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TMUS > SEC Filings for TMUS > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for T-MOBILE US, INC.

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


1-May-2014

Quarterly Report


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

Cautionary Statement Regarding Forward-Looking Statements

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 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 Securities and Exchange Commission ("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.

Additional information concerning these and other risk factors is contained in the Risk Factors included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.

You should carefully read and consider the cautionary statements contained or referred to in this section in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf, and all future written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statements.

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 ("MD&A") are those of T-Mobile.

Overview

The 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 Consolidated Financial Statements included in Part II, Item 8 of our Form 10-K for the year ended December 31, 2013. 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:

• Financial Highlights

• Other Highlights

• Results of Operations


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• Performance Measures

• Liquidity and Capital Resources

• Contractual Obligations

• Off-Balance Sheet Arrangements

• Related Party Transactions

• Critical Accounting Policies and Estimates

Financial Highlights

• Total revenues increased 47% to $6.9 billion for the three months ended March 31, 2014 compared to $4.7 billion for the three months ended March 31, 2013.

• Service revenues increased 33% to $5.3 billion for the three months ended March 31, 2014 compared to $4.0 billion for the three months ended March 31, 2013.

• Total net customer additions were 2,391,000 for the three months ended March 31, 2014, a significant increase compared to 579,000 net customer additions for the three months ended March 31, 2013.

• Branded postpaid churn was 1.5% for the three months ended March 31, 2014, a 40 basis point improvement compared to 1.9% for the three months ended March 31, 2013.

• Adjusted EBITDA of $1.1 billion for the three months ended March 31, 2014 compared to $1.2 billion for the same period in 2013.

• Cash capital expenditures for property and equipment were $947 million for the three months ended March 31, 2014 compared to $1.1 billion for the three months ended March 31, 2013.

Note: Comparability of results in this Form 10-Q for the three months ended March 31, 2014 and 2013 is affected by the inclusion of MetroPCS results after the completion of the business combination on April 30, 2013.

Other Highlights

Un-carrier value proposition - In January 2014, we launched phase 4.0 of our Un-carrier value proposition, which reimburses customers' early termination fees when they switch from other carriers and trade in their eligible device. The reimbursement of early termination fees ("ETF") is recorded as a reduction of equipment sales revenues, and accordingly had an impact on both revenue and Adjusted EBITDA of approximately $100 million for the three months ended March 31, 2014. In April 2014, we announced that starting in May for bills arriving in June, domestic overage charges will be abolished for all customers on our consumer plans.

Spectrum purchases - In January 2014, we entered into agreements with Verizon for the acquisition of 700 MHz A-Block spectrum licenses in exchange for approximately $2.4 billion in cash and the transfer of certain AWS spectrum and PCS spectrum. The spectrum licenses acquired from Verizon cover more than 150 million people, including approximately 50% of the U.S. population and 70% of our existing customer base, in 23 markets. This transaction is expected to further enhance our portfolio of U.S. nationwide broadband spectrum and enable the expansion of LTE coverage to new markets. The transaction closed in April 2014.

Factoring arrangement - In February 2014, we entered into a two-year factoring arrangement to sell certain service accounts receivable on a revolving basis, subject to a maximum funding limit of $500 million at any given time. See Note 2
- Acquisitions and Other Transactions of the Notes to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Form 10-Q for more information.


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Results of Operations

Set forth below is a summary of consolidated results:
                                                   Three Months Ended March 31,         Percentage
(in millions)                                         2014               2013             Change
Revenues
Branded postpaid revenues                       $       3,447       $       3,263             6  %
Branded prepaid revenues                                1,648                 503            NM
Wholesale revenues                                        174                 149            17  %
Roaming and other service revenues                         68                  90           (24 )%
Total service revenues                                  5,337               4,005            33  %
Equipment sales                                         1,448                 606           139  %
Other revenues                                             90                  66            36  %
Total revenues                                          6,875               4,677            47  %
Operating expenses
Cost of services, exclusive of depreciation and
amortization shown separately below                     1,464               1,109            32  %
Cost of equipment sales                                 2,286                 886           158  %
Selling, general and administrative                     2,096               1,506            39  %
Depreciation and amortization                           1,055                 755            40  %
MetroPCS transaction and integration costs                 12                  13            (8 )%
Restructuring costs                                         -                  31            NM
Other, net                                                (10 )                (2 )          NM
Total operating expenses                                6,903               4,298            61  %
Operating income (loss)                                   (28 )               379            NM
Other income (expense)
Interest expense to affiliates                            (18 )              (178 )         (90 )%
Interest expense                                         (276 )               (51 )          NM
Interest income                                            75                  35            NM
Other expense, net                                         (6 )                (6 )           -  %
Total other expense, net                                 (225 )              (200 )          13  %
Income (loss) before income taxes                        (253 )               179            NM
Income tax expense (benefit)                             (102 )                72            NM
Net income (loss)                               $        (151 )     $         107            NM

NM - Not Meaningful

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Revenues

Branded postpaid revenues increased $184 million, or 6%, for the three months ended March 31, 2014, compared to the same period in 2013. The increase was primarily attributable to a 14% year-over-year increase in the number of average branded postpaid customers driven by the continued success of our Un-carrier value proposition. The increase, along with an increase in revenues from the adoption of upgrade programs, was partially offset by lower average revenue per user ("ARPU"). See "Performance Measures" for a description of ARPU. Branded postpaid ARPU was negatively impacted by the growth of our Value and Simple Choice plans which have lower monthly service charges compared to traditional bundled plans. Branded postpaid customers on Value and Simple Choice plans more than doubled over the past twelve months to 75% of the branded postpaid customer base at March 31, 2014, compared to 36% at March 31, 2013.

Branded prepaid revenues increased $1.1 billion for the three months ended March 31, 2014, compared to the same period in 2013 primarily due to the inclusion of MetroPCS operating results for the three months ended March 31, 2014.

Roaming and other service revenues decreased $22 million, or 24%, for the three months ended March 31, 2014, compared to the same period in 2013 due to a decline in early termination fees following the introduction of the no annual service contract feature of the Simple Choice plan launched in March 2013.

Equipment sales increased $842 million, or 139%, for the three months ended March 31, 2014, compared to the same period in 2013. The increase was primarily attributable to significant growth in the number of handsets sold due to higher gross customer additions and an increase in the rate of customers upgrading their handsets. Additionally, equipment sales increased


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due to higher volume of smartphone sales. Approximately $150 million of the increase in equipment sales was attributable to the inclusion of MetroPCS operating results for the three months ended March 31, 2014. These increases were partially offset by revenue reductions from the reimbursement of ETFs from other carriers in connection with Un-carrier phase 4.0 totaling approximately $100 million for the three months ended March 31, 2014.

We financed $1.2 billion of equipment sales revenues through equipment installment plans during the three months ended March 31, 2014, a significant increase from $298 million in the three months ended March 31, 2013 resulting from growth of our Value and Simple Choice plans. Additionally, customers had associated equipment installment plan billings of $657 million in the three months ended March 31, 2014, compared to $194 million in the three months ended March 31, 2013. We classify EIP receivables, gross into credit categories of "Prime" and "Subprime". Prime receivables, those with lower delinquency risk, were 53% of the EIP receivables on a gross basis as of March 31, 2014.

Other revenues increased $24 million for the three months ended March 31, 2014, compared to the same period in 2013 primarily due to higher co-location rental income from leasing space on T-Mobile owned wireless communication towers to third parties.

Operating Expenses

Cost of services increased $355 million, or 32%, for the three months ended March 31, 2014, compared to the same period in 2013. Approximately $300 million of the increase was due to the inclusion of MetroPCS operating results for the three months ended March 31, 2014.

Cost of equipment sales increased $1.4 billion, or 158%, for the three months ended March 31, 2014, compared to the same period in 2013. The increase was primarily attributable to a 216% increase in the sale of smartphone units for the three months ended March 31, 2014, compared to the same period in 2013. Additionally, the inclusion of MetroPCS's operating results contributed approximately $450 million to the increase in cost of equipment sales for the three months ended March 31, 2014.

Selling, general and administrative increased $590 million, or 39%, for the three months ended March 31, 2014, compared to the same period in 2013. Approximately $300 million of the increase in selling, general and administrative was attributable to the inclusion of MetroPCS operating results for the three months ended March 31, 2014. The increase in selling, general and administrative, excluding MetroPCS was primarily due to higher promotional costs and higher commission expenses driven by increased branded gross customer additions during the three months ended March 31, 2014.

Depreciation and amortization increased $300 million, or 40%, for the three months ended March 31, 2014, compared to the same period in 2013. Approximately $200 million of the increase in depreciation and amortization was attributable to the inclusion of MetroPCS operating results for the three months ended March 31, 2014. The increase in depreciation and amortization, excluding MetroPCS, was primarily associated with the build out of the T-Mobile LTE network, which increased the depreciable base.

MetroPCS transaction and integration costs of $12 million for the three months ended March 31, 2014 and $13 million for the three months ended March 31, 2013, reflect personnel-related costs and professional services costs associated with the business combination.

Other Income (Expense)

Interest expense to affiliates decreased $160 million, or 90%, for the three months ended March 31, 2014, compared to the same period in 2013. The decrease in interest expense to affiliates was primarily due to lower debt balances with Deutsche Telekom for the three months ended March 31, 2014, resulting from the recapitalization of T-Mobile prior to the business combination and Deutsche Telekom's sale of non-reset notes in the aggregate principal amount of $5.6 billion in October 2013. The decrease was further impacted by fair value adjustments related to embedded derivative instruments associated with the senior reset notes during the three months ended March 31, 2014.

Interest expense increased $225 million for the three months ended March 31, 2014, compared to the same period in 2013. The increase in interest expense is primarily the result of new senior notes issued during 2013, the assumption of MetroPCS long-term debt in connection with the business combination and the issuance of non-reset notes to Deutsche Telekom in April 2013. Following Deutsche Telekom's sale of the non-reset notes in October 2013, they were reclassified from long-term debt to affiliates to long-term debt.


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Interest income increased $40 million for the three months ended March 31, 2014, compared to the same period in 2013. The increase in interest income is primarily the result of significant growth in handsets financed through our equipment installment plans for the three months ended March 31, 2014. Deferred interest associated with our EIP receivables is imputed at the time of sale and then recognized over the financed installment term.

Income Taxes

Income tax expense decreased $174 million for the three months ended March 31, 2014, compared to the same period in 2013. The decrease in income tax expense was primarily due to lower pre-tax income. The effective tax rate was 40.3% and 40.2% for the three months ended March 31, 2014 and 2013, respectively.

Guarantor Subsidiaries

Pursuant to the applicable indentures and supplemental indentures, the long-term debt, excluding capital leases, are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile ("Parent") and certain of T-Mobile USA's ("Issuer") 100% owned subsidiaries ("Guarantor Subsidiaries"). In 2014, T-Mobile entered into a two-year factoring arrangement to sell certain service accounts receivable on a revolving basis. In connection with the factoring arrangement, the Company formed the Factoring SPE, which is included in the Non-Guarantor Subsidiaries condensed consolidating financial information.

The financial condition of the Parent, Issuer and Guarantor Subsidiaries is substantially similar to the Company's consolidated financial condition. Additionally, the results of operations of the Parent, Issuer and Guarantor Subsidiaries are substantially similar to the Company's consolidated results of operations. The change in the financial condition of the Non-Guarantor Subsidiaries was primarily due to the inclusion of the net assets and results of operations of the Factoring SPE as a result of the factoring arrangement. As of March 31, 2014 and December 31, 2013, the most significant components of the financial condition of the Non-Guarantor Subsidiaries were property and equipment of $575 million and $595 million, respectively, long-term financial obligations of $2.1 billion and $2.1 billion, respectively, and stockholders' deficit of $1.2 billion and $1.3 billion, respectively. The most significant components of the results of operations of our Non-Guarantor Subsidiaries for the three months ended March 31, 2014 were services revenues of $265 million, offset by costs of equipment sales of $138 million resulting in a net comprehensive loss of $5 million. Similarly, for the three months ended March 31, 2013, services revenues of $176 million were offset by costs of equipment sales of $130 million, resulting in a net comprehensive loss of $21 million.

Performance Measures

In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating or statistical data and non-GAAP financial measures. These operating and financial measures are utilized by our management to evaluate our operating performance and, in certain cases, our ability to meet liquidity requirements. Although companies in the wireless industry may not define each of these measures in precisely the same way, we believe that these measures facilitate key operating performance comparisons with other companies in the wireless industry.

Total Customers

A customer is generally defined as a SIM card with a unique T-Mobile identity number which generates revenue. Branded customers generally include customers that are qualified either for postpaid service, where they generally pay after incurring service, or prepaid service, where they generally pay in advance. Wholesale customers include Machine-to-Machine ("M2M") and Mobile Virtual Network Operator ("MVNO") customers that operate on our network, but are managed by wholesale partners.


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The following table sets forth the number of ending customers:

                               March 31,    March 31,
(in thousands)                    2014         2013
Customers, end of period
Branded postpaid customers        23,622       20,094
Branded prepaid customers         15,537        6,028
Total branded customers           39,159       26,122
M2M customers                      3,822        3,290
MVNO customers                     6,094        4,556
Total wholesale customers          9,916        7,846
Total customers, end of period    49,075       33,968

The following table sets forth the number of net customer additions (losses):

                                      Three Months Ended March 31,
(in thousands)                               2014                  2013
Net customer additions (losses)
Branded postpaid customers              1,323                     (199 )
Branded prepaid customers                 465                      202
Total branded customers                 1,788                        3
M2M customers                             220                      200
MVNO customers                            383                      376
Total wholesale customers                 603                      576
Total net customer additions            2,391                      579

Net customer additions for the three months ended March 31, 2014 were 2,391,000, compared to net customer additions of 579,000 in the same period in 2013. At March 31, 2014, we had approximately 49.1 million customers, a 44% increase from the customer total as of March 31, 2013. The increase was the result of growth in all customer categories, as described below. Additionally, the increase was driven by the addition of MetroPCS's customer base due to the completion of the business combination during the second quarter of 2013, which increased the branded prepaid customer base by 8,918,000.

Branded Customers

Branded postpaid net customer additions were 1,323,000 for the three months ended March 31, 2014, compared to branded postpaid net customer losses of 199,000 for the same period in 2013. The significant improvement in customer development was attributable to increased new customer activations and improved branded postpaid churn. Growth in branded postpaid net customer additions resulted primarily from strong response to our Un-carrier value proposition and the sales of popular devices such as the Apple iPhoneฎ and Samsung Galaxy Sฎ4.

Branded prepaid net customer additions were 465,000 for the three months ended March 31, 2014, compared to branded prepaid net customer additions of 202,000 for the same period in 2013. The improvement was attributable to higher branded prepaid gross customer additions primarily due to the acquisition and subsequent expansion of the MetroPCS brand, including the launch into 30 additional markets during 2013, partially offset by higher branded prepaid customer deactivations as a result of the robust competitive environment in the prepaid market and more branded prepaid customers upgrading to branded postpaid plans.

Wholesale

Wholesale net customer additions were 603,000 for the three months ended March 31, 2014, compared to wholesale net customer additions of 576,000 for the same period in 2013. The increase in wholesale net customer additions resulted primarily from MVNO growth in monthly plans and government subsidized Lifeline programs offered by our MVNO partners. Both MVNO and M2M customers continued to grow in the three months ended March 31, 2014. MVNO partners often have relationships with multiple carriers and through steering their business towards carriers offering promotions can impact specific carriers' results.


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Churn

Churn represents the number of customers whose service was discontinued as a
percentage of the average number of customers during the specified period. The
number of customers whose service was discontinued is presented net of customers
that subsequently have their service restored. We believe that churn provides
management with useful information to evaluate customer retention and loyalty.
                         Three Months Ended March 31,
                            2014                2013
Branded postpaid churn        1.5 %                1.9 %
Branded prepaid churn         4.3 %                7.0 %

Branded postpaid churn was 1.5% for the three months ended March 31, 2014, compared to 1.9% for the same period in 2013. The improvement in branded postpaid churn was due to continued improving quality of our customer base and the continued focus on churn reduction initiatives, such as improving network quality and the customer sales experience. Additionally, our Un-carrier value proposition announced in 2013 has gained positive traction with customers. We also introduced popular handsets during 2013, such as Apple iPhone products and the Samsung Galaxy S4, which improved customer retention.

Branded prepaid churn was 4.3% for the three months ended March 31, 2014, compared to 7.0% for the same period in 2013. Branded prepaid churn was impacted positively by the inclusion of MetroPCS customers, which is the largest portion of the branded prepaid customer base and has lower rates of churn than the T-Mobile branded prepaid business.

Average Revenue Per User ("ARPU") and Average Billings Per User ("ABPU")

ARPU represents the average monthly service revenue earned from customers. We believe ARPU provides management, investors and analysts with useful information to assess our per-customer service revenue realization, assist in forecasting our future service revenues, and evaluate the average monthly service revenues generated from our customer base.

ABPU represents the average monthly branded postpaid customer billings. We believe ABPU provides management, investors and analysts with useful information to evaluate average per-branded postpaid customer billings as it approximates . . .

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