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LEAP Still in Neutral Lane

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We reaffirm our long-term Neutral recommendation on Leap Wireless International Inc. following its mixed third-quarter of 2012 results. On the back of spectrum sale, the company topped the Zacks Consensus Estimate but the top line missed the same.

Leap Wireless remains one of the low cost prepaid wireless service providers in the U.S, which offers attractive service plans to its customers. The company is continuously expanding its smartphone portfolio inclusive of Apple Inc’.s (AAPL - Free Report) new iPhone 5. Moreover, increased competitions from other low cost carriers have forced the company to upgrade its subscriber base by deploying 4G LTE service across major cities in the U.S.

Leap Wireless has launched an array of attractive service plans for its customers. The company made its popular Muve Music service available to all Android-based smartphones at no extra cost and without any contract terms, hence helping the company to improve its subscriber base. In addition, the company also launched a new handset financing program for the customers, which will facilitate them to buy high-end smartphones in installments.

Despite these positive traits, Leap Wireless continues to suffer from huge subscriber loss. During the reported quarter, the company lost around 268,984 customers. Moreover, the sale of iPhone devices without any subsidy will further suppress the company’s margins in the forthcoming quarters.

As Leap Wireless is suffering from huge spectrum crunch, so it is planning to deploy 4G LTE networks in two-thirds of its overall network foothold in the next 2-3 years. However, highly leveraged balance sheet may act as a strong impediment for the company to support such expansive business drive going forward.

Currently, the company has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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