T-Mobile US, Inc. (TMUS) Q2 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the MetroPCS Communications Second Quarter 2011 Conference Call. [Operator Instructions] This conference will be recorded today, August 2, 2011. I would now like to turn the conference over to Mr. Keith Terreri, Vice President and Treasurer of MetroPCS. Please go ahead, sir

Thank you, Cindy, and good morning, everyone. I'm Keith Terreri. I'd like to welcome you to our second quarter 2011 conference call. The speakers with me this morning are Roger Linquist, our Chairman and Chief Executive Officer; Tom Keys, our President and Chief Operating Officer; and Braxton Carter, our Vice Chairman and Chief Financial Officer. The format for today's call is as follows. First, Roger will provide an overview of the business, then Tom will provide an update on the number of operational results and initiatives. Braxton will then review the financial highlights of the second quarter of 2011, followed by a question-and-answer session. During today's call, we will refer to certain non-GAAP financial measures. We have reconciled these historical non-GAAP measures to GAAP measures in our earnings release, which is available 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. Forward-looking statements are any statements not of historical fact and involve risk, assumptions and uncertainties that may not occur or could cause actual results or the timing of events to materially differ from those made in the forward-looking statements. 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 statement include, but are not limited to, statements we make regarding our future operational financial plans, our prospects for success and our positioning in the highly competitive wireless industry. Furthermore, included in our forward-looking statements are statements regarding the momentum and attractiveness of the no-contract segment, the strength of our business, our execution of our business plan, competitiveness of our service plans and products, positioning from a balance sheet perspective, expectations regarding the introduction, attractiveness and pricing of smartphones, the efficiency of our networks and spectrum use, seasonality of our business and outlook for growth entering [ph] our future quarters, factors that lead to customer base buying of our services, completion of our network upgrades and deployments, reasons for churns, our estimates of capital expenditures and other statements, which are not historical. Management may make additional forward-looking statements in response to questions. Additionally, our forward-looking statements are subject to a number of risks, many of which are beyond our control, including the risk factors described in our earnings release, our supplemental slides, in our annual form on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, copies 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 documents. We have also provided supplemental slides that are available for download and printing on our Investor Relations website. These slides may contain forward-looking statements and risk factors. We may refer to these slides during our prepared remarks and in responses to questions. 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. For anyone listening to a taped or a webcast replay or reviewing a written transcript of today's call, please note that all information presented is current and should be considered valid only as of August 2, 2011, 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 pursuant to Regulation FD. Certain terms that are used in today's call are registered trademarks of MetroPCS. Before we begin the call, please be advised that Roger is participating on this quarter's call remotely. And at this time, I'd like to turn the call over to our Chairman and Chief Executive Officer, Roger Linquist.

Thank you, Keith. Six months into 2011, we are pleased with our performance. We believe mobile broadband momentum is growing within the no-contract segment, and the second quarter results show continued strength in 2 key areas: financial performance and subscriber growth. We continue to add subscribers as our total subscriber base grew 19% in the last 12 months even in light of significant challenges, including continued high unemployment and economic pressures. On this morning's call, I want to focus on several thoughts: demand for mobile broadband, broadband capacity, and spectrum management and acquisition of additional spectrum. No-contract wireless has grown at a tremendous rate. Since 2005, we have grown subscribers at well over 20% CAGR. This is an outstanding growth rate, a result of focus on execution at every level of our organization. Further, we have continued to evolve our service offerings to meet consumer demands. For example, in 2010, we dramatically changed our go-to-market strategy with Wireless for All. As a result of this change, we lowered our historical churn rates and have successfully managed our cost of churn. Year-to-date, we have been able to deliver a cost of churn that is within $5 to $6 range, a level that is comparable or better than traditional contract wireless services. In December of 2010, we introduced our first Android smartphone and demand has been strong. In the first quarter, approximately 30% of all handset sales were Androids. In the second quarter, nearly 40% of all handset sales were Androids. While Android is bringing in new customers, it is also attractive to existing customers. Of our customer base, 13% upgraded this quarter. And of those, nearly 40% upgraded to an Android smartphone. Clearly, customers are demanding the advanced features available through the Android OS. With 4 Android devices currently available, we expect to produce additional smartphones throughout the remainder of 2011. Affordability of smartphones is key for our customers, and we are vigorously working with our suppliers to achieve this important goal. In the future, we expect prices for smartphones to decline as they did for feature phones, making smartphones more affordable for a larger segment of the population. In regards to broadband capacity management, we are focused on efficiently adding data capacity to our CDMA network based on growing smartphone demands, and equally important, managing data traffic where possible by compressing and optimizing throughput. In preparing for the future, we are at the forefront of 4G LTE network deployment, having already introduced 4G service in all our markets, and we are currently expanding the footprint of our 4G network. Android smartphone users demand a wide choice in applications, and many applications are also increasing their features, utility, functionality and ability to entertain and inform. With the ever-expanding community of developers working on a myriad of new applications to meet this demand for Android smartphones, we are implementing technology to preserve the customer experience and accessibility of the network. One technology-based solution is to reduce the number of times an Android application needs to connect to its respective server. By optimizing this interface, we can realize a measurable increase in capacity with no adverse effect on customer experience. While this is one solution, we are implementing a number of changes to increase capacity on the CDMA network, while we focus on growing traffic on our 4G LTE network with the next generation of handsets in 2012. While 4G LTE is clearly the future of wireless, we are further identifying, optimizing and shaping our existing CDMA network as we experience extensive increases in data demands. With the success we are having in deploying CDMA Android smartphones, we are constantly evolving the network to meet future capacity requirements. Lastly, I want to discuss spectrum management and the opportunity for spectrum acquisition. Looking back, we selected our network technology and designed our network to use our spectrum in the most efficient manner possible. We believe we are one of the most efficient users of spectrum based on the number of subscribers per megahertz and see the potential for continually improving our spectrum use efficiency. Clearly, capacity requirements are going to continue to increase, and 4G LTE provides us a spectrally efficient network to manage these requirements. Additionally, we are planning to begin introducing VoLTE-capable handsets early next year to move voice as well as data traffic to our LTE network. Also, we are actively looking at acquiring additional spectrum from a number of potential sources and have available the financial means to move quickly for the right opportunity. Importantly, we will be disciplined and opportunistic when qualifying these opportunities. The wireless experience is changing and opening new avenues of growth opportunities. Smartphones have increased functionality, networks are getting faster and the number of applications is constantly growing. It's an exciting time to be in this industry. And with our no-contract, low-cost service plan, we are providing what has traditionally been viewed as the postpaid experience at a significant savings. I'm pleased with this quarter's results and believe we are well positioned for the future. Let me pass it now to Tom.

Thank you, Roger. Good morning, everyone. Overall, we are pleased with our second quarter results, which reflects the fundamental strength in our no-contract wireless business. With second quarter net subscriber additions of 199,000, we now serve approximately 9.1 million subscribers, up 19% from a year ago. In the first 6 months of 2011, we have experienced solid growth, having added 925,000 subscribers. Our total penetration rate now stands at 9.1%, up from 8.4% at the beginning of 2011 and up from 8% a year ago. As discussed on last quarter's call, the seasonal nature of our business, coupled with our strong performance in Q1 and, we believe, continued economic pressure on our customer has led to an increase in churn that is not unexpected when viewed against our Q1 net gain attainment [ph]. Historically, during the second and third quarters, we have reported lower gross and net additions and higher churn when compared to the first and fourth quarters of the year. Given the strong net additions we had during the first half of the year, seasonality during the third quarter could also be accentuated. Over the past 6 months in what is a competitive wireless industry, our performance has been solid, and we are executing well against our 2011 plans. We believe the no-contract segment will remaining attractive to wireless users and provide fuel for the future subscriber growth. While the industry is becoming incrementally more competitive, we believe that price stability has allowed our customer base to plan and budget accordingly while deriving great value from our service offering. As economic pressures mount and consumers continue to struggle, MetroPCS needs to be positioned as the attractive alternative for families that need to save on their wireless bill. At the end of the second quarter, family plans account for roughly 38% of all subscribers. Our operational growth has, in large part, been driven by the increasing interest in smartphone. According to a recent Q [ph] Internet study, 35% of Americans currently own a smartphone. Among younger demographics, the percentage is higher as 58% of Americans between the ages of 25 to 34 own a smartphone. Since the beginning of the year, 33% of all handsets shipped have been Android-based, and during the second quarter, that number increased to 38%. At the end of the second quarter, we had overall smartphone penetration of approximately 25%. As we introduce more Android-based devices into the smartphone lineup, we could see this percentage increasing as Wireless for All transitions into the second phase of our marketing initiative, Android for All. Interest in smartphones is helping to support ARPU. This is the third quarter in a row in which ARPU was up sequentially, up $0.07 in this most recent quarter. Since the fourth quarter of 2010, the same quarter we introduced Android phones, ARPU has increased $0.70. We continue to expand our network footprint with the introduction of service in the Reading and Lehigh Valley areas of Pennsylvania. These are geographic areas of interest to our Philadelphia market and complement it well. We also recently purchased network assets in the Connecticut River Valley area, which extends from Springfield, Massachusetts through Hartford and down to New Haven, Connecticut, joining together our Boston and New York Metropolitan area. With our national coverage through Metro USA covering over 280 million POPs, our subscribers get an incredible value, and we believe our service plans put us at parity with the large postpaid carriers. Operationally, we are committed to providing our customers with a quality experience. The 4G LTE upgrade of our network continues, and we expect to complete the majority of the upgrade by the end of this year. We also continue to increase our CDMA network capacity as consumer demand for data grows, particularly with the significant deployment of Android phones, the popularity of the Android platform and the accompanying increase in data consumption it has created and we expect will continue to put pressure on our CDMA network. The adjustment we made to our 2011 CapEx guidance reflects additional CapEx to expand capacity to satisfy our year-to-date significant subscriber growth and the demands put on our CDMA network from increased data consumption. The increase in data consumption is driven by more and more subscribers using a mobile device that entertains, connects and simplifies life on the go. Six months into 2011, we believe we have executed our plan, highlighted by strong subscriber growth and adjusted EBITDA growth. Some macroeconomic headwinds continue to persist, and that is why we need to be heads down in the work to leverage our best-in-cost structure. Our focus continues to be managing network efficiency and executing on our strategy. We believe with our current and future smartphone lineup we will continue to position our product and service offerings such that consumers have a real option for quality wireless broadband experience, on predictable, affordable and flexible no-contract plans. Now I'll turn the call over to Braxton.

Thanks, Tom. Good morning. We ended the quarter with approximately 9.1 million subscribers, up 19% from second quarter 2010 and up 45% over the past 2 years. We also recorded our highest adjusted EBITDA in company history of $357 million, up approximately 11% year-over-year. This is the 11th quarter in a row in which we have reported year-over-year adjusted EBITDA growth of over 10%. Building on a strong 2010, our second quarter results were largely due to 3 factors: our continued success and execution of Wireless for All service plans, our Android smartphones and our focus on managing our superior cost structure. We have a very strong balance sheet and substantial liquidity with approximately $2.2 billion in cash and short-term investments. In March, we completed an amendment, restatement and expansion of our senior secured credit facility to expand the facility with a new $500 million term loan. In May, we completed an incremental commitment agreement, which supplements the amendment with an additional $1 billion term loan. A portion of the proceeds from the incremental term loan were used to repay $536 million in outstanding principal under the then existing Tranche B-1 Term Loans that would have matured in November of 2013. The remaining net proceeds will be used for general corporate purposes, including opportunistic spectrum acquisitions. Our total leverage was 3.7x [indiscernible] in accordance with the indentures governing our senior notes at the end of June, and our net leverage at the end of the second quarter was approximately 2x. Based on our very manageable maturity schedule, the weighted average cost of debt for the quarter of approximately 6.1%. The fact that the majority of our debt is fixed by its nature or through interest rate swaps and our significant liquidity, we believe we are very well positioned from a balance sheet perspective. Churn for the quarter was 3.9%. The increase in churn was primarily driven by an increase in gross additions, adjusted for false churn, in the first quarter of 2011 over the first quarter of 2010 and, secondly, we believe, continued economic pressure on our subscribers. Given the seasonality inherent in our business and with the significant performance we had in the first quarter of 2011, we expect the churn to increase in the second quarter and believe these trends could continue into the third quarter. Our second quarter 2011 ARPU was $40.49, up $0.65 on a year-over-year basis, and up $0.07 on a sequential basis. The increase in ARPU year-over-year was primarily due to continued demand for our Wireless for All and 4G LTE rate plan. This is the third quarter in a row in which we have reported a sequential increase in ARPU. Our CPGA continues to be one of the lowest of any facilities-based wireless carriers in the U.S. For the second quarter, our CPGA was approximately $178, up $14 over the prior year's second quarter. This increase was primarily due to an increase in promotional activities. As can be seen on our supplemental slides, year-to-date our cost of churn is below $6, which is best in 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 $18.94 as compared to $17.90 in the prior year's second quarter and compared to $19.79 in the first quarter of 2011. This year-over-year increase was primarily due to an increase in retention expense on existing customers, costs associated with our 4G LTE network upgrade and roaming expenses associated with Metro USA, offset by the continued scaling of our business. Adjusted EBITDA for the second quarter was a record $357 million, an increase of approximately 11% year-over-year. Our adjusted EBITDA margin for the quarter was 32% compared to 35% in the second quarter of 2010. Over the last 12 months, we have generated record adjusted EBITDA of approximately $1.3 billion. This is particularly impressive given the potential margin dilution that could have occurred with the Wireless for All service plans, the significant increase in handset upgrades we've been experiencing and our ongoing 4G LTE network rollout. 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 approximately 21% and 19%, respectively, to $1.1 billion and $366 million, respectively, over the same quarter in 2010. The increases are primarily due to the growth of our subscriber base. Our consolidated selling, general and administrative expenses were approximately $155 million for the second quarter of 2011, representing a decrease of $4 million when compared to the year ago quarter. We generated approximately $344 million in cash from operating activities in the quarter, an increase of $231 million from the prior year's second quarter. The increase is primarily attributable to an increase in cash flows provided by changes in working capital. We incurred capital expenditures of approximately $265 million during the second quarter. During the last 12 months, our unlevered free cash flow was $346 million. Our results demonstrate our continued focus and ability to grow the business while generating cash flows over the long term. Our updated current estimate for total 2011 capital expenditures is $900 million to $1 billion. This is an increase over the guidance given on the first quarter 2011 earnings call and is primarily driven by an increase in capacity expenditures for future subscriber and data growth driven by the popularity of our Android handset offering. We generated $84 million in consolidated net income during the second quarter. This amount includes approximately $6 million in charges related to the extinguishment of the Tranche B-1 Term Loans under the company's senior secured credit facility during the quarter. On a non-GAAP basis, excluding the loss on extinguishment of debt, net income would have been $90 million or $0.24 per common share, an increase of approximately 13% and 2% -- $0.02 per share, respectively, when compared to the prior year's second quarter. Now we'll move to Q&A. Operator?

[Operator Instructions] We will move to our first question, which comes from Brett Feldman with Deutsche Bank.

I was hoping we can maybe just see if we could break down churn a little bit. Obviously, it came in at the high end of the range for the season. You gave some interesting statistics during your commentary with regards to subscriber mix. You have nearly 40% of your subs on family plans, 25% on smartphones. I know there's an overlap there. I think we would have expected lower churn characteristics out of those types of subscribers. So I'm curious, is that actually true? And are you mostly seeing elevated churn in the feature phone base? Or is there another dynamic here we need to sort of dig into?

Yes, Brett. This is Tom. Factors on churn, obviously seasonality in Q2 based upon our high net gains in Q1. Competitive factors are certainly out there. There's still, well, a lot of aggressive plans as well as some government phones launching in different markets, economic pressure. But family plans, as we've stated, I think the base is close to 38%. But in the second quarter, it was approximately 48% to 49% of all subscribers came on, on family plans. So we see family plans as being beneficial to churn in the long run, but we probably didn't see any of that benefit in the second quarter.

So, I mean, is it something that you would expect to start seeing flowing through in the fourth quarter? Or is it really just going to be normal seasonality that's going to drive churn from this point forward?

I would think mostly it's going to be normal seasonality as we've seen in years past in the second and third quarters.

We'll take our next question from Rick Prentiss with Raymond James. Richard Prentiss - Raymond James & Associates, Inc.: I want to follow up on Brett's question. In your supplemental slides of your analysis [ph], it gives a nice history from '05 showing that typically, third quarter has been the highest quarter of churn given what happened, second quarter seasonality and the high gross adds in the first quarter. You had pretty high gross adds second quarter, too, year-over-year. Just trying to gauge. I think, previously you had mentioned you thought churn would be in a 3% to 4% range. I don't see you mentioning that here. Is the thought that third quarter would be the high seasonal year for churn? And does that mean we're going to be breaking the 4% level?

Rick, I can tell you that it's probably too early to call that in the quarter, certainly with only one month gone. We do believe there's going to be economic headwinds, as we stated in the scripts. We don't think that's going to subside right now. And certainly, third quarter does have seasonal pressure that we're going to continue to see. So I can't call that for you, but we understand what the seasonality of the second quarter means for the business. Richard Prentiss - Raymond James & Associates, Inc.: Okay. And also in the quarter, equipment revenue was a little bit lighter than we were looking for. Any special promotions in the second quarter? And what are we looking at for the rest of the year? And maybe a side question. Do you think the iPhone, the low-priced iPhone at AT&T, the iPhone 3, have any effect on your churn or promotional pricings?

So yes, we had various promotions in the second quarter, as we do every quarter. The driver for the quarter was an Android for All promotion, which, in essence, was a family promotion but was led with our Android phones. With regard to the iPhone 3, I can tell you it's fairly popular. So I can't attribute that on a consumer by consumer basis. But at the end of the day, that is a handset and an operating system that is in demand by many, many people.

We'll take our next question from David Barden with Bank of America Merrill Lynch.

I guess I don't like to ask 3 but I will, if I can. I mean, very specifically could you guys comment on what impact you saw from Verizon's $50 unlimited feature phone plan in the Miami and L.A. markets? Second, could you talk specifically to kind of what, if any, shrapnel you took from the back-and-forth between Sprint and T-Mobile with T-Mobile lowering prices and Sprint kind of introducing bounties? And whether you did anything in the quarter to react to that? And I guess the final point is maybe wrapping up Brett and Rick's question. Is -- the whole idea, I think, here was that this smartphone thing was going to be a big game changer and that what the idea was here is that ARPU is going to go up and churn is going to go down, and those things are worth making an incremental investment in equipment subsidy so that we can improve the value of the base. And I guess it's tough looking at this quarter to see evidence that, that actually happened. You did have good EBITDA performance, but could you kind of, like, look into your numbers and help us kind of see the value that this smartphone evolution is actually having on the base of business?

David, I'll take a couple of those. First, in terms of any Verizon impact in the 2 markets, we kept our advertising and our brand awareness, I would say, normal to high in those markets, so I can't attribute anything specifically from that offer in those 2 markets. We do know what Verizon was advertising, and we were aware of that and we tried to stay out in front of that. With regards to Sprint and T-Mobile and any bounty effect, there has been substantial hoarding bounties out there. They range from a variety of offers market to market, carrier to carrier. And at the end of the day, those can certainly be compelling to some people to make a switch if they think the economy is that bad and that's a way to get ahead of the curve. We did not offer any bounties like that in the second quarter. The value of smartphones to the base is a good question, and what we tried to do was bring smartphones in reach of our customer base. Number one, it's what they're demanding. Number two, we understand there's a higher cost at times of the device with the operating system. And we attempted, through our Android for All family plan promotion, to bring people to the base and to understand the value with our service in a no-contract environment. So I think I would go back to the offset of that in seasonality in the second and third quarter coupled with the economy. We do see it being tough out there currently. We see anecdotal evidence in our stores with our subscribers through conversations, through focus groups. So we work through to try to continue to have our handsets. You've heard Roger talk about being the best deal in town. We continue to see ourself that way. And we have to make ourselves attractive not only to our current base but also to future people who want to move out of contracts and go to a no-contract opportunity.

So Tom, are you saying that maybe, flipping that around, that if you weren't selling smartphones, the churn benefit that you're getting from those smartphone sales hadn't been present, that the churn sequentially would have been even worse, and that the economy is having that huge an impact on the non-smartphone base?

Yes. I think it's hard to draw those analogies. We had a larger percentage of smartphones sold in the first and second quarter. So they're going to contribute obviously to our percentage of churn. That's just normal. But I was just mentioning about the economy. We just haven't seen it get better in the markets that we do business in. So we're mindful of that. We have to continue to try to bring our handsets in reach to our customers, and then provide a quality experience so our customers are compelled to stay with us. I can't make a complete analysis of what you're looking for right here.

Yes, David, it's Brax, and let me get down to some numbers that might help put the seasonality in perspective. And remember in the first quarter of 2010, we had not -- we'd just launched Wireless for All. So we still had the run-off of our free Wireless for All offerings that were out there. So the first quarter of 2010 had a significant amount of false churn in it. When we normalize what we think that false churn was and look at Q1 '11 over Q '10 normalized for false churn, we believe that the gross adds were up, adjusted for that false churn, 13%. When you look at the gross adds not adjusted for the false churn, it's about 4%. So that was significant incremental growth that impacted us in the second quarter, which had a very substantial impact here. And that, coupled with the impacts of the economy -- I mean, Tom talked about the differences between smartphone churn and non-smartphone churn, and at this point we're not seeing any significant difference. But remember, smartphones are fairly young in their evolution. And the take rate of that has been increasing, and we need to see how things play out and develop. But at this point, we're not seeing a big difference.

Got it.

We'll take our next question from Phil Cusick with JPMorgan. Philip Cusick - JP Morgan Chase & Co: If I can follow up on that just quickly and then I'll let it go. But as you look at the customers who came on in the first quarter, you said the smartphone and non-smartphone churn, was it fairly similar across those 2 bases? So are smartphone customers acting like sort of new customers like they typically act? Or is there a higher skin in the game, higher sort of entry point difference for those customers versus feature phone customers?

And again, still early in the game, Phil, but we're not seeing a big difference at this point. Philip Cusick - JP Morgan Chase & Co: Okay. And then from there, it seems like there was a pretty good balance, I mean given the economy, of adds and margin in the quarter. Do you feel like you're getting your share of customers? And is there any need to ramp promotions here to sort of raise you sub trajectory where you say, "Okay, we're doing the right thing given the economy" and sort of wait out the seasonality and really come out strong and -- when things get a little bit better.

Phil, from some outside studies, we think we held our share for the first half of the year very well and actually grew the base. So promotions are always necessary in our business to get awareness, right? And once we get awareness in a market, depending upon the age and the vintage of the market, we can different things. Obviously, in more mature markets, we can move quicker and at times see a greater take rate on our promotions. In younger markets, it takes us a little bit more investment, obviously to be a little bit more aggressive at times with the amount of marketing dollars we put into that. We'll generally use the same promotion nationwide, but we may emphasize additional media or different spending to get the promotion out in places that we've only been in business for 2 years. Philip Cusick - JP Morgan Chase & Co: And in terms of the family plan promotion, was it a surprise at all, the, sort of, what did you say, 49% of new subs came in on family plans given that, that was the big promotion through most of the quarter?

No. Actually what it did is it reinforced that when we go to a targeted promotion, we can be successful at this because it was at an Android, which really was a family plan offer, but we based it off of the success of the Android platform. So we really enjoyed the results of that, and it kind of reinforced to us that our marketing of -- when we apply the dollars so it can be successful.

We'll take our next question from Tim Horan with Oppenheimer. Timothy Horan - Oppenheimer & Co. Inc.: Two, well, three questions, if you don't mind. Do you think the competitive intensity at this point is increasing or declining? It seems to have beat [ph] the couple of years ago, but do you kind of expect it to get worse? And then on the EBITDA margin front, I know there's a lot of moving parts. But do you think this is the bottom on the margins and we can expand from here given the LTE will start to get filled up? And what you're doing here in terms of gross adds with smartphones? Just some outlook on that.

I'll take the first part, on the competitive intensity. We think it's always competitive. As mentioned, we continue to see government phones roll out with different providers in different markets. We've also seen T-Mobile be front and center with a variety of different advertising and promotional elements during their second quarter. So yes, we do think it is always going to be competitive and there's always going to be promotional tension in the marketplace. Braxton, you want to take the EBITDA?

Yes, Tim, you're absolutely right. There are a lot of moving parts on EBITDA, and on one of them is what is your gross additions during a particular quarter. So if you look at the EBITDA margins, there is seasonality within that. But when you look at a longer period of time year-over-year and you look at historically what we have accomplished even with some very significant initiatives such as rolling out LTE, such as the Wireless for All, which was essentially a $5 price cut by embedding taxes and regulatory fees in the rate plan, now we offset that with mixed execution. But those initiatives put significant pressure on our EBITDA margin, yet we are still growing margins on a continual basis. And that is certainly what we're continuing to drive to. The one thing about our business with 9.1 million subscribers, we have a lot of additional scale in front of us, and you are seeing some of those scaling benefits in the CPU number coming down.

And we'll take our next question from Jennifer Fritzsche with Wells Fargo. [Technical Difficulty]

Since this is the first quarter where we've seen a decline in service gross margin since, I think, fourth quarter of 2009, can you kind of talk about the impact of smartphones and the data usage capping [ph] on profitability? Is that a trend we should expect to continue to see?

I think when you're looking at the service gross margins, there is an impact there due to the continued rollout of 4G LTE. And that investment, we talked about that being the majority of that footprint increasing to our newer subs [ph]. It's not as clean-cut as just additional data pressure coming in. When you look at the overall profitability characteristics of smartphones, first of all you're driving a higher ARPU with that. Now some of that was muted in the second quarter given that our primary promotion was family planning. We saw the highest ever take rates in family plan penetration, as Tom alluded to. So we didn't see a significant of an ARPU growth as we've seen in prior quarters. Now backing away from family plan promotions, you will potentially see more of an impact of smartphones penetrating. But they're at a $50 higher ARPU, which does positively impact the margin characteristics of the company.

Great. And just one follow-up, if I could, on gross adds in third quarter. If my model is correct with the exception of '09, those are typically up sequentially. And I know it's alluded -- included in that is some market launches. But I'm hearing a lot of mention of competition in the economy. Is that still a fair assumption to assume they would be up from second quarter levels?

Jennifer, this is Tom. I would call it too early to tell. When we look at 2010, they were up, but they were only up marginally. So it's really about the promotional impact and how well we execute all this. So it's too early to tell.

And we'll take our next question from Craig Moffett with Bernstein. Craig Moffett - Sanford C. Bernstein & Co., Inc.: If we could just dig into churn a little bit. You talked about the economy. Can you give us any breakdown of where those customers are going as they disconnect? Are you -- are they going to competitors? Are you seeing non-pay -- effectively customers that your research shows just aren't able to pay their bills and are disconnecting altogether? I guess it raises one question for me about the smartphone customers as to: Are your smartphone customers essentially biting off more than they can chew in terms of ARPU?

On the no-pay customers, Craig, we really don't have a view that they're going anywhere else. We do see our reactivation numbers month-over-month are steady, if not increasing slightly. So we do see people come back on to the network. Anecdotally, from payment in the stores, from our cash payments, we think that's fairly consistent. But we can tell by our dealers, by our company-owned stores that it is tougher for people to come up with their monthly rate plan. There is a belief that right now, people are just struggling to get by. And obviously, if you take a Maslow's look at needs, this one is not 1 or 2. So it's just suffering probably with the rest of the economy. Smartphone customers right now, are they biting off more than they could chew? I think part of what we get our people upgrade from a positive experience. So they stay with us again, they reaffirm their belief in the brand. New customers coming to us either from a competitive contract rate or for their first time in, I think they do after we adjust. It's $10 more than a $40 feature phone plan, obviously. So there could be some pressure there, but it's too early to tell since we're just into this thing for about 9 months now. Craig Moffett - Sanford C. Bernstein & Co., Inc.: Do you think that the Assurance plans and the SafeLink plans that are out there, the government's subsidized plans, are actually cutting into your customer base as -- particularly given how much your -- you have a kind of wireless-only customer base?

I think if you look at when those plans launch, where they launch and how they launch, we certainly see blips in those markets, we can tell from third-party data that we get that's available to everybody. When we see an Assurance wireless plan launch in a market, we can see about a 90- to 120-day blip with an increase in activations on that particular MVNO brand. And then it could be a slight dip in our market while that happens because the consumer's going to be drawn to free. It's kind of hard to fight that, so we just let that go through. We let the blip play through in the market. We try to be consistent with our offering. Craig Moffett - Sanford C. Bernstein & Co., Inc.: And that's helpful.

We'll take our next question from John Hodulik with UBS.

You guys raised CapEx guidance again here this quarter, and obviously, there were comments about usage on the CDMA network. First of all, how confident are you that this level of spending will get you through these capacity issues as we look out into 2012? And are you potentially seeing any network quality issues at this point which would affect the smartphone users? Or is this spending just to stay ahead of what may become quality issues as usage grows? And then I guess putting it all together in terms of gross adds and churn. I mean, I know you've hesitated putting a stake in the ground, but are you reasonably confident that you'll be positive from a net add standpoint in 3Q?

Well, let me take the first part of that. It's Roger. We've added a lot of capacity, obviously, for the CDMA network. LTE build continues, and that's a very important part of this overall CapEx. The increases that we've made in terms of the guidance we've given does reflect the fact that we are building capacity both at the cell site and the radio access networks that we're in as well as the core. So that's the question. A lot of this investment will be going in rather lumpy so that there will be a future benefit here that is not immediately realizable. But we have done quite a bit of expansion, and we plan to do some more because, obviously, the data demands on the Android phones, which we're very successful in selling right now, as everybody knows, is much higher on the data usage side. I would say one thing, that the additional CapEx that we are putting in and beginning to put in, which is a part of this plan, is going to go to a microwave backhaul system so that we can get the full benefit of the forward link in LTE. And that upgrade is going to be primarily on the microwave side. So we should see a significant benefit in the future. And this will be a future benefit late '12 and going into '13 for EBITDA. So on one hand, we are investing in the future very significantly in LTE. But the increase is also very substantially going to support our network in the CDMA area. In terms of quality, we're always focused on staying ahead of quality and service disruption. The effort here is, I think, staying ahead of the game. But I will tell you this, that the significant increase in usage is putting demands on the system. So this increase truly reflects what's needed to get through what we anticipate being the balance of the year.

Do you think you're seeing any impact on churn because of the network?

I think that that's the variable that we're not capturing in the data that Tom has mentioned before in terms of why are you leaving the service. There is always points that some networks are -- some markets are experiencing more capacity constraints. But we are staying ahead, we believe, in these cases. But it's a challenge. Tom, do you want to add anything to this?

Yes, well, just in terms of the last part of the question by John on the third quarter, first of all, we try to give everybody a quality experience, like Rogers said. We try to [indiscernible] for capacity for now and for the future. Secondarily, in the no-contract model, it's really important that we put offers out there that also have some form of retentive value that we attempt to keep customers on the network for as long as possible in a model where they have choice. And if the economy does get difficult, that choice is probably tougher for us to overcome as a company. So in terms of everything we stated, I would say it's too early to tell about the third quarter. We don't do forward-looking statements that way about what the net gains will be for the third quarter. But we always look for offers that give us the best opportunity to retain customers in a model where literally, they can vote us off the island 12 times a year. So trying to put offers out there that work and then help that effort is our #1 objective.

And we'll take our next question from Simon Flannery with Morgan Stanley.

I wanted to follow up on the 4G. I know you've talked before about 4G adoption really being driven when you get the handset prices coming down. I know you talked about VoLTE early '12. So can you just comment on the supply chain that you see and where -- when you start to see those LTE devices getting into a prepaid-type price range to where you drive adoption? I don't know if you had shared a stat with what the percentage of your sales this quarter were on 4G and what your base is, but any kind of general color there would be great.

This is Tom. Oh, go ahead, Roger.

Yes, I was just saying I'll take the first part of this. The mention of VoLTE, I think, is important for us because we want to make sure that when we do make a transition, the transition is from the CDMA network to the LTE network, not just in data but in voice also because we believe there are some opportunities and efficiencies that can be gained there. But that hasn't taken place. We'd indicate that we're on track at this point to get that into first quarter -- likely first quarter next year with the VoLTE handset that will start our evolution towards both LTE, data and voice. I think as it relates to the phone picture, as to when we expect to get phones priced in an area where we can see that they're competitive with the 3G-type handphones that are available today, I think that's going to be in the mid to second half of next year. I think we'll start seeing some price declines as we go into 2012. But I think the real effort that we want to put forward and that we see is opportunities from handset suppliers will probably be a second half of 2012 effect.

Okay, great. And anything on your current 4G adoption?

Yes, we have not broken out the numbers between 4 -- LTE and CDMA at this point. And so we don't plan on doing that. And I think that the adoption is really reflective of the high-priced handsets. And so I think the best connection I can make is that the high-priced handsets that we're selling on 3G is about the same proportional value on LTE. I think that this is may -- there may be a little stronger, so people who are willing to pay for a higher priced handset on 3G are certainly in the smaller percentage range of our promotional handsets. So I think it's -- the adoption at this point is really reflective only of the handset price itself.

And our last question today will come from Jonathan Chaplin with Crédit Suisse. Jonathan Chaplin - Crédit Suisse AG: Two quick questions, if I may, on CapEx. Firstly, I'm wondering if you could give us a sense what your sort of ongoing CapEx needs would be in the business if you don't acquire more spectrum. And then how that would change if you were able to get your hands on, say, another 20 megahertz of spectrum. And what I'm thinking of specifically is now that you've sort of lapped the -- having the impact of smartphones in your base and you've had a year to sort of see how usage grows and smartphone take -- smartphone adoption grows, like, how has your perspective on CapEx to sustain the business changed? And secondly, I'm wondering, there seems to be about 4 sources of potential spectrum out there for you: 2.5 gigahertz spectrum, DISH's MSS spectrum if that comes to market in some fashion, LightSquared's spectrum if there's proof that there's any usable spectrum there, and then maybe an AT&T divestiture. I'm wondering if you could rank order those for us. And talk a little bit about whether you have to own your own spectrum or whether it would make sense in certain circumstances to partner with a spectrum owner.

Well, that was a fairly significant list. Let me try to get that, Jonathan. Clearly, the CapEx is going to continue to be needed whether we get spectrum or not. But it will be, shall we say, right off the green densification in most with [indiscernible] to replace the spectrum that you could have bought. So spectrum and CapEx does have an equivalency, and I think we've not indicated this -- what the equivalency is. But the key here, I think, is that there are opportunities, we believe, to purchase spectrum. As we've said before, we're looking into them. The notion that there are 3 or 4 possibilities -- you cited the Clearwire spectrum, the DISH spectrum, Touch Band [ph], then the LightSquared, which is really a lease kind of concept and -- as opposed to ownership, and then the possibilities that could be the result of the AT&T merger, if that does happen, and the subsequent likely divestiture of spectrum they would have. I think it really comes down to the economics, what we can purchase at. This is not the same type of spectrum. AT&T is -- with its AWS PCS spectrum is not the same at this band [ph]. They're certainly not the same as the Clearwire. We think all of it is usable. There are different requirements and rules for each band, which impact obviously its economic value. So if you put an economic value and normalize all these, I think that we see this as a potential opportunity. And as we've indicated, we are looking across the board, but there's been no decision in this regard and there's nothing we can say at this point.

If I can just follow up on that, Roger. I think going into the [indiscernible] CapEx next year after the LTE build, could drop to sort of $450 million to $600 million range. It seems that we're not sort of on that trajectory anymore. Where does CapEx go on an ongoing basis?

I think, as we've indicated, we have not put forward our projection in 2012. The notion of making these expenditures which we're making this year, you have a significant future benefit. I think the LTE [indiscernible] expenditures are clearly going to be light if they are significant [indiscernible] than the CDMA. As I mentioned before, our objective right now is secure handsets so that we can have a major impact on shifting the balance of our business, certainly beginning to shift the balance of our business in the second half of 2012 towards LTE.

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 2011 Conference Call. Thank you for your participation. You may now disconnect, and have a pleasant day.