MetroPCS: 1Q Earnings Miss

MetroPCS Communications Inc. ( ) reported first-quarter 2013 adjusted earnings per share of 6 cents, failing to meet the Zacks Consensus Estimate of 11 cents, hurt by a weak business in the service unit along with higher operating expenses. The results remained unchanged from the year-ago quarter.

Total revenue remained nearly flat year over year at $1,287.1 million in the first quarter, and surpassed our expectation of $1,281.0 million. The well performing equipment segment supported the outperformance.

Adjusted EBITDA increased 10.9% year over year to $291.1 million. The company generated EBITDA margin (adjusted EBITDA as a percentage of service revenues) of 26.4% that improved 380 basis points (bps).

Operational Metrics

In the first quarter, average revenue per user (ARPU) was $40.96 compared with $40.56 in the year-ago quarter. Cost per user (CPU) decreased 2.9% year over year to $22.21.

Cost per gross addition (CPGA) remained at the same level as the prior-year quarter at $236.14. Churn (customer switch) was 2.9%, down 20 bps from first quarter 2012.

Subscriber Statistics

As of Mar 31, 2013, the total subscriber base comprised 8.99 million customers (down 5.0% year over year). During the quarter, the company added 108,668 subscribers, which was less than 131,654 added in the prior-year period. Consolidated penetration of the covered population was 8.7%, down from 9.3% in first quarter 2012.

Liquidity

MetroPCS ended the first quarter with cash and cash equivalents (inclusive of short-term investment) of $2,701.3 million compared with $2,613.3 million in a year-ago quarter. Long-term debt was $5,807.2 million compared with $4,724.1 million in the year-earlier quarter.

Guidance

For fiscal 2013, MetroPCS expects capital expenditures of $800 million to $900 million.

Our Analysis

We believe that MetroPCS – which has business tie-ups with Cisco Systems Inc. ( CSCO - Analyst Report ) – stands to benefit from the boost in spectrum capacity and influx of significant infrastructural investments. High demand for wireless data and the incorporation of VoLTE will also help the company’s performance.

Additionally, the company has finally received a favorable ruling by the Committee on Foreign Investment in the United States regarding its merger with T-Mobile USA.

This deal is expected to result in accelerated financial growth with estimated five-year CAGR for revenues, EBITDA and free cash flow in the range of 3–5%, 7–10% and 15–20%, respectively. Apart from financial benefits, the merger between MetroPCS and T-Mobile would boost the company’s operations in the U.S. and safeguard its market share against bigger players like AT&T Inc. ( T - Analyst Report ) and Verizon Communications Inc. ( VZ - Analyst Report ) .

MetroPCS has a Zacks Rank #3 (Hold).