T-Mobile’s Business Push, Technology Advantages, and 5G Slicing with Daryl Schoolar

Full Transcript

Don Kellogg 0m10s

Hello, and welcome to the two hundred and fifteenth episode of the week with Roger, conversation between analysts about all things telecom, media, and technology by Recon Analytics. I'm Don Kellogg, and with me as always is Roger Hintner. How are doing, Roger?

Roger Entner 0m23s

I'm good. How are you?

Don Kellogg 0m24s

I'm good. So it's earnings season again. Verizon just had their sell side analyst meeting as well as their Q3 earnings call. So I thought we could talk a little bit about that. What do you think?

Roger Entner 0m35s

Yeah, so Verizon had an improving quarter, right? They had consumer postpaid net adds of 81,000. They had business postpaid phone net adds of 158. Prepaid excluding SafeLink added 80,000 on the broadband side. They added 389,000 in total, 363 of that were fixed wireless, and 26,000 were BIOS and DSL.

Roger Entner 1m8s

I don't know who adds DSL these days, but okay, I believe them. They still lost 50,000 consumer accounts. So they are continuing to wring water out of a rock. I think what's important, and especially as we talk about also the Investor Day, is to look at Verizon through the lens that Verizon tells us that we should look at them. And to look at what their goals are, and how they're executing against that.

Roger Entner 1m39s

And the three goals are wireless service revenue growth, adjusted EBITDA expansion, and strong free cash flow. And on these three metrics where management and the rest of the company is rewarded on, they are performing. The metrics that everybody else cares about, but they don't get rewarded for, you know, they're getting there, right? So I think that's what's really important to look at, and what a lot of people misunderstand is, look at the goals that they have set themselves, and that their board has set for them. And that's all that matters, right?

Roger Entner 2m16s

And so churn has improved, but is not the best. Subscriber growth is still coming from the base. Broadband net adds have been slowing down. But, you know, as long as you drive wireless service revenue growth, and it's wireless, not wireline, right? Important.

Roger Entner 2m36s

Or broadband, it's wireless service revenue. And as long as that drives EBITDA and strong cash flow, everything is okay. Will everything get better if and when they become a churn leader as they have been in the past? They are clearly trying to do this? Yes, it will come better.

Roger Entner 2m55s

Their gross ads have gone up, and with gross ads, when you control for churn, your net ads come up. And so they need to drive more gross ads, and then everything else will become easier as well. And so I think that's really important when we look at Verizon, and especially when we look at what they talked about at their Investor Day, where they laid out their strategy for the next year, if not going further.

Don Kellogg 3m23s

So let's talk about that. What did we learn that was new at the Investor Day this year?

Roger Entner 3m28s

What was interesting, right, is when you look at it today, they talked about the looming Frontier acquisition. They did not talk about the rebellion of several large

Don Kellogg 3m41s

Shareholders, yeah.

Roger Entner 3m42s

Shareholders of Frontier about the price. But when they talk about broadband, at Fyres, they're building right now about a million passings a year with Verizon. That Frontier builds about a million passings for Frontier. And that when the two companies come together, the combined entities will also build 1,000,000 passings, you know, a year.

Don Kellogg 4m8s

I'm not sure about the math on that. That doesn't necessarily sound like synergy to me.

Roger Entner 4m12s

Well, the math ties back again to the metrics, right? Broadband is not directly one of the service revenue growth. It's not also with the build, it's not in the EBITDA, but it shows up in free cash flow. And so what this tells me is they need to push up free cash flow, because basically revenue minus cost gives you EBITDA, right? So wireless service revenue plus the ancillary broadband revenue gives you adjusted EBITDA expansion.

Roger Entner 4m44s

So they want to do more. And then when you subtract CapEx out of that, you get the strong free cash flow. In a very simplified way here, right? So don't nitpick us to death. I know there's more on it.

Roger Entner 4m56s

But basically what this tells me is with the slowdown of expansion of a joint company, they are supporting here the strong cash flow. Now, this conflicts with their story about, oh, where we have fiber, we have more market share, we have like 5% more market share, and we have 40 basis points less churn. You know, it's a really good thing margin accretive. If it's really such a good thing, why not accelerate it? Why slow it down?

Roger Entner 5m28s

The answer lies in probably in the free cash flow side. And so that's on the fiber side. On the FWA side, they also talked about the expansion that they hit their goal of four to five. They hit their 4,000,000 goal, fifteen months early, right? And we predicted this year left and right.

Roger Entner 5m46s

And that they're going to go to eight to 9,000,000 subscribers. But Joe Russo, friend of the show who has been here, pointed out that the build for FWA is mobility driven, that they are not doing a build just for FWA. Which all has very interesting implications. When you know that today the wireless build with C band and millimeter wave is largely urban, They tell us and we see it in our numbers that 70% of their FWA customers are from urban areas. And that's where they build out.

Roger Entner 6m28s

And over the next couple of years, they want to build out 80 to 90% of their mobility footprint. And we've done math around it in detail. They're probably mostly done with their FWA expansion, customer expansion in urban areas.

Don Kellogg 6m46s

Well, that's the lowest hanging fruit, right?

Roger Entner 6m48s

It's lowest lowest hanging

Don Kellogg 6m49s

It's customer density, right? You don't have to worry less about propagation because it's denser. All the reasons. All that stuff, right?

Roger Entner 6m56s

Yeah. But they also focused and most of their customers have come from urban areas. Contrary to T Mobile, which has a very spread out FWA customer base, and we see about give or take a third, a third, a third, right? So Verizon is much more concentrated, which to me means the FWE caravan is going to pick up its harvesting of customers from urban areas, and is moving further out to suburban and rural, as the mobility C band build goes in that direction. And so it should be good news for the cable guys, at least in urban areas, where Verizon's and the T Mobile's have harvested their customer base.

Don Kellogg 7m44s

We also know that Verizon penetration tends to be a little better in more rural areas because at least historically they tended to have better coverage in more rural areas. So to the extent that a lot of FWA customers are on bundles along with wireless, If there's already a larger customer base or a proportionally larger customer base in a rural area, that may be an easier upsell as well.

Roger Entner 8m7s

Yeah. So they wanna go to like 300,000,000 ultra wideband coverage, which is 90%. Also what's interesting is on the broadband side, they want to cover 90,000,000 households, 90,000,000 homes and businesses with FWA. Just as a benchmark, benchmark, there are 125,000,000 households in The US, and 143,000,000 housing units. So that gives you an indication.

Roger Entner 8m37s

They want to do 35 to 40,000,000 fiber passings, if they close Frontier with fiber. But like by 02/1930, right? This will be like Hans' successors promise to keep. And 35 to 40,000,000 by 2030 tells me, even though they say it on the call, oh, we don't need they want BEAT money, right? And BEAT has been delayed and delayed and delayed.

Don Kellogg 9m4s

But why would you build out on your own dime when you could build out on somebody else's dime, right?

Roger Entner 9m8s

Well, why not, right? And commissioner Carr is like giving us a daily count on how many days that the money hasn't given out. So the broadband is more like a slow rolling thing. We internally have always the discussion, and you very nicely put it, are happy people bundling, or are bundles making people happy? Right?

Roger Entner 9m30s

Right. Right. One of the financial analysts, in different words, posed that question and they punted on it. I think we have our hypothesis. I certainly have my hypothesis.

Roger Entner 9m40s

Oh, why don't you share your hypothesis?

Don Kellogg 9m42s

You know, this is obviously a chicken or the egg type thing, but are you more likely to do business across multiple product lines with somebody you're happy with? I think you are. Right? Something has to come first for most folks. And then if you deliver on that promise, then they're open to upsell.

Don Kellogg 9m57s

And I think that's the right way to do business. Right? So I don't necessarily think that bundling is a causal function of satisfaction. I think satisfaction is a causal function of bundling. At the end of the day, you want happy people.

Roger Entner 10m8s

I think happy people bundle. Yes. Bundling doesn't make you happier. If you hate what you're buying from somebody today, you're not gonna buy more for it. Thank you very much, right?

Roger Entner 10m18s

And wear lipstick with it.

Don Kellogg 10m19s

Well, you know, unless you're giving it away, right? And on some level there's some

Roger Entner 10m23s

But not even then. But not even then.

Don Kellogg 10m25s

No, no, no. I think there's some cable wireless numbers that

Roger Entner 10m27s

When you look at that, even there, the happy cable people are the ones who are bundling. The unhappy people are not that looking at our data.

Don Kellogg 10m36s

Not too wild on it. Yeah, you know, look at it.

Roger Entner 10m38s

And then Samba's talking about he has two engines for growth, mobility and broadband. And I think the two engines are actually linked together. But the other thing is, it is easier to add mobility to broadband, than for broadband to add mobility. Which would give like a lot of support to what, for example, AT&T is doing. Right?

Don Kellogg 11m0s

In the case of all the national the MNOs, right, you already have a national wireless network that's built on a fiber core in most circumstances. Whereas in every circumstance, you've got a regional fiber broadband operation. Yeah. Even for AT&T and for Verizon.

Roger Entner 11m15s

But even in footprint, it is easier. It is easier to do that. So the two are actually closely linked. And what's really interesting is like the AT&T strategy is now being copied by both Verizon and T Mobile, and cable was always a bundler, but they were already there. And I think this should give John Stankey, one had a lot of satisfaction of, yes, I've been right when, you know, everybody's copying me.

Roger Entner 11m44s

And he's executing very well on that strategy. And AT&T both on cable and on mobile right now is executing better than Verizon is. T Mobile is executing on the mobility side better than anybody else. You have to give it to them hands down. On the mobility side and consumer, with business they have big goals.

Don Kellogg 12m9s

I I think the T Mobile model as far as vis a vis fiber is a little different. Right? They're taking a much more capital light approach by doing partnerships, which is different from the way that, you know, AT&T's kind of in footprint build is their own capital, Gigafiber is also capital light. Yeah. I'm actually kind of surprised that Verizon hasn't come out with a capital light flavor of this as well.

Roger Entner 12m32s

Yeah. But and I'm not surprised at all. Because if Verizon thinks that something will make a meaningful difference for them, they want to own. Verizon wants to own and wants to control. Whereas AT&T is much more a partnering company, and T Mobile even more so.

Roger Entner 12m53s

T Mobile right now is, I would say, pretty light on the product side. I think T Mobile is phenomenal on the network innovation side, where they have become really the leader and maintain being the leader. The way I look at T Mobile, they're really very gifted marketers. AT&T has a very solid, very good product group, which T Mobile is lacking. And Verizon, if they think this rocks, then they wanna own the rock, right?

Don Kellogg 13m22s

Yes. But I I mean, I also feel like when we were talking about managing the free cash flow and EBITDA and everything else, if you can build out fiber for, you know, less investment, There's an argument to do that as well, right? All I'm saying is that two out of three of the MNOs have figured this piece out. And I would be surprised if there wasn't some flavor of that that Verizon plays around with in the future.

Roger Entner 13m42s

And thank you for queuing me up. They probably changed their leverage goal from 1.75 to two point zero to two point zero to 2.25, right? Right. There they gave themselves moves. Now, I would be shocked if Verizon goes and Partners.

Roger Entner 14m0s

Partners on something that they think is so important to them. Right? I'm much more likely shocked that they

Don Kellogg 14m7s

Well, mean, here's the thing though, is that T Mobile talked about this at their Investor Day, you know, they believe this is a foot race. Right? And AT&T's actions would also suggest that they believe this is a foot race. I think some of the reactions to the Verizon investor day have been that their pace of and, you know, you mentioned it earlier in the podcast, like, it's a little bit slow. Right?

Don Kellogg 14m26s

And so if this is a land grab, if, you know, owning fiber is the end goal here and, you know, if you don't take it now, it's not gonna be yours. What are you waiting for? What are you waiting for exactly? And and one of the ways to do that is a capital light model so that you can, you know, extend the speed at which you do this. Right?

Roger Entner 14m44s

Well, sometimes, Don, you can't argue with facts and logic. It doesn't get you anywhere. And it's that kind of deeply ingrained cultural value where it's religion, good luck arguing.

Don Kellogg 14m59s

Well, we'll see. We'll see. Right? I mean, think as you always say, people make decisions. Right?

Don Kellogg 15m4s

But they also make decisions based on incentives. Right? We know what the incentives at Verizon are based on their kind of goals.

Roger Entner 15m10s

Exactly. And they will execute on the incentives. The takeaway here is really look at Verizon through wireless service revenue growth, adjusted EBITDA expansion, and cash flow. And that explains everything that they do. All right.

Don Kellogg 15m25s

Well, I'm sure we'll revisit this.

Roger Entner 15m27s

Over and over again.

Don Kellogg 15m28s

Over and over and over again,

Roger Entner 15m29s

T Mobile and AT and

Don Kellogg 15m32s

T. Yep.

Roger Entner 15m33s

All

Don Kellogg 15m33s

right. We'll talk to you next week. Thanks.

Roger Entner 15m35s

See you next week. Bye.