Leap Wireless International Inc. (LEAP) declared weak financial results for the first quarter of 2012, missing the Zacks Consensus Estimates. In the previous quarter, the company’s customer churn rate was 3.3% compared with 3.1% in the prior-year quarter.

Even worse is management’s prediction that the second quarter churn rate will be much higher at 4.2% (at par with the second quarter of 2011).

The major concern for Leap Wireless is the growing competition in the U.S. low-cost prepaid wireless phone market. Traditionally, the company competes with MetroPCS Communications Inc. (PCS), Boost Mobile, the prepaid subsidiary of Sprint Nextel Corp. (S), and Tracfone, the prepaid subsidiary of America Movil S.A.B. (AMX).

Recently, the two largest nationwide carriers, Verizon Wireless and AT&T Inc. (T) entered the wireless prepaid phone market after the growth rate of lucrative postpaid wireless market slowed. Verizon Wireless is a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group plc. (VOD).

Quarterly total revenue was $825.6 million, up 5.9% year over year, but fell below the Zacks Consensus Estimate of $830 million. Service revenue was nearly $774 million, up 14.1% year over year. Equipment revenue was $51.6 million, down 49.1% year over year.

Net loss in the first quarter of 2012, was $98.4 million or a loss of $1.28 per share, compared with a net loss of $96.2 million or $1.26 per share in the prior-year quarter. Quarterly EPS of a loss of $1.28 was significantly higher than the Zacks Consensus Estimate of a loss of $1.02. Quarterly cash cost per user (primarily indicating carrier subsidy for new smartphone) was $24.55, up 6.8% year over year.

Quarterly gross margin was 38.3% compared with 40.3% in the prior-year quarter. In the first quarter of 2012, operating loss was $15.8 million compared with $18.1 million in the prior-year quarter.

Quarterly adjusted OIBDA was $130.5 million, up 16% year over year. In the reported quarter, adjusted OIBDA was 16.9% of the service revenue compared with 16.6% in the year-ago quarter.

During the first quarter of 2012, Leap Wireless generated $35.4 million of cash from operations compared with $72 million in the prior-year quarter. Free cash flow in the previous quarter was a negative $111 million compared with a negative $20.9 million in the year-ago quarter.

At the end of the first quarter of 2012, Leap Wireless had over $636.7 million of cash & marketable securities compared with $751.1 million at the end of 2011. Total debt at the end of the first quarter of 2012, was over $3,222.5 million compared with $3,220.7 million, at the end of 2011. At the end of the first quarter of 2012, debt-to-capitalization ratio was 0.86 compared with 0.84 at the end of 2011.

Subscriber Statistics

During the first quarter of 2012, Leap Wireless added around 258,060 net customers, down 21.9% year over year. In the last quarter, the company gained a total of 257,000 wireless voice customers and 1,000 wireless broadband subscribers. Total subscriber base at the end of the first quarter of 2012, was 6,192,073, an improvement of 5.9% year over year.

Voice churn rate was 3.1% compared with 2.8% in the year-ago quarter. ARPU in the reported quarter was $42.59, up 8.2% year over year. Quarterly cost per gross addition was $228, up 18.9% year over year.

Recommendation

We maintain our long-term Neutral recommendation on Leap Wireless. Currently, the company has a short-term Zacks #3 Rank (Hold).

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