01—Abstract
Summary
Summary of the 10-K filed March 30, 2007. Cited figures are marked; the original filing is the authoritative source.
MetroPCS Communications, Inc. (TMUS predecessor; ticker PCS on NYSE after its pending IPO) reported strong 2006 operating growth in its 10-K filed March 30, 2007.
Total revenues rose 49% to $1.55 billiona and service revenues rose 48% to $1.29 billion, driven by customer growth to roughly 2.94 million (up 53%). Core Markets Adjusted EBITDA increased 56% to $492.8 million, with a 43.3% margin on service revenue. Net income fell 73% to $53.8 million, but that comparison is distorted by the 2005 $228.2 million pre-tax gain on a spectrum sale; excluding that gain, net income declined about 10%, largely because of rising losses in the Expansion Markets, where Adjusted EBITDA was a deficit of $97.2 million.
The balance sheet changed substantially during the year. The company spent about $1.4 billionb on AWS spectrum in FCC Auction 66, and total debt rose to $2.6 billion, consisting of a $1.6 billion senior secured term loan and $1.0 billion of 9 1/4% senior notes. Interest expense more than doubled to $116 million, and the company recorded $51.5 million in debt extinguishment losses.
Capital expenditures were $550.7 millionc, and management guides to about $650 million in 2007 for the Core and Expansion Markets, plus $175 million for Auction 66 markets. Investors should weigh several risks.
The company depends on a single infrastructure vendor (Lucent/Alcatel-Lucent), is subject to a pending patent suit from Leap Wireless, and faces legal and regulatory uncertainty around the Auction 66 licenses (a Third Circuit appeal could revoke them) and the Royal Street designated-entity arrangement. The company also disclosed past material weaknesses in internal controls and a late Form 10 registration, which created rescission exposure of about $2.6 milliond.
02—Key points
Key Highlights
- Revenue growth: total revenues up 49% to $1,546.9M in 2006; service revenues up 48% to $1,290.9M.
- Subscriber growth: 2,940,986 customers at year-end 2006 (up 53%), with 1.02M net additions; churn of 4.6% monthly and ARPU of $42.98.
- Profitability: Core Markets Adjusted EBITDA of $492.8M (43.3% of service revenue), while Expansion Markets posted a $97.2M deficit as new markets launched.
- Net income fell to $53.8M from $198.7M, largely due to the 2005 $228.2M spectrum sale gain; excluding it, net income declined about 10%.
- Leverage and interest: total debt of $2.6B after Auction 66 financing; interest expense rose to $116.0M and a 9 1/4% senior note issuance was completed in November 2006.
- Auction 66: roughly $1.4B paid for AWS licenses covering about 117M people; initial launch targeted late 2008 or early 2009 with $550-650M of capex and $875M-$1.0B to reach free cash flow positive.
- Key risks: pending Leap Wireless patent suit, DOJ scrutiny of Dallas and Detroit spectrum use, FCC designated-entity appeal threatening Auction 66 licenses, and reliance on a single network vendor.
03—Questions
Frequently Asked Questions
Why did net income drop 73% in 2006?
The 2005 result included a one-time $228.2M pre-tax gain from selling a 10 MHz portion of the San Francisco PCS license. Excluding that gain, net income declined about 10% in 2006, mainly because of operating losses in the new Expansion Markets (Dallas/Ft. Worth, Detroit, Tampa/Orlando) and higher interest expense.
How will the company fund the Auction 66 build-out?
Management said the proceeds from the pending IPO, existing cash and short-term investments ($552M at year-end 2006), and internally generated cash flow from Core and Expansion Markets should be sufficient. The filing also notes that the company does not intend to build any license area until funds are available, and that credit agreement covenants could limit additional borrowing for this purpose.
What are the biggest legal or regulatory risks to the Auction 66 licenses?
Several petitioners have challenged the FCC's designated-entity order in the Third Circuit and seek to overturn Auction 66. If they succeed, the licenses could be revoked, with refunds made without interest while the company keeps paying interest on the borrowed funds. Separately, the DOJ has warned it will scrutinize any statement the company makes in support of future spectrum acquisitions.
What is the status of the company's public listing and capital structure?
There was no public trading market at the time of filing. The company had registered its common stock on Form 10 and applied to list on the NYSE under the symbol PCS, with the IPO expected in the second quarter of 2007. A 3-for-1 stock split was approved in March 2007, and preferred Series D and E stock will convert to common stock upon the IPO.
04—Continue