T-Mobile US, Inc. (TMUS) Q2 2008 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to MetroPCS Communications' Second Quarter 2008 Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. This conference is being recorded today, August 7, 2008. 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, Casey, and good morning everyone. I would like to welcome you to our second quarter 2008 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. Please note that on today's call, Roger is participating while out of the country. Should we encounter any tactical difficulties during the call, we thank you for your patients. The format for today's call is as follows. First, Roger will provide an overview of our business, then Tom will provide an update on a number of operational results and initiatives and Braxton will review the financial highlights of our second quarter followed by a question-and-answer session. During today's call, we will refer to certain non-GAAP financial measures. We've reconciled these historical non-GAAP measures to GAAP figures in our earnings release, which is available in the Investor Relations section on our website at www.metropcs.com under the Investor Relations tab. Before I turn the call over to Roger, I want to remind you that certain information that we will discuss in this conference call may constitute forward-looking statements within the meaning of federal securities laws. Words such as believes, anticipates, expects, intends, estimates, projects and other similar expressions typically identify forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results or the timing of the events to differ materially from those described in the forward-looking statements. We cannot assure you that the expectations discussed on this conference call will be attained. We also encourage you to review the risk factors described in our filings with the Securities and Exchange Commission. We would also like to remind you that the results for the second quarter may not be reflective of results for 2008 nor any subsequent period. For anyone listening to a taped or webcast replay or reviewing a written transcript of today's call, please note that all information presented including our reaffirmation of guidance occur as of only August 7, 2008 and should be considered valid only as of August 7, 2008 regardless of the date review, the replay [ph]. MetroPCS disclaims any intention or obligation to revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. The company does not plan to update nor reaffirm guidance except through formal public disclosure pursuant to Regulation FD. I hope by now you've had a chance to review our earnings release issued this morning with the financial results for the second quarter. I would encourage everyone to read our earnings release in conjunction with the information discussed in this call along with previous SEC filings. We intend to file our 10-Q this Friday. At this time, I'd like to turn the call over to our Chairman, President and CEO, Roger Linquist.

Good morning everyone and welcome to the MetroPCS second quarter 2008 earnings call. Thank you for joining us this morning. Once again, we are very pleased to see how well the business has performed during these times of continued economic weakness. Our second quarter and six month results demonstrate the resiliency of our business model. Over the past six months, we have added 635,000 new subscribers, introduced innovative products and services such as MetroFlash, continued to expand coverage in our existing markets and on July 1st, we passed a milestone with our launch of service in Philadelphia, our first Northeast market launch. For 22 quarters in a row, we have reported year-over-year subscriber growth of 30% or higher and we now serve over 4.6 million subscribers. In the midst of a weakened economy, we are pleased again to report total subscriber growth of approximately 30% year-over-year. We look forward to our upcoming market launches, which we expect will continue to drive our exceptional growth. Last quarter we talked about how we saw a significant shift in the wireless industry as all the national wireless providers introduced unlimited plans. As MetroPCS continues to be a pioneer in the unlimited wireless space, we introduced MetroFlash during the second quarter. This innovative service allows customers with compatible CDMA handsets to reflash their phones and become MetroPCS subscribers. This technology allows customers to easily take advantage of MetroPCS's value proposition and eliminates the requirement of having to purchase a new handset. While in a weakened economy, we believe our results demonstrate that our predictable, affordable and flexible service presents a compelling value to the consumer. Additionally, in an environment where wireless service has become a necessity to many of our subscribers, our low-cost service plans enable us to compete very well. Given our strong six month results and our outlook for the remainder of 2008, we reaffirm our guidance today for the full year 2008. Our second quarter results were very strong with 184,000 net additions. The overall momentum of our business continues to be strong and with our July launch of Philadelphia, we look forward to our ongoing future expansion into the Northeast with Boston and New York City scheduled to launch in the first quarter and first half of 2009 respectively. The trend in wireline replacement continues to be an important positive driver for our business. Several wireline providers announced over 8% landline losses during the second quarter. As people continue to cut their landline phone service based on an updated customers survey, we found approximately 90% of our customers rely on MetroPCS as their primary telephone service. With the increasing dependence people place on using their unlimited MetroPCS service, we believe these primary users are less likely to discontinue service. According to a recent government study, nationally, only 16% of landlines have been replaced. As consumers continue to give up their landline service, we are confident in our ability to capitalize on this major trend. Our coverage is focused on major markets and as we expand, we will continue to focus our future buildouts on the largest markets in the country. The next phase of our buildout is in the Northeast, and we believe this area represents a tremendous opportunity for us to continue our strong profitable growth. After launching service in Philadelphia at the beginning of July, we are working hard to launch service in the densely populated area of the Boston and New York metropolitan areas. Our ongoing strategy is to continually provide our customers with innovative services, expand our market segments through aggressive customer acquisition programs and provide predictable, affordable unlimited service plans. As you might have recently seen, we are also very pleased to have received the J.D. Power and Associates Award for excellent customer service as the number one wireless provider in the prepaid category. We believe this award is a testament to our customer focus on providing unlimited wireless solutions. We are confident in our strategy and believe our strong results demonstrate the strength of our business model. Now I'd like to hand it over to Tom to discuss some of the operational highlights from the quarter.

Thanks Roger. I'll first talk about high level trends, then I'll discuss some of our operational initiatives in more detail. We are pleased with our second quarter total net additions of approximately 184,000. Our churn for the quarter came in at 4.5%, down 30 basis points when compared to the second quarter of last year. We believe the strong net additions and our low churn in a seasonally weak quarter and in a challenging economic environment are the result of a number of drivers, included: The ongoing trend of wireline replacement; the predictability, affordability and flexibility of our service plans and the entire organization's focus on providing customers with an overall positive experience. Touching on customer satisfaction, as Roger mentioned earlier, we are excited to be recognized by J.D. Power and Associates as having the highest ranking in prepaid customer satisfaction. We are committed to providing consumers with an affordable, worry-free, quality wireless experience. Not only are we honored to have received the highest ranking in this category, we also view it as a demonstration of how we work to provide a positive customer experience while expanding our user base and converting awareness to consideration. The ongoing U.S. macroeconomic environment continues to pressure consumers to look for ways to consolidate their expenses while expanding their value. Our unlimited flat rate wireless service is well accepted in the marketplace and has broad customer appeal. As a result, we believe we continue to be well positioned as the wireless provider of choice. We continue to focus on consumers who cut the cord. In the United States, approximately one out of seven consumers have replaced their landline phones. Within our subscriber base, the statistics are even more compelling. According to a recent updated survey we conducted, nine out of ten of our subscribers used a MetroPCS service as their primary phone. Approximately 60% of our subscribers either do not have a landline phone or have completely replaced their landline usage with MetroPCS unlimited service. Clearly, subscribers realize the value proposition of MetroPCS service and they continue to cut the cord. As Roger says and as national wireline players have reported, voice does go wireless. During the second quarter, our core markets continue to grow and are currently penetrated at approximately 12.4%. Our core markets have added over 273,000 subscribers in the past 12 months and over 156,000 in the past six months. In a seasonally slow quarter, coupled with the weaker economic environment, we are pleased to see 19,000 net additions and a total core market subscriber base of 2.8 million, representing approximately 11% growth from the same quarter a year ago. We believe growth in our core markets is far from over. The growth within our expansion markets continues to be outstanding. First launched in the third quarter of 2005, our expansion markets now serve approximately 1.8 million subscribers. When compared to the second quarter of 2007, total subscribers have grown approximately 77% in just 12 months. We anticipate growth to continue as we launch additional markets and expand coverage footprints in other markets. As many of you recall, last quarter, the national wireless carriers all introduced unlimited wireless plans. As pioneers in the unlimited wireless space, we view the introduction of these more extensive plans as a positive and as being accretive to awareness of the unlimited wireless space. MetroPCS's unlimited plans are generally two to three times cheaper than the nationals. Consumers now have the ability to compare service plans and make educated decisions and fully realize the value of MetroPCS plans. In the second quarter, we feature an enhanced family plan promotion. Although cost structure and ease of activation enabled us to offer this family plan, priced significantly below our competitors' this plans, we successfully drove awareness of our brand and converted that awareness to new subscribers that came from a variety of demographic segments. After the consumer chooses and purchases their phone, our family plan promotion allowed families to utilize our affordable and reliable service, which included local, long distance, SMS and voicemail for two to five users, costing from 25 up to $35 per user per month. This promotion was an opportunity for people to utilize their tax refund stimulus checks as a way to stay connected and realize the tremendous value of our MetroPCS service offerings. Additionally, this promotion helped to drive new traffic to our stores, allowing people to gain an understanding of our service offerings. In a seasonally slow quarter, this promotion accounted for less than 20% of our mix and we believe it also helps to reduce churn. The viral nature of the offering and our extremely high net promoter value that shows itself in customer loyalty drove new and unique users into our stores. Taking a closer look at a few of our markets. The second largest market in the country, Los Angeles, is performing well. We continue the buildout in this market and expect to reach 15 million covered POPs later this year. As we build out the network, product awareness and distribution continues to increase. We are seeing positive subscriber growth and we expect this momentum to continue. I'm sure many of you saw the milestone we recently reached with our first entry into the Northeast. Our launch of Philadelphia on July 1st is our second significant Auction 66 market to launch and we are very excited to be the first and the only flat-rate, unlimited wireless provider in the Philadelphia area. Our collective launch experience enabled us to launch the market and provide consumers in Greater Philadelphia access to our products and services earlier than expected. Our DAS [Distributed Antenna System] network in downtown Philadelphia, which covers over 1.5 million POPs is performing well as is the rest of our network. We are very encouraged by our early operating results. We expect that the MetroPCS value proposition will compete very well in this market. Additionally, during the second quarter, we lunched service using Auction 66 spectrum in Shreveport-Bossier City as well as East Texas. These communities of interest expand our service reach to the Dallas/Fort Worth market. Looking at our upcoming service launches in Boston and New York, we are currently constructing DAS networks and macro sites and we are on track for our scheduled launches during the first quarter of 2009 in the first half of 2009 respectively. With every launch, we gain in our collective experience. These large construction projects are well underway and our internal metro teams for making excellent progress. We should note that at this point we do not anticipate that these markets will launch during 2008. We are extremely focused on these significant market launches as we believe these initiatives are the key drivers to maximize shareholder value. In late June, we announced the launch of MetroFlash. MetroFlash is an exciting and innovative service that enables consumers to activate their compatible CDMA handsets on MetroPCS's network. Consumers now have the option of joining our low-cost flat-rate, unlimited wireless service without the requirement of purchasing a new handset. As consumers' contracts expire and wireless users are looking to utilize existing handsets, this innovative and creative service is gaining rapid acceptance. Initial responses have been positive and we view MetroFlash as a driver of continued growth. Our industry is competitive and we believe our continued focus on providing unlimited, highly differentiated service offerings and superior customer service will continue to separate us from the competition. We continue to introduce and provide innovative service offerings such as our recent introduction of MetroFlash. As I discussed earlier, MetroFlash is a service whose time has come. As we enter the third quarter, we are very excited about loot [ph], our recently introduced social networking application. Additionally, we also continue to evolve our methods of distribution with the announcement of our partnership with Best Buy. Our continued interaction with our customer base and potential users allows us to understand what is attractive to users of all segments. This understanding, coupled with our low-cost structure allows us to deliver products that are very compelling. We are very pleased with the second quarter 2008 results. And with that, I will turn the call over to Braxton.

Thanks Tom and good morning everyone. We recorded strong financial and operational results for the second quarter 2008. Today I will discuss the results of the second quarter, then I will walk everyone through our 2008 guidance, which we reaffirmed in this morning's press release. Total revenues for the second quarter were approximately $679 million, up 23% over the second quarter of 2007. Consolidated adjusted EBITDA for the quarter was $210 million, approximately 17% higher than last year's second quarter. We generated $331 million in cash from operating activities in the quarter, an increase of $64 million from the prior year's second quarter. We generated $50 million in net income during the second quarter or $0.14 per share. Excluding a $9 million impairment charge related to the company's investment in auction rate securities. Net income would have been approximately $59 million or $0.17 per common share. We are in an extremely strong financial position with approximately $1.1 billion of cash at June 30th, 2008. Our net leverage was 2.45, demonstrating the ability of our model to significantly reduce leverage over time. We are fully funded for all of our planned market builds with a various substantial cash cushion. This will allows us to bring our remaining Northeast markets on line in 2009 with no anticipated delay. From a financial metric perspective, we are pleased with the results of the second quarter. Our second quarter ARPU was 41.77, down slightly when compared with 42.22 in the first quarter of 2008. The change in ARPU is primarily attributable to higher penetration in our family plan as well as reduced revenue from certain features now included in our service plans that were previously provided a la carte. We believe lower ARPU will lead to lower churn and higher penetration. Even with the decrease in ARPU, we have increased our core market adjusted EBITDA margin as a percentage of service revenues from 47% in Q2 '07 to right at 50% for the second quarter of 2008. We focus on bottom line profitability versus exclusively growing the top line. And these results demonstrate the scaling benefits of our business. Our CPGA for the quarter was $136 as compared to $125 in the prior year's second quarter. The $11 increase was primarily driven by the company's continued market launches including the Los Angeles, Las Vegas and Jacksonville metropolitan areas. Our CPGA continues to be among the lowest in the industry. Our CPU for the quarter was 18.23 as compared to 18.01 in the prior year's second quarter. This modest increase in CPU was due primarily to expenses relating to the construction and launch of Philadelphia as well as the ongoing construction of Boston and New York. Our CPU continues to be among the lowest in the industry and demonstrates the significant impact of the scaling of our business even when taking into account significant expenses related to our Northeast market belts. The expansion markets impacted our consolidated second quarter CPU by $3.70, resulting in a world class core market CPU of 14.53 for the second quarter of 2008. I would now like to discuss the income statement in more detail. Let's start with service revenues. On a consolidated basis, service revenue totaled approximately $599 million, an increase of approximately 25% from the second quarter of 2007. Growth in service revenue for the second quarter is primarily attributable to the net addition of over 1 million subscribers since the second quarter of 2007. In our core markets, service revenues increased $22 million or 6% to $378 million for the second quarter. This increase was primarily attributable to full year net addition of 273,000 subscribers during the last 12 months. Our expansion market service revenues increased $98 million or 80% to $221 million for the second quarter versus $123 million for second quarter 2007. This increase was primarily attributable to net additions of 775,000 subscribers during the last 12 months. Let's now talk about expenses. Our consolidated cost of service increased approximately $44 million or 27% to $206 million for the second quarter. The increase in cost of service was primarily related to the increase in expansion market cost of service including the increase in total subscribers as well as the continued buildout of the Northeast markets. Core market's cost of service was flat when compared to a year ago and totaled approximately $111 million for the second quarter of 2008. The expansion market's cost of service increased approximately $44 million to $95 million for the second quarter of 2008 from $51 million a year ago. The increase was primarily attributable to the addition of 775,000 new subscribers during the last 12 months coupled with expenses relating to the launch of service in the Las Vegas and Jacksonville metropolitan areas as well as the ongoing buildout of our Northeast markets. Consolidated selling, general and administration expenses increased over the past 12 months by approximately $31 million or 37% to $113 million for the second quarter. The increase was largely related to supporting the company's continued grow in the expansion markets including our buildout of the Northeast markets. Moving on to adjusted EBITDA. Consolidated adjusted EBITDA for the quarter was $210 million with consolidated adjusted EBITDA margin of 35%. I am very pleased to report that our core marked fully loaded adjusted EBITDA as a percent of service revenue was approximately 50% for the second quarter, another new milestone for MetroPCS. During the quarter, we included capital expenditures of approximately $205 million. This was a consolidated number and included not only CapEx to support the growth in our core and expansion markets, but also CapEx related to our recent launch of service in Las Vegas, the continued expansion of Los Angeles and the buildout of our Auction 66 markets. With respect to liquidity and capital resources, we finished the quarter with approximately $1.1 billion in cash and cash equivalents. Our total leverage computed in accordance with our 9.25% senior notes on an LTM basis at the end of June was less than four times. Our weighted average cost of debt for the quarter was approximately 8% and currently approximately 97% of our debt is fixed by its nature or through interest rate swaps. MetroPCS today reaffirms its previous guidance provided on November 14, 2007 and as such, expects full year 2008 net subscriber additions to be in the range of 1.25 million to 1.52 million on a consolidated basis with 250,000 to 320,000 in the core markets and 1 million to 1.2 million in the expansion markets, which does include 75,000 to 125,000 in the Auction 66 markets. The company currently expects consolidated adjusted EBITDA in the range of 750 to 850 million for the year ended December 31, 2008, which is inclusive of an adjusted EBITDA burn in the range of $125 million to $175 million in the Auction 66 markets. Without the adjusted EBITDA burn on the Auction 66 markets, we would be approaching the $1 billion adjusted EBITDA range for 2008. MetroPCS currently expects to incur in the range of $1.1 billion to $1.3 billion in capital expenditures for the year ended December 31, 2008 in its core and expansion markets, which includes 6 to 700 million in Auction 66 markets. In addition, we paid $313 million for the purchase of spectrum in Auction 73 during the six months ended June 30, 2008. This is the end of our prepared remarks. I would now like to turn the call back over to the operator for Q&A. Operator? Question And Answer

Thank you. [Operator Instructions]. Your first question comes from the line of Scott Malat with Goldman Sachs.

Good morning. Thanks for taking the question.

Good morning, Scott.

I want to talk about the core market, just some [ph] impressive margins on that. I think the service revenues increased $22 million while EBITDA was increasing $19 million, so looks like 85% plus incremental margin on that. As we think about these markets going forward, should we expect relatively flat costs to continue with maybe the incremental penetration falling mostly to the bottom line?

It's a very good point. When you look at what you refer to as the productivity leave [ph] for the continued reinvestments into the service plans that we offer our customers, we believe that there is really some concrete benefits that come out of that, namely lower churn and high penetration. And looking at the scale of the business that we continue to give you transparency on in accordance specifically with our core market segment disclosures, you can see the impact of that with the expanding EBITDA margins that we have. We are very pleased with those results and it's important to note that our focus is on growing profitability and cash flow per subscriber, not exclusively on growing the top line.

Thanks. Just on handsets, and looks like you have six now, it's a bit higher that I would have thought this early in AWS. But can we expect some less expensive phones to come out? I know MetroFlash had really helped, but it does seem like a $100 entry price point on the phone is just tough right now given the macro.

Yes, we are always working with our OEMs to try to bring down any retail price that we can on a handset. We think we may see some movement in that into the future, but it's too early to tell yet. But we have seen some very good progress with AWS handsets and we are extremely pleased with what they have brought to fruition to date and we'll continue to work on that.

All right. Thanks.

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

Hey guys, good morning.

Good morning, David.

Just wanted to follow up a little bit on 3Q and MetroFlash. Obviously, Braxton, again, 3Q typically a more churn-oriented quarter, seasonally the weakest of the year. And theoretically, you will be terminating your family plan promotion and probably around the end of this month I guess. And at the same time, however, you should still be kind of in the sweet spot of the Vegas launch. You also have the Philly launch, which is incremental to the second quarter. So if you could kind of talk about how those puts and takes might net out in terms of view for the third quarter, given obviously the high sensitivity to very narrow changes in expectations. And then just the second question, if I could, maybe Tom on the MetroFlash. Obviously, an interesting product or approach to subscribers. I was wondering just realistically, how big an impact, if any, has it really had. And if so, from whom are you taking those customers? Thanks a lot.

Sure. David, first of all, I want to clarify that the family plan promotion has already ended.

All right, yes. Sorry.

That is not a continuing promotion through the month of August. When we look at the dynamics involved with our business, we are very pleased with what we are seeing. Specifically, there is a lot of concern about the impact of the overall economic environment. While certainly, it's had certain pressures on our customer base and on potential growth, wireless in [ph] MetroPCS has performed very well. And it goes to really the point that Roger continues to drive home that this is a model that is focused on wireline displacement and replacement. We all saw numerous wireline carriers report over an 8% loss in lines during the quarter, and those dynamics are a very positive fundamental. And what better service to have position to capitalize on that trend other than the unlimited all-you-can-eat service. Remember, our subscribers use well over 2000 minutes a month, a perfect fit for that trend. While there are dynamics and puts and takes going on, we think it's extremely significant that we have continued to reaffirm the guidance that we provided last November this far out. And reaffirming that guidance today tells you where we think the balance of the year is going to be positioned: right down the center of what we've said for over nine months. I will turn it over to Tom for MetroFlash.

Yes, with regards to MetroFlash, we are excited about the introduction of the service and we continue to roll it out throughout our channels. The one thing that we have noted out there that there could be potentially tens of millions of CDMA handsets in our markets today. And as we look at contracts expiring, it was just a natural evolution to see if we could utilize those on our network. And it's seems [ph] to be gaining acceptance. We believe it's a very important piece of our strategy going into the third and fourth quarters. And with that, it's too early to tell the overall acceptance. But what we have seen so far, we have seen consumers who find value in reusing something that they have paid for that otherwise might have just laid in the sock drawer can now can have utility for them. So we are extreme pleased with it.

And Tom, if I could just follow up, though, this is... my understanding was that it was only for handsets that you guys had already preapproved to work on the network, which, if that's the case, would really shrink the potential target market opportunity for the product. Is that not correct?

That is not correct, David.

Okay.

There are certain compatible CDMA handsets that will [ph] be able to work within the software and there are some that are just not part of that software today. But no, it is not limited to just the handsets that MetroPCS itself retails.

All right, great. We'll follow up. Thanks so much.

Okay.

Your next question comes from the line of Brett Feldman with Lehman Brothers.

Hey thanks, for taking the question.

Good morning Brett.

Good morning guys. Just two quick ones for you. The first one relates to your core market. I think that you have traditionally talked about targeting a mid-teens penetration level across this market. I'm just wondering whether you still think that's something you can get to. And if we were to get there, do you think you would have to do anything different than what you have already done? I'm particularly interested in whether you think the network needs to be significantly enhanced or whether you need to make bigger levels of investment in distribution that you've historically made.

Right now if you look at what we have done with the core markets, we are extremely pleased with the growth. Over the last 12 months, I think it 273,000 net additions, six months about 156,000. So we see strong growth in the core markets today. We always look at our distribution to ensure that it's what we want it to be to be able to maximize it in every one of our core markets going forward. And that's something that's extremely important to everybody. But in terms of any significant changes to our network, we don't anticipate needing that to achieve the levels that we want to achieve, no.

So if you think about... I don't know if you disclosed it in your CapEx in those markets. I mean as you... the run rate level of CapEx, say, per... relative to your services revenue, does that change in any way [ph]

No, it really doesn't. We have given the guidance for the CapEx Brett, and given visibility as to how much is related to our significant market builds, which is the majority of it. But we are not looking at anything significantly different in the way that CapEx has been deployed.

Okay. And then the second question relates to ARPU. I mean we have obviously seen it dip a little bit for the last couple of quarters. And you've done a good job talking about some of the factors behind that. I'm just trying to think over the next couple of quarters, should we expect to see a little bit of this sustained pressure due to the same dynamics? And if so, how much visibility do you have into that? If you see some stability a few quarters out, what are the puts and takes that that leads you to believe that, or in fact are you comfortable with ARPU continuing to trend down a little bit as long as you are seeing I guess [ph] backlog in churn for example?

I think you are bringing up a really important point there in that we do believe that lower ARPU will lead to lower churn as well as higher penetration. I mean that just makes sense. We operate in a competitive industry and have always spoke about ARPU not significantly increasing over time. As we continue to differentiate our service offerings from the competition, we've continued to invest to offer new features and services in existing plans; thus, increasing the productivity loop or value that we bring our customers. Brett, we've said that our focus is on growing profitability and cash flow per subscriber, not exclusively on growing the top line. And the point there is look at the expansion even during this period where ARPUs have dropped and our overall profitability going from 47% in the second quarter of '07 in our core markets to a 50% EBITDA margin in our core markets in the second quarter of '08. I mean this really demonstrates the significant scaling benefits we are getting out of the business, our focus on cost, our focus on acquisition cost is a key part of our strategy..

Well thanks for taking the question.

You are welcome.

Your next question comes from the line of Gray Powell with Wachovia.

Hi guys. Good morning everybody.

Good morning.

I just had a couple of questions. How should I think about the timing of prelaunch costs, and can you give us just an idea of like what kind of costs are hitting a market say six to nine months before launch versus two months before launch?

Yes, we have given overall guidance, Gray, for the EBITDA burn for 2008. And we really haven't broken that down on a more granular basis in the public realm. But if you sit back and you look at it from a macro standpoint, we launched a very, very significant market at the... on July 1st. So obviously, there was a very significant impact from an expense standpoint in the second quarter leading up to having a market fully ready to support a launch. On top of that, you do have extremely significant expenditures that are happening in our other builds. But when you look at from a CapEx deployment standpoint, while there is a spread throughout the build, you really don't layer in your equipment, your antennas, a lot of your final costs until you get closer to launch. And I guess the case in point there would be to look at our year-to-date CapEx compared to our year-to-date CapEx guidance. And you can see that we do have some significant investments coming from a CapEx standpoint during the next two quarters.

Okay. Okay. And then I guess just kind of along those lines, you guys give guidance for the EBITDA dilution with the AWS markets of 125 to 175 million. Can you just tell us how that's tracked for the first half of the year?

Well I think the way to look at it, Gray, is that we've reaffirmed that guidance continually. So the total burn that we have out there for the year is... our view on that has not really changed. You can get some idea from a modeling perspective with the disclosures that we do on the CPU impacts relating to the expansion markets, which we did disclose earlier in the script. What is it? $3 and --

3.70.

3.70. So that would be a good way overall from the expansion market standpoint to size the impact of that.

Okay, great. That's very helpful. Then just last question. It sounds like you recently surveyed your customer base again. Can you give any detail on the breakout of subscriber growth that comes from those that are new to wireless versus those that are coming from other carriers?

Yes, it's really interesting that we do periodically a couple of times a year update our surveys, and it was really some interesting trends. Tom talked about where 90% of our subscribers now use MetroPCS as their primary phone. That's different and that's a significant increase. The other change that we have seen is a lower percentage coming that are saying they are new to wireless, which is implying... I think that makes sense when you look at the overall penetration rates. We are having a higher percentage that is coming from other existing carriers. And that may fit with some of the wireline displacement trends and it's a perfect fit of the MetroPCS model to capitalize on that.

Okay, that makes a lot of sense. Thank you very much.

Thank you.

Thanks.

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

Good morning. Thanks a lot.

Good morning Simon.

Good to talk to you. On the expansion markets, you are seeing a little bit of improvement in the EBITDA margins there, up to 10%. When you look at those core EBITDA margins, is that a realistic goal for us to think about in the long term for the expansion markets? Are they tracking along sort of metrics that leads you to believe that they will look comparable to your core markets in five years time or better or maybe a little bit lower? What are the puts and takes there? And can you update us on any thoughts about getting into the laptop card marker or looking at other 3G data opportunities? Thanks.

Sure. Yes, I think you point out that there has been expansion in the expansion market EBITDA margins, which, when you think about it, is even more impressive given the significant buildout we have going on in the Northeast and the burn that is directly impacting those margins and incorporated therein. Since day one, the vision that Roger laid in place with this business is to have the same structure, approach, rate plans, cost structures in all of our markets. So when you looked at, we don't customize in a given market. Sure, there is little differences that we do, but from a macro cost structure standpoint, we don't really differentiate the way we do business in one market versus the other. So theoretically, you should definitely be in a position as you scale the business to achieve roughly comparable EBITDA margins. I think that's really the best way to look at it. Roger, do you... would you like to address the laptop card issue?

Yes. Yes, I would like to Braxton. A couple of things to bear in mind. First of all, we have always viewed the notebook or the PCMCIA card as being more of an enterprise business model. And so it doesn't really fall in the mainstream of our consumer business, which really is the heart of our focus. Several other things attached to this also. And I think that we all look at the opportunities afforded by 3G and then in the not too distant future 4G. But bottom line is that there is such a great opportunity and unpenetrated market opportunity in the handset area that the kind of support you need, the helpdesk for people that are trying to engage and use their wireless cards takes us in really a different direction. And it's one that has not really impacted significantly the consumer market, the mainstream market. So as long as prospecting and opportunities here are significant for us, we think that that's an opportunity that will lie in the future for us. And unless there is some significant consumer changes, and it could happen in electronics. If it's there, the conversion could be done very quickly. Quite frankly, 4G represents a great opportunity for us because we see that as capacity expansion, higher data rates imply capacity expansion, not just combining speed and download capability. So I think overall, we see as kind of wait and see. And if the market trends shifts and changes, then that's something that will be easily accessible to us.

So when you say 4G, are you thinking LTE, Roger?

Oh, yes. I think that the trend in the industry very clear. And LTE being was the key format, particularly in the frequency division duplex basis or FDD basis. I think the world is going there, the world phone will be a reality. And I think you'll see some interesting developments here over the next six to twelve months.

Excellent. Thank you.

Your next question comes from the line of Todd Rethemeier with Soleil Securities.

Thanks. Good morning.

Hello Todd.

Two quick questions for you. One, could you talk about the tax rebate checks and especially what you've seen in the last couple of weeks? Has there been a drop off in your growth adds maybe as the rebate checks have... are mostly done now just in the last two weeks? And then the second question, the marketing spend this quarter was a little higher than I had expected. I guess was there any spend prelaunch for Philly included in the second quarter?

Yes, tax rebate checks, interesting metric to truly track. According to the schedules that were put out and were posted by the government, we believe we are at the end of that trail. So naturally, we have probably seen less people utilizing their tax refund check for handsets. But we certainly do believe that it was a contributor over the course of the refund timeframe. If I looked at... is it quantifiable? Probably not, because we don't see people walking in with a check in their hand in any of our stores, so. But we do believe that it did help our segment very much.

And Tom, I think it's probably fair to say that reaffirming our guidance this morning would indicate that we really haven't seen any negative trends that would have impacted our take on achieving the goals that we've laid out this year.

Absolutely.

Okay, I just want to check. There has been some retailers reporting some softer numbers just recently because of that, so. And then the second part about the marketing spend?

There is always some marketing spend prelaunch as you put out your awareness into the community, as you go in outfit your stores, as you hire up your staffs, as you bring on collateral. All of those are part of a re launch strategy. And depending upon how big the launch will be will really depend upon how early you need to get those things in place. But it's always part of a prelaunch spend, absolutely.

Can you quantify it for Philly?

Not necessarily. It's not anything that we breakout on a routine basis.

Okay, thanks.

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

Hey, god morning guys.

Hey Ric.

Hey Ric.

A couple of questions for you. First, on the Auction 66 markets, can you update us... I know you said you had a I think a 1.5 million POP DAS in Philly. Can you just update us on just what the POPs are that you are covering in Vegas and in Philly, because those are your big Auction 66 markets?

Ric, what we did earlier on, we did provide some penetration of marketable POPs in other markets. But going forward, we really don't anticipate it's a practice that we are going to continue to give market penetration rates. We did that in LA because we thought it was important early on to help give people a better understanding of what the size of it is. But we think going forward, that's not a practice that we'll hold true to.

How about just the [indiscernible]

And Ric, I think that you can very easily go on the website and see that the coverages that we have are very, very robust. We have a lot of transparency there. We also show what future expansions going to be, and we think that's very informative to us all [ph].

Yes, what we did in the 1.5 million, we wanted to highlight that because we think this is one of the first times as a Northeast anchor for MetroPCS that we have covered a downtown area, a really dense populated area with the DAS network that gives phenomenal in-building penetration. And we think this is going to being an anchor technology that we'll duplicate up in the Northeast.

The landline replacement trend too, I would guess.

Absolutely.

Yesterday, or... this has been a long week... Leap, the other day, when they had their earnings call, put out some pretty interesting numbers and I know you guys probably aren't going to touch on it directly. But just maybe thoughts on 30 day, 60 day penetration rates of new market launches. They said they were seeing 1% penetration in the first 30 days and sometimes 1.5 to 2.5% penetration in 60 days. Is that something replicable in the Northeast or is that something that is not really touchable or just kind of what your thoughts are on that maybe that comment by Leap?

I think that as you look at the dynamics of our growth, Ric, I think you know that those types of numbers have been experienced in many, many different markets. And the size of the buildout has a direct impact how an individual market will perform and how rapidly it will penetrate. But overall, we have always been very, very pleased with our initial penetrations or 12 month penetrations rates. And when you look at the size of the growth that we have in the expansion markets, it tells you absolutely, we are achieving significant penetration levels not only in the expansion, but the core. I mean look at the last 12 months, over 775,000 net additions in our expansion markets. And you can just do the math on that to know that the numbers you are talking about are definitely achievable.

And then on the guidance that you had given and reaffirmed today, you mentioned the Auction 66 impacts on CapEx and on EBITDA. Can you just help us remind us maybe as far as if you've got a dollar figure as far as dollar per covered POP in the first year. Leap the other day also updated their costs, saying instead of 26 bucks, be more like 25 bucks per covered POP to get the network built. And then they also mentioned that this $5 per POP OpEx burn was more aggregate whereas individual markets should be more like $7 per covered POP as far as OpEx burn. Just trying to gauge, are those numbers similar for what you guys are seeing or any update on that thought process from you guys.

Yes, we think it's really informative to really disclose the total dollars that are involved in this as well as the targeted covered POPs which were all part of our guidance and our disclosures. So there is just a mathematical exercise to divide the burns in the CapEx investments into the POPs. So our approach really has been just to show you the overall dollars, and we are not prepared to comment on a per POP basis.

Do you think you will give us the, by year end, how much the burn was? I know we haven't done it through the quarterly stuff, but at year end, do you expect you will give us the updated version of how you did versus the 125 to 175 on the OpEx and 600 to 700 on the CapEx?

Well let me say that we have reaffirmed that guidance now for the third time.

Right.

So obviously it's in that range, or we wouldn't been in a position to reaffirm it. So for planning purposes, I would definitely consider it within the guidance that was put forward.

I am going to give you one final shot at something here. The lower ARPU leading to maybe lower churn and higher penetration. Where do you think churn could go in this business model given your current footprint and your footprint expansion plan and given the revenue trends that you are seeing and penetration trends you are seeing? Where should we think churn might be able to get down to?

We think there is some real opportunities. We have talked about a lower ARPU. We'll have more stickiness with more value proposition for the customer. We have also talked in the past about how the family plan has much more stickiness to it just by its design and its nature. And early indications, and we'll have to see how this continues to develop, is that there is a significant pick up in churn when you are looking at family plan participation. Tom clearly disclosed the family plans in the second quarter was less than 20% of our met [ph]. That's what we told you last quarter it was and what we felt the promotion would... how it would impact the quarter. So it's not like it's the majority of what we are doing. But it will bring incremental benefits to us we believe.

Additionally, I think what you'll see is that just the consolidation of expenses by consumers and just the increase in just landline replacement, displacement we think is a dependency in the wireless space that's going to increase over time as well which should help that metric.

Okay. Well, thanks guys.

Our final question for today's call will come from Romeo Reyes from Jefferies.

Hello?

Hi Romeo.

Can you hear me? Hi guys. On other [indiscernible] today. A couple of questions. What impact are you seeing from the increases that Boost put through back in June, particularly in the LA market? I think the LA market was one of the markets that was mostly... most affected by the Boost product. And then with respect to the overall prepaid opportunity here in the U.S., globally speaking, I think the U.S. is kind of inverted. It's 85.15 and the rest of the world is like 15.85 in terms of prepaid, postpaid mix. That probably changes over time. So I don't know if anyone could perhaps maybe Roger can chime in here and to see what that opportunity is for the unlimited players and for the overall prepaid business. And do you need to have a nationwide type of network in order to fully maximize that opportunity? And then as you think about the landline replacement, which I think is obviously a big theme here, do you have any sort of data on sort of productivity out of landline... residential access lines to cell phone service that you might be able to share with us? Thanks.

Well I'll take the first question on the impact of Boost, then we'll have Roger comment on the prepay. We said quarter after quarter, Romeo that Boost wasn't having any measurable impact in us in our operating market. And that included Los Angeles. Once Los Angeles was up and operating. So the raising of the prices logically then would tell you that there wasn't a major difference because we really weren't seeing an impact to being with. You are absolutely right that there was an impact from Los Angeles given the fact that Boost operated in that market for six months... over six months before we launched that market. With... and the only carrier to have a similar type offering. And there was a lot of low-hanging fruit and a lot of initial penetration that Boost picked up. And that's definitely had an impact on Los Angeles as we have talked about in the past. But from a pure operating standpoint, once LA was up, no, there really hasn't been any significant difference. It was never, as we said in the past, a heads up offering. There was very limited handset availability, it was a completely voice-centric plan with no data on them. Remember, there is massive data on bundled in in essentially all of our higher end rate plans that offer tremendous value for our company. And that really wasn't what this was doing. Roger, would you like to address the level of [indiscernible] payments?

Let me try to address it a couple of ways. One is that I do think there is a invested, shall we say, currently what's happening in the U.S. versus the rest of the world. I think that they will improve, i.e. more prepaid overtime. But I don't think its going to flip flop the way it has in Europe or in other places around the world. I think one of the elements of this as the fact that we offer and we see now that there is fairly a strong growth in our credit card as a post cash pay, it's not a tremendous mix change but it's getting really steady and growing a bit. And auto paying a smaller factor in that. But I think as you go through this service is really the same kind of service as you have postpaid it is paying in advance. But because of its unlimited nature, the only area that change month-by-month would be that transactional business that we would cast as data whether it's existing games or ring tones or whatever; that would be a difference. But fundamentally it's not different than postpaid paying and we are paying in advance. You do pay your monthly service. It's not a characteristic of prepaid, which is a card that may have loaded on it so many minutes and it's good for 90 days or 180 days or a bit longer, a bit shorter. So it is really the same variation on the postpaid theme. I think we are kind of a hybrid. So I don't know if that question helps you, but... or that answer helps you in regards to this question, but I think it's... we are kind of in between. And I don't know if we are ever going to see a major change in prepaid versus postpaid in this country as we do the rest of the world.

Then the productivity.

No, to look at just general wireline reduction. It's just an assumption that it would make that we're seeing more movement to household, [indiscernible] it's actually, say that we could give you data on what effective our carrier would be, loosing share there, we really don't have that to capture. But we don't know that we see our wireless ports every month but the wireline decrease is actually what connected to our increase in MetroPCS subscribers using their wireless phone as their only phone. So there is macro assumption you can make there.

So there is no way tell whether or not the port is coming from a wireline company?

I don't have that data right now, no.

Okay. Thank you. Actually, Tom, can you just give us a sense of the distribution in LA? I think that's been a big differentiator for you guys. And obviously, the marketing that you guys did, I see you guys are marketing at Dodger Stadium when I see a baseball game. Can you talk a little bit about the distribution? This is something I talked... I mean I asked you a couple of quarters ago. But what's different that your distribution relative to say the Boost distribution, or if somebody wants to get into the pay in advance business with an unlimited product? You guys are obviously in direct, mostly indirect. But is there any difference, big appreciable difference between what you guys do and what the other guys are doing that makes it more successful... that makes you guys more successful?

I would... two things, first of all, thank you for the Dodger commercial. We appreciate that and I am glad to see you are seeing us there. It's important if we are going to advertise, people see us and then they take that awareness to consideration as we like. Secondly, and it's really one word. I don't want to downplay it, but it's real simple: it's execution. Our model, as Roger has always said, we are laser focused. We are not all over the board. The things that we do, we do very well we execute very well and here we ever find our settled there is net we will do that and we will make changes accordingly. So I think what you are seeing in LA just like a phase launch, distribution will follow in the similar pattern and phase by so as a networking places more distribution comes on our model is extremely in as you know and one of the things that is really imagined to that as our net promoted valued as I spoke about earlier. People who know about tell other people about it and that's how our service resonates in the community. So our distribution base understand that, I think that evident and now we achieve as our J.D. Power ranking as that everybody understands and individual is connected to six other individuals, to a fixed degree the separation rule holds true in every one of our customers. So to that extent, what we do on the customer service side is throughout the organization that comes in call centers, that comes in every price that we deal with customers and I just think that one of that comes down to execution: we do it very well.

Well we would like to thank you again for participating on today's call. We certainly appreciate your interest and support of MetroPCS and look forward to our next quarter of continued progress.

Ladies and gentlemen, this concludes the MetroPCS Communications 2008 first quarter results conference call. Thank you for your participation. You may now disconnect and have a pleasant day.