Why Leap Wireless Will Underperform If Not Acquired
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Leap Wireless (NASDAQ: LEAP) offers no contract, fixed rate unlimited access to wireless voice and data communications under the “Cricket” brand. It engineers its own efficient networks which only cover the areas that potential customers will use. The geographic targeting allows for a lower cost structure. It operates in 34 states in the U.S. The company was founded in 1998 as a spin off from Qualcomm (NASDAQ: QCOM). Leap attributes its success to constantly polling to determine its customers and potential customers exact wants and needs. It services almost six million customers. It targets households making less than $50,000 per year but is expanding focus to include value seeking customers of all incomes. The company has 4,000 Cricket retail stores and another 5,000 locations in national retailer locations.
Leap doesn’t make money. Leap’s difficulties stem from offering services to limited geographic areas, limited product offerings, poor service and a high rate of customer churn. Despite its claims to listening to customer needs, it does not have a good rate of retention. Many customers have difficulty in deriving satisfaction from the company’s products and services. The only reason the stock has seen any action recently is that there are rumours that AT&T (NYSE: T) is looking at Leap as a potential acquisition target. This is a turnaround from a few months ago when speculation was that AT&T was looking to Leap to purchase some of its wireless spectrum in order for a deal to purchase T-Mobile to be approved by the Federal Communications Commission (FCC). At the time, Leap did not have the financial wherewithal to purchase any of the assets offered by AT&T. There is not much attractive about Leap’s business model at the current time. It may be wiser for AT&T or any other suitor to wait until the company’s assets are offered as part of a reorganization plan.
Results from the fourth quarter 2011 indicate 14.6% increased service revenues to $729.5 million for the fourth quarter over the same quarter in 2010. There was an operating loss of $3.5 million compared to an operating loss of $27 million for the fourth quarter of 2010.
The number of customers for the fourth quarter was approximately 5.9 million a 7.5% increase from the end of period customers for the fourth quarter of 2010. The quarter also showed that 60% of the new handset sales in the quarter were for smart phones and its Muve Music devices compared to 30% in the fourth quarter of 2010. Ten percent of customers upgraded handsets during the quarter, compared to 13% in the fourth quarter of 2010. Net loss for the fourth quarter was 2011 was ($84.4) million or ($1.10) per share compared to ($294.4) million or ($3.28) per share for the same period in 2010. The improvement is due to better operating performance, lower income tax expenses and the realising of revenue after expenses relative to the company’s joint ventures. The company also recorded a one-time expense in the quarter related to the retirement of debt issued in November 2010. Capital expenditures for the quarter were $152.4 million and $441 for the full year.
The company expects to make expenditures between $600 million to $650 million in 2012 for development of its next-generation technology, maintenance of the existing network and other capital projects. During 2011 the company added tablets to its offerings in December with the addition of the Samsung Galaxy Tab 10.1 as part of its product line. New international calling products were introduced during the year along with the company’s first 4G market. It also introduced new smart phones and music enabled android phones. It started selling its products on Amazon.com and HSN during 2011.
Reports in 2012 have AT&T now looking at Leap as an acquisition target to acquire more spectrum and assets after failing to acquire T-Mobile. The T-Mobile acquisition was fraught with regulatory difficulties. With AT&T looking to purchase Leap, a smaller, more regional company than T-Mobile, the FCC may be more lenient in allowing the transaction.
Statistics show that the percentage of the float that is short as of January 31, 2012 is 23% or 9.93 million shares down from 12.39 million in the prior month. The diminishing short position indicates that the stock was oversold at the low end of its 52 week trading range and that the market sees the stock as being an acquisition target. The volume has picked up recently as the 10 day volume has neared the average three month preceding volume statistics. It is trading at the mid range of its 52 week trading range. Speculation is the only reason to be in this stock. If the deal with AT&T completes, there will be a premium paid to the holders of Leap. What that premium is beyond what it is currently trading at would be difficult to justify given the company’s poor financial track record. If the deal with AT&T does not complete for any reason, it is likely that investors, particularly the institutions, will exit the stock.
The Motley Fool owns shares of Qualcomm. DividendKings has no positions in the stocks mentioned above. 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.
