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TMUS > SEC Filings for TMUS > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for T-MOBILE US, INC.

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


31-Jul-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


Table of Contents

Performance Measures

Liquidity and Capital Resources

Contractual Obligations

Off-Balance Sheet Arrangements

Related Party Transactions

Critical Accounting Policies and Estimates

Recently Issued Accounting Standards

Financial Highlights
Service revenues increased 15% to $5.5 billion for the three months ended June 30, 2014, compared to $4.8 billion for the same period in 2013. Service revenues increased 23% to $10.8 billion for the six months ended June 30, 2014, compared to $8.8 billion for the same period in 2013.

Total net customer additions were 1,470,000 for the three months ended June 30, 2014, an increase compared to 1,130,000 net customer additions for the same period in 2013. Total net customer additions were 3,861,000 for the six months ended June 30, 2014, compared to 1,709,000 net customer additions for the same period in 2013.

Branded postpaid phone churn was consistent at 1.5% for the three months ended June 30, 2014 and 2013. Branded postpaid phone churn was 1.5% for the six months ended June 30, 2014, a 20 basis point improvement compared to 1.7% for the same period in 2013.

Adjusted EBITDA of $1.5 billion for the three months ended June 30, 2014, compared to $1.1 billion for the same period in 2013. Adjusted EBITDA of $2.5 billion for the six months ended June 30, 2014, compared to $2.3 billion for the same period in 2013.

Cash capital expenditures for property and equipment were $1.9 billion for the six months ended June 30, 2014, compared to $2.1 billion for the same period in 2013.

Note: Comparability of results in this Form 10-Q for the three and six months ended June 30, 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 or "Contract Freedom", which reimburses customers' early termination fees ("ETF") when they switch from other carriers and trade in their eligible device. The reimbursement of ETF is recorded as a reduction of equipment sales revenues, and accordingly had an impact on both revenue and Adjusted EBITDA for the three and six months ended June 30, 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. In June 2014, we launched phase 5.0 of our Un-carrier value proposition, or "T-Mobile Test Drive", which allows consumers to test our network and an iPhone 5s with unlimited nationwide service for seven days at no charge. Also, in June 2014, we launched phase 6.0 of our Un-Carrier value proposition, or "Music Freedom", which allows customers to stream music from popular music services without it counting against their data allotment. Additionally, as part of phase 6.0 of our Un-carrier value proposition, we launched Rhapsody unRadio in partnership with Rhapsody for a limited time, which allows Simple Choice customers with unlimited 4G data service to stream music at no additional cost. We are also offering Rhapsody unRadio at a discounted price for our eligible customers.

Spectrum purchases - In November 2013 and January 2014, we entered into agreements with Verizon for the acquisition of 700 MHz A-Block, AWS and PCS spectrum licenses in exchange for cash and the transfer of certain AWS and PCS spectrum licenses. These transactions further enhance our portfolio of U.S. nationwide broadband spectrum and enable the expansion of LTE coverage to new markets. Upon closing of the transactions in April 2014, we received 700 MHz A-Block, AWS and PCS spectrum licenses and exchanged certain AWS and PCS spectrum licenses. 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.

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.


Table of Contents

Results of Operations

Set forth below is a summary of consolidated results:
                                     Three Months Ended June 30,                   Six Months Ended June 30,
(in millions)                    2014            2013         % Change         2014           2013        % Change
Revenues
Branded postpaid revenues    $    3,511       $   3,284           7  %     $   6,958       $  6,547           6  %
Branded prepaid revenues          1,736           1,242          40  %         3,384          1,745          94  %
Wholesale revenues                  172             143          20  %           346            293          18  %
Roaming and other service
revenues                             65              87         (25 )%           133            177         (25 )%
Total service revenues            5,484           4,756          15  %        10,821          8,762          23  %
Equipment sales                   1,600           1,379          16  %         3,048          1,984          54  %
Other revenues                      101              93           9  %           191            159          20  %
Total revenues                    7,185           6,228          15  %        14,060         10,905          29  %
Operating expenses
Cost of services, exclusive
of depreciation and
amortization shown
separately below                  1,453           1,327           9  %         2,917          2,436          20  %
Cost of equipment sales           2,215           1,936          14  %         4,501          2,822          59  %
Selling, general and
administrative                    2,151           1,847          16  %         4,247          3,353          27  %
Depreciation and
amortization                      1,129             888          27  %         2,184          1,643          33  %
MetroPCS transaction and
integration costs                    22              26         (15 )%            34             39         (13 )%
Restructuring costs                   -              23          NM                -             54          NM
Other, net                         (747 )             -          NM             (757 )           (2 )        NM
Total operating expenses          6,223           6,047           3  %        13,126         10,345          27  %
Operating income                    962             181          NM              934            560          67  %
Other income (expense)
Interest expense to
affiliates                          (85 )          (225 )       (62 )%          (103 )         (403 )       (74 )%
Interest expense                   (271 )          (109 )        NM             (547 )         (160 )        NM
Interest income                      83              40         108  %           158             75         111  %
Other income (expense), net         (12 )           118          NM              (18 )          112          NM
Total other expense, net           (285 )          (176 )        62  %          (510 )         (376 )        36  %
Income before income taxes          677               5          NM              424            184          NM
Income tax expense                  286              21          NM              184             93          98  %
Net income (loss)            $      391       $     (16 )        NM        $     240       $     91          NM


NM - Not Meaningful

Revenues

Branded postpaid revenues increased $227 million, or 7%, for the three months ended and $411 million, or 6%, for the six months ended June 30, 2014, compared to the same periods in 2013. The increases were primarily attributable to growth in the number of average branded postpaid customers driven by the continued success of our Un-carrier value proposition along with an increase in revenues from the adoption of upgrade and insurance programs. These increases were partially offset by lower branded postpaid phone average revenue per user ("ARPU"). See "Performance Measures" for a description of ARPU. Branded postpaid phone ARPU was negatively impacted by the growth of our Value and Simple Choice ("Simple Choice") plans, which have lower monthly service charges compared to traditional bundled plans. Branded postpaid customers on Value and Simple Choice plans increased over the past twelve months to 80% of the branded postpaid customer base as of June 30, 2014, compared to 50% as of June 30, 2013. Additionally, non-recurring factors of a reduction in certain regulatory surcharges and a non-recurring revenue adjustment for expected customer refunds on premium SMS content charges together reduced branded postpaid revenues by $43 million for the three months ended June 30, 2014.

Branded prepaid revenues increased $494 million, or 40%, for the three months ended and $1.6 billion, or 94%, for the six months ended June 30, 2014, compared to the same periods in 2013, primarily due to the inclusion of MetroPCS operating results since completion of the business combination and the subsequent expansion and growth of the MetroPCS customer base.


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Wholesale revenues increased $29 million, or 20%, for the three months ended and $53 million, or 18%, for the six months ended June 30, 2014, compared to the same periods in 2013. The increase was primarily attributable to growth of the average number of Mobile Virtual Network Operator ("MVNO") customers for the period. The increase in MVNO customers was primarily from MVNO growth in government subsidized Lifeline programs and monthly plans offered by our MVNO partners.

Roaming and other service revenues decreased $22 million, or 25%, for the three months ended and $44 million, or 25%, for the six months ended June 30, 2014, compared to the same periods in 2013, primarily due to a decline in ETFs following our introduction of the no annual service contract feature of the Simple Choice plan launched in March 2013.

Equipment sales increased $221 million, or 16%, for the three months ended and $1.1 billion, or 54%, for the six months ended June 30, 2014, compared to the same periods in 2013. The increases were primarily attributable to significant growth in the number of handsets sold due to higher gross customer additions and higher handset upgrade volumes, including JUMP! redemptions. To a lesser extent, the increases resulted from the inclusion of MetroPCS operating results for the entire three and six months ended June 30, 2014. These increases were partially offset by reductions to equipment sales revenues from the reimbursement of other carriers' ETFs in connection with Un-carrier phase 4.0.

We financed $1.3 billion of equipment sales revenues through equipment installment plans during the three months ended June 30, 2014, a significant increase from $811 million in the same period in 2013, resulting from growth of our Simple Choice plans. Additionally, customers had associated equipment installment plan billings of $810 million in the three months ended June 30, 2014, compared to $314 million in the same period in 2013. During the six months ended June 30, 2014, we financed $2.6 billion of equipment sales revenues through equipment installment plans, an increase from $1.1 billion in the six months ended June 30, 2013. Additionally, customers had associated equipment installment plan billings of $1.5 billion in the six months ended June 30, 2014, compared to $508 million in the six months ended June 30, 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 June 30, 2014.

Other revenues increased $8 million, or 9%, for the three months ended and $32 million, or 20%, for the six months ended June 30, 2014, compared to the same periods in 2013. The increases were primarily due to higher co-location rental income from leasing space on T-Mobile-owned wireless communication towers to third parties and higher lease income associated with spectrum license lease agreements.

Operating Expenses

Cost of services increased $126 million, or 9%, for the three months ended and $481 million, or 20%, for the six months ended June 30, 2014, compared to the same periods in 2013. The increases were primarily due to the inclusion of MetroPCS operating results for the entire three and six months ended June 30, 2014. To a lesser extent, increases resulted from higher lease expense primarily relating to spectrum license lease agreements. These increases were partially offset by a reduction of certain regulatory surcharges that also reduced branded postpaid revenues for the three and six months ended June 30, 2014

Cost of equipment sales increased $279 million, or 14%, for the three months ended and $1.7 billion, or 59%, for the six months ended June 30, 2014, compared to the same periods in 2013. The increases were primarily attributable to significant growth in the number of handsets sold due to higher branded gross customer additions, higher handset upgrade volumes, including JUMP! redemptions, and an increase in the volume of smartphone sales of 41% and 99% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. To a lesser extent, the increases resulted from the inclusion of MetroPCS operating results for the entire three and six months ended June 30, 2014.

Selling, general and administrative increased $304 million, or 16%, for the three months ended and $894 million, or 27%, for the six months ended June 30, 2014, compared to the same periods in 2013. The increases were primarily due to higher employee-related costs as a result of increases in the number of retail and customer support employees, as well as costs associated with stock-based compensation, and the inclusion of MetroPCS operating results for the entire three and six months ended June 30, 2014. Additionally, higher promotional costs contributed to the increase for the six months ended June 30, 2014.

Depreciation and amortization increased $241 million, or 27%, for the three months ended and $541 million, or 33%, for the six months ended June 30, 2014, compared to the same periods in 2013. The increases in depreciation and amortization were primarily associated with the build out of the T-Mobile LTE network, which increased the depreciable base, and the inclusion of MetroPCS operating results for the entire three and six months ended June 30, 2014, including accelerated depreciation related to the decommissioning of the MetroPCS CDMA network. Additionally, depreciation expense was higher due to the shortening


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of useful lives of certain network equipment to be replaced in connection with network modernization efforts contributed to the increase.

MetroPCS transaction and integration costs of $22 million and $34 million for the three and six months ended June 30, 2014, respectively, and $26 million and $39 million for the three and six months ended June 30, 2013, respectively, reflect personnel-related costs and professional services costs associated with the business combination. In July 2014, we began decommissioning the MetroPCS CDMA network and certain other redundant network cell sites. We expect to incur between $250 million and $300 million in network decommissioning costs during the second half of 2014, which will be excluded from Adjusted EBITDA. These network decommissioning costs relate primarily to the acceleration of lease costs for cell sites that would have otherwise been recognized as cost of services over the remaining lease term had we not decommissioned the cell sites. See Note 8 - Subsequent Events of the Notes to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Form 10-Q for more information on the network decommissioning costs.

Other, net for both the three and six months ended June 30, 2014 primarily consisted of a non-cash gain of $731 million from spectrum license transactions. 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.

Other Income (Expense)

Interest expense to affiliates decreased $140 million, or 62%, for the three months ended and $300 million, or 74%, for the six months ended June 30, 2014, compared to the same periods in 2013. The decreases were primarily due to lower debt balances with Deutsche Telekom in 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 during the six months ended June 30, 2014, compared to the same period in 2013, was further impacted by fair value adjustments related to embedded derivative instruments associated with the senior reset notes issued to Deutsche Telekom in the recapitalization. Additionally, interest expense to affiliates was higher during 2013 as a result of losses related to the retirement of derivative instruments associated with the extinguishment of the long-term debt to affiliates prior to the business combination.

Interest expense increased $162 million for the three months ended and $387 million for the six months ended June 30, 2014, compared to the same periods in 2013. The increases were 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 reclassification of non-reset notes from long-term debt to affiliates to long-term debt following Deutsche Telekom's sale of the non-reset notes in October 2013.

Interest income increased $43 million, or 108%, for the three months ended and $83 million, or 111%, for the six months ended June 30, 2014, compared to the same periods in 2013. The increases were primarily the result of significant growth in handsets financed through our equipment installment plans. Deferred interest associated with our EIP receivables is imputed at the time of sale and then recognized over the financed installment term.

Other income (expense), net decreased $130 million for the three and six months ended June 30, 2014, compared to the same periods in 2013. The decreases were primarily due to the recognition of foreign currency translation gains in 2013 related to the retirement of derivative instruments prior to the business combination in April 2013.

Income Taxes

Income tax expense increased $265 million for the three months ended and $91 million for the six months ended June 30, 2014, compared to the same periods in 2013, primarily due to higher pre-tax income. The effective tax rate was 42.2% and 395.2% for the three months ended June 30, 2014 and 2013, respectively, and 43.4% and 50.5% for the six months ended June 30, 2014 and 2013.

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.


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The financial condition of the Parent, Issuer and Guarantor Subsidiaries was substantially similar to the Company's consolidated financial condition. Additionally, the results of operations of the Parent, Issuer and Guarantor Subsidiaries were 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 June 30, 2014 and December 31, 2013, the most significant components of the financial condition of the Non-Guarantor Subsidiaries were property and equipment of $555 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 and six months ended June 30, 2014 were service revenues of $323 million and $588 million, respectively, offset by costs of equipment sales of $207 million and $345 million, respectively, resulting in a net comprehensive loss of $25 million and $30 million, respectively. Similarly, for the three and six months ended June 30, 2013, service revenues of $191 million and $367 million, respectively, were offset by costs of equipment sales of $122 million and $251 million, respectively, resulting in a net comprehensive loss of none and $20 million, respectively.

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 is associated to an account that 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 MVNO customers that operate on our network, but are managed by wholesale partners.

The following table sets forth the number of ending customers:

                                            June 30,    March 31,    December 31,
(in thousands)                                2014         2014          2013
Customers, end of period
Branded postpaid phone customers              23,633       23,054          21,797
Branded postpaid mobile broadband customers      897          568             502
. . .
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