Do Not Give In to Temptation on VM

Year to date, shares of Virgin Mobile USA (vm - commentary - Cramer's Take) are down 38%, and for those who have followed my view on the shares, I am not surprised. But with the shares down so much compared to 12.1% for the Nasdaq year to date, is now the time to start looking at VM shares again?

Virgin Mobile

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Source: Google Finance

Not at all in my opinion, and I'll tell you why. In the last 24 hours, two new data points underscore the need, in my view, to be very critical of the mobile-virtual-network operator (MVNO) market.

Missing Forecast Hurts Helio

Thursday, Earthlink's (ELNK - commentary - Cramer's Take) 10k included some review of Helio -- one of the last remaining MVNOs in the U.S. -- given its ownership position. In a nutshell, revenue was up -- more on that in a second -- but losses grew and the amount of cash on hand continues to fall.

First the "good news" for Helio -- its revenue in 2007 jumped dramatically to $171 million from $46.6 million in 2006. In the fourth quarter, Helio posted anther large increase in revenue, both on an annual basis, and a more modest 8% increase on a sequential one, to $56 million. In the Earthlink 10k, it's reported that Helio had more than 180,000 subscribers at the end of the fourth quarter, which equates to 28% sequential increase.

On its face, one would say "not bad," but the underlying data is what we need to be focused on. Those 180,000 plus subscribers fall far short of the 200,000-250,000-subscriber forecast that was shared at the beginning of 2007. While the numbers were good, they simply did not live up to expectations.

As a result of that shortfall, Helio's net loss widened by 41.3% to $326.6 million in 2007 compared to $191.8 million in 2006. This, of course, ate up cash, which fell to $45.1 million in cash and cash equivalents at the end of 2007 compared to $139 million at the end of 2006. Helio exited 2007 with a convertible note worth $62.6 million vs. none exiting 2006.

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At the time of publication, Versace had no positions in the stocks mentioned, although positions may change at any time.

Chris Versace joined Agile Equity in 2006 and leads the Washington D.C. office where he oversees Agile Capital Management and serves as a sub adviser for other asset managers. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Versace appreciates your feedback; click here to send him an email.