Add
CYCL to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CYCL > SEC Filings for CYCL > Form 10-Q on 7-Apr-2009 | All Recent SEC Filings |
7-Apr-2009
Quarterly Report
read in conjunction with the unaudited interim Condensed Consolidated Financial
Statements and accompanying notes presented in Part 1, Item 1 of this Quarterly
Report on Form 10-Q. Those statements in the following discussion that are not
historical in nature should be considered to be forward-looking statements that
are inherently uncertain. Please see "Cautionary Statement for Purposes of the
"Safe Harbor" Provisions of the Private Securities Litigation Reform Act of
1995" and the "Risk Factors" section of our 2008 Annual Report on Form 10-K.
Management's Summary
Our vision is to be the premier regional telecommunications service provider,
by tailoring the ultimate customer experience, in the markets we serve. We
deliver our tailored approach by serving local markets with high quality
networks, company-owned stores and well-trained sales and service associates.
Our local scale and knowledge have led to a strong track record of success.
In the United States, we provide wireless voice and data services in two
geographic clusters, covering approximately 9.0 million Net Pops. Our Midwest
cluster includes parts of Indiana, Michigan and Ohio, and our Southeast cluster
includes parts of Louisiana, Mississippi and Texas. Our clusters are comprised
of small cities and rural areas.
In Puerto Rico, we offer wireless and broadband communications services. We
also offer wireless services in the U.S. Virgin Islands. Puerto Rico is a U.S.
dollar-denominated and FCC regulated commonwealth of the United States. San
Juan, the capital of Puerto Rico, is currently one of the 25 largest and 5 most
dense U.S. wireless markets based on population.
We tailor the ultimate customer experience by focusing on attractive local
markets with growth opportunities and customizing our sales, marketing and
customer support functions to customer needs in these markets. For both the
three and nine months ended February 28, 2009, approximately 86% of our postpaid
wireless sales in the United States and Puerto Rico were made through our own
employees, which allows us to have a high degree of control over the customer
experience. We invest significantly in training for our customer-facing
employees and believe this extensive training and controlled distribution allows
us to deliver an experience that we believe is unique and valued by the
customers in our various markets. We target high quality postpaid wireless
subscribers which generate high ARPU (revenue per average wireless subscriber,
including roaming revenue) in our U.S. and Puerto Rico operations.
Our business strategy also requires that our networks are of the highest
quality in all our locations. Capital expenditures for our U.S. wireless
operations were used to expand our coverage areas and upgrade our cell sites and
call switching equipment in existing wireless markets. In Puerto Rico, these
investments were used to add capacity and services, to continue the development
and expansion of our Puerto Rico wireless systems and to continue the expansion
of our Puerto Rico broadband network infrastructure.
We believe that the success of our business is a function of our performance
relative to a number of key drivers. The drivers can be summarized in our
ability to attract and retain customers by profitably providing superior service
at competitive rates. We continually monitor our performance against these key
drivers by evaluating several metrics. In addition to adjusted operating income
(adjusted operating income represents the profitability measure of our segments
- see Note 9 to the unaudited Condensed Consolidated Financial Statements for
reconciliation to the appropriate measure under accounting principles generally
accepted in the United States of America, or "GAAP" measure), the following key
metrics, among other factors, are monitored by management in assessing the
performance of our business:
• Gross postpaid and prepaid wireless additions
• Net additions - wireless subscribers
• ARPU
• Roaming revenue
• Penetration - wireless
• Postpaid churn - wireless
• Average monthly minutes of use per wireless voice subscriber
• Data revenue per average wireless subscriber
• Fiber route miles - Puerto Rico broadband
• Switched access lines - Puerto Rico broadband
• Dedicated access line equivalents - Puerto Rico broadband
• On-net buildings - Puerto Rico broadband
• Capital expenditures
Gross postpaid and prepaid wireless additions represent the number of new
subscribers we are able to add during the period. Growing our subscriber base by
adding new subscribers is a fundamental element of our long-term growth
strategy. We must maintain a competitive offering of products and services to
sustain our subscriber growth. We focus on postpaid customers in our U.S. and
Puerto Rico operations.
Net additions- wireless subscribers represents the number of subscribers we
were able to add to our service during the period after deducting the number of
disconnected or terminated subscribers. By monitoring our growth against our
forecast, we believe we are better able to anticipate our future operating
performance.
ARPU represents the average monthly subscriber revenue generated by a typical
subscriber (determined as subscriber revenues divided by average number of
retail subscribers). We monitor trends in ARPU to ensure that our rate plans and
promotional offerings are attractive to customers and profitable. The majority
of our revenues are derived from subscriber revenues. Subscriber revenues
include, among other things: monthly access charges; charges for airtime used in
excess of plan minutes; Universal Service Fund ("USF") support payment revenues;
long distance revenues derived from calls placed by our customers; roaming
revenue; handset insurance; messaging and other data; and other charges such as
activation, voice mail, call waiting, call forwarding and regulatory charges.
Roaming revenue represents the amount of revenue we receive from other
wireless carriers for providing service to their subscribers who "roam" into our
markets and use our systems to carry their calls. The per minute rate paid to us
is established by an agreement between the roamer's wireless provider and us.
The amount of roaming revenue we generate is often dependent upon usage patterns
of our roaming partners' subscribers and the rate plan mix and technology mix of
our roaming partners. We closely monitor trends in roaming revenues because
usage patterns by our roaming partners' subscribers can be difficult to predict.
Penetration - wireless represents a percentage, which is calculated by
dividing the number of our subscribers by the total population of potential
subscribers available in the markets that we serve.
Postpaid churn represents the number of postpaid subscribers that disconnect
or are terminated from our service. Churn is calculated by dividing the
aggregate number of wireless retail subscribers who cancel service during each
month in a period by the total number of wireless retail subscribers as of the
beginning of the month. Churn is stated as the average monthly churn rate for
the applicable period. We monitor and seek to control churn so that we can grow
our business without incurring significant sales and marketing costs needed to
replace disconnected subscribers. We must continue to ensure that we offer
excellent network quality and customer service so that our churn rates remain
low.
Average monthly minutes of use per wireless voice customer represents the
average number of minutes ("MOUs") used by our voice customers during a period.
We monitor growth in MOUs to ensure that the access and overage charges we are
collecting are consistent with that growth. In addition, growth in subscriber
usage may indicate a need to invest in additional network capacity.
Data revenue per average wireless subscriber represents the portion of ARPU
generated by our retail subscribers using data services such as text, picture,
and multi-media messaging, wireless Internet browsing, wireless e-mail, Instant
Internet, data cards and downloading content and applications.
Fiber route miles are the number of miles of fiber cable that we have laid.
Fiber is installed to connect our equipment to our customer premises equipment.
As a facilities-based carrier, the number of fiber route miles is an indicator
of the strength of our network, our coverage and our potential market
opportunity.
Switched access lines represent the number of lines connected to our
switching center and serving customers for incoming and outgoing calls. Growing
our switched access lines is a fundamental element of our strategy. We monitor
the trends in our switched access line growth against our forecast to be able to
anticipate future operating performance. In addition, this measurement allows us
to compute our current market penetration in the markets we serve.
Dedicated access line equivalents represents the amount of Voice Grade
Equivalent ("VGE") lines used to connect two end points. We monitor the trends
in our dedicated service using VGE against our forecast to anticipate future
operating performance, network capacity requirements and overall growth of our
business.
On-net buildings are locations where we have established a point of presence
to serve one or more customers. Tracking the number of on-net buildings allows
us to size our addressable market and determine the appropriate level of capital
expenditures. As a facilities-based broadband operator, it is a critical
performance measurement of our growth and a clear indication of our increased
footprint.
Capital expenditures represent the amount spent on upgrades, additions and
improvements to our telecommunications network and back office infrastructure.
We monitor our capital expenditures as part of our overall financing plan and to
ensure that we receive an appropriate rate of return on our capital investments.
This statistic is also used to ensure that capital investments are in line with
network usage trends and consistent with our objective of offering a high
quality network to our customers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our unaudited Condensed Consolidated Financial Statements
and related disclosures in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities as of the
date of the financial statements and revenues and expenses during the periods
reported. We base our estimates on historical experience, where applicable, and
other assumptions that we believe are reasonable under the circumstances. Actual
results may differ from our estimates under different assumptions or conditions.
There are certain critical estimates that we believe require significant
judgment in the preparation of our unaudited Condensed Consolidated Financial
Statements. We consider an accounting estimate to be critical if:
• it requires us to make assumptions because information was not available at
the time or it included matters that were highly uncertain at the time we were
making the estimate, and
• changes in the estimate or different estimates that we could have selected may have had a material effect on our consolidated financial condition or consolidated results of operations.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses, which
result from our customers not making required payments. We base our allowance on
the likelihood of recoverability of our subscriber accounts receivable based on
past experience and by reviewing current collection trends. A worsening of
economic or industry trends beyond our estimates could result in an increase in
our allowance for doubtful accounts by recording additional expense.
Property, Plant and Equipment - Depreciation
The telecommunications industry is capital intensive. Depreciation of
property, plant and equipment constitutes a substantial operating cost for us.
The cost of our property, plant and equipment, principally telecommunications
equipment, is charged to depreciation expense over estimated useful lives. We
depreciate our telecommunications equipment using the straight-line method over
its estimated useful lives. We periodically review changes in our technology and
industry conditions, asset retirement activity and salvage values, as conditions
warrant, to determine adjustments to the estimated remaining useful lives and
depreciation rates. Actual
economic lives may differ from our estimated useful lives as a result of changes
in technology, market conditions and other factors. Such changes could result in
a change in our depreciable lives and therefore our depreciation expense in
future periods.
Valuation of Long-Lived Assets
Long-lived assets such as property, plant and equipment are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. In our estimation of fair value, we
consider current market values of properties similar to our own, competition,
prevailing economic conditions, government policy, including taxation, and the
historical and current growth patterns of both our business and the industry. We
also consider the recoverability of the cost of our long-lived assets based on a
comparison of estimated undiscounted operating cash flows for the related
businesses with the carrying value of the long-lived assets. Considerable
management judgment is required to estimate the fair value of an impairment, if
any, of our assets. These estimates are very subjective in nature; we believe
that our estimates are consistent with assumptions that marketplace participants
would use in their estimates of fair value. Estimates related to recoverability
of assets are critical accounting policies as management must make assumptions
about future revenue and related expenses over the life of an asset, and the
effect of recognizing impairment could be material to our consolidated financial
position as well as our consolidated results of operations. Actual revenue and
costs could vary significantly from such estimates.
Goodwill and Wireless Licenses - Valuation of Goodwill and Indefinite-Lived
Intangible Assets
A significant portion of our intangible assets are licenses that provide the
Company's wireless operations with the exclusive right to utilize radio
frequency spectrum designated on the license to provide wireless communication
services. The wireless licenses are treated as indefinite-lived intangible
assets under the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets ("SFAS 142") and are not amortized, but rather are tested for impairment.
We test our wireless licenses for impairment annually, and more frequently if
indications of impairment exist. We use a direct value approach in performing
our annual impairment test on our wireless licenses, in accordance with a
September 29, 2004 Staff Announcement from the staff of the Securities and
Exchange Commission ("SEC"), "Use of the Residual Method to Value Acquired
Assets Other Than Goodwill." The direct value approach determines fair value
using estimates of future cash flows associated specifically with the licenses.
If the fair value of the wireless licenses is less than the carrying amount of
the licenses, an impairment is recognized.
In addition, we test goodwill for impairment pursuant to SFAS 142. We
currently test goodwill for impairment using a residual value approach on an
annual basis or on an interim basis if an event occurs or circumstances change
that would reduce the fair value of a reporting unit below its carrying value.
Specifically, goodwill impairment is determined using a two-step process. The
first step of the goodwill impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit (calculated using a
discounted cash flow method) with its carrying amount, including goodwill. We
determined that our reporting units for SFAS 142 are our operating segments
determined under SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"). If the fair value of a reporting unit exceeds
its carrying amount, goodwill of the reporting unit is considered not impaired
and the second step of the impairment test is unnecessary. If the carrying
amount of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test is performed to measure the amount of impairment loss,
if any. The second step of the goodwill impairment test compares implied fair
value (i.e., fair value of reporting unit less the fair value of the unit's
assets and liabilities, including identifiable intangible assets) of the
reporting unit's goodwill with the carrying amount of that goodwill. If the
carrying value of goodwill exceeds its implied fair value, the excess is
required to be recorded as an impairment.
In analyzing goodwill and wireless licenses for potential impairment, we use
projections of future cash flows from each reporting unit to determine whether
its estimated value exceeds its carrying value. These projections of cash flows
are based on our views of growth rates, time horizons of cash flow forecasts,
assumed terminal value, estimates of our future cost structures and anticipated
future economic conditions and the appropriate discount rates relative to risk
and estimates of residual values. These projections are very subjective in
nature. We believe that our estimates are consistent with assumptions that
marketplace participants would use in their estimates of fair value. The use of
different estimates or assumptions within our discounted cash flow model (e.g.,
growth rates, future economic conditions or discount rates and estimates of
terminal values) when determining the fair value of the reporting unit and
wireless licenses are subjective and could result in different values and may
affect any related goodwill or wireless licenses impairment charge.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"), which
establishes accounting for share-based awards exchanged for employee services
and requires companies to expense the estimated fair value of these awards over
the requisite employee service period.
We adopted SFAS 123(R) using the modified prospective transition method
beginning June 1, 2006. Accordingly, during the nine months ended February 28,
2009, we recorded stock-based compensation expense for awards of options granted
prior to, but not yet vested, as of June 1, 2006, as if the fair value method
calculated for purposes of pro forma disclosure under SFAS 123 were in effect
for expense recognition purposes, adjusted for estimated forfeitures. For awards
of options granted after June 1, 2006, we recognized compensation expense based
on the estimated grant date fair value method using the Black-Scholes valuation
model. For these awards, compensation expense was recognized on a straight-line
basis over their respective vesting periods, net of estimated forfeitures.
In the process of implementing SFAS 123(R), we analyzed certain key
variables, such as expected volatility and expected life to determine an
accurate estimate of these variables. For the nine months ended February 28,
2009, we utilized an expected volatility with a range of 62.11%-63.53% and an
expected term of 6.25 years. The expected life of the option is calculated using
the simplified method set out in SEC Staff Accounting Bulletin No. 107 using the
vesting term of 3 or 4 years and the contractual term of 7 or 10 years. The
simplified method defines the expected life as the average of the contractual
term of the options and the weighted average vesting period for all option
tranches. SFAS 123(R) requires that we calculate stock-based compensation
expense based on awards that are ultimately expected to vest. Accordingly,
stock-based compensation expense for the nine months ended February 28, 2009 has
been reduced for estimated forfeitures. When estimating forfeitures, we consider
voluntary termination behaviors as well as trends of actual option forfeitures.
Income Taxes
The computation of income taxes is subject to estimation due to the
significant judgment required with respect to the tax positions we have taken
that have been or could be challenged by taxing authorities. Our income tax
provision is based on our income, statutory tax rates and tax planning
opportunities available to us in the various jurisdictions in which we operate.
Tax law requires items to be included in the tax return at different times
than when these items are reflected in the unaudited Condensed Consolidated
Financial Statements. As a result, our annual tax rate reflected in our
unaudited Condensed Consolidated Financial Statements is different than that
reported in our tax return (our cash tax rate). Some of these differences are
permanent, such as expenses that are not deductible in our tax return, while
other differences reverse over time, such as depreciation expense. These
temporary differences create deferred tax assets and liabilities. Deferred tax
assets and liabilities are determined based on temporary differences between the
financial reporting and tax bases of assets and liabilities. The tax rates used
to determine deferred tax assets or liabilities are the enacted tax rates in
effect for the year in which the differences are expected to reverse. Based on
the evaluation of all available information, we recognize future tax benefits,
such as net operating loss carryforwards, to the extent that realizing these
benefits is considered more likely than not.
We evaluate our ability to realize the tax benefits associated with deferred
tax assets by analyzing our forecasted taxable income using both historical and
projected future operating results, the reversal of existing temporary
differences, taxable income in prior carry-back years (if permitted) and the
availability of tax planning strategies. A valuation allowance is required to be
established unless management determines that it is more likely than not that we
will ultimately realize the tax benefit associated with a deferred tax asset.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax regulations. In the first quarter of fiscal 2007,
we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of SFAS No. 109 ("FIN 48") (see Note 4 to the
unaudited Condensed Consolidated Financial Statements). As a result of the
implementation of FIN 48, we recognize liabilities for uncertain tax positions
based on the two-step process prescribed in the interpretation. The first step
is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
. . .
|
|