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MetroPCS Earnings Disappoint ... for Now

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The first quarter of 2012 proved to be a disappointing one for MetroPCS (NYSE: PCS  ) . The wireless carrier's earnings per share dropped to $0.06, a precipitous 76% drop from last quarter's $0.25.

Where 2012's fourth-quarter EPS was a pleasant surprise to analysts' predictions of $0.18, Q1 2011 was a bigger downer than expected. The $0.18 a share that a panel of analysts polled by Bloomberg thought would be MetroPCS' bottom line was far too optimistic -- by 200%!

Why such a turnaround? Here's the main reason, according to MetroPCS Chairman and CEO Roger Lindquist from the company's earnings press release:

"Our first-quarter results highlight our continued focus on getting affordable 4G LTE smartphones into the hands of our customers. ... However, the significant number of upgrades at a higher promotional handset cost during the quarter resulted in higher costs."

In other words, this month-to-month mobile services provider is -- at least temporarily -- falling prey to the same market pressures that are affecting the carriers that provide mostly pre-paid long-term contract services: having to subsidize the costs of pricey smartphones to catch and retain their customers.

There is a difference, though. AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , and Sprint Nextel (NYSE: S  ) have been relying on the iPhone to bring in the customers -- and paying a substantial price to Apple (Nasdaq: AAPL  ) for the rights to sell the iPhone, which eats into the margins data plans provide.

MetroPCS has stayed away from The Handset That Controls the Wireless Industry and, instead, has been focused on moving its clientele onto its 4G LTE network by working with phone makers to come up with ever cheaper LTE-capable smartphones.

The goal, of course, is for the carrier to finally be able to offer its clients LTE phones without any subsidy at all, because those subsidies helped bring the cost per user, or CPU, up almost 16% over the same quarter last year.

Even though net subscribers grew by 7% over the same period last year to almost 9.5 million, the growth rate has shrunk from the previous quarter: 131,000 new customers in the second quarter 2012, compared to 190,000 additions in the fourth quarter 2011.

Despite the earnings letdown for the first quarter of the year, I think that MetroPCS' strategy is the correct one. As Lindquist said in the press release, "In wireless, speed does matter," and the company has upgraded 16% of its customers to an LTE handset. Job No. 1, then, is to get the price of those LTE handsets down, and I believe the carrier can do just that in 2012.

Last October, I gave MetroPCS a thumbs up in CAPS, the Fool's stock-picking community. Now that the share price is down almost 22% from that time, I have to reiterate my belief that this company will outperform.

I like MetroPCS and may purchase some shares in it when the Fool's trading rules allow it. However, one thing the carrier doesn't do is offer a dividend. If your investing tastes run more to income producing stocks, then this free Motley Fool report, "Secure Your Future With 9 Rock-Solid Dividend Stocks," is a definite must-read. Sign up for it today ... before it goes away!

Fool contributor Dan Radovsky owns shares of AT&T. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 26, 2012, at 11:30 PM, MattC69 wrote:

    WOW! Busy day today Dan - I see you've managed to bag CLWR and pump PCS when the market see's things completely opposite. What a contrarian you are...

  • Report this Comment On April 27, 2012, at 9:32 AM, MattC69 wrote:

    Check out Dan's admission in Comments on "Clearwire Keeps Up the Monster Losses, but Investors Cheer" that perhaps he hasn't been fair in his less-than-objective and selective commentary... Too little too late for one's reputation, but worth the read nonetheless.

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