T-Mobile US, Inc. (NASDAQ:TMUS) Q4 2023 Earnings Call Transcript January 25, 2024

T-Mobile US, Inc. misses on earnings expectations. Reported EPS is $1.67 EPS, expectations were $1.9. 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 tweet to @TMobileIR or @MikeSievert using the $TMUS. Please note this event is being recorded. I would now like to turn the conference over to 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 2023 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’s get it over to Mike to tell us about our results.

Mike Sievert: Thanks, Jud. Welcome, everybody. As you can see, if you’re viewing online, I’m here with a good cross-section of our senior team once again. We’re coming to you today from Bellevue, Washington and looking forward to a great discussion. But first, I’d like to take a moment to reflect on a historic year for T-Mobile and the exciting momentum that we bring into 2024. ’23 was another year for T-Mobile of industry-leading growth in both customers and key financials, including all-time record results across many metrics. It was also a year where T-Mobile became established as the overall network leader. Built on our extensive advantages in 5G. And it was the year that we effectively completed the biggest arguably the most successful telecommunications merger integration in the world, delivering synergies bigger and faster than even our own ambitious goals and doing it while also accelerating 5G investment in this country to the benefit of consumers and businesses.

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Our remarkably consistent, best value best network strategy, delivered industry-leading postpaid phone net additions of 3.1 million in 2023. This was driven by our highest postpaid phone gross adds in company history, up 2% for the year and up 6% in Q4. And by our lowest postpaid phone churn in company history for the year. Our net adds essentially matched our great results from ’22 despite industry postpaid phone net adds decreasing year-over-year. You know what that means? It means that our unique formula enabled us to take a higher share of postpaid phone net adds than a year ago. In fact, ’23 was our highest share of postpaid phone net adds since the merger, showing the ongoing durability of our differentiated strategy. And we finished the year on a high note, with Q4 postpaid phone net adds of 934,000 highest in the industry by a wide margin, and we did it with rising ARPA, up almost 2% delivering industry-leading growth in postpaid service revenue and core EBITDA in Q4 while also nearly doubling our adjusted free cash flow.

Let’s talk about Broadband. We added over 2.1 million customers in ’23, our biggest growth year yet with more net new customers than the other largest providers combined, as our product just continues to resonate in the market. And we finished strong with 541,000 nets in Q4, making us one of the largest ISPs in the nation with 4.8 million customers and counting at year-end. At T-Mobile, our network is the key enabler of our growth, not only for the success that we’ve had to date, but also for years to come. I predicted years ago that our well-established 5G leadership would eventually translate into overall network leadership, and that was proven loud and clear in 2023. By leading third parties like Ookla and OpenSignal, time and again, with T-Mobile sweeping every category of their test for overall network performance.

Listen, it boils down to this. T-Mobile has the broadest and the deepest and the most advanced 5G network in the US today. And we have the assets and capabilities to further extend our network leadership in ’24 and beyond. Okay. One final network point, we recently celebrated a pivotal moment in our ground-breaking alliance with SpaceX. By kicking off testing of direct satellite to cellular communications, our teams are really excited about what’s coming. Let me just remind you of one thing. Our network leadership still isn’t yet fully recognized by millions of network seekers who are still potential future customers for T-Mobile. And yet that same network leadership is already driving our strong win share, particularly in underpenetrated areas like enterprise and government and also in smaller markets and rural areas in our consumer business.

Let me just double-click on that growth momentum. T-Mobile for Business, delivered the highest postpaid phone net adds in company history in 2023. And we exited the year with great momentum, with Q4 being our highest quarterly net adds ever. Meanwhile, in our Consumer Group, we continued to grow our share of households, both in smaller markets and rural areas where we are well on our way to our 2025 targets and even in the top 100 markets, where we grew our share year-over-year on the strength of our network and our compelling value proposition. We’re executing our balanced growth playbook with great and consistent success. And the best part is we still have a lot of room to run. All of this added up to delivering the highest consolidated service revenue growth in the industry in ’23.

And it was an industry that continues to grow service revenues and cash flows while simultaneously seeing customers win from healthy competition that delivers more value and better networks. On that all-important postpaid service revenue metric, we delivered 6% growth in 2023, way above our next closest competitor. That growth led to core adjusted EBITDA growth of over 10% and free cash flow growth of nearly 80%. All of this enables our substantial stockholder return model, which has returned $17 billion to stockholders so far through the end of ’23, including our first-ever quarterly dividend in Q4. Now Peter will share our guidance with you in a moment. But the short version is this. We see continued strong customer and revenue growth, translating into rapid growth in cash flows in 2024 and beyond, and supporting our ambitious plans for shareholder returns that we’ve already shared with you.

Before I wrap up, because this is a year-end report, I want to touch on some of the ways we’re building a connected world where everyone can thrive. We believe reliable and affordable wireless and internet service is a necessity for all in today’s highly connected and digital world. And that’s why we are so proud to have connected nearly 6 million students. And provided $6.4 billion in products and services so far under our flagship initiative Project 10Million and our other education initiatives. We’ve also partnered with Welcome.US to provide service through Metro by T-Mobile to refugees entering the US as part of a multiyear commitment of 200,000 lines. It is difficult to imagine restarting a new life in a new country, without the connectivity that most of us take for granted.

We are also working hard to create a more sustainable future, and we are proud to be the first US wireless provider to commit to achieving net zero emissions across our entire carbon footprint by 2040 using SBTi’s net-zero standard. All right. Let me just wrap up with why I am so excited about what’s ahead. We are now entering a period of tremendous value creation at T-Mobile, driven by ongoing growth leadership and having — and by having completed both a historic merger and a massive 5G network build that are foundational to unlocking the cash flow potential of this business. Our network is now a differentiated competitive advantage that complements our well-established value leadership. This unique and powerful formula means that our significant growth and value creation opportunities only continue to scale, and they have lots of room to run.

As we enter 2024 with momentum, I could not be more proud of this team and of our employees who remind us every day that it’s better over here at T-Mobile. All right, Peter, over to you to talk about our key financial highlights as well as our 2024 guidance.

Peter Osvaldik: All right. Well, thank you, Mike. As you can see, our 2023 results highlighted our strong execution and accelerating our merger integration while leveraging our network leadership and fame for value to deliver industry-leading growth in both traditional postpaid and broadband customers. Our Land and Expand strategy also led to industry-leading growth in postpaid account net adds as well as ARPA growth of 1.3%. Before I jump into our guidance, I would also like to take a moment to note a couple of items impacting our Q4 earnings per share. In December of 2023, we issued 48.8 million shares to SoftBank as the 45-day VWAP of our stock price reached the threshold price under the letter agreement from 2020. This obviously increased our share count, which impacted our diluted EPS and as it is treated as if those shares had been issued for the full quarter.

We expect that dilution to be more than offset by our ongoing share repurchases in 2024. We also accelerated depreciation on certain technology assets in Q4 and would anticipate a year-over-year increase in depreciation and amortization of approximately $500 million to $1 billion in full year 2024, as we continue to modernize our network and technology systems and platforms. Mike already highlighted our best-in-class growth in both the top line and the bottom line and how our industry-leading conversion of service revenue to free cash flow continues to differentiate T-Mobile. So let me jump into how we expect that growth to continue in 2024. Starting with customers. We expect total postpaid net customer additions to be between 5 million and 5.5 million the same starting guidance as last year, reflecting continued focus on profitable growth as we execute our differentiated strategy even while expecting total industry net additions to moderate.

This assumes roughly half of postpaid net adds will be phones. And the guidance also assumes the final portion of deactivations of our lower ARPU postpaid other data devices in the education sector with most of that impact already having been accelerated into the second half of 2023. As we noted last quarter, we had always anticipated many of these connections, which supported educational institutions through the pandemic would roll off as the emergency connectivity program wound down and things return to normal. Turning to core adjusted EBITDA. We expect it to be between $31.3 billion and $31.9 billion up nearly 9% year-over-year at the midpoint and above the midpoint of our Capital Markets Day guidance for 2024. This is three times the growth rate of peers and a year-over-year dollar increase comparable to what we delivered in 2023 despite no material incremental merger synergy benefits in 2024.

Our sustained growth represents the power of our industry-leading service revenue growth, the operating leverage of our profitable growth model and the opportunity to continue to drive operating efficiencies in the business. We would expect slightly different shaping across the quarters now that we are past the integration. For example, we would expect slightly less sequential improvement from Q4 2023 to Q1 of this year than we saw last year as we achieved full run rate synergies in Q4 2023 and no longer have that as an incremental sequential factor as we had in past Q4 to Q1 progressions. We would expect the operating leverage and efficiencies to drive EBITDA this year to build throughout the year, layered against the seasonal trends of the business.

We expect cash CapEx to be between $8.6 billion and $9.4 billion as we deliver a capital efficiency unmatched in the industry on the back of our network integration and 5G leadership. Our pull forward of CapEx into 2022 and 2023 has provided us with a broad multilayer 5G network on which we can now deploy additional spectrum for capacity across those existing radios without material incremental CapEx required. Our capital-efficient and data-informed customer-driven coverage approach guides us as we continue to enhance and further expand our network. Our expectations for free cash flow, including payments for merger-related costs is in the range of $16.3 billion to $16.9 billion. This is up approximately 22% 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, and this also represents a free cash flow to service revenue margin multiple percentage points higher than peers. We expect Q1 free cash flow to be approximately 20% of that full year midpoint given several items that fall early in the year. First, we expect Q1 to be the peak CapEx quarter at probably 30% of the full year midpoint of the CapEx guidance I just shared with you. Second, we expect approximately half of the $600 million to $700 million of anticipated full year ’24 cash merger-related costs to be in Q1. Third, we have cash severance for workforce actions taken late last year or if the monthly payments to Cogent following the Wireline sale will taper after April.

And finally, there are working capital seasonality elements coming off the higher holiday sales period. 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 2% in 2024. Further acceleration of the growth we saw in 2023. In closing, we expect ’24 to be another year of profitable growth as we continue to extend our network leadership and further scale our differentiated growth opportunities. We expect this to continue to translate into industry-leading growth in service revenue, core adjusted EBITDA and free cash flow delivering the highest free cash flow margin in the industry to unlock 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.

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. You can ask a question via phone by pressing star then one and via X by sending a tweet to @TMobileIR or @MikeSievert using $TMUS. We’ll start with a question on the phone. Operator first question please.

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