T-Mobile US Inc (TMUS) 2009 Q2 法說會逐字稿

Good many, ladies and gentlemen, and thank you for standing by.

Welcome to the MetroPCS Communications second quarter 2009 results conference call.

During today's presentation all parties will be in a listen-only mode.

Following the presentation the conference will be open for questions.

(Operator instructions).

This conference call is being recorded today, Thursday, August 6, 2009.

I would now like to turn the conference over to Mr.

Keith Terreri, Vice President and treasurer of MetroPCS Communications.

Please go ahead, sir.

Thank you, and good morning, everyone.

Welcome to our second quarter 2009 conference call.

The speakers with me this morning are Roger Linquist, our Chairman, President and Chief Executive Officer; Tom Keys, our Chief Operating Officer; and Braxton Carter, our Executive Vice President and Chief Financial Officer.

The format for today's call is as follows, first, Roger will provide an overview of our business, then Tom will provide an update on a number of operational results and initiatives, then Braxton will review the financial highlights of the second quarter 2009, followed by Roger's closing remarks and a question-and-answer session.

During today's call we will refer to certain non-GAAP financial measures.

We have reconciled these historical non-GAAP measures to GAAP measures in our earnings release, which is available in the investor relations section of our website at www.metropcs.com under the investor relations tab.

Before I turn the call over to Roger, I want to remind you that certain information that we will discuss in this conference call may constitute forward-looking statements within the meaning of Federal Securities Laws.

Words such as believes, anticipates, expects, intends, should, could, would, estimates projects, and other similar expressions typically identify forward-looking statements.

Forward-looking statements involve risks and uncertainties that could cause actual results or the timing of events to differ materially from those made in the forward-looking statements.

We cannot assure you that the forward-looking statements discussed on this conference call will be attained.

Our forward-looking statements also are subject to the risk factors described in our filings with the Securities and Exchange Commission and we encourage you to review them.

We would also like to remind you that the results for the second quarter may not be reflective of the results for any subsequent period or the entire year.

I would like to remind of everyone of our new segment-reporting format.

Our second quarter results reflect core markets, which are comprised of all our operating markets with the exception of our Northeast market segment, which includes the Philadelphia, New York City, and Boston metropolitan areas.

We filed a current report on Form 8-K on June 9, 2009, which retrospectively adjusted our 2008 financial and operational results to reflect this change.

We encourage you to review the 8-K.

For anyone listening to a taped or webcast replay, or reviewing a written transcript of today's call, please note that all information presented, including our reaffirmation of guidance for 2009, is current only as August 6, 2009, and should be considered valid only as of August 6, 2009, regardless of the date reviewed or replayed.

MetroPCS disclaims any intention or obligation to revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The Company does not plan to update or reaffirm guidance except through former public disclosure pursuant to Regulation FD..

Certain terms used in today's call are registered trademarks of MetroPCS.

I hope by now you've had a chance to review our earnings release issued this morning with the financial and operational results for the second quarter of 2009.

I could encourage everyone to read our earnings release in conjunction with the information discussed in this call, along with our previous SEC filings.

We intend to file our quarterly report on Form 10-Q for the period ended June 30, 2009 by Monday August 10th.

At this time I'd like to turn the call over to our Chairman, President, and CEO, Roger Linquist.

Good morning, everyone, and thank you for joining us.

A key objective for MetroPCS is to offer exceptional value through unlimited wireless voice and data services.

The natural evolution for wireless, as with all technology-based business, is to provide more value for less money over time.

Maintaining our best-of-class cost structure enables us to maximize our profitability while making our service offerings compelling to the consumer, as well as meeting competitive advantages.

Our best-in-class cost structure is also improving as our markets mature, Our historical adjusted EBITDA margins and EBITDA growth have demonstrated the importance of maintaining our cost discipline while significantly growing our subscriber base.

Our customer messaging is simple, we have the best deal in time.

We have always been the innovator in unlimited wireless and we continue our leadership position with a recent enhancement of our service plans.

We're able to do this because of our focus on cost structure and continued scaling of our business.

I would like to review the driving factors behind the recent evolution of our service plans.

We now are the fifth largest facilities-based wireless provider in the US and the largest regional carrier.

We're at a point in our evolution where we want to enhance the affordability of our unlimited voice, text, and voice browsing services to ensure that our strong subscriber growth continues.

The current economic environment is accelerating change, and the no-contract, pay-in-advance segment is attracting more competitive offerings given its growth opportunity.

Many of these carriers offer a single-rate plan with limited options.

MetroPCS offers wide choice of unlimited rate plans from $30 to $50 per month.

As a pioneer and leader in the pay-in-advance segment we have further enhanced our service offering to ensure we provide our subscribers the best deal in time across a full range of unlimited offerings.

We are able to provide service offerings unmatched by other competitors, while maintaining a mid-40% adjusted EBITDA margin in our more mature markets.

The evolution of our service plans can impact some operating metrics.

In the short term our plan changes can impact both ARPU and EBITDA, but we expect these actions will help ensure that we meet our penetration goals in all markets.

Short-term ARPU could dip in to the high 30s; however, this is only one variable in our overall growth and profitability.

Our best-of-class cost structure and our continued scaling has enabled us to reaffirm our EBITDA guidance for 2009.

In addition, we expect further positive impact of our operating metrics and financial performance with our introduction of LTE mobile broadband data services in the second half of 2010..

In the current economic environment consumers are demanding more value for their money and are looking for ways to rationalize their spending by replacing or displacing their landline phone.

This new frugality generation places great emphasis on value and we believe we see a permanent shift in thinking with consumers about how much they're willing to pay for goods and services, including their wireless services.

With one at of five landlines converted to wireless at year-end 2008 the trend of voice traffic moving wireline to wireless is a long term systemic shift, and represents a major opportunity for MetroPCS to support both affordable consumer services and further untether customers.

Recognizing these trends and this opportunity we have focused on multi-family in-building coverage with our data system deployment, and the configuration of our networks.

Our unlimited service plans make cutting the chord a cost-effective reality.

The repositioning of our family plan, suitable for two to five family members and introduced on August 1st, simplifies messaging, provided greater retention, and we believe is ARPU neutral relative to our previous family-plan offering.

Under this new family plan a user can enjoy MetroPCS unlimited nationwide talk, text, picture messaging and web services for $35 a month.

Consistent with our strategy, this value is unmatched by any other wireless company and could result in savings on average of approximately $1,400 per year for a family of two that uses a comparably-featured post-pay plan from one of our national competitors.

Announced during the second quarter we pioneered unlimited international calling, and have seen a very strong customer response.

This offering is unmatched in the US and enables subscribers on an unlimited basis to call over 100 countries around the world.

This plan can dramatically reduce monthly long distance costs and is yet another example of MetroPCS's commitment to providing industry-leading value to consumers in today's tough economic environment.

Furthermore, we expect higher customer retention on this program with a minimum ARPU of $50.

We continue to be excited about our overall growth prospects.

With the internet going mobile, we are moving quickly towards the forth generation of network infrastructure.

LTE represents the next generation of technology.

We are in preparation for building out our LTE network to support a dual-mode LTE CDMA Smartphone offering in the second half of 2010.

We anticipate that our move to 4G LTE now gives us a huge advantage, allowing us the ability to avoid committing spectrum resources and stranding investment in 3G EBDO.

When compared to CDMA EBDO we believe LTE enables carriers to gain approximately a ten-fold improvement in data through-put and capacity.

Furthermore, we believe LTE advanced will provide even greater data through-put and capacity improvements.

As the web increasingly goes mobile we also foresee a huge opportunity to collapse the multitude of music, video and data appliances to one or two wireless broadband units.

It's exciting to imagine a future in which we not only have smart handsets but also have foldable and compact netbooks using OLED displays printer electronics with very low power drain.

Imagine receiving periodicals, books, and magazines on these devices, all operating on 4G networks.

Once again, the low-cost structure provider that properly measures what technology to select and when to commit infrastructure investments should be rewarded in the marketplace.

We believe the technology is 4G LTE, and the time is now.

Few facility-based carriers can report the sustained annual subscriber growth we have had over six years now.

At the end of the second quarter this year we served approximately 6.3 million subscribers, an increase of approximately 1.7 million subscribers from the second quarter of 2008.

With a focus on execution we believe our results demonstrate the strength and resiliency of our business, even in these difficult economic times.

We intend to continue to innovate and maintain our market leadership position as the most affordable provider of quality wireless services and unlimited service plans in the industry.

As we have discussed in the past, we're focused on building lop-term shareholder value and we're pleased to have, again, reaffirmed our full-year 2009 guidance.

Now I'd like to hand it over to Tom to discuss some of the operational highlights from the quarter.

Thanks, Roger.

Interest in the MetroPCS value proposition continues to be strong and resulted in approximately 1.3 million gross additions during the quarter, up nearly 63% from the second quarter of 2008.

Gross addition growth in our Northeast markets was robust, while our more mature markets continued to introduce more new users to our unlimited value proposition.

I will discuss our quarterly results in greater detail in a moment, but first I want to report on recent trends within our industry segment.

There's been a significant amount of increased awareness and acceptance in the pay-in-advance prepay segment.

According to Wall Street estimates, in 2004 through 2008 this segment grew at a 29% CAGR, and at the end of 2008 accounted for 18% of total US wireless subscribers.

In 2008 approximately 34% of the growth within the wireless industry came from the pay-in-advance and prepay segments.

We continue to be very bullish on the opportunity in the unlimited pay-in-advance segment.

Importantly, as the pioneers in this space we believe that we are on track to attreive our pen -- achieve our penetration goals.

In the second quarter, according to a nationally-recognize third party, MetroPCS was ranked either first or second in terms of growth share of decision in nine of our 10 core markets.

In the unlimited provider segment we were ranked number one in share of decision in all of our operating markets.

In fact, over the past 12 months MetroPCS's share of total subscribers in all markets, with the exception of New York and Boston, as they have yet to be opened for 12 months, has increased 19.5%, the largest such increase of any wireless carrier.

With approximately 1.3 million gross adds in the second quarter, we recorded a year-over-year increase of nearly 0.5 million gross additions.

Gross additions in both the core and Northeast markets were strong.

This level of gross additions highlights our compelling value proposition, as well as the growing acceptance of pay-in-advance wireless options.

US economic weakness persists and consumers are looking for the most value for every dollar they spend.

We think this emphasis on value is permanent and a mindset change amongst consumers.

Beginning in the fourth quarter of 2008,we aggressively positioned the Company to take advantage of this reevaluation in spending by making available lower-priced handsets.

The change in sentiment towards consumers demanding more value for money accelerated our brand position.

We believe our unlimited, flexible model is perfectly suited for this new economy.

Door swings, share of decision, and gross additions were strong during the second quarter.

Our distribution is robust, with nearly 6,000 doors comprised of direct-owned, authorized dealer, and national retail locations continues to enjoy success.

This strategic distribution makeup provides a wide variety of retail purchasing options for users in various demographics.

Higher-end handsets, such as the Samsung Finesse and Blackberry Curve, also continue to enjoy success with our strong distribution mix.

With the natural progression and evolution in this industry, we are committed to maintaining our leadership position.

With the greatest availability of unlimited wireless services and handset options, we continue to be the best deal in town.

With our recent service plan enhancements we have increased the services available at each price point.

MetroPCS's $40 plan includes our nationwide unlimited service, talk, text, picture messaging, and web browsing.

Our $45 flagship plan now includes unlimited e-mail, navigation and social networking applications, and gives customers exactly what they're look for, an incredible number of valuable features for vertically half of the price of post-paid national wireless carriers.

MetroPCS's $30 and $35, local unlimited plans include caller ID and call waiting.

The $50 plan continues to offer Smartphone users full html web browsing and enterprise wireless e-mail at a significantly less cost when compared to other carrier's data packages.

We've been very thoughtful in making these rate-plan enhancements and been selective in our changes in order to minimize the overall impact of ARPU dilution.

Clearly, one of the most important events for the Company was the launch of our two Northeast markets, New York and Boston, in February of 2009.

After a full quarter of launch we continue to be very excited about the growth potential of the Northeast markets.

We anticipate the Northeast markets will see a major addition when we connect the eastern boundary of Queens to the heart of Long Island, and open up service in Q4 of this year.

We will also continue to expand the boundaries of our New Jersey, Westchester, and Staten Island footprints that were part of our initial launch.

Our Boston market continues to expand, as we grow our footprint in the New Bedford, Worcester and greater metropolitan Boston areas.

At the end of the second quarter we now cover nearly 25 million POPs in our Northeast markets, an increase of over two million since the end of the first quarter.

We are pleased with our progress and excited about our future in the Northeast as we build a world class network.

Our local teams did an outstanding job building these networks and the coverage quality is excellent.

Important for dense urban areas, our rate of drops and blocks is outstanding and compares favorably to the national carriers.

The people who use our service get high-quality coverage, the in-building penetration has been outstanding, which is important as we continue to see customers cut the core and go wireless.

Our strategic use of DAS systems has increased the importance of our service and helps enhance the customer experience.

Los Angeles, second largest market in the US, is performing very well.

Building out a market correctly with over 26 major freeways and extensive urban sprawl takes diligence and perseverance.

The entire greater Los Angeles network continues to expand as we densify coverage and increase distribution.

Our network team has delivered an outstanding network that benefits our distribution partners.

Our viral, world-of-mouth promotion is evident and is providing outstanding subscriber growth that is allowing us to grow our brand on the West Coast.

Our West Coast system will see improvements, as we expect to expand service in Riverside, Lancaster/Palmdale and Rancho Cucamonga in Q4 '09.

Additionally, we expect to open up service in Santa Barbara and other surrounding communities during the first half of 2010.

Touching on our core markets, year to date all of our core market segments have had net subscriber additions.

Gross additions continue to be strong in the core markets and we will bullish on the long-term potential of these markets.

Over the next six months we expect to expand our service and distribution in Gainesville and Ocala, as we enhance our Northern Florida coverage, which, when complete, will provide contiguous coverage from the Florida Keys to the Northern Florida border.

Additionally, we continue to improve our nationwide footprint as we work on roaming arrangements that provide additional mobility for our customers.

Our Mexico unlimited offering was launched in April.

In June we greatly expanded Mexico unlimited by introducing our unlimited international product.

Our subscribers can now call landlines in 1,000 cities and towns in over 100 countries, as well as text wireless callers on an unlimited basis.

Similar to the Mexico unlimited offering we saw a need, we engineered a solution and we delivered tremendous value.

This compelling offering is further evidence of our ability to lead and drive segment growth.

Overall, we are pleased with the demand that we saw for unlimited wireless in the second quarter.

From our vantage point the pay-in-advance segment continues to gain interest among consumers.

Recognizing this demand for value we have made adjustments to our plans that we believe will help us build upon our leadership position in the unlimited wireless segment.

With that I'll turn the call over to Braxton.

Thank you, Tom.

Before I get to my discussion of the quarterly results I would like to emphasize a couple of points for everyone.

First, our business continues to grow, with total subscribers up 36% year over year.

This subscriber net additions for the second quarter, while lower than Wall Street consensus, do not reflect lower gross additions, but are the result of higher gross additions from customers' purchasing promotional handsets in previous quarters where the initial investment in their handset did not result in loyalty to MetroPCS.

The MetroPCS value proposition is selling very well.

Absent the handset promotions, we estimate that first quarter's net additions would have been lower and second quarter's net additions would have been higher, but on a year-to-date basis, directionally the same and ahead of internal projections.

Churn for the second quarter of 2009 was 5.8%, up 130 basis points from 4.5% in the second quarter of 2008.

Excluding our false churn, which is driven by handset upgrades from customers who did not identify themselves as an existing customer, our churn in the second quarter of 2009 was 3.8%, or up 100 basis points from 2.8% in the second quarter of 2008.

Churn is very seasonal in nature and the second and third quarters have historically always had elevated churn, which is compounded this year by the accelerated growth in gross additions.

78 of the 100 basis point increase is due to the significant ramp in gross additions over the preceding three quarters versus the comparable prior year, which resulted in incremental disconnects this quarter of over 140,000.

We have a major focus on bottom-line profitability, measured by adjusted EBITDA prescriber, as well as free cash flow in order to profitably promote the business.

EBITDA and free cash flow are key to building long term shareholder value.

There are many different variables that ultimately maximize EBITDA.

Achieving a balance of the metrics is accomplished when companies fine tune the business over time as they mature and industries evolve.

By design it is our low-cost structure, it is our true competitive advantage and is unparalleled by any other wireless carrier.

We are pioneers in unlimited wireless and we are the best prepared to compete.

We intend to be here for the long term.

Our business is not an experiment or a bolt-on to traditional wireless plans.

It is all we do.

With that being said, let's take a run through the financial results for the quarter.

We ended the second quarter, 2009 with approximately $1.1 billion in cash and short-term investments.

We believe our strong financial condition and liquidity is a significant differentiator and will allow us to capitalize on unique opportunities for future growth when they occur and will allow us to continue to be the leader in the unlimited wireless space.

Based on current business plans we believe we are now past our low cash point.

We are now a net cash generator on an unlevered basis.

Our total leverage was approximately 4.4 times, competed in accordance with the indentures governing our 9.25% senior notes, at the end June, and our net leverage was approximately three times, demonstrating the ability of our model to significantly reduce leverage quickly overtime.

With debt maturities in 2013 and 2014, the weighted average cost of debt for the quarter are below 8.5% and substantially all of our debt fixed by its nature or through interest rate swaps, and with approximately $1.1 billion in cash and short-term investments we are very well positioned from a balance sheet perspective.

We are pleased to see the positive impact our ARPU initiatives had during the second quarter.

Our second quarter 2009 ARPU was $40.52, up $0.12 when compared $40.40 in the first quarter of 2009.

I do want to point out that we reclassified $24.7 million from service revenue to equipment revenue in the second quarter related to dealer computation on the sale of promotionally-priced handsets.

This is a reclass related to the acquisition of the customer, and does not affect ongoing service revenue.

Therefore, it is an add back to ARPU.

As we have moved away from lower-priced handsets this will be much less of an issue in future periods.

As Roger and Tom have discussed, the rate plan changes we have recently announced could lead to ARPU dipping in the high 30s, but importantly, we still expect mature market adjusted EBITDA margins to be in the mid-40% range and reach free cash flow positive on an unlevered basis in 2009..

Our CPGA for the quarter was approximately $160, as compared to $141 in the prior-year second quarter, the lowest of any wireless provider.

Other unlimited carriers have historically had CPGA in the $200 or higher range.

This low CPGA is the key to generating the adjusted EBITDA prescriber that we do.

MetroPCS's result demonstrate spending efficiency in our marketing and distribution, offset by promotional handset activity during the quarter.

The approximate $19 increase was primarily driven by costs associated with the launch and ramp up of operation of the New York and Boston metropolitan areas, as well as promotional handset activity.

Our CPU for the quarter was $16.82, as compared to $18.23 in the prior-year second quarter.

This significant decrease was due primarily to continued cost-reduction effort and the increase in scale of our business, partially offset by expenses related to our recent launches and ramp up of operations in the Northeast market segments.

Our business continues to scale and our CPU continues to be among the lowest in the industry.

MetroPCS is focused on profitable growth, and we are pleased to report that during the second quarter adjusted EBITDA was approximately $234 million, which represents a margin of approximately 31% compared to 35% in the second quarter of 2008.

These results were after an adjusted EBITDA burn of $60 million for the second quarter in our Northeast markets.

Our core market adjusted EBITDA margin was approximately 41%, compared to approximately 39% in the second quarter of 2008.

In addition, our original core market adjusted EBITDA margin was 50% for the second quarter of 2009.

We believe over time all of our markets on a consolidated basis can achieve a mid-40% adjusted EBITDA margin.

I'd like to highlight a few items from the income statement and cash flow statement.

On a consolidated basis both service revenue and cost of service continue to grow as our overall subscriber base increases.

In the quarter, our service revenue and cost of service grew 28% and 30% respectively to approximately $767 million and approximately $269 million.

Service revenues in the current quarter were reduced by a reclass of $24.7 million to equipment revenues, again, due to rebates to dealers to provide additional compensation on the sale of lower-priced handsets as required by EITF 0021.

Our consolidated selling, general, and administrative expenses were $142 million for the second quarter of 2009, representing an increase of approximately $29 million when compared to the year-ago quarter.

This increase is primarily related to the launch of the Boston and New York metropolitan areas.

We generated $159 million in cash from operating activities in the quarter, a decrease of approximately $65 million from the prior-year second quarter.

Offsetting this operating cash flow we incurred capital expenditures of approximately $143 million during the quarter.

We also generated $26 million in consolidated net income during the second quarter, or $0.07 per share.

For the year ending December 31, 2009, MetroPCS today reaffirms the guidance it originally provided on November 5, 2008, and reaffirmed on May 7, 2009.

MetroPCS currently expects net subscriber additions to be in the range of 1.4 million to 1.7 million on a consolidated basis, and consolidated adjusted EBITDA to be in the range of $900 million to $1.1 billion for the year-ending December 31, 2009.

MetroPCS currently expects to incur capital expenditures in the range of $700 million to $900 million on a consolidated basis for the year-ended December 31, 2009.

MetroPCS currently expects to reach free cash flow positive on an unlevered basis in late 2009.

The Company currently plans to focus on building out networks to cover approximately 40 million of total population during 2009 through 2010, which includes the Boston and New York metropolitan areas in which service was launched on February 4, 2009.

I'd now like to turn the call back over to Roger.

Since we launched service in 2002 we've emphasized our low-cost structure, which has enabled MetroPCS to maintain leadership position within a competitive environment.

Longer term, we believe that our low-cost leadership position will be a catalyst for growth, and will provide a seamless financial platform for our transition to new LTE services.

We believe that the continued benefits from scaling our business and our laser focus on maintaining our cost structure advantage will allow us to continue our leadership position, while delivering subscriber growth and world-class EBITDA margins.

Thank you.

We'll now move to Q&A, operator.

(Operator instructions).

Your first question comes from the line of Ric Prentiss with Raymond James.

Good morning, guys.

Good morning, Ric.

The first question I've got is on the churn side.

Obviously you talked a little bit about false churn, adjusting for that 3.8% versus 2.8% a year ago, and a lot of the increase pointing to higher gross adds over the last while.

If we look at your gross ad share, it came in line with what we were looking for, 1.3 million on the gross add side, but the churn was still significantly higher than we thought.

Can you talk to us a little bit about where you see churn going over the next several quarters, seasonally-high second quarter, third quarter, and what you're doing to really improve churn?

That'll the first question.

Yes.Ric, I think that the right way to look at churn is, we've been somewhat a victim of our own success.

Certainly the upgrade phenomenon did increase over 30 basis points when you go through the numbers, and part of that was driven by the promotional handset activity that we had during the quarter.

I want to be clear that on June 1st we moved away from the $49 handset to $59, and on August 1 we increased the $59 handsets to$ 69.

so we have substantially moved away from that.

Secondly, we talked about 78 basis point impact on churn due to the accelerated growth that we had.

And we also pointed out that we feel that the gross additions on a trailing nine-month basis were inflated because of our handset promotional activity.

And again, we moved away from that, and without that we think things would have been more normalized between the first and second quarter.

So in a nutshell, that's how we're looking at it.

I do want to point out we don't give quarterly guidance, but historically third quarter churn has been as high or higher than the second quarter.

Also, on the net ad basis, which we don't have the churn numbers for core versus Northeast, but the north -- the core markets seemed to be a lot less than we were expecting on the net add side.

I think Tom mentioned that they were positive on a year-to-date basis, but it makes it sound like maybe negative adds in the quarter for the core markets -- and those markets have been around longer, wouldn't have thought that the pent-up gross add impact would have been as significant there.

Is it really the handset issue that's affecting the core markets and can they get back to stronger growth to head towards 15% ultimate penetration goal?

Well I'll take the first part of that.

Yes, Ric, yes, we do think that the $49 handsets and our promotional handset activity did have a significant impact on the core markets.

As you could see they were slightly positive for the quarter at 13,000, so overall it was not negative, but Tom did make a key point that every one of our markets continues to grow and has positive net additions for the year.

Yes, and Ric, we absolutely believe there our goal of achieving a mid-teens15% or more penetration in all of our markets on average is definitely the goal.

I do think that the higher and more mature markets have higher subscriber basis and therefore, a small increase in churn has a disproportional affect as it does on markets that are just newly introduced, like New York and Boston.

Your next question comes from the line of David Barden with Banc of America.

Good morning, guys.

Obviously this result conjures up lots of question, but I guess the first one is with the stock down 26% right now, you guys missing expectations for adds having lowered your prices, it plays in to the hypothesis that this isn't maybe just a one-time event; that the next competitor that comes in comes in at lower prices and lower prices and the whole thing spirals downward, and that seems to be what's getting reflected in the stock.

And yet, irrespective of all that you guys have reiterated your guidance.

So I think it would be helpful for people to hear specifically what you think is going to happen from a competitive standpoint in response to how you've priced, in response to how (inaudible) is therefore priced, because obviously that's going to be a big part of it.

And then I guess the second question, if I could, is on the ARPU side of it.

This is the second quarter in a row we've redefined ARPU and it's not clear to me what changed from Q1 to Q2, where you have some promotions that you -- maybe were supposed to be in service revenue but then were in equipment revenue and then we backed them out again, and whether they're going to recur or not.

So if you could get real specific on that, Braxton, that'll be helpful, too.

Thanks.

Let me take the first part of that.

We can't, obviously, predict the future, but the thing that I think we ought to focus on is that this a natural evolution.

As I mentioned early on in my prepared remarks that we expect that over time all technology-based businesses -- and certainly wireless is probably one of the fastest growing technology-based businesses today, certainly service businesses -- so we expect that at prices in what we see as more value in the price plans we offer, we haven't changed our price plan range.

It's still $30 to $50.

We feel there's a tremendous value now in the $45 and $50 plan, particularly for the international long distance on an unlimited basis.

So we feel that it is absolutely imperative that companies like ourselves focus on our cost structure, because the superior cost structure does have a huge advantage as we add more value in to these price plans over time.

So we see this as the normal course of business, I guess, and clearly, as we have backed away from these promotional and more aggressive handset pricing that the value we want to make sure is still contained to customers, particularly in this difficult economic environment.

Do you want to take the second --?

Yes, Roger.

About the competition, to date in our Wal-Mart sales we've not seen any change in our sales from Wal-Mart, and so, therefore, we haven't seen the introduction of Track phone influencing our numbers at Wal-Mart.

I can't speak for the competition, but so far that hasn't been the case.

Understand that Boost now will be under Virgin's leadership I don't know how that's going to impact the marketplace, but it'll be interesting to see how that rolls out, as well.

David, on to your question on ARPU, let me try to explain this fairly simple.

We bundle in the first month's worth of service with the price of the handset, and because of that there is some gap out there, EITF 0021, that deals with accounting for revenue arrangements with multiple deliverables.

And what basically you have to do is allocate the total consideration of the handset bundle to each of the components, be it the first month free, versus the price of the handset.

What we had is not a redefinition of ARPU, but what we had is, for the first time our overall consideration was not sufficient to cover the fair market value of the handsets.

And because of this gap, we had to do a reclassification, which was related to the initial acquisition out of service revenue to equipment revenue.

Pure geography, no ongoing impact of that reclassification, one time related to the acquisition.

And that was the $24.7 million reclass out of revenue -- out of service revenue toe equipment revenue.

ARPU is a metric that measures the ongoing revenue per user from a customer.

The ongoing revenue per user of the customer is not impacted by this reclass.

Now to specifically answer your question about future periods, we did raise the price of our handsets from $49 to $59 on the low end on June 1st, and on August 1st we raised them again to $69.

You will see this issue again during the second quarter, but as we have significantly ramped the prices up on these lower-end handsets this issue will be much less and much less material in future periods.

Your next question comes from the line of Jennifer Fritzsche with Wells Fargo.

Thanks for making the question.

Just continuing on David's point.

Excluding the ARPU add back I calculate that ARPU in the quarter -- second quarter was about $39 and clearly this was before the changes in pricing that went into effect on Saturday, and I know Roger, you said ARPU would be in the high 30s, but given that you're no longer getting revenue from some of the fees you were able to charge before, do you think the ARPU deterioration could be more material here?

And just quickly as an add on, I know you don't give third-quarter trends guid -- or quarterly guidance, but could you give any color on July, given that that's in the books and with the competitive landscape changing, I know you mentioned the Wal-Mart data point, but anythin -- any other color would be helpful?

Well, Jennifer, let me take the first question.

Again, the ongoing ARPU from our customers is not impacted by this service revenue reclass relating to the acquisition.

We have provided a longer-term view on ARPU dipping in the low 30s, but we're not going to provide any additional guidance beyond that, nor are we going to provide any guidance or additional color on the third quarter.

Second piece.

Okay, and then just one -- oh, go ahead.

Yes, Jennifer, would you repeat the other part of your question, please?

I don't know if you're going to talk anything, I was just wondering any color on July trends, but it sounds like that might not be answered, but just one other question.

On the first quarter promotion -- or can you give color, Braxton, as to the -- I didn't really understand when the cust -- first quarter promotion where customers were not loyal, can you explain that a little bit further?

Yes, basically, when we were selling handsets with the first month bundled in for free for $49 to the customer, we attracted customers who did not have as much buy-in investing into the MetroPCS value proposition.

And while it enhanced our growth during the first quarter, what we saw is a lot of those customers were not loyal and left MetroPCS.

Hence we've moved away from that pricing, as we said, first on June 1st and then again August 1st.

Tom do you want to elaborate on that?

Yes.

As we move the handset pricing up what we're really trying to do is get greater loyalty by somebody investing in the handset and then looking to get long-term value out of the rate plans.

As we've talked about, Roger and I on the call, as we've changed our rate plans -- and we always tried to give greater value inside of the price buckets, $30 through $50 -- we think that this combination is extremely strategic and the right move for us to do at this point.

Great.

Thank you.

Your next question comes from the line of Scott Malat with Goldman Sachs.

Good morning, thanks.

First I just wanted to ask maybe about Boost, wondering about the competitive dynamic there.

Are there any markets where the pressure from them maybe has slowed or they've cut back on marketing?

What I'm trying to get a hold on is if you think there are already some capacity issues with Sprint in certain locations.

And then the second question I have is a little bit more of a macro question.

I know we're blaming this -- a lot of the churn issues on a bunch of different factors, but if you actually look at the underlying health of your lower-end consumer unemployment among those without a high school diploma -- which I think is a key indicator here -- has doubled, has gone from about 8% to 15% -- or over 15% in the last year.

Wondering how that's affecting the low-income customer.

Are they turning off and turning back on more, are they having more trouble paying their bills, are you seeing the paycheck cycle more pronounced, and what are you seeing out of that consumer?

Thanks.

Scott, let me just talk about Boost here for a second.

We believe that they're probably doing well in markets where the model doesn't exist.

They have a nationwide footprint., it's on the IDEN network.

I don't know the CPJ impact, but that's for everybody else to look at and to try to digest, so we expect in markets where the model wasn't that they are doing very well.

As I mentioned just a second ago, I don't know what the future holds, because as they operate under the Virgin Mobile leadership upcoming as they announced I think that's a wait and see game for us.

Yes, in regards to the question about segments of our customer base in terms of the -- shall we say the lower end of the economic group, we have really seen no specific evidence and we view the exit interviews and these are surveys and of course they're done on a periodic basis.

I don't think we have anything over the last 60 days, but we have certainly a dynamic in the marketplace that would suggest there's continual change, but up until now we have not seen the so-called -- the more economic disadvantaged having extraordinary churn, at least through that eye piece that we have today.

I think the part that also lends to that is that in our chord cutting, chord cutting is becoming more popular and hence people are making a choice to use a mobile device versus stationary device.

So we think inside of that demographic that certainly helps everybody afford a mobile device.

Okay.

Thanks.

Your next question comes from the line of Simon Flannery with Morgan Stanley.

Thank you very much.

Good morning.

Yes, can you help us think through the impact of the price changes you've put through, perhaps first, any dealer feedback that you have and any early response from the consumers?

And then, if you can give us a little bit of color into your rate plan mix as it currently stands, people on the sub $40, $40, $45, and up, to what extent you think you're going to see some people -- or a lot of the $45s going down to $40, and over what sort of time period you're assuming that might happen?

Thanks.

Yes, Simon, I'll address the dealers.

Any time that we've put out promotions that we believe give greater value from the end user we get a very large acceptance from our dealer population, so to that end, everything that benefits the consumer is always going to be seen as a positive to a dealer, as it drives door swings, increases the brand and allows more people inside of a community to understand what we've done.

The viral nature of how we sell, as we mentioned about the West Coast inside of our prepared remarks, that actually helps as the word gets out that we do have applications now in our $40 and $45 rate plans that didn't exist before.

We think all of our dealers, as well as our distribution partners, are going to absolutely benefit from this change.

Yes, and the other part of the question that you have is really is there migration threats between various rate plans, and now that we've effectively have added a good deal more value in the $40 plan -- as we have added to all rate plans -- maybe what's not as apparent is the value of the $45 plan and what we see as a $50 plan was Smartphone and now international long distance, which is a $50 ARPU item I think mentioned earlier in our prepared remarks.

So I think we have -- the answer is, yes we do expect some migration, we have never had as much in the past -- we have never had as much, shall we say, interest in our $50 ARPU subscribers.

So we do look for an offset here, but we can't really, at this point, speculate as to what the net differential will be.

One extra thing, Simon is that the introduction of our unlimited international plan we've seen just exceptional acceptance of that.

We've seen consumers who absolutely love the program, dealers who love the fact that it brings more consumers to their door.

Existing consumers, which we think will long term help with churn, as well as new share of decision.

So we think that's a positive, as well.

That's a minimum mark of $50 on those customers?

Absolutely.

Thanks.

Your final question comes from the line of Romeo Reyes with Jefferies.

Hello?

Can you hear me.

Hello Romeo.

Yes, hi.

Just wanted to follow up on the churn since everybody's talking about this.

When you look at first bill non-pays I think you guys and Leap disclose your churn differently, calculate it differently, in order to take out the noise, which I think there's a lot of noise here, it is possible to adjust and take out the first bill non-pays here because that -- I don't know if -- when you look at the first quarter net add -- gross adds, rather, of 1.5 million something like maybe that 78 basis points implies something like 10% of those gross adds weren't really customers or first bill non-pays (inaudible) the customers, can you give us a sense as to, oh, whether that number is -- for Q2, if that's going up, down, or side ways?

First of all.

And second of all, would you consider just adjusting where you calculate churn?

Thanks.

Yes, I think -- Romeo, I think the largest difference between our respected methodologies is we have a process that's really not tracking customers, it's tracking handsets.

And we talked about the impact of the upgrades on customers coming and not identifying themselves as a previous customer, and the churn for the second quarter minus that being 3.8%, which was up 100 basis points over the prior-year's second quarter.

That's the main difference between what MetroPCS is doing and what Leap's doing.

They don't have that phenomenon to that extent.

So I think when you look at things more on an apples-to-apples basis that's the number that you need to focus on.

Hello, and Braxton, is the number closer to 10% of gross adds or 15% of gross adds and how are those first bill non-pays trending in Q2?

Well, the -- as we've said, that -- the way we take a look at the false churn, or the customer is not identifying themselves when they upgrade the handset was about 200 basis points of the total churn that happened in the second quarter, and that's really the way that we look at it.

And then you can translate that into gross -- a percentage of gross additions, et cetera.

All right.

Thanks.

Ladies and gentlemen, we have reached the allotted time for questions.

I will now turn the call back over to management.

Thank you again for participating on today's call.

We appreciate your interest and support of MetroPCS and we look forward to our next quarter of continued progress.

Operator?

Ladies and gentlemen, this concludes the MetroPCS Communications 2009 second quarter conference call.

Thank you for your participation.

You may now disconnect, and have a pleasant day.