PCS Profit Soars, but Churn Rises

Leading unlimited wireless carrier MetroPCS Communications (PCS - Analyst Report) reported better-than-expected third-quarter 2009 results with earnings per share (EPS) of 21 cents outpacing the Zacks Consensus Estimate of 9 cents, as well as the prior-year quarter EPS of 13 cents. Net income increased 64% year over year to $73.6 million, driven by healthy revenue growth across all segments.

Revenue & EBITDA

Consolidated revenues of $895.6 million reflect 30.4% year-over-year increase, fuelled by 33% annualized growth in service revenue that reached $812.3 million (91% of total sales). Equipment revenue was $83.3 million, up 9.5% year over year.

Revenues at the Core Markets segment increased 18.6% year over year to $809 million. Northeast Markets revenues grew to $87 million from $5 million reported a year-ago. Consolidated adjusted EBITDA increased 35% year over year to $272 million.

ARPU & Churn

Reported ARPU (average revenue per user) of $41.08 represents an improvement from $40.73 reported in the year-ago quarter, driven by the success of the company’s new unlimited international calling plan. Monthly average churn rate (a measure of customer attrition) rose to 5.8% from 4.8% registered in the prior-year quarter.

Despite its leading position in the unlimited prepaid segment, MetroPCS is struggling with customer retention. The company has been increasingly challenged by the aggressive roll-out of competitive discounted service plans by rival Leap Wireless (LEAP - Snapshot Report) and some of its larger peers such as Sprint Nextel (S - Analyst Report) and America Movil’s (AMX - Analyst Report) Tracfone.

Subscriber Trends

Net subscriber additions in the quarter were 66,157, down from 205,585 customers added in the previous quarter and 249,265 additions registered in the year-ago quarter. The company lost 54,441 customers in its Core Markets while adding 120,598 customers in the Northeast markets.

Consolidated penetration of covered population in the quarter was 7.1%, compared to 7.9% in the prior-year quarter. MetroPCS’ unlimited nationwide services are now available in more than 11,000 cities and towns across the U.S. At the end of the quarter, the company served approximately 6.3 million customers.

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 the quarter 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 $143 million for the first nine months of 2009, compared to a negative free cash flow of $133 million registered for the same period a year-ago.

Outlook

MetroPCS has updated its financial and operational guidance for 2009. The company now expects consolidated net subscriber additions for the year to be in the range of 1 million to 1.2 million, down from 1.4 million to 1.7 million as per previous guidance. Consolidated adjusted EBITDA is projected to be within the range of $850 million to $950 million, also a decline from the earlier forecast of $0.9 billion to $1.1 billion.

However, the company continues to project consolidated capital expenditures in the range of $0.7 billion to $0.9 billion and expects to generate positive free cash flow in 2009.

MetroPCS is increasingly focused on strengthening its position in the unlimited prepaid market by broadening its portfolio of discounted service plans. Moreover, the company continues expand its footprint in the lucrative Northeast markets.

However, MetroPCS is expected to remain challenged by subscriber retention problems as Tier-1 national carriers such as AT&T (T - Analyst Report) and Verizon (VZ - Analyst Report) continue to attract customers with better product/service offerings. While expansion into Northeastern US markets may drive future growth, we feel that associated expenditures may strain balance sheet conditions moving forward.