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TMUS > SEC Filings for TMUS > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for T-MOBILE US, INC.

Form 10-Q for T-MOBILE US, INC.


8-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including information concerning our possible or assumed future results of operations, are forward-looking statements. These forward-looking statements are generally identified by the words "anticipates," "believes," "estimates," "expects," or similar expressions.

Forward-looking statements are based on current expectations and assumptions which are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The following important factors, along with the "Risk Factors" included in Risk Factors in Part II, Item 1A of this Form 10-Q, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements:

• adverse conditions in the U.S. and international economies or disruptions to the credit and financial markets;

• competition in the wireless services market;

• the ability to complete and realize expected synergies and other benefits of acquisitions;

• the inability to implement our business strategies or ability to fund our wireless operations, including payment for additional spectrum, network upgrades, and technological advancements;

• the ability to renew our spectrum licenses on attractive terms;

• the ability to manage growth in wireless data services including network quality and acquisition of adequate spectrum licenses at reasonable costs and terms;

• material changes in available technology;

• the timing, scope and financial impact of our deployment of 4G Long-Term Evolution ("LTE") technology;

• the impact on our networks and business from major technology equipment failures;

• breaches of network or information technology security, natural disasters or terrorist attacks or existing or future litigation and any resulting financial impact not covered by insurance;

• any changes in the regulatory environments in which we operate, including any increase in restrictions on the ability to operate our networks;

• any disruption of our key suppliers' provisioning of products or services;

• material adverse changes in labor matters, including labor negotiations or additional organizing activity, and any resulting financial and/or operational impact;

• changes in accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; and,

• changes in tax laws, regulations and existing standards and the resolution of disputes with any taxing jurisdictions.

Except as expressly stated, the financial condition and results of operations discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations are those of T-Mobile US, Inc. and its consolidated subsidiaries ("T-Mobile").

Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative explanation from the perspective of management of our financial condition, results of operations, liquidity and certain other factors that may affect future results. The MD&A is provided as a supplement to, and should be read in conjunction with, our audited Consolidated Financial Statements for the three years ended December 31, 2012, included in the Current Report on Form 8-K filed on June 18, 2013 and our unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior year. T-Mobile's MD&A is presented in the following sections:

• Results of Operations

• Performance Measures

• Reconciliation of Financial Measures

• Liquidity and Capital Resources

• Off-Balance Sheet Arrangements

• Related Party Transactions

• Restructuring Costs

• Critical Accounting Policies and Estimates


Table of Contents

T-Mobile is a national provider of mobile communications services capable of reaching over 280 million Americans. Our objective is to be the simpler choice for a better mobile experience. Our intent is to bring this proposition to life across all our brands, including T-Mobile, MetroPCS, and GoSmart, and across our major customer base of retail consumers and B2B.

We generate revenue by offering affordable postpaid and prepaid wireless voice, messaging and data services, as well as mobile broadband and wholesale wireless services. We provided service to approximately 44 million customers through our nationwide network as of June 30, 2013. We also generate revenues by offering a wide selection of wireless handsets and accessories, including smartphones, wireless-enabled computers such as notebooks and tablets, and data cards which are manufactured by various suppliers. Our most significant expenses are related to acquiring and retaining customers, maintaining and expanding our network, and compensating employees.

Business Combination with MetroPCS

On April 30, 2013, the business combination of T-Mobile USA and MetroPCS was completed. Under the terms of the business combination agreement, Deutsche Telekom received approximately 74% of the fully-diluted shares of common stock of the combined company in exchange for its transfer of all of T-Mobile USA's common stock. This transaction was consummated to provide us with expanded scale, spectrum, and financial resources to compete aggressively with other larger U.S. wireless carriers. The acquired assets and liabilities of MetroPCS are included in the Company's condensed consolidated balance sheet as of June 30, 2013 and MetroPCS' results of operations and cash flows for the period from May 1, 2013 through June 30, 2013 are included in the Company's condensed consolidated statement of income and comprehensive income and cash flows for the period from May 1, 2013 through June 30, 2013. Customer and revenue results of MetroPCS are included in the branded prepaid category. See Note 2 - Transaction with MetroPCS of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further information regarding the business combination.

Customers

T-Mobile generates revenue from three primary categories of customers: branded postpaid, branded prepaid and wholesale. Branded postpaid customers generally include customers that are qualified to pay after incurring service and branded prepaid customers include customers who pay in advance. Our branded prepaid customers include customers from the T-Mobile, MetroPCS and GoSmart brands. Wholesale customers include Machine-to-Machine ("M2M") customers and Mobile Virtual Network Operator ("MVNO") customers that operate on the T-Mobile network, but are managed by wholesale partners. We generate the majority of our revenues by providing wireless communication services to branded postpaid customers. Therefore, our ability to acquire and retain branded postpaid customers is significant to our business, including the generation of service revenues, equipment sales and other revenues.

During the three months ended June 30, 2013, 69% of our service revenues were generated by providing wireless communication services to branded postpaid customers, compared to 26% for branded prepaid customers, and 5% for wholesale customers, roaming and other services.

Services and Products

T-Mobile provides affordable wireless communication services nationwide through a variety of service plan options including our Value and Simple Choice plans, which allow customers to subscribe for wireless services separately from, or without purchase of, or payment for, a bundled handset.

As part of our Un-carrier value proposition, we introduced our Simple Choice plans in the first quarter of 2013. The Simple Choice plans eliminate annual service contracts and simplify the lineup of consumer rate plans to one affordable plan for unlimited talk, text and web service with options to add data services. Depending on their credit profiles, customers are qualified either for postpaid service, where they pay after incurring service, or prepaid service, where they pay in advance.

Customers on our Simple Choice or similar plans benefit from reduced monthly service charges and can choose whether to use their own compatible handset on our network or purchase a handset from us or one of our dealers. Depending on their credit profiles, qualifying customers who purchase their handset from us have the option of financing a portion of the purchase price at the point-of-sale over an installment period. Our Value and Simple Choice plans result in increased equipment revenue for each handset sold, compared to traditional bundled price plans that typically offer a significant handset discount, but involve higher monthly service charges. Our Value and Simple Choice plans result in increased net income during the period of sale while monthly service revenues are lower over the service period as further described in "Results of Operations - Equipment Sales."


Table of Contents

We sell services, handsets and accessories through our owned and operated retail stores, independent third party retail outlets and over the Internet through our websites (www.T-Mobile.com and www.MetroPCS.com) and a variety of third party web locations. The information on our website is not part of this report or any other report furnished to or filed with the SEC. We offer a wide selection of wireless handsets and accessories, including smartphones, wirelessly enabled computers (i.e., notebooks and tablets), and data cards which are manufactured by various suppliers. We sell handsets directly to consumers, as well as to dealers and other third party distributors for resale.

Business Strategy

We continue to aggressively pursue our strategy developed to reposition T-Mobile and return the company to growth. In the first half of 2013, we introduced Simple Choice plans as part of our "Un-carrier" value proposition. Our strategy focuses on the following elements:

• Un-carrier Value Proposition - We plan to extend our position as the leader in delivering distinctive value for consumers in all customer segments. Our Simple Choice plans have brought flexibility and value to customers by providing the option to pay for handsets over an installment period or to bring their own device. Simple Choice plans also eliminate annual service contracts and provide customers with a single, affordable rate plan without the complexity of caps and overage charges. Customers on Simple Choice plans can purchase the most popular smartphones, pay for them, if qualified, in affordable, interest-free monthly installments and upgrade any time they like without restrictive annual service contract cycles. Modernization of the network and introduction of the Appleฎ iPhoneฎ in the second quarter of 2013 further repositioned T-Mobile as a provider of dependable high-speed service with a full range of desirable handsets and devices. Customers are able to purchase or, if qualified, finance handsets from a competitive device lineup including of popular devices. Additionally, the MetroPCS brand has been a value leader in the prepaid market and we expect to continue to accelerate its growth by expanding the brand into new geographic regions, beginning in the second half of 2013 through 2014.

• Network Modernization - We are currently in the process of upgrading our network with a $4 billion investment designed to modernize the 4G network, improve coverage, align spectrum bands with other key players in the U.S. market and deploy nationwide 4G LTE services in 2013. The timing for the launch of 4G LTE allows us to take advantage of the latest and most advanced 4G LTE technology infrastructure, improving the overall capacity and performance of our 4G network, while optimizing spectrum resources. We remain on target to deliver nationwide 4G LTE network coverage by the end of 2013, reaching 200 million people in more than 200 metropolitan areas. The migration of MetroPCS customers onto T-Mobile's 4G HSPA+ and LTE network is also ahead of schedule, providing faster network performance for MetroPCS customers with compatible handsets. We expect the migration of MetroPCS's customers to our 4G HSPA+ and LTE network to be complete by the end of 2015.

• Multi-segment Focus - T-Mobile plans to continue to operate in multiple customer market segments to accelerate growth. The combination of T-Mobile USA and MetroPCS added another flagship brand to the T-Mobile portfolio and increased our ability to serve the full breadth of the wireless market. In B2B, T-Mobile has made significant investments in software and systems. Additionally, T-Mobile expects to continue to expand its wholesale business through MVNOs and other wholesale relationships where its spectrum depth, available network capacity and GSM technology base help secure profitable wholesale customers.

• Aligned Cost Structure - We continue to pursue a low-cost business operating model to drive cost savings, which can be reinvested in the business. These cost programs are on-going as we continue to work to simplify our business and drive operational efficiencies in areas such as network optimization, customer roaming, improved customer collection rates and better management of customer acquisition and retention costs. A portion of savings have been, and will continue to be, reinvested into customer acquisition programs.


Table of Contents

Results of Operations

Set forth below is a summary of consolidated results for the periods indicated:
                                    Three Months Ended June 30,                 Six Months Ended June 30,
(in millions)                    2013            2012         Change         2013           2012        Change
Revenues
Branded postpaid revenues    $    3,284       $   3,713         (12 )%   $   6,547       $  7,534         (13 )%
Branded prepaid revenues          1,242             414          NM          1,745            791          NM
Wholesale revenues                  143             143           -  %         293            273           7  %
Roaming and other service
revenues                             87             111         (22 )%         177            227         (22 )%
Total service revenues            4,756           4,381           9  %       8,762          8,825          (1 )%
Equipment sales                   1,379             435          NM          1,984            970          NM
Other revenues                       93              67          39  %         159            122          30  %
Total revenues                    6,228           4,883          28  %      10,905          9,917          10  %
Operating expenses
Network costs                     1,327           1,178          13  %       2,436          2,374           3  %
Cost of equipment sales           1,936             745          NM          2,822          1,590          77  %
Customer acquisition              1,028             751          37  %       1,765          1,500          18  %
General and administrative          819             871          (6 )%       1,588          1,841         (14 )%
Depreciation and
amortization                        888             819           8  %       1,643          1,566           5  %
MetroPCS transaction-related
costs                                26               -          NM             39              -          NM
Restructuring costs                  23              48         (52 )%          54             54           -  %
Other, net                            -              19          NM             (2 )           43          NM
Total operating expenses          6,047           4,431          36  %      10,345          8,968          15  %
Operating income                    181             452         (60 )%         560            949         (41 )%
Other income (expense)
Interest expense to
affiliates                         (225 )          (151 )        49  %        (403 )         (322 )        25  %
Interest expense                   (109 )             -          NM           (160 )            -          NM
Interest income                      40              18          NM             75             32          NM
Other income, net                   118              23          NM            112              8          NM
Total other expense, net           (176 )          (110 )        60  %        (376 )         (282 )        33  %
Income before income taxes            5             342         (99 )%         184            667         (72 )%
Income tax expense                   21             135         (84 )%          93            260         (64 )%
Net income (loss)            $      (16 )     $     207          NM      $      91       $    407         (78 )%


NM - Not Meaningful

Revenues

Branded postpaid revenues decreased $429 million, or 12%, for the three months ended and $1.0 billion, or 13%, for the six months ended June 30, 2013, compared to the same periods in 2012. The decreases were primarily attributable to lower average revenue per user ("ARPU") and a 5% year-over-year decline in the number of average branded postpaid customers. Branded postpaid ARPU was negatively impacted by the growth of our Value and Simple Choice plans which have lower priced rate plans than other branded postpaid rate plans. Compared to other traditional bundled price plans, Value and Simple Choice plans result in lower service revenues but higher equipment revenues at the time of the sale as the plans do not include a bundled sale of a heavily discounted handset. Branded postpaid customers on Value and Simple Choice plans more than doubled over the past twelve months and comprised 50% of the branded postpaid customer base at June 30, 2013, compared to only 19% at June 30, 2012.

Branded prepaid revenues increased $828 million for the three months ended and $954 million for the six months ended June 30, 2013, compared to the same periods in 2012. Of the increases, $717 million was due to the inclusion of the operating results of MetroPCS since May 1, 2013. The remaining increase was primarily due to organic growth of our branded prepaid customer base. Branded prepaid revenues, excluding MetroPCS increased by 30% for the six months ended June 30, 2013 compared to the same period in 2012 primarily as a result of an increase in average branded prepaid customers for the six months ended June 30, 2013 driven by the success of T-Mobile's monthly prepaid service plans, including data.


Table of Contents

Wholesale revenues were consistent for the three months ended and increased $20 million, or 7%, for the six months ended June 30, 2013, compared to the same periods in 2012. The increase for the six months ended June 30, 2013 was primarily attributable to a 22% growth of the average number of MVNO customers for the period. However, a significant portion of our MVNO partners' recent customer growth has been in lower ARPU products that result in revenues that do not increase in proportion with customer growth.

Roaming and other service revenues decreased $24 million, or 22%, for the three months ended and $50 million, or 22%, for the six months ended June 30, 2013, compared to the same periods in 2012. The decreases were primarily attributable to lower data roaming revenues due to rate reductions entered into with certain international roaming partners in the second half of 2012.

Equipment sales increased $944 million for the three months ended and $1.0 billion for the six months ended June 30, 2013, compared to the same periods in 2012. The increases were primarily attributed to significant growth in the number of handsets sold and an increase in the rate of customers upgrading their handset. This was driven by our introduction of both the Apple iPhone 5 and the Samsung Galaxy Sฎ4 in the second quarter of 2013, comprising of 26% and 18%, respectively, of smartphones sold, excluding MetroPCS. The inclusion of MetroPCS' operating results since May 1, 2013 contributed $73 million to the increase in equipment sales. Additionally, handsets sold during the second quarter had higher revenue per unit sold due to growth in the sales of smartphones, which have a higher average revenue per unit sold as compared to other handsets.

We financed $811 million of the equipment revenues through equipment installment plans during the three months ended June 30, 2013 an increase from $150 million in the three months ended June 30, 2012. Additionally, customers had associated equipment installment plan billings of $314 million in the three months ended June 30, 2013 compared to $96 million in the three months ended June 30, 2012. During the six months ended June 30, 2013, we financed $1.1 billion of the equipment revenues through equipment installment plans, an increase from $336 million in the six months ended June 30, 2012. Additionally, customers had associated equipment installment plan billings of $508 million in the six months ended June 30, 2013, compared to $172 million in the six months ended June 30, 2012.

Other revenues increased $26 million, or 39%, for the three months ended and $37 million, or 30%, for the six months ended June 30, 2013, compared to the same periods in 2012. The increases were primarily due to higher rental income from leasing space on our owned wireless communication towers to third parties.

Operating Expenses

Network costs increased $149 million, or 13%, for the three months ended and $62 million, or 3%, for the six months ended June 30, 2013, compared to the same periods in 2012. Of the increase, $216 million was due to the inclusion of the operating results of MetroPCS since May 1, 2013. Excluding network costs attributable to the MetroPCS operations, network costs decreased due to lower roaming expenses related to a decrease in average branded customers and associated usage compared to the prior year. Additionally, due to the network transition to enhanced telecommunication lines with higher capacity, we were able to accommodate higher data volumes at a lower cost, resulting in lower network costs in the three and six months ended June 30, 2013, compared to the same periods in 2012.

Cost of equipment sales increased $1.2 billion for the three months ended and $1.2 billion for the six months ended June 30, 2013, compared to the same periods in 2012. The increase in cost of equipment sales was primarily attributable to the significant increase in the volume of handsets sold during the second quarter of 2013, driven by our launch of the Apple iPhone 5 and the Samsung Galaxy S4 as well as additional phones sold through our expanded distribution channel as a result of acquiring MetroPCS. Of the increase, $204 million was attributable to the inclusion of operating results of MetroPCS since May 1, 2013. Additionally, cost of equipment sales increased during the three and six months ended June 30, 2013 due to an increase in the average cost per unit of each handset sold resulting from the growth in the sale of smartphones.

Customer acquisition increased $277 million, or 37%, for the three months ended and $265 million, or 18%, for the six months ended June 30, 2013, compared to the same periods in 2012. Of the increase, $95 million of the increases was attributable to the inclusion of operating results of MetroPCS since May 1, 2013. The remaining increase in customer acquisition expenses were primarily attributable to higher commissions costs driven by increased sales volumes and an increase in advertising expenses to promote our Un-carrier message and promote the launch of the iPhone 5 in April 2013.

General and administrative expense decreased $52 million, or 6%, for the three months ended and $253 million, or 14%, for the six months ended June 30, 2013, compared to the same periods in 2012. Excluding general and administrative costs attributable to the MetroPCS operations, general and administrative expenses decreased during the three and six months ended


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June 30, 2013 primarily due to lower bad debt expense of $87 million and $196 million, respectively, driven by improved credit quality of our customer portfolio and the shift in the customer base towards branded prepaid customers. This decrease was offset by an additional $59 million of general and administrative expenses from the inclusion of operating results of MetroPCS since May 1, 2013. Additionally, lower employee-related expenses in the three and six months ended June 30, 2013, as a result of restructuring initiatives implemented in the first half of 2012, which contributed to the year-over-year decreases.

Depreciation and amortization increased $69 million, or 8%, for the three months ended and $77 million, or 5%, for the six months ended June 30, 2013, compared to the same periods in 2012. Depreciation and amortization expense attributable to MetroPCS was $137 million for the months of May and June 2013. Excluding MetroPCS's operating results, depreciation and amortization expenses decreased during the three and six months ended June 30, 2013 as 2012 included increased depreciation expense due to changes in useful life of certain network equipment to be replaced in connection with network modernization efforts.

MetroPCS transaction-related costs were $26 million and $39 million in the three and six months ended June 30, 2013, respectively, primarily related to professional services costs associated with the business combination between T-Mobile USA and MetroPCS.

Restructuring costs of $23 million and $54 million for the three and six months ended June 30, 2013, respectively, were related to our 2013 cost restructuring program to align our operations to our new strategy and position the company for future growth. Costs associated with the 2013 restructuring program primarily related to severance and other personnel-related costs. Restructuring costs of $48 million and $54 million for the three and six months ended June 30, 2012 related primarily to the consolidation of our call center operations in 2012.

Other, net for the six months ended June 30, 2013 reflects a $2 million gain on a spectrum license transaction. Other, net of $19 million and $43 million for the three and six months ended June 30, 2012, respectively, primarily related to employee retention costs associated with the terminated AT&T acquisition of T-Mobile.

Other Income (Expense)

Interest expense increased $109 million for the three months ended and $160 million for the six months ended June 30, 2013, compared to the same periods in 2012. The addition of MetroPCS long-term debt assumed during the second quarter of 2013, resulted in a $56 million increase in interest expense over the prior year. Additionally, interest expense of $54 million and $105 million for the three and six months ended June 30, 2013 related to the long-term financial obligation recorded as a result of the Tower Transaction that closed on November 30, 2012 contributed to the increase. The Tower Transaction and related impacts are further described in Note 4 of the audited Consolidated Financial Statements for the year ended December 31, 2012 included in the Current Report on Form 8-K filed on June 18, 2013.

Income Taxes

Income tax expense decreased $114 million, or 84%, for the three months ended . . .

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