MetroPCS Communications: Earnings Preview

| About: T-Mobile US, (TMUS)
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Leading unlimited wireless carrier MetroPCS Communications (PCS) is slated to report first-quarter 2010 results on Thursday, May 6, 2010, ahead of the opening bell. The current Zacks Consensus Estimate for the first quarter is 6 cents, representing a 51.7% year-over-year decline.

MetroPCS has not released its financial guidance for the first quarter and full year 2010, given the uncertainties in the economic and competitive environment. However, the carrier has provided a grim margin outlook for 2010 as it expects adjusted EBITDA margin for its “Core Markets” segment in the mid-30% range, which underscores the impact of higher promotional expenses for rolling out its new service plans.
Fourth Quarter Flashback
MetroPCS reported earnings per share of 9 cents for the fourth quarter, exceeding the Zacks Consensus Estimate of 6 cents. Net income soared 127% year over year to $33.1 million, driven by healthy revenue growth and subscriber accretions across all segments.
Consolidated revenues climbed 29% year over year to $930 million on the back of healthy service revenues, beating the Zacks Consensus Estimate of $893 million. Revenues from both Core Markets and Northeast Markets increased in the quarter.
MetroPCS posted an annualized improvement in ARPU (average revenue per user), driven by the success of its new unlimited international calling plan. However, churn increased due to higher customer defection, as the carrier has been increasingly challenged by the aggressive roll-out of discounted service plans by its rivals such as Leap Wireless (LEAP) and Sprint Nextel (NYSE:S).
Estimate Revisions Trend
Agreement: Estimates for the first quarter have been inclined more towards the negative side over the past month with 5 analysts (out of a total of 24) having reduced their estimates with 1 making a positive revision. Opinions have been mixed for 2010 with 4 analysts (out of a total of 25) having lifted their estimates over the past month and 4 having moved in the opposite direction. There have been no estimate revisions over the past week.
Negative estimate revisions can be attributed to the high churn level and downward pressure on ARPU and margins due to the ongoing aggressive price promotions. Conversely, the near-term visibility for improvement in net subscriber additions resulting from customer migration from contract based plans to prepaid (driven by tariff rate reductions) represents the key impetus for upward estimate revisions.
Magnitude: The magnitude of revisions for the forthcoming quarter has plateaued over the past 7, 30 and 60 days. A similar trend applies to full year 2010. With respect to earnings surprises, MetroPCS had three positive surprises and one negative surprise in the preceding four quarters. The carrier produced an average positive earnings surprise of 50.32% over the last four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.
Our Take
MetroPCS remains a leading low-cost service provider in the unlimited prepaid market. The company is increasingly focused on strengthening its position in this market by broadening its portfolio of discounted service plans. Moreover, the carrier continues to expand its footprint in the lucrative Northeastern US markets.
MetroPCS plans to launch 4G Long-Term Evolution (LTE) service and several dual-mode smartphones across its metropolitan markets in the second half of 2010. The ultra- high bandwidth multimedia data applications supported by the 4G LTE network will boost revenue per user through increased minutes of use.
The company revamped its prepaid wireless service plans in January 2010 to counter stiff competition in the low-cost unlimited prepaid segment. The revised service plans (called "Wireless for All"), which start at $40 per month, includes all taxes and regulatory fees.
However, MetroPCS is expected to remain challenged by high churn as Tier-1 national carriers such as AT&T (NYSE:T) and Verizon (NYSE:VZ) continue to attract customers with better product/service offerings. While expansion into Northeastern markets and network upgrade to 4G LTE may drive future growth, we feel that associated expenditures will strain the balance sheet.
Although MetroPCS will benefit from improving fundamentals of the US prepaid market, higher promotional expenses for rolling out new service plans will dilute margins in the upcoming periods. We currently have a Neutral recommendation on MetroPCS, which is supported by a Zacks #3 Rank (Hold).