T-Mobile US, Inc. quarterly report, Q2 FY2012

MetroPCS Communications, Inc. — Q2 2012 Form 10-Q

Entity identification: The supplied filing is for MetroPCS Communications, Inc., not T-Mobile US, Inc. It covers the quarter ended June 30, 2012, and was signed July 26, 2012. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.

Business context and reporting period

MetroPCS was a U.S. wireless carrier focused on selected metropolitan markets, offering prepaid, no-long-term-contract service and operating CDMA and 4G LTE networks. Its spectrum licenses covered a population of 142 million; its own coverage and roaming arrangements extended service to areas covering more than 280 million people. The filing reports one aggregated operating segment.

Key financial metrics

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Revenue	$1,281.2 million	$1,209.5 million	$2,557.8 million	$2,403.8 million
Operating income	$311.9 million	$210.3 million	$410.2 million	$355.6 million
Net income	$148.8 million	$84.3 million	$169.8 million	$140.7 million
Diluted EPS	$0.41	$0.23	$0.46	$0.38
Operating cash flow	$319.7 million	$343.8 million	$456.6 million	$482.1 million

Q2 operating margin was approximately 24.3%, compared with 17.4%; net margin was approximately 11.6%, compared with 7.0%. Six-month operating and net margins were approximately 16.0% and 6.6%, respectively, versus 14.8% and 5.9%.
Q2 service revenue rose 4% to $1,158.9 million; equipment revenue rose 27% to $122.2 million. For the first half, service revenue increased 7% to $2,317.7 million, while equipment revenue was essentially flat at $240.0 million.
Q2 Adjusted EBITDA, a non-GAAP measure, was $476.7 million versus $357.3 million; first-half Adjusted EBITDA was $739.1 million versus $642.5 million.
At June 30, cash and cash equivalents were $1,901.2 million and short-term investments were $447.4 million. Total debt on the balance sheet, including capital leases, was $4,761.7 million; capital lease obligations were $310.6 million. Current assets were $2,895.8 million and current liabilities $741.9 million.
First-half capital expenditures were $326.2 million. Operating cash flow less purchases of property and equipment was approximately $130.4 million, compared with approximately $30.5 million in the prior-year period.

Material changes versus prior comparable periods

Despite higher revenue and profit, customer additions weakened sharply: Q2 recorded net losses of 186,062 customers versus additions of 198,810 a year earlier; first-half net losses were 54,408 versus additions of 924,755. End-of-period customers were 9.29 million, up 2% year over year.
Management attributed weaker additions to its emphasis on Adjusted EBITDA and cash flow, competition, economic pressure, and customer expectations for high-speed 4G data. Monthly churn improved to 3.4% in Q2 from 3.9%; first-half churn improved to 3.3% from 3.6%.
Q2 cost of equipment fell 19%, partly reflecting fewer gross additions and upgrades. Operating expenses overall declined 3%, while operating income rose 48%. First-half operating income rose 15% as revenue growth exceeded the 5% increase in operating expenses.
Interest expense increased 4% in Q2 and 13% in the first half. First-half expense reflected higher debt outstanding from 2011 term-loan issuances and lower capitalized interest, partly offset by repayment of earlier loans. Prior-year comparisons included a $9.5 million debt-extinguishment loss that did not recur.
First-half operating cash flow declined $25.5 million year over year, which management primarily attributed to a $118.3 million increase in cash used by working-capital changes.

Outlook, risks, contingencies, and unusual items

Management expected 2012 capital expenditures of $900 million to $1.0 billion, principally for network capacity, geographic expansion, and the 4G LTE upgrade. It stated that available cash, short-term investments, and expected operating cash flows should fund near-term operations and planned investments.
Management identified seasonal weakness in customer additions as typical in the second and third quarters, with stronger additions generally expected in the first and fourth quarters. No specific revenue or earnings guidance was provided in the supplied filing text.
Interest-rate exposure remains: approximately $1.1 billion of variable-rate debt was not covered by interest-rate protection agreements. A 100-basis-point LIBOR increase was estimated to add $10.6 million to annual interest expense. Hedging agreements covered $1.4 billion in notional amounts and had a combined fair-value liability of $19.9 million.
Key risks include intense competition, economic stress affecting the company’s customer base, handset and network-equipment availability, network capacity and service quality, customer churn, spectrum access and cost, privacy and cybersecurity, and possible changes in regulation, taxes, and fees. The company reported no material changes to its previously disclosed risk factors except for additions described in this filing.
The company disclosed ordinary-course litigation, including intellectual-property matters, but said no pending matter was believed likely to have a material adverse effect. It cautioned that litigation outcomes remain unpredictable.
A subsequent broadband backhaul and interconnection agreement carried a minimum commitment of approximately $164.2 million and ran through 2017. A handset pricing agreement with approximately $3.6 million of remaining commitment expired August 31, 2012.
Management reported effective disclosure controls as of June 30, 2012, with no material changes in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.

Important facts for investors to verify

Confirm the intended issuer: this document is MetroPCS’s 10-Q, not a T-Mobile US filing.
Review the sharp reversal in customer additions, the causes of customer losses, and whether the new $25 nationwide voice-and-text plan and 4G LTE offering supported subsequent customer trends.
Assess whether the stated $900 million to $1.0 billion capital-expenditure outlook and network investment can be funded while sustaining cash generation and debt service.
Reconcile debt figures, including the distinction between approximately $4.5 billion of notes and credit-facility debt and total balance-sheet debt that also includes capital leases.
Evaluate the sustainability of profit growth alongside higher depreciation, interest expense, and first-half cash-flow pressure from working capital.
Consider the $164.2 million backhaul commitment, floating-rate debt exposure, hedging arrangements, and the company’s stated litigation and regulatory risks.