UPDATE: MetroPCS 2Q Profit Falls 48% On Higher Turnover

MetroPCS Communications Inc. (PCS) posted a 48% decline in second-quarter earnings as intense competition hamstrung the discount carrier's ability to hang on to its customers.

The Dallas company barely kept pace with rivals, who are also aggressively muscling into the so-called prepaid segment. That led to a startlingly high turnover rate and disappointing subscriber growth in a period where investors had expected blowout numbers. A bigger concern: more competition is on the way.

MetroPCS's stock fell 29% to $8.98.

"It's not an overreaction," said Walter Piecyk, an analyst at Pali Research, on the share decline. "There's a lot of competition coming. Even when it hasn't arrived they can't put up good numbers."

MetroPCS Chairman and Chief Executive Roger Linquist, however, called the movement a knee-jerk reaction.

"Not only are we the best deal in town to our customers, but now potentially to our investors," Linquist quipped.

MetroPCS has taken steps to stay competitive, including adding features to its cheaper plans and offering an unlimited international calling plan. The company, which is expanding into the key New York and Boston markets, relies on its low-cost model to profitably serve customers with cheaper plans and no service contracts.

"We see this as a competitive market," Linquist said. "The best strategy for a player like ourselves is to have a superior cost structure."

The lack of a contract, however, has meant the company is unable to keep its customers when the next cheaper plan arrives around the corner. Boost Mobile, a unit of Sprint Nextel Corp. (S), was the chief culprit this quarter. But Tracfone Wireless's Straight Talk, as well as ramped up efforts by AT&T Inc. (T) and Deutsche Telekom AG's (DT) T-Mobile USA are expected to hit MetroPCS hard in the coming quarters.

"The competition is obviously already having an impact on MetroPCS," Piecyk said.

MetroPCS reported income of $26.2 million, or 7 cents a share, down from $50.5 million, or 14 cents a share, from a year earlier.

Revenue rose 27% to $859.6 million.

Wall Street was looking for earnings of 14 cents and revenue of $862 million.

MetroPCS added 205,585 customers in the period, well below Wall Street's estimates. It ended the quarter with 6.3 million customers.

The turnover rate jumped to 5.8% from 4.5%. Historically, customer defections rise in the third quarter, said Chief Financial Officer Braxton Carter, but he blamed the abnormally high customer losses on aggressive promotions in the first quarter, which led to little incentive for customers to stick around after the first few months.

The company has since removed the promotion with the thinking that customers who have to invest more early on in phones and service plans are likely to stay.

The average revenue per user fell 3.6% to $40.52, although analysts noted that the company factored in some promotional activity, artificially boosting the figure, which most peg at closer to $39.

Linquist, however, said the adjustment was a matter of normal accounting rules.

"That's unfortunate," he said regarding the confusion over the numbers. "We should straighten it out."

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; [e-mail]