2nd UPDATE: MetroPCS 1Q Profit Rises 11% On Subscriber Growth

MetroPCS Communications Inc.'s (PCS) first-quarter profit rose 11%, fueled by subscriber growth in several key new markets.

MetroPCS, which offers flat-rate pre-paid pricing with regional restrictions, sits in the sweet spot in the industry. More customers are trading down to cheaper plans and avoiding contracts.

"There's a kind of sea change in consumers looking for greater value," Chief Executive Roger Linquist told Dow Jones Newswires.

But the growth has attracted a lot of players, intensifying the competition in this segment.

That's reflected in MetroPCS's lower average revenue per user, suggesting it had to cut prices and offer promotions to stay in contention. Cost cuts, however, helped it to bank higher profits.

"Profitability impressive given subscriber gains," Goldman Sachs analyst Scott Malat wrote in a note.

MetroPCS shares, however, fell 6.3% to $17.28. The stock has rallied more than 75% over the past three months, and was up 11% over the past week.

"It's profit-taking," said Romeo Reyes, an analyst at Jefferies & Co. "Overall, the numbers were great."

MetroPCS posted earnings of $44 million, or 12 cents a share, up from $39.5 million, or 11 cents a share, a year earlier. There were 5.2% more shares outstanding in the most recent period. The latest results included about $382,000 in write-downs related to hedging; the prior year had $13.9 million.

Revenue increased 20% to $795.3 million on a 29% jump in services revenue and 34% drop in equipment revenue.

Analysts polled by Thomson Reuters expected earnings of 9 cents a share on revenue of $818 million.

Contributing to results were launches in New York and Boston in the period. MetroPCS blanketed billboards and airwaves in those cities with advertisements ahead of its rollout.

"We painted the town purple," Linquist said. "The rollout is going well."

The company said last month that subscribership rose 51% from a year earlier, marking a third-consecutive quarter of growth and another record increase. Net subscriber additions rose to 684,000.

Average revenue per user fell 5%, the company said Thursday. It also said in April that churn, or turnover rate, rose one percentage point to 5%.

If there is a concern, it would be on turnover. The rate of customer defections is expected to rise in the second and third quarters as a result of seasonal trends, Reyes said.

MetroPCS backed its estimate for full-year consolidated adjusted earnings before interest, taxes, depreciation and amortization of $900 million to $1.1 billion, as well as subscriber additions of 1.4 million to 1.7 million.

Threatening its forecast are aggressive offers from rival pre-paid players. Sprint Nextel Corp.'s (S) Boost service offers a flat-rate, all-inclusive $50 plan, and added 764,000 new customers in the first quarter.

Virgin Mobile USA Inc. (VM) has also cut its plan to $50 a month, while Leap Wireless International Inc. (LEAP) competes also in some overlapping territories. National player T-Mobile USA, owned by Deutsche Telekom AG (DT), has also delved into the pre-paid segment.

MetroPCS CEO Linquist, however, said he didn't see much of an impact in areas where MetroPCS operates. He added that Boost still has questions about its economics, since its parent has a much higher cost structure than MetroPCS.

There was little progress on the much-speculated upon merger between MetroPCS and Leap, with Linquist saying the two haven't met on that subject.

"It's kind of in our rearview mirrror," he said.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; [e-mail]

(Kerry Grace contributed to this report.)

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