T-Mobile USA Reports Fourth Quarter 2012 Financial Results

T-Mobile USA, Inc. ("T-Mobile") today reported its fourth quarter 2012 results which were highlighted by a year-on-year increase in net customers, improvement in branded contract churn, the continued investment in more customer-focused Value plans and an accelerated network modernization program. T-Mobile ended the fourth quarter of 2012 with 33.4 million customers, representing net additions of 61,000 customers compared to the prior quarter and 203,000 more customers than the end of 2011. The sequential and year-on-year improvement in net customer additions was driven primarily by the continued expansion of the branded prepaid and wholesale segments, in particular, with growth from the Mobile Virtual Network Operator (MVNO) component of the wholesale segment, and a year-on-year improvement in branded contract churn.

In the quarter, the Company reported adjusted OIBDA of $1.0 billion, compared to $1.2 billion in the prior quarter and $1.4 billion in the fourth quarter of 2011. As expected, the decline in fourth quarter 2012 adjusted OIBDA reflects higher advertising and promotional expenditures related to the Company's brand re-launch, partially offset by benefits from continued cost management programs in operational areas such as network optimization and overall Company overhead.

Fourth Quarter 2012 Financial Summary


Customer Results
	Quarter Ended

(thousands)	Dec 31, 2012		Sept 30, 2012		Dec 31, 2011		Y-o-Y %?
Customers, end of period^1,2
Branded contract customers	20,293		20,809		22,367		(9	%)
Branded prepaid customers	5,826		5,659		4,819		21	%
Total branded customers	26,119		26,468		27,186		(4	%)
M2M customers	3,090		2,954		2,429		27	%
MVNO customers	4,180		3,905		3,569		17	%
Total wholesale customers	7,270		6,859		5,999		21	%
Total T-Mobile USA customers, end of period	33,389		33,327		33,185		1	%
Thereof, contract customers	23,383		23,763		24,797		(6	%)
Thereof, prepaid customers	10,006		9,564		8,389		19	%

Net customer additions/(losses)
Branded contract customers	(515	)	(492	)	(706	)	27	%
Branded prepaid customers	166		365		220		(25	%)
Total branded customers	(349	)	(127	)	(486	)	28	%
M2M customers	135		168		(95	)	NM
MVNO customers	275		119		56		NM
Total wholesale customers	410		287		(40	)	NM
Total T-Mobile USA net customer additions/(losses)	61		160		(526	)	NM
Thereof, contract net customer additions/(losses)	(380	)	(324	)	(802	)	53	%
Thereof, prepaid net customer additions/(losses)	441		483		276		60	%

NM - Not meaningful
Note: Certain customer numbers may not add due to rounding.

Branded Customers

Branded contract net customer losses were 515,000 in the fourth quarter of 2012, compared to 492,000 in the third quarter of 2012 and 706,000 in the fourth quarter of 2011.
- Sequentially, branded contract gross additions increased by 5% to over 1 million. The Company's churn reduction efforts including its network improvements and expanded value priced offerings continue to have positive impacts on customer deactivations. However, aggressive competitor promotions and the iPhone 5 launch in late September drove a slight increase in branded contract customer losses quarter-over-quarter.
- Year-on-year, the significant improvement in the fourth quarter branded contract net customer losses was due to fewer branded contract deactivations resulting from significant customer retention programs in the quarter, partially offset by lower gross customer additions. The lower gross additions were in part a result of the Company's credit risk optimization initiatives introduced earlier in 2012.
Branded prepaid net customer additions were 166,000 in the fourth quarter of 2012, down from 365,000 in the third quarter of 2012 and down from 220,000 in the fourth quarter of 2011.
- The Monthly4G plans continue to be popular with branded prepaid gross additions up significantly year-on-year and stable compared to the third quarter of 2012. The overall sequential and year-on-year decline in net customer additions were due to increased churn related to aggressive handset pricing, unlimited data rate plan offerings from competitors and a maturing Monthly4G customer base.

Wholesale

The Company's wholesale base, which includes the M2M and MVNO customer segments, had net customer additions of 410,000 in the fourth quarter of 2012, compared to 287,000 additions in the third quarter of 2012 and net losses of 40,000 in the fourth quarter of 2011.
- The M2M customer segment, which has significantly lower ARPU than branded contract customers, had net customer additions of 135,000 for the quarter and totaled 3.1 million customers at the end of the fourth quarter of 2012, an increase of 27% compared to the end of 2011.
- The MVNO customer segment experienced net customer additions of 275,000 in the fourth quarter of 2012 and was up significantly from the 119,000 additions in the third quarter of 2012. This increase was due in part to the launch of new MVNO partners, such as Spot Mobile, Solavei and UltraMobile and from higher activation volumes from existing MVNO partners driven in part by growth in the government-subsidized Lifeline support program.


Churn Results
	Quarter Ended

	Dec 31, 2012	Sept 30, 2012	Dec 31, 2011	Y-o-Y bps?
Branded churn³	3.50%	3.10%	3.60%	-10 bps
Branded contract churn³	2.50%	2.30%	3.00%	-50 bps
Branded prepaid churn³	7.00%	6.20%	6.70%	+30 bps

Branded customer churn was 3.5% in the fourth quarter of 2012, up 40 basis points from the third quarter of 2012 but an improvement of 10 basis points from the fourth quarter of 2011.
- Branded contract churn of 2.5% in the fourth quarter of 2012 increased 20 basis points from the prior quarter but improved 50 basis points from the fourth quarter of 2011.
  - The sequential increase in branded contract churn was due to seasonality and the launch of the iPhone 5 by competitors late in the third quarter of 2012.
  - Year-on-year, branded contract churn decreased as a result of initiatives focused on improving the overall quality of the Company's branded contract customer base. These initiatives include credit risk optimization programs and efforts in re-contracting the Company's most loyal branded contract customers.
- Branded prepaid churn of 7.0% in the fourth quarter of 2012 increased 80 basis points from the third quarter of 2012 and 30 basis points from the fourth quarter of 2011.
  - The sequential increase in branded prepaid churn was primarily due to impacts from the iPhone 5 launch and aggressive pricing on unlimited data plans and promotional handset pricing by competitors.
  - The year-on-year increase in branded prepaid churn was driven primarily by higher churn from a maturing Monthly4G customer base and a more competitive environment in this market segment.


ARPU Results
	Quarter Ended

	Dec 31, 2012	Sept 30, 2012	Dec 31, 2011	Y-o-Y %?
($)
ARPU (branded contract)⁴	55.47	56.59	58.23	(4.7	%)
ARPU (branded prepaid)⁴	27.69	27.35	24.90	11.2	%
ARPU (blended)⁴	41.31	42.78	45.52	(9.2	%)
Data ARPU (branded contract)⁵	20.07	19.45	18.13	10.7	%
Data ARPU (branded)⁵	17.83	17.40	16.45	8.4	%

Branded contract Average Revenue Per User (ARPU), was $55.47 in the fourth quarter of 2012, down from $56.59 in the third quarter of 2012 and down from $58.23 in the fourth quarter of 2011.
- Sequentially and year-on-year, branded contract ARPU declined primarily due to lower voice revenues which was due in part to a customer shift to the Company's Value plans. Value plans result in recording lower service revenues from lower monthly recurring charges while recognizing higher equipment revenues at the time of sale.
- Branded contract data ARPU was $20.07 in the fourth quarter of 2012 which increased 3.2% from the prior quarter and increased 10.7% from the fourth quarter of 2011. The overall increases were the result of higher smartphone penetration and customer's continued adoption of data plans including the successful introduction of the Company's Unlimited Nationwide 4G Data plan in the third quarter of 2012.
- At the end of the fourth quarter 2012, non-iPhone 3G/4G smartphones used by branded contract customers accounted for 12.4 million or 61% of total branded contract customers compared to 11.8 million or 57% at the end of the third quarter of 2012 and 11 million or 49% in the fourth quarter of 2011. In addition to the Company's branded customer smartphones, the Company's network supported 1.8 million iPhone customers at the end of the fourth quarter of 2012, of which, 900,000 were branded contract customers using the "bring your own device" (BYOD) program. The total number of iPhones at the end of the fourth quarter of 2012 includes customers in the Company's MVNO base. When the 900,000 branded contract customers using BYOD iPhones are included, over 66% of the T-Mobile branded contract customers are using smartphones as of year end.
Branded prepaid ARPU, was $27.69 in the fourth quarter of 2012, up 1.2% from the third quarter of 2012 and up 11.2% from the fourth quarter of 2011.
- Year-on-year, branded prepaid ARPU increased primarily due to the continued success of the Monthly4G products which have higher ARPU than the Company's Pay-As-You-Go prepaid products.
Branded data ARPU in the fourth quarter of 2012 was $17.83 per branded customer, an increase of 2.5% from the third quarter of 2012 and an increase of 8.4% from the fourth quarter of 2011.
- 3G/4G smartphone sales were 2.8 million units in the fourth quarter of 2012, up 21.7% from 2.3 million units in the prior quarter and a 7.7% increase from 2.6 million units sold in the fourth quarter of 2011. Smartphone sales accounted for 79% of units sold, and 95% of handset sales revenues in the fourth quarter of 2012, up from 77% of units sold and 94% of handset sales revenues in the prior quarter and 73% of units sold and 92% of handset sales revenues in the fourth quarter of 2011. This result reflects strong sales of the Samsung Galaxy S III, in particular.
Blended ARPU was $41.31 in the fourth quarter of 2012, down from $42.78 in the third quarter of 2012 and down from $45.52 in the fourth quarter of 2011. These declines are primarily due to customer shifts towards Value plans and branded prepaid programs and increases in wholesale customers. Branded prepaid, wholesale and Value plan customers now make up 57% of the customer base compared to 52% in the prior quarter and 40% in the fourth quarter of 2011.


Financial Results
	Quarter Ended

($ millions)	Dec 31, 2012		Sept 30, 2012		Dec 31, 2011		Y-o-Y %?
Service revenues⁴	4,127		4,261		4,565		(9.6	%)
Branded Revenues⁴	3,890		4,021		4,316		(9.9	%)
Thereof, branded contract revenues	3,416		3,571		3,966		(13.9	%)
Thereof, branded prepaid revenues	474		450		350		35.4	%

Total revenues	4,909		4,893		5,179		(5.2	%)
Adjusted OIBDA⁶	1,048		1,226		1,400		(25.1	%)
Adjusted OIBDA margin⁷	25	%	29	%	31	%	-6 pp
Capital expenditures⁸	898		717		551		63.0	%

Revenue

Service revenues were $4.1 billion in the fourth quarter of 2012, down 3.1% from the third quarter of 2012 and down 9.6% from the fourth quarter of 2011.
- Sequentially and year-on-year, quarterly service revenues decreased primarily due to branded contract customer losses. The decrease, however, was partially offset by the increased adoption of data plans in both the contract and prepaid customer base. Additionally, branded prepaid revenues increased compared to the prior quarter and the fourth quarter of 2011 as a result of the continued success of the Monthly4G plans. Adoption of the Company's Value plans, which do not include handset equipment subsidies, adversely impacts service revenues but results in higher equipment revenues when compared to traditional bundled pricing plans.
- Data service revenues, including messaging, were $1.5 billion in the fourth quarter of 2012, consistent with both the prior quarter and the fourth quarter of 2011. Data service revenues in the fourth quarter of 2012, excluding messaging revenues, accounted for over 70% of total data service revenues and increased 10.5% year-on-year.
Total revenues, including service, equipment sales, and other revenues, were $4.9 billion in the fourth quarter of 2012, up slightly from the third quarter of 2012 but declined from $5.2 billion in the fourth quarter of 2011.
- Total revenues declined less than service revenues compared to the fourth quarter of 2011 despite losses in branded contract customers as equipment revenues increased year-on-year due to stronger smartphone sales and handset program changes in connection with the Company's Value plans.
- The Company's Value plans, which were first introduced in the third quarter of 2011, allow customers to subscribe to wireless services without the purchase of or upfront payment for a bundled handset. This results in a reduction of initial subsidies and benefits adjusted OIBDA and net income within the quarter of purchase. Qualifying customers may separately purchase handsets at any time, either deferring payments over 20-month installment contracts or paying the full price at the point-of-sale. Compared to traditional bundled price plans, Value plans have lower monthly recurring charges which result in lower service revenues over the service contract period, while recognizing higher equipment revenues at the time of the sale. In the fourth quarter of 2012, Value plan customers accounted for over 50% of the branded contract gross additions, which is consistent with the third quarter of 2012. Additionally, Value plans made up 30% of the branded contract customer base at the end of the fourth quarter of 2012. This is up from 23% at the end of the third quarter of 2012.

Adjusted OIBDA and OIBDA

The Company reported adjusted OIBDA of $1.0 billion in the fourth quarter of 2012, compared to $1.2 billion in the third quarter of 2012 and $1.4 billion in the fourth quarter of 2011. Adjusted OIBDA margin was 25% in the fourth quarter of 2012, down from 29% in the third quarter of 2012 and 31% in the fourth quarter of 2011.
- Adjusted OIBDA in the fourth quarter of 2012 excludes one-time non-recurring expenses of $5 million, primarily related to spectrum exchanges and transaction related activities. The prior quarter excludes a net benefit of $140 million, primarily as a result of a spectrum swap gain that was partially offset by costs associated with restructuring initiatives. The fourth quarter of 2011 excludes special transaction related charges of $123 million primarily related to the terminated AT&T transaction.
- Sequentially, adjusted OIBDA decreased primarily as a result of planned higher advertising expenses associated with the Company's re-branding initiatives and lower service revenues. Year-on-year, adjusted OIBDA decreased as a result of lower service revenues due primarily to branded contract customer losses and increased expenses associated with the Company's rebranding initiatives.

Operating Expenses

Total operating expenses were $4.7 billion in the fourth quarter of 2012 and included non-recurring costs associated with spectrum exchanges and acquisition related activities. Excluding these non-recurring items, total operating expenses in the fourth quarter 2012 increased $220 million or 4.9% from the third quarter of 2012 and increased $157 million or 3.4% from the fourth quarter of 2011. Sequentially and year-on-year, the increase is primarily attributable to higher advertising expenses partially offset by benefits from continued cost management programs in operational areas such as network optimization, customer roaming, improved customer collection rates, and better management of customer acquisition and retention costs.
- Losses from equipment subsidies in the fourth quarter of 2012 were $263 million (equipment revenues of $718 million, less cost of equipment sales of $981 million), down 15.7% from the prior quarter and down 19.1% from the fourth quarter of 2011. The quarter-on-quarter decrease in net subsidies is primarily the result of increased margin per unit from sales of more expensive smartphone devices. The year-on-year decrease in net subsidies was due primarily to handset program changes from the Company's Value plans.
  - Equipment subsidies related to customer acquisition were $23 million in the fourth quarter of 2012, compared to $79 million in the prior quarter and $108 million in the fourth quarter of 2011. The decreasing trend in equipment subsidies is primarily attributable to the increase in Value plan activations and associated unsubsidized smartphone sales.
  - Equipment subsidies related to customer retention were $240 million in the fourth quarter of 2012, compared to $233 million in the prior quarter and $218 million in the fourth quarter of 2011. Sequentially and year-on-year, the increase in equipment subsidies is primarily due to the increase in handset sales in indirect retail channels and the associated incentive payments to dealers.
- Network expenses of $1.1 billion in the fourth quarter of 2012, were consistent with the prior quarter and decreased 4.7% from the fourth quarter of 2011. This year-on-year decrease was due primarily to lower roaming expenses and reduced rates for providing long distance service to customers partially offset by increased lease expenses associated with network modernization. Additionally, due to the transition to enhanced backhaul (e.g. fiber) over the past year, the Company was able to accommodate higher data volumes year-on-year without significant increases in network costs.
- Customer acquisition expenses of $963 million in the fourth quarter of 2012 increased 17.0% from the prior quarter and 17.3% from the fourth quarter of 2011. Compared to the prior quarter and fourth quarter 2011, the increase was primarily due to higher advertising expenses associated with new promotional campaigns and the Company's rebranding initiatives.
- General and administrative expenses of $829 million in the fourth quarter of 2012 were slightly lower than the prior quarter and decreased 7.9% from the fourth quarter of 2011. The year-on-year decrease was primarily due to lower bad debt expense related to improved customer collection rates from credit optimization initiatives.
- Depreciation and amortization expenses of $796 million in the fourth quarter of 2012 decreased 3.5% from the prior quarter and increased 4.6% from the fourth quarter of 2011. The year-on-year increase was primarily due to assets placed into service and accelerated depreciation related to network modernization initiatives. Sequentially, depreciation expense was lower driven by changes in the deployment schedule of the Company's ongoing network modernization efforts.

Capital Expenditures

Cash capital expenditures (excluding spectrum licenses) were $898 million in the fourth quarter of 2012, compared to $717 million in the third quarter of 2012 and $551 million in the fourth quarter of 2011.
- Sequentially and year-on-year, higher cash capital expenditures were a result of the network modernization transformation.

Other Transactions

During the fourth quarter of 2012, T-Mobile conveyed to Crown Castle International Corp. ("CCI") the exclusive rights to manage and operate approximately 7,100 T-Mobile owned wireless communication tower sites. In exchange, T-Mobile received net proceeds of $2.5 billion of which the Company subsequently distributed $2.4 billion as an equity distribution to its parent, Deutsche Telekom. T-Mobile contemporaneously entered into a lease back for part of the space at each of the tower sites required for continued operation of T-Mobile's network equipment installed at the sites. Under US GAAP accounting rules pertaining to sales of real estate operations, T-Mobile was precluded from derecognizing the tower assets and the transaction has been accounted for as a financing. As a result, during the fourth quarter of 2012, T-Mobile recorded on its balance sheet a long-term financial obligation in the amounts of the cash proceeds from CCI.