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TMUS > SEC Filings for TMUS > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for T-MOBILE US, INC.

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


7-Nov-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 and may cause actual results to differ materially from the forward-looking statements. The following important factors, along with the "Risk Factors" included in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed on August 8, 2013, could affect future results and 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 or acquire new spectrum licenses;

• 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


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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, wholesale and business (B2B) consumers.

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 45 million customers through our nationwide network as of September 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 September 30, 2013 and MetroPCS's results of operations and cash flows for the period from May 1, 2013 through September 30, 2013 are included in the Company's condensed consolidated statement of income and comprehensive income and cash flows. Customers and revenues 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 generally include customers who pay in advance. Our branded prepaid customers include customers of 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 service 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.

We offer services, handsets and accessories directly to consumers through our owned and operated retail stores, as well as through our websites (www.T-Mobile.com and www.MetroPCS.com). In addition, we sell handsets to dealers and other third party distributors for resale through independent third party retail outlets and a variety of third party websites. The information on our website is not part of this report or any other report furnished to or filed with the SEC.

During the three months ended September 30, 2013, 64% of our service revenues were generated by providing wireless communication services to branded postpaid customers, compared to 31% from branded prepaid customers, and 5% from wholesale customers, roaming and other services. During the nine months ended September 30, 2013, 71% of our service revenues were generated by providing wireless communication services to branded postpaid customers, compared to 24% from branded prepaid customers, and 5% from wholesale customers, roaming and other services.

Services and Products

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

We introduced our Simple Choice plans as part of our Un-carrier value proposition in the first quarter of 2013. 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 the option to add high speed data services. Depending on their credit profiles, customers are qualified either for postpaid service, where they generally pay after incurring service, or prepaid service, where they generally pay in advance.


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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 profile, 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 handset discount but involve higher monthly service charges. Our Value and Simple Choice plans also result in increased net income during the period of sale while monthly service revenues are lower over the service period.

In July 2013, we launched phase 2 of our Un-carrier value proposition, Just Upgrade My Phone ("JUMP!TM"), under which qualifying customers who finance their initial handset purchase using the Company's Equipment Installment Plan ("EIP") and enroll in the JUMP! program can upgrade their handset up to twice a year, following completion of an initial six-month enrollment period, and receive a credit for their outstanding EIP balance provided they trade in their used handset to purchase a new handset from the Company.

Business Strategy

We continue to aggressively pursue our strategy to reposition T-Mobile and return the company to growth. 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. We believe the launches of Un-carrier phases 1 and 2 have been successful, as evidenced by our strong customer growth momentum. Simple Choice plans, launched in March 2013 as phase 1 of our Un-carrier value proposition, eliminate annual service contracts and provide customers with affordable rate plans without the complexity of caps and overage charges. Customers on Simple Choice plans can purchase the most popular smartphones and if qualified, pay for them in affordable interest-free monthly installments. Modernization of the network and introduction of the Apple® iPhone® 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. In July 2013, we announced JUMP!, which enables participating subscribers to upgrade their eligible handset twice a year upon completion of an initial six-month enrollment period. In October 2013, we unveiled phase 3 of our Un-carrier value proposition, which provides our customers reduced United States to International calling rates and roaming fees, and free data roaming while traveling abroad in over 100 countries. In addition, in November 2013, we began to offer the Apple iPad® Air and iPad mini.

• Network Modernization - We are currently in the process of rapidly upgrading our network 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 of 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. In October 2013, we announced that we have exceeded our 2013 targets for 4G LTE network coverage, by delivering 4G LTE to more than 200 million people in 254 metro areas and a goal to deploy 10+10 MHz 4G LTE in 24 of the Top 25 metro areas by year end (and 40 of the Top 50 metro areas). Additionally, the migration of MetroPCS brand legacy CDMA customers onto T-Mobile's 4G HSPA+ and LTE network is ahead of schedule, providing faster network performance for MetroPCS customers with compatible handsets. We expect the migration to be complete by the end of 2015.

• Multi-segment Focus - We plan to continue to operate in multiple customer market segments to accelerate growth. The addition of the flagship MetroPCS brand to the T-Mobile portfolio increased our ability to serve the full breadth of the wireless market. We expect to continue to accelerate the growth of the MetroPCS brand by expanding into new geographic regions, through the end of 2013 and continuing through 2014. Recently, we introduced the Simple Choice value proposition to our prepaid and B2B customers as well, so that prepaid customers and businesses can leverage the benefits of the Simple Choice plans. Additionally, we expect to continue to expand our wholesale business through MVNOs and other wholesale relationships where our 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 and cost savings in areas such as network optimization, customer roaming, customer service, 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.


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Results of Operations

Set forth below is a summary of consolidated results:
                                   Three Months Ended September 30,                 Nine Months Ended September 30,
(in millions)                     2013              2012          Change          2013              2012          Change
Revenues
Branded postpaid revenues    $     3,302       $      3,571          (8 )%   $     9,849       $     11,105         (11 )%
Branded prepaid revenues           1,594                450          NM            3,339              1,241          NM
Wholesale revenues                   157                134          17  %           449                407          10  %
Roaming and other service
revenues                              85                106         (20 )%           262                333         (21 )%
Total service revenues             5,138              4,261          21  %        13,899             13,086           6  %
Equipment sales                    1,467                554          NM            3,452              1,524          NM
Other revenues                        83                 78           6  %           242                200          21  %
Total revenues                     6,688              4,893          37  %        17,593             14,810          19  %
Operating expenses
Network costs                      1,444              1,141          27  %         3,880              3,515          10  %
Cost of equipment sales            2,015                866          NM            4,837              2,456          97  %
Customer acquisition               1,039                823          26  %         2,804              2,323          21  %
General and administrative           894                840           6  %         2,482              2,681          (7 )%
Depreciation and
amortization                         987                825          20  %         2,630              2,391          10  %
MetroPCS transaction and
integration costs                     12                  -          NM               51                  -          NM
Impairment charges                     -              8,134          NM                -              8,134          NM
Restructuring costs                    -                 36          NM               54                 90         (40 )%
Other, net                             -               (179 )        NM               (2 )             (136 )        NM
Total operating expenses           6,391             12,486         (49 )%        16,736             21,454         (22 )%
Operating income (loss)              297             (7,593 )        NM              857             (6,644 )        NM
Other income (expense)
Interest expense to
affiliates                          (183 )             (165 )        11  %          (586 )             (487 )        20  %
Interest expense                    (151 )                -          NM             (311 )                -          NM
Interest income                       50                 20          NM              125                 53          NM
Other income (expense), net           (7 )               15          NM              105                 22          NM
Total other expense, net            (291 )             (130 )        NM             (667 )             (412 )        62  %
Income (loss) before income
taxes                                  6             (7,723 )        NM              190             (7,056 )        NM
Income tax expense                    42                 12          NM              135                272         (50 )%
Net income (loss)            $       (36 )     $     (7,735 )        NM      $        55       $     (7,328 )        NM


NM - Not Meaningful

Revenues

Branded postpaid revenues decreased $269 million, or 8%, for the three months ended and $1.3 billion, or 11%, for the nine months ended September 30, 2013, compared to the same periods in 2012. The decreases were primarily attributable to lower average revenue per user ("ARPU"). 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 postpaid 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 discounted handset. Branded postpaid customers on Value and Simple Choice plans more than doubled over the past twelve months to 61% of the branded postpaid customer base at September 30, 2013, compared to only 23% at September 30, 2012.

Branded prepaid revenues increased $1.1 billion for the three months ended and $2.1 billion for the nine months ended September 30, 2013, compared to the same periods in 2012. Of the increases, approximately $1.1 billion and $1.8 billion was due to the inclusion of the operating results of MetroPCS since May 1, 2013 for the three and nine months ended September 30, 2013, respectively. Branded prepaid revenues, excluding MetroPCS, were fairly consistent for the three months ended September 30, 2013 and increased by 26% for the nine months ended September 30, 2013 compared to the same period in 2012. This increase for the nine months ended September 30, 2013 resulted primarily from an increase in average branded


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prepaid customers driven by the success of T-Mobile's monthly prepaid service plans, including data services that have higher ARPU.

Wholesale revenues increased $23 million, or 17%, for the three months ended and $42 million, or 10%, for the nine months ended September 30, 2013, compared to the same periods in 2012. The increase was primarily attributable to 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 $21 million, or 20%, for the three months ended and $71 million, or 21%, for the nine months ended September 30, 2013, compared to the same periods in 2012. The decreases were primarily attributable to lower international voice and domestic data revenues from rate reductions entered into with certain roaming partners. Additionally, fewer early termination fees associated with the no annual service contact features of Simple Choice plans launched in March 2013 contributed to lower other service revenues.

Equipment sales increased $913 million for the three months ended and $1.9 billion for the nine months ended September 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 S®4 in the second quarter of 2013, and the Apple® iPhone® 5s and iPhone® 5c in the third quarter of 2013. Additionally, equipment sales increased due to growth in the sales of smartphones, which have a higher average revenue per unit sold as compared to other handsets. The inclusion of MetroPCS's operating results since May 1, 2013 contributed approximately $200 million and $250 million to the increase in equipment sales for the three and nine months ended September 30, 2013, respectively.

We financed $1.0 billion of the equipment revenues through equipment installment plans during the three months ended September 30, 2013, an increase from $235 million in the three months ended September 30, 2012. Equipment installment plan billings totaled $435 million in the three months ended September 30, 2013 compared to $125 million in the three months ended September 30, 2012. During the nine months ended September 30, 2013, we financed $2.1 billion of equipment revenues through equipment installment plans, an increase from $571 million in the nine months ended September 30, 2012. Additionally, customers had associated equipment installment plan billings of $943 million in the nine months ended September 30, 2013, compared to $297 million in the nine months ended September 30, 2012.

Other revenues were consistent for the three months ended and increased $42 million, or 21%, for the nine months ended September 30, 2013, compared to the same periods in 2012. The increase for the nine months ended September 30, 2013 was primarily due to an increase in tower site imputed rental income.

Operating Expenses

Network costs increased $303 million, or 27%, for the three months ended and $365 million, or 10%, for the nine months ended September 30, 2013, compared to the same periods in 2012. Of the increase, approximately $300 million and $500 million was due to the inclusion of the operating results of MetroPCS since May 1, 2013 for the three and nine months ended September 30, 2013, respectively. Excluding network costs attributable to the MetroPCS operations, network costs decreased due to lower roaming expenses related to reduced roaming rates negotiated with our roaming partners and reduced volumes driven by a decrease in average branded customers 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.

Cost of equipment sales increased $1.1 billion for the three months ended and $2.4 billion for the nine months ended September 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 three and nine months ended September 30, 2013. Additionally, cost of equipment sales increased during the three and nine months ended September 30, 2013 due to an increase in the average cost per unit of each handset sold. This was due in part to an increase in the sale of smartphones units of 139% and 77% for the three and nine months ended September 30 2013, respectively, compared to the same periods in 2012. Additionally, of the increase in cost of equipment sales, approximately $350 million and $550 million was attributable to the inclusion of operating results of MetroPCS since May 1, 2013 for the three and nine months ended September 30, 2013, respectively.

Customer acquisition increased $216 million, or 26%, for the three months ended and $481 million, or 21%, for the nine months ended September 30, 2013, compared to the same periods in 2012. Of the increase, approximately $150 million and $250 million was attributable to the inclusion of operating results of MetroPCS since May 1, 2013 for the three and nine months ended September 30, 2013, respectively. Excluding customer acquisition costs attributable to the MetroPCS


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operations, higher commissions costs driven by increased number of customer additions further increased customer acquisition expenses during the three and nine months ended September 30, 2013. For the three months ended September 30, 2013 the increase was partially offset by lower promotional expenses.

General and administrative expense increased $54 million, or 6%, for the three months ended and decreased $199 million, or 7%, for the nine months ended September 30, 2013, compared to the same periods in 2012. General and administrative expense attributable to MetroPCS since May 1, 2013 was approximately $75 million and $100 million for the three and nine months ended September 30, 2013, respectively. Excluding general and administrative costs attributable to the MetroPCS operations, general and administrative expenses decreased during the three and nine months ended September 30, 2013 primarily driven by $120 million and $330 million, respectively, in lower bad debt expense, net of recoveries. This decrease in bad debt expense was driven by improved credit quality of our customer portfolio. Additionally, lower employee-related expenses, as a result of restructuring initiatives implemented in the first half of 2012 contributed to the year-over-year decreases.

Depreciation and amortization increased $162 million, or 20%, for the three months ended and $239 million, or 10%, for the nine months ended September 30, 2013, compared to the same periods in 2012. Depreciation and amortization attributable to MetroPCS since May 1, 2013 were approximately $200 million and $350 million for the three and nine months ended September 30, 2013, respectively. Excluding MetroPCS's operating results, depreciation and amortization expenses decreased 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 and integration costs were $12 million and $51 million in the three and nine months ended September 30, 2013, respectively, primarily . . .

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