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We upgrade our recommendation for MetroPCS Communications (PCS) to Neutral following the company’s better-than-expected operating results in the last quarter. Reported earnings have outpaced the Zacks Consensus Estimate fueled by healthy revenue growth across the company’s Core and Northeast markets. MetroPCS is benefiting from its new unlimited international calling plan which is driving revenue per user.

MetroPCS remains a leading low-cost service provider in the unlimited prepaid market in the US and will continue to benefit from the ongoing wireline replacement trend. The company is increasingly focused on strengthening its position in the unlimited prepaid segment by broadening its portfolio of discounted service plans.

MetroPCS has initiated several steps to counter intense competition and drive subscriber accretion. The company is rolling out new product/services, upgrading network infrastructure and entering additional markets for growth.

The company is currently enjoying meaningful traction in the Northeast region, which is evidenced by healthy subscriber growth. Gains from the Northeastern markets continue to offset declines in Core markets (including Atlanta, Dallas, Las Vegas, Los Angeles and San Francisco). A significant part of MetroPCS’ network infrastructure deployment initiatives is centered on the lucrative Northeast region.

MetroPCS has joined the league of the top-tier US wireless carriers such as Verizon (VZ) and AT&T (T) as the company recently declared vendors for its 4G Long Term Evolution (LTE) wireless broadband service. MetroPCS has selected Ericsson (ERIC) as network infrastructure vendor and Samsung as the supplier of LTE enabled handsets.

The company plans to launch 4G LTE service and several dual-mode smartphones across its metropolitan markets in second-half 2010. The ultra high bandwidth multimedia data applications supported by the 4G LTE network will boost revenue per user through increased minutes of use.

However, despite these encouraging growth prospects, MetroPCS contends with subscriber retention problems as customer accretion continues to decelerate on a sequential basis due to intense competition in the prepaid wireless segment. The company is experiencing sustained customer attrition in its legacy Core markets.

Churn (customer switch) level remains high due to increased customer defection as the company’s larger peers in the prepaid market such as Sprint Nextel (S) and America Movil’s (AMX) Tracfone continue to lure subscribers with competitive service plans and better product offerings.

While expansion into the Northeastern markets is expected to drive future growth, we feel that associated capital expenditures will strain balance sheet moving forward.

Source: MetroPCS Upgraded to Neutral After Positive Quarter