3rd UPDATE: MetroPCS, Leap Both Bitten By Competition
August 06 2009 - 5:30PM
Dow Jones News
Discount carriers MetroPCS Communications Inc. (PCS) and Leap
Wireless International Inc. (LEAP) saw intense competition
hamstring their efforts to keep subscriber growth flowing in the
second quarter.
The pre-paid players are laboring to keep pace with rivals, who
are also aggressively muscling into the so-called pre-paid segment.
MetroPCS posted early Thursday a startlingly high turnover rate,
while Leap, reporting after the bell, took down its expectations
for subscriber growth this year. The disappointing results come at
a time when investors were looking for blowout numbers.
A bigger concern: more competition is on the way.
Leap shares fell 24.3% to $18.30 in after-hours trading.
MetroPCS's stock fell 29% to $8.99 in the regular session.
"It's not an overreaction," said Walter Piecyk, an analyst at
Pali Research, on MetroPCS's decline. "There's a lot of competition
coming. Even when it hasn't arrived, they can't put up good
numbers."
MetroPCS Chairman and Chief Executive Roger Linquist, however,
called the movement a knee-jerk reaction.
"Not only are we the best deal in town to our customers, but now
potentially to our investors," Linquist quipped in an interview
with Dow Jones Newswires.
Leap CEO Doug Hutcheson said in a separate interview that the
adjusted expectations reflected the "turmoil" in the industry.
MetroPCS and Leap both took steps in recent weeks to stay
competitive, including adding features to its cheaper plans. Both
are expanding into new markets and rely on a low-cost model to
profitably serve customers with cheaper plans and no service
contracts.
"We see this as a competitive market," Linquist said. "The best
strategy for a player like ourselves is to have a superior cost
structure."
The lack of a contract, however, has meant both companies have
been unable to keep their customers when the next cheaper plan
arrives around the corner. Boost Mobile, a unit of Sprint Nextel
Corp. (S), was the chief culprit this quarter. But Tracfone
Wireless's Straight Talk, as well as ramped up efforts by AT&T
Inc. (T) and Deutsche Telekom AG's (DT) T-Mobile USA are expected
to hit MetroPCS hard in the coming quarters.
"The competition is obviously already having an impact on
MetroPCS," Piecyk said.
MetroPCS reported income of $26.2 million, or 7 cents a share,
down from $50.5 million, or 14 cents a share, a year earlier.
Revenue rose 27% to $859.6 million.
Wall Street was looking for earnings of 14 cents and revenue of
$862 million.
MetroPCS added 205,585 customers in the period, well below Wall
Street's estimates. It ended the quarter with 6.3 million
customers.
The turnover rate jumped to 5.8% from 4.5%. Historically,
customer defections rise in the third quarter, said MetroPCS Chief
Financial Officer Braxton Carter, but he blamed the abnormally high
customer losses on aggressive promotions in the first quarter,
which led to little incentive for customers to stick around after
the first few months.
MetroPCS has since removed the promotions with the thinking that
customers who have to invest more early on in phones and service
plans are likely to stay.
Leap, meanwhile, posted a loss of $61.2 million, or 89 cents a
share, compared with year-earlier loss of $24.6 million, or 39
cents a share. Results were hurt by a one-time legal charge of 50
cents a share.
Revenue rose 25.8% to $597.4 million.
Wall Street was looking for a loss of 30 cents a share and
revenue of $636 million.
Leap added 202,767 net customers to its base of 4.5 million. It
also slightly took down its forecast for full-year additions, now
targeting 1.5 million. It previously said it expected to be higher
than that level.
-By Roger Cheng, Dow Jones Newswires; 212-416-2153;
roger.cheng@dowjones.com