T-Mobile US, Inc. (TMUS) Presents at Bank of America Merrill Lynch 2018 Leveraged Finance Conference (Transcript)

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About: T-Mobile US, Inc. (TMUS)
by: SA Transcripts

T-Mobile US, Inc. (NASDAQ:TMUS) Bank of America Merrill Lynch 2018 Leveraged Finance Conference December 4, 2018 9:30 AM ET

Executives

Braxton Carter - CFO

Analysts

Ana Goshko - Bank of America Merrill Lynch

Ana Goshko

Joining us is Bank of America Merrill Lynch Leverage Finance Conference. I am Ana Goshko, I cover high yield telecom and technology, and we're thrilled to have T-Mobile with us here today, and Braxton Carter has been doing all Q&A session, the Company's longtime CFO.

So without further ado, Braxton let me open it to you. You know for those listening through webcast and those in the audience, I want you to direct your attention to Braxton’s co-branded T-Mobiles Sprint T-shirt, so thank you.

Braxton Carter

All right. Ana, it's such a pleasure to be here. Thank you for having us and definitely looking forward to a great session.

Question-and-Answer Session

Q - Ana Goshko

Okay, great. Without further ado, let’s -- lots of stuff to cover, let’s kind of segment this. First part let's talk about the business and the customer strategy and then we'll get into merger topics and some larger strategic longer term questions. But on the customer strategy, so subscriber growth, it's a highly penetrated U.S. mobile market, which you've acknowledged that switching pool is diminished. So, how does T-Mobile U.S. continue to grow subscribers and specifically what kind of customer categories do you think are up for grab?

Braxton Carter

Yes, I think first and foremost, the foundation of everything that we've done is putting 40 billion in spectrum and CapEx over the last -- gosh, it's almost six years now, five and a half years. And that ultimately is the product that we sell and that's almost inconceivable six years ago when we dreamed about putting T-Mobile and Metro together that we'd have a network that had equivalent geographical expense as Verizon or AT&T. We're now at 324 million POPs. Even the SEC has come out recently and said that we are the fastest 4G LTE networks in the country, part of that is our differentiated spectrum holdings and it's just a wonderful story.

And on top of that applying very innovative marketing and disrupting wireless and changing the face of wireless in the U.S. for good. You know it's interesting the momentum continues. Now remember quarter-by-quarter you know 5, 4, 3 years ago where it was going to all it's going to end next quarter. Third quarter, we did a 180% of all postpaid voice additions in the industry, had records you know from a growth and financial performance standpoint and the momentum continues. Our porting ratio in the third quarter was 1.73. We're very pleased with how we see Q4 developing and increase in porting ratios, but your point about a lower switching environment is spot on.

People are -- most carriers are reporting record low churn levels and I think it's somewhat a function of the expansion of the handset lifecycle. With equipments financing, it changed the paradigm once in for all that these devices that we utilize are not disposable, that's very, very expensive devices. And I think the way to study the average life of a handset you know is now approaching three years. And investing for new handsets for a family for 1,000 bucks a pop is a pretty big deal. And we think that’s partly what’s behind the industry wide trends as the lower churn levels is the extension of handset lifecycle.

But even with that, we continue to make very significant inroads and our momentum continues unabated. What gives us confidence for multiple years to come is what you're alluding to some of our growth adjacencies. Again, given our legacy, our distribution footprint is a fraction of our geographical footprint that you asked. Last year, we expanded that by about $30 million POPs to around $260 million on -- of new greenfield market, 30 POPs new greenfield markets, but we're going to continue that expansion over the next several years. And a lot of what we do from a marketing standpoint is national and scope. So, it's a tremendous opportunity to sort of the other third of America that we've never served and really wasn't embedded in some of our early results.

The other thing we're seeing and is tremendous traction in our enterprise segment. And we just really want relevance to enterprise and government 4, 3, 2 years ago, and now we're very, very relevant and bring them a lot of really marquee brands and continue to penetrate those relationships. And it's not just the corporate liabilities where the corporations paying the cell phone that individual is liable. So program set up through your employer are -- is a very significant piece of the pie when you look at overall enterprise. So we have these two growth adjacencies and that's before you get into everything that's going to develop into the future is already starting in its infancy with IoT. So, we're fairly confident that on a standalone basis that we got multiple years of very, very strong growth ahead of us.

Ana Goshko

An interesting point on the enterprise side, so obviously that's highly penetrated super-penetrated market segment, and your competitors tend to provide other enterprise services I think all AT&T, Verizon and Sprint actually all have enterprise businesses on the fixed side. So, how are you making traction into that?

Braxton Carter

So what the T-Mobile standalone approach has been -- is to partner with other parties to enhance our offerings and bring more of a fuller set of solutions to play, albeit not entirely our asset. Now that's one thing we're excited about with the potential combination with Sprint, is having other tools in the toolbox that we haven't had before. And we think the new T-Mobile with Sprint & T-Mobile combined is going to be a force to be reckoned with on the enterprise standpoint especially given the network.

Ana Goshko

So just continuing along this line of customer growth. So on the promotional side, I think you've noted but it's clear that two of the biggest competitors you've got AT&T and Verizon are the two big ones. They've got a lot going on in their businesses and which includes having a heavy debt load, so they're particularly focused on free cash flow. So given that, how do you characterize the current promotional environment? And particularly, we now that we're in the holiday season, which tends to be a big promotional period.

Braxton Carter

Yes, we all had our Black Friday promotions out there. We're really pleased with the outcome of that, but it's some it will ebb and wane for the balance of the quarter. People will post them with more aggressive promotions especially as we get closer to the actual holidays. And to me, it's really kind of more the same for the fourth quarter. But to your point is…

Ana Goshko

Is it more muted than typical? That's my question.

Braxton Carter

Let’s wait and see, let’s see how the quarter plays out. I am not sure, it will be. And the fourth quarter has always been more promotional in nature and it's a little bit of history behind it where a lot of the national carriers put on, in the contract world, historically 40% of their net additions in the fourth quarter. And a lot of carriers still have a lot of people in those old bundled classic rate plans. We’re completely out of at this point of T-Mobile and there’s always a defensive nature with some of the behavior as you see in the fourth quarter as well as people of course want to put up growth numbers for the quarter.

So, let’s wait and see. The intensity certainly has increased or gone up from prior years.

Ana Goshko

Okay, any early read-on on what you guys saw for Black Friday week and into this week?

Braxton Carter

We have been very, very pleased with our performance.

Ana Goshko

Great, so continuing on the competitive environment, so let’s talk about cable. So, what’s your overall investment of the cable players obviously, specifically Comcast and Charter, and how they’re doing in wireless?

Braxton Carter

Yes, I think that Charter is just really too early to tell. Some of the preliminary analysis we’ve done there are not as competitive from a pricing standpoint. Approaching the market little more conservatively, but they just started. So, let’s keep an eye on it. Comcast is now over a 1 million net additions. They have made substantial progress in the market. We believe that they are attracting a very high quality customer, older demographics, on a bucket of data usage that really hasn’t pushed their unlimited, which probably makes sense given that’s an MVNO relationship with Verizon.

You can certainly control your cost much better with a bucketed rate plan offering, very much skewed to older demographics, very prime, very good retention characteristics. And what we’re seeing is the majority of their flows coming out of Verizon, and I think Verizon even acknowledge that on their last earnings call about partial from the MVNO segment, but those subs are coming right back onto the network via the wholesale arrangement, but they are forced to be reckoned with. They have 1.2 billion accumulative cash burn.

I believe what they are doing is dipping their toe in the water and understanding this business. Because 5G will be a game changer for them and the more that they are involved and embedded and truly understand the dynamics in our business, I think the better off they are going to be prepared for the ultimate evolution network with their business as we go into a 5G world.

Ana Goshko

I mean, do you believe that they can ultimately being meaningful wireless players on MVNO basis without the traditional wireless network?

Braxton Carter

I think it's really difficult. I mean you look at, gosh, we know each other for a long time. The graveyard of MVNOs and there’s the difference between having owners economics and a wholesale type arrangement with the facilities base carrier. Now, they do have facilities based capabilities with the Wi-Fi which is a little bit of a differential. But I think it's an amazing opportunity for a large super regional cable to expand to a nationwide footprint and really be in the action as things evolved in the 5G to help them pivot whatever they're going to do. But certainly, the economics are very different in MVNO versus owners' economics.

Ana Goshko

Switching to a different carrier topic, so there's obviously something that you guys roll out with a lot of fanfare and have led…

Braxton Carter

And we have a lot of fun.

Ana Goshko

A lot of fun events, yes, but of all the uncertain moves, which one do you think has been the most impactful?

Braxton Carter

Wow, I think overall to the enterprise, I think what we did with Binge On was the most impactful. And you know, let's rewind, the re-administration huge focus on net neutrality, we had to thread a needle to not be in violation of what the commission wanted and coming out with that offering. And just to refresh to that offering was to white list all video consumption with the customer agreement that we will deliver all that white listed video at 480p. And on the small device, you really can't tell the difference between HD and 480p.

And why I say this was the best, multiple reasons, it dramatically changed the curve on the consumption of data. Because what's really been driving the increase of data of video consumption on the network, kind of think four years ago on your social media videos really weren't part of it. Look how pervasive video is today and everything that you consume from a media standpoint on your smartphone, it's changed the curve and dramatically lowered the tax on the network by optimizing 480p. The other thing it did is laid the foundation for a subsequent carrier move, which was going totally unlimited with our rate plan offering. And that led to again another sea change in the industry of everybody pivoting back to unlimited.

I think that's probably the best and we've had others that are focused on unlocking or facilitating switching from other carriers like carrier freedom. That was extremely successful and continues to be successful. We've had targeted offerings like our simple global being able to call a 150 or be in the 150 countries around the world, free text messaging, free 2G data, which is fine for email or maps and voice cap to $0.25 a minutes. That’s more niche for the international traveler part of the segment, but very very successful. I'd say that Binge On is my favorite.

Ana Goshko

Okay.

Braxton Carter

What about you.

Ana Goshko

Oh, I can tell you one thing, my least favorite was with the data stash and all that, like that’s like messed up all of how do financial analyst models is painful.

Braxton Carter

Yes, and at this point fairly irrelevant with going time limited, but we're still a little bit of deferred revenue and maybe $100 million on the books.

Ana Goshko

Whether any of that you -- that after you announced and you're like now those kind of a good idea, but more came in it was worth?

Braxton Carter

I think test drive, and the thought behind it is facilitating people trying our network out. I think it was too complicated, maybe another opportunity for the future.

Ana Goshko

Okay, and then…

Braxton Carter

Especially in the eastern type environment, might be very easy to do that.

Ana Goshko

So last question in this period on the customer front, so just on prepaid, it seems to be kind of two things going on here. So, on the one hand, we see a migration from prepaid to postpaid and that’s been continuing, but then you guys have just done a rebranding of Metro and have come out and said that, prepaid sort of underrated and kind of less than each and misunderstood. So, what is the future of prepaid? Is it a growth segment or we all really kind of migrating other than for the really credit challenge customers? Is there going to be a real migration to postpaid?

Braxton Carter

Yes, if you look at the third quarter, we’re very transparent about migrations from prepaid to postpaid that's a 140,000 in the third quarter which was down from the second quarter. I think there is multiple things going on. I think the line between prepaid and postpaid is blurred. You get a lot of the same type of offerings, so just when you really paying for it, in our construct upfront or in rears. I think another thing that’s going is a lot of competition in the traditional prepaid environment. The MVNOs were struggling. They are trying to stay relevant. You have certain carriers out with fairly aggressive prepaid offerings. AT&T is doing a nice job of cricket they are in a massive geographical expansion, which is really the driver behind the lot of their numbers and we did the same thing just two years or earlier with Metro.

So I think that we also have to look at the macroeconomic environment. These are good times in America, unemployment's at a record low, people are better off economically and that’s really part of the driver on the conversion to prepaid versus postpaid over several years. And I think in the short term that environment is probably going to be fairly similar, highly competitive, less of the growth opportunity for us. However, there is a countercyclical argument that when times do get a little bit more challenging and they always do. It’s a question of, not if, it’s a question of when where that values seeker actually drives more flow into prepaid offerings. And that’s an interesting piece. We saw a lot of that with Metro back in the early days, during some of those cycles that were out there.

But I think that’s a place for it, certainly our flagship brand, there is Metro. We just did the rebranding it's early. We just really launched it. But, part of the thought process was attributing what we’ve done with the T-Mobile network to the MetroPCS brand hence Metro by T-Mobile. And we think that will pay a lot of dividends and part of the strategy here is to move up slightly in some of the demographic to expand the relative pie for Metro and Magenta certainly positioned as more future-rich, more value to the consumer at a step up from that. So, it's trying to expand the overall market. We'll see how it goes, but so far so good.

Ana Goshko

Okay. So switching to your, the topic of your T-shirt, the merger of Sprint, so regulatory approval hinges on DoJ in particular concluding that consumer welfare is not breached. And then specifically due to lessen competition, we just had a regulatory session here with [Andy Whitman] and first of all, who's very complementary of the way that T-Mobile and Sprint are presenting the case to the regulators in DC. Do you still think it's a very tough call? So can you crystallize for us, how do you convince the regulators that consumers are not harmed by these merger?

Braxton Carter

So, we've essentially completed all the information gathering phase with the regulatory bodies, delivered over 25 million pages of documentation to the DoJ. You saw our PIS. We followed with the files with the SEC, right in the middle of depositions are going to ramping up in early January. And the public comment, response on the state of shot clock is up today. So this is again, the shot clock is probably going to get a turn back on what would happen by the end of the day, but final comments from the opposition are due today.

We are extremely respectful of the process and we've taken extraordinary measures to non-politicize this process. To put the facts on the table and to support those facts, and the fundamental econometric model which in the SEC's own word was the most intensive and complicated model that they've ever seen, demonstrates that combined with the combined assets of Sprint and T-Mobile results in an eight-fold increase to capacity and a fifteen-fold increase in speeds versus what either of us could do on a standalone basis, creating a truly differentiated 5G experience here in the U.S.

And really putting the U.S. at the forefront of the innovation and all the value creation that comes out of look at what 4G really respond. And basic economic is that you have that increase in capacity. You're economically incented to fill that capacity or said in an another way, we have massive fixed costs and leveraging those fixed cost to expand margins and have an appropriate return on those $40 billion, we're going to put in the network in the next three years is a huge basic economic reality and trust that supports this will be highly competitive to the U.S. plus you have our D&A.

I mean look what we've done in the last six years I mean drove incredible competition and innovation against quite a bit of skepticism and yet never really wavered for that. What’s interesting on the hill, we thought our Comcast and we’ve got a Charter deep pocketed quasi facility based offerings in the U.S. guess this is the longer a four player market. But what’s really resonated with many of the agencies on the Hill and in the states is the fact that you have two go into three. That’s a two scaled incumbents controlled two-thirds of the cash flows, the vast majority of subscribers are basically oligopolous to begin with or this is called the predatory duopoly.

And that the creation of the third scale players even than we still are just at number three really increases the environment from a two player market that’s out there. And if you really think about that, there’s lot of truth to that. So, that’s the primary rationale that we’ve provided the DOJ, they’re doing their analysis, we’re hopeful in the next month, month and a half that we get some preliminary feedback. At this point, we're optimistic the agencies have been very engaged, they have been very open to hear the arguments and they are spending a huge amount of time to rising into the details asking questions, which is very different than what happens with previous attempts for us, notably in the 14 we've just basically got shut down.

We are working with all the states very closely. We have over half of state PUCs, have already approved this. John has spent an extensive amount of time in California, New York, some of the other hot button states when it becomes to being fairly sophisticated looking at these types of actions, and we’re in very deep dialogue, with them, but ultimately they are looking at the same thing take California. How does this merger benefit the 40 million people who live in California and we’re certainly making those arguments and painting that picture and we’re optimistic that we work for all this.

Ana Goshko

Okay and since it's a debt comment, so I'll make sure to get some debt questions in there with the audience, and I am looking at the treasurer is in the audience, Dirk Wehrse is here. So, you have plans to issue $36 billion of investment grade rated debt, to fund the close of the transaction, now that’s lot of debt to place in the market, market can be choppy. What’s the potential timing for that? And what do you need in order to be comfortable to come to market?

Braxton Carter

Yes, sure. So first and foremost what we wanted to do is have a fully funded business at the point of closure to take us through the costs to achieve period, where we have a very significant cost to achieve associated with the rationalization are really the shutdown of the Sprint network and adding those assets and spectrum into the T-Mobile network. And that considers all debt maturities, which our tower is very rational and very staggered in the future, but you know Sprint does have some shorter term maturities that come during this critical cost to achieve period, that we wanted to have adequate funding, call it conservative, did we really have to fund everything upfront, not necessarily. But that's we're pretty conservative people when it comes to the financials.

So, number one, we'll have the fully funded business. When we announced the merger, we put together a $38 billion bridge and then proceeded into the market with a series of consents to perfect the capital structure for NewCo and those consents were both on the T-Mobile side and the Sprint side. And we very successfully obtained all the requisite consents. So structure what we need is do, and upon conclusion of that we actually reduce the bridge to $30 billion. The $30 billion bridge includes the $4 billion liquidity revolver not funded just committed to by the banks and $7 billion of term loan B placement that will roll right into term loan B sort of fairly large term loan B on a secured basis.

So it's part of this. We are cut free from DT bilats. That consent was done by Deutsche Telekom contingent upon closing the merger. So our limitation that we've historically had relating to those bilats is gone. The new entity is completely self-funding i.e. there'll be no more DT participation in the capital structure. But you take the 30 less to 4 to 7, that's $19 billion of issuance, of which we will do all in the IGE market.

So your question, one would we go out and potentially fund that? We won't go out and fund it until we have surety from a regulatory standpoint so we can proceed with this merger. I mean the super expensive and that's why the bridge mechanism is in place to go out and pre-fund anything. But if we had enough confidence, we would potentially look at doing some things potentially in escrow in a perfect type scenario. But one of the issues that we will have is material non-public information. So you know maybe we have certainty from our communications with the regulatory agencies, but that's not fully on the public capital markets and that would preclude us from doing anything.

So at this point what we're planning on doing, being open to options to prefund anything that we could prefund in a rational basis. There is a $19 billion raise. All IG and not only would we look to the U.S. marketplace, we would also work at Euro-denominated offerings. So we'll do a road show both in the U.S. and in Europe. I mean that's just part of the supply consideration. And that protects capital structure. We'll still be what's the number? Is it the third highest, high yield issuer in the U.S. after the transaction is completed $70 billion dollars worth of debt which is very much engineered, number one, to fully fund the business but to achieve the appropriate ratings that are important for us as well as for the parent that we're consolidated into in DC.

We have to really thread both rating equations, which is very important and that $70 billion really is going to be the peak gross debt for the period until we get into your massive cash generation. And actually gross that deleveraging of course EBITDAs will continue to grow with our plans. So we have organically deleveraging. But we’ll facilitate all those, those are very strong balance sheet at this point 2.2 times levered at the end of the third quarter and pro forma will be about 3.6 times levered at the $70 billion level. So that’s roughly what the plans are.

Ana Goshko

Time's flying by, so I think we've got one more here. So in going to the market, you'll be capping the investment grade market that’s a lot of bonds, the investors are less risk averse, this merger has a lot of execution risk, right. So, you’ve $10 billion of integration spending, you're going to take three years, you're going to be taken down one of the networks. How do you make investors comfortable with the potential around execution missed steps? And when do you think on a true free cash flow basis post merger close you can get to positive.

Braxton Carter

So, I think first and foremost, the playbook that we did with Metro, it wasn’t combining two network. It was shutting one network down and extracting some assets out of that network to enhance the T-Mobile network and we’re applying the same philosophy here. Very quickly after the close of the transaction, all new activation upgrades flow will flow on to T-Mobile.

And as we have adequate capacity, we'll start migrating customers from Sprint over to the T-Mobile network and shutting down that network taking roughly 25% of the macro size, intensifying our network, re-firming all the spectrum, as we do this, and you don't do it on a nationwide basis, you do it on a geographical area basis, because every geographical area is very different, what's your current penetration, what's your current density, what's your spectrum holdings.

So, there’s the capacity there for us in geographical areas within the U.S. and where can we put our investments to get up to adequate capacity to onboard all the Sprint customers coming on to the new T-Mobile network is a critical part of that equation because if you don't do it right you'll end up losing a lot of customers. You don't want to degrade the performance you want to actually delight with the performance for the Sprint customers coming over and have no degraded impact to the existing T-Mobile customers. Many times we get asked well this is giant compared to Metro.

That is true. But when you look at on a geographical basis you know cities like Miami and New York where Metro was extremely deep number one or number two of all carriers in those markets we have that type of scale that we had to deal with before. So, the results of that network strategy where we beat the time period, we beat the synergy estimates, we beat the cost to achieve estimates and we lost essentially no customers in the process. So, it's really Metro PCS redo with the Sprint deal.

Ana Goshko

On steroids.

Braxton Carter

For sure, on steroids.

Ana Goshko

Okay, we're out of time. And it really always flies by when you're here, but Braxton, thank you so much for be with us or being with us.

Braxton Carter

It's definitely a pleasure. Good seeing you too.