MetroPCS Communications, Inc. — Q1 2011 Form 10-Q
Identity note: The supplied filing is for MetroPCS Communications, Inc., not T-Mobile US, Inc. It covers the unaudited quarter ended March 31, 2011, with comparisons to Q1 2010 unless noted. Financial figures below are in U.S. dollars; amounts are in millions except per-share and customer figures.
Business context and results
MetroPCS provided prepaid wireless services in selected U.S. metropolitan areas and was expanding its 4G LTE network. It reported one operating segment. Management attributed revenue growth mainly to customer additions and described its no-long-term-contract plans as a differentiator.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Service revenue | $1,050.2 | $853.3 | +23% |
| Equipment revenue | $144.2 | $117.2 | +23% |
| Total revenue | $1,194.4 | $970.5 | +23% |
| Operating income | $145.3 | $105.2 | +38% |
| Net income | $56.4 | $22.7 | +149% |
| Diluted EPS | $0.15 | $0.06 | Up |
| Operating margin | 12.2% | 10.8% | +1.4 percentage points |
| Net margin | 4.7% | 2.3% | +2.4 percentage points |
| Adjusted EBITDA | $285.2 | $223.6 | +28% |
Cash flow, liquidity, and debt
- Operating cash flow was $138.3 million, down from $225.0 million. The filing attributes the decline mainly to working-capital movements, including a $124.8 million increase in inventory.
- Investing activities used $168.7 million, including $187.0 million of property and equipment purchases. Financing activities provided $555.4 million, principally from new borrowing.
- Cash and cash equivalents were $1,321.6 million at quarter-end; short-term investments were $337.4 million. Management reported approximately $1.7 billion in cash, equivalents, and short-term investments and considered near-term liquidity adequate.
- Total debt, including current maturities and net of discount, was approximately $4.283 billion, up from $3.779 billion at year-end 2010. The balance included $265.2 million of capital lease obligations. The March credit-facility amendment added $500 million of term loans and raised rates on existing term loans.
- Debt included variable-rate borrowings. The company reported a 5.022% weighted-average credit-facility rate at March 31, including hedges, and estimated a 100-basis-point LIBOR increase would add about $10.3 million to annual interest expense on unhedged variable-rate debt.
Operating trends and changes
- Quarter-end customers rose 21% year over year to 8.88 million; quarterly net additions were 725,945 versus 691,602.
- Monthly churn improved to 3.1% from 3.7%. ARPU increased to $40.42 from $39.83.
- Acquisition cost per gross addition (CPGA) rose to $157.28 from $146.18, attributed mainly to promotions. Cost per user (CPU) increased to $19.79 from $18.79, reflecting upgrade handset subsidies, plan-related regulatory fees, and LTE costs.
- Operating expenses rose 21%, slower than revenue growth, but equipment costs increased 30% and depreciation and amortization rose 19% as handset costs and network investment grew. Interest expense declined 16%, partly due to refinancing lower-rate senior notes.
Outlook, risks, and unusual items
- Capital spending: Management expected 2011 capital expenditures of $700 million to $900 million; Q1 spending was $187.0 million, principally for network expansion, capacity, and LTE upgrades. Management said existing liquidity and expected operating cash flows should fund planned expansion.
- Expansion and technology: LTE was being rolled out across markets, with Tampa launched in April 2011. The filing highlights risks around limited spectrum, LTE deployment costs and execution, network performance, equipment availability, and roaming access.
- Competition and customer retention: Risks include larger competitors and promotional activity, handset availability and subsidies, supplier dependence, customer-care performance, and churn. Customers can leave without a long-term contract.
- Debt and financing: The March credit-facility amendment changed pricing and covenants, including removing certain financial covenants except in specified circumstances. In May, the company announced a planned $600 million incremental term loan to refinance Tranche B-1 loans and for general purposes, including possible spectrum acquisitions; closing was subject to customary conditions.
- Legal and other matters: The company said no pending legal proceedings were expected to have a material adverse effect. A securities class action was dismissed on March 28, 2011, with judgment against the plaintiff. It also disclosed $70.2 million of handset-pricing commitments and an April 2011 related-party capital lease with approximately $51.5 million of future minimum payments over 15 years.
- Management reported effective disclosure controls as of March 31, 2011. The filing provided no specific revenue or earnings guidance; it cautioned that interim results may not predict full-year results.
Key facts for investors to verify
- Confirm the issuer: this filing is MetroPCS Communications, Inc., not T-Mobile US, Inc.
- Review customer growth and churn alongside rising CPGA and CPU to assess whether subscriber expansion is translating into durable profitability.
- Track operating cash flow against capital expenditures and inventory needs; Q1 operating cash flow fell despite higher net income.
- Assess the higher debt balance, variable-rate exposure, refinancing terms, covenants, and the announced incremental loan.
- Monitor LTE deployment, spectrum capacity, roaming arrangements, and whether planned $700–$900 million 2011 capital spending supports growth as expected.