MetroPCS (PCS.N) saw a sharp increase in customer defections in the third quarter as heavy use of bandwith-hungry smartphones hurt its network performance, sending its shares down almost 9 percent in morning trade.
The wireless provider to cost-conscious consumers had bet that the sale of costly smartphones would improve customer loyalty but the devices have had the opposite effect.
Its customer cancellation rate, also known as churn, rose to 4.5 percent from 3.8 percent a year-earlier as increased data use by smartphone users put pressure on its network.
On top of this, the heavy expenses that came with smartphone promotions hurt MetroPCS' profit, which missed Wall Street expectations for the quarter.
Even though MetroPCS has upgraded its network with a so-called fourth-generation (4G) high-speed data technology known as LTE, its smartphone customers are still using its slower second-generation (2G) service because LTE phones are still too expensive for MetroPCS customers.
A smartphone on a 2G network is like having a Ferrari in heavy New York traffic. It just doesn't work the way it's supposed to, said Credit Suisse analyst Jonathan Chaplin.
Executives told analysts on a conference call that the company does not expect to have more affordable LTE phones until the second half of 2012.
The MetroPCS report contrasted with that of rival Leap Wireless (LEAP.O) which said the day before that smartphones helped it retain customers.
On top of the network problems MetroPCS cited economic pressure on its customers for the weak performance.
But Chaplin questioned how big an impact economic uncertainty could be having on MetroPCS numbers since it was the only U.S. operator to make this complaint this quarter.
We haven't seen it anywhere else, he said.
MetroPCS net income for the quarter fell to $69.3 million, or 19 cents per share, from $77.2 million, or 22 cents, a year ago and missed Wall Street expectations for 23 cents per share, according to Thomson Reuters I/B/E/S.
Mizuho analyst Michael Nelson said the results were disappointing. In particular he cited a profit margin of 28.9 percent which missed his estimate of 31.4 percent based on earnings before interest, tax, depreciation and amortization as a percentage of service revenue.
Revenue rose 18 percent to $1.2 billion and compared with analyst expectations for $1.22 billion.
MetroPCS said it added 69,000 subscribers in the quarter compared with the average expectation of 68,000 subscriber additions from five analysts contacted by Reuters.
MetroPCS sells smartphones based on Google Inc (GOOG.O) Android software.
MetroPCS shares were down 73 cents, or almost 9 percent, at $7.77 in morning trade on New York Stock Exchange. Meanwhile Leap shares rose 74 cents, or 11 percent, to $7.69 on Nasdaq.