We reaffirm our long-term Neutral recommendation on
Leap Wireless International Inc.
). The company posted disappointing financial results for the first
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.
Recently, management has taken a major strategic decision, which
will make Leap Wireless the first pre-paid wireless operator in the
U.S. to offer iPhone. However, we believe this decision is a 50-50
winning opportunity for the company as it has to pay huge contract
). Meanwhile, the stock price plummeted 70% in the last year
providing a cushion for further downslide.
We believe Leap Wireless seriously needs to revamp its business
model. In the first quarter of 2012, the company performed
miserably in several operating metrics. Customer churn rate was
3.3% compared with 3.1% in the prior-year quarter. Net customer
addition was actually down 21.9% year over year. Quarterly gross
margin came in at 38.3% compared with 40.3% in the prior-year
quarter. The decline in gross margin was due to a rise in service
cost and subsidized handset expense, which is expected to be a
matter of concern, going forward.
Quarterly cash cost per user (primarily indicating carrier
subsidy for new smartphone) was $24.55, up 6.8% year over year,
reflecting further increase in customer acquisition and
retention cost. Quarterly cost per gross addition was $228,
up 18.9% year over year.
APPLE INC (AAPL): Free Stock Analysis Report
LEAP WIRELESS (LEAP): Free Stock Analysis
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