Earnings Call Transcript - TMUS Q1 2023

Jud Henry, Senior Vice President, Head of Investor Relations

Good afternoon. I would now like to turn the conference over to Mr. Jud Henry, Senior Vice President, Head of Investor Relations for T-Mobile US. Please go ahead, sir.

Mike Sievert, President and CEO

Okay. Thanks, Jud. Hi, everybody. Well, welcome to the call, and as you can see, we are coming to you live from Bellevue, Washington, at our headquarters and I am here gathered with a great group of our senior leadership team as we share with you some terrific results that we are posting today to kick off 2023. And I will start by saying our results for Q1 continue to demonstrate that no matter the competitive environment, our unique formula of offering the best network and the best value continues to produce best-in-class outcomes. We again led the industry in postpaid and broadband customer net adds, while continuing to deliver the best profitability growth. And our consistent focus on reliably translating customer growth into industry-leading postpaid service revenue growth and unlocking substantial cash flow gives us the confidence to raise our full-year guidance just one quarter into the new year. Now I will also say Q1 was a quarter of celebration at T-Mobile. I am so proud of how our now ten-year history of more than 20 Un-carrier moves have transformed the wireless industry and more recently, broadband for the benefit of customers, and as you often hear us say, we won’t stop. So we announced last week our latest Un-carrier move with Phone Freedom, a move aimed to free customers and other wireless providers locked into those three-year contracts, while they are subjected to relentless pricing changes and gadgets. We continue to make it easier for customers to come to T-Mobile and switch to T-Mobile for peace of mind, knowing that with price lock, we won’t raise their price for top text and data. And now with new one too our part of Phone Freedom, they will be upgrade-ready in two years, because three years is too long to force customers to wait. Here’s kind of a crazy sort of fact to get your head around, AT&T reported the lowest postpaid phone churn in the industry this quarter and yet quantitative research states that their customers have the highest self-reported likelihood of switching away. Their customers report being almost 50% more likely to switch than Verizon’s or T-Mobile’s customers. The lowest churn, but the highest apparent dissatisfaction. And to me, that means one thing. Their customers are trapped and we are here to solve it and that’s what our latest Un-carrier move is all about. That’s what Phone Freedom is all about. And it’s the way we have been designing our groundbreaking Un-carrier moves for a full decade now. And as you know, we hit another milestone this month, the three-year anniversary of our merger. We are wrapping up an integration that many have deemed, and I think, we will conclude that it is, the most successful merger in telecom history. And most of all, we are celebrating what it was always about, the dream we had of leapfrogging from last place in the 4G era to leadership in the 5G era, smashing the biggest pain point of all by finally giving customers in this industry both the best network and the best value from the same provider. And you know what? We did it and we did it ahead of schedule, meeting our commitments and unlocking massive value in the process. And yeah, we brought about a new level of competition to this market and a 5G network to America that would not have been possible without this merger and that makes customers and businesses everywhere the real winners. Speaking of network, another round of results are in and our team is again celebrating wins as the largest, fastest, and most awarded 5G network as well as the best overall network for the second quarter in a row according to Ookla. And this is not just a snapshot in time. It is a durable network lead. And I am confident that Ulf and team in his new role as President of Technology, congratulations and thank you for stepping in to lead us…

Ulf Ewaldsson, President of Technology

Thank you. Mike Sievert … will continue to keep us ahead in this race over the next years with our great spectrum assets in both depth and breadth deployed rapidly and our rapid execution of our unique process called customer-driven coverage, and finally, continued leadership in implementing advanced technologies such as standalone 5G and multi-carrier aggregation. All of these things, importantly are contributing to the best capital efficiency in our sector. All of these strengths, coupled with our unique opportunity in underpenetrated markets are what enables a differentiated and profitable growth strategy that separates us from the competition, and you know what, we showed that again in Q1. We added 287,000 postpaid account net additions, the highest reported in the industry once again. And that means we are winning the switching decisions in the market, because this looks at it at the account level. And we had postpaid net additions of 1.3 million, more than AT&T and Verizon combined. This included postpaid phone net adds of 538,000. We won a higher share of net adds year-over-year even as the industry continues to moderate, just like we predicted we would in previous calls. Our increased share was driven by our strong phone gross adds, as well as being the only national wireless provider to improve postpaid phone churn year-over-year. Our consistent approach to profitable growth continues to deliver right on and sometimes even above our ambitious plans and that’s even as the competitive landscape continues to shift and evolve. In recent quarters, we have seen cable giving away three first lines that don’t, by the way, appear to be incrementally pulling from existing customers and incumbent providers but definitely are driving their ARPUs down. We have seen AT&T and Verizon significantly outspend us in media advertising. I mean Verizon alone spent almost 60% more than T-Mobile in Q1. And we continue to see, as I mentioned earlier, others lean into expensive long-term device contract offers to lock up their customers, while T-Mobile was the only one who improve churn year-over-year and have the lowest upgrade rate. Improving churn, but with the lowest upgrades, that’s because our approach is not to slam customers with expensive unwanted upgrade contracts to tie them down for three years. Customers genuinely choose to stay with T-Mobile for the network, for the value proposition and for the experiences. And you know what? That’s how we want it to be. You have heard us say before, our strategy is differentiated and durable, because it’s driven by taking share in the places where we continue to be underpenetrated relative to the market, but where we now have new permission to win. This profitable growth playbook and the momentum we saw in Q1 is exactly what gives us the confidence to raise our postpaid net add and financial guidance for the year. A perfect example of this, T-Mobile for Business where we just posted one of our highest ever phone net add quarter in Q1 with the lowest business phone churn in our history and we are profitably taking share with more business account net adds and more business phone net adds than Verizon in the quarter. On the consumer side, we are winning with prime network seekers in the top 100 markets who increasingly recognize that T-Mobile offers the best combination of network coverage and capacity for their needs. In fact, our prime customer base hit an all-time high again this quarter. And in smaller markets and rural areas, we are now capturing a win share of switchers in the upper 30s and that’s in the roughly two-thirds of this geography where we are competing. This is great news, because it’s showing that our strategy here is very much on track. In addition, we added 523,000 high-speed Internet customers as we have continued to grow our gross adds every quarter since we launched two years ago. I would expect that we added more broadband customers than AT&T, Verizon, Comcast, and Charter combined for the fourth consecutive quarter. And not only did we have the highest net adds, but our focus on profitable growth translated into strong financial performance with core adjusted EBITDA up 9% year-over-year and free cash flow up over 45%. Our Q1 results were just the latest example of how we have lots of room to run at T-Mobile and I am confident in our ambitions for this year and beyond. One thing you have come to expect from this management team is that we are never satisfied, and you saw that again with our latest Un-carrier move to free customers from three-year contracts and introduce new Go5G plans that offer even more value than before. As proud as I am of what we have accomplished in our 10 years as the Un-carrier and in Q1 most recently, I am even more excited about what’s ahead for T-Mobile and I am so thankful that all of you are on this journey with us. Okay. Peter, over to you to talk about the key financial highlights and our updated guidance for 2023.

Peter Osvaldik, CFO

Thank you, Mike. We are on track for another year of exceptional profitable growth in 2023, as demonstrated by our Q1 results and the updated guidance I'll share shortly. Our steady growth in postpaid accounts and postpaid ARPA has led to the highest postpaid service revenue growth in the industry, increasing by 6% year-over-year. Our commitment to profitability resulted in a 9% year-over-year rise in core adjusted EBITDA, with an increase of 270 basis points in our core adjusted EBITDA margin, while AT&T and Verizon saw flat to declining numbers. Additionally, as Mike noted, our free cash flow has surged over 45%, achieving the highest free cash flow margin compared to our competitors. We anticipate that our leading free cash flow margin will provide sustainable and distinct value for shareholders moving forward. This robust financial performance has supported our share buybacks, with 33 million shares repurchased for $4.8 billion in Q1 and a total of 59.4 million shares repurchased for $8.5 billion as of April 21. We are also pleased with the recent rating upgrades from Moody’s to Baa2 and Fitch’s two-notch upgrade to BBB+, which further enhance our access to lower-cost capital in the investment-grade market. Now, let's discuss our increased guidance for 2023. We expect total postpaid phone net customer additions to be between 5.3 million and 5.7 million, reflecting growth across all market opportunities, with nearly half coming from phones for the full year. Our focus on profitable growth enables us to support these higher customer net additions while also increasing our core adjusted EBITDA expectations to between $28.8 billion and $29.2 billion, representing a 10% year-over-year growth at the midpoint driven by higher service revenues and merger synergies, excluding approximately $300 million in leasing revenues as we transition customers off device leasing. Our merger synergies are projected to be between $7.3 billion and $7.5 billion in 2023, reaching the full run rate synergy target ahead of schedule and aiming for an $8 billion target in 2024. We expect merger-related costs, not included in adjusted or core adjusted EBITDA, to be around $1 billion before taxes, with cash merger-related costs anticipated to be between $1.5 billion and $2 billion for 2023. Net cash provided by operating activities, including merger-related cost payments, is projected to range from $17.9 billion to $18.3 billion. We anticipate cash CapEx to be between $9.4 billion and $9.7 billion, showcasing capital efficiency that is unmatched in our industry, thanks to our network integration and 5G leadership. Q2 is expected to be slightly lower than Q1, with a moderation in the latter half of the year, resulting in heightened free cash flow, including merger-related cost payments, now expected between $13.2 billion and $13.6 billion, marking a 75% increase over last year due to margin expansion and capital efficiency without factoring in significant net cash inflows from securitization. This also reflects a free cash flow to service revenue margin several percentage points higher than peers, and I project free cash flow in Q2 to be slightly higher than Q1, ramping up in the latter half of the year. We still expect our full-year effective tax rate to range between 24% and 26%, and as we implement our strategy for expanding account relationships, we project full-year postpaid ARPA to grow about 1% in 2023. Before I conclude, I want to provide a brief update on the sale of our wireline assets to Cogent. The process is progressing smoothly under Dave and the Cogent team's leadership, and we now expect the transaction to close in early May. This will lead to approximately $125 million lower wholesale and service revenue and about $175 million lower cost of service expenses on a quarterly basis, with minimal impact to SG&A. With the mid-quarter closing, we foresee a partial effect in Q2, with the full impact taking place in Q3. In conclusion, we are optimistic that 2023 will be another year of profitable growth, with increased free cash flow as we continue to enhance our network leadership and scale our profitable growth opportunities. I will now turn the call back over to Jud to begin the Q&A session. Jud?

Jud Henry, Senior Vice President, Head of Investor Relations

Thanks, Peter. All right. Operator, let’s take our first question, please.

Operator, Operator

Our first question comes from Phil Cusick with J.P. Morgan. Please proceed.

Phil Cusick, Analyst

Hi, guys. Thanks very much. Maybe we can start with the revenue per user. I think you said the same thing about ARPA this quarter that you did last approximately up 1% in 2023. We have been looking at the Go5G plans, which were launched recently. Can you remind us of the path of customers moving to Magenta MAX, how long that took and sort of the and is that a good guide for the pace of the Go5G upgrades and how that drives that ARPA lift?

Mike Sievert, President and CEO

Hey, Phil. I will start and maybe turn to Mike and Peter. First of all, we are really excited about this new lineup. I want to highlight a couple of points. One, Magenta MAX remains in the lineup, and this is an addition to Magenta MAX. As we consider the price point for these mainstream popular plans, we will view them as Magenta MAX and higher. This includes Magenta MAX and the new Go5G Plus Plan as a category. Our expectation is that the run rate we've been seeing in the 60s will continue, and we've certainly observed that since the launch. It was the same for Magenta MAX throughout Q1. It's great to see that our popular plans are also our highest value plans, filled with the features that T-Mobile customers want. Mike, could you elaborate on that a bit?

Mike Katz, Chief Marketing Officer

Yeah. I mean, I think like Mike said, it’s a great representation of the differentiation of our strategy, particularly as it comes to the way that we construct rate plans and do pricing, because with Go5G and Go5G Plus, you see new plans that are incremental to our portfolio that really give customers choice. And with these plans, we packed in the most benefits that we have ever done in the plan with increased roaming in Mexico and Canada, which is the most popular destination for our customers, increased hotspot, which we are seeing utilized more, especially in a post-pandemic world where people are moving around and working everywhere and with Go5G Plus. The first plan, we are guaranteed in the plan, new and existing customers get the same deal on phones, not a promotion like you see from other folks. So we are really bullish on these plans. The early response to them has been really good. One of the things I will say about ARPU is ARPU is a mix-driven metric. And one of the things that you see with us, particularly with the success in some of the segments that we have talked about as being opportunities for us, whether it’s business or 55-plus. The mix of our success in those segments is reflected in our ARPU and it’s one of the reasons why we look a lot at ARPA and we focus a lot on opportunities where we can attract customers and retain customers that demonstrate a really high CLV, like we see with business customers and like we see with 55-plus customers. So you will see us continue to focus on those kinds of accretive value creating opportunities in our portfolio.

Peter Osvaldik, CFO

I think it's important to note that this metric is driven by a mix of factors. For instance, the segments Mike mentioned, particularly those targeting customers aged 55 and older, attract clients with customer lifetime values that exceed the average. While they may report lower average revenues per user, they have significantly high customer lifetime values. Our strategy is to drive profitable growth, so if we look at the average revenue per user metric, we can anticipate it being relatively stable sequentially due to this mix shift. However, as we incorporate more of the 5G Plus offerings, there may be potential growth opportunities in the latter half of the year. Our primary focus will be on average revenue per account and expanding our customer base to drive value within the company.

Phil Cusick, Analyst

That’s helpful. Thanks, guys.

Operator, Operator

Our next question comes from Simon Flannery with Morgan Stanley. Please proceed.

Landon Park, Analyst

Hi. This is Landon on for Simon. Thanks for taking the question.

Mike Sievert, President and CEO

Okay.

Landon Park, Analyst

I am wondering if we could start on the home broadband side. Maybe can you talk about how you are seeing churn in the different cohorts there and what your latest thoughts are on some of the fiber trials you have been running, as well as the latest thoughts on a potential millimeter wave overlay on that front?

Mike Sievert, President and CEO

Yeah. I will start and then we will see who wants to jump in. There’s a bunch there. First of all, you are asking about our fiber trials. And I don’t have a lot new to report there, other than this is a team that, obviously, through our leadership in high-speed Internet and 5G is very committed to being winners in broadband. And so for us, being able to get involved, learn, understand what drives CLV, understand the service models, the technology models, et cetera, is something that’s very important and you see us continuing to do that. We haven’t taken any decisions beyond that other than anything we learn there is accretive to us being in this business and you see that we are already in this business as a major player in the 5G variant. As it relates to what we are seeing in the business itself, I am very pleased. I mean Net Promoter Scores for this business continue to be higher than average cable and higher-than-average fiber in the country. So people love what T-Mobile is serving up to them and that’s important and it informs the churn models, as you are saying. Now we have a very young base and so to your point, we look at it on a cohorted view and some of those aging customers from earlier, we really like what we are seeing in terms of their retention. So really pleased and you can see Net Promoter Score as kind of an indicator of that. Mike, why don’t you jump in, anything else you want to share on that?

Mike Katz, Chief Marketing Officer

I would just say to Mike’s point, as the customer base is growing as we are seeing more cohorts in the longer tenures, we are seeing sequential decreases in churn. And it really does start with what Mike said, this is a great product. It’s a product that really that doesn’t require any trade-offs from customers. It’s got a great NPS and you are seeing it pull heavily from cable. Cable is the biggest contributor to our customer base in this business. And we have built a model and a go-to-market process that now is reliably delivering plus or minus 500,000 customers a quarter, which gives us a lot of confidence in this number that we talked about a couple of years ago of us getting to several millions at the end of this planning period.

Mike Sievert, President and CEO

Okay. And last part of your question was about where do we go beyond our current model and I want to remind everybody what the current model is before answering that, because it kind of speaks to the opportunity here, because others have side eye to what we are doing and said, well, you know there’s a limited opportunity to that. What they are doing over there, and we are like, well, right. I mean we have said that all along. We expect this to be a 7 million unit to 8 million unit opportunity the way we are doing it right now, which is essentially selling excess capacity on our network. So remember, the way this works is, we have created a nationwide mapping of every household in this country, map them to every sector on every tower and determined which sectors no normal amount of mobile wireless use will take up our rapidly expanding capacity and that is where we approve applicants for high-speed Internet on 5G. So we are essentially selling our excess capacity. We see that, that takes us into those high single-digit millions of households in the planning period. Now the question that you asked about millimeter wave is really part of a broader question that says, whether for millimeter wave or not, would we entertain the idea of a capital burden to 5G home Internet plan. And yeah, we would entertain that. It would have to be smart. We would have to have a way to make it capital efficient. We haven’t taken any decisions on that. I don’t know if you want to share a little bit of our thinking or kind of what we see as the opportunity of, but the short answer of it is we haven’t taken a decision on it, but of course, we are interested in it.

Neville Ray, Chief Technology Officer

Thank you, Mike, and that's a great question, Simon. Our 2.5 spectrum is working exceptionally well for us because we have ample excess capacity. This quarter, we're reporting coverage of 275 million POPs with this mid-band spectrum, and we expect to reach 300 million by the end of the year, which opens up new opportunities for us in the HSI sector. We are also continually evaluating millimeter wave during our trials and testing, but it's important to note that its range is limited. We will analyze its economics over time to determine whether it's worth pursuing.

Mike Sievert, President and CEO

Terrific. Thanks for joining the call.

Landon Park, Analyst

Thank you very much.

Mike Sievert, President and CEO

All right. Operator, next question, please.

John Hodulik, Analyst

Great. Hey, Mike. Maybe a couple of questions. First just on the competitive environment. You mentioned Verizon has been a little bit sort of ladder from an advertising statement. I think from a promotion standpoint, too, and Comcast we had some success with their sort of free line offer similar to what Charter has been doing. Just how would you characterize the competitive environment in wireless as it stands today and sort of what gives you the confidence to sort of raise the postpaid numbers as we look into the rest of the year? And then on the buyback, a bit higher than we thought and you are sort of pretty far along on the authorization, should we expect the buyback to slow through the year as you bump up against that existing authorization? Thanks.

Mike Sievert, President and CEO

Great. So competition and buyback. I will start on competition and then turn to Jon Freier. I would say, it’s competitive out there. And that being said, I have probably done 50 of these calls for T-Mobile and that’s been the case for all 50 of them. It’s competitive out there and we have made it more competitive through the creation of this version of T-Mobile. What I said in my prepared remarks is that we have demonstrated time and time again that regardless of the competitive environment, we find our way through to accretive profitable growth, and that’s because our strategy is so differentiated. So I am not going to repeat all that here, other than to say, of course, it’s really competitive. I find the industry a rational level of competition, even the competitors you talked about have been pulsing in and out. Some of the offers have been eyebrow-raising but they pulse in and out. I think to me, it feels competitive and rational and we look at our differentiated strategy. And what we have within our control and we see our way through to increasing our overall guidance for the year. But maybe tell us on the ground, Jon, what your team is seeing as we compete last quarter and this quarter.

Jon Freier, Executive Vice President, Consumer Markets

Certainly. As Mike mentioned, we are in a competitive environment, but that’s something we are accustomed to. We are continuing to experience solid demand. Our overall traffic and interest levels reflect strong demand, as evidenced by our Q1 performance, and we are seeing robust demand in Q2 as well. Additionally, we have noted a significant concentration of prime customers, with the highest mix of prime customers we’ve ever had. Our activating revenue from new accounts switching to Magenta MAX and Go5G Plus continues to show healthy growth, especially since our recent launch on Sunday, which has yielded promising early results. In smaller markets and rural areas, we have a differentiated approach. Back in 2021, we aimed to increase our share of households from 13% to 20% by 2025, and we are excited to report we’ve reached 16.5%—more than halfway to our goal, and we achieved this in less than half the time projected. Our success in smaller markets and rural areas comes down to four key factors: first, we are expanding our network and distribution, now covering two-thirds of smaller markets, reaching 140 million people and 50 million households, which represents 40% of the U.S. Second, we are facilitating customer switching, sustaining a 350 basis point year-over-year increase in switching. Third, our approach to high-speed Internet serves as a new entry point into households, helping us encourage customers to consider migrating their mobile services from competitors. Lastly, we have a dedicated team and have opened more than 400 stores in these smaller markets to support our efforts. Overall, we are seeing strong demand in rural areas, and the quality of the customers we are engaging has never been better.

Mike Sievert, President and CEO

So it’s been two years and we have progressed from 13% to 16.5% market share while only competing in two-thirds of the space. This rapid deployment has been impressive, and you should be proud of what’s happening there. Jon, before I address your competition question, I think we need to mention cable. We are a highly competitive company, and I want to commend our team for having strong diagnostics and telemetry regarding the marketplace. This allows us to monitor competitors as the quarter progresses, and I can share a few insights. You may have noticed Comcast's impressive numbers this morning and Charter's excellent performance in phone net additions, which we observed develop throughout the quarter. When we make operational decisions, we try to understand the underlying reasons behind these numbers. For instance, we believe that approximately 75% of the recent increase from last year's normal levels involves non-traditional net additions, such as promotional offers or low-value adds. We adjust our strategies accordingly to determine how aggressively to compete. It appears that much of this growth isn't coming from established players, so it's essential for us to account for this when making decisions. You also asked a second question about the buyback.

John Hodulik, Analyst

Right.

Mike Sievert, President and CEO

And let me say a couple of things and I will turn it over to Peter. Like, I wouldn’t read too much into how fast we are going and I cannot make any predictions for you as to how that will play out in the future. I could just tell you that generally speaking, we are going fast because we think we are getting a relative great deal on the stock and it’s not normal for management to talk a lot about valuation. But since you have hired us to conduct this buyback on your behalf, we have to make operating decisions with an idea in mind about whether or not we are getting a relative value. And our team thinks and our Board thinks it is and so we have authorized moving quickly, because we look at this rapidly developing cash flow picture and a lot of people are increasingly valuing T-Mobile on our value relative to cash production and we see a lot of potential ahead for a diminishing opportunity for us to be able to grab shares at these share prices and so we are moving really fast. I cannot predict for you, though, what that means going forward, obviously, we are going to take it one step at a time.

Peter Osvaldik, CFO

I am really excited about how things are progressing. While I can only mention the $14 billion target approved by the Board, it's important to highlight that our business's cash flow generation supports this. Looking ahead, we have the potential for up to $60 billion in share buybacks through the end of 2025, and we're already in 2023. Our free cash flow production will continue into 2026 and beyond. This strong cash flow is what enables our shareholder return strategy. We have again raised our guidance for the year based on our confidence just one quarter in, and I am very pleased with how the share buybacks are advancing.

Mike Sievert, President and CEO

Okay. We better keep moving. We gave you quite an answer there, John.

Operator, Operator

Our next question comes from Jonathan Chaplin with New Street Research. Please proceed.

Mike Sievert, President and CEO

Hey, Jonathan.

Jonathan Chaplin, Analyst

Hey, guys. I am going to ask two questions as well, if that’s okay. The color you just gave us on small markets, some of the progress you are making on market share is super helpful. I am wondering if you can give us exactly the same context for business in terms of where you are in share and any color you can give us around sort of the number of business accounts or business lines you have would be super helpful? And then on the Phone Freedom Plan which looks like it really has the potential to unlock trapped customers, as you suggest. Can you help us understand what the impact of that is on EBITDA expectations for the rest of the year? You have got, on the positive side, obviously, you are pushing people into higher ARPU plans. But then presumably to trigger a higher upgrade rate and so that’s a cost against it and how do those two things net together in the guidance?

Mike Sievert, President and CEO

Okay. Sounds great. Well, let’s go first to Callie. I will just say she’s going to give you exactly what you asked for, which is some color on what’s going on, but probably not what was behind what you asked for, which is lots of racking and stacking of market share numbers and things like that. We are moving really fast here and we want to keep it competitive as to some of the details. But maybe tell us what you are seeing in the marketplace?

Callie Field, President of Business Group

Yeah. Thanks, Mike, and thanks, John, for the question. You know we have a longstanding goal to be the growth leader in business and I am really pleased to see that we are making very nice progress towards doubling our market share. We are growing in customers and in revenue. And we are taking share from AT&T and Verizon. In fact, in Q1, as Mike mentioned in his opening remarks, our business account growth, our phone net adds and our phone churn were all better than Verizon. And while AT&T reported declines in FirstNet quarter-over-quarter, we saw a 2.5 times growth in Connecting Heroes. So we are winning and we are winning across every segment. In Enterprise, we were selected to be the exclusive partner nationwide for AAA to develop roadside connectivity using partners like Dialpad with a collaboration tool and in our phone solutions. Siemens Energy selected T-Mobile as their exclusive partner, UPS, Oracle, Dell Resorts. These are all companies that are choosing T-Mobile, because of the quality, the value, and the performance of our network. In the government space, I will add, I am actually really proud of the team for the work that we have been doing with Veteran Affairs. The VA just selected T-Mobile as a primary partner for nine years with over 50,000 phone lines, as well as to create healthcare 5G solutions in the vertical. So we are very excited about that. In SMB, what I can say in SMB is that, we have seen net positive port trends versus Verizon for four quarters straight in a row. So it’s great profitable rates, great CLVs, competing not only like I said, on the best value, but also a superior product and experience. You know businesses buy because they have tested the product and we surpassed the competition.

Mike Sievert, President and CEO

It could be a little bit of a canary in the coal mine for us, too, because of that fact, that last fact that you just shared, Callie, that businesses aren’t going so much on brand reputation. They actually check out the phones, like sometimes hundreds of them before making these decisions and compare us head-to-head. And so businesses through their testing now that we now have the best network and we do get questions about, well, how are you going to keep competing if the incumbent guys just keeps slashing their prices to hang on to those customers. And what is missed in that dialogue is that that’s not actually the only factor going into this decision process.

Callie Field, President of Business Group

Yeah.

Mike Sievert, President and CEO

I mean businesses have corporate liable lines for a reason. They want to take responsibility for this connection, because it’s mission-critical and we can save them some money. I mean we are the Un-carrier, but they are picking us because we are the best network. And that’s been a breakthrough that I would say was not the case the same way a couple of years ago. So you are hearing a lot of optimism there. One thing we did here as we listened in, were some in the industry is kind of saying, hey, there’s a sort of a sector decline happening, lots of layoffs, companies aren’t interested in business lines anymore, there’s sort of a pause going on. That is not our experience and you can hear that in the optimism of what Callie is saying.

Mike Katz, Chief Marketing Officer

Yeah, I mean, I would say to that that those enterprise wins is large scale impact. And we have seen really strong net positive trends on with respect to business chasing across all customer segments, large enterprise, mid-market and SMB. So I think as we look at the year ahead, I am really excited about the opportunities ahead in business for T-Mobile.

Mike Sievert, President and CEO

Okay, your second question was about Phone Freedom and what’s going on there. So maybe we will start with Mike and then there was a particular EBITDA outlook question associated with Peter.

Mike Katz, Chief Marketing Officer

Yeah. Like I mentioned before, Phone Freedom kind of had two big components to it. One was the rate plan Go5G, Go5G Plus, which, Jonathan, as you indicated, has this benefit of upgrade built into it. And then the second thing, which I think is also an important input to the second part of the question you asked is, we launched a promotional program called the Easy Unlock. And what the Easy Unlock, the insight it’s really going off of is both what Mike talked about in terms of the dissatisfaction that AT&T customers have, 50% more reports that they want to leave their current carrier than in Verizon and T-Mobile. And when they want to leave, it’s incredibly difficult, both because of long-term contracts, but also because they have the most customer unfriendly unlock process in the entire industry. And what we wanted to do is make switching incredibly easy and that’s what we did with that program. And I think that’s one of the things that will really help us unlock the switcher pool a little bit, which when we know happens, T-Mobile is the disproportionate winner.

Peter Osvaldik, CFO

Regarding the EBITDA guidance, we had already anticipated a certain level of opportunity by the end of the year. Customers were clearly indicating, particularly in the latter half of last year, that they were looking for the best value and network combination, which at that time was represented by Magenta MAX. This feedback inspired us to create an even more comprehensive plan. Therefore, all revenue assumptions, along with customer acquisition contributing to high customer lifetime values, are encompassed in the core EBITDA guidance we provided. Additionally, there was a question about how this impacts the contract asset. The contract asset increased sequentially from Q4, mainly due to ongoing promotions into Q1, as well as some business initiatives. However, our current core EBITDA guidance reflects an expectation that the contract asset will decrease to a negligible impact for the year, as outlined in the guidance we shared.

Mike Sievert, President and CEO

Good stuff. Okay.

Operator, Operator

Our next question comes from Twitter. I will go to Bill Ho, who wants to discuss the network. He has some statistics, but the main question is about depth and breadth. We currently have 275 million people covered by ultra-capacity 5G mid-band, and we're aiming for 300 million. How challenging is it to reach these last 25 million, and how does that compare to the last 100 million? It’s interesting to consider this in relation to our competitors and what lies ahead for them. Additionally, can you discuss the depth of coverage and how much spectrum we have planned?

Ulf Ewaldsson, President of Technology

If we start with coverage, we have reached 275 million and have about 25 million left to reach our goal of 300 million by the end of the year. This task becomes progressively harder; typically, it's about three times as challenging for every additional 10 million. This is largely due to the vast geography of the U.S., where some areas have high population density making initial expansion easier but subsequent growth more difficult. However, we are confident in our current build plan to achieve this. Regarding the depth of our network, we continue to transfer frequency assets from LTE to 5G effectively. Currently, we have 150 megahertz dedicated on our mid-band, which is providing us with impressive speeds. This last quarter, we have enhanced our downlink speed advantage over competitors, and we expect to finish the year with 200 megahertz of dedicated mid-band spectrum. It's exciting to witness this progress with our technology team.

Mike Sievert, President and CEO

Which means with each passing day, the overall capacity of this network is rapidly expanding. It’s a fascinating thing when you listen to what Ulf says too, about how the easy part is that first 100-and-something million POPs, right, which generally corresponds to where our competitors are. And so we get questions a lot about, hey, you guys jumped out with a couple of year lead in 5G, aren’t they catching you. And hopefully, you can understand when you see where we already are and where we are at the end of the year. Now there’s still years behind us because that last part is really difficult and it’s really important for the overall perception that a customer has about the brand. You have to be great outside the core urbans with a high-capacity offering for somebody to believe you have a high-capacity offering. And that matters to them even if they don’t leave that space all the time. So it’s really important, and it’s one of the many reasons why we have a durable leap.

Operator, Operator

All right. So let’s go back to the calls? Let’s do it. Operator, next question, please?

Brett Feldman, Analyst

Yeah. Thanks for taking my question.

Mike Sievert, President and CEO

Hi, Brett.

Brett Feldman, Analyst

Hi, Mike. You made an interesting point about churn. You mentioned that you had the best year-on-year improvement in churn, but also noted that your churn isn't the lowest in this category yet. That's intriguing because you pointed out that your large customer cohorts show a lower churn profile compared to similar groups at your competitors. It seems like there's a chance to reduce churn further across your customer base. Looking at the areas where churn remains high, what do you believe that opportunity is? Is this something you're actively planning to address to continue lowering churn, or do you feel you've reached a certain limit? Thanks.

Mike Katz, Chief Marketing Officer

I appreciate your question, Brett. We are currently at a significant point in our company's history. Over the past six years, we've focused on dreaming about, completing, and integrating our merger, which allowed us to surpass AT&T and Verizon, moving from last place in the LTE era to first in the 5G era. We've successfully made progress in this regard by establishing the best network in the country and offering the best values as the merger is now complete. Our next step is to persuade the American public of these realities. I find inspiration in the successful journey of standalone T-Mobile, which achieved the lowest churn rates in the industry despite lacking a robust network. Presently, we are focused on prime customers, achieving the highest prime rate in our company’s history, as well as business customers and travelers, who are increasingly recognizing that T-Mobile is their best choice. The process of convincing the country of our merits may take time, but our goal is to have the lowest churn in the industry for postpaid phones, having already achieved this for prepaid service. With our superior network and prices, there is no reason we shouldn’t have the lowest churn. We've navigated this journey from worst to first before with standalone T-Mobile, and I am optimistic as we continue this journey with the new version of our company. The major merger-related changes are largely in the past, and we are now engaged in the steady work required, similar to our previous successes as standalone T-Mobile.

Brett Feldman, Analyst

Okay. Thank you.

Operator, Operator

Our next question comes from Michael Rollins with Citigroup. Please proceed.

Mike Sievert, President and CEO

Hey, Michael.

Michael Rollins, Analyst

Thanks and good afternoon. Hi. Two questions. First, going back to the customer unlock opportunities, where is the industry and T-Mobile on eSIM capabilities and is this a topic that’s important to helping you propel unlocks and switching opportunities? And then just secondly, do you have visibility on whether or not DISH will exercise its option to buy your 800 megahertz spectrum, and if they don’t, what is the next steps for T-Mobile with respect to that spectrum band?

Mike Sievert, President and CEO

I will start with the DISH situation and then let Mike provide insights on the eSIM topic. Currently, we don’t have any visibility on that. DISH has requested a 60-day extension for their decision, and we did not oppose this. According to our consent decree, it is entirely their decision. We are here to support them and will await their choice. I am in communication with Charlie, and as I gather more information, we might be able to assist further. Ultimately, if DISH wants the spectrum under the consent decree terms, it will be theirs. If they choose not to proceed, the spectrum would go to auction and could end up with another party. We will observe how this develops and are here to support whatever decision they make. Regarding eSIM, it’s interesting to see how this has evolved in the industry, though there hasn’t been significant discussion around it. One challenge has been the phone locking issue related to Phone Freedom. With eSIM, even if the second SIM is accessible, a locked phone makes using that second SIM difficult. This creates some barriers to fully realizing the potential of eSIM. Nevertheless, we are enthusiastic about it. A few months ago, we introduced excellent switching features that let you test our network on the second SIM, assuming your phone supports it. This has been enjoyable for users who want to experience our network. But, Mike, perhaps you can elaborate on what we’re observing.

Mike Katz, Chief Marketing Officer

Yeah. I was going to say something really similar. We are big fans of eSIM, really for two big reasons. One, we think it’s a much better customer experience. You don’t have to deal with plastic and switching in and out of your phones every couple of years when people are upgrading. And for a company that wins when switching happens, eSIM does make switching easier and we have tried to take advantage of that with the technology that Mike mentioned earlier, where we launched an app where you can easily test the T-Mobile network side-by-side with your incumbent network on the same phone and when you are ready to switch, you can just do it in a couple of clicks. So we are fans of eSIM. We are really supportive of it, and we are optimistic that it will help accelerate even programs that we talked about today with that Phone Freedom.

Mike Sievert, President and CEO

Okay. How about…

Operator, Operator

Our next question comes from Craig Moffett with MoffettNathanson. Please proceed.

Craig Moffett, Analyst

Yeah. Hi. Two questions, if I could. One is I want to stay with the DISH theme for a minute. It’s becoming more and more openly discussed that DISH may eventually be a liquidation story. If that were to happen and if the FCC were willing, how much appetite do you have for more spectrum? And it sort of leads into my second question, which is just with respect to 5G, the new applications have been somewhat slower to develop than might have been expected. I wonder if you could just update us on 5G usage growth and how quickly the consumption of network resources is proceeding with 5G and if that is the differentiator you had hoped and expected it to be given your spectrum and network advantage?

Mike Sievert, President and CEO

I won't be addressing the first question directly, as I believe John provided an adequate response, although he was misquoted. John's response was in a hypothetical context about spectrum, and I think labeling him unfairly is not warranted. To start with, I consider the question regarding DISH a bit premature. I have a long history with Charlie and wouldn't easily count him out. This also leads to a broader point; we should consider whether the wireless industry has enough spectrum in the long term to maintain American competitiveness. In my view, there is always a need for more spectrum, which ties back to public policy matters. The FCC lost its auction authority this year, and T-Mobile, along with others, is encouraging Congress to restore it. It's essential for our regulatory body to collaborate with other agencies to ensure a consistent, long-term spectrum pipeline for all players in this industry, which is critical for maintaining our country's leading connectivity. It's important for our business, our competitors, and American competitiveness as a whole. Regarding your second question about apps in 5G, our competitors created a lot of excitement about 20 gigabit connectivity, talking about how it would revolutionize things, but we've always approached it differently. We believe that 5G should be significantly better than 4G and that the initial killer apps will revolve around smartphones and home broadband. By focusing on our mid-band spectrum, we paved the way, and now, the average T-Mobile customer enjoys connectivity that's ten times faster than it was in 2018. That's impressive. However, people still wonder about the augmented reality applications we mentioned. My response is that our priority is to establish a robust network, which we have achieved. As developers explore innovations, I believe they will choose T-Mobile for our outstanding connectivity that covers the entire country, not just in select areas. The pace at which they develop their applications is up to them. Would you like to add anything?

Mike Katz, Chief Marketing Officer

The only other thing I’d add is that, let’s not forget about HIS, because HSI, I do think is still one of the big killer apps for 5G that you are seeing play out right now. 3.2 million customers are running their home Internet in their house over our 5G wireless network and using hundreds of gigs a month on average, both in the big top 100 markets. But also importantly, many customers in rural areas, some of which this is the first high-speed option that existed and it only happened because of 5G. So I don’t think we can forget about HSI being one of those big killer 5G applications.

Mike Sievert, President and CEO

Terrific. That’s right.

Operator, Operator

That’s helpful. Thank you.

Jud Henry, Senior Vice President, Head of Investor Relations

All right. Operator, we have got time for one more question.

David Barden, Analyst

Thank you for your time. Mike, I appreciate you addressing this question. I'm glad to hear you’re doing well. My first question is about the stock. The company's performance has been impressive, yet the stock seems to be struggling to break through the 150 mark. I’d like to revisit the topic of the 48.8 million SoftBank top-up shares. Have there been any updates in your discussions with DT and SoftBank regarding the remaining buyback authorization as a way to simplify this process? It appears to be a smooth and non-disruptive solution, and I’d welcome your thoughts on that. My second question pertains to your previous commitment regarding price increases in T-Mobile. You pledged not to raise prices for three years in most states, with that commitment ending on April 1, 2023, followed by the introduction of your new Un-carrier plan. Now that you have the ability to adjust prices in response to inflation or other factors, how do you view that in relation to T-Mobile's brand image in the market? Thank you.

Mike Sievert, President and CEO

We have consistently offered superior pricing compared to our benchmark competitors throughout the decade-long journey of the Un-carrier, and we plan to continue this strategy. While market conditions may change, we aim to maintain our pricing advantage without being rigid about it. Our strength lies in our solid balance sheet, optimal capital structure, and strong spectrum position, which enable us to uphold our pricing superiority sustainably. As market dynamics shift, such as inflation, we recognize opportunities to adjust our pricing accordingly. However, our focus remains on our customers and the value our brand offers. This commitment is evident as customers increasingly choose our higher value products like Magenta MAX and Go5G Plus, demonstrating their loyalty to our brand. Regarding the potential SoftBank share triggering under certain stock price conditions, we communicate regularly with them and are aware of the situation, but we currently have no updates to share. If a transaction were to occur, it would need to be mutually beneficial. Notably, we've already repurchased more shares than the potential dilution might entail, and we plan to continue our buyback program if our capital strategy allows. Therefore, this potential event is relatively minor considering our overall shareholder returns supported by our cash flow.

Peter Osvaldik, CFO

No. Great.

Mike Sievert, President and CEO

Perfectly said. Anything to add to the whole show?

Peter Osvaldik, CFO

The show must go on.

Mike Sievert, President and CEO

All right. Well, we appreciate you guys. Thanks for tuning in and for asking all these questions. I am so proud of our team. It’s a fascinating year. It was fascinating for us to watch how it all started and the different perceptions people have. But one thing I hope that you take away from us is that we are a team maniacally focused on delivering for you what we promised you we would do and that’s what we show up and try to do every single time and I am so proud that this was one more quarter where we were able to put down great results and outlook for you in 2023 that we are going to be proud of. So thanks for tuning everybody. See you later.

Operator, Operator

Ladies and gentlemen, this concludes the T-Mobile first quarter earnings call. We thank you for your participation. You may now disconnect. Have a pleasant day, everyone.