The Cracks Form In Prepaid & No-Contract Cellular (LEAP, PCS, S, T, VZ)

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MetroPCS Communications, Inc. (NYSE: PCS) is being treated rather poorly after its earnings report missed expectations.  Leap Wireless International Inc. (NASDAQ: LEAP) is being treated even worse.   Competition from Sprint Nextel Corporation (NYSE: S) and T-Mobile USA in the cheap and prepaid phone market is hurting both companies, but the real fear is the reach-down effect which may take place from AT&T Inc. (NYSE: T) and from Verizon Communications Inc. (NYSE: VZ).  Sprint also decided to cancel an acquisition of MetroPCS earlier this year.

MetroPCS added fewer subscribers and phone subsidies increased its operating costs. Net income fell by more than half to $21 million and that translated to a mere $0.06 in earnings per share, but revenue did rise 7% to about $1.27 billion for the quarter.  We had a Thomson Reuters consensus target of $0.17 EPS and $1.29 billion in sales.  That is a poor showing on earnings even if revenue was only a miss worth a footnote. The subscriber additions of just over 131,000 gave MetroPCS 9.4 million subscribers at the end of the quarter, but that was only about half of the add-on subscribers expected.  MetroPCS offers no iPhone.  Can you imagine a no-contract or prepaid iPhone?  Maybe overseas, but not so much here in America.

Leap Wireless posted a wider loss than expected at -$1.28 EPS and its revenue was only up 6% to $825.6 million. Thomson Reuters had estimates of -$0.98 EPS and about $831.7 million in sales. Leap added about 258,000 subscribers in the quarter rather than about 280,000 to 290,000 expected.  Leap is facing higher churn and a slower gain in the average revenue per user.

Leap Wireless shares are down a whopping 23% at $5.90 against a 52-week range of $5.50 to $17.66; MetroPCS shares are down almost 12% at $7.00 at a new 52-week low as the prior 52-week range was $7.51 to $18.79.

JON C. OGG

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