The Prepaid Press - December 15, 2007 - (Page 13)

WIRELESS December 15 · 2007 - 13 Has the Virgin Been Deﬂowered? The Virgin Mobile USA Saga Continues By Gene Retske “macro-economic concerns, skepticism about the pay-as-you-go wireless segment and the company’s weaker-than-expected 2008 outlook for earnings before interest, taxes, depreciation and amortization.” Other analysts were similarly unimpressed. Virgin’s focus on a fast growing niche market, and a flexible price structure might offer it some ability to deal with ﬁnancial setbacks. It also noted that Virgin Mobile USA has strong brand recognition and favorable relationships with Sprint Nextel, the underlying network provider and Virgin Group. How Virgin Mobile USA performs and its ability to survive may depend on factors out of its control, and that is a frightening proposition. Given the recent history of Disney Mobile, Mobile ESPN and Amp’d, Moody’s concern may not be unreasonable. Standard & Poor’s assigned Virgin Mobile a non-investment grade corporate credit rating, noting the high degree of risk in the prepaid wireless phone business. Moody’s assigned a B2 Corporate Family Rating (CFR) to Virgin Mobile. It cited Virgin’s “modest scale” as an MVNO against much larger and ﬁnancially stronger national wireless players. Moody’s said that as the US wireless industry approaches maturity, operating risks will increase. Because of what it called “weak liquidity proﬁle and its currently elevated leverage levels” it said that Virgin would not be able to withstand unforeseen operating “challenges.” Given the recent history of Disney Mobile, Mobile ESPN and Amp’d, Moody’s concern may not be unreasonable. Moody’s did recognize Investors File Class Action Suit A number of class action and investor suits have been ﬁled against Virgin Mobile USA at press time. One class action suit, ﬁled in New Jersey by Brower Piven, alleges that during the Class Period the Company, and certain of its ofﬁcers and/or directors, violated federal securities laws by issuing various materially false and misleading statements that had the effect of artiﬁcially inﬂating the market price of the Company’s securities and causing Class members to overpay for the securities. The class for this action has not yet been certiﬁed. Amid a lot of hoopla, and some reservations, Virgin Mobile USA (NYSE:VM) went IPO in October of this year. On one side, the allure of founder Sir Richard Branson, and a rosy projection for MVNOs, seemed to portend a bright future. On the ﬂip side, many analysts cited an apparently weakening MVNO market, and the lackluster ﬁnancial performance of Virgin Mobile USA. Virgin Mobile USA had racked up over $600 million in losses since it began operations in 2002. One of the contributing factors is that the churn is very low, approaching that of some contract based companies. So far, the naysayers seem to be winning the bet. When the Virgin Mobile USA IPO came out on October 11, 27.5 million Class A common shares were sold, and it ended at $15.75 a share in trading on the New York Stock Exchange, up 5% from its IPO price of $15.00. Virgin Mobile USA closed on December 3rd at $6.83, a 65% decrease in stock price and market value. The price fell steadily during the ﬁrst two months after the IPO, and precipitously during November, going from just under $12 a share to under $7 in just 30 days. $127 each. One of the contributing factors is that the churn is very low, approaching that of some contract based companies. The average monthly churn for the third quarter of 2007 remained at 4.9% when compared to the third quarter 2006. For the fourth quarter, because of the strength of the holidays, the company said it expects gross additions to be 1.1 million or more. This is in an increase of almost 75,000 from its previous expectations. “We are receiving positive indications from our retail partners as we enter the seasonally strong fourth quarter,” Chief Executive Daniel Schulman said in a statement. “The Virgin Mobile brand and proposition continues to attract considerable demand, and we look forward to a strong holiday season.” The indicators now are as mixed as they were pre-IPO. On one hand, several class action suits have been initiated. On the other hand, the subscriber base is growing, churn is low and stable, and revenues are up. But, losses are also up, and many analysts are skeptical about its future. Mixed Blessings One of the things that has enabled Virgin Mobile to grow as rapidly as it has is its subsidizing of reduced-price handsets. The youth market has responded very strongly to this incentive, but unfortunately, so have some less than ethical opportunists. The low price Virgin handsets have been bought, reprogrammed, and then sold in big quantities for use on other cellular networks. This not only deprived Virgin Mobile USA of the revenue stream it was expecting in return for the subsidized handsets, but often allowed competitors to use them to compete with Virgin. Virgin has made some changes to its software and won some court cases related to these sales, but it has cost Virgin a lot of money to stem the tide. By the Numbers In mid-November, Virgin Mobile USA reported a third-quarter net loss of $7.3 million, which was an increase; a year earlier the net loss was $5.1 million for the same period. This caused the per-share loss, adjusted to rise to 15 cents from 10 cents last year. Adjusted earnings before interest, taxes, depreciation and amortization, was also up marginally, to $17 million, from $16.4 million a year ago. Total operating revenue was $319.5 million versus $271 million last year. Net service revenue, which excludes net equipment revenue, rose 25% to $301.4 million for the three months ending Sept. 30 from $240.7 million. The truly bright note has been a steady increase in subscribers and revenue. In the third quarter, Virgin’s net service revenue increased 25% to $301.4 million over the previous year. An increase in the customer base of almost 23% from the previous year raised the total to just under 5 million subscribers as of Sept. 30, 2007. New activations during third quarter of 2007 totaled 759,927. This is an increase of 14% from the same period a year ago. The acquisition cost was about the same as the previous year, about Insiders Bet on Virgin, Outsiders Uncertain If insider trades are an indication, things may improve soon at Virgin Mobile. The chief executive of Virgin Mobile USA Inc., and other insiders, bought more than 25,000 of the prepaid wireless service provider’s shares during November, even as the stock continued to sink after release of the company’s third-quarter earnings report. One Lehman Brothers analyst, Thomas Seitz, attributed Virgin Mobile’s steady decline to http://www.allstateprint.com http://www.allstateprint.com

Table of Contents Feed for the Digital Edition of The Prepaid Press - December 15, 2007

The Prepaid Press - December 15, 2007 GENERAL PREPAID 2007: Prepaid in Review New Prepaid Association? Contents A Funny Thing Happened on the Way to the Forum Regulatory Rundown: FCC Enforcement, SEC Cracks Down, VoIP Hacking, & Wireless Regulation The Legal Line WIRELESS Prepaid Wireless Roundup kajeet to Offer Horoscopes, Jokes and Trivia Redknee Extends Converged Billing Solution AT&T GoPhone Offers Roaming Option in Mexico Total Call Mobile Introduces Holiday Bonus Wireless in Brief INTERNATIONAL Spot Rates Keycorp to Distribute Hypercom in Canada International in Brief Mobile Communications in Latin America Gets a Leg Up TELECOM & TECHNOLOGY T&T in Brief Phone House Launches New Card Facebook Goes Mobile CVT and Total Call Settle IDT Lawsuit Wireline Capex Grows 7% in Third Quarter PAYMENTS Transcard Selected for Discover Payroll Cards Vesdia and MXT Card Services Form Alliance The Giving Tree Card Gives Back MasterCard Launches Prepaid Travel Card Payments in Brief 7-Eleven Pushes Video Games Capital One and NetSpend Merger Off i2c Launches New Release of Campaign Manager Prepaid Card Dispensing from ATMs Credit Card Design Competition Begins NRF Says Gift Cards Gaining Popularity EXTRAS Classifieds Contact Us Our Advertisers

The Prepaid Press - December 15, 2007

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