T-Mobile US Inc (TMUS) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by.

Welcome to the T-Mobile US second-quarter 2013 conference call.

Today's presentation, all participants will be in a listen-only mode.

Following the presentation the conference will be open for questions.

(Operator Instructions)

This conference call is being recorded today August 8, 2013.

I would now like to turn the conference over to Mr. Nils Paellmann, Head of Investor Relations for T-Mobile US.

Please go ahead, sir.

Thank you very much.

Welcome to the first earnings call of T-Mobile US.

With me today are John Legere, our President and CEO, and Braxton Carter, our CFO.

Please turn to slide 2, the disclaimer.

During the course of this earnings call the Company will make projections and other forward-looking statements that are subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

A detailed discussion of the risks and uncertainties that affect the Company's business and qualify the forward-looking statements made in this call is contained in T-Mobile's SEC filings, particularly the risk factors included in our current report on Form 8-K filed with the SEC on May 8, 2013.

Copies of T-Mobile's SEC filings are available online from the SEC or at the Investor Relations home page on the T-Mobile website.

The Company's projections and forward-looking statements are based on factors that are subject to change and therefore these statements speak only as of the date they are given.

The Company does not undertake any duty to update any projections of forward-looking statements.

In addition, during today's discussion Management will comment on both actual results and certain non-GAAP results.

Reconciliations between GAAP results and these non-GAAP results are available in the Investor Quarterly, on the Investor Relations home page, on our website at, as you know, T-Mobile.com.

Let me turn it over to John Legere please.

John.

Okay.

Good morning, everyone.

I am going to jump straight into our results.

We clearly had an outstanding second quarter and here is just a few of the highlights from an operational perspective.

Starting with net adds, now I know these are the numbers you have all been waiting for, and frankly as you know, I have been waiting to be able to tell you.

In the second quarter we brought in 1.1 million net additional customers.

Moving to branded post paid net adds, T-Mobile led the entire industry with 685,000 branded post paid phone net adds.

Just to be clear, that's exclusive of tablets and other mobile devices.

By the way, we added about 3,000 of those, bringing the total branded post paid adds to 688,000.

This result is underpinned by a 77% year-over-year and 53% quarter-over-quarter increase in branded post paid gross adds.

Turning to branded post paid churn, the combined improvements in the network, customer care, the device line up and especially the new Un-carrier offers that we have implemented have led to a new record low for branded post paid churn of 1.58%.

Our Un-carrier initiatives continue to roll out and we are on a purpose-driven march to solve all customer pain points, change the way this industry operates and create value for our shareholders.

We have hugely accelerated the modernization and upgrading of our network to 4G LTE, having lit up 116 metro areas covering 157 million people as we had announced in July, and that expands even further as we speak.

We clearly exceeded our goal of 100 million by mid-year and the pace continues.

We now have a complete line-up of the most desired devices, having launched the iPhone.

We rolled out Un-carrier 1.0 and 2.0 and solved the pain points with our annual -- no annual service contract offer, low out of pocket costs on the most desirable devices, JUMP, our any time upgrade pain killer, and we have Un-carrier 3.0 scheduled for delivery soon, which will cure more pain.

We are determined not to let anyone disrupt our momentum.

We will continue to be disrupted but we will do it smartly and profitably.

We are not only innovating with our pain-killing customer offers, we are reinventing our business model and have already made over $1 billion in cost structure improvements which will be realized this year.

We are reinvesting these resources into profitable growth.

Finally, we are moving forward swiftly with the integration of MetroPCS.

We have already rolled out new devices homed on the T-Mobile network, have completed the detailed planning and begun implementation of the network migration, improved the network experience for the Metro customers and have launched Apollo 15, which is doubling Metro's market presence.

Now, let me take each of these highlights and dig a little deeper with you.

Customers are responding extremely well to the moves that we're making.

I already mentioned the very strong post paid net adds and taking phones and other devices into account we finished at 688,000 positive for the period.

This is an improvement from a loss of 199,000 in Q1 and a loss of 515,000 in Q4.

Brand consideration is also up 17% over Q1.

We are clearly hitting a chord with customers, which is also demonstrated by record low branded post paid churn of 1.58%, almost a full percentage point decline from Q4 at 2.5%.

Smartphone sales were extremely strong and accounted for 86% of devices sold.

Including prepaid we sold a record 4.3 million smartphones.

To get a feel for what a dramatic upswing this is, if we subtract the approximately 800,000 smartphones sold by Metro in the period, we sold close to 60% more smartphones in Q2 than we did in Q1.

Smartphone penetration in our customer base is now approaching 74% and, this may be a bit of a surprise, they were not dominated by the sales of the iPhone.

In fact the quarter -- in the quarter the iPhone accounted for approximately 21% of the total smartphone sales.

On a separate note, demand for the Samsung family of devices has been very strong as they continue to innovate.

The state of improving profitability requires the enhancing --- enhancing the quality of customers.

I am very pleased we can report that we have seen a material improvement in the quality of these newly acquired customers.

Our porting ratios have improved against all carriers, especially AT&T and Sprint, but also against Verizon.

This is not a one-time blip as alleged by some competitors.

Porting ratios continue to today to remain robust.

Additional evidence for our improving customer quality is the fact that our number of prime applications has tripled year over year and the credit quality of our installment receivables is improving.

52% of the portfolio is now prime versus 43% at the end of 2012.

We have also seen a significant decrease in our service revenue days sales outstanding or DSOs, as well as our bad debt expense.

Let me put one myth to rest.

Our results were not driven by the iDEN shut down by Nextel.

In fact it is unlikely that we gained many of those customers, given that the remaining iDEN base was essentially all business customers seeking a push to talk solution.

Let me provide you with a few more details on our total branded customer growth.

With our Simple Choice plan we have blown away the industry's distinctions between post paid and prepaid.

It's all about their hatred of contract.

As a result, we have seen creditworthy customers that have historically purchased prepaid products upgrading to branded Simple Choice post paid plans.

Branded prepaid net additions were positive after normalizing for qualified upgrade made by T-Mobile customers from prepaid to post paid plans.

As I mentioned in the highlights we led the entire industry in branded post paid phone net ads.

Our branded post paid growth was overwhelmingly new phone customer additions, accounting for 685,000 of the 688,000 or more than 99% of these net adds.

As we develop our offerings of tablets and mobile devices, we see additional revenue upside coming from this growing customer base.

Or said another way, if you look at some of our competitors' growth in the quarter 80% to 90% of their growth came from parts of the business that we have yet to attack.

Another significant contributing factor is our performance on churn.

Branded post paid churn is at a record low of 1.58%, down over 30 basis points from Q1, and 90 basis points from 4Q, 2012.

We do continue to see the so-called subprime segment as a big opportunity.

We have yet to bring the full benefits of our combined network and Un-carrier philosophy to the MetroPCS prepaid base and the prepaid market in general.

That's another huge upside still in front of us.

The overall total branded growth of more than 600,000 net adds at a pro forma combined basis demonstrates the success of our Un-carrier strategy and our Simple Choice plan.

In addition to the total branded net adds, we saw continued momentum in the wholesale segment as well.

As in the first quarter, MVNO net add gains exceeded 300,000 and were actually more than 10 times the MVNO net adds in the second quarter of 2012.

Machine to machine net adds also increased year over year to 133,000, but were down from 200,000 in the first quarter.

Overall, we had approximately 1.1 million total net adds, which is an incredibly strong demonstration of the momentum we have generated and are building.

Turning to strategy, let me give you a brief update of our major initiatives which we have been aggressively implementing over the last few months.

Starting with device line up, we now have a full device line up and strong partnerships with Apple, Samsung and other key suppliers.

We and our partners acknowledge the importance we play in each others' success.

We continue to unfold our Un-carrier value proposition.

In the Un-carrier release 1.0 which we announced on March 26th we introduced our radical Simple Choice plans with low out-of-pocket cost for devices and no annual service contract.

In Un-carrier release 2.0, which was July 10 in New York, we introduced JUMP, giving customers upgrades when they want them up to twice a year after six months, along with comprehensive handset protection for just $10 a month.

This time there was more tangible response from our competitors.

However they got it wrong and everyone including the financial community, the consumer and technology analysts called their move out for what it is.

Customers will essentially be paying twice for their phone with no discount to their service plan.

As theverge.com said, quote, AT&T's reaction to T-Mobile's transparency is to be more deceptive than ever, end quote.

We will continue to play on this distinction.

Also on July 10 in part of 2.0 we introduced no annual contract family plans to further upgrade the prepaid experience.

This is just the beginning of what we have in mind for this customer set.

Further, we responded to competitive moves with a knock out zero down promotion, which we will run for the summer.

We will not allow our momentum to be impeded.

And we are not finished, not by a long shot.

Stay tuned for Un-carrier 3.0, which is coming soon.

And we will continue to innovate beyond that.

You get it.

We're solving the industry-imposed pain points, growing a profitable franchise and changing the industry at the same time.

Cost management and simplification of our business process is fundamental to the Un-carrier strategy.

While we had higher customer acquisition costs in the second quarter driven by the 53% quarter-over-quarter increase in branded post paid gross adds we made very good progress with regard to the network and G&A costs.

Our network team has not only been busy with network modernization, but also with the relentless focus on driving third-party network costs out, specifically around roaming and backhaul costs.

Excluding the MetroPCS operating cost, network costs decreased year over year.

We have put significant emphasis on bad debt expense and employee-related costs through a range of performance improvement initiatives resulting in lower G&A costs.

We are using these cost structure improvements to partially fund our growth.

If you adjust for the higher costs driven by higher than expected branded post paid gross adds and retention expenses, our underlying cost performance in the second quarter was actually very good.

Looking forward, our radically simple plans give us an opportunity to simplify operations and further reduce costs.

Coming back to our key initiatives, we accelerated network modernization, integrated MetroPCS and expanded the MetroPCS brand.

Now let me address each of these three last initiatives in turn.

If you saw or heard me at our July 10 JUMP launch event, you have already heard the great news about our rapid progress in the rollout of 4G LTE.

We absolutely smashed our initial mid-year target, launched 116 metro areas.

This includes coverage in 73 of the top 100 markets.

We are on track to reach our goal, our coverage goal of 200 million people with LTE prior to the end of 2013.

Our 4G LTE network is blazing fast with the highest download speeds in the majority of markets with a 10 by 10 megahertz speed in service.

When our customers don't have 4G LTE they roll to our 4G HSPA plus, which now covers 228 million people on AWS spectrum and 108 million in the 1,900 band.

Our coverage spectrum position's improving.

On June 28th we announced our pending purchase of US Cellular spectrum in key markets in the Mississippi Valley, covering 32 million pops, and includes coverage in key metropolitan areas such as St.

Louis, Nashville, Kansas City, Memphis, New Orleans and a number of other cities.

The spectrum is adjacent to our current holdings, which provides key network efficiency benefits.

Further, due to the spectrum position in the network deployment program that Neville and our team have marshalled we are on track to remain on track for 20 by 20 megahertz 4G LTE coverage in 90% of the top 25 markets in 2014 and beyond.

Now let me move on to the integration of MetroPCS and how we are leveraging this investment.

We already achieved significant integration milestones.

We have launched HSPA plus and LTE devices in multiple MetroPCS markets and expect to complete the launch in all existing markets by the end of Q3.

We have already combined our 4G LTE spectrum in Las Vegas.

MetroPCS branded customers there are seeing huge service improvements.

Neville and his team have worked their magic with the US first implementation of multi operator core network.

What this means is MetroPCS customers with LTE handsets are already using T-Mobile 4G LTE network for data.

This is a huge and immediate improvement in their network experience without a change in handset.

As we announced on July 25th, we are aggressively expanding the geographic presence of Metro's distribution.

We are doubling the number of markets from 15 to 30 initially and have already opened 325 doors in those new markets and plan to have 1,000 open in these 15 new expansion markets by the end of the year.

In addition, we are finalizing plans to expand further in 2013 and 2014.

Think of this.

MetroPCS launched its first 15 markets in 10 years.

Combined, we will expand to the next 15 markets in just 10 weeks.

Finally we believe we are well ahead of plan in realizing both OpEx and CapEx synergies with lower-than-expected integration costs.

As a new public company we are off to a strong start and are highly confident that we continue to build on the momentum we've created.

Now let me turn it over to our CFO, Braxton Carter, for a review of the quarterly financials and guidance.

Then we'll answer questions you might have.

Braxton?

Thank you, John, and good morning.

I'm very excited about our first TMUS earnings call.

Let me start with revenues and EBITDA.

Most of the figures I will present to you are pro forma combined, that is including MetroPCS results for the entire quarter and previous comparable periods.

Total revenues grew by 11.5% quarter over quarter, driven by strong growth in equipment revenues.

In the quarter we financed over $800 million of equipment sales revenue compared to $300 million in the first quarter and $150 million in the second quarter of last year.

Service revenues continue to be impacted by the migration to Simple Choice value plan.

However, even with the significantly increased migration to these plans in the quarter, service plans were stable sequentially in the quarter and year-over-year trends improved.

In total, Simple Choice value plans now make up 50% of our branded post paid base versus 36% at the end of the first quarter.

Stabilization is supported by the fact that the difference in ARPUs between Simple Choice, value and classic plan customers appears to be narrowing due to the improving plan loading mix.

Adjusted EBITDA in the quarter was impacted by our investment in sustainable profitable growth.

Branded post paid growth adds alone increased by 77% year over year and 53% quarter over quarter, and we also increased promotional expenditures in connection with the iPhone and Un-carrier launches.

We told you this was the plan in our first quarter release.

Our upgrade rate doubled by approximately 5% in the first quarter to a record 10% in the second quarter.

This was the big driver for the increase in retention expense.

We believe this was a very worthwhile investment which is reflected by the improving quality of our customer base, which John already highlighted.

Adding to these statistics already mentioned by John, service revenue days sales outstanding, or DSOs, decreased by approximately 10% year over year and bad debt expense decreased by 48% year over year.

Turning to ARPU, as with service revenues, branded post paid ARPU continues to be impacted by the migration to Simple Choice value plans.

The sequential decline in branded post paid ARPU slowed significantly despite the much faster uptake in Simple Choice value plans.

Branded post paid ARPU declined by just $0.47, 0.9% versus the prior quarter compared to a decline of $1.40 or 2.5% in the first quarter when compared to the fourth quarter.

Simple Choice value plans accounted for over 77% of branded post paid gross addition versus approximately 57% in the first quarter.

The relative stabilization in trends here was supported by continued strong uptick in smartphones, which now account for 72% of the total branded post paid base versus 54% in the second quarter of 2012.

Branded prepaid ARPU on a pro forma combined basis has been increasing slightly.

Turning to cash CapEx and cash flows we have been spending more than $1 billion of cash CapEx in each of the last three quarters.

This was driven by our network modernization, including the accelerated rollout of 4G LTE.

We continue to remain focused on free cash flow.

Simple free cash flow, that is adjusted EBITDA minus cash CapEx, remained positive despite the significantly higher cash CapEx.

From an operating free cash flow perspective, total installment receivables net of allowance for credit losses increased by approximately $500 million compared to the first quarter.

This was driven by the strong operational results and record smartphone sales.

In terms of key balance sheet metrics, we ended the quarter with a very strong cash position of $2.4 billion.

Net debt excluding [tariff] obligations amounted to $15.3 billion which represents a multiple of 2.7 times the adjusted EBITDA over the last 12 months.

Let me conclude with updated guidance for 2013.

On a pro forma basis we expect an adjusted EBITDA for the year of between $5.2 billion and $5.4 billion.

The difference to our December guidance at the Deutsche Telecom Capital Markets Day is essentially driven by much faster than expected Un-carrier growth.

And to a lesser extent by the market expansion of MetroPCS to 15 new markets which was an acceleration from the original plan.

We strongly believe that this is the right investment for growth and we expect to create significant shareholder value.

Cash CapEx is expected to be between $4.2 billion and $4.4 billion pro forma for the year.

The slight reduction versus the original guidance is due to lower than expected integration CapEx and also cash timing differences.

Branded post paid net adds for the year are expected to be between 1 million and 1.2 million.

This means that we expect to grow more in the second half of the year than in the first half of the year.

Finally, the penetration of Simple Choice value plans in the branded post paid base is expected to be between 60% and 70% by year end.

Let me now turn it back over to John Legere for a recap of the highlights.

Okay.

Thanks, Braxton.

Here are the main highlights from my perspective.

We have successfully launched Un-carrier 1.0 and 2.0 and have seen a significant improvement in customer momentum.

We led the entire industry with 685,000 branded post paid phone net adds.

Branded post paid gross adds increased 77% year over year and 53% quarter over quarter and we have achieved an all-time low branded post paid churn of 1.58%.

We are rapidly expanding our 4G LTE footprint.

The 4G LTE rollout is proceeding ahead of schedule and we expect our 200 million pop target to be met prior to the end of the year.

Our 4G LTE network is performing great and we are on track for 20 plus 20 megahertz 4G LTE in 90% of the top 25 markets.

The MetroPCS integration is proceeding well ahead of plan and on July 25th we announced that we doubled the number of MetroPCS markets.

After 15 markets in the first 10 years we will add the next 15 markets in 10 weeks, and by the way, more will follow.

We have a strong cash position with $2.4 billion of ending cash, and most importantly, we are just getting started.

Stay tuned for Un-carrier 3.0 and more.

The fun is just beginning.

We are now ready for Q&A, operator.

First question please.

(Operator Instructions)

Phil Cusick from JPMorgan.

Hey guys, thanks.

I guess two if I can.

John, number 1, can you talk about the momentum over the last five weeks, and especially as you launch the new sort of financing promotions in the last couple of weeks versus when you first launched the iPhone?

And then second, Braxton, if you could help us, what's the marginal OpEx of a gross add at this point on an expense basis?

So, excluding the capitalization how does that change EBITDA when you add another customer?

Thanks.

Thank you very much for your questions.

Interestingly the momentum we have in July is very strong and there is a lot of new data coming out as we speak as the period just ended, but I will tell you as you probably noticed we came into the marketplace a little over a week ago with a zero down promotion for the summer.

We have had great traction with that.

Give you an idea, the porting ratios that we have seen previously in, let's just go back, if you go back a year ago, the porting ratios with AT&T and Sprint were about 0.41 and 0.50.

In Q2 where we had a successful quarter, as you know, the porting ratio with Sprint was about 1.6 and AT&T about 1.7.

And in the week ended July 31st the porting ratios for AT&T were about 2.04 and Sprint 2.24.

So we've had a good strong response.

Momentum is good through July.

I think our performance on a total basis in July probably mirrored May and June as we start to get the data.

We are anticipating.

As you saw we gave guidance from 1 million to 1.2 million subscriber additions on the post paid side net for the year, which is an increase in the second half over the first half.

It does anticipate so we are anticipating additional competitive response.

So even with that we are pretty confident in that.

So, I will turn the second part of the question over to Braxton.

Yes, Phil, when you look at the branded CPGA, significant decreases, Q2 2012 was $420.

Q1 was $341.

Q2 went down to $326.

Partly what's reflected there is leveraging fixed costs in the base and that's manifestating itself in lower CPGA.

When you are looking at truly the incremental OpEx part of a gross add, over two-thirds of this is variable, so when you account for the variable OpEx associated with this increased growth and adjust some of the consensus estimates for EBITDA, it's clear to see that we are definitely performing well from a profitability standpoint, which again, is testament to some of the focus on cost control and cost initiatives within the Company.

Is that marginal cost all sort of commission and things like that?

Or is there something else in there?

Yes, I mean there is commissions.

There are certainly distribution costs.

There is some subsidy on certain handsets that are part of that equation.

Great.

Thank you.

You're welcome.

Brett Feldman from Deutsche Bank.

Thanks for taking the question.

If I look at your full year post paid net add guidance, it looks like the net adds you're looking for in the second half of the year are about in line with what you did in the second quarter alone.

You alluded to an expectation there may be some competitive response.

I'm just curious, what do you think that means?

In other words, do you think that some of the gross adds that you saw a nice pop in in the second quarter might turn down a little bit as people realize you are doing better or are you actually assuming that maybe the churn rate you achieved in the second quarter could tick back up in light of some of the competitive responses?

On the prepaid side, John, you talked about Apollo 15, you are going to go out there, you're going to acquire LEAP's customers, AT&T has announced that they're going to acquire LEAP's customers, the whole company actually.

Have you given any reconsideration to whether it makes more sense to just bid for the company versus bidding for the subs?

Let's do two things.

I will start and just say we have no interest in acquiring LEAP.

We had no interest in acquiring LEAP which was fascinating and led to, I think, AT&T outbidding itself thinking that people were coming.

But we've said all along that we'll acquire LEAP's customers the old fashioned way, using our network and our devices, and frankly, AT&T is acquiring LEAP.

It doesn't mean there will be any customers left by the time they get through the process.

But we -- make it clear we have no interest in acquiring LEAP as an entity.

I will say more about Apollo 15.

I'd ask Mike to comment on your initial comments and then I will comment at the end on the competitive response and it's got more do with that we have always been conservative in outlining our forecast.

All I'm trying to say is our guidance assumes a competitive environment.

I'll make some comments after Mike does on whether or not that is already happening and whether it's impacting us or not.

Mike, did you want to comment?

Just an outlook on the second half and connecting it to the guidance.

The first thing to say is that we are starting off strong.

As John said we've seen great porting ratios in the quarter so far.

Our share of gross adds on the phones we believe in July was in line with out performance in May and June, which as we previously said were our stronger months of Q2.

So, really nice performance so far in the second half.

As you mentioned, our guidance suggests that we will outperform in the second half versus the first half.

A couple of things there.

One is the second quarter with its 685,000 post paid net additions, if you just take that math forward we would overperform versus the guidance that we shared.

As John said, there is a certain amount of you could call it conservatism or you could just call it expectation of customer response built into the numbers that we're sharing for the second half on customer growth.

A couple of other things.

One is, if you look at churn, it was a huge factor in our performance.

We expect the structural improvements in our business, the brand reassessment by consumers, the way Simple Choice and the Un-carrier strategy are driving customer loyalty, the network performance which has been phenomenal, to allow us to continue post paid churn at low levels.

That being said, there is some seasonality to churn.

We have been historically very successful in the third and fourth quarters at gross adds which means we have more contract expirations in the third and fourth quarter, so you could see some seasonal variability in churn that could put a little pressure there.

If you look at the numbers overall, while the second half is expected to be better than the first half, the guidance we gave would suggest that would moderate a bit from Q2 and you can chalk that up to a little bit of conservatism and an expectation of stronger customer response, competitive, I should say.

Just a couple of other comments.

Don't read my comments that the little kid in the school yard is sitting here waiting for the bully to come out and beat him up after school.

We just try to be conservative.

Frankly I would suggest that AT&T certainly, although they don't want to admit it, they're in full fight back mode.

This acquisition of LEAP certainly was an attempt to get some spectrum but also a competitive response although delayed to what we're doing with MetroPCS.

The next program was an attempt to respond to JUMP, and it failed miserably from a standpoint of how the market understood it and perceived it.

I would more so suggest to you that, as each month goes on, an entire new set of customers at AT&T and Verizon have the ability to consider the Un-carrier proposition.

That's the big news here.

The simplified rate plans, the low upfront device costs, the no contract, the any time upgrade, this is what customers are desiring.

As each month goes on there is a whole new set of people that can respond to this, and competitively I think our competitors have already got to respond to Un-carrier phase 1, Un-carrier phase 2, our MetroPCS Apollo 15 migration that we are doing and I have made it clear we are not done.

So in responding to us and what we are doing in the market place, Un-carrier 3.0 is already scheduled and you can trust it's going to do two things.

It's going to solve another customer pain point.

And it's going to unveil another weakness of the major players with an inability for them to respond so the pile of things you need to respond to is going to grow as much and as fast as we can possibly solve points for customers.

Great.

Thanks for all that color.

Craig Moffett, Moffett Research.

Hi.

Can you talk about your momentum with commercial accounts, and most of what we have heard from the Un-carrier strategy has been aimed at the residential market.

Can you help us understand what your expectations are with commercial going forward and is that a big part of Un-carrier 3?

Let me do this, it's a good chance to introduce Drew Kelton, who has been here very quietly creating the next phase of our B2B process.

I put that in the category of coming attractions, and a piece of the business where we think there is quite a bit of upside.

I will ask Drew to use this opportunity to make a quick comment on that.

Thanks, John.

Thanks, Craig.

Let me give you quick color of it in terms of where we are right now, Craig, and then some of the things you can look forward to.

First is, the B2B portfolio continues to grow in line with the rest of the organization at 11% year on year growth which is very strong performance in this business portfolio.

More importantly, as we start to embrace Simple Choice for business or Simple Choice as for business, you are going to see a dramatic shift in the offerings we put out to the business and commercial communities.

So a really exciting opportunity for T-Mobile business to change the game, the way we engage with the B2B customer base, so watch the specs.

I'd just summarize what Drew is saying as we didn't get started there yet.

We are a small player in a big market and we are going to choose the pain points that we can solve.

Q4, Q1, you will start to hear more from us in this space.

Can you provide any additional color on what percentage of your business is that today of your gross adds, for example?

How small is it?

It's too small to get concerned with at this point.

All right.

Got it.

Thank you.

John Hodulik from UBS.

Okay.

Thanks.

Good morning, guys.

Maybe for Braxton, could you talk about what's driving the narrowing of the gap between the value plans and the classic plans and the flattening out sequentially that you have seen in terms of that change in ARPU?

Do you expect that to continue going forward?

And then the iPhone number is lower than we thought.

Maybe Braxton, can you let us know of the 900,000 or so iPhones you sold, the mix between gross adds and upgrades?

Thanks.

Yes, sure.

Looking at the ARPU trajectory, again a significant deceleration, the dilutive impact of going to Simple Choice value plan, and specifically EIP where what traditionally would be reported as service revenues is now being used to reduce the equipment installment receivable on the balance sheet.

What's going on here?

We did in the second quarter have a very significant penetration, 14% quarter over quarter of our base.

It's simple math to go in and see that the impact on the dilution of ARPU could have been much larger.

What is the offset?

We are also having migration from classic customers down to Simple Choice.

The offset was a very well crafted simplified Simple Choice offering where the tiers of data were designed to rightsize to our customers' needs.

And the power of truly unlimited data in the world of the latest and greatest smartphones with very significant usage, is a true competitive differentiator in the marketplace.

That data attach rate, driving customers to the premium unlimited offering that we have was the significant offset that we're seeing to the dilutive impact of EIP.

Looking forward, we gave guidance again for purposes of transparency that we believe by the end of the year, 60% to 70% of the base will be on Simple Choice value.

That implies a 10% to 20% growth in the second half of the year versus a 14% growth in the base in the second quarter.

So the dilutive effect should be somewhat mitigated while we execute on optimizing mix and rightsizing the data attach rate for the needs of the customer.

Going into 2014 you are going to hit terminal penetration of these plans, which definitely signals a stabilization of ARPU before other innovations that we're going to bring to the market such as Un-carrier 3.0.

Stay tuned.

The outlook is bright.

Great and did you guys have the iPhone mix?

Mike, do you want to talk about the iPhone?

A couple things.

One is that, as you know, upgrades were a record quarter for us.

We went up to 10% on upgrades.

That's more than 2 million upgrades.

The iPhone was 29% of combined gross adds and upgrades, but on the gross adds side it was only 20%, which means it was a higher percentage of that on the upgrade side.

So you've got just about everything in the investor quarterly to be able to triangulate on the answer to your question.

More on upgrades than on gross adds and a record upgrade quarter with more than 2 million total upgrades.

Got you.

Okay.

Thank you.

Matt Niknam from Goldman Sachs.

Hey guys.

Thanks for taking the question.

You talked about $1 billion in cost structure improvements.

I am just wondering if you can talk about where some of the biggest areas of improvement have been and where you see the greatest opportunity for incremental improvement going forward.

And as we look to the second half of the year in 2014 how much of these cost savings do you expect to reinvest to pursue further growth?

Thanks.

A lot of the cost initiatives had been previously announced and we are executing on that throughout the year.

There is a variety of measures that are incorporated into that $1 billion number.

I think the way to look at it, one of the beauties about the Un-carrier strategy is complete simplification of the business and driving our business processes and making them more efficient in a much more simplified offering to the customer.

We have not cut back at all on the front line.

We continue to invest very heavily in customer service.

Very important.

We have eliminated a lot of the pain points that our customers had suffered in the past.

So it's a focus on preserving and actually enhancing the customer experience while driving out back office costs.

These changes that we made are sustainable and we think that there is incredible additional opportunity and cost transformation.

Our cost transformation initiatives will continue throughout 2013 going into 2014.

We're not giving an outlook on 2014 at this point but suffice it to say that we are very focused on increasing our EBITDA margins and growing the cash flows of the business.

Important to note the Un-carrier is a philosophy as well as a marketing proposition.

You know, we are creating and enabling a different kind of a company, one that is flat, one that is fast, one that is not your typical flat bloated hierarchical player that can't move quickly.

And we're putting all of our focus in the care environment, in the retail environment, into our network environment and then with a very simple set of propositions simplifying as much as possible our business, and as much of the overhead as we can remove.

And what we have done is amongst other things we have made every single employee in the Company a shareholder.

So there is this combined aggressive set of shareholders across the business looking for every piece of cost.

I think what we've demonstrated recently is the flatter we become as a company our ability to move in the marketplace is very quick.

And the ability to move as much of this cost over to the front line and to the network, I think, is going to be as big a part of our success as any and it's as big a part of the Un-carrier revolution as possible.

I mean, I think the companies in our industry got a little fat and bloated and bureaucratic.

It's going to stop them from being able to respond to us.

We're going to put as much of that as we can into the growth of the business.

That's helpful.

Thanks.

Kevin Smithen for Macquarie.

Wonder if you can give us an update on the conversion of PCS's spectrum onto T-Mo's network?

What was the retention of PCS subs in Las Vegas when you did that conversion?

What percentage signed up for value plans and post paid and what percentage onto prepaid plans on T-Mo?

It's Neville, let me take the first piece on spectrum and then I'll hand back to Tom for some of the stats on what customer movement we saw.

I mean obviously the foundation of network is key for all of the growth that we've talked about.

We are moving very, very quickly right through the modernization stuff as you have heard from John and Braxton.

We are well ahead of our plan and will be well ahead of what we said we would do by the end of the year.

We are also ahead on what we need do to integrate and move to a single network.

So combining those Metro spectrum assets into the -- and onto the T-Mobile network.

So we are making great strides there.

The costs of the network are now integrated.

All of the LTE traffic carried by Metro customers is supported on the T-Mobile US core network.

That's the first critical and key step in spectrum migration.

Spectrum migration will commence this year, and as John said, we'll be moving towards that 20 plus 20 vision in 2014, but a lot is happening.

In Vegas already, as you know, two weeks post close we went from two 5 plus 5 networks to a combined 10 plus 10 network.

That was our first and major move combining the two company spectrum.

We saw great performance there.

Our Metro customer experience went from 1 to maybe 2 megabit per second speed on their LTE to 8 to 10 on the combined network.

And our customers at T-Mobile also saw a material improvement in performance, peaks well above the 15 to 20 megabit per second story.

So, we are well on the way to integrating these two spectrum portfolios, collapsing down to the one network.

A lot of massive synergy that comes through on a cost basis, but the customer experience is continuing to improve.

The great news piece is we are doing it in a spectrum that we run day in, day out on AWS.

We're not looking to try and incorporate a new band here or clear a new band out of existing customers.

We are adding and piling on in the AWS band that we know so well.

We'll be announcing more as we move through the next quarter or two, but Vegas first, and there will be many markets to come where we'll be integrating that spectrum over the next three to six months.

Neville, as I turn the call over to Tom Keys, who is running the Metro business, and has been running the Metro business, let me just say that we couldn't be more thrilled with the coming together of T-Mobile and MetroPCS.

This was clearly the right thing to do, not only from a network standpoint but from a business standpoint.

This is the real deal.

The legacy of this Company, everything has lived up exactly to what we thought.

I will tell you just a quick update.

The integration process, the integration synergies, the integration savings, the one-time costs, et cetera, everything so far is on or ahead of plan.

As we have said all along, we think there is some conservatism built into the potential savings here and we see some upside.

So far, so good.

The combination of what's happening in protecting the base as well as expanding dramatically the presence of Metro, as you get into Q4 and beyond, you are going to see a significant impact on our business by this, but let me introduce and turn the call over to Tom Keys to make some comments.

Thank you, John.

Kevin, to your point specifically, the two things that I want to highlight are speed to market and cost containment.

If you remember Metro's calls and the things we've said over time, those are just legacy elements of our business that it's wonderful to have them as key tenets of the new Company.

Specifically to Las Vegas, as Neville mentioned, 7 to 8 times quicker network speed.

The customers that did have our devices now enjoy it better.

I think we are seeing better retention, although it's early to tell.

It's only been 90 days since we started this and I think we got this done in the first couple of weeks.

Secondarily, and even more importantly, the marketing team, Mike Sievert's team, the entire device team, we have been able to get devices into the market now, seven devices that we are selling on the new network.

So people who now come into MetroPCS who hear from their original customers that it's a better network are now coming and getting a better device selection, getting Samsung Galaxy 3s and Galaxy 4s.

And additionally, the most exciting thing on the market is that we can now take BYOD, bring your own device, and we can have sim-based devices come into Las Vegas, as well as every other MetroPCS market out there, and now bring in customers who before had to stay with the device they loved but with the network they weren't quite happy with.

Specifically, Las Vegas is the beta test market.

Neville and his team, Ed Choi, great job.

Now we take this out to the remaining markets, we are selling now in eight markets on their network, meaning the T-Mobile network with MetroPCS locations, this thing's only going to get bigger.

Just to confirm, the Metro customers are having a full Metro experience on the T-Mobile network.

We're not migrating the Metro customer to the T-Mobile brand.

This is the Metro brand, all handset experience, fully supported on the T-Mobile network.

The vast bulk of them are still taking a prepaid device.

They may be upgrading to a higher end smartphone but they're still taking prepaid, they're not showing up in the post paid value plans.

That's correct.

Out of the Metro locations we have purposely segmented our distribution so that Metro is selling what Metro always has done, pay in advance, no contract, unlimited plans.

A last follow-up on this.

Historically Metro has had a lot of success when launching new markets in adding subscribers.

Obviously these are a lot of markets where there is an existing prepaid competitor or several existing prepaid competitors.

How should we think about prepaid sub growth in the second half and into 2014?

Will you experience the same success that you saw in post paid on the prepaid side with these new market launches?

I think John mentioned we've started this on the 25th of July.

So in less than 90 days we have opened up about 350 doors with 1,000 on track to the end of the year as our goal.

Interesting thing to note, these are all dealer distribution doors.

None of these are opened up by Metro.

So, think about that.

In competitive markets where they know that they are the seventh, eighth carrier on the block, we have people dying to open up distribution locations, actually clamoring to get into big cities like Houston, Washington, San Diego.

That's a really strong signal for us.

We also have some people who had doors that might have had some other logos on them that want to come our way over time.

Really big.

This is the way that we do get customers who want to use Metro's simple plans, right, $40, $50, $60.

The second half of the year is teed up for a lot of growth.

As John mentioned, we call this Apollo 15, it's a nice umbrella name for 15 markets to sit under.

We think there is an Apollo 30.

We are working with Nev on it, challenged him to look at the next set of markets that are out there and say what can we do in the back end of the year into Q1, and could we get ready to have additional markets in our strongest selling season in Q1 in 2014.

That's really the goal at this point.

A lot of excitement behind it.

My feelings on the issue is watching, I think as you know, Metro is also quite a seasonal business.

In Q2 and in Q3 so far we are operating well ahead of their seasonal trends but I think as you look at the broader TMUS, as you get into Q4 and then into Q1, you will see a substantial presence in our numbers from both the underlying Metro business but the Apollo 15 and soon to be 30.

Michael Rollins, Citi.

Hi.

Good morning and thanks for taking my questions.

A couple if I could please.

The first one is, I was wondering if you could talk a little bit more about the growth and the value in the simple plans.

I think the metric was you got to about 50% penetration, and if you look at that significant sequential growth, how much of that was bring your own device versus customers who came in and actually upgraded or bought a new device from you as part of the equipment installment plan?

Secondly, I was wondering if you could peel back the onion a little bit more on the 10% device replacement rate that you had in the quarter.

How much of that do you think was pent up demand, people waiting for some of the new iconic devices that you launched during the quarter?

Or was part of that maybe some flexibility that you gave in upgrade policies to encourage more retention of your customers and satisfaction from customers.

If you could just peel that one back a little bit, that would be great.

Thank you.

Those are great questions.

There are some hidden gems in there because as you know when you give customers the visibility to the Simple Choice and no contract plan they feel free.

They love the engagement with you as a carrier with a no contract or what you do as a business.

And then as they're buying their device when you give them the right to have a low up front cost buy an equipment installment plan purely of their choice as a way to finance their purchase, it does have a significant linkage to you as a customer, other than through that contract mechanism.

And in general 75% to 80% of our customers that come in also take an equipment installment plan.

I will let Mike, if you want to comment on both of those variables.

Yes, to me it's a nice sign of commitment from the customer.

It's a great benefit to the customer to have a two year free installment plan for their device and to have lower plan service charges through the Simple Choice.

They're making a commitment to us.

It's about 75% who are choosing Simple Choice are also taking a two year EIP, and some of the balance are bring your own device customers.

Which again, it's a nice source of strength for us, and an attack weapon for us to go after the competition, in the pent up demand for iconic devices.

It's interesting.

This was not a quarter that was defined by any one device.

As we said we sold about 900,000 iPhones, which was terrific, a great success.

We also sold about 600,000 Galaxy S4s.

The iPhone represented about 29% of gross adds and upgrades.

The month of the iPhone launch was a great month for us.

May and June inside the quarter were better.

What we've got here is reassessment by the consumer public of our brand.

We've got people stepping back and rethinking T-Mobile on a new set of terms and that's driven by the Un-carrier strategy.

That's driven by fantastic network progress.

That more than anything else is what's driving our renewed momentum in the market place.

Let's be clear on what we're saying.

Our partnership with Apple is a significant and special component of who we are as a Company and the things that we will do going forward in the full array of devices that Apple does and will offer.

I think it's done great for our store traffic.

It's done great for our brand, in combination with our Un-carrier program it's had a significant positive impact on us, but unfortunately for our competitors it's the one time pent up demand of customers wanting the iPhone is not an explanation of the phenomenon that we are announcing here with our Q2 results.

I do see Apple products, the iPhone 5 and ensuing devices, to be a significant part of how we will compete in the way we bring them to market.

And the percentage of our base could change positively going forward, but it's the combination of them with our brand and our Un-carrier proposition that has made the impact.

And does that mean then that the replacement rate might just stay elevated for a little while as you are trying to get to your goal of up to 70% on the value plans by the end of the year, and you've got these new devices, you've got the new network.

Does that mean that we should expect that replacement rate to stay elevated now because it was less about the pent up demand in the second quarter?

Yes.

You are right.

You quoted the math and suggested it will stay elevated.

We picked up a record 14 points.

Our base on Simple Choice moved from 36% at the end of the last quarter to 50%, which was a record.

We had more than 2 million of those people take a phone upgrade moving to 10% of our total post paid base taking an upgrade from 5% last quarter.

Both of these are records for us.

Which basically says we're winning over not only the public and their reassessment of our brand but our own base.

You see that reflected in our record low churn as well.

I think it's a beginning.

It's a big base.

They're coming back to us and recommitting to us as we said before.

What we are providing in the guidance is a sense for where we think that will land by the end of the year.

Thanks.

Ric Prentiss from Raymond James.

Great.

Thanks for getting me in under the wire there.

Obviously very strong customer numbers.

I wanted to talk a little further on the churn topic, given the improvements in network but more to come, care, device line up, Un-carrier 3.0 coming, how low could churn get for you guys as we look out into the future?

I think that Ric you really hit auto a lot of the key drivers.

It's almost the perfect storm of multiple factors coming together that contributed to our record low post paid churn of 1.58%.

Can it get better?

Absolutely.

There is seasonality involved in churn.

You do need to take that into account.

The foundation is the network.

You have to remember we are making a very significant investment in the network.

We have a much simpler network.

We are not dealing with a lot of the legacy bands and complexities that the other large carriers are dealing with.

You are seeing a team that is hitting on all cylinders with a very rapid and massive roll out of first HSPA plus and now 4G LTE.

That's the foundation.

Everything else that John and Mike and the team has talked about with the Un-carrier strategy is obviously having a significant impact on customer retention and the quality of the customer mix has significantly increased.

While there is always some seasonality to churn, we certainly expect that as we continue to innovate in the market place and execute on our strategy that there are potential up sides from a churn standpoint.

It's a fantastic question.

I'm not going to give guidance on that at this point in time.

Let's just think about what's happened.

From previous descriptions about the medium term of this business we talked about having some potential incremental positive post paid net adds in '13 and then positive in '14 to changing our update 1 million to 1.2 million positive this year.

We previously had a multi year plan that looked at dipping under 2% this year to post paid churn and then potentially dipping under 1.9% and then two years hence dipping under 1.8%.

We are now sitting at 1.58% already.

Obviously there may be, we'll have to see whether we can hold that specifically on a month to month basis going forward.

But the combination of where we are and the momentum of our net adds on the post paid side and where we are in the churn base is giving us some very positive feeling about the previously described multi year view for the business, both from a revenue and an EBITDA and a cash generating standpoint.

Makes sense.

The second question is, it seems like one of the other pain points in the industry might be family plans, shared data, is it really cheaper or not?

If I had somebody that wanted to change to a T-Mobile plan it might be a child who is locked up on a different expiration date.

How are you guys feeling about attacking that kind of segment out there?

I will let Mike answer that.

Ric, I just want to say that sounded like you were describing your own pain point and what you need, so I will have Mike answer this one specifically to you as our potential new customer.

This has been a systematic strategy of going after the things that frustrate customers most.

Anybody that studies the industry shouldn't have too hard of a time figuring out the things that are high on our radar screen.

We went after contracts first because those were such an area of frustration.

We went after simplicity and transparency in our rate plans and separating out the cost of the device from the cost of the rate plan so people can really see what they're buying.

Then we went after upgrades, the thing that's always been the most frustrating part about those contracts.

You just have to kind of extrapolate that forward and get a sense for the kinds of things that customers are saying really matter.

By the way, it's all customers.

As Drew and John mentioned a few minutes ago, it's across the segments, not just consumer.

We think there are some big things still remaining.

The strategy is pretty simple.

Solve their pain points and pick things that are not only really valuable to customers and really important to them, but important to them at their moment of choice so that they choose T-Mobile.

And specifically, it's things that as John said cost some money, add some value, but would be disproportionately difficult for our competitors to respond to.

That's the cocktail of criteria that we look at when we're planning our phases on Un-carrier.

Great.

Thanks guys.

Okay.

Well we appreciate everybody tuning in.

You certainly have a lot more to hear from us.

We look forward to individual discussions with as many of you as possible.

Thank you for tuning in today.

Ladies and gentlemen, this concludes the T-Mobile US second quarter 2013 conference call.

If you have any further questions you may contact the investor relations department.

Thank you for your participation.

You may now disconnect and have a pleasant day.