Mobile phone service provider MetroPCS Communications Inc handily beat analysts' estimates for second-quarter earnings due to lower costs from acquiring new customers, sending its shares up sharply Thursday.
At least one analyst speculated that MetroPCS could now be a more likely target for a stock-based acquisition by Sprint Nextel, whose shares rose 17 percent on Thursday after it posted stronger-than-expected results.
Because MetroPCS held back on smartphone promotions in the quarter, analysts said this helped its costs. Operators often pay costly subsidies for phones to boost subscriber growth.
Barclays analyst James Ratcliffe said MetroPCS's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $477 million exceeded the $345 million he expected.
"The quarter showed the kind of adjusted EBITDA the business can deliver in a quarter they're not focused on subscriber acquisitions or upgrades," Ratcliffe said.
The company's second-quarter net income rose to $148.8 million, or 41 cents per share, from $84.3 million, or 23 cents per share, a year ago. Analysts, on average, were looking for 21 cents, according to Thomson Reuters I/B/E/S.
Because of the increase in Sprint's share price on Thursday, to $4.04, Evercore analyst Jonathan Schildkraut said the bigger company may be in a better position than before to buy a smaller rival like MetroPCS.
Reuters reported on Feb. 24 that talks between the two had failed earlier this year when Sprint shares were at $2.47.
"At these levels we think Sprint can start to think about using its stock as an acquisition currency," Schildkraut said, adding that it would make most sense for Sprint to buy a company that uses the same CDMA network technology it uses.
"You'd imagine they'd look at other CDMA based operators such as MetroPCS and Leap Wireless," he said.
However, Schildkraut, who follows Sprint but not MetroPCS, questioned whether a MetroPCS deal would deliver enough wireless airwaves and customers to be worth the distraction.
Sprint Chief Executive Dan Hesse declined direct comment on a question about the company's prospects for mergers and acquisitions during a conference call with analysts on Thursday.
But he said Sprint, which expects to be engaged in a massive network modernization project until mid 2013, would want to avoid "anything between now and the middle of 2013 that would ... stretch the resources" of its network organization.
"So we wouldn't want to undertake anything that would complicate that process ... between now and mid-2013," he said.
Sprint reported higher-than-expected operating earnings on Thursday as it managed to reduce costs faster than expected.
MetroPCS revenue for the second quarter rose 6 percent to $1.28 billion, above analyst expectations of $1.26 billion.
Also on Thursday MetroPCS said it expects a network upgrade for high-speed wireless services to be almost complete by the end of the current quarter.
At the end of the second quarter, the company said, about 8 percent of its subscribers were using its so-called fourth generation high-speed service, which is based on a technology known as Long Term Evolution.
The company's service revenue rose 4 percent to $1.16 billion for the quarter. Quarterly average revenue per user was $40.62, up 13 cents from a year earlier.
MetroPCS posted a net subscriber loss of 186,000 in the second quarter. Analysts had been expecting its subscriber numbers to fall by 94,000 to 174,000, according to four analysts contacted by Reuters.
The company said it expects to boost subscriber growth with 4G LTE For All, a line of affordable 4G LTE smartphones it plans to launch in the second half of 2012.
"During the fourth quarter, we expect our 4G LTE For All initiative to lead to a return to subscriber growth," Chief Executive Roger Linquist said in a statement.
Churn -- or customer defection rate -- fell by half a percentage point to 3.4 percent for the quarter.
MetroPCS shares rose to $8.56 on New York Stock Exchange on Thursday. The shares had lost about 44 percent of their value since the February report on the failed Sprint deal.
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