Business context and reporting period
Registrant discrepancy: The supplied filing is MetroPCS Communications, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2011—not a T-Mobile US, Inc. filing. The summary below therefore covers MetroPCS and its consolidated subsidiaries. MetroPCS provided prepaid wireless services in selected U.S. metropolitan areas and was expanding its 4G LTE network.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $1,209.5 million | $1,012.5 million | $2,403.8 million | $1,983.0 million |
| Operating income | $210.3 million | $198.4 million | $355.6 million | $303.6 million |
| Operating margin | 17.4% | 19.6% | 14.8% | 15.3% |
| Net income | $84.3 million | $79.9 million | $140.7 million | $102.6 million |
| Diluted EPS | $0.23 | $0.22 | $0.38 | $0.29 |
| Adjusted EBITDA | $357.3 million | $322.3 million | $642.5 million | $546.0 million |
| Operating cash flow | Not separately stated | Not separately stated | $482.1 million | $337.5 million |
Amounts are in U.S. dollars. Operating margins are calculated from reported revenue and operating income. For the six months, cash used for property and equipment purchases was $451.6 million; operating cash flow less those purchases was approximately $30.5 million, before other investing items.
Liquidity, debt and operating metrics
- At June 30, cash and cash equivalents were $1.856 billion and short-term investments were $300.0 million, or approximately $2.156 billion combined.
- Total debt carrying value was $4.747 billion, including $271.4 million of capital lease obligations; current maturities were $32.4 million. Debt increased from $3.779 billion at year-end 2010, principally following new borrowing.
- For the six months, service revenue grew 22% and equipment revenue 16%. End-period customers rose 19% year over year to 9.08 million, while six-month net additions declined to 924,755 from 994,611.
- Q2 monthly churn increased to 3.9% from 3.3%. ARPU increased to $40.49 from $39.84; CPGA rose to $177.88 from $164.29, and CPU rose to $18.94 from $17.90.
Material changes versus the comparable period
- Q2 revenue increased 19% and operating income 6%, but operating margin fell to 17.4% from 19.6%. Net income rose 6%, partly despite a $9.5 million debt-extinguishment loss.
- Six-month revenue increased 21%, operating income 17%, and net income 37%. Interest expense declined 7% for the half year, partly reflecting replacement of higher-rate senior notes, but the company recorded the debt-extinguishment loss.
- Equipment cost grew faster than equipment revenue: up 46% in Q2 and 37% for the half year. Management attributed the increase to handset upgrades, customer additions and higher handset costs.
- Capital expenditures increased to $451.6 million for the first half from $315.3 million a year earlier. Depreciation and amortization also rose, reflecting network investment.
Outlook, commentary and risks
- Management expected 2011 capital expenditures of $900 million to $1.0 billion, principally for network area and capacity expansion and 4G LTE upgrades. It said available cash, investments and anticipated operating cash flows were adequate for near-term operations and planned geographic expansion.
- In March and May 2011, the company added $1.5 billion of Tranche B-3 term loans, with proceeds partly used to repay $535.8 million of Tranche B-1 loans. The new loans mature in 2018 and bear interest at LIBOR plus 3.75%; the secured facility’s reported weighted-average rate, including hedges, was 5.008% at June 30.
- Interest-rate exposure remains: management estimated that a 100-basis-point LIBOR increase would add about $10.3 million to annual interest expense on $1.0 billion of unhedged variable-rate debt. Interest-rate agreements had $18.2 million of net liabilities subject to cross-default provisions.
- Management cited competitive pressure, customer churn, economic conditions, handset and network costs, technology deployment, spectrum availability, supplier dependence, regulation, debt and investment risks. It attributed higher churn in part to economic pressures and higher first-quarter additions; seasonally, it generally expected net additions to be strongest in the first and fourth quarters.
- The company reported no pending litigation it believed would have a material adverse effect, while cautioning that litigation outcomes are unpredictable. It also identified risks to its substantial cash and investment balances, including credit, liquidity, market and interest-rate risk. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Confirm the issuer: this document is MetroPCS Communications, Inc., not T-Mobile US, Inc.
- Review customer additions and churn trends alongside ARPU, CPGA and CPU; revenue growth did not prevent Q2 margin compression.
- Assess handset economics and the extent to which rising equipment costs reflect promotions, upgrades or higher unit costs.
- Track capital spending against the $900 million–$1.0 billion full-year outlook and the expected operating cash available to fund it.
- Review debt terms, maturities, covenant provisions, variable-rate exposure and hedge coverage, including the effect of further borrowing.
- Consider the filing’s stated risks around cash investments, litigation, spectrum, competition and execution of 4G LTE expansion.