Leap Misses on Higher Client Churn

Leap Wireless International Inc. ( LEAP - Analyst Report ) declared disappointing financial results for the second quarter of 2012, missing the Zacks Consensus Estimates. In the previous quarter, the company’s customer churn rate was 4.4% compared with 4.2% in the prior-year quarter. Consequently, in the after market trade on NASDAQ, the stock price of Leap wireless dropped $0.60 (10.87%) to $4.92 per share.

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 the likes of 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, viz., Verizon Wireless and AT&T Inc. ( T - Analyst Report ) entered the wireless prepaid phone market after the growth rate of lucrative postpaid wireless market subdued. Verizon Wireless is a joint venture between Verizon Communications Inc. ( VZ - Analyst Report ) and Vodafone Group plc. ( VOD - Analyst Report ) .

Quarterly total revenue was $786.8 million, up 3.5% year over year, but well below the Zacks Consensus Estimate of $839 million. Service revenue was nearly $751.3 million, up 6.7% year over year. Equipment revenue was $35.5 million, down 37.1% year over year.

Net loss, in the second quarter of 2012, was $41.6 million or a loss of $0.54 per share compared with $65.2 million or $0.85 per share in the prior-year quarter. Quarterly earnings per share of a loss of $0.54 were higher than the Zacks Consensus Estimate of a loss of $0.52. Quarterly cash cost per user (primarily indicating carrier subsidy for new smartphone) was $22.91, up 4.9% year over year.

Quarterly gross margin was 45.6% compared with 43.8% in the prior-year quarter. In the second quarter of 2012, operating loss was $31.6 million compared with $12.3 million in the prior-year quarter. Quarterly adjusted OIBDA was $190.8 million, up 18.8% year over year. In the reported quarter, adjusted OIBDA was 25.4% of the service revenue compared with 22.8% in the year-ago quarter.

During the second quarter of 2012, Leap Wireless generated $50.6 million of cash from operations compared with $101.6 million in the prior-year quarter. Free cash flow, in the previous quarter, was a negative $214 million compared with a negative $84.5 million in the year-ago quarter.

At the end of the second quarter of 2012, Leap Wireless had over $524.4 million of cash & marketable securities against $751.1 million at the end of 2011. Total debt, at the reported quarter end was over $3,202.4 million compared with $3,220.7 million, at the end of 2011. At the end of the second quarter of 2012, debt-to-capitalization ratio was 0.87 compared with 0.84 at the end of 2011.

Subscriber Statistics

During the second quarter of 2012, Leap Wireless lost around 289,270 net customers, down 180.5% year over year. In the last quarter, the company lost approximately 205,000 wireless voice customers and 84,000 wireless broadband subscribers. Total subscriber base, at the end of the second quarter of 2012, was 5,902,803, an improvement of 2.7% year over year. Voice churn rate was 4.0% compared with 3.6% in the year-ago quarter. ARPU in the reported quarter was $41.64, up 3.7% year over year. Quarterly cost per gross addition was $296, up 17.9% 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).