Leading unlimited wireless carrier MetroPCS Communications (PCS) reported better-than-expected fourth-quarter 2009 results with earnings per share (EPS) of 9 cents, exceeding the Zacks Consensus Estimate of 6 cents as well as the prior-year quarter EPS of 4 cents.
Net income soared 127% year-over-year to $33.1 million, driven by healthy revenue growth and subscriber accretions across all segments. For full year 2009, net income climbed 18% to $176.8 million or 49 cents a share, also beating the Zacks Consensus Estimate of 47 cents. The current Zacks Consensus Estimate for 2010 EPS is 44 cents.
Revenue & EBITDA
Consolidated revenues of $930 million for the quarter reflect a 29% year-over-year increase, beating the Zacks Consensus Estimate of $893 million. This growth was fuelled by a 24% annualized increase in service revenue that reached $824.5 million (89% of total sales). Equipment revenue was $105.5 million, up 83% year over year.
Revenues of the Core Markets segment increased 15.4% year over year to $823 million. Northeast Markets revenues grew to $107 million from $11 million. Consolidated adjusted EBITDA increased 29% to $251 million. Revenue for the full year grew 26.5% to $3.48 billion, also above the Zacks Consensus Estimate of $3.45 billion.
ARPU & Churn
Reported ARPU (average revenue per user) of $40.70 represents an improvement from $40.52 reported in the year-ago quarter, driven by the success of the company’s new unlimited international calling plan. However, monthly average churn (a measure of customer attrition) rose to 5.3% from 5.1% registered in the prior-year quarter.
Churn level remains high due to increased customer defection, as MetroPCS has been increasingly challenged by the aggressive roll-out of discounted service plans by its rival Leap Wireless (LEAP) and some of its larger peers, such as Sprint Nextel (S) and America Movil‘s (AMX) Tracfone.
Subscriber Trends
Net subscriber additions in the quarter were 317,255, a significant improvement from 66,157 customers added in the previous quarter. However, this represents a decline from the net additions of 519,519 customers registered in the year-ago quarter. The company added 112,427 customers and 204,828 customers in the Northeast and Core markets, respectively. Roughly 1.3 million net additions were registered in 2009.
Consolidated penetration of covered population in the quarter was 7.2%, compared to 8.3% in the prior-year quarter. At the end of 2009, the company served approximately 6.6 million customers, up 24% year-over-year.
Financial Condition
The balance sheet remains leveraged for MetroPCS, as total debt of approximately $3.6 billion represents an increase from roughly $3.1 billion reported at the end of 2008. The company exited 2009 with consolidated cash and marketable securities of approximately $1.2 billion.
MetroPCS generated positive free cash flow (cash flow from operations less capital expenditure) of approximately $67.7 million for 2009, compared to a negative free cash flow of $507 million registered a year-ago.
Outlook
MetroPCS has not released its financial guidance for 2010 given the uncertainties in the economic and competitive environment. However, the company recently provided a grim margin outlook for 2010 as it expects adjusted EBITDA margin for its core markets in the mid-30% range, which underscores the impact of higher promotional expenses for rolling out its new service plans.
MetroPCS remains a leading low-cost service provider in the unlimited prepaid market in the US. The company is increasingly focused on strengthening its position in the unlimited prepaid segment by broadening its portfolio of discounted service plans. Moreover, the company continues to expand its footprint in the lucrative Northeast markets.
MetroPCS plans to launch 4G Long-Term Evolution (LTE) service and several dual-mode smartphones across its metropolitan markets in the second-half 2010. The company has selected Ericsson (ERIC) as infrastructure vendor and Samsung Telecommunications America as the supplier of the LTE-enabled handsets. The ultra high bandwidth multimedia data applications supported by the 4G LTE network will boost revenue per user through increased minutes of use.
The company recently revamped its prepaid wireless service plans to counter stiff competition in the low-cost unlimited prepaid wireless market. The revised service plans (called “Wireless for All”), which start at $40 per month, includes all taxes and regulatory fees. Moreover, MetroPCS has reportedly hired investment bankers JPMorgan Chase and Credit Suisse as advisors to explore the possibility of purchasing rival Leap Wireless.
However, MetroPCS is expected to remain challenged by high churn as Tier-1 national carriers such as AT&T (T) and Verizon (VZ) continue to attract customers with better product/service offerings. While expansion into Northeastern US markets may drive future growth, we feel that associated expenditures will continue to strain the balance sheet. We currently have a Neutral recommendation on the stock.
Read the full analyst report on “PCS”
Read the full analyst report on “LEAP”
Read the full analyst report on “S”
Read the full analyst report on “AMX”
Read the full analyst report on “VZ”
Read the full analyst report on “T”
Read the full analyst report on “ERIC”
Zacks Investment Research
