T-Mobile US, Inc. (TMUS) Q2 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the T-Mobile US Second Quarter 2014 Conference Call. [Operator Instructions] This conference call is being recorded today, July 31, 2014. I would now like to turn the conference over to Mr. Nils Paellmann, Head of Investor Relations for T-Mobile US. Please go ahead, sir.

Good morning. Welcome to T-Mobile's second quarter 2014 earnings call. With me today are John Legere, our President and CEO; and Braxton Carter, our CFO. Let me just get to the disclaimer on Slide 2. During the course of this earnings call, the company will make projections and other forward-looking statements that are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussion of the risks and uncertainties that affect the company's business and qualify the forward-looking statements made in this call is contained in T-Mobile's SEC filings, particularly, the risk factors included in our annual report on Form 10-K filed with the SEC on February 25, 2014. Copies of T-Mobile's SEC filings are available online from the SEC or at the Investor Relations homepage on the T-Mobile website. The company's projections and forward-looking statements are based on factors that are subject to change, and therefore, these statements speak only as of the date they are given. The company does not undertake any duty to update any projections or forward-looking statements. In addition, during today's discussion, management will comment on both actual results and certain non-GAAP results. Reconciliations between GAAP results and these non-GAAP results are available in the Investor -- quarterly, on the Investor Relations homepage on our website at www.tmobile.com. Let me also point out that they have -- that there should be a small change on Page 8 in the deck. The last bullet should read properly, agreements to clear encompass A-Block metro areas in pipe markets covering more than 13 million POPs on top of many markets already free and clear today. So with that said, let me now turn it over to John Legere. John?

Okay. Good morning, everyone. I brought my [Audio Gap] [Technical Difficulty]

Okay. good morning, everyone. I brought the team here to New York Stock Exchange today to talk about our second quarter results and to reflect on the fact that it was in the second quarter of last year that T-Mobile began trading right here. We've done a lot in the last 15 months, we've got a lot more to do. In this quarter, we achieved a bunch of new milestones and are ready to report our progress to you, so let's jump right in. T-Mobile continues to be the fastest-growing wireless company in America. It now has 50.5 million customers. In the second quarter of 2014, we grew our customer base by a total of 1.5 million total net additions, making it the fifth consecutive quarter that we've delivered over 1 million total net adds. Now that's 7.6 million total customers added over the last 5 quarters since we launched the Un-carrier revolution. Our branded net adds for the quarter were also just over 1 million, surpassing this milestone for the second quarter in a row. And on the metric that you all track most closely, T-Mobile led the industry once again with 579,000 branded postpaid phone nets, and this was more than the other 3 major carriers combined. We also finished #1 in branded prepaid nets too, at 102,000 against losses at all of the other carriers. Finally, we've broken the code on tablet sales and sold almost 5x as many tablets in Q2 than in Q1. We continue to see the future upside in tablets, wearables and other devices. This momentum and the level of these customer acquisitions result has translated into total revenue growth of 8% year-over-year, the industry's best this quarter, as with our service revenue growth of 7.1%. By aggressively managing costs, coupled with the revenue growth, we also led the industry in adjusted EBITDA growth of 33.4% quarter-over-quarter. Bottom line, I'm very proud of the performance the team delivered this quarter. On the network front. The T-Mobile network is the fastest nationwide 4G LTE network and I intend to keep it this way. The 4G LTE network now covers more than 233 million Americans in 325 metro areas. Neville and his team are aggressively rolling out our wideband LTE, upgrading our limited remaining 2G footprint to 4G LTE to increase our speed, and we already have started our 700 megahertz A-Block rollout to further increase coverage and quality. I'll take you through these in a bit more detail in a moment. Now it's no secret that I'm possessed with giving our customers nothing short of both a fantastic network -- of both a fantastic network experience but also how we care for them. And all you have to do is follow me on Twitter to see that. This morning, J.D. Power's announced that we finished first in their semi-annual wireless customer care survey for both the T-Mobile and MetroPCS brands. For the T-Mobile brand, this is the first time since February 2011 that the company has received the highest ranking. For MetroPCS, it is the fourth time in a row. Taking all of this in together, we're in full gear and the team is totally focused. Finally, we expect our positive momentum to continue into the second half of 2014. We're increasing our guidance range for branded postpaid net adds this year to 3 million to 3.5 million, and we are not changing our adjusted EBITDA guidance despite this increased customer growth. Now over the last 5 quarters, we turned the declining business into a growth business by simply listening to our customers and offering them what they told us they wanted: great service or a nationwide lightning-fast 4G LTE network; devices, when and how they want them; and plans that are simple, affordable and without the restrictions the other guys place on them. During the second quarter, we continue to accelerate and aggressively drive change into the wireless industry, solving pain points and innovatively advocating for the customer. We kicked off the quarter in April 9 where we launched 3 days of Un-carrier, and we launched our Simple Starter $40 plan, Tablet Freedom and Overage Freedom initiatives. On June 18, we launched Un-carrier 5.0: T-Mobile Test Drive, a new program that invites customers to try our network and an Apple iPhone 5S [indiscernible] for free. On the same day, we launched Un-carrier 6.0: Music Freedom, which allows customers to stream music from the most popular music services without the data usage counting against their 4G data allotments. We will continue to innovate and we will never stop advocating for America's wireless customers. Stay tuned for Un-carrier 7.0 later this summer. Now let's drill into our Q2 results a little bit further. Total branded net had another great quarter at a little over $1 million, up 409,000 a year on a year-over-year basis. Decomposing the 1 million total net ads, branded postpaid net adds were 908,000, up 220,000 from a year ago. Breaking down the branded postpaid adds further, we did 579,000 branded phone net adds, which once again led the industry. We also posted a record 329,000 mobile broadband net add, mostly tablets, up almost 5x from the first quarter. This reflects the success of our Operation Tablet Freedom, which we launched in April. Tablets have become a big part of our business and a big part for the wireless industry, and this quarter's results show that T-Mobile can play to win in that area as well. We see it as a significant opportunity going forward and we're just getting started. The quality of our customers is showing up in our churn results, which continue to be at record lows, and in our customer quality metrics. In the second quarter, branded postpaid phone churn was 1.5%, flat sequentially and year-over-year. And the mix of Prime customers within our branded postpaid growth ads increased 9 percentage points year-over-year. Customers love the T-Mobile experience and they're staying with us longer. This is more we can do, and having regained our #1 position at J.D. Power, the team is focused on it completely. I also want to point out that we have the industry's best branded prepaid performance in the seasonally lower second quarter. We had 102,000 branded prepaid net adds, up from a loss of 87,000 last year, while every other major carrier had negative prepaid net adds in the second quarter. The improvement was driven primarily by MetroPCS brand expansion, more than offsetting the ongoing migration of prepaid to postpaid. Sales of smartphones, including branded postpaid and branded prepaid, were 6.2 million units in the second quarter of 2014 compared to 4.3 million units in the second quarter of 2013. Smartphone sales accounted for 93% of all phone units sold. Now let me turn to customer growth, including wholesale. We generated nearly 1.5 million total net adds in Q2, marking our fifth consecutive quarter with over 1 million net adds and a total of 7.6 million since we launched Un-carrier. We had a solid performance in wholesale in the second quarter with a total of 460,000 net adds, of which MVNO was 235,000 and M2M was 225,000. Our network. It's a foundation of our competitive formula and we're building our network data strong. Let me give you a few highlights about where we stand today and what we're working on in 2014. We continue to expand our 4G LTE network. We now stand at more than 233 million 4G LTE covered POPs and we're well on our way to covering more than 250 million people this year. And we're continually working to improve our network breadth and quality. As part of our 4G LTE network expansion on our limited remaining 2G footprint, we have our first 1,900 megahertz 4G LTE sites on air and more are coming. This rollout should enable us to cover more than 280 million people with 4G LTE by mid-2015. We've also launched voice over LTE or VoLTE this quarter ahead of our competitors and the service covered 107 million POPs today. But I'm happy to announce that as of now, we have full nationwide coverage with more than 200 million POPs covered and growing. So the 107 million was at the end of the quarter, 200 million is as of today and now we're nationwide. In January of this year, I told you we were the fastest nationwide 4G LTE network in the U.S. based on download speeds from millions of user-generated test results. On the last call, I gave you a lot of download speed stats that show T-Mobile as the fastest network in the first quarter. Well, I'm happy to report that we continued our speed leadership for another quarter. Our average download speed based on user-generated test results of 19.3 megabit per second is ahead of Verizon at 16.8 and AT&T at 13.8, and way ahead of Sprint at 9.7. And our speed leadership actually increased during the second quarter. Our speed advantage versus Verizon went from 1.4 megabits in the second -- in the first quarter to 2.5 in the second. And versus AT&T, whose network actually got slower this quarter, our speed advantage went from 2.9 megabits per second last quarter to 5.5 megabits this quarter. We continue to amp up our speed as we commit more spectrum to LTE and upgrade our cell site backhaul. We've now rolled out 10x10 4G LTE in 43 of the top 50 metro areas, and we continue to grow our wideband LTE footprint, currently covering 17 metro areas and aiming for at least 26 by year end. As a reminder, with wideband LTE, customers are regularly observing speeds into 70 megabits per second range. Our network's speed is simply incredible. And all this breadth, quality and speed is happening before Neville and his team really start cranking on the 700 megahertz A-Block spectrum. That will be another game changer for us, so let me give you an update on what lies ahead. Our 700 megahertz A-Block spectrum covers about 158 million or about 50% of the population and 70% of the existing T-Mobile customer base. It covers 9 of the top 10 and 21 of the top 30 metros in the U.S. I'm thrilled to report that the first 700 megahertz sites are already on air. Compatible handsets are being field tested right now and are expected to be available for sale by the fourth quarter. About 1/2 of the markets covered by A-Block spectrum are encumbered by Channel 51, limiting our ability to use the spectrum until after the incumbent broadcasters are relocated. However, Neville and his team have already entered into agreements to relocate broadcasters into new frequencies in 5 markets covering more than 13 million people, making those markets available for launch in 2015. This is in addition to many markets which are already free and clear today, such as Washington, D.C., Miami, Dallas and Houston, just to name a few. We have recently entered into agreements to acquire A-Block spectrum in additional markets for multiple parties covering 8.7 million POPs for approximately $50.5 million. That translates into an average megahertz per POP price of approximately $0.48 compared to $1.85 per megahertz POP price we pay in the Verizon A-Block transaction. As we've said before, we will be opportunistic and disciplined on price, and I believe we have several options for adding low band spectrum to our portfolio, including the 600 megahertz incentive options next year. Now let me provide you with an update on MetroPCS integration, which continues to exceed even our own expectations. The MetroPCS customization is rapidly migrating to T-Mobile compatible handsets. Currently, 2/3 of the MetroPCS customer base is already on the T-Mobile network. That's up from 53% at the end of Q1. In terms of spectrum, approximately 60% of the MetroPCS spectrum on a megahertz POP basis has already been refarmed and integrated into the T-Mobile network at the end of the second quarter. That's up from 50% at the end of last quarter. We also have continued to ramp up distribution in the 30 MetroPCS expansion markets. We added 900 new MetroPCS distribution points in Q2, bringing the total to 3,100 doors in the expansion markets and approaching 10,000 MetroPCS outlets nationwide. Now that's as compared to Cricket, which last reported an approximate 3,000 doors. Now on to an update on synergy and integration costs. With another quarter under our belt, we remain more confident than ever that the synergies projected at the end of the announcement of our transaction were conservative and are coming in ahead of expectations. We'll give you a full financial update on the synergies target as we report full year results. But today, I want to highlight that in early July, we shut down the CDMA portion to the MetroPCS networks in Boston, Hartford and Las Vegas. That's 2.5 years ahead of initial plan. We will be shutting down the CDMA portion of the MetroPCS network in Philadelphia later this summer, and we'll potentially shut down several additional markets by year end, all while ensuring a seamless transition for our customers. Now why is this important? Well, we're moving MetroPCS 3G CDMA customers to a better, faster network and offering them a superior experience. The conversion also frees up spectrum that we can refarm and reuse to improve the speed and quality of the T-Mobile network. And finally, it allows us to realize the synergies from running a leaner single-network structure. It will be a one-time cost associated with these network shutdowns, approximately $250 million to $300 million in 2014. But it is also, materially, it moves the synergy timeline forward. As a reminder, we eventually seek to realize cash savings of $1.5 billion annually in terms of total merger synergies. Note that the one-time cost will be excluded from adjusted EBITDA. Overall, another great quarter. Now I'd like to turn things over to our CFO, Braxton Carter, for a review of the quarterly financials and guidance, then I'll be back to answer questions. Braxton?

Thank you, John. I'm so excited to be here at the New York Stock Exchange with our leadership team sharing these fantastic second quarter results with you. Let me start by discussing our revenue adjusted EBITDA for the quarter. All figures for Q2 2013 are presented on a pro forma combined basis to allow for an apples-to-apples comparison. In the second quarter, total revenue amounts to $7.2 billion, growing 8% year-over-year, the highest growth rate in the industry. The year-over-year growth was primarily due to service revenues, which accounted for about 2/3 of the growth. On a sequential basis, total revenues increased by 4.5% and that is a significant acceleration from the 0.7% growth rate we reported last quarter. The sequential increase was due to growth in both service revenues and equipment sales driven in part by a lower impact from the ETF offer. Going forward, we expect to see service revenue becoming an increasing driver of total revenue growth. In the second quarter, we financed $1.3 billion of equipment sales on our Equipment Installment Plans or EIP, up 7% compared to the first quarter of 2014. Service revenues were again a key highlight in the quarter. The fifth consecutive quarter of sequential growth and acceleration in year-over-year growth from 4.5% in the first quarter to 7.1% this quarter. Even more significant, T-Mobile led the wireless industry in service revenue growth. Please note that service revenues in the second quarter were impacted by $43 million due to a reduction in certain regulatory surcharges and a revenue adjustment for expected customer refunds on premium SMS charges. Without these 2 one-time non-reoccurring factors, the growth in service revenues would have been 7.9% year-over-year. We generated 1.45 of adjusted EBITDA in the second quarter, up 14.7% year-over-year and up 33.4% quarter-over-quarter. The adjusted EBITDA margin increased by 600 basis points, up sequentially to 26% as operating expenses remained basically flat despite increases in customers and revenue growth. Smartphone sales remain strong at 6.2 million units. The branded postpaid upgrade rate was 8%, up from 7% in the first quarter but down from 10% in the second quarter of 2013. I think these are very strong results that show our financial strategy is working. Customer growth, followed by revenue growth, followed by adjusted EBITDA and cash flow growth. We still have much work ahead of us to keep this momentum going; however, we are clearly demonstrating that this model works. Turning to Slide 12. I wanted to start by letting you know that we will be reporting a new metric, branded postpaid phone ARPU, which is more consistent with the presentation of our competitors. Essentially, tablets are becoming a larger piece of the business and can distort some of the underlying phone metrics. Branded postpaid phone ARPU will allow a more apples-to-apples comparison. Branded postpaid average growth billings per user, or ABPU, as a reminder, this is branded postpaid service revenues plus EIP billings divided by average branded postpaid customers. It approximates what we receive on a cash basis from our customers on a monthly basis. ABPU, up $59.79 in the second quarter, continue to grow unlike some of our competitors, up 1.8% year-over-year and 0.4% sequentially. Branded postpaid phone ARPU declined by 2.3% sequentially in Q2 compared to a drop of 1.3% in the first quarter but an improvement compared to the 2.8% drop we experienced in the fourth quarter of 2013. Please note that phone ARPU in the second quarter of 2014 was impacted by 2 one-time non-reoccurring factors already mentioned in connection with service revenues. A reduction in certain regulatory surcharges and a revenue adjustment for expected customer refunds on premium SMS charges. Excluding these 2 factors, branded postpaid ARPUs would've been approximately $49.93, a drop of 1.1% or $0.55 compared to the first quarter of 2014. We are encouraged by the fact that we are already through most of the migration in contrast to our competitors who are just starting out migrating to EIP plans. At the end of the second quarter, 80% of our branded postpaid base was on Simple Choice plans, up from 75% at the end of Q1, rapidly approaching full penetration. We continue to expect that phone ARPU will generally stabilize in the second half of 2014, once we are done with most of the migrations to Simple Choice. We believe that recent pricing actions, like the requalification requirements retain corporate discounts, the elimination of corporate discounts from new customers and the increase in the price for 4G unlimited from $70 to $80, will help us achieve our ARPU goal. Also, I wanted to give you a quick update on customer quality metrics. The mix of Prime customers within our branded postpaid gross adds increased 9 percentage points year-over-year. The percentage of Prime customers within our EIP receivables was 53%. Lastly, branded prepaid ARPU grew both year-over-year and quarter-over-quarter, reflecting growth in the MetroPCS customer base. Turning to cash CapEx and cash flows. We spent a total of $940 million in cash CapEx in the second quarter, supporting the ongoing investment on our network. This was essentially flat compared to the first quarter and down 15% to the second quarter of 2013. We continue to expect that full year 2014 cash CapEx will be between $4.3 billion and $4.6 billion, with a bit of a ramp up later in the quarter -- later in the year as we shut down the CDMA portions of the MetroPCS network and continue the rollout of 700 megahertz and the deployment of 4G LTE on the 1,900 PCS spectrum. We continue to see the benefits of our spend as our 4G LTE network, the fastest in the nation, covers more than 233 million people in 325 metro areas. While supporting the necessary network modernization, we also remain focused on free cash flow generation. In the second quarter, we generated a significant positive simple free cash flow, that is adjusted EBITDA minus cash CapEx of $511 million, up $370 million versus the first quarter of 2014. In terms of working capital, our EIP receivables, net of allowance for credit losses, increased by $497 million from Q1, reaching a total of $3.6 billion in Q2. I want to point out that the sequential increase in our EIP receivables of $497 million in Q2 was less than the sequential increase we experienced in Q1 of 2014, continuing the trend from the prior quarter as strong growth in our EIP collections more than offset growth in equipment sales financed on EIP. To put it simply, the working capital drive continues to decline. Based on our current projections, we continue to expect the [indiscernible] program to cross over in the course of 2015, meaning that EIP billings will exceed the amounts of the EIP finance. Our cash position remains strong. We had ending cash of approximately $3.1 billion, leaving us with significant financial flexibility. The decrease compared to the first quarter was due primarily to the acquisition of the 700 megahertz A-Block spectrum from Verizon with a cash outlay of $2.4 billion. Net debt, excluding towers, announced at $17.2 billion at the end of Q2 or 3.4x our pro forma combined adjusted LTM EBITDA near the middle of our target range of 3x to 4x. Let me now turn to our guidance for 2014. Given our Un-carrier initiatives, we expect the momentum in branded postpaid customer growth to continue and currently expect between 3 million and 3.5 million branded postpaid net additions in 2014. That is up from our prior guidance of 2.8 million to 3.3 million branded postpaid net adds and an increase of 200,000 postpaid customers at the mid-point. Adjusted EBITDA is expected to be between $5.6 billion and $5.8 billion. That is unchanged versus prior guidance despite the expected increase in customer growth. Cash CapEx is expected to be between $4.3 billion and $4.6 billion. That has not changed versus prior guidance. The transition to Simple Choice plans should be largely complete by the end of this year with the penetration of Simple Choice plans reaching 85% to 90% at the branded postpaid base by the end of 2014. Again, that has not changed versus prior guidance. While not providing quarterly guidance, it should be noted that several of our cost initiatives, as well as top line initiatives, will have a more positive impact on the fourth quarter due to the timing of such initiatives. Let me now turn it back to John for a recap of the highlights.

Okay. Thank you, Braxton. And a huge shout out to all the T-Mobile employees out there who continue to put in all the hard work necessary to drive these kind of results. Let me recap a few highlights. T-Mobile is the fastest-growing wireless company in America. We led the industry in both total and service revenue growth, and we had the best adjusted EBITDA growth quarter-over-quarter. And we had the best branded postpaid phone and branded prepaid net adds. We have the fastest nationwide 4G LTE network. We're rolling out improvements to increase our coverage, speed and quality, including already starting the A-Block rollout, and we have the best customer service nationwide. We've regained the highest ranking in J.D. Power wireless customer care for the T-Mobile brand, and we maintained it for the MetroPCS brand for the fourth time in a row. And finally, we expect our positive momentum to continue into the second half of 2014. We're increasing our branded postpaid net adds guidance to 3 million to 3.5 million, while making no change to our adjusted EBITDA target. And we're not done yet. Now let's move on to Q&A. To make a final comment, I'm hoping that this will be one of the last quarters you have to put up with what was about a 20- to 30-minute monologue, and we're looking to find an Un-carrier way in future quarters to do these earnings calls, so stay tuned. Now I think we're ready for the Q&A, operator, so please, first question.

[Operator Instructions] And we'll take our first question from Simon Flannery of Morgan Stanley.

Nice to see the increase in the postpaid add guidance, but you've already done 2.2 million adds. Even at the high end, it's only a 1.3 million second half. And it seems like with your new Un-carrier initiatives, with the recent promotion and with a new iPhone launch coming, that you've got an opportunity to have some nice acceleration into the back half of the year. So are you just being conservative there? Or are there some other puts and takes we should be aware of?

Simon, I think it's a great question. I think that we've consistently demonstrated that we're very balanced in the way that we provide future guidance. I want to point out that we've increased our guidance consistently throughout the year as things have developed. We certainly are balanced in that approach. And I also want to point out since being a public company, TMUS has beat, met or exceeded on every piece of guidance that we've given.

And Simon, I would say, yours was more a statement than a question, and I do think that our guidance is, as we have always done, is conservative and there are no gotchas [ph] that you should be searching for.

We'll go next to Amir Rozwadowski of Barclays.

I wanted to talk a bit about sort of the pricing trajectory. It seems as though we've seen some of the year-over-year declines in terms of your ARPU ease over the last couple of quarters. And according to your prepared remarks, we should continue to see that trend into the back half of the year. What type of competitive environment are you anticipating with respect to achieving that type of goal? And if some of your competitors decided to get a little bit more flexible with respect to their pricing, do you have the flexibility to adjust accordingly, if needed?

I'll start, and then Mike and Braxton can chime in. I think it's a good opportunity to answer a few things. One is everyone's obsession with ARPU can rest assure -- I know a question is, are we still on track for a second half stabilization of ARPU and net increase? And the answer is yes. Much more importantly, ABPU or the average billing per user, is something that we think greater reflects even in the short term in the period we've gone through what's happening with the revenue streams of our customers. And in Q2, the average billing per user was up 1.8% sequentially and 3% year-over-year, and that shows, of course, what we pointed out, is that as you move from the way we do business historically as an industry to separating devices and providing the financing, you need to add several items together to show what's happening with the billing environment. So ABPU is already increasing at a nice pace. ARPU will stabilize in the second half as we planned. An interesting item to note is that most of our competitors are not only seeing the ARPU issues that go with moving to a financing environment that we did previously, but ABPU was down in the quarter. So I think our pricing -- our environment is very strong and will continue to be. From a competitive environment, not to be cocky or to point out, but we are the competitive environment. And I think what's very important is our actions on the Un-carrier, our moves and our promotions are not based on reacting to anybody. We've been going straightforward since we started this initiative and doing things that we know we can profitably do and that customers will respond to. The competitors are responding to our moves, which has been happening very aggressively on their part for about 2 or 3 quarters. So I reiterate what I said last quarter. No one needs to sit back and wait what happens when the big guys attempt to beat up on the little guy. They've been trying their best for 2 or 3 quarters and this is about what you get. I mean, if you're talking about some of our more closer competitors like Sprint, come on, I mean they -- with some of our recent promotions, they would have to change price by 100% to get into our range. So we're very comfortable with where we are. We're doing it in an environment that, as you can see, profitability is growing, service revenues are growing. And I'll just point out that by your own analyst reviews, consensus estimates by most analysts, even before these earnings, were about $7 billion in EBITDA for next year and we've guided $5.6 billion to $5.8 billion. So yes, we're comfortable the momentum will continue.

I would just reiterate that, John -- it's Mike -- just to say the pattern you're describing is that for the last 3 or 4 quarters, we've been making moves, others have been responding and during that time, we've been driving significant value into this business and positioning it for margin expansion. And so the patterns are already there. What the question supposes is that going to change, and I think what everybody needs to realize is our competitors are in full-on response and compete mode and yet we're outpacing the industry, not only on customer acquisition, but this quarter on sequential EBITDA growth. And we think there's a strong opportunity for us to continue to monetize that going forward into next year.

I'll add, and by the way, I liked the report that you did a couple of weeks ago that was also focusing on T-Mobile's management making all the right decisions and moves that it needs to make in any environment. That was very well done. I think what's really happening is there is now a period where people are starting to wonder, can the competitors actually just respond to this Un-carrier movement? Or is it something with sustainable momentum? And I think the biggest news of Q2's results is the qualitative aspects here have stopped the alarm bells of what -- when Contract Freedom and ETF payments were announced, which is not a program, these are not huge discount programs. They are very profitable moves that are built into our program that we can sustain very strongly. I appreciate the questions.

We'll go next to John Hodulik of UBS.

A couple of things. First, do you guys see the upcoming iPhone refresh as an opportunity to take share in terms of high end subs? And if so, why not keep the $100 promotion you announced, I think it was early this week, keep it going through that launch period given how profitable it is? And then secondly, obviously, there's been a lot of talk about the possibility of a sale of the company. Given all the momentum you have and the visibility you have in terms of keeping that momentum going, why consider a sale now to potentially a company that doesn't have anywhere near the momentum? If you know what I'm saying? So that's it.

Your questions included most major items, as well as 2 or 3 announcements in there. First of all, you're not going to get me to use the iPhone 6 word on this call. And your attempt to say, should we sustain our promotion pricing past the announced date to the iPhone launch date suggest that we know or you know when it is, and we're not going to deal with any of those. But let me just say, there's been some great reports written as well in the past week that I think offer some great insights about what's happening in -- as it relates to some of these. Now this couples that, 33%, this was a Morgan Stanley report, sorry for quoting one to you, John, but the 33% of wireless customers are likely or somewhat likely to consider switching over the next 6 months. That's #1. Interestingly, of the 4 major carriers, T-Mobile has the lowest percentage of customers that are likely or somewhat likely to switch. And then, of course, when you look at a potential iconic device that's coming to the market, T-Mobile, because of a lot of variables, has the lowest percentage of our base in the iPhone product because of we've only recently launched it. And what that does, it makes us far less susceptible to this new device being a switching event of our customers and a major upside possibility for us. Because amongst other things, T-Mobile was seen as a likely destination for those switchers. So if a switching event is coming, a major one, we've got a big pool of players that are moving. I think we've got a huge opportunity. On the promotional offer that we made, listen, we can respond very quickly. We can make offers and coming in and out of the market. We don't need to test our pricing for 6 months to think about it. So what we've done is something very aggressive. And by the way, it's not a pricing move. It's a data bucket move. We already had a 4-for-$100 offer. We think it's going to be very competitive and we can respond with additional or other offers as need be, and we think this one will be very successful. To your last question, when -- your preface of your question was this deal that we keep talking about -- I just want to point out, you keep talking about it, we have never talked about it. And I would only point out a few things, and we can have more questions on this as we go along. T-Mobile is doing absolutely everything that is necessary as part of my stated strategy to both organically and inorganically prepare this company to continue to grow and be highly successful. Inorganic options for the acceleration of the T-Mobile brand are always an opportunity. There are multiple of them that we will continue to consider, but the things that we're doing right now in Q2, in Q3 and move on, are the things that this company needs to do to be a viable long-term player. And we've got multiple options to consider and will consider. And when we have something to report on those topics, we'll let you know.

We'll go next to Jonathan Chaplin of New Street Research.

I just want to actually follow up on John Hodulik's question. So firstly, given the momentum that you guys have in the business and the fact that you think it's sustainable, shouldn't -- and given the sort of a scale, nature of this business, with this growth, shouldn't EBITDA next year be a lot higher than the 7 billion that consensus has in their models? And if that's the case, if you're generating this kind of incremental scale organically, I just want to hit on John's question again, why consider a deal now when all of this -- when the primary driver of a deal would be to gain scale and you're gaining scale organically at the expense of somebody you might merge with?

Yes...

Given the inhospitable regulatory environment, it just seems like there's a lot of risk associated with a deal like that now.

And again, as I said, I don't think -- let's take 2 or 3, and then I'll be glad to come back around to this. We have never commented on this sort or any other deal, and I'm not going to comment on a specific ones. We have always been clear. If you look at the long term of the wireless industry, it is a scale game. It is an industry here where the #1 and 2 players are hugely more powerful from a standpoint of scale and capital, et cetera, than the rest of the industry. We've been very successful, and we see a path forward to be highly successful as a stand-alone company, but we also know that we could significantly accelerate that growth and create an even higher level of competition in the U.S. wireless industry by various forms of accelerating this platform. Now from a standpoint of what we will do inorganically and when, we haven't commented on that. Obviously, we will always consider the benefits to shareholders and the questions you raised will be part of the things that we will consider. And I would point out that we have multiple versions of things that we can do inorganically with this company and multiple versions of timing as to when we do them. Importantly, from the results that you see today, is that the company is not in need of doing something to be successful in the short to medium term, and I think that's slightly different. There is -- in the industry, there is a dramatically different performance level of businesses going on between the 4 major wireless carriers, and I think that's important. We're not going to give guidance on next year, but I think one of the things you're starting to do, and I will take a short, brief celebratory success that you're starting to question whether a $5.7 billion to $7 billion consensus view for EBITDA is sufficiently large, and I'll take that as positive feedback, but I think Braxton and I and the management team have been consistent over the past 5 quarters or so that the growth right now that we're playing through will pay itself back in dividends for earnings growth and free cash flow growth in the coming quarters and years, and we are more bullish on that than ever.

We'll take our next question from Phil Cusick of JPMorgan. Philip Cusick - JP Morgan Chase & Co, Research Division: I guess, let's focus on the gross ad momentum. Can you talk about the mix of gross ads needing a buyout? And then is there a shift at all in where your ads are coming from as carriers have responded to your efforts?

Yes, I mean, I'll let Mike talk about that because a 30% annual increase in gross ads is certainly something to probe in on.

Yes, it's -- the momentum is terrific, Phil. And it really speaks to the difference in our approach versus our competitors' approach. We continue to see -- and we heard about even yesterday, promotions that swap-out, that change from our competitors. And what you see from us with this Un-carrier strategy is a layering of value that's significant, that changes the industry and that's permanent. Un-carrier 1.0 is still in effect. Un-carrier 2 JUMP! still out there. Un-carrier 3.0, it's good forever, the world is your network, and so on. So what we're doing is essentially adding value to customers' experience with us and they're rewarding us in growth, as John said, with 30% year-over-year gross add growth this quarter. You saw in our guidance that we're increasing it for the 2nd straight quarter in a row, so obviously we remain confident. We provide numbers that we think are conservative. But the strategy is showing that customers are really resonating with our brand. And they're resonating with it because we're executing a very, very different strategy in the market than what we see from our competitors.

Yes, and again, an interesting item is, based upon the results that everybody has reported, there's generally an assumption that the customers that are coming to T-Mobile are coming from the large base of bleeding that's taking place at Sprint. And I think that's certainly an industry opportunity for all of us, but I think reports have been written that I think makes the most sense, which is if you look at the prior wireless carrier of the postpaid customer base of T-Mobile customers, it's significant amount of them and the most of them are former AT&T customers, which means based on the size, that the size of the opportunity continues to be huge when you start to look at the network performance relationship and the degradation of performance of their network, the JDP customer service capabilities, the size of their base, the iPhone base, the likely switchers. So the opportunity base here is very large for us and very well scripted.

Just to your specific question about Contract Freedom, we did disclose in our investor quarterly that as we predicted on the last quarter, that the Q2 impact of Contract Freedom was significantly less than the Q1 impact. So less customers came in and took that deal as we predicted. We think that, as Braxton talked about in the last call, we think that's the long-term trend here as obviously the people most interested in the offer will act the quickest. However, it could change. It could slow depending on the device. The previous question was around a potential new device from Apple, for example. We see, as John said, a big opportunity if that were to happen. And that could reinvigorate interest in the Contract Freedom offer as well for obvious reasons.

I would urge you all to continue writing that Contract Freedom is T-Mobile using significantly discounted price to allure customers at the sake of profitability loss because things couldn't be further than the truth. But another quarter or 2 of our competitors thinking that's what it is and not figuring out what the mechanics are would be beautiful. Because I've seen the business case, and we can discuss these over time, not only is the business case something that looks at a very lucrative customer gross add at these new customers at a very quick payback, but we've exceeded that business case in a great way, which makes this, and all the other variables with the Un-carrier move, tools that we can sustain and we would love to continue to do, and we'd love forever for people not to be able to figure out the mechanics of doing them themselves.

We'll take our next question from Ric Prentiss of Raymond James. Richard H. Prentiss - Raymond James & Associates, Inc., Research Division: I had a question back on guidance for a second. Obviously, pretty successful in the net adds, raising the guidance. You mentioned, John, in your comments that there's even further upside in tablets and even wearables. I think I've seen you wearing them. As you think about the guidance, how should we think about what tablets involved there? As the timing for a new acronym, Braxton, maybe ARPAD, average revenue per account plus device payment to kind of capture how much you're getting from people's tablets and wearables of the future.

Mike, you want to talks about it?

First thing I would say is we're very excited about wearables coming with their own radios, and we're seeing some of these on the horizon. And so we're entering an era where people are going to want to experience 4G LTE connectivity from a variety of different devices. We see an era where people may have a tiny purse for their -- a tiny phone for their clutch, a bigger tablet for their purse, a wristwatch phone for their run, a ruggedized phone for the beach and all of these things being connected to the macro network. And we're gearing our plans, assuming that, that world unfolds, including how we plan to charge for our services, et cetera. So we think there's a really exciting potential there. We're not giving guidance on how it breaks down. Obviously, that vision that I just talked about will only get started this year with a few devices out of the gate. Tablets are the big phenomenon right now outside of phones. You saw our tablet momentum increased 5x this quarter over last, so we really found our stride in tablets. But you also saw that we continue to focus on the big profitable segment of this industry, which is smartphones and we led the industry once again in postpaid phone net ads, which is very important that we continue to focus there and win, and we think in some cases, our competitors are kind of hiding behind tablet adds, which, by many measures, are less valuable. You can use our own investor quarterly to parse our tablet ARPU, which you very quickly get through using the numbers we disclosed there, about $24 per tablets, which we're very proud of, but it's a lower number than what you get from smartphones. And so we'll continue to stay focused on what drives real value to the company and what drives real value to customers and keep them in balance. But we're not going to be sort of giving you a breakdown on the numbers on what to expect between the different platforms.

Yes, but that said, I think what we're doing is leading the industry also in how to look through what's happening in the information and the customer decisions and understand the reality of how we're growing. And I think, let's be clear to what Mike said, and I think it's slowing down now. But 2 or 3 quarters ago, as T-Mobile started to really dominate the phone add business, in a short term, competitors were virtually giving away tablets, calling them postpaid adds and masking their declines. And I don't think anybody's fooled by that anymore. There's definitely a different revenue model associated with tablets. And what we've started to show is, yes, we're going to play in the tablet space profitably, but not at the demise of our other businesses. We're going to play in the wearables and accessories. We're going to call them what they are and there's a different -- and by the way, the revenue models may shift and we'll adapt and play to that as well. So I think everybody sees what it is. That's why we're getting ABPU and ARPU and postpaid phone net adds and tablets, and we'll give as much information as possible. But with our retail presence in our brand and our association with our customers, you're also seeing, by the way, a significant growth in accessory sales and high-margin products in our stores as well. And we'll try to give as much information so you can understand what's happening with us, but also we'll help you try to understand what isn't happening at our competitors. Just a service we provide. We're going to take one more question and then we're going to have to go talk to some of the TV shows and reiterate what we told you here.

We'll take our last question from Kevin Smithen of Macquarie.

Can you talk a little about your plans for the AWS-3 auction and the incentive auction, how you fund both of these and a little bit about the reported $10 billion Spectrum JV with Sprint? What's behind that? And given different potential inorganic scenarios, how will that play out if there is no consolidation in the space?

We're going to need a guide here that is the same way, what does postpaid mean? What does reported mean? Because certainly, there hasn't been any reported, kind of, deals associated with how we're going to participate. We've been very clear that Spectrum is extremely important for us. We plan to participate in the broadcast options. We're looking very closely at our roles rules in AWS-3. We think we've got significant wherewithal to raise the money and use the capital that we have as a company to be highly successful in both of those options as well, but I don't know if Neville, or Braxton, if either of you want to comment?

Yes, let me provide a little bit more color. I think with existing liquidity and access to the public debt capital markets that we're more than comfortable that we have the flexibility to participate in the upcoming auctions. And our preference, as certainly I've said in prior call, that any incremental capital would come through debt and not in equity to do this participation.

Yes, and I -- the good news, let's reiterate one of the things that we talked about. With what's happened over the past 5 quarters, the success of the Un-carrier, the momentum that we have now playing into another variable, which is there are some very good opportunities for us to gain continued scale in spectrum, and we have the capital to do it. So if you play the tape forward over the next year or 2, you certainly see that both with our performance, the capital availability and the auctions that are coming, we've got a good runway in front of the company to continue to grow and be highly successful. So we look forward to them and we plan to be successful in both options. Okay. Well, I think that's about as much time as we have. I thank everybody for listening in and we'll see you again next quarter.

Ladies and gentlemen, this concludes the T-Mobile US Second Quarter 2014 Conference Call. If you have any further questions, you may contact the Investor Relations department. Thank you for your participation. You may now disconnect and have a pleasant day.