Leap Wireless International Inc. (LEAP) reported disappointing financial results for the second quarter of 2011. The company is trying hard to restructure its business models through which it is giving maximum emphasis on high ARPU generating smartphone customers shedding less profitable wireless broadband subscribers as these users generally place huge load on its network. In the previous quarter, Leap gained some new smartphone customers but has lost quite a large number of wireless broadband subscribers, which significantly affected both its top and bottom line.
We believe Leap Wireless seriously needs to revamp its business model. In the second quarter of 2011, the company performed miserably regarding several operating metrics. Leap lost approximately 103,140 customers, down 7.7% year over year. In the last quarter, the company net gained 29,000 voice customers, but net lost 132,000 wireless broadband subscribers.
Quarterly gross margin was 43.8% compared with 52% in the prior-year quarter. The decline in gross margin was due to a rise in service cost and subsidized handset expense, which is expected to be a concern going forward. Quarterly cash cost per user was $21.83, up 24% year over year, indicating further increase in customer acquisition and retention cost. Quarterly cost per gross addition was $251, up 16.7% year over year.
Ongoing economic volatility in the U.S. is another major negative factor since the company is primarily dependent on the low-income customers, who are very much susceptible to economic downtrend. A slow moving U.S. economy is taking toll on the low-cost wireless service providers. MetroPCS Communications Inc. (PCS), the closest competitor of Leap Wireless also suffered significantly in the last quarter. Meanwhile, the stock price plummeted 52% last year, which may provide a cushion for further downslide. We thus reaffirm our long-term Neutral recommendation on Leap Wireless.
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