T-Mobile US, Inc. (NASDAQ:TMUS) Credit Suisse 24th Annual Communications Conference June 15, 2022 4:15 PM ET
Company Participants
Peter Osvaldik – Executive Vice President & Chief Financial Officer
Conference Call Participants
Douglas Mitchelson – Credit Suisse
Douglas Mitchelson
Good afternoon. I’m Doug Mitchelson, Credit Suisse’s media and cable satellite wireless analyst. Welcome to the final section of the 24th Annual Credit Suisse Communications Conference. It will be a productive last 2 days. I want to thank my partners, Meghan Durkin and Media and Grant Joslin and cable satellite and wireless for their tireless work doubling our panel this year; and to our short-handed but ever-capable conference team, Lauren MacIntosh and [Sharon Vyonis].
Delighted to have with us again this year, Peter Osvaldik, who’s Chief Financial Officer of T-Mobile, for our closing keynote. This will be a fireside chat format. My questions will run the full time. Peter, thank you for giving up your lunch hour to talk to us.
Peter Osvaldik
Well, Doug, thank you so much for having us. And let me get the legalese out of the way. Of course, I can perhaps make a number of forward-looking statements subject to risks uncertainties. So I refer you to our SEC filings for a comprehensive list of those. And of course, we’re in the quiet period of Auction 108, so I can’t comment on that.
But with that all said, thank you, again. Always exciting to be part of this conference and appreciate your time.
Question-and-Answer Session
Q – Douglas Mitchelson
Well, we’ll try to get to as many of those forward-looking statements as we can. I mean let’s start high level, though, right? So how does T-Mobile as management team create the most value from here?
Peter Osvaldik
Yes. Well, at the highest level, the most exciting part about T-Mobile and what we’re doing from a network perspective and a growth perspective is that the opportunity for value creation really stems from getting rid of that age-old trade-off that consumers and businesses had to make between the best network and the best value. And that’s really at the heart of everything that we’re doing.
When you double-click into it, where the growth opportunities for us are in value creation. If you think short term, of course, it’s completing the integration. And this is a big, big year for us from an integration perspective. I’m sure we’ll get into more details around network decommissioning and how synergies come to play. It’s also how do you migrate Sprint customers to the full Magenta value proposition and get all the churn benefits from there.
And then besides the integration, though, what has always been exciting for us is our unique and differentiated growth opportunities. And we tend to talk about those in a few segments, and I’ll maybe add one more here that we’re thinking about.
One of those are smaller markets and rural areas. By how we categorize, that’s 40% of the U.S. population. In areas where, because of how we’re rolling out this network and the distribution, it gives us an opportunity to play like we’ve never been able to play before. And we went from 13% market share to 15% market share there in 2021 and continue to see good growth, as you saw in Q1 results.
The other one is enterprise and government. Again, an area, because of the capabilities that we’re bringing on board with this network, that we’ve seen tremendous growth and we’ll continue to see because of the underpenetrated area that we were in and how both the capabilities of this network but also how this team operates and brings those capabilities to life for allowing us to grow there.
The third one is high-speed Internet. And that’s just been a phenomenal success. You’ve seen us be the broadband net add leader for 2 quarters in a row and just recently launched an Un-carrier move around this to really help consumers break free from big cable and other providers that are just substandard for them.
And the other thing that’s really got us excited is, as you continue to build this differentiated 5G network. Now you mentioned in the top 50 markets, we tend to be highest market share. But if we’re honest with ourselves, that’s been primarily over the period of the Un-carrier momentum, value seekers coming to us.
And now with this network, where the opportunity exists is more of the network seekers coming to us as well. And so we have definitely aspirations to continue to take market share in those top 50 markets as well, beyond just all those other growth opportunities for us.
So that’s really the combination of how we’re going to create value. And when you look at what we outlined there at Analyst Day, that results in tremendous conversion of service revenue into free cash flow because it’s profitable growth for us. That’s what this management team is about.
And when you look at ’21 to 2024, that’s a 45% CAGR on free cash flow growth. And that’s really, at the end of the day, value creation comes from profitable growth. And for us in this industry, it really should be measured in how can you convert service revenue into free cash flow. So tremendously excited about all of those opportunities for us to continue to create shareholder value.
Douglas Mitchelson
So you’re going to love this, what I’m asking about, impediments to executing on all that. Just a lot is in flux, how fast the sector might grow, competition, both current and new competitors and now macro at this point. Any potential impediments to your plans and guidance?
Peter Osvaldik
Yes. There’s been a lot of discussion around industry growth in 2021 and what happens in 2022. And all of our modelings definitely assume that, at some point, industry growth will normalize from what we saw in 2021, more towards population in terms of postpaid phones. Of course, the beauty of this industry in 5G is that you’ve opened up new avenues, a new TAM that didn’t really exist there just with postpaid phones. But that’s what we’re operating, under the assumption that growth in postpaid phone will normalize from what we saw in 2021. But again, because we have the differentiated growth opportunities and underpenetrated markets that others don’t, it creates a differentiated opportunity for us. And you saw that in what we delivered in Q1, both from a postpaid account perspective, total postpaid perspective, but also, because I always say, right, you have to translate growth into profitability, we were also leaders not from just a customer growth perspective in terms of total postpaid and accounts, but also service revenue growth and core EBITDA growth and free cash flow growth. And those are so important.
From a competitive perspective, look, it’s always been competitive out there. And you had new entrants come in, in the form of cable a few years ago, and they’re in the run rate now and doing well. But we do tremendously well in a competitive environment because the more you can create switching consideration for customers, the more we went out. Because we are, again, breaking through this traditional issue that you had in this industry of having to trade off value and network. And so that’s what makes us excited about the continued opportunity at T-Mobile.
Douglas Mitchelson
So about halfway through the year, how you’re feeling about how the year has progressed, what’s gone right, what’s been more challenging than expected. And so as we’re at it, anything notable for 2Q as it wraps up?
Peter Osvaldik
Yes. Well, if I look about across a few dimensions of just how tremendous this year has been and just an ongoing momentum from 2021, and the first and foremost is what powers everything, which is the network build, right? And if you think about 5G, it’s really unprecedented, the rollout that Neville and his team are doing here and how they’re managing it.
But when you think about 5G, we’ve got our extended range 5G, now 315 million covered POPs, 95% of Americans covered with extended range. And Ultra Capacity, which is really the game changer for us, the mid-band layer, right now at 225 million covered POPs on our way to 260 million by the end of this year and 300 million covered POPs by the end of next year. So the ability, despite the macroeconomic environment and the supply chain challenges, because of how Neville and his team plan this out with precision rollout and precision supply chain and lean manufacturing principles, and we’re able to secure long-term contracts and supplies early on, it’s just allowed this machine to continue to roll.
And that same lean manufacturing principles has been applied to the decommissioning in a very controlled manner. So the ability to decommission. And we’re coming into the biggest moment right now, right, decommissioning of towers. But we already have done 1/3 of the 35,000 target, on our way to completing the rest of those by the end of this year.
So the momentum we’re seeing from both the network build and the decommissioning is very, very — one of those things I really look at as a tremendous success throughout the first part of 2022 and, of course, 2021.
The other is, as part of that integration, and that decommissioning will open up the synergies, and the decommissioning process is going very well. And one of the things I’d update us on is from a merger-related costs, where I see Q2 now landing with the decommissioning progress happening as well as Sprint customer handset and other investments being made to move over off the LTE network is probably in the range of 1.6 billion to 1.7 billion.
And we had previously also spoken about wireline and the fact that the shutdown of the LTE wireless network will actually trigger a noncash impairment charge for wireline, and we see that sitting roughly around 500 million. So those are the 2 things around integration as an update for Q2.
And then effectively, everything else from a Q2 perspective is a continuation of the Q1 story, going to execute on those growth opportunities that I listed at the start. So that’s about where we see Q2 and the year. And we gave guidance. We raised it. We were the only carrier to raise guidance after Q1 earnings, and we continue to be confident for the year in what we issued in Q1.
Douglas Mitchelson
All right. Got it. And you mentioned that you’re managing through the competitive environment in your earlier comments, but I still want to ask you about the competitive environment. How do you describe it? Is it getting better, worse? And how are you balancing the promotional handsets versus not overspending on retention or acquisition?
Peter Osvaldik
Yes. Well, it’s a really great question. I’d say the competitive intensity and environment really are about where we’ve seen them over the last few quarters, and you see how we manage across it. And Mike and myself and the team are really focused on always delivering profitable growth, right? It just so happens we’re also delivering the most growth from an account perspective as well as a total postpaid perspective. But it’s always done with the mindset of profitability. And you can always go get a few more net adds in every single quarter, but you’re going to cost yourself a lot more. That N plus 1 of net add is always incrementally more expensive. And so the important thing for us, because ultimately, again, what we believe is value creation comes from profitable growth, is to balance that in every single quarter. We have our plan, we go execute against that plan, and we deliver the results that we did, including on a company-wide basis, the only ones with EBITDA growth year-over-year in Q1.
Douglas Mitchelson
So I wanted to shift over to the integration you were mentioning earlier. You gave us some confidence in the cell site decommissionings. And I think as of April, 37% of Sprint subs were all the way through the migration journey and steps, and you got the LTE network shut down for Sprint just a couple of weeks, I think. And I think it was described recently as being in the middle of the hardest part of the integration. So can you just walk us through the remaining steps of the integration and where there’s risk and how long things take?
Peter Osvaldik
Yes. And let me just frame it. That 37% is really the subset of Sprint customers that have the entirety of the Magenta experience. So what that means is for their account, they’re utilizing the T-Mobile network. They’re off of leasing constructs. They’re on to a T-Mobile EIP device financing plan on their account, and they’re also on a T-Mobile-like rate plan. That could still be on the Sprint biller, but they’ve got all of those elements of the T-Mobile experience.
And when you see that, that 37% cohort at the end of Q1 is churning on par with Magenta. And so that’s why we’re so encouraged with that momentum. The remaining steps really continue throughout the next couple of months is the big moment for network shutdown. And this has been done, again, by this team, Neville and team and cross-functionally across the business, extremely, extremely precisely.
On a by cell site basis, we’re looking at what is the usage pattern on that cell site? How do we make sure that, that traffic that’s critical to customers is either taken up by the Magenta network? That could be with the new build coming. That could be maybe the sites are co-located, and we start turning the power down on the Sprint cell site, could be getting a compatible handset into the hands of that Sprint customer, whether it was CDMA, which we just saw the full and complete sunset of on May 31 or whether it’s LTE-type compatibility from a low-band perspective to configure them to the architecture of the T-Mobile network.
And so as you see that continuing, that’s really the biggest part. What we’ll see continue on, of course, is billing conversion. Because remember, the way we disconnected this process is we took away the need for traffic to be connected with billing and decommissioning. So a lot of the traffic we started moving off of the Sprint network on day 1 of this merger, and that continues on through this.
Now we’re coming to the peak tower decommissioning. The LTE network will be turned off, and we’ll decommission the remainder of the towers throughout the end of this year. And then we’ll have billing conversion. But the way we’ve architected that, because we’ve disconnected it from all of this, is to make it a relatively seamless process for customers. It will happen in the background throughout the course of ’22 and into 2023. And that was done really to reduce friction for customers and help manage the churn propensity there.
So the biggest piece is coming on now. There’ll be more goodness that comes throughout the period of time as both billing conversion happens and then as we continue to take out, for example, the leasing constructs out of the Sprint base and bring them on to EIP, kind of T-Mobile customer-friendly device financing constructs.
Douglas Mitchelson
Now you’ve been asked before, but I’m going to ask again. What gives you the confidence level of this next 63% of Sprint subs that fully convert over to Magenta over the next year or so will have that same experience? And I guess, hand-in-hand with that is that 37% benefiting from having a phone recently and being under any kind of contract or something else that manage their churn a little bit lower.
Peter Osvaldik
Yes, absolutely. Well, the reason we have confidence in it is because of what we’ve seen with that 37%. And that was a smaller percentage back at the end of Q4, and we grew that in Q1. Obviously, we’re continuing to grow that in Q2 here. But that’s what encourages us.
And in terms of comparative, when I do a comparative to Magenta churn metric, and I say that 37% is churning like Magenta is, it’s an equivalent tenured and kind of device, newness of device financing customers on the Magenta side. So yes, you’d obviously typically see lower churn for very well-tenured customers and new into device financing, but it’s like-for-like when I say that they’re on par with Magenta. And those are the things that are really encouraging us as we continue this.
Douglas Mitchelson
When you walk through the merger synergies and some of the steps, is there anything on it back and you get through billing? And I know you have long-term guidance of merger synergies out there, but is there a sort of structural overhead things that come into play at some point when you sort of really done, all the customers have moved over, everything is running great? Are there overhead things to address or that kind of has run its course? Synergies are captured for the most part by the middle of next year.
Peter Osvaldik
Yes. Synergies will be, we anticipate, getting to that full 7.5 billion run rate by 2024. So that’s that timing, which is a year ahead of schedule from the original plans. But yes, as we continue into 2023, what you’re going to see is the ability to — as you convert billing to shut down a lot of the legacy Sprint billing system, some of the systems that we have in our retail store to serve both of those customers. So we have a set of systems that work off of the Sprint biller, and you’re going to see more opportunity then for back-office consolidation, ERPs, things to that effect from an IT perspective, to achieve those full run rate synergies by 2024.
Douglas Mitchelson
So on the network, speed, check; latency, check; capacity, check, I think you’re just starting to talk about coverage a little bit. And I think was a challenge for all 3 of the major carriers. But something that perhaps has helped some of the folks in the suburbs back, and you talked about trying to target some of those folks. So is there an increased focus on filling in these gaps? And any more details that you can give us around sort of timing or spending or anything in this regard?
Peter Osvaldik
Yes. Again, I go back to just how quickly we’re rolling out the 5G network, and that’s going to be a big part of the story because as you think about suburbs and rural areas, when you roll out the mid-band network to 300 million covered POPs by the end of 2023, remember, from 200 million covered POPs to 300 million covered POPs is 5x the geographic area. So it’s a tremendous amount of work. The first 100 million, it’s not easy, but it’s easy compared to the next 100 million and the next 100 million. And our competitors certainly have no externally stated plans to match us in that regard. And so the differentiated experience that this mid-band network will bring, both from a coverage perspective but also to your point, capacity, which will continue to increase.
Our goal by the end of next year is to have 300 million covered POPs with 200 megahertz of bandwidth devoted to that. It’s just a tremendous — as Neville says, it’s bringing a 14-lane highway to rural America when they’re used to dirt road. It’s going to be a tremendous experience there.
We’re also very focused — there’s also always a plan to say, you came in and had a combined network. There was always a plan to decommission roughly 35,000 sites. There was always Sprint, keep sites that were getting upgraded and the plan is to upgrade all of those by the end of this year. And then there was new build. And a lot of how all of this algorithm works out for us is we’re now very focused on what we call customer-driven coverage.
So to make sure that where we build, particularly the new sites, is where customers need coverage at their moment of truth. And that’s a lot of what we’re focused on and Neville and his team are focused on in terms of closing those gaps.
And there’s also, I’ve got to say one of the things that’s very exciting is just what we’re doing from a technology leadership perspective on 5G. You saw us launch voice over new radio. And that’s a game changer to finally free up as we continue to roll that out, spectrum from LTE into 5G.
The other thing you just saw us announce, now millimeter wave in sight. We did a 3-carrier ag — kind of a 3-channel carrier ag in the wild, right, on a Samsung handset taking 2 channels of 2.5 and 1 channel of 1,900. And we got near-3 gigabit speeds. And that’s on a Samsung handset in production, not some theoretical lab test here. So that’s the kind of capacity that this network is going to bring as we roll out all of the bandwidth. And those are the things that are going to create a game-changing experience for customers and continue to move sentiment.
Douglas Mitchelson
Well, I think you moved us right into fixed wireless given you’re talking about the amount of speeds on your network. So you launched the Un-carrier experience in May for fixed wireless. How’s the consumer reception been to Internet freedom? And is the business conversation — how is the business conversation going out as the product is ubiquitously available?
Peter Osvaldik
Yes. It’s been great to be able to launch that Un-carrier move and bring a lot of the goodness that we did to the phone industry into fixed wireless. And what we’re seeing is a continuation of the momentum that we saw in Q1. And again, Q1, we were the — second time in a row, second quarter in a row, we were the next leader from a broadband perspective. And what we’re seeing is a lot of customers coming over have tremendously improved NPS scores relative to their previous carrier, whether that was cable, whether it was a DSL provider, and it is powered by the power of this network, but also just how we treat customers and the value proposition that we give them. So yes, very encouraged by that. I think we’ll continue to see the momentum that we saw in Q1 continue into Q2.
Douglas Mitchelson
Yes. It was interesting, we’re talking not that long ago about how can you get up to [0.5 million] more a quarter to get on pace for the long-term guide. And could you do that by the end of the year or early next year? And it looks like it might happen a lot sooner than I might have thought.
Beyond opening up more markets, which you continue doing, is there other things that will impact the pace of growth for fixed wireless for the company? Is it more aggressive retail store quotas or more marketing dollars? Any supply chain issues that are holding you back at all? What drives further acceleration, if there is to be any?
Peter Osvaldik
Yes. Well, first and foremost, it is, to your point, network. And it’s not just new areas, which will come as the network builds, particularly with mid-band. But it’s also, as we continue to bring more spectrum into the 5G space in that mid-band’s layer. It’s going to free up capacity even in places where we’re at today. Because remember, the way we’re doing this, it’s a fallow capacity model. And on a sector-by-sector basis, we’re looking at what is the mobile phone traffic, what is the projected customer growth on mobile phones, both from a number of customers as well as data usage. And then we’re in those areas where with our current bandwidth, we don’t believe we can use all that capacity is where we free it up.
Now as you bring on more capacity in the network with more dedicated mid-band spectrum, you’ll have more capacity open up, and there’ll be more sectors that you can suddenly sell into or maybe sectors that you already sold will now become more available because there’s more availability from the bandwidth. So that’s first and foremost, it’s the ongoing network build, both in terms of coverage but also the bandwidth aspect of it.
And then from a supply chain perspective, no, we’re not seeing issues because early on, and even in last year as we saw what we thought would be great success, we made sure that there was enough supplier diversity. And again, same principles as we do on the network rollout, making sure that we had visibility into all of the critical parts, components and make sure that we can sustain supply into the growth that we were projecting. So we’re good there.
And of course, to your point, yes, there are going to be other things, awareness, continued increase in awareness of this product. Once customers understand it and they try it and they switch over, the NPS scores and the satisfaction are tremendous. So continued awareness, particularly as we build into new areas. Those are the things that can be accelerants to get to those run rates that we need to.
Douglas Mitchelson
Let me flip over to rural. And you mentioned that earlier as a growth driver for us and commonly mentioned a growth driver. You build out with more spectrum in 5G. In your early rural markets, were you pushing about past 20% penetration? And the reason I ask is, as we talked about earlier, you’re #1 in the top 50 markets. And so 20% is nothing, but it might, in the rearview mirror, seem like a modest ambition relative to what you’re bringing to rural markets. So is there anything different about world markets than large markets and ultimately what are you seeing so far?
Peter Osvaldik
Well, the way we look at that smaller markets and rural area is we really categorize that into 775 distinct markets. And we look at where is the network in terms of readiness because we’re going through this build over the course of this year and next year; where is it in terms of network readiness, distribution readiness. And when we get into the markets and have the network ready and have distribution ready, of course, we’re seeing good results.
I mean what we saw in terms of overall market share in smaller markets and rural area, where it moved from 13% to 15% last year, that was by playing in 30% of those 775 markets. And what I mean by that is playing where we have the network ready and distribution ready. Of course, we had some share in the other markets.
And in those markets where we see that, yes, of course, the SOPIs and the SOGAs and the porting, we’re very, very pleased with. And as we continue that expansion, we expect to end this year with about probably slightly over half of those 775 markets being in a state where the network is ready, the distribution is ready. And that will continue for us to feed this growth opportunity for us. Whether there’s upside to the 20%? If we continue to execute by the end of 2025, perhaps, perhaps.
Douglas Mitchelson
One thing we think about a lot, and actually, Neville always lights up when he’s talking about capacity rural for fixed wireless. It seems like a penetration opportunity there is directly above deep urban environments, just by nature of the best use of your spectrum. It’s early days, but are you seeing that play out in the marketplace for those areas where you have been pushing fixed wireless and roll either strong sell-in for new rural mobile additions or just a fast sort of per capita take rate, given the product spread really out there in rural?
Peter Osvaldik
Yes. It’s been surprising because it functions in two ways for us. One is just, yes, as you create that capacity — and remember, the put up, what we’re doing from a mid-band perspective, as you rebuild these sites and roll out the 2.5, we’re putting the same radios in the rural as you are in urban, right? So you’re going to have a radio with 200 megahertz of capacity of 2.5. And of course, in those more suburban and rural areas, that’s a heck of a lot of capacity to create, and it will not get filled up by mobile traffic.
And so yes, by definition, you’ll likely have, ultimately, as you build out the network fully in terms of coverage and depth, probably more opportunity to play in that 40% than the dense urban environments. But we’re still playing in the dense urban environments. We’re seeing uptake in there where we have the fallow capacity.
But the other thing that it’s really done for us in terms of perception, you come into these smaller markets, rural areas where T-Mobile may have not been well known before. I mean we had a 13% market share start of 2021, and you come in with a mid-band rollout, where the competition doesn’t have a mid-band 5G experience. And you bring something like high-speed Internet. And suddenly, you’ve got a community where maybe they had DSL or some other type of experience, didn’t know T-Mobile. And now they can get, for $50, a home Internet product that just blows all that away, plus our customer service and value proposition, and it quickly starts changing perceptions. And it creates an opportunity to then cross-sell into the mobile phone space in those new areas that you’re going into. So that’s been something that we’ve seen that we’re highly encouraged by as well.
Douglas Mitchelson
So let’s shift go over to the enterprise and government side. When we think about the 20% share of business, as I recall it, I guess I imagine there being a higher share in small and medium size business and a little bit more modest share in large enterprises. And I guess one of the reasons I ask if that’s right is it seems like less execution risk going after small and medium versus large. But also you talked about serving double-digit number of the Fortune 50 companies. And so I’m curious what stage of development, what stage of deployment, what types of services are these top 50 taking from you or would they be taking from you?
Peter Osvaldik
Yes. Well, definitely, what we have currently is a higher penetration in small and medium businesses than large enterprise. We think there’s continued opportunity to take share in SMB as well. But as we focus on large enterprise, that aspect of the growth opportunity for us, there’s a number of things that we’re doing that give us really good line of sight to that target by the end of 2025. And they’re not just traditional, as we said, postpaid phone, but it’s all of the things that 5G unlocks. And a lot of those are distinct for us because we have a 5G stand-alone core. We have the most distributed architecture. So we’re able to create opportunities and real life. All these buzzwords that you hear, we can actually create real-life use cases for consumers and businesses.
And that’s where you see a lot of the uptake from a large enterprise coming to us and how it’s opening doors into the conversation, both with, a, replacing potentially things that already exist in a wireless space, but also creating all of these new services. I’ll give you some examples.
One of the things we’ve been able to do in the financial services industry is really provide them secure connectivity to address some of the needs that have recently arisen from a regulatory perspective. And we’ve done tremendously well in the financial services industry.
With our partnership with DT, we launched T-IoT, and it really creates a seamless solution for large enterprises to manage their IoT beyond just the bounds of the U.S. And that created also the opportunity to create the first 5G-connected car with BMW, and we delivered that.
We’ve created and recently announced, with our advanced network services, both private cloud but also a hybrid cloud model. So it creates new opportunities and potentials for businesses. Maybe they don’t want a full private cloud installation, maybe they need something from a hybrid cloud perspective. Our 5G standalone core is what will enable network slicing to come, and that’s a whole new use case.
And we’re also seeing, as we’ve previously kind of shared, actual replacement of things that exist that aren’t wireless with wireless because of the power of 5G. And one of those is in the airline industry, where we’ve been able to not only take postpaid phone share but also provide solutions to airlines for, say, underwing operations that were traditionally powered by WiFi but are more reliable and secure connections with 5G, and we’re actually displacing WiFi with 5G type of solutions, which is part of that expansion of the market that’s so exciting for us.
So yes, Kelly and her team are just doing a fabulous job in the T-Mobile for Business space, and I’m very optimistic about what the future holds there for us.
Douglas Mitchelson
Interesting ends. So why don’t we move to pricing and ARPU? I think there’s 2 dynamics put together, if you don’t mind. One is just overall pricing strategy. I think you’ve seen AT&T take price up and mentioned they might take it up further if inflation persists at these levels. I think Verizon had 3 price increases at this point. You have regulatory commitments, but you have probably flexibility to do certain things as well. So I’m just curious what you think about pricing, especially in this inflationary backdrop. And I’m going to throw the other part of ARPU in there, which is your penetration of Magenta MAX to your higher tier, is at a different level than your peers, and there’s probably some structural differences in marketing and strategy. And how is that opportunity to get captured over time?
Peter Osvaldik
Yes. Well, let me start with that last one because I think from a penetration perspective, it’s a little bit of apples-to-oranges because when we talk about Magenta MAX and our penetration, remember, that’s our highest-tier rate plan. And I think when you hear some of the competition talk about penetration, it may not be just their highest tier, maybe the next one down that they’re incorporating. And that’s perfectly fine. We can all do it however we want to do it. We’re focused on how is the power of this network actually attracting network seekers and moving them into our highest-tier rate plan?
And you talked about the price increases. And boy, isn’t it interesting how you just — they can’t help themselves, right? They just want to go back into the carrier mindset and take away customer value and treat them like they don’t care about them. And that’s not how we’re doing it. And I understand what they’re doing. They know that what we’ve created from a network perspective and the value that we’re bringing and removing that trade-off in the past creates something that they can’t create. And that’s our strategy. Why don’t we bring to customers a truly amazing network and a value proposition that will have them self-select into our highest-tier rate plan? We don’t need to raise prices on them when they’re not looking or after we’ve put them into a long commitment. But hey, we give them the value, and they’re self-selecting.
And that, to your point, what we’re seeing is tremendous flow there. Over 55% of the new customer acquisitions coming on board are selecting Magenta MAX. And we have room to run. Our base is penetrated at roughly 15%. So that gives us more opportunity to run and increase ARPU and increase ARPA. And remember, this is the first year with our Q1 guidance that we actually have raised our ARPU guidance. We don’t believe it will be dilutive. ARPU will be up 1%, and ARPA will be up 2% full year to full year. So that’s just the power of how you can bring the right customer product and customer value, and that’s how you can be accretive from a service revenue perspective and profitable at the same time. So that’s how we approach it.
Douglas Mitchelson
One of the things that’s interesting is folks, of course, compare all the large carries a lot, whether it’s financially or valuations or operationally. Pound for pound, you can slice and dice pricing in different ways, but it still feels like your price is quite a bit below your peer levels, and you’ve got long-term guidance already. So theoreticals can be a little bit challenging to discuss, but in an end state, whenever market shares normalize it, whatever they’re ultimately going to normalize, just I mean, I guess, maybe it feels like a softball, but it’s not meant to be. Is there any reason why your pricing should be structurally different from the rest? And do you guys talk about that? Think about that? Or is that just too far out to even consider?
Peter Osvaldik
Well, it’s a couple of questions, I think, embedded in there. I don’t know what pricing is going to look like from our competition because how can you live in a world where as consumer sentiment continues to increase around 5G and we have the differentiated 5G network, how do you justify higher pricing at our competition? So that’s one maybe question to throw out there. But our focus has always been how do we grow the relationship and have account-level ARPA expansion, whether that’s high-speed Internet, whether it’s other connected devices that currently exist or that the 5G ecosystem will continue to bring. And that’s our philosophy is to grow that household relationship, grow that ARPA relationship and create really, really profitable accounts and more profitable accounts. So that’s how we’re thinking about it and probably will be.
Douglas Mitchelson
So on the margin side, you’ve talked about being able to manage through any inflationary pressure. So I guess one way to think about that perhaps is inflation might be taking away a little bit of what otherwise might have been upside to long-term margins. But any commentary on margins and inflation pressures that you want to share?
Peter Osvaldik
Yes. I mean, of course, like all of us, right, the current inflationary environment is not something that you want to see persisted. It has an impact to consumers. In terms of how it impacts our cost structure, I think I mentioned before, of course, we’ve seen some impacts in the labor space and some other spaces, but we also have been able to lock up a significant portion of our largest costs in long-term agreements, whether that’s — whether our CapEx side, our OEM agreements to help roll out this network; whether it’s operating leases where we entered into long-term contracts with 2 of the tower companies; whether it’s our backhaul agreements, where we’re getting fabulous rates in a very competitive environment and long-term arrangements there as well.
Another area we’ve done that is actually in the energy space, where we have — we don’t talk about it and put press releases all the time, but we have the most aggressive sustainability goals from an energy perspective. And we are making great headway there and combining sustainability with also price stability and unique constructs that we’re doing with whether it’s solar farms or wind farms or other renewables. So that’s another area where we’ve been able to create price stability.
But of course, like we said, there’s always pressure, and we’re looking at it and monitoring it. But right now, we believe we can manage everything and certainly continue to be confident in the guidance that we gave in Q1.
Douglas Mitchelson
In your CapEx, I think you ticked up a little bit in 1Q. And after the end of 2023, you guided to a drop-off in capital intensity in 2024. So is the network done by the end of 2023? Neville can finally retire at that point?
Peter Osvaldik
The network is never fully done, right? And we’re always going to be focused on technology advancements and consumer-driven coverage. But absolutely, I mean, the big, big rollout is happening this year and next year and predominantly happened in ’21 and will happen throughout the course of this year. So it very much — the one thing is this was a capital pull forward from the outer years. Because of the momentum that Neville and his team have been able to sustain on the rollout, that’s enabled us to pull forward capital and it makes a tremendous amount of sense. Build it now, get that rollout as quickly as you can because that’s the differentiating factor for us. And so that’s how I see it. It will never be done. We’ll continue to refine, work on coverage. We’re customer-oriented from a network perspective. But the vast majority of the build is absolutely done at the end of this year, and we’ll be on our way to that final bit to get to 300 million covered POPs with mid-band by the end of next year.
Douglas Mitchelson
Hard to give myself some credit for holding off and asking you about stock buybacks for 40 minutes. So here we go. Should investors expect a steady buyback? Essentially, is it sort of $60 billion divided by 3 year, so $20 billion a year or a bit more than 3 years if you happen to start early? Or can it start small and big as your free cash flow generates? Does it vary based on the T-Mobile stock price performance? I know you’re not going to tell me when, where you know how much. So I thought I’d try a couple of different angles to see what we can learn.
Peter Osvaldik
Well, it’s a good try and an innovative new angle. Thank you that everybody asks me. But look, fundamentally, there’s nothing new I can really share on this front other than to continue to say that free cash flow generation from this business, as we unlock the synergies and continue to profitably grow, continues to make us very optimistic about not only the ongoing capability of this business. Remember, that number we gave you was 23 to 25 and the potential shareholder returns. And of course, we’ll look at other alternatives if they come our way, whether it’s spectrum, whether it’s potential other ideas that could be higher shareholder return, and that will all figure into the calculus. But that potential return of $60 billion, it’s only through the end of 2025. And this machine keeps going past 2025, which is one of those exciting things. It creates a lot of optionality.
In terms of the timing or the magnitude, there’s a lot of factors that go into that, and we’ll have more to share when there’s something for us to announce on that plan.
Douglas Mitchelson
Yes, I thought I’d take a shot in. I’m not sure if you sort of agree, there might be a little bit confusion as to how T-Mobile will manage its balance sheet relative to the buyback. Do you maintain 2.5x leverage, meaning debt trends higher over time because you’re growing your EBITDA? Or is it, no, we’re going to maintain the current level of debt, and free cash flow goes to the latter?
Peter Osvaldik
No, we — what our thought process is now is that we’re going to maintain somewhere in the mid to core net leverage, and that will be kind of some of the calculus that goes in there. So yes, to your point, with core EBITDA expansion, there’ll likely be gross debt expansion but keeping a very healthy level of leverage and, of course, looking at all of the other factors in there.
Douglas Mitchelson
All right. Well I appreciate you going through all that. Any closing comments, Peter?
Peter Osvaldik
Again, thank you for having us. It’s just a pleasure and just such an exciting time at T-Mobile. 2021 ended with records, and we’re really looking forward to ’22 and what the future holds with this network advantage that we have from a 5G perspective, that will only continue and persist and our differentiated growth opportunities and, to your point, the amount of free cash flow generation that this business is going to create and the opportunities that it creates for us. So just a very exciting time to be here. And thank you again for having us at your conference.
Douglas Mitchelson
Thanks for joining us, Peter, and thanks, everyone, for listening in.
Be the first to comment