Virgin Mobile USA Inc. Q3 2008 Earnings Call Transcript

Virgin Mobile USA Inc. (VM)

Q3 2008 Earnings Call

November 10, 2008 5:00 pm ET

Executives

Erica Bolton - IR

Dan Schulman - CEO

John Feehan - CFO

Analysts

Rick Prentiss - Raymond James

Michael Nelson - Stanford Group

Nick Waldorf - Barclays Capital

Presentation

Operator

Good afternoon. At this time I would like to welcome everyone to the Virgin Mobile USA third quarter 2008 Earnings Call.

(Operator Instructions).

Ms. Bolton, you may begin your conference.

Erica Bolton

Thanks, Ellie. Hello everyone and welcome to Virgin Mobile USA's third quarter 2008 results conference call. Presenting our third quarter 2008 results on the call today will be Dan Schulman, Chief Executive Officer, and John Feehan, Chief Financial Officer, is also here on the call to answer questions, and we are joined by Steve Koffel, Vice President and Treasurer.

Our earnings release went out at 4:15 this afternoon and is available on our Investor website, investorrelations.virginmobileusa.com. Please note that this presentation of results will include forward-looking statements. These statements, which reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions about future events which may not prove to be accurate. We provide a detailed discussion of various risk factors in our SEC filings and I strongly encourage you to thoroughly review these filings. We plan to file our 10-Q for the third quarter by the end of the week and we encourage you to read this as well.

We will refer to several non-GAAP metrics in our call. Reconciliations of our non-GAAP measures to the appropriate GAAP measures for the third quarter and first nine months of 2008, can be found at the end of our earnings release and in SEC filings.

Lastly I would like to note that our results today include the impact of Helio, which closed on August 22nd, 2008. Included in these results we are reporting an adjusted earnings per share, which excludes the non-cash amortization of intangibles associated with the acquisition. All metrics, including adjusted EPS reflect 40 days of impact from Helio.

Today Dan will give you an update on the third quarter and first nine months 2008, operating results, as well as our outlook for the remainder of 2008, and then Dan and John can take any questions you may have.

I'd now like to turn the call over to Dan Schulman.

Dan Schulman

Thanks, Erica. Thanks everyone for joining us today. Our results for the third quarter were strong, both against our expectations and versus last year. The multiple initiatives we put into place earlier this year are now beginning to produce results. Our revenues are up year-over-year, with ARPU showing a strong 5% sequential improvement.

Gross additions exceeded our expectations, up 8% year-over-year, and even with the incremental acquisition costs associated with this over-performance, we produced very strong profitability. Adjusted EBITDA was up 61% year-over-year, and earnings per share EPS grew from a net loss of $0.14 per share on the third quarter 2007 to a gain of an adjusted $0.08 per share in Q3 2008.

We also substantially improved our capital structure. We paid down $50 million of our Term B loan with investments made by the Virgin Group and SK Telecom at $8.50 per share, an important shift of value from debt to equity. This debt repayment also significantly reduces our principal and interest payments, and will improve our cash flows on an ongoing basis.

Lastly, we increased the liquidity available to the business by $60 million, which combined with our debt repayment provides us a large degree of flexibility under our debt covenants. Despite a difficult and volatile economic environment, we have and we will continue to innovate.

We improved our voice and data plans, significantly expanded our retail footprint, launched new handsets, and closed the Helio acquisition; not only ahead of schedule, but also with a better cost structure than anticipated. All of these initiatives have contributed to our strong results and trends for the third quarter.

We had total gross customer additions of 821,000 for the quarter, which demonstrated healthy year-over-year growth. Our results are reported on a consolidated basis with Helio which closed on August 22, so Helio's results are included in ours for the last 40 days of the quarter. However, our gross add growth did not come as a result of the acquisition but came from our traditional prepaid and hybrid products. These offers improved from a 7% decline in gross additions year-over-year last quarter to 7% growth in Q3.

We ended the quarter with nearly 5.2 million customers which represent 6% growth on the base year-over-year. The growth includes the impact of Helio, which added 170,000 customers at the time of close. While our overall net customer additions reflect a loss of some 3,000 customers, our prepaid base saw an increase of several thousand net additions during the quarter.

The Helio base had a net negative impact of approximately 5,000 customers over this tough period due to our proactive efforts to rapidly reduce Helio's unprofitable distribution channels during the quarter.

We're also quite pleased to see an inflection point in ARPU. The rollout of our new voice plans, including the launch of our totally unlimited for $79.99 plan on July 1, has helped to grow our ARPU for the third quarter to $20.19, compared to $19.32 in Q2. While the integration of Helio had a positive impact on ARPU, we also saw a sequential increase to ARPU on a standalone basis.

As we anticipated, the implementation of our initiatives and the corresponding growth in the gross add percentage of our monthly plans is beginning to show an increased spend across our base. This growth in both gross adds and ARPU has been matched by marked benefits in operational efficiencies throughout the year.

While network costs are important component of this, in the third quarter, we also reduced our overall SG&A expenses by 10% year-over-year with, I might add, a customer base that is 6% larger tan last year. I'll detail some of our operational improvements in just a moment but first I want to emphasize that we were able to show these strong cost improvements even as we integrated Helio during the quarter.

I'm very pleased with the rapid progress we've made in rationalizing the Helio business and thanks to the hard work of many folks; the integration has gone better than planned. We've made rapid and comprehensive improvements to Helio's cost structure rationalizing their distribution channels and excluding certain duplicative transition costs this year, immediately making their customers LTV positive.

As we outlined when we announced the acquisition at the end of June, we have now closed all of Helio's retail stores and kiosks and have reduced Helio's headcount from 600 people to less than 190. We expect to implement further cost savings as we continue to integrate and in fact, as we have progressed with the integration of Helio, we have found just that.

Overall transition expenses at Helio have been much lower than planned. When we announced the deal, we said we expected to incur about $15 million in networking capital liabilities at closing. Which in fact, came in just over $8 million due to lower than expected closing costs.

Our expectation was that we would draw about $15 million on our revolver at the close of the deal when in fact, we drew just $10 million to repay Helio's debt with no further expenses incurred due to the rapid cost reductions agreed to and implemented by Helio and SKT pre-close

This allowed us to end the third quarter with $80 million in liquidity on our revolver and a greatly improved capital structure overall, with the pay down of our Term B principal during the quarter, we ended Q3 with net total debt of approximately $260 million, a reduction of approximately $40 million during the quarter and $60 million since year end.

Our Term B senior debt now stands at $203 million, which is just 1.8 times our LTM EBITDA used for our covenant test. Our overall debt to EBITDA ratio has dropped to 2.6 times, and I'll talk later about the significant cash flow benefits this reduction in debt has yielded.

With the financial markets, and particularly the credit markets, in crisis, these transactions prove to be very well timed, and we are very pleased that we have both the liquidity and free cash flow to invest in the growth of the business, with no need to access the capital markets in the foreseeable future.

The Helio acquisition brought us very clear and substantial financial benefits, but the strategic benefits of the transaction are of greater long-term importance. We've rapidly begun to offer advanced data services to our broader customer base, and we now have immediate access to the highly valuable post-paid market.

In mid-September we launched our first EV-DO phone, which included integrated Helio data applications, just 21 days after closing. This included Buddy Beacon, which is the first location-based service we've launched, as an integrated application on our phones. We are quite excited about the potential for the further launch of unique integrated data applications and have already seen some beginning lift in October from increased data usage.

We've been quite proactive over the past couple of quarters in deploying numerous initiatives and we're very pleased with the initial results we've produced. We began this year with negative growth in our gross adds and revenue due to a deteriorating retail and economic environment. Throughout the year, we've worked to first stabilize and then to steadily improve those trends.

We've brought gross ads from negative 10% year over year in Q1 to positive 8% in the third quarter. Our net service revenue growth rate has improved steadily throughout the year from the negative 6% reported in the first quarter, which stands in stark contrast to last year's performance.

Our results for adjusted EBITDA are even better, growing over 60% year-over-year to $27.5 million. This includes an FET tax refund, we anticipated receiving in Q4, but also includes substantial one-time incremental expenses associated with the outsourcing and transition of our IT infrastructure to IBM, as well as one-time Helio transition costs.

Adjusted EBITDA margin for third quarter 2008 expanded to 9% from 5.7% a year ago. Reflecting strong operational efficiencies implemented throughout the business. We've continued to reduce our costs in our traditional prepaid business and at Helio, and we are in the process identifying significant further cost improvements, which we will begin to implement in the near future.

Our post-paid customers are now LTV positive and we are comfortable with our post-paid gross add guidance as we go into 2009. Our core business has shown steady improvements since Q1 and we are under discussion with numerous retailers to profitably grow both our post-paid and prepaid products next year.

I'd like to now take a couple minutes to walk through some of our financial metrics in a bit more detail, and then we'll obviously have time to answer your questions. Overall, as I said, the business is showing steady improvement quarter after quarter. In the first nine months of the year, we produced 2.3 million gross customer additions, $967 million in total operating revenues, and $89 million in adjusted EBITDA, with an adjusted EBITDA margin of 9.8% during that period.

This strong performance helped us to produce $52.2 million in un-levered free cash flow in the first nine months of the year, which excludes cash paid for interest. This reflects a 7% improvement compared to a year ago. As we've continually said, cash flow is a key strength of our business model due to the extremely low capital requirements of our business versus typical network carriers. We look to continue this strong performance and growth.

Gross additions, as I mentioned in the third quarter were 821,000, up 8% year-over-year, a much stronger result than we guided, reflecting the success of our new service plans and our increased distribution during the quarter. While net additions on a consolidated basis were negative 3,300, on a stand-alone basis we were slightly positive for the quarter. Including the impact of Helio, we ended the quarter with nearly 5.2 million customers, up 6% from the third quarter 2007.

Churn came in at 5.5% for the quarter, which was slightly higher than our expectations. We believe this is a direct impact of the extraordinarily volatile market conditions on consumer confidence towards the end of the quarter. In fact, the last week of September saw marked decrease in our net additions far above our expectations. Conditions however in October have rebounded significantly and the month actually came in much better than we expected, but we remain cautious in what everyone agrees is an uncertain market environment.

We generated just over $900 million in net service revenues in the first nine months of the year and $967 million in total operating revenues. While net service revenues for the first nine months of the year saw a decline as forecasted, net service revenues for the third quarter increased to $305 million, our first year-over-year growth in 2008, due to the impact of the Helio acquisition and the strong adoption of our new service plans.

In a challenging year, we believe we have established a strong foundation and we continue to be cautiously optimistic about current customer trends. Our monthly hybrid plans are performing in line with our expectations, with gross customer additions from hybrid plans at 47% in the third quarter, resulting in 26% of our customer base participating in these offers at the end of the quarter. This trend is obviously encouraging and has contributed to the sequential improvement in ARPU trends we've seen this quarter.

Total operating revenues for the quarter were $323 million, an increase of 1% year-over-year. ARPU for the quarter was $20.19, which, while slighting down year-over-year, reflects a 5% sequential increase from Q2. This improvement reflects both the impact from Helio and the early fruits of the new service plans we've put into place with their strong adoption now beginning to be reflect in our base.

We've also seen strong demand of data services, especially our newly launched data service packs. Data was 18% of service revenues in the third quarter and grew 27% year-over-year and we are hopeful about the continued penetration of data services as we expand our product footprint in 2009.

As discussed, we've continued to drive cost efficiencies throughout the business with the third quarter results reflecting this discipline. Cost of service was $84.5 million for the third quarter, a decline of 5% from the third quarter of 2007. CCPU for the quarter was $12.62, compared to $12.81 in Q3 2007.

This decline is in spite of the continued growth of our higher usage hybrid base as well as higher upgrade cost associated with the continued success of our higher end handsets. These were offset by improved network cost as well as the benefits of continued operating efficiencies. For instance, our per unit customer care costs have come down by 14% year-over-year.

CPGA for the third quarter was approximately $106, which was well within our guided range and this includes about adds $2 impact from post-paid. This compares to a CPGA, or cost per gross acquisition of, $127 in the third quarter of 2007. The strong year-over-year improvement to CPGA during the quarter were the result of less marketing spend following our higher spend to launch our new service plans in the first half of the year, as well as our over performance in gross adds. Our CPGA is consistently one of the lowest in the industry, and we expect this to continue.

Selling, general, and administrative expenses for the third quarter were $105 million, a 10% decline from the $116 million in the third quarter of 2007 and reflects continuing sequential improvements in cost benefits, growing from a 3% year-over-year improvement last quarter.

The improvement in SG&A in Q3 compared to a year ago was result of lower marking spending which was offset by a $6.2 million restructuring charge related to the IBM transition. As we discussed last quarter, we expect to incur approximately $9 million in incremental costs associated with this transition, not contemplated in our original guidance for the year.

This one-time expense, however, is expected to yield approximately $50 million in IT operational savings over the next five years. We also incurred approximately $2 million in Q3 of what we expect will be $6 million of one-time transition expenses in connection with our Helio acquisition.

With improving revenue performance and increasing improvements on our cost side, we produced very strong adjusted EBITDA in the third quarter, even as we over performed on our customer gross additions by nearly 10%.

Adjusted EBITDA for the third quarter was $27.5 million, a 61% improvement compared to $17 million in the third quarter of 2007. There are a few dynamics here worth addressing. The third quarter benefited from an FET tax refund, which was planned for and expected in the fourth quarter. This was more than offset by the approximately $8 million of IBM and Helio transition one-time costs, and the incremental costs associated with our gross add over-performance. This refund timing means that Q4 adjusted EBITDA will be lighter than expected while Q3 far over-performed. All together, we expect to perform within our full-year guidance for adjusted EBITDA, excluding incremental Helio and IBM transition costs, which we estimate at about $15 million.

Net income for the quarter was $4.1 million, a fully diluted $0.07 per share, up substantially compared to a net loss of $7.4 million, or a pro forma loss of $0.14 per share for the third quarter 2007. Our adjusted EPS, which excludes the non-cash amortization of intangibles associated with Helio, and is a more relevant comparison, was $0.08 per share. Net income for the first nine months of 2008 was $12.4 million, or $0.23 per diluted share compared to $18.9 million or $0.28 per diluted share on a pro forma basis.

While this quarter's performance demonstrates very strong growth, its actually even stronger than it would appear, as it's important to note that included in the current quarter's net income are negative items that did not impact last year's results. This includes approximately $4.4 million in minority interest, which negatively impacted net income in Q3 '08, and without this incremental item, our earnings per share would have been substantially higher on an apples-to-apples basis.

The first nine months of 2008 had $6.4 million in minority interest, as well as an additional $6.4 million expense for payment of our tax receivable agreements to Sprint and to Virgin Group. As we were not taxpayers last year, and we are effectively taxpayers going forward through our tax receivable agreements, this is incremental expense that must be considered in any year-over-year comparison. Excluding these incremental expenses, our net income for the first nine months of 2008 would be more than doubled.

Capital expenditures for the first nine months of the year were just $12.6 million or 1.4% of net service revenues, compared to the 15% to 20% for the rest of the industry. Our consistently low level of capital expenditure is a hallmark of the NVNO business model in this ongoing stable cost efficiency of the business means we expect to continue to produce strong free cash flow as we increase our scale. Our EBITDA to free cash flow conversion is far and away the best in the industry.

Net interest expense was $6.9 million in Q3 2008, compared to $14.3 million in the third quarter of 2007 and $7.9 million in the second quarter of 2008. I want to reemphasize the strong benefits we have seen to our capital structure from the acquisition and its related transactions. With the close of the Helio deal, we immediately reduced our net debt by $40 million, thereby substantially decreasing our quarterly debt service.

We also have the added benefit of substantially increasing our covenant head room. With the additional increase to our revolver at the end of the third quarter, we had $80 million of available liquidity to invest in the growth of our business, and both our Term B and revolving debt facilities are at very attractive rates.

While the current overall market volatility and the resulting equity valuations are frustrating, they do not in any way impact our ability to operate our business. While no one predicted the extent of the market downturn in the past few months, the Helio transaction was very well timed and has provided us ample liquidity and covenant room to make the right decisions for the growth of our business.

During the first nine months of the year, we generated un-levered free cash flow of $52.2 million, which is stronger than our initial expectation, due in part to lower than expected cash needs at Helio at the time of deal close. Un-levered free cash flow reflects 7% improvement over the first nine months of 2007, and reinforces our confidence in achieving our original guidance of $55 million to $65 million for the year for the standalone business, which excludes Helio.

Additionally, should we see incremental opportunities for investment and profitable growth, as we approach the holiday season, we will certainly take them. In the first half of the year, we invested in the future growth of the business, as we launched our new value proposition and shifted additional handsets to support our expanding distribution.

In the third quarter, we began to see the pay off of these initiatives in our financial results. As I said earlier, the core business in the third quarter performed ahead of our expectations and the Helio integration is going as planned. We're very pleased with the trajectory we are seeing in the business due to the initiatives we've put in place and in spite of a very challenging business environment.

In terms of our guidance, we do believe it's appropriate and prudent to be conservative regarding our estimates for the holiday season as a result of very uncertain retail environment. The third quarter was the first full quarter in which our new service plans and distribution were fully deployed.

We expect these plans and incremental retail presence to continue to provide a positive impact to the business. We believe fourth quarter net adds will be expected and be in the range of approximately 60,000 to 100,000 with gross adds roughly flat to Q4, 2007, and churn expected to end the year within previous annual guidance of mid 5%.

Net service revenues for the fourth quarter are expected to show annual growth of 6% to 9% in the range of $310 million to $320 million. Full year standalone EBITDA is expected to remain between $105 million and $130 million, excluding the approximately $15 million of one-time costs associated with the Helio transaction and the IBM IT outsourcing transition. Neither of these costs were anticipated in our original 2008 guidance. Including these items, we expect to generate $95 million to $100 million of adjusted EBITDA given our guidance of flat gross adds.

Excluding the transition costs I just outlined, earnings per share for the year are expected to be in the range of $0.21 to $0.26 which is comparable to our previous earnings per share guidance of $0.19 to $0.38. Including the transition costs we expect adjusted earnings per share to be in the range of $0.03 to $0.07.

I'd like to now conclude my remarks by observing that while the upcoming holiday season holds a large degree of uncertainty due to the economy, we do remain cautiously confident in the initiatives we've put into place and the opportunities that lie ahead for our business. The most recent quarter's results show good continued positive momentum. We trust that continued steady improvement in our operating performance will eventually have a positive effect on our shareholder value.

Now, before I turn it the over to your questions, I do want to say a few words about my colleague, John Feehan, who is sitting here with me on his final earnings call with Virgin Mobile. John has contributed a tremendous amount to this business over the past seven years and is not only a valued and trusted business partner but a good friend, and all of us at Virgin Mobile wish him well in his future endeavors.

I know John wanted to say a few quick words to you as well, so let me turn it over to him before we get to your questions.

John Feehan

Thank you, Dan. I appreciate that. My experience here at Virgin Mobile has been a great one. I came to Virgin Mobile at the beginning, as I was the first finance person on staff, and have truly enjoyed all of the challenges and opportunities the job has presented to me.

This is a great company, one that I believe in and while I'm excited about the future and relish the opportunity to roll up my sleeves and build the business again, it is also with a heavy heart that I leave a great dynamic company with a truly passionate group of people. I want to thank everyone on the call for their interest in Virgin Mobile and their support of the company during our first year in the public markets, and I want to express my confidence in the future opportunity for this business.

Dan Schulman

Thanks, John. John's last day will be at the end of this week on November 15. Quickly, let me give you an update on our status in our search for John's replacement. We're making quite good progress on that with a number of people and a number of candidates expressing high interest in the job.

The recruiting process is nearly complete, and as I mentioned, we have a number of very strong candidates under consideration. We anticipate that we will announce John's replacement before the end of the year.

And with that, let me turn the call over to Ellie, so we can answer your questions.

Ellie?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Rick Prentiss of Raymond James.

Rick Prentiss - Raymond James

Yes, good evening.

Dan Schulman

Hey, Rick.

John Feehan

Hey Rick.

Rick Prentiss - Raymond James

Hey. Couple questions for you; first, I know it is still very early in the holiday season, although we seem to be hearing Christmas songs already. How due feel about one, the supply of handsets for the Thanksgiving-Christmas time? Do you think you have got an adequate lineup to handle that? Then last year obviously there were some surprises in the Black Friday timeframe and competitor offerings and competitor website sales, et cetera. what do you see happening this year in the fourth quarter that is baked into your guidance?

Dan Schulman

Well, Rick we had a good October, but as you know, really the fourth quarter is all about the last six weeks of the year, and so we tried to be prudent and conservative in our guidance for the fourth quarter with flat gross adds. I am actually quite pleased with the lineup of the handsets we have. It is probably our strongest lineup that we have ever had out in the marketplace with a good range of handsets, high, middle, and low-end handsets. I think all of those are important as we go into this holiday season.

We are particularly well positioned as we go into the Thanksgiving and Black Friday weekend, better than we were last year. We are working and have worked quite hard with our retail partners to assure that. My gut tells me that, although, it will be an aggressive holiday season, I think we will see reasonably rational pricing in terms of handset pricing. By the way, that does not mean it is not going to be competitive and aggressive, but I think those very low-end price points that we saw last year I think, people who have those realize that they really did not provide LTV positive customers.

We also have tremendously improved our cost structure, not only our operating side, but on our handset side as well. So we are ready to compete aggressively for LTV positive customers. I would have to say, going into the season, on one hand, I am quite pleased with where we are from a positioning perspective, from a lineup, from advertising circulars, that thing. On the other hand, you have got obviously a very uncertain retail environment out there. So, when you put the two of them together, our best view is to be relatively prudent in terms of our guidance and to guide to flat growth over 2007 for the quarter.

Rick Prentiss - Raymond James

Okay. Then on your '09 you mentioned about how you are positioning for growth in '09. What gives you the comfort and visibility on that? Then as you think about getting positioning, is it modest growth? Single digit? What growth do you think could be produced with the money you have spent preparing the product and the plans?

Dan Schulman

Well, I think, Rick, what we have seen is good, continued positive trends, since the first quarter. Whether you look at gross adds, or you look at our revenues, you have seen a relatively nice trend line from the beginning of the year until now. A lot of that comes as a result of the new plans that we put into place, the expansion of our hybrid offers, as a percentage of our gross adds. They went up from 38% of our gross adds in Q2 to 47% of our gross adds in Q3, that obviously is helpful from an ARPU perspective. From a revenue perspective, from an LTV perspective.

As our gross adds have now started to pick up quite nicely in the third quarter, and I think due in large part to the economic environment, making our value proposition quite attractive, now even more attractive than it might have been before, that our retail partners are quite supportive of us as we look ahead. We have had quite a number of interesting conversations with them in terms of both our prepaid and our post paid business going forward.

We are going to give 2009 guidance as we announce our fourth quarter calls. We are not going to give that right now. I want to see where we jump off. I want to see continuation of these trend lines before we give guidance in 2009, but we felt like we have put into place a reasonably strong foundation, as we end the year and go into next year.

Rick Prentiss - Raymond James

Thanks.

Dan Schulman

Thank you, Rick.

Operator

Your next question comes from the line of Michael Nelson of Stanford Group.

Michael Nelson - Stanford Group

Hi. Thanks a lot for taking the call. A couple of questions that are really related; the first is, if you could further elaborate on the competitive landscape and the impact from the slowing economy, and then can you also elaborate on what your go-to market strategy is? How do you balance your message for the various service plans that range from the low end per minute usage plans to the higher end unlimited post-paid plans and how do you relay that message to the market? Thanks a lot.

Dan Schulman

Mike, thanks for your question. Look, I think from the economic environment, the competitive environment out there, from an economic perspective, as I mentioned to Rick, I think there are two sides to that picture. One is we are seeing our value proposition gain traction as a good deal for people who are feeling the effects of the economy and who are budget constrained. In fact, we just did a survey of our base of customers and about three-quarters of them said that they were feeling the impact of the economy and on the flip side, it made them much more appreciative of Virgin Mobile's value proposition. So, 51% of our base said that they appreciated our value proposition even more in these unsettled economic times than they did before, while only 3% said that they appreciated less.

So you basically have 97% of our base either the same or a lot more appreciating the value proposition that we have and we saw a good continued momentum in our gross adds in both September and October. So I think the environment is a difficult one for consumers and retailers, but I do believe that our proposition in a difficult environment is an attractive one.

In terms of our go-to market strategy, really our proposition is all about value and flexibility. Those are really the two key words for our proposition and what we really try and do is allow customers to pick and chose high value providing offers from those that can only afford to pay by the minute to those that can afford to pay $79.99 for an unlimited offer, which is the best value in the marketplace for an unlimited offer even including postpaid.

So really, I think what is happening is that our retailers are pointing customers to our full suite of our value proposition and basically saying, look, if you are looking for good value, and you are looking for flexibility, you can go with Virgin Mobile. If you want to spend more money one month and less another month, they have that product line, and we do not penalize customers for shifting from one product to another. So our go-to market strategy again is value and flexibility and we intend to keep with that go-to market strategy even when we launch our postpaid services.

Michael Nelson - Stanford Group

Thanks. Good luck.

Dan Schulman

Yes. Thanks, Mike.

Operator

(Operator Instructions). Your next question comes from the line of Nick Waldorf of Barclays Capital.

Nick Waldorf - Barclays Capital

Hi. Thanks for taking the question. You have done a good job of increasing the hybrid gross adds in percent of the total adds. I was wondering if could you comment on whether you expected to the stay at those levels, what you have done to increase that gross add mix.

Then another question unrelated but, what specific steps have you taken to keep the Helio base intact and grow it as you made this transition? Because I know sometimes those can be disruptive for customers? Thanks.

Dan Schulman

Thanks for the questions, Nick. In terms of the hybrid gross adds, we have continued to see that at the high 40% level and we expect that to continue. The truth of the matter is that we really rolled out our new value suite of offers beginning towards the second quarter, and it really took awhile for retailers and customers to understand the full extent of our offer suite and the value that our monthly plans offer.

Basically each and every month we have seen that percentage of customers who are attracted to our monthly plans increase, and so, my estimation and belief is that the hybrid gross adds continue to stay in the high 40% range for us for the foreseeable future and as a result of that I think you can expect if that is the case, that the percent of customers on our higher ARPU customers in our traditional base will continue to grow.

Therefore, lending credence to increasing ARPU, they have better LTVs for us, etcetera. So, I am reasonably policed with the success of the hybrid plans and that is I think is a direct result of the value that they do offer which is quite compelling, but too really having our retail partners now understand that value and be able to communicate it to the customers as well as our thousands of customer care reps as well being able to explain that.

In terms of the Helio base, which was, I believe, your second question, our first quarter of business on Helio was to get the cost structure under control. Last year Helio lost a couple of hundred million dollars, and I think there was a lot of concern from a number of people who understood the strategic rationale for us coming together but we are concerned about taking a quite significant money losing proposition and merging it into a public company.

So we really focused quite hard on assuring that the customers and the cost structure was right coming in and you see from our EBITDA, which is a combined EBITDA, that we now have made the Helio base LTV positive.

Part of what that involves is shutting down Helio's unprofitable retail stores and kiosks and also shutting down distribution channels that had unreasonable expectations of compensation structure, as well as in very low credit scoring, which led to just high churn and bad debt. So as we have rationalized that obviously our gross adds have come down during that period, but as expected. And, now what our goal is, as we go into next year, is to be able to grow our post-paid and our pre-paid bases profitably as we go forward, and we are in position now to go do that.

Nick Waldorf - Barclays Capital

All right, thanks.

Dan Schulman

Thank you.

Operator

(Operator Instructions). I am showing no further questions.

Erica Bolton

Okay, thanks, Ellie. Thanks, everyone, for joining the call today. If you have any follow-up questions, you can call me directly at 908-607-4108. Thanks a lot.

Operator

This concludes today's conference. You may now disconnect.

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