siddhanta chandra [[email protected]] … began making several changes in late 2012 to...

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Siddhanta Chandra [[email protected]]

T-Mobile US Inc. (TMUS) April 18, 2017

Telecom Services – Wireless Telecom Services Stock Rating HOLD

Investment Thesis Target Price $64-68

T-Mobile is the 3rd largest wireless service provider in the US and is one of only four national service providers. The fastest growing wireless provider in the nation, they call themselves the ‘Un-carrier’, servicing over 71 Million usersi across the United States. We recommend a HOLD for TMUS as we feel that the stock is at fair value and may see increased pricing pressure or a slowdown in customer additions as other carriers respond. TMUS also has substantial debt which is expected to increase as it continues building capacity in a data driven market. Drivers of Thesis

• Consistent Growth and customer focus T-Mobile has added over a million net customers for 15 quarters straight. It is expected to keep adding more customers, growing to 80M in 2017. Customers rate T-Mobile highest in customer service amongst the Big 4.i

• Maverick and innovative Leadership In John Legere, T-Mobile have a non-conformist CEO who abides by the motto of ‘Shut up and Listen’ii to the customer, is often found in stores listening to what the customers want, and is not afraid to take on the bigger rivals.

• Branding Prowess. T-Mobile has a brand which resonates with the young audience and is seen as being ‘cool’. In a market seeing rapid growth of internet driven social apps, frequented by a young demographic, this branding will hold T-Mobile in good stead.

• Access to 700MHz Band 12 LTE Spectrum. Band 12 enjoys the advantage of greater range than other LTE Bands. T-Mobile has used the band to good effect with this wide ranging ‘Extended LTE’ service available in remote places with lesser number of towers and repeaters.

Risks to Thesis

• Intense competition Prevailing competition with Verizon and AT&T has the potential to squeeze margins as the pricing war escalates.

• Inability to acquire spectrum and build capacity As T-Mobile grows to our projected customer base of 97M by 2021, it will need to acquire more spectrum, especially in the 700 MHz Band as it relies on it to provide widespread LTE coverage. An inability to do so due to scarcity or competition will lead to massive overburden on existing capacity.

Henry Fund DCF $66.26 Henry Fund DDM $65.93 Relative Multiple $37.22 Price Data Current Price $64.61 52wk Range $38.31 – 65.41 Consensus 1yr Target $67.50 Key Statistics Market Cap (B) $52.55 Shares Outstanding (M) 826.53 Institutional Ownership 34.60% Five Year Beta 1.03 Dividend Yield 0% Price/Earnings (TTM) 37.85 Price/Sales (TTM) 1.43 Price/Book (mrq) 2.88 Profitability Operating Margin 10.21% Profit Margin 3.83% Return on Assets (TTM) 2.28% Return on Equity (TTM) 8.38%

Source: Factset, Fidelity, YCharts

Earnings Estimates Year 2014 2015 2016 2017E 2018E 2019E

EPS 0.31 0.83 1.70 3.12 4.41 5.16

growth 86% 63% 51% 45% 29% 15%

12 Month Performance Company Description

T-Mobile US traces its roots back to VoiceStream Wireless PCS, a company which Deutsche Telekom acquired in 2001 and renamed T-Mobile USA. Headquartered in Bellevue in Washington, T-Mobile is the 3rd largest wireless carrier in the United States with over 71M customers and revenues exceeding $37B. Operating under the T-Mobile and MetroPCS brands, T-Mobile offers mobile voice, messaging, and data services in the postpaid, prepaid, and wholesale markets.

Source: Yahoo Finance

37.9

8.4

39.3

8.8

22.49 18.78

0

10

20

30

40

50

P/E ROE

TMUS Industry Sector

-5%

5%

15%

25%

35%

45%

A M J J A S O N D J F M

TMUS S&P 500

EXECUTIVE SUMMARY

” We are the Un-carrier®. Un-satisfied with the status

quo. Un-afraid to innovate.” i

T-Mobile describes itself as the Un-carrier, which has

become not only their marketing strategy but also their

differentiation blueprint. T-Mobile, led by their

uncharacteristic CEO John Legere, prides itself on its ability

to listen to the customer and give them what they want.

This strategy has been highly successful, making T-Mobile

the 3rd largest wireless carrier in the US. With over 71M

users, T-Mobile has emerged as a genuine competitor to

Verizon and AT&T. T-Mobile continues to be rated highest

in customer service in the space and claims to have the

best 4G LTE speeds in the business. It has also rapidly

expanded its footprint, reaching 314 Million people with

its 4G network.i

While T-Mobile has shown strong growth, the outlook is

slightly murky. Increased competition has forced Verizon

and AT&T into action which has resulted in a price war that

will put downwards pricing pressure on T-Mobile,

squeezing profitability. T-Mobile’s efforts to raise prices

have been summarily unsuccessful with prices hovering at

2013 levels even though offerings have become more

comprehensive.

As T-Mobile aims to expand its network, it will need

capital. Whether it comes from retained earnings or debt

will depend upon the growth it sees in 2017. If the Risk-

Free Rate rises, T-Mobile will find it difficult to roll over its

substantial debt obligations and it will need to cut back on

upgrades which may hurt its competitiveness which is

centered around the quality of its network.

With no dividend paid out and no plans to do so in the

future, the stock needs to keep appreciating at risky

multiples to provide returns to a shareholder. We are

recommending a HOLD for T-Mobile on the basis of

increased competition and the relatively high trading

multiple of the TMUS stock.

COMPANY DESCRIPTION

T-Mobile USA Inc. is a telecommunications company

providing cellular equipment and services as a wireless

carrier. It is one of the 4 national wireless carriers and is

the 3rd largest by revenues and users. It provides services,

devices, and accessories across its brands, T-Mobile and

MetroPCS. It provides wireless communication services

through a range of service plan options. The Company

offers a device trade-in program, Just Upgrade My Phone

(JUMP!), which provides customers a specified-price

trade-in right to upgrade their device. It offers a range of

wireless devices, including handsets, tablets and other

mobile communication devices, and accessories for sale,

as well as financing through equipment installment plans

(EIPs) and leasing through JUMP On Demand. In addition,

it sells devices to dealers and other third-party distributors

for resale through third-party retail outlets and a range of

third-party Websites. It also provides reinsurance for

handset insurance policies and extended warranty

contracts offered to its mobile communications

customers.

T-Mobile services, mainly, three type of customers –

branded postpaid, branded prepaid, and wholesale. The

wholesale customers include the MVNOs (Mobile Virtual

Network Operator). They are essentially vendors who buy

excess capacity from carriers like T-Mobile and sell it to

end users, thereby avoiding capital expenses involved in

creating network infrastructure. Carriers benefit by getting

revenues off unutilized capacity.

The branded prepaid and postpaid consumers are offered

a T-Mobile ONE plan which unifies all of T-Mobile’s

offering under one plan, reducing clutter in terms of

variety of offered plans. The ONE plan is an unlimited plan

which offers users unlimited 4G LTE data, 480p video

streaming, and 3G tethering. The ONE plan is offered at

$70/line for one line, going down to $40/line for a family

of 4 lines.

Customers have the option to add T-Mobile One Plus for

$5/line/mo which adds HD video streaming and 4G

tethering for the first 10GB. On T-Mobile ONE Plus

customers also receive features, such as Voicemail to Text

and Gogo in-flight Internet passes on capable domestic

flights.

Another option is T-Mobile ONE Plus International addon

for $25/line/mo. On T-Mobile ONE Plus International,

customers receive the benefits of T-Mobile ONE Plus, as

well as calling from the United States to foreign countries

and 4G LTE mobile hotspot data in the United States,

Mexico, and Canada.

T-Mobile offers Un-carrier Next, where monthly wireless

service fees and taxes are included in the advertised

monthly recurring charge for T-Mobile ONE. It also offers

Kickback on T-Mobile ONE which refunds $10/line/mo to

lines using under 2GB data a month. In addition, it offers

Un-contract for T-Mobile ONE with 4G LTE plan, which

allows T-Mobile ONE customers to keep their price for

service until they decide to change it.iii

Revenue Decomposition

T-Mobile’s revenue is broadly divided into three segments:

Service (74% of FY16 revenues), Equipment (23%), and

Others (2%).

T-Mobile USA Revenue Breakup (2016)

Source: TMUS 10K

Services

A majority of T-Mobile’s revenues come from the services

segment which includes revenue from postpaid, prepaid

and roaming services.

Source: T-Mobile investor factbook Q4 2016

T-Mobile has seen class-leading service revenue growth in

recent years with a YoY growth of 12.2%, service revenues

exceeding $27.8B. Since its resurgence in 2013, T-Mobile

has put together a hefty portfolio of wireless assets which

would be difficult, if not impossible, to replicate. T-Mobile

holds large contiguous blocks of spectrum that have

helped it efficiently deploy new technology, providing a

network that is delivering solid performance. T-Mobile

also inked a deal in 2013 to acquire a portion of Verizon's

holdings in the 700 MHz block, and it has since cobbled

together a solid position in this band. This spectrum has

enabled T-Mobile to improve network coverage,

overcoming a key shortcoming. At the end of Q4 2016, T-

Mobile owned or had agreements to own an average of 86

MHz of spectrum across the top 25 markets in the U.S. The

spectrum is comprised of an average of 12 MHz in the 700

MHz band, 30 MHz in the 1900 MHz PCS band and 44 MHz

in the AWSiv

49%

23%

23%

Branded postpaidrevenues

Branded prepaidrevenues

Wholesale revenues

Roaming and otherservice revenues

Equipment revenues

Other revenues

Source: T-Mobile

band. However, this illustrates the difficult position T-

Mobile faces: The firm has spent more than $5 billion on

spectrum over the past three years, placing a strain on its

finances. T-Mobile will need to spend more in the future,

including on broadcast spectrum up for auction in 2017.

T-Mobile Projected Coverage Map Dec 2017

Source: T-Mobile

T-Mobile began making several changes in late 2012 to

improve the market position of its postpaid business.

These changes, including the launch of a new branding

campaign around the "un-carrier" designation and the

creation of rate plans that separate service and phone

pricing, have produced solid results. The firm has reported

strong postpaid customer growth over the past three

years, reversing huge customer losses in 2010-12. The US

wireless market is highly saturated with penetration rates

of over 115%v which means that there are now more

cellphone connections than there are people. Smartphone

penetration reached 80%, 3rd highest in the world after

South Korea and Australia. vi New growth will come from

taking market share from other carriers. T-Mobile came

into the wireless world as a bit of a maverick and triggered

a price war with its un-carrier initiatives. While the price

war helped T-Mobile become the 3rd largest carrier, it has

put downwards pressure on the ARPU or Average Returns

Per Customer numbers.

Source: Factset for estimates and Statista for historical

In the longer term, however, we expect that T-Mobile US

will struggle to maintain pace with its larger, financially

stronger rivals.

Source: Strategy Analytics

The company claims only 17% of the U.S. wireless market,

about half the size of AT&T and Verizon. At the end of

2008, T-Mobile served about 40% as many postpaid

customers as Verizon Wireless and 45% as many as AT&T.

35.40.45.50.55.60.

2013 2014 2015 2016 2017E

Historical ARPU

Verizon Wireless AT&T

Sprint T-Mobile USA

35%

33%

17%

14%1%

Carrier Market Share - US Wireless Market (2016)

Verizon AT&T T-Mobile Sprint US Cellular

However, T-Mobile shed about 10% of its postpaid

customers during both 2011 and 2012; those percentages

now stand at only 30% and 41%, respectively, even after

the firm's recent run of strong customer growth. Smaller

scale leaves T-Mobile at a cost disadvantage versus these

rivals, which we expect will ultimately limit its ability to

invest aggressively in network capacity while generating

acceptable returns on capital.

Equipment

As a cellphone carrier, T-Mobile needs to have agreements

with major smartphone manufacturers to bring their

flagship devices to their networks. Availability and non-

availability of a popular flagship can be the difference

between net customer adds or losses for a carrier. Imagine

if T-Mobile did not offer the iPhone on its network, how

many users will migrate to a network which did. Upgrade

cycles are as important to carriers as they are to

smartphone manufacturer as every upgrade is a point

where a user can potentially switch carriers.

Source: T-Mobile

T-Mobile offers almost all flagship devices on its network

with the notable exception of the Google Pixel devices

which are a Verizon exclusive.

T-Mobile makes about 23% of its revenues from the sale

or lease of equipment to users. For 2016, its equipment

revenues were up 30% YoY, reaching $8.7B. The increase

was due to an increase in lease revenues resulting from the

launch of the JUMP! On Demand program at the end of Q2

2015 and an increase in device sales revenues primarily

due to an increase in the number of devices sold.

It offers an Equipment Installment Plan or EIP which

provides users with an opportunity to get a flagship device

with a monthly payment instead of the entire upfront cost.

T-Mobile financed $6.1B in device financing under the EIP

in 2016.

Source: T-Mobile

Customers on T-Mobile plans had associated EIP billings of

$1.370 billion in Q4 2016, down 1.7% compared to $1.394

billion in Q3 2016 and down 2.1% from $1.400 billion in Q4

2015. Total EIP receivables, net of imputed discount and

allowances for credit losses, was $2.914 billion at the end

of Q4 2016, compared to $2.508 billion at the end of Q3

2016 and $3.225 billion at the end of Q4 2015. i

RECENT DEVELOPMENTS

Fiscal 2016 Fourth Quarter Earnings

T-Mobile reported its 4Q2016 earnings on 14th Feb. The

earnings beat estimates comfortably. T-Mobile earned

$0.45 per share on revenue of $10.2 billion. The Street's

estimate was $0.29 per share on revenue of $9.8 billion.

Source: T-Mobile

With 11% growth in service revenues, 31% in Net Income,

12% in Adjusted EBITDA and 2.1M net customer additions,

T-Mobile has a fantastic 4th Quarter. The strong results

have prompted an ambitious guidance for 2017 with the

company projecting a 2.4 to 3.4 million net customer add.

They declined to provide guidance on net income saying

“T-Mobile is not able to forecast net

income on a forward-looking basis

without unreasonable efforts due to the

high variability and difficulty in

predicting certain items that affect GAAP

net income including, but not limited to,

income tax expense, stock based

compensation expense, interest expense

and interest income.” Their EBITDA target stands at $10.4B to $10.8B

Deutsche Telekom issues $4Bn loan to T-

Mobile USA

T-Mobile USA entered into a $4 billion secured term loan

facility with Deutsche Telekom AG (74% ownership of T-

Mobile USAvii), its majority stockholder in Jan 2017.viii The

company is not required to pay any upfront fees,

underwriting fees, original issue discount or other

consideration to DT. Deutsche Telekom does not have to

borrow any additional long-term capital to provide the

credit and said its net debt will not increase.

The company plans to draw on two tranches; on Jan. 31:

One for $2B, bearing interest at Libor plus a 2% margin,

maturing Nov. 9, 2022; and another for $2B, at Libor plus

a 2.25% margin, maturing Jan. 31, 2024.ix T-Mobile is

expected to use the loan to pay off high interest debt

obligations. It also helps T-Mobile build up a war chest for

spectrum acquisition and other capital expenditures.

T-Mobile buys 600MHz Spectrum for $8B

In an expected move, T-Mobile bid heavily in the recent

FCC spectrum auction, winning 31MHz on the low-band

600MHz spectrum. T-Mobile agreed to pay $8B for the

haul.x This move is in line with T-Mobile’s recent

acquisitions in the 700MHz band. Low frequency bands

have the advantage of better propagation characteristics

and penetrates obstacles such as walls and buildings,

enabling T-Mobile to bolster its ‘Extended LTE’ coverage in

urban and remote areas.

INDUSTRY TRENDS

IoT and Smart Home Tech: Traffic Explosion

Internet of Things(IoT) is the inter-networking of physical

devices also referred to as ("connected devices" and

"smart devices"), vehicles, buildings, and other items—

embedded with electronics, software, sensors, actuators,

and network connectivity that enable these objects to

collect and exchange data.

Source: IHS

IoT has seen massive growth in recent years and is

projected to grow to a massive 75 billion devices by 2025xi.

These devices will stress the existing network

infrastructure like never seen before. Wireless carriers will

need to keep upgrading their capacity to service these

devices with a clear roadmap for 5G rollout.

Network Upgrades and 5G roadmaps

As the world moves towards data from voice and text,

carriers will need to continually upgrade their capacity by

adding spectrum and/or towers. With the average user

projected to use 22GB mobile data every month, carriers

need a clear roadmap to rollout 5G networks. 2017 will see

progress in testing as companies find the best possible

technology to use. A big risk in this industry is backing the

wrong technology which does not end up as the standard,

leading to losses and network complications in the future.

Expected consolidation through M&A

It will be difficult for telecom companies to embrace a new

strategic identity by themselves; many of them don’t have

the capabilities required to create the product offerings

and services needed for repositioning in the marketplace.

For that reason, acquisitions are an attractive vehicle.

During Sprint’s recent fiscal 3Q16 earnings conference call,

Sprint’s management stated that “further consolidation

among the smaller players may be necessary to compete

with the big two,” giving credence to hopes of a T-Mobile

(TMUS) tie-up.

One thing that may help push some deals across the finish

line is the prospect of less regulation from government

agencies. While the specifics of the new administration are

yet to be determined, early indications are that anything is

fair game for reevaluation.

MARKETS AND COMPETITION

T-Mobile US faces stiff competition from two larger rivals

that are far better equipped to handle changes in the

telecom industry. Technological changes, like the shift to

the LTE network standard, the introduction of new

devices, such as the iPhone, or the availability of spectrum

at auction, can create opportunities for Verizon and AT&T

to put their financial firepower to work and expand their

advantages versus smaller carriers. Though it has made

fantastic progress recently, T-Mobile has struggled to

retain its highest-value customers in recent years. These

struggles highlight that customers will leave if network

coverage and capacity, customer service, or pricing fail to

meet expectations. Rivals have also aggressively

responded to T-Mobile's recent pricing actions,

threatening to slow the firm's momentum. Sprint, in

particular, has begun aggressively competing on price in an

attempt to stabilize its customer base.

T-Mobile US is subject to broader industry risks, including

shifting regulation and consumer habits. We expect the

firm will be a net beneficiary on the regulatory front, but

issues around service pricing and network usage come up

from time to time. Also, the FCC is examining data roaming

rates, which could result in T-mobile paying more for this

service.

Carriers, including T-Mobile, have slowly migrated pricing

structures to reflect growing data usage, adding unlimited

voice and text service while charging based on data

consumption. This transition is far from complete,

however. For example, T-Mobile US' 6 GB data plan triples

the potential load on the network versus its base plan, but

boosts the customer bill by only 30%. Customers may

demand increased data usage at current prices or actively

seek out alternatives, such as free Wi-Fi.

Peer Comparisons

T-Mobile is the 3rd largest wireless carrier in the US. It has

the 3rd highest net margin amongst its peer group. It lags

Verizon and AT&T by a 6% and 4% respectively.

A look at the revenue and profit numbers for the

competing companies follows.

Revenue and Profitability

Subscribers

(in 000s)

Net Income

(in $M)

Net Margin

T-Mobile 71,455 1,460 3.92%

Verizon 114,243 13,127 10.4%

AT&T 134,859 12,976 7.9%

Sprint 58,806 -1,477 -4.5%

US Cellular 5,031 48 1.2%

Source: Factset

One of the biggest reasons for the huge margin differential

is the debt on the balance sheets with the interest

payments wiping out any earnings for carriers like Sprint.

T-Mobile also suffers but to a lesser extent due to

favorable terms on debt issued by parent Deutsche

Telekom.

T-Mobile compares unfavorably in terms of ARPU, Churn

and ROE amongst its peer group. A big challenge for T-

Mobile will be to make more money off each customer.

Key Stats Q4 2016

ARPU (in $) Churn ROE

T-Mobile 43.14 2.55% 7.7%

Verizon 45.54 1.26% 70.4%

AT&T 51.12 1.5% 14.2%

Sprint 43.49 1.61% -10%

US Cellular 45.27 1.60% 1.3%

Source: Factset and Strategy Analytics

Verizon’s ROE number is huge due to a massive decline in

equity from its purchase of Vodafone’s stake in the

company.

Key Stats

PE EBIT

Margin

ROA

T-Mobile 37.62 8.2% 2.3%

Verizon 15.16 20.6% 5.4%

AT&T 19.33 15.8% 3.2%

Sprint -- 4.29% -2.4%

US Cellular 67.07 0.00% 0.7%

Source: Factset

Compared to the Big Two – Verizon and AT&T, T-Mobile is

trading at elevated multiples. This makes the stock very

risky.

ECONOMIC OUTLOOK

Due to the telecom industry’s strong position and

penetration rates, it is slightly shielded by the economy as

people typically don’t cellphone connection even in a

downturn. But in a heavily saturated market, growth will

come from GDP growth and population growth rates. This

is force companies to find new avenues for growth. This is

why we see Verizon going after Yahoo and AOL or AT&T

seeking Time Warner after DirecTV. T-Mobile is growing by

taking market share away from the other carriers but

eventually it will need to find a new avenue, whether by

consolidation or by diversification.

US GDP Growth Rate

The big telecom companies can expect at most a 2%-3%

growth in wireless.

Population Growth Rate

Source: World Bank

With a low .7% population growth rate, new

growth/customer adds will be difficult to find. Carriers will

have to fight for a bigger piece of the pie but the pie will

not get any bigger any time soon.

Interest Rates

After almost a decade of flat rates, the Fed finally raised

the rate to .5% in December 2015. The current rate stands

at 1% after two 25bps hikes in January 2017 and March

2017. With the Federal Reserve making it clear that it’s

looking to take the rate to 1-1.25% range, the cost of debt

will increase for all companies, as businesses find

themselves in an environment of reduced liquidity. T-

Mobile has the advantage of having Deutsche Telekom

backing it, which has issued it loans at low interest rates in

the past. Which enhances T-Mobile’s capability to roll over

debt even in a higher rate environment.

CATALYSTS FOR GROWTH

T-Mobile has seen substantial growth since 2012 and will

continue to do so in the short term by taking users away

from other carriers. But the one event which can act as a

catalyst is Merger and Acquisition activity. Whether it

takes over Sprint or makes a deal with Dish, T-Mobile will

need such an event to catalyze growth over and above the

normal.

An early mover advantage on 4.5G and 5G technologies

can also propel T-Mobile’s growth, as data hungry

consumers looks for more bandwidth. T-Mobile already

has a significant bank of spectrum which it can put to use

for such rollouts.

INVESTMENT POSITIVES

• Brand Value and consistent growth. T-Mobile, the

‘Un-carrier’ is perceived well amongst the user base

and that helps it grow by eating away at the other

carriers. It has been a growth engine which refuses to

slow down in the recent years with impressive

revenue incline in the last 3 years.

• The backing of Deutsche Telekom means that T-

Mobile has access to liquidity at low cost with which to

build capacity and that in event of a takeover of Sprint,

it has an experienced negotiator guiding it through the

waters.

• A strong management has enabled T-Mobile to

become a genuine competitor. T-Mobile can be relied

on to make good decisions in terms of marketing and

positioning in the future. Their decision to test 5G

early and continuous capacity upgrades mean that T-

Mobile is looking forward with a roadmap in place.

• The IoT segment can be a growth driver but that is still

some ways into the future.

INVESTMENT NEGATIVES

• Scale. T-Mobile is likely to operate at a persistent cost

disadvantage versus its larger rivals. This position will

make it difficult for T-Mobile to compete as a value

carrier while delivering decent profitability. Smaller

scale and a relatively weak balance sheet will hamper

T-Mobile's ability to react to changing market

conditions or take advantage of new opportunities.

• Pricing Pressures. In order to lure customers from

competitors, T-Mobile US recently launched several

low-priced service plans for individual consumers as

well as small business entities. Although the company

has increased its top line by adding customers, T-

Mobile is yet to improve its bottom line numbers.

Notably, the costs incurred to gain customers and

grow revenues has not rewarded its shareholders yet.

Valuation

We valued TMUS’s stock in the $64-68 range using DCF. T-

Mobile’s valuation is helped by its relatively low beta

which gives it some upside but unless T-Mobile can

increase its margins and ARPU, the stock will see pressure

especially considering the debt on its Balance Sheet and

the expected spend in 2020 onwards on 5G rollouts.

Revenue Growth Rate

The wireless telecom industry has shrunk by 0.54% over

the last 5 years while T-Mobile has seen steady and

impressive growth. T-Mobile now faces increased

competition with the big carriers responding to its

initiatives, leveraging their scale to put pressure on T-

Mobile. While we expect T-Mobile to grow by 8.5% in

2017, we need to be wary of how much is being added to

the bottom line.

T-Mobile Revenue Growth

2012 5.24%

2013 378.70%

2014 21.06%

2015 8.42%

2016 16.19%

2017E 12.60%

2018E 9.08%

2019E 6.73%

2020E 4.11%

2021E 2.28%

Cost of Goods Sold

We forecast a slight decline in COGS as a percentage of

revenue for the next 3 years as T-Mobile’s current gen

network is reaching maturity and would not require the

levels of spending it did in the recent past. T-Mobile will

still need to spend substantially to maintain and expand its

foot print but overall the spending will decline as %age of

revenues. This will change in 2020 and beyond when T-

Mobile will need to build up the 5G infrastructure and will

see an increase in spending in the build-out of that

network.

Current COGS/Rev is at 44% and we estimate 2017

COGS/Rev to be 43%

Selling, General, and Administrative Expense

SG&A saw a 12% increase in 2016 as revenues grew 16%.

We can see an increase in SG&A expense as T-Mobile has

to try harder in a saturated market to find new users and

hence we are growing SG&A by revenue growth.

Continuing Growth Assumptions

Using the McKinsey approach to valuation, net operating

profit less adjusted taxes (NOPLAT) feeds into the

discounted cash flow model that is used to derive the

target price. After the forecast period, we estimate a

continuing NOPLAT growth amount. We estimate NOPLAT

growth at 1.85% due to the highly-penetrated market. The

1.85% rate is estimated taking into consideration the US

GDP Growth Rate and the Population Growth Rate.

KEYS TO MONITOR

Regulation: Telecom is a highly-regulated industry. Any

adverse FCC rulings might impact T-Mobile and the

industry as a whole.

Sprint Merger Talks: A merger will Sprint will create a

behemoth big enough to compete on scale with Verizon

and AT&T. Such a merger will create the necessary

synergies to take market share away from the other

carriers.

REFERENCES

1. T-Mobile 10-K

2. CNBC

http://www.cnbc.com/2015/04/28/t-mobile-ceo-to-

cramer-shut-up-and-listen.html

3. T-Mobile www.t-mobile.com

4. T-Mobile investor factbook Q4 2016

5. CTIA

http://www.ctia.org/industry-data/ctia-annual-

wireless-industry-survey

6. Comscore

http://www.comscore.com/Insights/Market-

Rankings/comScore-Reports-December-2015-US-

Smartphone-Subscriber-Market-Share?

7. T-Mobile

http://investor.t-mobile.com/FAQ#FAQ20791

8. Reuters

http://www.reuters.com/finance/stocks/TMUS.O/key

-developments/article/3515187

9. Seeking Alpha

https://seekingalpha.com/news/3237655-t-mobile-

refinances-4b-loan-draw-deutsche-telekom

10. Forbes

https://www.forbes.com/sites/greatspeculations/201

7/04/17/t-mobiles-big-spectrum-haul-comes-with-

some-risks/#35bafdf82587

11. IHS

i T-Mobile 10-K ii CNBC http://www.cnbc.com/2015/04/28/t-mobile-ceo-to-cramer-shut-up-and-listen.html iii www.t-mobile.com iv T-Mobile investor factbook Q4 2016 v CTIA http://www.ctia.org/industry-data/ctia-annual-wireless-industry-survey vi http://www.comscore.com/Insights/Market-Rankings/comScore-Reports-December-2015-US-Smartphone-Subscriber-Market-Share?

12. Factset

13. YCharts

14. Morningstar

15. Fidelity eResearch

16. S&P Capital IQ

17. Sprint

http://investors.sprint.com/financials/default.aspx

18. Verizon

http://www.verizon.com/about/investors/sec-filings

19. Statista

IMPORTANT DISCLAIMER

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the University of Iowa’s Tippie School of Management.

These reports are intended to provide potential employers

and other interested parties an example of the analytical

skills, investment knowledge, and communication abilities

of Henry Fund students. Henry Fund analysts are not

registered investment advisors, brokers or officially

licensed financial professionals. The investment opinion

contained in this report does not represent an offer or

solicitation to buy or sell any of the aforementioned

securities. Unless otherwise noted, facts and figures

included in this report are from publicly available sources.

This report is not a complete compilation of data, and its

accuracy is not guaranteed. From time to time, the

University of Iowa, its faculty, staff, students, or the Henry

Fund may hold a financial interest in the companies

mentioned in this report.

vii http://investor.t-mobile.com/FAQ#FAQ20791 viii Reuters http://www.reuters.com/finance/stocks/TMUS.O/key-developments/article/3515187 ix https://seekingalpha.com/news/3237655-t-mobile-refinances-4b-loan-draw-deutsche-telekom x https://www.forbes.com/sites/greatspeculations/2017/04/17/t-mobiles-big-spectrum-haul-comes-with-some-risks/#35bafdf82587 xi IHS

http://www.comscore.com/Insights/Market-Rankings/comScore-Reports-December-2015-US-Smartphone-Subscriber-Market-Share?



http://investor.t-mobile.com/FAQ%23FAQ20791

http://www.reuters.com/finance/stocks/TMUS.O/key-developments/article/3515187

http://www.reuters.com/finance/stocks/TMUS.O/key-developments/article/3515187

https://seekingalpha.com/news/3237655-t-mobile-refinances-4b-loan-draw-deutsche-telekom

https://seekingalpha.com/news/3237655-t-mobile-refinances-4b-loan-draw-deutsche-telekom

https://www.forbes.com/sites/greatspeculations/2017/04/17/t-mobiles-big-spectrum-haul-comes-with-some-risks/%2335bafdf82587



http://investors.sprint.com/financials/default.aspx

http://www.verizon.com/about/investors/sec-filings

T-Mobile USARevenue Decomposition

Fiscal Years Ending Dec 31 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021ETotal Revenue 15,218 19,387 29564.00 32053.00 37242.00 41934.58 45740.44 48817.13 50823.43 51984.07YoY %change 27.40% 52.49% 8.42% 16.19% 12.60% 9.08% 6.73% 4.11% 2.28%

Net Sales by ProductBranded postpaid revenues 14,521 13,166 14,392 16,383 18,138 19679.73 20663.72 21283.63 21922.14 22360.58YoY %change -9.33% 9.31% 13.83% 10.71% 8.50% 5.00% 3.00% 3.00% 2.00%% of total revenue 67.91% 48.68% 51.11% 48.70% 46.93% 45.18% 43.60% 43.13% 43.01%

Branded prepaid revenues 1,715 4,945 6,986 7,553 8,553 9664.89 10728.03 11586.27 12049.72 12290.72YoY %change 188.34% 41.27% 8.12% 13.24% 13.00% 11.00% 8.00% 4.00% 2.00%% of total revenue 25.51% 23.63% 23.56% 22.97% 23.05% 23.45% 23.73% 23.71% 23.64%

Wholesale revenues 544 613 731 692 903 930.09 948.69 967.67 987.02 1006.76YoY %change 12.68% 19.25% -5.34% 30.49% 3.00% 2.00% 2.00% 2.00% 2.00%% of total revenue 3.16% 2.47% 2.16% 2.42% 2.22% 2.07% 1.98% 1.94% 1.94%

Roaming and other service revenues 433 344 266 193 250 295.00 330.40 360.14 378.14 385.71YoY %change -20.55% -22.67% -27.44% 29.53% 18.00% 12.00% 9.00% 5.00% 2.00%% of total revenue 1.77% 0.90% 0.60% 0.67% 0.70% 0.72% 0.74% 0.74% 0.74%

Equipment revenues 2,242 5,033 6,789 6,718 8,727 10559.67 12143.62 13600.85 14416.91 14849.41YoY %change 124.49% 34.89% -1.05% 29.90% 21.00% 15.00% 12.00% 6.00% 3.00%% of total revenue 25.96% 22.96% 20.96% 23.43% 25.18% 26.55% 27.86% 28.37% 28.57%

Other revenues 264 319 400 514 671 805.20 925.98 1018.58 1069.51 1090.90YoY %change 20.83% 25.39% 28.50% 30.54% 20.00% 15.00% 10.00% 5.00% 2.00%% of total revenue 1.65% 1.35% 1.60% 1.80% 1.92% 2.02% 2.09% 2.10% 2.10%

Total Number of Customers(in Thousands)33,389 46,684 55,018 63,282 71,455 79315.05 86453.40 92505.14 96205.35 97167.40YoY %change 39.82% 17.85% 15.02% 12.92% 11.00% 9.00% 7.00% 4.00% 1.00%Revenue/customer(in USD) 455.78 415.28 537.35 506.51 521.20 528.71 529.08 527.72 528.28 534.99

T-Mobile USASensitivity Analysis

DCF Target Price 66.26$

0.920 0.970 1.020 1.070 1.120 1.170 1.220 1.270 1.320 4.40% 4.65% 4.90% 5.15% 5.40% 5.65% 5.90% 6.15% 6.40%1.66% 72.68 68.82 65.20 61.81 58.62 55.61 52.78 50.10 47.56 1.00% 76.27 74.67 73.13 71.65 70.22 68.84 67.51 66.22 64.97 1.86% 69.44 65.79 62.36 59.14 56.10 53.24 50.54 47.98 45.55 1.25% 76.09 74.49 72.95 71.47 70.04 68.66 67.33 66.04 64.79 2.06% 66.38 62.92 59.66 56.60 53.71 50.98 48.39 45.95 43.63 1.50% 75.90 74.30 72.77 71.28 69.86 68.48 67.14 65.86 64.61 2.26% 63.48 60.19 57.09 54.18 51.42 48.81 46.35 44.00 41.78 1.75% 75.71 74.12 72.58 71.10 69.67 68.29 66.96 65.68 64.43 2.46% 60.72 57.60 54.65 51.87 49.24 46.75 44.39 42.14 40.01 2.00% 75.53 73.93 72.40 70.92 69.49 68.11 66.78 65.49 64.25

2.66% 58.10 55.13 52.32 49.67 47.15 44.77 42.51 40.36 38.31 2.25% 75.34 73.75 72.21 70.73 69.31 67.93 66.60 65.31 64.07 2.86% 55.61 52.78 50.10 47.56 45.16 42.88 40.71 38.64 36.68 2.50% 75.16 73.56 72.03 70.55 69.12 67.75 66.42 65.13 63.89 3.06% 53.24 50.54 47.98 45.55 43.25 41.06 38.98 37.00 35.11 2.75% 74.97 73.38 71.85 70.37 68.94 67.56 66.24 64.95 63.71 3.26% 50.98 48.39 45.95 43.63 41.42 39.32 37.32 35.42 33.60 3.00% 74.79 73.19 71.66 70.18 68.76 67.38 66.05 64.77 63.53

33.30% 34.30% 35.30% 36.30% 37.30% 38.30% 39.30% 40.30% 41.30% 65.55% 67.55% 69.55% 71.55% 73.55% 75.55% 77.55% 79.55% 81.55%3.80% 78.29 78.29 78.29 78.29 78.29 78.29 78.29 78.29 78.29 0.60% 63.28 63.23 63.18 63.13 63.08 63.03 62.98 62.94 62.89 4.05% 75.04 75.04 75.04 75.04 75.04 75.04 75.04 75.04 75.04 0.70% 64.00 63.95 63.90 63.85 63.80 63.75 63.70 63.65 63.60 4.30% 71.97 71.97 71.97 71.97 71.97 71.97 71.97 71.97 71.97 0.80% 64.74 64.69 64.65 64.60 64.55 64.50 64.45 64.40 64.35 4.55% 69.04 69.04 69.04 69.04 69.04 69.04 69.04 69.04 69.04 0.90% 65.53 65.48 65.43 65.38 65.33 65.28 65.23 65.18 65.13 4.80% 66.26 66.26 66.26 66.26 66.26 66.26 66.26 66.26 66.26 1.00% 66.35 66.30 66.25 66.20 66.15 66.10 66.05 66.00 65.95

5.05% 63.61 63.61 63.61 63.61 63.61 63.61 63.61 63.61 63.61 1.10% 67.20 67.16 67.11 67.06 67.01 66.96 66.91 66.86 66.81 5.30% 61.09 61.09 61.09 61.09 61.09 61.09 61.09 61.09 61.09 1.20% 68.11 68.06 68.01 67.96 67.91 67.86 67.81 67.76 67.71 5.55% 58.68 58.68 58.68 58.68 58.68 58.68 58.68 58.68 58.68 1.30% 69.05 69.00 68.95 68.90 68.86 68.81 68.76 68.71 68.66 5.80% 56.37 56.37 56.37 56.37 56.37 56.37 56.37 56.37 56.37 1.40% 70.05 70.00 69.95 69.90 69.85 69.80 69.75 69.70 69.65

Market Risk Rate NOPLAT CV Growth

Beta Pre-Tax Cost of Debt

Risk Free Rate Normal Cash %

Tax Rate Net Intagibles/Revenue

T-Mobile USAIncome Statement

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021ESales 29,564.00 32,053.00 37,242.00 41934.58 45740.44 48817.13 50823.43 51984.07

COGS excluding D&A 15,409.00 14,898.00 16,550.00 18006.32 18753.58 19526.85 20837.61 21313.47Depreciation 4,342.00 4,788.00 6,023.00 6282.90 6290.19 6861.07 7176.12 7623.51Amortization of Intangibles 333.00 276.00 220.00 218.79 218.79 218.79 218.79 218.79Gross Income 9,480.00 12,091.00 14,449.00 17,426.57 20,477.88 22,210.42 22,590.92 22,828.30SG&A Expense 8,863.00 10,189.00 11,378.00 12580.37 13493.43 14156.97 14738.80 15075.38EBIT (Operating Income) 617.00 1,902.00 3,071.00 4,846.20 6,984.45 8,053.46 7,852.12 7,752.92Nonoperating Income - Net 1,146.00 572.00 1,090.00 1227.34 1338.73 1428.78 1487.50 1521.47Interest Expense 1,369.00 1,348.00 1,755.00 1824.42 1883.21 1991.54 2075.83 2127.13Unusual Expense - Net -19.00 148.00 79.00 0 0 0 0 0Pretax Income 413.00 978.00 2,327.00 4,249.12 6,439.98 7,490.70 7,263.79 7,147.26Income Taxes 166.00 245.00 867.00 1657.16 2511.59 2921.37 2832.88 2787.43Consolidated Net Income 247.00 733.00 1,460.00 2,591.96 3,928.39 4,569.33 4,430.91 4,359.83Preferred Dividends 0.00 55.00 55.00 55.00 55.00 55.00 55.00 55.00Net Income available to Common 247.00 678.00 1,405.00 2,591.96 3,928.39 4,569.33 4,430.91 4,359.83

Per ShareEPS 0.31 0.83 1.70 3.14 4.75 5.52 5.36 5.27EPS Growth 86% 63% 51% 84% 51% 16% -3% -2%Total Shares Outstanding 807.47 818.39 826.36 826.72 827.08 827.19 827.19 827.19Dividends per Share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

T-Mobile USABalance Sheet

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021EAssets

Cash & Short-Term Investments 5,832.00 7,580.00 5,500.00 7383.41 9936.48 13872.70 18326.08 22458.64Short-Term Receivables 5,003.00 4,202.00 3,866.00 5661.17 6174.96 6590.31 6861.16 7017.85Inventories 1,085.00 1,295.00 1,111.00 1250.99 1364.52 1456.31 1516.16 1550.78Other Current Assets 2,064.00 1,813.00 3,740.00 2096.73 2287.02 2440.86 2541.17 2599.20Total Current Assets 13,984.00 14,890.00 14,217.00 16,392.29 19,762.99 24,360.18 29,244.57 33,626.48

Net Property, Plant & Equipment 16,245.00 20,000.00 20,943.00 20967.29 22870.22 23920.40 25411.72 25992.04Total Investments and Advances 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Long-Term Note Receivable 1,628.00 847.00 984.00 984.00 984.00 984.00 984.00 984.00Net Goodwill 1,683.00 1,683.00 1,683.00 1683.00 1683.00 1683.00 1683.00 1683.00Net Other Intangibles 22,825.00 24,549.00 27,390.00 28934.86 29731.28 30754.79 30494.06 30670.60Other Assets 288.00 467.00 674.00 758.93 827.80 883.48 919.79 940.80Total Assets 56,653.00 62,436.00 65,891.00 69,720.37 75,859.29 82,585.86 88,737.14 93,896.92

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt 318.00 182.00 354.00 0 0 0 0 0Accounts Payable 5,322.00 6,272.00 5,288.00 5954.30 6494.69 6931.56 7216.43 7381.23Income Tax Payable 0.00 0.00 0.00 0 0 0 0 0Other Current Liabilities 3,136.00 3,074.00 3,380.00 3805.89 4151.30 4430.53 4612.62 4717.96Total Current Liabilities 8,776.00 9,528.00 9,022.00 9,760.19 10,645.99 11,362.09 11,829.05 12,099.19

Long-Term Debt 24,394.00 28,742.00 30,053.00 30407.00 31386.80 33192.28 34597.22 35452.12Provision for Risks & Charges 211.00 731.00 523.00 588.90 642.35 685.55 713.73 730.03Deferred Tax Liabilities 4,873.00 4,061.00 4,938.00 4612.80 4574.04 3905.37 3557.64 3119.04Other Liabilities 2,736.00 2,817.00 3,119.00 3512.00 3830.74 4088.41 4256.44 4353.64Total Liabilities 40,990.00 45,879.00 47,655.00 48,880.89 51,079.92 53,233.70 54,954.08 55,754.02

Common Equity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Additional Paid-In Capital/Capital Surplus 38,503.00 38,666.00 38,846.00 38,857.51 38,869.02 38,872.48 38,872.48 38,872.48Retained Earnings -22,841.00 -22,108.00 -20,610.00 -18,018.04 -14,089.65 -9,520.33 -5,089.41 -729.58Unrealized Gain/Loss Marketable Securities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Other Appropriated Reserves 1.00 -1.00 1.00 1.00 1.00 1.00 1.00 1.00Treasury Stock 0.00 0.00 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00Total Shareholders' Equity 15,663.00 16,557.00 18,236.00 20,839.47 24,779.37 29,352.15 33,783.06 38,142.89

Minority Interest

Total Equity 15,663.00 16,557.00 18,236.00 20,839.47 24,779.37 29,352.15 33,783.06 38,142.89

Total Liabilities & Shareholders' Equity 56,653.00 62,436.00 65,891.00 69,720.37 75,859.29 82,585.86 88,737.14 93,896.92

T-Mobile USACash Flow Statement

Fiscal Years Ending Dec 31 2012 2013 2014 2015 2016Operating Activities

Net Income / Starting Line 389.46 35.00 247.00 733.00 1,460.00

Depreciation, Depletion & Amortization 648.05 3,627.00 4,412.00 4,688.00 6,243.00

Deferred Taxes & Investment Tax Credit 216.81 10.00 122.00 256.00 914.00

Other Funds 21.67 939.00 208.00 1,104.00 201.00

Funds from Operations 1,275.98 4,611.00 4,989.00 6,781.00 8,818.00

Changes in Working Capital -94.53 -1,066.00 -843.00 -1,367.00 -2,683.00

Receivables -20.64 -1,315.00 -2,519.00 830.00 -506.00

Inventories -19.51 42.00 -499.00 -2,495.00 -802.00

Accounts Payable -51.72 611.00 2,395.00 693.00 -1,201.00

Other Assets/Liabilities -2.67 -404.00 -220.00 -395.00 -174.00

Net Operating Cash Flow 1,181.45 3,545.00 4,146.00 5,414.00 6,135.00

Investing Activities

Capital Expenditures -868.96 -4406.00 -7217.00 -6659.00 -8670.00

Capital Expenditures (Fixed Assets) -845.85 -4,025.00 -4,317.00 -4,724.00 -4,702.00

Capital Expenditures (Other Assets) -23.11 -381.00 -2,900.00 -1,935.00 -3,968.00

Net Assets from Acquisitions 0.00 0.00 0.00 0.00 0.00

Sale of Fixed Assets & Businesses 31.97 2,147.00 20.00 0.00 0.00

Purchase/Sale of Investments 61.07 -33.00 -49.00 -2,997.00 2,998.00

Purchase of Investments 694.50 33.00 49.00 2,997.00 0.00

Sale/Maturity of Investments 755.57 0.00 0.00 0.00 2,998.00

Other Funds 52.50 200.00 0.00 96.00 -8.00

Other Uses 0.00 -100.00 0.00 0.00 -8.00

Other Sources 52.50 300.00 0.00 96.00 0.00

Net Investing Cash Flow -723.43 -2,092.00 -7,246.00 -9,560.00 -5,680.00

Financing Activities

Cash Dividends Paid 0.00 -41.00 0.00 -55.00 -55.00

Common Dividends 0.00 -41.00 0.00 0.00 0.00

Preferred Dividends 0.00 0.00 0.00 -55.00 -55.00

Change in Capital Stock 1.78 1,924.00 1,009.00 47.00 29.00

Repurchase of Common & Preferred Stk. -4.33 0.00 0.00 0.00 0.00

Sale of Common & Preferred Stock 6.11 1,924.00 1,009.00 47.00 29.00

Proceeds from Sale of Stock 0.00 1,787.00 982.00 0.00 0.00

Proceeds from Stock Options 6.11 137.00 27.00 47.00 29.00

Issuance/Reduction of Debt, Net -44.46 2,250.00 1,556.00 3,498.00 622.00

Change in Current Debt 0.00 -244.00 -418.00 -564.00 -150.00

Change in Long-Term Debt -44.46 2,494.00 1,974.00 4,062.00 772.00

Issuance of Long-Term Debt -10.00 2,494.00 2,993.00 4,119.00 997.00

Reduction in Long-Term Debt -34.46 0.00 -1,019.00 -57.00 -225.00

Other Funds 9.68 -89.00 -41.00 -77.00 -133.00

Other Uses 0.00 -89.00 -75.00 -156.00 -133.00

Other Sources 9.68 0.00 34.00 79.00 0.00

Net Financing Cash Flow -33.00 4044.00 2524.00 3413.00 463.00

Net Change in Cash 425.02 5497.00 -576.00 -733.00 918.00

Free Cash Flow 335.60 -480.00 -171.00 690.00 1433.00

Free Cash Flow per Share 1.84 -0.71 -0.21 0.84 1.72

Free Cash Flow Yield (%) 9.25 -2.11 -0.78 2.14 2.99

Fiscal Years Ending Dec 31 2017E 2018E 2019E 2020E 2021E

Net Income 2591.96 3928.39 4569.33 4430.91 4359.83Depreciation 6282.90 6290.19 6861.07 7176.12 7623.51Amortization 218.79 218.79 218.79 218.79 218.79OperationsShort-Term Receivables -1795.17 -513.79 -415.35 -270.85 -156.69Inventories -139.99 -113.54 -91.78 -59.85 -34.62Other Current Assets 1643.27 -190.29 -153.83 -100.31 -58.03Other Assets -84.93 -68.88 -55.68 -36.31 -21.01Accounts Payable 732.20 593.84 480.07 313.05 181.10Income Tax Payable 0 0 0 0 0Other Current Liabilities 425.89 345.41 279.23 182.09 105.34Unrecognized Tax Benefits 0 0 0 0 0Deferred Tax Liabilities -325.1962 -38.76013 -668.6730522 -347.73 -438.596Other Liabilities 393.00 318.74 257.67 168.03 97.20Cash from Operation 9942.73 10770.10 11280.83 11673.93 11876.83

Investing Intangibles -1763.65 -1015.21 -1242.30 41.94 -395.33Gross PPE -6307.19 -8193.12 -7911.24 -8667.44 -8203.83Total Investments and Advances 0.00 0.00 0.00 0.00 0.00Cash from Investing -8070.84 -9208.33 -9153.54 -8625.50 -8599.17

Financing ST Debt & Curr. Portion LT Debt -354 0 0 0 0Long-Term Debt 354.00 979.80 1805.48 1404.94 854.90Additional Paid-In Capital/Capital Surplus 11.51 11.51 3.45 0.00 0.00Unrealized Gain/Loss Marketable Securities 0 0 0 0 0Other Appropriated Reserves 0 0 0 0 0Treasury Stock 0 0 0 0 0Dividends 0.00 0.00 0.00 0.00 0.00Cash from Financing 11.51 991.31 1808.94 1404.94 854.90

Net Cash Change 1883.41 2553.08 3936.22 4453.37 4132.57

Cash at the Beginning 5500 7383.405127 9936.480133 13872.7 18326.1Cash at the end 1883.41 2553.08 3936.22 4453.37 4132.57

Cash at the B/S 7383.41 9936.48 13872.70 18326.08 22458.64

T-Mobile USACommon Size Income Statement

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021ESales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

COGS excluding D&A 52.12% 46.48% 44.44% 42.94% 41.00% 40.00% 41.00% 41.00%Depreciation 14.69% 14.94% 16.17% 14.98% 13.75% 14.05% 14.12% 14.67%Amortization of Intangibles 1.13% 0.86% 0.59% 0.52% 0.48% 0.45% 0.43% 0.42%Gross Income 32.07% 37.72% 38.80% 41.56% 44.77% 45.50% 44.45% 43.91%SG&A Expense 29.98% 31.79% 30.55% 30.00% 29.50% 29.00% 29.00% 29.00%EBIT (Operating Income) 2.09% 5.93% 8.25% 11.56% 15.27% 16.50% 15.45% 14.91%Nonoperating Income - Net 3.88% 1.78% 2.93% 2.93% 2.93% 2.93% 2.93% 2.93%Interest Expense 4.63% 4.21% 4.71% 4.35% 4.12% 4.08% 4.08% 4.09%Unusual Expense - Net -0.06% 0.46% 0.21% 0.00% 0.00% 0.00% 0.00% 0.00%Pretax Income 1.40% 3.05% 6.25% 10.13% 14.08% 15.34% 14.29% 13.75%Income Taxes 0.56% 0.76% 2.33% 3.95% 5.49% 5.98% 5.57% 5.36%Consolidated Net Income 0.84% 2.29% 3.92% 6.18% 8.59% 9.36% 8.72% 8.39%Minority Interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net Income 0.84% 2.29% 3.92% 0.00% 0.00% 0.00% 0.00% 0.00%Preferred Dividends 0.00% 0.17% 0.15% 0.13% 0.12% 0.11% 0.11% 0.11%Net Income available to Common 0.84% 2.12% 3.77% 6.18% 8.59% 9.36% 8.72% 8.39%

T-Mobile USACommon Size Balance Sheet

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021EAssets

Cash & Short-Term Investments 19.73% 23.65% 14.77% 17.61% 21.72% 28.42% 36.06% 43.20%Short-Term Receivables 16.92% 13.11% 10.38% 13.50% 13.50% 13.50% 13.50% 13.50%Inventories 3.67% 4.04% 2.98% 2.98% 2.98% 2.98% 2.98% 2.98%Other Current Assets 6.98% 5.66% 10.04% 5.00% 5.00% 5.00% 5.00% 5.00%Total Current Assets 47.30% 46.45% 38.17% 39.09% 43.21% 49.90% 57.54% 64.69%

Net Property, Plant & Equipment 54.95% 62.40% 56.23% 50.00% 50.00% 49.00% 50.00% 50.00%Total Investments and Advances 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Long-Term Note Receivable 5.51% 2.64% 2.64% 2.35% 2.15% 2.02% 1.94% 1.89%Net Goodwill 5.69% 5.25% 4.52% 4.01% 3.68% 3.45% 3.31% 3.24%Net Other Intangibles 77.21% 76.59% 73.55% 69.00% 65.00% 63.00% 60.00% 59.00%Deferred Tax Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Assets 0.97% 1.46% 1.81% 1.81% 1.81% 1.81% 1.81% 1.81%Total Assets 191.63% 194.79% 176.93% 166.26% 165.85% 169.17% 174.60% 180.63%

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt 1.08% 0.57% 0.95% 0.00% 0.00% 0.00% 0.00% 0.00%Accounts Payable 18.00% 19.57% 14.20% 14.20% 14.20% 14.20% 14.20% 14.20%Income Tax Payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Current Liabilities 10.61% 9.59% 9.08% 9.08% 9.08% 9.08% 9.08% 9.08%Total Current Liabilities 29.68% 29.73% 24.23% 23.27% 23.27% 23.27% 23.27% 23.27%

Long-Term Debt 82.51% 89.67% 80.70% 72.51% 68.62% 67.99% 68.07% 68.20%Unrecognized Tax Benefits 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Provision for Risks & Charges 0.71% 2.28% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%Deferred Tax Liabilities 16.48% 12.67% 13.26% 11.00% 10.00% 8.00% 7.00% 6.00%Other Liabilities 9.25% 8.79% 8.37% 8.37% 8.37% 8.37% 8.37% 8.37%Total Liabilities 138.65% 143.13% 127.96% 116.56% 111.67% 109.05% 108.13% 107.25%

Common Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Additional Paid-In Capital/Capital Surplus 130.24% 120.63% 104.31% 92.66% 84.98% 79.63% 76.49% 74.78%Retained Earnings -77.26% -68.97% -55.34% -42.97% -30.80% -19.50% -10.01% -1.40%Unrealized Gain/Loss Marketable Securities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Appropriated Reserves 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Treasury Stock 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total Shareholders' Equity 52.98% 51.66% 48.97% 49.70% 54.17% 60.13% 66.47% 73.37%

Minority Interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total Equity 52.98% 51.66% 48.97% 49.70% 54.17% 60.13% 66.47% 73.37%

Total Liabilities & Shareholders' Equity 191.63% 194.79% 176.93% 166.26% 165.85% 169.17% 174.60% 180.63%

T-Mobile USAKey Management Ratios

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Liquidity RatiosCurrent Ratio (Current Assets/ Current Liabilities) 1.59 1.56 1.58 1.68 1.86 2.14 2.47 2.78Quick Ratio (Cash + Other Liquid Assets) / current liabilities 1.23 1.24 1.04 1.34 1.51 1.80 2.13 2.44Operating Cash Flow Ratio = Cash Flow From Operations/Current Liabilities 0.47 0.57 0.68 1.02 1.01 0.99 0.99 0.98

Activity or Asset-Management RatiosAsset Turnover Ratio (Sales/Total Assets) 52.18% 51.34% 56.52% 60.15% 60.30% 59.11% 57.27% 55.36%Total Assets Turnover ex Cash 58.17% 58.43% 61.67% 67.27% 69.38% 71.04% 72.18% 72.77%

Financial Leverage RatiosDebt Ratio = Total Liab/Total Assets 72.35% 73.48% 72.32% 70.11% 67.34% 64.46% 61.93% 59.38%Equity Ratio (Total Equity/ Total Assets) 27.65% 26.52% 27.68% 29.89% 32.66% 35.54% 38.07% 40.62%

Profitability RatiosGross Margin Ratio= (Sales-COGS-SG&A)/Sales 17.90% 21.73% 25.01% 27.06% 29.50% 31.00% 30.00% 30.00%Profit Margin Ratio = Net Income/Sales 0.84% 2.12% 3.77% 6.18% 8.59% 9.36% 8.72% 8.39%ROA = Net Income/Avg Total Assets 0.46% 1.14% 2.19% 3.82% 5.40% 5.77% 5.17% 4.77%ROE= Net Income/Shareholder Equity 1.58% 4.09% 7.70% 12.44% 15.85% 15.57% 13.12% 11.43%

Payout Policy RatiosTotal Payout Ratio (Div + Repurchase)/Net Income 0.00% 8.11% 3.91% 0.00% 0.00% 0.00% 0.00% 0.00%Dividend Payout Ratio 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

T-Mobile USAValue Driver Estimation

Fiscal Years Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021ENOPLAT Calculation

Sales 29,564.00 32,053.00 37,242.00 41,934.58 45,740.44 48,817.13 50,823.43 51,984.07

-COGS excluding D&A 15,409.00 14,898.00 16,550.00 18,006.32 18,753.58 19,526.85 20,837.61 21,313.47

-Depreciation 4,342.00 4,788.00 6,023.00 6,282.90 6,290.19 6,861.07 7,176.12 7,623.51

-Amortization of Intangibles 333.00 276.00 220.00 218.79 218.79 218.79 218.79 218.79

-SG&A 8,863.00 10,189.00 11,378.00 12,580.37 13,493.43 14,156.97 14,738.80 15,075.38

+PV of Interest on Operating Leases 670.30 686.66 743.65 553.39 553.54 590.05 615.10 640.38EBITA 1,287.30 2,588.66 3,814.65 5,399.58 7,537.99 8,643.51 8,467.22 8,393.29

Pre Tax Income 413.00 978.00 2,327.00 4,249.12 6,439.98 7,490.70 7,263.79 7,147.26Total Income Tax Provision (inc. tax) 166.00 245.00 867.00 1,657.16 2,511.59 2,921.37 2,832.88 2,787.43

Tax Rate = Total Inc. Provision/Pre Tax 0.40 0.25 0.37 0.39 0.39 0.39 0.39 0.39Plus Tax Shield on Interest Expense 550.25 337.69 653.88 711.52 734.45 776.70 809.57 829.58Plus Tax on Lease Interest 269.42 172.01 277.07 215.82 215.88 230.12 239.89 249.75Plus Tax Shield on Unusual Expenses -7.64 37.08 29.43 0.00 0.00 0.00 0.00 0.00Minus Tax on Non-Operating Income (Plus in this formula) (Nonop Int. Income+Other Inc) 460.62 143.29 406.12 478.66 522.11 557.22 580.13 593.37Less Adjusted Taxes 525.05 611.41 1,391.84 2,105.84 2,939.82 3,370.97 3,302.21 3,273.38Plus Change in Deferred Taxes 228.00 -812.00 877.00 -325.20 -38.76 -668.67 -347.73 -438.60Equals NOPLAT 990.25 1,165.24 3,299.81 2,968.55 4,559.41 4,603.87 4,817.27 4,681.31NOPLAT Growth % -80% 18% 183% -10% 54% 1% 5% -3%Normal Cash % of Sales 2% 2% 2% 2% 2% 2% 2% 2%

Normal Cash (2% * Sales) 591.28 641.06 744.84 838.69 914.81 976.34 1,016.47 1,039.68Short-Term Receivables 5,003.00 4,202.00 3,866.00 5,661.17 6,174.96 6,590.31 6,861.16 7,017.85Inventory 1,085.00 1,295.00 1,111.00 1,250.99 1,364.52 1,456.31 1,516.16 1,550.78Other Current Assets 2,064.00 1,813.00 3,740.00 2,096.73 2,287.02 2,440.86 2,541.17 2,599.20Operating Current Assets 8,743.28 7,951.06 9,461.84 9,847.58 10,741.31 11,463.82 11,934.96 12,207.52Accounts Payable 5,322.00 6,272.00 5,288.00 5,954.30 6,494.69 6,931.56 7,216.43 7,381.23Income Tax Payable 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Non Interest-Bearing Current Liabilities(Accounts Payable + Income Tax Payable + Deferred Tax Liablities) 10,195.00 10,333.00 10,226.00 10,567.10 11,068.74 10,836.93 10,774.07 10,500.27Net Operating Working Capital -1,451.72 -2,381.94 -764.16 -719.53 -327.42 626.89 1,160.89 1,707.24Plus Net PPE 16,245.00 20,000.00 20,943.00 20,967.29 22,870.22 23,920.40 25,411.72 25,992.04PV of Operating Leases 11,444.26 12,394.20 9,223.14 9,225.61 9,834.19 10,251.60 10,672.92 10,396.81Net Other Intangibles 22,825.00 24,549.00 27,390.00 28,934.86 29,731.28 30,754.79 30,494.06 30,670.60Other Assets 288.00 467.00 674.00 758.93 827.80 883.48 919.79 940.80Plus Net Other Operating Assets 34,557.26 37,410.20 37,287.14 38,919.39 40,393.28 41,889.88 42,086.78 42,008.22Less other Liab. (BS line items) 5,872.00 5,891.00 6,499.00 7,317.89 7,982.04 8,518.94 8,869.06 9,071.60

Invested Capital 43,478.54 49,137.26 50,966.98 51,849.27 54,954.04 57,918.22 59,790.33 60,635.90

WACC 5.27% 5.27% 5.27% 5.27% 5.27% 5.27% 5.27% 5.27%

NOPLAT 990.25 1,165.24 3,299.81 2,968.55 4,559.41 4,603.87 4,817.27 4,681.31Beg Invested Capital 25,211.14 43,478.54 49,137.26 50,966.98 51,849.27 54,954.04 57,918.22 59,790.33Change in IC 18,267.40 5,658.73 1,829.71 882.29 3,104.77 2,964.18 1,872.10 845.57End Invested Capital 43,478.54 49,137.26 50,966.98 51,849.27 54,954.04 57,918.22 59,790.33 60,635.90ROIC (NOPLAT/Beg IC) 3.93% 2.68% 6.72% 5.82% 8.79% 8.38% 8.32% 7.83%FCF (NOPLAT - Change in IC) -17,277.15 -4,493.48 1,470.10 2,086.26 1,454.64 1,639.68 2,945.17 3,835.74EP (Beg IC * (ROIC-WACC)) -338.83 -1,126.87 709.39 281.66 1,826.01 1,706.79 1,763.93 1,529.27

Marginal Tax Rate CalculationFederal Statuatory rate 35% 35% 35%State income taxes, net of federal tax benefit 4% 4% 4%Foreign rate differential 0% 0% 0%Marginal Tax Rate 39% 39% 39%

T-Mobile USAWeighted Average Cost of Capital (WACC) EstimationWeighted Average Cost of Capital (WACC) EstimationMarginal Tax Rate 39%Cost of equity CalculationRisk Free Rate 2.98%+Beta 0.73Market Risk Premium 4.80%= Cost of Equity 6.48%

WACC CalculationShares outstanding 826.36MV of share $64.61=Total MV of Equity [E] $53,390.95

MV of debt [D] 40153Cost of Debt 6.00%

MV of equity $53,390.95+MV of debt 40153= MV of the firm [V] $93,544.08

Cost of Equity * 6.48%(E/V) 0.571+Cost of Debt * 6.00%(1-Marginal tax Rate) 61%(D/V) 0.429= WACC 5.27%

T-Mobile USADiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 1.00% CV ROIC 7.83% WACC 5.27% Cost of Equity 6.48%


DCF ModelDiscount period 1 2 3 4 5NOPLAT 2968.55 4559.41 4603.87 4817.27 4681.31Continuing Value 95589Free Cash Flow 2086 1455 1640 2945 3836Net FCF 2086 1455 1640 98535PV of free cash flows 1982 1313 1405 80231Value of Operations 84931

Non Operating AssetsExcess Cash 4755ST Instruments 3866LT Instruments 0Value of Non Operating Assets 8621

Non Operating LiabilitiesPV of Operating Leases 9223Total Debt 30407PV of employee stock options 0Value of Non Operating Liabilities 39630

Equity Value 53922Shares outstanding 826Intrinsic Share Price $65.25Current Share Price 64.61Upside Potential 1%

EP ModelPeriods to discount 1 2 3 4 5Economic Profit 282 1826 1707 1764 1529Continuing Value 35799Net EP 282 1826 1707 37563PV of Economic Profit 268 1648 1463 30585Initial Invested Capital 50967Value of Operations 84931

Non Operating AssetsExcess Cash 4755ST Instruments 3866LT Instruments 0Value of Non Operating Assets 8621

Non Operating LiabilitiesPV of Operating Leases 9223Total Debt 30407PV of employee stock options 0Value of Non Operating Liabilities 39630

Equity Value 53922Shares outstanding 826Intrinsic Share Price $65.25Current Share Price 64.61Upside Potential 1%

Today 4/19/2017Next FYE 12/31/2017Last FYE 12/31/2016Days in FY 365 Days to FYE 109 Elapsed Fraction 0.299Intrinsic Value Today $66.26Current Share Price 64.61Upside Potential 2.56%

T-Mobile USADividend Discount Model (DDM) or Fundamental P/E Valuation Model


1 2 3 4 5EPS 3.14$ 4.75$ 5.52$ 5.36$ 5.27$

Key Assumptions CV growth 1.00% CV ROE 11.43% Cost of Equity 6.48%

Future Cash Flows P/E Multiple (CV Year) 16.64 EPS (CV Year) 5.27$ Future Stock Price 87.70$ Dividends Per Share 0.00 0.00 0.00 0.00 0.00 Future Cash Flows 0.00 0.00 0.00 0.00 87.70$

Discounted Cash Flows 0.00 0.00 0.00 0.00 64.06

Intrinsic Value $64.06Current Share Price 64.61

Today 4/19/2017Next FYE 9/26/2017Last FYE 9/26/2016Days in FY 365Days to FYE 205Elapsed Fraction 0.56Intrinsic Value Today $65.93Upside Potential 2.05%

T-Mobile USARelative Valuation Models

EPS EPSTicker Company Price 2017E 2018E P/E 17 P/E 18S Sprint $8.50 ($0.25) ($0.03) (34.0) (283.3) T AT&T Inc. $40.25 $2.94 $3.07 13.7 13.1 AMOV America Movil $14.37 $0.80 $0.82 18.0 17.5 VZ Verizon $49.22 $13.80 $3.84 4.0 12.8

Average 11.9 14.5

TMUS T-Mobile USA $64.61 $3.14 $4.75 20.6 13.6

Implied Value: Relative P/E (EPS17) $ 37.22 Relative P/E (EPS18) 68.80$

Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Operating OperatingFiscal Years Ending Dec31 Leases Fiscal Years Ending Dec31 Leases Fiscal Years Ending Dec31 Leases Fiscal Years Ending Dec31 Leases Fiscal Years Ending Dec31 Leases2017 2417 2016 2379 2015 2031 2014 1963 2013 36622018 2118 2017 2235 2016 1977 2015 1926 2014 36502019 1832 2018 2046 2017 1895 2016 1864 2015 36162020 1511 2019 1900 2018 1744 2017 1767 2016 34122021 1102 2020 1679 2019 1591 2018 1589 2017 3012Thereafter 2188 Thereafter 5583 Thereafter 5487 Thereafter 5230 Thereafter 6985Total Minimum Payments 11168 Total Minimum Payments 15822 Total Minimum Payments 14725 Total Minimum Payments 14339 Total Minimum Payments 24337Less: Interest 1945 Less: Interest 3428 Less: Interest 3281 Less: Interest 3167 Less: Interest 4903PV of Minimum Payments 9223.14 PV of Minimum Payments 12394.20 PV of Minimum Payments 11444.26 PV of Minimum Payments 11171.74 PV of Minimum Payments 19434

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00%Number Years Implied by Year 6 Payment 2.0 Number Years Implied by Year 6 Payment 3.3 Number Years Implied by Year 6 Payment 3.4 Number Years Implied by Year 6 Payment 3.3 Number Years Implied by Year 6 Payment 2.3

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 2417 2280.2 1 2379 2244.3 1 2031 1916.0 1 1963 1851.9 1 3662 3454.72 2118 1885.0 2 2235 1989.1 2 1977 1759.5 2 1926 1714.1 2 3650 3248.53 1832 1538.2 3 2046 1717.9 3 1895 1591.1 3 1864 1565.1 3 3616 3036.14 1511 1196.9 4 1900 1505.0 4 1744 1381.4 4 1767 1399.6 4 3412 2702.65 1102 823.5 5 1679 1254.6 5 1591 1188.9 5 1589 1187.4 5 3012 2250.76 & beyond 1102 1499.4 6 & beyond 1679 3683.2 6 & beyond 1591 3607.3 6 & beyond 1589 3453.6 6 & beyond 3012 4741.4PV of Minimum Payments 9223.1 PV of Minimum Payments 12394.2 PV of Minimum Payments 11444.3 PV of Minimum Payments 11171.7 PV of Minimum Payments 19434.1

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 0.83Average Time to Maturity (years): 2.30Expected Annual Number of Options Exercised: 0.36

Current Average Strike Price: 31.75$ Cost of Equity: 6.48%Current Stock Price: $64.61

2017E 2018E 2019E 2020E 2021E

Increase in Shares Outstanding: 0.36 0.36 0.11 0.00 0.00Average Strike Price: 31.75$ 31.75$ 31.75$ 31.75$ 31.75$ Increase in Common Stock Account: 12 12 3 - -

Change in Treasury Stock 0.00 0.00 0.00 0.00 0.00Expected Price of Repurchased Shares: 64.61$ 68.80$ 73.26$ 78.01$ 83.07$ Number of Shares Repurchased: - - - - -

Shares Outstanding (beginning of the year) 826.36 826.72 827.08 827.19 827.19Plus: Shares Issued Through ESOP 0 0 0 0 0Less: Shares Repurchased in Treasury - - - - - Shares Outstanding (end of the year) 826.720 827.082 827.191 827.191 827.191

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol TMUSCurrent Stock Price $64.61Risk Free Rate 2.98%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 25.48%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 0.83 31.75 2.30 35.10$ 29.27$ Range 14Total 0.83 31.75 2.30 35.10 29.27

siddhanta chandra [[email protected]] … began making several changes in late 2012 to...

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