MetroPCS Matches Estimate - Analyst Blog

MetroPCS Communications Inc. (PCS) reported third-quarter earnings of 22 cents per share, which is in line with the Zacks Consensus Estimate and a penny higher than the prior-year quarter.

Net income was $77.2 million, up 5% from $73.5 million in third quarter 2009.

Total revenue of $1,020.78 million narrowly missed the Zacks Consensus Estimate of $1,031 million but increased 14% from $895.59 million in the prior-year quarter. Strong operating metrics followed it by effective expense management led to the increase in revenue.

Total operating expense was $812.8 million in the reported quarter, up 10.2% from $737.3 million in the prior-year quarter. Earnings before interest, tax, depreciation and amortization were $315.1 million, up 15.8% from $272.1 million in third quarter 2009.

Operational Metrics

Average revenue per user was $39.69 in the third quarter of 2010, down 3.3% from $41.08 in the prior-year quarter fueled mainly by the company's “Wireless for All” (inclusive of applicable taxes and regulatory fees) plan.

Inthe reported quarter, churn decreased 200 basis points to 3.8% from 5.8% in third-quarter 2009. Continued acceptance of Wireless for All led to lower churns.

Cost per user increased by $1.20 or 7% year over year to $18.47 in the third quarter. A combination of increased handset subsidies for existing customers and inclusion of regulatory fees in the tax-inclusive service pricing on Wireless for All customers, led to the increase.

Subscriber Statistics

Net subscriber additions increased by a whopping 237% to 223,000 from the prior-year quarter.

Consolidated penetration of covered population in the quarter was 8.1%, compared with 7.1% in the year-ago quarter. At the end of the quarter, MetroPCS had approximately 7.9 million customers, up 24% year over year.

Financial Update

Cash and cash equivalent of $889.7 million at quarter-end declined 4.2% from $929.3 million at the end of fiscal 2009. MetroPCS' long-term debt increased 19.06% year over year to $4.3 billion at the end of the third quarter.

Cash from operations totaled $341.9 million, down 9.1% from $313.4 million in the prior-year quarter.

Our Take

As one of the lowest cost wireless service providers in the U.S., MetroPCS offers a wide range of cheap service plans to its subscribers that differentiate it from its rivals. With the launch of 4G LTE services in the U.S. MetroPCS is even prepared to give tough competition to big players like AT&T (T) and Verizon (VZ) who have not yet launched the service.

However, we prefer to remain on the sidelines due to the company's huge debt burden that will curb its plan to expand into other markets as well as upgrade its technology. Moreover, the company's relatively backdated CDMA network platform does not support smartphone offerings, which can result in customer loss.

MetroPCS currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.