Business context and reporting period
The supplied filing is MetroPCS Communications, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2011—not a T-Mobile US filing. MetroPCS operated wireless services in selected U.S. metropolitan areas, including 4G LTE markets. The filing reports Q3 and year-to-date results through September 30, 2011, compared with 2010.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,205.4 million | $1,020.8 million | $3,609.2 million | $3,003.8 million |
| Operating income | $176.8 million | $207.9 million | $532.4 million | $511.6 million |
| Net income | $69.3 million | $77.3 million | $210.0 million | $179.9 million |
| Diluted EPS | $0.19 | $0.22 | $0.57 | $0.50 |
| Adjusted EBITDA | $327.3 million | $315.2 million | $969.8 million | $861.1 million |
Q3 operating margin was approximately 14.7% versus 20.4%; net margin was approximately 5.8% versus 7.6%. For the nine months, operating margin was approximately 14.8% versus 17.0%, and net margin approximately 5.8% versus 6.0%. Margins are calculated from reported figures.
- Cash flow: Nine-month operating cash flow was $753.7 million, up from $679.4 million. Investing used $700.0 million and financing provided $990.6 million. Capital expenditures were $699.6 million. Cash and cash equivalents ended at $1,840.8 million.
- Liquidity: Cash, cash equivalents, and short-term investments totaled approximately $2.14 billion. Current assets were $2,549.8 million and current liabilities $779.3 million.
- Debt: Total debt, including capital leases and current maturities, was approximately $4,743.9 million at September 30, 2011, up from $3,779.3 million at year-end 2010. The company reported approximately $4.5 billion under its credit facility and senior notes, plus $274.5 million of capital lease obligations. Reported long-term debt fair value, including current maturities, was approximately $4.2 billion.
- Operating indicators: Customers totaled 9.15 million, up 16% year over year. Q3 net additions fell to 69,384 from 223,249; monthly churn rose to 4.5% from 3.8%. ARPU rose to $40.80 from $39.69, while CPGA increased to $193.95 from $160.54 and CPU to $19.52 from $18.47.
Material changes versus prior comparable periods
Revenue grew 18% in Q3 and 20% year to date, primarily from customer growth and higher ARPU. However, Q3 operating income fell 15% and net income fell 10%, as operating expenses rose 27%, including higher equipment costs, network costs, and depreciation; the prior-year quarter also included an $18.3 million asset-disposal gain. Year-to-date operating income increased 4% and net income 17%, aided by lower debt-extinguishment losses and interest expense. Equipment costs grew faster than revenue in both comparisons.
During 2011, MetroPCS borrowed additional Tranche B-3 term loans, including $1.0 billion in May, and used part of the proceeds to repay $535.8 million of Tranche B-1 loans. The repayment generated a $9.5 million extinguishment loss year to date. The credit agreement also relaxed certain restrictions and removed specified financial covenants, subject to possible covenant requirements in certain circumstances.
Outlook, management commentary, risks and unusual items
- Management expected 2011 capital expenditures of $900 million to $1.0 billion, mainly for network expansion, capacity, and 4G LTE upgrades. It stated that liquidity and expected operating cash flows should fund near-term operations and planned capital investment.
- Management cited competitive pressure, customer growth and churn, promotional activity, network capacity and technology deployment, spectrum availability and cost, supplier performance, regulation, and economic conditions as risks. It attributed higher churn partly to economic pressures and increased data demand on the CDMA network. The company generally expected net additions to be strongest in the first and fourth quarters due to seasonality.
- Approximately $2.5 billion of credit-facility debt carried floating rates. Management estimated a 100-basis-point LIBOR increase would add about $10.3 million to annual interest expense on the $1.0 billion of variable-rate debt not covered by interest-rate protection agreements.
- The company reported no litigation it believed would individually or collectively materially harm its financial condition, results, or liquidity, while noting that litigation outcomes remain uncertain. It reported no material change in risk factors beyond previously disclosed updates, adding discussion of system failures, cybersecurity, and customer-data risks.
- The annual impairment test of indefinite-lived spectrum-related intangible assets found no impairment. A 2010 spectrum exchange had contributed to the prior-year disposal gain; 2011 disposal losses related mainly to retired network technology. The filing reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer: this filing is for MetroPCS Communications, Inc., not T-Mobile US, Inc.
- Assess whether the weaker Q3 margins, higher churn, and rising acquisition, handset, and network costs persist.
- Review the planned $900 million–$1.0 billion 2011 capital-spending range against actual spending and resulting network or customer growth.
- Evaluate debt levels, variable-rate exposure, refinancing and covenant terms, and the use of new borrowing proceeds.
- Consider the assumptions behind management’s liquidity outlook and spectrum-asset impairment estimates.