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Leap Wireless Remains Neutral

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Leap Wireless International Inc. posted disappointing financial results for the second quarter of 2012, missing the Zacks Consensus Estimates. The results were significantly hurt by higher customer churn rate. Leap Wireless has restructured its business model through which it is emphasizing on higher ARPU generating smartphone subscribers, while shedding less profitable wireless broadband subscribers as these users generally place huge load on its network.

We believe the decision of management to offer iPhone of Apple Inc. (AAPL - Free Report) is a 50-50 winning opportunity for the company as it has to pay huge contract money to Apple. Sequential fall in ARPU was a major concern since the company has to opt for promotional activities to contain subscriber churn. Meanwhile, the stock price plummeted nearly 47% in the last year providing a cushion for further downslide. We believe Leap Wireless is currently fairly valued and thus reaffirm our long-term Neutral recommendation.

On August 28, Leap Wireless disposed 23 PCS and 13 AWS spectrum to Verizon Communications Inc. (VZ - Free Report) for about $120 million. Additionally, the company also acquired 12 MHz of 700 MHz A block spectrum in Chicago from Verizon. In last April, Leap Wireless entered into a spectrum sharing partnership with T-Mobile USA. The new partnership will expand the two carrier’s 4G LTE network capability.

Leap Wireless will get expanded broadband spectrum in Phoenix and Texas and T-Mobile will get additional spectrum in Alabama, Illinois, Missouri, Minnesota, and Wisconsin. Leap Wireless will offer LTE services in two-thirds of its overall network foothold in the next 2-3 years.  

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