Virgin Mobile USA, Inc., a leading national provider of wireless communications services, today reported its financial and operational results for the three and nine months ended September 30, 2008. During the third quarter, Virgin Mobile USA closed the acquisition of Helio, a joint venture between SK Telecom and EarthLink, Inc. that complements Virgin Mobile USA's strengths through its specialization in highly advanced postpaid products and services. Financial results for Helio are included in Virgin Mobile USA's results beginning on August 22, 2008.
"Our business performed well in the third quarter," said Dan Schulman, Chief Executive Officer, Virgin Mobile USA. "We were able to increase gross customer additions by 8% year over year, while our continued operational discipline allowed us to once again overperform in Adjusted EBITDA, growing by 61% versus Q3 2007 and improving our Adjusted EBITDA margin by 330 basis points."
Schulman continued, "Despite a challenging economic environment, we have not stood still. In the third quarter we closed the acquisition of Helio, and just 21 days later announced the launch of Shuttle, our first EV-DO phone with integrated Helio data services offered to our prepaid and hybrid customers. We also continued our roll-out of new service plans, increasing hybrid customers to 47% of gross customer additions, and sequentially increasing ARPU by 5% to $20.19 during the quarter. Our free cash flow excluding interest expense continues to grow and is now at $52.2 million for the year. We are pleased with the trajectory of the business as we enter the holiday season."
Overview and Basis of Presentation
Financial results for Helio are included in Virgin Mobile USA's results beginning on August 22, 2008. The financial results for the three and nine months ended September 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 nine months ended September 30, 2007 converts the historical weighted average number of outstanding units of limited liability company interests in Virgin Mobile USA, LLC, our pre-IPO predecessor entity 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 nine months ended September 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, free cash flow and unlevered 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 third quarter of 2008, Virgin Mobile USA's net service revenue was $305.0 million, an increase of 1% versus the same period last year. Virgin Mobile USA's net service revenue for the first nine months of 2008 was $900.2 million compared to $933.5 million in the same period in 2007, a decrease of 4%. Net service revenue in both the third quarter and first nine months of 2008 was impacted by the economic environment as well as usage trends toward lower cost alternatives such as text messaging.
Adjusted EBITDA in the third quarter of 2008 was $27.5 million, an increase of 61% compared to Adjusted EBITDA of $17.0 million in the third quarter of 2007. Adjusted EBITDA included the impact of a higher FET tax refund received in the third quarter of this year, offset by one-time transition costs from Helio and the shift to IT outsourcing with IBM. Adjusted EBITDA margin for the third quarter increased to 9.0% from 5.7% in the third quarter of 2007. Despite difficult economic conditions, Virgin Mobile USA increased its year over year profitability as the Company continues to benefit from ongoing operating efficiency initiatives as well as more favorable network costs.
Adjusted EBITDA for the first nine months of 2008 was $88.5 million compared to $89.9 million for the first nine months of 2007. Adjusted EBITDA for the first nine months of 2008 was impacted by additional investments in marketing-related activities in order to strengthen our retail presence and better position us for the fourth quarter selling season, along with additional one-time costs associated with the implementation of our new services agreement with IBM and the Helio transition.
Virgin Mobile USA's net income for the quarter ended September 30, 2008 was $4.1 million, compared to a net loss of $7.4 million for the third quarter of 2007. Additionally, net income for the third quarter of 2008 included minority interest expense of $4.4 million, which did not exist in the comparable period in the prior year. Net income for the first nine months of 2008 was $12.4 million compared to $18.9 million for the first nine months of 2007. The first nine months of 2008 included $6.4 million in minority interest and a $6.5 million incremental expense related to our tax receivable agreements, neither of which existed in the prior year period.
Diluted earnings per share for the third quarter of 2008 was $0.07, compared to diluted loss per share of $0.29 for the third quarter of 2007. Adjusted earnings per share was $0.08 in the third quarter and excludes the amortization of intangible assets, adjusted for minority interest, as a result of the acquisition of Helio. Pro forma diluted earnings per share, which is adjusted to reflect the fully diluted share count following the Company's IPO, was a net loss of $0.14 in the third quarter of 2007. Pro forma diluted earnings per share for the first nine months of 2007 was $0.28 per share, with fully diluted earnings per share in the first nine months of 2008 at $0.23.
Unlevered free cash flow, which excludes cash paid for interest, totaled $52.2 million for the first nine months of 2008, up 7% from $48.9 million in the first nine months of 2007. The increase in unlevered free cash flow is a result of ongoing cost efficiencies in Virgin Mobile USA's model as well as the ongoing benefit from the amendments made to its Sprint PCS Services agreement throughout 2008. Capital expenditures for the first nine months of 2008 were $12.6 million, compared to $19.1 million for the first nine months of 2007.
Concurrent with the close of the Helio acquisition in the third quarter, Virgin Mobile USA made changes to its capital structure which the Company believes significantly improved its structure and outlook. Virgin Mobile USA increased its liquidity by adding an incremental $60 million to its revolving credit facility and also paid $50 million of the outstanding balance under its senior secured credit facility, through investments and commitments made by Virgin Group and SK Telecom. The net debt reduction to Virgin Mobile USA at close was approximately $40 million. As a result, net interest expense for the third quarter was $6.9 million, down from $7.9 million in the second quarter of 2008. Total net debt at the end of the third quarter was reduced to $259 million from $300 million at the end of last quarter.
John Feehan, Chief Financial Officer of Virgin Mobile USA, commented, "We are pleased with the strong Adjusted EBITDA and free cash flow the Company produced for the third quarter and first nine months of the year. The successful completion of the Helio acquisition has enhanced our capital structure, and positioned the Company well for continued growth and profitability in the fourth quarter and into 2009."
Key Metric Performance Review for the Third Quarter and First Nine Months of 2008
Gross additions (or new Virgin Mobile USA customers who activated their accounts) during the third quarter of 2008 totaled 821,491, up 8% from 759,927 in the third quarter of 2007. Gross additions for the first nine months of 2008 were 2,345,436, down 3% from 2,426,919 in the first nine months of 2007, due to the current economic conditions and their impact on consumer behavior. The gross addition increase in the third quarter of 2008 is a result of the success of the Company's newly launched service plans, trends for which continue to be encouraging.
The Company's cost per gross addition (CPGA) for the third quarter of 2008 was $105.86, compared to CPGA of $127.35 in the third quarter of 2007. CPGA for the first nine months of 2008 was $111.50, compared to $108.10 in the first nine months of 2007. Virgin Mobile USA CPGA in the third quarter benefited from a reduction in marketing spend following investments in its new service plans in the first half of the year.
Average monthly customer turnover, or churn for the three months and nine months ended September 30, 2008 was 5.5% and 5.4%, respectively, compared with 4.9% for both the three and nine month periods ended September 30, 2007. As of September 30, 2008, the Company had approximately 5.2 million customers, an increase of 6% over September 30, 2007, reflecting, in part, the acquisition of Helio. The increase in churn was as a result of normal churn patterns that occur after new plans are implemented and was within our expectations.
Average revenue per user (ARPU) for the third quarter of 2008 was $20.19, reflecting a 2% decline from the prior year's third quarter ARPU of $20.59, and an increase of 5% from the second quarter of 2008. ARPU for the first nine months of 2008 was $19.82, a 7% decline compared to $21.31 for the same period last year. ARPU in the first three and nine months of 2007 benefited from the launch of our hybrid plans in the second half of 2006. The sequential growth in ARPU from $19.32 in the second quarter was the result of continued adoption of the new higher cost plans as well as the impact of our recent acquisition of Helio.
Virgin Mobile USA's management believes the operational initiatives it has put in place in recent quarters, including new service plans, improved handsets, increased distribution and operational cost savings, will enable it to continue to produce positive business trends in the fourth quarter of 2008, and position the Company for growth in 2009.
Fourth Quarter & Full Year 2008
With the current economic environment challenging for all businesses, particularly at retail, we believe it is prudent to be conservative in our expectations for the holiday season. However, Virgin Mobile USA's fourth quarter results are expected to continue to reflect the positive impact of the Company's operational initiatives.
-- The third quarter was the first full quarter of our new service plans and new "$79.99 Totally Unlimited" calling plan. We expect these plans to continue to provide a positive impact to the business. Fourth quarter net adds are expected to be in the range of 60,000 - 100,000 with gross additions roughly flat with the fourth quarter of 2007.
-- Net service revenues are expected to show annual growth of 6% to 9% in the fourth quarter, in the range of $310 - $320 million.
-- Adjusted EBITDA for 2008 is expected to remain between $105 and $130 million, excluding approximately $15 million of incremental one-time costs associated with Helio and the transition to IBM IT outsourcing.
-- Including the incremental costs associated with Helio and IBM, adjusted earnings per share for the full year 2008 is expected to be in the range of $0.03 - $0.07.
-- Closed Helio acquisition and received $50 million in equity capital investment from SK Telecom and Virgin Group. The transaction resulted in a net debt reduction of approximately $40 million at close. As a result of benefits from this transaction, the Company's total net debt was reduced to approximately $259 million at the end of the third quarter.
-- Debuted "Shuttle," Virgin Mobile USA's first 3G handset and the first Virgin Mobile USA device to integrate features from the Helio portfolio. The slider device includes a 1.3 megapixel camera and is made by Personal Communications Devices, LLC.
-- Virgin Mobile USA reached an agreement with Sprint to revise the terms of its existing network contract. Under the Fifth Amendment to the PCS Services Agreement, Virgin Mobile USA's cost per minute is tied directly to the volume of network traffic it generates, and will no longer be dependent on Sprint's network costs. Virgin Mobile USA will achieve reductions to its per minute rate upon achieving certain targets for the volume of minutes used by its customers. Additionally, effective July 1, 2008, Sprint is providing a $2.50 network usage credit to Virgin Mobile USA for each gross customer addition, with a cap at $10 million.
-- Implemented the transition to IBM for managed information technology (IT) services. 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. The Company incurred approximately $6.2 million in one-time costs associated with the transition during the third quarter. These transition costs are expected to yield IT operational cost savings of approximately $50 million over the next five years.
-- Virgin Mobile USA unveiled its new branding message to highlight its acquisition: "Helio By Virgin Mobile: Plan To Have It All." The new branding included the enhancement of Helio's $80 a la carte plan to include unlimited minutes rather than the current 1500 minutes included with the plan.
-- Appointed two new board members: Richard Chin, President of SK Telecom Americas (NYSE: SKM - News), a subsidiary of SK Telecom; and Sung Won Suh, EVP and Head of Global Strategy and Investment for SK Telecom.
-- Named Top Retail Supplier with SPARC Award from major retailers including Wal-Mart, Best Buy, Target and others.
-- Executed third Virgin Mobile Festival featuring Bob Dylan, Kanye West, Chuck Berry and Foo Fighters along with 35 other acts over two days in Baltimore. Kyocera, Dell and Toyota were participating sponsors.