T-Mobile US Inc (TMUS) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

And thank you for standing by.

Welcome to the MetroPCS Communications second quarter 2010 conference call.

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

Following the presentation, the conference will be open for questions.

(Operators Instructions).

This conference call is being recorded today, August 5, 2010.

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

Keith Terreri, Vice President and Treasurer for MetroPCS.

Please go ahead, sir.

Thank you, Regina, and good morning, everyone.

I'm Keith Terreri and I'd like to welcome you to our second 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 a number of operational results and initiatives.

Then Braxton will review the financial highlights of the second quarter of 2010.

And 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 nonGAAP measures to GAAP measures in our earnings release, which is available at www.metropcs.com under the Investor Relations tab.

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

Although management will not refer to these slides in their prepared comments, we provide these slides as a means to show quarterly highlights and graph historical trends in many of our metrics, as well as compare our 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 wand 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, 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 and positioning in the highly competitive wireless industry, the effectiveness of our marketing efforts, the expectations of seasonality of our business, forecast when our NOLs will be used, our competivie position in the industry, the value subscribers subscribe to our service, and the growth opportunities available in the wireless industry.

Furthermore, included in our forward-looking statements are the benefits of false churn reduction, future customer usage patterns including whether the web goes mobile, the rollout and launch of our 4GLT networks and services, the cost advantages of LTE, our future LTE services, the impact of wireless-for-all and it's acceptance by customers, and other statements regarding our objectives, strategies, goals, future events, financial or operational results or performance, and other information that is not historical.

Forward-looking statements involve risk and uncertainties that could cause actual results or the timing of events to materially differ from those made in the forward-looking statements, including but not limited to competitive responses, the success of our marketing and cost control initiatives, our ability to launch our LTE network, and changes in taxes and regulatory fees.

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 highly competitive nature of our industry, our ability to maintain our cost structure, our and our competitiors' planned promotions, marketing and sales initiiatives, and our ability to respond and support them, the seasonality of our business, increases or changes in taxes and regulatory fees, and the current economic environment in the United States.

Furthermore, our forward-looking statements are subject to our ability to meet the demands and expectations of our customers, our ability to maintian adequate customer care, manage our churn rate, our ability to secure the necessary products, services, spectrum, content and network infrastructure equipment, changes in customer preferences or demand for our products, our reliance on third parties to provide distribution, products, software and services that are integral to our business, and the performance of our suppliers and other third parties on whom we rely.

Additionaly, our forward-looking statements are subject to the risk factors described in our earnings release and our annual report on form 10K, quarterly reports on form 10Q, and current reports on form 8K, a copy of which can be obtained free of charge from the SEC at www.sec.gov, or from our website or directly from contacting the Investor Relations department.

We encourage you to review these.

I'd like to remind you that the results for the second quarter may not be reflective of results for the full year or any subsequent period.

Also, I'd like to remind everyone that effective January 1, 2010, we now aggregate our 13 operating segments into one reportable segment.

For anyone listening to a taped or webcast replay or reviewing a written transcript of today's call, please note that all information presented is current only as of August 5, 2010, and should be considered valid only as of August 5, 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 otherwise, except as required by law.

The Company does not plan to update or reaffirm guidance except through formal public disclosure persuant to regulation FD.

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

We intend to file our quarterly report on form 10-Q for the period ended June 30, 2010, with the SEC by August 9.

And at this time I'd like to turn the call over to our Chief Operating Officer, Tom Keys.

Thank you, Keith.

Good morning, everyone.

The transformation of our Company with wireless-for-all continued in the second quarter, where we delivered record subscriber net additions of 303,000.

I'm also very pleased to report record low churn of 3.3%, down 250 basis points from the second quarter of 2009, and down approximately 40 basis points sequentially.

The strong subscriber growth and record low churn this quarter, combined with our low cost operating structure, drove record adjusted EBITDA of $322 million, representing growth of approximately 38% in the quarter.

We are focused on executing on our wireless-for-all initiatives.

Our record low churn in the quarter was primarily driven by the acceptance of our wireless-for-all offerings, including a significant increase in year-over-year reactivations.

Clearly, subscribers are reconfirming their choice in MetroPCS.

We believe our wireless-for-all go-to-market strategy reasserted our no contract segment leadership.

Importantly, wireless-for-all was not just a rate plan change.

It was a multifaceted transformation of our business system, which took extensive planning and execution.

The no-contract wireless industry continues to evolve, and we're optimizing our business for sustained execution.

Our second quarter results are truly a continuation of the positive impact we saw from wireless-for-all in the first quarter of the year.

Six months into the year, customer response has exceeded our expectations, and we are pleased with our execution, as we believe our current price points provide outstanding value to the consumer.

We have demonstrated that there remains significant growth opportunity within the no-contract segment.

As of June 2010, in the aggregate of all of our operating markets, MetroPCS has approximately one-third of all no contract subscribers, according to a third party study.

The no-contract segment is growing quickly, and for the last several quarters a third party estimates that over 50% of total wireless decisions are choosing no-contract wireless service plans.

Other wireless companies recognize the growth opportunities within the no-contract space, and we have seen increasing segmentation and differentiation over the past 12 months.

Our wireless-for-all initiatives, low cost operating structure, and unlimited service plans are specifically tailored and engineered to capture the growth within this segment.

Churn this quarter declined both year-over-year and sequentially.

The decline in churn is primarily due to the continued benefit of the move to wireless-for-all tax-inclusive plans.

Approximately two-thirds of our customers are now on tax-inclusive plans at the end of the second quarter.

Our customers now pay for the first month of service with all taxes and fees included, and this has reduced first month bill shock.

We have also lowered handset prices by a corresponding amount, so the net the customer is spending is the same amount of cash in the initial transaction.

Without a free month of service, subscribers now upgrade their handset, and leave their current number in service.

Our wireless-for-all transformation and our focus on our distribution channel enables us to optimize our rate plan mix, thus stabilizing ARPU and maximizing customer satisfaction.

As we move forward, we believe the launch of premium 4G service offerings could have a positive impact on ARPU.

A key component in our record second quarter net subscriber additions is delivering to consumers handsets that they really want.

Subscribers increasingly used our handsets to access the internet as broadband has truly gone mobile.

Smart phones and (inaudible) handsets are popular among our subscribers, and we will continue to introduce compelling handsets to our lineup from OEM's including Samsung, LG, Kyocera, Huawei, ZTE, and Motorola.

We were very pleased with our recent introduction of our next generation BlackBerry Curve to the northeast markets.

Users of our BlackBerry service save approximately half of what they would spend with one of the national wireless contract providers.

We are very pleased with our execution six months into the year.

We believe we will see our typical third quarter seasonality, and would expect lower net subscriber additions and higher churn for the third quarter, consistent with historical norms.

In our operating markets, competitive pressures, increased competition from big box retailers, and the need for carriers to meet and exceed expectations are realities.

While we acknowledge these pressures, we have modeled our annual expectations accordingly to maintain profitable growth as we encounter competition, support our distribution partners, and provide no-contract unlimited wireless services to over 95 million potential customers.

We believe national carriers will have great difficulty in conducting an isolated price war in the no-contract segment without directly impacting the contract subscriber base.

Now I'll turn the call over to Braxton.

Thanks, Tom.

Good morning.

We reported strong second quarter 2010 operational and financial results.

We had record second quarter net additions of 303,000, and ended the quarter with over 7.6 million subscribers, up 22% from the second quarter of 2009.

Our second quarter consolidated adjusted EBITDA of $322 million was a record for the Company, and it was up approximately 38% year-over-year.

Our strong results this quarter are largely due to two factors.

Our successful launch and execution of our wireless-for-all service plans, coupled with our focused management on our superior cost structure.

We have a very strong balance sheet and substantial liquidity, with approximately $1.1 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.

We took a key step in terming out the maturity schedule of our capital structure by recently completing an amendment and extension of our existing term B credit facility.

We were pleased with the reception of this transaction in the marketplace, whereby we extended $1 billion of our $1.54 billion in secured debt by three years to 2016.

We felt that increasing the LIBOR spread for the amount extended by 125 basis points for this three year extension was a prudent tradeoff.

Our total leverage was under 3.5 times, computed in accordance with the indentures governing our 9.25% senior notes at the end of June.

And our net leverage is now below 2.5 times.

With debt maturities in late 2013 and 2014, and now 2016, the weighted average cost of debt for the quarter of below 7.5%.

The majority 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 believe we are very well positioned from a balance sheet perspective.

We're proud of our record net subscriber additions for this quarter.

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

Historically, the third quarter has generally seen lower net subscriber additions, and a sequential increase in churn.

This is our expectation for the third quarter of 2010.

Churn for the quarter was 3.3%, down 250 basis points year-over-year, and down 40 basis points on a sequential basis.

The decrease in churn was primarily driven by the acceptance of our wireless-for-all offerings, including a decline in false churn as a combination of our realigned dealer incentives and stronger value propositions (inaudible).

Our second quarter 2010 ARPU was $39.84, down $0.68 on a year-over-year basis, and up $0.01 on a sequential basis.

The decrease in ARPU year-over-year was primarily due to the introduction of our new wireless-for-all service plans in January 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 this dilution with the sale of our full range of our service plans, including our $60 world unlimited offering.

We were pleased with the stabilization of ARPU experienced in the second quarter.

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

For the second quarter, our CPGA was $164, up approximately $4 over the prior year second quarter.

As you can see in our supplemental slides, our current cost to churn is approximately $5, which is truly best of class.

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

Our CPU for the quarter was $17.90, as compared to $16.82 in the prior year's second quarter.

This increase was due primarily to an increase in retention expenses related to handset subsidies on existing customers, the inclusion of regulatory fees in our wireless-for-all customers, as well as the costs associated with our unlimited international calling plan.

The increase in CPU would have been much higher without the continued scaling of our business.

Consolidated adjusted EBITDA for the second quarter was $322 million, an increase of approximately 38% year-over-year.

Our consolidated adjusted EBITDA margin for the quarter was 35% compared to 30% in the second quarter of 2009.

Over the trailing 12 months, we have generated record consolidated adjusted EBITDA of approximately $1.1 billion.

I'd 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 20% and approximately 15% to $922 million and $308 million, respectively.

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

Our consolidated selling, general and adminstrative expenses were approximately $159 million for the second quarter of 2010, representing an increase of $16 million when compared to a year ago quarter.

We generated $112 million in cash from operating activities in the quarter, a decrease of $47 million from the prior year's second quarter.

The decrease was primarily driven by an increase in cash used for working capital.

We incurred capital expenditures of approximately $176 million during the second quarter of 2010.

During the quarter, our un-levered free cash flow was approximately $146 million.

Our results demonstrate our focus and ability to grow the business while generating cash flow over the long term.

We believe free cash flows will increase significantly as we complete our LTE deployment in 2010 and early 2011.

We generated approximately $80 million in consolidated net income during the second quarter, representing year-over-year growth of over 200%, or $0.22 per share compared to $26 million and $0.07 per share in the prior year quarter.

Now I'd like to turn it over to Roger.

Thank you, Braxton, and good morning.

Today, we reported outstanding quarterly results, driven by a strong set net subscriber additions, lower churn, and a continued focus on expense management.

Our consolidated adjusted EBITDA was the highest in Company history at $322 million for the second quarter, and $1.1 billion in the last 12 months.

In the first six months of 2010, we have added approximately one million subscribers to our base.

At the end of the second quarter, we served over 7.6 million subscribers.

This represents total subscriber growth of over 22% from the second quarter of last year.

The no-contract market is the core of our business model, and we have focused on the unlimited segment to drive our cost leadership.

We believe that the no-contract segment will continue to expand in the US, and ultimately approach levels of adoption seen in some European countries.

Wireless-for-all introducted in early 2010 repositioned MetroPCS to capitalize on the opportunity within the fastest growing area wireless to no-contract segment.

We provide a postpaid experience in the no-contract environment.

We intend to continue to execute on our strategy of providing subscribers predictable, affordable, and flexible wireless service.

By offering a number of compelling services in our rate plan, we believe we provide real value to wireless consumers.

The wireless industry is dynamic, and our move to wireless-for-all highlights our ability to innovative.

It requires signficant systems development, and changes at every level of the organization.

But more importantly, in a highly competitive marketplace, it also highlights our ability to be a nimble competitor.

I would like to highlight some of the new services we anticipate offering in the future.

We are in the process of creating a proprietary MetroPCS studio.

When introduced, we expect this application will provide streaming video, full track downloads and television channels, all powered by our 4G LTE network.

As we move towards the start of launching 4G LTE service in the second half of this year, we believe our subscribers will increasingly use their web-based handset to fully access a multimedia environment, recognizing the phone's transition to an entertainment device.

LTE leadership will further improve our service features and ability to gain market share, while maintaining cost and price differentials.

This affords MetroPCS the opportunity to potentially be the only carrier offering the range of service rate plans, payment options, and handsets to the growing no-contract market segment.

We are excited with the upcoming launch of 4G LTE services in our metropolitan areas.

4G LTE services are about creating a multimedia data experience for our subscribers.

In the no-contract segment, we are clearly the leader in 4G LTE network deployment for smartphone devices.

We anticipate our first two market launches will be in Dallas/Fort Worth and Las Vegas, with the Samsung Craft, the first LTE smartphone approved by the FCC.

In the future, we also look forward to migrating our CDMA voice customers to 4G LTE VOIP.

We believe this will provide a significant cost advantage, and makes full use of our spectrum resources while providing substantial additional capacity.

We believe the investment we are making now will provide our wireless subscribers the first 4G LTE smartphone in the no-contract wireless segment.

And even more exciting it is possible that in the future, subscribers will have multiple devices connected to the network, proviing an opportunity significantly exceed penetration rates of 100%.

Initially, the smart phone will be the primary device we will offer to access our 4G LTE network.

But in the future, the evolution will undoubtedly incorporate additional devices like netbooks and tablets.

It's exciting to look out over the next several years and envision the 4G LTE environment with opportunity to drive incremental revenue and value for the business.

Overall, we are very pleased with our second quarter and first half of 2010 results.

The wireless indusry is very competitive, but the no contract space is where the growth opportunity exists and we are the leaders in the space.

We are executing well and effectively balancing financial performance with subscriber growth.

Our wireless for all strategy enables us to expand in our leadership position in the no contract space.

We are committed to the next evolution of our business, 4G LTE broadband services.

We will now move to Q&A.

(Operator Instructions) Our first question comes from the line of Brett Feldman with Deutsche Bank.

Thanks for taking my question.

Just two quick ones if you don't mind.

First, I appreciate the color on what we should expect for the third quarter for net adds and churn.

I was hoping we could talk a little bit about what we should be thinking in terms of margins in the second half of the year.

I'm wondering if we should be layering in any expenses associated with LTE.

And then the second question kind of gets to your distribution strategy.

You guys have historically relied on sort of a branded distribution channel.

But some of your peers are talking more and more about the high importance of a being a national channels.

I was hoping you could talk a bit about that as well.

Let me take the first part of that.

As we go forward and put in the 4G services, we would expect some additional costs as you know.

Backhaul will be one of those items which would be an increase in our OpEx.

And so we would see that, however, we are still scaling in subscribers.

So from a go forward standpoint, we don't see major variables that are acting to change margin performance year to date.

Tom, would you like to take on the second half of that?

I think the reliance on national retail big box to date has been immaterial.

And what Metro has traditionally found and what's worked for us is a benefit by being in the community on a more granular basis.

And that difference has served us well to date.

And we believe we'll continue down that path.

And you're not seeing change in store traffic or customer behavior?

Just seems that other operators are feeling that if you're not in the big box channels right now, you eventually are going to miss the flow.

So, just wondering why did you guys have a slightly different perspective on this?

Let me try it this way.

I think we've been very effective in the channel of distribution where we distribute.

And I think it is more in a community environment.

Big box has been as it always has been for manufacturers and service providers a kind of a one stop shopping.

There's shall we say an obvious reception for let's go to big box.

But big box as you know is very crowded at this point.

And we don't think the level of service, the convenience for our customers, and the actual customer support you get at the point of sale is as good as you would get in a standard big box.

So we're very happy with your channels.

Alright, so basically you are planning on sticking with what you have been doing for the time being.

We shouldn't expect a major change in the distribution model?

You shouldn't expect a major change.

Obviously, we'll take advantage and we are in big box today, Best Buy and Wal-Mart.

So, it's not that we are not there.

The question is that we're not depending on big box to basically carry the load.

Great.

Thanks for taking the questions.

Our next question comes from the line of Craig Moffett with Sanford Bernstein.

Hi.

I wanted to turn my attention to the larger industry for a second.

We saw in T-Mobile relatively weak results, I'm sorry, quite weak results in prepaid this morning.

Trac Fone results were a little softer than we would have expected.

It looks like the overall prepaid market even with the strength that you guys had in the quarter net adds were down 50% year-over-year.

Can you comment on that?

Is that anything close to what your market expectations were?

And what do you think is going on with what looked like until this quarter was the real growth engine of the market?

Excellent question.

There's some concern about the fact that the so called pay in advance prepaid market is not getting the growth that everybody expects.

I think there's several things operating here.

We are in a very difficult economic environment and we've said all along for the last really year and a half that this has been an overhang on the marketplace.

But there's one thing I'd like to point out that I try to cover in my comments.

And that is that other our objective in the expanding this no contract segment is to step up our ability to provide not only handsets but services that people would expect in a post pay environment.

We don't have parity now.

Let's be very blunt about it.

The no contract segment in most cases is not at parity with what you can receive in services and hand set selection from the contract side of the business.

So, we think we have a great opportunity and 4G is really a transformation of our network and it gives us the opportunity to get at, shall we say, at parity obviously with the exception of exclusive handset deals that have permeated the carrier business in the last few years.

But nevertheless I think you're seeing there is a tremendous increase in smart phones.

I think you are going to see the emergence,as we already have, of the Android in competing with the Apple operating system in hand set.

So, I think what we'll see is that the no contract segment is going to have a much stronger parity, and that causes a real issue for contract providers because of the concerns for,shall we say, shifting sales if not cannibalization into the no contract space.

That is our space.

It is a cost based strength that we have.

We intend to use it.

And now we're approaching we think an opportunity to be at greater parity with the post pay side of the business.

That's very helpful.

And could I slip in one more company specific question if I could.

Your roaming agreement with Leap, in light of the announcement that Leap said they will be doing a wholesale NBO with Sprint.

How does that work when they're going to be selling services in regions that you have your network?

I assume that your MBL, roaming agreement with Leap would not let them continue to operate in your network in our markets?

Is that right?

It's uneffected.

Just to clarify.

Does that mean they've never sold services in your markets before under their own brand name.

How does that work given your roaming agreement?

Our roaming agreement does not cover the markets in the same manner as they cover, excuse me, home markets as it does markets outside of their network.

So there's differentiation.

We don't see this as a threat bottom line.

Okay, thank you.

Our next question comes from the line of Richard Prentiss with Raymond James.

Thanks.

Good morning, guys.

Good morning, Rick.

I wanted to hit on a couple of points.

Obviously impressive improvements in churn seasonally going up next quarter, I understand.

Talk us through a little bit about, is mid-threes kind of the new what used to be five?

Could it go any lower?

What would cause churn to go in either direction?

Just trying to look at the new reality of a wireless for all world.

Well, Rick, I think the seasonality that we indicated in our remarks, I think we have a new reality.

We indicated for some number of years that we had an element of false churn.

And we do believe that that has significantly decreased.

It will never go to zero.

But it's significantly decreased.

I think the other factor that's been an impact in first and second quarter has been the fact that our wireless for all services have really provided a better alternative we think than the industry.

So what I would say, I guess is that plus the fact that we have seen a resurgence, this is tied really to the false churn of reactivations that this correlates very well with the fact that our subscribers now are upgrading our handset, as Tom remarked earlier instead of changing their phone number or going off service.

There is a new reality.

I think you clearly picked up on that.

I won't be projecting what churn will be but I do think the net effect are going to be lower churns going forward.

And how low can we go?

I'm going to avoid that one, Rick.

On the ARPU side, what mix are your customers taking in the plans as you look out there?

How are your sales agents through the different distribution channels trying to position people through the ARPU question.

Our sales agents Rick, through distribution channels the change for wireless all really did a really big thing to our customer experience at the counter.

Now that you're paying for the first month and not receiving it free, the experience, the education, the explanation of what you're buying actually is probably four to five times longer just from a pure minutes in time wise at the counter.

So the customer walks out of a store understanding what's in a $45 or a $50 rate plan or $60 with ILD.

Where before they spent more time picking outline a handset since that was the primary driver.

And they went to the counter and the rate plan probably wasn't as important.

They got the first month bill with the $50 rate plan, taxes and fees.

On top of that they get sticker shocked and then they run away from us at a much easier rate.

So what we've done now is we forced the training at the counter.

So, when you realize that you're getting a $50 rate plan you know everything that's in it.

It's really important to the people selling it.

And we've aligned behavior with our distribution partners to help train better and sell the value of the rate plan.

Rick, I'd like to add that we were very, very thoughtful with wireless for all in the buildup of the value proposition under each rate plan.

And Tom had talked about the first quarter that the vast majority of sales mix that we were seeing was on a $45 or higher plan.

Based upon the ARPU results, that absolutely continues to be the story.

Rate plan ARPU is not the only component of ARPU.

There's family plan dilution.

There's other items that impact it.

But our organization I think has done a phenomenal job from an execution standpoint in our distribution channels of really educating the consumer as to what our value propositions are.

And you're seeing it in a stable vision of our ARPU up in the very high 39s.

And I'd like to say one thing Rick, if I could, the thing we have to understand is that there's a lot of compelling rate plans in the industry.

That this really comes down to execution.

We could have good rate plans.

But if we don't execute on it, we don't receive the benefit of it.

So, this took a lot of planning and a lot of focus to have a transformation where by everyone of our distribution partners were trained and then retrained again on how to do this.

So we've been pleased with the results.

On handset mix, how are smart phones selling?

Is there an update as far as good, better, best mix of handsets going off the store?

We have an increasing handset mix.

I think that's probably the best way for us to address that.

Tom, would you like to add to that?

We found a lot of success number one with Qwerty's, not Smarts but just Qwerty's.

Our SmartPhones that are Qwerty's go nicely on the higher end.

Although you could always understand that the percentage is going to be lower on the higher end.

The next thing that we are excited about is to get in some full touch handsets that will have Android on them.

And the evolution to the third and fourth quarter.

One of the things that we believe as you heard me talk today is that we need to have multiple OEMs with us.

We need to work hard with them to continue to develop handsets and not to get a stale lineup.

And I think that today, you'll find that most of our distribution partners were anywhere between 15 to 18 skews.

And although that can have some additional back end cost that we recognize, the choice for the customer for them to stay with a compelling handset is really important.

I think just to add to that because it's a very important subject and I tried to touch on it before to achieve this notion of parity.

And I do that under quotation marks.

But the fact is that our lineup will include a number of Android devices going forward before the end of the year.

And next year, there will be a very strong offering of units that I think everybody would classify as either Qwerty or SmartPhones with a pretty heavy mix of SmartPhones.

I think this is a critical transformation for us and the pay in advance or for that matter, the prepaid industry as usually described.

Because the services offered is really not from looking back up to the same standard as you would expect to get in the post pay environment.

And so I think this will be terribly important in prices of SmartPhones are coming down.

I think we said a year and a half ago, that we would expect to get below $100 in the next few years for an LTE SmartPhone.

I think we certainly we'd come back and say that a reality.

That will happen.

And it may happen sooner than people think.

So this is an important driver.

Handsets and services that come with it, I thinks that a very important element of our business.

Great, thanks, guys.

Our next question comes from the line of Jonathan Chaplin with Credit Suisse.

Thanks, guys.

Just like to follow up on Rick's questions a little bit.

So we're in a bit of a new realm for churn.

Looking back, actually last year churn didn't go up in Q3.

But if I look up at prior years it seemed to have gone up by about 30 basis points from the last couple of years.

Is that about the magnitude of churn increase we should be looking for this time around?

And then on ARPU, Braxton, it sounds like you're doing well at selling the high rate plans.

But that's offset by family plan dilution.

Does that keep ARPU from expanding from these levels?

Do you think it bounces around in this $39 to $40 range?

Or is there some level of saturation of family plans, where the impact of selling higher rate plans actually drives ARPU up from these levels.

And then finally, I apologize for the laundry list.

But on CPU, it actually came in lower than we expected given the cost pressures from the new rate plans.

Does CPU decline from here as the business scales?

Or are there some one time impacts that we should think about?

Thanks.

Sure, Jonathan.

Let me take a couple of those and I'd like to ask Roger to talk about our view on ARPU and the dynamics associated with that especially as we enter the LTE realm.

But let's first talk about CPU.

And I think you bring up a very important point.

Our business continues to scale.

But one of the foundational tenets of our Company has always been a laser focus on the cost control.

And it wasn't kind of a dejois thing we started a year ago.

Goes really back to he foundation and forming of our Company.

And it's something that we are always focused on.

And I think you see those in all of our metrics and the results.

The power of scale is significant.

You're looking at a world class CPU of a Company that is a little less than 7 million subs versus what you have new with very, very large industry players that are many multiples the size of us.

So yes, we do see that there are some real benefits coming from scale.

It came up earlier in the call us, there will be some expenses associated with LTE.

And some of those expenses will be a step function as we build and roll out the markets.

And that will cause some short term pressure.

But as Roger very clearly indicated, we believe that we'll more than adequately cover that with the scale of our business over time.

On the churn equation, we're not really going to give specify guidance as to what churn is going to be for the third quarter.

But we wanted to make it clear that the expectation is that it would increase.

And I think very astutely.

You looked at the trends year-over-year.

And last year was certainly an anomaly.

But there has been a historically 30 basis point plus or minus five to ten basis point increase in churn going from the second to third quarter.

The dynamics this year is we had (inaudible) not in place for all of the first quarter.

You did see some residual benefit of having a full quarter of that in the second quarter.

So you need to take that into account when you're trying to model this.

And the final thing I can say about the churn is Tom mentioned in his part of the prepared presentation that we expect that the churn will increase generally consistent with historic norms.

With that I'd like to turn it over to Roger to talk a little bit about your question on ARPU.

Yes, let me try to expand on this.

Certainly we think that our introduction of LTE will be a strong factor in adding shall we say services at higher ARPU.

We do envision having as we said the Metro store or Metro media studio.

So we will be looking at rate plans that will be north of what we have today.

But not very far north of what we have today.

The other side is the pressure from competitive stand point that we don't get too far out of our skin in terms of the overall ARPU for all our services.

We are adding applications.

But I think that's on the margin relatively small.

So depending on the buildup of LTE and I think I would think about it more in this light that it will with more gradual.

We will not be offering services in all our markets until the end of the year or very early next year depending upon the build program.

And we would expect that to be an impact at that point.

So I wouldn't see great jumps.

I would see more gradualism.

We'll continue to be competitive.

But that's the one area that I identified that we would have some opportunity for upward movement.

Got it, thank you.

Our next question comes from the line of Michael Rollins with Citi Investment Research.

Hi, good morning.

Thanks for taking the questions.

Just a couple of quick questions.

As you look at ARPU are there any impacts from roaming from the partners, whether it's from a Leap or other players that you may allow onto your network?

And second question was if you look at the inventory balance it looks like it picked up meaningfully in the quarter.

Anything you read into that in terms of new products your getting to rollout or new direction with respect to your device lineup?

Thanks.

Sure, ARPU roaming revenue is really deminimus to our overall ARPU numbers reported.

So, I think that clearly answers that.

We have been building event as you can see with our handset lineup.

We have a very robust lineup with Qwerty and SmartPhones, recently launched the BlackBerry, Next Generation which includes VAWS which directly benefited our northeast markets.

And as Tom likes to say, you can't sell out of an empty wagon.

You need adequate inventory on hand to support the growth that you're forecasting.

Yes, I think the summary is that there's a handset mix demand that we see and we think that's very positive.

Because that usually indicates an interest in greater services.

We do think web browsing has become shall we say a very strong story of development this year for us.

And just within that context, do you feel any pressure or do you see any opportunity of adjusting your subsidy structure for integrated devices or SmartPhones to try to get a larger share of that marketplace?

Let me make sure I understand the question.

When you say integrated devices.

Are we talking SmartPhones or are we talking about cards and dongels?

SmartPhones or Qwerty keyboard devices, integrated messaging and advanced multimedia features.

Yes.

I think that was the essence of what I was attempting to say that because of what we see in demand and the, and that is demand on network as well as in the stores.

That we're seeing a very significant increase in our customer base interest in web browsing.

And so that naturally puts us in handsets more suitable for this type of experience.

So the shift really the shift in what our consumers what our customers are interested in at the counter.

And the short term impact of that is a more significant increase in event as the price per unit increases.

And I was just thinking about the subsidy itself,.

So in addition to selling more of those devices is there an appetite cost to the customer increasing the subsidy to try to get more share of the market or address any competitive issues that you see in the marketplace?

We are not as you see historically been significantly subsidizing more expensive handsets.

That does put pressure on us to get the best value for our customers with the most features.

But the corollary to that is that we're subsidizing more heavily because we have more expensive handsets.

And even though there may be some at the margin difference, there is not the significance of what I think you're attaching to it.

We simply charge more.

I think we also need to go back to the understanding that since we charge now for the first month of service under WFA as mentioned in the prepared remarks, we have correspondingly reduced the handsets prices.

So, the net out of the store is the same for the consumer, but the appearance of a subsidy could appear bigger.

That's helpful.

Thank you very much.

Our next question comes from the line of David Barden with Bank of America.

Hey, guys, thanks for taking the questions.

Nice work this quarter.

I want to talk about the data strategy a little bit.

Your guys are kind of talking about a move to web browsing and SmartPhones and such.

But you guys made a choice not to do RevA.

So the experience for users if this turns out to be the decision making tangent point as we get into the higher volume quarters at the end of the year, despite your device lineup might put you as a disadvantage.

I would like to hear what your comfort level is.

And how you manage that relative to your competition out there.

And the other half of it as you move to LTE, if you can elaborate a little bit more on where we go from Dallas/Fort Worth and Vegas.

What are you planning on charges for craft?

And if your base doesn't understand the difference in your data relative to competitors today, how do you make them understand the difference in your data strategy after you put LTE to work?

Let me take the last one first.

We better have a more accomplished promotion, advertising and marketing staff to communicate to our customers that a 4G is different than a 3G or a 2 1/2G phone.

We have to be challenged there.

But it is a job.

We won't just assume that our customers are going to know that.

Let me go to the point that you made I think initially.

That the service that we have on the 1XRTT network, which we have today.

And yes, we've avoided going to 3G RevA.

We think it's too little too late.

And 4G is really where the opportunity lays.

The small screen and our willingness and I think focus on the phone business as opposed to the Carter Dongel business kept us within our space and our capability.

The disadvantage is on video streaming.

And we have worked on the shall we say in the optimization area for our network to provide a good experience on our SmartPhones for streaming video over YouTube.

There will be other sites that will be accessible.

So we're working on the compression and the shall we say the network side to provide a better experience.

But for just web browsing and the like, side by side comparisons do not show great differences.

It's full track downloads and streaming video where we have the differentials.

And to the extent we can work on specific sites like YouTube then I think we can get a reasonable parity until we have a much stronger offering in our 4G LTE network which does away with all the limitations.

And could you follow-up a little bit on that LTE build plan is and what the cost is going to be for the users that are having the 2G experience today?

We're not ready to release that information.

But we are obviously focused on the two markets that we talked about.

We are in friendly trial testing.

So we'll have more on that.

But we are not prepared to release further information on this at this point.

Let me ask, one last chance.

Do you feel like the pricing that you're going to be able to bring to this device and to justify the build cost is going to be still within the affordability realm of our target market base?

Oh, yes.

We are not expecting to put a price umbrella on this.

By the same token, we do see it as a premium service and thereby we'll do accordingly.

I think there may be a misconception on the 4G LTE purpose.

And I want to make it very clear.

The purpose is nothing short of a transformation of a network.

This is just not getting something fast.

This is getting, what we think, is the network of the future because we want to see this as being all inclusive.

And we're working our way out of CCMA but there's tremendous economies we believe.

And capacity for broadband data is so extremely strong.

And the cost per byte so very attractive.

It's not just an overlay.

It's a transformation of the entire network.

And that's way we're viewing this.

Dave, let me address the handset piece.

We're working with multiple OEMs today.

And we are going to look at retail prices that are going to mirror where you would find some of our SmartPhone offerings today.

We don't believe we're going to put our customers at a distinct disadvantage as they look to upgrade their phones if they are existing or if they are new wanting to come into the metro piece of the family.

We think it's going to be extremely compelling.

And remember, all of this is going to be under the no contract umbrella.

That's not available today.

As Roger mentioned earlier, this is a transformation of the entire our Company for this network.

But the handset choices will be robust.

It will take a little bit of time into 2011.

But we've done a lot of work and there's significant opportunity for us.

Alright guys.

Thanks much.

Our final question comes from the line of Simon Flannery with Morgan Stanley.

Okay, thanks very much.

A couple for Braxton.

I think Braxton, you mentioned as the LTE rollout completes that that's going to have a significant impact on capital spending.

Can you give us some sense of what we should be thinking about in terms of sustainable CapExp or sort of maintenance CapEx over the next couple of years?

Is that sort of a low teens type number of revenues?

And then I think you touched on NOLs for a second.

Can you update us on when you expect those to expire and cash tax payments and so forth?

Thanks.

Yes, sure.

Let me take the last one first quickly.

As we said in the last quarter call, we currently expect to have adequate NOL to keep us from paying any meaningful federal taxes through early 2014.

There'll be some minor state taxes that we pay prior to 2014.

But we don't really become a significant cash taxpayer until 2014.

The second question, I think it's helpful to look at the previous guidance that we included on our 10Q on CapEx, which for 2010 is six to $800 million of which we commented that roughly half of it relates to LTE.

When you really look at the dynamics of what's going on in 2010, we're certainly expanding networks and making our markets more relevant as we will continue to do in the future.

But once your really get past an LTE spend and rationalization probably more steady course without major market builds is really roughly what we're spending in 2010 minus the LTE.

I do want to say that there will be some LTE spend in 2011 as we continue to fully deploy LTE in all of our networks.

So you shouldn't expect a 50% dropoff next year.

But the neat thing about LTE is it has tremendous scaling aspects, unlike our CPMA CapEx.

And that's not only from a CapEx standpoint, it's from an OpEx standpoint.

The LTE overlay that we are deploying on our CDMA network basically has the ability to scale without adding additional carriers like you do in the CDMA world, which means you really have more of a step function increase in your CapEx.

And you get tremendous CapEx scale after the initial deployment.

And the same is true with the way that we're deploying backhaul.

Roger, would you like to touch base on this because this is such an important point.

There's two major elements, obviously.

One is that we now are deep into the exploration and gaining contracts with specific entities.

And as I think most of you are well aware, the cost per megabit as you increase the speeds are pretty significantly reduced.

So there's a tremendous difference in going to from say 10 bits to 20 as it is from zero to five.

And so there's a tremendous scaling opportunity in that sense.

Obviously, there are many, many providers.

And this is becoming a very competitive front, a very important one.

And that's one dimension of it.

The other dimension of it is that when (inaudible) all our stations that we have LTE and CDMA and by the way, the build is in place.

So we're using all the facilities of our existing infrastructure while we're adding these what's called E nod V's to give us the LTE capability.

Is the fact that we're going to be overlaying our traffic on CDMA in the LTE network.

As we scale up in terms of users and capacity that we get the benefit of both CDMA traffic and LTE.

So I think combining it gives us scale out of the box.

And as we get more scale, the price elasticity or if you will the cost to us in elasticity is very, very high.

So higher volumes of data rate are at a per bit basis much lower.

Great.

That's helpful.

Thank you.

At this time, I will turn the conference back over to Mr.

Carter for closing remarks.

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 second quarter 2010 conference call.

Thank you for your participation.

You may now disconnect.

And have a pleasant day.