Leap Wireless Disappoints in 3Q - Analyst Blog

Yesterday, after market close, Leap Wireless International Inc. (LEAP) declared third quarter of 2010 financial results that fell below our expectations. The company suffered a net subscriber loss in the reported quarter as customer churn rate increased. In synergy with this poor performance, share price of Leap Wireless plunged 52 cents (4.51%) to $11 in the after-market trade on NASDAQ.

Quarterly total revenue was $602.7 million, up 0.5% year over year but well below the Zacks Consensus Estimate of $624 million. Service revenue was $565.2 million, up 4.4% year over year. Equipment revenue was nearly $37.5 million, down 35.6% year over year.

Net loss in the quarter was $536.3 million or $7.06 per share compared to a net loss of $64.6 million or 85 cents per share in the prior-year quarter. However, net loss in the quarter includes a $477.3 million of non-cash charges related to goodwill impairment and write-off of certain previously capitalized network expansion costs. Excluding these items, quarterly adjusted net loss of 98 cents per share was significantly higher than the Zacks Consensus Estimate of a loss of 51 cents per share.

Quarterly gross margin was 50.2% compared to 51.6% in the prior-year quarter. In the reported quarter, operating loss was $478.1 million compared to an operating income of $1.4 million in the prior-year quarter. Quarterly adjusted OIBDA was $123.2 million, up 1.4% year over year. In the reported quarter, adjusted OIBDA was 22% of the service revenue, which remained the same year over year.

During the first nine months of 2010, Leap Wireless generated $326.3 million of cash from operations compared to $194.8 million in the prior-year period. Capital expenditure in the same period was $299 million compared to $577.4 million in the year-ago period.

At the end of the quarter, Leap Wireless had $568.6 million of cash & marketable securities compared to $564.2 million at the end of fiscal 2009. Total debt at the end of the reported quarter was over $2,739 million compared to $2,743.3 million at the end of fiscal 2009. At the end of the quarter, debt-to-capitalization ratio was 0.71 compared to 0.62 at the end of fiscal 2009.

Subscriber Statistics

During the quarter under review, Leap Wireless suffered 200,000 net subscriber loss. Out of this, 172,000 were voice customers and 28,000 were broadband customers. Total subscriber base at the end of the reported quarter was approximately 5.1 million, an improvement of 9.3% year over year.

Quarterly churn rate was 5.5% compared to 5.4% in the year-ago quarter. Voice churn rate was 5.2% compared to 5.4% in the prior-year quarter. Broadband churn rate was 7.6% compared to 5.6% in the year-ago quarter. ARPU was $37.02, down 6.5% year over year. Quarterly cost per gross addition was $219 compared to $208 in the prior-year quarter. 

We maintain our long-term Neutral recommendation for Leap Wireless. Currently it is a short-term Zacks #3 Rank (Hold) stock.