One thing Cricket Communications Inc. did not plan on when it decided to offer a wireless service that competes with landline telephony was the fact that handsets break faster.
In the two markets where Cricket has launched service, customers are using an average of 1,000 minutes per month, Leap Wireless International Inc., Cricket’s parent company, said in its recent quarterly conference call. As a result, phones break more and customers don’t get them fixed. Cricket is considering establishing repair facilities and an insurance program to keep customers from churning off the network.
“The phones are just being used all the time,” said Harvey White, chairman and chief executive officer of Leap. “Over 60 percent of our customers use their phone as their primary phone. They’re not just breaking down, but they are being dropped, getting beer spilled on them more often or whatever. It’s a phenomena that in this segment of the market we’re going to have to deal with. We are talking to our vendors about the phone and phone life. I’m sure wireless phones were never designed for this kind of usage.”
Cricket offers customers unlimited local calling for an upfront payment of about $30 per month, but the company has purposely limited the coverage area to the metropolitan area, and customers can’t roam. Cricket has launched just two markets, Chattanooga and Nashville, Tenn. Subscribers in those markets reached 46,000 in the third quarter of fiscal year 2000, bringing total penetration, the primary metric by which Cricket measures its business, to 3.7 percent.
“We continue to build high penetration, the best the industry has seen, while meeting or breaking cost goals,” said White. “The cost of acquisition per gross add was less than $230 in the quarter … We continue to be comfortable with 7-percent penetration of covered pops this year and EBITDA break even soon after.”
Leap narrowed its loss in the third fiscal quarter, losing $32.2 million, or $1.26 per share, on revenue of $16.9 million. Analysts had expected a loss of $3.55 per share.
White said Leap will focus primarily on building out the U.S. markets this year after surprisingly selling off another international property last month. Leap sold its Chilean operator, Smartcom PCS, to Spanish utility company Endesa S.A. for $300 million. Leap had less than $100 million in equity in Smartcom plus $80 million in company debt that was returned. In addition to tripling the equity value of the operation, White said Leap also will be able to reallocate about $75 million the company had budgeted for the Chilean operation.
Similarly, Leap last August sold its wholly owned Australian subsidiary, OzPhone Pty. Ltd., to an affiliate of AAPT Ltd. for $16.3 million and pulled out of Russia for different reasons. Its operating partner there defaulted on loan agreements. Leap today has just one international holding, a 22.4-percent interest in Mexican operator Pegaso PCS. White expects to use most of the money to aggressively roll out the company’s U.S. markets.
“We have a very large task ahead of us to quickly build out markets,” said White. “Our primary focus is on our domestic operations … If you look at how well we did in Chile and our investment in Pegaso, there is certainly support for our position that we got into those at the right time and at the right price, and we did get the returns that are rewarding for ourselves. When you see what licenses are selling for now, it causes you to wonder how well those people are going to do in shareholder returns. We are looking selectively, and there are some opportunities that could turn out to be interesting.”
Leap, which is aggressively acquiring personal communications services basic trading areas from auction winners, plans to launch eight markets before the end of the year and another 25 by the end of 2001.
“Our strategy is to move as quickly as possible into as many markets as we can, establishing our position in those markets,” said White. “That means we will be very aggressive in acquiring markets and launching markets. We will launch markets with less than a full coverage map to establish our position … That limits the scope of service in terms of coverage and impacts people wanting to use the service and churn.”
