CORPORATE OVERVIEW.
Metro PCS offers digital wireless services in the U.S. under the MetroPCS brand. The company's services are based on the Code Division Multiple Access (CDMA 1xRTT) technology. PCS offers unlimited service for a flat rate to customer segments that we believe are underserved by traditional wireless carriers. The company sells handsets that are equipped with color screens, camera phones and other features to facilitate digital data transmission. In the first quarter of 2010, equipment sales accounted for 12% of total revenues, while service revenues contributed 88%. PCS provided services to roughly 7.3 million subscribers at the end of the first quarter of 2010, up from 6.1 million a year earlier.
In the second half of 2006, the company won eight licenses costing a total of $1.4 billion in Auction 66, the Advanced Wireless Services auction, covering roughly 126 million potential customers, including areas where PCS already provides service. The company recently expanded its coverage with launches in New York, Philadelphia, Boston and Las Vegas, and plans to build out these markets to cover 40 million POPs in 2009 and 2010. In March 2008, PCS participated in the 700 MHz spectrum auction and won a license covering the Boston market for roughly $360 million.
In September 2007, PCS announced a stock-based offer to merge with Leap Wireless (LEAP 13, Buy), a regional prepaid wireless carrier. The terms of the deal, equal to 2.75 shares of PCS for every LEAP share, originally valued LEAP at $5.5 billion, or $75 a share. In November 2007, PCS withdrew its offer. In September 2008, PCS and LEAP announced a national roaming agreement and spectrum swap. As part of the agreement, both companies also settled all outstanding litigation.We believe that consolidation in the competitive prepaid market will continue throughout 2010 and into 2011.
PRIMARY BUSINESS DYNAMICS.
In the first quarter of 2010, PCS added 691,602 net subscribers, and had a monthly churn rate of 3.7% and average revenue per user (ARPU) of $39.83, down 1.4% from a year earlier. In the second and third quarters of any given year, PCS's churn rate tends to increase and customer growth slows, but this is likely to be more pronounced in 2010 due to economic issues, including less disposable
income. The company's customer profile is skewed toward first-time users, with roughly 55% of its customers fitting into that category. About 90% of its subscribers use their wireless phone as their primary phone service.
We believe a majority of PCS's customers are in the lower-income bracket, making it difficult for the company to expand its revenue per user metrics. PCS's customers have an average of 2,000 minutes of use per month, substantially higher than the national average of 803 minutes.
MARKET PROFILE.
Roughly 91% of the total U.S. population has subscribed to mobile wireless services, extending from the workplace to family members. Affordable service plans may enable wireless to reach higher market penetration rates. Network reliability has driven higher penetration of wireline substitution, but national carriers have begun to show differentiation due to handset availability, network coverage, and
data service offerings.
CORPORATE STRATEGY.
PCS targets the youth and lower income markets, which are not viewed favorably by large wireless players. Given the high penetration of wireless in the U.S., we believe these segments, including ethnic minorities, are the fastest-growing relatively untapped segments. The company's services do not require any contractual commitment or credit check, unlike those of other major wireless players. PCS offers flat-rate unlimited voice and text messaging service plans, as well as nationwide roaming and Web access for an additional amount that is paid in advance.
FINANCIAL TRENDS.
The company's total cash, cash equivalents and short-term investments increased to$1.2 billion as of March 31, 2010, little changed from December 31, 2009. The company had total debt of $3.7 billion as of March 31, 2010, representing 61% of total capitalization.