Apples to Autos

The apples-to-oranges simile doesn't cut it in describing the differences among metrics of wireless carriers. According to Bob Roche, CTIA vice president for policy and research, trying to compare and contrast carrier metrics is like comparing “apples to automobiles.”

“Concepts like ARPU, churn and subscribers — everybody tosses them around but sometimes people look at the results and say ‘how can this churn number be right compared to the churn reported by these other entities?’” Roche said.

For some carriers, though, knowing that metrics are calculated inconsistently isn't a problem.

“It's not an issue I lose sleep over,” said Michael Small, Centennial president & CEO. “The important thing is that companies consistently do things, so you can see what's happening over time.”

The differences in metric calculations are “something you learn to live with,” said Kent Evans, Cingular executive director of investor relations. “A lot of people probably just look at the trends within the metrics of a carrier rather than do a comparison,” Evans said.

Mike Stefanski, Verizon Wireless vice president of strategic and financial planning, said that every carrier has nuances to its numbers.

“(With subscriber numbers) you really have to get under what's being reported, especially below the headline,” he said. “(Subscriber numbers) have caused a tremendous amount of confusion across the industry.”

It has become the job of financial analysts to weed through that confusion, and it's not getting any easier. Over the past few years, inconsistencies have gotten worse, according to Todd Rethemeier, Bear Stearns senior wireless analyst. Industry consolidation hasn't helped.

“It's hard to compare year over year because it's not the same company today as it was a year ago,” Rethemeier said.

Revenue may be the one metric you can bet on being consistent, given the SEC's interest in the figure. Beyond that, it's risky business.

“As soon as you come off a revenue or financial number and you get into operational metrics, your confidence has to go down,” said Mike Felicissimo, Qwest Wireless vice president finance — treasurer.

Metrics You Love to Hate

These metrics are identified by carriers and analysts as particularly mystifying:

• ARPU — Some carriers disagree on exactly which revenue sources should factor into ARPU, particularly roaming.

  “Some carriers report ARPU that includes all roaming revenue, whereas others report ARPU which includes local service only,” said Sherry Stegall, Cellular South director of accounting.

  Including roaming can bolster a carrier's ARPU significantly. For example, Alamosa PCS, a Sprint PCS affiliate, reported a second quarter ARPU of $91, including roaming. Without roaming revenue, the carrier's ARPU was $62.

• Churn — Exactly when a carrier stops counting an inactive prepaid subscriber toward its total subscribers directly influences prepaid churn, which generally is listed separately or combined with postpaid churn.

  For Cingular and Centennial, that deadline is 90 days. For some carriers, it can be a year.

  “If I'm taking my prepaid guys off at 90 days with no activity, I'm going to have a higher churn than somebody that's keeping them on for over a year,” said Tom Bucks, Centennial senior vice president & controller.

• CPGA — “Of all the metrics, CPGA (cost per gross addition) is the toughest one to reconcile,” said Craig Mallitz, Legg Mason associate analyst, wireless services. “Bell Atlantic Mobile used to report a CPGA that didn't even include handset subsidy, so their CPGA would always be substantially lower than their competitors'. “

  Verizon's Stefanski said the fixed and variable cost sides make CPGA difficult.

  “When you look at variable costs, whether it's commissions or the subsidy, that's fairly easy to understand,” he said. “It's how much is allocated out of fixed costs that only the carriers themselves know.”

  Stefanski added that Verizon Wireless never has reported a true CPGA but is working on how it will. The company has reported what the carrier calls cost of acquisition, “which is purely the variable cost of commission and equipment subsidy,” Stefanski said.

Jump in the Tool

A method of standardized-metrics benchmarking exists; however, its use is strictly internal.

Developed by carriers, CTIA and Andersen, the wireless benchmarking tool rigidly defines key performance indicators (KPIs), including ARPU, churn, CPGA, minutes of use and EBITDA as a percentage of revenue and cumulative capital expenditure per subscriber. The tool originated in 1998 when carriers and financial analysts expressed interest in creating a consistent set of definitions for metrics, according to CTIA's Roche.

“They really wanted to know that X was X for these companies,” Roche said.

The tool has evolved into a Web-based program that participants access through Andersen's Web site. The dozen subscribers include AT&T Wireless, Cingular, Sprint PCS and VoiceStream.

Each KPI is defined and falls into customer, acquisition, operating, investing, prepaid and data metrics categories. As quarterly financials are released, participating carriers compare their metrics to groupings of other participants.

For antitrust reasons, a carrier only can compare its numbers to a group of at least five other carriers, said Kirk Johnson, Andersen manager.

The tool has most of the industry's largest carriers as participants, with a few exceptions.

“It would be nice if we could get Verizon in the tool,” Johnson said. “They used to participate as GTE prior to the merger with Bell Atlantic.”

Nextel is the only other national carrier not in the tool. As for reasons why a carrier wouldn't participate, Johnson said that consolidated carriers have numerous reporting systems and therefore have difficulty gathering the necessary data. Other carriers have told him that they have internal departments that serve the tool's purpose.

Stefanski said Verizon Wireless has an internal benchmarking method. Joining the tool, though, isn't out of the realm of possibilities.

“It's something that we'll re-evaluate, but we were concerned about our status as a pre-IPO company,” he said.

Cellular South's Stegall said the tool's comparative information would be more meaningful if more carriers participated in reporting to it on a quarterly basis.

Ken Meyers, U.S. Cellular CFO, added that if carriers are worried about sharing proprietary information, they shouldn't be.

“I am convinced that it is more than adequately safeguarded,” he said.

Qwest's Felicissimo suggested carriers trial the tool. (Carriers interested in the wireless benchmarking tool can contact Johnson at kirk.johnson@us.andersen.com.)

“It's the only attempt at trying to standardize definitions and create a regular look at (metrics) information,” Felicissimo said. “I'm sure that everyone else does the same thing internally for a lot more money.”

Although most carriers say standardizing metrics industry-wide is good idea, most also say it's unlikely to happen.

“We understand the benefit, but even if you have consistent formulas, it may not give you comparability on the metrics,” said Verizon's Stefanski.

Cingular hopes standardization can happen.

“It would make it easier for us to compare our numbers against everybody else if we knew the calculations were the same across the board,” said Jeff Cannon, Cingular director of investor relations.

With public metrics, Cingular's Evans added that carriers don't calculate them any differently internally than they do for Wall Street.

“What you don't want to do is stick a metric out there that doesn't mean anything in the concept of managing your business,” he said.

If that holds true among the 12 carriers that participate in the wireless benchmarking tool, there's at least some consistency out there. Internal standardization may be possible, but extending that to public releases could be another story.

“I don't think you can dictate metrics across the industry in terms of public reporting,” said U.S. Cellular's Meyers. “Every company's strategy is different, and it's more important that you have the reporting to allow that strategy to be monitored and successful.”

Some carriers are tight-lipped when asked about metrics standardization. An AT&T Wireless spokesperson declined comment aside from saying that the carrier feels what it reports is fair and accurate. Sprint PCS also declined comment.

“Moving in the direction of standardization would be a good thing for the industry and investors,” said Paul Blalock, Nextel vice president, investor relations.

Centennial's Bucks is hopeful for the idea and leery of the consequences of continuing without some degree of standards.

“I would love to pick up an annual report or press release, and when I read a statistic, know that it's the same definition as what I know here,” he said. “It's critical that the industry has some commonality of definitions. Otherwise disclosures are misleading to investors.”

Legg Mason's Mallitz said industry-wide standardized metrics would be beneficial; although, he pointed out that several attempts have not taken off. Bear Stearns' Rethemeier agreed and was equally pessimistic.

“I'm not sure it would be realistic to expect them to do that,” he said. “The companies all have special situations, and they would feel that they need to report things slightly differently.”