Still Neutral on Leap Wireless - Analyst Blog

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We reaffirm our long-term Neutral recommendation on Leap Wireless International Inc. ( LEAP ). 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 money to Apple Inc. ( AAPL ). 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.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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Referenced Stocks: AAPL , LEAP

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