Confused by Virgin Mobile USA's S-1

Posted by: Olga Kharif on May 03, 2007

I just finished perusing Virgin Mobile USA’s S-1 filing, submitted on May 1. And I feel very confused.

On the plus side, the prepaid cell phone service provider’s performance looks pretty good: Last year, Virgin lost $37 million on more than $1.1 billion in sales. That’s pretty close to break-even. With 4.88 million customers, the company controls 15% share of the prepaid mobile phone market. But: The company’s customer turnover is rising, its average revenues per customers are falling. And Virgin Mobile USA has no cash whatsoever, and half a billion in debt.

A few other things in the filing gave me pause. Apparently, public investors will only be able to buy shares in a holding company — not the Virgin Mobile USA business itself. The prospectus outlines a very confusing new organizational structure, similar to a real-estate investment trust (basically, the company investors buy shares in owns no business assets). As a results of this organizational structure change, there can be conflicts of interest between public shareholders and holders of the actual operational assets (current owners, Sprint-Nextel and the Virgin Group), according to the filing’s risks section.

Worse, as part of the reorganization, the company will amend and restate its agreement with current co-owner and network provider, Sprint-Nextel, running through 2027. The prospectus doesn’t say what exactly the amendment will entail. Considering that Sprint is taking a major cut of profits, an amendment can have a lot of impact on Virgin Mobile USA’s financial performance. And one of the risk sections explains that, in July 2008, Sprint’s affiliates have a right to stop offering Virgin’s service in their regions if, for example, Sprint Nextel changes hands (and we’ve all heard talk of Sprint being for sale). Would you be worried about these? Are you considering investing into the IPO?

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Reader Comments

jason galanis

May 4, 2007 02:05 AM

While Virgin has an amazing consumer brand and awareness, it is remarkable to me that a company of this scale can be built as a 'virtual company'. that is, they own no network of their own. rather, they entirely ride on a competitors network. doesnt this scream vulnerability....notwithstanding a iconic brand?

Neil Brillhart

May 6, 2007 02:08 AM

Last I looked, Apple didn't manufacture iPods, nor do they record any of the music or TV shows in the iTunes store. It's all about marketing baby! And these guys are great at it. Just walk around Best Buy. The Virgin Mobile display is the most impressive place in the store. Even the big carriers look pale in comparison.

Levonne Reed

June 4, 2007 10:08 PM

Whereas, Virgin Mobile may seem like a life saver for those who do not want a contract but it is a scam. These phones are available for children to purchase, which is very convenient but there is a draw back. The Rep. ask you to register your credit/debit card in order to pay your child bill but they don't inform you that if they run out of minutes before their next payment date, they will process a continuous charge to your card. The catch is to make it convenient for you to pay the bill, register your card. There should be something done about this, because they (Virgin Mobile) are preying on minors.

Bill Taylor

July 6, 2007 02:05 PM

With regard to VMUSA operating a "scam" w/regard to charges to a parent's credit card, the FAQs on the VMUSA web site currently do explain that parental permission to "register" a credit card for minutes to a child's mobile phone account may result in a repetition of charges when the child's minutes are running out, thus permitting the child to keep adding minutes to his or her account with those minutes billed to the credit card that is registered with VMUSA. Instead of registering a credit card with VMUSA, an option that is always available, however--and also pointed out in the FAQs on VMUSA's web site-- is simply to add minutes to a child's acocunt by purchasing a VM "top-up" card available in various amounts($20 or greater) at thousands of locations. I agree that a VM representative shouldn't assume that a parent understands how the two options work and should be careful to discuss the two options with a parent.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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