Business context and reporting period
The supplied filing is MetroPCS Communications, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2010; it is not a T-Mobile US filing. MetroPCS provided prepaid wireless services across 13 U.S. metropolitan areas. It reported one aggregated operating segment beginning in 2010.
Key financial metrics
Amounts are U.S. dollars. Quarterly results compare the three months ended June 30; cash flow and year-to-date results cover six months.
| Metric | Q2 2010 | Q2 2009 | Change |
|---|---|---|---|
| Revenue | $1.013 billion | $859.6 million | +18% |
| Service revenue | $922.1 million | $766.9 million | +20% |
| Operating income | $198.4 million | $115.8 million | +71% |
| Operating margin | 19.6% | 13.5% | +6.1 percentage points |
| Net income | $79.9 million | $26.2 million | +205% |
| Diluted EPS | $0.22 | $0.07 | — |
- For the first half of 2010, revenue was $1.983 billion (+20% year over year), operating income was $303.6 million (+23%), and net income was $102.6 million (+46%).
- First-half operating cash flow was $337.5 million, down from $466.0 million. Investing cash outflow was $402.5 million; financing cash outflow was $87.8 million. Cash and cash equivalents decreased $152.8 million to $776.5 million.
- At June 30, cash, cash equivalents and short-term investments totaled approximately $1.076 billion. Total assets were $7.479 billion, total liabilities $5.063 billion, and stockholders’ equity $2.417 billion. Total debt, including capital leases and before unamortized discount, was approximately $3.648 billion; current maturities were $19.9 million.
- Quarterly customer count reached 7.63 million, up 22% year over year. Monthly churn improved to 3.3% from 5.8%; ARPU declined to $39.84 from $40.52. Management-reported non-GAAP CPU rose to $17.90 from $16.82.
Material changes versus comparable periods
- Revenue growth was driven primarily by customer additions: approximately 1.4 million net additions over the 12 months to June 30, 2010. Operating income and net income rose faster than revenue.
- Operating expenses increased 9% in Q2, including higher service costs, selling and administrative expenses, and depreciation as the network expanded. Equipment revenue fell 3% in Q2 but rose 29% for the first half.
- Q2 interest expense fell 7%, partly reflecting lower rates on the secured credit facility after hedges became effective. First-half interest expense increased 3%, including the effect of the additional $550 million of 9.25% notes issued in 2009 and lower capitalized interest.
- First-half operating cash flow declined despite higher earnings, principally because of working-capital changes. Capital expenditures were $315.3 million versus $455.1 million in the first half of 2009.
Outlook, commentary, risks and unusual items
- Management expected 2010 capital expenditures of $600 million to $800 million, mainly for network expansion, capacity, and LTE upgrades in selected markets. It said existing liquidity and anticipated operating cash flow should fund planned expansion.
- On July 16, 2010, after quarter-end, the company extended $1.0 billion of term loans to November 2016 at LIBOR plus 3.50%; the remaining $540 million was due in 2013 at LIBOR plus 2.25%. The extended portion’s rate increased.
- Royal Street’s controlling member exercised a contractual put in April 2010. The purchase, subject to FCC consent, was expected to close on or after December 22, 2010; the filing does not provide a clear purchase price in the supplied text. Royal Street had approximately $1.2 billion of net outstanding borrowings from MetroPCS at June 30.
- Key risks include intense competition, customer churn and seasonal customer trends, network investment and technology execution, access to financing, debt covenants, regulatory and FCC license requirements, and dependence on third parties. A securities class action was pending; the company said the outcome was not determinable and a loss was not considered probable or reasonably estimable.
- Interest-rate hedges covered $1.0 billion of variable-rate debt through February 2012. The company estimated a 100-basis-point LIBOR increase would add approximately $5.4 million in annual interest expense on the unhedged $540 million.
- Management reported effective disclosure controls as of June 30, 2010 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing entity: the supplied 10-Q is for MetroPCS Communications, Inc., not T-Mobile US, Inc.
- Review customer growth, churn, ARPU, and the cost of acquiring and serving customers; the filing identifies these as important operating measures, and some are non-GAAP.
- Assess the sustainability of operating cash flow given its year-over-year decline and the planned $600 million to $800 million of 2010 capital expenditures.
- Examine debt terms, covenant headroom, and the cost and maturity effects of the July 2010 loan extension.
- Track FCC consent and closing terms for the Royal Street put and spectrum exchanges, and the status and potential cost of the securities litigation.