How did MetroPCS perform financially in 2009?

Revenue rose 26% to $3.48 billion and net income grew 18% to $176.8 million. Consolidated Adjusted EBITDA reached $956 million, up from $783 million. Growth was driven by customer additions in the Core Markets and the launch of New York and Boston in early 2009, while the Northeast Markets remain loss-making at the Adjusted EBITDA level.

Why is the Northeast Markets segment losing money, and when might it turn profitable?

The segment posted a $205 million Adjusted EBITDA deficit in 2009 because of launch costs, network build-out, and marketing for Philadelphia, New York, and Boston. Management attributes the deficit to ramp-up expenses. The filing does not give a breakeven timeline. The Core Markets, which reached a 40% margin, show the economics the company expects as new markets mature.

Are the company's customer growth and unit economics deteriorating?

Some metrics weakened. Net additions fell 9% to 1.27 million, churn rose to 5.5% from 4.7%, ARPU declined to $40.68 from $41.39, and CPGA increased 15% to $145.79. Management cites competition from national carriers' unlimited plans, a shift toward cheaper family and promotional plans, and the economic downturn. Gross additions remain high, however, at about 5.3 million.

What are the biggest risks to the investment thesis?

The main risks are the legal and regulatory challenges to the Auction 66 and 73 spectrum, which could lead to license revocation, and the Royal Street designated-entity arrangement, which could be found noncompliant with FCC rules. There is also a securities class action, rising competition and churn, and dependence on a few vendors, including Amdocs for billing and Alcatel-Lucent for CDMA equipment. Leverage is moderate, with a 1.67x senior secured ratio, but total debt of $3.6 billion and rising interest costs limit flexibility.

How will the company fund its LTE network build-out and Royal Street financing?

Management expects 2010 capital expenditures of $600 million to $800 million. Liquidity was about $1.2 billion in cash and short-term investments at year-end, and the company has a $100 million undrawn revolver. The February 2010 amendment adds $874 million to the Royal Street loan facility, bringing total availability to about $2.5 billion. Management says existing cash and operating cash flow are sufficient for planned expansion, but future funding may require new debt or equity, and the company's ability to access capital markets depends on conditions at the time.

T-Mobile US, Inc. 10-K FY2009 Annual Report

01—Abstract

Summary

Summary of the 10-K filed March 1, 2010. Cited figures are marked; the original filing is the authoritative source.

MetroPCS Communications (NYSE: PCS) ended 2009 with 6.64 million subscribers, up 24% year over year, and reported revenue of $3.48 billion^a (+26%) and net income of $176.8 million (+18%).

Growth is concentrated in the Core Markets (Atlanta, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, Orlando/Jacksonville, Sacramento, San Francisco, Tampa/Sarasota), which generated $1.16 billion^b of Adjusted EBITDA at a 40.1% margin. The Northeast Markets (New York, Boston, Philadelphia) are a heavy drag, with a $205 million Adjusted EBITDA deficit as they ramp up after launch.

Consolidated Adjusted EBITDA rose to $956 million^c from $783 million. The key pressures are rising churn, which reached 5.5% from 4.7%, and higher acquisition costs, with CPGA up to $145.79 from $127.21. ARPU slipped to $40.68 from $41.39 as customers shifted to family and promotional plans.

Net customer additions fell to 1.27 million from 1.40 million, which management attributes to the economy and competition. Operating cash flow nearly doubled to $899 million^d, but capital expenditures of $832 million and interest expense of $270 million (up 51%) absorbed much of it. Total debt is $3.6 billion, and the senior secured leverage ratio is 1.67x against a covenant maximum of 4.5x.

Investors should also weigh material contingent risks. A securities class action was filed in December 2009. FCC licenses from Auctions 66 and 73 ($1.4 billion and $313 million) face legal challenges that could lead to revocation.

The Royal Street Communications structure, in which MetroPCS holds an 85% non-controlling interest and has lent Royal Street about $1.1 billion (with a further $874 million commitment added in February 2010), raises designated-entity compliance questions. The company is also shifting to LTE, guided to 2010 capex of $600 to $800 million, and has signed a spectrum exchange with another carrier.

02—Key points

Key Highlights

Subscriber base reached 6.64 million at December 31, 2009, up 24% from 5.37 million, with 1.27 million net additions, although this was down from 1.40 million in 2008.
Total revenue grew 26% to $3.48 billion, driven by 28% service revenue growth to $3.13 billion; the Northeast Markets contributed $235 million of service revenue after launching in early 2009.
Consolidated Adjusted EBITDA rose 22% to $956 million, and Core Markets Adjusted EBITDA margin expanded to 40.1% of service revenue from 37.2%.
Churn rose to 5.5% monthly from 4.7%, and CPGA increased to $145.79 from $127.21, reflecting competition and Northeast launch costs.
Northeast Markets Adjusted EBITDA deficit widened to $205 million from $119 million, a drag that will persist until those markets mature.
Operating cash flow nearly doubled to $899 million, while capital expenditures were $832 million and interest expense rose 51% to $270 million.
Material legal and regulatory exposure includes a securities class action filed in December 2009, FCC challenges to AWS-1 and 700 MHz licenses worth about $1.7 billion combined, and DE-eligibility risk tied to the Royal Street structure.

03—One dollar

Follow one dollar

Of each $1.00 of revenue in FY2009, T-Mobile US, Inc. kept $0.05.

Revenue$3.48B100.0%100.0%
Cost of revenue−$2.00B57.6%57.6%
Gross profit$1.48B42.4%42.4%
Operating costs−$940.9M27.0%27.0%
Operating income$535.3M15.4%15.4%
Interest, other & tax−$358.4M10.3%10.3%
Net income$176.8M5.1%5.1%

10-KFY2009filed March 1, 2010Computed from this filing’s revenue, gross profit, operating income and net income · right columngrey figure: share of revenue

Where FY2009 revenue went

$3.48B

Cost of revenue: $2.00B, 58% of revenue
SG&A: $567.7M, 16% of revenue
Net income: $176.8M, 5.1% of revenue
Other operating costs: $373.2M, 11% of revenue
Interest, other & tax: $358.4M, 10% of revenue

Kept 5.1% as net income

Full revenue history →

04—Financials

Financial Highlights

10-KFY2009filed March 1, 2010

Revenue$3.48B42.4% Gross Margin Net Income$176.84M5.1% Net Margin EPS (Diluted)$0.98 Total Assets$7.39B Cash & Equivalents$929.38M Free Cash Flow$67.67M

Financial Statements

FY2009 against FY2008

Line item	FY2009FY2008	FY2008	Change
Revenue	$3.48B$2.75B	$2.75B	+26.5%
Cost of Revenue	$2.00B$704.65M	$704.65M	+184.4%
Gross Profit	$1.48B$2.05B	$2.05B	−27.9%
SG&A Expenses	$567.73M$447.58M	$447.58M	+26.8%
Operating Expenses	$2.95B$2.28B	$2.28B	+29.0%
Operating Income	$535.29M$467.77M	$467.77M	+14.4%
Interest Expense	$270.29M$179.40M	$179.40M	+50.7%
Net Income	$176.84M$149.44M	$149.44M	+18.3%
EPS (Basic)	$1.00$0.86	$0.86	+16.3%
EPS (Diluted)	$0.98$0.84	$0.84	+16.7%
Shares Outstanding (Basic)	175.95M174.70M	174.70M	+0.7%
Shares Outstanding (Diluted)	177.97M177.69M	177.69M	+0.2%

05—Questions

Frequently Asked Questions

How did MetroPCS perform financially in 2009?
Revenue rose 26% to $3.48 billion and net income grew 18% to $176.8 million. Consolidated Adjusted EBITDA reached $956 million, up from $783 million. Growth was driven by customer additions in the Core Markets and the launch of New York and Boston in early 2009, while the Northeast Markets remain loss-making at the Adjusted EBITDA level.
Why is the Northeast Markets segment losing money, and when might it turn profitable?
The segment posted a $205 million Adjusted EBITDA deficit in 2009 because of launch costs, network build-out, and marketing for Philadelphia, New York, and Boston. Management attributes the deficit to ramp-up expenses. The filing does not give a breakeven timeline. The Core Markets, which reached a 40% margin, show the economics the company expects as new markets mature.
Are the company's customer growth and unit economics deteriorating?
Some metrics weakened. Net additions fell 9% to 1.27 million, churn rose to 5.5% from 4.7%, ARPU declined to $40.68 from $41.39, and CPGA increased 15% to $145.79. Management cites competition from national carriers' unlimited plans, a shift toward cheaper family and promotional plans, and the economic downturn. Gross additions remain high, however, at about 5.3 million.
What are the biggest risks to the investment thesis?
The main risks are the legal and regulatory challenges to the Auction 66 and 73 spectrum, which could lead to license revocation, and the Royal Street designated-entity arrangement, which could be found noncompliant with FCC rules. There is also a securities class action, rising competition and churn, and dependence on a few vendors, including Amdocs for billing and Alcatel-Lucent for CDMA equipment. Leverage is moderate, with a 1.67x senior secured ratio, but total debt of $3.6 billion and rising interest costs limit flexibility.
How will the company fund its LTE network build-out and Royal Street financing?
Management expects 2010 capital expenditures of $600 million to $800 million. Liquidity was about $1.2 billion in cash and short-term investments at year-end, and the company has a $100 million undrawn revolver. The February 2010 amendment adds $874 million to the Royal Street loan facility, bringing total availability to about $2.5 billion. Management says existing cash and operating cash flow are sufficient for planned expansion, but future funding may require new debt or equity, and the company's ability to access capital markets depends on conditions at the time.

06—Continue

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