The number of active subscribers rose 27% to 1.68 million. However, the increase was actually much higher, but the company instituted a Verizon policy of not including prepaid customers who have not replenished their cards within six months of the card's expiration. Including such subscribers, Iusacell had 2.2 million subs, a 65% increase year-on-year. The number of contract or post-paid subs rose 26%, in line with our expectations, as Iusacell continued to capture roughly 45% of the new adds in this category. MOUs and ARPUs were substantially stronger than expected, suggesting that the quality of subscribers is still pretty solid. The only area of disappointment was higher-than-expected churn among contract subscribers of around 42% for the year, although the figure has already begun to decline and management expects to revert to more normal levels by mid-2001.
Declining prices of digital handsets reduced Iusacell's customer acquisition costs to US$344 from US$377 last year versus our forecast of US$383. The benefit of lower acquisition costs was partially offset by legal fees and certain one-time charges. Without such charges (taken in the fourth quarter), margin would have reached 35% in both the fourth quarter and the full year. We are encouraged by the relatively low subsidies offered so far - roughly US$10 on average and US$20 to US$30 for the. high-end prepaids (which generate US$30 ARPUs). This segment targets the third and fourth phone in a household. Going forward, management's outlook suggests subscriber growth in the 15-25% range per year for the next few years, with stronger margins. The company expects to surpass 30% EBITDA margin on a US GAAP basis, while Mexican GAAP margins should exceed 38% in 2001. (Our model uses Mexican GAAP, since Iusacell's financials are filed this way - the difference in standards pertains to capitalizing versus expensing of the handsets.) As per management's expectations (which have been fairly conservative in the recent past), we are projecting a 27% increase in the number of subs to 2.1 million (not including inactive prepaids). Contract churn should decline to 3% per month, ARPUs and usage should decline as hybrid contracts (which combine the fixed rate nature of postpaids and the variable characteristics of prepaids), which generate around US$30 ARPUs, dragging down the average of pure contract subs. Metrics for prepaids should be stable, in our view. We expect revenue to rise 18% to US$675 million, with EBITDA increasing 30% to US$258 million on lower interconnection fees (assuming Iusacell soon reaches an agreement with Telmex similar to that of Alestra and Avantel), and economies of scale. On its Q4 conference call, management said that Iusacell would spend US$200 million in capex in the core business, which would be 100% financed by internally generated cash flow. However, a more aggressive investment in the PCS operations will most likely result in an increase in consolidated debt levels. Given that the company had US$69 million in cash at year-end, sold 170 towers to American Tower for US$18 million in February and plans to close another similar transaction before year end, we expect the PCS capex to take debt from US$798 million to around US$873 million in 2001, with cash rising to around US$95 million.1 We project nearly breakeven free cash flow for the operating company this year and positive free cash flow in 2002, even after including the US$50 million in PCS capex.
A refinancing of US$266 million in various restrictive credit facilities (which mature mostly in 2001 and 2002) enables Iusacell to tap vendor financing facilities going forward. The company should invest roughly US$150 million in its PCS operations in 2001 through 2003, with approximately half that amount in 2001, and most of the remainder in 2002, focused on regions 1 and 4: the Monterrey to Tijuana corridor and surrounding cities. 1 We consolidate the debt for the cellular operating company, the holding company and the PCS unit.

Company Description:
Grupo Iusacell is the second largest wireless operator in Mexico, providing mobile, long-distance, local telephony, paging, and data services in an area that includes 70 million people (pops) in four cellular regions and 11 million pops in two PCS regions, or over 80% of the Mexican population. The company has a nationwide footprint, four contiguous 850 MHz regions, including Mexico City, and PCS licenses in Region 1 (Tijuana) and Region 4 (Monterrey). Iusacell is controlled by Verizon, which has committed US$1.2 billion in financing to date, with Vodafone controlling 34.5% of the company.

Network:
Iusacell had nearly 1.7 million subscribers at year-end, and added 358,000 subscribers (on a net basis) in 2000, including 150,000 subs in the fourth quarter. The company's network is based on CDMA technology, which increases the effective capacity of the network and the spectrum. Approximately 520,000 users are digital, with about half of the digital cellular base coming from new additions and half migrating from existing analog accounts. Iusacell has over 20,000 points of sale, which is critical in the highly competitive sector. The company's points of sale include distributors of lottery tickets, OXXO and Seven Eleven stores, Bancrecer ATMs, subway stations, and PEMEX gas stations. Iusacell plans to add an additional 10,000 to 15,000 points of sale this year, largely in the new PCS regions.
The company completed an US$800 million capex program, which included US$217 million in investments in 2000. Of the total US$800 million, over US$470 million was invested in expanding network capacity; US$130 million on network coverage and regulatory issues; and the remainder on systems, wireless application protocol (WAP), telemetry, and PCS technologies. Going forward, we expect the company to invest US$150 million in its PCS operations through year-end 2003. ML 15-3-2001