Virgin Mobile USA Reports Earnings Per Share of $0.07 for the First Quarter Ended March 31, 2008
WARREN, N.J., May 5 /PRNewswire-FirstCall/ -- Virgin Mobile USA, Inc.
(NYSE: VM), a leading national provider of wireless communications services
without annual contracts, today reported its financial and operational results
for the quarter ended March 31, 2008.
(Logo: http://www.newscom.com/cgi-bin/prnh/20070613/VIRGINMOBILE )
"We executed against our business plan in the first quarter, delivering a
strong start to the year," said Dan Schulman, Chief Executive Officer, Virgin
Mobile USA. "While the current economic environment presents challenges, our
business performed above our expectations, producing strong profitability and
cash flow, even as we increased our marketing spend by $7.5 million year over
year, to support the launch of our new voice and data plans.
"We believe our new service plans, which will be in all of our channels by
the end of the second quarter, represent some of the best value available to
wireless consumers today. These offers provide compelling value and present a
clear choice for consumers. Early indications are positive, with our monthly
plans representing 38% of gross additions for the new offers in April, and
average ARPU on the new monthly plans of approximately $40."
Schulman continued, "I'm also pleased we will be substantially increasing
our retail footprint with both new and existing retail partners in the months
ahead. These include increased expansion into independent wireless retail
through American Wireless stores, our planned launch into over 900 new Sears
locations, and increased penetration and retail space with our largest retail
partner. We believe this expansion, in combination with the launch of our new
offers, represents a strong incremental growth opportunity for Virgin Mobile
USA in the second half of the year, and we remain confident in our estimates
for the full year 2008."
Overview and Basis of Presentation
The financial results for the three months ended March 31, 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. Virgin Mobile
USA is also presenting its earnings per share for 2007 on a pro forma basis
which 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 and 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 communication
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 First Quarter 2008
Virgin Mobile USA, Inc.
(Unaudited)
Three Months Ended March 31,
2008 2007
($ in thousands, except per share amounts) (restated)(1)
Net service revenue $303,764 $322,337
Total operating revenue 326,791 339,314
Operating income 16,603 32,559
Net income 4,749 19,172
Adjusted EBITDA 28,702 41,729
Adjusted EBITDA Margin 9.4% 12.9%
Earnings per common share - basic(2) $0.09 $0.74
Earnings per common share - diluted(2) $0.07 $0.38
Pro forma earnings per common
share - diluted(2) N/A $0.25
Interest expense - net 9,339 13,589
Capital expenditures 6,241 5,310
(1) During the preparation of the Company's financial statements for the
six months ended June 30, 2007, management identified errors in the Company's
financial statements in the amount of $3.8 million and $(0.1) million to its
net income for the three months ended March 31, 2007 and in total for the
years ended December 31, 2004-2006, respectively. These errors were primarily
the result of system interface failures for recovery fees for certain airtime
taxes and regulatory charges and accrued revenues, which overstated net
service revenue and overstated cost of service in each period for the years
ended December 31, 2004-2006, and understated net service revenue and
overstated cost of service for the three month period ended March 31, 2007.
The Company corrected these errors through a restatement of its results for
the three month period ended March 31, 2007. The impact of the out-of-period
adjustments in 2007 were not material to the Company's financial results for
the three months ended March 31, 2007. The interim results for the three
months ended March 31, 2007 included herein reflect the out-of-period charges.
(2) The calculation of basic and diluted earnings per share and pro forma
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 period ended March 31, 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.
Virgin Mobile USA, Inc.
(Unaudited)
Three Months Ended March 31,
2008 2007
(restated)(1)
Gross additions 795,575 881,756
Churn 5.1% 4.0%
Net customer additions 17,772 309,721
End-of-period customers 5,103,658 4,883,811
ARPU $19.93 $22.41
CCPU $12.01 $13.46
CPGA $115.59 $98.69
Free cash flow (in thousands) $10,386 $14,292
During the first quarter 2008, Virgin Mobile USA's net service revenue was
$303.8 million, a decrease of 5.8% versus the same period in 2007, reflecting
the effect of current economic conditions on consumer behavior, as well as the
Company's decision in the fourth quarter of 2007 not to invest in temporary,
aggressive handset pricing engaged in by certain competitors. Adjusted EBITDA
in the first quarter of 2008 was $28.7 million, compared to an Adjusted EBITDA
of $41.7 million in the first quarter of 2007.
Revenues in the first quarter of 2007 benefited from the launch in the
second half of 2006 of our hybrid monthly bucket plans, and Adjusted EBITDA in
the first quarter 2007 also reflects $3.8 million E911 tax refunds and
favorable settlements with taxing jurisdictions. The first quarter of 2007
also had a $4.9 million cost benefit due to the transition to consignment.
Adjusted EBITDA for the first quarter of 2008 was also impacted by an
incremental $7.5 million investment in marketing, to support the launch of the
Company's new voice and data plans, as well as the impact of additional states
subject to E911 tax in 2008.
Virgin Mobile USA's continued profitability reflects the growth of its
customer base, and the Company expects to produce growth in profitability for
the full year 2008. Net income for the quarter ended March 31, 2008 was $4.7
million, compared to net income of $19.2 million for the same period in 2007.
Diluted earnings per share for the first quarter of 2008 were $0.07, compared
to diluted earnings per share of $0.38 for the first quarter of 2007. Pro
forma diluted earnings per share, which is the more relevant comparison to the
first quarter of 2008 as it is adjusted to reflect the fully diluted share
count following the Company's IPO, were $0.25 in the first quarter 2007. The
decline in net income and earnings per share was due to factors related above,
as well as a $2.1 million accrual for payments under the Company's tax
receivable agreements. While net income declined from the first quarter 2007,
the Company was able to produce continued profitability while increasing its
marketing investment by an incremental $7.5 million year over year.
Free cash flow for the quarter totaled $10.4 million, a decline from $14.3
million from the first quarter of 2007. The primary driver of the decline in
free cash flow in the first quarter 2008 was lower top up streams associated
with a decline in consumer spending within the current economic environment,
which was in line with Company expectations for the quarter. Capital
expenditures for the first quarter of 2008 were $6.2 million, compared to $5.3
million for the first quarter of 2007, reflecting continuing investment,
although at a lower level than the competition. Interest expense for the
first quarter was $9.3 million, down from $13.6 million in the first quarter
of 2007.
John Feehan, Chief Financial Officer of Virgin Mobile USA commented, "Our
business performed well in the first quarter 2008, and we continue to generate
strong cash flow to service our debt and fund the growth of our business. We
believe there is a great deal of opportunity for growth in the second half of
the year."
Key Metric Performance Review for the First Quarter 2008
Gross customer additions, or new Virgin Mobile USA customers who activated
their accounts during the first quarter of 2008, totaled 795,575, down from
881,756 in the first quarter 2007. Gross customer additions in the first
quarter 2007 grew 42% year over year, benefiting from the launch in the second
half of 2006 of the Company's hybrid monthly bucket plans.
The Company's cost per gross addition, or CPGA, for the first quarter 2008
was $115.59, compared to CPGA of $98.69 in the first quarter 2007. Higher
CPGA in the first quarter of 2008 was related to an incremental spend of $7.5
million in marketing spend, related to the launch of the Company's new voice
and data plans, introduced during the quarter. The increase was also due to a
45,000 unit increase in handset shipments to non-consignment channels at the
end of quarter, as well as higher mix costs due to the popularity of the
$99.99 Wild Card handset. While these phones have slightly higher CPGA, they
also result in greater data usage, lower churn and increased return on
investment.
First quarter 2008 average monthly customer turnover, or churn, was 5.1%,
in line with Company estimates. As of March 31, 2008, the Company had over 5.1
million customers, an increase of 4.5% over March 31, 2007.
Average revenue per user, or ARPU, for the first quarter was $19.93,
reflecting a decline from the prior year's first quarter ARPU of $22.41, as
well as a stabilization of declining usage trends in the prepaid base
experienced during the fourth quarter 2007. This decline was the result of
lower customer usage of the traditional prepaid plans, which the Company
attributes in part to a migration of its higher-spending prepaid customers to
monthly hybrid offers. ARPU continues to be supported by sales of Virgin
Mobile USA's monthly hybrid plans, which offset declining usage on the
traditional prepaid side within a challenging economic environment.
Outlook
Virgin Mobile USA's management believes its significant experience in
delivering strong results in a historically competitive industry will enable
it to successfully position the Company through the current macroeconomic
conditions, even as they continue to impact consumer and wireless products.
Additionally, the Company's lean and variable cost structure, combined with an
improved capital structure, provides Virgin Mobile USA the opportunity to
produce profitable results in a challenging economic environment.
2008
Estimates for the full year 2008 remain unchanged from the guidance
provided on March 12, 2008.
Second Quarter 2008
Virgin Mobile USA's second quarter results are expected to reflect the
seasonality of its business, in which churn tends to be higher due to higher
gross adds in the seasonally strong fourth quarter, and revenues tend to be
lower. In addition, in the second quarter the Company expects to ship
incremental handsets to support its distribution expansion.
-- The impact of the new voice and data plans, as well as the Company's
expanded retail footprint, are expected to contribute to positive year
over year net add growth in the second half of 2008. Second quarter
net additions are expected to be in the range of (130,000) - (160,000).
Gross customer additions are expected to be comparable to the second
quarter 2007.
-- Net service revenues are expected to be in the range of $285 - $295
million.
-- Adjusted EBITDA is expected to be in the range of $19 to $23 million.
-- Earnings per share are expected to be in the range of ($0.01) - $0.03.
Recent Highlights
In addition to the launch of the Company's new plans with benefits
previously only available to postpaid customers including Roll Forward minutes
and unlimited text & messaging, other highlights in the first quarter
included:
-- the announcement of headline acts for the third Virgin Mobile Festival,
the largest music and arts festival on the East Coast, being held
August 9-10 at Pimlico Race Course in Baltimore, Maryland -- Foo
Fighters, Jack Johnson, Kanye West, Nine Inch Nails, and Stone Temple
Pilots. Last week, the Company announced the full lineup, adding such
artists as Bob Dylan, The Offspring, Wilco, Iggy & The Stooges, The
Swell Season, Chuck Berry, Cat Power, Paramore and many more.
-- the introduction of the Virgin Mobile Festival Special Edition Wild
Card handset, to be carried exclusively at Best Buy. Fans who purchase
the phone will receive festival-inspired content among other benefits
at the Festival.
-- the appointment of Bob Stohrer as new Chief Marketing Officer.
-- continued strength in Ringback sales with more than 100,000 Virgin
Mobile USA customers subscribing to the Ringback service and an average
of two Ringbacks per customer.
-- the debut of Flare, Virgin Mobile USA's second phone from LG
Electronics, and its first with a Spanish-language interface.
In April, the Company announced David Messenger's role had been expanded
to Chief Administrative and Corporate Development Officer.
Later this week, Virgin Mobile USA plans to launch its first handset by
Samsung, a mid-tier phone called 'Slash', and will expand its partnership with
Facebook to launch a unique new social networking application.
Earnings Conference Call
Virgin Mobile USA will host a conference call Monday, May 5th, 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 888.354.3598
(toll-free domestic) or 706.643.8861 (international); passcode: 37431006.
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
800.642.1687 (toll-free domestic) or 706.645.9291 (international); passcode:
37431006. The webcast will be archived on Virgin Mobile USA's web site for 30
days after the call at http://investorrelations.virginmobileusa.com/.
About Virgin Mobile USA, Inc.
Virgin Mobile USA (NYSE: VM) offers more than five million customers
control, flexibility and choice in wireless service, rich data content and
innovative products without annual contracts.
Voice pricing plans range from monthly options with unlimited nights and
weekends to by-the-minute offers, allowing consumers to adjust how and what
they pay according to their needs. Virgin Mobile USA's smart, stylish and
affordable handsets, including the Wild Card, Super Slice and Flare, are
available at top retailers in more than 40,000 locations nationwide and online
at http://www.virginmobileusa.com/, with Top-Up cards available at more than
140,000 locations.
J.D. Power and Associates ranked Virgin Mobile USA highest in customer
satisfaction among wireless prepaid services in both 2006 and 2007, and its
customers report a 90% satisfaction rate. Virgin Mobile USA contributes a
portion of profits from downloadable content to The RE*Generation, its
pro-social initiative to help homeless youth, and provides postage-paid return
envelopes in every new phone package for customers to recycle old phones.
Virgin Mobile USA's national coverage is powered by the nationwide Sprint PCS
network.
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)
March 31, December 31,
2008 2007
Assets
Current assets:
Cash and cash equivalents $5 $19
Accounts receivable, less
allowances of $95 at March 31, 2008
and $610 at December 31, 2007 47,750 57,956
Due from related parties 158 321
Other receivables 12,128 14,613
Inventories 123,950 137,364
Prepaid expenses and other current
assets 26,586 19,722
Total current assets 210,577 229,995
Property and equipment 160,403 154,162
Accumulated depreciation and amortization (116,927) (108,249)
Property and equipment, net 43,476 45,913
Other assets 5,070 6,131
Total assets $259,123 $282,039
Liabilities and Stockholders' deficit
Current liabilities:
Accounts payable $80,146 $111,753
Due to related parties 69,040 56,486
Book cash overdraft 62 2,045
Accrued expenses 74,056 73,142
Deferred revenue 127,761 128,125
Current portion of long-term debt 32,669 32,669
Total current liabilities 383,734 404,220
Long-term debt 235,870 244,037
Related party debt 45,000 45,000
Due to related parties 2,080 -
Other liabilities 1,981 3,981
Total non-current liabilities 284,931 293,018
Commitments and contingencies
Stockholders' deficit:
Common stock:
Class A common stock, par value
$0.01 per share - 200,000,000 shares
authorized and 53,122,755 shares
issued and outstanding, net of 27,315
treasury shares at March 31, 2008
and 53,136,839 shares issued and
outstanding, net of 13,231
treasury shares at December 31, 2007 532 532
Class C common stock, par value
$0.01 per share - 999,999 shares
authorized and 115,062 shares
issued and outstanding
at March 31, 2008 and December 31, 2007 1 1
Class B common stock, par value
$0.01 per share - 1 share
authorized, issued and outstanding at
March 31, 2008 and December 31, 2007 - -
Additional paid-in-capital 343,553 340,382
Accumulated deficit (750,111) (754,860)
Accumulated other comprehensive loss (3,517) (1,254)
Total stockholders' deficit (409,542) (415,199)
Total liabilities and stockholders' deficit $259,123 $282,039
Virgin Mobile USA, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
2008 2007
(restated)
Operating revenue
Net service revenue $303,764 $322,337
Net equipment revenue 23,027 16,977
Total operating revenue 326,791 339,314
Operating expenses
Cost of service
(exclusive of depreciation and amortization) 83,492 93,978
Cost of equipment 105,018 94,648
Selling, general and administrative
(exclusive of depreciation and amortization) 113,000 110,048
Depreciation and amortization 8,678 8,081
Total operating expenses 310,188 306,755
Operating income 16,603 32,559
Other expense (income)
Interest expense - net 9,339 13,589
Other expense (income) 2,080 (202)
Total other expense 11,419 13,387
Income before income tax expense 5,184 19,172
Income tax expense 435 -
Net income 4,749 19,172
Other comprehensive loss:
Unrealized loss on interest rate swap (2,263) (663)
Total comprehensive income $2,486 $18,509
Basic and diluted loss per share information:
Earnings per common share - basic $0.09 $0.74
Earnings per common share - diluted $0.07 $0.38
Weighted average common shares
outstanding - basic 52,757 25,797
Weighted average common shares
outstanding - diluted 64,828 50,089
Virgin Mobile USA, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three months ended March 31,
2008 2007
(restated)
Operating Activities
Net income $4,749 $19,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,678 8,081
Amortization of deferred financing costs 298 496
Non-cash charges for stock-based compensation 3,421 781
Non-cash cost of royalties and services - 25
Changes in assets and liabilities:
Accounts receivable 10,206 21,534
Due from related parties 163 2,209
Other receivables 222 9,659
Inventories 13,414 (5,147)
Prepaid expenses and other assets (6,101) 6
Accounts payable (31,607) 10,875
Due to related parties 14,634 (6,503)
Deferred revenue (364) 2,695
Accrued expenses and other liabilities (1,086) (44,281)
Net cash provided by operating activities 16,627 19,602
Investing Activities
Capital expenditures (6,241) (5,310)
Net cash used in investing activities (6,241) (5,310)
Financing Activities
Net change in book cash overdraft (1,983) (27,042)
Repayment of long-term debt (8,167) (9,250)
Net change in related party debt - 22,000
Other (250) -
Net cash used in financing activities (10,400) (14,292)
Net (decrease) increase in cash and cash
equivalents (14) -
Cash and cash equivalents at beginning of year 19 8
Cash and cash equivalents at end of period $5 $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 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 communication industry defines these metrics in precisely the
same way, we believe that these metrics as we use them facilitate comparisons
with other wireless communication 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, unadjusted for churn in the same period. In measuring
gross additions, we begin with account activations and exclude retailer
returns, customers who have reactivated and fraudulent activations. 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 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. Churn includes those pay-by-the-minute
customers whom 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 whom 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 who replenishes his or her account is still permitted to retain the
same phone number. This calculation is 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
represents the number of new customers that activated our handsets during a
period, 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,
income tax expense, the tax receivable agreements expense, depreciation and
amortization, non-cash compensation expense, 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 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 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
carry forward, 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 March 31,
2008 2007
(restated)
(In thousands, except Adjusted EBITDA
Margin) (Unaudited)
Net income $4,749 $19,172
Plus:
Depreciation and amortization 8,678 8,081
Interest expense 9,339 13,589
Income tax expense 435 -
Tax receivable agreements expense 2,080 -
Non-cash compensation expense 3,421 781
Bluebottle USA Investments L.P. expenses
prior to the IPO - 106
Adjusted EBITDA $28,702 $41,729
Net service revenue $303,764 $322,337
Adjusted EBITDA margin 9.4% 12.9%
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 March 31,
2008 2007
(restated)
(In thousands, except number of months and ARPU) (Unaudited)
Net service revenue $303,764 $322,337
Divided by weighted average number of customers 5,081 4,795
Divided by number of months in the period 3 3
ARPU $19.93 $22.41
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) our cost of
service (exclusive of depreciation and amortization), excluding cost of
service associated with initial customer acquisition, (ii) general and
administrative expenses, excluding Bluebottle USA Investments L.P. general and
administrative expenses prior to the IPO and non-cash compensation expenses,
(iii) net loss on equipment sold to existing customers, (iv) cooperative
advertising expenses in support of existing customers and (v) other (income)
expense, 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 communication
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 March 31,
2008 2007
(restated)
(In thousands, except number of months and CCPU) (Unaudited)
Cost of service (exclusive of
depreciation and amortization) $83,492 $93,978
Less: Cost of service associated
with initial customer acquisition (500) (609)
Add: General and administrative
expenses (excluding Bluebottle USA
Investments L.P. expenses prior to
the IPO)(1) 84,513 86,518
Less: Non-cash compensation expense (3,421) (781)
Add: Net loss on equipment sold to
existing customers 18,361 13,940
Add: Cooperative advertising
expenses in support of existing customers 607 721
Add: Other expense (income), net of
tax receivable agreements expense, debt
extinguishment costs and
Bluebottle USA Investments L.P. - (205)
Total CCPU costs $183,052 $193,562
Divided by weighted average number of
customers 5,081 4,795
Divided by number of months in the period 3 3
CCPU $12.01 $13.46
(1) Bluebottle USA Investments L.P. general and administrative expenses
were: $0 and $103 for the three months ended March 31, 2008 and 2007,
respectively.
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
communication 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 March 31,
2008 2007
(restated)
(in thousands, except CPGA) (Unaudited)
Selling expenses $28,487 $23,427
Add: Cost of equipment 105,018 94,648
Less: Net equipment revenue (23,027) (16,977)
Less: Net loss on equipment sold to
existing customers (18,361) (13,940)
Less: Cooperative advertising in
support of existing customers (607) (721)
Add: Cost of service associated with
initial customer acquisition 500 609
Total CPGA costs $92,010 $87,046
Divided by gross additions 796 882
CPGA $115.59 $98.69
Free cash flow is calculated as net cash provided by operating activities
less capital expenditures. Free cash flow is a non-GAAP financial measure that
indicates cash generated by our business after operating expenses capital
expenditures and 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.
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.
Three Months Ended March 31,
2008 2007
(restated)
(Unaudited)
(in thousands)
Calculation of Free cash flow:
Net cash provided by operating activities $16,627 $19,602
Less:
Capital expenditures (6,241) (5,310)
Free cash flow $10,386 $14,292
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 pro forma 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 to
common stock based on a conversion rate used in the reorganization and shares
issued in the IPO are assumed to be outstanding for all periods presented.
Three months ended
March 31, 2007
(restated)
(Unaudited)
Net income $19,172
Weighted average shares outstanding - diluted 50,089
Adjustments for proforma weighted average shares:
Increase in common shares outstanding if IPO
occurred on January 1, 2007 26,800
Pro forma weighted average shares
outstanding - diluted 76,889
Earnings per share - diluted $0.38
Pro forma earnings per share - diluted $0.25
(1) The calculation of pro forma diluted earnings per share converts the
historical weighted average number of units of limited liability company
interests in Virgin Mobile USA, LLC outstanding for the period ended March 31,
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.
SOURCE Virgin Mobile USA, L.P.
