Leap Wireless International Inc. (LEAP) posted weak financial results for the third quarter of 2011, which fell below the Zacks Consensus Estimates. However, contrary to the consensus opinion, the company reported net subscriber addition. For the last one year, Leap wireless is restructuring its business model through which the company is emphasizing on the high ARPU generating smartphone customers, while shedding less profitable wireless broadband subscribers as these users generally place huge load on its network. Management is hopeful regarding its business strategy for future subscriber growth.
Nevertheless, precipitous economic volatility in the U.S. is a major concern since the company is primarily dependent on the low-income customers, who are very much susceptible to economic downtrend. Meanwhile, the stock price plummeted 56% in the last year, which may provide a cushion for further downslide. We, therefore, reaffirm our Neutral recommendation on Leap Wireless.
Leap Wireless remains one of the low cost wireless service providers in the U.S, which enables it to roll out a range of cheap service plans that start as low as $35 per month. The company plans to expand coverage in urban and suburban markets and avoid less populated areas, which in turn, will facilitate it to keep infrastructural cost low. After establishing network in a new market, the company promotes its services mostly through less expensive media. Management is showing signs of aggression by employing new advertising companies to promote their brand beyond its targeted customers.
Several industry sources reported that Leap Wireless may become a beneficiary of the proposed merger between AT&T Inc. (T) and T-Mobile USA. Currently, AT&T is facing significant opposition from both the Department of Justice in the U.S. and Federal Communications Commission regarding this deal as both these authorities believe a merger between these two national telecom carriers will lead to market concentration, which is detrimental to consumers.
Industry sources rumored that in order to satisfy the authorities, AT&T is negotiating with Leap Wireless to divest a substantial part of T-Mobile assets including T-Mobile’s subscribers and highly-demanded wireless spectrum. If this rumor becomes true then we believe Leap Wireless will get the necessary scale economies to strengthen its foothold within the small and medium sized wireless operators in the U.S.
LEAP WIRELESS (LEAP): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment