MetroPCS Shines As Phone Subsidies Plunge; Sprint Continues To Grow Unprofitably

| About: Sprint Corporation (S)


Today MetroPCS (PCS) released earnings of 41 cents per share, beating estimates by 20 cents. Revenue rose 6% year over year. The company lost 186,000 subscribers in the quarter. Net income rose 78% year over year, attributed mostly to falling costs for phone subsidies. Cost per user fell from $3.73 to $3.06. This trend should continue for the near term, as handset prices are falling across the board. Average revenue per user rose by 13 cents as more customers moved over to its 4G LTE network.

The stock popped nearly 40% on the earnings release as the market seems to have gained comfort that the company will not need to continue subsidizing phones as much as the prior quarter.

Last quarter MetroPCS missed earnings expectations due to higher-than-normal phone subsidy expense. This is the cost the company must incur to get the latest LTE phones over to the network. But as technology and efficiencies of scale and competition all move forward, the price of those LTE handsets is falling.

MetroPCS financials are listed in a strictly year-over-year format, but if one compares quarter one to quarter two, more can be seen. "Cost of Equipment" fell by approximately $181 million even as revenue rose slightly. This is signaling that for the near term there is substantial income stability even without adding customers.

Also worth noting, compared with quarter one, quarter two had slightly higher depreciation expense.

At least one VOLTE (Voice Over LTE) phone will be released in quarter one of 2013. VOLTE phones help network and spectral efficiency by migrating voice data to the LTE network. VOLTE phones also offer the potential for increased clarity for the users.

Management also continues to express interest in picking up more spectrum, but seems to be letting the VOLTE technology pan out more first. Prior conference calls have demonstrated management's interest in acquiring spectrum in the Seattle and Minneapolis markets, but this call seemed to show management has just as much interest in adding spectrum to its current markets to improve quality, using Dallas as an example they would like to duplicate.

Management seems very selective in acquiring any spectrum and is not afraid to stay a regional carrier for the long term. In other words, MetroPCS may just in fact stay a strictly metropolitan carrier forever because it is more profitable.


Sprint (S) popped 20% after releasing earnings of -39 cents, or -46 cents when diluted. Iphone sales were roughly 1.5 million units. LTE was added to 15 cities over the quarter. The Nextel network shutdown and an impairment to the investment in Clearwire (CLWR) accounted for more than half of the loss.

Management emphasized confidence that the company is turning around. Profits are not there yet, but underlying cash flows seem to be gaining some strength. Average revenue per user rose and continues to be high relative to the sector. Capital expenditures rose almost 100% year over year, evidently mostly for expanding LTE across the nation.

The addition of the Apple (OTC:APPL) Iphone seems to have provided little improvement to profits for the time being due to high subsidies to Apple, but this could change and Sprint's cash flows have strengthened. Overall, Sprint seems to be targeting customer growth rather than cost cutting. There is a significant amount of debt coming due in 2013, but unless losses accelerate, Sprint should have no problem meeting those obligations.


The market loved both company reports, but my overall opinion of the telecom sector changes very little from the past. MetroPCS is managing its limited spectrum holdings very effectively by focusing on earning profit every quarter no matter what. Sprint on the other hand continues to have grand plans that never result in profits. I see Sprint as the company that bites off more than it can chew and MetroPCS as the company that bites off no more than it can digest.

Quality at Sprint is still higher than that of MetroPCS, but the gap seems to have continued to close. The quicker that handsets and LTE technology fall in price, the greater the advantage for MetroPCS because spectrum becomes a smaller issue.

After watching both company's conference calls, I also found Sprint's management to be very stressed out and unclear about what exactly their market niche and strategy is. They tend to be vague, and that is how their business plan tends to pan out as well. Sprint tries to offer high quality even if the company cannot afford it. On the other hand, I found MetroPCS' management to be calm, cool, and collected. An excellent strategy was laid out very clearly every step of the way for several years forward.


For these reasons and due to a slowing economy, I see MetroPCS as a buy even after its price pop but Sprint a hold or mild sell after its price pop. I see both MetroPCS equity and debt as a superior investment to Sprint's.

Disclosure: I am long PCS.

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Tagged: , Wireless Communications, Earnings
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