Business context and reporting period
Important entity clarification: The supplied filing is MetroPCS Communications, Inc.’s Form 10-Q for the quarter ended September 30, 2012—not a T-Mobile US, Inc. 10-Q. It reports MetroPCS’s unaudited consolidated results for the three and nine months ended September 30, 2012, compared with the same periods in 2011. MetroPCS operated wireless services in selected U.S. metropolitan areas.
Financial and operating performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1.259 billion | $1.205 billion | $3.817 billion | $3.609 billion |
| Operating income | $292.2 million | $176.8 million | $702.5 million | $532.4 million |
| Net income | $192.7 million | $69.3 million | $362.5 million | $210.0 million |
| Operating cash flow | $391.9 million | $271.6 million | $848.5 million | $753.7 million |
Q3 operating margin was approximately 23.2% versus 14.7%; net margin was approximately 15.3% versus 5.8%. Nine-month operating margin was approximately 18.4% versus 14.7%, and net margin approximately 9.5% versus 5.8%. The Q3 and nine-month 2012 net income figures include a $52.5 million gain on settlement.
- Revenue mix: Q3 service revenue declined 1% to $1.122 billion, while equipment revenue rose 85% to $137.2 million. For nine months, service revenue increased 4% to $3.440 billion and equipment revenue increased 20% to $377.3 million.
- Cash flow and investment: Nine-month property-and-equipment purchases were $588.3 million, compared with $699.6 million in 2011. Operating cash flow less these purchases was approximately $260.1 million, versus $54.0 million. Cash, cash equivalents and short-term investments totaled approximately $2.565 billion at quarter-end.
- Debt and liquidity: Debt carrying value was approximately $4.767 billion, including $322.2 million of capital lease obligations. Current maturities were $36.1 million. Management said available cash, investments and expected operating cash flows were adequate for near-term operations. The revolving facility was $100 million.
- Margins and costs: Q3 cost of equipment fell 23%, while depreciation and amortization rose 17%, reflecting network assets placed in service, including LTE infrastructure. Nine-month operating expenses grew 1% against 6% revenue growth.
- Customer metrics: MetroPCS had 8.98 million customers at quarter-end, down 2% year over year. Net losses were 312,291 in Q3 and 366,699 for nine months, versus additions of 69,384 and 994,139 in the respective 2011 periods. Churn improved to 3.7% in Q3 from 4.5%; ARPU was $40.50 versus $40.80.
- Non-GAAP performance: Adjusted EBITDA was $466.0 million for Q3 and $1.205 billion for nine months, versus $327.3 million and $969.8 million, respectively, in 2011. These company-defined measures are not GAAP substitutes.
Material changes versus prior periods
Q3 net income increased 178% and nine-month net income increased 73%, reflecting higher operating income and the settlement gain. Excluding the settlement’s effect, the reported net-income increase is less indicative of underlying recurring performance. Customer growth weakened materially: the company reported net customer losses for both Q3 and the nine-month period, despite lower churn. Q3 service revenue was slightly lower year over year; nine-month service revenue benefited from higher average subscriber levels. Interest expense rose 7% for nine months, mainly due to higher average debt and lower capitalized interest, although the weighted average interest rate declined.
Outlook, commentary, risks and unusual items
- Management forecast 2012 capital expenditures of $900 million to $1.0 billion, primarily for network coverage, capacity and the 4G LTE upgrade. It expected cash and operating cash flows to fund planned operations and investments.
- Management attributed weaker additions to a focus on Adjusted EBITDA and cash flow, competition, economic pressures and customer demand for high-speed data. It noted that net additions are typically strongest in the first and fourth quarters and weaker in the second and third.
- On October 3, 2012, after quarter-end, MetroPCS agreed to a proposed combination with T-Mobile. The announced terms included a $1.5 billion cash payment to MetroPCS shareholders, a reverse stock split, and issuance of shares giving Deutsche Telekom 74% of the combined company; MetroPCS shareholders were expected to own 26%. Closing was expected in the first half of 2013, subject to shareholder, regulatory and other approvals. These were proposed transaction terms, not completed-period results.
- Shareholder class and derivative lawsuits challenging the transaction were filed in Delaware and Texas. The company said the outcome was not determinable and that substantial defense costs, damages or settlement costs could adversely affect results.
- The transaction could trigger change-of-control provisions requiring repayment or repurchase of debt; the filing cautions that MetroPCS might not have sufficient funds to meet those obligations. The agreement also includes potential termination fees: $150 million payable by MetroPCS in specified circumstances, or $250 million payable by Deutsche Telekom if termination is solely due to failure to obtain required regulatory approvals.
- Other key risks include intense competition and pricing pressure, customer losses, limited spectrum and LTE capacity, reliance on vendors and indirect dealers, roaming costs and availability, regulatory and tax exposure, litigation, and substantial indebtedness. A 100-basis-point increase in LIBOR was estimated to raise annual interest expense by $10.5 million on approximately $1.1 billion of unhedged variable-rate debt.
- The company reported no impairment of indefinite-lived spectrum assets in its September 30, 2012 annual test. It also disclosed $164.1 million of minimum commitments under a broadband services agreement and $24.2 million outstanding under handset pricing agreements.
Important facts for investors to verify
- Confirm the issuer: this filing is MetroPCS Communications, Inc., not T-Mobile US, Inc.; review subsequent filings for the combination’s status and final terms.
- Assess recurring earnings and cash generation separately from the $52.5 million settlement gain and from non-GAAP Adjusted EBITDA.
- Track customer losses, gross additions, churn, ARPU and acquisition costs to determine whether the customer trend is stabilizing.
- Verify whether capital spending, LTE deployment and network capacity support the stated outlook without weakening liquidity.
- Review debt covenants, change-of-control repayment or repurchase requirements, and the availability of funds to satisfy them.
- Monitor transaction approvals, merger litigation, possible termination fees and any changes to roaming or other agreements following a change of control.