1Q09 EARNINGS: Virgin Mobile USA

The Last of the MVNO-hicans

When all you’re doing is reselling someone else’s service, you need to come up with a good shtick.  For MVNO Virgin Mobile USA (NYSE:VM), the strategy has always been to build and leverage upon a strong, recognizable brand that appeals to the youth market.  VM, which resells Sprint Nextel (NYSE:S) service, unabashedly targets the under-35 crowd with what had historically been a prepaid, voice-only service.  With the acquisition of Helio, LLC in August 2008 (The Deal Advisor, 07/08, p.1), VM added postpay and data services to its portfolio.

VM has its share of challenges going forward.  The company survived the initial shake-out of the MVNO market, but the long-term viability of the business model has yet to be determined.  Subscriber and revenue growth over the last 15 months has been virtually nonexistent, even after factoring in the 170k subs picked up in the Helio acquisition.  And its uncertain whether a revised deal between VM and Sprint, inked concurrent with the signing of the Helio deal, has resulted in any tangible bottom line benefit.  Two years removed from its $350m IPO, VM is nothing more than treading water due to the razor-thin margins associated with the MVNO model and the absence of meaningful revenue or subscriber growth.

Fortunately for VM, its primary backers – Virgin Group, SK Telecom, EarthLink (Nasdaq:ELNK) and Sprint – have some pretty deep pockets.  And with roughly 10% of its total subscribers coming through VM, Sprint, more than anyone else, has a strong strategic interest in keeping VM afloat.  But both Virgin Group and SK Telecom already ponied up for an additional $25m of preferred equity last year, SK Telecom and ELNK had collectively invested more than $560m in Helio before it was folded into VM, and ELNK has indicated it has no interest in making further investments in the effort.  Unless VM can start to gain some meaningful traction on both the top and bottom line, we suspect the only ones left hanging on will be Sprint…and a bunch of unfortunate public shareholders.

1Q09 EARNINGS: Leap Wireless International

Competitive Concerns Weigh on Share Price

Ever aggressive Leap Wireless International (Nasdaq:LEAP) has been launching in larger markets this year, bringing its unlimited usage plans to Chicago, Philadelphia and more recently, Washington D.C. and Baltimore.  Following its foray into the nation’s capital, LEAP’s Cricket-branded service is available to 91m POPs nationwide, an increase of 36m covered POPs since early 2008. 

But the aggressive expansion is costly.  The company’s debt stood at $2.575b as of March 31, or about 7.25x TTM cash flow.  In May, LEAP issued 7m new shares of common stock—no small feat in this market—and it also placed $1.1b in new senior secured notes.  Net proceeds from the share offering of $264m were earmarked for general corporate purposes, “which could include the expansion and improvement of its network footprint, acquisitions of additional spectrum or complementary businesses and, over the longer term, the deployment of next-generation network technology.”  Net proceeds from the note offering (approximately $1.042b, after discounts, commissions and offering expenses) were slated to repay all amounts outstanding under LEAP’s senior secured credit agreement. 

More recently, concerns that new unlimited prepaid offerings from TracFone Wireless and Sprint Nextel’s (NYSE:S) Boost could cut into LEAP’s growth has pushed its share price lower and led to several analyst downgrades.  And perennial rumors that LEAP may be an acquisition target—most recently by AT&T (NYSE:T)—continue to swirl.  But given recent whispers about the DOJ’s scrutiny of AT&T’s pending acquisition of Centennial Communications (Nasdaq:CYCL), we’d be surprised to see another major announcement in the near future.

1Q09 EARNINGS: iPCS

A David and Goliath Tale

iPCS, Inc. (Nasdaq:IPCS) has stubbornly refused to budge on its stance that Uncle Sprint Nextel (NYSE:S) broke its promise to affiliates when it acquired Nextel in 2005, and the courts have agreed—leading to millions in settlement dollars that helped IPCS to its first profitable quarter ever in 1Q09.  Of course, the costs of the litigation were also substantial.  The company actually only netted about $600k in the first quarter after the Sprint settlement yielded $4.3m, but IPCS said that legal expenses totaled $3.7m.  In 2008, IPCS’ litigation costs exceeded $13m.

IPCS had argued that the Nextel buy violated the affiliates’ exclusivity rights because Sprint was offering the iDEN service within affiliate territories.  Earlier this month Sprint announced that its former Nextel operations within IPCS territory will be sold (The Deal Advisor, 07/09, p.18).  Similarly, IPCS has entered into litigation regarding Sprint’s joint venture with Clearwire (Nasdaq:CLWR), which intends to deploy 4G wireless services using WiMax technology.  Presently, the companies have a truce in place whereby CLWR has agreed not to commercially launch within IPCS territory.  Ultimately, the Nextel precedent likely means that Sprint/CLWR will not be allowed to deploy within the IPCS service area.

Operationally, IPCS has been performing relatively steadily, all things considered.  But we have to wonder whether it has shot itself in the foot with all its contentious legal maneuverings.  In the long-run, the company’s shareholders have surely anticipated a sale to Sprint—that’s what most other affiliates did years ago.  But given its reliance upon Sprint and the latter’s operating difficulties in recent quarters, IPCS may have to go it alone for another few years.  The company has more than $475m in long-term debt—more than 6x TTM cash flow—and while ceo Tim Yager noted that it doesn’t have any significant debt maturities coming until 2013, IPCS has been unable to improve its cash flow margin beyond teenage levels for the past three years.

1Q09 EARNINGS: T-Mobile

Top Consumer Ratings, But Economy Nevertheless Hitting Results

T-Mobile is pushing hard to deploy its 3G network and maximize its benefit from the wireless data boom, and the fourth-ranked U.S. carrier has been number 1 in customer service (as ranked by JD Power and Associates) for seven out of the past eight quarters—but the difficult economy is taking its toll on both its top line and on profitability. 

Despite the inclusion of the former SunCom’s operations in its first quarter, which led to higher gross adds than in the year prior period, the Deutsche Telekom (NYSE:DT) subsidiary added less than half as many net new subscribers in 1Q09 compared with a year ago, due largely to an increase in churn.  Even more significant, the difficult economy is having a serious impact on the customer mix—T-Mobile said that just 39% of net new customers were contract customers in the first quarter, down from more than 80% in the year ago period.  Prepaid customers tend to have dramatically lower ARPU and higher churn rates than contract customers.

ARPU for both contract and prepaid customers has also fallen as consumers tighten their belts, and, combined with lower roaming revenue, T-Mobile weathered a decline in its top line despite the growth in its subscriber base.

The recession won’t last forever, though, and the company is focused on investing for the future.  It is aggressively spending on its 3G network—capex has averaged about $1b per quarter for the past year—and T-Mobile said that it already has 1.5m 3G capable converged devices on its network.  Additionally, data revenue now accounts for nearly 20% of total blended ARPU; about $9.40 per customer per month.  T-Mobile’s 3G network now reaches 107m POPs of a total 288m covered POPs.

1Q09 EARNINGS: Centennial Communications

Deal Delay Derails Stock Price

Despite solid operating results reported for fiscal 2008 and 1Q09, investors in Centennial Communications (Nasdaq:CYCL) were recently sucker-punched following news that its previously announced sale to AT&T (NYSE:T) is now expected to close in the third quarter, rather than by mid-year.  The stock drifted in the low $8 per share range on the news, but concerns that the Department of Justice may object to the combined entities’ market concentration in Puerto Rico left investors worrying that the deal may fall apart, and pushed the stock price below $7 briefly on July 14.  An upgrade from “underperform” to “outperform” from Raymond James—and an optimistic overall mood on Wall Street—helped the stock recover to the high $7 range July 15, but until final approvals are in, the stock may trade well below its $8.50 deal price.  Shareholders approved the $2.8b sale on February 24, with 99% of votes cast in favor.

Growth in data usage is helping keep CYCL’s top line growing.  In the latest fiscal quarter (ended February 28), the company reported a 7% increase in U.S. retail revenue and a 3% increase in roaming revenue, despite a 16% decrease in the roaming rate for voice usage.  ARPU improved 6% to $74 in the period, and more than $8 of that was due to data usage.  In Puerto Rico an even larger percentage of wireless ARPU came from data—more than $10 of a total $65 average monthly take per subscriber.

CYCL has also adjusted upward its outlook for the remainder of 2009.  The company now says it expected consolidated adjusted operating income between $400m and $415m, up from $395m to $415m, with the increase coming primarily from an improvement in U.S. roaming.  Capital expenditures are expected to be well above prior forecasts, however.  CYCL said that it plans to spend $190m in fiscal 2009, compared with previous guidance of $125m, as it begins 3G upgrades to its U.S. network.