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Mark Yu
Mark Yu
Articles (316)  | Author's Website |

T-Mobile: A Company and a CEO to Watch For

John Legere has been exemplary

May 11, 2016 | About:

“We are the Un-carrier™. Unsatisfied with the status quo. Unafraid to innovate.” T-Mobile 2015 annual report.

Since being listed on the New York Stock Exchange in March 2013 and being transferred to the NASDAQ exchange in mid-October 2015, T-Mobile U.S. (NASDAQ:TMUS) has returned an annual average return of 31%. This happened while AT&T (NYSE:T), Verizon (NYSE:VZ) and Sprint (NYSE:S) delivered 7%, 3.6% and -21% in the same time frame. On the other hand, the Standard & Poor's 500 returned 10.6%.

(Google Finance)

Big telecom CEOs

(Google Images: In order from left: John Legere, T-Mobile CEO since 2013; Randall L. Stephenson, AT&T CEO since 2007; Marcelo Claure, Spring CEO since 2014; Lowell C. McAdam, Verizon CEO since 2000.)

John Legere, age 56, has been the company’s CEO since its listing. In the pictures above, one might wonder (if not for the T-Mobile shirt he was wearing) if Legere may be one of the three on the right, not the rock star on the left.

Legere definitely demonstrated that a person can never be judged by his appearance. He did not just come out of nowhere and hit all the right buttons to propagate T-Mobile as the next best contender to AT&T and Verizon. Legere worked for AT&T for nearly 20 years in the early part of his career (source).

Further, Legere ran a telecommunications company called Global Crossings as company CEO for more than a decade (2001-2011). Under his leadership, Global Crossings actually had to file bankruptcy in early 2002 and was identified as the fourth-largest bankruptcy after Enron and Texaco (source).

John Legere on Verizon (source)

Despite the volatile sales and profit figures Global Crossings exhibited through 2002-2011, the company managed to sell itself to Level 3 Communications in 2011. The company had sales figures of $2.6 billion with loss of $176 million but was acquired for $1.9 billion (source).

The following year (2012) after the acquisition of his company Global Crossings, Legere made a comeback as T-Mobile CEO.

T-Mobile U.S. was then formed through the business combination between T-Mobile USA and MetroPCS, which closed on April 30, 2013 (Value Line). According to its 10-K, the company is controlled and primarily owned by Deutsche Telekom (NYSE:DTE). Deutsche Telekom has a long history, dating back to 1989. Deutsche Telekom seems to be enamored with using the color pink and T-Mobile in its businesses. Deutsche Telekom has huge stakes not only in T-Mobile U.S. but also in T-Mobile Czech Republic and T-Mobile U.K. among others. Most of its history can be accessed here (source).

According to Deutsche Telekom’s 2015 10-K, it owns roughly 65% of T-Mobile U.S. Nevertheless, understanding what T-Mobile has done to generate growth in its subscribers while other big U.S. telecoms were losing would be quite interesting.

(John Legere introduces the Un-carrier)

In the first quarter of 2013, T-Mobile U.S. introduced the game changing "Un-carrier." The Un-carrier initiative is interesting; T-Mobile has been "upgrading" it to different versions, and as it evolves, it becomes clearer whom it treats as its boss – its customers and other soon-to-be clients.

As I sift through T-Mobile USA’s annual reports, here are some tabulated highlights I had noted in its Un-carrier business:

Version 1.0: March 2013, Un-carrier introduced. T-Mobile ends its annual service contracts.

Version 2.0: July 2013, Jump! introduced. This service permitted more frequent upgrades.

Version 3.0: October 2013, World Your Network introduced. Customers were given unlimited data in 120-plus countries and destinations with no extra charge.

Version 3.0 Part 2: October 2013, Unleashed Tablets with Free Data for Life. Customers were to get 200 MB of free data each month.

Version 4.0: January 2014, Fastest 4G LTE in the U.S. T-Mobile is the fastest network in the U.S.

Version 4.0 (still): Contract Freedom for Families. T-Mobile offers to pay early termination fees for an entire family if they were to switch to the "Un-carrier" services.

Version 5.0: June 2014, Test Drive. T-Mobile offered 1 million Americans one week free use of its Data StrongTM network along with the iPhone 5s smartphone and unlimited nationwide service.

Version 6.0: June 2014, Music FreedomTM. T-Mobile customers can stream unlimited music without ever hitting their 4G data allotment.

Version 7.0: September 2014, Wi-Fi UnleashedTM. T-Mobile allowed its customers to call and text over any Wi-Fi connection where there is no cellular network reach.

Version 8.0: December 2014, Data StashTM. T-Mobile allowed its customers to roll over their unused data for up to a year with 20 GB limitation.

Version 9.0: March 2015, Business UnleashedTM. T-Mobile to provide 100% transparent pricing, best rates, business family discounts and other benefits to U.S. businesses of all sizes.

Version 10.0: November 2015, Binge-OnTM. T-Mobile allowed its customers to stream all the movies, sports and TV shows they want without ever using their data on partner services like HBO, Netflix, ESPN, YouTube — over 60 participating video providers.

T-Mobile keeps on innovating and continues to provide amazing services to its clients. The Un-carrier business model has clearly been a success as T-Mobile was able to add over 20 million new subscribers since its implementation in early 2013 (Value Line).

(The Un-Carrier timeline, p. 5 of recent T-Mobile U.S. annual report)

Gross, operating and profit margins

T-Mobile demonstrated subpar performance with its peers except for Sprint in recent times. Interestingly, T-Mobile has a good uptrend in the most recent three years; it can even overtake AT&T at some point in the future.

In terms of operating margin performance, T-Mobile remained flat compared to the two giants Verizon and AT&T. Nevertheless, once T-Mobile’s heavy marketing expenses subside we’ll see how T-Mobile would be able to emerge and demonstrate some potential upside in its operating margin. As for its three-year Selling, General & Administrative Expense (SG&A) average cost per revenue, T-Mobile has spent roughly 31% of its sales for marketing and personnel while AT&T, Sprint and Verizon have spent 25%, 28% and 26%.

T-Mobile exhibited similar findings here with its profitability. In 2015, T-Mobile brought in 2 cents per dollar revenue while AT&T and Verizon brought in 9 cents and 14 cents per dollar revenue.

Debt to equity

For conservative investors seeking less than 1.0 debt-to-equity ratio in Telecom companies may be rare since most of the business operations rely on heavy capital expenses for betterment of services. In this quarterly figure, T-Mobile and AT&T showed consistency with current ratios of 1.55 and 1.06. Verizon, on the other hand, has been a monster debt-issuer regardless of time frame.

Meanwhile, I am not confident in the figures I calculated for Sprint. In mid-April, Bloomberg ran an article titled, “Sprint's Hidden Debt Bomb.” In the article, Bloomberg highlighted that Sprint had high net debt to earnings before interest, tax, depreciation and amortization (EBITDA) accompanied by high leverage, which can also be observed in its peers.

Valuations

Despite these "subpar" margin numbers that T-Mobile provided, the company’s shares were rewarded by Mr. Market with a good premium compared to its peers (as shown in the above graph) despite the company not providing any single dividend issuance and just $11 million share repurchases between 2010 and 2012.

A speculation

(U.S. wireless carrier market share of subscriptions 2011-2015, Statista)

A speculation I have in mind is the only way T-Mobile can beat its top peers (Verizon and AT&T) is to merge with Sprint. This may seem far from happening secondary to Sprint’s balance sheet and its culture, which may not jive with Legere’s.

Nevertheless, an outstanding business cannot always please each and every customer no matter how innovative the business may be.

(source)

In the meantime, observing the progress that T-Mobile is making and how it empowers and enriches its customers will surely be interesting. Further, T-Mobile, Verizon and AT&T were all reportedly working trials in 5G (fifth-generation wireless broadband technology) implementation (source). 5G could be expected to produce 40 times faster connection speed than a 4G wireless (source) although there are already ongoing debates whether the cost of 5G may or may not be cheaper than 4G (source).

Happy investing.

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About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings one company a day.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

"The only source of knowledge is experience"

"I have no special talent. I am only passionately curious." Albert Einstein

" To strive, to seek, to find, and not to yield." Alfred, Lord Tennyson

Visit Mark Yu's Website


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