T-Mobile US, Inc. (NASDAQ:TMUS) Q4 2022 Earnings Call Transcript

T-Mobile US, Inc. (NASDAQ:TMUS) Q4 2022 Earnings Call Transcript February 1, 2023

Operator: Good morning . I would now like to turn the conference over to Mr. Jud Henry, Senior Vice President and Head of Investor Relations for T-Mobile US. Please go ahead, sir.

Jud Henry: All right. Welcome to T-Mobile’s Fourth Quarter and Full Year 2020 Earnings Call. Joining me on the call today are Mike Sievert, our President and CEO; Peter Osvaldik, our CFO; 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 the call over to Mike.

Mike Sievert: Okay. Thanks, Jud. Hi, everybody. As you can see, we’re here in New York City with the whole senior team. And I am very much looking forward to talking about 2022 and a look ahead to what I think is going to be an even more exciting future. 2022 was a record year for our company. It was our best year ever. We welcomed more customers to the un-carrier than ever before in our history, and we translated this customer growth to industry-leading financial growth, finishing with a strong Q4. Our T-Mobile team delivered at or above the high end of our guidance across the board. 2022 was also the biggest investment year in our history. By accelerating these investments, we rewrote the competitive dynamic on network competition for good, and laid the foundation for a highly capital-efficient run rate business beginning this year.

When I took responsibility as CEO almost three years ago, I spoke to you about an opportunity we saw that if we could execute well, we can position T-Mobile to be the first company in our space to simultaneously offer the best network and the best value, breaking a decade forced choice on consumers and businesses. While the results are in, with the latest network awards and we’ve done it. T-Mobile is not only the 5G leader, but now the overall network leader. And this opens big growth pathways for our future. Along the way, we successfully completed the customer migration and network shutdown faster than planned, while also delivering industry-leading growth in both customers and cash flows through our differentiated and profitable growth strategy.

And we launched our most ambitious ESG initiatives ever. Our financial outcomes allowed us to accelerate our network deployments and begin share repurchases earlier than planned. And looking ahead to 2023, we’re very confident in our differentiated strategy. In fact, we’re on track to meet or exceed all of the aspirations for this year that we shared with you way back at our Analyst Day in early 2021. I’m excited to talk more about all of this today, and let’s start with our merger integration. Back when we closed the merger, a few people would have thought that we could shut down the Sprint network faster than planned and deliver the lowest churn in our history at the same time, that’s exactly what our team did. We moved all Sprint customers off the network and completed the DCOM of Sprint sites, all within 2.5 years.

And not only that, we had our best postpaid phone churn year in the Company’s history at just 0.88, and we were the only one in the industry to deliver year-over-year improvement for full year 2022. Diving into network, while T-Mobile has been the clear 5G leader for years, we can now say that T-Mobile has the best overall network in the United States. That is a big statement. For the first time ever, T-Mobile won a clean suite across every single overall network category in Ookla’s recent report. And recent data from Opensignal and umlaut also show T-Mobile as the clear leader with over 12 billion data points across these network coverage and performance tests, the facts show T-Mobile is the new network leader. And this brings with it an exciting new opportunity, convincing people that this 30-year force choice between network and value is gone when you choose T-Mobile.

This is no small task. But other results show that more and more people are beginning to notice and they’re choosing T-Mobile. In fact, our results in ’22 demonstrated how differentiated and effective our growth strategy really is. Kind of feels like deja vu. When I think back to this time last year, and everyone was worried about what would happen when industry growth began to normalize. And I sense that’s top of mind for everyone again as we enter 2023. Well, let’s show up immediately last year. The industry did see lower year growth in the second half. And guess what? Our unique ability to offer customers both the best network and the best value across multiple new and underpenetrated segments of the market led to T-Mobile’s SaaS growth year ever, with two of our best core system merger coming in the second half, even as market growth began to normalize.

We posted a record 1.4 million postpaid account net adds, the highest in company history and the highest reported in the industry once again. We’re winning the highest share of switching decisions in the industry through our clear growth strategies. And we delivered our highest-ever postpaid net adds of over $6.4 million, above the high end of our recently raised guidance. This included our highest postpaid fund net adds since the merger with an industry-leading 3.1 million. We explained it before. Our strategy is differentiated and durable because it’s driven by taking share in places where we’re massively underpenetrated relative to the competition and where we now have the winning hand. Including T-Mobile for Business, where we just delivered one of our highest ever phone net adds quarters in Q4.

And we’re clearly having an impact on the incumbents. As you can see in Verizon’s highest-ever business churn in 2022. In the top 100 markets for consumer, we’re winning with prime network seekers who increasingly recognize that T-Mobile offers the best combination of network coverage and capacity for their needs and at a lower cost. We’re only beginning to tap into this new opportunity. And in smaller markets in rural areas, where we’re bringing a better value proposition and a better network to new geographies, we really didn’t play in before. We’re capturing a win share of switchers in the high 30s, which says a lot because in many of these places, we’re only just getting started. In addition, we added 2 million high-speed Internet customers in our first full year since our commercial launch.

In fact, T-Mobile had more broadband net adds in ’22 that AT&T, Verizon, Comcast and Charter combined. This is a powerful new phenomenon for our brand in addition to being a good business. And not only did we deliver industry-leading customer growth, but our focus on profitable growth translated into industry best financial performance with core adjusted EBITDA up 12% year-over-year and free cash flow up 36%. The investments we’ve made in 2022, including in our cybersecurity capabilities showed up in a critical way a few weeks ago. I want to take a moment to address the recent cyber incident. After address identifying a criminal attempt to access our data through an API, we shut it down within 24 hours. And more importantly, our systems and policies protected the most sensitive kinds of customer data from being accessed.

We take this issue very seriously. Find disappointed that the crime actor will be able to obtain any customer information, we are confident that our aggressive cybersecurity plan working with the support of some of the world’s experts will allow us to achieve our goal of becoming second-to-none in this area. Before I wrap up, I want to touch on some of the ways we’re building a more connected and sustainable future. Nearly three years ago, we launched our digital divide initiative called Project 10Million to bring connectivity to underserved students nationwide with free or highly subsidized service. And I am proud to say we’re now more than halfway to achieving our goal. To date, we’ve provided $4.8 billion in services and connected more than 5.3 million students, and we’re not slowing down.

We’re also working hard to create a more sustainable future, recently committing to our most ambitious sustainability goal yet to achieve net-zero emissions across our entire carbon footprint by 2040. This makes T-Mobile one of the only four Fortune 100 companies to do so. Our work in this space is being recognized, including being named in the top 20 of JUST Capital’s 2023 rankings, which measures companies against metrics that matter to our communities, including environmental impact, where we ranked number one in our industry. Okay. Let me wrap up with some comments on 2023 and what’s ahead. With these record results, we’ve clearly shown that our differentiated strategy has lots of room to run. And I strongly believe that this will prove to be the case even as industry as a whole is seeing moderating growth and potentially a challenging macroeconomic environment.

In fact, it may be especially true in that case as our unique high-quality positioning is proving remarkably well suited to the times. We believe 2023 will also be a year in which we begin to see the payoff. In terms of EBITDA and massive cash flow expansion of years of work on merger integration, synergy attainment and the most ambitious network build in U.S. history, all of which are mostly behind us now. And an ongoing differentiated profitable growth, which is the durable result in front of us. I could not be more proud of this team and our employees, and I am so excited for all that’s ahead in 2023 and beyond. Okay, Peter, over to you to talk about our key financial highlights and our guidance for 2023.

Peter Osvaldik: Awesome. Thanks, Mike. As you can see, our 2022 results highlighted our strong execution in accelerating the moderation while leveraging our network leadership to deliver industry-leading growth in both traditional postpaid and broadband customers. This translated into industry-leading postpaid service revenue growth of 8% in 2022. We delivered core adjusted EBITDA of $26.4 billion, up 12% and reaching a record high and at the high end of our recently raised guidance. We realized approximately $6 billion of synergies in 2022 or roughly the total run rate synergies expected in our original merger plan in 2018. Our strong margin expansion also unlocked rapid free cash flow growth, which grew at an industry-best 36% year-over-year to $7.7 billion and that’s even after funding our peak CapEx year in 2022.

This strong financial performance allowed us to commence our share buybacks ahead of our original 2023 time line. We repurchased 16.5 million shares for $2.3 billion in Q4, bringing the cumulative total repurchase to $21.4 million shares for $3 billion in 2022. This is such an exciting start to this opportunity to deliver significant shareholder value. So let’s talk about how our great execution and investments in ’22 set us up for another strong year of growth in 2023. We expect total postpaid net additions to be between 5 million and 5.5 million, reflecting continued focus on profitable growth as we execute our differentiated growth strategy even while expecting total industry net additions to be down versus 2022. This guidance assumes roughly half of postpaid net adds coming from fans.

That profitable growth leads to core adjusted EBITDA that is expected to be between $28.7 billion and $29.2 billion, or up 10% midpoint based on continued growth in service revenues and merger synergies and above our Analyst Day guidance for 2023. This excludes leasing revenues of approximately $300 million as we transition substantially all remaining customers off device leasing by year-end. Our merger synergies are expected to further ramp to between $7.2 billion to $7.5 billion in 2023, approaching a full run rate synergy target from our Analyst Day a year ahead of schedule. And thanks to great execution by the teams. We not only delivered accelerated synergies, but now also expect higher run rate synergies of approximately $8 billion in 2024, of which approximately $2 billion is avoided cost, which is consistent with the amount expected at our Analyst Day.

With the major integration work now behind us, we expect merger-related costs, which are not included in adjusted or core adjusted EBITDA, to be approximately $1 billion before taxes, and is expected to be front-end loaded with roughly 40% expected in Q1. This is expected to be the last year of material margin related costs from a P&L perspective. And just as we have highlighted at Analyst Day, cash payments related to merger costs have underwent the P&L recognition to date and are expected to invert and be between $1.5 billion to $2 billion for 2023 with almost half of that total heading in Q1. Net cash provided by operating activities, including these payments for merger-related costs, expected to be in the range of $17.8 billion to $18.3 billion.

We expect cash CapEx to be between $9.4 billion and $9.7 billion as we deliver capital efficiency unmatched in our industry on the back of our network integration and 5G leadership. I would expect this to be a bit more weighted towards the first half of the year. Our capital efficiency and data-informed customer-driven coverage approach guides us as we continue to enhance and further expand our network. Together, this results in expected free cash flow, including payments for merger-related costs to be in the range of $13.1 billion to $13.6 billion. This is up approximately 75% over last year, thanks to our large tension and capital efficiency and does not assume any material net cash inflows from securitization. And this also represents a free cash flow service revenue margin multiple percentage points higher than peers.

Turning now to taxes, we expect our full year effective tax rate to be between 24% and 26%. And finally, as we continue to execute our strategy of winning and expanding account relationships, we expect full year postpaid ARPA to be up approximately 1% in 2023 and as we continuously win and then deepen our cap relationships. Altogether, we expect 2023 to be another year of profitable growth and even greater free cash flow expansion as we continue to extend our network leadership and further scale our differentiated growth opportunities. And with that, I will now turn the call back to Jud to begin the Q&A. Jud?

Jud Henry: All right. Let’s get to your questions. Operator?

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Q&A Session

Operator: Our first question comes from Craig Moffett with SVB Moffett. You may proceed with your question.

Craig Moffett: Two questions, if I could. One is, you’ve now had a number of announcements about dabbling in the wireline market. I wonder if you could just talk about your wireline ambitions. And maybe bridge from that into the role that you think WA plays in making bundled offers. Is that something that you need to have nationally? And if so, how do you think you get there on the wireline side? And then second, just a financial question for Peter. I wonder if you could talk about the pacing of share repurchases. I understand that there’s some debt paydown that we always expected the first, now that we’re sort of well into the repurchase segment. What does the pace of that looks like over the next couple of years?

Mike Sievert: Well, I’ll start, Craig. Let me start by telling you a little bit about how we view the convergence space. And obviously, to the premise of your question, we are competing very ambitiously in this space with more new broadband net additions in 2022 than the rest of the industry combined. So we’re very happy with our position, and it has lots of room to run for years to come. But on the other hand, the larger question is whether or not we’re doing this for offensive reasons or defensive reasons. And our view is that the market has shown that customers will accept bundles. But it’s far from certain weather bundles are something that they will require. And so we’re some flank is exposed that we have to protect. We’re interested in convergence because we have a lot to offer.

And we have a great brand, a great capability, a great team, great distribution and the ability to add value to the space as you’re seeing in our present success in home broadband through 5G. So we’re very interested in the space. But I’ll tell you, we haven’t decided whether or not that would translate into augmenting that strategy with a wireline approach. But if we did, it would be because it’s a good business. Not because we feel like there’s some flank that we have exposed that we need to protect. And so while we haven’t made a decision about it, I can tell you a few things that we’ve decided not to do. And I think that’s important for people to understand. I personally have no interest in having some kind of major change to our strategy as a company or the financial outcomes that will go from that strategy or the shareholder remuneration that flows from our financial outcomes.

We’re on a mission to become the best in the world at wireless. And we’re pursuing that mission ambitiously and so far, very successfully. That is the place where the future lies and where we want to be. And I’m interested in delivering all of the financial outcomes that we promised you that flow from that business plan. And the shareholder remuneration and share buybacks that flow from that, and we’re not interested in something that would cause a material change in any of that. Secondly, because of that, I think we’ve looked at it and said, if we got involved we would do it most likely with partners. It would make — it would just be smart to do it with partners versus by ourselves. And that means purely through a partnership or if we have an ownership stake of some type of some kind, it would be off balance sheet and again, would not be at a level that would have a material change in terms of who we are.

And then as I said, we’d be interested in it. If it’s something that we could add value and make the market better for customers and make some money doing it, directly for the merits of the business, not necessarily for the merits of how it would attribute to wireless. And that’s because consumers are sort of voting with their feet. And so far, we haven’t seen a benefit to convergence that really translates into consumer value beyond just a discount. And there are plenty of ways to deliver customers’ discounts when you have the superior assets in wireless superior balance sheet and wireless, the best overall network and a tradition of a brand that delivers outstanding value. So hopefully, that helps clear that one up.

Peter Osvaldik: Yes. And then on share buybacks, Craig, I think the important thing is that the strategy hasn’t changed, other than, of course, the ability with the financial performance of the Company to initiate those earlier. And so, we couldn’t have been more excited to get that first $14 billion through Q3 approved, and you saw we delivered $3 billion of that in 2022. We continue to have line of sight to the up to $60 billion. And so, nothing’s changed with regards to the strategy. We’re very excited about the cash flow generation of the business, and the flexibility that, that provides. If you think about shaping, of course, I’m not going to talk about day-to-day or week-to-week shaping for natural reasons. But of course, you’ve got the growth of core EBITDA coming throughout the years, which gives you financial flexibility.

As you know, we’re very prudent in just the leverage target that we’ve set overall. But again, nothing has changed with respect to the strategy, very excited about the free cash flow generation and the shareholder remuneration affords.

Operator: Our next question comes from Philip Cusick with JPMorgan. You may proceed with your question.

Philip Cusick: I wonder if you could dig into the business growth a little bit. What type of contracts are you signing? Are we — what’s sort of enterprise versus SMB mix? And where do these customers tend to come in on ARPU? We’ve heard about some free heavy discounting that you’ve done to win some big contracts. And as it goes to that, as we think about our POP up 1% this year, should we think of ARPU more like flat? Or does that start to drift a little bit lower year-over-year?

Mike Sievert: We’ll start with Callie on what we’re seeing and then switch over to Peter on ARPA and ARPU.

Callie Field: Okay. Thanks Mike. So in T-Mobile for Business, as Mike mentioned earlier, we continue to build very strong momentum, which is driven by our 5G network leadership combined with toward winning customer service model. In Q4, we continued to grow our service revenue. We delivered one of our highest ever postpaid so net add performance. We recorded our lowest postpaid phone churn since the merger with Sprint, and we grew our voice ARPU. In fact, we grew strong net adds every quarter in ’22 and it’s having an impact, as you can see in Verizon’s business trend, which was its highest ever levels in ’22. And their business to net adds declined sequentially for the last three quarters. We’ve also achieved five consecutive quarters of business Internet growth.

Some of our key wins in strategic verticals, we found in the airline industry, where we’ve won nine out of 10 major airlines growing our base with these customers by 15% in Q4 alone. In the healthcare industry, we welcome to Ensign here as a using company who’s deploying our mobility of a service solution to their 25,000 employees. In banking, large financial institutions are fast adopting on multiline solutions. We won three new logos in Q4 for a total of 24 accounts. In the public sector, we welcome to Chicago PD, Head County, Dallas IST. And even in our Advanced Network Solutions category, we signed on Formula 1, where we’re on the last Vegas, be providing powering our operations and ensuring top performance fees. And we also welcomed Bell Resorts, the largest mountain resort operator where we’re working together to provide innovative guest experiences, helping meet their sustainability goals and enhance restore operations.

And we know why we’re laying, it’s not a race to the bottom, it’s not a bit of the lowest rate of pricing down. We always treat our customers first. And in the modern workplace where CIS, we are focused on productivity digital transformation, even more considered sales. And therefore, it matters that we have a two-year head start in IT network leadership. It matters that we deploy customers drove coverage, and we’re differentiated as a superior network an unparalleled service model. I’m going to it over to you, Peter.