Should Investors Take Leap of Faith For This Telecom Stock?

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Leap Wireless (NASDAQ: LEAP), the sixth largest US telecom company which sells pre-paid wireless service under the Cricket brand, posted its fiscal 2012 second quarter results recently and let’s say the quarter ended on a disappointing note. One day after Leap announced that it had lost $42 million in the second quarter along with 289,000 customers, its shares plunged 22% to a new low of $4.28. The management is on its toes and is attempting to turn around the situation. But what are the chances for that to happen? What all is the company up to? Let’s dig deeper into this telecom service provider’s quarter.

A sneak-peak of the quarter
Though Leap managed to improve sales and trim down losses, it ended up missing out on the market’s expectation of $836.8 million revenue. The company reported total revenue of $786.8 million representing 3.4% growth in the top line, and a net loss of $41.6 million or -$0.54 per diluted share. The Average Revenue per User (ARPU) at the quarter-end stood at $41.64, up $1.49 from the prior year period but down $0.95 sequentially. Though the company also reported to have added 493,000 customers during the quarter, it failed to stop customers from leaving its platform and the finally ended the quarter losing 289,000 customers and thus hugely surpassing the analyst estimates of a loss of 48,000 to 100,000 customers. The churn rate at 4.4% is also looking very high, up from 3.3% in the previous quarter. Customer retention programs that Leap undertook could not save the quarter and instead came at higher than anticipated cost, thus reducing margins and the service provider also faced shortage in supply of some popular handsets during the quarter. So, all in all, a bad quarter.

Leap vs. Competition
Leap is no Sprint (NYSE: S). The third largest US telecom carrier posted its recent quarter’s results a few days back and though Leap took Sprint’s path to deliver a green top line and a red bottom line, it failed to pull off what Sprint could. Despite the $0.46 loss per share, Sprint’s stock prices surged as much as 20% as the company announced consistent Apple (NASDAQ: AAPL) iPhone shipments in an environment where even the biggies like Verizon (NYSE: VZ) and AT&T failed to do the same and reported 16% and 14% drops in shipments. Mr. Street’s response to Leap’s bottom line was a mirror image of the response Sprint got, and Leap’s shares fell 22%. Even in the regional landscape, Leap isn’t looking good against MetroPCS (NYSE: TMUS) also. Last month MetroPCS came out with its Q2 2012 earnings and it impressed the investors with a skyrocketing profit of $149 million despite losing 200,000 customers. Leap has been consistently performing poorly and this year the stock has already tumbled more than 50%.

Unlike its peers, the company fails to employ iPhone for its own benefit. Though the company started selling iPhones in June only, the device represented only 10% of Leap’s revenue in this recent quarter and this possibly has to do with the fact that users have to pay $499.99 upfront to get an iPhone as against $199.99 charged by Verizon, AT&T and Sprint. Though Leap provides contract free pre-paid iPhone experience, the $500 price tag is probably a bit too high for many users. This pay-as-you-go service provider needs to look into its pricing again and even more now that Sprint has slashed its iPhone offering price by $50, making it available for $149.99 only.

New strategies in play
The situation is bad and Leap’s management knows it. In the latest earnings call, the management discussed some of the strategies that they plan to execute to clean up this mess and these will include closing of stores, cutting spending on marketing and reducing investment in its 3G network by $80 million. But, these measures will not help the company to a great extent and thus the management is also considering other options such as a potential buy-out by a larger player which will help Leap realize the maximum value of its assets.

At the moment the most valuable asset for Leap is its $1.6 billion spectrum, which according to Jerry Elliot, the CFO, is carrying a market value of about $3 billion. He also went ahead to say that at the moment the company will not rule out anything, even chances of sale, as a possible move. Though not explicitly mentioned, from these remark one can be easily deduce that the company is looking at an opportunity of getting acquired and thus has some idea of the market value. The company with its spectrum and its 5.9 million subscribers is definitely an attractive target, but for large carriers mainly.

Though MetroPCS’ model matched with that of Leap as both are regional players providing pre-paid services, the company will not be in an advantageous position if it acquires Leap, because of the huge $3.2 billion debt in Leap’s balance sheet. On the other hand, a biggie such as Verizon holds higher chances of buying this troubled regional player. Recently Verizon has expressed its need for spectrum and a deal such as this would fit in like a glove. Although AT&T is also in need of additional spectrum, it is not likely to acquire Leap since these two companies don’t share compatible networks. And lastly, we cannot rule out the possibility of Sprint acquiring Leap. Sprint is actually in an expansion mode. It has decided to do away with the old Nextel network and is attempting to grab hold of the Nextel customers and shift to its new network before they fly away to rival Verizon’s network. Sprint is in need for both spectrum and subscribers and this deal can help.

Concluding thoughts
With lower than expected revenue, a beaten up bottom line and shrinking subscriber base, Leap surely is giving the analysts and investors loads of reasons to turn their backs on the company. Analysts have been downgrading the stock and cutting the target price since the earnings release and now are considering Leap’s chance of bouncing back into the game to be next to nothing. So, should investors take a leap of faith for this telecom stock? No, if you ask me. However, we must also remember there is more than one way to benefit from a stock. If the investors think they will benefit because the company will turn around and start making substantial profits anytime soon, they need to think again. On the other hand, the investors can benefit from the stock if Leap becomes a target in an acquisition, thus pushing up the share price and benefiting the shareholders. We should keep a watchful eye on this telecom stock and let events unfold before making a decision.

analyse360degree has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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