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Section 1: 8-K (TMUS FORM 8-K)

Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of report (Date of earliest event reported): June 18, 2018
393924803_tmuslogo.jpg
T-MOBILE US, INC.
(Exact Name of Registrant as Specified in Charter)
 
 
 
 
 
DELAWARE
 
1-33409
 
20-0836269
(State or other jurisdiction
 
(Commission File Number)
 
(I.R.S. Employer
of incorporation or organization)
 
 
 
 Identification No.)
 
 
 
12920 SE 38th Street
 
 
Bellevue, Washington
 
98006-1350
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (425) 378-4000
(Former Name or Former Address, if Changed Since Last Report):
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨





Item 8.01    Other Events
T-Mobile US, Inc. (the “Company”) is filing this Current Report on Form 8-K to retrospectively reclassify certain previously reported financial information in its Annual Report on Form 10-K for the year ended December 31, 2017 to reflect a change in accounting principle.

The Company adopted Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” (the “new cash flow standard”) on January 1, 2018. The new cash flow standard impacted the presentation of cash flows related to the Company’s beneficial interests in securitization transactions, which is the deferred purchase price, resulting in a reclassification of cash inflows from Operating activities to Investing activities in its Consolidated Statements of Cash Flows. The new cash flow standard also impacted the presentation of the Company’s cash payments for debt prepayment and debt extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities in its  Consolidated Statements of Cash Flows. This change in accounting principle has been reflected beginning with the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on May 1, 2018.

This Current Report on Form 8-K the Items listed below in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 8, 2018 to apply the new cash flow standard retrospectively to all periods presented. Except as specifically provided herein, the Company has not updated the Items listed below in this Current Report on Form 8-K for any developments or events occurring after February 8, 2018.

Exhibit 99.1 to this Current Report on Form 8-K includes updates only to the extent necessary to reflect the retrospective reclassifications made to information in the following Items of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017:
Updated Item 6. Selected Financial Data
Updated Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Updated Item 8. Financial Statements and Supplementary Data

Item 9.01 — Financial Statements and Exhibits
The following exhibits are furnished as part of this report:

Exhibit No.
 
Description
 
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document







 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
T-MOBILE US, INC.
 
 
 
 
 
June 18, 2018
 
/s/ J. Braxton Carter
 
 
 
J. Braxton Carter
Executive Vice President and Chief Financial Officer
 





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Section 2: EX-99.1 (TMUS EXHIBIT 99.1)

Exhibit
Explanatory Note
T-Mobile US, Inc. (the “Company”) is filing this Exhibit 99.1 to its Current Report on Form 8-K to retrospectively reclassify certain previously reported financial information in its Annual Report on Form 10-K for the year ended December 31, 2017 to reflect a change in accounting principle.

The Company adopted Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” (the “new cash flow standard”) on January 1, 2018. The new cash flow standard impacted the presentation of cash flows related to the Company’s beneficial interests in securitization transactions, which is the deferred purchase price, resulting in a reclassification of cash inflows from Operating activities to Investing activities in its Consolidated Statements of Cash Flows. The new cash flow standard also impacted the presentation of the Company’s cash payments for debt prepayment and debt extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities in its Consolidated Statements of Cash Flows. This change in accounting principle has been reflected beginning with the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on May 1, 2018.

This Exhibit 99.1 to this Current Report on Form 8-K updates the Items listed below in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 8, 2018 to apply the new cash flow standard retrospectively to all periods presented. Except as specifically provided in this Exhibit 99.1 to this Current Report on Form 8-K, the Company has not updated the Items listed below for any developments or events occurring after February 8, 2018.

This Exhibit 99.1 to this Current Report includes updates only to the extent necessary to reflect the retrospective reclassifications made to information in the following Items of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017:

Updated Item 6. Selected Financial Data
Updated Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Updated Item 8. Financial Statements and Supplementary Data

Cautionary Statement Regarding Forward-Looking Statements

This Exhibit 99.1 includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including information concerning our future results of operations, are forward-looking statements. These forward-looking statements are generally identified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could” or similar expressions. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties and may cause actual results to differ materially from the forward-looking statements. Forward-looking statements are based on information available to us on February 8, 2018, the date of the filing of our Annual Report on Form 10-K for the year ended December 31, 2017, updated only to the extent necessary to reflect the retrospective reclassifications described in the Explanatory Note to this Exhibit 99.1, and are based on expectations and assumptions, which are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. The following important factors, along with the Risk Factors included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, could affect future results and cause those results to differ materially from those expressed in the forward-looking statements:

adverse economic or political conditions in the U.S. and international markets;
competition, industry consolidation, and changes in the market for wireless services could negatively affect our ability to attract and retain customers;
the effects of any future merger, investment, or acquisition involving us, as well as the effects of mergers, investments, or acquisitions in the technology, media and telecommunications industry;
challenges in implementing our business strategies or funding our operations, including payment for additional spectrum or network upgrades;
the possibility that we may be unable to renew our spectrum licenses on attractive terms or acquire new spectrum licenses at reasonable costs and terms;
difficulties in managing growth in wireless data services, including network quality;



material changes in available technology and the effects of such changes, including product substitutions and deployment costs and performance;
the timing, scope and financial impact of our deployment of advanced network and business technologies;
the impact on our networks and business from major technology equipment failures;
breaches of our and/or our third-party vendors’ networks, information technology and data security;
natural disasters, terrorist attacks or similar incidents;
unfavorable outcomes of existing or future litigation;
any changes in the regulatory environments in which we operate, including any increase in restrictions on the ability to operate our networks;
any disruption or failure of our third parties’ or key suppliers’ provisioning of products or services;
material adverse changes in labor matters, including labor campaigns, negotiations or additional organizing activity, and any resulting financial, operational and/or reputational impact;
the ability to make payments on our debt or to repay our existing indebtedness when due or to comply with the covenants contained therein;
adverse change in the ratings of our debt securities or adverse conditions in the credit markets;
changes in accounting assumptions that regulatory agencies, including the SEC, may require, which could result in an impact on earnings;
changes in tax laws, regulations and existing standards and the resolution of disputes with any taxing jurisdictions; and
the possibility that the reset process under our trademark license with Deutsche Telekom results in changes to the royalty rates for our trademarks.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. In this Exhibit 99.1, unless the context indicates otherwise, references to “T-Mobile,” “T-Mobile US,” “our Company,” “the Company,” “we,” “our,” and “us” refer to T-Mobile US, Inc., a Delaware corporation, and its wholly-owned subsidiaries.

Investors and others should note that we announce material financial and operational information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to also use the @TMobileIR Twitter account (https://twitter.com/TMobileIR) and the @JohnLegere Twitter (https://twitter.com/JohnLegere), Facebook and Periscope accounts, which Mr. Legere also uses as means for personal communications and observations, as means of disclosing information about the Company and its services and for complying with its disclosure obligations under Regulation FD. The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these social media channels in addition to following the Company’s press releases, SEC filings and public conference calls and webcasts. The social media channels that we intend to use as a means of disclosing the information described above may be updated from time to time as listed on the Company’s investor relations website.

PART II.

Item 6. Selected Financial Data

The following selected financial data are derived from our consolidated financial statements. In connection with the business combination with MetroPCS, the selected financial data prior to May 1, 2013 represents T-Mobile USA’s historical financial data. The data below should be read together with Risk Factors included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 and Financial Statements and Supplementary Data included in Part II, Item 8 of this Exhibit 99.1.


2


Selected Financial Data
(in millions, except per share and customer amounts)
As of and for the Year Ended December 31,
2017
 
2016
 
2015
 
2014
 
2013
Statement of Operations Data
 
 
 
 
 
 
 
 
 
Total service revenues
$
30,160

 
$
27,844

 
$
24,821

 
$
22,375

 
$
19,068

Total revenues (1)
40,604

 
37,490

 
32,467

 
29,920

 
24,605

Operating income (1)
4,888

 
4,050

 
2,479

 
1,772

 
1,181

Total other expense, net (1)
(1,727
)
 
(1,723
)
 
(1,501
)
 
(1,359
)
 
(1,130
)
Income tax benefit (expense)
1,375

 
(867
)
 
(245
)
 
(166
)
 
(16
)
Net income
4,536

 
1,460

 
733

 
247

 
35

Net income attributable to common stockholders
4,481

 
1,405

 
678

 
247

 
35

Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
5.39

 
$
1.71

 
$
0.83

 
$
0.31

 
$
0.05

Diluted
$
5.20

 
$
1.69

 
$
0.82

 
$
0.30

 
$
0.05

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,219

 
$
5,500

 
$
4,582

 
$
5,315

 
$
5,891

Property and equipment, net
22,196

 
20,943

 
20,000

 
16,245

 
15,349

Spectrum licenses
35,366

 
27,014

 
23,955

 
21,955

 
18,122

Total assets
70,563

 
65,891

 
62,413

 
56,639

 
49,946

Total debt, excluding tower obligations
28,319

 
27,786

 
26,243

 
21,946

 
20,182

Stockholders’ equity
22,559

 
18,236

 
16,557

 
15,663

 
14,245

Statement of Cash Flows and Operational Data
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities (3)
$
3,831

 
$
2,779

 
$
1,877

 
$
1,957

 
$
3,545

Purchases of property and equipment
(5,237
)
 
(4,702
)
 
(4,724
)
 
(4,317
)
 
(4,025
)
Purchases of spectrum licenses and other intangible assets, including deposits
(5,828
)
 
(3,968
)
 
(1,935
)
 
(2,900
)
 
(381
)
Proceeds related to beneficial interests in securitization transactions (3)
4,319

 
3,356

 
3,537

 
2,228

 

Net cash (used in) provided by financing activities (3)
(1,367
)
 
463

 
3,413

 
2,485

 
4,044

Total customers (in thousands)(2)
72,585

 
71,455

 
63,282

 
55,018

 
46,684

(1)
Effective January 1, 2017, we changed an accounting principle. The imputed discount on Equipment Installment Plan (“EIP”) receivables, which is amortized over the financed installment term using the effective interest method, and was previously presented within Interest income in our Consolidated Statements of Comprehensive Income, is now presented within Other revenues in our Consolidated Statements of Comprehensive Income. We have applied this change retrospectively and presented the effect of $280 million, $248 million, $414 million, $356 million and $185 million on the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively in the table above. See Note 1 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.
(2)
We believe current and future regulatory changes have made the Lifeline program offered by our wholesale partners uneconomical. We will continue to support our wholesale partners offering the Lifeline program, but have excluded the Lifeline customers from our reported wholesale subscriber base resulting in the removal of 4,528,000 reported wholesale customers in 2017.
(3)
On January 1, 2018, we adopted the new cash flow standard which impacted the presentation of our cash flows related to our beneficial interests in securitization transactions, which is the deferred purchase price, resulting in a reclassification of cash inflows from Operating activities to Investing activities in our Consolidated Statements of Cash Flows. We have applied this change retrospectively and presented the effect of $4.3 billion, $3.4 billion, $3.5 billion, $2.2 billion, and $0 for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively, in the table above. The new cash flow standard also impacted the presentation of our cash payments for debt prepayment and extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities in our Consolidated Statements of Cash Flows. We have applied this change retrospectively and presented the effect of $188.0 million, $0, $0, $39.0 million and $0 for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively, in the table above. See Note 1 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our consolidated financial statements with the following:

A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results;
Context to the financial statements; and
Information that allows assessment of the likelihood that past performance is indicative of future performance.

Our MD&A is provided as a supplement to, and should be read together with, our audited consolidated financial statements for the three years ended December 31, 2017 included in Part II, Item 8 of this Exhibit 99.1. Except as expressly stated, the financial condition and results of operations discussed throughout our MD&A are those of T-Mobile US, Inc. and its consolidated subsidiaries.

Accounting Pronouncement Adopted During the Current Year

Classification of Certain Cash Receipts and Cash Payments

On January 1, 2018, we adopted the new cash flow standard which impacted the presentation of our cash flows related to our beneficial interests in securitization transactions, which is the deferred purchase price, resulting in a reclassification of cash inflows from Operating activities to Investing activities in our Consolidated Statements of Cash Flows. We have applied this change retrospectively and presented the effect of $4.3 billion, $3.4 billion and $3.5 billion for the years ended December 31, 2017, 2016 and 2015, respectively, in our Consolidated Statements of Cash Flows. The new cash flow standard also impacted the presentation of our cash payments for debt prepayment and extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities in our Consolidated Statements of Cash Flows. We have applied this change retrospectively and presented the effect of $188 million, $0 million and $0 million for the years ended December 31, 2017, 2016 and 2015, respectively, in our Consolidated Statements of Cash Flows. For additional information, see Note 1 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

Business Overview

Change in Accounting Principle

Effective January 1, 2017, the imputed discount on EIP receivables, which is amortized over the financed installment term using the effective interest method and was previously recognized within Interest income in our Consolidated Statements of Comprehensive Income, is recognized within Other revenues in our Consolidated Statements of Comprehensive Income. We believe this presentation is preferable because it provides a better representation of amounts earned from the Company’s major ongoing operations and aligns with industry practice thereby enhancing comparability. We have applied this change retrospectively and the effect of this change for the years ended December 31, 2016 and 2015, was a reclassification of $248 million and $414 million, respectively, from Interest income to Other revenues. The amortization of imputed discount on our EIP receivables for the year ended December 31, 2017 was $280 million. For additional information, see Note 1 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

Un-carrier Strategy

The Un-carrier is about adding value to the customer relationship by changing the rules of the industry and giving our customers more. We introduced our Un-carrier strategy in 2013 with the objective of eliminating customer pain points from the unnecessary complexity of the wireless communication industry. Since that time, we have continued our efforts with the launch of additional initiatives of our Un-carrier strategy. During 2017, we launched the following Un-carrier initiatives:

In January 2017, we introduced, Un-carrier Next, where monthly wireless service fees and sales taxes are included in the advertised monthly recurring charge for T-Mobile ONE. We also unveiled Kickback on T-Mobile ONE, where participating customers who use 2 GB or less of data in a month, will get up to a $10 credit per qualifying line on their

4


next month’s bill. In addition, we introduced the Un-contract for T-Mobile ONE with the first-ever price guarantee on an unlimited 4G LTE plan which allows current T-Mobile ONE customers to keep their price for service until they decide to change it.
In September 2017, we introduced, Un-carrier Next: Netflix On Us, through an exclusive new partnership with Netflix where qualifying T-Mobile ONE customers on family plans can opt in for a standard monthly Netflix service plan at no additional cost.

Our ability to acquire and retain branded customers is important to our business in the generation of revenues and we believe our Un-carrier strategy, along with ongoing network improvements, has been successful in attracting and retaining customers as evidenced by continued branded customer growth and improved branded postpaid phone and branded prepaid customer churn.

 
Year Ended December 31,
 
2017 Versus 2016
 
2016 Versus 2015
(in thousands)
2017
 
2016
 
2015
# Change
 
% Change
 
# Change
 
% Change
Net customer additions
 
 
 
 
 
 
 
 
 
 
 
 
 
Branded postpaid customers
3,620

 
4,097

 
4,510

 
(477
)
 
(12
)%
 
(413
)
 
(9
)%
Branded prepaid customers
855

 
2,508

 
1,315

 
(1,653
)
 
(66
)%
 
1,193

 
91
 %
Total branded customers
4,475

 
6,605

 
5,825

 
(2,130
)
 
(32
)%
 
780

 
13
 %

 
Year Ended December 31,
 
Bps Change 2017 Versus 2016
 
Bps Change 2016 Versus 2015
2017
 
2016
 
2015
 
Branded postpaid phone churn
1.18
%
 
1.30
%
 
1.39
%
 
-12 bps
 
-9 bps
Branded prepaid churn
4.04
%
 
3.88
%
 
4.45
%
 
16 bps
 
-57 bps

On September 1, 2016, we sold our marketing and distribution rights to certain existing T-Mobile co-branded customers to a current MVNO partner for nominal consideration (the “MVNO Transaction”). Upon the sale, the MVNO Transaction resulted in a transfer of 1,365,000 branded postpaid phone customers and 326,000 branded prepaid customers to wholesale customers. Prospectively from September 1, 2016, revenue for these customers is recorded within wholesale revenues in our Consolidated Statements of Comprehensive Income. Additionally, the impact of the MVNO Transaction resulted in improvements to branded postpaid phone churn for year ended December 31, 2016.

We believe current and future regulatory changes have made the Lifeline program offered by our wholesale partners uneconomical. We will continue to support our wholesale partners offering the Lifeline program, but have excluded the Lifeline customers from our reported wholesale subscriber base resulting in the removal of 4,528,000 reported wholesale customers in 2017.

During the year ended December 31, 2016, a handset OEM announced recalls on certain of its smartphone devices. As a result, in 2016 we recorded no revenue associated with the device sales to customers and impaired the devices to their net realizable value. The OEM agreed to reimburse T-Mobile for direct and indirect costs associated with the recall, as such, we recorded an amount due from the OEM as an offset to the loss recorded in Cost of equipment sales and the costs incurred within Selling, general and administrative in our Consolidated Statements of Comprehensive Income and a reduction to Accounts payable and accrued liabilities in our Consolidated Balance Sheets. The reimbursement was received from the OEM in 2017.


5


Hurricane Impacts

During the third and fourth quarters of 2017, our operations in Texas, Florida and Puerto Rico experienced losses related to hurricanes. The impact to operating income for the year ended December 31, 2017, from lost revenue, assets damaged or destroyed and other hurricane related costs are included in the table below. We expect additional expenses to be incurred and customer activity to be impacted in the first quarter of 2018, primarily related to our operations in Puerto Rico. We have recognized insurance recoveries related to those hurricane losses in the amount of approximately $93 million for the year ended December 31, 2017 as an offset to the costs incurred within Cost of services in our Consolidated Statements of Comprehensive Income and as an increase to Other current assets in our Consolidated Balance Sheets. We continue to assess the damage of the hurricanes and work with our insurance carriers to submit claims for property damage and business interruption. We expect to record additional insurance recoveries related to these hurricanes in future periods.
(in millions, except per share amounts, ARPU, ABPU, and bad debt expense as a percentage of total revenues)
Year Ended December 31, 2017
Gross
 
Reimbursement
 
Net
Increase (decrease)
 
 
 
 
 
Revenues
 
 
 
 
 
Branded postpaid revenues
$
(37
)
 
$

 
$
(37
)
Of which, branded postpaid phone revenues
(35
)
 

 
(35
)
Branded prepaid revenues
(11
)
 

 
(11
)
Total service revenues
(48
)
 

 
(48
)
Equipment revenues
(8
)
 

 
(8
)
Total revenues
(56
)
 

 
(56
)
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Cost of services
198

 
(93
)
 
105

Cost of equipment sales
4

 

 
4

Selling, general and administrative
36

 

 
36

Of which, bad debt expense
20

 

 
20

Total operating expense
238

 
(93
)
 
145

 
 
 
 
 
 
Operating income (loss)
$
(294
)
 
$
93

 
$
(201
)
Net income (loss)
$
(193
)
 
$
63

 
$
(130
)
 
 
 
 
 
 
Earnings per share - basic
$
(0.23
)
 
$
0.07

 
$
(0.16
)
Earnings per share - diluted
(0.22
)
 
0.07

 
(0.15
)
 
 
 
 
 
 
Operating measures
 
 
 
 
 
Bad debt expense as a percentage of total revenues
0.05
%
 
%
 
0.05
%
Branded postpaid phone ARPU
$
(0.09
)
 
$

 
$
(0.09
)
Branded postpaid ABPU
(0.08
)
 

 
(0.08
)
Branded prepaid ARPU
(0.05
)
 

 
(0.05
)
 
 
 
 
 
 
Non-GAAP financial measures
 
 
 
 
 
Adjusted EBITDA
$
(294
)
 
$
93

 
$
(201
)


6


Results of Operations

Highlights for the year ended December 31, 2017, compared to the same period in 2016

Total revenues of $40.6 billion increased $3.1 billion, or 8%. The increase was primarily driven by growth in service and equipment revenues as further discussed below. On September 1, 2016, we sold our marketing and distribution rights to certain existing T-Mobile co-branded customers to a current MVNO partner for nominal consideration. The MVNO Transaction shifted Branded postpaid revenues to Wholesale revenues, but did not materially impact total revenues.

Service revenues of $30.2 billion increased $2.3 billion, or 8%. The increase was primarily due to growth in our average branded customer base as a result of strong customer response to our Un-carrier initiatives, promotions and the success of our MetroPCS brand.

Equipment revenues of $9.4 billion increased $648 million, or 7%. The increase was primarily due to higher average revenue per device sold and an increase from customer purchases of leased devices at the end of the lease term, partially offset by lower lease revenues.

Operating income of $4.9 billion increased $838 million, or 21%. The increase was primarily due to higher Total service revenues and lower Depreciation and amortization, partially offset by higher Selling, general and administrative, lower Gains on disposal of spectrum licenses and higher Cost of services expenses.

Net income of $4.5 billion increased $3.1 billion, or 211%. The increase was primarily due to the impact of the Tax Cuts and Jobs Act of 2017 (the "TCJA"), which resulted in a net tax benefit of $2.2 billion in 2017, and higher operating income driven by the factors described above, partially offset by the negative impact from hurricanes. Net income included net, after-tax spectrum gains of $174 million and $509 million, for the years ended December 31, 2017 and 2016, respectively.

Adjusted EBITDA, a non-GAAP financial measure, of $11.2 billion increased $574 million, or 5%. The increase was primarily due to higher operating income driven by the factors described above, partially offset by lower Gains on disposal of spectrum licenses. Adjusted EBITDA included pre-tax spectrum gains of $235 million and $835 million for the years ended December 31, 2017 and 2016, respectively.

Net cash provided by operating activities of $3.8 billion increased $1.1 billion, or 38%. See “Liquidity and Capital Resources” section for additional information.

Free Cash Flow, a non-GAAP financial measure, of $2.7 billion increased $1.3 billion, or 90%. See “Liquidity and Capital Resources” section for additional information.


7


Set forth below is a summary of our consolidated results:
 
Year Ended December 31,
 
2017 Versus 2016
 
2016 Versus 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
(in millions)
(As Adjusted - See Note 1)
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Branded postpaid revenues
$
19,448

 
$
18,138

 
$
16,383

 
$
1,310

 
7
 %
 
$
1,755

 
11
 %
Branded prepaid revenues
9,380

 
8,553

 
7,553

 
827

 
10
 %
 
1,000

 
13
 %
Wholesale revenues
1,102

 
903

 
692

 
199

 
22
 %
 
211

 
30
 %
Roaming and other service revenues
230

 
250

 
193

 
(20
)
 
(8
)%
 
57

 
30
 %
Total service revenues
30,160

 
27,844

 
24,821

 
2,316

 
8
 %
 
3,023

 
12
 %
Equipment revenues
9,375

 
8,727

 
6,718

 
648

 
7
 %
 
2,009

 
30
 %
Other revenues
1,069

 
919

 
928

 
150

 
16
 %
 
(9
)
 
(1
)%
Total revenues
40,604

 
37,490

 
32,467

 
3,114

 
8
 %
 
5,023

 
15
 %
Operating expenses
 
 
 
 
 
 
 
 
 
 

 


Cost of services, exclusive of depreciation and amortization shown separately below
6,100

 
5,731

 
5,554

 
369

 
6
 %
 
177

 
3
 %
Cost of equipment sales
11,608

 
10,819

 
9,344

 
789

 
7
 %
 
1,475

 
16
 %
Selling, general and administrative
12,259

 
11,378

 
10,189

 
881

 
8
 %
 
1,189

 
12
 %
Depreciation and amortization
5,984

 
6,243

 
4,688

 
(259
)
 
(4
)%
 
1,555

 
33
 %
Cost of MetroPCS business combination

 
104

 
376

 
(104
)
 
(100
)%
 
(272
)
 
(72
)%
Gains on disposal of spectrum licenses
(235
)
 
(835
)
 
(163
)
 
600

 
(72
)%
 
(672
)
 
NM

Total operating expense
35,716

 
33,440

 
29,988

 
2,276

 
7
 %
 
3,452

 
12
 %
Operating income
4,888

 
4,050

 
2,479

 
838

 
21
 %
 
1,571

 
63
 %
Other income (expense)
 
 
 
 
 
 
 
 
 
 

 


Interest expense
(1,111
)
 
(1,418
)
 
(1,085
)
 
307

 
(22
)%
 
(333
)
 
31
 %
Interest expense to affiliates
(560
)
 
(312
)
 
(411
)
 
(248
)
 
79
 %
 
99

 
(24
)%
Interest income
17

 
13

 
6

 
4

 
31
 %
 
7

 
117
 %
Other expense, net
(73
)
 
(6
)
 
(11
)
 
(67
)
 
NM

 
5

 
(45
)%
Total other expense, net
(1,727
)
 
(1,723
)
 
(1,501
)
 
(4
)
 
 %
 
(222
)
 
15
 %
Income before income taxes
3,161

 
2,327

 
978

 
834

 
36
 %
 
1,349

 
138
 %
Income tax benefit (expense)
1,375

 
(867
)
 
(245
)
 
2,242

 
(259
)%
 
(622
)
 
254
 %
Net income
$
4,536

 
$
1,460

 
$
733

 
$
3,076

 
211
 %
 
$
727

 
99
 %
 
 
 
 
 
 
 
 
 
 
 

 

Net cash provided by operating activities
$
3,831

 
$
2,779

 
$
1,877

 
$
1,052

 
38
 %
 
$
902

 
48
 %
Net cash used in investing activities
(6,745
)
 
(2,324
)
 
(6,023
)
 
(4,421
)
 
190
 %
 
3,699

 
(61
)%
Net cash (used in) provided by financing activities
(1,367
)
 
463

 
3,413

 
(1,830
)
 
(395
)%
 
(2,950
)
 
(86
)%
 
 
 
 
 
 
 
 
 
 
 

 

Non-GAAP Financial Measures
 
 
 
 
 
 
 
 
 
 

 

Adjusted EBITDA
$
11,213

 
$
10,639

 
$
7,807

 
$
574

 
5
 %
 
$
2,832

 
36
 %
Free Cash Flow
2,725

 
1,433

 
690

 
1,292

 
90
 %
 
743

 
108
 %
NM - Not Meaningful


8


The following discussion and analysis is for the year ended December 31, 2017, compared to the same period in 2016 unless otherwise stated.

Total revenues increased $3.1 billion, or 8%, primarily due to higher revenues from branded postpaid and prepaid customers as well as higher equipment revenues as discussed below.

Branded postpaid revenues increased $1.3 billion, or 7%, primarily from:

A 7% increase in average branded postpaid phone customers, primarily from growth in our customer base driven by the continued strong customer response to our Un-carrier initiatives and promotions for services and devices, including the growing success of our business channel, T-Mobile for Business; and
The positive impact from a decrease in the non-cash net revenue deferral for Data Stash; partially offset by
A 1% decrease in branded postpaid phone ARPU primarily driven by dilution from promotions targeting families and new segments;
The MVNO Transaction; and
The negative impact from hurricanes of approximately $37 million.

Branded prepaid revenues increased $827 million, or 10%, primarily from:

A 7% increase in average branded prepaid customers primarily driven by growth in the customer base; and
A 2% increase in branded prepaid ARPU from the success of our MetroPCS brand and the optimization of our third-party distribution channels; partially offset by
The negative impact from hurricanes of approximately $11 million.

Wholesale revenues increased $199 million, or 22%, primarily from the impact of the MVNO Transaction, growth in MVNO customers and higher minimum commitment revenues.

Roaming and other service revenues decreased $20 million, or 8%.

Equipment revenues increased $648 million, or 7%, primarily from:

An increase of $445 million in device sales revenues excluding purchased lease devices, primarily due to:
Higher average revenue per device sold due to an increase in the high-end device mix and the impacts of an OEM recall of its smartphone devices in 2016, partially offset by an increase in promotions and device-related commissions spending; partially offset by
A 2% decrease in the number of devices sold, excluding purchased lease devices, driven by a lower branded postpaid handset upgrade rate. Device sales revenue is recognized at the time of sale;
An increase of $395 million from customers' purchase of leased devices at the end of the lease term;
An increase of $231 million primarily related to proceeds from liquidation of returned customer handsets in 2017; and
An increase of $130 million in SIM and upgrade revenue; partially offset by
A decrease of $539 million in lease revenues from declining JUMP! On Demand population due to shifting focus to our EIP financing option beginning in the first quarter of 2016;
A decrease of $18 million in accessory revenue primarily related to the decrease in device sales volume; and
The negative impact from hurricanes of approximately $8 million.

Under our JUMP! On Demand program, upon device upgrade or at lease end, customers must return or purchase their device. Revenue for purchased leased devices is recorded as equipment revenues when revenue recognition criteria have been met.

Gross EIP device financing to our customers increased by $437 million for the year ended December 31, 2017, primarily due to growth in the gross amount of equipment financed on EIP. The increase was also due to certain customers on leased devices reaching the end of lease term who financed their devices over a nine-month EIP.

Other revenues increased $150 million, or 16%, primarily due to higher revenue from revenue share agreements with third parties.


9


Our operating expenses consist of the following categories:

Cost of services primarily includes costs directly attributable to providing wireless service through the operation of our network, including direct switch and cell site costs, such as rent, network access and transport costs, utilities, maintenance, associated labor costs, long distance costs, regulatory program costs, roaming fees paid to other carriers and data content costs.

Cost of equipment sales primarily includes costs of devices and accessories sold to customers and dealers, device costs to fulfill insurance and warranty claims, costs related to returned and purchased leased devices, write-downs of inventory related to shrinkage and obsolescence, and shipping and handling costs.

Selling, general and administrative primarily includes costs not directly attributable to providing wireless service for the operation of sales, customer care and corporate activities. These include commissions paid to dealers and retail employees for activations and upgrades, labor and facilities costs associated with retail sales force and administrative space, marketing and promotional costs, customer support and billing, bad debt expense, losses from sales of receivables and back office administrative support activities.

Operating expenses increased $2.3 billion, or 7%, primarily from higher Cost of services, Cost of equipment sales, Selling, general and administrative and lower Gains on disposal of spectrum licenses, partially offset by lower Depreciation and amortization as discussed below.

Cost of services increased $369 million, or 6%, primarily from:

Higher lease, engineering and employee-related expenses associated with network expansion; and
The negative impact from hurricanes of $105 million, net of insurance recoveries; partially offset by
Lower long distance and toll costs as we continue to renegotiate contracts with vendors; and
Lower regulatory expenses.

Cost of equipment sales increased $789 million, or 7%, primarily from:

An increase of $806 million in device cost of equipment sales, excluding purchased leased devices, primarily due to:
A higher average cost per device sold primarily from an increase in the high-end device mix and from the impact of an OEM recall of its smartphone devices in 2016; partially offset by
A 2% decrease in the number of devices sold, excluding purchased lease devices, driven by a lower branded postpaid handset upgrade rate.
An increase of $201 million in lease device cost of equipment sales, primarily due to:
An increase in lease buyouts as leases began reaching their term dates in 2017; partially offset by
A decrease in write downs to market value of devices returned to inventory resulting from a decrease in the number of leased device upgrades.
These increases are partially offset by a decrease of $159 million primarily related to:
A decrease in insurance and warranty claims;
Higher proceeds from liquidation of returned customer handsets under our insurance programs; and
Lower inventory adjustments related to physical adjustments and obsolete inventory; partially offset by
Higher costs from an increase in the volume of liquidated returned customer handsets outside of our insurance programs.
A decrease of $57 million in accessory cost primarily driven by the decrease in device sales volume.

Under our JUMP! On Demand program, upon device upgrade or at the end of the lease term, customers must return or purchase their device. The cost of purchased leased devices is recorded as Cost of equipment sales. Returned devices transferred from Property and equipment, net are recorded as inventory and are valued at the lower of cost or market with any write-down to market recognized as Cost of equipment sales.


10


Selling, general and administrative increased $881 million, or 8%, primarily from higher commissions, employee-related costs, promotional and advertising costs, and costs related to outsourced functions and managed services to support our growing customer base, partially offset by lower handset repair services cost. Additionally, the negative impact from hurricanes of approximately $36 million contributed to the increase.

Depreciation and amortization decreased $259 million, or 4%, primarily from:

Lower depreciation expense related to our JUMP! On Demand program resulting from a lower number of devices under lease. Under our JUMP! On Demand program, the cost of a leased wireless device is depreciated to its estimated residual value over the period expected to provide utility to us; partially offset by
The continued build-out of our 4G LTE network;
The implementation of the first component of our new billing system; and
Growth in our distribution footprint.

Cost of MetroPCS business combination decreased $104 million. On July 1, 2015, we officially completed the shutdown of the MetroPCS CDMA network. Network decommissioning costs primarily relate to the acceleration of lease costs for cell sites that would have otherwise been recognized as cost of services over the remaining lease term had we not decommissioned the cell sites. We do not expect to incur significant additional network decommissioning costs in 2018.

Gains on disposal of spectrum licenses decreased $600 million, or 72%, primarily from gains of $636 million and $191 million on disposal of spectrum licenses with AT&T and Sprint during the first quarter and third quarter of 2016, respectively. These 2016 gains were partially offset by gains of $235 million from spectrum license transactions with AT&T and Verizon in 2017.

Net income increased $3.1 billion, primarily due to the Tax Cuts and Jobs Act of 2017 ("TCJA") as discussed below, higher operating income and a net decrease in interest expense, partially offset by the negative impact from hurricanes of approximately $130 million, net of insurance recoveries.

Operating income, the components of which are discussed above, increased $838 million, or 21%. The negative impact from the hurricanes for the year ended December 31, 2017 was approximately $201 million, net of insurance recoveries.

Income tax benefit (expense) changed $2.2 billion, from an expense of $867 million in 2016 to a benefit of $1.4 billion in 2017 primarily from:

A lower effective tax rate. The effective tax rate was a benefit of 43.5% in 2017, compared to an expense of 37.3% in 2016. The decrease in the effective income tax rate was primarily due to the impact of the TCJA, which resulted in a net tax benefit of $2.2 billion in 2017, substantially due to a re-measurement of deferred tax assets and liabilities; and
A $319 million reduction in the valuation allowance against deferred tax assets in certain state jurisdictions in 2017; partially offset by
Higher income before income taxes.

The TCJA was enacted December 22, 2017 and is generally effective beginning January 1, 2018. The TCJA includes numerous changes to existing tax law, which have been reflected in the 2017 consolidated financial statements. The state corporate income tax impact of the TCJA is complex and will continue to evolve as jurisdictions evaluate conformity to the numerous federal tax law changes. As such, a re-measurement of state deferred tax assets and liabilities and the associated net tax benefit or expense may result within the next 12 months. The TCJA resulted in a net tax benefit of $2.2 billion in 2017.

See Note 11 - Income Taxes of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

Interest expense decreased $307 million, or 22%, primarily from:

A decrease from the early redemption of our $1.98 billion Senior Secured Term Loans and $8.3 billion of Senior Notes; partially offset by

11


An increase from the issuance of the $1.5 billion of Senior Notes in March 2017; and
An increase from the issuance of the $1.0 billion of Senior Notes in April 2016.

Interest expense to affiliates increased $248 million, or 79%, primarily from:

Issuance of $4.0 billion secured term loan facility with Deutsche Telekom AG ("DT") entered into in January 2017;
Issuance of a total of $4.0 billion in Senior Notes in May 2017;
An increase in drawings on our Revolving Credit Facility; and
Issuance of $500 million in Senior Notes in September 2017; partially offset by
A decrease from lower interest rates achieved through refinancing of a total of $2.5 billion of Senior Reset Notes in April 2017.

See Note 7 – Debt of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

Other expense, net increased $67 million primarily from:

A $73 million net loss recognized from the early redemption of certain Senior Notes; and
A $13 million net loss recognized from the refinancing of our outstanding Senior Secured Term Loans.

See Note 7 – Debt of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

Net income included net, after-tax gains on disposal of spectrum licenses of $174 million and $509 million for the years ended December 31, 2017 and 2016, respectively.

Guarantor Subsidiaries

The financial condition and results of operations of the Parent, Issuer and Guarantor Subsidiaries is substantially similar to our consolidated financial condition. The most significant components of the financial condition of our Non-Guarantor Subsidiaries were as follows:
 
December 31,
2017
 
December 31,
2016
 
Change
(in millions)
$
 
%
Other current assets
$
628

 
$
565

 
$
63

 
11
 %
Property and equipment, net
306

 
375

 
(69
)
 
(18
)%
Tower obligations
2,198

 
2,221

 
(23
)
 
(1
)%
Total stockholders' deficit
(1,454
)
 
(1,374
)
 
(80
)
 
6
 %

The most significant components of the results of operations of our Non-Guarantor Subsidiaries were as follows:
 
Year Ended December 31,
 
Change
(in millions)
2017
 
2016
$
 
%
Service revenues
$
2,113

 
$
2,023

 
$
90

 
4
 %
Cost of equipment sales
1,003

 
1,027

 
(24
)
 
(2
)%
Selling, general and administrative
856

 
868

 
(12
)
 
(1
)%
Total comprehensive income
28

 
24

 
4

 
17
 %

The change to the results of operations of our Non-Guarantor Subsidiaries was primarily from:

Higher Service revenues primarily due to the result of an increase in activity of the non-guarantor subsidiary that provides device insurance, primarily driven by growth in our customer base;
Lower Cost of equipment sales expenses primarily due to a decrease in device insurance claims and a decrease in higher cost devices used, partially offset by a decrease in device non-return fees charged to customers; and

12


Lower Selling, general and administrative expenses primarily due to a decrease in device insurance program service fees, partially offset by higher costs to support our growing customer base.

All other results of operations of the Parent, Issuer and Guarantor Subsidiaries are substantially similar to the Company’s consolidated results of operations. See Note 16 – Guarantor Financial Information of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

The following discussion and analysis is for the year ended December 31, 2016, compared to the same period in 2015 unless otherwise stated.

Certain prior year amounts relating to the change in accounting principle which presents the imputed discount on EIP receivables, which is amortized over the financed installment term using the effective interest method, and was previously presented within Interest income in our Consolidated Statements of Comprehensive Income, is now presented within Other revenues in our Consolidated Statements of Comprehensive Income have been reclassified to conform to the current presentation. See Note 1 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

Total revenues increased $5.0 billion, or 15%, primarily due to:

Branded postpaid revenues increased $1.8 billion, or 11%, primarily from:

A 13% increase in the number of average branded postpaid phone and mobile broadband customers, driven by strong customer response to our Un-carrier initiatives and promotions for services and devices;
Higher device insurance program revenues primarily from customer growth; and
Higher regulatory program revenues; partially offset by
An increase in the non-cash net revenue deferral for Data Stash; and
The MVNO Transaction.

Branded prepaid revenues increased $1.0 billion, or 13%, primarily from:

A 13% increase in the number of average branded prepaid customers driven by the success of our MetroPCS brand; and
Continued growth in new markets.

Wholesale revenues increased $211 million, or 30%, primarily from:

The MVNO Transaction;
Growth in customers of certain MVNO partners; and
An increase in data usage per customer.

Roaming and other service revenues increased $57 million, or 30%, primarily due to higher international roaming revenues driven by an increase in inbound roaming volumes.

Equipment revenues increased $2.0 billion, or 30%, primarily from:

An increase of $1.2 billion in lease revenues resulting from the launch of our JUMP! On Demand program at the end of the second quarter of 2015. Revenues associated with leased devices are recognized over the lease term; and
An increase of $570 million in device sales revenues, primarily due to a 9% increase in the number of devices sold. Device sales revenue is recognized at the time of sale.

Gross EIP device financing to our customers increased by $923 million to $6.1 billion primarily due to an increase in devices financed due to our focus on EIP sales in 2016, compared to focus on devices financed on JUMP! On Demand after the launch of the program at the end of the second quarter of 2015.


13


Other revenues decreased $9 million, or 1%, primarily due to:

An increase in sales of certain EIP receivables pursuant to our EIP receivables sales arrangement resulting from an increase in the maximum funding commitment in June 2016. Interest associated with EIP receivables is imputed at the time of a device sale and then recognized over the financed installment term. See Note 2 - Receivables and Allowance for Credit Losses of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information; and
Focus on devices financed on JUMP! On Demand in the third and fourth quarters of 2015 following the launch of the program of at the end of the second quarter 2015; partially offset by
Higher revenue from revenue share agreements with third parties; and
An increase in co-location rental income from leasing space on wireless communication towers to third parties.

Operating expenses increased $3.5 billion, or 12%, primarily due to:

Cost of services increased $177 million, or 3%, primarily from:

Higher regulatory program costs and expenses associated with network expansion and the build-out of our network to utilize our 700 MHz A-Block spectrum licenses, including higher employee-related costs; partially offset by
Lower long distance and toll costs; and
Synergies realized from the decommissioning of the MetroPCS CDMA network.

Cost of equipment sales increased $1.5 billion, or 16%, primarily from:

A 9% increase in the number of devices sold; and
An increase in the impact from returned and purchased leased devices.

Under our JUMP! On Demand program, the cost of the leased wireless device is capitalized and recognized as depreciation expense over the term of the lease rather than recognized as cost of equipment sales when the device is delivered to the customer. Additionally, upon device upgrade or at lease end, customers must return or purchase their device. Returned devices transferred from Property and equipment, net are recorded as inventory and are valued at the lower of cost or market with any write-down to market recognized as Cost of equipment sales.

Selling, general and administrative increased $1.2 billion, or 12%, primarily from strategic investments to support our growing customer base including higher:

Employee-related costs;
Commissions driven by an increase in branded customer additions; and
Promotional costs.

Depreciation and amortization increased $1.6 billion, or 33%, primarily from:

$1.5 billion in depreciation expense related to devices leased under our JUMP! On Demand program launched at the end of the second quarter of 2015. Under our JUMP! On Demand program, the cost of a leased wireless device is depreciated over the lease term to its estimated residual value. The total number of devices under lease was higher year-over-year, resulting in higher depreciation expense; and
The continued build-out of our 4G LTE network.

Cost of MetroPCS business combination decreased $272 million, or 72%, primarily from lower network decommissioning costs. In 2014, we began decommissioning the MetroPCS CDMA network and certain other redundant network cell sites as part of the business combination. On July 1, 2015, we officially completed the shutdown of the MetroPCS CDMA network. Network decommissioning costs, which are excluded from Adjusted EBITDA, primarily relate to the acceleration of lease costs for cell sites that would have otherwise been recognized as cost of services over the remaining lease term had we not decommissioned the cell sites.

Gains on disposal of spectrum licenses increased $672 million primarily from a $636 million gain from a spectrum license transaction with AT&T recorded in the first quarter of 2016 and $199 million from other transactions in 2016, compared to

14


$163 million in 2015. See Note 5 – Goodwill, Spectrum Licenses and Other Intangible Assets of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

Net income increased $727 million, or 99%, primarily from:

Operating income, the components of which are discussed above, increased $1.6 billion, or 63%.

Interest expense to affiliates decreased $99 million, or 24%, primarily from:

Changes in the fair value of embedded derivative instruments associated with our Senior Reset Notes issued to Deutsch Telekom in 2015; partially offset by
Higher interest rates on certain Senior Reset Notes issued to Deutsch Telekom, which were adjusted at reset dates in the second quarter of 2016 and in 2015.

Income tax expense increased $622 million, or 254%, primarily from:

Higher income before income taxes; and
A higher effective tax rate. The effective tax rate was 37.3% in 2016, compared to 25.1% in 2015. The increase in the effective income tax rate was primarily due to income tax benefits for discrete income tax items recognized in 2015 that did not impact 2016; partially offset by the recognition of $58 million of excess tax benefits related to share-based payments following the adoption of ASU 2016-09 as of January 1, 2016.

Interest expense increased $333 million, or 31%, primarily from:

Higher average debt balances with third parties; and
Lower capitalized interest costs of $83 million primarily due to a higher level of build out of our network to utilize our 700 MHz A-Block spectrum licenses in 2015, compared to 2016.

Net income during 2016 and 2015 included net, after-tax gains on disposal of spectrum licenses of $509 million and $100 million, respectively.

Guarantor Subsidiaries

The financial condition and results of operations of the Parent, Issuer and Guarantor Subsidiaries is substantially similar to our consolidated financial condition.

The most significant components of the financial condition of our Non-Guarantor Subsidiaries were as follows:
 
December 31,
2016
 
December 31,
2015
 
Change
(in millions)
$
 
%
Other current assets
$
565

 
$
400

 
$
165

 
41
 %
Property and equipment, net
375

 
454

 
(79
)
 
(17
)%
Tower obligations
2,221

 
2,247

 
(26
)
 
(1
)%
Total stockholders' deficit
(1,374
)
 
(1,359
)
 
(15
)
 
(1
)%

The most significant components of the results of operations of our Non-Guarantor Subsidiaries were as follows:
 
Year Ended December 31,
 
Change
(in millions)
2016
 
2015
$
 
%
Service revenues
$
2,023

 
$
1,669

 
$
354

 
21
 %
Cost of equipment sales
1,027

 
720

 
307

 
43
 %
Selling, general and administrative
868

 
733

 
135

 
18
 %
Total comprehensive income
24

 
60

 
(36
)
 
(60
)%

The change to the results of operations of our Non-Guarantor Subsidiaries was primarily from the increases in Service revenues, Cost of equipment sales and Selling, general and administrative were primarily the result of an increase in activity of the non-guarantor subsidiary that provides device insurance, primarily driven by growth in our customer base. All other results

15


of operations of the Parent, Issuer and Guarantor Subsidiaries are substantially similar to the Company’s consolidated results of operations. See Note 16 – Guarantor Financial Information of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

Performance Measures

In managing our business and assessing financial performance, we supplement the information provided by our financial statements with other operating or statistical data and non-GAAP financial measures. These operating and financial measures are utilized by our management to evaluate our operating performance and, in certain cases, our ability to meet liquidity requirements. Although companies in the wireless industry may not define each of these measures in precisely the same way, we believe that these measures facilitate comparisons with other companies in the wireless industry on key operating and financial measures.

Total Customers

A customer is generally defined as a SIM number with a unique T-Mobile identifier which is associated with an account that generates revenue. Branded customers generally include customers that are qualified either for postpaid service utilizing phones, mobile broadband devices (including tablets), or DIGITS, where they generally pay after receiving service, or prepaid service, where they generally pay in advance. Wholesale customers include M2M and MVNO customers that operate on our network, but are managed by wholesale partners.

The following table sets forth the number of ending customers:
 
December 31,
2017
 
December 31,
2016
 
December 31,
2015
 
2017 Versus 2016
 
2016 Versus 2015
(in thousands)
# Change
 
% Change
# Change
 
% Change
Customers, end of period
 
 
 
 
 
 
 
 
 
 
 
 
 
Branded postpaid phone customers (1)
34,114

 
31,297

 
29,355

 
2,817

 
9
 %
 
1,942

 
7
%
Branded postpaid other customers (1)
3,933

 
3,130

 
2,340

 
803

 
26
 %
 
790

 
34
%
Total branded postpaid customers
38,047

 
34,427

 
31,695

 
3,620

 
11
 %
 
2,732

 
9
%
Branded prepaid customers
20,668

 
19,813

 
17,631

 
855

 
4
 %
 
2,182

 
12
%
Total branded customers
58,715

 
54,240

 
49,326

 
4,475

 
8
 %
 
4,914

 
10
%
Wholesale customers (2)
13,870

 
17,215

 
13,956

 
(3,345
)
 
(19
)%
 
3,259

 
23
%
Total customers, end of period
72,585

 
71,455

 
63,282

 
1,130

 
2
 %
 
8,173

 
13
%
Adjustments to branded postpaid phone customers (3)

 
(1,365
)
 

 
1,365

 
(100
)%
 
(1,365
)
 
NM

Adjustments to branded prepaid customers (3)

 
(326
)
 

 
326

 
(100
)%
 
(326
)
 
NM

Adjustments to wholesale customers (3)

 
1,691

 

 
(1,691
)
 
(100
)%
 
1,691

 
NM

NM - Not Meaningful
(1)
During 2017, we retitled our “Branded postpaid mobile broadband customers” category to “Branded postpaid other customers” and reclassified DIGITS customers from our “Branded postpaid phone customers” category for the second quarter of 2017, when the DIGITS product was released.
(2)
We believe current and future regulatory changes have made the Lifeline program offered by our wholesale partners uneconomical. We will continue to support our wholesale partners offering the Lifeline program, but have excluded the Lifeline customers from our reported wholesale subscriber base resulting in the removal of 4,528,000 reported wholesale customers in 2017.
(3)
The MVNO Transaction resulted in a transfer of Branded postpaid phone customers and Branded prepaid customers to Wholesale customers on September 1, 2016. Prospectively from September 1, 2016, net customer additions for these customers are included within Wholesale customers.

Branded Customers

Total branded customers increased 4,475,000, or 8%, in 2017 primarily from:

Higher branded postpaid phone customers driven by the continued strong customer response to our Un-carrier initiatives and promotional activities, the growing success of our business channel, T-Mobile for Business, continued growth in existing markets and distribution expansion to new Greenfield markets, and lower churn, partially offset by increased competitive activity in the marketplace with all competitors having launched Unlimited rate plans in the first quarter of 2017;
Higher branded prepaid customers driven by the continued success of our Metro PCS brand and continued growth from distribution expansion, partially offset by the optimization of our third-party distribution channels; and
Higher branded postpaid other customers primarily due to higher connected devices and DIGITS.

16



Total branded customers increased 4,914,000, or 10%, in 2016 primarily from:

Higher branded prepaid customers driven by the success of our MetroPCS brand, continued growth in new markets and distribution expansion, partially offset by the optimization of our third-party distribution channels; and
Higher branded postpaid customers driven by strong customer response to our Un-carrier initiatives and promotional activities, partially offset by higher deactivations on a growing customer base.

Wholesale

Wholesale customers decreased 3,345,000, or 19%, primarily due to Lifeline subscribers, which were excluded from our reported wholesale subscriber base as of the beginning of the second quarter of 2017. This decrease was partially offset by the continued success of our M2M partnerships.

Wholesale customers increased 3,259,000, or 23%, in 2016 primarily due the continued success of our M2M partnerships and the MVNO transaction.

Net Customer Additions

The following table sets forth the number of net customer additions:
 
Year Ended December 31,
 
2017 Versus 2016
 
2016 Versus 2015
(in thousands)
2017
 
2016
 
2015
# Change
 
% Change
# Change
 
% Change
Net customer additions
 
 
 
 
 
 
 
 
 
 
 
 
 
Branded postpaid phone customers (1)
2,817

 
3,307

 
3,511

 
(490
)
 
(15
)%
 
(204
)
 
(6
)%
Branded postpaid other customers (1)
803

 
790

 
999

 
13

 
2
 %
 
(209
)
 
(21
)%
Total branded postpaid customers
3,620

 
4,097

 
4,510

 
(477
)
 
(12
)%
 
(413
)
 
(9
)%
Branded prepaid customers
855

 
2,508

 
1,315

 
(1,653
)
 
(66
)%
 
1,193

 
91
 %
Total branded customers
4,475

 
6,605

 
5,825

 
(2,130
)
 
(32
)%
 
780

 
13
 %
Wholesale customers (2)
1,183

 
1,568

 
2,439

 
(385
)
 
(25
)%
 
(871
)
 
(36
)%
Total net customer additions
5,658

 
8,173

 
8,264

 
(2,515
)
 
(31
)%
 
(91
)
 
(1
)%
(1)
During 2017, we retitled our “Branded postpaid mobile broadband customers” category to “Branded postpaid other customers” and reclassified DIGITS customer net additions from our “Branded postpaid phone customers” category for the second quarter of 2017, when the DIGITS product was released.
(2)
Net customer activity for Lifeline was excluded beginning in the second quarter of 2017 due to our determination based upon changes in the applicable government regulations that the Lifeline program offered by our wholesale partners is uneconomical.

Branded Customers

Total branded net customer additions decreased 2,130,000, or 32%, in 2017 primarily from:

Lower branded prepaid net customer additions primarily due to higher deactivations from a growing customer base, increased competitive activity in the marketplace and de-emphasis of the T-Mobile prepaid brand. Additional decreases resulted from the optimization of our third-party distribution channels; and
Lower branded postpaid phone net customer additions primarily due to increased competitive activity in the marketplace partially offset by the continued strong customer response to our Un-carrier initiatives and promotional activities, the growing success of our business channel, T-Mobile for Business, continued growth in new markets and distribution expansion to new Greenfield markets, and lower churn; partially offset by
Higher branded postpaid other net customer additions primarily due to higher gross customer additions from connected devices and DIGITS, offset by higher deactivations from a growing customer base.

Total branded net customer additions increased 780,000, or 13%, in 2016 primarily from:

Higher branded prepaid net customer additions primarily due to the success of our MetroPCS brand, continued growth in new markets and distribution expansion, partially offset by an increase in the number of qualified branded prepaid customers migrating to branded postpaid plans; partially offset by
Lower branded postpaid mobile broadband net customer additions primarily due to higher deactivations resulting from churn on a growing branded postpaid mobile broadband customer base, partially offset by higher gross customer

17


additions; and
Lower branded postpaid phone net customer additions primarily due to lower gross customer additions from higher deactivations on a growing customer base, partially offset by lower churn as well as an increase in the number of qualified branded prepaid customers migrating to branded postpaid plans as well as the optimization of our third-party distribution channels.

Wholesale

Wholesale net customer additions decreased 385,000, or 25%, in 2017 primarily from lower gross customer additions, partially offset by lower deactivations driven by the removal of the Lifeline program customers. While we continue to focus on more profitable wholesale opportunities, we believe current and future regulatory changes have made the Lifeline program offered by our wholesale partners uneconomical. We will continue to support our wholesale partners offering the Lifeline program, but have excluded the Lifeline customers from our reported wholesale subscriber base resulting in the removal of 4,528,000 reported wholesale customers in 2017.

Wholesale net customer additions decreased 871,000, or 36%, in 2016 primarily due to higher MVNO deactivations from certain MVNO partners.

Customers Per Account

Customers per account is calculated by dividing the number of branded postpaid customers as of the end of the period by the number of branded postpaid accounts as of the end of the period. An account may include branded postpaid phone, mobile broadband, and DIGITS customers. We believe branded postpaid customers per account provides management, investors and analysts with useful information to evaluate our branded postpaid customer base on a per account basis.
 
December 31,
2017
 
December 31,
2016
 
December 31,
2015
 
Change
 
Change
#
 
%
#
 
%
Branded postpaid customers per account
2.93

 
2.86

 
2.54

 
0.07

 
2
%
 
0.32

 
13
%

Branded postpaid customers per account increased 2% in 2017 primarily from promotions targeting families.

Branded postpaid customers per account increased 13% in 2016 primarily from growth of customers on family plan promotions and increased penetration of mobile broadband devices. In addition, the increase in 2016 was impacted by the MVNO Transaction.

Churn

Churn represents the number of customers whose service was disconnected as a percentage of the average number of customers during the specified period. The number of customers whose service was disconnected is presented net of customers that subsequently have their service restored within a certain period of time. We believe that churn provides management, investors and analysts with useful information to evaluate customer retention and loyalty.
 
Year Ended December 31,
 
Bps Change 2017 Versus 2016
 
Bps Change 2016 Versus 2015
2017
 
2016
 
2015
Branded postpaid phone churn
1.18
%
 
1.30
%
 
1.39
%
 
-12 bps
 
-9 bps
Branded prepaid churn
4.04
%
 
3.88
%
 
4.45
%
 
16 bps
 
-57 bps

Branded postpaid phone churn decreased 12 basis points in 2017 primarily from:

The MVNO Transaction as the customers transferred had a higher rate of churn; and
Increased customer satisfaction and loyalty from ongoing improvements to network quality, customer service and the overall value of our offerings in the marketplace.

Branded postpaid phone churn decreased 9 basis points in 2016 primarily from:

The MVNO Transaction as the customers transferred had a higher rate of churn; and
Increased customer satisfaction and loyalty from ongoing improvements to network quality, customer service and the overall value of our offerings in the marketplace.

18



Branded prepaid churn increased 16 basis points in 2017 primarily due to higher churn from increased competitive activity in the marketplace, partially offset by increased customer satisfaction and loyalty from ongoing improvements to network quality, customer service and overall value of our offerings in the marketplace.

Branded prepaid churn decreased 57 basis points in 2016 primarily from:

A decrease in certain customers, which have a higher rate of branded prepaid churn;
Strong performance of the MetroPCS brand; and
A methodology change in the third quarter of 2015 as discussed below.

During 2015, we had a methodology change that had no impact on our reported branded prepaid ending customers or net customer additions, but resulted in computationally lower gross customer additions and deactivations.

Average Revenue Per User, Average Billings Per User

ARPU represents the average monthly service revenue earned from customers. We believe ARPU provides management, investors and analysts with useful information to assess and evaluate our service revenue realization per customer and assist in forecasting our future service revenues generated from our customer base. Branded postpaid phone ARPU excludes mobile broadband and DIGITS customers and related revenues.

Average Billings Per User (“ABPU”) represents the average monthly customer billings, including monthly lease revenues and EIP billings before securitization, per customer. We believe branded postpaid ABPU provides management, investors and analysts with useful information to evaluate average branded postpaid customer billings as it is indicative of estimated cash collections, including device financing payments, from our customers each month.

The following tables illustrate the calculation of our operating measures ARPU and ABPU and reconcile these measures to the related service revenues:
(in millions, except average number of customers, ARPU and ABPU)
Year Ended December 31,
 
2017 Versus 2016
 
2016 Versus 2015
2017
 
2016
 
2015
$ Change
 
% Change
$ Change
 
% Change
Calculation of Branded Postpaid Phone ARPU
 
 
 
 
 
 
 
 
 
 
 
 
 
Branded postpaid service revenues
$
19,448

 
$
18,138

 
$
16,383

 
$
1,310

 
7
 %
 
$
1,755

 
11
 %
Less: Branded postpaid other revenues
(1,077
)
 
(773
)
 
(588
)
 
(304
)
 
39
 %
 
(185
)
 
31
 %
Branded postpaid phone service revenues
$
18,371

 
$
17,365

 
$
15,795

 
$
1,006

 
6
 %
 
$
1,570

 
10
 %
Divided by: Average number of branded postpaid phone customers (in thousands) and number of months in period
32,596

 
30,484

 
27,604

 
2,112

 
7
 %
 
2,880

 
10
 %
Branded postpaid phone ARPU (1)
$
46.97

 
$
47.47

 
$
47.68

 
$
(0.50
)
 
(1
)%
 
$
(0.21
)
 
 %
 
 
 
 
 
 
 


 


 
 
 
 
Calculation of Branded Postpaid ABPU
 
 
 
 
 
 


 


 
 
 
 
Branded postpaid service revenues
$
19,448

 
$
18,138

 
$
16,383

 
$
1,310

 
7
 %
 
$
1,755

 
11
 %
EIP billings
5,866

 
5,432

 
5,494

 
434

 
8
 %
 
(62
)
 
(1
)%
Lease revenues
877

 
1,416

 
224

 
(539
)
 
(38
)%
 
1,192

 
532
 %
Total billings for branded postpaid customers
$
26,191

 
$
24,986

 
$
22,101

 
$
1,205

 
5
 %
 
$
2,885

 
13
 %
Divided by: Average number of branded postpaid customers (in thousands) and number of months in period
36,079

 
33,184

 
29,341

 
2,895

 
9
 %
 
3,843

 
13
 %
Branded postpaid ABPU
$
60.49

 
$
62.75

 
$
62.77

 
$
(2.26
)
 
(4
)%
 
$
(0.02
)
 
 %
 
 
 
 
 
 
 


 


 
 
 
 
Calculation of Branded Prepaid ARPU
 
 
 
 
 
 


 


 
 
 
 
Branded prepaid service revenues
$
9,380

 
$
8,553

 
$
7,553

 
$
827

 
10
 %
 
$
1,000

 
13
 %
Divided by: Average number of branded prepaid customers (in thousands) and number of months in period
20,204

 
18,797

 
16,704

 
1,407

 
7
 %
 
2,093

 
13
 %
Branded prepaid ARPU
$
38.69

 
$
37.92

 
$
37.68

 
$
0.77

 
2
 %
 
$
0.24

 
1
 %
(1)
Branded postpaid phone ARPU includes the reclassification of 43,000 DIGITS average customers and related revenue to the “Branded postpaid other customers” category for the second quarter of 2017.


19


Branded Postpaid Phone ARPU

Branded postpaid phone ARPU decreased $0.50, or 1%, in 2017 primarily from:

Dilution from promotions targeting families and new segments; and
The negative impact from hurricanes of approximately $0.09; partially offset by
The MVNO Transaction as those customers had a lower ARPU; and
A decrease in the non-cash net revenue deferral for Data Stash.

Under existing revenue standards, T-Mobile continues to expect that Branded postpaid phone ARPU in full-year 2018 will be generally stable compared to full-year 2017, with some quarterly variations.

We adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), as amended, on January 1, 2018. Adoption of the standard will impact the timing, amount and allocation of our revenue and is expected to impact ARPU. We will provide additional disclosures comparing results to previous GAAP in our 2018 consolidated financial statements. See Note 1 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for information regarding recently issued accounting standards.

Branded postpaid phone ARPU decreased $0.21 in 2016 primarily from:

Decreases due to an increase in the non-cash net revenue deferral for Data Stash; and
Dilution from promotional activities; partially offset by
Higher data attach rates;
The positive impact from our T-Mobile ONE rate plans prior to the release of Un-carrier Next in 2017 which began including taxes and fees;
The transfer of customers as part of the MVNO Transaction as those customers had lower ARPU;
Continued growth of our insurance programs; and
Higher regulatory program revenues.

Branded Postpaid ABPU

Branded postpaid ABPU decreased $2.26, or 4%, in 2017 primarily from:

Lower lease revenues;
Growth in the branded postpaid other customer base with lower ARPU; and
The negative impact from hurricanes of approximately $0.08.

Branded postpaid ABPU decreased $0.02 in 2016 primarily from:

Lower EIP billings due to the impact of our JUMP! On Demand program launched at the end of the second quarter of 2015;
Lower branded postpaid phone ARPU, as described above; and
Dilution from increased penetration of mobile broadband devices; partially offset by
An increase in lease revenues.

Branded Prepaid ARPU

Branded prepaid ARPU increased $0.77, or 2%, in 2017 primarily from:

Continued growth of MetroPCS customers who generate higher ARPU; and
The optimization of our third-party distribution channels; partially offset by
The negative impact from hurricanes of approximately $0.05.


20


Branded prepaid ARPU increased $0.24, or 1%, in 2016 primarily from:

A decrease in certain customers that had lower average branded prepaid ARPU, as well as higher data attach rates; partially offset by
Dilution from growth of customers on rate plan promotions.

Adjusted EBITDA

Adjusted EBITDA represents earnings before Interest expense, net of Interest income, Income tax expense, Depreciation and amortization, non-cash Stock-based compensation and certain income and expenses not reflective of T-Mobile’s operating performance. Net income margin represents Net income divided by Service revenues. Adjusted EBITDA margin represents Adjusted EBITDA divided by Service revenues.

Adjusted EBITDA is a non-GAAP financial measure utilized by our management to monitor the financial performance of our operations. We use Adjusted EBITDA internally as a metric to evaluate and compensate our personnel and management for their performance, and as a benchmark to evaluate our operating performance in comparison to our competitors. Management believes analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate overall operating performance and facilitate comparisons with other wireless communications companies because it is indicative of our ongoing operating performance and trends by excluding the impact of interest expense from financing, non-cash depreciation and amortization from capital investments, non-cash stock-based compensation, network decommissioning costs as they are not indicative of our ongoing operating performance and certain other nonrecurring income and expenses. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for income from operations, net income or any other measure of financial performance reported in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).

The following table illustrates the calculation of Adjusted EBITDA and reconciles Adjusted EBITDA to Net income, which we consider to be the most directly comparable GAAP financial measure:
 
Year Ended December 31,
 
2017 Versus 2016
 
2016 Versus 2015
(in millions)
2017
 
2016
 
2015
$ Change
 
% Change
$ Change
 
% Change
Net income
$
4,536

 
$
1,460

 
$
733

 
$
3,076

 
211
 %
 
$
727

 
99
 %
Adjustments:
 
 
 
 
 
 


 


 


 


Interest expense
1,111

 
1,418

 
1,085

 
(307
)
 
(22
)%
 
333

 
31
 %
Interest expense to affiliates
560

 
312

 
411

 
248

 
79
 %
 
(99
)
 
(24
)%
Interest income (1)
(17
)
 
(13
)
 
(6
)
 
(4
)
 
31
 %
 
(7
)
 
117
 %
Other (income) expense, net
73

 
6

 
11

 
67

 
1,117
 %
 
(5
)
 
(45
)%
Income tax expense (benefit)
(1,375
)
 
867

 
245

 
(2,242
)
 
(259
)%
 
622

 
254
 %
Operating income (1)
4,888

 
4,050

 
2,479

 
838

 
21
 %
 
1,571

 
63
 %
Depreciation and amortization
5,984

 
6,243

 
4,688

 
(259
)
 
(4
)%
 
1,555

 
33
 %
Cost of MetroPCS business combination (2)

 
104

 
376

 
(104
)
 
(100
)%
 
(272
)
 
(72
)%
Stock-based compensation (3)
307

 
235

 
222

 
72

 
31
 %
 
13

 
6
 %
Other, net (4)
34

 
7

 
42

 
27

 
386
 %
 
(35
)
 
(83
)%
Adjusted EBITDA (1)
$
11,213

 
$
10,639

 
$
7,807

 
$
574

 
5
 %
 
$
2,832

 
36
 %
Net income margin (Net income divided by service revenues)
15
%
 
5
%
 
3
%
 


 
1000 bps

 
 
 
200 bps

Adjusted EBITDA margin (Adjusted EBITDA divided by service revenues) (1)
37
%
 
38
%
 
31
%
 


 
-100 bps

 
 
 
700 bps

(1)
The amortized imputed discount on EIP receivables previously recognized as Interest income has been retrospectively re-classified as Other revenues. See the table below and Note 1 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.
(2)
Beginning in the first quarter of 2017, the Company will no longer separately present Cost of MetroPCS business combination as it is insignificant.
(3)
Stock-based compensation includes payroll tax impacts and may not agree to stock-based compensation expense in the consolidated financial statements.
(4)
Other, net may not agree to the Consolidated Statements of Comprehensive Income primarily due to certain non-routine operating activities, such as other special items that would not be expected to reoccur, and are therefore excluded in Adjusted EBITDA.


21


Adjusted EBITDA increased $574 million, or 5%, in 2017 primarily from:

An increase in branded postpaid and prepaid service revenues primarily due to strong customer response to our Un-carrier initiatives, the ongoing success of our promotional activities, and the continued strength of our MetroPCS brand;
Higher wholesale revenues; and
Higher other revenues; partially offset by
Higher selling, general and administrative expenses;
Lower gains on disposal of spectrum licenses of $600 million; gains on disposal were $235 million for the year ended December 31, 2017, compared to $835 million in the same period in 2016;
Higher cost of services expense;
Higher net losses on equipment; and
The negative impact from hurricanes of approximately $201 million, net of insurance recoveries.

Adjusted EBITDA increased $2.8 billion, or 36%, in 2016 primarily from:

Increased branded postpaid and prepaid service revenues primarily due to strong customer response to our Un-carrier initiatives and the ongoing success of our promotional activities;
Higher gains on disposal of spectrum licenses of $672 million; gains on disposal were $835 million in 2016 compared to $163 million in 2015;
Lower losses on equipment; and
Focused cost control and synergies realized from the MetroPCS business combination, primarily in cost of services; partially offset by
Higher selling, general and administrative.

Effective January 1, 2017, the imputed discount on EIP receivables, which was previously recognized within Interest income in our Consolidated Statements of Comprehensive Income, is recognized within Other revenues in our Consolidated Statements of Comprehensive Income. Due to this presentation, the imputed discount on EIP receivables is included in Adjusted EBITDA. See Note 1 - Summary of Significant Accounting Policies of Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Exhibit 99.1 for further information.

We have applied this change retrospectively and presented the effect on the years ended December 31, 2016 and 2015, in the table below.
 
Year Ended December 31, 2016
 
Year Ended December 31, 2015
(in millions)
As Filed
 
Change in Accounting Principle
 
As Adjusted
 
As Filed
 
Change in Accounting Principle
 
As Adjusted
Operating income
$
3,802

 
$
248

 
$
4,050

 
$
2,065

 
$
414

 
$
2,479

Interest income
261

 
(248
)
 
13

 
420

 
(414
)
 
6

Net income
1,460

 

 
1,460

 
733

 

 
733

Net income as a percentage of service revenue
5
%
 
%
 
5
%
 
3