Raymond Yu
Virgin Mobile USA: Profits for the very last time?
On Wednesday, Virgin Mobile USA announced its 2007 results, adding 511,796 new customers in 2007 to reach a total subscriber base of nearly 5.1 million. Net service revenues increased by 20% to $1.2 billion and 2007 was Virgin's first year of profitability, as it achieved a net income of $4.2 million, generating a pro forma earnings per share of $0.06.Comment: At first glance, these results do not look too bad, but Virgin Mobile USA has certainly fallen short of market expectations. Its share price plummeted to $2.46 on Thursday, an 83% drop from its IPO price of $15 per share in October last year. Virgin Mobile's loss of shareholder belief was largely down to a poor fourth quarter. It added only 209,669 new customers in Q4 2007, compared to 613,752 in Q4 2006. In comparison the largest US MVNO, Tracfone, added 711,000 customers in Q4 2007, resulting in a year-on-year subscriber increase of 20.5% to 9.5 million and revenues of $1.4 billion for the year. If Virgin Mobile found it tough in 2007, we think it is going to struggle even more in 2008. The bulk of its subscriber base is prepaid, typically low-end customers in the US, many of who cannot afford the postpaid contracts offered by the major MNOs or have bad credit. The economic slow down in the US is going to place even more pressure on these customers and it is likely that mobile expenditure will be among the cut backs made. Furthermore, in the longer term we expect the US MNOs to increasingly turn their focus onto the prepaid segment, despite the poor economic timing. To date, the major MNOs have concentrated on postpaid customers. However, the US mobile market is approaching maturity (mobile penetration is nearing 85%) and new opportunities, however slim the margins, will be sought. Therefore, Virgin Mobile USA, and all the other US MVNOs, should expect much fiercer competition over the next few years, particularly for the prepaid segment they have previously claimed as their own.
