Transcripts
T-Mobile US, Inc. (TMUS) SVB MoffettNathanson’s Inaugural Technology, Media and Telecom Conference (Transcript)
T-Mobile US, Inc. (NASDAQ:TMUS) SVB MoffettNathanson’s Inaugural Technology, Media and Telecom Conference May 17, 2023 8:00 AM ET
Company Participants
Peter Osvaldik – Chief Financial Officer
Conference Call Participants
Craig Moffett – MoffettNathanson
Craig Moffett
Good morning everyone and thank you for joining us for the First Annual SVB MoffettNathanson TMT Conference. Thank you to those who are joining via the web as well. I am delighted to have T-Mobile with us this morning. This is I think that this would be the tenth consecutive media and communications summit for MoffettNathanson and it’s the tenth appearance for T-Mobile. So really delighted to have you here this morning, Peter.
Question-and-Answer Session
Q – Craig Moffett
I want to start with the mobile market and the market growth rate. I think it’s been a topic of certainly a topic of interest of mine but I think increasingly a topic of interest for the whole market as they focus on the growth rate particularly of subscribers. First what’s your assessment of why the market has grown so much faster than population growth rate over the last five years?
Peter Osvaldik
Perfect. Well first off thank you for having us again Craig. It’s always a pleasure to be here. Let me do the 30 second [Indiscernible] of legalese. I may make forward-looking statements probably will. And of course I might reference non-GAAP probably will. So please look at our SEC filings for all the risks and uncertainties and GAAP and non-GAAP reconciliations.
I think it’s been an interesting few years and there is an element of this which is explainable and then there’s still an element I think that’s hard to really pin down. I mean certainly during the pendency of the pandemic you saw core connectivity become even more important than it was before and you did see demographic age demographic expansion both up and down the age brackets. You saw a new business formation come in. Of course you saw stimulus money that helped. I think you saw certainly towards the tail end of it much more multi-line and business CL lines where I think businesses particularly with a more remote workforce than perhaps in the past need more reliable connections more secure connections that they can apply their policies to. So you see a bit of that. And of course you’ve seen an industry wide transition from prepaid into post-paid. Certainly a catalyst for cables growth in that regard.
So that explains quite a bit of I think what we saw. But there’s still a question around okay but it’s hard to explain the totality of the industry growth with just those factors. And that’s a that’s a question that I think we can’t answer either. You look at port non-port ratios you kind of see what cable is doing and it’s hard to ascertain what really happened.
Craig Moffett
Is it your assessment though that whatever was the cause of why it was growing so quickly that now it’s starting to decelerate back towards something that’s at least a little more reasonable?
Peter Osvaldik
Yes it’s very much what we said would happen and we started to see it in the tail end of last year which in a period by the way you saw T-Mobile deliver some of our two best quarters since the merger itself and we do anticipate that much like we said it at year-end earnings that probably this year in the post-paid phone category you’ll see an industry-wide of maybe the seven to eight million so down from the roughly 9.3 of last year so we’d anticipate over time this thing would go closer to population growth. One of the things that I remember and I know you know this well is everybody seems very hyper focused on post-paid phone, but certainly with the advent of 5G and we can talk about the use cases a little bit later there’s so many other connectivity plays that certainly aren’t as valuable from a CLB perspective as a core post-paid phone consumer but are very accretive in totality to the industry as a whole and we capture our lion’s share of that as well.
Craig Moffett
I want to get to some of those but the reason I’m drilling down on the post-paid phone question or I always tend to think of it as just total phone whether it’s post-paid or prepaid but the phones question is because it is still an area where everyone feels it is imperative for every company to make its subscriber numbers and yet it does appear that that’s starting to become harder for to visualize how that happens.
Verizon yesterday on the stage estimated that the growth rate of the market would fall down to five or six million post-paid phones. If the cable industry is taking three million and you’re taking two and a half to three million there’s nothing left for anyone else and yet everyone else is saying they’re going to grow a million subscribers each and so the numbers it’s getting harder to see how the numbers add up and I’m wondering in that environment where I guess I’m thinking particularly about Verizon and AT&T more than cable where there is a tendency to get hyper competitive about or hyper aggressive about handset promotions. How does that how do you respond to that without getting dragged into the mud of suddenly having to offer these kind of crazy promotions just to keep the industry at equilibrium?
Peter Osvaldik
Yes, well a few things. One is, this industry as you know has been promotionally intensive for a very long time and it can manifest itself differently whether it’s rate plans or devices. From a device side it’s been there for a while since AT&T really brought back the subsidy model and cable has been hyper aggressive with their first line free exploding promotions. I think for us what we look at is what’s the differentiation of what we provide and again the industry did start slowing much as we predicted in the second half of last year and you saw us deliver the best quarter since the merger and really that’s a result of where we are at this moment in time.
Both from a best value play which we’ve had for a long time and will continue to jealously guard the customer value proposition and the perception that comes with it but now having arrived at the station at the best network much as for a long time we said the 5G leadership which is durable will translate into overall network leadership and we’re here. Couple those two things which I know you’ve highlighted in many of your writings that’s probably the first time in this industry that you’ll ever see this false trade-off gone.
Now you have the best value in the form of price and the best product in the form of network and that gives you a very distinct durable advantage but we also have underpenetrated segments that we’re going after and quite successfully and I know we’ll get into some of those whether it’s smaller markets and rural areas whether it’s in enterprise and government and the success that we’ve had there but also now with this network piece where we’ve been traditionally strong the top 100 markets we’re seeing continued growth come from prime network seekers so that’s another opportunity and of course you know what 5G brought in the form of broadband and fixed wireless has been a tremendous play for us as well.
So I think it’s just a matter of stepping back and this is a company that always delivers on its commitments to the market and based on all of those factors the underpenetrated segments what we’ve seen dynamics play out in Q1 and what we anticipate for the rest of the year that gave us the confidence to actually raise our post-paid net add to a total post-paid net add guidance at the end of Q1.
Craig Moffett
I want to drill down on those because I you articulated them exactly the way I sort of set them up here which is I think about your first there’s the first there’s the two opportunities that you talk about most frequently the smaller and rural markets and the SMB and commercial segment but there’s also maybe just to start there is the premium network market. Are there any stats or anything quantitative you can share with us like your market share in 5G devices versus 4G devices that are in the market or something like that that that sort of provide evidence that the market understands the network advantage that you’ve got in 5G?
Peter Osvaldik
Maybe a couple things I would say. When you look at the again the top 100 markets where in many of those markets we’re in a 40% market share and we arrived there over time because of the customer value proposition and that’s just the honest truth you had a lot of value seekers come to T-Mobile. We started to see that shift as we’ve arrived to the best network station and you start seeing more and more continued growth continued account switching and when you look at our total post-paid net account growth it’s very much spread across all of the segments that we’re looking at whether it’s smaller markets and rural areas or in this case the prime top 100 markets so we’re continuing to see many more prime consumers that who are looking for just network above all else they will trade off value for network.
And we’re starting to see that continued growth come in as our network equities with the consumer segment continue to increase. From a post-paid phone perspective we’re near 60% penetration on 5G devices and that’s another reason for why we believe our upgrade rate is where it is because as you meet customers with 5G enabled handsets and this 5G network they can actually experience what true 5G is versus just having a handset and not really getting that and so now that’s another rationale for why the upgrade rate is where it is currently we’re really meeting market demand but I couldn’t be more pleased with what we’re seeing it’s an area that we weren’t talking about a year or two ago this top 100 markets and how do we see continued growth from the individuals in the consumer space we’re looking for network above all else but that has certainly started to manifest itself.
Craig Moffett
So then to drill down on that question you said 40% share in some of or all of the top?
Peter Osvaldik
No, some of, it varies you take certainly.
Craig Moffett
So in some markets you’re 40% share is it fair to say that you are gaining share in across the top 100 that you’re still gaining share?
Peter Osvaldik
Absolutely. Yes
Craig Moffett
And obviously that index is higher than your overall market share.
Peter Osvaldik
Yes the blend yes, absolutely as we continue to grow in the smaller.
Craig Moffett
So even in the places where you over index you’re still gaining share?
Peter Osvaldik
Yes.
Craig Moffett
In the places where you under index you said you’ve said you have a goal of getting to 20% share in each of a rural and SMB so that would still be under indexing relative to your average market share but more importantly significantly under indexing relative to your urban share which would suggest there’s that those may not be hyper aggressive goals. But can you talk about the progress of getting to those goals of 20 especially let’s think about them sequentially first in rural?
Peter Osvaldik
Yes so well the way we categorize the markets as you say the top 100 markets and then smaller markets on rural areas this is for consumers that’s about four as we categorize it about 40% of the total population and we break that down into 775 markets so you’ve got your top 100 and then you’ve got your next 775 markets and that’s where our aspirations that we laid out at Analyst Day were to reach 20% market share by the end of 2025. We’re well on our way I think we shared in Q1 that we’re now at about a 16.5% blended penetration but the way we approach each one of those markets is of course it starts with a network build and as we get we again we categorize levels of network readiness and it goes to license to play which is the network is competitive in that area that’s when we start bringing in distribution and start seeing the Soapies [Ph] and the Sogas [Ph] come in and then we’ll ultimately we’ll graduate those markets into what we call license to win which is the network is just far and above better than the competitive set. Where we’re at now is about…
Craig Moffett
So just to make sure I understand that, that is a sequence of the 600 megahertz low band for coverage followed by the mid band for filling in the denser areas of what are generally otherwise relatively less dense areas but still have their denser parts and the license to win is when you bring in the 2.5?
Peter Osvaldik
No it’s not necessarily just driven based on band I mean first off it’s more in the in the mid band layer with the ultra-capacity 5G network as we play it it’s more than just the dense urban areas. I mean we’re at 275 million covered pops with the mid-band layer, more than Verizon and AT&T have stated goals to reach in two years.
But it’s really about more than just here’s the dense urban core of that area, and some of these cities by the way aren’t small cities, I mean it’s large markets, it’s just not the top 100. But it’s about what about the county area, what about the key roads that connect it, right? It’s this concept that we’ve introduced now and spoken more about customer-driven coverage. So beyond just pops, it’s really where do customers tell you, very data-informed, deeply data-informed process of where the critical connectivity is. Beyond just the pop of where people live, where do they need connectivity?
So that’s how as we start seeing the markets play out, it’s more driven by do we have the right coverage? Certainly do we have the right capacity in the core, denser areas, but do we have the right coverage beyond just that to be competitive? And that’s when we bring in the distribution.
Craig Moffett
And then you come in with the stores.
Peter Osvaldik
And then we come in with the stores or national retail partnerships, depends on what the market is. And then we’re certainly the progression after that is to get to license to win. But the two-thirds of markets that we’re playing at right now in that smaller markets and rural areas is the combination of this license to play and license to win. And that’s where we’re seeing in those two-thirds where we’re in the upper 30% of [Indiscernible].
Craig Moffett
And presumably the license to win markets are further along in that progression than the license to play, right?
Peter Osvaldik
Yes, absolutely.
Craig Moffett
What about in the small-medium business segment?
Peter Osvaldik
Well, so the play in enterprise and government, it’s certainly small and medium businesses is a big part of the T-Mobile business group. But the under penetration that we had was in enterprise and government where we said we’re going to go from basically a single-digit penetration at the time of Analyst Day, again to 20% aspirations by the end of 2025. And you’ve seen the success. I mean, we’ve talked about the success of the plays in enterprise and government where enterprise and government buys a lot differently than the consumer set, right? Many times we’ve said our network equities with consumers continue to increase while Verizon’s go down. They’re still above us, so there’s still more room to run for us. But enterprise and government tests before they actually purchase.
And so it’s very much a where the network, is it going to work for them where they need it, how they need it, or do we have the advanced capabilities, do we have certainly the customer service experience? And that has driven a lot of the growth and acceleration in the T-Mobile for business group.
Craig Moffett
Well, what’s the sales cycle in that? Is that testing period a year long before they tend to make a decision, is it six months? I’m sure there’s variants, but I’m wondering if there’s a sort of a lag between the achievement of network milestones before it actually starts to show up in that segment.
Peter Osvaldik
It’s tremendously varied, and it certainly depends on where that large enterprise or government is and their purchasing decisions have they, and this is another exciting space where it’s way more than just post-paid phone. Certainly post-paid phone is an important category here, but at large enterprise and government, the CLVs of post-paid phone are not at the CLVs of consumer post-paid phone. But what is there is you have a lot of value creation with all the other connected devices as well.
And that’s probably been the most exciting part of this network story, as you have a 5G network with low band, that’s 98% of Americans reach, and 275 million pops with the ultra-capacity mid band layer, that’s what enterprises are looking for. And you see, again, they test, and it could be varied. Some test for three months, some test for six, some are ready to test quicker, and it’s just a faster cycle, but you’re seeing not only that we’re meeting their needs from a post-paid phone perspective, but we’re meeting their needs with other connected areas. And whether that’s been, I’ve spoken before about the airline industry, where we now have practically all of the majors, and it goes beyond just, again, phones, but actually being able to displace Wi-Fi with other 5G connected devices for under wing operations in that regard.
So actually a TAM expansion for the entire industry from 5G. We just had AAA do very much a torture test. As you can imagine, AAA is kind of out there everywhere, helping everybody, and they did a very lengthy torture test to say, who’s the provider that can get them connectivity everywhere where they need it?
The VA is another government entity we just announced. So the sales cycle can be varied, and the beauty of all these names that you hear us make wins and inroads into is that typically you land that relationship, and then it expands all the time. And so you can continue to win more business, whether that’s post-paid phone or whether that’s as they need other connected devices. So that’s the fabulous part.
Craig Moffett
Is it typically an RFP-driven process where there’s an invitation to
Peter Osvaldik
Yes.
Craig Moffett
Because I’m wondering if I think about the sales pipeline, is it something that you can track to say we are currently invited to 80% of RFP processes where historically we were invited to 60 or some metric like that that allows you to sort of track the progress?
Peter Osvaldik
Very much is. It’s RFP-driven. It’s, of course, funnel-driven. It’s how do you get the CIOs and individuals to come to our executive briefing centers and show them actually the capabilities and how those capabilities can solve problems far beyond just, again, post-paid phone connectivity for them. So we monitor a lot of those trends. In all those cases, again, the word of mouth is spreading, the capability is spreading. And in the past, if we’re all honest with ourselves on how we arrived at a single-digit market share in that space long ago was T-Mobile was the stalking horse in RFPs, right?
You were just trying to get some pricing relief from AT&T or Verizon. That started shifting once we started seeing the network build out, and it’s completely shifted now. And in fact, of course, there’s some enterprise and government entities that’ll continue to buy on price, price, price, and that is the end of it. But many, many more are actually buying and selecting T-Mobile, not because we’re the cheapest. In fact, in some of these cases, we’re not the cheapest, but because of the network capabilities that we can bring that others cannot.
Craig Moffett
So you mentioned before some of the non-phone opportunities. The ones that have gotten the most attention over the last few years as the 5G opportunities are probably private networks and mobile edge compute and maybe a beginning of a smattering of IoT types of applications. Can you talk about those, the sense is they’ve taken longer to materialize than people had hoped and are maybe a bit smaller than people had hoped, although that may just be a timing issue.
Peter Osvaldik
Yes, absolutely. Well, it’s not a surprise to us, because as you remember at our analyst day, what we said about everybody talking all the buzzwords around private networks and Mac, and that’s going to be that some included it in their plans for billion-plus dollar opportunities, we knew, I can’t help myself sometimes. We knew it would come. But to what extent and what form it takes, we never knew that. And so we didn’t actually include it in our analyst day outlook. And as those opportunities arise, and some of them are coming, I mean, we have private networks in place that are revenue generating. They’re not massive yet. Again, I think these are a lot of use cases that other enterprises are looking at.
From an IoT perspective, I mean, we see a lot of success there. Again, we have UPS from an IoT perspective. We just reached an agreement with Oracle to expand some IoT. You saw some of the fun stuff we’re doing with like SAIL GP, right? And you see a lot of opportunity because of what this network can provide in the IoT space. And in some cases, it’s also because of the pairing with Deutsche Telekom. So we introduced T-IoT, which is an ability for multinational organizations to actually get connectivity, not just in the U.S., but also in all of the DT countries have a single pane of glass. And so those are value propositions that others can’t necessarily match. But so upside to the plan, and if it materializes from a private network perspective, we’ve done some interesting things like with hybrid networks, because we don’t believe the future is necessarily all just private network driven. You’re going to need a smattering of solutions, whether it’s all the way from public networks to a hybrid to private.
Craig Moffett
You’re in the enviable position of not having to earn a return on having spent $50 billion on C-Band.
Peter Osvaldik
That’s not what I feel. I have to earn a return, but not on 50.
Craig Moffett
But not on $50 billion of C-Band. What’s the TAM expansion out of all of this in your mind, and is it sufficient for the industry to earn a return on $100 billion of C-Band spectrum plus tens of billions of dollars of network expansion in radios and infrastructure to support a bunch of opportunities that I think at this point we’re all scratching our heads over. Sure they’re starting to show some promise, but that’s a big not, right?
Peter Osvaldik
Yes, well it is. I don’t think they had a choice. You saw what happened with the merger, and you saw our ability to quickly roll out the network that we did, as well as the spectrum bandwidth that we did and are continuing for the benefit of consumers. They didn’t have a choice. Let me maybe contextualize it in the form of how we look at 5G and all of the investment that we’ve done in the network and building it out. There are use cases that are here and now. Certainly things like our ability to upsell into our highest tiered rate plans, whether that was Magenta MAX before or Go 5G Plus now.
The capacity that the network in 5G actually generates allows that. So that’s one way to think about the monetization opportunity. The second for us in particular with the fallow capacity model is fixed wireless. We have a business now that at the end of the last quarter is 3.2 million subs generating ARPUs near post-paid phone levels. That’s been an amazing opportunity to monetize, and yes, all of these other things are coming. There’s no doubt there’s so much R&D money being spent into the wearables category, other connected devices. Those things will come, and I think that’ll be an interesting play for the industry in total.
Like I said in the business and enterprise space, we’re starting to see displacement of, for example, Wi-Fi-based solutions, because you can bring more security, better connectivity without handoffs. That’s an interesting time expansion. Is that going to pay off all 50 billion of their investment? No, but it’s just another area that does. All of these things, I think, accrete up to a very interesting opportunity for the industry, and of course us very uniquely positioned in there and demonstrating it.
Craig Moffett
Is it a lot easier when, in retrospect, it’s sort of extraordinary that what you paid for all of Sprint with more Spectrum than anyone got in the C-band auction was half of what Verizon alone paid for C-band, so it’s, in retrospect, that looks like an extraordinarily attractive acquisition of Spectrum, let alone the customers that you got out of that relationship.
You mentioned fixed wireless. I’m going to come back to that in a second, but I want to drill down on what you said about the new plans that you’ve introduced, because you’ve introduced the Go 5G plans. I think it’s fair to say that, at least compared to the Magenta plans that used to run with a third free line, this is something of a price increase, with a clear trade-off, however, that now you’re subsidizing devices more frequently. You used to run your forever upgrade program with iPhones, but post-paid upgrade rates across the industry are down, and yours are down, I think, the most, despite running shorter EIP terms.
Talk about that, if you will. What are you seeing with respect to customers holding on to their devices, and what made you decide that there is at least a meaningful segment that says, we really need to refresh devices every two years?
Peter Osvaldik
It’s two things. One, first off, Go 5G Plus sits alongside Magenta MAX, and similarly to what Go 5G sits alongside Magenta, so those plans continue to exist. What we did was, as you saw the natural flow and customer demand, quite a different approach, the un-carrier approach to customers, as you have 60% of your new customers self-selecting into your highest tier rate plan, that tells you something.
That’s where we saw the opportunity to say, let’s take the power of the network and add even a little bit more, pack in some value, and of course, the promise that you will have same as new. That doesn’t mean a fully subsidized phone, necessarily. It just means you’ll have the same as new customers coming in. That’s the value proposition here.
And put it alongside our Magenta plans, and allow customers to continue to self-select. We’re seeing great traction, and the combined Go 5G Plus and Magenta MAX attach rates are right where they were for just Magenta MAX, of course, skewing again to Go 5G Plus. And so that’s the market and consumers telling you that they value the network proposition that we have, the value proposition that we have, and are selecting into there.
From an upgrade rate perspective, a couple of things have happened for us. One, we had a lot of post-paid upgrade pull forward with the Sprint network transition that happened last year, and so naturally, that pulled forward some upgrades that probably would have happened this year. I see this year being a lower upgrade rate cycle for us, and so you’ll probably even see less equipment revenue than we did last year, which is fine, as we all know. That’s not where margins happen in this industry. It’s service revenue.
But we’re meeting customers where they want to be met from a demand perspective, and again, I think it comes down to customers on our 5G network, and we said we have about 60% of the post-paid phone base with a 5G device, are actually getting a 5G mid-band experience. And so they’re able to feel the power of this network and don’t need to upgrade as frequently.
There’s definitely, on an industry-wide perspective, a different dynamic happening. I mean it’s interesting to see AT&T’s customers have a 50% higher likelihood and propensity and desire to switch, except they’ve been locked into three-year agreements, and similarly with Verizon. And I can see the play why, when your only proposition is device subsidies, of course you want to lock in customers, and then you can make your unilateral price increases on them, and that’s why you have such a high propensity to switch of that customer base, which is why we introduced, with the Go 5G+, the concept of phone freedom, and how do we actually create a vehicle for those unsatisfied AT&T customers to come over and take their 5G handset and actually use it on a network that can deliver.
Craig Moffett
Is there anything you can share with us about the early reaction you’ve had to the new plans?
Peter Osvaldik
I will say we’re very pleased with the early reaction, but it’s early and so I’m not ready to share anything yet.
Craig Moffett
And I’ll put you on the spot a little bit, because it’s still quite new, but Verizon introduced what they described as a, not just a set of pricing plans, but I think they would describe it more grandly as a sort of reorientation of their entire consumer unit around these new plans. What’s your first day competitive analysis of those plans, and how do you think you and the industry respond?
Peter Osvaldik
We’re very comfortable with our strategy and the plans that we just put in place, and that’s in reaction to what customers were telling us. I don’t know. It’s really hard for me to fathom how they sat around for probably months and months and said they were going to have this major announcement and then can’t really tell you, is it a price increase? Is it a price decrease? What’s happening here? I really don’t know, but I let them continue on with that proposition.
It’s still, when you look at it on a comparative basis, whether it’s that entry level plan compared to T-Mobile Essentials, you get a better value on T-Mobile. And so that’s basically what we always look at, is how do we ensure that we keep this customer value proposition and the fame for customer value that we’re known for, while continuing to increase our network equities. So we always look at it on a relative basis. Do we feel the value is here? We absolutely do. And so good luck to them again. This industry is always competitive. The more you get customers talking and considering switching, because obviously not all Americans think about this category like I do every single day. But when they do and you start creating a moment of switching consideration, we’re the beneficiary of that. So happy to have it.
Craig Moffett
So it certainly seems, from the outside looking in, that your new plans, obviously you didn’t know where Verizon was going to come out. But you had a long, long history of AT&T running very aggressive handset promotions to the point where it had become clear they weren’t going to stop. Is it fair to say that that was an important part of the handset renewal part of the Go 5G plans that you introduced, that you have now neutralized that free handset for anyone from AT&T?
Peter Osvaldik
Yes, we’re always looking at, again, it’s a matter of based on what the competitive dynamics are in the industry. And sometimes they manifest themselves differently, as we said. Sometimes it’s on the service rate plan perspective. Sometimes it’s in the device side. How do we make sure that we’re offering a value proposition that customers will flock to?
Now, it doesn’t mean necessarily that we need to match on every single element. And AT&T, as they brought back device subsidies a little while back now, when you don’t have the network to compete on and you don’t have the value proposition beyond subsidies, I understand why they did what they did, again, to lock customers down and then do price increases on them. We have a lot more to the value proposition than just a device subsidy. And so that’s why, first, you’ve seen us be very rational from an upgrade perspective and what we’ve done on the retention side.
But if customers choose this plan, they’ll have that option. That doesn’t mean, as you bring customers on board to these plans, you typically never see, if you’re switching three lines, that you actually take advantage of device subsidies on all three lines, right? So, you always have to think about these headline numbers that you see are quite different than what the actual dollars spent from a device subsidy perspective are.
Craig Moffett
Is it fair to assume that the customer lifetime value proposition for the account is improved even though the, because essentially you’ve taken ARPU higher, and you’ve taken subsidy higher, but you’ve probably also extended customer life, and the net of all of that is an improvement to customer lifetime value?
Peter Osvaldik
Yes, absolutely right. And importantly also, because we launched it with Phone Freedom and the Go Back Guarantee, is that we’re stimulating more switching as well into T-Mobile.
Craig Moffett
I know as much as the industry loves to talk about ARPA, I’m still an old ARPU guy, so forgive me that I’m still focused on ARPU. You saw better than expected ARPU growth last year, but it looked like, I mean, I remember at your guidance back in your analyst day, it had been for something slightly below zero. It then looked like it was going to switch to 1% positive, maybe. Now it’s kind of moderated again. Where are we in that? And remind us again, was that driven by rate plan mapping for the Sprint customers and 55 plus lines and that sort of thing? How did we get to the ARPU dynamics that we’re seeing right now and where should we think ARPU goes from here for you guys?
Peter Osvaldik
Yes, well, I love that you’re an ARPU guy, but as we’ve said, we are really focused from an enterprise value creation on accounts and ARPA expansion over time. And our guidance continues to be that we anticipate ARPA expansion of about 1% this year relative to last. The problem with ARPU is that it’s very much a single unit rate driven metric and doesn’t necessarily represent what you’re doing from a value creation. And some of the things that you mentioned are exactly those. For example, our ability to go into the 55 plus segment with a segmented strategy there that results in a lower ARPUs than what our blended average is, but actually higher CLVs. Those customers tend to be more prime. They tend to have longer tenure. They tend to have lower servicing costs.
And so while if you were hyper focused on an ARPU dynamic, you’d say, well, that’s not good. Those customers have a slightly lower ARPU than the blended basis, but the actual customer CLV is higher than the blended basis. Similarly, in the enterprise and government space, I mean, yes, those customers, because of the nature of how much they’re buying, have a lower ARPU, but create tremendous CLV perspective. You also see with our ability to take a fixed wireless proposition and our post-paid phone proposition, that’s something that you would then allocate from a rev rac perspective between the two. And so that might put an ARPU pressure relative to what the average baseline is, but you brought on an account that’s actually very ARPA accretive and very CLV creative to the enterprise as a whole. And so that’s why we’re just not hyper focused on ARPU, but it really is an ARPA play.
So we continue, as I’ve said before, to anticipate ARPU to be essentially flat sequentially. I mean, is there some upside opportunity later? Yes, potentially some upside opportunity with things like Go 5G Plus. That’s a front book change. It’s not a, let’s go, unilaterally lock customers and put price increases on them, but it’s really an ARPA. It’s a land and expand strategy for us.
Craig Moffett
Do you think just given the network improvements that you’ve had even if I just think of them on a relative basis, the network improvements you’ve had, do you think that the value differential or price differential that you’ve got between AT&T and Verizon narrows over the next five years which is to say you can now recoup some of that as in higher pricing because your network is better? Or do you continue to say I want to keep that differential and take it as faster market share growth instead.
Peter Osvaldik
Yes. Certainly, for now, the strategy is to keep a value differential Yes, network equities are continuing to increase, and we’re starting to see more and more, as we spoke about earlier, network seekers come to T-Mobile. But we want to, for now, jealously guard that customer value proposition because what it does is it creates switching and it allows us to capture a significant amount of true switchers as shown by post-paid net accounts. Now that everybody discloses post-paid net accounts, but you see what we’re able to capture from a true account switching perspective that you can then expand again that ARPA strategy.
And so for now, we’re looking to really maintain that customer value differential and the proposition that can come in the form of different things than just pricing, right? It’s what we actually pack into the plans, some of which actually aren’t that expensive to T-Mobile because of our unique place. Mobile without orders and the ability for travellers particularly with our relationships with Deutsche Telekom, that’s one of the best kept secrets for travellers, and we still get so many, so many notes from customers once they understand what that value that we can bring is relative to getting massive roaming bills if you’re traveling in Europe, for example. So there’s — it’s about a value pack plan, not just price, but value different and everything we’re able to pack…
Craig Moffett
How do cable operators factor into that? They’re pricing so aggressively, as you’ve said, like free and easy way to gain customers, and they are now out with offers that, for a lot of lines, are free. You’ve seen that in the industry before. Does that really inform the way you think about your pricing strategy though? Are they starting to affect the way the big three price?
Peter Osvaldik
Certainly not for us. I mean they’ve been in the run rate for a while. I guess 1 could argue, particularly with Charter that they’ve gone very deep into this first-line free exploding promotion. We still maintain what we’re seeing from an info perspective is that most of this is coming from Verizon in the prepaid space. We think we’re very well positioned for value seekers. We’re very well positioned with T-Mobile essentials, for example, or very low-priced plans that allow us to compete there.
Also, as we talked about on our Q1 call, is a lot of this hasn’t seemed to impact the incumbents from a net perspective. It’s hard to understand because the port, non-port ratio has changed so dramatically and the majority of, for example, charters grow, has been in the non-port space, which could make sense if you’re really pulling out of prepaid, but it certainly hasn’t impacted our growth and our ability to actually translate that growth into industry-leading profitability and service revenue.
That’s the most important play on this. Like they’ve been in the run rate. We’re continuing to be very confident in our play because it is the value proposition, the network proposition, these differentiated market opportunities. And you saw that play out in Q1. We showed the industry-leading post-paid service revenue growth, and we arrived at the station with what we promised at Analyst Day, which is the ability to convert that service revenue into free cash flow. We’re at the highest conversion in the industry of service revenue to free cash flow — and remember, free cash flow continues to expand beyond this year for us.
Q – Craig Moffett
The reason I brought up the cable operators is because their offers are now very much converged offers, at least in the eyes of the consumer of offering them together as a bundle. Your fixed wireless business, would you describe that as it is part of a convergent strategy for T-Mobile? Or is it part of a capacity utilization strategy where I can pick up some extra money, but I’m not fundamentally pivoting the company towards selling a bundle of fixed and mobile together?
Peter Osvaldik
Yes. It’s not a convergent strategy in that we haven’t seen evidence in the U.S. at least, that convergence is anything more from a cable perspective than a discount. And we already have customer value leadership in the industry and great low price plans for true just value seekers.
So for us, fixed wireless was really an ability to monetize the massive excess capacity we’re creating with this network and create very high margin-accretive customers now at 3.2 million as of the end of last quarter, again, with ARPU profile, since you’re an ARPU guy, that are near post-paid phone levels. And yet the equipment, the handset equivalent or CPE is much lower priced and it just provides a great value prop for customers. And so for us, it’s how do you monetize very smartly excess capacity in the network?
Craig Moffett
So the usage though is typically 50 times or so a post-paid customer. Mike, on your conference call said that as you think about your runway to the $7 million to $8 million that you talked about that additional capital investment may be required to go beyond that. Can you talk about that? How likely is it that fixed wireless becomes a driver of incremental capital spending? And how do you think about the ROI for that investment?
Peter Osvaldik
Well, it’s something that we’re investigating. It’s not necessarily that it will happen. But if there are smart ways for us to utilize our spectrum assets for the benefit of consumers in an ROI-accretive way, again, in a way that would be accretive to what we put out at Analyst Day. If we’re going to put any capital investment in the space, it has to come with returns that are in excess of what we put out at Analyst Day.
So it’s areas we’re investigating whether it’s usage of millimeter wave, whether it’s something different from a network perspective that you can do a more simple point-to-multipoint architecture. We have a lot of spectrum assets we can put to work for the benefit of consumers. And so of course, as you’d expect, we’re investigating it, but there’s no conclusions drawn in that regard. And if we did that, it would have to be accretive to what we’ve done.
Craig Moffett
So I want to finish with a few big picture questions. It’s been, what, three years since the Sprint merger. You’ve continued to gain share in mobile. But now we’re also seeing real cash flow generation that you promised. That has unlocked the buybacks, which are running ahead of your plan, which I think you have said $60 billion through 2025. Are there any potential investment opportunities that would change that trajectory? I’m thinking probably the obvious one would be Spectrum that would say, here’s an opportunity for us to meaningfully invest, but it’s going to mean a divergence from that $60 billion target?
Peter Osvaldik
Well, Spectrum is an interesting one, but we have made room for Spectrum in the plan. So even when we said there’s a potential of up to $60 billion in share buybacks or capital returns, as you saw, I mean, we played in C-band smartly. We’ve played in 3, 4, 5 smartly. We had our Columbia capital pending purchase that’s out there. We played an auction 108 smartly. And none of that has impacted the potential of $60 billion. Whether there’d be another opportunity?
Well, you’d expect us to be looking at those, but right now, there’s really nothing significant that we see on the horizon. But to the extent there’s something that does come to play that could be a higher enterprise value creation formula than some portion of the share buybacks, of course, we’d investigate it, but we’re not there yet.
And the beauty of it is, again, as you said, it’s up to $60 billion through the end of 2025 and 2026, 2027, which seems to be coming faster than I anticipated, we’re sitting here in ’23 is, this cash flow generation machine just continues on with continued growth and aspirations there.
Craig Moffett
One of the most common topics in the hallways here of the conference off the stage is what happens to DISH Network, where you have an upcoming spectrum transaction with them that I’ll invite you to just talk about a little bit, but also there may be an opportunity for spectrum from Sprint to be available on the market — from DISH to be available on the market. Can you just talk about that, and how, as an observer of the developments at DISH, T-Mobile is sort of positioning to say there may — what those opportunities might be?
Peter Osvaldik
Yes. Well, as regarding our 800 megahertz potential transaction, that really sits in Charlie’s court. He has the option. He has to decide what to do with it, and we’re there to fulfill the obligations based on whatever he decides.
Craig Moffett
Can you share what your expectation is for what happens there?
Peter Osvaldik
Well, remember, what we put in Analyst Day is that we assumed no proceeds from this transaction. And to the extent that there are proceeds, and if Charlie does exercise this option, then that’s upside from a cash perspective and gives us strategic optionality there.
In regards to DISH itself, we’re here to be a continued partner to DISH. We’re here to support them. We obviously have an MVNO relationship with DISH. And I would have to leave everything else for Charlie to comment on. But DISH is a great fourth player right now, again, with the network partnership that we have as they continue to build out. And I think Charlie is going to make a run at it so…
Craig Moffett
I’ll finish up with a question that I’m sure you think about every day, and that is that with success comes higher expectations. And with a higher stock price over these last few years comes higher expectations. Where are the places where you think expectations are still too low. And I’m not talking about this year’s guidance. I’m thinking, as you think longer term for why the stock price isn’t higher, what are the places that you think the market is missing for the long-term trajectory of this business?
Peter Osvaldik
I think there’s a few, and you alluded to some of them earlier. When you think about our underpenetrated growth opportunities, whether that’s enterprise, government or 40% of the population in smaller markets and rural areas or even top 100, and the greatness that we’re seeing with network seekers starting to come to T-Mobile in and of itself per network is, there’s no reason we can’t run beyond 20% penetration rates in those areas. And so I think there’s upside there for continued growth beyond what we gave in 2025.
There’s also that free cash flow machine that continues to generate. And as you think about this company from a free cash flow perspective, that’s one place. I think many investors I’m hearing from are saying, when you think about the share buybacks, the free cash flow generation, and as you think about the company and the value that it’s creating from a free cash flow perspective, that continues on beyond 2026 with more growth aspirations on the top line, that’s probably the place where I get most excited about.
So our job is to continue to grow, go beyond those 20% penetration rates, maintain what is now that most — the highest conversion of service revenue into free cash flow because that’s the ultimate value creation for a company, whether that’s in the form of shareholder returns, whether that’s in the form of additional investment opportunities. When you’re rolling in that $18-plus billion a year free cash flow generation, it’s a great place to be. That gives you a lot of strategic alternative.
Craig Moffett
Is there any appetite for a regular dividend? Or do you think that return of cash through share repurchases is the more attractive?
Peter Osvaldik
Right. I think certainly, for now, return through share repurchases makes a lot of sense. In the future, I don’t know. Of course, all of that would be subject to Board discussions and deliberations. But the beauty of it is we have a business that’s tremendously healthy. We’re here delivering against those free cash flow goals, and that allows us all of those opportunities in the future.
Craig Moffett
Well, I thank you for being here. As I said, 10 years running. I hope it’s another 10 years, and I really enjoy these conversations. So thank you very much.
Peter Osvaldik
Thank you so much, Craig. Thank you.
Craig Moffett
All right. Well done.