Leap Reports Results for Third Quarter 2008

~Leap Reports 156,000 Net Customer Additions and a 54 Percent Year-Over-Year Increase in Existing Business Adjusted OIBDA~

 

Note: A webcast of Leap's conference call and accompanying presentation slides will be available at 5:00 p.m. EST today at http://investor.leapwireless.com.

SAN DIEGO - November 5, 2008 - Leap Wireless International, Inc. (NASDAQ: LEAP), a leading provider of innovative and value-driven wireless communications services, today reported financial and operational results for the quarter ended September 30, 2008. The Company reported approximately 156,000 net customer additions in the third quarter of 2008. Churn for the quarter was 4.2 percent, an improvement from 5.2 percent in the prior year period.  The Company reported adjusted operating income before depreciation and amortization (OIBDA) of $97.5 million, up $1.8 million from the comparable period of the prior year.  Adjusted OIBDA growth remained relatively flat year-over-year due primarily to $50 million of initial operating losses incurred in connection with the Company's new market launch activity and the expansion of its mobile broadband service. For the quarter, Existing Business Adjusted OIBDA was $146.9 million, an increase of nearly $51 million from the prior year period.  This increase reflects an approximately 400,000 year-over-year increase in end-of-period customers in existing markets and the resulting benefits of scale. The Company's operating income for the quarter was $2.4 million, compared to $9.4 million for the third quarter of 2007. 

 

"Our results reflect the strength of our business and its ability to attract and service new customers and perform well during times of economic uncertainty," said Doug Hutcheson, Leap's president and chief executive officer. "Given our focus on achieving deeper penetration in our markets, the early successes of our mobile broadband service, and the attractive initial results of our Auction 66 market launches, we believe that the Company is well positioned as the value leader in the markets we serve with the right products in the right place at the right time. Our success in operating and further expanding our business, together with our strong liquidity position and commitment to operate our business in a thoughtful and disciplined manner, give us confidence that we can continue to move successfully through uncertain economic times."

                                                                                                                                           

Key Financial Results and Operating Metrics ^{(1) (2)}

(Unaudited; in millions, except for percentages, customer data and operating metrics)

 

_Three Months Ended September 30,_

 

_Nine Months Ended September 30,__

 

      2008___

      2007___

    Change_

 

      2008___

      2007___

    Change_

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenues ..........................................................................

$          434.5

$         354.5

       22.6%

 

$       1,250.6

$        1,023.4

       22.2%

Total revenues.............................................................................

$          496.7

$         409.7

       21.2%

 

$       1,439.9

$        1,201.0

       19.9%

Operating income ........................................................................

$              2.4

$             9.4

     (74.5%)

 

$            42.9

$           38.6

       11.1%

Adjusted OIBDA...........................................................................

$            97.5

$           95.7

       1.9%

 

$          322.9

$         279.7

        15.4%

Adjusted OIBDA as a percentage of service revenues ............................

              22%

             27%

     (18.5%)

 

              26%

             27%

(3.7%)

Existing Business Adjusted OIBDA⁽³⁾.................................................

$          146.9

$           95.7

        53.5%

 

$          436.3

$         279.7

        56.0%

Net loss.....................................................................................

$          (48.8)

$         (43.3)

     (12.7%)

 

 $         (93.0)

$         (57.9)

    (60.6%)

Loss per share.............................................................................

$          (0.72)

$         (0.64)

      (12.5%)

 

 $         (1.37)

$         (0.86)

    (59.3%)

Gross customer additions..............................................................

         593,619

        450,954

        31.6%

 

     1,686,143

     1,478,443

          14%

Net customer additions..................................................................

         155,779

          36,484

      327.0%

 

         557,012

        481,621

       15.7%]

End of period customers................................................................

      3,460,140

     2,711,447

        27.6%

 

      3,460,140

     2,711,447

    27.6%

Weighted-average customers..........................................................

     3,371,932

     2,654,555

        27.0%

 

      3,163,480

     2,544,872

        24.3%

Churn........................................................................................

              4.2%

            5.2%

              -

 

              3.9%

            4.4%

              -

End of period covered POPS............................................................

         ~ 61.7

                ~

         --

 

         ~ 61.7

                ~

         --

Average revenue per user (ARPU).....................................................

$          42.95

$         44.51

       (3.5%)

 

$          43.92

$         44.68  

       (1.7%)

Cash costs per user (CCU)..............................................................

$          21.50

$         21.24

          1.2%

 

$          21.41

$         20.78  

          3.0%

Cost per gross addition (CPGA).......................................................

$            201

$           199

          1.0%

 

$            189

$           181

         4.4%

Cash purchases of property and equipment........................................

$          190.0

$         105.8

        79.6%

 

$          528.3

$         345.2

        53.0%

Unrestricted cash, cash equivalents and short-term investments...............

$          826.3

$         655.7

        26.0%

 

$          826.3

$         655.7

        26.0%

 

•(1)            The foregoing results and operating metrics reflect the operations of Cricket markets for the periods indicated and markets in South Carolina and Georgia acquired from Hargray Wireless in April 2008, except for net customer additions and churn for the three and nine months ended September 30, 2008 which exclude the Hargray Wireless markets.  The Company completed the upgrade of the Hargray Wireless networks and introduced Cricket service in these markets in October 2008 and our results for net customer additions and churn will include customers in the former Hargray Wireless markets beginning in the fourth quarter of 2008.

 

•(2)            For a reconciliation of non-GAAP financial measures, please refer to the section entitled "Definition of Terms and Reconciliation of Non-GAAP Financial Measures" included at the end of this release.  Information relating to population and potential customers (POPs) is based on population estimates provided by Claritas Inc. for the relevant year.

 

•(3)            The terms  "Existing Business" and "Existing Markets" in this release refer to the Company's markets in operation as of December 31, 2007, excluding the effects of the Company's mobile broadband initiative.

 

Discussion of Financial and Operational Results for the Quarter

• Net customer additions included approximately 24,000 net customer additions for voice services in existing markets, approximately 92,000 net customer additions for voice services in new markets launched in 2008 and approximately 40,000 net customer additions associated with mobile broadband service.
• Customer churn for the third quarter was 4.2 percent,an improvementfrom 5.2 percentin the comparable period of theprior year. This decrease in churn year-over-year reflects an increase in customer tenurein markets launched prior to 2008. Churn in the Company's existing markets was 4.3 percent. Looking ahead, the Company expects new expansion markets to follow tenure-related churn patterns similar to the markets launched in 2006 and 2007. The Company's third quarter churn performance also reflects an increase in both customer deactivations and reactivations during the quarter, similar to what was experienced in the second quarter of 2008.
• Service revenues increased to $435 million, a 23 percent increase over the comparable period of the prior year and a 4 percent increase over the second quarter of 2008. These increases resulted from a 27 percent year-over-year increase in weighted-average customers due to growth in the Company's existing business, success of new market launches and customer acceptance of the Company's mobile broadband product offering, offset by changes in ARPU.
• Third quarter ARPU declined 3.5 percent over the prior year quarter to $42.95, reflecting expected seasonal trends in customer activity in our core business and the success of the continued expansion of our new broadband initiative. Third quarter APRU was also impacted by increased customer deactivationsand higher reactivations in the quarter, and the impact of slightly lower-than-expected customer uptake of the Company's higher value rate plans and optional add-on products in the quarter. We expect that fourth quarter 2008 ARPU will reflect seasonal trends in our existing markets, increased uptake of our optional add-on products and the maturing of our new markets.
• Adjusted OIBDA for the third quarter includes $16.9 million in negative OIBDA associated with the expanded launch and ongoing operations of the Company's broadband product; $31.3 million of negative OIBDA associated with new markets and certain initial launch costs associated with the up to 36 million additional POPs the Company plans to launch by the middle of 2009 (including costs associated with the 8 million POPs launched in the second quarter; and $1.2 million associated with write-off of certain business development activities.
• Third quarter 2008 operating income of $2.4 million decreased by $7.0 million over the comparable period of the prior year, reflecting the impact of additional depreciation expense and the investments the Company is making to support its new initiatives.
• Net loss for the third quarter was $48.8 million, or $0.72 per share, compared to a netloss of $43.3 million, or $0.64 per share, for the comparable period of the prior year. The loss of $0.72 per share for the quarter included approximately $0.73 per share of initial operating losses associated with the Company's new initiatives.
• Capital expenditures during thethird quarter of 2008 were $190.0 million, including expenditures associated with the build-out of new markets and capitalized interest.

 

"During the third quarter, the positive impact of the Company's customer growth initiatives was masked by the effects of Hurricane Ike and related weather systems," said Walter Berger, Leap's executive vice president and chief financial officer. "Prior to Hurricane Ike's impacting customer activity in September, we experienced attractive results early in the third quarter, and we are experiencing strong subscriber growth early in the fourth quarter as well.  Adjusted OIBDA margin increased 10 percentage points year-over-year, reflecting the benefits of scale as we expand our customer base. During the third quarter we also absorbed approximately $5 million of expenses in connection with legal fees associated with the settlement of litigation, Hurricane Ike, and certain business development activities. Third quarter results also reflect the Company's planned continuation of its new initiative spending to support the launch of up to 36 million total new covered POPs by the middle of 2009 and associated subscriber growth."

Other Key Operational Highlights

• Continued launch of Cricket Wireless Internet Service^TMto additional markets, bringing the total number of covered POPs to approximately 32 million as of September 30, 2008, an increase of 38 percent since the end of the second quarter of 2008. Cricket Wireless Internet Service provides high-speed mobile broadband service for a low, flat rate with no long-term commitments or credit checks.
• Successful launch of the new Samsung Messager, a tri-band device that contains an array of compelling features including a full QWERTY keyboard, built-in MP3 player and digital camera.
• Timely and active response to Hurricane Ike and related weather systems, with Cricket crews responding immediately to the storms with pre-positioned recovery assets, securing additional resources from multiple locations and deploying technical teams to restore service in areas of the four states that sustained damage or experienced continued loss of power - Texas, Ohio, Kentucky and Pennsylvania. The Company believes the storm impacted approximately 11.5 million covered POPs.
• Introductory launch of Cricket PAYGo^TM, a 24/7 unlimited prepaid wireless service, in approximately 1,600 locations, including major national retailers in Cricket markets across the nation. Cricket PAYGo is a daily pay-as-you-go service designed for customers who prefer the flexibility and control offered by traditional pre-paid services but who are seeking greater value for their dollar.
• Entry into a nationwide roaming agreement, spectrum exchange agreement, litigation settlement and cross-licensing agreement with MetroPCS Communications, Inc. The new roaming agreement, which has an initial term of 10 years, covers all of the companies' existing and future markets, which the parties expect could ultimately encompass virtually all of the top 200 markets in the nation.

 

 "We believe that the cash generated by our business, together with our third quarter cash and short-term investment position of $826 million, provides us with the financial resources necessary to operate our business and pursue our planned expansion activities. Further, the Company has no significant scheduled repayments of principal on its debt obligations until September of 2012," continued Berger.  "In addition, we have the flexibility to defer or substantially reduce our investments in business expansion efforts, if necessary, due to changes in general economic conditions. Given our attractive financial position, we believe that we are well-situated to continue investing in our business expansion initiatives and to consider any strategic opportunities that may arise.  We intend to follow a disciplined and thoughtful approach that balances continued investment with management of our overall capital resources."

 

Updated Business Outlook

The Company updated its previously announced business expansion outlook to reflect the following:

• Customer penetration for voice services in the Company's existing markets in aggregate is expected to reach between 8 percent and 9 percent by the end of 2010. This forecast does not include the expected positive contribution of the Company's mobile broadband initiative.
• Annual capital expenditures to support the on-going growth and development of the Company's markets in commercial operation for one year or more are expected to be in the mid-teens as a percentage of service revenue. This estimate may be affected by capital expenditures for footprint enhancement in existing markets. The Company may provide additional updates as it finalizes plans to develop additional sites.
• The Company and Denali License have identified up to 50 million POPs (as measured on a cumulative basis beginning January 2008) that the companies may cover with Cricket service by the end of 2010. The Company and Denali License expect to cover up to approximately 36 million of these additional POPs by the middle of 2009. The Company currently expects to finalize its plans with respect to the launch of the approximately 14 million remaining additional POPs in the middle of 2009. The Company currently intends to fund the costs required to build-out and launch the new markets associated with these 14 million additional POPs with cash generated from operations, and the pace and timing of the build-out and launch plans will depend upon the performance of the business and the amount of cash generated by the Company's operations.
• Aggregate capital expenditures for the build-out of new markets through their first full year of operation following commercial launch are anticipated to be approximately $25 per covered POP, excluding capitalized interest.
• Aggregate cumulative investment in OIBDA loss in the Company's newly launched markets through adjusted OIBDA break-even for these markets, including corporate and regional overhead allocations, is expected to be approximately $6 per covered POP. The OIBDA loss for a typical new market through adjusted OIBDA break-even in that market is expected to be approximately $7 per covered POP. The Company's new markets are generally expected to reach adjusted OIBDA break-even within four quarters of commercial operation.
• Total adjusted OIBDA is expected to grow at a compound annual growth rate of between 35 percent and 45 percent from 2007 through 2010. This forecast does not include the effects of the Company's mobile broadband initiative. This initiative is still developing; however, the Company believes that the compound annual growth rate of adjusted OIBDA from 2007 through 2010 would be higher if the effects of the mobile broadband initiative were included.
• With the continued expansion of the Company's mobile broadband initiative, the Company expects to cover approximately 63 million total POPs with broadband service by the end of 2008 and the Company expects to cover approximately 88 million total POPs with broadband service by the middle of 2009. The Company also expects to have between 130,000 and 150,000 mobile broadband customers by the end of 2008. Mobile broadband penetration after the first year of operation following commercial launch of the service in a given market is expected to be approximately 0.5 percent.
• Aggregate cumulative investment in OIBDA loss for the mobile broadband initiative through adjusted OIBDA break-even, including corporate and regional overhead allocations is expected to be approximately $0.50 per covered POP or less.The Company expects that peak OIBDA burn on a market-by-market basis will be higher.
• The Company's mobile broadband initiative in launched markets is generally expected to reach adjusted OIBDA break-even within three full quarters of commercial operation. The cumulative OIBDA loss for mobile broadband excludes approximately $6 million per quarter, though the end of 2008, of EvDO-related fixed costs that the Company expects to incur. The cumulative OIBDA loss for mobile broadband also excludes up to approximately $12 million per quarter, by year-end 2009, of EvDO-related fixed costs that the Company expects to incur as a result of increased subscribers. The Company expects that the negative OIBDA from the mobile broadband initiative will peak in the second half of 2008 and that the mobile broadband initiative will contribute positive adjusted OIBDA in the second half of 2009.

 

Conference Call Information

As previously announced, Leap management will host a conference call with live webcast at 5:00 p.m. EST / 2:00 p.m. PST today to discuss these results.  Other forward-looking and material information may also be discussed during this call.

 

To listen live via telephone, dial 1-866-831-6291 (domestic) or 1-617-213-8860 (international) and enter passcode number 95011255.  If listening via telephone, the accompanying presentation slides may be accessed by visiting http://investor.leapwireless.com.  Listeners should navigate to the webcast and choose the 'Live Phone' option to view the slides in conjunction with the live conference call.  Individuals dialing into the live call are encouraged to call in 15 minutes prior to the start time in order to register and be placed into the call.

 

To listen live via webcast and view accompanying presentation slides, visit http://investor.leapwireless.com.  Please choose the 'webcast' option to view the slides in conjunction with the webcast.

 

An online replay and downloadable MP3 of the event will be available on the Company's website shortly after the live call and will be accessible for a limited period of time. A telephonic replay will be available two hours after the call's completion and can be accessed by dialing 1-888-286-8010 (domestic) or 1-617-801-6888 (international) and entering passcode number 78428117.

 

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. The Company and its joint ventures now operate in 29 states and hold licenses in 35 of the top 50 U.S. markets. Through its affordable, flat-rate service plans, Cricket offers customers a choice of unlimited voice, text, data 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 Securities and Exchange Commission (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 consolidated balance sheets, consolidated statements of operations or 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, Existing Business Adjusted OIBDA, CPGA, 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 in "Updated Business Outlook" for fiscal year 2008 and future years, our plans to offer our services to additional covered POPs and our expectations regarding future growth, spending, results of operations and customer penetration, 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;
• changes in economic conditions, including interest rates, consumer credit conditions, unemployment rates, energy costs and other macro-economic factors that could adversely affect demand for the services we provide;
• the impact of competitors' initiatives;
• our ability to successfully implement product offerings and execute effectively on our planned coverage expansion, launches of markets we acquired in the FCC's auction for Advanced Wireless Services, or Auction#66, expansion of our mobile broadband product offering and other strategic activities;
• our ability to obtain roaming services from other carriers at cost-effective rates;
• our ability to maintain effective internal control over financial reporting;
• delays in our market expansion plans, including delays resulting from any difficulties in funding such expansion through our existing cash, cash generated from operations, or additional capital, or delays by existing U.S.government and other private sector wireless operations in clearing the AWS spectrum, some of which users are permitted to continue using the spectrum for several years;
• our ability to attract, motivate and retain an experienced workforce;
• our ability to comply with the covenants in our senior secured credit facilities, indentures and any future credit agreement, indenture or similar instrument;
• failure of our network or information technology systems to perform according to expectations;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 September 30, 2008, which we expect to file shortly with the SEC, and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

 

All forward-looking statements included in this news release should be considered in the context of these risks. We undertake no obligation to publicly 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, Jump, the Cricket "K" and Flex Bucket 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 and Cricket Wireless Internet Service. All other trademarks are the property of their respective owners.