MetroPCS (NYSE: PCS) has seen the future, and it is simply this: a no-contract wireless 4G LTE network with inexpensive smartphones -- affordable both to the consumer and to the carrier. It is that cheap but fully featured smartphone that the company sees as the key to its -- and the wireless industry's -- eventual success.
"We are quite simply moving the industry in the direction of low-cost 4G LTE handsets," said MetroPCS Chairman and CEO Roger Linquist during the company's fourth-quarter conference call. "We will continue to ... push for more affordable, high-performance handsets."
Linquist's vision is to eventually offer 4G LTE handsets at a price between $99 and $149, with no or nominal subsidies, by the second half of 2012. Contrast that with the large subsidies that Verizon (NYSE: VZ), AT&T (NYSE: T), and Sprint Nextel (NYSE: S) must pay to sign up iPhone customers for two-year contracts. The more iPhones those first-tier carriers sell, the thinner their profit margins.
A fine quarter
MetroPCS is just coming off a fourth-quarter earnings triumph that saw its adjusted EBITDA rise 15% over the same period last year. It also took analysts by surprise, beating their earnings per share estimates of $0.16 and coming in at $0.25 a share. The company managed this by gaining 1.2 million net subscribers over the year, 15% more than it had at the end of 2010. This is the sixth consecutive year of over a million net added subscribers, and it now has a customer base of 9.35 million.
All this good news caused the company's share price to jump almost 17% since its earnings statement was released.
Obviously, the flat-rate, no-contract scheme is able to attract new subscribers, but can the company keep them? The fourth-quarter churn rate was 3.7%, down from the previous quarter's 4.5%. MetroPCS COO Thomas Keys said on the conference call that the reduction in churn was helped by a family plan promotion, those plans having a generally lower churn rate than non-family plans. Even though the average revenue per user, or ARPU, is usually a bit lower on family plans, the Q4 ARPU was up $0.76 over last year's fourth quarter. The lower family plan ARPU was offset by the increase in ARPU from smartphone customers.
But a perusal of the MetroPCS website does not show any family plans being offered. The takeaway here may be that the company decided that the higher ARPU from smartphone plans trumps the lower churn rate from family plans. If so, then first-quarter 2012 earnings should reflect a higher churn rate.
MetroPCS's secret sauce
COO Keys gave up a bit of what he called the company's "secret sauce" during the conference call. Part of the carrier's revenue-producing strategy is inherent in the month-to-month nature of its business model. "We see people 12 times a year," says Keys, and when they come into the store they are introduced to new handsets. "The one thing we know from our base is that handsets are fashion. ... People have a personality attached to a handset." And that desire to have the latest personality-enhancing device leads to more handset sales.
Furthermore, Keys says: "It helps us sell more phones because a lot of people come into the store to make payments with somebody else who's not presently a customer. That works on the viral nature of how we advertise, at how we move a product."
The competitive edge
MetroPCS sees much of its growth riding on its dream of cheaper LTE smartphones. First, its month-to-month fashion-conscious customers aren't going to hang around long if they can't get affordable smartphones from the company; they can just up and go someplace else without having to pay a penalty.
Also, the company has to start drawing subscribers away from the two-year-commitment carriers. Without phones comparable to those offered by the big boys -- LTE smartphones that MetroPCS can afford to sell -- the company would not be a viable alternative.
The spectrum question
With wireless carriers, the question of future success will always come down to how much spectrum it has (the answer is always "never enough") and how much spectrum it can get its hands on. Unfortunately for MetroPCS, recent events have taken a good bit of available spectrum off the table.
The LightSquared situation has dimmed hopes for the ability to use satellite communication frequencies as viable cellular spectrum. The Federal Communications Commission's recent finding that LightSquared's network will interfere with airline navigation devices has put paid to the notion of using that spectrum for ground communication uses.
And a huge cache of unused spectrum was taken off the table by Verizon's deal with several cable companies. Verizon paid Comcast (Nasdaq: CMCSA), Time Warner Cable, and Bright House Networks $3.6 billion and agreed to co-marketing agreements in order to get those frequencies. That deal, however, is not yet cast in concrete.
A company to watch
I have a good feeling about MetroPCS. It knows its customer base and what it needs to do to keep those customers coming back. It also seems to be building its network and gathering its resources in a truly thought-out manner. However, much is riding on MetroPCS's ability to get those inexpensive LTE phones in its stores by the beginning of 2012's third quarter. This is a company to watch.
The smartphone manufacturers that will eventually produce those capable but inexpensive LTE handsets for MetroPCS are dependent on the companies that create the heart-and-soul components of those phones: the chipset makers. To get an invaluable and free report on three companies enriched by the smartphone revolution, click here!
