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TMUS > SEC Filings for TMUS > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for METROPCS COMMUNICATIONS INC

Form 10-Q for METROPCS COMMUNICATIONS INC


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
Any statements made in this quarterly report that are not statements of historical fact, including statements about our plans, beliefs, opinions, projections and expectations, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and should be evaluated as such. Forward-looking statements include our plans and focus in the fourth quarter, the causes of customer turnover, or churn, the effect of seasonality on our business and churn, the importance of our key non-GAAP financial measures and their use to compare companies in the industry, the advantages of a merger with T-Mobile, our value proposition, the reasons for our operational and financial results, our ability to predict and meet customer demands, the launch of our 4G LTE for All initiative, availability of handsets, our network capabilities, our ability to increase subscribers, impact of increased sales on our CPU and CPGA and expectations regarding future CPGA, our ability to drive profitable growth, whether existing cash, cash equivalents and short-term investments and anticipated cash flows from operations will be sufficient to fully fund planned operations and expenditures, the challenges and opportunities facing our business, our competitive positioning and promotional strategies, competitive differentiations, our guidance on capital expenditures for 2012 and statements that may relate to our plans, objectives, strategies, goals, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. These forward-looking statements often include words such as "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "views," "becomes," "projects," "should," "would," "could," "may," "will," "forecast," and other similar expressions. Forward-looking statements are contained throughout this quarterly report, including in the "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Company Overview," "Seasonality," "Performance Measures," "Liquidity and Capital Resources," "Qualitative and Quantitative Disclosure About Market Risk," "Legal Proceedings," and "Risk Factors" sections of this report.
We base the forward-looking statements made in this report on our current expectations, estimates, plans, beliefs, opinions and assumptions that have been made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such times. As you read and consider this quarterly report, you should understand that these forward-looking statements are not guarantees of future performance or results and no assurance can be given that such statements or results will occur, be realized, or be obtained. Although we believe that these forward-looking statements are based on reasonable expectations, beliefs, opinions and assumptions at the time they are made, you should be aware that many of these factors are beyond our control and that many factors could affect our actual financial results, performance or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. Factors that may materially affect such forward-looking statements include, but are not limited, to:

• the ability of our vendors to supply the handsets we need in the time frames we require;

• our and our competitors' current and planned promotions and marketing, sales and other initiatives and our ability to respond to and support them;

• our ability to manage our networks to deliver the services, content, service quality and speed our customers expect and demand and to maintain and increase the capacity of our networks and business systems to satisfy the demands of our customers and the demands placed by devices on our networks;

• the highly competitive nature of our industry and changes in the competitive landscape;

• our ability to successfully combine with T-Mobile and achieve the cost and capital expenditures savings and synergies we expect;

• our ability to remain focused and keep all employees focused on the business during the pendency of the T-Mobile transaction;

• the current economic environment in the United States; disruptions to the credit and financial markets in the United States; and contractions or limited growth on consumer spending as a result of the uncertainty in the United States economy;

• our ability to manage our growth, achieve planned growth, manage churn rates, maintain our cost structure and achieve additional economies of scale;

• our ability to negotiate and maintain acceptable agreements with our suppliers and vendors, including roaming arrangements;

• the seasonality of our business and any failure to have strong customer growth in the first and fourth quarters;


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• the rates, nature, collectability and applicability of taxes and regulatory fees on the services we provide and increases or changes in taxes and regulatory fees or the services to, or the manner in, which such taxes and fees are applied, calculated, or collected;

• the rapid technological changes in our industry, our ability to adapt, respond and deploy new technologies and successfully offer new services using such new technology;

• our ability to fulfill the demands and expectations of our customers, provide the customer care our customers want, expect, or demand, secure the products, services, applications, content and network infrastructure equipment we need, or which our customers or potential customers want, expect or demand;

• the availability of additional spectrum, our ability to secure additional spectrum, or secure it at acceptable prices, when we need it;

• our ability to adequately defend against suits filed by others and to enforce or protect our intellectual property rights;

• our capital structure, including our indebtedness amounts, the limitations imposed by the covenants in the documents governing our indebtedness and the maintenance of our financial and disclosure controls and procedures;

• our ability to attract and retain key members of management and train personnel;

• our reliance on third parties to provide distribution, products, software content and services that are integral, used or sold by our business and the ability of our suppliers to perform, develop and timely provide us with technological developments, products and services we need to remain competitive;

• possible disruptions or intrusions of our network, billing, operational support and customer care systems which may limit or disrupt our ability to provide service or which may cause disclosure or improper use of our customer's information and the associated harm to our customers, our systems, our reputation and our goodwill;

• governmental regulation affecting our services and changes in government regulation, and the costs of compliance and our failure to comply with such regulations; and

• other factors described under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 as updated or supplemented under "Part II, Item 1A. Risk Factors" in each of our subsequent Quarterly Reports on Form 10-Q as filed with the SEC, including this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.

These forward-looking statements speak only as of the date of this quarterly report, are based on current assumptions and expectations, and are subject to the factors above, among other things, and involve risks, uncertainties, events, circumstances and assumptions, many of which are beyond our ability to foresee, control or predict. You should not place undue reliance on these forward-looking statements which are based on current assumptions and expectations and speak only as of the date of this report. The results presented for any period, including the three months ended September 30, 2012, may not be reflective of results for any subsequent period or for the fiscal year. All future written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by our cautionary statements. We do not intend to, are not obligated to, and do not undertake a duty to, update any forward-looking statement in the future to reflect the occurrence of events or circumstances after the date of this report, except as required by law.
Company Overview
Except as expressly stated, the financial condition and results of operations discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations are those of MetroPCS Communications, Inc. and its consolidated subsidiaries, including MetroPCS Wireless, Inc., or Wireless. References to "MetroPCS," "MetroPCS Communications," "our Company," "the Company," "we," "our," "ours" and "us" refer to MetroPCS Communications, Inc., a Delaware corporation, and its wholly-owned subsidiaries.
We are a wireless telecommunications carrier that currently offers wireless broadband mobile services primarily in selected major metropolitan areas in the United States, including the Atlanta, Boston, Dallas/Fort Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco and Tampa/Sarasota metropolitan areas. As of September 30, 2012, we hold licenses for wireless spectrum suitable for wireless broadband mobile services covering a total population of 142 million people in and around many of the largest metropolitan areas in the United States. In addition, we have roaming agreements with other wireless broadband mobile carriers that allow us to offer our customers service in many areas when they are outside our service area. These roaming agreements, together with the area we serve with our own networks, allows our customers to receive service in an area covering over 280 million in total population under the Metro USA® brand. We provide our services using code division multiple access (CDMA) networks using 1xRTT and EVDO technology and fourth generation long term evolution technology (4G LTE).


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As a result of the significant growth we have experienced since we launched operations, our results of operations to date are not necessarily indicative of the results that can be expected in future periods. We expect that our number of customers will continue to increase over time, which will continue to contribute to increases in our revenues and operating expenses.

We sell products and services to customers through our Company-owned retail stores as well as indirectly through relationships with independent retailers. Our service allows our customers to place unlimited local calls from within our local service area and to receive unlimited calls from any area while in our service area, for a flat-rate monthly service fee. In January 2010, we introduced a new family of service plans, which include all applicable taxes and regulatory fees and offering nationwide voice, text and web access services on an unlimited, no long-term contract, paid-in-advance, flat-rate basis beginning at $40 per month. For an additional $5 to $30 per month, our customers may select alternative service plans that offer additional features predominately on an unlimited basis. We also offer discounts to customers who purchase services for additional handsets on the same account. In January 2011, we introduced new 4G LTE service plans that allow customers to enjoy voice, text and web access services at fixed monthly rates starting as low as $40 per month. In 2012, we introduced a nationwide 4G LTE data, talk and text service plan for $25 per month, including all applicable taxes and regulatory fees. For additional usage fees, we also provide certain other value-added services. All of these plans require payment in advance for one month of service. If no payment is made in advance for the following month of service, service is suspended at the end of the month that was paid for by the customer and, if the customer does not pay within 30 days, the customer is terminated. We believe our service plans differentiate us from the more complex plans and long-term contract requirements of traditional wireless carriers.

Subsequent Events
On October 3, 2012, we announced we had entered into a definitive Business Combination Agreement to combine our business with T-Mobile. Upon completion of the transaction, which we expect to occur in the first half of 2013, MetroPCS and T-Mobile will create a new company to be called T-Mobile that will operate T-Mobile and MetroPCS as separate customer units. The Business Combination Agreement is structured as a recapitalization, in which MetroPCS will declare a 1 for 2 reverse stock split, make a cash payment of $1.5 billion, or approximately $4.09 per share prior to the reverse stock split, to its stockholders and acquire all of T-Mobile's capital stock by issuing Deutsche Telekom 74% of MetroPCS' common stock on a pro forma basis. Upon completion of the combination, MetroPCS stockholders will own 26% of the combined company. For further details and information regarding the transaction, please see the Company's Current Report on Form 8-K filed on October 3, 2012 with the SEC and the investor presentation filed as solicitation material under Schedule 14A on October 3, 2012 with the SEC. Additionally, the transaction will be further described in a proxy statement to be filed by MetroPCS with the SEC. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" of our annual report on Form 10-K for the year ended December 31, 2011 filed with the United States Securities and Exchange Commission, or SEC, on February 29, 2012.

Our accounting policies and the methodologies and assumptions we apply under them have not changed from our annual report on Form 10-K for the year ended December 31, 2011.
Revenues
We derive our revenues from the following sources:
Service. We sell wireless broadband mobile services. The various types of service revenues associated with wireless broadband mobile for our customers include monthly recurring charges for airtime, one-time or monthly recurring charges for optional features (including nationwide long distance, unlimited international long distance, unlimited text messaging, international text messaging, voicemail, downloads, ringtones, games and content applications, unlimited directory assistance, enhanced directory assistance, ring back tones, mobile Internet browsing, location based services, mobile instant messaging, navigation, video streaming, video on demand, push e-mail and nationwide roaming) and charges for long distance service. Service revenues also include intercarrier compensation and nonrecurring service charges to customers.


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Equipment. We sell wireless broadband mobile handsets and accessories that are used by our customers in connection with our wireless broadband mobile services. This equipment is also sold to our independent retailers to facilitate distribution to our customers.
Costs and Expenses
Our costs and expenses include:
Cost of Service. The major components of our cost of service are:

•            Cell Site Costs. We incur expenses for the rent of cell sites,
             network facilities, engineering operations, field technicians and
             related utility and maintenance charges.


•            Interconnection Costs. We pay other telecommunications companies and
             third-party providers for leased facilities and usage-based charges
             for transporting and terminating network traffic from our cell sites
             and switching centers. We have pre-negotiated rates for transport
             and termination of calls originated by our customers, including
             negotiated interconnection agreements with relevant exchange
             carriers in each of our service areas.


•            Variable Long Distance. We pay charges to other telecommunications
             companies for long distance service provided to our customers. These
             variable charges are based on our customers' usage, applied at
             pre-negotiated rates with the long distance carriers.


•            Customer Support. We pay charges to nationally recognized
             third-party providers for customer care, billing and payment
             processing services.

Cost of Equipment. Cost of equipment primarily includes the cost of handsets and accessories purchased from third-party vendors to resell to our customers and independent retailers in connection with our services. We do not manufacture any of this equipment.
Selling, General and Administrative Expenses. Our selling expenses include advertising and promotional costs associated with marketing and selling to new customers and fixed charges such as retail store rent and retail associates' salaries. General and administrative expenses include support functions including technical operations, finance, accounting, human resources, information technology and legal services. We record stock-based compensation expense in cost of service and in selling, general and administrative expenses for expense associated with employee stock options and restricted stock awards, which is measured at the date of grant, based on the estimated fair value of the award.
Depreciation and Amortization. Depreciation is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service, which are five to ten years for network infrastructure assets, three to ten years for capitalized interest, up to fifteen years for capital leases, approximately one to eight years for office equipment, which includes software and computer equipment, approximately three to seven years for furniture and fixtures and five years for vehicles. Leasehold improvements are amortized over the term of the respective leases, which includes renewal periods that are reasonably assured, or the estimated useful life of the improvement. Interest Expense and Interest Income. Interest expense includes interest incurred on our borrowings and capital lease obligations, amortization of debt issuance costs and amortization of discounts and premiums on long-term debt. Interest income is earned primarily on our cash, cash equivalents and short-term investments.
Income Taxes. For the three and nine months ended September 30, 2012 and 2011 we paid no federal income taxes. For the three and nine months ended September 30, 2012 we paid $0.8 million and $4.7 million, respectively, of state income tax. For the three and nine months ended September 30, 2011 we paid $0.2 million and $4.1 million, respectively, of state income tax. Seasonality

Our customer activity is influenced by seasonal effects related to traditional retail selling periods and other factors that arise from our target customer base. Based on historical results, we generally expect the net customer additions to be strongest in the first and fourth quarters. Softening of sales and increased customer turnover, or churn, in the second and third calendar quarters of the year usually combine to result in fewer net customer additions or in net customer losses. However, sales activity and churn can be strongly affected by the launch of new metropolitan areas, introduction of new price plans, competition, general economic conditions and by promotional activity, which could reduce, accentuate, increase or outweigh certain seasonal effects.


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Results of Operations
Three Months Ended September 30, 2012 Compared to Three Months Ended September
30, 2011
Operating Items
Set forth below is a summary of certain financial information for the periods
indicated:
                                                  Three Months Ended September 30,
                                                        2012               2011           Change
                                                           (in thousands)
REVENUES:
Service revenues                                 $       1,121,957     $ 1,131,054            (1 %)
Equipment revenues                                         137,203          74,334            85 %
Total revenues                                           1,259,160       1,205,388             4 %
OPERATING EXPENSES:
Cost of service (excluding depreciation and
amortization disclosed separately below)(1)                373,032         382,033            (2 %)
Cost of equipment                                          265,940         343,473           (23 %)
Selling, general and administrative expenses
(excluding depreciation and amortization
disclosed separately below)(1)                             163,409         162,459             1 %
Depreciation and amortization                              163,089         139,309            17 %
Loss on disposal of assets                                   1,452           1,283            13 %
Total operating expenses                                   966,922       1,028,557            (6 %)
Income from operations                           $         292,238     $   176,831            65 %


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(1) Cost of service and selling, general and administrative expenses include stock-based compensation expense. For the three months ended September 30, 2012, cost of service includes $0.7 million and selling, general and administrative expenses includes $8.5 million of stock-based compensation expense. For the three months ended September 30, 2011, cost of service includes $0.8 million and selling, general and administrative expenses includes $9.1 million of stock-based compensation expense.

Service Revenues. Service revenues decreased $9.1 million, or 1%, to approximately $1.1 billion for the three months ended September 30, 2012 from approximately $1.1 billion for the three months ended September 30, 2011. The decrease in service revenues is primarily attributable to a net loss of 169,289 customers during the twelve months ended September 30, 2012 as well as a $0.30 decrease in average revenue per customer for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. Equipment Revenues. Equipment revenues increased $62.9 million, or 85%, to $137.2 million for the three months ended September 30, 2012 from $74.3 million for the three months ended September 30, 2011. The increase is primarily attributable to higher average price of handsets sold accounting for a $70.2 million increase, as well as a $46.1 million increase in equipment revenues associated with a decrease in commissions paid to independent retailers due to a lower volume of handsets sold. These items were partially offset by a 47% decrease in gross customer additions which led to a $31.8 million decrease, as well as a decrease in upgrade handset sales to existing customers which led to a $20.8 million decrease.
Cost of Service. Cost of service decreased $9.0 million, or 2%, to $373.0 million for the three months ended September 30, 2012 from $382.0 million for the three months ended September 30, 2011. The decrease in cost of service is primarily attributable to a decrease in long distance cost, as well as a decrease in taxes and regulatory fees during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. These decreases were partially offset by expenses associated with the deployment of additional network infrastructure, including network infrastructure for 4G LTE. Cost of Equipment. Cost of equipment decreased $77.5 million, or 23%, to $266.0 million for the three months ended September 30, 2012 from $343.5 million for the three months ended September 30, 2011. The decrease is primarily attributable to a 47% decrease in gross customer additions which accounted for an $83.2 million decrease, as well as a decrease in handset upgrades by existing customers which led to a $37.8 million decrease. These decreases were partially offset by a higher average cost of handsets accounting for a $43.5 million increase.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.9 million, or 1%, to $163.4 million for the three months ended September 30, 2012 from $162.5 million for the three months ended September 30, 2011. Selling expenses decreased by $9.9 million, or 11%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The decrease is primarily attributable to an $8.6 million decrease in


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marketing and advertising expenses. General and administrative expenses increased $11.4 million, or 18%, for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, primarily due to an increase in commissions paid to independent retailers for customer reactivations, coupled with an increase in legal and professional service fees. Depreciation and Amortization. Depreciation and amortization expense increased $23.8 million, or 17%, to $163.1 million for the three months ended September 30, 2012 from $139.3 million for the three months ended September 30, 2011. The increase related primarily to network infrastructure assets placed into service during the twelve months ended September 30, 2012 to support the continued growth and expansion of our network.
Loss on Disposal of Assets. Loss on disposal of assets increased $0.2 million, or 13%, to $1.5 million for the three months ended September 30, 2012 from $1.3 million for the three months ended September 30, 2011. The loss on disposal of assets during the three months ended September 30, 2012 and 2011 was due primarily to the disposal of assets related to certain network technology that was retired and replaced with newer technology.

Non-Operating Items
                                    Three Months Ended September 30,
                                            2012                     2011      Change
                                             (in thousands)
Interest expense             $          66,655                     $ 69,511      (4 %)
Gain on settlement                      52,500                            -     100 %
Provision for income taxes              85,981                       38,618     123 %
Net income                             192,667                       69,326     178 %

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