Yesterday, after market close, Leap Wireless International Inc. (LEAP) declared severe net losses its financial results for the fourth quarter of 2010. Service revenue increased significantly due to the introduction of the new smartphones based on Google Inc.’s (GOOG) Android software. However, Leap Wireless had to spend much more than our expectation in order to attract new customers that, in turn, jeopardized its bottom line. In synergy with this poor performance, share price of Leap Wireless plunged 36 cents (2.74%) to $12.80 in the after market trade on NASDAQ.

Quarterly total revenue was slightly above $708 million, up 13% year over year, significantly surpassing the Zacks Consensus Estimate of $537 million. Service revenue was $636.6 million, up 10.9% year over year. Equipment revenue was nearly $71.5 million, up 36.5% year over year.

Net loss, in the fourth quarter of 2010, was $249.4 million or a loss of $3.28 per share compared with a net loss of $61.9 million or 82 cents per share in the prior-year quarter. However, excluding $136.9 million of special charges, quarterly adjusted net loss was $1.48 per share, significantly higher than the Zacks Consensus Estimate of a loss of $1.06 per share. Quarterly cash costs per user (primarily indicating carriersubsidy for new smartphone) were $21.77, up 26.9% year over year.

Quarterly gross margin was 41.7% compared with 48.5% in the prior-year quarter. In the fourth quarter of 2010, operating loss was $27 million compared with an operating income of $4.5 million in the prior-year quarter. Quarterly adjusted OIBDA was $107 million, down 17.3% year over year. In the reported quarter, adjusted OIBDA was 16.8% of the service revenue compared with 22.5% in the year-ago quarter.

During fiscal 2010, Leap Wireless generated $312.3 million of cash from operations compared with $284.3 million in fiscal 2009. Capital expenditure, in fiscal 2010, was $398.9 million compared with $699.5 million in fiscal 2009.

At the end of fiscal 2010, Leap Wireless had $419.2 million of cash & marketable securities compared with $564.2 million at the end of fiscal 2009. Total debt, at the end of fiscal 2010, was over $2,840.6 million compared with $2,743.3 million at the end of fiscal 2009. At the end of fiscal 2010, debt-to-capitalization ratio was 0.76 compared with 0.62 at the end of fiscal 2009.

Subscriber Statistics

During the fourth quarter of 2010, Leap Wireless gained approximately 430,000 customers including 107,000 net customer additions and 323,000 former customers of Pocket Communications with which Leap Wireless formed a joint venture in last October. The company’s net customer additions for the fourth quarter include 155,000 voice net customer additions and a net loss of 48,000 broadband customers. Total subscriber base, at the end of fiscal 2010 was 5,518,179, an improvement of 11.4% year over year.

Quarterly churn rate was 4% compared with 4.7% in the year-ago quarter. Voice churn rate was 3.6%. Average revenue per user (ARPU), in the reported quarter, was $38.14, down 1.5% year over year. Quarterly cost per gross addition was $209, up 14.9% year over year.  

Recommendation

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

 
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