Leap Wireless Jumps on Rosy Outlook
Leap Wireless International (LEAP) has been pushing to grow its cell phone services into new cities. Even though the San Diego company lost money in the effort last quarter, its efforts have won it more sales. And investors liked the fact that Leap raised its outlook for customer growth.
The company lost $39.4 million during the three months ended Dec. 31, compared to earnings of $5 million during the same period of last year, according to a press release late Feb. 27. And its sales grew 37.4% year-over-year to $314.5 million during the quarter.
Leap signed up around 262,000 new customers during the fourth quarter, more than four times the amount a year ago. During the first three months of 2007 the company expects to take on another 260,000 to 320,000 customers.
The stock jumped 8.7% to $67.40 on the Nasdaq on Feb. 28, as markets recovered from their sell-off the previous day amid fears about the global economy. Earlier in the day, Leap touched a new 52-week high of $69.50.
CEO Doug Hutcheson has been expanding Leap's Cricket brand, which targets low-income customers with poor credit. (About 70% of Cricket subscribers have annual income of less than $35,000, compared with about 21% for competitors, according to Morningstar.) After having initially begun offering Cricket in the southern part of the U.S. more than seven years ago, Leap has launched new services during recent months in cities such as San Diego, Portland, and Kansas City.
Still, a few analysts are concerned about the company's rising costs to lure subscribers. Standard & Poor's Equity Research said Feb. 28 that the company will at best profit the same amount on each sale in 2007, but could possibly fare worse, as Leap shells out more money for costs like selling and marketing the Cricket brand. "While we believe LEAP will return to growth in '07, we believe a lower premium is warranted given its upfront marketing costs," S&P analyst Todd Rosenbluth said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) S&P kept a sell opinion on the stock.
Morningstar analyst Patrick Elgrably, CFA said on Feb. 9: "We are enthusiastic about Leap's growth prospects and improving returns on invested capital, but we are concerned that widening plans for rapid expansion into new markets will pressure margins."