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Leap Q2 results not as bad as feared, concern remains for Q3

Leap Wireless International Inc.’s (LEAP) second quarter results were not as bad as some had feared, but were apparently bad enough to scare off investors who fled the carrier’s stock this morning to the tune of a more than 30% drop in the carrier’s stock price. (Leap’s sell off should be taken in context with the overall tanking of the stock market this morning.)
Leap reported late yesterday that it managed to trim customer losses during its second quarter from a loss of 111,718 customers in 2010 to a loss of 103,140 customers this year. The improvement was based on a drop in customer churn from 5% in 2010 to 4.2% this year, which offset an 8.8% decrease in gross customer additions.
Leap ended the second quarter with 5.7 million customers on its network, an 8.7% increase compared with the previous year.
Leap was quick to point out that the customer losses were attributed to its mobile broadband offering, which it’s de-emphasizing. The carrier said that for the quarter it added 29,000 net customers to its traditional “voice” offering – helped by a drop in segment customer churn from 4.6% during that second quarter of 2010 to 3.6% this year – that was outnumbered by the loss of 132,000 customers to its mobile broadband service. Leap noted that the mobile broadband defections were due to higher device pricing, a reduction in marketing efforts and increased network management initiatives to help maintain network quality.
While Leap continued to bleed customers, the carrier’s average revenue per user posted a significant year-over-year gain from $37.71 in 2010 to $40.15 this year. The carrier attributed the growth to increased adoption of smartphones and related higher-priced rate plans.
The higher APRU combined with the greater customer base helped push Leap’s total revenues up 14% from $667.3 million during the second quarter of 2010 to $760.5 million this year.
However, with the increase in smartphone growth that helped spur the increased ARPU is increased costs involved with device subsidies. Leap noted that its cost per gross customer addition jumped 16.7% to $251 during the second quarter, while its cash cost per user was up 24% to $21.83. Leap also noted that capital expenditures increased 5.8% year-over-year to $93.3 million.
Those additional expenses hit Leap’s bottom line with net losses increasing from $18.2 million during the second quarter of 2010, a loss of 24 cents per share, to a loss of $65.2 million this year, or a loss of 85 cents per share.
Leap said it expects to spend up to $475 million on capital expenditures in 2011 to support continued growth of its current network capabilities as well as to lay the groundwork for its planned LTE deployment. The carrier said it expects to roll out LTE across two-thirds of its current footprint over the next three years at a cost of less than $10 per covered pop, or approximately $600 million. Leap expects to launch its first LTE trial market later this year.
Wells Fargo Securities L.L.C. noted in a report that while Leap’s Q2 results came in better than feared following a poor showing from rival MetroPCS Communications Inc., it was concerned that Leap’s management was setting expectations too high flat churn results heading into the current third quarter. Leap signed a LTE roaming agreement earlier this year with LightSquared for potential coverage outside of Leap’s core markets.

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