Leap Misses on Higher Client Churn

Leap Wireless International Inc. ( LEAP - Analyst Report ) 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. ( ) , Boost Mobile, the prepaid subsidiary of Sprint Nextel Corp. ( S - Analyst Report ) , and Tracfone, the prepaid subsidiary of America Movil S.A.B. ( AMX - Analyst Report ) .

Recently, the two largest nationwide carriers, Verizon Wireless and AT&T Inc. ( T - Analyst Report ) 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 - Analyst Report ) and Vodafone Group plc. ( VOD - Analyst Report ) .

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).