Leap Wireless (LEAP) saw its stock price plunge more than 20% early Thursday following release of its first quarter financial results that showed an increase in expenses to support smartphone sales and a bevy of financial analysts cutting their price targets for the regional operator.
Leap reported customer growth dipped nearly 22% year-over-year to 258,060 net customer additions during the first quarter of this year. That drop was attributed to an increase in customer churn from 3.1% to 3.3% that offset a nearly 1% increase in gross customer additions. Leap added that customer churn saw an uptick late in the quarter.
Leap also noted that 38,000 net customer additions came from outside of its native footprint via its wholesale agreement with Sprint Nextel. Leap ended the first quarter with 6.192 million total customers on its network.
Average revenue per user increased 8.2% year-over-year to $42.59, which was attributed to growing adoption of smartphones and the carrier’s Muve music offering, both of which require higher-priced rate plans. Those devices require higher subsidies, which pushed Leap’s cost per gross addition up nearly 19% to $228. The carrier noted that those devices made up approximately 62% of new handset sales during the quarter.
Total revenues increased 5.9% to $825.6 million, while operating expenses were up 5.4% to $841 million. This resulted in a slight drop in net operating losses for the quarter from $18.1 million in 2011 to $15.8 million this year, though due to tax and equity expenses net losses attributed to shareholders increased from $96.2 million last year to $98.4 million this year.
Leap also said it expects to expand its LTE footprint to about 25 million covered potential customers by the end of the year at a price of about $10 per covered pop. The carrier said it expects full year capital expenditures to come in between $600 million and $650 million, with $146.3 million spent during the first quarter.
“We are pleased with the performance of our initial LTE launch in Tucson and the progress we’re making toward deploying LTE in additional markets,” said Bill Ingram, EVP of strategy and acting CFO, in a statement. “We continue to look for opportunities to improve our spectrum position, including the recently announced transaction with T-Mobile that will enable us to enhance our spectrum depth in several markets. In addition, the transaction we announced late last year with Verizon is expected to improve our spectrum position in Chicago and generate net cash proceeds to us of more than $100 million.”
Leap last month signed a five-year wholesale deal with Clearwire that will provide Leap and its Cricket brand with LTE coverage for customers when they are outside of the company’s native markets.
Guggenheim Partners downgraded Leap’s rating from “buy” to “neutral,” while Canaccord Genuity slashed its price target for Leap’s stock from $12 to $9 and maintained its “hold” rating. Leap’s stock was trading at $6.14 per share early Thursday.
“With mounting competitive pressure from larger competitors looking to the lower end of the market for growth, to growth from lower-ARPU government-subsidized programs, to the company’s expansion out of its core region using Sprint’s network as a platform, we find it increasingly difficult to recommend Leap’s stock for purchase,” explained Canaccord Genuity telecom analyst Greg Miller. “With churn on the rise late in the quarter and the need to more aggressively subsidize and promote handsets, we believe the competitive pressures in the lower end of the industry are intensifying. With the traditional best quarter of the year now behind, it will likely be difficult to produce the gains needed to drive growth.”
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