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T-Mobile USA Reports Third Quarter 2012 Financial Results
Posted: 08-Nov-2012 [Source: T-Mobile USA]

[T-Mobile ended the third quarter of 2012 with 33.3 million customers, a net addition of 160,000 customers compared to the second quarter of 2012.]

Bellevue, Washington -- T-Mobile USA, Inc. (“T-Mobile“) today reported its third quarter 2012 results, which demonstrate that successful execution of the Company’s Challenger Strategy continues to improve performance in key operational and financial areas. T-Mobile ended the third quarter of 2012 with 33.3 million customers, a net addition of 160,000 customers compared to the second quarter of 2012. The sequential improvement was driven primarily by the continued expansion of branded prepaid customers and a reduction in branded contract net customer losses. The Company’s branded prepaid customer growth was its best quarterly performance of this year and exceeded the annual growth reported in 2011.

In the quarter, the Company reported adjusted OIBDA of $1.2 billion and an adjusted OIBDA margin of 29%, which are down sequentially and from the third quarter of 2011. As expected, third quarter 2012 adjusted OIBDA reflects higher advertising expenditures related to the Company’s brand re-launch.

Branded Customers

Branded prepaid net customer additions, excluding MVNO, were 365,000 in the third quarter of 2012; up from the second quarter of 2012 branded prepaid net customer additions of 227,000 and up from 254,000 in the third quarter of 2011.

The sequential and year-on-year improvement was due to the continued popularity of the Monthly4G plans compared to traditional contract plans and competitive offers.

Branded contract net customer losses, excluding M2M, were 492,000 in the third quarter of 2012, compared to 557,000 net customer losses in the second quarter of 2012 and 389,000 net customer losses in the third quarter of 2011.

Sequentially, the Company’s churn reduction efforts, along with its network improvements and expanded value priced offerings, enabled it to improve its branded contract performance even with the iPhone 5 launch in September. The Company also benefitted from the strategic phase-out of certain discontinued products, which historically had higher churn. Branded contract gross adds increased by 17% compared to the second quarter.

Year-on-year, the increase in net branded contract customer losses was due to lower gross customer additions in line with general industry trends, partially offset by improvements in branded contract deactivations. The lower gross additions were also driven in part by the Company’s credit risk optimization initiatives. Additionally, year-on-year comparisons were impacted by the timing of the iPhone 4S launch in the fourth quarter of 2011, whereas the iPhone 5 launched in the third quarter of this year.

Wholesale

M2M net customer additions were 168,000 in the third quarter of 2012, compared to net customer additions of 95,000 in the second quarter of 2012 and net customer additions of 204,000 in the third quarter of 2011.

The sequential change was driven by higher M2M customer additions and lower M2M customer deactivations. The year-on-year change was driven by higher M2M deactivations. M2M customers, which have significantly lower ARPU (averaging less than $1) than branded contract customers, totaled 3.0 million at September 30, 2012.

MVNO customers increased slightly in the third quarter of 2012, totaling 3.9 million customers as of September 30, 2012.

Sequentially MVNO net customer additions increased primarily due to higher MVNO gross customer additions. Year-on-year, MVNO net customer additions increased due primarily to fewer MVNO deactivations.

Revenue

Service revenues were $4.3 billion in the third quarter of 2012, down 2.7% from the second quarter of 2012 and down 8.7% from the third quarter of 2011.

Sequentially and year-on-year, quarterly service revenues decreased due to branded contract customer losses, which were partially offset by the increased adoption of data plans in the contract and prepaid customer base. Additionally, branded prepaid revenues increased compared to the second quarter of 2012 and the third quarter of 2011, a result of the continued success of the Monthly4G plans. Service revenues were also negatively impacted by growth in the adoption of the Company’s Value plans, which do not include subsidized handset equipment. However, handset equipment sales sold in connection with Value plans result in higher equipment revenues than traditional bundled price plans, as described below.

Data service revenues, including messaging, were $1.4 billion in the third quarter of 2012, consistent with both the second quarter of 2012 and the third quarter of 2011. Data service revenues, excluding messaging revenues, accounted for over 70% of total data service revenues and increased 8.7% year-on-year.

Total revenues, including service, equipment sales, and other revenues, were $4.9 billion in the third quarter of 2012, consistent with the second quarter of 2012 and down from $5.2 billion in the third quarter of 2011.

Compared to the third quarter of 2011, total revenues changed due primarily to branded contract customer losses, as described above. Additionally, equipment revenues increased year-on-year, despite lower overall sales volumes, due to handset program changes in connection with the Company’s Value plans and stronger smartphone sales. As a result, total revenues declined less than service revenues compared to the third quarter of 2011.

The Company’s Value plans, which were first introduced in the third quarter of 2011, allow customers to subscribe to wireless services without the purchase of or upfront payment for a bundled handset, resulting in reduced initial costs, benefitting adjusted OIBDA and net income within the quarter. Qualifying customers may separately purchase handsets at any time, either deferring payments over 20-month installment contracts or paying the full price at the point-of-sale. Compared to traditional bundled price plans, Value plans result in recording lower service revenues over the service contract period, while recognizing higher equipment revenues at the time of the sale. In the third quarter of 2012, Value plan customers accounted for over 50% of the branded contract gross additions, compared with 41% of branded contract gross additions in the second quarter of 2012. Additionally, Value plans made up 23% of the branded contract customer base at the end of the third quarter of 2012. This is up from 20% at the end of the second quarter of 2012.

Adjusted OIBDA and OIBDA

T-Mobile USA reported adjusted OIBDA of $1.2 billion in the third quarter of 2012, down 8.4% from the second quarter of 2012 and down 15.2% from the third quarter of 2011.

Adjusted OIBDA in the third quarter of 2012 excludes a net benefit of $140 million, primarily consisting of a gain associated with a spectrum swap, offset by employee severance costs as a result of restructuring initiatives announced in the first and second quarters of 2012. Adjusted OIBDA in the second quarter of 2012 excludes special transaction related charges of $67 million consisting of employee severance costs associated with restructuring initiatives, while the third quarter of 2011 excludes special transaction related charges of $51 million primarily consisting of employee retention benefit expenses related to the terminated AT&T transaction.

Sequentially, adjusted OIBDA decreased as a result of planned higher operating expenses associated with the Company’s re-branding campaign and lower service revenues driven by branded customer losses. Year-on-year, adjusted OIBDA decreased as a result of lower service revenues due primarily to branded contract customer losses and increased expenses associated with the Company’s rebranding initiatives. Adjusted OIBDA margin was 29% in the third quarter of 2012, down from 31% in both the second quarter of 2012 and the third quarter of 2011. On October 3, 2012, Deutsche Telekom and MetroPCS announced their intent to combine T-Mobile USA and MetroPCS, which triggered an impairment assessment of indefinite-lived assets. As a result of the impairment assessment, T-Mobile USA recorded a non-cash impairment charge of $8.1 billion related to goodwill for the quarter ended September 30, 2012. These charges have no effect on the Company’s business operations, current cash balance or future cash flows.

Operating Expenses

Total operating expenses were $12.5 billion in the third quarter of 2012 and included the impairment, restructuring charges, AT&T transaction costs, and a gain associated a spectrum swap. Excluding these non-recurring items for comparative purposes, total operating expenses were $4.5 billion in the third quarter of 2012, up 3.0% from the second quarter of 2012 and down 0.4% from the third quarter of 2011.

Losses from equipment subsidies in the third quarter of 2012 were $312 million (equipment revenues of $554 million, less cost of equipment sales of $866 million), consistent with the second quarter of 2012 and down 19.6% from the third quarter of 2011. The year-on-year decrease in net subsidy was due primarily to handset program changes from the Company’s Value plans.

Equipment subsidies related to customer acquisition were $79 million in the third quarter of 2012, compared to $83 million in the second quarter of 2012 and $151 million in the third quarter of 2011. Equipment subsidies related to customer retention were $233 million in the third quarter of 2012, compared to $227 million in the second quarter of 2012 and $237 million in the third quarter of 2011.

Network expenses of $1.1 billion in the third quarter of 2012 decreased 3.1% from the second quarter of 2012, and decreased 8.6% from the third quarter of 2011. This sequential and year-on-year decrease was due primarily to lower roaming expenses and reduced rates for providing long distance service to customers. Additionally, due to the transition to enhanced backhaul (e.g. fiber) over the past year, the Company was able to accommodate higher data volumes year-on-year without significant increases in network costs. Customer acquisition expenses in the third quarter of 2012 of $823 million increased 9.6% from the second quarter of 2012 and increased 3.5% from the third quarter of 2011. Compared to the second quarter of 2012, the increase was primarily due to higher advertising expenses associated with new promotional campaigns, the Company’s rebranding initiative and higher volume-based commission expenses. The year-on-year increase was due primarily to higher advertising expenses. General and administrative expenses in the third quarter of 2012 of $840 million decreased 3.6% from the second quarter of 2012 and decreased 3.0% from the third quarter of 2011. The sequential decrease was due primarily to lower employee related costs associated with organizational restructuring initiatives and lower bad debt reflecting improved customer collection rates. The year-on-year decrease was primarily related to lower employee related costs. In addition, general and administrative expenses benefitted sequentially and year-on-year as a result of continued cost management programs. Depreciation and amortization expenses of $825 million in the third quarter of 2012 were consistent sequentially and increased 12.9% from the third quarter of 2011. The year-on-year increase was primarily due to assets placed into service and accelerated depreciation related to network modernization initiatives.

Capital Expenditures

Cash capital expenditures (excluding spectrum licenses) were $717 million in the third quarter of 2012, an increase of 33% from the second quarter of 2012 and a decrease of 3.2% from the third quarter of 2011. Sequentially, higher cash capital expenditures were a result of the network modernization transformation. As a result of the network modernization initiatives, capital expenditures are expected to continue to rise in the fourth quarter of 2012 compared to the fourth quarter of 2011. Year-on-year, the decrease in cash capital expenditures was a result of payment timing differences.

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