T-Mobile US Earnings Call Insights: Momentum Analysis and Leap Wireless

T-Mobile US Inc (NYSE:TMUS) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Momentum Analysis

Philip Cusick – JPMorgan: I guess two if I can. John, number one, can you talk about the momentum over the last five weeks. Especially, as you launched the new financing promotions in the last couple of weeks versus when you first launched the iPhone? And then second, Braxton if you could help us what’s the marginal OpEx of a gross add at this point on an expense basis, not – so excluding the capitalization, how does that change the EBITDA when you add another customer?

John J. Legere – President and CEO: Interestingly, the momentum we have in July is very strong. There is a lot of new data coming out as we speak, as the period just ended. But I will tell you, as you probably noticed, we came into the marketplace a little over a week ago with a zero down promotion for the summer, and we’ve had great traction with that, giving idea the porting ratios that we’ve seen previously in – let’s just go back, if you go back a year ago, the porting ratios with AT&T and Sprint were about 0.41 and 0.50. In Q2, where we had a successful quarter as you know, the porting ratio with Sprint was about 1.6 and AT&T about 1.7. In the week ended July 31, the porting ratios for AT&T were about 2.04 and Sprint 2.24. So, we’ve had a good strong response, momentum is good in through July. I think our performance on a SOGA basis in July probably mirrored May and June as we start to get the data. So, we are anticipating, as you saw we gave guidance for 1.2 million subscriber additions on the postpaid side net for the year, which is an increase in the second half over the first half and it does anticipate – so we are anticipating additional competitive response. So, even with that we’re pretty confident in that. So, I’ll turn the second part of the question over to Braxton.

J. Braxton Carter – EVP and CFO: Phil, when you look at the branded CPGA significant decreases Q2 2012 was $420, Q1 was $341, Q2 went down to $326. Partly what reflects there is leveraging fixed cost from the base and that’s manifesting itself in lower CPGA. When you are looking, it’s really the incremental OpEx part of a gross add, over two-thirds of this is variable. So when you account for the variable OpEx associated with this increased growth and adjust some of the consensus estimates for EBITDA, it’s clear to see that we are definitely performing well from a profitability standpoint, which again is a testament of some of the focus on cost control and cost initiatives within the Company…

Philip Cusick – JPMorgan: Is that marginal cost all sort of commission and things like that or is there – there is something else in there?

J. Braxton Carter – EVP and CFO: Yes. I mean there’s commissions. There is distribution costs and there is some subsidy on certain handsets that are part of that equation.

Leap Wireless

Brett Feldman – Deutsche Bank: So if I look at your full year postpaid net add guidance, it looks like the net adds you are looking for in the second half of the year are about in line with what you did in the second quarter alone. You alluded to an expectation or maybe some competitive response. I am just curious like, what do you think that means, in other words, do you think that some of the gross adds that you saw nice pop in the second quarter might turn down a little bit as people realize you are doing better or are you actually assuming that maybe the churn rate you achieved in the second quarter could tick back up in light of some of the competitive responses? Then just on the prepaid side, John you talked about Apollo 15, you are going to go out there you are going to acquire Leap’s customers. AT&T had announced that they are going to acquire Leap’s customers – the whole company actually. Have you given any reconsideration to whether it makes more sense to just bid for the company versus bidding for the subs?

John J. Legere – President and CEO: Let’s do two things, I will start and just say we have no interest in Leap. We had no interest in acquiring Leap which was fascinating and led to I think AT&T outbidding itself thinking that people were coming. But we have said all along that we will acquire Leap’s customers the old-fashioned way using our network and our devices. Frankly AT&A is acquiring Leap, it doesn’t mean there will be any customers left by the time they get through the process. So we – I will make it clear, we have no interest there in acquiring Leap as an entity and I’ll say more about Apollo 15. I’d ask Mike to comment on your initial comments and then I’ll comment at the end on the competitive response, and it’s got more to do with – that we are – we’ve always been conservative in outlining our forecast and all I’m trying to say is our guidance assumes a competitive environment. I’ll make some comments after Mike does on whether or not that is already happening and whether it’s impacting us or not. But Mike, do you want to comment?

G. Michael Sievert – EVP and Chief Marketing Officer: Just an outlook on the second half and connecting it to the guidance. The first thing to say is that we’re starting off strong. As John said, we’ve seen great porting ratios in the quarter so far. Our share of gross adds on the phones we believe in July was in line with our performance in May and June which as we previously said were our stronger months of Q2. So, really nice performance so far in the second half, and as you mentioned, our guidance suggests that we will outperform in the second half versus the first half. But a couple of things there, one is, the second quarter with its 685,000 postpaid net additions, if you just take that math forward, we would over perform versus the guidance that we shared. So, as John said, there is a certain amount of – you could call it conservatism or you could just call it expectation of customer response built into the numbers that we’re sharing for the second half on customer growth. Couple of other things, one is that if you look at Churn, it’s a huge factor in our performance and we expect the structural improvements in our business, the brand reassessment by consumers, the way Simple Choice and the Un-carrier strategy are driving customer loyalty, the network performance which has been phenomenal should allow us to continue postpaid churn at low levels. I think there is some seasonality to churn, and we been historically very successful in the third and fourth quarters at gross adds, which means we have more contract expirations in the third and fourth quarter. So, you could see some seasonal variability in churn that could put a little pressure there. So, if you look at the numbers, overall, while the second half is expected to be better than the first half, the guidance we gave would suggest that would moderate a bit from Q2 and you can chop that up to little bit of conservatism and an expectation of stronger customer response – competitive, I should say.

Unidentified Company Speaker: Just couple of other comments. Don’t read my comments that little kid in the school yard is sitting here waiting for the bully to come out and beat him up after school. We are just trying to be conservative. And frankly I would suggest that AT&T, certainly, although they want to admit it, they are in full fight back mode. This acquisition of Leap certainly was an attempt to get them spectrum, but also a competitive response, although delayed to what we are doing with MetroPCS. The next program was an attempt to respond to Jump!, and it failed miserably from the standpoint of how the market understood it and perceived it. Now, I would more so suggest to you that as each month goes on an entire new set of customers at AT&T and Verizon have the ability to consider the Un-carrier proposition. That’s the big news here. The simplified rate plan, the low upfront device cost, the no contract, the anytime upgrade this is what customers are desiring, and as each month goes on there is a whole new set of people that can respond to this. And competitively I think our competitors have already got to responds to Un-carrier Phase 1, Un-carrier Phase 2, our MetroPCS, Apollo 15 migration that we are doing and I have made it clear we are not done. So, in responding to us in what we are doing in the marketplace Un-carrier 3.0 is already scheduled, and you can trust it’s going to do two things, it’s going to solve another customer pain point and it’s going to unveil another weakness of the major players with an inability for them to response. So, the pile of things you need to respond to is going to grow much and as fast as we can possibly solve points for customers.