Leap announces changes after rough Q2

Leap Wireless International Inc. (LEAP) fell back to earth during the second quarter following robust Q1 results and has announced a round of operational changes that it hopes will help turn around its fortunes in a market that has suddenly become obsessed with the prepaid market that has been Leap’s bread-and-butter.
The company noted that its Cricket business lost 111,718 customers during the second quarter as both gross additions dropped and customer churn surged to 5%. The carrier’s first-quarter results included a net gain of nearly 446,000 customers boosted by strong gross customer additions and a 4.5% churn rate. Year-over-year, Cricket’s operations saw a 13.6% drop in gross customer additions and an increase in churn from 4.4% that contributed to a 155.1% drop in net customer additions from more than 202,000 posted during the second quarter of 2009.
Leap noted that the customer losses included approximately 73,000 voice customers and 39,000 mobile broadband customers. The company attributed the losses to fewer market launches compared to the year-ago period, device selection and lower-than-expected handset inventories. The carrier has yet to begin offering a pair of highly anticipated devices including a smart phone from Kyocera Wireless Corp. that is powered by Google Inc.’s Android operating system and a BlackBerry device from Research In Motion Ltd., though noted those device were on the horizon.
Industry observers had only recently commended Leap for its strong growth in mobile broadband customers during the first quarter of this year when it added approximately 200,000 net customers.
In addition to the customer growth struggles, Leap noted that average revenue per user dropped 7.7% year-over-year to $37.61 and down sequentially from $37.96. A 4.9% drop in cash costs per user to $17.51 during the quarter was offset by a 7% increase in cost per gross additions that jumped from $201 during the second quarter of 2009 to $215 this year.
The carrier ended the quarter with 5.288 million customers on its network, a 16.5% year-over-year increase.
The overall larger customer base helped Leap post a 10.2% increase in service revenues to $597 million, while a smaller increase in operating expenses helped the carrier improve losses from $62.751 million during the second quarter of 2009, a loss of 89 cents per share, to a loss of $18.238 million this year, or a loss of 24 cents per share.
“We expected second quarter net customer additions to be seasonally soft, and while customer activity in the quarter was even softer than expected, we believe it will strengthen in coming quarters as a result of the actions we are taking,” noted Leap’s president and CEO Doug Hutcheson.
Hutcheson added in an interview with RCR Wireless News that historically Leap’s results have always been soft during the second and third quarters, and that the carrier rebounds with strong fourth and first quarter results.
“That’s just the natural rhythm of our business,” Hutcheson said.
Changes ahead
Looking to reassure investors that it was working on improving operations, Leap announced a handful of changes, including plans to change its corporate name from Leap Wireless to Cricket, the name of its branded service offering.
Beyond the name change, the carrier rolled out a slew of changes to its rate plans, expanded coverage and more details on new device launches.
Only months after bolstering its service plans with additional coverage through extensive roaming agreements covering portions of all 50 states, Leap updated its rate plans in an attempt to simplify the billing process for consumers. The news plans are now limited to a trio of options at $35, $45 and $55 per month for the carrier’s feature phones, a planned $55 per month plan for Android-powered devices and a $60 per month plan for BlackBerry devices. The carrier noted the changes will unify its pricing plans across its direct and third-party partners.
The carrier also altered its traditional pay-as-you-go PayGo offering to align pricing with the rate plan changes. Those PayGo plans begin at $1 per day for unlimited voice, $2 per day for the same features as its $35 per month plan and $3 per day for all the features of its $45 per month plan.
Leap also said that the new plans will now incorporate telecom taxes, regulatory fees and other additional taxes, with the only extra charge being sales tax. In addition, the carrier is doing away with activation fees that it had begun charging earlier this year, but was also eliminating its first-month-free offer.
Beyond its voice-based services, Leap also announced new data plans, which were hinted at an investor conference earlier this year, provide for a tiered usage level and price range beginning at $40 per month for 2.5 gigabytes of data usage, ramping up to $50 per month for 5 GB and $60 per month for 7.5 GB. The carrier’s previous offerings allowed for 5 GB of data for $40 per month or a limited retail package that included 10 GB for $50 per month. As with the old plans, the new plans will throttle data speeds once a customer goes over their allotted usage level.
Leap is also tackling a hot topic for smaller carriers by announcing a data roaming agreement with an unnamed carrier that will allow Leap to provide customers with nationwide data roaming. Leap said the expansion will grow its current data network from 92 million covered pops to more than 280 million pops. Rural carriers have for years been arguing for greater access to data roaming services to help them compete with nationwide operators.
Hutcheson said the carrier will trial the off-network data roaming service to gauge customer usage and may in the future alter pricing for the service if it finds that consumer usage is higher than expected.
Leap also said it signed a five-year wholesale wholesale agreement with Sprint Nextel Corp. that will allow Leap to “offer its products and services over Sprint’s 3G network throughout the United States.”
Details on those plans were light, though Hutcheson noted in a press release that “This agreement with Sprint creates a new hybrid wholesale and facilities-based model that is unique in the industry. We believe that our ability to offer compelling 3G voice and data services in markets we do not currently serve will allow us to further establish a national brand and attract new customers for our exciting Cricket products, including Smartphones and other services. In addition, we believe that this agreement will allow us to significantly strengthen and expand our retail position and distribution relationships.”
As part of the agreement, Leap said it made commitments to deliver minimum levels of revenue to Sprint Nextel. Leap said the deal will allow it to realize “improved economic terms as it grows subscribers added through the wholesale agreement.”
The carrier also said it was still interested in migrating to LTE, echoing comments made at a previous investor conference.
As for its admitted lack of device depth, Leap said it plans to launch 15 new devices by the end of the year, including the long-rumored BlackB
erry on Aug. 6 and the Kyocera/Sanyo Zio smart phone running the Androi
d OS “this fall.” The carrier said it would also launch a “low-cost Android” phone from Huawei Technologies Ltd., new feature phones, wireless modems and its first mobile hot spot device.
Despite all the changes, Leap’s Hutcheson said they are not as drastic as they appear and are just normal adjustments that are made in light of a changing industry dynamics.
“What we did was put a set of rate plans out there that allow us to maintain our best value proposition at all price points,” Hutcheson explained. “Those include adding more features and in some cases increase pricing. This will allow us to relieve pressure on revenues, but also focus on new changes in the industry.”
The news did not seem to have the desired effect on investors as Leap’s stock price was down more than 12% early Wednesday briefly touching a new 52-week low of $9.95 per share.