Yesterday after market close, Leap Wireless International Inc. (LEAP) declared financial results for the third quarter of 2011, which fell below the Zacks Consensus Estimates. However, contrary to the consensus opinion, the company reported net subscriber addition in the previous quarter. Management remains hopeful regarding its business strategy for future subscriber growth. Consequently, in the after market trade in NASDAQ, stock price of Leap Wireless went up 78 cents (11.22%) to $7.73.
For the last three quarters, the company is restructuring its business models through which it is giving maximum emphasis to the high ARPU (average revenue per user) generating smartphone customers, while shedding less profitable wireless broadband subscribers as these users generally place huge load on its network.
Quarterly total revenue was $763.3 million, up 19.6% year over year and slightly beating the Zacks Consensus Estimate of $762 million. Service revenue was $717.3 million, up 19.4% year over year. Equipment revenue was nearly $46 million, up 22.7% year over year.
Net loss, in the third quarter of 2011, was $68.8 million or a loss of 90 cents per share compared with a net loss of $536.3 million or $7.06 per share in the prior-year quarter. Quarterly EPS of a loss of 90 cents was significantly higher than the Zacks Consensus Estimate of a loss of 80 cents. Quarterly cash cost per user (primarily indicating carrier subsidy for new smartphone) was $23.09, up 15.7% year over year. Hence, the company’s bottom-line was negatively affected.
Quarterly gross margin was 41.5% compared with 47.4% in the prior-year quarter. In the third quarter of 2011, operating loss was $16.1 million compared with $478.1 million in the prior-year quarter. Quarterly adjusted OIBDA was $154.3 million, up 25.2% year over year. In the third quarter, adjusted OIBDA was 21.5% of the service revenue compared with 20.5% in the year-ago quarter.
During the first nine months of 2011, Leap Wireless generated $268.1 million of cash from operations compared with $326.3 million in the prior-year period. Free cash flow, in the reported period, was a negative $21.2 million compared with $27.3 million in the year-ago period.
At the end of the third quarter of 2011, Leap Wireless had over $800 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 $3,227.4 million compared with $2,840.6 million, at the end of fiscal 2010. At the end of the third quarter of 2011, debt-to-capitalization ratio was 0.82 compared with 0.76 at the end of fiscal 2010.
Subscriber Statistics
During the third quarter of 2011, Leap Wireless added around 9,511 net customers compared with a net loss of 199,949 customers in the prior-year quarter. In the last quarter, the company gained a total of 73,000 wireless voice customers but lost 64,000 wireless broadband subscribers. Total subscriber base, at the end of the third quarter of 2011, was 5,755,124, an improvement of 13.1% year over year.
Quarterly consolidated churn rate was 3.8% compared with 5.5% in the year-ago quarter. Voice churn rate was 3.4% compared with 5.2% in the year-ago quarter. ARPU in the reported quarter was $41.25, up 11.1% year over year. Quarterly cost per gross addition was $238, up 8.7% year over year.
Recommendation
Leap Wireless is operating in an intensely competitive domestic low-cost prepaid wireless market. Its major competitors are 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). We maintain our long-term Neutral recommendation on Leap Wireless. Currently, the company has a short-term Zacks #3 Rank (Hold).
