The Long and Short

Subscriber Growth Continues to Outperform Peers at T-Mobile

| January 6, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

T-Mobile US (TMUS) provided preliminary wireless subscriber growth for the fourth quarter of 2022 that came in above analyst expectations and continues to outpace both AT&T Corp (T) and Verizon Wireless (VZ). TMUS chalks up the better-than-expected performance to its 5G network, which was boosted by the Sprint acquisition and rolled out roughly a year ahead of its peers. With leverage quickly approaching its target of 2.5x and subscriber growth that has largely outpaced its peers through 2022, TMUS spreads are expected to start collapsing closer to T. The greatest value is in the 3-year part of the curve, with paper yielding close to 5.3%.

Exhibit 1. US Wireless Spread Curve (2Y-10Y)

Source: Bloomberg TRACE; APS

Best in Class Postpaid Customer Additions

TMUS noted that it achieved net wireless customer additions of 927k in 4Q22, which is not only its highest level since the close of the Sprint acquisition but is the best in the US wireless industry (Exhibit 2).  TMUS began to outpace T in wireless net adds post the second quarter of 2022 and continues to extend its lead. Postpaid phone churn came in at 0.92%, which is the company’s lowest churn rate in any fourth quarter, and marks an improvement from the 1.1% churn rate posted in the year ago-period. TMUS management noted that are the only US wireless operator to witness a reduction in churn in the fourth quarter.

Exhibit 2. Subscriber Wireless Additions (Quarterly 2022)

*Estimates for Verizon and AT&T

For the full year, TMUS witnessed postpaid phone additions of 3.1 million which is also the highest in the industry and the largest number of annual additions since it combined with Sprint. Postpaid phone churn was a strong 0.88% in 2022, the lowest rate achieved in the company’s history and down from the 0.98% posted in 2021.  Including all of its services, TMUS saw net customer additions of 6.4 million for the year, which is a record and came in at the high end of management’s guidance range of 6.2 to 6.4 million.  We note that management increased this guidance three times during the year with original guidance calling for 5.0 to 5.5 million customer additions.

Leverage Moving Closer to Target

While no financial data was provided in the release, TMUS ended the last quarter with net leverage of 2.8x. We do note that TMUS’ leverage is a tick behind VZ and roughly a half turn better than T (Exhibit 3).  TMUS maintains a net leverage target of 2.5x and is expected to come close to/achieve that target when it releases fourth quarter results.

Exhibit 3. IG Wireless Net Leverage Comparison

Source: Company Reports; Bloomberg; APS

Merger synergy guidance was increased to the $5.7 to $5.8 billion range (from $5.4 to $5.6 billion) as TMUS completed the decommissioning of the legacy Sprint macro sites one year ahead of expectations.  The faster than expected integration process led to a stronger margin profile, thereby improving its leverage metric.  We note that TMUS posted and EBITDA margin of 39.9% on a LTM basis (ended 9/30/22), which was 600 bp higher than T and 450 bp higher than VZ.

Meredith Contente
meredith.contente@santander.us
1 (646) 776-7753

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