Leap Wireless Incurs Mounting Losses in Q2

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 |  About: AT&T Inc. (T)
by: Zacks Investment Research

Yesterday after market close, Leap Wireless International Inc. (LEAP) declared disappointing financial results for the second quarter of 2011, which fell below the Zacks Consensus Estimates. Consequently, in the after market trade in NASDAQ, stock price of Leap Wireless went down 59 cents (5.9%) to $9.45.

For the last couple of quarters, the company is restructuring its business models through which it is giving maximum emphasis on high ARPU (average revenue per user) generating smartphone customers shedding less profitable wireless broadband subscribers as these users generally place huge load on its network.

In the previous quarter, Leap Wireless gained some new smartphone customers but has lost quite a large number of wireless broadband subscribers, which has significantly affected both its top line and bottom line.

Quarterly total revenue was slightly above $760.5 million, up 14% year over year, but well below the Zacks Consensus Estimate of $778 million. Service revenue was $704.1 million, up 11.6% year over year. Equipment revenue was nearly $56.5 million, up 54.5% year over year.

Net loss, in the second quarter of 2011, was $65.2 million or a loss of 85 cents per share compared with a net loss of $18.2 million or 24 cents per share in the prior-year quarter. Quarterly EPS of a loss of 85 cents was significantly higher than the Zacks Consensus Estimate of a loss of 48 cents. Quarterly cash cost per user (primarily indicating carrier subsidy for new smartphone) was $21.83, up 24% year over year.

Quarterly gross margin was 43.8% compared with 52% in the prior-year quarter. In the second quarter of 2011, operating income was $12.3 million compared with $49.2 million in the prior-year quarter. Quarterly adjusted OIBDA was $160.7 million, down 6.6% year over year. In the reported quarter, adjusted OIBDA was 23% of the service revenue compared with 27% in the year-ago quarter.

During the first half of 2011, Leap Wireless generated $101.6 million of cash from operations compared with $204.6 million in the prior-year period. Free cash flow, in the reported period, was a negative $84.6 million compared with $9 million in the year-ago period.

At the end of the second quarter of 2011, Leap Wireless had $724 million of cash & marketable securities compared with $419.2 million at the end of fiscal 2010. Total debt, at the end of the reported quarter, was over $3,225.6 million compared with $2,840.6 million, at the end of fiscal 2010. At the end of the second quarter of 2011, debt-to-capitalization ratio was 0.81 compared with 0.76 at the end of fiscal 2010.

Subscriber Statistics

During the second quarter of 2011, Leap Wireless lost approximately 103,140 customers, down 7.7% year over year. In the last quarter, the company net gained 29,000 voice customers but net lost 132,000 wireless broadband subscribers. Total subscriber base, at the end of the second quarter of 2011, was 5,745,613, an improvement of 8.7% year over year.

Quarterly churn rate was 4.2% compared with 5% in the year-ago quarter. Voice churn rate was 3.6% compared with 4.6% in the year-ago quarter. Average revenue per user (ARPU) in the reported quarter, was $40.15, up 6.5% year over year. Quarterly cost per gross addition was $251, up 16.7% year over year.

Recommendation

A slow moving U.S. economy is taking toll on the low-cost wireless service providers. Most of the customers of these companies are from lower income group, who are very much susceptible to macro-economic volatility. Just a couple of days ago, MetroPCS Communications Inc. (PCS), the closest competitor of Leap Wireless also reported a highly disappointing quarter. We maintain our long-term Neutral recommendation on Leap Wireless. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.