Filing summary
Entity and period: The supplied filing is MetroPCS Communications, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. It is not a T-Mobile US, Inc. filing; the company named in the filing differs from the request metadata.
Business context
MetroPCS operated a prepaid wireless business in 13 U.S. metropolitan areas. It reported one segment and consolidated Royal Street Communications as a variable interest entity. Management cited customer growth, network expansion and 4G LTE deployment as important business drivers.
Financial performance
Amounts below are in millions, except per-share data and operating metrics.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Service revenue | $942.3 | $812.3 | $2,717.7 | $2,305.9 |
| Equipment revenue | $78.5 | $83.3 | $286.2 | $244.6 |
| Total revenue | $1,020.8 | $895.6 | $3,003.8 | $2,550.5 |
| Operating income | $207.9 | $158.2 | $511.6 | $405.5 |
| Net income | $77.3 | $73.6 | $179.9 | $143.7 |
| Diluted EPS | $0.22 | $0.21 | $0.50 | $0.40 |
| Operating cash flow | Not separately stated | Not separately stated | $679.4 | $779.4 |
- Q3 revenue increased 14%, operating income 31% and net income 5% year over year. Nine-month revenue increased 18%, operating income 26% and net income 25%.
- Operating margin was approximately 20.4% for Q3 2010 versus 17.7% a year earlier, and 17.0% for the nine-month period versus 15.9%. Nine-month net margin was approximately 6.0%, up from 5.6%; Q3 net margin was approximately 7.6%, down from 8.2%.
- Customer growth supported service revenue: total customers reached 7.86 million, up 24% year over year. Q3 net additions were 223,249; nine-month net additions were 1.22 million.
- Churn improved to 3.8% in Q3 from 5.8%, and to 3.6% for nine months from 5.5%. ARPU fell to $39.69 for Q3 from $41.08 and to $39.78 for nine months from $40.68. Management attributed the ARPU reduction primarily to tax- and fee-inclusive plans.
- Cost pressures included higher handset upgrade subsidies, network buildout and depreciation. Q3 cost of equipment rose 29%; nine-month cost rose 24%. CPU rose to $18.47 in Q3 from $17.27 and to $18.38 for nine months from $16.93.
Liquidity, cash flow and debt
- At September 30, cash and cash equivalents were $889.8 million and short-term investments were $1,012.6 million, totaling $1.90 billion. Current assets were $2.25 billion and current liabilities $689.0 million.
- Nine-month operating cash flow was $679.4 million, down from $779.4 million, primarily due to working-capital movements. Investing cash outflow was $1.27 billion, including $547.9 million of property and equipment purchases; financing cash inflow was $550.7 million. Cash declined $39.6 million to $889.8 million.
- Total debt, including capital leases and net of unamortized discount, was $4.33 billion; capital lease obligations were $202.1 million. Long-term debt on the balance sheet was $4.31 billion.
- In September, the company issued $1.0 billion of 7.875% senior notes due 2018 and tendered for $313.1 million principal of 9.25% notes, paying $327.5 million and recording a $15.6 million extinguishment loss. Separately, $1.0 billion of secured term loans was extended to November 2016 at LIBOR plus 3.50%; the remaining $536 million matures in 2013. The secured facility’s reported rate was 4.593%, including hedging effects.
- After quarter-end, the company redeemed a further $686.9 million principal of 9.25% notes for $718.7 million on November 1, with an expected $31.8 million extinguishment loss.
- The senior secured leverage ratio was 1.56 to 1.0 against a maximum covenant of 4.5 to 1.0. A 100-basis-point LIBOR increase would raise annual interest expense by approximately $5.4 million on the $536 million of unhedged variable-rate debt.
Outlook, risks and unusual items
- Management expected 2010 capital expenditures of $750 million to $850 million; $547.9 million had been incurred through September. It believed cash, investments and operating cash flows would fund planned expansion, while warning that market volatility could make future financing or refinancing difficult.
- Management expected customer additions to be strongest in the first and fourth quarters, with weaker seasonal trends in the second and third quarters. The filing did not provide specific revenue or earnings guidance.
- MetroPCS launched initial commercial 4G LTE service in Las Vegas and Dallas/Fort Worth in September 2010, with other market launches described as occurring after quarter-end. It also announced Metro USA in November 2010.
- A spectrum exchange generated a $19.2 million gain. The company reported no impairment on its approximately $2.5 billion of indefinite-lived spectrum assets at September 30, 2010, but valuation depends on assumptions including projected growth and discount rates.
- The controlling member of Royal Street exercised a contractual put. FCC consent had been granted but was not final; the transaction was expected to close on or after December 22, 2010. The company disclosed approximately $1.6 billion borrowed by Royal Street and a $2.4 billion maximum borrowing capacity under its loan agreement.
- A securities class action naming the company, officers and a director remained unresolved. The company said the outcome was not determinable and a loss was not considered probable or reasonably estimable; adverse costs or damages could be material. Handset purchase pricing commitments totaled approximately $62.3 million.
- Management identified competition, customer churn and growth, technology and LTE execution, spectrum access, regulation, supplier dependence, leverage and covenant restrictions, and capital-market conditions as risks. It reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Confirm that MetroPCS, rather than T-Mobile US, is the intended issuer and that comparisons use the correct filing.
- Review the drivers of lower ARPU and higher handset-upgrade costs, and whether customer growth and improved churn offset those pressures.
- Assess the sustainability of operating cash generation given its year-over-year decline and substantial network investment needs.
- Verify post-quarter completion and total cost of the senior-note redemption, the resulting extinguishment loss, and debt maturities and covenant headroom.
- Monitor the Royal Street put transaction, related funding exposure, and the securities litigation and spectrum-related developments.