Leap Reports Third Quarter Results

SAN DIEGO, Nov. 8, 2013 /PRNewswire/ -- Leap Wireless International, Inc. LEAP today reported operational and financial results for the three and nine months ended September 30, 2013. Total revenues for the third quarter of 2013 decreased 10 percent to $694.0 million and service revenues decreased 10 percent to $646.3 million, each when compared to the prior year period. The Company reported $78.0 million of adjusted operating income before depreciation and amortization (OIBDA) for the third quarter of 2013, compared to $131.6 million for the prior year period. Excluding $16.4 million of merger-related expenses incurred during the quarter, adjusted OIBDA was $94.4 million. Third quarter 2013 operating loss was $83.4 million, compared to operating income of $81.4 million for the third quarter of 2012.

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The Company reported approximately 316,000 core wireless gross customer additions for the third quarter of 2013 and approximately 140,000 core wireless net customer losses. Core wireless churn for the third quarter of 2013 was 3.5 percent. "Core wireless" refers to the Company's traditional, monthly voice and data service (Cricket Wireless) and excludes customers for Cricket Broadband and Cricket PAYGo™.

The Company reported a total of approximately 371,000 gross customer additions and a total of approximately 196,000 net customer losses for the third quarter of 2013. Total churn for the third quarter of 2013 was 4.0 percent.

"During the third quarter we continued our multi-faceted approach to enhancing customer satisfaction, which led to a 60 basis point improvement in core wireless churn and fewer net customer losses year-over-year," said S. Douglas Hutcheson, Leap's chief executive officer. "Gross customer additions decreased year-over-year primarily due to increased competitive activity and customer demand for an affordable purchase path to higher-priced devices. We continue to make progress reducing our device subsidy costs and that, coupled with our efforts to manage sales and marketing expenses, led to a relatively flat CPGA compared to the prior year period, despite gross customer additions having declined over 30 percent year-over-year.

"Our efforts to improve the customer experience are being realized, as customer survival was recently at its highest rate in over a year. We continue to seek new ways to meet our customers' needs and recently introduced a new handset financing program, which is designed to reduce the out-the-door price barrier for both new and upgrading customers. The new program is outperforming the previous plan we offered and drawing stronger customer interest, as evidenced by a seven-fold increase in the number of applications we have received. Our commitment to improve the customer experience is also being recognized by others. In a third-party customer care study published in August 2013, Cricket was ranked second highest in overall wireless customer care satisfaction among non-contract carriers.

"We are also pleased with the results of our recent special meeting of stockholders, at which Leap stockholders overwhelmingly voted to approve the proposed merger transaction with AT&T. This approval is an important milestone on our path to completing the transaction. We will continue to work closely with the Federal Communications Commission and Department of Justice on their review of the transaction."

 

 

Discussion of Financial and Operational Results for the Quarter

Customer Activity

• End-of-period customers for the third quarter of 2013 were 4,643,430, an 18 percent decrease from end-of-period customers for the third quarter of 2012.
• The Company reported net customer losses of 196,045 for the third quarter of 2013, compared to net customer losses of 268,984 for the third quarter of 2012.
  • Net customer losses for the third quarter of 2013 reflects fewer gross additions due primarily to intensified competition and increasing customer demand for high-end devices, as reflected in a 135 percent year-over-year increase in average out-the-door handset price.
  • Net customer losses also reflects the discontinuation of sales of the Company's daily PAYGo product, a narrowing of the Company's focus in national retail to fewer, more productive retailers and locations, and continued de-emphasis of the Company's broadband service.
  • Third quarter 2013 net customer losses reflects a year-over-year improvement in churn. 
• The Company reported core wireless net customer losses of 139,636 for the third quarter of 2013, compared to core wireless net customer losses of 181,573 for the third quarter of 2012.
  • Core wireless net customer losses for the third quarter of 2013 reflects fewer gross additions due primarily to intensified competition and increasing customer demand for high-end devices, reflected in a 135 percent year-over-year increase in average out-the-door handset price, offset by a year-over-year improvement in churn. 
  • When compared to the prior year period, core wireless net customer losses improved 23 percent due to the year-over year improvement in churn resulting from better customer experience.
• Total churn for the third quarter of 2013 was 4.0 percent, compared to 4.8 percent for the third quarter of 2012, and reflects approximately 570,000 fewer gross deactivations in the third quarter 2013, compared to the prior year period, partially offset by fewer reactivations.
  • Core wireless churn for the third quarter of 2013 was 3.5 percent, compared to 4.2 percent for the comparable period of the prior year.
  • Core wireless churn improved due to delivery of a better customer experience, including increased adoption of automatic bill payment, introduction of a new handset financing program, increased uptake of Muve Music and expansion of the Company's lifeline credit program.
• 76 percent of the Company's new handset sales were for smartphones in the third quarter of 2013, compared to 57 percent in the prior year period. 
• 61 percent of the Company's voice customer base was on a smartphone service plan as of September 30, 2013, compared to 48 percent at the end of the prior year period.
• 12 percent of the Company's voice customer base upgraded their handset during the third quarter of 2013, compared to 9 percent in the prior year period. The Company continues to expect that facilitating customer upgrades to higher-end devices will result in higher-value, longer-tenured customers.

Revenues and ARPU

• Total revenues for the third quarter of 2013 were $694.0 million, a 10 percent decrease over the comparable period of the prior year, primarily due to a lower weighted-average number of customers, partially offset by an improved mix of customers on higher-value service plans and increased sales of higher-priced devices.
• Service revenues for the third quarter of 2013 were $646.3 million, a 10 percent decrease over the comparable period of the prior year, primarily due to a lower weighted-average number of customers, partially offset by an improved mix of customers on higher-value service plans.
• ARPU for the third quarter of 2013 was $45.45, an increase of $3.51 over the comparable period of the prior year. The year-over-year increase in ARPU primarily reflected improved uptake of higher-value service plans, additional fees and a reduction in the number of customers for the Company's daily PAYGo product.

Adjusted OIBDA, Operating Expense & Financial Metrics

• Adjusted OIBDA for the third quarter of 2013 was $78.0 million, a decrease of 41 percent over the comparable period of the prior year.
  • The year-over-year decrease in adjusted OIBDA was primarily driven by approximately $16.2 million of costs associated with the year-over-year increase in customer handset upgrades, approximately $16.4 million of costs associated with the proposed merger transaction with AT&T and lower revenues due to the lower weighted-average number of customers, partially offset by lower operating expenses.
  • Excluding the approximately $16.4 million of merger-related costs, adjusted OIBDA for the third quarter was $94.4 million, a 28 percent decrease over the comparable period of the prior year. 
• Third quarter 2013 operating loss was $83.4 million, compared to operating income of $81.4 million for the comparable period of the prior year.
  • The third quarter 2012 operating income included a net gain of approximately $130 million associated with the consummation of spectrum transactions.  Excluding the effect of this net gain, third quarter 2012 would have had an operating loss of $48.6 million.
  • The year-over-year change, excluding the effect of the net gain on the spectrum transactions, was primarily driven by approximately $16.2 million of costs associated with the year-over-year increase in customer handset upgrades, approximately $16.4 million of costs associated with the proposed merger transaction with AT&T and lower revenues due to the lower weighted-average number of customers, partially offset by lower operating expenses as well as lower depreciation and amortization expense, lower impairments and other charges.
• CCU for the third quarter of 2013 increased 31 percent over the prior year period to $31.64, reflecting the year-over-year reduction in the weighted-average number of customers, increased product costs, increased upgrade expense driven by consumer demand for higher-end devices, and costs associated with the proposed merger transaction with AT&T, partially offset by reductions in fixed costs.
• CPGA for the third quarter of 2013 increased only 3 percent over the prior year period to $319, despite a 34 percent year-over-year decrease in gross customer additions, reflecting a reduction in device subsidy costs and the Company's continued management of its sales and marketing expenses.
• Net loss attributable to common stockholders for the third quarter of 2013 was $185.4 million, or $(2.37) per diluted share, compared to net income attributable to common stockholders of $25.0 million, or $0.32 per diluted share for the third quarter of 2012.
  • As described above, excluding the effect of a net gain of approximately $130 million from spectrum transactions, net loss attributable to common stockholders for the third quarter of 2012 would have been $105 million.
  • The increase in net loss attributable to common stockholders, excluding the effect of the net gain on spectrum transactions, was primarily driven by the operating loss described above, as well as an increase in accretion expense related to the redemption value of the minority interest in the Company's joint venture, STX Wireless, LLC.
  • In addition, in the third quarter of 2013, the Company recognized tax expense, in contrast to the third quarter of 2012, where the Company recognized a tax benefit related to the net gain on spectrum transactions.

Capital Expenditures and Free Cash Flow

• Capital expenditures during the third quarter of 2013 were $30.1 million, compared to $132.4 million for the prior year period.
• Free cash flow for the third quarter of 2013 was $8.9 million, compared to $(7.7) million for the prior year period.
• Net cash provided by operating activities for the third quarter 2013 was $39.0 million, compared to $124.6 million for the prior year period.
• Total capital expenditures for 2013 are expected to be between $125 million and $150 million.

"As we discussed on our second quarter earnings call, the actions we are taking to protect our customer base and distribution, along with promotional device pricing and expanded data allotments we introduced in our service plans in the third quarter, resulted in increased costs and placed additional pressure on CCU," said R. Perley McBride, Leap's chief financial officer. "As a result, the decline in adjusted OIBDA reflects $16 million of increased upgrade costs associated with third quarter device promotions, $5 million in higher product costs related to roaming and increased Muve Music customers as well as $3 million in increased network costs. Adjusted OIBDA in the third quarter was also impacted by over $16 million of merger-related costs associated with the proposed transaction with AT&T.

"We are committed to the thoughtful management of our balance sheet and cash resources. During the third quarter we generated modest free cash flow of approximately $9 million. We continue to focus on driving free cash flow and plan to make appropriate investments to operate our business while conserving cash. To that end, we are reducing projected 2013 capital expenditures to the range of $125 million to $150 million, principally by managing 3G network capacity investments, exploring cost-effective alternatives to deliver 4G LTE services in lieu of deploying additional facilities-based coverage and exercising increased financial discipline."

Other Significant Business Highlights

• Entered into a merger agreement with AT&T, which the Company's stockholders recently approved at a special meeting of stockholders.
• Introduced two new Samsung Galaxy smartphones, the 4G LTE Admire 2 and the Samsung Galaxy Discover. The Discover offers Cricket customers an exceptional value and delivered nearly 25 percent of the Company's handset sales volume in the third quarter.
• Debuted Muve Music 4.0, the latest version of our popular music service, which features faster performance and a new user interface that allows for easier exploration of music and improved navigation; Muve Music now has more than two million customers, making it the largest on-demand subscription music service in the U.S.
• Introduced a new handset financing program, giving Cricket customers the flexibility to pay for their handsets over time and removing the barrier that high device prices present to many customers in the pre-paid space.
• Launched our Unlimited International Long Distance Plus feature, offering the lowest price for unlimited international calling and texting to mobile phones in Mexico, making it easy for Cricket customers to stay in close contact with friends and family in Mexico.

Merger Agreement with AT&T

On July 12, 2013, the Company entered into a merger agreement with AT&T for AT&T to acquire the Company in a transaction in which the Company's stockholders would receive $15 in cash per share, plus one non-transferable contingent value right per share, on the terms and subject to the conditions thereof. On October 30, 2013, the Company's stockholders approved the merger agreement at a special meeting of stockholders. Consummation of the transaction remains subject to review by the Federal Communications Commission and the Department of Justice. For additional information regarding the transaction, please see the Company's filings with the Securities and Exchange Commission (SEC).

About Leap
Leap provides innovative, high-value wireless services to a fast-growing, young and ethnically diverse customer base. With the value of unlimited wireless services as the foundation of its business, Leap pioneered its Cricket service. Cricket products and services are available nationwide through company-owned stores, dealers, national retailers and at MyCricket.com. Through its affordable, flat-rate service plans, Cricket offers customers a choice of unlimited voice, text, data, music and mobile Web services. Headquartered in San Diego, Calif., Leap is traded on the NASDAQ Global Select Market under the ticker symbol "LEAP." For more information, please visit www.leapwireless.com.

Notes Regarding Non-GAAP Financial Measures
Information presented in this press release and in the attached financial tables includes financial information prepared in accordance with generally accepted accounting principles in the U.S., or GAAP, as well as non-GAAP financial measures. Generally, a non-GAAP financial measure, within the meaning of Item 10 of Regulation S-K promulgated by the SEC, is a numerical measure of a company's financial performance or cash flows that (a) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, which are included in the most directly comparable measure calculated and presented in accordance with GAAP in the condensed consolidated balance sheets, condensed consolidated statements of comprehensive income or condensed consolidated statements of cash flows; or (b) includes amounts, or is subject to adjustments that have the effect of including amounts, which are excluded from the most directly comparable measure so calculated and presented. As described more fully in the notes to the attached financial tables, management supplements the information provided by financial statement measures with several customer-focused performance metrics that are widely used in the telecommunications industry. Adjusted OIBDA, free cash flow, CPGA, ARPU and CCU are non-GAAP financial measures. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with GAAP. Reconciliations of non-GAAP financial measures used in this release to the most directly comparable GAAP financial measures can be found in the section entitled "Definition of Terms and Reconciliation of Non-GAAP Financial Measures" included toward the end of this release.

Forward-Looking Statements
This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management's current expectations based on currently available operating, financial and competitive information, but are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated in or implied by the forward-looking statements. Our forward-looking statements include our discussions about planned product and service plan developments, expected customer activity, future capital expenditures and LTE deployment and expected financial and operational performance, and are generally identified with words such as "believe," "expect," "intend," "plan," "could," "may" and similar expressions. Risks, uncertainties and assumptions that could affect our forward-looking statements include, among other things:

• our ability to attract and retain customers in an extremely competitive marketplace;
• our ability to successfully implement product and service plan offerings and execute effectively on our strategic activities;
• our ability to compete effectively against wireless carriers with nationwide networks and significantly greater deployment of 4G Long Term Evolution network technology, or LTE, network technology, and the impact of competitors' initiatives (including new service plans and pricing) and our ability to anticipate and respond to such initiatives;
• our ability to offer customers cost-effective 4G LTE services and to meet increasing customer demand for high-quality, high-speed data services;
• uncertainties with respect to the proposed merger with AT&T, including the possibility that the proposed merger may not close or may be delayed, including due to the failure to timely receive required regulatory approvals or satisfy other closing conditions;
• the effect of the announcement of the proposed merger with AT&T on our customers, employees, suppliers, vendors, distributors, dealers, retailers, content and application providers, operating results and business generally;
• the diversion of management's time and attention while the proposed merger transaction is pending;
• the amount of the costs, fees, expenses and charges related to the merger;
• our ability to operate our business in light of the proposed merger with AT&T and the covenants contained in the Agreement and Plan of Merger, dated as of July 12, 2013, between Leap, AT&T and the other parties thereto;
• changes in economic conditions, including interest rates, consumer credit conditions, consumer debt levels, consumer confidence, unemployment rates, energy and transportation costs and other macro-economic factors that could adversely affect demand for the services we provide;
• our ability to meet significant purchase commitments under agreements we have entered into;
• our ability to refinance our indebtedness under, and comply with the covenants in, any credit agreement, indenture or similar instrument governing our existing indebtedness or any future indebtedness;
• future customer usage of our wireless services, which could exceed our expectations, and our ability to manage or increase network capacity to meet increasing customer demand, in particular demand for data services;
• our ability to obtain and maintain 3G and 4G roaming and wholesale services from other carriers at cost-effective rates;
• our ability to acquire or obtain access to additional spectrum in the future at a reasonable cost or on a timely basis;
• our ability to cost-effectively procure handsets compatible with our network technology and frequency channels;
• failure of our network or information technology systems to perform according to expectations and risks associated with the ongoing operation and maintenance of those systems, including our customer billing system;
• our ability to attract, integrate, motivate and retain an experienced workforce, including members of senior management;
• our ability to maintain effective internal control over financial reporting; and
• other factors detailed in the section entitled "Risk Factors" included in our periodic reports filed with the SEC, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC on August 5, 2013 (as amended by Amendment No. 1 filed with the SEC on October 28, 2013) and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, which we expect to file shortly with the SEC.

All forward-looking statements included in this news release should be considered in the context of these risks. All forward-looking statements speak only as of November 8, 2013, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors and prospective investors are cautioned not to place undue reliance on our forward-looking statements.

Leap is a U.S. registered trademark and the Leap logo is a trademark of Leap. Cricket, Cricket Wireless, Cricket Clicks, Muve Music, Muve First, Muve Headliner, MyPerks, Flex Bucket, Real Unlimited Unreal Savings and the Cricket "K" are U.S. registered trademarks of Cricket. In addition, the following are trademarks or service marks of Cricket: BridgePay, Cricket By Week, Cricket Choice, Cricket Connect, Cricket Nation, Cricket PAYGo, Muve, Muve Money, Cricket Crosswave, Seek Music, Cricket MyPerks and Cricket Wireless Internet Service. All other trademarks are the property of their respective owners.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOURCE Leap Wireless International, Inc.