T-Mobile US - Q2 2023

Transcript

Operator (participant)

Good afternoon. Following opening remarks, the earnings call will be open for questions via the conference line by pressing one followed by four, and via Twitter by sending a tweet to @TMobileIR or at Mike Sievert using hashtag TMUS. I would now like to turn the conference over to Mr. Jud Henry, Senior Vice President and Head of Investor Relations for T-Mobile US. Please go ahead, sir.

Jud Henry (SVP and Head of Investor Relations)

Welcome to T-Mobile's Q2 2023 earnings call. Joining me on the call today are Mike Sievert, our President and CEO, Peter Osvaldik, our CFO, as well as other members of the senior leadership team. During this call, we will make forward-looking statements which involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review. Our earnings release, investor fact book, and other documents related to our results, as well as reconciliations between GAAP and the non-GAAP results discussed on this call, can be found in the Quarter Results section of the Investor Relations website. With that, let me turn it over to Mike.

Mike Sievert (President and CEO)

Okay, thanks, Judd. Hi, everybody. Welcome to the call. As you can see, we're here with several members of our senior management team. We're coming to you live from Bellevue, Washington, and we're ready to take your questions. First, let me share just a few comments. If you'll recall, at our Analyst Day in early 2021, we shared our strategy to build the best network, couple it with a leading Un-carrier value proposition and customer experience, and grow our share in areas where T-Mobile was massively under-penetrated relative to our peers. That strategy and our approach has remained remarkably consistent, and our Q2 results continue to show that it's working better than ever. In fact, T-Mobile delivered our highest Q2 postpaid phone net adds in 8 years, fueled by both industry-leading gross adds and the lowest postpaid phone churn in company history.

Importantly, we did this while industry growth normalized, proving that the growth opportunities and durable advantages we've been sharing with you really are unique to T-Mobile. We also told you that if we delivered the best product, and the best value, and the best experiences, there was no reason we couldn't get to the lowest churn in the industry. Remember that? In Q2, we did it. For the first time in our history, T-Mobile reported the lowest postpaid phone churn in the industry. That is a remarkable statement, and it's a testament to the work our team has done to build the best network and to further our value proposition to deliver even better experiences to customers.

I'm sure there's still gonna be some back and forth between us and the other guys before we consistently put them in the rearview mirror for good on churn, but all the same, it is great to get this first win. We also continue to run the business in a smart and sustainable manner, translating our industry-leading customer growth in Q2 into industry-leading service revenue growth and core Adjusted EBITDA growth, while growing free cash flow by more than 60% year-over-year. This industry-leading customer and financial growth led us to raise guidance for the year again. We're fortunate to deliver these industry-leading results within the context of a vibrant wireless industry, with growing industry service revenues and industry cash flows, and healthy competition that continues to deliver more value and better networks to customers.

In fact, on network, we not only defended, but extended our leadership in both overall and 5G performance, with the latest third-party reports showing that T-Mobile's lead is widening. Looking at Ookla data, T-Mobile once again swept every category for overall network performance, with median download speeds more than double our closest competitor. We've long talked about how our dedicated 5G spectrum assets with superior propagation would result in a demonstrable advantage in customers' everyday lived experiences, even as the competitors try to catch us. T-Mobile's head start, our dedicated 5G spectrum assets, and our technology leadership are the things that allow us to stay meaningfully ahead, as in like two years or more ahead, in 5G reach and overall network performance, and to stay ahead for years to come.

The most exciting part is that many prospective customers are only just beginning to notice, which means lots of the benefit from this is in front of us. Importantly, these things also allow it to do it all with the best capital efficiency in the industry. Now, we also continue to build on our fame for providing the best value. Our latest Un-carrier move, Phone Freedom, frees customers locked up into those 3-year contracts at the carriers, and our new Go5G Plus rate plan delivers the best value in wireless. The response from customers has been really amazing. In fact, Go5G Plus instantly became our most popular plan. We're seeing improved porting ratios against every competitor, including yet another quarter of year-over-year improvement against cable.

In fact, total postpaid porting ratios for us have improved every month since we launched Phone Freedom, including in July, as more and more customers learn that they can break free from those three-year contracts, come to a better network, and get a better value at T-Mobile. All of these catalysts, coupled with our unique growth opportunities in under-penetrated markets, are what enable a differentiated and profitable growth strategy that separates us from the competition, and you're seeing it again in these Q2 results. We added 299,000 postpaid account net adds, the highest reported in the industry, showing that we continue to win the switching decisions in the market. We had postpaid net additions of 1.6 million, again leading the industry by a wide margin.

This included postpaid phone net adds of 760,000, our highest Q2 in 8 years, even as the industry sees more normalized levels of growth. Our increased share was driven by our industry-best phone gross adds, which grew over last year's Q2, as well as the lowest postpaid phone churn in our history, and as I mentioned, the lowest in the industry for the first time ever, at just 0.77%. In T-Mobile for Business, we had a record quarter with best-ever phone net adds and our lowest-ever phone churn. Enterprise and government customers buy based on their own rigorous testing of the networks, not just price. Our network leadership, innovative solutions, and customer experiences are driving major wins and fueling our momentum in these segments. We're attracting profitable customers with CLVs in the hundreds of dollars each and still growing.

As I mentioned, consumers are beginning to take notice of our network strides as well, as we're winning prime network seekers in the top 100 markets, who increasingly recognize that T-Mobile offers the best combination of network coverage and capacity to meet their needs. We saw our share of switchers in the top 100 markets increase both sequentially and year-over-year. In smaller markets and rural areas, where we continue to bring the first, and in many places, only 5G network, we're seeing an incredible response. We're capturing a win share of switchers in these areas in the upper 30s, which shows we're not only on track to meet our goal of 20% share in 2025, but it gives us confidence we have room to run in the years beyond.

In addition to mobile wireless, we added 509,000 high-speed internet customers. Notably, we've continued to grow our gross adds every quarter since we launched over two years ago, as demand for the product just continues to grow. We saw a sequential improvement in churn again this quarter, and Net Promoter Scores that remain multiples higher than cable, demonstrating how our high-speed internet resonates with and satisfies an important target audience within this larger broadband market. We also celebrated another major milestone in our Sprint merger integration, as we are now substantially complete with both the billing migration and retail rationalization, well ahead of our year-end target. At every step of our integration journey, the customer has been our primary focus.

As you know, this has allowed us to not only unlock synergies bigger and faster than expected, but also to deliver industry-leading growth and record-low churn at the same time. I could not be more proud of what our team has accomplished in this area. Okay, I'm gonna wrap it up. We are pulling into the station halfway 2023 with great momentum. Our postpaid phone net adds year-to-date are right on track with last year, which was a growth record year for us. We continue to extend our durable network and value leadership over the competition, which fuels our growth opportunities. Our profitable growth strategy continues to translate into the highest Core Adjusted EBITDA growth and year-to-date cash flow conversion in the industry.

Listen, in our industry, change is a constant, but our team navigates it deftly with the customer as our North Star, and because of that, there has never been a more exciting time to be at T-Mobile. Okay, Peter, over to you to talk about our key financial highlights and an update on our guidance for 2023.

Peter Osvaldik (EVP and CFO)

Absolutely. Thanks, Mike. Hey, Q2 was another quarter of best-in-class profitable growth, which underpins the updated guidance that I'll share with you in a moment. It starts with the best postpaid service revenue growth in the industry, up over 5% year-over-year, driven by continued increases in both postpaid accounts and postpaid ARPA. Our disciplined focus on profitability resulted in an 11% year-over-year increase in Core Adjusted EBITDA, and we grew our Core Adjusted EBITDA margin by over 300 basis points year-over-year. In addition, free cash flow was up 64% year-over-year, and with the highest free cash flow to service revenue margin relative to our peers year to date. We expect this to be a durable and differentiated unlock of shareholder value going forward.

This strong financial performance also supported our share buybacks as we repurchased 25.2 million shares for $3.5 billion in Q2, with a cumulative total of 83.5 million shares repurchased for $11.8 billion as of July 21st. All right, let's jump into the details of our increased guidance for 2023. We now expect total postpaid net customer additions to be between 5.6 million and 5.9 million, up 250,000 at the midpoint, reflecting growth across all of our market opportunities. We continue to expect roughly half of postpaid net adds coming from phones for the full year. Our focus on profitable growth allows us to fund those higher customer net adds and still increase our Core Adjusted EBITDA expectation, which we now expect to be between $28.9 billion and $29.2 billion.

This is up 10% year-over-year at the midpoint based on higher service revenues and merger synergies, and excludes leasing revenues of approximately $300 million as we transition substantially all remaining customers off device leasing by year-end. Our merger synergies are expected to be approximately $7.5 billion in 2023, achieving the full run rate synergy target provided at our Analyst Day, a year ahead of schedule, as we build towards the full run rate synergies of $8 billion in 2024. We continue to expect merger-related costs, which are not included in adjusted or Core Adjusted EBITDA, to be approximately $1 billion before taxes. We now expect cash merger-related costs of $1.6 billion-$2 billion for 2023, as they have underrun the P&L recognition to date.

Net cash provided by operating activities, which include payments for merger-related costs, is now expected to be in the range of $18 billion-$18.3 billion. We now expect cash CapEx to be between $9.5 billion and $9.7 billion, delivering a capital efficiency unmatched in our industry, unlocked by our network leadership. We expect CapEx to taper in Q3, then further in Q4. The slightly higher operating cash flows fund the increased CapEx, resulting in strong free cash flow of $13.2 billion-$13.6 billion, which includes payments for merger-related costs. This is up approximately 75% over last year, thanks to our margin expansion and capital efficiency. Does not assume any material net cash inflows from securitization.

This also represents a free cash flow to service revenue margin, which is multiple percentage points higher than peers, with further expansion expected next year. We continue to expect our full year effective tax rate to be between 24% and 26%. Finally, we now expect full year postpaid ARPA to increase slightly more than the 1% we had previously guided for 2023, as we continue to expand our account relationships across products and services as part of our land and expand account strategy to grow service revenue. Before I wrap up, I want to remind folks that we closed the sale of our wireline assets to Cogent on May first, which had a partial impact on our results in Q2, and we expect the full run rate impact beginning in Q3, as I laid out last quarter.

In closing, we continue to extend our network leadership and further scale our differentiated, profitable growth opportunities to deliver the highest free cash flow conversion in the industry and unlock shareholder value. With that, I will now turn the call back to Judd to begin the Q&A. Judd?

Jud Henry (SVP and Head of Investor Relations)

All right, let's get to your questions. You can ask a question via phone by pressing 1 followed by 4, and via Twitter by sending a tweet to @TMobileIR or @MikeSievert, using #TMUS. We'll start with a question on the phone. Operator, first question, please.

Operator (participant)

Certainly. Thank you. That will come from the line of Brett Feldman with Goldman Sachs. Your line is open.

Mike Sievert (President and CEO)

Hi, Brett.

Peter Osvaldik (EVP and CFO)

Brett.

Brett Feldman (Equity Research Analyst)

Hi. Thanks for taking the question, and it was great to see, great to see the strong cash flow in the quarter. And in light of that, we've, we've gotten a few questions around why you decided to, to downtick a little bit on the buyback. And I guess maybe the higher level question we're getting now that you're much further into the program, how do you think about managing that program going forward? I mean, cash flow is obviously an input. You're going to be making some payments for C-band spectrum this year. What, what's the right way for investors to kind of frame their expectations around how you're going to manage that on a go-forward basis? Thank you.

Mike Sievert (President and CEO)

Yeah, sounds great. Thanks, Brett. I'll start and then maybe hand it to Peter for some comments. You know, the way I think about it is we're, we're buying at a pace mostly through pre-designed 10b5-1 programs, in order to be able to meet the authorization during the timeframe of the authorization. If you recall, the initial authorization of this program, it's a $14 billion program that takes us through September. If you look at some of our activity early in the year, where we were able to grab some additional run rate, now the remaining funds, relative to the remaining time, suggests a run rate where we have it. It's not really a downtick so much as just a, kind of a programmatic view. Then maybe Peter can pile in on the second part.

The way we think about it broadly, is that there's essentially been no underlying change to the thesis we've been communicating all along. Now, our board hasn't made a determination yet about the second step, but the inputs to those steps have to do with the free cash flow development of this company, which, as you mentioned in the premise of your question, is right on track. We're guiding to 75% year-over-year cash flow growth this year. you know, the underpinnings of, of the growth in the business, as you saw from our fantastic Q2 momentum, suggest another good year in 2024. As the cash flow develops, you know, that's what gives us the confidence that that original thesis of around $60 billion through 2025 is intact.

Maybe you can also comment, Peter, on kind of how we think about this from a dedication of resources to this versus spectrum and other things, as Brett asked.

Peter Osvaldik (EVP and CFO)

Yeah. Absolutely, Brett. Yeah, one of the things that we had underpinned at Analyst Day is that it's, you know, about up to $65 billion of free cash flow that's going to support this $60 billion of potential shareholder remuneration. Within that, we had some room and had reserved some capacity for spectrum purchases and other things. Of course, we'll fundamentally continue throughout this whole period, one, to deliver, because the underlying delivery of the free cash flow is what allows everything to happen, and of course, always look at opportunities before us for the highest value creation opportunity. With your, with your question on C-band, that was already included in our assumption here. When we continue to say we have optimism around the program in totality, C-band is fully contemplated within that.

Brett Feldman (Equity Research Analyst)

That's great color. If I could ask a quick follow-up question, since we're talking about overall liquidity. Any update on the spectrum option that Dish holds? If that were to get exercised, how do you think about putting that proceeds to work? Thanks.

Mike Sievert (President and CEO)

Sure. Well, the first thing I would point out is that any proceeds from that have not been contemplated in the long-range cash planning. So if there's cash that comes from that soon, that'd be incremental to the planning expectations. We're still awaiting Dish's decision. Just as an update, and I think our filings made some of this clear, the deadline has come and gone for them to determine whether or not they would exercise their privilege to buy that spectrum for $3.6 billion. They asked for some additional time of the DOJ, and we did not object to that. We have committed that we would not terminate their agreement and right to do that at any time before August 11th.

In fact, we're in discussions with Dish about whether or not there might be a win-win that's different from their initial privilege. If there is, you know, that'd be wonderful. Obviously, you know, that deadline is coming. You know, our view was it was worth taking the extra time, especially since they asked for it, in case there's a bigger win-win to be had here.

Brett Feldman (Equity Research Analyst)

Thank you. Appreciate it.

Mike Sievert (President and CEO)

You bet.

Jud Henry (SVP and Head of Investor Relations)

Operator, next question, please.

Operator (participant)

Thank you. That will come from the line of Craig Moffett with MoffettNathanson. Your line is open.

Craig Moffett (Co-Founder and Senior Managing Director)

Hi, thank you. 2 questions. One, as long as we're on the topic of Dish, outside of the 800, if the opportunity came up, would you have an appetite for more mid-band spectrum, either from Dish or perhaps any other source? We're talking about sort of meaningful size chunks here. Second, if you could just talk about the pacing and trajectory of fixed wireless as you now, with a little more experience under your belts, as you look out toward your long-term guidance, how do you, how do you think about the pacing to get to 8 million or so households?

Mike Sievert (President and CEO)

Sounds great. Well, I'll tackle the first one and then maybe hand to Mike Katz for the second one. You know, I... I don't mean to be flip, Craig, but I think you, you know, you've been following us for so long. You know, we've never met spectrum we didn't like. So of course, one thing that distinguishes us from other providers is that when we get our hands on spectrum, we put it to work, you know, right away for the benefit of the American consumer. So that's not only in the public interest, but that's in the interest of T-Mobile and our customers.

You know, you see that in how we're deploying so ambitiously the 2.5 GHz that are the proceeds of the merger, having built the best 5G network in history on that spectrum acquisition that came through the merger. Look, I mean, you know, we're always on the hunt for other ways to add capacity to our network because it allows us to do amazing things like not only continue to take share and grow and meet ever-rising needs of customers on their smartphones, but also to get after the subject of your second question, which is fixed wireless access. You know, to the first part of your second question, nothing has changed in our aspiration.

You know, we're still on the hunt for that single-digit penetration. Maybe Mike could comment about what we're seeing in the marketplace and the rate and pace of our growth versus our expectations. Yeah. Thanks, Mike, and thanks, Craig, for the question. You know, we couldn't be happier with what's going on with this HSI business. You probably saw from all of our results, we just crossed over 3.7 million customers in this business.

This pacing that we're on, you know, which we told you last quarter and the quarter before, of right around where we were in Q2, right around 500,000 customers, gives us confidence that, you know, the 7 million-8 million total customers that we committed to at the end of this planning period, that we've got high confidence that we're going to get there. One of the things that Mike mentioned as comments that I think is worth reiterating is, we saw in Q2, again, our highest gross adds, and our gross adds have increased every single quarter since we launched this product. Then again, in Q2, we saw sequential decreases in churn. I think that really speaks to the fact that this is a great product.

It's a great product that customers are really, really loving. You see that both in this sequential churn decrease, but also just in the overall NPS scores, which continue to be the highest amongst any broadband category in America. We're really thrilled with where we are with this product. Back to my comments up front, I said things have been remarkably consistent with what we rolled out to you at our Analyst Day in 2021. This is one of those things. You know, we said we saw a potential here of 7-8 million subscribers based on the excess capacity profile of our built mobile network. That means it's not capital burdened, and because of that, we can make profit there. It plays a role.

It's a single-digit penetration role. We're on our way to going and seizing it, for the benefit of our shareholders and our customers. It's right on track.

Craig Moffett (Co-Founder and Senior Managing Director)

Thank you.

Mike Sievert (President and CEO)

Okay.

Jud Henry (SVP and Head of Investor Relations)

Thanks, Craig. Operator, next question, please.

Operator (participant)

That will come from the line of Jonathan Chaplin with New Street Research. Your line is open.

Jonathan Chaplin (Analyst)

Thank you very much. Wondering if you can give us context on a couple of things. Firstly, how are you thinking about the evolution of upgrades in the second half of the year as we go through a new iPhone cycle? Kind of what have you factored into your guidance on EBITDA for that? It looks like upgrades for the industry have been, have been coming in sort of lower than expected, much lower than historical trends. I'm wondering how that shifts in the second half of the year. Then wondering if you can give us a little bit more context on fixed wireless broadband churn. You mentioned that it had come down sequentially, which isn't surprising, and that it's always low in the broadband market in the Q2.

What does it look like on a year-over-year basis? Maybe you can give us some context around the, the kind of levels that it's at for the mature portion of the base that, that's been with you maybe for a year or more?

Mike Sievert (President and CEO)

Yeah, Jonathan, you're, you're spot on in the premise of the question, that looking at the aging of the base is the way to get at it. We'll come to Mike on that in a minute, but first, on upgrades, historically low upgrades, Peter, what's contemplated for the rest of the year? Maybe a little commentary on why do we think we're seeing that.

Peter Osvaldik (EVP and CFO)

Yeah. Well, let me start with why do we think we're seeing that? Fundamentally, we believe we're meeting customers' needs and desires. If you look at what we've talked about from a network perspective and a value perspective, it makes a lot of sense. You come onto this network, and you have a 5G device. Remember, about 2/3 of our postpaid base already has a 5G device, and they get experience on this network that is just phenomenal in the broadest sense of the word, much more than the competitive sense can bring. We think we're just meeting their natural demand. Customers are happy with their devices. They're happy with their devices from a longer perspective.

Remember, we continue to have two-year financing constructs, so they have the ability to upgrade earlier than the competition, one of the unlocks of Phone Freedom that we, that we put out there that led to the port ratio changes. Fundamentally, we think we're exactly meeting what customers need. In regards to the second half, the second half always tends to have slightly higher upgrade rates, and you mentioned that you have a new product introduction from Apple. You tend to have promotional constructs and a little bit higher switching in the second half, and we're typically the beneficiary of that. We also obviously make very, very solid offers to our base from an upgrade perspective. We do have higher upgrade rates contemplated than what we saw in Q2, but we don't specifically guide to those other than directionally.

Mike Sievert (President and CEO)

Okay. Mike, over to you on a little bit more color on high-speed internet churn. Yeah, I mean, I think building on what you're saying, Mike, you know, we have the youngest base of broadband customers in America, and like I think we've said in a couple calls, you know, the churn curves that we see for customers, like in our mobile business, tends to be higher in the earlier tenure months and then reduces as customers achieve greater, greater tenure lengths with us. We're seeing the exact same thing in our, in our broadband business. Customers that have been with us for some months, their churn has decreased to the point that was right where we expected it.

It's look- looking right, right on where our plan was, and the behavior has, has been just right, right on, right in line with what we expected. Okay, terrific. Maybe, Judd, tell us when it's time to go to Twitter, so that we're not ignoring the people coming in on Twitter, 'cause we always do some of that as well. But while you're thinking about it, we'll go operator to one more online.

Operator (participant)

That will come from the line of John Hodulik with UBS. Your line is open.

John Hodulik (Senior Equity Research Analyst)

Great. Thanks, guys. Two questions, if I could. First, on the, on margins, obviously a lot of progress there, 200 basis points, but you guys still trail AT&T and Verizon by about 500 basis points. Do you see that closing over time, or is it really just a function of the sort of lower ARPU and, and faster sub growth? That's number one. Number two, Mike, I think you said that your porting versus cable has improved, and I, and I don't think you've, you've called that out before, but maybe just some commentary about what you're seeing in terms of competition in wireless and cable.

I mean, they're talking about, you know, sort of more and more bundled offerings and, I guess, I guess Comcast is sort of flattish on a, on a, on a year-over-year basis, but just, you know, what the posture is there and what's driving that improvement in, in porting from cable? Thanks.

Mike Sievert (President and CEO)

Okay, I'll take that one, but Peter, we'll start with you.

Peter Osvaldik (EVP and CFO)

Yeah, certainly on, on the margin question, you know, it's, it's a lot more than an ARPU differential. It's really some structural differences that we always call out. For example, the, the whole leased versus owned, the backhaul strategy. The other thing they'll always note is that with this, significant higher switching that we see and the net add production that we're giving, obviously, we have more S in SG&A than the competition does. We have a very dense network built out. There's fundamental, some structural differences, that also mean there's a CapEx, OpEx differential in when you compare, AT&T, Verizon and us, and that's why it's always important to fundamentally look at conversion of service revenue into free cash flow.

Free cash flow is the value generation engine that allows you to further invest, return, you know, capital to shareholders, or do all sorts of other things to create value. That is the measure by which we're really comparing ourselves to the competition, to get rid of all the structural noise. On that regard, you, you know, you heard what we announced today, already there from a year-to-date basis in terms of beating them on the conversion ratio, with next year anticipated to expand that ratio further. That's, that's how I think about margins.

Mike Sievert (President and CEO)

It's interesting that when you listen to Peter, that, and you, you hear that even with our superior growth and our lower prices, both of which hit margins, we have the superior cash production per service revenue dollar in the industry year to date. That's rapidly expanding, 75% year-over-year guide this year on our way to higher cash flows next year. It really shows you the power of this model based on this team's ability to execute, but also based on the balance sheet, the incredible assets that we control, the track record of execution, the head start, and many other benefits. Okay, great! The second one was- second one was cable. John, let me come back to that.

Yeah, we did make a very light comment on it, but it was light, that we had been seeing improvements in our port ratios with cable last quarter because we wanted to provide some commentary because cable in Q4 started to see some pretty big net add trajectory changes. So we kinda double-clicked into that, 'cause you kinda have to do that as a competitor to figure out, you know, is this gonna come from us or what's going on? It's kinda interesting, you fast-forward to this quarter, I'll remind that even in a world where cable is now a pretty big share taker in overall postpaid, T-Mobile produced the highest postpaid phone net additions for a Q2 in 8 years, not only the lowest churn ever in our history, but the lowest in the industry.

That kind of answers a question as to whether or not, you know, this dynamic from cable is coming from our side, right? I mean, you know, we're performing better than before they were in the industry. Obviously, there's a dynamic that affects others, both of our two look-alike competitors plus prepaid. You know, there's a lot of brands that have been affected by this, and they're viable competitors to be taken seriously. But it's just, as you can see in our performance, not affecting our results. Okay, Judd, who do we, what do we have coming in online?

Jud Henry (SVP and Head of Investor Relations)

We've got a question from Roger Entner on, how strong was the business growth this quarter? Maybe we can tee that one up, and then we've got a follow-on question around enterprise sector as well, so we can, we can hit those.

Mike Sievert (President and CEO)

Great. Roger Entner asked, "How strong was business growth this quarter? Can you talk about the VA and any additional color on overall business growth?" We also have Chetan Sharma coming in. "Congrats on another great quarter." Thank you. "I was wondering if you could provide some color on traction you're seeing in the enterprise sector beyond connectivity. What about vertical industries, people using 5G, 5G advanced services, et cetera?" Maybe, Callie, why don't you start on both of those, and anybody else can jump in.

Speaker 15

Okay. Thanks, Mike. Thanks, Roger and Chetan, for the questions. As Mike mentioned earlier, we delivered on our highest phone net adds and lowest phone churn ever, handily beating Verizon again. We're seeing profitable growth in all three segments. In SMB, we achieved positive port trends against AT&T. This makes five consecutive quarters against Verizon, and we grew ARPU quarter-over-quarter again. As Mike mentioned in his opening remarks, in enterprise and in government, our business is good business with very profitable CLVs, but roughly 60%-70% relative to consumer, and they're rising year-over-year, quarter-over-quarter. In Q2, for enterprise, for instance, we welcomed both the largest global asset management firm and yet another leading global bank as new accounts.

We landed two huge government contracts with the EPA and the IRS, and continued to double our net adds quarter-over-quarter with first responders, most significantly in rural areas where an older LTE network just doesn't cut it for critical response. A lot of really good growth this quarter from an incredible team in the business group. For the VA question, if I could just take that one for a second. I, I wanted to say, as, as you may remember, we took Verizon's share back in 2018, now because of our network, we've taken the pole position and have added roughly 20,000 phones year-to-date, supporting more than 50% of the VA phones today.

I'll note, too, our contract also includes T-Mobile's 5G internet for the VA's community, community-based outpatient clinics. So we're able to provide healthcare for veterans in rural areas because of the network that we have that we have built. Just wanted to add some clarity on the on the VA subject. Then one last thing on use cases for 5G applications outside of pure connectivity. I'll, I'll start, Chetan, with some of the verticals where we're seeing the most traction, and that would be in retail, where we see many use cases for fixed 5G solutions, where people are looking to look at better costs and less truck rolls and and support for perhaps older wireline services and are replacing that with T-Mobile's 5G in in multi-unit national retailers.

In healthcare, this is another area where we're seeing CTOs and CIOs from large hospitals come to us and say, "Look, we need ubiquitous connectivity, both indoor and outdoor. We need more of a programmable network. We need certain places in our buildings where we want to designate private networks." Because of our public 5G network and the solutions that we can offer with our standalone core, we're able to offer a hybrid solution that's really working in a place like a, like a hospital that has lots of different variation to the types of connectivity they need. Lastly, I'll say we're seeing some traction in education.

Large campuses that want to provide connectivity for their students, but also ways to use their data differently and to get in all of the dorms and places in the campus, and rooms, and libraries, and perhaps older buildings, where there's really a need for ubiquitous coverage throughout the, throughout the campus. Those are the 3 areas that really pop out to me. The last one I would say is in, in the federal use cases with the Department of Defense, where not a surprise to anyone, lots of areas for us to begin to deploy hybrid networks and private networks for use cases specific to the military.

Mike Sievert (President and CEO)

Well, hopefully, that answers it and more. I mean, if you listen to Callie, it just reinforces what I said in my upfront remarks, which is some of the biggest and most sophisticated and profitable customers are choosing T-Mobile because of the sophistication of our advanced network capabilities and our ability to translate that into solutions for their business, and that's just so different from where we were a few years ago.

Speaker 15

Right.

Mike Sievert (President and CEO)

It's a complete 180, and it's fueling momentum, in fact, all-time record results in our business group. Hopefully that answers the question, guys. Terrific. Should we go back to the phones?

Jud Henry (SVP and Head of Investor Relations)

Let's do it. Operator, next question, please.

Operator (participant)

Thank you. That will come from the line of Phil Cusick with JP Morgan.

Mike Sievert (President and CEO)

Hey, Phil.

Ulf Ewaldsson (President of Technology)

The line is open.

Phil Cusick (Senior Analyst)

Hi, guys. Thank you. Hi, Mike. You know, the wireless industry is still running maybe hotter than many expected at the beginning of the year. Certainly, your momentum is strong. Are you seeing improving porting ratios versus other MNOs and, and maybe the MVNOs? Do you think there's a growing mix of customers who are coming in without a phone history or a number? Then second, if I can, CapEx. Mike, you talked about tapering in the second half. Does that jumping off rate in the Q4 indicate a much lower 2024 CapEx level? Thank you.

Mike Sievert (President and CEO)

Okay, great. I'm gonna let Peter answer the second CapEx question. The first one's really interesting. The answer to the question is yes and yes. Both are true. Yes, our port ratios are improving each and every month since we launched Phone Freedom against each and every competitor, including Cable overall and Cable individually. That's a really interesting fact, that it shows that not only are people starting to discover our network advantages, which has sort of been a slow improvement over the last year and a half, but we have really sparked an intrigue with consumers around this idea that we can free them from being trapped with the other guys.

You know, and Cable, in some ways, actually is helpful in that in a dynamic, competitive industry, more people are jump balls, and more people are saying, "Should I be with one of those two look-alike, you know, kind of old line providers, or should I be with somebody new?" When they ask that question, they aren't picking Cable, by and large. They're picking T-Mobile. As you saw, we had the industry-leading postpaid phone net additions. What is happening is Cable is growing very rapidly and faster than I think a lot of people expected. Specifically to your premise of your question, our port ratios with Cable have been improving for year-over-year for nine quarters in a row.

What you see is that the big step forward they started to take in Q4, according to our analysis, about 80% of the year-over-year increment in their performance from the same periods year ago, Q4, Q1, and Q2, is from non-ports. They're actually not growing the porting side of their business at the same rate as the not porting side of their business, instead, kind of printing postpaid ads. They might be coming over from prepaid, they might be just simply net new, they might be kind of dropped in the bag. I don't really know. There's probably several different factors to it. We don't know quite how to unpack it 'cause we don't have all the information. I mean, we, we double-click into things, like Verizon's wholesale revenue and note that it's not growing.

That's sort of an interesting diagnostic for us that helps us understand, you know, what might be happening. Anyway, hopefully that helps it. Our industry-leading account growth of 299,000 shows that T-Mobile is winning the switching decisions, in, you know, high-quality, prime, paying families, the kind everybody's going for.

Peter Osvaldik (EVP and CFO)

Yeah, and on, on CapEx, Phil, the way I think about next year, although we're not specifically guiding, is we're still comfortable in the 9-10 range that we gave out. Remember, I wouldn't take Q4 as a jumping off point because really the way Ulf and team have built this is a very lean manufacturing approach to the build, one of the, one of the secrets to our capital efficiency there. So it isn't that I take a run rate and an exit run rate and project it, but $9 billion-$10 billion feels about right for next year at this point in time.

Mike Sievert (President and CEO)

Speaking of a lean, network performance machine, I think it would be a good time to just stop and take note of what's been delivered with this incredibly capital-efficient profile that you're asking about. You know, Ulf and team, you guys deserve incredible credit. We've now reached 285 million people with, you know, ultra-capacity 5G. This is something that neither of our competitors, principal competitors, have promised to ever do, certainly not in the next 2 years. We've been talking about this idea of being, you know, 2 or more years ahead in the 5G race, but if anything, it's expanding. Maybe you could share a few of the statistics of kind of where we are and also a little shadowing of where we're going.

Ulf Ewaldsson (President of Technology)

Well, thanks, Mike. Yeah, the last quarter, we actually pulled ahead in our, in our leadership, and, 285 mid-band POPs, we're heading towards 300 by the, end of this year. We have to remember that we reached 200 mid-band POPs, two years ago, in, in 2021. On our low band, we reached 300 two years ago, where others are now pulling into the station. It gets harder and harder with the POPs as you grow through. Every 100 million POPs takes about 3 times the efforts in terms of upgrading and building new towers to be able to deliver the same POP growth.

This network is just fantastic, and we are so proud of it, and we're proud to support also, what Callie commented on earlier, 5G being capable of not only being that tremendous consumer driver, it also drives now more and more of the business inside the enterprise space, which is a dream for Oliver Bahn, who has followed the 5G for many, many years. On top of that, we have lots of room to move ahead. We have today 255 megahertz of spectrum that is dedicated to 5G on our midband. You have to remember that our low band is all de-dedicated to 5G. When others are talking about their, their coverage, they're sharing this between LTE and 5G, and we're not. We're dedicating spectrum.

The mid-band megahertz will grow to 200 megahertz dedicated to 5G by the end of the year by migrating more LTE spectrum over, over to 5G. We haven't even started on what we can use for, for 2024 and beyond, which is our C-band. We can use our 3.45 auction results. We can use our 108 auction results, which is enhancing our 2.5 capabilities even more, and we have yet to re-farm spectrum, for example, on AWS as well. There is just so much more for us to run at, and couldn't be more excited that we're extending our lead in terms of our network.

Mike Sievert (President and CEO)

Well, it's a good thing you are, 'cause we're filling it up. You know, what's interesting is that with 3.7 million high-speed internet customers and rapidly growing, the average speeds on our network are not just twice as fast of our as our competitors, but growing. We're speeding up, not slowing down on this network in terms of the average person's lived experience, and that's just phenomenal. It's got tons of capacity that we have not yet rolled out, which opens up more and more opportunity on our way to not only the 7-8 million high-speed internet customers, but our ability to, with the best network, continue to take share from our competitors.

We said at the beginning, we had a 2-plus year advantage, and we would have it for the duration of the 5G era, and you're proving us right with that work. Thank you. Okay.

Ulf Ewaldsson (President of Technology)

Great.

Mike Sievert (President and CEO)

Operator?

Operator (participant)

Your next question comes from line of Simon Flannery with Morgan Stanley. Your line is open.

Simon Flannery (Senior Equity Analyst)

Great. Thanks a lot. Good evening. Just following up, if I could, on that spectrum deployment. I think in the past you've talked about rolling out fixed wireless to a majority of the U.S. Perhaps you could just help us understand where you are on coverage today with the base offer and how that should evolve over time now that you're at 285, going to 300. I guess a related question is for Ulf. You didn't mention the millimeter wave. I know you've been looking at potentially a macro overlay product. How, how are you thinking about that at the moment or attacking MDUs with millimeter wave? Thanks.

Mike Sievert (President and CEO)

Let's start with the millimeter wave question, then we can come back to the coverage on fixed wireless. I can touch on that one.

Ulf Ewaldsson (President of Technology)

Right. We are actually using millimeter wave today. We, we have deployments that we early on started off in Manhattan, for example, in Los Angeles, in some areas where we really have that extraordinary capacity need, we can use the, use the tool of millimeter wave. Our general strategy is not based on millimeter wave. It's based on a macro strategy, which, you know, is our layered approach with our low band and our mid-band, and now also deploying deploying our PCS spectrum for 5G. Millimeter wave could also be potentially an interesting play for us when it comes to enhancing capacities that could be used, for example, for HSI.

We are working with our vendors, and we're working through our OEMs to figure out if we can make a viable economic and technical performance case out of that with them.

Mike Sievert (President and CEO)

That kind of bridges to your second question. Maybe this is a good time to remind everybody how our capacity model works for fixed wireless access. Essentially, right now, we serve about the potential of about 50 million homes, but they're not in certain geographies. They're geographically dispersed all over the U.S. The way our model works is we're selling excess capacity, sector by sector. What we do is study every sector from every tower in our, in our network and determine what amount of normative smartphone usage will there be over the next several years. In areas where there's still excess capacity, we today approve applicants for home internet use.

Right now, there's about 50 million home addresses where if you were to go into our tool and apply to be our customer, we'd say yes, out of the 145 million in the country. What's interesting is if you and several of your neighbors all did the same, the nth person would get a no, 'cause it's a dynamic model. What we're selling is excess capacity, and because of that, what we... our modeling shows us that we will get to, as we said at the very beginning, about 7 or 8 million households with this excess capacity model that's not burdened by capital. Since it's not burdened by capital with an already built mobile network that you need for great coverage and competitiveness, we're able to profitably build this business at very low prices.

It's just a, a win-win for a sort of single-digit penetration part of the market. Now, to the premise of your question and what Ulf was getting into, of course, we're studying whether there are ways to go beyond that initial, excess capacity, capital-free model, capital-free-ish model. We haven't drawn any conclusions about that yet. I mean, we're, we're looking hard at millimeter wave. You know, we're looking at whether or not, dedicating mid-band spectrum to HSI would make sense, whether there are non-standards-based solutions, and we just haven't drawn any conclusions. It's not immediately obvious, that there are economic ways to grow this business beyond its initial single-digit penetration. You may see us doing trials in the marketplace as we experiment with this and try to crack the code.

You know, you'll hear about us trying millimeter wave things or MDUs strategies or non-standards-based solutions to see if there's a way to get after it. You see us trialing fiber, whether or not there's a way for our team, our distribution, our brand, to add value in the fiber ecosystem, and I've made mention of that before. These things are things we're doing to try to learn, and the good news is we've got some time because we'll hit this kind of initial terminal sizing of HSI, still, we've got 2 more years to run. You know, our heads are down, seeing if there's a way to crack the code on this.

Peter Osvaldik (EVP and CFO)

Of course, any of the things we do there that we just talked about, a capital burden model or something with fiber, are all things that would have to be accretive to our Analyst Day guidance that we put out there.

Mike Sievert (President and CEO)

Good. All right.

Operator (participant)

Great. Operator, next question. That will come from the line of Tim Horan with Oppenheimer. Your line is open.

Tim Horan (Analyst)

Thanks, guys. Just curious, why wouldn't you be raising fixed wireless prices now? It, it seems like you have very, very strong demand from everything we hear out there, and you kind of have somewhat limited supply. I guess related to that, the Go5G plan, can you give us some color what that means for ARPU growth the next couple of years? Thanks.

Mike Sievert (President and CEO)

... Okay, let's start with the second one on Go5G, and where's ARPU going, and ARPA, and all that stuff. Peter, we can start with you.

Peter Osvaldik (EVP and CFO)

Yeah, absolutely. I'll, I'll let John comment on the success of Go5G Plus, but as I always say, you know, when we think about ARPU, and you saw a sequential increase of about $0.20, and we continue to believe on a year-to-year basis, ARPU will be generally stable. There's probably some potential for sequential increase, again, from Q2 to Q3. Since it is such a mix-driven metric, and you have to put everything into it, whether we're talking about all the benefits we see from Go5G Plus, whether we talk about the benefits we see from a segmented approach, whether it's, you know, military, 55 plus, and how those might be lower ARPU customers than the average that we see, but are high CLV customers coming in, very high-quality customers.

Similarly, in business, you know, business, you tend to get enterprise, government, large accounts that have very, very great CLVs, but would have, given the nature of, you know, the volume purchasing, lower ARPU. All of that blends into ARPU that we see as generally stable. It's the ARPA strategy that we have. It's the switching, attracting accounts into T-Mobile, and then the land and expand ARPA strategy, which you just saw, you know, an exciting update to the guide from +1% - slightly over 1% on a year-over-year basis there, and that's really the focus point for us. You know, the question on Go5G Plus, I think I'd hand to John for a moment.

Mike Sievert (President and CEO)

Yeah

Peter Osvaldik (EVP and CFO)

...because it's been a phenomenal success.

Mike Katz (CMO)

I think, Peter, just to, just to remind everybody, the Go5G Plus is really kind of a front book, you know, initiative. We're not going into the base and asking people to migrate to Go5G Plus and doing all of that within the base. It's really kind of a front book initiative. This is going fantastic. We had an opportunity to mention this on our Q1 earnings call back on April 27th, when we launched Phone Freedom, Go5G, Go5G Plus in mid-April. Like Mike said a few moments ago, when you look at the overall porting ratios and the attractiveness of this offer, and what's happening, that we've increased our porting ratios every month against every competitor and have followed that through so far in July.

Over 60% of the accounts that are joining T-Mobile are now subscribing to Go5G Plus. There's, you know, utility that's different than Magenta MAX in terms of hotspot data that we've increased, in terms of high speed roaming in Mexico and Canada, across North America, that we've increased. The big pain point that I think Go5G Plus is solving is that new and two promise. First of all, paired with the easy unlock and helping people get out of AT&T and Verizon, mostly AT&T, given the unlocked devices, helping people get out of that, switching to T-Mobile. This three-year contract cycle that AT&T and Verizon has, we knew this was a big insight and a big opportunity, but even I underestimated how big of a pain point that is.

The fact that you, you know, you can basically go to law school and complete law school faster than you can complete a phone contract at AT&T and Verizon. So that's a huge pain point, and the promise of Go5G Plus of being able to get in a new device, same device offer as a new customer every two years, that's a differentiated and unique proposition in the marketplace that's really different and has really resonated with customers.

Mike Sievert (President and CEO)

Well said. Okay, your last question was about HSI pricing. I'll just answer it briefly. I don't normally give sort of forward-looking commentary on pricing, so I'll answer it this way instead, which is: Do we see ARPU, and are we interested in ARPU enhancement for HSI? The answer is yes, of course. Generally, when you look at our track record, our philosophy in the past as to how to get about that isn't to jack up people's prices. It's to add value to their life, bring new services, show them increased offers, and let themselves select their way up. You know, obviously, we're interested in that in this space.

Mike Katz (CMO)

Okay.

Mike Sievert (President and CEO)

Great.

Mike Katz (CMO)

Good.

Mike Sievert (President and CEO)

Thank you.

Operator (participant)

All right, next question, please. That will come from line of Michael Rollins with Citi. Your line is open.

Michael Rollins (Managing Director)

Thanks, and good afternoon. Just following on the earlier comments on some of the integration milestones that you've hit, what are the activities that are left to get to the full synergy run rate of $7.5 billion for this year's guidance, $8 billion next year? Can you unpack and, and maybe even size some of the opportunities for further cost efficiencies that may be embedded in your multi-year plan to drive that longer-term margin expansion? Thanks.

Mike Sievert (President and CEO)

Okay, great, Michael. Well, let's talk about where we are on synergies this year and, and what's left to be done. I mean, on the what's left to be done front, not much. You know, the major milestones are behind us, but that doesn't mean the synergy run rates are quite there yet. Maybe you can comment on that dynamic, Peter.

Peter Osvaldik (EVP and CFO)

Yeah, exactly. A few things in there. Of course, we have a small tail of customers to still get over. That'll allow the final, you know, decommissioning of systems and things to that, whether it's front office, back office. Those are the things that are kind of left to do. Certainly, from a cost perspective, there's a little bit in terms of physical decom. While the sites are shut off, there's still physical decom happening. On the synergy development, you know, as we get from $7.5 billion to the $8 billion next year, really, the big chunk of that is avoided costs. We'll realize the vast majority of the run rate synergies by the end of this year, which you'd naturally expect, given we're saying we're substantially done.

Then the shift to next year will be fundamentally those avoided site build costs.

Mike Sievert (President and CEO)

Okay, great.

Michael Rollins (Managing Director)

Just one other: Can you just share how T-Mobile is looking at the role and mix of online distribution, and how you're viewing the durability of customers wanting a physical retail location to buy and upgrade devices?

Mike Sievert (President and CEO)

Yeah, absolutely, it kind of goes to the premise of your follow-on question, your initial follow-on question, Michael. I mean, obviously, across consumer markets, generally, customers want a transaction that's fast, transparent, simple, and mostly digital. Our industry has been very stubborn on that front, mostly due to the complexity of the offers across all the providers. You know, that's something that we're very focused on, and I know everybody in the industry is. Our digital capabilities are rapidly improving, especially as it relates to self-service for our customers. It's incredible what's going on left to right in our company as to how we're already applying AI technologies and machine learning to speed things up, serve customers in a better way, and we can get into some examples around that.

Because of emerging technologies, there's a lot of potential over the coming years to not only meet customers where they are, finally, in this industry, because we've been kinda slow in this industry due to the complexity of our offers, but also to potentially realize some efficiencies over time. That's a good thing because the cost of competition is high, and, you know, as you've seen over the last few years, it's gone up. You know, it's, it's all about us seizing opportunities to be able to continue this formula that works so well. For us to continue to do what we do with this flywheel of success, we can't sit on our hands. You know, we have to be able to seize new opportunities, not necessarily to outperform the promises we made you.

Those promises were really high, fulsome promises, but in some cases, to achieve them in light of, you know, what we have seen in the past, which is some increased cost of competition. Which at the end of the day, is great for consumers.

Jud Henry (SVP and Head of Investor Relations)

All right. Thank you. Next question, please.

Operator (participant)

That will come from the line of Ric Prentiss with Raymond James. Your line is open.

Ric Prentiss (Analyst)

Great. Thank you. A couple of questions. I want to follow up on the private network question. When do you feel that private networks, 5G private networks, will become a material enough number on the revenues? An associated question, do you feel customers, whether it's consumer or enterprise, really understand what 5G means for them and why they should choose you with your head start? It just seems like the market is still just kind of like, "Oh, I'm not sure what 5G is.

Mike Sievert (President and CEO)

You know, on the consumer piece, I kinda agree. What people want is a really strong, powerful signal everywhere they go. That's what they want, and 5G is a means for us to get them that better than anyone else. Whether or not they give us credit that the thing that got them that was 5G, I really don't care. We have the highest-performing network with incredible reach of the high-performing parts of our network, 5G, than anybody else, like, by far. Like, twice the landmass covered of Ultra-Capacity 5G than our next closest competitor, and rapidly expanding, as Ulf explained. You're right, they don't really give 5G credit for that, but what they want, make no mistake, is a very powerful signal everywhere they go. Because they're watching video more than ever.

They're glued to their TikTok and their Instagram stories and their sports and their YouTube and their videos and their Zooms. They don't want buffering. They want that signal with no latency and no buffering and no jitter. That's the power of 5G, whether they give it credit or not. On the business side, I'll say the short version, which is we, we don't really know. I mean, whether you... To your question, literally material means something in our company. That's big. You know, we're a big company. We don't know when it'll be bigger than a breadbasket. We do know that we're best positioned to capture it.

you know, as Peter pointed out back at our Analyst Day, 2+ years ago, we actually did not, for that reason, factor a lot of revenues in, or really any at all, from some of these advanced 5G network services. Our, our strategy was: Let's make sure we are best positioned to capture them, and Callie, I think, very deftly explained some of the things that we're doing in this area with early adopting customers. But when it becomes something that's bigger than a breadbasket and really contributes, we don't really know. Because we didn't know, we made you no promises in our long-range plan on it. I can tell you this promise: As that market develops, we are beautifully positioned to capture it.

Jud Henry (SVP and Head of Investor Relations)

Great!

Ric Prentiss (Analyst)

Great. Thank you.

Jud Henry (SVP and Head of Investor Relations)

All right, looks like we're right at time. I appreciate everybody joining us today. If you have any further questions, please reach out to either Investor Relations or the Media Relations departments. Again, we look forward to talking to you again soon. Thank you.

Mike Sievert (President and CEO)

Thanks, everybody.

Operator (participant)

Ladies and gentlemen, this concludes the T-Mobile Q2 earnings call. Thank you for your participation. You may now disconnect and have a pleasant day.