MetroPCS Communications Inc. (PCS) reported lower-than-expected first quarter 2012 results. Earnings per share of 6 cents missed the Zacks Consensus Estimate of 17 cents and registered a steep 60% fall from 15 cents in the year-ago quarter on higher subsidies to customers for handset upgrades.
Total revenue climbed 7% year over year to $1,277 million in the first quarter, but failed to match our expectation of $1,295 million. Adjusted EBITDA dropped 8% year over year to $262 million. Operating expenses increased 12.3% year over year to $1,178.3 million.
Operational Metrics
Average revenue per user was $40.56 in the reported quarter compared to $40.42 in the year-ago quarter mainly on strong demand for “Wireless for All” services and fourth-generation (4G) long-term evolution (LTE) rate plans.
Cost per user (CPU) grew 16% year over year to $22.87 due to higher expenses on customer retention, costs associated with 4G LTE network upgrade and roaming expenses related to Metro USA. Additionally, cost on handset upgrades also contributed substantially ($7.13 per user) to the rise in CPU.
Churn (customer switch) was 3.1% in the first quarter, reflecting an improvement from 3.7% in the fourth quarter of 2011 but flat with the first quarter of 2011. The sequential improvement was primarily attributable to continued investment in network upgrades, deeper focus on customer retention and favorable seasonal impacts.
Subscriber Statistics
MetroPCS added 131,654 subscribers during the quarter to reach a total of 9.5 million customers (up 7% year over year). Consolidated penetration of the covered population was 9.3% compared with 9.0% in the year-ago quarter. The year-over-year growth was primarily driven by increased demand of Google‘s (GOOG) Android based smartphone.
Liquidity
The company ended the first quarter with cash and cash equivalents of $1,886.2 million compared with $1,321.6 million at the end of the year-ago quarter. Long-term debt remained at $4.726 billion compared with $4.711 billion.
Guidance
For fiscal 2012, MetroPCS maintained its prior expectation of capital expenditures in the range of $0.9 billion to $1.0 billion.
Our Analysis
Despite the growing demand in the low-cost prepaid space, MetroPCS, one of the leading players in the prepaid market faced a setback in its first quarter earnings. We believe that entry of Telecom Czars like Sprint Nextel Corp. (S) into the prepaid service segment is showing its impact on the smaller carriers like MetroPCS.
Given the stiff competition, these small carriers are increasingly depending on their smartphone sales. Therefore, more focus is drawn on cell phones upgraded by subsidies to lure existing customers. This is now turning into a bane for carries like MetroPCS. At the same time, network upgrades like spectrum acquisitions for accommodating smartphone facilities are capital intensive, and create a serious concern for the company’s financial.
However, we may bank upon MetroPCS’ success in its Wireless for All program. Further, the no-contract wireless service is rapidly gaining ground against traditional post-paid plans, propelling higher voice and data traffic.
We are currently maintaining our long-term Neutral rating on MetroPCS with a Zacks #3 Rank (Hold).
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