Prospectus Summary
PROSPECTUS SUMMARY This summary highlights selected information in this prospectus, but it may not contain all of the information that you should consider before deciding to invest in our Class A common stock. You should read this entire prospectus carefully, including the “Risk Factors” section and the financial statements, which are included elsewhere in this prospectus.Our Company
We are a leading national provider of wireless communications services, offering prepaid, or pay-as-you-go, services targeted at the youth market (ages 14-34). Our customers are attracted to our products and services because of our flexible monthly terms, easy to understand pricing structures, stylish handsets offered at affordable prices and relevant mobile data and entertainment content. We believe that the appeal of our brand and products and services extends beyond our target audience and estimate that approximately half of our current customers are ages 35 and over. We offer our products and services on a flat per-minute basis and on a monthly basis for specified quantities, or buckets, of minutes purchased in advance—in each case without requiring our customers to enter into long-term contracts or commitments.
We were founded as a joint venture between Sprint Nextel and the Virgin Group and launched our service nationally in July 2002, reaching one million customers in November 2003, within eighteen months of our national launch. We have continued to grow our customer base rapidly and, as of December 31, 2006, we served approximately 4.57 million customers, which we estimate represented approximately a 15% share of the pay-as-you-go market and a 19.0% increase over the 3.84 million customers we served as of December 31, 2005. As of March 31, 2007, we served approximately 4.88 million customers. Our revenues for the year ended December 31, 2006 were $1.1 billion.
We market our products and services under the “Virgin Mobile” brand, which enjoys strong brand awareness and in 2004 was rated as one of the top “trendsetting” brands in any sector by The Intelligence Group’s Cassandra Report, which tracks youth trends in the United States. We have exclusive rights to use the Virgin Mobile brand for mobile voice and data services through 2027 in the United States, Puerto Rico and the U.S. Virgin Islands through our trademark license agreement with the Virgin Group.
We provide our services using the nationwide Sprint PCS network. We purchase wireless network services at a price based on Sprint Nextel’s cost of providing these services plus a specified margin under an agreement which runs through 2027. As a result, we are able to dedicate our resources to acquiring and servicing customers rather than to acquiring spectrum or building and maintaining a wireless network.
We believe that two key factors distinguish us from many of our competitors: our focus on the youth and pay-as-you-go segments of the U.S. wireless market and our mobile virtual network operator, or MVNO, business model. Our focus on the youth and pay-as-you-go segments of the U.S. wireless market allows us to tailor our products and services, advertising, customer care, distribution network and overall operations to the needs and desires of our target market, which we believe is underserved by wireless providers. We control our customers’ experience and all customer “touch points,” including brand image, pricing, mobile content, marketing, distribution and customer care. As an MVNO, however, we do not own or operate a physical network, which frees us from related capital expenditures and allows us to focus our resources and compete effectively against the major national wireless providers in our target market.
Competitive Strengths
We believe that the following key strengths enable us to compete effectively in the wireless telecommunications market:
Differentiated Market Approach. We have been pioneers in the U.S. wireless industry, offering innovative, youth-oriented pay-as-you-go plans without long-term contracts or commitments. Our service plans, which include both flat per-minute rates and hybrid plans with monthly buckets of minutes purchased in advance, are attractive alternatives to traditional postpaid plans. Our stylish and affordable handsets and our voice and data service offerings, including VirginXL and VirginXtras (entertainment applications which include ringtones, text, instant and picture messaging, email and entertainment content), are designed to make Virgin Mobile particularly appealing to the youth market. We believe that the relevance and appeal of our non-voice services is evidenced by the fact that approximately 17% of our service revenues for the year ended December 31, 2006 were from non-voice services, approximately 5 percentage points higher than the wireless industry average of 12%, according to the Yankee Group. These services provide an additional source of revenue and we believe provide us with improved customer retention.
Strong Brand. Virgin Mobile is the number one brand for prepaid wireless services in the United States in awareness and purchase consideration among 14-34 year-olds, according to Gallagher Lee Brand Tracking (fourth quarter 2006), and was rated as one of the top ten “trendsetting” brands in any sector in the United States by the Cassandra Report in 2004. We benefit from our brand association with the Virgin Group, a global consumer organization with interests ranging from transportation to leisure and entertainment. We believe that our customers identify with brands and products that reflect their values and our marketing efforts focus on leveraging the popular attributes of the Virgin brand: fun, style, good value and social responsibility. We believe that this strong brand association is one of our most distinct and powerful competitive advantages and is difficult for our competitors to replicate. We have exclusive rights to use the Virgin Mobile brand through 2027 for mobile voice and data services in the United States, U.S. Virgin Islands and Puerto Rico through our trademark license agreement with the Virgin Group.
Extensive and Efficient Distribution. Our nationwide distribution network is comprised of 130,000 third party retail stores that offer account replenishment, or Top-Up cards, including more than 35,000 retail locations that also sell our handsets. We distribute our products through leading national retailers, including Wal-Mart, Best Buy, RadioShack and Target, and generally receive favorable product positioning in their retail locations. Our products are designed to require minimal sales assistance, which enables us to distribute them cost-effectively through third party channels and eliminates the need to expend capital to build and operate our own retail stores.
Award-winning Customer Service. Our award-winning customer service program, Virgin Mobile At Your Service, provides user-friendly and effective customer service through our call centers and our website. Our high quality of customer service helps us to retain customers. As a result, we believe that our churn is among the lowest in the prepaid segment of the wireless industry. We consistently receive high ratings in customer satisfaction surveys. In 2006, we were the sole recipient of the J.D. Power and Associates Award for Wireless Prepaid Customer Satisfaction and our customer satisfaction ratings consistently exceed 90%, according to Market Strategies, Inc., which began surveying our performance in 2003.
Capital Efficient Business. Our mobile virtual network operator, or MVNO, business model, easy-to-understand products and services, cost-efficient distribution channels and focused marketing strategy have made us one of the lowest cost operators in the wireless industry. As an MVNO, we have substantially lower capital expenditures than those of wireless service providers that own their networks. While we expect to continue to subsidize our handsets in order to acquire additional customers, we do not operate our own retail stores, which saves us substantial sales and distribution costs. In addition, we pay Sprint Nextel for wireless services only to the extent of our customers’ usage. As a result, we have a highly variable cost structure, which we believe will allow us to reach profitability faster than if we were to maintain our own network.
Proven and Committed Management Team. We are led by a highly experienced management team, which has significant expertise in the telecommunications, Internet and e-commerce, media and entertainment, consumer products and retail industries. Many members of our management team have been with us since before our national launch and have been instrumental in developing and implementing our business model.
Business Strategy
We believe the following components of our business strategy will allow us to continue our growth and improve our profitability:
Focus on Fast-growing Segments of U.S. Wireless Market. We focus on two fast-growing segments of the U.S. wireless market: youth and pay-as-you-go. We believe there is substantial demand in the United States for our straightforward and fun wireless communication services. According to the Yankee Group, the number of users of wireless service in the under 35 year-old segment in the United States is projected to increase by 16 million from 2006 to 2008, representing approximately 42% of the total growth in U.S. wireless customers over the same period. According to the Yankee Group, in 2006, there were approximately 29.5 million pay-as-you-go wireless customers in the United States and such number is expected to grow to approximately 53.0 million by 2011, representing a 12.4% compound annual growth rate over the same period. In 2006, the U.S. prepaid and hybrid market represented only 13% of wireless customers, according to the Yankee Group. By comparison, mobile penetration rates in western European markets range from 80% to 120%, according to Current Analysis. By 2008, the U.S. market is expected to add 37 million new wireless customers, of which 13 million, or 35%, are expected to be pay-as-you-go and hybrid customers, according to the Yankee Group. We plan to continue to penetrate the youth segment and grow our market share by continuing to tailor our products, services and advertising message to this market, leveraging our brand through new and existing distribution channels and utilizing select youth-oriented media channels that specifically resonate with our target market, such as MTV, Vice, Facebook.com, MySpace.com and outdoor billboards and postings in key trendsetting neighborhoods.
Continue Product and Service Innovation. We have a proven ability to innovate and adapt to our customers’ needs. For example, in 2006 we launched a suite of new service plans that were designed to be more attractive to higher-usage customers. These monthly bucket plans include anytime and night and weekend minutes without long-term contracts or commitments—effectively expanding the pay-as-you-go market to include some customers who previously might have selected a postpaid service. We launched a new service plan that enables our customers to buy monthly buckets of messages in advance, as well as a new flat-rate per-minute voice plan. At the same time, we launched mobile social networking and Sugar Mama, an innovative new program that enables our customers to earn minutes by viewing and rating advertisements online. We intend to continue our efforts to address our market’s evolving needs and to offer innovative and popular products and services ahead of our competitors.
Enhance our Brand Strength. We aim to maintain and strengthen a vibrant brand image that resonates with our customers and distinguishes us from other wireless service providers. Our goal is to attract and retain customers through our youth-oriented marketing message and service offerings that are straightforward, flexible and a good value. For example, our marketing events in 2006 included the Virgin Festival by Virgin Mobile, a one-day event that drew over 42,000 fans to see major performing artists. Given the success of our Virgin Festival in 2006, we are planning a larger two-day event for 2007. We will continue to enhance our brand through targeted marketing, advertising, product packaging, point-of-sale materials and innovative services.
Leverage Our Scale and Infrastructure to Drive Profitable Growth. As of March 31, 2007, in less than five years since our national launch, we had grown our customer base to approximately 4.88 million. We have built the infrastructure to support future growth in customers and usage while leveraging the advantages of our predominantly variable cost structure. As we continue to scale the business, we expect our growing customer base to translate into improved cost economies without the need for substantial capital investment.
We were incorporated in Delaware on April 11, 2007. Our principal executive offices are located at 10 Independence Boulevard, Warren, NJ 07059 and our main telephone number is (908) 607-4000. Our principal website is virginmobileusa.com. Information contained on our website or that can be accessed through our website is not incorporated by reference in this prospectus.
Organizational Structure
Current Organizational Structure
Our operations are presently conducted by Virgin Mobile USA, LLC, a Delaware limited liability company owned by Sprint Nextel, the Virgin Group and two minority investors. The following diagram depicts our current organizational structure.
Post-IPO Organizational Structure
Virgin Mobile USA, Inc. was formed in April 2007 for the purposes of this offering. Virgin Mobile USA, Inc. has not engaged in any business or other activities except in connection with its formation and the reorganization transactions described below. Following the reorganization transactions described below and this offering, Virgin Mobile USA, Inc. will be a holding company and will hold, directly and indirectly through Bluebottle USA Investments L.P. and Bluebottle USA Holdings L.P., partnership units in the Operating Partnership and all of the outstanding shares of VMU GP, LLC. As an indirect owner of Bluebottle USA Holdings L.P., the sole general partner of the Operating Partnership, Virgin Mobile USA, Inc. will operate and control all of the business and affairs of the Operating Partnership. Virgin Mobile USA, Inc. will consolidate the financial results of the Operating Partnership, and the ownership interest of Sprint Nextel in the Operating Partnership will be treated as a minority interest in our consolidated financial statements. Virgin Mobile USA, Inc., directly and through Holdings, and Sprint Nextel will be the only partners of the Operating Partnership after the reorganization transactions and this offering. The diagram below depicts our organizational structure immediately following the reorganization transactions and this offering.
Reorganization Transactions
Prior to completion of this offering, we intend to complete an internal restructuring, to which we collectively refer in this prospectus as the reorganization transactions. Pursuant to the reorganization transactions, Virgin Mobile USA, LLC will convert into a Delaware limited partnership and become an indirect, majority-owned subsidiary of Virgin Mobile USA, Inc. Virgin Mobile USA, Inc. will serve as the holding company for the public’s common equity interests in our business following this offering.
We expect that the directors of Virgin Mobile USA, LLC will agree, subject to their fiduciary duties, to support and approve the reorganization transactions and this offering, prior to or simultaneously with the execution of the underwriting agreement relating to this offering. The final determination as to the completion, timing, structure and terms of these transactions and this offering will be based on financial and business considerations and prevailing market conditions.
The reorganization transactions are generally described below.
Presently, Virgin Mobile USA, LLC is owned by Sprint Nextel (through Sprint Ventures, Inc.), the Virgin Group (through Bluebottle USA Holdings L.P., or Holdings) and two other minority investors. The general partner of Holdings, Bluebottle USA Investments L.P., or Investments, owns a 99% interest in Holdings. The remaining 1% of Holdings is owned by a minority investor and VMUI, Inc., Holdings’ limited partners. Investments is indirectly 100% owned by the Virgin Group.
Prior to the consummation of this offering, Sprint Nextel will (1) contribute a portion of its interest in Virgin Mobile USA, LLC to Virgin Mobile USA, Inc. in consideration for one share of Class B common stock and shares of Class A common stock (which will be sold in this offering) and (2) sell a portion of its interest in Virgin Mobile USA, LLC to Virgin Mobile USA, Inc. in consideration for $ million (which will be paid from the net proceeds to us from this offering). The minority investor in Holdings will contribute its limited partnership interest in Holdings to Virgin Mobile USA, Inc. in consideration for shares of Class A common stock. VMUI, Inc. will be liquidated into Investments. Minority investors in Virgin Mobile USA, LLC will contribute their respective interests in Virgin Mobile USA, LLC to Virgin Mobile USA, Inc. as consideration for shares of Class A common stock. The Virgin Group will contribute its interests in Investments and its interests in a newly-formed entity, VMU GP, LLC, to Virgin Mobile USA, Inc. in consideration for shares of Class A and shares of Class C common stock, resulting in Virgin Mobile USA, Inc. becoming (directly and indirectly) the sole owner of Holdings.
As a part of the reorganization transactions, Virgin Mobile USA, LLC will convert into a Delaware limited partnership and change its name to Virgin Mobile USA, L.P. As a result of such conversion, Virgin Mobile USA, Inc.’s and Holdings’ interests in Virgin Mobile USA, LLC will convert into a % limited partnership interest and a % general partnership interest, respectively, in Virgin Mobile USA, L.P., and Sprint Nextel’s remaining interest in Virgin Mobile USA, LLC will convert into a % limited partnership interest in Virgin Mobile USA, L.P. exchangeable for Class A common stock. VMU GP, LLC will be the general partner of Investments and will be wholly owned by Virgin Mobile USA, Inc.
As a result of the reorganization transactions, Virgin Mobile USA, Inc., the issuer of Class A common stock in this offering, will be a holding company with no material assets other than % of the equity interest in Virgin Mobile USA, L.P. ( % if the underwriters’ over-allotment option is exercised in full) in the form of a general and limited partnership interest. The remaining % equity interest in Virgin Mobile USA, L.P. ( % if the underwriters’ over-allotment option is exercised in full) will be held by Sprint Nextel in the form of a limited partnership interest exchangeable for Class A common stock in Virgin Mobile USA, Inc. The sole business of Virgin Mobile USA, Inc. will be to hold its interest in Virgin Mobile USA, L.P. and to act, through its subsidiaries, as the managing general partner of Virgin Mobile USA, L.P., in which capacity it will generally control the management and operations of Virgin Mobile USA, L.P. Because Virgin Mobile USA, Inc. will only own % of the equity of Virgin Mobile USA, L.P., our net income (loss) will be reduced by a minority interest expense to reflect the entitlement of Sprint Nextel to a portion of the Virgin Mobile USA, L.P.’s income (loss).
Upon completion of the reorganization transactions, the capital stock of Virgin Mobile USA, Inc. will consist of three classes of stock: (i) Class A common stock, entitled to one vote per share on all matters submitted to a vote of stockholders; (ii) Class B common stock, entitled to a number of votes per share on all matters submitted to a vote of stockholders that is equal to the total number of shares of Class A common stock for which the partnership units that Sprint Nextel holds in the Operating Partnership are exchangeable; and (iii) Class C common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and convertible into our Class A common stock on a one-for-one basis at any time. See “Description of Capital Stock.” All shares issued in this offering will be shares of Class A common stock. Sprint Nextel and the Virgin Group, our principal stockholders, will be able to exercise control over our management and affairs and all matters requiring stockholder approval as a result of their ownership of % voting power in Virgin Mobile USA, Inc. (in the form of Class A common stock and Class C common stock) in the case of the Virgin Group and a % voting power (in the form of Class B common stock) in the case of Sprint Nextel.
In addition, as a part of the reorganization transactions, we expect to amend and restate our PCS services agreement and our trademark license agreement with Sprint Nextel, to amend and restate our trademark license agreement with the Virgin Group and to enter into tax receivable agreements with Sprint Nextel and the Virgin Group. See “Certain Relationships and Related Party Transactions.”
Effect of the Reorganization Transactions
As a result of the transactions described above, immediately following this offering:
Holding Company Structure
Following the reorganization transactions and this offering, Virgin Mobile USA, Inc. will become the sole member of VMU GP, LLC and control the Operating Partnership through its subsidiaries. Virgin Mobile USA, Inc. will directly and indirectly hold partnership units in the Operating Partnership.
As the indirect owner of Holdings, the sole general partner of the Operating Partnership, Virgin Mobile USA, Inc. will operate and control all of the business and affairs of the Operating Partnership. Virgin Mobile USA, Inc. will consolidate the financial results of the Operating Partnership and the ownership interest of Sprint Nextel in the Operating Partnership will be treated as a minority interest in Virgin Mobile USA, Inc’s consolidated financial statements. Virgin Mobile USA, Inc., directly and through Holdings, and Sprint Nextel will be the only partners of the Operating Partnership after this offering.