Leap Wireless has had a history of challenging second quarters, and this year was no exception as the no-contract operator suffered operationally and announced plan for changes designed to turn around operations.
The carrier reported a loss of 289,270 customers during the quarter, which was nearly three-times the 103,140 customers it lost during the second quarter of 2011. The customer losses were impacted by slower gross additions as well as an increase in customer churn from 4.2% last year to 4.4% this year. Leap attributed some of the increased churn on nationwide retail sales channels underperforming, adding that it was looking at tightening up its retail mix for the rest of the year that will result in approximately 8,000 “national retail doors,” which is lower than previous estimates.
Through the first half of the year Leap has lost 31,210 customers compared with a gain of 227,434 subscribers in 2011.
Breaking out its 2012 results, Leap said it lost approximately 205,000 handset customers during the quarter and 84,000 customers signed up for its mobile broadband offering. The mobile broadband losses were somewhat expected as the carrier has increased its data focus on smartphone subscribers. The carrier last month tweaked its mobile broadband offer in an attempt to infuse more value for customers while maintaining protection for its current 3G network.
Leap’s management noted that the current economic condition amplified what has traditionally been a slow quarter for the carrier, which combined with unsuccessful promotional activities designed to drive gross customer additions led to its customer growth shortfall. Leap also noted that growth was impacted by quality issues on select devices during the quarter, which have since been addressed. While specific devices were not named, the carrier did note that “we are in discussions with these suppliers and expect significant steps to be taken on their part or they may be, among other things, eliminated from our device portfolio.” Despite the device issues, Leap said it expects to roll out up to 10 new devices by the end of the year, including three LTE-equipped models.
Leap also noted that it was in discussions with Sprint Nextel regarding terms of a nationwide roaming and mobile virtual network operating agreement. Leap explained that it would not be obligated to meet that agreement’s commitments for all of 2012, counter to the feeling from Sprint Nextel.
“Due to certain provisions in the wholesale agreement, we do not believe the company is obligated to meet this commitment in 2012, although we expect to satisfy a significant majority of it in any event,” explained Leap President and CEO Doug Hutcheson. “Sprint has not agreed with our position and we are in discussions with them.”
Leap did manage to extract more money from those customers it did retain as average revenue per user increased 3.7% to $41.64 during the second quarter. That gain was somewhat tempered by increased costs associated with serving those customers as cash cost per user increased 4.9% to $22.91, while its cost per gross customer addition surged 17.9% to $296 during the quarter.
Looking to drive further ARPU potential, Leap said in the next several weeks it will be rolling out its “first major service plan update in two years.” However, a continued drag on ARPU could come in the form of stronger uptake of its government-subsidized Lifeline offering, which provides certain customers with up to $13.50 in subsidies on rate plans. Leap noted that segment witnessed strong growth during the second quarter and that it ended the first half of the year with 350,000 customers on the program.
Overall revenues increased 3.5% year-over-year to $786.8 million, just outpacing a 1.5% increase in expenses that resulted in a drop in net losses from $58.4 million in 2011 to a loss of $46 million this year. Leap said it was looking to curb expenses for the remainder of the year by trimming capital expenditures by $80 million for the year, which it said would come from less spending on 3G network capacity enhancements. The carrier also trimmed its LTE rollout forecast from 25 million potential customers covered by year end to just 21 million pops covered, which it attributed to pushing back the launch of one market until early 2013. Leap’s management added that it was also looking at “opportunities to more efficiently deploy capital in collaboration with others.”
The carrier has previously mentioned such arrangements, noting the benefits of potential collaboration with smaller and larger carriers. Leap has also recently signed a wholesale network deal with Clearwire that will see Leap tap into Clearwire’s planned LTE network launch scheduled for next year.
As for attempts to turn around operations, Hutcheson noted the carrier expects to announce “significant enhancements to our higher-ARPU service plans to provide more alternatives and value at different price points. We’ll also be making improvements to our customer experience and adding more desirable, high-quality handsets.”
This follows the launch of Apple’s iPhone product line during the tail-end of the second quarter. Analysts were looking for more color on that launch as Leap was selling the device at a premium compared to its postpaid rivals, though still offering a subsidy for consumers.
Leap’s management also noted that the carrier was looking at all alternatives in trying to extract greater value and cash flow from its current operations. Analysts took the bait on that claim by throwing out numerous possible scenarios, including selling off “underperforming” markets, selling off the whole company, restructuring the company and potentially selling off all of its licenses and operating simply as an MVNO, to which Leap’s management noted that all scenarios were on the table.
The overall news was not good for investors as Leap’s stock (LEAP) plunged more than 20% in early Tuesday trading, echoing a similar drop following its first-quarter results earlier this year.
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