Business context and reporting period
Entity clarification: This is MetroPCS Communications, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed March 1, 2013—not a 10-K for the combined T-Mobile US, Inc. MetroPCS was a U.S. prepaid wireless carrier with approximately 8.9 million customers at year-end, operating in selected metropolitan areas and offering service through its own network and roaming agreements.
The company used CDMA/EVDO and LTE networks; LTE covered approximately 98% of the population served by its CDMA/EVDO network. MetroPCS had announced a proposed combination with T-Mobile in October 2012, expected to close in the first half of 2013, subject to approvals and other conditions.
Financial and operating performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Service revenue | $4.540 billion | $4.428 billion | +3% |
| Equipment revenue | $561.5 million | $419.2 million | +34% |
| Total revenue | $5.101 billion | $4.847 billion | +5% |
| Operating income | $824.0 million | $747.5 million | +10% |
| Net income | $394.2 million | $301.3 million | +31% |
| Operating cash flow | $1.181 billion | $1.062 billion | +11% |
| Capital expenditures | $845.9 million | $889.8 million | −5% |
| Adjusted EBITDA (non-GAAP) | $1.512 billion | $1.332 billion | +14% |
Operating margin was approximately 16.2%; net margin was approximately 7.7%. Adjusted EBITDA margin was approximately 29.6%. Operating cash flow less reported capital expenditures was approximately $335.6 million, a derived measure that does not include other investing or financing flows.
At December 31, 2012, cash, cash equivalents and short-term investments totaled $2.613 billion; current assets were $3.187 billion and current liabilities were $847.8 million. Reported debt, including current maturities and capital leases, was $4.761 billion net of discount; the company separately reported $4.447 billion of long-term debt principal excluding capital leases and $321.7 million of capital lease obligations. Stockholders’ equity was $3.359 billion. The company paid no federal income taxes in 2012 and paid $6.5 million in state income taxes.
Key customer metrics: year-end customers fell 5% to 8.887 million, with net losses of 459,936 for the year. Average monthly churn improved to 3.4% from 3.8%; ARPU was nearly flat at $40.63 versus $40.57. Customer acquisition cost (CPGA) rose to $216.15 from $173.11, while cost per user (CPU) increased to $20.38 from $19.56. These are company-defined non-GAAP measures.
Material changes versus the prior comparable period
- Revenue growth was modest and service revenue rose 3%, while equipment revenue increased 34%; management attributed the latter partly to higher handset prices and lower retailer commissions, despite fewer gross additions.
- Operating income and Adjusted EBITDA increased, but depreciation and amortization rose 19% to $641.4 million as network assets entered service. SG&A increased 8%, including approximately $17.6 million of T-Mobile transaction-related legal and professional fees.
- Net income growth included a one-time $52.5 million cash settlement gain related to securities litigation/arbitration. Interest expense increased 6% to $275.5 million.
- Customer performance weakened sharply: MetroPCS added 1.192 million customers in 2011 but lost 460,000 in 2012. Management cited competitive pressure, economic conditions, customer expectations for high-speed data, and a focus on EBITDA and cash flow over customer growth.
- Year-end cash and short-term investments increased to $2.613 billion from $2.243 billion. Operating cash flow increased, while capex declined modestly; investing cash outflow was $723.4 million, affected by investment purchases and maturities as well as capital spending.
Fourth-quarter signal: Revenue was $1.284 billion versus $1.238 billion in Q4 2011, but operating income fell to $121.5 million from $215.1 million and net income to $31.7 million from $91.3 million. Q4 net customer losses were 93,237; Adjusted EBITDA was $307.3 million versus $362.0 million.
Outlook, transaction, risks and unusual items
- Management expected 2013 capital expenditures of $800 million to $900 million and stated that available liquidity and anticipated operating cash flows should fund near-term operations and planned investment. This is management’s outlook, not a guarantee.
- The proposed transaction contemplated a $1.5 billion aggregate cash payment to MetroPCS stockholders after a 1-for-2 reverse split; Deutsche Telekom would receive 74% of the combined company’s fully diluted shares, leaving pre-transaction MetroPCS holders with 26%. The filing anticipated closing in the first half of 2013, subject to stockholder, FCC, antitrust, foreign-investment and other approvals. A regulatory-only failure to close would trigger a $250 million payment by Deutsche Telekom; specified other termination circumstances could require MetroPCS to pay $150 million.
- The transaction was expected to involve up to $18.5 billion of senior unsecured notes to Deutsche Telekom and potentially third-party investors. The filing cautioned that the combined company would have substantially greater indebtedness, restrictive covenants and possible interest-rate resets, and that integration, network migration, synergies and related costs were uncertain.
- Material business risks include aggressive prepaid competition and pricing, customer losses and churn, limited spectrum and network capacity, handset availability, roaming costs and continuity, reliance on key vendors and indirect dealers, cybersecurity and service interruptions, and extensive regulatory requirements.
- MetroPCS’s 700 MHz Lower A Block license faced construction and interference challenges. The filing described a construction benchmark and pending waiver request; failure to meet applicable requirements could risk fines, reduced service area or loss of license rights.
- Stockholder lawsuits challenged the transaction’s value and process. The filing reported that, by February 2013, Delaware plaintiffs had withdrawn their preliminary-injunction request after revised proxy disclosures, while related Texas proceedings remained subject to further court action. Other litigation and contingencies were described as inherently uncertain.
- No impairment was recorded for property and equipment or indefinite-lived spectrum assets. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Most important facts for investors to verify
- Confirm the identity and period: MetroPCS Communications, Inc., FY 2012; do not treat this as the combined T-Mobile US entity’s results.
- Reconcile the 2012 net-income increase to the $52.5 million settlement gain and assess the weaker fourth-quarter operating and earnings results.
- Track customer losses, churn, ARPU, CPGA and CPU, including whether subscriber trends improved after the year-end decline.
- Verify cash availability, debt principal and lease obligations, maturity and covenant terms, and the actual cash generated after capital spending.
- Check the transaction’s closing status and final terms, including stockholder consideration, ownership dilution, financing, regulatory conditions and integration costs.
- Monitor 2013 capital expenditures, spectrum-license construction/waiver developments, roaming arrangements, and outcomes of transaction-related litigation.