Virgin Mobile USA, Inc., a leading national provider of wireless communications services without annual contracts, reported its financial and operational results for the three and six months ended June 30, 2008.
"Our efforts in the first half of the year position Virgin Mobile to rapidly improve our growth trends," said Dan Schulman, Chief Executive Officer, Virgin Mobile USA. "The operational improvements we have put into place are beginning to pay off. While net revenues declined year over year due to general economic conditions and their resultant impact on consumer budgets, the benefits of our low fixed-cost model are reflected in our strong profitability and record free cash flow of $29.2 million.
"The success of our newly introduced voice and data plans has driven substantial increases in higher ARPU gross customer additions in the second quarter. The recent launch of our 'Totally Unlimited' calling plan for $79.99 provides our customers with one of the most compelling offers on the market and is quickly becoming a clear differentiator for Virgin Mobile USA. Sales of the new unlimited plan are exceeding our expectations, and at current usage levels, they are among our most profitable. We believe these factors will result in an improvement to ARPU trends going forward and reinforce our confidence in our 2008 estimates."
Schulman continued, "The acquisition of Helio offers an excellent opportunity to expand our addressable market into postpaid and significantly increase the value we can provide our customers through new data services and feature-rich handsets. The additional liquidity and improved capital structure anticipated from the deal will benefit our business financially and strategically, and we are looking forward to the closing of the transaction in the third quarter."
Overview and Basis of Presentation
The financial results for the three and six months ended June 30, 2007 presented in this release reflect the retroactive consolidation of Virgin Mobile USA, Inc., Virgin Mobile USA, L.P., and Bluebottle USA Investments L.P. Virgin Mobile USA, Inc. is a holding company formed for the purpose of an initial public offering, or IPO, that was completed on October 16, 2007. The earnings per share for the three and six months ended June 30, 2007 converts the historical weighted average number of units of limited liability company interests in Virgin Mobile USA, LLC outstanding to common stock based on a conversion rate used in the reorganization. Virgin Mobile USA is also presenting its earnings per share for the three and six months ended June 30, 2007 on a pro forma basis which also reflects the shares issued in the IPO as outstanding for 2007.
This press release uses several financial performance metrics, including Adjusted EBITDA, Adjusted EBITDA margin, ARPU, CCPU, CPGA and free cash flow, which are not calculated in accordance with GAAP. The Company believes that these non-GAAP financial metrics are helpful in understanding its operating performance from period to period and, although not every wireless company defines these metrics in the same way, believes that these metrics as used by Virgin Mobile USA facilitate comparisons with other wireless service providers. These metrics should not be considered substitutes for any performance metrics determined in accordance with GAAP. For a reconciliation of non-GAAP financial measures, please refer to the section entitled "Definition of Terms and Reconciliation of Non-GAAP Financial Measures" included at the end of this release.
During the second quarter of 2008, Virgin Mobile USA's net service revenue was $291.4 million, a decrease of 5.9% versus the same period last year. Virgin Mobile USA's net service revenue for the first half of 2008 was $595.1 million compared to $632.1 million in the same period in 2007. Revenues in the first half of 2007 benefited from the launch of our hybrid monthly plans, while second quarter 2008 revenues continue to be impacted by the effect of the current economic environment on prepaid customer usage, as well as by the industry-wide trend of substitution of lower-priced messaging for voice.
Adjusted EBITDA in the second quarter of 2008 was $32.3 million, compared to Adjusted EBITDA of $31.2 million in the second quarter of 2007. Adjusted EBITDA grew in the second quarter of 2008 in spite of a challenging economic environment, reflecting the results of ongoing operating efficiency initiatives. Adjusted EBITDA margin for the second quarter increased to 11.1% from 10.1% in the second quarter of 2007.
Adjusted EBITDA for the first half of 2008 was $61.0 million, compared to $72.9 million for the first half of 2007. Adjusted EBITDA for the first half of 2008 was impacted by an incremental $13.3 million investment in marketing, to support the launch of our new voice and data plans. In addition, the first half of 2007 had a $3.9 million benefit related to E911 tax refunds and favorable settlements with taxing jurisdictions.
Virgin Mobile USA's net income for the quarter ended June 30, 2008 was $3.5 million, compared to net income of $7.1 million for the second quarter of 2007. Net income for the second quarter of 2008 included an accrual of $6.0 million for payments under Virgin Mobile USA's tax receivable agreements, and minority interest expense of $2.0 million, both of which did not exist in the comparable period in the prior year, before the Company's initial public offering. In addition to the items previously discussed, net income for the first six months of 2008 was also impacted by an $8.1 million accrual for payments under the Company's tax receivable agreements compared to the first half of 2007 when the tax receivable agreements were not in effect.
Diluted earnings per share for the second quarter of 2008 were $0.07, compared to diluted earnings per share of $0.14 for the second quarter of 2007. Pro forma diluted earnings per share, which is adjusted to reflect the fully diluted share count following the Company's IPO, were $0.11 in the second quarter of 2007. Pro forma diluted earnings per share for the first half of 2007 were $0.40 per share, with earnings per share in the first half of 2008 at $0.16. The decline in net income and earnings per share was due to factors described above. While net income and earnings per share declined from the first half of 2007 due in part to changes in corporate structure, the Company was able to produce continued profitability while increasing its marketing investment by an incremental $13.3 million year over year.
Free cash flow including interest payments and capital expenditures for the first six months of 2008 totaled $29.2 million, up 146% from $11.9 million in the first half of 2007. The increase in free cash flow in the first half of 2008 reflects cost efficiencies in Virgin Mobile USA's model as a result of the Company's ongoing low capital needs as well as from an amendment made to its Sprint PCS Services agreement in the first quarter of 2008. Capital expenditures for the first half of 2008 were $9.4 million, compared to $12.7 million for the first half of 2007, reflecting the Company's low ongoing capital needs. Interest expense for the second quarter was $7.9 million, down from $13.9 million in the second quarter of 2007.
John Feehan, Chief Financial Officer of Virgin Mobile USA commented, "The strong Adjusted EBITDA and free cash flow we produced for the first six months of the year continues to demonstrate the strength of our model and capital structure. The closing of the Helio acquisition and the expected repayment of $50 million of our senior credit facility are expected to further improve our liquidity and cash flows."
Key Metric Performance Review for the Second Quarter and First Half of 2008
Gross additions, or new Virgin Mobile USA customers who activated their accounts during the second quarter of 2008, totaled 728,370, down from 785,236 in the second quarter of 2007. Gross additions for the first half of the year were 1,523,945, down 8.6% from 1,666,992 in the first half of 2007, due to the current economic conditions and their impact on consumer behavior. The gross addition decline in the second quarter of 2008 narrowed to 7.2% year-over- year, reflecting the success of the Company's newly launched service plans.
The Company's cost per gross addition (CPGA) for the second quarter of 2008 was $113.38, compared to CPGA of $100.03 in the second quarter of 2007. CPGA for the first six months of 2008 was $114.53, compared to $99.32 in the first half of 2007. Higher CPGA in the first half of 2008 was related to an incremental spend of $13.3 million in marketing and distribution related to the launch of new service plans as well as the decline in gross additions. The increase was also due to higher retail commissions due to the popularity of the $99.99 Wild Card handset, as well as the popularity of the newly-launched Slash phone, priced at $79.99. While these phones have slightly higher CPGA, they also result in greater data usage, lower churn and increased return on investment.
Second quarter 2008 average monthly customer turnover, or churn, was 5.6%, below Company estimates and slightly better than churn of 5.7% in the second quarter of 2007. For the first six months of the year churn was 5.3% compared with 4.8% churn in the first six months of 2007, as a result of lower gross adds for the period and weaker economic conditions. As of June 30, 2008, the Company had approximately 5.0 million customers, an increase of 3.4% over June 30, 2007.
Average revenue per user (ARPU) for the second quarter of 2008 was $19.32, reflecting a 7.9% decline from the prior year's second quarter ARPU of $20.97. ARPU for the first six months of 2008 was $19.63, a 9.5% decline compared to $21.68 for the same period last year. This decline was the result of lower customer usage of the traditional prepaid, or pay as you go, plans as well as an industry-wide trend of the substitution of lower-cost messaging for voice. The Company expects ARPU trends to show improvement in the second half of 2008, through a continued shift to higher-value hybrid customers and increased penetration of new services, including adoption of its "Totally Unlimited" calling plan for $79.99. ARPU in the first six months of 2007 benefited from the launch of our hybrid plans, which have consistently shown substantially higher ARPU than that of traditional pay as you go customers.
Virgin Mobile USA's management believes the operational initiatives it has put in place in recent quarters, including new service plans, handsets, increased distribution and operational cost savings, will enable it to continue to improve business trends in the second half of 2008, and position the Company for growth in 2009.
Virgin Mobile USA's third quarter results are expected to continue to reflect the positive impact of the Company's operational initiatives, with year-over-year declines in growth rates continuing to slow on a sequential basis.
-- The Company's new voice and messaging offers were in an interim stage of roll-out throughout the second quarter. The positive impact of these high-value plans, as well as that of the Company's expanded retail footprint, is expected to deliver improved results in the second half of 2008. Third quarter net adds are expected to be in the range of (20,000) - 20,000.
-- Net service revenues are expected to stabilize and be consistent with the second quarter, in the range of $285 - $295 million.
-- Adjusted EBITDA is expected to show approximately 20% to 40% growth year-over-year and be in the range of $20 - $24 million.
-- Earnings per share are expected to be in the range of $0.00 - $0.03.
-- Announced Virgin Mobile USA's agreement to acquire Helio from SK Telecom and EarthLink. Concurrent with the pending acquisition, Virgin Group and SK Telecom will each invest $25 million of equity capital in the Company, creating an aggregate investment of $50 million. The $50 million will be used to pay down a portion of Virgin Mobile USA's third party debt. Virgin Mobile USA estimates net debt reduction at the time of close to be approximately $35 million.
-- Virgin Mobile USA also reached an agreement with Sprint to revise the terms of its existing PCS Services Agreement, and expects to achieve an 8% reduction in its effective cost per minute in 2009, with further reductions over the next three years. Concurrent with the acquisition of Helio, Sprint has also agreed to provide a $2.50 network usage credit to Virgin Mobile USA for each gross customer addition, with a cap at $10 million.
In addition, the Company:
-- Announced the lowest-priced unlimited nationwide calling plan, "Totally Unlimited" calling plan for $79.99 with no roaming or long distance charges, no activation fees or annual contracts.
-- Entered into a service agreement for managed information technology (IT) services with IBM. The agreement will allow Virgin Mobile USA to enhance its technology capabilities and improve its product portfolio for new and existing customers by affording the Company access to IBM's significant telecommunications industry experience and state-of-the-art IT resources.
-- Expanded distribution through American Wireless, the nation's largest master agent of independent wireless stores, and Sears stores. The expansion added over 1,100 new doors to Virgin Mobile USA's distribution network during the second quarter.
-- Announced an agreement to increase distribution at Wal*Mart by 20%, and increase shelf space at all Wal*Mart stores.
-- Hosted the third annual Virgin Mobile Festival which took place on August 9th and 10th in Baltimore, Maryland including Kanye West, Foo Fighters, Stone Temple Pilots, Bob Dylan and Chuck Berry.
-- Introduced Virgin Mobile Festival Special Edition Wild Card handset from Kyocera for $99.99 carried exclusively at Best Buy. Fans who purchased this phone received special festival-inspired content and additional benefits including VIP access to the Virgin Mobile Festival.
-- Debuted the Slash, Virgin Mobile USA's first Samsung handset, and the Arc, an affordably priced flip phone with a camera by UTStarcom.
-- Expanded partnership activity as the first entitlement sponsor of the ArenaBowl, the championship game of Arena Football League.
-- Introduced unique social networking aspect to Sugar Mama, through an application with Facebook called "Fund My Phone," allowing subscribers to get their Facebook friends to help pay for their wireless minutes.