Metrics better than expected, driving improved long-term profile May 09, 2007
Goldman Sachs' Rating/Coverage View is Buy/Neutral
What's changed
LEAP reported a strong 1Q, with core metrics, including subscriber additions and ARPU, outpacing our expectations. Stronger adds in the quarter and an upwards ARPU trajectory, which seems to have incremental momentum based on new rate plans, cause upward revisions to our longer-term forecasts. We are raising our price target to $88, a $10 increase.
Implications
We believe the per market profile of the company improved through this earnings season. Subscriber additions in core legacy markets picked up meaningfully this quarter and beat expectations, which could push terminal penetration rates per market higher than previously expected. In addition, ARPU was higher than expected, and we expect new rate plans to continue this momentum. The two key drivers of growth seem to be on track to deliver better than expected long-term revenue growth. With a scaleable cost structure, this points also to EBITDA and FCF growth on a better trajectory than prior expectations.
Valuation
Our 12-month $88 price target (from $78) sums: (1) 2007YE DCF of ~$71 for the existing business; (2) ~$16/share option value for AWS spectrum market launches not in our model but included in Leap’s launch plans; (3) ~$2/share value for licenses owned but not likely to be built out.
Key risks
(1) Rising competition in the “unlimited” market; and (2) the customer profile leads to macro risks such as unemployment, subprime fears, and gas prices. |
