T-Mobile US Inc (TMUS) 2014 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 2014 conference call.

(Operator Instructions)

This conference call is being recorded, today, July 31, 2014.

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.

Good morning.

Welcome to T-Mobile's second-quarter 2014 earnings call.

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

Let me just get to the disclaimer, on slide 2.

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 annual report on form 10-K, filed with the SEC on February 25, 2014.

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 or 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 www.T-Mobile.com.

Let me also point out that there should be a small change on page 8 in the deck.

The last bullet should read properly: Agreements to clear encumbered A-block metro areas apply to markets covering more than 13 million pops, on top of many markets already free and clear today.

So with that said, let me now turn it over to John Legere.

John?

Okay, good morning, everyone.

I brought my team -- (technical difficulty)

Pardon the interruption.

This is the operator.

Please stand by.

We are still connected.

Okay, good morning, everyone.

I brought the team here to the New York Stock Exchange today to talk about our second-quarter results, and to reflect on the fact that it was in the second quarter of last year that T-Mobile began trading right here.

We have done a lot in the last 15 months.

We've got a lot more to do.

In this quarter, we achieved a bunch of new milestones and are ready to report our progress to you, so let's jump right in.

T-Mobile continues to be the fastest-growing wireless company in America, and now has 50.5 million customers.

In the second quarter of 2014, we grew our customer base by a total of 1.5 million total net additions, making it the fifth consecutive quarter that we have delivered over 1 million total net adds.

Now, that is 7.6 million total customers added over the last five quarters, since we launched the Un-carrier revolution.

Our branded net adds for the quarter were also just over 1 million, surpassing this milestone for the second quarter in a row.

And on the metric that you all track most closely, T-Mobile led the industry once again with 579,000 branded postpaid phone nets, and this was more than the other three major carriers combined.

We also finished number one in branded prepaid nets, too, adding 102,000 against losses at all of the other carriers.

And finally, we've broken the code on tablet sales, and sold almost 5 times as many tablets in Q2 than in Q1.

We continue to see the future upside in tablets, wearables, and other devices.

This momentum, and the level of these customer acquisitions results, has translated into total revenue growth of 8% year over year, the industry's best this quarter, as was our service revenue growth of 7.1%.

By aggressively managing costs, coupled with the revenue growth, we also led the industry in adjusted EBITDA growth of 33.4% quarter over quarter.

Bottom line: I'm very proud of the performance the team delivered this quarter.

On the network front, the T-Mobile network is the fastest nationwide 4GLT network, and I intend to keep it this way.

The 4GLT network now covers more than 233 million Americans in 325 metro areas.

Neville and his team are aggressively rolling out our wide band LTE, upgrading our limited remaining 2G footprint to 4GLT to increase our speed, and we already have started our 700 megahertz A-block rollout to further increase coverage and quality.

I will take you through these in a bit more detail in a moment.

Now, it is no secret that I am possessed with giving our customers nothing short of both a fantastic network experience, but also how we care for them.

All you have to do is follow me on twitter to see that.

This morning, JD Powers announced that we finished first in their semi-annual wireless customer care survey, for both the T-Mobile and MetroPCS brands.

For the T-Mobile brand, this is the first time since February 2011 that the Company has received the highest ranking.

For MetroPCS, it is the fourth time in a row.

Taking all of this in together, we are in full gear and the team is totally focused.

Finally, we expect our positive momentum to continue into the second half of 2014.

We're increasing our guidance range for branded postpaid net adds this year to 3 to 3.5 million, and we are not changing our adjusted EBITDA guidance, despite this increased customer growth.

Now, over the last five quarters, we turned a declining business into a growth business by simply listening to our customers and offering them what they told us they wanted: great service on a nationwide, lightning-fast 4GLT network; devices when and how they want them; and plans that are simple, affordable and without the restrictions the other guys place on them.

During the second quarter, we continued to accelerate and aggressively drive change into the wireless industry, solving pain points and innovatively advocating for the customer.

We kicked off the quarter on April 9 when we launched three days of Un-carrier, and we launched our simple starter $40 plan, tablet freedom, and overage freedom initiatives.

On June 18, we launched Un-carrier 5.0 T-Mobile test drive, a new program that invites customers to try our network and an Apple iPhone 5S for seven days for free.

On the same day, we launched Un-carrier 6.0, music freedom, which allows customers to stream music from the most popular music services without the data usage counting against their 4G data allotments.

We will continue to innovate and we will never stop advocating for America's wireless customers.

Stay tuned for Un-carrier 7.0 later this summer.

Now, let's drill into our Q2 results a little bit further.

Total branded nets had another great quarter at a little over 1 million, up 409,000 a year on a year-over-year basis.

Decomposing the 1 million total net adds, branded postpaid net adds were 908,000, up 220,000 from a year ago.

Breaking down the branded postpaid adds further, we did 579,000 branded phone net adds, which once again led the industry.

We also posted a record 329,000 mobile broadband net adds, mostly tablets, up almost 5 times from the first quarter.

This reflects the success of our operation tablet freedom, which we launched in April.

Tablets have become a big part of our Business and a big part for the wireless industry, and this quarter results show that T-Mobile can play to win in that area as well.

We see it as a significant opportunity going forward, and we are just getting started.

The quality of our customers is showing up in our churn results, which continue to be at record lows, and in our customer quality metrics.

In the second quarter, branded postpaid phone churn was 1.5%, flat sequentially and year over year.

And the mix of prime customers within our branded postpaid gross adds increased 9 percentage points year over year.

Customers love the T-Mobile experience, and they're staying with us longer.

This is more we can do, and having regained our number-one position at JD Power, the team is focused on it completely.

I also want to point out that we have the industry's best branded prepaid performance in the seasonally lower second quarter.

We had 102,000 branded prepaid net adds, up from a loss of 87,000 last year, while every other major carrier had negative prepaid net adds in the second quarter.

The improvement was driven primarily by MetroPCS brand expansion, more than offsetting the ongoing migration of prepaid to postpaid.

Sales of smartphones, including branded postpaid and branded prepaid, were 6.2 million units in the second quarter of 2014, compared to 4.3 million units in the second quarter of 2013.

Smartphone sales accounted for 93% of all phone units sold.

Now, let me turn to customer growth, including wholesale.

We generated nearly 1.5 million total net adds in Q2, marking our fifth consecutive quarter with over 1 million net adds, and a total of 7.6 million since we launched Un-carrier.

We had a solid performance in wholesale in the second quarter, with a total of 460,000 net adds, of which MVNO was 235,000 and M-to-M was 225,000.

Our network is the foundation of our competitive formula, and we're building our network data-strong.

Let me give you a few highlights about where we stand today, and what we're working on in 2014.

We continue to expand our 4GLT network.

We now stand at more than 233 million 4GLT covered pops, and we are well on our way to covering more than 250 million people this year.

We're continually working to improve our network breadth and quality.

As part of our 4GLT network expansion on our limited remaining 2G footprint, we have our first 1,900 megahertz 4GLT sites on air, and more are coming.

This rollout should enable us to cover more than 280 million people with 4GLTE by mid-2015.

We have also launched voice over LTE, or VOLTE, this quarter, ahead of our competitors, and the service covers 107 million pops today, but I'm happy to announce that, as of now, we have full nationwide coverage with more than 200 million pops covered and growing.

So the 107 million was at the end of the quarter.

200 million is as of today, and now we're nationwide.

In January of this year, I told you we were the fastest nationwide 4GLTE network in the US, based on download speeds from millions of user-generated test results.

On the last call, I gave you a lot of download speed stats that showed T-Mobile is the fastest network in the first quarter.

Well, I'm happy to report that we continued our speed leadership for another quarter.

Our average download speed based on user-generated test results of 19.3 megabits per second is ahead of Verizon at 16.8, and AT&T at 13.8, and way ahead of Sprint at 9.7.

And our speed leadership actually increased during the second quarter.

Our speed advantage versus Verizon went from 1.4 megabits in the second -- in the first quarter, to 2.5 in the second.

And versus AT&T, whose network actually got slower this quarter, our speed advantage went from 2.9 megabits per second last quarter to 5.5 this quarter.

We continue to amp up our speeds as we commit more spectrum to LP and upgrade our cell site back haul.

We have now rolled out 10-by-10 4GLTE in 43 of the top 50 metro areas; and we continue to grow our wide band LTE footprint, currently covering 17 metro areas and aiming for at least 26 by year end.

As a reminder, with wide band LTE, customers are regularly observing speeds in the 70-megabits-per-second range.

Our network speed is simply incredible.

And all this breadth, quality and speed, is happening before Neville and his team really start cranking on the 700 megahertz A-block spectrum.

That will be another game changer for us, so let me give you an update on what lies ahead.

Our 700 megahertz A-block spectrum covers 158 million, or about 50% of the population, and 70% of the existing T-Mobile customer base.

It covers 9 of the top 10, and 21 of the top 30, metros in the US.

I'm thrilled to report that the first 700 megahertz sites are already on air.

Compatible handsets are being field tested right now, and are expected to be available for sale by the fourth quarter.

About half of the markets covered by A-block spectrum are encumbered by channel 51, limiting our ability to use the spectrum until after the incumbent broadcasters are relocated.

However, Neville and his team have already entered into agreements to relocate broadcasters into new frequencies in five markets covering more than 13 million people, making those markets available for launch in 2015.

This is in addition to many markets which are already free and clear today, such as Washington, DC; Miami; Dallas; and Houston, just to name a few.

We have recently entered into agreements to acquire A-block spectrum in additional markets from multiple parties covering 8.7 million pops, for approximately $50.5 million.

That translates into an average megahertz-per-pop price of approximately $0.48, compared to the $1.85 per megahertz-pop price we pay in the Verizon A-block transaction.

As we have said before, we will be opportunistic and disciplined on price, and I believe we have several options for adding low-band spectrum to our portfolio, including the 600 megahertz incentive auctions next year.

Now, let me provide you with an update on MetroPCS integration, which continues to exceed even our own expectations.

The MetroPCS customer base is rapidly migrating to T-Mobile-compatible handsets.

Currently, two-thirds of the MetroPCS customer base is already on the T-Mobile network.

That is up from 53% at the end of Q1.

In terms of spectrum, approximately 60% of the MetroPCS spectrum on a megahertz-pop basis has already been refarmed and integrated into the T-Mobile network at the end of the second quarter.

That is up from 50% at the end of last quarter.

We also have continued to ramp up distribution in the 30 MetroPCS expansion markets.

We added 900 new MetroPCS distribution points in Q2, bringing the total to 3,100 doors in the expansion markets, and approaching 10,000 MetroPCS outlets nationwide.

Now, that is as compared to Cricket, which last reported an approximate 3,000 doors.

Now, on to an update on synergy and integration costs.

With another quarter under our belts, we remain more confident than ever that the synergies projected at the end of the announcement of our transaction were conservative, and are coming in ahead of expectations.

We will give you a full financial update on the synergies and targets as we report full-year results.

But today, I want to highlight that in early July we shut down the CDMA portions of the MetroPCS networks in Boston, Hartford and Las Vegas.

That is 2.5 years ahead of initial plan.

We will be shutting down the CDMA portion of the MetroPCS network in Philadelphia later this summer, and will potentially shut down several additional markets by year end; all while ensuring a seamless transition for our customers.

Now, why is this important?

Well, we're moving MetroPCS 3G CDMA customers to a better, faster network, and offering them a superior experience.

The conversion also frees up spectrum that we can refarm and reuse to improve the speed and quality of the T-Mobile network.

And finally, it allows us to realize the synergies from running a leaner, single network structure.

There will be a one-time cost associated with these network shutdowns, approximately $250 million to $300 million in 2014, but it is also materially -- it moves the synergy timeline forward.

As a reminder, we eventually seek to realize cash savings of $1.5 billion annually, in terms of total merger synergies.

Note that the one-time costs will be excluded from adjusted EBITDA.

Overall, another great quarter.

Now, I would like to turn things over to our CFO, Braxton Carter, for a review of the quarterly financials and guidance.

Then I will be back to answer questions.

Braxton?

Thank you, John.

It is so exciting to be here at the New York Stock Exchange with our leadership team, sharing these fantastic second-quarter results with you.

Let me start by discussing our revenues and adjusted EBITDA for the quarter.

All figures for Q2 2013 are presented on a pro forma combined basis, to allow for an apples-to-apples comparison.

In the second quarter, total revenue amounts to $7.2 billion, growing 8% year over year, the highest growth rate in the industry.

The year-over-year growth was primarily due to service revenues, which accounted for about two-thirds of the growth.

On a sequential basis, total revenues increased by 4.5%, and that is a significant acceleration from the 0.7% growth rate we reported last quarter.

The sequential increase was due to growth in both service revenues and equipment sales (inaudible) by a lower impact from the ETF offer.

Going forward, we expect to see service revenue become an increasing driver of total revenue growth.

In the second quarter, we financed $1.3 billion of equipment sales on our equipment installment plans for EIP, up 7% compared to the first quarter of 2014.

Service revenues were again a key highlight in the quarter, the fifth consecutive quarter of sequential growth, and an acceleration in year-over-year growth, from 4.5% in the first quarter to 7.1% this quarter.

Even more significant, T-Mobile led the wireless industry in service revenue growth.

Please note that service revenues in the second quarter were impacted by $43 million due to a reduction in certain regulatory surcharges, and a revenue adjustment for expected customer refunds on premium SMS charges.

Without these two one-time, non-reoccurring factors, the growth in service revenues would have been 7.9% year over year.

We generated $1.45 billion of adjusted EBITDA in the second quarter, up 14.7% year over year, and up 33.4% quarter over quarter.

The adjusted EBITDA margin increased by 600 basis points, up sequentially to 26%, as operating expenses remain basically flat, despite increases in customers and revenue growth.

Smartphone sales remain strong at 6.2 million units.

The branded postpaid upgrade rate was 8%, up from 7% in the first quarter, but down from 10% in the second quarter of 2013.

I think these are very strong results that show our financial strategy is working.

Customer growth, followed by revenue growth, followed by adjusted EBITDA and cash flow growth.

We still have much work ahead of us to keep this momentum going.

However, we are clearly demonstrating that this model works.

Turning to slide 12, I wanted to start by letting you know that we will be reporting a new metric, branded postpaid phone ARPU, which is more consistent with the presentation of our competitors.

Essentially, tablets are becoming a larger piece of the Business, and can distort some of the underlying phone metrics.

Branded postpaid phone ARPU will allow a more apples-to-apples comparison.

Branded postpaid average gross billings per user, or ABPU -- as a reminder, this is branded postpaid service revenues, plus EIP billings, divided by average branded postpaid customers.

It approximates what we receive on a cash basis from our customers on a monthly basis.

ABPU of $59.79 in the second quarter continued to grow, unlike some of our competitors, up 1.8% year over year, and 0.4% sequentially.

Branded postpaid phone ARPU declined by 2.3% sequentially in Q2 compared to a drop of 1.3% in the first quarter, but an improvement compared to the 2.8% drop we experienced in the fourth quarter of 2013.

Please note that phone ARPU in the second quarter of 2014 was impacted by two one-time non-reoccurring factors already mentioned in connection with service revenues, a reduction in certain regulatory surcharges, and a revenue adjustment for expected customer refunds on premium SMS charges.

Excluding these two factors, branded postpaid ARPU would have been approximately $49.93, a drop of 1.1%, or $0.55, compared to the first quarter of 2014.

We are encouraged by the fact that we are already through most of the migration, in contrast to our competitors who are just starting out migrating to EIP plans.

At the end of the second quarter, 80% of our branded postpaid base was on simple choice plans, up from 75% at the end of Q1, rapidly approaching full penetration.

We continue to expect that phone ARPU will generally stabilize in the second half of 2014, once we are done with most of the migration to simple choice.

We believe that recent pricing actions, like the re-qualification requirements to retain corporate discounts, the elimination of corporate discounts from new customers, and the increase in the price for 4G unlimited from $70 to $80, will help us achieve our ARPU goal.

Also, I wanted to give you a quick update on customer quality metrics.

The mix of prime customers within our branded postpaid gross adds increased 9 percentage points year over year.

The percentage of prime customers within our EIP receivables was 53%.

Lastly, branded prepaid ARPU grew both year over year and quarter over quarter, reflecting growth in the MetroPCS customer base.

Turning to cash CapEx and cash flows, we spent a total of $940 million in cash CapEx in the second quarter, supporting the ongoing investment in our network.

This was essentially flat compared to the first quarter, and down 15% to the second quarter of 2013.

We continue to expect that full-year 2014 cash CapEx will be between $4.3 billion and $4.6 billion, with a bit of a ramp-up later in the quarter -- later in the year, as we shut down the CDMA portion of the MetroPCS network and continue the rollouts of 700 megahertz and the deployment of 4GLTE on the 1,900 PCS spectrum.

We continue to see the benefit of our spend, as our 4GLTE network, the fastest in the nation, covers more than 233 million people in 325 metro areas.

While supporting the necessary network modernization, we also remain focused on free cash flow generation.

In the second quarter, we generated a significant positive simple free cash flow, that is adjusted EBITDA minus cash CapEx, of $511 million, up $370 million versus the first quarter of 2014.

In terms of working capital, our EIP receivables, net of allowance for credit losses, increased by $497 million from Q1, reaching a total of $3.6 billion in Q2.

I want to point out that the sequential increase in our EIP receivables of $497 million in Q2, was less than the sequential increase we experienced in Q1 of 2014, continuing the trend from the prior quarter, as strong growth in our EIP collections more than offset growth in equipment sales financed on EIP.

To put it simply: The working capital drag continues to decline.

Based on our current projections, we continue to expect the ARPU program to cross over in the course of 2015, meaning that EIP billings will exceed the amounts of the EIP financed.

Our cash position remains strong.

We had ending cash of approximately $3.1 billion, leaving us with significant financial flexibility.

The decrease compared to the first quarter was due primarily to the acquisition of the 700 megahertz A-block spectrum from Verizon, with a cash outlay of $2.4 billion.

Net debt, excluding towers, amounted to $17.2 billion at the end of Q2, or 3.4 times our pro forma combined adjusted LTM EBITDA, near the middle of our target range of 3 to 4 times.

Let me now turn to our guidance for 2014.

Given our Un-carrier initiatives, we expect the momentum in branded postpaid customer growth to continue, and currently expect between 3 and 3.5 million branded postpaid net additions in 2014.

That is up from our prior guidance of 2.8 to 3.3 million branded postpaid net adds, and an increase of 200,000 postpaid customers at the midpoint.

Adjusted EBITDA is expected to be between $5.6 billion and $5.8 billion.

That is unchanged versus prior guidance, despite the expected increase in customer growth.

Cash CapEx is expected to be between $4.3 billion and $4.6 billion.

That has not changed versus prior guidance.

The transition to simple choice plans should be largely complete by the end of this year, with the penetration of simple choice plans reaching 85% to 90% of the branded postpaid base by the end of 2014.

Again, that is not changed versus prior guidance.

While not providing quarterly guidance, it should be noted that several of our cost initiatives, as well as top-line initiatives, will have a more positive impact on the fourth quarter due to the timing of such initiatives.

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

Okay, thank you, Braxton.

And a huge shout out to all of the T-Mobile employees out there who continue to put in all of the hard work necessary to drive these kind of results.

Let me recap a few highlights.

T-Mobile is the fastest-growing wireless company in America.

We led the industry in both total and service revenue growth, and we had the best adjusted EBITDA growth quarter over quarter.

And we had the best branded postpaid phone and branded prepaid net adds.

We had the fastest nationwide 4GLTE network.

We are rolling out improvements to increase our coverage, speed and quality, including already starting the A-block rollout.

We have the best customer service nationwide.

We regained the highest ranking in JD Power wireless customer care for the T-Mobile brand, and we maintained it for the MetroPCS brand for the fourth time in a row.

And finally, we expect our positive momentum to continue into the second half of 2014.

We're increasing our branded postpaid net adds guidance to 3 to 3.5 million, while making no change to our adjusted EBITDA [cart].

And we're not done yet.

Now, as we move on to Q&A, I will just make a final comment.

I'm hoping that this will be one of the last quarters you have to put up with what was about a 20- to 30-minute monologue, and we are looking to find an Un-carrier way in future quarters to do these earnings calls, so stay tuned.

Now, I think we are ready for the Q&A, operator, so please, first question.

Thank you.

(Operator Instructions)

We will take our first question from Simon Flannery of Morgan Stanley.

Thanks very much.

Good morning.

Nice to see the increase in the postpaid add guidance, but you've already done 2.2 million adds; even at the high end, it is only a 1.3 million second half.

And it seems like with your new Un-carrier initiatives, with the recent promotion, and with a new iPhone launch coming, that you've got an opportunity to have some nice acceleration into the back half of the year.

Are you just being conservative there or are there some other puts and takes we should be aware of?

Thanks.

Simon, I think it is a great question.

I think that we have consistently demonstrated that we are very balanced in the way that we provide future guidance.

I want to point out that we have increased our guidance consistently throughout the year as things have developed.

We certainly are balanced in that approach.

And I also want to point out: Since being a public company, TMUS has beat, met, or exceeded on every piece of guidance that we have given.

And Simon, I would say yours was more a statement than a question, and I do think that our guidance is, as we have always done, is conservative, and there are no gotchas that you should be searching for.

Great.

Thank you.

Thank you.

We will go next to Amir Rozwadowski of Barclays.

Thank you very much, and good morning, folks.

Good morning.

I wanted to talk a bit about the pricing trajectory.

It seems as though we've seen some of the year-over-year declines, in terms of your ARPU, ease over the last couple of quarters.

And according to your prepared remarks, we should continue to see that trend into the back half of the year.

What type of competitive environment are you anticipating with respect to achieving that type of goal?

And if some of your competitors decided to get a little bit more flexible with respect to their pricing, do you have the flexibility to adjust accordingly if needed?

Thanks a lot.

I will start, and then Mike and Braxton can chime in.

I think it is a good opportunity to answer a few things.

One is: Everyone's obsession with ARPU -- can rest assured.

I know the question is: Are we still on track for a second-half stabilization of ARPU and net increase, and the answer is yes.

Much more importantly, ABPU, or the average billing per user, is something that we think greater reflects, even in the short term, in the period we've gone through, what's happening with the revenue streams of our customers.

In Q2, the average billing per user was up 1.8% sequentially and 3% year over year.

And that shows, of course, what we pointed out is that as you move from the way we do business historically, as an industry, to separating devices and providing the financing, you need to add several items together to show what is happening with the billing environment.

So, ABPU is already increasing at a nice pace.

ARPU will stabilize in the second half, as we planned.

An interesting item to note is that most of our competitors are not only seeing the ARPU issues that go with moving to a financing environment that we did previously, but ABPU was down in the quarter.

So, I think our pricing -- our environment is very strong, and will continue to be.

From a competitive environment, not to be cocky or to point out, but we are the competitive environment.

I think what is very important is: Our actions on the Un-carrier -- our moves and our promotions are not based on reacting to anybody.

We have been going straight forward since we started this initiative, and doing things that we know we can profitably do, and that the customers will respond to.

The competitors are responding to our moves, which has been happening very aggressively on their part, for about two or three quarters.

So, I reiterate what I said last quarter: No one needs to sit back and wait -- what happens when the big guys attempt to beat up on the little guy.

They have been trying their best for two or three quarters, and this is about what you get.

I mean, if you're talking about some of our more closer competitors, like Sprint -- come on, I mean, with some of our recent promotions, they would have to change price by 100% to get into our range.

So, we are very comfortable with where we are.

We are doing it in an environment that, as you can see, profitability is growing, service revenues are growing.

And I will just point out that, by your own analyst reviews, consensus estimates by most analysts, even before these earnings, were about $7 billion in EBITDA for next year, and we have guided it $5.6 billion to $5.8 billion.

So, yes, we're comfortable the momentum will continue.

I would just reiterate that, John -- it's Mike -- just to say that the pattern you're describing is that for the last three or four quarters we have been making moves, others have been responding, and during that time, we have been driving significant value into this Business and positioning it for margin expansion.

So the pattern is already there.

The question supposes: Is that going to change?

And I think what everybody needs to realize is: Our competitors are in full-on response and compete mode, and yet we're outpacing the industry, not only on customer acquisitions, but this quarter, on sequential EBITDA growth.

And we think there is a strong opportunity for us to continue to monetize that going forward into next year.

I guess I would add, and by the way, I like the report that you did a couple of weeks ago that was also focusing on T-Mobile's management making all the right decisions and moves that it needs to make in any environment.

I thought it was very well done.

I think what is really happening is there is now a period where people are starting to wonder: Can the competitors actually just respond to this Un-carrier movement, or is it something with sustainable momentum?

And I think the biggest news of Q2's results is the qualitative aspects here have stopped the alarm bells of what -- when contract freedom and ETS payments were announced, which is not a program -- these are not huge discount programs.

They are very profitable moves that are built into our program that we can sustain very strongly.

I appreciate the question.

Thank you.

We will go next to John Hodulik of UBS.

Okay, thanks.

Good morning, guys.

A couple of things.

First, do you guys see the upcoming iPhone refresh as an opportunity to take share in terms of high-end subs?

And if so, why not keep the $100 promotion you announced earlier -- I think it was earlier this week -- keep it going through that launch period, given how profitable it is?

And then secondly, obviously there has been a lot of talk about the possibility of a sale of the Company.

Given all of the momentum you have and the visibility you have in terms of keeping that momentum going, why consider a sale now to potentially a company that doesn't have anywhere near the momentum, if you know what I'm saying?

That's it.

Thanks.

Your questions included most major items, as well as two or three announcements in there.

So, first of all, you're not going to get me to use the iPhone 6 word on this call.

And your attempt to say: Should we sustain our promotion pricing past the announce date to the iPhone launch date suggests that we know or you know when it is.

We're not going to deal with any of those.

Let me just say: There has been some great reports written as well in the past week that I think offer some great insight about what is happening as it relates to some of these.

Now, a couple of stats: 33% -- this was a Morgan Stanley report, sorry for quoting one to you, John, but the --

No problem.

33% of wireless customers are likely or somewhat likely to consider switching over the next six months.

That is number one.

Interestingly, of the four major carriers, T-Mobile has the lowest percentage of customers that are likely or somewhat likely to switch.

And then, of course, when you look at a potential iconic device that is coming to the market, T-Mobile, because of a lot of variables, has the lowest percentage of our base in the iPhone product, because of -- we have only recently launched it.

And what that does -- it makes us far less susceptible to this new device being a switching event of our customers, and a major upside possibility for us, because amongst other things, T-Mobile was seen as a likely destination for those switchers.

So if a switching event is coming, a major one, we've got a big pool of players that are moving -- I think we've got a huge opportunity.

On the promotional offer that we made -- listen, we can respond very quickly.

We can make offers, and coming in and out of the market.

We don't need to test our pricing for six months and think about it.

So what we have done is something very aggressive.

And by the way, it is not a pricing move; it is a data bucket move.

We already had a four for $100 offer.

We think it is going to be very competitive, and we can respond with additional or other offers as need be.

We think this one will be very successful.

To your last question, when -- your preface of your question was this deal that we keep talking about -- I just want to point out, you keep talking about it.

We have never talked about it.

I would only point out a few things, and we can have more questions on this as we go along.

T-Mobile is doing absolutely everything that is necessary, as part of my stated strategy, to both organically and inorganically prepare this Company to continue to grow and be highly successful.

Inorganic options for the acceleration of the T-Mobile brand are always an opportunity.

There are multiple of them that we will continue to consider.

But the things that we are doing right now in Q2, in Q3, and move on, are the things that this Company needs to do to be a viable long-term player.

And we've got multiple options to consider and will consider.

When we have something to report on those topics, we will let you know.

Great, thanks, guys.

We will go next to Jonathan Chaplin of New Street Research.

Thanks, I just wanted to actually follow up on John Hodulik's question.

Firstly, given the momentum that you guys have in the Business, and the fact that you think it is sustainable, shouldn't -- and given sort of the scale nature of this business, with this growth, shouldn't EBITDA next year be a lot higher than the $7 billion that consensus has in their models?

And if that is the case -- if you're generating this kind of incremental scale, organically -- I just want to hit on John's question again.

Why consider a deal now, when all of this -- when the primary driver of a deal would be to gain scale and you are gaining scale organically at the expense of somebody you might merge with?

Given the inhospitable regulatory environment, it just seems like a -- it seems like there is a lot of risk associated with a deal like that now.

And again, as I said, I don't think -- let's take two or three, and then I will be glad to come back around to this.

We have never commented on this or any other deals, and I'm not going to comment on specific ones.

We have always been clear; if you look at the long term of the wireless industry, it is a scale game, it is in the industry here, where the number one and two players are hugely more powerful from a standpoint of scale and capital, et cetera, than the rest of the industry.

We have been very successful, and we see a path forward to be highly successful as a stand-alone company, but we also know that we could significantly accelerate that growth, and create an even higher level of competition in the US wireless industry, by various forms of accelerating this platform.

Now, from a standpoint of what we will do, inorganically, and when, we haven't commented on that.

Obviously, we will always consider the benefits to shareholders, and the questions you raise will be part of the things that we will consider.

And I would point out that we have multiple versions of things that we can do inorganically with this Company, and multiple versions of timing as to when we do them.

Importantly, from the results that you see today, is that the Company is not in need of doing something to be successful in the short to medium term.

And I think that is slightly different.

There is -- in the industry, there is a dramatically different performance level of businesses going on between the four major wireless carriers, and I think that is important.

We're not going to give guidance on next year, but I think one of the things you are starting to do, and I will take a short, brief celebratory success that you're starting to question whether a $5.7 billion to $7 billion consensus view for EBITDA is sufficiently large, and I will take that as positive feedback.

But I think Braxton and I and the management team have been consistent, over the past five quarters or so, that the growth right now that we're playing through will pay itself back in dividends for earnings growth and free cash flow growth in the coming quarters and years, and we are more bullish on that than ever.

Thanks, John.

Thank you.

We will take our next question from Phil Cusick of JPMorgan.

Hi, guys.

Thanks.

I guess, let's focus on the gross add momentum.

Can you talk about the mix of gross adds needing a buyout?

And then, is there a shift at all in where your adds are coming from, as carriers have responded to your efforts?

Yes, I mean, I will let Mike talk about that, because a 30% annual increase in gross adds is certainly something to probe in on.

The momentum is terrific, Phil, and it really speaks to the difference in our approach versus our competitors' approach.

We continue to see, and we heard about it even yesterday, promotions that swap out, that change from our competitors.

And what you see from us, with this Un-carrier strategy, is a layering of value that is significant, that changes the industry, and that is permanent.

Un-carrier 1 is still in effect.

Un-carrier 2, Jump, still out there.

Un-carrier 3 -- it is good forever, the world's your network, and so on.

What we're doing is essentially adding value to customers' experience with us, and they're rewarding us in growth, as John said, with 30% year-over-year gross add growth this quarter.

You saw in our guidance that we were increasing it for the second straight quarter in a row, so obviously we have remained confident.

We provide numbers that we think are conservative.

But the strategy is showing that customers are really resonating with our brand.

And they're resonating with it because we're executing a very, very different strategy in the market than what we see from our competitors.

Again, an interesting item is: Based upon the results that everybody has reported, there is generally an assumption that the customers that are coming to T-Mobile are coming from the large base of bleeding that is taking place at Sprint.

And I think that is certainly an industry opportunity for all of us.

But I think reports have been written that I think make the most sense, which is: If you look at the prior wireless carrier of the postpaid customer base of T-Mobile customers, a significant amount of them, and most of them, are former AT&T customers.

Which means, based on the size, that the size of the opportunity continues to be huge, when you start to look at the network performance relationship and the degradation of performance of their network, the JDP customer service capability, the size of their base, the iPhone base, the likely switchers.

So, the opportunity base here is very large for us, and very well distributed.

Just to your specific question about contract freedom, we did disclose in our investor quarterly that, as we predicted on the last quarter, that the Q2 impact of contract freedom was significantly less than the Q1 impact.

So, less customers came in and took that deal, as we predicted.

We think that, as Braxton talked about in the last call, we think that is the long-term trend here, as obviously the people most interested in the offer will act the quickest.

However, you know, it could change.

It could slow, depending on the device.

The previous question was around a potential new device, from Apple for example.

We see, as John said, a big opportunity if that were to happen.

And that could reinvigorate interest in the contract freedom offer as well, for obvious reasons.

I would urge you all to continue writing that contract freedom is T-Mobile using significantly discounted price to allure customers at the sake of profitability loss, because things couldn't be further than the truth.

But another quarter or two of our competitors thinking that is what it is, and not figuring out what the mechanics are, would be beautiful.

Because I've seen the business case, and we can discuss these over time.

Not only is the business case something that looks at a very lucrative cost per gross add of these new customers at a very quick payback, but we have exceeded that business case in a great way, which makes this and all of the other variables through the Un-carrier move, tools that we can sustain and we would love to continue to do.

And we would love forever for people not to be able to figure out the mechanics of doing them themselves.

Thanks, John.

We will get on it.

(laughter)

Thank you.

We will take our next question from Ric Prentiss of Raymond James.

Yes, thanks.

I had a question back on guidance for a second.

Obviously, pretty successful in the net adds, raising the guidance.

You mentioned, John, in your comments that there is even further upside in tablets and even wearables.

I think I've seen you wearing them.

As you think about the guidance, how should we think about what tablets involved there?

Is it time even for a new acronym, Braxton?

Maybe ARPAD, average revenue per account plus device payment, to kind of capture how much you are getting from people's tablets and wearables in the future.

The thirst thing I would say is we're very excited about wearables coming with their own radios.

And we're seeing some of these on the horizon.

We're entering an era where people are going to want to experience 4GLTE connectivity from a variety of different devices.

We see an era where people may have a tiny purse for their -- a tiny phone for their clutch, a bigger tablet for their purse, a wristwatch phone for their run, a ruggedized phone for the beach, and all these things being connected to the macro network.

We're gearing our plans assuming that that world unfolds, including how we plan to charge for our services, et cetera.

So, we think there is a really exciting potential there.

We are not giving guidance on how it breaks down.

Obviously, that vision that I just talked about will only get started this year with a few devices out of the gate.

Tablets are the big phenomenon right now, outside of phones.

You saw our tablet momentum increased 5 times this quarter over last, so we really found our stride in tablets.

But you also saw that we continue to focus on the big profitable segment of this industry, which is smartphones.

And we led the industry once again in postpaid phone net adds, which is very important.

We continue to focus there and win, and we think in some cases our competitors are kind of hiding behind tablet adds, which, by many measures, are less valuable.

You can use our own Investor Quarterly to parse our tablet ARPU, which you very quickly get to, using the numbers we disclosed there, about $24 for tablets, which we're very proud of, but it is a lower number than what you get from smartphones.

And so, we will continue to stay focused on what drives real value to the Company, and what drives real value to customers, and keep them in balance.

But we're not going to be sort of giving you a breakdown in the numbers on what to expect between the different platforms.

But that said, I think what we're doing is leading the industry also in how to look through what is happening in the information and the customer decisions, and understand the reality of how we're growing.

I think, let's be clear to what Mike said, and I think it is slowing down now, but two or three quarters ago, as T-Mobile started to really dominate the phone add business, in a short term, competitors were virtually giving away tablets, calling them postpaid adds and masking their declines.

I don't think anybody is fooled by that anymore.

There is definitely a different revenue model associated with tablets.

And what we've started to show is, yes, we are going to play in the tablet space profitably, but not at the demise of our other businesses.

We are going to play in the wearables and accessories.

We are going to call them what they are, and there is a different -- and by the way, the revenue models may shift, and we'll adapt and play to that as well.

I think everybody sees what it is.

That's why we're getting ABPU and ARPU and postpaid phone net adds and tablets, and we will give as much information as possible.

But with our retail presence and our brand, and our association with our customers, you are also seeing, by the way, a significant growth in accessory sales and high-margin products in our stores as well.

And we will try to give as much information so you can understand what is happening with us, but also we will help you try to understand what isn't happening at our competitors -- just a service we provide.

Transparency is appreciated.

We are going to take one more question, and then we are going to have to go talk to some of the TV shows and reiterate what we told you here.

Thank you.

We will take our last question from Kevin Smithen of Macquarie.

Can you talk a little bit about your plans for the AWS3 auction and the incentive auction?

How will you fund both of these?

And a little bit about the reported $10-billion spectrum JV with Sprint -- what is behind that?

And given different potential inorganic scenarios, how will that play out, if there is no consolidation in the space?

We are going to need a guide here that is the same way -- what does postpaid mean, what does reported mean?

Because certainly, there hasn't been any reported kind of deals associated with how we are going to -- I think we have been very clear that spectrum is extremely important for us.

We plan to participate in the broadcast auctions.

We are looking very closely at our roles in AWS3.

We think we've got significant wherewithal to raise the money and use the capital that we have as a Company to be highly successful in both of those auctions, as well.

But I don't know if Neville or Braxton -- if either of you want to comment.

Let me provide a little bit more color.

I think with existing liquidity and access to the public debt capital markets that we're more than comfortable that we have the flexibility to participate in the upcoming auctions.

And our preference is certainly, as I said in prior calls, that any incremental capital would come through debt and not in equity to do this participation.

And the good news, let's reiterate one of the things that we talked about.

With what has happened over the past five quarters, the success of the Un-carriers, the momentum that we have, now playing into another variable, which is: There are some very good opportunities for us to gain continued scale and spectrum, and we have the capital to do it.

So, if you play the tape forward over the next year or two, you certainly see that, both with our performance, the capital availability, and the auctions that are coming, we have got a good runway in front of the Company to continue to grow and be highly successful.

So we look forward to them, and we plan to be successful in both auctions.

Great, thank you.

Okay, well, I think that is about as much time as we have.

I thank everybody for listening in.

And we will see you again next quarter.

Ladies and gentlemen, this concludes the T-Mobile US second-quarter 2014 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.