MetroPCS: Increased churn a moot point

Regional CDMA wireless carrier MetroPCS Communications (NYSE: PCS) added 684,000 subscribers in the first quarter of the year, its highest quarterly net adds in history. Yet despite finishing the quarter with a total 6.1 million subs, the company saw its churn increase 1% year-over-year to 5% for the quarter. The prepaid market in general is subject to extremely high churn rates, but Roger Linquist, chief executive officer of MetroPCS, said the increase is not a concern for the company.

“If we can grow as we have – and you’ve seen our growth in the first quarter has been quite exceptional – if we can maintain growth and maintain profitability, then it’s the confluence of all these variables that really matter,” Linquist said on today’s earnings call. “In our original core markets, once again we had 48%-plus EBIDTA margins. If we can make that kind of profitability and grow this quickly, then the [churn] issue is really moot.”

Chief Operating Officer Tom Keys estimated that 1.7% of Metro’s churn was false churn, referring to those customers who upgrade their handset to a new phone with a new phone number, giving the false appearance they’ve left the carrier. In Metro’s case, it was partially created by consumers buying handsets from indirect dealers that don’t keep and track their information if the consumer gets a new phone number, Linquist said.  

Metro’s adjusted level of normalized churn has actually been remarkably consistent over the last four to five years, according to Chief Financial Officer Braxton Carter. Churn may have increased this quarter, but he maintained that it is actually in the 3% range when normalized. Customer retention is clearly an important measure for the carrier, but it is focusing on the all-in – the cost of acquisition amortized over the life of the customer, he said.

“Churn is never a positive thing, but if you can minimize your acquisition cost, you can minimize the overall impact on the profitability of the company… Even with a higher level of churn you will have with this 3% normalized range, we benchmark very, very well against the national players when you’re looking at the all-in cost of churn.”

If the first quarter is any indication, Metro may be justified in not being overly concerned with churn. Coming off the fourth quarter when it added a record 520,000 subscribers, the company continued the growth into the first quarter and has added 1.6 million subs in the last 12 months. The low-cost carrier continued to benefit from consumers cutting their landline cord or looking for a more value from cheaper, flat-rate unlimited or prepaid plans in the down economy.

Using its advanced wireless service (AWS) spectrum acquired at auction in 2006 or purchased from NextWave Wireless, the company also expanded into several new markets in the quarter, including New York City and Boston in February. Coupled with its Philadelphia launch last summer, MetroPCS has more than doubled the size of its footprint in the last year. And the momentum is continuing as it went live in Western Michigan yesterday, offering complete coverage to all of Michigan’s major population centers. Last month, the company also introduced unlimited calling to select locations in Mexico for $3 per month.

The prepaid market in general has seen growing success as the economy continues to falter, and competition is heating up as a result. Sprint (NYSE:S) offset otherwise massive subscriber losses with its value arm, Boost Mobile, with most new subs signing up for Boost’s $50 unlimited plan. Although its customer growth was cut in half, T-Mobile (NSYE:DT), too, benefited the most from customers signing up for prepaid plans.

Linquist said the host of new entrants into the unlimited prepaid space has been positive in driving awareness for the industry segment. He believes the unlimited segment of wireless will grow faster than the overall industry and that Metro will be positioned to capitalize on the growth. After capturing a 25% share of gross additions among all carriers, he said, companies like Boost Mobile haven’t yet had an impact on Metro in its markets. “Unlimited is the only thing we do, and we do it well,” Linquist said.

Fellow regional provider Leap Wireless (NSDAQ: LEAP), which reports its first-quarter earnings later today, is expected to report similarly strong growth.