Leap’s stock plunges on Q2 shortfall, speculation on merger

Leap Wireless International Inc. failed to meet analysts’ estimates for customer additions in the last quarter and its stock suffered dramatically because of it, plummeting more than 20% following yesterday’s report.
The carrier reported almost 127,000 customer additions to its Cricket-branded service, most of which came from new markets launched since 2006, and a churn rate of 4.3% during the second quarter.
Analysts categorically took the carrier to task for coming up shy of the 150,000-plus customer additions forecast for the quarter, and then turned up the speculation knob with predictions about the operator’s not-so-distant future.
Ric Prentiss, an analyst at Raymond James, noted that Leap’s decision to give next-year guidance about six months earlier than expected could hint heavily at its interest in spiking valuation prior to merger and acquisition discussions.
“We believe there is a window of opportunity for Leap and MetroPCS to agree on a merger” before their respective 700 MHz auction forms have to be filed this fall, he wrote. “We believe a merger would have a positive impact on net adds and churn reduction by vastly increasing national network coverage.”
Leap greatly enlarged its footprint and bought spectrum in markets that seem likely to fit into the carrier’s market clustering strategy, spending $710 million on 99 licenses in last year’s advanced wireless services spectrum auction.
It’s because of that recently acquired spectrum and assumed synergy with MetroPCS Communications Inc., which was an even higher bidder in the auction, that market watchers haven’t given up on the long-term viability of Leap’s business model. Both carriers offer similar flat-rate, unlimited calling services.
With the planned coverage expansion and launches of Auction 66 markets, Leap expects to cover an additional 20 million to 28 million potential customers by the end of 2008, bringing its total covered pops to around 73 million to 81 million.
Costs associated with equipment, servicing and interest expense charges on debt crippled the company’s bottom line during the quarter. The carrier reported $3.2 million in net income for the quarter, down from the $7.5 million it earned in the year-ago period, and said it experienced a 5% rise in average revenue per user. Its overall revenue rose 47% from the year-ago period to $393.2 million.
The carrier said it served almost 2.7 million customers as of June 30.