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Leap Wireless International Inc. declared financial results for the third quarter of 2012, where the bottom line topped the Zacks Consensus Estimates but the top line marginally missed the same.

In the previous quarter, the company’s customer churn rate was 4.8% compared with 3.8% in the prior-year quarter. Consequently, in the after market trade on NASDAQ, the stock price of Leap wireless increased 10 cents (1.87%) to $5.44.

Quarterly total revenue came in at $774 million, up 1.4% year over year, but was slightly below the Zacks Consensus Estimate of $775 million. Service revenue was nearly $722 million, up 0.7% year over year. Equipment revenue was $52 million, up 13% year over year.

Net profit, in the third quarter of 2012, was $25 million or earnings per share of 32 cents compared to a net loss of $68.8 million or a loss of 90 cents per share in the prior-year quarter. Profit from the sale of spectrum has driven the bottom-line growth of the company. Quarterly earnings per share of 32 cents were higher than the Zacks Consensus Estimate of a loss of 47 cents. Quarterly cash cost per user (primarily indicating carrier subsidy for new smartphone) was $24.11, up 4.4% year over year.

Quarterly gross margin was 45.6% compared with 43.8% in the prior-year quarter. In the third quarter of 2012, operating income was $81.4 million compared to an operating loss of $16.1 million in the prior-year quarter. Quarterly adjusted OIBDA was $131.6 million, down 14.7% year over year. In the reported quarter, adjusted OIBDA was 18% of the service revenue compared with 22% in the year-ago quarter.

During the third quarter of 2012, Leap Wireless generated $98.6 million of cash from operations compared with $166.5 million in the prior-year quarter. Free cash flow, in the previous quarter, was a negative $7.7 million compared with $63.4 million in the year-ago quarter.

At the end of the third quarter of 2012, Leap Wireless had over $623 million of cash and marketable securities compared with $800 million at the end of the first nine months of 2012. Total debt, at the end of the third quarter of 2012, was over $3,204.4 million compared with $3,198.7 million, at the end of 2011. At the end of the third quarter of 2012, debt-to-capitalization ratio was 0.86 compared with 0.84 at the end of the third quarter of 2011.

Subscriber Statistics

During the third quarter of 2012, Leap Wireless lost around 268,984 net customers against a gain of 9,511 customers in the year-ago quarter. In the last quarter, the company lost a total of 239,000 wireless voice customers and 29,000 wireless broadband subscribers. Total subscriber base, at the end of the third quarter of 2012, was 5,633,819, exhibiting a 2.1% year-over-year drop. Voice churn rate was 4.7% compared with 3.4% in the year-ago quarter. ARPU in the reported quarter was $41.94, up 1.7% year over year. Quarterly cost per gross addition was $310, up 30.3% year over year.  

Recommendation

Leap Wireless offers quality service plans to its customers at attractive rates. Continuous expansion of smartphone portfolio (inclusive of new iPhone 5) coupled with popular muve music service offerings will act as tailwinds for the company going forward.

Despite such positive traits, we remain cautious about Leap Wireless due to huge competitive pressure from other carriers like AmericaMovil’s (AMX - Analyst Report), Tracfone and MetroPCS (PCS), which also offer such attractive plans. Furthermore, lower margin due to higher subsidy associated with the launch of iPhone 5 coupled with highly leveraged balance sheet will continue to act as headwinds for the company going forward.

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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