Shares of MetroPCS lost more than a third of their value in morning trading on the New York Stock Exchange after its second-quarter earnings release today as investors questioned whether the company's smartphone strategy was paying off.
The company's stock plummeted 35 percent by 10:20 a.m. Eastern, dropping from yesterday's closing price of $16.18 to $10.44.
The marked decline in the company's share price came after analysts on the company's conference call expressed skepticism about the benefit of rolling out higher priced smartphones to MetroPCS' cost-sensitive consumers.
"The whole idea here is that the smartphone thing would be a big game changer – ARPU up, churn down – that those things are worth making incremental investments in equipment. It's tough looking that this quarter that that actually happened, to see the value that this smartphone evolution is actually having," one analyst said during the company's call.
Although MetroPCS saw sales rise 19 percent to $1.2 billion and profits rose 6 percent to $84 million, or 23 cents per share, the company missed analysts' estimates of profits of 28 cents per share on sales of $1.23 billion.
ARPU and churn were also worse than investors expected. The company posted ARPU of $40.49, missing analysts' consensus estimate of $40.66, and churn rose to 3.9 percent, higher than the 3.38 percent analysts expected.
The company added about 198,000 net new customers, 34 percent less than the 303,000 customers it added during the same period last year. However, MetroPCS managed to end the quarter with a 19 percent year-over-year increase in its overall customer base, which now stands at about 9 million.
Bernstein Research called the results "a death by a thousand cuts" in a research note today.
"Key revenue inputs just a little light, costs just a little high, and capital spending rising sharply to eat away cash, value, and ROIC. Strong gross additions suggest that MetroPCS is still the beneficiary of customer shifts in the "wireless barbell" (growth at the high end and low end, but an eroding middle). But one question looms above all others… will they profit from that growth?" Bernstein Research analyst Craig Moffett stated in the report, which he wrote with two other analysts.
MetroPCS also said it would have to spend more money on its network than it previously expected to address soaring traffic, raising its capital expenditures forecast to between $900 million and $1 billion from its prior estimate of $700 million to $900 million.
"The data demands on the Android phones is much higher on the data usage side," MetroPCS CEO Roger Linquist said in a call with analysts, adding that the company would be spending more money on microwave backhaul to increase the capacity of its LTE service. "The significant increase in usage is putting demands on our system."
Linquist also said the company was using optimization and compression technologies to address congestion on its CDMA network.
MetroPCS has increased its line of smartphones over the past several months, launching its first Android device last November, in an effort to make its handset lineup more competitive. However, the cost of marketing and subsidizing those handsets raised the company's acquisition costs, and its cost per gross addition rose $13.59 over last year to $177.88.