The Reed Report. Company Spotlight T-Mobile 3/1/2017

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1 The Reed Report Company Spotlight T-Mobile 3/1/2017

2 Business Overview T-Mobile (Ticker: TMUS) T-Mobile provides wireless communications services, including voice, messaging and data, to more than 71 million customers in the postpaid, prepaid and wholesale markets. They provide service, devices and accessories across their flagship brands, T-Mobile and MetroPCS, through owned and operated retail stores, third party distributors, and their websites ( and Previous Quarter On 02/14/2017, T-Mobile reported Q results. EPS (earnings per share) was $0.45 which beat estimates by $0.16 and revenue was $10.2 billion which beat estimates by $0.3 billion. They more than doubled earnings per share and free cash flow (Net cash provided by operating activities minus capital expenditures) in Also, T-Mobile led the industry in customer growth numbers by adding 2.1 million new customers in Q4 and 8.2 million in This is the third year in a row they have been number one in this category. Growth Opportunities In 2017, T-Mobile is forecasting adding 2.4 million to 3.4 million postpaid customers, EBITDA (Earnings before interest, taxes, depreciation, and amortization) growth of 8% to 13%, excluding spectrum (radio wavelengths) gains, and three-year free cash flow CAGR (compound annual growth rate) of 45% to 48%. T-Mobile plans to achieve this by improving their network and putting their customers first. There is a belief among consumers that AT&T and Verizon have vastly better networks than T- Mobile. That s why they were able to get away with higher pricing and did not offer no strings attached unlimited data plans. A few years ago that was true but not anymore. According to Open Signal s February 2017 State of the Mobile Networks article, Verizon and T-Mobile are tied for first in network speeds and T-Mobile s ranked second in 4G availability less than two percentage points below Verizon. I personally have switched to T-Mobile a few months ago and have not seen a difference in service except for when I take the subway. T-Mobile currently provides 4G LTE coverage to 314 million people, and plans to provide 320 million people with 4G LTE coverage by year-end Their Extended Range LTE, which enhances signal strength and coverage in suburban and rural areas, covers more than 252 million people and they plan to expand its reach to an additional 30 to 40 million people by the middle of this year. The company continues to increase the depth, breadth, and functionality of its LTE network by adding new spectrum to increase coverage, upgrading existing spectrum, and implementing new technology to expand capacity. T-Mobile recently added spectrum by acquiring the Chicago 700 MHz A-Block at the end of 2016, and the Eastern Montana 700 MHz A-Block in At the end of 2016, approximately 70% of spectrum was being used for 4G LTE compared to 52% at the end of These network improvements has helped T- Mobile s 4G LTE network to become one of the fastest in the nation based on download and upload LTE speeds. T-Mobile s Un-carrier strategy is built around listening to customers and finding solutions for their pain points. This has resulted in a series of consumer-friendly moves that changed the rules of wireless and forced the competition to change along with it. So far, T-Mobile has launched 13 Un-carrier moves in the last four years including the elimination of service contracts, ending overages, enabling upgrades

3 anytime, free international data roaming, unlimited music and video streaming, and offering all unlimited plans with taxes and fees included. Over the past few years, the biggest concern of mobile phone customers is data overages. With the rise of streaming services such as Netflix, Amazon Prime, and Spotify and social media apps such as Instagram and Snapchat, people are spending more time on their phones than ever before. T-Mobile s Chief Operating Officer G. Michael Sievert believes that 2017 will be the first year people will spend more screen time looking at mobile devices than any other screen. We ve all been through or know someone that has experienced the frustration of not being able to use a phone because we were close to the data limit. People want to be able to use data when they want and not worry about additional fees. This is especially the case with teenagers and young adults as they communicate through social media messaging instead of phone calls and texts. Until last month, only T-Mobile offered unlimited data with no strings attached because the other companies saw data overages as a source of additional revenue. Why else would they offer unlimited text and talk but place a limit on data which is used more than the other two? Customers got tired of monitoring their data and paying overages so they started switching to T-Mobile making them the leader in customer growth for the past 3 years. When people switch to T-Mobile they tend to stay with it. T-Mobile set company records for branded postpaid and prepaid churn (the annual percentage rate at which customers stop subscribing) of 1.30% and 3.88% respectively. T-Mobile s fourth quarter postpaid porting rate (the amount of customers switching carriers but keeping their same phone number) was 1.53% compared to AT&T s 2% and Verizon s 2.28%. This shows that T-Mobile is taking customers from AT&T and Verizon and explains why both recently began offering an unlimited plan to compete with T-Mobile. T-Mobile responded by offering customers 2 lines with unlimited data for $100 which is $20 lower than their previous plan. If this is the start of a pricing war, it could hurt revenues and profits for everyone in the industry. Below is the chart for T-Mobile over the past year. Technical Analysis As of February 28, 2017 the stock is at $62.53, up nearly 62% over the past year and less than 5% from its all-time high of $65.41 which it hit on February 17, The stock has been on an uptrend due

4 to customer growth numbers that have outperformed the rest of the industry. In Q4 2016, during the holiday season when many people consider upgrading their phones or switching carriers, T-Mobile added 1.2 million postpaid subscribers, Verizon added 167,000, and AT&T lost 67,000. While T-Mobile has been focused on improving the wireless experience for customers, Verizon and AT&T have been focused on acquiring content. Verizon is working on a deal to acquire Yahoo. They believe owning mobile content well help them attract millennials. Outside of fantasy sports, I don t know any other reason why millennials use Yahoo. AT&T acquired DIRECTV in July 2015 and is working on a deal to buy Time Warner. Verizon and AT&T were trying to entice people to sign up for their wireless service with promises of a superior network from Verizon and unlimited data when you sign up for DirectTV from AT&T. As you can tell from the Q subscriber addition numbers, this strategy did not work. As previously mentioned, people just want to use their phone whenever they want and not think about it. T- Mobile gave customers this opportunity which is why they took subscribers from the other carriers. They followed an old rule of business, the customer is always right. Now AT&T and Verizon are offering unlimited data plans. It will be interesting to see how things play out in this industry but it s clear the other carriers are playing on T-Mobile s terms. Which leads me to believe T-Mobile will continue to be successful since they are built for this environment. The price-earnings ratio (P/E Ratio) is a popular tool used to value a company. It measures the company s current share price relative to its per-share earnings. For example, suppose that a company is currently trading at $43 a share and its EPS over the last 12 months were $1.95 per share. The P/E ratio for the stock could then be calculated as 43/1.95, or T-Mobile s P/E is 37, Verizon s P/E is 16 and AT&T s P/E is 20. T-Mobile s P/E is higher than the other two because they are expected to grow earnings at a higher rate. Another way to value these companies is using the price/earnings to growth ratio (PEG ratio). This is a valuation metric used to determine a stock's value while taking the company's earnings growth into account. The PEG ratio is a stock's price-to-earnings (P/E) ratio divided by the growth rate of its expected earnings. The lower the PEG ratio, the more the stock may be undervalued. T- Mobile s PEG ratio is 1.32, Verizon s is 8.0, and AT&T s is T-Mobile is by far the cheapest among the major carriers when it comes to PEG ratio. When reviewing an income statement, I primarily focus on the year over year change in revenue and margins. For 2016, revenues grew 16% and gross margins went from 53.5% to 55.6%. Refer to the income statement below for more details.

5 When I look at T-Mobile's balance sheet the first thing that pops out at me is their long term debt of $21.8 billion. You have to spend money to make money but with the potential for a pricing war, I'm concerned they may have trouble hitting their free cash flow goals. If that s the case, they will not be able to pay down some of their debt. Also, they will have to take out additional debt to continue to upgrade their network. I will keep an eye on this number to see how it changes going forward. Refer to the balance sheet below for more details.

6 Recommendation T-Mobile has become a force to be reckoned with in the wireless industry and the big carriers have taken notice. While unlimited data plans and lower pricing across the industry is good for consumers it's bad for shareholders of these wireless companies. The lower pricing will cut into revenue and earnings. This was the case with the airline industry until recently. With oil prices being so low, airlines were continuously adding flights and cutting fares in order to get more customers. Lower revenues and earnings caused the airline stocks to plummet and become a lousy investment. Even though I think T- Mobile is built to deliver value pricing and still make money, I will wait to see the how the pricing war turns out before buying any shares of the company.