MetroPCS Beats Earnings: Are Consumers Shifting To Prepaid Phones?

| About: T-Mobile US, (TMUS)

The largest pay as you go telecom carrier in the United States, MetroPCS (PCS) Communications Inc., recently reported its third quarter results. Results were impressive as the company more than doubled its bottom line from the same quarter last year. The company posted earnings per share of $0.52 on revenues of $1.26 billion. Both revenues and earnings grew, by 5% and 177%, respectively. The company ended the quarter beating estimates for both revenues and earnings. Third quarter revenues of $1.26 billion beat revenue estimates of $1.25, whereas, PCS beat earnings estimate by a comfortable margin of $0.26. Despite the fact that earnings were helped by a $53 million gain on sale of certain securities, the company would have still beaten the EPS estimates by a margin of $0.19 per share after excluding the effects of the said sale of securities.

MetroPCS, which provides flat rate services to its customers and does not require contracts, has shown an impressive growth in revenues in recent quarters. Launching a 4G network with wider coverage and offering a wider range of smartphones has helped attract new customers for the company. Moreover, despite its business model being based on the less predictable prepaid segment of the market, it has done well to report a lower churn in recent quarters, which is showing a downward trend. Churn, the percentage of subscribers leaving the network, was reported to be 3.7%. Even though this is much higher than what other telecom carriers in the region have reported because of the reasons mentioned above, it is a substantial decrease from the third quarter churn of 4.5%. With price wars among wireless players becoming fiercer, PCS has done exceptionally well with its service plans, and that has helped it report a lower churn. The company's recently announced 4G data plan has done particularly well and is currently the only plan on offer that provides unlimited data, along with features such as no annual contract required.

The company's faster 4G service is gaining traction among customers, and it currently has more than a million subscribers using its LTE services. A total of 700,000 customers were using the company's LTE services in the second quarter. Currently, a total of 12% of its total customers are using its 4G services, up from 8% by the end of the second quarter.

Other key features of the company's quarterly results are as follows:

  • The company has announced that it is focusing more towards EBITDA growth, and it has achieved exactly that in the quarter ended recently. Reported EBITDA was $466 million, which represents an improvement of 42% over the third quarter of the previous year. This is particularly impressive considering that EBITDA growth was 35% in the second quarter.
  • Cost per user was $18, a 6% decrease from the previous quarter. The decrease was largely due to the decrease in costs related to retaining existing customers.

The company has recently announced that it will merge its operations with T-Mobile. In our previous report, we mentioned the various operational and financial benefits for the company in the post merger scenario. We believe that in addition to a significant expansion in its customer base, the company will achieve operational scale, wider coverage and wider range of handsets, which will eventually help it bring back customer growth.

PCS is trading at 7 times its earnings, at a discount to the industry multiple of 16x. On a forward P/E basis, PCS is trading at 14 times its earnings while Verizon (NYSE:VZ) is trading at 15.7x. Valuations for PCS suggest that the stock is currently undervalued.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Telecom Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

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