T-Mobile US Inc (TMUS) 2010 Q1 法說會逐字稿

Good morning, my name is Sanya, and I will be your conference operator today.

At this time I would like to welcome everyone the first quarter 2010 financial results conference call.

(Operator Instructions).

Thank you, Mr.Terreri, you may begin your conference.

Thank you, Sanya, and good morning, everyone.

Welcome to our first quarter 2010 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 Tom will provide an update on number of operational results and initiatives,then Braxton will review the financial highlights of the first quarter 2010, and finally, Roger will provide an overview of our business, followed by 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 web site at www.metroPCS.com under the Investor Relations tab.

Also this quarter, supplemental slides are available for downloaded printing on our Investor Relations website.

Please note however, that management will now refer to the slides in their prepared comments.

We prepared these slides as a means to show quarterly highlights, graph historical trends in many of our metrics, as well as compare our industry leading low cost structure to other major wireless providers.

These slides may contain forward-looking statements, and may refer to publicly available information.

Before I turn the call over to Tom, 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, anticipate,s expects, intends, plans, should, could, would, view, estimates, projects and other similar expressions typically identify forward-looking statements.

Forward-looking statements include but are not limited to statements we make regarding our future plans, our prospects for success in the highly competitive wireless environment, the effectiveness of our marketing efforts, the seasonality of our growth, the improvement in the economy, forecasts when our NOL's will be used, when our acquisition of C9 Wireless interest in Wireless and Royal Street Communications will close, the dynamics of the wireless marketplace, the value customers ascribe to our service, the rollout and launch of 4G network and services, the future cost of LTE and cost advantages of LTE, and impact of Wireless for All and it's acceptance by consumers, our objectives, strategies, goals, future events, revenues, or performance, or other information that is not historical.

Forward-looking statements involve risks and uncertainties that could cause actual results or the timing of events to differ from those made in the forward-looking statements, including but not limited to competitive responses, the change in competitive dynamics, the success of our marketing and cost control initiatives, our ability to launch our LTE network, our ability to efficiently manage our spectrum use, changes in tax and regulatory fees, or the continued success of our indirect channel distribution.

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

Our forward-looking statements also are subject to general economic conditions, financial, competitive, business, political, regulatory, and other factors that are beyond our control, including but not limited to the risk factors described in our earnings release, which is available on our website and our annual report on Form 10-K,, quarterly reports on Form 10-Q, and periodic reports on Form 8-K including our quarterly report on Form 10-Q, filed for the quarter March 31, 2010, to be filed by Monday, May 10th with the the SEC in other filings with the SEC, all of which can be obtained free of charge at www.SEC.gov, or from our website, or from the Company by directly contacting the Investor Relations department.

We encourage you to review them.

We would also like to remind you that the results for the first quarter may not be reflective or results for subsequent period.

Also, I would like to remind everyone affective January 1, 2010, we now aggregate our 13 operating segments in to one reportable segment.

For anyone listening to taped or webcast replay, or reviewing written transcript of the call, please note that all information presented is current only as of May 6, 2010, and should be considered valid only as of May 6, 2010 regardless of the date reviewed, read, or replayed.

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

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

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

I hope by now you had a chance to review the earnings release issued this morning, with the financial and operational results for the first quarter 2010.

Again, I 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 March 31, 2010 with SEC by Monday, May 10th.

At this time, I would like to turn the call over to our Chief Operating Officer, Tom Keys.

Thanks, Keith.

And good morning, everyone.

I would like to begin today with a discussion of our first quarter operational results.

After launching our Wireless for All campaign in January, MetroPCS is proud to report record quarterly net subscriber additions, and significantly lower churn.

These operational achievements were driven by the success of our Wireless for All campaign.

In the first quarter of 2010, we recorded nearly 1.5 million gross additions, 692,000 net subscriber additions, and reduced year-over-year churn by 130 basis points to be 3.7%.

As you may recall, the main premises behind our Wireless for All go-to-market strategy included, no contract segment leadership, simplicity and predictability for consumers, Wireless for All traction, and service plan stability.

While we are always mindful of economic realities and the competitive pressures that exist in our markets, we are pleased with our plan mix in the first quarter.

And believe that our current price points provide outstanding value to the consumer.

Maintaining consistent and predictable market pricing is important to the continuation of the success we have seen with the implementation of our Wireless for All campaign.

With regards to our no contract unlimited segment leadership, in our markets, we believe we had more retail net additions than any other retail facilities based wireless provider during the quarter.

This was a great customer response, and a vote of confidence for our new plans.

We leveraged our best of class cost structure to absorb the taxes and regulatory fees into our new plans, and at the same time effectively managed our customer acquisition costs.

Gross additions in the quarter were driven by sales of the Samsung Freeform.

This QWERTY handset was fastest to achieve 100 million units sales in our history.

The Freeform features a QWERTY keyboard and a affordable retail price point of $79.

Smartphones and QWERTY handsets resonate well with our subscribers.

Going forward, we plan to introduce additional smartphones and QWERTY handsets.

For the quarter, MetroPCS was ranked number one in overall share precision, when compared to all of our competitors in the same markets by an independent third party.

Additionally, for the entire quarter, our internal porting data shows that for each month of the quarter, ports in exceeded ports out to MetroPCS versus ever contract wireless provider.

The shift to UNC, unlimited no contract service is in full gear.

Our belief is that this space is growing, and that the market has room for multiple players that offer value and deliver quality to the consumer.

Our new advertising campaign, Tech & Talk, that surrounds our Wireless for All offer with the educational message that you can purchase unlimited talk text and web service plan for $40 period has been well received.

In the first quarter, we spent an incremental $26 million in promotional activities, and we believe this messaging helps educate the public on our new marketing platform, and we believe generated door swings.

Going forward, we plan to continue to develop Ranjit and Chad, and their Tech & Talks campaign, as we highlight the elements of our Wireless for All service platform.

Evidence by this quarter operational results, we believe it's clear that the simplicity and predictability of our new tax inclusive service plans resonated well with the consumer.

Now that the customer is paying for the first month at service at the time of the handset purchase, and paying less for that handset, we have reduced first month bill shock for our subscribers.

With Wireless for All, we've recaptured our market leadership position.

The customer perception of lower cost phones is a key factor in attracting new subscribers.

One of the benefits of this approach, is that the customers is generally out-of-pocket the same amount of cash when they leave the store.

Our indirect distribution channel dealers are compensated on the service plans they sell for selling handsets.

This transition has enabled salespeople to engage with the customer, and better match their needs with a specific service plan.

Now the true value of our $40, $45, $50 and $60 rate plans will be more apparent.

This skill set will be more important to MetroPCS as we move into the 4G era.

As we get into the seasonally slower summer months, we would expect to see lower net subscriber additions, and a seasonal increase in churn.

However, we believe the triple play inside Wireless for All tax inclusive rate plans, lower cost handsets, and payment for the first month of service should continue to have a positive impact going in to the summer months.

Churn in the first quarter which came in at 3.7%, represents a significant reduction from the first quarter of 2009.

On previous calls, I've discussed the idea that managing churns is an ongoing focus for the Company.

With our Wireless for All campaign, I believe we increased overall customer satisfaction, created programs that promote positive distribution, and improve customer behaviors that helped to lower churn for the quarter.

We believe that the majority of the reduction in churn leads to decline in falls churn, as we no longer offer the first month of service for free.

Wireless for All is a campaign and pricing platform is still in it's infancy.

Our goal is to continue to gain traction with our marketing platform, while we stabilized pricing at current levels.

Distribution as well as consumers really found the elements of this unlimited no contract tax inclusive offering satisfying and easy to understand.

The success of Wireless for All is evidence by the results of our recent survey work on new customer acquisitions.

Our internal survey data showed us that roughly one-third of those surveyed transitioned from contracted service.

Over one quarter came from prepaid plans, about one-fifth of previous MetroPCS customers that came back and purchased a new handset in the balance, from new to wireless.

With the roll out of Wireless for All, we grew by nearly 700,000 net subscriber additions in the quarter, and have a total of over 7.3 million subscribers.

As we look forward, we believe the more $45 and higher rate plans we sell, the more stable our ARPU will remain.

In fact during the month of March, four out of five gross additions were in the $45 or higher plan.

We have heard and read everyone's comments as they relate to competition and potential pricing pressures.

The industry continues to be a competitive one, but we believe we are well positioned with Wireless for All now and in the future.

While it's difficult to predict the future, we believe we see signs of pricing stability in the industry.

The simplicity of our tax inclusive offerings makes it easy for customers to know exactly what they are purchasing.

We have redefined predictability, by making the plans easier to budget for.

The tag line we use is, "what you see, is what you pay."

The tax inclusive unlimited no contract plans are the new emerging paradigm.

And while it's still early second quarter results continue to exceed our expectations.

We believe the economic situation in many of our urban markets begun to show modest improvement, over the past six months, our level of hot line activity trended down.

Meaning more customers are paying their bills on time than the previous four quarters.

We are pleased with our execution, and excited about our progress, as we expand the unlimited no contract service segment, and prepare for our transition to LTE.

Now I will turn the call over to Braxton.

Thank you, Tom.

Good morning.

We reported solid first quarter 2010 operational and financial results this quarter.

We had record net additions in the first quarter of approximately 692,000, and ended the quarter with over 7.3 million subscribers, up 21% from the first quarter of 2009.

Our first quarter consolidated adjusted EBITDA of approximately $224 million, was also a record for the Company, and was up approximately 13% year-over-year.

Our strong results this quarter are largely due to two things, successful introduction of the Wireless for All service plans, coupled with our effective management of superior cost structure.

We have a very strong balance sheet and substantial liquidity, with approximately $1.2 billion in cash and short-term investments.

Our strong cash position enables us to look at opportunities for general corporate purposes, which could include opportunistic spectrum acquisitions, corporate development opportunities, future technology initiatives, or the retirement of outstanding debt.

Our total leverage was under four times, computed in the accordance with the indentures governing our 9.25% senior notes at the end of March.

And our net leverage was approximately 2.5 times.

With debt maturities in late 2013 and 2014, weighted average cost of debt for quarter of below 7.5%.

Substantially all of our debt, fixed by it's nature through interest rate swaps.

With approximately $1.2 billion in cash and short-term investments, we believe we are very well positioned from a balance sheet perspective.

We are proud of the record net subscriber additions this quarter.

I would like to again remind those on the call that we operate in a seasonal business.

Now that we are past our major market launches, the first quarter could be an even larger percentage of full-year net subscriber additions.

Churn for the quarter was 3.7%, down 130 basis points year-over-year, and down 160 basis points on a sequential basis.

The dramatic decrease in churn was related to the acceptance of the triple play benefits of our Wireless for All offerings, as Tom has discussed.

Touching on ARPU, our first quarter 2010 ARPU was $39.83, down $0.57 on a year-over-year basis, and down $0.87 on sequential basis.

The decrease in ARPU was primarily due to the introduction of our new Wireless for All service plans in January of 2010, which included all applicable taxes and regulatory fees.

The burden on ARPU for our tax inclusive plans is in the $4 range.

We were able to mitigate the majority of the dilution with the sale of our full range of service plans including our $60 world unlimited offering.

Our CPGA continues to be one of the lowest of any facilities-based wireless carriers in the US.

For the first quarter, our CPGA was $146.

up $8 sequentially and up approximately $12 year-over-year.

Year-over-year increase in CPGA was driven by increased promotional activities in all of our metropolitan areas.

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

Our CPU for the quarter was $18.79 compared to $16.69 in the prior year's first quarter.

This increase was due primarily to an increase in retention expense, due to handset subsidies on existing customers.

The inclusion of the regulatory fees and the tax inclusive service pricing on our Wireless for All customers, as well as cost associated with our unlimited international calling plan.

Consolidated adjusted EBITDA for the first quarter was approximately $224 million, an increase of approximately 13% year-over-year.

Our consolidated adjusted EBITDA margin for the quarter was 26%, compared to 27% in the first quarter of 2009.

Over the trailing 12 months, we have generated record consolidated adjusted EBITDA of approximately $981 million.

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

In the quarter, on a consolidated basis, our service revenue and cost of service grew approximately 17% and 16% to approximately $853 million and $285 million respectively.

The increases are primarily due to the growth of our subscriber base.

Our consolidated selling general administrative expenses were approximately $160 million for the first quarter of 2010, representing an an increase of approximately $23 million, when compared to the year ago quarter.

This increase is primarily related to increased promotional activities and launching Wireless for All.

We generated $225 million in cash from operating activities in the quarter, a decrease of approximately $82 million from the prior year's first quarter.

Offsetting this operating cash flow, we incurred capital expenditures of $139 million during the quarter.

Our results demonstrate our focus and ability to grow the business, while generating positive cash flow.

We also generated approximately $23 million in consolidated net income for the first quarter, or $0.06 per share compared to $44 million and $0.12 per share for the prior year first quarter.

The prior year quarter does include a one time gain of approximately $25 million, on disposal of assets.

On a non-GAAP basis, excluding the one time gain, EPS for the first quarter of 2009 would have been $0.05 per share.

To help the Street with forecasts going forward, based on the amount of tax NOLs we have outstanding at just under $1 billion.

And including ongoing amortization of our spectrum licenses for tax purposes, we do not anticipate at this time paying meaningful cash taxes until 2014.

MetroPCS recently made significant changes to the pricing structure of it's service plans, and has enhanced market position.

Thus far the Company has been pleased with the customer interest and results.

But in what continues to be a competitive and price sensitive market, MetroPCS does not anticipate providing financial guidance for fiscal year 2010.

Thank you.

Roger?

Thank you, Braxton.

Good morning, everyone.

We are very pleased to report strong quarterly results, highlighted by net addition growth in the quarter, and significantly lower churn.

Our strategy has, and continues to be to provide predictable affordable and flexible unlimited service on a no contract basis.

With a robust handset line up, national coverage, international offerings, and our 4G LTE network under construction, we intend to provide subscribers with a post-pay experience, in a prepay environment.

This is truly an exciting time.

After taking an extensive review of our competitive position in the marketplace, in early January 2010, we introduced our Wireless for All rate plans.

These rate plans significantly repositioned our business.

By moving to tax and regulatory fee inclusive rate plans, we addressed the desire from the subscriber for simplicity and predictable pricing.

We believe these rate plans and respective price points solidify position as offering the best deal in town.

We believe the change in rate plans, including the elimination of the first month free, lowering handset prices by a corresponding amount, and our new marketing campaign has resonated with our customers, and has positioned us well for the future.

We are approaching a point in time, in which the wireless experience will dramatically improve.

In our markets, we have been actively building our 4G LTE network.

And in early 2010, we have completed our first S calls in both our Dallas, Fort Worth and Las Vegas markets.

The introduction of commercially available, 4G LTE is exciting prospect and illustrates and enhanced technology that promises major improvements to the broadband wireless experience.

The world is moving towards 4G LTE service.

And here the the US, we are the clearly leader in the no contract segment.

The internet going mobile.

And when we launch 4G LTE, we will be well positioned to enable subscribers to utilize a next generation network on advance smartphones and QWERTY handsets.

It will be a premium service at an affordable price, 4G LTE will enable exciting new services including, many video applications.

But importantly from our perspective, moving towards 4G greater capacity and significantly reducing cost per bit.

We believe one of the significant advantages of LTE, is that the cost of adding capacity is substantially less, than adding the same amount on CDMA, and has a game-changing consequence.

As industry wide prices for data per bit are declining, LTE enables MetroPCS to further improve world class cost structure for broadband data access.

Part of our long-term strategy is to manage one of the lowest cost networks of any US based broadband wireless carrier The combination of our CPU and CPGA metrics are among the lowest in the industry, and help us compete effectively, while delivering healthy adjusted EBITDA margins.

And building our 4G network, we are able to manage our costs, while advancing the technology, and providing the subscriber with a superior experience.

Our initial 4G launch will be an IP data overlay, over our voice CDMA 1x RTT network.

Over time, we will move to an all IP network.

This migration is expected to provide tremendous leverage in CapEx and OpEx, and drives our low cost operating network strategy in the broadband data era.

Since we began this business, we have been judicious in the use of our spectrum, and we have been pioneers in developing technologies to get the most from our spectrum holdings.

For example, we've helped to pioneer six sectored cell technology, and the extensive use of DAS systems that enable our subscribers to enjoy tremendous service coverage, and handle exceptionally high traffic on our systems.

As we build our 4G network, we will continue to develop and utilize technologies that enable our subscribers to enjoy the benefits of a next generation network.

Additionally, with a focus on handsets, we believe we will help to usher in wireless mobility, for the way consumers access the internet, using smart phones and QWERTY handsets, While still in early 2010, we intend to continue our focus on retaining our market and segment leadership.

Our Wireless for All campaign has redefined predictability with true all-in pricing.

And we believe we have positioned the Company to capitalize on this dominant emerging paradigm.

With over 7.3 million subscribers, and nationwide coverage of approximately 220 million pops, we have grown tremendously in the past few years.

We have also evolved the business to deliver a subscribers a post-pay experience, on a no contract pay in advance basis.

The rapid growth in subscriber base provides us an opportunity to redefine the wireless experience for the industry.

Industry analysts project that the no contract service segment will drive much of the growth in the wireless service industry going forward.

Within the unlimited segment of wireless, total revenue is forecasted to grow at a roughly 25% CAGR,, through 2013.

From investment standpoint, we are focused on creating long-term shareholder value.

We believe investors should focus on four items when looking at MetroPCS, including our Company's ability to innovate and offer services, and products customers truly want, our continued differentiation in the marketplace, our strong balance sheet and the ability to generate free cash flow.

And finally our ability to grow profitably.

We had a record first quarter, and we're pleased so far with our with our momentum going in to the summer months.

We are focused on growing the business profitably, and launching our 4G service with a focus on maintaining our cost leadership position.

Thank you, we will now move to the Q&A.

Operator?

(Operator Instructions).

Your first question comes from Brett Feldman from Deutsche Bank.

Thanks for all the color around churn, but I was hoping we could go back to that a little bit.

You talked in the past about how this false churn was as high as 1.5%.

That's about the amount in which you showed an improvement in your churn this quarter.

But you also highlighted other things like the lack of sticker shock, less hot lining.

Could you maybe break it down for us, in terms of why you think the churn levels improved so much, and what was the biggest contributor.

Brett, hi, this is Tom.

Good question.

I think it's a combination of things.

We don't have a percentage breakdown for all the elements.

But I think the biggest something really simplicity, when you think of the rate plan, it's $45 to $50.

And that's what it's going to be when you get to pay your bill.

Sticker shock is tremendously important, but the simplicity that there is no other taxes and fees.

You can budget that, and it's really simple to come up with two $20s and a $5.

That has been really important, as we've gone forward with the campaign, Wireless for All.

I think the second piece that we looked at is, as we retrained our whole base, we actually educated every one of our salespeople on the benefits of the rate plans.

So as we sell the rate plan, now consumers truly understand what is inside of every rate plan.

And we find they are using more of the elements of the rate plan than they probably did before, when the service was given away for free.

I think the other dimension was the fact that we have talked in the past about the 1.5% and up to, we think, even 2% of our churn was false.

We think you have to reconsider also, the fact that the program that we introduced was on January 12th.

And so significant part of first quarter was not yet fully baked in to the first quarter results, because we had a carryover for 30 days, obviously on those customers that were still on the other rate plan.

So, I think yes, we are achieving, and realizing that what we indicated before was a false churn.

Whether we are significantly better than that, or about the same, I think we are going to be looking at as we go in to second and third quarters.

And remember, Brett, the real benefit here was the elimination of the first month free.

And moving that consideration that the customer paid which really didn't change, over the reduced hand set prices.

So the incentive to go in and buy new handset to get the first month free was no longer there.

And was really the organic change that reduced the false churn.

Because as Roger said, the full impact will continue to spill in to the second quarter.

But also remember, that churn has some seasonal components, and typically does increase after periods of high net additions.

So under your old pricing model and your old commission model, the subscriber had an incentive, the existing one had incentive to kind of de-activate and re-activate to get the free month.

And the deal kind of had a incentive to encourage this, because they were getting commission on handset sale itself.

And now commission off of the ARPU that they are selling.

So I am just wondering, are you actually seeing less upgrade activity, because neither the customer nor the dealer has the incentive to encourage it?

We are seeing the reverse, Brett.

We are seeing significant increase in upgrade activity which we think while causing some issues with our CPU, and I will direct you to the non-GAAP reconciliation in our earnings release, where you can see the retention costs are increasing by $50 million year-over-year, we think it's actually a good news story.

People are reinvesting in the value proposition of MetroPCS we think it's a harbinger of future positive benefits from a churn standpoint.

But it's really driven by two things it's driven by alignment of the dealer behavior, to capture the upgrade.

But it's also I think importantly to note that our handset prices have been reduced.

We have a very robust line of very desirable handsets, and consumers are coming in and re-investing in the MetroPCS value proposition, because it's more affordable to do so now.

Thank you for taking the question.

Your next question comes from John Chaplin from Credit Suisse.

Hi, guys.

I apologize, if you dealt with this, if you dealt with this at the beginning of the call, I missed the first few minutes.

But we saw the Sprint pricing plans come out this morning.

And the good news on the face of things is, looks like unlimited pricing is stable, which is certainly better than we thought it would be a few weeks ago.

The plans that looked really interesting were the limited MOU plans, for 300 minutes or 1200 minutes at $25 or $40.

I'm wondering if you could talk a little bit about to what extent your customer base values the truly unlimited nature of the plans, to what extent are they aware of how many minutes they are using?

And if you have an idea of what the distribution is of users across the minute spectrum.

How many of your customers use less than 1200 minutes and could possibly be susceptible to these new virgin plans that would be really helpful.

And then one other thing, the $35 million in advertising spend seems like it didn't show up in the quarter.

Is that spend getting pushed out to later quarters, or did the Ranjit and Chad ads come in substantially lower than expected, in terms of expense, what is going on with that component?

Thanks.

Well, let me take the first part of your question if I may, John.

The question about whether our customers want unlimited, I think is really the issue you are raising.

And as you know we still see the voice minutes in the 2000 plus category on average per user.

There are certain segments, we believe in this marketplace where the new Sprint plans might address.

We think we are less susceptible to that, because we have fairly substantial user use that we gone to an all inclusive talk text and web service.

We see heavy use in all those categories.

The question really is if there are -- is a segment that really just uses their phone for texting and web service, and that's what they will be probing.

But from our standpoint, we have heavy use across all three service plans.

So we are just going to have to see.

We think the unlimited side gives people the idea that for a relatively, shall we say a cost affective service to use it without it being concerned about when they are going to be capped on any of those three services.

I think something to add to that, is that in segmentation play, we go after the whole market.

So we are not trying to divide and conquer by figuring out the right customers who is going to walk in the door is going to use less than 1200, to Roger's point, we let everybody use as much as they want, because they are also cutting the cord, which is important to this equation.

With regards to advertising dollars, for Rajit and Chad, I want to let everybody know we didn't take the full $26 million,p and spend it on media.

We have variety of advertising and marketing campaigns that we do, over the course of all of our markets, that was just component, in terms of how we went to market.

We did a lot of things that were in the street, that were in the community.

But we think as we go forward, we wouldn't need the same levels of spend going forward into the second and third quarters, because they are seasonally a little slower.

And we seeded the market with a phenomenal education campaign that doesn't need the same level of spend to continue.

So Jonathan, that really translates into that we under spent $35 million, by $9 million.

But when you are looking at CPGA, and particularly, year-over-year, don't forget that the first quarter of last year, we had significantly subsidized our handsets, which is really not at the case with the approach to the marketplace in the first quarter of 2010.

So we did pick up some organic benefit there from reduced hand sets subsidies, and when you dig in to the numbers that disclosed you can readily see that.

So when I look at the marketing spend, Braxton, it looks like it was up $10 million sequentially.

And little bit more than that, year-over-year.

I was assuming all of the $35 million in incremental advertising spend would be captured in the line item.

Is that not the case.

Is it distributed in other categories within CPGA?

Exactly.

I would like to direct your attention, for further analysis to the CPGA reconciliation, and you can see several components there, and again, I would like to direct your attention to specifically cost of equipment.

And then normalized that for gross ads, and you can see what I'm talking about here.

Okay.

Great, thank you very much.

Great results.

You're welcome.

Your next question comes from Phil Cusick.

Hey, guys.Thanks for taking the call.

I think what people are trying to figure out, and you helped us out a little bit on the call with this.

But how much of this beat is seasonality new plans, or is the economy getting better?

And I know it's really tough to quantify, but can you give us insight in to what your customers are doing, outside of seasonality, are they coming in and paying their bill on a more regular basis, than they were, for example, a year ago or six months ago?

And is there any shift happening through the quarter on that basis.

Trying to figure out health of that sort of low end customer.

Thank you.

Phil, I think we talked about sticker shock, right when you get a first month under the old way that we did business, you got a text message, you had a $50 rate plan, you had taxes and fees.

And that number was brand new to you, and it's the first time you ever got a bill on a text message on your phone.

Now when your are in the store, you know exactly what you paid for, the simplicity the predictability, truly resonates with everybody.

I've been in multiple dealer stores, multiple retail stores across the country.

And people, it takes them about 3 minutes for them to understand exactly what we are presenting, in terms of pricing.

And then we go to everybody, and look at what is in the rate plan, what do you need, what fits your wireless need.

And our sales process connects 360 all the way around the board.

We have robust set of handsets, we introduced 9 handsets last year.

We found a really good sweet spot with QWERTY handsets, and also mentioned in our survey data, that we are seeing a tremendous amount of people who want to leave a contract, and get the benefits, as Roger mentioned of contracted service, in a no contract environment.

And that's important in the economy, we think it's modestly improving, but people don't want the connection to a contract when they can get a lower priced handset and get the benefits of a contracted service.

I think your thesis was right on we have been seeing steady improvement over the last several months, going in to late last year, and the timeliness and of reduction in the number of customers that were hot lining with us, so that's an indicator.

That's great.

So that's improved?

That's continued to improve through this year?

Yes it has.

Thanks, Braxton.

Your next question comes from the David Barden.

Hey, guys.

Congrats on the adds this quarter.

Two questions, if I could.

I guess first, is we had a very similar positive net ad feeling, and call this time last year, kind of high fiving, that Boost Unlimited, hadn't had a big impact.

But then, we spent the next two quarters regretting that the net adds had come from low end phones that engendered bigger churn.

I was wondering if you can talk to us about if there is going be a got you, in the next two quarters about having revved up net adds so aggressively in 1Q.

And I guess, the second question would be, Brax, on ARPU.

There -- you know there was a lot of confusion about all the moving parts in ARPU, you had trade downs, you had repricing.

You had a a lot of new adds coming in at higher ARPU levels, and then there is some of the old base, that may have or may not of changed.

whether the of new ads coming in at higher ARPU levels and the old base that may or may not have changed.

Could you kind of help us get a sense as to whether we should anticipating ARPU growth now, because four to five gross adds are coming in at higher end plans?

Or is there enough of the base so we should be expecting declines?

I guess it is still confusing where ARPU trends are going.

Thanks a lot.

David, I think you've been in a few of our meetings with the got you question.

It's a really good question.

We are looking for the got you.

What we see quite honestly, is in the repositioning of the service plans, we've really eliminated what we believe is really bad behavior on our consumers part, to go and get a new phone at a price where you get a phone, and a rate plan that's probably cheaper than if you just paid your rate plan bill.

So paying for the first month of service, that is major factor in the shift that we've seen.

We think that's probably the key inside of everything we've seen.

Tax inclusive unlimited no contract,p it's really important, but the repositioning of how service plans are paid for, is probably the number one key.

We don't see a got you yet, but we are looking.

I think the idea that the repositioning to us is really very important.

Because we not only repositioned our entire way we go-to-market, and in doing so aligned the incentives.

And I think that's what we are talking about here.

We see a set of aligned on the part of distribution channels, we see the that the customer now is making a more informed decision.

So, and at the same time we have been able to, as I mentioned that we have been able to, so I'd say, transform where the value goes.

So now we've reduced our hand set prices by corresponding amount, that we use to, shall I say, look towards the first month of free service.

Now the customer pays that.

I think this has been a total transformation to a new paradigm to the all inclusive tax paradigm that we think that is so critical for this.

And I believe that we are looking at stabilizing ARPU, as opposed to shifting it in any particular direction.

If I could offer one more thing, that I think we mentioned in the script, but I think it bears repeating.

With our Samsung Freeform, as an example, what we are doing is capitalizing on OEM relationships that are important to us and for the future.

But for right now, we are able to look at hand sets by volume, leverage the volume, and bring compelling offer to the consumer when they buy a handset they appreciate, the form factor and all it's functionality.

And then they see the rate plan that is now tax inclusive, we really think it's a one, two punch is that is unparalleled right now.

And David, on your ARPU question, I hope this helps, approximately two-thirds of our base is now on tax inclusive.

Remember we did a forced migration, and we've had voluntary migrations.

The voluntary migrations have slowed significantly going in to the second quarter.

So we think we are reaching close to equilibrium on people who are comfortable with where they were versus where they are going.

You will see as we continue just to add tax inclusive customers in the future and old customers turn off, some additional movement.

But I think most of it has been accomplished as of this point, or the dramatic change.

And you've heard both Tom and Roger talk about the view, that our focus is on stabilizing ARPU, and doing it through product innovation and operational execution.

And I think the last comment I would make is that which you alluded to is the the notion that, yes, the competitive environment will continue to move.

And we've just seen some of the notes earlier this morning on what the Sprint re-pricing is going to be on Virgin mobile and others.

And last year if I would reflect back, I think we had many more changes, which to me was the major paradigm shift, between before and after tax world.

So now that we've gone and addressed the price points that our customers really want.

We are on after tax basis to regain the predictability side of the equation.

I think we have made the significant transition.

And I'm sure there will be others going forward, that we will look at in terms of changes and tinkering.

But for thus tax inclusion and regulatory fees, was a very significant change in our business.

So we don't see it in the same proportion as we did going in to shall we say second and third quarters of last year.

Great.

Thank you, guys.

Your next question come from Simon Flannery.

Thanks very much, good morning, nice quarter.

I know you are not breaking out the sort of the core and legacy markets anymore.

But can you give us any color around performance here, was there any big difference between some of your newer markets, your older markets between the different distribution formats, big box versus exclusive dealers.

Any sort of geographic sort of deltas, anything that really seemed to out perform the rest?

On 4G, any major OpEx impact this quarter, and any sort of guidance about how we should think about 4G OpEx, as you prepare for launch later this year, over the next several quarters.

Thanks.

So, Simon first on the markets, the northeast being newer, we are still gaining traction, we are still building out the network, we are still getting bigger.

But the northwest is certainly starting to understand who MetroPCS is.

We are very, very happy with that.

Interestingly enough, all the legacy markets, anything other than the northeast, they all had a very, very nice quarter.

We believe that this didn't just resonate in the southeast, it resonated in the west, it resonated in the Midwest.

Everyone of our markets had a very, very nice quarter, so we think it's across the board in terms of outperformance.

Okay.

Great.

As relates to the your question on the 4G, I understood it was OpEx, and not CapEx you that you were focused on,.

You can talk about both of them.

As much as you want, right?

The OpEx, as you know really translates to backhaul.

We think that we have an opportunity to capitalize on many of the dynamics going on there.

there will be an increase in the OpEx obviously to get the backhaul necessary for 4G.

But there will be a gradual change for us, because we will not see the kind of dramatic impact, as it really relates this year.

Primarily because the launches will, as we indicated, take place market by market throughout the second half of this year.

So there will be a more gradual buildup, but there will be a buildup.

One thing I might add as you go to the backhaul world, it's really a a cottage industry.

It's a very fragmented market, there is not just one player to negotiate with, there are many players.

And there are some more major ones, agreed.

But some of the advantages we are seeing as going through a ethernet foundation, and the value we have in having the kind of traffic that we already incur, is that the ethernet backhaul, and the move to that, will be in some cases, will be a cost savings.

Because we have so much traffic now, and we have not taken full advantage of the (inaudible) at each bay station that we will have under our 4G scenario.

So it's mostly cost increase, but there are some savings, and as the backhaul increases.

as the pricing is quite dramatic in terms of price per bip, at higher backhaul rates and lower backhaul rates.

So it's kind of a mixed picture, but it will be gradual this year.

Thanks, Roger.

Your next question come from Ric Prentiss.

Thanks.

Good morning, guys.

Good morning,.

Hi, Ric.

I wanted to touch on the seasonality point, maybe a little bit also.

Obviously very strong numbers this year.

In your slide deck you have that nice slide showing the seasonal items, all the way from 2002 to 2009.

As you look at the second and third quarter on the slide you provided us, typically second and third quarter have been maybe in the mid teens as a percent of the annual net ads.

If I am picking up what you are saying correctly, you are suggesting with no major launches, those might be lower as a percent of the year I guess?

And if so, could you give us a frame work of what we are thinking about, instead of mid teens, are we looking at single digit, are we looking at high single digit, just kind of what your thoughts are?

I guess the thought we have is that we had a very strong first quarter.

The question of what we expect going forward, is really going be determined by what the strength, I think in second quarter.

And I think at this point, we see some encouraging results.

And as a percentage basis, as Braxton indicated, this is kind of a let's not be so terribly optimistic, but we really feel we have strong momentum come out of first quarter.

So is it different than the preceding years, that would be hard one to call.

But it's certainly not going be, first quarter running in to second quarter, and kind of uniform across the year.

We are going to see the seasonality, I really don't think we are going to see, or can articulate anything besides that now, Phil.

It's Ric, I love Phil, but I'm not him.

How about within the quarter itself?

Can you share with us how the quarter progressed, and now in to April too, January, February, March, April?

Typically you have the income tax refund situation, where customers in the segment are flushed with cash.

Did you notice significant shifts between, say the first three months and now April in the books.

I think -- only thing we really noticed it seemed to be a week later this year in January, when the refunds really started hitting.

But when you look at the distribution in the first quarter.

I mean February is very, very, very strong.

And that was the same this year.

January really ramps up towards the end of the month, March comes down a bit from February, but continues to be strong.

And we have indicated that we are pleased with momentum with carrying in to the second quarter so far.

Tom, do you want to add anything?

Yes, Ric, the only real anomaly to put to this, is we didn't launch the program until the 12th of January.

We actually started working on this about eight months beforehand.

But we didn't launch it until January 12th.

And we didn't roll this out to distribution, until the last day of December.

Obviously it was a pretty big event.

We needed to keep it pretty low key, until we had it buttoned up.

And as we rolled it out, and we got all the distribution to understand what we were doing, then it was a rush to get inventory allocation.

Because now everybody understood what the pricing was going to be, they were starting to get the message and understood the simplicity, as we went through the training points.

So it took us a little bit to get inventory in the channel, to the levels we were comfortable with.

So to Braxton's point -- was it a week later, because of income tax?

I think we could go there, but I also think it took awhile to get the inventory in the channel for us to really see momentum at the end of January, and then carry through in to February.

Just a quick one on the Harbinger word, that you mentioned, Braxton.

We hear a lot of buzz in the press about Harbinger SkyTerra building a LG network.

Clearwire, last night talked about changing their Intel agreement and moving to LTE quicker.

Any thoughts about going wholesale on a network?

Are you bound and determined to build your own network owned 4G LTE?

I think we are committed to building our own network, RIc.

I just thought I would see.

When I heard the word Harbinger I thought I would ask.

Got it.

Thanks, guys.

Your next question come from the John Hodulik from UBS.

Great.

Thanks.

Again, I apologize, I joined the call a bit late.

Just back on the churn issue.

Did you guys say, or is there is this a situation where you guys believe, aside from normal seasonality, that this new level of churn which we are seeing in the quarter, which is excellent, is sustainable, going forward?

And how much of the reduction we are seeing, we talked about this a lot, how much is purely the result of Wireless for All, that you guys are the low priced high value offering in the street, and on the street?

And that it sort of requires you to maintain that level of competitiveness going forward?

And I guess, a little bit of a follow up to Ric's question, how did churn progress through the quarter?

I will take a piece of that, I think churn in the quarter, obviously, as since we just rolled it out as Braxton mentioned, in the 12th of January.

We didn't get a January effect in terms of churn, because we were still working on the old model, so you can just imply from that it got better in the quarter, because we had the product rolled out in February and March.

March would be meaningfully less than the 3.7% that you showed here.

Directionally correct.

There is seasonality absolutely I don't think we looked at this thing any other way.

The question is how well will it do in to the future, and can we continue our momentum.

And that's about your execution, and we are going to continue to educate our dealers.

We are going to educate our customers on what they are buying.

We are going to educate them on what they are buying, what tax inclusive is.

And we've just started this, we are in the infancy.

We are not every place, where everybody understands who we are and this is a long process.

And we are going to wait and see, but we think directionally, it's correct.

In terms of the WFA and really the level of competitiveness, I think you are suggesting there maybe concerned about price pressures.

I think there is a number of other things in the equation and the value of the services.

And I really do believe that at this point, we've come to a very useful level.

But the major transition we feel we have made, so tinkering around the edges I think very strong possibility.

There is just one more thing that as we are in the no contract unlimited space, and we've changed everything over.

One of the things that now works in your benefit you have to be in the community, with the support system to support 7.3 million customers monthly.

So going forward, all of our changes were predicated on the fact that we could support our customer base every month, as they came to us and pay their bill.

It's always been that way, but we are going to see more customers pay their bill, because of reduction in false churn.

So that's a important part for us going forward so we felt comfortable, as we progressed through the year, we will be able to put our best foot forward, as we attempt to always reduce churn, and give our customer as better experience.

Thanks, guys.

Your last question comes from Jason Armstrong with Goldman Sachs.

Thanks guys I will stick to one.

Most of mine have been asked.

Just getting back to price plans that came out this morning.

I think the conversation so far is focused on the risk to you, around the plans that anchor around text.

So I will focus on the other side which is the opportunity.

And it is fairly predictable that in the next few days, people are going to worry about cannibalization of existing rate plans.

But you guys would seem to actually have a lot more insulation than most, given where your voice minutes of use fit per customer.

Seems like if anyone could roll this out, without risking the rest of their base, it would seem to be you.

So just wondering how you think about, and would you be interested in following suite here?

Thanks.

I think we spoke already that price stabilization for us to really have traction inside of Wireless for All, is going to be important.

As I mentioned, there is still a lot of people who don't know who we, are on this new program.

Success of it, we are very proud of, we think there is a lot of population that we advertised to, that we branded to, that needs to soak it in, and understand it for what it is.

And when that greenfield comes, i.e., their contract is up for being renewed, we figure we have a certain percentage every month, based upon 12 month and 24 month contracts that fall out of that space, that are now open, and will look at us.

So we think we are in the right place with our pricing, and we think the stability is the right place to be at this point.

And it's really predicated upon the minutes of use by our customer base dictates that it's unlimited model.

Okay, basically saying enough room to run within Wireless for All and there is not really an appetite to explore other niches at this point?

Summary.

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 Communication first quarter 2010 conference call.

Thank you for your participation.

You may now disconnect, and have a pleasant day.