T-Mobile US Inc (TMUS) 2018 Q2 法說會逐字稿

Good afternoon.

Welcome to the T-Mobile US Second Quarter 2018 Earnings Call.

(Operator Instructions) 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.

Yes.

Thank you very much.

Welcome to our second quarter 2018 earnings call.

With me today are John Legere, our CEO; Mike Sievert, our President and COO; Braxton Carter, our CFO; and other members of the senior leadership team.

Let me read the disclaimer.

During this call, we will make forward-looking statements that include projections and statements about our future financial and operating results, our plans, the benefits we expect to receive from the proposed merger with Sprint and other statements that are not historical facts.

Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties outside of our control that could cause our actual results to differ materially, including the risk factors set forth in our annual report on Form 10-K and quarterly reports on Form 10-Q.

Reconciliations between GAAP and the non-GAAP results we discuss on this call can be found in the Quarterly Results section of the Investor Relations page of our website.

In addition, in connection with the proposed transaction on July 30, we filed with the SEC a registration statement on Form S-4 that contains important information about T-Mobile and Sprint, the merger and related matters.

The registration statement has not yet become effective.

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

Okay.

Good afternoon, everyone.

Welcome to T-Mobile's Second Quarter 2018 Earnings Call and Twitter conference coming to you live from Bellevue, Washington.

We have incredible results to cover.

Let me just give you the headlines, then we can jump in to the details.

We just posted our best Q2 ever and led the industry in postpaid phone growth for the 18th quarter in a row.

Service revenues and adjusted EBITDAR are hitting record highs, and we also posted record-low branded postpaid phone churn.

Our network was just recognized by Ookla and OpenSignal as leading the industry in 4G speeds, extending our -- our network was just recognized by Ookla and OpenSignal as leading the industry in 4G LTE speeds, extending our winning streak to 18 quarters in a row.

And even Verizon's favorite pay-to-play measurement service, RootMetrics, gave T-Mobile's network some love in their report last week with 454 metro area RootScore Awards, second only to Verizon and well ahead of AT&T.

Our retail and customer care teams are setting the standard for customer experience, and our increased guidance shows that we expect to maintain this level of performance in the second half of the year.

In a nutshell, T-Mobile continues to meet the needs of customers by delivering more value, and that is translating into incredible results.

So let's dive into our fantastic second quarter.

We added 1.6 million total net customers, extending our winning streak to 21 quarters in a row with more than 1 million.

That's more than half a decade if you're keeping score at home.

With 686,000 branded postpaid phone net additions, we captured about 2/3 of the industry's postpaid phone growth, grew nearly 2x faster than Verizon, AT&T, Sprint and Comcast combined and more than 3x faster than our next closest competitor, Comcast.

And we grew faster sequentially and year-over-year.

So who says we're slowing down?

Our share gains are also reflected in strong postpaid porting ratios.

The overall postpaid porting ratio was 1.86, up from 1.69 in Q1 and 1.38 in Q2 of last year.

In the second quarter, our postpaid porting ratio against both AT&T and Verizon was higher than 2:1.

Yes, I did say 2. This acceleration in growth has been driven in particular by our continued focus on underpenetrated segments such as new geographies, business, 55+ and most recently this April, military, one of the most underappreciated segments.

We also had strong branded postpaid net additions of 1 million supported by continued strong growth of wearables, particularly the Apple Watch.

Our customers are staying longer than ever before.

In Q2, we had our lowest-ever branded postpaid phone churn of 0.95%, down 15 basis points year-over-year.

This blew away even the most bullish analyst estimates and was our first quarter ever with churn below 1%.

And branded prepaid net customer additions came in at 91,000, flat year-over-year despite increased competitive activity in the market.

Our financial results were just as solid as our customer results.

Service revenues grew by 7% year-over-year to $7.9 billion, which was another record high.

Net income was strong at $0.8 billion, up 35% year-over-year.

And fully diluted EPS came in at $0.92.

Adjusted EBITDA amounted to a record high $3.2 billion, up 7% year-over-year, with a 41% adjusted EBITDA margin.

Now turning to network.

We continue to expand coverage and to improve our already industry-leading network performance.

We now cover 323 million POPs with 4G LTE, well on our way to 325 million by year-end.

And we continue to aggressively roll out low-band spectrum with our 700 megahertz deployment virtually complete and our 600 megahertz deployment continuing at a furious pace.

We now have low-band spectrum deployed to 289 million POPs.

And 600 megahertz is live in 992 cities and towns and 33 states as of today.

And the 600 megahertz gear we are deploying will be upgradable to 5G with a software update.

In March, we launched our first 600 megahertz-capable flagship smartphone, the Samsung Galaxy S9, which was followed by the LG G7 ThinQ in June.

Including these phones, we now have a dozen smartphones in market that are 600 megahertz capable.

Our plan continues to be to bring 5G to 30 cities in 2018 starting with New York, L.A., Dallas, Las Vegas, with nationwide coverage coming in 2020.

This network will utilize 600 megahertz and will harness 4G and 5G bandwidth simultaneously for dual connectivity, and will be ready for the first 5G smartphones in 2019.

As I mentioned earlier, Ookla released their mobile speed test report, and millions of real-world tests confirm what we already know: T-Mobile's download and upload speeds continue to lead the industry.

In Q2, our average download 4G LTE speed was 31.8 megabits per second, well ahead of all our competitors.

Like I mentioned, Q2 marks the 18th quarter in a row that T-Mobile was the fastest 4G LTE network.

OpenSignal also just published their state of mobile networks report, which analyzed billions of data points from actual users.

T-Mobile once again cleaned up, winning 5 of 7 categories outright and tied for first place with Verizon for 4G availability.

Can you hear me now?

Our frontline is setting the standard for customer experience.

Digitally accelerated retail is making it easier for -- to join T-Mobile by simplifying the switching experience, and team of experts in care is making it easy to serve our customers in driving record-low calls per account.

Our strong momentum and record Q2 means that we're increasing our guidance for 2018 again.

Our outlook now calls for 3 million to 3.6 million branded postpaid net customer additions and adjusted EBITDA of $11.7 billion to $12.4 billion.

Our 3-year CAGR estimate for free cash flow remains at 46% to 48% with cash CapEx now expected to be at the high end of the guidance range of $4.9 billion to $5.3 billion.

Let me also give you a brief update on the progress of our pending merger with Sprint.

While we still have a number of steps remaining in the regulatory approval process, we are optimistic and confident that regulators will recognize the significant pro-competitive benefits of this combination and grant regulatory approval.

I think we made it clear that this merger is proconsumer and all about supercharging the Un-carrier and about bringing broad and deep nationwide 5G to Americans as fast as possible.

On top of that, the new T-Mobile will increase competition and create American jobs.

A few milestones to note.

Our public interest statement was filed with the FCC on June 18.

On June 27, Marcelo Claure and I had the opportunity to testify in front of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights.

The FCC put out its public notice on July 18, starting their nonbinding 180-day transaction clock.

Our preliminary S-4 was filed with the SEC on Monday, July 30.

So we're making great progress and look forward to continuing to tell the story about how this merger will be good for consumers and good for the country.

Okay.

Before handing over, let me mention one more thing.

Isn't it about time we shake things up in this industry again?

Let me just say that our next industry-shaking Un-carrier move is just 2 weeks away.

I'll leave it at that and let speculation begin.

I can't wait to talk to you all on August 15.

Okay.

Our CFO, Braxton Carter, will take us through the financial results and the details of our guidance.

Braxton, let's take a closer look.

Thanks, John.

And I'm so excited to report on another fantastic quarter here at T-Mobile.

Net income amounted to $782 million, up 35% year-over-year.

This was due to higher operating income, lower interest expense and lower tax expense due to the continued positive impact of tax reform.

Net income included a benefit of $62 million from the new revenue recognition standard and also benefited from $45 million in after-tax insurance reimbursements for the hurricane impacts.

On the other hand, net income was impacted by $39 million in after-tax costs associated with the Sprint merger.

On a sequential basis, net income was also impacted by higher depreciation, which increased 3.7% from Q1 due to lease depreciation and the impact of the further expansion and build-out of our network.

We expect this trend of higher depreciation to continue into the second half of the year and impact net income accordingly.

Adjusted EBITDA amounted to $3.2 billion, up 7.3% and included lease revenues of $177 million versus $234 million in the prior year.

Note that adjusted EBITDA included a positive impact from last year's hurricanes of $70 million due to insurance reimbursements and $84 million from the new revenue recognition standard.

The adjusted EBITDA performance is a reflection of strong cost management.

Cost of services as a percentage of service revenues increased by just 30 basis points sequentially despite the rapid rollout of 600 megahertz, and that excludes the net positive impact from hurricanes in Q1 and Q2.

Also, the new revenue recognition standard added $26 million to the cost of services in Q2.

SG&A as a percentage of service revenue decreased by 90 basis points sequentially despite the acceleration in growth.

This was adjusted for the $41 million in costs associated with the Sprint merger, which are also excluded from adjusted EBITDA.

Equipment losses decreased by $45 million or 9.1% sequentially in connection with a still light postpaid upgrade rate of 6% and a sequential decrease in the number of devices sold.

Free cash flow increased by 61% to $774 million.

This was driven by a 14% increase in net cash provided by operating activities and a 50% increase in proceeds related to our deferred purchase price from securitization transactions.

Please note that the net cash proceeds from securitization amounted to just $25 million in Q2 and a drag of $125 million in the first half of 2018.

The increase in free cash flow occurred despite a significant increase in cash CapEx, which grew by 21% year-over-year to $1.6 billion.

As last year, CapEx is front-end loaded in connection with our accelerated 600 megahertz rollout.

Branded postpaid phone ARPU proved fairly resilient in the second quarter at $46.52, down 0.3% sequentially and 1.2% year-over-year, reflecting the impact of promotions targeting new segments offset by the positive impact of continued adoption of our T-Mobile run rate plans.

For the year as a whole, we continue to expect ARPU to be generally stable, excluding the impact from the new revenue recognition standard.

In terms of customer quality, our results in the second quarter were outstanding.

Total bad debt expense and losses from sale of receivables were $102 million or a record low of 0.96% of total revenues compared to $162 million or 1.59% in the second quarter of '17 even with a significantly higher customer base.

Do note that Q2 is usually a season low for bad debt expense for our industry so we do not expect a seasonal -- or sequential pickup in the second half of the year.

Now let's get on to 2018 guidance.

We expect branded postpaid net customer additions to be between 3 million and 3.6 million, up from the prior guidance range of 2.6 million to 3.3 million.

This guidance takes into account our long-term strategy to balance growth and profitability, the lower switcher volumes we've seen in recent quarters and our pursuit of growth adjacencies.

Our guidance also takes into account the expected typical seasonal sequential uptick in postpaid churn, which will occur in the second half of the year.

We expect adjusted EBITDA to be in the range of $11.5 billion to $11.9 billion, not including the impact of the new revenue recognition standard, up from the prior guidance range of $11.4 billion to $11.8 billion.

The new revenue recognition standard will increase adjusted EBITDA by another $0.2 billion to $0.5 billion for an all-in new guidance range of $11.7 billion to $12.4 billion.

This guidance takes into account an expected decline in leasing revenues in 2018.

We still target it at $600 million to $700 million, but that's compared to $877 million in '17 as well as our build-out of low-band spectrum, including the accelerated rollout of 600 megahertz spectrum, driving up expected cost of services by $300 million to $400 million per year, which we communicated at the beginning of the year.

Our increased outlook for 2018 demonstrates that we're following the same approach with regard to our guidance in prior years.

Note that we now have increased ranges for both branded postpaid net additions and for adjusted EBITDA twice this year.

We target cash CapEx of $4.9 billion to $5.3 billion excluding capitalized interest.

This includes expenditures for 5G deployment.

Updated from prior guidance, we now expect to come in at the high end of the guidance range given the massive success that Neville and his team are having clearing 600 megahertz spectrum.

Finally, we expect free cash flow to increase at a 3-year CAGR of 46% to 48% from full year 2016 to full year 2019, unchanged from the prior range.

During the same period, we expect the net -- underlying net cash provided by operating activities to increase at an unchanged CAGR of 7% to 12%.

Let me emphasize that our free cash flow guidance does not assume any material net cash inflows from securitizations going forward.

Before we get to your questions, let me briefly address the preliminary S-4 for the merger with Sprint.

The S-4 contains disclosures regarding the transaction, including certain stand-alone and pro forma combined financial projections, which have been prepared on the basis and subject to the qualifications described in the S-4.

The prospective financial information in the S-4 reflects what we believe is a conservative case, does not include the impacts of the revenue recognition standard and is not necessarily our current view on the outlook for the upcoming years.

We encourage you to read the disclosure in the S-4 for additional information.

The S-4 has not yet become effective, and the purpose of today's call is to discuss our second quarter.

So I'd ask that you focus your questions on our earnings.

Now let's get to your questions.

You can ask questions via phone, text message or via Twitter or Facebook.

We'll start with a question on the phone.

Operator, first question, please.

(Operator Instructions) And our first question comes from Mike Rollins with Citi.

So a couple questions if I could.

First, on the gross add side, can you talk about what you're seeing?

You mentioned some of the vertical strength, but can you talk a little bit more about maybe some of the benefits that the vertical promotions gave you in the quarter like the 55+, the military promotions?

And then what you're seeing from customers who have been bundling in the Netflix promotion.

Are you seeing any significant differences in the cohort for churn or engagement rates?

Mike, I think that's the best first question of all time.

It's a day of best.

Mike, why don't you go ahead and take that?

Yes.

Unfortunately, Michael, we can give you a little bit of color but probably can't unpack it very quantitatively for you.

The color is probably as you would suspect.

This Unlimited 55+ and also the military offer we launched a few months ago that we're very proud of, they're just going great.

They're going gangbusters, and it's really showing new audiences where we've been underindexed, audiences that have been underappreciated in this market, that somebody is looking out for them, and our business is responding.

So they've been nice contributors.

Another thing that's been a nice contributor has been the business markets.

We saw our highest activations ever in the business markets this last quarter.

More public sector successes, across-the-board enterprise successes and in larger enterprises where churn is more favorable.

So the lowest churn in our business markets ever this last quarter as well.

And to your question about Netflix, yes, we can't unpack it for you too much except to say, yes, it does turn out that those that are taking advantage of it do have lower churn, and that was one of the things that was important for our business case, and it's panning out to be the case.

Mike, I think one of the things I'm glad you recognized, we're a very forward-looking team, not just on the investments in our network, but the focus on the segments that we know provide growth, including, of course, geographic expansion around the network.

And that has gotten us to the point where quarter after quarter, we're now getting the growth that we thought about 3 to 4 or more quarters ago.

I would also say that one of the most exciting parts is on a day-to-day basis going forward, our network has never been better, and it's going to be better every day.

And secondly, we have started to perform in the customer care environment in a way that I don't think American business itself has ever seen.

And those 2 aspects of a care experience and a network experience that's never been matched up to now, I feel very bullish about what we're going to be able to do going forward.

And if I could just follow up on your comments on the regulatory side.

Are there some incremental learnings that the management team had, had over the last few months in your conversations and engagement with regulators that you'd want to share with the audience today?

Yes.

I think -- I wouldn't say new learnings.

We've been very, very pleased from day 1 with the story that we're providing as to why the coming together with Sprint is procompetition, proconsumer, pro-America, very critical from many aspects, especially the deployment of 5G capability.

And the whole story together has been something that we've been telling and working on, and we're very confident that with that story and the details of why these 2 companies coming together makes tremendous sense for competition, for the country, the learning is that it's a story that we need to keep telling, and it's a story that with the aspects associated with the people we're competing against, has been very well received.

But as you know, this is a process where all I can say is we're in a process, we're in multiple processes that we greatly respect, and we have committed to playing continuous and not necessarily in the public eye.

But as it's going, I would say we feel very good that if we continue to tell this story to the associated regulatory groups that they will see why this is a deal that should be approved.

Operator, we're going to take another question on the phone, but I asked my peers here to go through the various questions that are coming in on TMUS and the various IR sites.

And if you pick 1, I'll pause in 1 or 2 questions from the operator, and we'll go to those as well.

Our next question comes from Brett Feldman with Goldman Sachs.

Obviously, another quarter of strong service revenue growth.

Some of your peers started to show some better service revenue growth, but in their case, it was ARPU driven where you guys are still doing it by winning customers.

It does look like the pricing ceiling's moving up a bit in the industry, and so I was hoping you could share your thoughts on sort of the trade-offs between figuring out ways to get people to maybe pay a bit more for the service to get more value versus keeping your pricing well below peers to make sure that you can drive higher customer growth.

All right.

Let's just make sure we go into that question from a standpoint of remembering that 7% service revenue growth, 7% EBITDA and the increase that we're driving in cash from operations and free cash flow in this business is something that's a part of going in.

I certainly haven't seen any of our peers driving that kind of growth in top line revenue.

And I think mostly, our peers, our competitors are attempting to break the 0 line.

So I'm very pleased with the differentiation of what we're doing and how we're driving it all the way to cash.

But maybe, Mike and Braxton, you can talk both about ARPU and pricing, et cetera.

A lot of what we're seeing on these ARPU developments has to do with customers choosing to deepen their relationships with us.

It's not just about the prices we offer.

It's about customers seeing the value of what we offer and deciding to buy up our stack.

And that's important.

We were able to beat consensus on ARPU this quarter.

We were generally stable from a year ago, 1.2% or so.

But what's happening is that people are taking advantage of, for example, our taxes and fees included, which is a terrific value and something that's contributing, for example, to our all-time record churn.

And so these things have business cases that unfold.

But that's offset by customers deciding to move up from our legacy Simple Choice offers into our fully unlimited T-Mobile ONE, customers buying more features from us like T-Mobile ONE Plus, which is a great add-on package, and other things.

So they're choosing proactively to deepen their relationships with us, and partly, that's because the experience they're having on our network.

We're attracting more prime consumers, more suburban families, people with more serious wireless needs.

And because the customers have more serious needs, they're buying up our stack.

Yes, and Brett, let me just add a couple things.

When you really deep dive some of these ARPU changes and trajectory with the competitors, you've got to remember that they're doing it by screwing the customer.

Administrative fees are a huge part of what's happening there, and you're taking that out of the pockets of existing customers.

You know our strategy has been that when we model all permutations of how we could manage the business, and we're very balanced in the way that we do it, we can create a lot more terminal value by unlocking the scale benefits of the network that's in place.

And we're doing that with a generally stable ARPU, which has been down just slightly over the last 2 years.

And that's a situation that we're going to do on a stand-alone basis, and it gets really exciting the competition that we can bring with all the network capacity with the new T-Mobile that will be formed in the future.

And that's our philosophy.

That's the way we run the business, and we're here to create shareholder value.

The experience we've had not just this quarter, but if you go back since we started the Un-carrier moves, you go back to 2013, our customers have enjoyed a 12-fold increase in the data that they can use with about an 11% decline in price but also a significant expansion in our EBITDA and EBITDA margin.

That's the history.

Our history with MetroPCS is even greater.

Since we merged and acquired MetroPCS, we have twice as many customers, 3x as many employees.

We cover 5x as many markets, and MetroPCS customers have gotten greater than tenfold the amount of data.

And they've enjoyed in their various plans between 17% and 25% lower-priced plans.

And by the way, they use more data than the rest of our customer base.

So when you click ahead to what we're talking about in coming together with Sprint and the significant expansion in available capacity that we're going to have, that's where you can clearly see competition will definitely go up.

Service offerings will expand, and prices, customers will be the beneficiary of lower prices while we'll be able to drive the profitability because of the significant decrease in cost structure.

So that's our game plan in the past.

We've proved it.

It's our game plan going forward as well as into the new T-Mobile.

If I see one on the -- coming in, you want to grab?

Our next question comes from Simon Flannery with Morgan Stanley.

Great.

I was wondering, John, if you could update us on Layer3 TV, and I think, Braxton, you talked about the adjacencies.

But what do you see in the ability to take the Un-carrier model beyond your current offerings?

Yes, Mike, why don't you start with what you want to update on Layer3 TV and maybe we can segue into not just through Layer3 but in the new T-Mobile, what we're thinking about and why it's critical for the industry and for the country.

Well, as we said when we announced the acquisition of Layer3, this is a market that if there ever was one that needs to be Un-carrier-ed, and we see a lot of opportunity.

We're doing a few things.

Number one, we have our heads down kind of quietly expanding what we have and -- as a test bed while simultaneously developing the product that we intend to bring to market.

And you're going to see a lot of firsts in that product because customers have a lot of needs.

They're sick and tired of these outdated systems that the legacy cable companies have been bringing them with their outdated program guides and the technology island that your TV represents as opposed to your highly connected social media-fueled life that you live in your mobile phones.

So we're really excited about what we can do there.

We continue to plan it for this year during 2018 as our initial launch, and our team's doing a fantastic job.

What's really interesting -- and we went into Layer3 with the idea in the back of our heads of the new T-Mobile.

What's really interesting is what component it could become when the 5G network of the new company starts to unfold because this 5G network is a network where we intend to plunge into broadband, not just mobile connections like today, but into in-home broadband because this network has the depth and breadth of 5G that's simply unprecedented in the market.

We see the opportunity to offer broadband during -- in huge swaths of the market, which will bring competition benefits to customers, even those who don't choose us.

But we think about 10 million will choose us over the first few years because we'll be offering a better-priced broadband offering and by the way, an offering to parts of the market that have literally no competition today.

Like half of Americans today have 1 or 0 high-speed broadband offers.

That's crazy.

It's the definition of uncompetitive.

Once we do that, now all of a sudden, the TV is even more interesting because you're offering the broadband, and you can offer the TV on top of it.

So that's a big piece of the future of the new T-Mobile.

Yes, I think one of the exciting -- there was a question previously about any learnings since we announced the transaction.

Amongst the things that I'm watching happening in the industry in various announcements is when you see what's happening in the cable industry, for example, and what broadband access is driving for their value, and you realize the speeds that they're giving, what people haven't really connected to until recently is that with the new T-Mobile, by 2021, 2/3 of the country will have greater than 100-megabit speed.

So when you think about it in the context of broadband, by 2024, it will be 90%.

And very importantly, in the underserved rural America segment, when you get out to 2024, we'll have 74% of them covered with greater than 10 megs but with home CP and in-broadband distribution opportunity that we see, you'll have 84% that can get greater than 25 megabits.

Now that's a big learning because I don't think people have really thought through what's going to come with the network capabilities that the wireless players like us will bring and what its impact is going to be on, amongst other things, in-home broadband.

Well, we expect to serve close to 10 million customers out by 2024, and 20% to 25% of them will be in rural America.

And these are the things that I don't think people have double clicked on yet with what happens when network speeds get to be 150, 450 megabits and certainly greater in hard areas.

And you can support several hundred gigs per customer in that environment?

That's right.

Mike Dano are bringing up the topic of millimeter wave and the FCC auction.

Maybe that's an opportunity for Neville just to comment on that.

Neville?

Yes, so Bill's question, thanks, Dave, was -- where is it?

View on millimeter wave or mid-band, not 2.5 gig, is foundational future complement to skinny 600 megahertz.

I think Mike Dano from Fierce had a question here too, which is along the same lines.

Will you participate in the upcoming FCC millimeter wave spectrum auction?

So real quick, I think we can claim, and I don't think it would be disputed, that we've been the most vocal company probably globally around the need for spectrum in all bands for 5G, be that low, mid or high.

And so we've had a lot of passion about that in the regulatory environments with across the technical community and standardization.

And today, obviously, everybody talks about 5G being used across mid, low and high band.

So that's a different discussion than the one that was happening 12 to 18 months ago.

So that's a good thing.

We're very encouraged by the actions of the FCC on millimeter wave, their efforts and work on mid-band spectrum, be that CBRS or the C-band.

There's timing challenges on -- especially on C-band.

That's going to take maybe several years to realize, but millimeter wave auctions are planned for this year and into '19.

And yes, for sure, we have material interest in participating in those auctions.

It's something that's of keen interest to us at T-Mobile.

We obviously have to work through the process in light of our transaction with -- pending transaction with Sprint with the FCC, and we're currently doing that.

And we look forward to participating in the auctions later this year.

I think from a mid-band perspective, CBRS probably '19, and then when we look at C-band and some of the other opportunities, it's going to be into the next decade.

But yes, 5G across all bands, a key priority for us and will continue to be so.

Neville, I think the topic that you're covering is great.

So going to the end, yes, we are interested.

We've made that very clear from the beginning.

We have some processes that we have to work through with the FCC that we're clearly driving ahead, and we have nothing to report, but our interest is high.

I would also say never confuse our attacks on the millimeter wave strategy of our competitors with us not believing that there's a place for millimeter wave spectrum in the 5G portfolio of what you need to create.

It's just not a stand-alone way to drive what this nation needs for coverage in 5G.

And very importantly, what we've said is with the breadth and the depth that you can get with the new T-Mobile's network of T-Mobile's low band and Sprint's 2.5, we can deliver something that is truly one of a kind in the world from a standpoint of 5G.

And the millimeter wave component is something we're very interested in, and we'll put it in the portfolio.

We have some spectrum already that we'll be deploying, but this nationwide, deep, broad network is what this country needs, and that's kind of not something you get purely by hotspots in 3 or 4 geographic locations.

But good question.

And, by the way, along with millimeter wave, Neville has never met any spectrum yet on this planet that he wasn't interested in.

So okay.

We'll take our next question from Jonathan Chaplin with New Street Research.

First one for Braxton.

You've taken the EBITDA guidance up twice.

CapEx guidance hasn't changed, and free cash flow guidance for 2019 is unchanged.

What are you anticipating in 2019 in terms of sort of is it a step-up in CapEx, working capital drag or something else that would suggest free cash flow shouldn't be higher than where you've guided?

So I just want to point out that you're going to be explaining why you have a meager 46% to 48% CAGR on 3-year free cash flow, which is something we should stop for a moment and just celebrate before you lean into it.

Yes.

Jonathan, great question, but we did actually change our guidance relating to the cash CapEx.

And what we signaled earlier is that we're going to be at the very high end of the guidance range on cash CapEx.

And that's really a function of the tremendous success, and you've probably seen some of the press releases that Neville and his team have had clearing broadcaster spectrum.

And even with that change, being at the high end, there is no changes in the free cash flow guidance.

You kind of know the way that we handle our guidance.

We don't miss.

We've never missed in 5 years, and we outperform what we say we're going to do.

When we look forward to '19, what we've talked about publicly is we've got tremendous momentum.

You know how we run our business.

There'll be a substantial step-up in EBITDA.

We'll provide guidance for '19 in connection with the year-end call.

Cash CapEx, when you look at the trend over the last couple of years, have been inching up a couple of hundred million a year, which is really a reflection of a success-based investment model.

And we're highly confident that we're going to meet or overachieve the numbers that we got here, and that's what gets me really excited as CFO because we all know the path's true value creation is ultimately the generation of significantly ramping cash flows.

And the thesis is very, very much in place for T-Mobile.

Great.

Can I follow-up with a quick one for John and maybe for Mike?

We've seen a huge surge in industry net adds in what I would think of as a pretty saturated market.

Any thoughts as to what could be driving it?

A couple of things.

One thing, Jonathan, is you're seeing some softening in the prepaid subsector.

And that's not necessarily all in 1 quarter.

It's a trend over the past 6 months.

It was strong in some cases, this quarter driven by prepaid other, other than phone devices.

But there's been a [transferential] trend over the past year or so, and that's partly due to the economy.

So what's happening is more people are qualifying for postpaid than they were a year or 2 ago.

And when you can qualify for postpaid, a lot of people take it because they want these device-financing deals that they're now qualifying for.

So I think that's been a healthy trend for the industry, and it's at least in part driven by the economy.

Before we have the next question, I would note that in the past 10 minutes, Walt Piecyk has submitted approximately 25 questions.

18 or 20 of them are highly inappropriate and will not be discussed.

But just to tell you a couple of things, Walt, yes, we do know what the next Un-carrier move is, and we're not just crowdsourcing it over the next 2 weeks.

However, if you have any ideas, and we see them, it doesn't mean we can't do more than one.

There's also a question I assume was tongue-in-cheek, which is will you coordinate bids with Sprint in the 5G millimeter wave auction, which is we're going for the right to be able to participate in the auction, but it's unsaid -- it doesn't need to be said that it would be inappropriate and not something we would be able to ever think of doing to coordinate bids.

So I'm sure you were just poking fun there, but hope those -- those are 2 of your 25 questions, but feel free to keep typing them in.

They're somewhat humorous, if not to me, the others that are watching.

We'll take our next question from Phil Cusick with JPMorgan.

Maybe for Mike.

Can you talk about the performance in the new geographies you've launched in the last few years?

I know they've come in sort of cohorts, but where are we in terms of markets that are launched in with flat distribution?

And where does that go in the next couple of years?

Yes.

So a couple of things.

One is we've seen the overall retail footprint grow just in line with the predictions we gave you a couple of years ago.

We had said when we were addressing about 230 million Americans, we'd see it hit about 260 million Americans addressed by our retail fleet, and that's what we've accomplished.

That and a little more.

And back to John's point, a big piece of what I think you count on this management team to do is to look ahead a couple of years and see the potential headwinds and take actions to make sure that they become positive tailwinds.

And our retail expansion and geographic expansion's been a great example of that.

What we're seeing is what we predicted for you we would see, which is there's been particularly in greenfield markets a pent-up demand for T-Mobile.

We've got markets where we have entered and gone immediately into SOPI leadership, share of port-in leadership.

That's a great sign for us.

So our retail fleet's been highly productive.

As a result, we're going to concentrate any additional expansion into greenfield areas, smaller towns, rural areas.

We're also expanding our fleet of retail-like trucks because that's a great way to address some smaller towns.

So we've been emboldened by the results.

I'll tell you that on the flip side of it, in some of the urban areas, we've also found that we've got the right penetration now, that we don't need more retail penetration in urban markets, and that's an important learning for us as well.

But generally speaking, what we predicted for you when we launched this retail expansion and last year in '17 became America's fastest-growing retailer is paying out just like we predicted for you that it would.

Can you talk about penetration in those markets versus your sort of top 200 million POPs penetration?

Not really.

Some of these markets, by the way, are very small.

But in some cases, where we're brand new, never existed before in just 2 or 3 quarters, we're seeing mid-single-digit penetrations.

That's nice to see.

But again, it's -- the results -- your results may vary because all these markets are quite different.

But Phil, I think you're onto a really important piece of the confidence that we have that there is tremendous future growth opportunity with this geographical expansion across the U.S. and even when we combine with Sprint, we just take that up on steroids.

And the other growth adjacency that Mike was talking about earlier that gives us extreme confidence for multiple years of high growth is what we're seeing in the business channel.

We're still tremendously underindexed but have incredible momentum going in that channel, and Mike threw out some of those stats earlier.

We're just really excited about these 2 areas.

Maybe if I can follow up, the increase in postpaid add guidance was pretty nice to see, but it implies a pretty big slowdown in the back half.

Is there anything happening in either tablets or watches that we should look for a headwind?

Or is this just typical conservatism?

Yes -- no.

You know how we do the guidance.

I think Bill Ho actually asked a question earlier.

Is this the fourth or fifth year where you've increased your growth guidance every quarter?

I think it's the fifth year.

We take it up as we execute throughout the year, and we see nothing that's really going to stop the trend.

So no change really in the way that we're providing guidance to the marketplace, and we're really optimistic for the back half of the year.

It may be a little conservative, but one of the reasons we do this is because the back half of the year contains, in some senses, a higher degree of uncertainty every year, and that's because some of the big phone launches happen during that time, and it's hard to predict competitive moves.

I will say the last couple of years, we've seen -- we haven't been really surprised by what we've seen from our competitors in those big phone launches.

So we'll have to see how the year plays out, but we're feeling very confident.

But I think it's important, as we said in the commentary, coming off a record Q2, our guidance change is intended to show that we feel very good about the rest of the year.

And Phil, I think you asked about tablets.

We never really play the tablet game to generate growth.

We've consistently done 200,000, 300,000, give or take.

We never really pushed that button to juice it up, and I think that strategy played out well when you look at what's really happened in the tablet space being connected with all the other carriers who did actually play that game pretty heavily.

Okay.

Phil, you're on the verge of asking as many questions as Walt, so we're going to go to the next question.

We'll take our next question from Craig Moffett with MoffettNathanson.

A question for Neville, I guess.

In the public interest statement, Sprint obviously revealed a lot of struggles putting its 2.5 gigahertz spectrum to work.

I'm wondering what's different about what you can do other than just having more financial resources to put to work to densify that network?

Are there things that, as you look back, Sprint could have done differently that you think make the 2.5 spectrum seem so important to the combined entity strategy or if you could just talk about that a bit.

Yes, happy to.

Thanks for the question on it, Craig.

If you think back to T-Mobile's history and even more recently with the combination with MetroPCS, we build the most dense network in the United States, hands down.

I think others have talked about densifying away from their initial low-band footprints.

AT&T and Verizon continue that struggle and battle.

Sprint has done less densification, some.

But when you look at network status today and you look at who has the most dense network in the U.S., macro, small cell, it's T-Mobile.

And so what we can do with this transaction is take that to the next level, and we would obviously combine key sites and add to the T-Mobile network with Sprint sites in key areas for coverage and primarily capacity.

But put down a network that will be incredibly difficult for others to match, and it's going to be very, very well suited to 2.5 gigahertz.

So this is round peg, square holes story.

I mean, even today, our network is more suited for 2.5 gig deployment than anybody else is because of its metro density.

And so when you think about a combined T-Mobile and Sprint, the incremental density capability, and you put a 2.5 layer on that, it's going to perform incredibly well, along the lines of John and Mike's statements about what we can offer, the capacity that we can generate.

It's pretty mind blowing and very exciting when you think about the capability when you finally put the right spectrum assets together with the right network architecture that T-Mobile has.

And if I could just -- sorry, just to follow on for a second.

Can you just talk about the indoor propagation issues?

Is that densification that you're talking about sufficient to solve the indoor propagation problems that Sprint has had with the spectrum?

Yes, it certainly helps, Craig, right.

And even today, I mean, if you deploy 2.5 on our dense network in key urban areas, then you'd see pretty strong performance.

But it's important again, we've mentioned this earlier on the call, you need low band, and you need low band to get deep into those building calls.

You need a good, strong mid-band layer, and mid-band in 5G includes 2.5 gigahertz, the spectrum band that Sprint has the most of.

And so yes, I mean, the whole plan here, and if you think about statements Mike made about broadband and what we can do, the intent here is to lay down a layer of wireless capability for not just macro and on street but also to penetrate the home.

And the 2.5 gigahertz spectrum with the right network architecture and layout can absolutely help us achieve that.

I just wanted to say that the teams' over-under on the timing of your answer was 12 to 15 minutes, and you exceeded that.

Mike, there's a good one from Kyle Romanoff.

With respect to continuing to lower churn numbers, does T-Mobile have new initiatives that could add on to this?

Or is the plan to continue customer -- current customer loyalty techniques?

Yes, we haven't talked much about churn.

Kyle, thanks for the question.

I'll tell you what.

Our team should just feel so proud today that we bust through this 1.0 barrier for the first time ever and delivered 0.95% churn.

And it really shows that 2 things are working incredibly well for this business.

Number one, Americans are finally realizing that our network has caught up and beaten Verizon's and AT&T's.

There may be some coverage differences around the margins in a couple of square miles in the rural areas, but where we all live and work, our network is the best, bar none.

And Americans are finally figuring that out, mostly through word-of-mouth, which gets to the second piece, which is that our brand is firing on all cylinders.

We're experiencing the highest Net Promoter Scores right now in the history of this industry.

And that means that people are telling other people about T-Mobile, and those 2 things are working together to bring more customers to us and drive our churn down.

And to your question, Kyle, yes, that's something we think's sustainable, and it will only be taken to the next level when we come together and create the new T-Mobile.

But that element of an ever-improving network and an ever-improving brand is core to who we are.

The next questions come from Amy Yong with Macquarie.

Just following up on your comments on broadband.

Maybe if you can elaborate a little bit more on your fixed wireless strategy, timing, market size.

Verizon's obviously talking about a 30 million market opportunity but being very selective on which cities they're going after.

Can you talk about how yours might compare with Verizon's?

And then I know you addressed cable competition in your comments, but maybe some early thoughts on Charter and Comcast's price point and strategy thus far.

Okay.

Do you want to start?

Yes, a couple of things, Amy.

I think our competition is talking about it as a way of justifying getting going with millimeter wave because they're kind of quickly realizing that millimeter wave, as John was saying, as a stand-alone 5G mobility strategy really isn't a strategy.

And so they're pivoting now their story to fixed wireless in the homes.

So that's what they're doing.

What we're doing is building a broad and deep 5G network that's a combination of spectrum low, mid- and high, and that allows us to address big sections of the country with the new T-Mobile and bring broadband.

And as John said, we will be in a place in just 3 years into this where 66% of the country, 2/3 of the country have 100 megabit per second service or better.

And that's going to allow us to support about 10 million customers that use home broadband-type capacities like a 0.5-terabyte a month types of capacities, and so we're going after this market.

We're not going to get into right now what markets or where.

But we're going to bring a level of competition to this market that's very serious and that the industry's not seen, and it's a market that needs competition very badly.

I'd just add in real quick, I mean, the Verizon number, around 30 million, is always fascinating to me.

30 million homes passed on the millimeter wave product.

That's one mighty task, but go at it, guys.

Okay.

I think we have time for one more question, which I hesitate to go to the phone on because I'm looking ahead.

But operator, let's take the next question.

We'll take our next question from Walt Piecyk with BTIG.

John, I actually wasn't joking about those coordination.

I think actually if you disclose it to the FCC ahead of time, you're allowed to do it.

But presumably, that's not the plan for any of these upcoming auctions, right?

It's not the plan.

Got it.

Can you give us a sense -- I mean, upgrade rates were down for you guys and for all your peers.

Can you give us a sense as when you look at the age product in your base, what you think is going to happen as we exit 2018 and whether this might be a year that promotions invert back up by you or some of your competitors?

A couple of things.

One is, it's not just about promotions.

It's also about what you get in the new devices, and one thing you heard from us, Walt, over and over is talk about the importance of this 600 megahertz layer in our network.

Well, because of that, we're going to see it really important that customers adopt 600 megahertz-compatible phones.

And so you may see us getting behind phones in a big way that have that technology because we're obsessed with customer experience, and we know with how fast Neville's going out rolling out this network, 950 cities so far and 33 states already being touched by 600 megahertz, we need to get handsets in people's hands.

And so you're going to see us pursuing a strategy that's pro upgrade, especially when it's an upgrade that will get you on to a 600 megahertz compatible phone.

Got it.

And then, Mike, you haven't grown postpaid phone net adds for a while.

So this is the first time in 6 quarters.

Is this the inflection point that we've been looking for in terms of the low-band investments and the store investments that you've made resonating with these very low-penetrated markets that you've talked about in the past, whether it's suburb, enterprise, whatever it is.

Like which of these areas do you think are inflecting?

Or is this just you had a good quarter.

It might slow down in the second half of the year, and we're still waiting for that kind of the big kick in where you take the Verizon subs en masse going forward.

I mean, as John said, this is -- what you're seeing is a demonstration that the investments we've been telling you about are starting to pay off.

And if anybody had any question about whether this business was slowing down, this quarter is the latest answer.

Our postpaid phone net adds are equal to if you took every other player in the market, including the #2 player, Comcast, and added them all up and then doubled it, that's how many postpaid phone net adds we delivered in the quarter.

And it's a demonstration that the strategy is working.

Geographic expansion, business expansion, segment expansion, suburban fringe expansion, going after different groupings of customers that have always been underpenetrated into our base, and it's working.

So we're really proud of the results.

And as you can tell, it's not just driven by us taking share with 2.0 porting ratios with AT&T and Verizon, but it's also driven by having the lowest postpaid phone churn in the history of our company.

And we think that's sustainable.

That's driven by our network, and it's driven by the brand, and those things are both very, very strong and getting stronger.

I think the last time you got over 2.0 was when Verizon launched unlimited.

So I guess we'll see what the competitive response is, if any.

Right.

I think the word of the day at school today must have been inflection point, but I don't think that's -- we've been very consistent over many, many quarters.

We feel very strong about it.

All right, Walt.

You're always welcome on this call even though they don't allow you on any other ones.

So we want to thank everybody for taking their time on this first day of August.

We're really excited about what's coming up in the second half of the year, and we'll talk to you next quarter.

Thank you.

Operator?

Ladies and gentlemen, this concludes the T-Mobile US Second Quarter 2018 Earnings Call.

If you have any further questions, you may contact the Investor Relations or Media departments.

Thank you for your participation.

You may now disconnect, and have a pleasant day.