With more than 2.5 million customers split between their two operations, Leap Wireless International Inc. and MetroPCS Inc. have proven there is a market for wireless customers willing to forgo the benefits of a nationwide footprint in exchange for unlimited flat-rate calling plans and no contractual obligations. The only question that remains is whether a carrier can offer such services and be profitable.
During the past several weeks, both carriers released first-quarter financial results that followed significant company milestones. Leap released its first quarterly report since a financial restructuring initiated last year and a resulting Chapter 11 bankruptcy filing, while MetroPCS’ results proceeded a filing with the Securities and Exchange Commission regarding plans for an initial public offering.
Despite vastly different market targets and scopes for their similar offerings, as well as dissimilar financial situations, the results showed both carriers are still finding willing customer bases.
Leap, which offers its Cricket service in 39 second-tier markets around the country, said it added 65,691 subscribers during the first three months of the year, compared with 1,357 during the first quarter of 2003, and ended the first quarter with more than 1.5 million customers. In addition to the strong growth, Leap said it managed to cut customer churn from 4.1 percent last year to 3.1 percent this year, raise average revenue per user from $35.12 to $37.45 and cut cost per gross addition from $177 to $124.
More importantly for Leap was an increase in total revenues from $183.8 million last year to $206.8 million this year and a resulting drop in net losses from $133.5 million during the first quarter of 2003, a loss of $2.28 per share, to a loss of $28 million this year, a loss of 48 cents per share.
“Over the past year we have focused on lowering our fixed-cost structure, and our performance during the first quarter reflects the results of this process,” said Glenn Umetsu, executive vice president and chief operating officer for Leap. “While we have benefited from a traditionally strong quarter, which had a positive impact on both customer growth and churn rates, we expect to continue exploring every opportunity to improve the operational efficiencies and growth potential of our business.”
By comparison, MetroPCS, which offers service in a handful of first-tier markets in California, Florida and Georgia, reported 174,000 net customer additions during the first quarter and more than 1.1 million subscribers at the end of the quarter. Customer churn was reported at 3.8 percent, compared with 3.5 percent during the first quarter of 2003, while ARPU increased slightly year over year from $39.50 to $40 and CPGA dropped from $104.97 last year to $96.74 this year.
MetroPCS also posted strong revenue growth, with income rising from $99.4 million last year to $173 million this year, which helped increase net income from a loss of $4.3 million during the first quarter of 2003 to $6.1 million this year.
Despite the year-over-year improvements in financial and operational metrics, there is still concern from industry analysts as to whether the carriers can maintain their offerings in the face of growing competition.
Both carriers offer a range of unlimited calling plans beginning with local calling for $30 per month with Leap and $35 per month with MetroPCS. Premium offerings range up to $50 per month with unlimited long-distance and text-messaging for Leap, and $40 per month with unlimited long-distance for MetroPCS, which also allows customers to select unlimited short message service for $3 per month or unlimited multimedia messaging service for $5 per month.
“The model is still debatable,” said Eddie Hold, vice president of telecom services at Current Analysis. “There is increasing competition from both wireless carriers that are including larger buckets of minutes and the benefit of a nationwide presence, while at the same time wireline providers are now offering unlimited local and long-distance packages for around the same price that [Leap and MetroPCS] are charging.”
That competition, along with unstable capital markets during the past several years, eventually led to Leap’s financial restructuring and bankruptcy filing and continues to concern analysts leading up to MetroPCS’ IPO. One industry source who asked to not be identified noted MetroPCS has managed to keep its balance sheet relatively clean at the expense of network coverage, a claim that appears to be supported by numerous complaints on Internet message boards. However, the carrier likely would use proceeds from the IPO to increase coverage and capacity.
MetroPCS said it is in a quiet period leading up to its IPO and could not comment on operations.
Others also note that unlike Leap’s original foray into the wireless space-which involved a large number of markets acquired at a time when spectrum license prices were at their highest-MetroPCS picked up its licenses for a fraction of the cost and in turn has not had to carry substantial debt.
“Leap was debt laden from the very beginning and was at the whim of the financial markets to help support that debt,” Hold said. “MetroPCS has managed to get into much larger markets with higher population densities for a much lower premium.”
