Tag Archive for "CPGA" tag

<!– /* Font Definitions */ @font-face {font-family:”Cambria Math”; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:1; mso-generic-font-family:roman; mso-font-format:other; mso-font-pitch:variable; mso-font-signature:0 0 0 0 0 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:”"; margin-top:0in; margin-right:0in; margin-bottom:10.0pt; margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:”Calibri”,”sans-serif”; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:”Times New Roman”; mso-bidi-theme-font:minor-bidi;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:”Times New Roman”; mso-bidi-theme-font:minor-bidi;} .MsoPapDefault {mso-style-type:export-only; margin-bottom:10.0pt; line-height:115%;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} –>

Virgin Mobile’s recent earning report and the associated announcements point towards a renewed future for prepaid and MVNO wireless programs in the U.S.

While many key components contribute towards the recent surge in this wireless segment, the current economic conditions certainly play an important role on several fronts.

Consider the recent flat monthly prepaid or pay as you go rate products announced by Virgin, Boost and others. But many existing prepaid customers, who make up the majority of Virgin subscribers, spend less than half of the going flat rate plans recently announced for their wireless voice and data needs. Therefore, there is little chance in this economic climate that these subscribers would upgrade their plans and double their monthly spend. Perhaps the silver lining is that some of the lower end of the postpaid subscribers would be encouraged to sign for plans that offer ‘unlimited’ minutes for a flat monthly rate.

Another economic climate contributing factor could be lower churn specifically from ‘switchers,’ who may think twice about an incremental spend on a new handset. Witness Virgin’s quarterly (period ending December 31, 2008) churn drop to 4.8% from 5.1%. The annual churn rate for 2008 compared to 2007, however, rose to 5.2% from 4.9%.

While much is being made about Virgin’s recent quarterly financial performance, especially about the growth in service revenue, the company should also be given credit for dramatically reducing its CPGA (Cost Per Gross Addition). While quarterly and year-over-year gross addition were roughly the same, the company reduced its quarterly CPGA to $101.93 from $120.68 for the same quarter in 2007 or improving a key metric for prepaid MVNOs by more than $17 million.

And while monthly ARPU (Average Revenue Per User) in 2008 increased by $0.78 over the same quarter in 2007, there was a corresponding increase in CCPU (Cash Cost Per User) of $2.22. For the full year, while CCPU was down, so was ARPU.

<!– /* Font Definitions */ @font-face {font-family:”Cambria Math”; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:-1610611985 1107304683 0 0 159 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:”"; margin-top:0in; margin-right:0in; margin-bottom:10.0pt; margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:”Calibri”,”sans-serif”; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:”Times New Roman”; mso-bidi-theme-font:minor-bidi;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:”Times New Roman”; mso-bidi-theme-font:minor-bidi;} .MsoPapDefault {mso-style-type:export-only; margin-bottom:10.0pt; line-height:115%;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} –>

Three Months Ended Year Ended

December 31, December 31,

——————– ——————–

2008 2007 2008 2007

——— ——— ——— ———

(Unaudited) (Unaudited)

Gross additions 960,421 957,541 3,305,857 3,384,460

Churn 4.8% 5.1% 5.2% 4.9%

Net customer additions 216,005 209,669 119,237 511,796

End-of-period customers 5,380,310 5,085,886 5,380,310 5,085,886

ARPU $ 21.14 $ 20.36 $ 20.30 $ 21.24

CCPU $ 13.99 $ 11.77 $ 12.74 $ 13.05

CPGA $ 101.93 $ 120.68 $ 108.68 $ 111.66

Free cash flow $ 25,720 $ 11,206

Unlevered cash flow $ 57,776 $ 62,657

Some have criticized AT&T’s increase in acquisition cost in 2008 especially when it picked up fewer net subscribers for dollars spent than it did in 2007.  However, 2007 was the year when it acquired massive number of low quality subscribers from prepaid.  With higher churn, lower ARPU, and intense competition, these prepaid subscribers can have a lifetime value 3-5x lower than an average postpaid subscriber.

Let’s look at the numbers more closely…..

AT&T spent $13B in 2007 for Selling, General, and Administrative expense vs. $14B.  So roughly the same.  However, in 2007 it picked up roughly 5.3M net additional subscribers while only 4.7M in 2008.  But of the 5.3M in 2007, one out of four were prepaid subscribers whereas in 2008 nearly all net adds were postpaid.

Not only were they postpaid subscribers, they were mostly iPhone postpaid subscribers that have a reportedly 1.6x ARPU than the average postpaid subscriber.  Extracting the numbers from the Investor Briefing, more than 50% of all postpaid gross adds where iPhones (1.9M out of the 3.5M total in postpaid) coupled with 60% of the net adds being smartphone subscribers……I would say the increase in acquisition cost was money well spent.  (I don’t buy the lower churn rate of iPhone subs yet since these subs have not been around long enough.)

But don’t iPhone subs cost more to acquire and it is hurting AT&T’s CPGA and bottom line as can be seen in the recent earnings??

Not true.  Despite the heavy acquisition cost for a iPhone sub as can be seen by the earnings shortfall at AT&T, in the long run, the residual value from higher iPhone ARPU and lower churn should justify the investment.  Assume that the iPhone is subsidized an additional $200 in CPGA. If ARPU was truly 1.6x higher than average postpaid ARPU, $60x.6 = $36.  $36 x 40% margin = $14.40 in additional gross contribution per month.  Hence, the breakeven point for the additional $200 in CPGA is a little more than 1 year ($200/14.40 = 14 months). This seems well worth the investment given that the subs are under a 2-year contract.