MetroPCS Communications Inc. (PCS), the sixth-largest prepaid wireless service operator in the U.S. has reported lower-than-expected third quarter 2011 results. Adjusted earnings per share of 19 cents missed the Zacks Consensus Estimate of 23 cents and fell 13.6% from 22 cents in the year-ago quarter on flaring operating expenses.
Total revenue climbed 18% year over year to $1,205 million in the third quarter, but failed to match our expectation of $1,224 million. Adjusted EBITDA increased 4% year over year to a record high of $327 million. However, operating expenses increased 26.5% year over year to $1,027 million that largely offset revenue growth in the quarter.
Operational Metrics
Average revenue per user nudged up 2.8% to $40.80 in the reported quarter from $39.69 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 upped 6% year over year to $19.52 due to higher expenses on customer retention, costs associated with 4G LTE network upgrade and roaming expenses.
Churn (customer switch) was 4.5% in the third quarter, up from 3.8% in the year-ago quarter, due to an increase in subscriber gross additions, adjustment of false churn rates and prevailing weak economical conditions of subscribers.
Subscriber Statistics
MetroPCS added 69,384 subscribers during the quarter to reach a total of 9.1 million customers (up 16% year over year). Consolidated penetration of the covered population was 9.1% compared with 8.1% in the year-ago quarter. The growth was primarily driven by increased demand of Google’s (GOOG) Android-based smartphone.
Liquidity
The company ended the third quarter with cash and cash equivalents of $1,840.8 million compared with $889.7 million at the end of the year-ago quarter. Long-term debt remained flat sequentially at $4.7 billion in the reported quarter.
Guidance
For fiscal 2011, MetroPCS maintained its estimated capital expenditures in the range of $0.9 billion to $1.0 billion.
Our Analysis
Despite the gradual slowdown in the economy, increasing cost pressure and stiff competition from AT&T Inc. (T), and Leap Wireless (LEAP), we believe MetroPCS will remain benefited from the continued high demand for Android-based smartphones backed by the company’s non-contractual and affordable wireless data plans. Further, the company’s Wireless for All service plans, entry into 4G LTE wireless servicesbode well for earnings growth in 2011 and beyond.
We are currently maintaining our long-term Neutral rating on MetroPCS with a Zacks #3 Rank (Hold).
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