MetroPCS (NASDAQ:PCS) reported lower net income for the first quarter on higher costs it incurred to acquire new customers. Yet the flat-rate carrier also disappointed analysts by reporting weaker than expected customer additions in the quarter. The company also said it will offer cheaper LTE smartphones and Voice over LTE-capable phones in the fall timeframe.
MetroPCS CEO Roger Linquist acknowledged on the flat-rate carrier's earnings conference call that the company's results were below expectations, but he said that competition on 3G data services and uncertainty in the economy made the company's deployment of LTE services all the more significant. During the quarter, MetroPCS engaged in a series of handset promotions, which Linquist and other executives said they will cut back on in the second quarter; the main promotion this quarter will be a $25 plan that offers unlimited voice and texting.
Here is a breakdown of MetroPCS' key quarterly metrics:
LTE: MetroPCS now counts 580,000 LTE subscribers, or around 6 percent of its subscriber base. A MetroPCS executive had said in late March that the company counted 500,000 LTE subscribers. In comparison, Verizon Wireless' (NYSE:VZ) said last week it now has 8 million LTE subscribers, or approximately 9 percent of its postpaid base.
MetroPCS has built out LTE to 80 percent of its CDMA footprint and expects to cover 95 percent of its CDMA footprint by the end of the third quarter. MetroPCS also said it is investing in microwave backhaul to supplement fiber and improve capacity for its LTE network, particularly in urban areas. The company also will deploy small cells to augment its LTE network. MetroPCS maintained its guidance of $900 million to $1 billion for capital expenditures this year, and said all of these network improvements are included in that amount.
MetroPCS COO Tom Keys said Huawei, LG, Samsung and ZTE are providing low-cost LTE Android smartphones that MetroPCS hopes to retail in the $99 to $150 price range. The first of these smartphones will be launched prior to the back-to-school season, he said. Keys added that MetroPCS' recent decision to add a $70 pricing tier to its LTE plans will help "lay the foundation" for when it introduces cheaper LTE smartphones later this year.
Linquist hinted that by year-end MetroPCS will add Rich Communications Services to its LTE offering, but did not provide specific details. Beginning in the fall, he said the company will ramp up its marketing efforts around LTE. MetroPCS executives also reiterated that the company will launch two to three smartphones with Voice over LTE capabilities in the second half of the year. MetroPCS CFO Braxton Carter said Samsung will provide the company's first VoLTE smartphone, though he declined to give details. Moving to VoLTE will allow MetroPCS to refarm its spectrum. "We want to make sure the quality of service is comparable or exceeds what we have on the CDMA," Carter said.
Interestingly, Carter also said MetroPCS might be interested in bidding for the Lower 700 MHz A and B Block licenses Verizon intends to sell as a way to secure regulatory approval for its acquisition of nationwide AWS spectrum from cable companies. "We are absolutely interested in any options out there," he said. While he acknowledged some issues with the spectrum, he said it "is a viable option. We will certainly be taking a very close look at that."
Smartphones: Keys said MetroPCS had 1.5 million handset upgrades in the quarter, representing 16 percent of its subscriber base. He said increased handset promotions drove up customer acquisition costs. Fully 46 percent of MetroPCS' customers now have a smartphone plan, Keys said, up from 33 percent at the end of the fourth quarter of 2011.
Subscribers: MetroPCS added roughly 132,000 net subscribers in the first quarter, far fewer than the roughly 726,000 it added in the year-ago period. Five analysts contacted by Reuters had expected MetroPCS to add between 236,000 and 400,000 customers. The number was also fewer than the 258,000 subs MetroPCS' smaller rival, Cricket provider Leap Wireless (NASDAQ:LEAP), reported on Wednesday.
"We believe investors were prepared for weak adds; however, gross adds were substantially worse than channel checks had suggested (down 35% vs. expectation of 20-25%)," Credit Suisse analyst Jonathan Chaplin wrote in a research note. "It has been a weaker quarter for adds for the industry in general; however, it is tough to explain the magnitude of slowdown at PCS in the context of industry trends."
Financials: MetroPCS reported a net income of $21 million in the quarter, down 63 percent from $56 million in the year-ago period. The company posted total revenue of $1.27 billion, up 7 percent from the year-ago period. The company's cost per gross addition (CPGA) of $235 for the first quarter was up $78 when compared to the prior year's first quarter. MetroPCS said the increase was primarily driven by increased promotional activities and lower gross additions. Additionally, the cost per user (CPU) increased to $22.87 in the first quarter of 2012, or a 16 percent increase over the first quarter of 2011. The increase in CPU was primarily driven by the increase in retention expense for existing customers, costs associated with the LTE network upgrade and roaming expenses.
Churn: Churn decreased in the quarter from 3.7 percent to 3.1 percent in the fourth quarter of 2011, and remained flat when compared to the year-ago period. The company said the sequential decrease in churn was primarily driven by continued investment in its network, aggressive retention programs and normal seasonal trends.
ARPU: MetroPCS said average revenue per user increased to $40.56 in the first quarter, up $0.14 when compared to the first quarter of 2011. MetroPCS said the increase in ARPU was primarily driven by continued demand for its Wireless for All 4G LTE service plans, which was offset by an increase in family plan penetration from 35 percent of the customer base 44 percent compared to the year-ago period.
Special Report: Wireless in the first quarter of 2012
MetroPCS adds data throttling to LTE, increases unlimited data to $70
MetroPCS counts 500,000 LTE customers, hunts for more spectrum
MetroPCS to launch at least one VoLTE handset in second half of 2012
MetroPCS slashes base LTE smartphone plan by $10, to $40/month
MetroPCS, Leap post sequential subscriber gains in Q4