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Executives

Keith Terreri - VP Finance and Treasurer

Roger Linquist - CEO and Chairman

Thomas Keys - President and COO

Braxton Carter - SVP and CFO

Analysts

Rick Prentiss - Raymond James

Phil Cusick - Bear Stearns

David Barden - Banc of America Securities

Jonathan Chaplin - JP Morgan

Brett Feldman - Lehman Brothers

Romeo Reyes - Jefferies

John Hodulik - UBS

Will Power - Robert Baird

MetroPCS Communications, Inc. (PCS) Q3 2007 Earnings Call November 14, 2007 9:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the MetroPCS Communications 2007 Third Quarter Results Conference Call. During today's presentation, all parties will be on a listen-only mode. Following the presentation, the conference will be open for questions (Operator Instructions). This conference is being recorded today, November 14, 2007.

I would now like to turn the conference over to Mr. Keith Terreri, Vice President, Finance, and Treasurer for MetroPCS. Please go ahead, sir.

Keith Terreri

Thanks, Breanna, and good morning everyone. I'm Keith Terreri. I'd like to welcome you to our 2007 third quarter conference call. The speakers with me this morning are Roger Linquist, our CEO and Chairman of the Board; Thomas Keys, our President and Chief Operating Officer; and Braxton Carter, our Senior Vice President and Chief Financial Officer.

The format for today's call is as follows: first, Roger will provide an overview of our business, then Tom will update you on a number of operational results and metrics, and Braxton will review the financial and investment highlights of our third quarter, followed by a question-and-answer session.

During today's call, we will refer to certain non-GAAP financial measures. We reconcile these historical non-GAAP measures to GAAP figures in our earnings release, which is available in the investor relation's section on our web site 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 meanings 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 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. Please review the risk factors described in our filings with the Securities and Exchange Commission. We'd also like to remind you that the results of the third quarter may not be reflective of the results for the year, nor any subsequent quarter.

For anyone listening to a taped or web cast replay or reviewing a written transcript of today's call, please note that all information presented is current only as of November 14, 2007 and should be considered valid only as of November 14, 2007, regardless of the date reviewed or replayed.

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. I hope by now, you've all reviewed our earnings release issued this morning with the financial results for the third 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 third quarter 10-Q later today.

At this time, I'd like to turn the call over to our Chairman of the Board and CEO, Roger Linquist.

Roger Linquist

Good morning, everyone, and welcome to MetroPCS third quarter 2007 earnings call. We're glad to have you with us this morning. I'd like to start off by saying that we're very pleased with the results of our third quarter.

Our third quarter EBITDA of $184 million was our highest quarterly EBITDA in the company's history, and marks the seventh consecutive quarter of increasing EBITDA. It is even more impressive, given the significant market launches we've undertaken over the last two years.

Additionally, over one million subscribers have been added in the last 12 months. This continued subscriber growth demonstrates the strength of our service offering and our value proposition, which compares very favorably with our competitors' offerings.

With 114,000 net additions during what has been a historic slow quarter, and 723,000 net additions on a year-to-date basis, we remain optimistic about the growth of the business and its potential. Our continued strong financial results reflect our success in the execution of launching and penetrating major metropolitan areas, which is a major component of our business strategy.

As we've stated previously, I'd like to remind everyone of the seasonality in our business. From a net addition perspective historically, our first quarter has been the strongest, followed by the fourth. The second and third quarters are typically the slowest, and you see that this trend has continued.

The inverse is true for churn, resulting in the highest churn during the second and third quarters with the third quarter historically being the highest of the two. Tom will follow-up on this later in the call.

Our mission has not changed since we've started this business. It's important to emphasize that we're not trying to be everything to everybody. We operate in major markets, we offer unlimited services that are predictable, affordable and flexible for our customers, and we maintain an industry-leading low cost structure.

This has resulted in EBITDA per subscriber that's best in class as compared to our competitors. We continue to focus on major markets as we expand the company, with licenses in nine of the top 12 markets--14 of the top 25--we will provide value-added services to many more customers, as we launch additional markets.

We plan to offer service in a number of markets, including New York, Boston, Philadelphia and Las Vegas in the future, and we believe these market launches will drive substantial growth in our business. We have a tremendous opportunity in the Northeast, one that will add approximately 60% to our covered population footprint through the first half of 2009.

Major markets with high population density and attractive demographics along with our intense focus on costs drive the economics of our business model. This has proven through our results quarter-after-quarter our low cost structure continues to provide the foundation to generate world-class margins that create shareholder value in a competitive industry.

We believe our subscriber profitability in our Core Markets, which in third quarter approached 48% EBITDA margin, is truly best in class and is one of the highest in the industry. As an update regarding the 700 MHz auction, we continue to consider our options with respect to participation in this auction.

We would also like to give everyone an update on the Los Angeles market. Tom will walk through more of the details on our launch, service and activity to date. But as we have said previously, this market has great demographics and many customers who will see the tremendous value in our service.

Before I turn the call over to Tom, I would like to quickly mention our withdrawn offer to Leap Wireless. While there is widespread investor and analyst enthusiasm for this incremental strategic opportunity, we were not able to engage Leap in meaningful negotiations.

Accordingly, as I'm sure you are all aware, on November 1st, we withdrew our proposal to Leap. While this offer was focused on a unique opportunity for our collective shareholders, we believe strongly in our standalone prospects and we continue to focus on realizing the significant growth opportunities there.

I'd like to hand over to Tom, to discuss some of the operational highlights from the quarter.

Thomas Keys

Thanks, Roger. I'd like to make some high-level comments about the quarter and then we will get into the details. As we have discussed before, our product is differentiated from the competition and provides an excellent tool for people to effectively manage their budgets and disposable income.

We've always provided an unlimited product with multiple service plans at different price points to give subscribers the permission to speak freely and not have to worry about overage charges. Our product gives our customers predictability but in an affordable manner with flexible terms. One of the ways our customers are consolidating their costs, are by using our phones instead of their landline phones.

In fact, wireless substitution continues to provide opportunities for cost savings within our customer base. Based on results from a recent survey, 85% of our customers use their MetroPCS phones as their primary phone. Our customer base continues to cut the cord and use MetroPCS as their only phone.

As Roger mentioned, there is significant seasonality in our business. We view this seasonality as coming from changes in customer's disposable income throughout the calendar year. In the fourth quarter and first quarter which are the seasonally high quarters for net additions, the holidays, year-end bonuses, tax refunds and alike, increase disposable income.

Historically, approximately 70% of our Core Market net additions have been in these two quarters. Customer migration and family vacations tend to have the opposite effect in the second and third quarters. This trend runs inversely to churn, which I will discuss in a few minutes.

In the Core Markets, we added approximately 36,000 net new subscribers during the third quarter. Although this is below the net additions from third quarter 2006 when we added 55,000 net new subscribers, it is important to remember that our subscriber base is significantly higher than it was in the third quarter of 2006.

However, this does not suggest we've stopped growing in our Core Markets. In fact, over the past 12 months, our subscribers in the Core Markets have increased nearly 20%, resulting in a 1.5% incremental penetration as compared to September 2006.

In the Expansion Markets, we gained an additional 78,500 net new subscribers during the quarter. This is approximately half of what we added in the third quarter 2006. However, during the third quarter of 2006, we were still experiencing net additions at a pace indicative of the newly launched market, since we brought Dallas and Detroit online in the first half of 2006.

The seasonality of our business, which we discussed earlier, causes net additions to be lower during the third quarter and for the same reason, also causes churn to be higher in that quarter.

Churn was higher in the third quarter as compared to a year ago by 20 basis points. We still continue to see a significant portion of our churn in the form of handset upgrades where the customer simply purchases a new phone and lets their old phone churn off. We have historically seen this at approximately 1.5% of our churn, and this trend is continuing.

I would also like to give everyone an update on some recent adjustments to our distribution approach. We increased our distribution by rolling out Target in late October and Wal-Mart in November.

Although we still continue to believe our traditional indirect dealer channel will provide most of the gross additions for our business, the expansion of our distribution to include these two national chains will add incremental growth by penetrating the mass retail segment.

From a competitive standpoint, everyone is aware that a large national carrier has launched their unlimited product in California and Texas and has recently announced an expansion of this product and pricing plans to Florida and Georgia, as well as other non-MetroPCS markets.

We see no measurable impact on our growth from these launches as we continue to expand our market segments.

As we discussed in the past, we have built our truly unlimited service from the ground up. It's not a pricing plan that can be profitably sustained over time by bolting on to a high cost structure enterprise.

Our offering, distribution design, customer care, back office support and low-cost network design were all engineered from the bottom up to achieve our industry-leading low cost structure. We feel comfortable we're in an excellent competitive position.

We also continue to provide additional unlimited services for our customers. In August, we introduced unlimited Metro411 premium directory assistance for our customers in the $45 and $50 service plans.

This is yet another example of how MetroPCS continues to drive more value into our service plans to stay ahead of the competition. We plan to continue to introduce more value in the form of features into our plans over time to increase our value proposition to our customers.

As Roger spoke about earlier, we launched service in the Los Angeles market at the very end of the third quarter, initially covering 11 million pops. Consistent for a launch of a market of this size, our local marketing and branding campaigns, as well as our distribution ramped up substantially in the 30 days since launch.

I'm pleased to report that during the first month and a half of operations in Los Angeles, we achieved approximately 0.5% penetration of marketable pops. We will continue to scale our distribution efforts with our network expansion, but we will always be mindful of providing a quality of service that is accurate as we communicate with our customer base and distribution partners.

We continue to build out the network every day towards our goal of covering 15 million pops during 2008. We're very focused on the Los Angeles market and the opportunities it provides for growth in our business.

The Los Angeles market is now engaged in meaningful advertising and local promotional activity that is allowing our customer base to understand that they now have a new choice for their wireless services.

Initial anticipation over the launch date has now subsided and the developed community is embracing the advantage of our unlimited service strategy. We're excited about our progress so far and extremely happy with the quality of service we're delivering to our customers.

Of concern recently have been the impact of the devastating fires that have swept across Southern California and their impact on our ability to deliver service. While the events of the past few weeks have been tragic and many people have been displaced. I'm happy to report that MetroPCS has not suffered any damage to our network and service was not impacted.

We are continuing to make a progress in moving forward in constructing our networks in the New York, Boston, Philadelphia and Las Vegas markets. In all key markets, key staff are in place, initial RF designs have been completed and construction is underway. Local management in all four markets is focused on network construction and coverage design. The Northeast is a huge opportunity for MetroPCS and we intend to capitalize on it.

We currently plan to focus on building out service in our Auction 66 Markets to a total population of approximately 40 million with the primary focus on the New York, Philadelphia, Boston and Las Vegas metropolitan areas.

We presently anticipate launching service in the following markets; Las Vegas, second quarter of 2008; Philadelphia, fourth quarter of 2008; Boston, first quarter of 2009; New York, first or second quarter of 2009.

Of the approximate 40 million total population in these areas, MetroPCS is targeting launch of operations with an initial covered population of approximately 30 million to 32 million. Our initial launch dates will vary in our Auction 66 Markets and launch dates in the larger metropolitan areas may be accomplished in phases. Timing of course depends on incumbent microwave clearing, which is progressing well.

As far as AWS equipment and availability is concerned, AWS equipment is currently available from our vendor. We expect handsets that meet our testing standards and the needs of our customers will be available in commercial quantities during the first quarter of 2008. This fits very nicely with our planned market rollout for the AWS markets that I just walked you through.

Once again, I would like to say that we're very pleased with the third quarter results, and quarter that, I will turn the call over to Braxton.

Braxton Carter

Thanks, Tom, and good morning, everyone. First, I will discuss the results of the third quarter, and then I will walk everyone through our 2008 guidance.

Total revenues were $557 million in the third quarter, up approximately 41% over the third quarter of 2006. Consolidated adjusted EBITDA for the quarter was $184 million, approximately 70% higher than last year's third quarter, and another record quarter for MetroPCS. Our continued success and profitability is a testament to the strong execution by all employees of MetroPCS.

We generated approximately $173 million in cash from operating activities in the quarter, an increase of over 100% from the prior year's third quarter. We produced consolidated net income of $53 million, or $0.15 per share, representing net income growth of approximately 81%, when compared to last year's third quarter.

From a financial metric perspective, we are also very pleased with the results of the third quarter. As expected, our ARPU for the third quarter of 2007 was $42.77, and was essentially flat with last year's third quarter.

Our CPGA for the quarter was approximately $126 as compared to $120 in the prior-year's third quarter. This increase in CPGA was due primarily to fixed costs in place related to the launch of service in the Los Angeles market.

Our CPU for the quarter of $17.81 was down nearly $1.34 from last year's third quarter, and continues to demonstrate the significant impact of the scaling of our business, even considering the ramp in expenses relating to the launch of service in Los Angeles.

The Expansion Markets impacted our consolidated third quarter 2007 CPU by approximately $3.36, resulting in a world-class core market CPU of just under $14.50 for the third quarter of 2007.

From a net subscriber addition basis, we had one of the most successful starts to any fiscal year, with year-to-date total net additions of approximately 723,000. A very important point is the proportion these net adds generated in our Core Markets.

We added approximately 36,000 Core Market net additions in the third quarter. [Technical Difficulty] for past nine months. At September 30, 2007, we have an 11.3% penetration in our Core Markets, which represents an incremental 1.5% penetration over the last 12 months.

Our Expansion Markets continue to perform very well, surpassing the one million subscriber milestone during the quarter with approximately 78,000 net additions. At the end of the third quarter, Expansion Market penetration was 6.9%, excluding Los Angeles, and 4.1% including Los Angeles.

I would now like to discuss the income statement in more detail. Let's start with revenues. On a consolidated basis, service revenues totaled $489 million, an increase of 47% from the third quarter of 2006. This growth is primarily attributable to the net addition of over one million subscribers since last year's third quarter. In our Core Markets, service revenues totaled $358 million for the third quarter, representing growth of 26% when compared to $285 million during the third quarter last year.

This increase was primarily attributable to full year net additions of approximately 404,000 subscribers from September 2006 to September 2007, which accounted for approximately $51 million of the Core Market increase, coupled with the migration of existing customers to higher price service plans accounting for approximately $5 million.

Our Expansion Markets service revenue increased $83 million, or 175% to $131 million for the third quarter, versus $48 million for the third quarter of 2006. This increase is primarily attributable to net additions of 644,000 subscribers during the last 12 months, accounting for approximately $69 million of the Expansion Market increase.

The migration of existing customers to higher priced rate plans account for approximately $14 million of the Expansion Market increase. Currently, over 85% of our consolidated customers are on our $40-or-higher service plans.

Now, let's talk about expenses. Our consolidated cost of service increased $50 million, or 44% to $164 million for the third quarter. Core Market cost of service increased $25 million, or 29% to $108 million for the third quarter, versus $83 million a year ago.

The increase was driven by the operating costs to support net additions of 404,000 subscribers over the last 12 months, as well as the additional network infrastructure added during the year.

The Expansion Markets cost of service increased $25 million to $56 million for the third quarter of 2007. The increase was primarily attributable to the addition of 644,000 new subscribers during the last 12 months. Consolidated selling, general and administrative expenses increased $24 million, or 40% to $85 million for the third quarter.

The increase was due to increases in Core and Expansion Markets'; selling, general and administrative expenses, including stock-based compensation and are as follows. Core Markets, SG&A expenses increased $2 million, or 5%, to $41 million for the third quarter, from $39 million during the same quarter in 2006.

Selling expenses increased by approximately $2 million, or approximately 12% for the quarter, compared to a quarter a year ago, primarily related to the increases in marketing and advertising expenses incurred to support the growth in the Core Markets.

The Expansion Markets' SG&A expenses increased $22 million to $44 million for the quarter ,compared to $22 million in the prior year. Selling expenses increased by $7 million for Q3 2007 compared to Q3 2006. This increase is related to $5 million increase in marketing and advertising expenses associated with the growth in Expansion Markets as well as higher labor costs of $2 million.

General and administrative expenses increased by $15 million for Q3 '07 compared to the same period in '06, due, primarily, to supporting the additional growth at the Expansion Market level. The launch of service in the Los Angeles market and build-out expenses relating to New York, Philadelphia, Boston and Las Vegas.

Moving onto EBITDA. Consolidated adjusted EBITDA for the quarter was $184 million, with a consolidated adjusted EBITDA margin of approximately 38%. For the four quarters ended September 30, 2007, adjusted EBITDA was $625 million, with an adjusted EBITDA margin of approximately 35%.

I'm pleased to report that our Core Market fully loaded adjusted EBITDA, as a percent of service revenue was nearly 48% for the third quarter. During the quarter, we incurred capital expenditures of approximately $179 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 Los Angeles.

You can refer to MD&A in our recent SEC filings for disclosure relating to our expected capital expenditures for 2007. With respect to liquidity and capital resources, we finished the third quarter with approximately $1.7 billion in cash and short-term investments.

Our total leverage computed in accordance with our 9.25% senior notes on an LTM basis at the end of September was 4.45 times. Our weighted average cost of debt was approximately 8%, and approximately 80% of our debt is fixed by its nature, or through interest rate hedges, for the next two years.

Moving onto guidance for the full year 2008. MetroPCS currently expects net subscriber additions to be in the range of 1.25 million-1.52 million on a consolidated basis, with 250,000-300,000 in the Core Markets, and 1 million-1.2 million in the Expansion Markets, which does include 75,000-125,000 in the AWS Markets.

The company currently expects consolidated adjusted EBITDA in the range of $750-$850 million, for the year ended December 31, 2008, which is inclusive of an adjusted EBITDA burn in the range of $125 million-$175 million in the AWS Markets. Without the EBITDA burn on the AWS Markets, we would be approaching the $1 billion EBITDA range for 2008.

MetroPCS currently expects to incur in the range of $1.1 billion-$1.3 billion in capital expenditures for the year ended December 31, 2008 in its Core and Expansion Markets, which includes $600 million-$700 million in its AWS Markets.

From a macro perspective, we understand that many of you are interested in what role the economy is playing in businesses such as ours. We're seeing signs of an economic slowdown that could result in a 20%-30% reduction in net additions during the upcoming quarter from current fourth-quarter Wall Street consensus of approximately 400,000 net additions.

However, it is important to note that we continue to experience solid growth in our Core and Expansion Markets, and we expect that to continue. Our no contract model makes our churn and net additions a sensitive early indicator of general economic trends.

We believe economic slowdowns facilitate an increase in our market penetration rates as consumers look for compelling value propositions. With no subscriber bad debt exposure and a low-cost structure, MetroPCS is well positioned in a difficult economy to continue its aggressive customer acquisition. Additionally, over 85% of our customers use our service as a primary telephone service and we believe these customers are less likely to discontinue service.

Furthermore, our unlimited no contract offering is well designed for wireline replacement, which will become more important regardless of the general economic conditions. 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 Session

Operator

(Operator Instructions) Our first question is coming from Rick Prentiss from Raymond James.

Rick Prentiss - Raymond James

Good morning, guys. Can you hear me okay.

Braxton Carter

Yeah. Good morning, Rick.

Rick Prentiss - Raymond James

Hi. Sorry. I am over here in London, once your host coming through. A couple of quick questions for you. First, for Braxton--the 20%-30% on the fourth quarter net add guidance, is that versus the Wall Street consensus of 400,000 versus last year's fourth quarter? And so, does that translate into 280,000-320,000 adds that we're interpreting?

Braxton Carter

Yeah, I think the right way to look at that, Rick, is the 20%-30% is of fourth quarter 2007 Wall Street consensus, which is approximately 400,000 net additions. So yes, you are looking at that correctly.

Rick Prentiss - Raymond James

Okay. And then as you give us your first official guidance and '08 guidance, what affect did the economy or continued potential weak economy have in your '08 guidance? What are your kind of your view as you created the '08 numbers?

Braxton Carter

When we looked at our 2008 guidance, we were fully aware of what current conditions are and what the outlook is and that is definitely reflected in the numbers.

Rick Prentiss - Raymond James

Great. Couple other quick cleanup questions. Tom, I think on LA, I was having trouble hearing there. I think you said about 0.5% in LA, was that cumulative from the September 19 date until today? Was that one month? I couldn't hear what you said on LA.

Thomas Keys

Yes Rick, that was about a month and half's worth of service subscriber numbers.

Rick Prentiss - Raymond James

So that's really almost up to probably yesterday timeframe and right, kind of?

Thomas Keys

About two to three days back.

Roger Linquist

Four to five days.

Rick Prentiss - Raymond James

Sure, okay. And then some more meaningful questions as opposed to those cleanup ones. As you look at ARPU trends out into the next year and beyond, should we expect kind of flat revenue trends. Is there a potential for upside from data and other rate plans or does the economy keep pressure on it? What are your thoughts on ARPU?

Braxton Carter

Well Rick let me take that. There's a couple of things that we need to look at here. There is somewhat of a seasonal impact on ARPU, where you will see the lowest ARPU during the summer months, which is also the highest churn months, and you will see it grow through the year.

When you look at the overall outlook on ARPU, the vision that Roger has always had with our company is to create a compelling value proposition for our subscribers. And when we look out in the future, we look at competing by continuing to add additional value in our rate plans for our subscribers. When you take that into account, our view is more of a stable ARPU going forward.

Rick Prentiss - Raymond James

Great, and then final cleanup question. As you look at that '08 guidance and your thoughts going forward, are we still thinking in the kind of $25-$30 of pop to get coverage rolled out per pop, and about call it $8-10 a pop on OpEx burn to get the markets up and running type thing?

Braxton Carter

Well, those two aren't mutually exclusive, and let's talk about that. We're really looking at $28-$30 per covered pop cumulative investment to reach free cash flow breakeven. One of the things that we have talked about is our extensive deployment of DAS system in our newly built and building out the AWS Markets.

That does have a tendency to accelerate CapEx to the point of a launch to the market. However, that's just timing when you're looking at the period to reach free cash flow breakeven.

Rick Prentiss - Raymond James

And the $28-$30 was CapEx, or that is OpEx plus CapEx or…?

Braxton Carter

That's total cash burn.

Rick Prentiss - Raymond James

Okay, and the OpEx side should we think of it being 8 to 10 of that or just trying to think how we split, because obviously a lot of people want to know EBITDA versus CapEx?

Braxton Carter

When you're looking at a period to free cash flow breakeven, what happens is you start generating EBITDA well before you start to hit the free cash flow breakeven point.

Rick Prentiss - Raymond James

Got you.

Braxton Carter

So if we were looking at the net investment at the point of the build, that would be a lower number from a CapEx standpoint in regards to the $28-$30 that we have guided towards, and there would be a burn component. But when you fast forward to free cash flow breakeven, the OpEx burn component or the EBITDA burn component is roughly $2-$3.

Rick Prentiss - Raymond James

Perfect. Thanks so much for taking the questions and good luck for what looks like an exciting year.

Braxton Carter

Thank you.

Operator

Thank you. Our next question is coming from Phil Cusick of Bear Stearns.

Phil Cusick - Bear Stearns

Hi, guys. Can you hear me?

Roger Linquist

Yes. Good morning, Phil.

Phil Cusick - Bear Stearns

Great, I wonder if you can start by clarifying a little bit, the language around the 700 auction sounded a little bit less interested than I had heard before. Am I reading too much into that, or is there something going on that we should know about?

Roger Linquist

Yeah, Phil let me answer that. I think we have the interest. There are a lot of factors in this auction, and according to obviously the new rules that are I think at this point it's not safe to say it's not totally stable.

So we see there is an opportunity. There is some issues regarding the spectrum and the interference from adjacent bands. I think everybody has seen this. So we are cautious, interested, but cautious.

Phil Cusick - Bear Stearns

Should we still assume that you're going to register at this point?

Roger Linquist

Yes, you probably should still assume that.

Phil Cusick - Bear Stearns

Okay. Good and then around the Leap potential deal. I know you pulled the offer, but would you still be willing to deal with them, even in their current financial situation?

Roger Linquist

That's a tough question. But right now, I would rather not speculate on information that seems to be, shall we say, rapidly coming to the forefront. I'm not quite sure what it all means, but we saw the opportunity for incremental strategic expansion, we thought it was great collectively for both our shareholder bases and because of what we said, the lack of progress in negotiations and in fact no progress, we moved on.

And, obviously, we still have a belief about the fundamentals, but this is just too speculative at this time to really give a greater indication.

Phil Cusick - Bear Stearns

You know I had to ask, right?

Roger Linquist

We knew.

Phil Cusick - Bear Stearns

And then following up on Rick, talking about the economy, we've seen slower periods of economic growth. Really, since your business has been in place, we've had a pretty strong ramp in the wireless business.

Can you talk about how you would expect the numbers to change were the economy to slow? Should we think about higher churn, higher CPGA, just lower gross adds in general? And that would help. Thanks again.

Braxton Carter

Sure, Phil. We are guiding towards a lower fourth quarter based upon the conditions we're seeing, but it's extremely important to understand that MetroPCS is a phenomenal company to own if there's a sustained economic slowdown.

Multiple reasons for that: First of all, look at the value proposition that we bring to our customers with over 2,000 minutes of usage per month on average. Over 85% of our customers use the phone as the primary phone.

I don't know where things fall in Maslow's hierarchy on communications. You have your basic needs of food, shelter. Communications are probably in the top five. We think our market opportunity will expand during a sustained economic downturn, if that's what we're looking at.

Going on further, our very low cost structure and no bad debt exposure positions us extremely well for aggressive customer acquisitions during these periods as composed to our competitors. When I look at telecom and I look at the landscape, there's no company I would rather own than MetroPCS, during those types of situations.

Phil Cusick - Bear Stearns

Thanks, guys.

Operator

Thank you. Our next question is coming from David Barden with Banc of America Securities.

David Barden - Banc of America Securities

Thanks, guys. Good morning. Maybe start with a question on the AWS launches and kind of the timetable that you have now. T-Mobile put out a press release saying that they were pleased with the spectrum, looks like it has been cleared in New York and things like that.

Could you talk about why your decision is now to launch New York in say the second quarter of '09, and why the rest of the market has got pushed back relative to kind of what the expected timetable was originally?

Braxton Carter

Yes, David. We didn't say the second quarter of '09. We positioned as the first quarter of '09 to the second quarter of '09. And if you look at the guidance that we have given on our AWS Market launches in the past, we always positioned the latter half of '08 or early '09.

So I just want to clarify that point. But we are very happy with the build in progress on the AWS Markets. Tom, would you like to comment on that?

Thomas Keys

Yeah, David. Our desire is to get a marketable footprint that we can communicate to everybody, a rational footprint as we launch and that's our desire and that's how we will build the AWS Markets.

New York obviously has a large geography, but one that we understand with people who have built the market before. So our desire is to provide an honest coverage as we have done in Los Angeles, and then it will be a phased in launch.

And as Braxton mentioned, in the first or second quarter of 2009, is our guidance at this point for New York. AWS clearing we do not believe at this point in time is an issue for the launch.

David Barden - Banc of America Securities

Great, and just I apologize to kind of keep hammering on this. Just making sure expectations are all in the same place I guess it's very important these days. But Braxton, you're saying that the economic signs could result in this 20%-30% reduction in net additions in the fourth quarter.

The question is we're in the middle of November, so is it causing this to be happening? And relative, the biggest question I got when the results were hitting is, based on that kind of softer 4Q outlook, what are you expecting could change into 2008? Because the subscriber guidance for 2008 actually looks pretty good, especially in the Expansion Markets.

Braxton Carter

Remember that Los Angeles is coming on and ramping substantial during October in this quarter, and we are extremely well positioned with a very large market going into the sweet spot of next year.

When you look at the maturity of markets, remember every one of our Expansion Markets has achieved a 5% penetration in the first year of operations. So you got to consider the LA impact when you're looking at this.

But back to your original question, we have not given quarterly guidance before. And while we are not giving a firm range of net addition guidance, based upon what we are seeing, we felt it was appropriate to position the fourth quarter in a way that we positioned it. So you should assume that that is how the fourth quarter is going to turn out.

David Barden - Banc of America Securities

Okay, great. Thanks, guys, I appreciate it.

Braxton Carter

Thank you.

Operator

Thank you. Our next question is coming from Jonathan Chaplin of JP Morgan.

Jonathan Chaplin - JP Morgan

Hi. Thanks guys. If I could just follow up on David's question. If I take the AWS net adds out of your guidance for 2008, I get to a mid point of somewhere around 1.3 million. And if annualize what you're expecting for the fourth quarter, you do generally sort of 35% of your adds in the fourth quarter, somewhere around there. It gets me to about 850,000 net adds on an annualized basis.

So it just seems like you would be expecting an improvement in economic conditions in 2008 to get to the midpoint of your guidance for '08. I know you've commented on this already, I'm just trying to reconcile that disconnect.

And then getting back to the Leap situation, when we look at the restatements in the context of the size of Leap's business, and if we take Leap's management's reasons for the restatement at face value, it doesn't seem like it's that meaningful an issue.

It doesn't seem like, based on that restatement, it would be hard for you to evaluate Leap's business in a meaningful way and figure out whether it's a company that you would still want to combine within under what terms, and what the price is.

So, I'm just wondering if you could give us a little bit more context in terms, and what would be holding you back from having meaningful discussions with Leap, assuming they would be more willing to have discussions with you now that this issue is out of the way? Thanks.

Braxton Carter

Well, I will take the first part of that question. While it's on the margins, the one change in your math that you should take a look at is the fourth quarter typically, has been 30% of the net additions in a year, and the first quarter of the year has been roughly 40%. The other two quarters are roughly 15% each. So when you take that into account and you annualize, that should help with the number there.

And again, I want to emphasize the importance of the Los Angeles market. We're so excited about that launch and we waited to get it right. Tom talked about, you have one chance to make the right impression, and you have one chance to launch a market correctly.

That's what we've done and substantially ramping the distribution and the advertising and marketing, and we were very, very excited about what that's going to do to our growth next year.

On the Leap question, I will take the first part of it and then hand it back over to Roger. We have no visibility, nor can we speculate on anything relating to their announcements on their financial statements. And with that, I will turn it over to Roger.

Roger Linquist

I think what I said before I would like to just repeat, and that is that we really can't speculate. As we articulated, the reason why we withdrew is there was no meaningful negotiations. So speculating on the future and their interests, I can only say that really the ball is not just in their court, but we remain at a strategic opportunity under certain conditions, and that's really all I can say at this point.

Jonathan Chaplin - JP Morgan

Thank you, very much.

Operator

Thank you. Our next question is coming from Brett Feldman with Lehman Brothers.

Brett Feldman - Lehman Brothers

Yeah, thanks for taking a question. I actually, just wanted to go back and quickly revisit some of the cost you expect to incur next year related with the AWS Market launches. If I look at the guidance in the press release related to the CapEx and the EBITDA burn that you're anticipating next year, and I used the midpoints of those ranges, I think it's about $800 million.

You indicated that you're looking to build 30 million to 32 million pops out of the gate in those four markets to the midpoint, it's about 31 million pops. So it suggests that the total amount of burn that you're going to incur next year associated with the AWS Markets is something like 90% of the total burn you would expect to have with those launches, even though some of them are into '09. Is that the right way of thinking about it, or am I not doing this math right?

Braxton Carter

No, Brett, you're not far off. The thing you have got to remember is that when I was talking about the total investment per covered pop to get a free cash flow breakeven, there is a period in there where you're generating cash flows off of your operations.

The EBITDA breakeven point is much sooner than your free cash flow breakeven point. So, when you're looking at the net investment at build, it is not unlike the way you're positioning it. But remember, we'll continue to layer in CapEx to free cash flow breakeven, but we will have an offset of EBITDA generation.

The other thing that's a little different compared to prior launches we've had in the past is the extensive use of these DAS systems. And what that is essentially doing is creating a more dense network at the point of launch, which has many, many benefits to us.

When you look and at the wireline displacement factor here, in-building penetration is critical to this business model. But when you are looking at the densification of a DAS network, you're accelerating CapEx into the point of launch that we typically have not done in the past with more of a macro side build. So that is really the right way to look at it.

Brett Feldman - Lehman Brothers

Because this were the base of the question is, I'm just trying to anticipate at what point around these launches you begin to experience some relief I guess first at the EBITDA level, and then at the CapEx level. Could that occur shortly after the last market launch in New York, or would it be delayed beyond that?

Braxton Carter

If we look back at history, it depends on market penetration and how quickly you penetrate. But we have reached EBITDA breakeven anywhere from six to 12 months on all of our markets. So to help position your question, take that to account.

Brett Feldman - Lehman Brothers

Okay, and then just one separate question. I was hoping to see if you could clarify something about the fourth quarter commentary around net adds. You indicated that you have seen some churn issues due to the economic environment. Is that the primary reason why net adds may come in a little below expectations, or is there also a gross add component as well?

Braxton Carter

No, we did not position a churn issue for the fourth quarter.

Brett Feldman - Lehman Brothers

Okay, so it's not churn related. Okay, thank you.

Operator

Thank you. Our next question is coming from Romeo Reyes of Jefferies.

Romeo Reyes - Jefferies

Good morning.

Braxton Carter

Hello, Romeo.

Romeo Reyes - Jefferies

Hi, how are you? Good.

Braxton Carter

Great.

Romeo Reyes - Jefferies

Just a couple of quick questions. If we look at the incremental penetration on new markets, it seems as though it's going to be just south of 4%--3.8% I think is what I come up with.

Historically, I guess, if you look at those 644,000 that you added in the Expansion Market, that would imply roughly 4%. So are you being conservative enough in your Expansion Market penetration?

That's the first question. The second question is with respect to ARPU. I guess Q3, Q2 were generally lower because of the inactive hotline customers. Can you give us a sense of sort of how that trends in Q4 as your hotline customers declined, given the seasonality in the business that we've seen Q4 and Q1? Thanks.

Braxton Carter

Sure, Romeo. I think on the latter question, let's take that first. You are absolutely right. There is a seasonal component to ARPU. We recognize revenue on a customer-level basis where we look at the exact profile of what has happened with our customer and we recognize revenue relating to their individual situation, and then build it up for the consolidated presentation.

When you look at the highest churn periods being in the second and third quarter and lower churn periods being in the first and fourth quarter, you definitely have a change in hotlines which said more generically, a change in the payment patterns of the customer and it's fundamental that you do not recognize revenue unless a customer has paid you in cash.

So absolutely, there is somewhat of a seasonal component where you would expect to see an ARPU up tick in the fourth quarter and first quarters as compared to the rest of the year. And your second question, could you repeat that?

Romeo Reyes - Jefferies

Yeah, in terms of the incremental penetration, I guess you're assuming about 3.8%?

Braxton Carter

Yes. I think, we have publicly disclosed that we have penetrated each of our Expansion Markets by over 5% in the first 12 months worth of operations. So let's talk about the math here. You continue to expand and build your footprint on these markets, so it's not a static number that you divide into to reach a penetration. I think when you're going back and looking at history, you're getting a lower number because you're taking end of period covered pops not beginning of period covered pops.

And likewise, when you look forward to next year, remember, we were very, very focused on launching a rational marketable footprint for Los Angeles. That footprint is going to continue to substantially grow over the next three quarters and Tom has positioned that up to 15 million pops. We're also growing our other markets so you need to also take that to account when you're looking at penetration and penetration trends.

Romeo Reyes - Jefferies

Yeah, that makes sense. Lastly, just a very quick question on the economy. I guess the gross add numbers would be probably the most obvious one when you're looking at a slowdown in the economic activity. Are there any other metrics that you would look at when you try to gauge where the how the economy is affecting your net additions?

Are you looking at measurable increases in hotline customers or disconnects or any downgrade activities from $45 plans down to $35? What were some of the other metrics that you look at? Thanks.

Braxton Carter

Obviously, those two components of net additions there is gross additions in those disconnects. And you are correct that you would look at both of those components on to determine signs of what you're seeing from a business standpoint. But let me tell you that our positioning for the fourth quarter was based upon, really, what we have seen up until just very, very recently.

And talking about the third quarter, we had a 20 basis point increase in churn year-over-year, but a large portion of that was due to the relative maturity in the markets that we're measuring that off us. When you're in newly launched markets you are on a growth trajectory that is not linear into the second year.

And the dynamics of entering a new market and how it penetrates really is what we're positioning when you see the 10-Q that will be filed later today will be the explanation for that increase in churn, not economic conditions. Now, we need to wait and watch and see, but we feel that our estimate for the fourth quarter is a good estimate.

Romeo Reyes - Jefferies

Yes, and let me add one more question, if you don't mind. In terms of the churn, I mean you calculate churn differently than Leap, in the sense they don't include their first billing until it pays as churn. Based on the numbers here, it seems like apples-to-apples, your churn would have been around 4.3% relative to Leap's 5.2% if we were to do apples-to-apples first at bill non-pays. Does that sound about right?

Braxton Carter

Well, Romeo, here's the problem. With the changes that Leap has done in the billing platform where they were [BOP] and now they've gone back to pay-in-advance. I think part of what you're seeing with their churn is what we've always talked about as upgrades that we weren't capturing.

And now with the change in their methodologies they are starting to experience the same type of phenomena, which is driving, I think we've commented on the last call was a 40 basis point increase in our churn.

So I really don't have the information or the insight to really do an apples-to-apples at this point because of the transition of how they're doing the billing. But if you look to past years, we have always positioned and it has really been fairly consistent.

I mean you had some seasonality in this too, but about a 1.5% impact of upgrades. Said another way, customers who are upgrading their phone who because of the way the systems work, we are not capturing as an existing customer.

We have another gross add and we have another disconnect, which is essentially inflating our real churn rate. Now, again having no insights, but just listening to what has been publicly commented on by Doug and his Leap team, is they have had some of that phenomena too. But when they were in the [BOP] world and were taking IDs, that was not as large of an impact on their business as it was on ours. So I hope that helps explains a little bit further.

Romeo Reyes - Jefferies

Thank you.

Operator

Thank you our next question coming from the John Hodulik with UBS.

John Hodulik - UBS

Hi. Thanks. Good morning. A couple of quick questions on two things. (1) competition, and (2) the use of DAS in the new markets. I heard your guys comments that you weren't seeing much impact from Sprint's rollout of unlimited service. Obviously they're going to go to 100 pops I think by sometime mid-November here, and I think it's probably likely that they're going to expand that next year.

Why do you think that you're not seeing impact where you overlap? You think its at a different market? Is it because they're at a different price point, or how does that factor into your numbers for next year? And then on the DAS side, could you talk a little bit about the difference in economics?

I think, Braxton, you said the CapEx is a little bit more front-loaded when you use DAS versus or the traditional power providers. And if you could comment on the, who you are going to be using and the profile of your suppliers for the infrastructure in these new markets and what data makes from a risk standpoint.

So getting back to David's question, it does seems like the launches are a little bit more delayed than at least what we had factored in. How is the decision to go with DAS architecture sort of play into that, or does it affect it at all? Thanks.

Thomas Keys

This is Tom, I will handle the competition question first, and I will look at the DAS question second. We, as stated, we don't believe we've seen any measurable impact from our competition in our markets as they rolled out first in the West and then as they moved to the East. We truly believe we're expanding the pie.

We think that the increase that available customers see in paying advanced prepaid opportunities is truly expanding the pie for everybody and making it more fashionable for people to go there. So in our marketplace, we absolutely believe that as we increase value, as Roger mentioned on the call, our goal is to always give our customers more value as we continue to add features into our rate plans.

And by doing that, we then like to get close to our distribution channels, our dealers, sell the value at the counter, increase our share of decision. So to that end, we don't believe we've seen any measurable effect to date.

John Hodulik - UBS

And then, if you look out to some of these markets where you will be competing head-to-head with Leap, do you think that will and how do you look at that versus that greater than 5% penetration in the first 12 months bogey that you guys have been hitting?

Do you think again it expands the market and you guys both get your share, and the market is just bigger than those markets? Or, do you think you split the market? Or how do you guys look at that from a modeling standpoint?

Thomas Keys

Well, I think our modeling continues the way we've always done it. What I really can't speak upon is if anybody else is cannibalizing any existing base I really don't know if that's happening or not, but that is something that we don't have to worry about as we expand our offering into new markets.

As we continue to build out Los Angeles, as we continue to build out the Northeast into 2008, 2009, we absolutely believe at the value we're going to bring in the packages as we look to add new services down the road we'll continue to make it an extremely attractive, unlimited package for all of our customers.

John Hodulik - UBS

Okay. Go ahead.

Roger Linquist

Yeah. This is Roger, let me just add to what Tom said. I think the key here is that there is a finite market opportunity and it's hard to judge up front just how that share may ultimately split out when you have, shall we say not only one, but three competitors in a market like Las Vegas.

But you have to bear in mind as to what the customer sees also, and that is Los Angeles and the Northern California, as well as Las Vegas. So there is a dimension of footprint, there is a dimension of affordability and pricing, we still have the most, we believe, the most aggressive and value-added packages.

So, even with Leap's appearance in Las Vegas, we will just see how that shakes out. But we feel that we have the coverage advantage there by a very significant amount, and we will just see how that ends up in share.

Just a lesson out of the playbook in paging. Many, many years ago, which would go probably beyond which anybody as interested in is right now, but MCI was in the paging business. At that time, I was at GenComm and heading up that company communication industries.

They spent a fortune in advertising in one quarter, they had very little results and we had the best quarter we ever had in our history. So, promoting the service and the pay-in-advance and the unlimited service we think is not something that has been on the lips of all our potential customers.

So we see the opportunity for more in that arena, as Tom said, to expand this pie, create greater awareness. And so there is an opportunity here, difficult to quantify now, but has been repeated in the past many, many times.

John Hodulik - UBS

Okay, great. And on the DAS side?

Thomas Keys

Yeah. I believe your question is why DAS in the Northeast, if I got it correctly.

John Hodulik - UBS

Yeah, and what does that do to the economics and the timing? Has that caused any delays, or is it something like you said you front-loaded the CapEx, if you could give us a little more color on that.

Thomas Keys

Well, I will let Braxton handle the economic piece, but in terms of the actual build, what this does for us, number one, is we get great in-building penetration. As we put a blanketed coverage in a specific area, the DAS actually gives us speed to market in places that could have been problematic to zone or to bill.

So we believe that we're actually getting an advantage in the Northeast as we continue to migrate to DAS as a coverage opportunity. Braxton, you want to touch the economics?

Braxton Carter

Yeah, and on the economics part, what we are doing with DAS if you have much more of a heavy capacity when you have that network built for the launch of the market; where with a macro type design, you're layering in your capacity from when you launch the business as you continue to penetrate.

So, it actually accelerates the CapEx to the point of the launch of the business, but it's just really a timing issue. When we look at the total CapEx profile to free cash flow breakeven, the cumulative investment is very similar.

John Hodulik - UBS

Okay. Great, thanks.

Braxton Carter

Welcome.

Operator

Thank you. Our final question is coming from Will Power with Robert Baird.

Will Power - Robert Baird

Great, thanks for taking the question. I guess a couple of things. I first just want to follow-up on the competitive environment. I know it doesn't sound like you are feeling that much pressure from Boost Unlimited today, but I wonder if you're seeing any additional pressure competitively from any of the traditional prepay providers perhaps in your markets or competitive pressures from anybody else I guess in that vein.

And then, secondly, as you look at Boost Unlimited continuing to expand, are you all thinking about or feeling additional pressure, at least maybe on the margin, to consider offering a more enticing roaming option, given that's one of the competitive differentiators that the Boost Unlimited offer may have. Thanks.

Thomas Keys

In terms of traditional postpaid carriers, as I think we alluded to in the call, there is a sustainability about looking at that model and making it a bolt-on to a higher cost enterprise. We believe to have positioned our model as a pay-in-advance unlimited structure truly puts us in superior position competitively.

So as we look to increase our share of the pie in the upcoming months, we look at our distribution, as mentioned. We believe by going into mass retail, we're going into another segment that allows us to get a branding awareness as well as to get a better yield out of a covered per pop basis as we look at Target and Wal-Mart.

The competitive environment in the fourth quarter is always intense. We understand that, and we've traditionally done very well in the fourth quarter.

Braxton Carter

Let me make some additional points here. When you look at the price points of the competitors, the MetroPCS value proposition is still compelling. There are significant differences in the pricing. And when you look at the unlimited offerings that Boost has on the table, it's not a nationwide footprint.

Yes. They're really putting forth much more of a regional footprint and they have to do that because of the cannibalization issue on their own business. If you make it too compelling, you're going to start bleeding off all of those postpaid customers that is Sprint's bread and butter into a very low margin for Sprint proposition with what Boost is doing.

So, is it really sustainable in the long-term given margin pressures and EBITDA pressures? And you have to ask yourself that question. And you also have to ask yourself that question on any other competitor. We all know that the general environment over time, things get more competitive.

But, again, Roger has always had the vision, since for years going back that we are going to compete by continuing to add more value to our customers and add more value proposition and that we're not out there trying to chase the last dollar of ARPU, we're out there trying to rapidly penetrate these segments under a pricing umbrella which we think is rational that we will continue to compete on based upon the value proposition of what we're doing.

Roger Linquist

And we're perfectly comfortable with the fact that they have a great strength in the national, as Braxton has indicated, really regional footprint for various reasons and so, we don't really see pressure.

We think there's probably a five, not more than 10% of the total served available market that really does fancy a need, a strong need, to have low cost roaming as opposed to occasional roaming where they can get it through our roaming package.

And so, we don't see any need to compete at that level. We want to compete at the value level with existing rate plans, just as Braxton indicated, with additional value that we keep increasing and will continue to increase.

Will Power - Robert Baird

Okay. Great. Thanks.

Roger Linquist

Okay.

Operator

Thanks.

Roger Linquist

Thank you again for participating on today's call. We certainly appreciate your interest and support of MetroPCS and look forward to the next quarter of continued progress. Thank you all. Bye.

Operator

Ladies and gentlemen, this concludes the MetroPCS Communications 2007 third quarter results conference call. Thank you for your participation. You may now disconnect and have a pleasant day.

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Source: MetroPCS Communications Q3 2007 Earnings Call Transcript
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