Virgin Mobile USA stock down on economic worries

Investors sent Virgin Mobile USA Inc.’s stock plunging this morning despite decent quarterly numbers, based on worries about the impact of an increasing competitive prepaid landscape as well as economic impacts on the company’s customer base.
Virgin Mobile USA’s stock was down more than 15% in early afternoon trading on Wall Street.
Virgin Mobile USA CEO Dan Schulman told analysts during the company’s conference call yesterday that Virgin is seeing dual effects on its customer base from the economic conditions: on one hand, subscribers are turning to Virgin Mobile USA as they seek to cut their household wireless costs, but at the same time, the company’s traditional prepaid base is trimming its spending as they feel pinched in the pocketbook.
With MetroPCS Communications Inc., Leap Wireless International Inc. and now Virgin Mobile USA all talking cautiously about expecting impacts from the economy, investors are wary.
“Any sector that focuses on the low end of the consumer market-credit cards, mortgages or cellphones-is doing poorly,” said analyst Kevin Roe of Roe Equity Research.
Schulman shrugged off questions about how much Virgin Mobile USA would be impacted by the market expansions of month-to-month, flat-rate providers such as Leap, MetroPCS and Sprint Nextel Corp.’s Boost Unlimited offer.
He said that the unlimited flat-rate carriers seem to be expanding the market share of prepaid/pay-as-you-go services and taking net additions from the larger carriers, instead of impacting Virgin Mobile USA’s gross adds.
However, Roe pointed out that Leap, MetroPCS and Boost Unlimited are expected to go through major expansions and that investors are skeptical that Virgin Mobile USA won’t be affected. The lack of visibility into the prepaid business is also a sticking point for investors with low confidence, he added, although he said today’s sell-off “frankly seems a little severe.”
Meanwhile, Stanford Research upgraded Virgin Mobile USA’s stock from sell to hold.
In its first quarter of reporting after going public, Virgin Mobile USA reported gross additions of 760,000 customers and a churn rate of 4.9%, which translated to 46,000 net new customers. The company said its churn rate was industry-leading for prepaid providers.
Schulman noted that Virgin Mobile USA’s average revenue per user made slight positive gains year-over-year, to $20.59 in the third quarter compared to $20.53 a year ago. Schulman called the change an “important inflection point and a very positive trend for our business.” Hybrid plans were credited with the ARPU increase.
The company’s third-quarter net income decreased slightly year-over-year, from a loss of $5.1 million for the third quarter of 2006 to a loss of $7.3 million this year.