Leap posts difficult Q3, network issues on the horizon

Citing recent business operating changes, Leap Wireless International Inc. (LEAP) posted disappointing third-quarter results and warned that it would have to work at managing future mobile broadband growth on its network.
Leap said it lost nearly 200,000 customers during the third quarter of this year compared with a gain of 116,182 during the third quarter of 2009. The drop was due to slowing gross subscriber numbers, which fell more than 24% year-over-year, and a slight increase in customer churn from 5.4% to 5.5%. Leap served 5.088 million people at the end of the third quarter.
Leap noted the gross subscriber decrease was due to increased upgrade activity by existing customers to the carrier’s recently altered all-inclusive service plans and the elimination of its first-month-free offering, the impact of device shortages through half of the third quarter and high growth posted last year due to service launches in new markets. As for churn, Leap noted that while voice churn had actually dropped year-over-year from 5.4% to 5.2%, the carrier’s mobile broadband service had seen a dramatic increase in defections from 5.8% in Q3 2009 to 7.6% this year, due to recently altered rate plans.
Leap’s CEO Doug Hutcheson noted that the carrier’s mobile broadband churn results were higher than anticipated from what it was seeing in trial markets and that the carrier’s managing of network speeds once customers went over their allotted buckets of data impacted churn. Hutcheson added that the new tiered data plans will result in slower growth and higher churn in the near term, but should be more profitable in the long term.
Average revenue per user also dropped year-over-year, from $39.60 to $37.02, which the carrier attributed to elimination of late fees associated with its new rate plans and an increase in the percentage of mobile broadband and traditional prepaid customers. Cash cost per user also increased nearly 12% to $19.83 due to increased upgrade activity and the resulting handset subsidies and increased costs associated with its new nationwide roaming and international calling services.
Despite the disappointing customer metrics, Leap managed to post a slight increase in revenues for the quarter, inching up .5% to $602.7 million. Net losses, however, ballooned due to a $477.3 million non-cash charge related to impairment of the carrier’s goodwill and the write-off of certain previously capitalized network expansion costs. The carrier said it lost $533.3 million during the quarter, a loss of $7.06 per share, compared with a loss of $65.4 million during the third quarter of 2009, or a loss of 85 cents per share.
The results follow a rough second quarter that resulted in the carrier dramatically altering its business practices.
While the third quarter was an expected challenge for the carrier, Hutcheson did add that the carrier expects to post positive net customer additions for the fourth quarter as the holiday shopping season traditionally has been strong for the carrier.
Network plans
As for future network plans, Leap seemed to indicate that it would have to start more aggressively manage its network assets as the carrier plans to roll out LTE services in the coming years. Hutcheson said that the carrier has already made arrangements to set aside spectrum assets in most of its markets for a planned LTE rollout, but that in a few markets it was still trying to manage resources.
With just over 5 million customers currently on its network, Leap said that it had the capacity to support a total of about 900,000 mobile broadband customers or 2.3 million smart-phone users. The carrier currently has about 600,000 mobile broadband customers on its network, and has recently begun to roll out smart phones, which the carrier said have become extremely popular with its customer base.
Mobile broadband customers are currently limited to tiered data packages ranging up to 7.5 gigabytes of data transmission per month for $60 before it begins to throttle network speeds. This compares with its smart-phone service packages, which include unlimited data services for $55 per month, though smart-phone customers traditionally use significantly less data than wireless modem users.
Hutcheson noted that the carrier could add up to 800,000 new smart-phone customers and try to cap growth from its mobile broadband offering, or it could add 300,000 more mobile broadband customers and try to hold smart-phone sales. Hutcheson added that the challenge now was to find which customers provided the most value over the long term.
Another alternative for Leap would be to ramp up its LTE plans to support increased data usage or even strike a deal with another operator to offer mobile services using a mobile virtual network operator model.
The carrier said it has a “comfortable back-up strategy” for its current 3G data services, thanks to recently signed roaming agreements that will let the carrier offload traffic onto other networks, but for a price. The carrier also said it was also looking at other mobile broadband alternatives, including possibly signing up to wholesale services from a carrier like Clearwire Corp. or LightSquared.