Cricket-parent Leap Wireless
While MetroPCS certainly deserved an ovation for topping earnings estimates, it's odd to see that effect carry over to the Cricket purveyor. It's not as if investors are still waiting on its Q4 results. Leap's disappointing earnings came out last week, sending shares down nearly 3%, making yesterday's bump seem undeserved.
Still playing catch-up
The two companies bear many similarities as the largest unique providers in the domestic prepaid wireless market, but while MetroPCS has been consistently making money, Leap has gone four years since its last profitable quarter.
Financially, the commonalities continue. Both carry heavy debt loads, and similar gross margins of roughly 41%. But a closer look at the Q4 numbers reveals some key differences holding Leap back, as the chart below shows:
|
Company |
Revenue |
Selling, General, and Administrative Expenses |
Depreciation and Amortization |
Interest Expense |
Cost per Gross Addition |
|---|---|---|---|---|---|
| Leap Wireless | $767,400 | $176,491 | $140,711 | $68,405 | $238.00 |
| MetroPCS | $1,238,164 | $157,173 | $136,306 | $68,021 | $165.79 |
Source: Company reports. All numbers (except cost per gross addition) in thousands.
Despite sales 38% below MetroPCS', Leap still spends more money in the two fixed-cost categories above, and takes on greater interest expense from paying a higher interest rate.
Sales, general, and administrative expenses are important to track because they show how efficiently a company is using its management and marketing dollars. Similarly, though depreciation and amortization aren't cash charges, they're representative of how wisely a company uses its fixed assets.
As a percentage, Leap spends almost double what MetroPCS pays for SG&A. It's no surprise then to see MetroPCS' cost to add new subscribers is almost a third below Leap's. This is a key metric for subscription-based models. Adding new users needs to be affordable in order for the business to grow, and an increasing cost per gross addition shows that the company is struggling to find new users, having already signed the low-hanging fruit. Leap's Q4 cost per gross addition rose to $238 from $209 a year ago.
The buyout option
A day before Leap's earnings release last week, another piece of news about a rival sent its shares soaring. The Wall Street Journal reported that AT&T
Though an acquisition would certainly reward Leap shareholders, the buyer would find itself with more than $3 billiion in additional debt as part of the price for increasingly scarce wireless spectrum.
Foolish takeaway
Notwithstanding a takeover, Leap will need a dramatic subscriber increase to push it into profitability. The company makes approximately $20 in gross profit per month per subscriber. Assuming that margin continues along with present fixed costs and interest expenses, the company would need to add about 1.3 million subscribers to its current total of 5.9 million to break even. Having added just 415,000 net subscribers in 2011 and 179,000 in the fourth quarter, Leap figures not to cross this threshold until 2013 at the earliest, and the maturation of the domestic wireless market won't help. Still, higher-revenue pay plans from smartphones could buoy the company, but I'm not betting on the low-price provider returning to profitability. Investors better hope Ma Bell doesn't drop the call.
While Leap may not be your best move in wireless, there's no question that the mobile revolution is full of opportunity. It's already started changing everything from communication to retail to gaming, and the good news is our experts at the Fool have found a company poised to profit from this boom. Its mobile segment saw 144% sales increase in the just the last year. You can learn more from this company sure to take off in the Fool's special free report: "The Next Trillion-Dollar Revolution." All you have to do is click right here.
