First quarters are supposed to be the best time of year for this country's prepaid mobile operators. But it didn't turn out that way for the two largest pay-as-you-go carriers.
MetroPCS (NYSE: PCS), coming off a strong fourth quarter, saw its earnings per share drop 76% in the next three months. Why? Because it focused on moving its existing and new customers onto its 4G LTE network by subsidizing the cost of the pricier LTE smartphones. As MetroPCS Chairman and CEO Roger Linquist said in the company's press release: "[The] higher promotional handset cost during the quarter resulted in higher costs. ... Adjusted EBITDA margins were pressured significantly."
This sobering result has forced MetroPCS to put off promoting its LTE phones and network until, as Linquist said during the company's quarterly conference call, "[W]e can mainstream our LTE For All initiatives with affordable handsets later this year." Until then, he said, "[W]e intend to focus on operating margins and free cash flow over subscriber growth."
While MetroPCS at least was still able to post a profit, Leap Wireless (Nasdaq: LEAP) deepened its losses to $1.28 a share -- worse even than analysts' estimates of $0.98 a share. As it did for MetroPCS, Leap's disappointing quarter also came on the heels of a much better Q1 2011.
Both companies also saw an abrupt drop in net additions to their subscriber bases. MetroPCS gained only 131,000 new customers, a 31% decrease in new adds from the previous quarter -- in spite of its promotional activity. Leap's customer growth fell by 22%.
The prepaid industry segment has always appealed to the customer seeking the least expensive wireless service, but with the nation's economy still sputtering along, customers may be seeking even cheaper alternatives.
But how low can one go? MetroPCS began offering a $25 promotional plan last month that featured unlimited talk and text. The phones offered with this plan cost from $39 to $59 and are feature phones, not smartphones.
Another threat
As if the prepaid folks didn't have enough on their plates, they now has to contend with competition from the deeper-pocketed major national carriers. Verizon (NYSE: VZ) has just launched a new prepaid smartphone plan: $80 a month with unlimited voice, texting, and 1 gig of data. The company's previous prepaid plan cost $95 a month with the same features but without a data plan. The 3G phone -- the Samsung Illusion -- will cost $170.
And there's trouble, too, with a capital "T," from AT&T's (NYSE: T) new prepaid plan. A customer can buy an LG Thrive 3G phone for $150 and, with a month-to-month payment of $75, get the same features of Verizon's plan.
A somewhat comparable MetroPCS plan would cost $50 a month for unlimited voice, text, and data -- a caveat being that the first 2.5 gigs of data will be at 4G LTE speeds, and after that the speed is reduced. Three 4G LTE phones are offered between $200 and $300.
Leap's Cricket brand offers its smartphone plan for $55 a month with unlimited voice and text, and 1 gig of data at 3G speed. Phones cost between $100 and $230.
It's the network, stupid
Though the prepaid carriers do offer cheaper plans than the major carriers' prepaid plans, if a potential customer takes into account the size of the larger carriers' networks -- especially their LTE networks -- then once those prices come down even further, the prepaids might find themselves being squeezed rather hard.
In the dog-eat-dog fight for spectrum, Verizon and AT&T could use their prepaid strategies as a way of forcing the smaller carriers into getting out of the business and selling their spectrum licenses. I think keeping an eye on what AT&T and Verizon do in terms of lowering their prepaid plans even more will be a baromoter as to how well MetroPCS and Leap will do in the coming quarters.
Whether MetroPCS and Leap can pull themselves back up or not, there will always be a need for mobile devices -- and the parts that make them work. The Motley Fool has released a free report called "The Next Trillion-Dollar Revolution. Don't miss out on this report. Get it today!
