From the Wires
Virgin Mobile USA Reports Strong Q3 2008 Results
Highlights* Include:
Nov. 10, 2008 04:15 PM
WARREN, N.J., Nov. 10 /PRNewswire-FirstCall/ -- Virgin Mobile USA, Inc.
(NYSE: VM), 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. (Nasdaq: ELNK) 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.
(Logo: http://www.newscom.com/cgi-bin/prnh/20070613/VIRGINMOBILE )
"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.
Key Financial & Operating Results for the Third Quarter and First Nine
Months of 2008
Virgin Mobile USA, Inc.
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
($ in thousands, except
per share amounts)
Net service revenue $305,031 $301,414 $900,159 $933,464
Total operating revenue 323,185 319,504 967,380 986,406
Operating income 14,086 6,871 50,670 60,436
Net income 4,067 (7,381) 12,362 18,931
Adjusted EBITDA 27,512 17,039 88,535 89,923
Adjusted EBITDA margin 9.0% 5.7% 9.8% 9.6%
Earnings per common share
- basic(1) $0.07 $(0.29) $0.23 $0.73
Earnings per common share
- diluted(1) $0.07 $(0.29) $0.23 $0.37
Adjusted Earnings per
common share - diluted(2) $0.08 N/A $0.23 N/A
Pro forma earnings per
common share - diluted(1) N/A $(0.14) N/A $0.28
Interest expense - net 6,905 14,332 24,177 41,780
Capital expenditures 12,570 19,144
(1) The calculation of basic and diluted earnings per share for 2007
converts the historical weighted average number of units of limited
liability company interests in Virgin Mobile USA, LLC outstanding for
the three and nine months ended September 30, 2007 to common stock
based on a conversion rate used in the reorganization. In addition,
the pro forma diluted earnings per share reflects the shares issued
in the IPO as if they were outstanding for all of 2007.
(2) Adjusted earnings per common share on a diluted basis excludes the
amortization of intangible assets adjusted for minority interest
relating to the acquisition of Helio on August 22, 2008.
Virgin Mobile USA, Inc.
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Gross additions 821,491 759,927 2,345,436 2,426,919
Churn 5.5% 4.9% 5.4% 4.9%
Net customer additions (3,267) 45,830 (96,768) 302,127
End-of-period customers 5,164,305 4,876,217 5,164,305 4,876,217
ARPU $20.19 $20.59 $19.82 $21.31
CCPU $12.62 $12.81 $12.11 $13.27
CPGA $105.86 $127.35 $111.50 $108.10
Unlevered cash flow (in
thousands) $52,163 $48,913
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.
Outlook
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.
Recent Highlights
-- 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), 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.
Earnings Conference Call
Virgin Mobile USA will host a conference call Monday, November 10, 2008 at
5:00 P.M. (ET) with access available via Internet and telephone. Investors and
analysts may participate in the live conference call by dialing 1-888-354-3598
(toll-free domestic) or 1-706-643-8861 (international); passcode: 68535312.
Please register at least 10 minutes before the conference call begins. A
replay of the call will be available for one week via telephone starting
approximately two hours after the call ends. The replay can be accessed at
1-800-642-1687 (toll-free domestic) or 1-706-645-9291 (international);
passcode: 68535312. The webcast will be archived on Virgin Mobile USA's web
site after the call at http://investorrelations.virginmobileusa.com/.
About Virgin Mobile USA, Inc.
Virgin Mobile USA, Inc. (NYSE: VM), through its operating company Virgin
Mobile USA, L.P., offers more than five million customers control, flexibility
and choice through Virgin Mobile's Plans Without Annual Contracts and postpaid
offerings through Helio By Virgin Mobile, with national coverage for both
powered by the Sprint PCS network.
Virgin Mobile USA is known for its award-winning customer service, was
recently rated the best prepaid wireless service for the third year in a row
in the Annual PC Magazine Readers' Choice Survey, with 90% of its own
customers reporting satisfaction with its service. Virgin Mobile USA allows
customers to earn free minutes in exchange for viewing advertising content
online through the innovative Sugar Mama program. Virgin Mobile USA's full
slate of smart, stylish and affordable handsets are available at approximately
40,000 top retailers nationwide and online at www.virginmobileusa.com, with
Top-Up cards available at more than 140,000 locations. Helio's advanced
devices like the Ocean and unlimited All-in voice plans can be explored at
www.helio.com.
Safe Harbor Statement
This press release contains certain forward-looking statements and
information relating to us that are based on the beliefs of our management as
well as assumptions made by, and information currently available to, us. These
statements include, but are not limited to, statements about our strategies,
plans, objectives, expectations, intentions, expenditures, and assumptions and
other statements contained in this document that are not historical facts.
When used in this press release, words such as "anticipate," "believe,"
"estimate," "expect," "intend," "plan" and "project" and similar expressions,
as they relate to us are intended to identify forward-looking statements.
These statements reflect our current views with respect to future events, are
not guarantees of future performance, and involve risks and uncertainties that
are difficult to predict. Further, certain forward-looking statements are
based upon assumptions as to future events that may not prove to be accurate.
Many factors could cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements. The potential
risks and uncertainties that could cause actual results to differ from the
results predicted include, among others, those risks and uncertainties
discussed in our filings with the Securities and Exchange Commission, copies
of which are available on our investor relations website at
http://investorrelations.virginmobileusa.com/ and on the SEC website at
http://www.sec.gov/. We neither intend nor assume any obligation to update
these forward-looking statements, which speak only as of their dates.
Virgin Mobile USA, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
September 30, December 31,
2008 2007
Assets
Current assets:
Cash and cash equivalents $6,495 $19
Accounts receivable, less
allowances of $1,584 at September
30, 2008 and $610 at December 31, 2007 58,140 57,956
Due from related parties 220 321
Other receivables 22,573 14,613
Inventories 153,054 137,364
Prepaid expenses and other current
assets 33,571 19,722
Total current assets 274,053 229,995
Property and equipment 177,634 154,162
Accumulated depreciation and
amortization (124,691) (108,249)
Property and equipment - net 52,943 45,913
Acquired intangibles 52,703 -
Goodwill 8,448 -
Other assets 7,842 6,131
Total assets $395,989 $282,039
Liabilities, minority interest, preferred
stock and stockholders' deficit
Current liabilities:
Accounts payable $97,943 $111,753
Due to related parties 81,780 56,486
Book cash overdraft - 2,045
Accrued expenses and other current
liabilities 118,370 73,142
Deferred revenue 129,835 128,125
Current portion of long-term debt 26,395 32,669
Total current liabilities 454,323 404,220
Long-term debt 177,378 244,037
Related party debt 55,000 45,000
Due to related parties 6,380 -
Other liabilities 2,000 3,981
Total non-current liabilities 240,758 293,018
Commitments and contingencies
Minority interest in consolidated
subsidiaries 6,390 -
Series A convertible preferred stock, par
value $0.01 and stated value $1,000 per
share - 50,000 shares authorized, and
50,000 shares issued and outstanding
at September 30, 2008, and 0 shares
issued and outstanding at December 31, 2007 50,000 -
Stockholders' deficit:
Common stock:
Class A common stock, par value
$0.01 per share - 200,000,000
shares authorized and 53,421,107 shares
issued and outstanding, net of 37,560
treasury shares at September 30, 2008 and
53,136,839 shares issued and outstanding,
net of 13,231 treasury shares at
December 31, 2007 534 532
Class C common stock, par value
$0.01 per share - 999,999 shares
authorized and 115,062 shares
issued and outstanding at June 30, 2008
and December 31, 2007 1 1
Class B common stock, par value
$0.01 per share - 1 share authorized,
issued and outstanding at September 30,
2008 and December 31, 2007 - -
Additional paid-in-capital 386,932 340,382
Accumulated deficit (742,498) (754,860)
Accumulated other comprehensive
loss (451) (1,254)
Total stockholders' deficit (355,482) (415,199)
Total liabilities, minority
interest, preferred stock and
stockholders' deficit $395,989 $282,039
Virgin Mobile USA, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Operating revenue
Net service revenue $305,031 $301,414 $900,159 $933,464
Net equipment revenue 18,154 18,090 67,221 52,942
Total operating revenue 323,185 319,504 967,380 986,406
Operating expenses
Cost of service
(exclusive of depreciation and
amortization) 84,543 89,352 250,442 273,331
Cost of equipment 102,997 99,133 307,770 292,157
Selling, general and
administrative
(exclusive of depreciation and
amortization) 104,510 115,529 323,927 335,132
Restructuring expense 6,511 - 6,511 -
Depreciation and amortization 10,538 8,619 28,060 25,350
Total operating expenses 309,099 312,633 916,710 925,970
Operating income 14,086 6,871 50,670 60,436
Other expense (income)
Interest expense 8,591 15,171 25,933 43,180
Interest income (1,686) (839) (1,756) (1,400)
Interest expense - net 6,905 14,332 24,177 41,780
Other (income) expense (1,737) (80) 6,453 (275)
Total other expense 5,168 14,252 30,630 41,505
Income (loss) before income tax
expense and minority interest 8,918 (7,381) 20,040 18,931
Income tax expense 421 - 1,288 -
Income (loss) before minority
interest 8,497 (7,381) 18,752 18,931
Minority interest 4,430 - 6,390 -
Net income (loss) 4,067 (7,381) 12,362 18,931
Preferred stock dividend 333 - 333 -
Net income (loss) available to
common stockholders 3,734 (7,381) 12,029 18,931
Net income (loss)
Other comprehensive income (loss): 4,067 (7,381) 12,362 18,931
Unrealized income (loss) on
interest rate swap 1,337 (1,848) 803 (1,700)
Total comprehensive income $5,404 $(9,229) $13,165 $17,231
Basic and diluted earnings per
share information:
Earnings (loss) per common share -
basic $0.07 $(0.29) $0.23 $0.73
Earnings (loss) per common share -
diluted $0.07 $(0.29) $0.23 $0.37
Weighted average common shares
outstanding - basic 52,987 25,828 52,844 25,810
Weighted average common shares
outstanding - diluted 65,046 25,828 52,943 50,652
Virgin Mobile USA, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months ended September 30,
2008 2007
Operating activities
Net income $12,362 $18,931
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Depreciation and amortization 28,060 25,350
Amortization of deferred
financing costs 1,278 1,474
Non-cash charges for stock-based
compensation 9,207 3,580
Non-cash cost of royalties and
services 333 408
Write-offs of fixed assets 671 -
Minority interest 6,390 -
Changes in assets and
liabilities:
Accounts receivable 17,963 17,236
Due from related parties 101 11,995
Other receivables (7,940) (852)
Inventories (8,065) (42,949)
Prepaid expenses and other
assets (9,657) (3,258)
Accounts payable (20,954) 11,945
Due to related parties 22,213 9,359
Deferred revenue (4,808) (3,579)
Accrued expenses and other
liabilities (6,356) (22,853)
Net cash provided by operating
activities 40,798 26,787
Investing activities
Cash acquired, net of acquisition
costs 3,516 -
Capital expenditures (12,570) (19,144)
Net cash used in investing
activities (9,054) (19,144)
Financing activities
Net change in book cash overdraft (2,045) (12,156)
Net change in related party debt - 32,000
Proceeds from issuance of
Preferred Stock 50,000 -
Repayment of long-term debt (72,933) (27,750)
Other (290) 263
Net cash used in financing
activities (25,268) (7,643)
Net increase in cash and cash
equivalents 6,476 -
Cash and cash equivalents at
beginning of year 19 8
Cash and cash equivalents at end
of period $6,495 $8
Definition of Terms and Reconciliation to Non-GAAP Financial Measures
This earnings press release includes several historical key performance
metrics used in the wireless communications industry to manage and assess our
financial performance. These metrics include gross additions, churn, net
customer additions, end-of-period customers, Adjusted EBITDA, Adjusted EBITDA
margin, average revenue per user, or ARPU, cash cost per user, or CCPU, cost
per gross addition, or CPGA, and unlevered free cash flow. Trends in key
performance metrics such as ARPU, CCPU and CPGA will depend upon the scale of
our business as well as the dynamics in the marketplace and our success in
implementing our strategies. These metrics are not calculated in accordance
with generally accepted accounting principles in the United States, or GAAP. A
non-GAAP financial metric is defined as a numerical measure of a company's
financial performance that (i) excludes amounts, or is subject to adjustments
that have the effect of excluding amounts, that are included in the comparable
measure calculated and presented in accordance with GAAP in the statement of
operations or statement of cash flows; or (ii) includes amounts, or is subject
to adjustments that have the effect of including amounts, that are excluded
from the comparable measure so calculated and presented. We believe that the
non-GAAP financial metrics that we use are helpful in understanding our
operating performance from period to period and, although not every company in
the wireless communications industry defines these metrics in precisely the
same way, we believe that these metrics as we use them facilitate comparisons
with other wireless communications providers. These metrics should not be
considered substitutes for any performance metric determined in accordance
with GAAP.
Gross additions represents the number of new customers that activated an
account during a period or, in the case of postpaid, the number of new or
existing customers that activated a new contract, unadjusted for churn during
the same period. In measuring gross additions, we begin with account
activations and exclude returns, customers who have reactivated and fraudulent
activations. Note that returns include "remorse returns" for the postpaid
business, within 30 days of activation, and retailer returns for the prepaid
business, without time restrictions. These adjustments are applied in order to
arrive at a more meaningful measure of our customer growth.
Churn is used to measure customer turnover on an average monthly basis.
Churn is calculated as the ratio of the net number of prepaid or postpaid
customers that disconnect from our service during the period being measured to
the weighted average number of customers during that period, divided by the
number of months during the period being measured. The net number of customers
that disconnect from our service is calculated as the total number of
customers that disconnect less the adjustments noted under gross additions
above. These adjustments are applied in order to arrive at a more meaningful
measure of churn. The weighted average number of customers is the sum of the
average number of customers for each day during the period being measured
divided by the number of days in the period. For the prepaid business, churn
includes those pay-by-the-minute customers that we automatically disconnect
from our service when they have not replenished, or "Topped-Up," their
accounts for 150 days, as well as those monthly customers who we automatically
disconnect when they have not paid their monthly recurring charge for 150 days
(except for such monthly customers who replenish their account for less than
the amount of their monthly recurring charge and, according to the terms of
our monthly plans, may continue to use our services on a pay-by-the-minute
basis), and such customers that voluntarily disconnect from our service prior
to reaching 150 days since replenishing their account or paying their monthly
recurring charge. We utilize 150 days in our calculation as it represents the
last date upon which a customer that replenishes his or her account is still
permitted to retain the same phone number. We have recently introduced an
option which allows customers to extend the 150 day period to one year by
replenishing their account using an "Annual Top-Up." In this case we will
automatically disconnect their service if an additional Top-Up is not made
within 415 days of the qualifying annual Top-Up. We also offer an option which
allows customers to extend the "current status" of their account to one year
by replenishing their account using an "Annual Top-Up". In this case, within
60 days of the expiration of the extended one year period of "current status,"
the customer must Top-Up an additional qualifying amount or we will
automatically disconnect their service. For the postpaid business, churn
includes those customers who either disconnect from our service voluntarily or
whose service we disconnect for nonpayment. These calculations are consistent
with the terms and conditions of our service offering. We believe churn is a
useful metric to track changes in customer retention over time and to help
evaluate how changes in our business and services offerings affect customer
retention. In addition, churn is also useful for comparing our customer
turnover to that of other wireless communications providers.
Net customer additions and end-of-period customers are used to measure the
growth of our business model, to forecast our future financial performance and
to gauge the marketplace acceptance of our offerings. Net customer additions
represent the number of new customers that activated an account during a
period or, in the case of postpaid, the number of new or existing customers
that activated a new long-term contract, adjusted for churn during the same
period. End-of-period customers are the total number of customers at the end
of a given period.
Adjusted EBITDA is calculated as net income (loss) plus interest expense -
net, income tax expense, tax receivable agreements expense, depreciation and
amortization, write-offs of fixed assets, non-cash compensation expense,
minority interest, equity issued to a member, debt extinguishment costs and
expenses of Bluebottle USA Investments L.P. prior to the completion of the
IPO. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net
service revenue. We believe Adjusted EBITDA is a useful tool in evaluating
performance because it eliminates items related to taxes, as well as the tax
receivable agreements, non-cash charges relating to depreciation and
amortization, write-offs of fixed assets and minority interest, as well as
items relating to both the debt and equity portions of our capital structure.
Adjustments relating to interest expense, income tax expense, and depreciation
and amortization, write-offs of fixed assets and minority interest are each
customary adjustments in the calculation of supplemental measures of
performance. We also exclude tax receivable agreement-related expenses for
payments to the Virgin Group for the utilization of the net operating loss
carryforwards, and to Sprint Nextel, for the increase in tax basis that will
be allocated to us, as we consider them to be the functional equivalent of
paying taxes. We believe such adjustments are meaningful because they are
indicators of our core operating results and our management uses them to
evaluate our business. Specifically, our management uses them in its
calculation of compensation targets, preparation of budgets and evaluations of
performance. Similarly, we believe that the exclusion of non-cash compensation
expense provides investors with a more meaningful indication of our
performance as these non-cash charges relate to the equity portion of our
capital structure and not our core operating performance. The expenses of
Bluebottle USA Investments L.P. also do not relate to our core operating
performance and are, therefore, excluded. These exclusions are also consistent
with how we calculate the measures we use for determining certain bonus
compensation targets, preparing budgets and for other internal purposes.
The following table illustrates the calculation of Adjusted EBITDA and
Adjusted EBITDA margin and reconciles Adjusted EBITDA to net income which we
consider to be the most directly comparable GAAP financial measure.
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(In thousands, except Adjusted
EBITDA margin) (Unaudited) (Unaudited)
Net income (loss) $4,067 $(7,381) $12,362 $18,931
Plus:
Depreciation and amortization 10,538 8,619 28,060 25,350
Interest expense - net 6,905 14,332 24,177 41,780
Income tax expense 421 - 1,288 -
Tax receivable agreements
(benefit) expense (1,736) - 6,380 -
Non-cash compensation expense 2,446 1,390 9,207 3,580
Write-offs of fixed assets 441 - 671 -
Minority Interest 4,430 - 6,390 -
Bluebottle USA Investments L.P.
expenses prior to the IPO - 79 - 282
Adjusted EBITDA $27,512 $17,039 $88,535 $89,923
Net service revenue $305,031 $301,414 $900,159 $933,464
Adjusted EBITDA margin 9.0% 5.7% 9.8% 9.6%
Average revenue per user, or ARPU, is used to measure and track the
average revenue generated by our customers on a monthly basis. ARPU is
calculated as net service revenue for the period divided by the weighted
average number of customers for the period being measured, further divided by
the number of months in the period being measured. The weighted average number
of customers is the sum of the average customers for each day during the
period being measured divided by the number of days in that period. ARPU helps
us to evaluate customer performance based on customer revenue and forecast our
future service revenues.
The following table illustrates the calculation of ARPU and reconciles
ARPU to net service revenue which we consider to be the most directly
comparable GAAP financial measure.
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(In thousands, except number of
months and ARPU) (Unaudited) (Unaudited)
Net service revenue $305,031 $301,414 $900,159 $933,464
Divided by weighted average number
of customers 5,036 4,880 5,047 4,866
Divided by number of months in the
period 3 3 9 9
ARPU $20.19 $20.59 $19.82 $21.31
Cash cost per user, or CCPU, is used to measure and track our costs to
provide support for our services to our existing customers on an average
monthly basis. The costs included in this calculation are our (i) cost of
service (exclusive of depreciation and amortization), excluding cost of
service associated with initial customer acquisition, (ii) general and
administrative and restructuring expenses, excluding Bluebottle USA
Investments L.P. general and administrative expenses prior to the IPO and
non-cash compensation expenses, (iii) write-offs of fixed assets, (iv) net
loss on equipment sold to existing customers, (v) cooperative advertising
expenses in support of existing customers and (vi) other expense (income),
excluding tax receivable agreements expenses, debt extinguishment costs and
Bluebottle USA Investments L.P. These costs are divided by our weighted
average number of customers for the period being measured, further divided by
the number of months in the period being measured. CCPU helps us to assess our
ongoing business operations on a per customer basis, and evaluate how changes
in our business operations affect the support costs per customer. Given its
use throughout the industry, CCPU also serves as a standard by which we
compare our performance against that of other wireless communications
companies.
The following table illustrates the calculation of CCPU and reconciles
total costs used in the CCPU calculation to cost of service, which we consider
to be the most directly comparable GAAP financial measure.
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007 (In thousands, except number of
months and CCPU) (Unaudited) (Unaudited)
Cost of service (exclusive of
depreciation and amortization) $84,543 $89,352 $250,442 $273,331
Less: Cost of service associated
with initial customer
acquisition (546) (550) (1,507) (1,675)
Add: General and administrative
and restructuring expenses
(excluding Bluebottle USA
Investments L.P. expenses prior
to the IPO)(1) 88,742 83,696 253,398 258,966
Less: Non-cash compensation
expense (2,446) (1,390) (9,207) (3,580)
Less: Write-offs of fixed assets (441) - (671) -
Add: Net loss on equipment sold
to existing customers 20,363 15,947 57,502 52,422
Add: Cooperative advertising
expenses in support of
existing customers 398 614 138 2,004
Add: Other expense (income),
net of tax receivable agreements
expense, debt extinguishment
costs and Bluebottle USA
Investments L.P. (1) (80) 73 (281)
Total CCPU costs $190,612 $187,589 $550,168 $581,187
Divided by weighted average
number of customers 5,036 4,880 5,047 4,866
Divided by number of months in
the period 3 3 9 9
CCPU $12.62 $12.81 $12.11 $13.27
(1) Bluebottle USA Investments L.P. general and administrative expenses
were $95 and $108 for the three and nine months ended
September 30, 2007, respectively. Bluebottle USA Investments L.P.
expenses were $0 for the three and nine months ended September 30,
2008.
Cost per gross addition, or CPGA, is used to measure the cost of acquiring
a new customer. The costs included in this calculation are our (i) selling
expenses less cooperative advertising in support of existing customers, (ii)
net loss on equipment sales (cost of equipment less net equipment revenue),
excluding the net loss on equipment sold to existing customers, (iii) equity
issued to a member, and (iv) cost of service associated with initial customer
acquisition. These costs are divided by gross additions for the period being
measured. CPGA helps us to assess the efficiency of our customer acquisition
methods and evaluate our sales and distribution strategies. CPGA also allows
us to compare our average acquisition costs to those of other wireless
communications providers.
The following table illustrates the calculation of CPGA and reconciles the
total costs used in the CPGA calculation to selling expense, which we consider
to be the most directly comparable GAAP financial measure.
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(In thousands, except CPGA) (Unaudited) (Unaudited)
Selling expenses $22,279 $31,754 $77,040 $75,889
Add: Cost of equipment 102,997 99,133 307,770 292,157
Less: Net equipment revenue (18,154) (18,090) (67,221) (52,942)
Less: Net loss on equipment
sold to existing customers (20,363) (15,947) (57,502) (52,422)
Less: Cooperative advertising
in support of existing
customers (398) (614) (138) (2,004)
Add: Cost of service associated
with initial customer
acquisition 546 550 1,507 1,675
Total CPGA costs $86,907 $96,786 $261,456 $262,353
Divided by gross additions 821 760 2,345 2,427
CPGA $105.86 $127.35 $111.50 $108.10
Unlevered free cash flow is calculated as net cash provided by operating
activities excluding interest payments and less capital expenditures.
Unlevered free cash flow is a non-GAAP financial measure that indicates cash
generated by our business after operating expenses and capital expenditures
but before interest expense. We believe this measure helps to (i) evaluate our
ability to satisfy our debt and meet other mandatory payment obligations, (ii)
measure our ability to pursue growth opportunities, and (iii) determine the
amount of potential cash which may potentially be available to stockholders in
the form of stock repurchase and/or dividends, subject to the terms and
conditions of our Senior Credit Agreement. Given that our business is not
capital intensive, we believe this measure to be of particular relevance and
utility. We also use free cash flow internally for a variety of purposes,
including managing our projected cash needs.
The following table illustrates the calculation of free cash flow and
reconciles free cash flow to cash provided by operating activities which we
consider to be the most directly comparable GAAP financial measure.
Nine Months Ended September 30,
2008 2007
(Unaudited)
(In thousands)
Calculation of unlevered free cash flow:
Net cash provided by operating activities $40,798 $26,787
Less: Capital expenditures (12,570) (19,144)
Free cash flow $28,228 $7,643
Add: Cash paid for interest 23,935 41,270
Unlevered cash flow $52,163 $48,913
Pro Forma Earnings Per Share (Unaudited). Virgin Mobile USA is presenting
its earnings per share for 2007 on a pro forma basis to reflect its IPO, which
took place in October 2007.
The calculation of diluted earnings per share converts the historical
weighted average number of units of limited liability company interests in
Virgin Mobile USA, LLC outstanding as of January 1, 2007 for the three and
nine months ended September 30, 2007, to common stock based on a conversion
rate used in the reorganization. Pro forma earnings per share reflects shares
issued in the IPO, which are assumed to be outstanding for all periods
presented.
Three months ended Nine months ended
September 30, September 30,
2007 2007
(In thousands, except per share
amounts) (Unaudited) (Unaudited)
Net income $(7,381) $18,931
Weighted average shares outstanding -
diluted 25,828 50,652
Adjustments for pro forma weighted
average shares:
Increase in common shares outstanding
if IPO occurred on January 1, 2007 26,800 15,847
Pro forma weighted average shares
outstanding - diluted 52,628 66,499
Earnings per share - diluted $(0.29) $0.37
Pro forma earnings per share - diluted $(0.14) $0.28
Adjusted earnings per share. The Company is presenting adjusted earnings
per share which excludes non-cash charges associated with the acquisition of
Helio which occurred on August 22, 2008.
Three months ended Nine months ended
September 30, September 30,
2008 2008
(In thousands, except per share
amounts) (Unaudited) (Unaudited)
Diluted Earnings per share $0.07 $0.23
Amortization of Intangibles per share,
net of minority interest $0.01 $0.00
Adjusted earnings per share $0.08 $0.23
SOURCE Virgin Mobile USA, Inc.
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