Pre-paid wireless provider MetroPCS Communications, Inc. (NYSE: PCS) reported earnings and revenues this morning that did not live up to expectations, pushing the shares down -28% in the first half-hour of trading. Analysts expected EPS of $0.28 on revenues of $1.23 billion, and MetroPCS posted EPS of $0.23 on revenues of $1.21 billion. If the punishment appears not to fit the crime, that’s because there are likely to be more issues ahead for the company that are not going to be solved easily.
MetroPCS’s proposed merger with competitor Leap Wireless International Inc. (NASDAQ: LEAP), first mentioned in 2007, is once more being discussed as MetroPCS expands its board of directors to include two nominees put forward by private equity firm Pentwater Capital Management LP, which owns about 4.8% of MetroPCS’s stock. Such a deal would have made more sense four years ago, but Leap’s share price has fallen by nearly -88%, from around $95/share to around $11.50 this morning.
MetroPCS has also seen its costs rise much more steeply than its profits. Its cost per gross addition reached $177.88 in the second quarter, up about 8%, and its average revenue per user rose to $40.49, up just over 1.6%. That is not a recipe for success.
And the company is not getting any help from Verizon Communications Inc. (NYSE: VZ), AT&T (NYSE: T), Apple Inc (NASDAQ: AAPL), or even Sprint Nextel Corp. (NYSE: S). The rising demand for smartphones has forced MetroPCS to offer, and promote, its own offerings which may be turning away the very customers that the company has depended on for so long. This is not a fight that MetroPCS can win, with AT&T selling the iPhone 3GS for just $49 with a two-year service contract.
Even if the company could get an iPhone deal and continue to build out its 4G network, the indications are pretty strong that Apple’s iPhone 5 is not going to support 4G. And other 4G phones are still priced at about $200 with a two-year contract and at least double without. Again, that is pretty steep for MetroPCS’s customer base. Why the company is promoting 4G so heavily, especially when it is not producing results, is a mystery.
The strength of AT&T and Verizon Wireless threaten the very existence of Sprint and does nothing to help either MetroPCS or Leap. A merger of MetroPCS and Leap is likely only to delay their inevitable demise. Both AT&T and Verizon Wireless offer pre-paid phones, and though the pre-paid service is not their preferred business, the two giants could pretty easily eliminate MetroPCS and Leap.
America Movil, S.A.B. de C.V. (NYSE: AMX), which has now offered to pay 6.5 billion for the 40.4% share of Telefonos de Mexico (Telmex) that it doesn’t already own, is may be interested in picking up the customers of either MetroPCS or Leap, or both. Leap would likely be the Mexican giant’s first choice because it would be much cheaper than MetroPCS. Increasing regulatory pressure in Mexico is hurting America Movil’s margins, and the company may decide to turn north for growth.
At mid-morning, MetroPCS shares are off almost -31%, at $11.17, within a 52-week range of $8.25-$18.79. Leap Wireless shares are off nearly -16%, at $10.97, in a 52-week range of $9.51-$17.66. Leap reports earnings tomorrow, and expectations are low – an EPS loss of -$0.50 on revenue of about $780 million, which is substantially higher than a year ago, but reflects the higher costs Leap is facing as well.
Paul Ausick
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