, that’s less than $500 per passing. And to the premise of the question, that’s not for sort of like half of it, because the other way it works is that T-Mobile is the branded entity for all of those passings, and it’s up to us to make sure that it stays that way and we perform and so on. But our strategy is to be able to get augmentations to an already nationwide multimillion customer broadband strategy.
And this is a smart way to do that. And I signaled we’re open to constructs like this around the margins. And so maybe in the end it’ll add up to more than this and certainly 3.5 million isn’t where this probably ends. This is a growth engine that could continue into the future. We’re not obligated for it to, so I love the strategy, and I think it’s about getting a better return based on our embedded assets and complementing a complementary product that’s already scaled. And that makes it very appealing for us to think about the efficiencies of how we would go to market. And we are the go-to-market entity in this construct as Lumos pivots into a wholesale model. So hopefully that helps. To your first question on ARPU, maybe you could unpack it a little bit vis-à-vis business versus consumer and then answer once again the age old question of free lines and all that stuff.
Peter Osvaldik: Yes, absolutely Dave. As we’ve been long saying, our focus is primarily on ARPA drive accounts. Land them, expand them. And we just gave an updated guide with respect to ARPA, both from that as well as those continued freight plan optimizations. And we’ll probably see that more unfold in the second half of the year, but that trickles down into ARPU as well. So I’d say probably this year we’re expecting ARPU to be up, say maybe 0.5 %, again more weighted to the second half of the year. But it is very much, as you say, a mix driven metric. And now we don’t separately disclose consumer versus business, but there’s just so much goodness in terms of ARPA, both accounts and ARPA accretion, that you would expect us to go heavily after, as Kelly was talking about, the enterprise space and the government space, where naturally ARPUs are lower, but account and CLVs and enterprise value creation is really great and strong.
So you see success even in the consumer space with segmented consumer offers, like in the 55 plus segment, in the military segment. Once again, you’re willing to do lower ARPUs because you have great CLVs with those types of customers for differential reasons, each in their own segment. So we’re going to continue to pursue this strategy. But again, now we expect about probably half a percent increase in ARPU. Now, this whole age old free line question I understand, because there’s some stuff that’s happening in the industry. As you know, we don’t do first free lines. Now, we’ve long had a construct in our rate plan constructs that encourages higher number of lines in terms of our accounts because the higher number of lines get to be more sticky, generate more ARPA and the greater lifetime value.
But there’s really been no trajectory change there at all from a year-over-year sequential perspective. In fact, I would say it contributed less this Q1 than it did last Q1. But that to me is very much a rate, plan, construct. And again, we don’t do first free lines. And so that’s kind of, it’s not really any sort of a contributor to what you see have happened year-over-year in terms of our net ad performance relative to the industry.
David Barden: All right, thank you, Mike and Peter. I appreciate it.
Peter Osvaldik: You bet. Good to hear from you.
Jud Henry: All right, next question?
Operator: And the next question comes from Eric Luebchow with Wells Fargo. Please go ahead.
