Filing identity and reporting period
Important metadata discrepancy: The supplied filing is MetroPCS Communications, Inc.’s Form 10-K for the fiscal year ended December 31, 2010—not a T-Mobile US, Inc. filing. This summary therefore covers MetroPCS, including its consolidated subsidiaries. The filing reports full-year results; fourth-quarter data are noted where available.
Business context
MetroPCS provided prepaid, no-long-term-contract wireless service in selected U.S. metropolitan areas. At year-end it had 8.16 million subscribers, up about 23%, and spectrum licenses covering a population of approximately 142 million. Its own network and roaming arrangements offered service across an area covering more than 280 million people. The company launched commercial 4G LTE service in several markets during 2010 and expanded to additional Florida and Georgia markets in January 2011. In December 2010, it acquired the remaining 15% interest in Royal Street Communications, making the entity wholly owned.
Financial performance
| Metric | FY 2010 | FY 2009 | Change or context |
|---|---|---|---|
| Total revenue | $4.069 billion | $3.481 billion | Up 17% |
| Service revenue | $3.690 billion | $3.130 billion | Up 18%, primarily from subscriber growth |
| Equipment revenue | $379.7 million | $350.1 million | Up 8% |
| Operating income | $718.9 million | $535.3 million | Up 34%; operating margin approximately 17.7%, versus 15.4% |
| Net income | $193.4 million | $176.8 million | Up 9%; net margin approximately 4.8%, versus 5.1% |
| Diluted earnings per share | $0.54 | $0.49 | Up $0.05 |
| Net cash from operating activities | $994.5 million | $899.3 million | Up about $95.2 million |
| Capital expenditures | $790.4 million | $831.7 million | Primarily network expansion and 4G LTE |
| Cash from operations less capital expenditures | Approximately $204.1 million | Approximately $67.7 million | Simple calculation; not a company-reported non-GAAP measure |
| Cash, cash equivalents and short-term investments | $1.171 billion | $1.154 billion | At December 31 |
| Total debt, including capital leases | $3.779 billion | $3.645 billion | At December 31; includes $254.3 million of capital lease obligations |
Operating expenses rose 14% to $3.350 billion. Equipment costs increased 24%, reflecting higher handset upgrade costs; depreciation and amortization increased 19% as network assets entered service. The 2010 operating result also benefited from a $38.8 million gain on asset disposals, mainly spectrum exchanges, compared with a $4.7 million gain in 2009. Interest expense declined 3% to $263.1 million; the weighted-average interest rate fell to 7.29% from 8.23%.
Subscriber and unit economics
- Net additions were 1.516 million in 2010, versus 1.273 million in 2009; year-end subscribers reached 8.155 million.
- Average monthly churn improved to 3.6% from 5.5%; management attributed the decrease primarily to acceptance of tax-inclusive plans and reduced “false churn.”
- ARPU declined to $39.79 from $40.68, primarily following introduction of tax- and regulatory-fee-inclusive plans.
- CPGA rose to $157.26 from $145.79, reflecting promotions and lower gross additions; CPU rose to $18.49 from $17.23, partly due to handset upgrade subsidies, included regulatory fees, and LTE costs.
Material changes, liquidity and debt
MetroPCS refinanced its high-coupon 9.25% notes during 2010: it issued $1.0 billion of 7.875% notes due 2018 and $1.0 billion of 6.625% notes due 2020, then redeemed the remaining 9.25% notes. The redemptions produced a $143.6 million loss on extinguishment of debt. It also amended its secured credit facility, extending $1.0 billion of term loans to November 2016 at LIBOR plus 3.50%; remaining term loans mature in 2013 at LIBOR plus 2.25%. The revolving facility was reduced to $67.5 million. The company reported a senior secured leverage ratio of 1.54 to 1.0 and stated that it believed cash and expected operating cash flows were adequate for near-term needs.
Liquidity should be considered alongside significant commitments: contractual cash obligations totaled $8.051 billion, including $3.532 billion of debt principal, $1.548 billion of scheduled interest, $2.337 billion of operating leases, and $491.4 million of capital lease payments. A substantial portion of secured-facility debt carried variable rates, partly hedged through interest-rate agreements. The filing states that a 100-basis-point increase in LIBOR would raise annual interest expense by approximately $5.3 million on the then-unhedged $532 million balance.
Outlook, risks and unusual items
- Capital spending: Management projected 2011 capital expenditures of $650 million to $800 million, principally in the context of network expansion and upgrades.
- Growth and technology: The strategy emphasized subscriber growth, affordable unlimited plans, wider service coverage, and continued investment in LTE. The filing cautioned that execution, customer adoption, capacity, devices, and roaming availability could differ from expectations.
- Competition and unit economics: National carriers, regional providers, and MVNOs were expanding prepaid and unlimited offers. Price pressure, handset availability and subsidies, customer churn, and rising roaming or network costs could weigh on revenue and margins.
- Funding and leverage: The business requires substantial ongoing investment and debt service. Financing availability, debt covenants, refinancing conditions, variable interest rates, and the ability to sustain operating cash flow are material risks.
- Regulatory and spectrum exposure: Risks include license renewal and build-out requirements, spectrum availability and auction challenges, possible changes to roaming and net-neutrality rules, and taxes or regulatory fees. Tax-inclusive plans expose margins to increases in those charges.
- Concentration and execution: The company relied on a limited number of key vendors for network infrastructure, LTE equipment, billing, customer support, and other services. It also relied heavily on indirect distribution; approximately 90% of gross additions came through indirect channels.
- Legal matter: A securities class action filed in 2009 alleged misleading statements about the company’s business and prospects. The outcome was not determinable; the filing did not consider a loss probable or reasonably estimable.
- Other notable items: The company recognized no impairment of its indefinite-lived spectrum assets in its September 2010 annual test. It reported no off-balance-sheet arrangements and no regular cash dividend was planned for the foreseeable future.
Most important facts for investors to verify
- Confirm the issuer: this source is MetroPCS, not T-Mobile US, Inc.; verify that it is the intended filing before relying on the figures.
- Review the audited statements and debt notes for the refinancing, maturities, lease commitments, covenant terms, and total debt definition.
- Track whether subscriber growth and improved churn persist while ARPU declines and CPGA and CPU increase.
- Assess whether the projected 2011 capital spending and LTE rollout deliver expected network capacity, customer demand, and returns.
- Check subsequent developments in the securities class action, spectrum-license matters, roaming agreements, and relevant FCC proceedings.