T-Mobile Reveals Q4 2011 Earnings, Plans to Bring LTE in 2013

Strong adjusted OIBDA and prepaid performance; contract business negatively impacted in the fourth quarter of 2011 by iPhone 4S launches by three nationwide competitors

• Adjusted OIBDA increased by 4.3% year-on-year to $1.4 billion in the fourth quarter of 2011, adjusted OIBDA margin improved 2 percentage points year-on-year to 31% in the fourth quarter of 2011
• Branded contract losses improved through the third quarter of 2011, however the launch of the iPhone 4S reversed this trend to a branded contract customer loss of 706,000 in the fourth quarter of 2011
• Strong branded prepaid additions of 220,000 in the fourth quarter of 2011, primarily due to continued success of unlimited Monthly 4G prepaid plans
• Service revenues down 2.7% year-on-year to $4.6 billion in the fourth quarter of 2011, due to branded contract customer losses and revenue effects from the shift to unlimited Value plans
• Branded contract ARPU increased $2 year-on-year to $58 in the fourth quarter of 2011, mainly driven by an increase in data ARPU
• Branded Data ARPU increased $2.70 year-on-year to $16.50 in the fourth quarter of 2011
• T-Mobile USA is reinvigorating its challenger strategy, which includes a major network modernization plan to launch LTE in 2013
• On December 20, 2011 T-Mobile USA’s proposed sale to AT&T, Inc. was terminated; due to the termination of the sale near year-end, T-Mobile USA’s annual impairment assessment of indefinite-lived assets is still ongoing

T-Mobile USA, Inc. (“T-Mobile USA”) today reported fourth quarter 2011 results and provided an update on its annual assessment of indefinite-lived assets recorded in its financial statements.  In the fourth quarter of 2011, T-Mobile USA reported service revenues of $4.57 billion, down from $4.69 billion in the fourth quarter of 2010, and adjusted OIBDA of $1.40 billion, up from $1.34 billion reported in the fourth quarter of 2010.  Blended ARPU in the fourth quarter of 2011 was $46, consistent with the fourth quarter of 2010.  Additionally, net customer losses were 526,000 in the fourth quarter of 2011, compared to 23,000 net customer losses in the fourth quarter of 2010.

“In 2011, T-Mobile USA showed solid financial performance with a remarkable adjusted OIBDA turn-around in the second half of the year, despite nine challenging months during the pending acquisition. We further increased our 4G data speed to 42 Mbps, expanded our sales channels, launched 25 new 4G handsets and significantly improved our operational efficiency. As a result, adjusted OIBDA rose again year-on-year in the fourth quarter of 2011 and branded data ARPU grew 20 percent year-on-year as smartphone adoption accelerated,” said Philipp Humm CEO and President of T-Mobile USA.  “However, not carrying the iPhone led to a significant increase in contract deactivations in the fourth quarter of 2011.  In 2012 and 2013, T-Mobile USA will invest to get the business back to growth, including an incremental $1.4 billion investment in its network modernization initiative, which will total a $4 billion investment over time.”

“Though we are not satisfied with the contract customer losses and the decreased total revenues, the quarterly margin improvement year-on-year was impressive.  The spectrum gained through the break-up fee empowers T-Mobile USA to start LTE-based services in key US markets and strengthens its competitiveness,” said René Obermann, CEO of Deutsche Telekom.

Total Customers

• T-Mobile USA served 33.2 million customers (as defined in Note 1 to the Selected Data, below) at the end of fourth quarter 2011, compared to 33.7 million customers at both the end of third quarter 2011 and the end of fourth quarter 2010.
• Fourth quarter 2011 net customer losses of 526,000, compared to net customer additions of 126,000 in the third quarter of 2011, and net customer losses of 23,000 in the fourth quarter of 2010.
  • The sequential and year-on-year increase in customer losses is a result of intense competitive pressure from the launch of the iPhone 4S by three nationwide competitors in the fourth quarter of 2011.  In addition, higher connected device deactivations contributed significantly to the net customer loss in the fourth quarter of 2011, including a nearly 265,000 deactivation related to one customer with a yearly service revenue impact of less than $1 million.

Contract Customers

• Contract net customer losses, including connected devices (as defined in Note 1 to the Selected Data, below), were 802,000 in the fourth quarter of 2011, compared to 186,000 net contract customer losses in the third quarter of 2011 and 251,000 net contract customer losses in the fourth quarter of 2010.
• Branded contract net customer losses, excluding connected devices, were 706,000 in the fourth quarter of 2011, a decline of 317,000 net branded contract customer losses from 389,000 in the third quarter of 2011.  Net branded contract customer losses were 364,000 in the fourth quarter of 2010.
  • Sequentially, the decline in branded net contract customers was driven primarily by higher branded contract deactivations as a result of the launch of the iPhone 4S by three nationwide competitors in mid-October.
  • The year-over-year change in branded contract gross customer additions resulted in part from competitive pressures and the implementation of strengthened credit standards as part of T-Mobile USA’s focus on improving the overall quality of its contract customer base.
• Connected device net customer losses were 95,000 in the fourth quarter of 2011 compared to net customer additions of 204,000 in the third quarter of 2011 and net customer additions of 113,000 in the fourth quarter of 2010.
  • The sequential and year-over-year change was driven by higher connected device customer deactivations during the fourth quarter of 2011.  Connected device customers, which have significantly lower ARPUs (averaging less than $2) than other contract customers, totaled 2.4 million at December 31, 2011.

Prepaid Customers

• Prepaid net customer additions, including MVNO customers (as defined in Note 1 to the Selected Data, below), were 276,000 in the fourth quarter of 2011, down from 312,000 net prepaid customer additions in the third quarter of 2011, and up from 229,000 net prepaid customer additions in the fourth quarter of 2010.
• Branded prepaid net customer additions, excluding MVNO customers, were 220,000 in the fourth quarter of 2011, down 34,000 from third quarter 2011 branded prepaid net customer additions of 254,000, and improved by 365,000 from 145,000 net branded prepaid customer losses in the fourth quarter of 2010.
  • Sequentially, branded prepaid net customers declined due to churn from prepaid customers as a result of competitive offers introduced by T-Mobile USA’s competitors during the quarter.
  • The year-on-year growth in branded prepaid net customer additions was due primarily to growth in customer adoption of T-Mobile USA’s unlimited Monthly 4G prepaid plans.
• MVNO customers increased slightly in the fourth quarter of 2011, totaling 3.6 million as of December 31, 2011. Compared to the fourth quarter of 2010, MVNO net customer additions decreased due to fewer MVNO gross customer additions.

Churn

• Blended churn (as defined in Note 3 to the Selected Data, below), reflecting both contract and prepaid customers, increased to 4.0% in the fourth quarter of 2011, up from 3.5% in the third quarter of 2011 and 3.6% in the fourth quarter of 2010.
  • The sequential and year-on-year increase in blended churn was primarily driven by higher churn from branded contract and connected device customers.
• Churn from branded customers was 3.6% in the fourth quarter of 2011, up from 3.2% in the third quarter of 2011, and 3.4% in the fourth quarter of 2010.
  • The sequential and year-on-year increase was primarily due to higher churn of branded contract customers as a result of competitive market conditions and all of T-Mobile’s primary nationwide competitors offering the iPhone 4S in the fourth quarter of 2011. The year-on-year increase was partially offset by an improvement in prepaid branded churn as a result of unlimited Monthly 4G prepaid plans introduced in 2011.
• Contract churn, including connected devices, was 3.1% in the fourth quarter of 2011, up from 2.4% in the third quarter of 2011 and 2.5% in the fourth quarter of 2010.
  • Sequentially and year-on-year contract churn was negatively impacted by competitors’ launches of the iPhone 4S, which is not offered by T-Mobile USA.
  • To address contract churn, T-Mobile USA continued to focus on loyalty efforts during the quarter, including a strong focus on re-contracting its most loyal customers.
• Prepaid churn, including MVNO, decreased to 6.8% in the fourth quarter of 2011, from 7.2% in the third quarter of 2011 and 7.5% in the fourth quarter of 2010.
• The sequential decrease in prepaid churn was driven primarily by fewer MVNO deactivations.
• The year-on-year decrease in prepaid churn was driven primarily by the success of unlimited Monthly 4G prepaid plans introduced in 2011.

Adjusted OIBDA

• T-Mobile USA reported Adjusted OIBDA (as defined in Note 8 to the Selected Data, below) of $1.40 billion in the fourth quarter of 2011, compared to $1.45 billion in the third quarter of 2011 and $1.34 billion in the fourth quarter of 2010.
• Adjusted OIBDA margin (as defined in Note 9 to the Selected Data, below) was 31% in the fourth quarter of 2011, consistent with the third quarter of 2011 and up from 29% in the fourth quarter of 2010.
  • Year-on-year OIBDA margin improved primarily due to the reductions in equipment subsidies in connection with the new unlimited Value plans.
• T-Mobile USA is currently performing its annual assessment of the indefinite-lived assets recorded in its financial statements.  T-Mobile USA anticipates that it will record a material non-cash impairment charge related to its indefinite-lived assets for the fourth quarter of 2011.  Any such charge would have no affect on either the Company’s current cash balance or future cash flows.  T-Mobile USA expects to include full financial statement results for the fourth quarter of 2011 in the earnings release for the first quarter of 2012 as a comparative period.

• Adjusted OIBDA in the fourth quarter of 2011 and the third quarter of 2011 excludes AT&T transaction-related costs of $123 million and $51 million, respectively, primarily consisting of employee-related retention benefit expenses.
• Sequentially, adjusted OIBDA decreased as a result of lower service revenues driven by branded customer losses and higher customer acquisition expenses.  This was offset by lower network operating expenses.  Third quarter of 2011 adjusted OIBDA had also benefitted by $29 million in connection with the discontinued retail partnership with RadioShack.
• Year-on-year, adjusted OIBDA increased as a result of reduced losses from equipment subsidies due to the launch of the unlimited Value plans and continued cost management programs. Fourth quarter 2011 operating expenses, excluding the cost of equipment sales, remained consistent sequentially and year-on-year as cost savings programs in 2011 helped control expense growth.

Revenue 

• Service revenues (as defined in Note 4 to the Selected Data, below) were $4.57 billion in the fourth quarter of 2011, down from $4.67 billion in the third quarter of 2011 and $4.69 billion in the fourth quarter of 2010.
  • Sequentially and year-on-year, quarterly service revenues decreased primarily due to contract customer losses, which were partially offset by the increased adoption of data plans in the contract and prepaid customer base.  Additionally, year-on-year service revenues were positively impacted by growth in revenues from providing handset insurance services to customers, which were insourced in the fourth quarter of 2010 and reconnection fees, which were introduced in the third quarter of 2011.
• Service and Sales revenues (as defined in Note 13 to the Selected Data, below) were $5.1 billion in the fourth quarter of 2011, down from $5.2 billion in the third quarter of 2011 and $5.3 billion in the fourth quarter of 2010.
  • Service and Sales revenues decreased slightly from the third quarter of 2011 primarily due to contract customer losses as described above, partially offset by increased 3G/4G smartphone sales volumes.  The number of 3G/4G smartphones sold in the fourth quarter of 2011 increased to 2.6 million from 1.8 million in the third quarter of 2011 and 2.1 million in the fourth quarter of 2010.  3G/4G smartphones also accounted for a record 92% of equipment sales in the fourth quarter of 2011 compared to 77% in both the third quarter of 2011 and the fourth quarter of 2010.
  • Compared to the fourth quarter of 2010, Service and Sales revenues decreased by 3.6% as fewer branded contract gross additions were partially offset by handset sales in connection with the introduction of T-Mobile USA’s new unlimited Value plans.
• Total revenues, including service, equipment sales, and other revenues were $5.2 billion in the fourth quarter of 2011, consistent with the third quarter of 2011 and down from $5.4 billion in the fourth quarter of 2010.
  • Compared to the fourth quarter of 2010, total revenues changed due primarily to contract customer losses as described above.

ARPU

• Blended Average Revenue Per User (“ARPU” as defined in Note 4 to the Selected Data, below) was $46 in the fourth quarter of 2011, consistent with both the third quarter of 2011 and the fourth quarter of 2010.
  • Both blended and contract ARPU benefitted from growing handset insurance revenues and from the introduction of reconnection fees.
• Contract ARPU, including connected devices, was $53 in the fourth quarter of 2011, consistent with the third quarter of 2011 and up from $52 in the fourth quarter of 2010.  Branded contract ARPU, excluding connected devices, was $58 in the fourth quarter of 2011, down from $59 in the third quarter of 2011 and up from $56 in the fourth quarter of 2010.
  • oYear-on-year, branded contract ARPU increased as data revenue growth more than offset lower voice revenue, which included effects from the shift to unlimited Value plans.
• Prepaid ARPU, including MVNO, was $19 in the fourth quarter of 2011, up from $18 in the third quarter of 2011 and consistent with the fourth quarter of 2010.  Branded prepaid ARPU, excluding MVNO customers, was $25 in the fourth quarter of 2011, up from $24 in the third quarter of 2011 and consistent with the fourth quarter of 2010.
  • oQuarter-on-quarter, branded prepaid ARPU increased primarily due to the continued growth in unlimited Monthly 4G prepaid products.
• Data service revenues (as defined in Note 4 to the Selected Data, below) were $1.4 billion in the fourth quarter of 2011, up 9.9% from the fourth quarter of 2010.
• Data service revenues in the fourth quarter of 2011 represented 31% of blended ARPU, or $14.20 per customer, compared to 30% of blended ARPU, or $14.00 per customer in the third quarter of 2011, and 28% of blended ARPU, or $12.80 per customer in the fourth quarter of 2010.  Branded data ARPU in the fourth quarter of 2011 amounted to $16.50 per branded customer, compared to $16.00 per branded customer in the third quarter of 2011 and $13.80 per branded customer in the fourth quarter of 2010.
  • In the fourth quarter of 2011, the increase in the number of customers using smartphones, along with T-Mobile USA’s continued upgrade of its 3G and 4G networks helped drive Internet access revenue growth through the increased customer adoption of mobile broadband data plans.
  • 11.0 million customers were using smartphones enabled for the T-Mobile USA 3G/4G network (as defined in Note 12 to the Selected Data, below) such as the Samsung Galaxy S^®II, the HTC Sensation™ 4G and the T-Mobile^® myTouch™ 4G Slide.  This represents a net increase of over 34% or 2.8 million customers using smartphones from the fourth quarter of 2010.
  • 3G/4G smartphone customers now account for 40% of total branded customers, up from 36% in the third quarter of 2011 and 28% in the fourth quarter of 2010.
  • Messaging revenue (as described in Note 5 to the Selected Data, below) continued to be an important component of data service revenues.  Messaging accounted for approximately 31% of total data revenues in the fourth quarter of 2011, a decrease compared to 32% in the third quarter of 2011 and 36% in the fourth quarter of 2010 related to a shift in the data revenue mix towards mobile broadband data plans.   

CPGA and CCPU

• The average cost of acquiring a customer, Cost Per Gross Add (“CPGA” as defined in Note 7 to the Selected Data, below) was $270 in the fourth quarter of 2011, up from $260 in the third quarter of 2011, but down from $290 in the fourth quarter of 2010.
  • Sequentially, CPGA increased in the fourth quarter of 2011 due primarily to a change in the customer mix towards branded customer additions and higher advertising costs.
  • Year-on-year, CPGA decreased in the fourth quarter of 2011 due primarily to lower handset subsidies as a result of T-Mobile USA’s new unlimited Value plans, which do not bundle subsidized handsets as in traditional wireless service contracts.
• The average cash cost of serving customers, Cash Cost Per User (“CCPU” as defined in Note 6 to the Selected Data, below), was $23 per customer per month in the fourth quarter of 2011, consistent with the third quarter of 2011 and down from $24 in the fourth quarter of 2010.
  • Year-on-year, CCPU decreased in the fourth quarter of 2011 due primarily to lower handset upgrade subsidies as a result of T-Mobile USA’s new unlimited Value plans.

Capital Expenditures

• Cash capital expenditures (as defined in Note 10 to the Selected Data, below) were $2.7 billion in 2011, fairly consistent with $2.8 billion in 2010.
  • In 2011, cash capital expenditures were driven by the continued build-out of the HSPA+ 21 and HSPA+ 42 networks (as defined in Note 11 to the Selected Data, below).
• Cash capital expenditures were $551 million in the fourth quarter of 2011, compared to $741 million in the third quarter of 2011 and $828 million in the fourth quarter of 2010.
  • Sequentially and year-on-year, the decrease in cash capital expenditures was a result of lower expenditures related to the buildout of the HSPA+ 42 network.
  • To further improve the value provided to customers through its 4G mobile broadband network, T-Mobile USA has continued to invest in its HSPA+ 42 network, which reached over 184 million people as of the end of the fourth quarter of 2011, doubling the theoretical speed of its 4G network to 42 Mbps.

T-Mobile USA Recent Highlights

• On March 20, 2011, Deutsche Telekom AG and AT&T Inc. entered into a definitive agreement under which AT&T proposed to acquire T-Mobile USA from Deutsche Telekom in a cash and stock transaction valued at approximately $39 billion, subject to adjustment in accordance with the agreement.  In the third quarter of 2011, the U.S. Department of Justice (DOJ) filed a complaint in the Federal District Court for the District of Columbia to block the acquisition.  On November 24, 2011, AT&T and Deutsche Telekom withdrew their pending applications at the Federal Communications Commission (“FCC”) for the transfer of T-Mobile USA spectrum licenses to AT&T as part of AT&T’s acquisition of T-Mobile USA.   On December 20, 2011, AT&T and Deutsche Telekom jointly announced the termination of the agreement on the sale of T-Mobile USA.  As a result, AT&T made a $3.0 billion cash payment to Deutsche Telekom in December 2011.  The break-up consideration due to Deutsche Telekom under the terminated Stock Purchase Agreement also included significant Advanced Wireless Services (“AWS”) spectrum and a long term agreement on Universal Mobile Telecommunications Systems (“UMTS”) roaming within the USA.  T-Mobile USA incurred transaction-related costs in 2011 that primarily reflect incremental personnel costs as a result of the formerly proposed deal.
• T-Mobile USA and AT&T Inc. have jointly filed a request with the FCC for approval of the AWS spectrum transfer noted above, which resulted from the termination of the agreement on the sale of T-Mobile USA.  This spectrum will increase T-Mobile USA’s average spectrum holdings in the Top 100 markets from approximately 54 to approximately 60 MHz.
• T-Mobile USA continues to unveil cutting edge devices including 42 Mbps-capable smartphones such as the T-Mobile^® myTouch^® Q, the HTC^® Amaze™ 4G and the Samsung Galaxy S^® II and new 4G tablets such as the T-Mobile^® SpringBoard™ with Google™  and the Samsung Galaxy Tab™ 10.1 and the upcoming Samsung Galaxy S^® Blaze™ 4G.
• T-Mobile USA announced it will invest $4 billion in total to strengthen its 4G network by installing new equipment at 37,000 cell sites and deploying HSPA+ in its PCS (1900) spectrum band. This spectrum re-farming effort, combined with the AWS spectrum T-Mobile USA will receive due to the termination of the AT&T transaction (subject to FCC approval), will allow the deployment of long-term evolution (LTE) service on AWS spectrum in 2013. This anticipated network transformation will significantly enhance coverage and performance for customers.