T-Mobile US, Inc. (NASDAQ:TMUS) BofA Securities 2022 Media, Communications & Entertainment Conference September 7, 2022 11:50 AM ET
CorporateParticipants
Peter Osvaldik – Chief Financial Officer
Jon Freier – President, Consumer Group
ConferenceCall Participants
David Barden – Bank of America
David Barden
And for our second in the series of presentations we have today, here in the Ballroom, I’m super pleased to be joined with us by the — in person for the first time, Peter Osvaldik, the Chief Financial Officer of T-Mobile and Jon Freier, who is the President of T-Mobile’s Consumer Group. So thank you guys for physically being here. This is kind of awesome. Appreciate it.
So, look, we had some news out this morning that I think we should talk about, and it was not the buyback announcement. And I’m a little disappointed by that. So would you like to make that announcement here?
Peter Osvaldik
No.
David Barden
Are you going to make it next week?
Peter Osvaldik
Oh, Dave, come on.
David Barden
I’m just saying. All right, I’m just looking for a little love. I guess the next question is going to be, this announcement that you’re selling the wireline business of Sprint, to Cogent, we’re going to talk to Dave Schaeffer about that later today. That’d be interesting. I know, I remember. I was telling Jon, I was in college in the 90s. And I was watching ads on TV about Sprint and the pin drop and the fiber optic network. And they were a pioneer. And they had the best network in the country. And 40 years go by and you sold it for $1.
Jon Freier
Right.
David Barden
So what happened?
Peter Osvaldik
Yes. Well, first off, thanks for having us. Thank you, David. It’s just a pleasure to be in person. Let me start with the obligatory legal statements. So of course, today, we may make some forward-looking statements of risks and uncertainties and may reference non-GAAP measures. So just refer you to our SEC filings, and we’re still in a quiet period of auction 108. So I can’t speak to that.
So yes, let’s talk a little bit about the deal. I really think this is a win-win-win. And we’re very pleased to have reached agreement with Cogent. And when you think about it, for us, with 5G being our strategic focus, as well as now the Sprint wireless network effectively shut down and the wireline network no longer supporting it, it really made sense from a Cogent’s perspective who can really unlock the value of these assets. And just as importantly, for us, ensure that the customers are taken care of in the right way by a top-tier provider. So we’re very pleased with that regard.
It does result for us, as you say, from the $1 purchase price, but it is going to be a charge of approximately $1 billion in Q3 on a non-cash basis, primarily. And that is just the remainder of the net assets then to be written down, as well as an upfront charge on the $700 million IP services. We don’t currently foresee a path to utilize those, hence the charge. But of course, we’re going to continue to look at ways over the course of that 4.5 year agreement.
David Barden
Okay, that’s interesting. So you’re essentially paying Cogent $700 million to take this asset from you. What’s wrong with it?
Peter Osvaldik
No. As I said, there’s nothing wrong with the asset. It’s to your point, it was you know, ahead of its time back then. And I think in the hands of Cogent, it can really be unlocked and utilized to its full potential. For us, the focus is on 5G strategically, right? And also what will a mountain come out of this is once the deal closes, there should be some marginal upside from an EBITDA perspective, given that we’re not fully utilizing the assets currently, they are a slight drag from an EBITDA and free cash flow perspective for us.
So that’s — all of this won’t impact any of our 22 guide, and we anticipate that marginal upside would probably be in 24 given the timing of the close, that’s anticipated.
David Barden
Okay. That’s interesting. My last question on that is, I think some people would be surprised that, that you would want to be fiber network light. Meaning that you have this fiber network that you could be using for backhaul or for transport on an owners economics basis. But you’ve chosen not to do that you’d rather lease. Can you talk about why that’s the right choice?
Peter Osvaldik
Yes. One, for us where the Sprint wireline network was didn’t match up well to how we’ve architected the T-Mobile Network from a long-haul perspective. And then, when you think about backhaul to the towers, as well as in the core, it’s just fascinating in terms of the competitiveness of that market space and the high-quality backhaul that we’re able to achieve at really, really great rates, in many of these we’ve locked in, in terms of long-term arrangements and are very pleased there. So it made a lot of sense for us and the really the fiber routes didn’t match up with how we have the T-Mobile Network architected.
David Barden
Okay. So let’s zoom out and kind of talk a little about the industry. I guess, the question we’ve been asking kind of everybody each quarter has been, one of the biggest apprehensions that the market investors have is that they kind of seem to think that the business is so good at an aggregate level from a kind of trailing 12-month postpaid phone net adds around 9 million, that it can only get worse. And then, if it does get worse that the very KPI sensitive basket of companies, someone’s going to have to do something crazy in order to respond to a shrinking total addressable market opportunity. How do you react to that?
Peter Osvaldik
Yes. Well, look, I think in our view, in the longer term, the industry growth probably will more normalize, it certainly doesn’t look like it didn’t happen in Q2. And based on what we’re seeing in Q3, switching levels are very healthy. And so we feel confident in terms of Q3. But the most important thing is as you step back and you look at who’s delivering these actual net adds into profitability, and that’s our job, and who has the differentiated growth opportunities, and that’s where T-Mobile sits, and I’ll let Jon maybe talk a little bit about, top 100 and smaller markets and rural areas. But at a high level that’s what you saw in Q2, and that’s our job, right? We had 380,000, postpaid account net additions, which is truly a great barometer for what’s happening from a switching perspective versus just lines. That was our highest quarter ever. We at the same time, also delivered significant expansion and service revenue, free cash flow and core EBITDA. So we are the ones that could translate the growth because of our differentiated opportunities into profitability. And at the end of the day, yes, that’s what you should be looking for. That’s where we’re differentiated. But let me let Jon speak a little bit about those opportunities.
Jon Freier
Yes. We have really kind of five different growth factors that we talk about and are focused on that T-Mobile. Number one is, what we’re doing in smaller markets and rural areas. Number two, in this enterprise space. Number three is high speed internet or fixed wireless access synonymous terms. Number four is more growth for people that are looking for a premium network in the top 100 markets. And the number five, we still have tailwinds from our Sprint churn reduction, we made a lot of progress on Sprint churn, but we have a little bit more that we see as an opportunity in Sprint churn.
So if I can take a couple of those when you think about smaller markets, rural areas, first of all, that’s the way we define it, as everything outside the top 100 markets. So it’s about 40% of the U.S. population, 54 million households, 140 million people in 2020, we started out with a 13% market share. And we have an aspiration to get to 20% market share by the end of 2025. And what you’ve seen us do is to really expand our network in smaller markets and rural areas and really expand the 5G capabilities that really are absent in so many of these places. So we’re having an incredible time really driving this network expansion in smaller markets and rural areas. And what we’re seeing is, we’re seeing the switching postpaid share port ends, which is a pretty good barometer of what’s happening in switching increased quarter-over-quarter for the last year, in smaller markets or in rural areas.
And then, of course, in high-speed internet, which I know we’ll probably talk more about a little while, you’re seeing us as the fastest growing broadband provider in the entire country for the last three quarters. This last quarter in Q2 560,000, broadband fixed wireless access net adds. So we’re seeing a lot of success in that particular area. Where we’ve been historically strong in the top 100 markets, largely because of our network strength in the top 100 markets, we still see opportunity there. We have a lot of people that have switched to T-Mobile because of the value centric fame that we’ve built over the last 10 years as the uncarrier. But when you pair that, with this premium network position that we’re building with 5G, we see even more opportunity for people that haven’t switched to us yet, as a result of this network experience.
So we got a lot of differentiated growth opportunities. It’s hard to know what AT&T and Verizon and Cable and all those guys are going to do. But we’re very, very confident in our differentiated and unique growth position.
David Barden
Thanks, Jon. You just killed my whole question. All right. So backing up a little bit. So that was the industry level question. And then so you guys, you’re focused on profitable growth, you’ve delivered that growth. One of the contributors to that has been a pivot from several years of ARPU decline to now at a pivot to the positive inflection in ARPU. Could you talk a little about — I’m assuming that fourth factor, the upselling factor, the Magenta MAX, in the absence of a necessity to kind of go down market to grab market share, are the contributing factors, but I would love to kind of hear more a little bit about how that inflection has occurred and its sustainability.
Jon Freier
Yes. Magenta MAX is a great plan that we have today. That’s really our most popular plan that customers are choosing when they join T-Mobile and the most popular plan for our existing customers when they change a plan to a different plan.
David Barden
What percent that you are on Magenta MAX now?
Jon Freier
Well, about 15%, I believe is in the base.
David Barden
One-five.
Jon Freier
One-five. Yes, 15% in the base. And so what we’re seeing is, we launched the software about 18 months ago is when we put it into the marketplace about 18 months ago. And it’s the best expression of the best 5G network that’s out there. And what we’re doing is, we’re packing more value into Magenta MAX as well. So even in an inflationary environment where consumers are pressured, and there’s no doubt that there’s pressure for inflation, we’re still seeing good takes on Magenta MAX, because of the value that is packed into Magenta MAX.
I mean, just last week, we announced a new partnership with Apple to put Apple TV Plus included for free in Magenta MAX. Last year, we announced a 12-month trial, and we moved away from the 12-month trial to now that’s included into Magenta MAX. So for customers who have two or more lines, typically what they’re seeing is $225 per month and extra value associated with Magenta MAX. So we’re seeing really, really good take rates there. And we’re having, just a great time talking to customers about what they’re doing. And we see really good utility from this as well.
Think about this for a second, when we look at gaming on Magenta MAX versus other plans five times more on gaming. When you look at social media, 2.5x more usage on social media, and then on video 2x more usage than a non-Magenta MAX plan. So we’re seeing really good utility with that plan, based on and in addition to all the value, we’re continuing to see those take rates really strong.
Peter Osvaldik
And then, Dave just an add-on ARPU. Magenta MAX has been just an amazing tailwind. And as we said, at the onset of this merger at our Analyst Day, the plan was really to have sequential declines in ARPU. And this completely changed that around. And now we’re guiding to plus 2%, ARPU year-over year growth, which is just a phenomenal tailwind. ARPU, though isn’t all in metric. And there’s a lot of things to consider there. Some of those are, for example, where our growth opportunities are in enterprise, government and enterprise, you’re attracting very high CLV customers that naturally have a lower ARPU than consumer, but longer tenure, very profitable accounts. Similarly, in smaller markets or rural areas, we’ve seen a great uptake in our 55 plus and our military plans, which again, very prime consumers coming in very high CLVs, but maybe slightly lower ARPUs.
And so that’s why and the other thing is, of course, a bundled product between fixed wireless and Magenta MAX. So as you see adoption of that you see some discount allocation. All of this is really why we focus more on ARPA account level metrics, how do we continue to expand ARPA versus focus, as you know, solely on ARPU, given there’s way more opportunity in 5G, with other connected products, whether it’s fixed wireless solutions or other things, that’s where the focus is. And there are we anticipate being up approximately 3% year-over-year on ARPA. So that’s the focus for us.
David Barden
So one of the interesting things, in February, you’ve made some very small changes to fees. But what’s interesting is that you’re getting the 2%, ARPU growth without really price increases, which every vendor has done, obviously, as part of the April 1, 2020 closing agreement, you’ve committed not to raise prices for three years that might change when it comes to April next year, is that part of the thought process for 2023 is when you get out from underneath your promise not to change prices, to change prices.
Peter Osvaldik
That’s so carrier view to ask. I will let Jon talk a little bit about price lock, and really what our strategy is and how it’s successful.
Jon Freier
That’s what you would expect from end carriers to take a differentiated position versus our competitors. Our competitors have jacked up, fees and rate plans, and put all this carnage on their existing customer base during one of the times that they’re struggling the most with inflationary pressure. And we decided to take an uncarrier approach to that and just move to the exact opposite of that and continue to be centered on value, put more value into the overall rate structure, and introduced price lock, which is really a commitment to not change our monthly plan for you joining T-Mobile, our commitment with price lock that we introduced a couple of months ago, just a few months ago, I should say that we’re not going to change your rate plan. You moved to T-Mobile price lock, never have to worry about your rate plan going up.
So that’s our approach. Our approach is to anytime we’ve had an opportunity to think about taking care of customers putting more value into customers and driving more customer-centric offers and promotions in the marketplace or taking advantage of customers. We always go right back to the customer-centric approach, and put more value and take care of our customers in every way we can.
Peter Osvaldik
And what we see and what this underpins the ARPU tailwind that we just talked about as well. We have customers self-select into higher tier rate plans and grow service revenue that way instead of forcing them with multibillion dollar price increases. So there’s two approaches to it.
David Barden
So kind of evolving that conversation. So we’ve been focusing on the first half of the year on getting the Sprint base migrated over. And I think that there was — there’s been the expectation of two things going to happen. Number one was that there was likely to be some ARPU pressure. And the second was that there’s going to be elevated churn. And what I think has happened is maybe the opposite has happened. And that we’re now going to see a full quarter that benefit of the lower churn and the kind of stabilization of the Sprint base in 3Q into 4Q into 2023. Have we gotten to there? Can you kind of hang up the mission accomplished banner on the Sprint migration process yet?
Peter Osvaldik
Sure. Well, let me start and then I can hand it to Jon to talk about churn. I mean, when you think about Sprint integration, remember there were multiple phases to it. Certainly the biggest one was network migration. And how do we get consumers off of the Sprint network onto the T-Mobile Network. And that’s just been a phenomenal success to your point, by the end of Q2, we were two-thirds done with the decommissioning and a target decommissioning of 35,000 cell sites, we had gone through the orderly wind down of CDMA. And we have begun the orderly wind down of LTE. And we updated it earnings that we now anticipate being done with that decommissioning by the end of Q3, which originally it was a year and a quarter further from that, we pulled it in a year. And then, based on what we saw trajectory wise, we pulled it into the end of Q3.
And to your point, the way that was approached, resulted in Q2 in a period where we decommissioned 10,000 towers. We delivered the best churn of this combined company, in fact, beating Verizon from a churn perspective. So I think there’s a lot of opportunity there, it’s not the end of the Sprint integration, remember, there’s a couple more things to happen. One of those is billing conversion. And that’s going to continue through 2022 and 2023. The plan for that is to have it be a very seamless approach kind of a background approach for consumers to migrate. We did go through a lot of great plan migration in the first half of ’21 as you highlighted, there’s a little bit more to be done, probably in the tail end of 22 here and maybe a little bit in 2023. We still have to get through the wind down of the leasing construct as well. Remember, Sprint had a device leasing construct, we have what we believe is a much more consumer friendly EIP construct. And so that wind down will occur through about mid-2023.
So there’s potentially some more tailwinds coming but from a network perspective, couldn’t be more pleased with where we ended Q2 and maybe Jon, you can touch on churn just a little bit.
Jon Freier
Yes. I would just tell you that when you look at sequentially from Q1 to Q2, we’re down 13 basis points in churn, the only wireless provider that had a year-over-year churn decrease as well. And what we mentioned at our earnings call that we just most recently did is, that we expect the same year-over-year, goodness to happen in the second half of this year, as well. And so but when you think about this for a second, I mean, just for those of you who’ve been following this business for a long time, if you would have heard 10 years ago, that the combination of T-Mobile and Sprint churn would be lower than Verizon, you would have had said that was just a piece of fiction. I mean, just 10 years ago, maybe five years ago, maybe even two years ago, if you heard that, that the combination of these two companies and their churn rate would be lower than Verizon at 0.8 postpaid phone churn, you would just think that’s incredible.
So this is one of the things that we’re most proud of, that we really executed our worst or first playbook in Magenta. Our churn before the consummation of the transaction was Sprint. And then we’ve been executing that same playbook over the last two and a half years since we closed the transaction with Sprint. And then to Peter’s point, we do have some more goodness that’s coming with that. We got this leasing, moving people off of leasing by the end of 2023, and nor to an ownership model with the EIP, that’ll help us of course, but as you get customers domiciled onto the T-Mobile Network on an EIP with a compatible handset that’s taken advantage of all the bands and capabilities of the network, you’re beginning to see churn that just as the same rival as T-Mobile. So yes, we got a lot of goodness that we’ve delivered, it’s more that we still have to go.
David Barden
So and I think that I just want to kind of close out on that kind of subject, which is, so I think in the fourth quarter of last year, I might be wrong, but it was something like you put up a sub-number and said, oh, well, if we had had the Sprint guys on the Magenta churn would have been 900,000 better. And then in the first quarter, it would have been 4000 better, in the second quarter, you didn’t give us a number, but it’s mentioned that it would be something more than nothing as we head into the second half of the year. So it feels like churn is coming down. We’re getting the Sprint base locked down, we’re going to see the end of the Sprint price migration probably through the second half of the year, even though we’re still going to have 2% ARPU growth. So as we go to 2023, it looks like we should be set up to have a much better full year experience, at least in that top line than we even had in 2022. So there’s a lot of momentum going into 2023, it sounds like.
Peter Osvaldik
Yes. There’s potential opportunities as we said, I’m not here to guide ’23 for you but –
David Barden
No, we had an agreement. So, let me — just a couple of things more on that. So we’re getting a new iPhone today. How do you think iPhone season 2022 is going to play out?
Jon Freier
Yes. So Apple is doing their event. And within about an hour, they’re starting their event at 10 o’clock. So I probably shouldn’t get in front of any announcements on Apple. So yes, go ahead. They won’t mind. But yes, they’re doing their events here in a little while. And we’re seeing like what Peter said, we’re seeing good switching activity, good healthy competitive environment so far in Q3. And just like any other season, this will be a great season for iPhone, there’s no question about it. I think our customers just love Apple products and services. And they’re always just so incredibly excited about the latest innovation that’s coming from Apple. So I don’t want to get in front of the events, they’ll speak about what they’re going to speak about. And we’ll have more to say after that, in terms of our announcements and what we’re doing. But I think what you’re going to continue to see us do is to be very competitive in the market, be very disciplined in the market, of course, and continue to see those great offers and programs that we’ve been delivering.
David Barden
So one of the things I am talking about these days with some of the companies, some companies are complaining that the handset discount promotions in the industry are an unhealthy evolution that the whole industry moved to installment pricing plans, with the express intention of getting away from the subsidy model, where carriers were competing with each other to give away the most amount of money. And you ended up giving a wealth transfer to the equipment players. And we started out I think, with all sorts of good intentions, then all of a sudden, we’re in a market now where handset promotion seemed to be the norm. And if in a three-player market, there’s a thought that maybe we could just stop doing that. And maybe we shouldn’t be doing it, it’s an unhealthy thing. It’s maybe only going to get worse. Can you kind of opine a little bit on what do you think about equipment subsidies and their role in this industry? And whether it’s a good thing or a bad thing?
Peter Osvaldik
Yes. Well, let me begin and Jon certainly add in, is the competitive dynamics of the industry tend to shift around sometimes it’s very plan focused, sometimes it’s device promotion focused. And what you’re seeing right now, I think is quite a bit of a delta. I mean, you definitely see what a AT&T is doing. It’s kind of free for all, at the expense of leveraging our balance sheet with $5 billion of future discount amortization to go. You saw Verizon, kind of try some things and then communicate that it clearly didn’t work with Q2 results. But you see us because of our differentiation, and the opportunity, take a slightly different tact, of course, we have device-centric promotions, because that’s what the consumer wants at this point in time. But it also see us link it with our top-tier rate plans. So another way to drive service revenue growth and that ARPA accretion, is to link it to that way versus just, a free for all type of thing. And the reason we can do that is two-fold. One, the network. And I know, we’ll probably talk a little bit more about the 5G network, our leadership there, and how it’s starting to evolve into overall network leadership. But also, as Jon noted, there’s a lot more benefit from a Magenta MAX and other rate plan perspective that we’re building in that drives competitiveness and switching to us because of that differentiation versus just having to do a flat out free for all type of a phone.
So that, obviously, we’re going to be always very responsive to what’s happening in the industry. But the differentiation for us is not only the growth vectors that Jon talked about, but the way we deliver it in a profitable manner through the disciplined approach.
David Barden
So one of the things that happened in the aftermath of the second quarter, some players had some success, some didn’t. And those didn’t, had to try to pivot a little and try new things. And one of the new things that happened was Verizon introduced a new lower price point, introductory unlimited plan. I think, with the intention of maybe trying to get the attention of the BYOD switcher pool. And I think there was some apprehension about what that might mean, when the biggest player in the market comes in with a newer lower price plan and how that could tilt the balance of power. Has it tilted the balance of power?
Peter Osvaldik
Yes, much like it didn’t in Q2, we’re not seeing much impact in Q3 from this plan. And there’s a number of reasons and one of those is again, it’s a very de-featured rate plan that they’ve offered. And for the subset of consumers that want a very de-featured rate plan. Well, T-Mobile actually offers much better in our prospective plans and competitive offerings. But there’s a desire, again, because of the differentiation in the rate plan structure and how much value we’re packing into Magento MAX, for consumers to have more features in their rate plan, and particularly in this time, as Jon said, of inflationary pressures. From a macro industry perspective, what we’re starting to see is switchers to us and while they’re going into our top tier rate plan, and they’re coming from a foreign network seeking perspective, they’re still probably going down from their legacy rate plan fees and rates and tax structures. So that’s a lot of goodness, that’s coming our way.
David Barden
Cool. So I want to shift a little bit on the revenue statement to the wholesale side. And obviously, this has been a topic of conversation for a year. It started pretty aggressively a year ago, and there was a lot of acrimony, and then there was detente, and is what — that’s the word I’ll use. And so now, I think that there’s some greater clarity, with respect to a multi-year agreement with respect to Verizon, TracFone, and how that might look. And it sounds like there’s more of a multi-year understanding with how the DISH transaction will unfold.
So at the beginning of the year, when you gave us guidance, and even when you gave us updated guidance last quarter, even it kind of felt like, there was still a degree of that panic, that DISH was going to just abandon ship and go away. And that I think that there’s probably a lot more wholesale revenue in the outlook today than there may be was in the beginning of the year. But it doesn’t seem to be reflected in the EBITDA outlook. Is that a fair statement that maybe where we want to really see this deal happen. And then and before we put it into the numbers?
Peter Osvaldik
Yes. No. First off, I love how you ask that every quarter when we do a beat and raise, still not reflected in EBITDA relative to the competition.
David Barden
Because you beat and then you raise by the beat.
Peter Osvaldik
Raise our subscriber aspirations as well for the year, which obviously comes with CPGA costs in there. But no, I mean, we had assumed a certain level of wholesale revenue from DISH as well as TrackFone throughout the course of 2022. And, of course, had assumptions in terms of what underpinned our 2023 guidance that we gave back at Analyst Day. And we’re certainly very pleased to have reached an agreement with DISH and get to be good partners and work through this in the future.
In terms of a long-term revenue stream as we said, it is lower than what we assumed for 2023. What underpinned Analyst Day guidance, this is about three quarters of that. But of course, there’s a lot of other goodness to your point coming and I’m not here to update ’23 guidance, but just giving some shaping there. TrackFone as well, I think we have more visibility into how TrackFone will come off over the period of time as they transition into Verizon.
But in terms of 2022s guide, all of that assumption, and of course, as we reach deal underpinned what we gave you which again was a beat and raise as well as higher subscriber aspirations for the balance of the year, so but it’s what have you done for me lately, T-Mobile?
David Barden
Well, yes, I mean that’s kind of comes with the territory. All right, so shifting gears a little bit further to kind of cost structure and the kind of shutdown of the network expected — Sprint network expected in 3Q, what should we — what kind of dollar numbers are we talking about that impact 3Q, 4Q and then into 2023?
Peter Osvaldik
Yes. Well, I think we gave a sense of what you should expect from a synergy perspective in the second half of the year, as well as merger related costs as we continue to achieve. So all of that is baked into the guide that we gave in 2022 as well as our anticipation that will reach full run rate synergies earlier than what underpinned the Analyst Day, given all of the ability to shut down the network faster than we thought.
David Barden
What informs the synergies, does that include the things that you talked about, like the billing system conversion and other things? Or is it just the network shut down?
Peter Osvaldik
No, what informs the synergies is everything, the biggest piece this year was definitely shutting down the network and seeing that flow through. But as we get through the rest of those activities, we talked about in terms of billing, system migration, and are able to shut a lot of those legacy systems off. That’s how we’ll get to the full run rate synergies.
David Barden
So I think one of the things that people are curious about is, when we think about the inflationary environment that we’re operating in, Verizon came out and gave us like, a specific number, like, it’s going to have — we have 25% of our costs are probably running 3% to 4% higher. And so you could do the math on that, and you kind of — they kind of gave you a number that was going to affect the second half.
In the case of AT&T, they raised the revenue guidance, but said, we’re not going to raise our EBITDA guidance, because that delta is the impact of inflation on our business. You guys have kind of not had anything to say about how inflation is going to negatively impact the second half. For the full year outlook and so how was T-Mobile proven so immune relative from the beginning of the year till now, so you can continue to guide and beat and raise like you are?
Peter Osvaldik
Yes. Well, there’s a number of reasons. I mean, definitely inflation on the edges is impacting us as well, from a labor perspective both OpEx and CapEx, as well as bad debt, which we talked about in Q2. We continue to believe what we’re seeing from a bad debt perspective, which is macro economic, as well as inflationary impacts on the consumers is that Q2 was the high watermark as a percentage of total revenues for 2022.
David Barden
Can you say that, that’s true, right?
Peter Osvaldik
Yes. We continue to see that, certainly, relative to the muted pandemic levels of churn that we saw in ’21, involuntary churn is higher and bad debt is higher in 2022. But we’re sort of seeing it, similar to pre-pandemic levels. And when you think about bad debt and development for us, one is, the uncarrier in T-Mobile and Sprint always had the core capabilities around working with consumers with variable income streams. And that continues and you see, probably us flex that and better than others. The other is, we’ve attracted a lot more prime consumers to T-Mobile, because of the network seekers because of the Magenta MAX seekers because of Prime 55 Plus and military consumers. So you don’t see that reflected in necessarily the EIP receivables piece, because there’s a lot of BYOD of prime influx. So those are developments that are all positive for us.
On the cost structure side, the benefit is that we very early on, post the merger entered into some very significant long-term agreements, whether it’s on the CapEx side with OEM hardware vendors, whether it’s backhaul agreements that we entered into very long-term contracts for given the competitive nature of that market and locked in great rates, our tower portfolio, both with American and Crown Castle, entering into long-term agreements, and be able to fix those costs.
So I think the ability to have a lot of costs fixed in the business through those long-term contracts, many of which were struck ahead of this inflationary pressure. So had the benefit of negotiating during those times, is what’s insulated us. But there’s, of course, like we said, it nibbles on the edges and labor and bad debts. But all of those impacts are overcome by the fact that, the discipline, real service revenue, profitable service revenue expansion allows us to not only absorb those minor inflationary impacts, but also continue to deliver and guide up in terms of core EBITDA and free cash flow.
David Barden
In some ways, I think maybe last year, you anticipated all this, and you actually raised the base wage, I think it went to $21, or something like that. So we’ve actually already got that in the run rate. So other people are just adjusting to that now.
Peter Osvaldik
Yes. Jon?
Jon Freier
That’s right. Yes, we made that change about this time last year. I saw this in August of last year and made the change. And I think we announced it in Q4 that we made the change. But yes, all that’s absolutely in the run rate. And then a lot of other companies have reacted to that and changed their cost structure more in ’22, versus doing that in ’21.
David Barden
And I think that’s interesting for me, just because when you look at the union side of some other businesses, by comparison, they haven’t seen that, because they’ve got a backward looking [co-led] adjustment in those numbers and so that’s still to come.
Jon Freier
Right.
David Barden
I wanted to talk about, there’s so much more to talk about, but just real quick, the $3.1 billion deal to take yourself out of the leases and own the spectrum, the 2.5 band, I think it was — correct me if I’m wrong in that, but it was why?
Peter Osvaldik
So this was the $3.5 billion deal with Columbia Capital for 600 megahertz. And again, the payment for this will happen after the FCC approval, it is a spectrum said that we leased for a very nominal fee from Columbia. If you look back into the 600 auction, we acquired just a fabulous set of spectrum assets and deployed those for the benefit of consumers. But we certainly couldn’t afford everything that we wanted back in that time. That was T-Mobile standalone had other constraints. And so the ability now to enter this agreement and it’s spectrum that we have been utilizing and now acquire it, is I think a fabulous thing for us because we put that low band spectrum to work. It’s a core of the extended range 320 million coverage that we now have from that 5G low band layer and it’s just a fabulous way both in building both in smaller markets and rural areas. So it was a great deal. We’re very pleased with it and happy we could strike it.
David Barden
So I want to spend a little bit of time just toward the end as your stock which is one of the best performing S&P 500 stocks this year, starts to flirt with that $150 level. People are starting to remember that there was a claw back agreement between SoftBank and Deutsche Telekom. I think it’s 48 million shares. And I think people want to understand a little bit more. I think there’s some people that think that maybe 48 million new shares are going to be issued. But I don’t think that’s accurate. Can you kind of maybe just walk us through exactly what happens when you guys get to 160.
Peter Osvaldik
I love the optimism. With the agreement with SoftBank was for a set of what we called true-up shares. And so if the company did and delivered exactly what we’ve been delivering, and you were one of the early pioneers, when this merger came together, that you knew what we could unlock as a management team and what we could deliver from a network perspective and we’re doing just that. And I think SoftBank also saw that potential and wanted to potentially share in it as part of this merger agreement. And so the agreement really stipulates that there’s a set of true-up shares, it’s about 48.8 million shares that would be issued to SoftBank if and there’s a little bit of a formula, but it’s effectively a 45 day trailing VWAP over 150, or at 150, sorry, at or above $150 would trigger the issuance of those shares. So that’s definitely something that we’re looking at.
David Barden
So those will be brand new shares that we would have to add to the share count of T-Mobile.
Peter Osvaldik
Right. Yes. And to your point, about asking about share buybacks earlier. One of the great milestones that we achieved is the full corporate family investment grade rating, and also speaks to the inflationary pressures, all our debt is fixed rate debt. And this opens just — it’s just a great ability to continue to manage our capital structure, both with the core family IG structure, we’re looking at other ways to potentially manage it, such as the asset backed securities for equipment receivables, and just optimizing that structure in and of itself. And then, on share buybacks, as you asked early on, flippantly, when we’re going to announce. We’ve always said that there is no single trigger for it, we’re going to look at what the business is delivering other capital outlays. And we’ve pulled forward network capital into 2022, and just delivered fabulous results and it’s fueling the machine of growth. And we continue to be optimistic that there’s up to $60 billion of potential shareholder returns in this business from ’23 to ’25. And so, it’s a great time to be a T-Mobile shareholder.
David Barden
It’ll be a great time when the buybacks start to. So I wanted to ask another question until Deutsche Telekom has been very public that they want to have at least 50.1% of your stock. If there’s 48 million more shares that — will 9 million more shares that get issued, they’re going to likely want to be in there buying them, is there any sense? Or should we get a sense that there could be like there was with these options exercises about a year ago, that there could be a structured agreement between Deutsche and SoftBank to kind of just make sure that those shares don’t create an overhang on the stock trading?
Peter Osvaldik
Right. No, as you mentioned, there’s still some option sets between Dt and SoftBank. And MDT has been very public that they would like to get their ownership above 50%. They’ve been just a fabulous partner. Obviously, they already have proxy voting rights over the SoftBank shares. So that’s why they consolidate and continue to be great investors — majority investors with those proxy shares in T-Mobile U.S. and support this path that we’re on.
In terms of what they could potentially do between themselves. Yes, that’s not something I can opine on behalf of Dt would have to defer to them.
David Barden
Have they shared with you any of their views? I met with Tim Akers a couple of weeks ago. Have they shared with you guys or would you share any views they have about their interest in participating in share buybacks when they occur?
Peter Osvaldik
Yes. That’s again, that would be something for Tim to opine on. Unfortunately, not on behalf of them. Not saying anything either way, right. It’s –
Question-and-Answer Session
Q – David Barden
David Barden
All right, I’ll let you off the hook. Peter and Jon, thank you guys for being a part of the conferences here. So great to see you. Thank you guys for being a part of the meeting. Up next in this room is going to be Charter Communications, Chief Financial Officer, and then I will be upstairs with the CEO and CFO of Rogers Communications. So thank you guys. See you in a few minutes.
Peter Osvaldik
Thank you.
Jon Freier
Thank you, guys. Yes.
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