Leap Reports Second Quarter Results

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SAN DIEGO, Aug. 6, 2012 /PRNewswire/ -- Leap Wireless International, Inc. (LEAP), a leading provider of innovative and value-driven wireless communications services, today reported operational and financial results for the three and six months ended June 30, 2012.  Service revenues for the second quarter of 2012 increased 6.7 percent over the prior year quarter to $751.3 million. The Company reported $190.8 million of adjusted operating income before depreciation and amortization (OIBDA) for the second quarter, an 18.8 percent increase over the prior year quarter.  Second quarter 2012 operating income was $31.6 million compared to operating income of $12.3 million for the second quarter of 2011. 

(Logo:http://photos.prnewswire.com/prnh/20101220/MM20546LOGO-a)

The Company reported approximately 493,000 gross customer additions for the second quarter of 2012 and approximately 289,000 net customer losses.  Net customer losses were comprised of approximately 205,000 voice customers and 84,000 broadband customers. Customer churn for the second quarter of 2012 was 4.4 percent.  In-footprint voice churn excluding PAYGo customers was essentially flat year-over-year at 3.4 percent.

"We are pleased to have delivered the Company's best-ever quarterly adjusted OIBDA, which drove an adjusted OIBDA margin increase of 260 basis points over the prior year and 850 basis points over first quarter 2012," said Doug Hutcheson, Leap's president and chief executive officer. "Second quarter customer results, however, were softer than anticipated.  The Company's plan for the balance of 2012 is designed to position us to capture customer growth and improve operational performance. Over the coming weeks, we will be announcing 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.

"At the same time, we remain focused on improving cash flows and financial performance.  We are tightening our focus in our national retail channel by narrowing the number of retail locations and our marketing spend. In addition, we are reducing 2012 capital expenditures by approximately $80 million, principally by managing 3G network capacity investments, and are exploring cost-effective alternatives to deliver 4G services as we roll out LTE.  We are also continuing to review alternatives to drive additional cash flow and value from our assets."

 

 

Financial Results and Operating Metrics (1)

(Unaudited; in millions, except for customer data, operating metrics and per share amounts)

         
   

Three Months Ended June 30,

 

Six Months Ended June 30,

   

2012

 

2011

 

Change

 

2012

 

2011

 

Change

Service revenues

 

$

751.3

   

$

704.1

   

6.7%

   

$

1,525.3

   

$

1,382.5

   

10.3%

 

Total revenues

 

$

786.8

   

$

760.5

   

3.5%

   

$

1,612.4

   

$

1,540.5

   

4.7%

 

Operating income (loss)

 

$

31.6

   

$

12.3

   

156.9%

   

$

15.8

   

$

(5.8)

   

372.4%

 

Adjusted OIBDA

 

$

190.8

   

$

160.7

   

18.8%

   

$

321.3

   

$

273.2

   

17.6%

 

Adjusted OIBDA as a percentage of service revenues

 

25%

   

23%

   

   

21%

   

20%

   

 

Net loss

 

$

(46.0)

   

$

(58.4)

   

   

$

(140.3)

   

$

(144.9)

   

 

Net loss attributable to common stockholders

 

$

(41.6)

   

$

(65.2)

   

   

$

(140.0)

   

$

(161.4)

   

 

Diluted net loss per share attributable to common stockholders

 

$

(0.54)

   

$

(0.85)

   

   

$

(1.82)

   

$

(2.11)

   

 

Gross customer additions(2)

 

492,720

   

622,863

   

(20.9)%

   

1,352,267

   

1,475,027

   

(8.3)%

 

Net customer additions (loss)

 

(289,270)

   

(103,140)

   

180.5%

   

(31,210)

   

227,434

   

(113.7)%

 

End of period customers

 

5,902,803

   

5,745,613

   

2.7%

   

5,902,803

   

5,745,613

   

2.7%

 

Weighted-average customers

 

5,992,047

   

5,766,438

   

3.9%

   

6,008,737

   

5,708,394

   

5.3%

 

Churn

 

4.4%

   

4.2%

   

   

3.8%

   

3.6%

   

 

End of period covered POPS

 

~95.4

   

~95.3

   

   

~95.4

   

~95.3

   

 

Average revenue per user (ARPU)

 

$

41.64

   

$

40.15

   

3.7%

   

$

42.12

   

$

39.75

   

6.0%

 

Cash cost per user (CCU)

 

$

22.91

   

$

21.83

   

4.9%

   

$

23.73

   

$

22.43

   

5.8%

 

Cost per gross addition (CPGA)

 

$

296

   

$

251

   

17.9%

   

$

253

   

$

217

   

16.6%

 

Cash purchases of property and equipment

 

$

119.1

   

$

93.3

   

27.7%

   

$

265.4

   

$

186.2

   

42.5%

 

Unrestricted cash, cash equivalents and short-term investments

 

$

524.4

   

$

724.0

   

(27.6)%

   

$

524.4

   

$

724.0

   

(27.6)%

 
                                             
 

(1)

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.

   

(2)

The Company recognizes a gross customer addition for each Cricket Wireless, Cricket Broadband and Cricket PAYGoline of service activated by a customer.

 

Discussion of Financial and Operational Results for the Quarter

Customer Activity

  • End-of-period customers for the second quarter of 2012 were approximately 5,903,000, a 2.7 percent increase from end-of-period customers for the second quarter of 2011.
  • The Company reported a net loss of approximately 289,000 customers for the second quarter of 2012, compared to a net loss of approximately 103,000 customers for the second quarter of 2011.
    • Voice net customer losses reflect approximately 191,000 net voice customers lost inside Cricket's own network footprint and approximately 14,000 net voice customers lost outside of Cricket's network footprint.  Voice customer losses reflect lower gross additions, promotional activities that did not perform as expected and higher churn levels.
    • Broadband net customer losses of approximately 84,000 customers reflect the Company's planned shift of network usage to higher-ARPU smartphones.
  • Customer churn for the second quarter of 2012 was 4.4 percent, compared to 4.2 percent for the second quarter of 2011.
  • Voice customer churn for the second quarter of 2012 was 4.0 percent, compared to 3.6 percent for the comparable period of the prior year, reflecting higher churn levels in certain national retail channels.
  • Broadband customer churn for the second quarter of 2012 was 10.3 percent, compared to 9.9 percent for the comparable period of the prior year reflecting the planned shift of network usage to higher-ARPU smartphones.
  • 57 percent of the Company's new handset sales in the second quarter of 2012 were for smartphones and Muve Music-enabled devices and approximately 9 percent of the Company's voice customer base upgraded their handsets during the quarter.

Service Revenues and ARPU

  • Service revenues for the second quarter increased to $751.3 million, a 6.7 percent increase over the comparable period of the prior year, primarily due to a 3.9 percent increase in weighted-average customers and continued uptake of the Company's higher-ARPU service plans.
  • ARPU for the second quarter of 2012 was $41.64, an increase of $1.49 over the comparable period of the prior year.  The year-over-year increase in ARPU primarily reflects continued penetration of higher-value service plans, offset in part by the effect of certain customer retention activities.

Operating Expenses, Adjusted OIBDA & Financial Metrics

  • Adjusted OIBDA for the second quarter of 2012 was $190.8 million, an increase of 18.8 percent over the comparable period of the prior year.  The year-over-year increase primarily reflects growth in the Company's service revenues.
  • Second quarter 2012 operating income was $31.6 million, compared with operating income of $12.3 million for the comparable period of the prior year.  The year-over-year increase in operating income resulted primarily from growth in the Company's service revenues, offset by increased depreciation and amortization expense primarily associated with network upgrades.
  • CCU for the second quarter of 2012 increased 4.9 percent over the prior year quarter to $22.91, primarily because of higher product costs, costs associated with the transition of the Company's supply chain vendor and upfront expenses related to cost reduction initiatives.
  • CPGA for the second quarter of 2012 increased by 17.9 percent over the prior year quarter to $296, reflecting a year-over-year decrease in gross customer additions and costs associated with national retail channels.
  • Net loss attributable to common stockholders for the second quarter of 2012 was $41.6 million, or $0.54 per diluted share, compared to a net loss attributable to common stockholders of $65.2 million, or $0.85 per diluted share, for the second quarter of 2011.

Capital Expenditures

  • Capital expenditures during the second quarter of 2012 were $119.1 million.

Updated Business Outlook

  • Total capital expenditures for 2012 are expected to be between $530 million and $560 million, including spending for the deployment of next-generation LTE network technology.
  • The Company currently plans to offer next-generation LTE network technology services over the next two to three years to customers in at least two-thirds of its network footprint.
    • The Company plans to cover approximately 21 million POPs with LTE network technology in 2012.
    • The Company continues to explore cost-effective ways to deliver LTE services to its customers, including by deploying facilities-based coverage and/or by entering into possible partnerships or joint ventures with others.
  • Aggregate capital expenditures for LTE deployment are expected to be less than $10 per covered POP. 

Other Business & Operational Highlights

  • Introduced the iPhone4 and iPhone4S in company-owned stores and select dealers in nearly 60 Cricket markets.
  • Announced agreements to exchange spectrum between T-Mobile, Leap and their venture partners.
  • Introduced the BlackBerry Curve 9350 Smartphone.
  • Appointed Jerry Elliott as executive vice president and chief financial officer.

Webcast Information

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

To listen live via telephone, dial 1-800-951-1214 (domestic) or 1-212-231-2911 (international). No participant pass code number is required for this call.  If listening via telephone, the accompanying presentation slides may be accessed by visiting http://earnings.leapwireless.com.

More information about this event including a live webcast, the accompanying presentation slides and other supporting materials may be accessed by visiting http://earnings.leapwireless.com. These materials will be available for download at approximately 5:00 p.m. EDT / 2:00 p.m. PDT today.

A replay of the conference call will be available for a limited time via webcast, MP3 or telephone and may be accessed by visiting http://earnings.leapwireless.com or dialing 1-800-633-8284 (domestic) or 1-402-977-9140 (international) and entering reservation number 21599263.

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 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 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, 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, pending spectrum transactions, competitiveness 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;
  • the duration and severity of the current economic downturn in the United States and 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;
  • the impact of competitors' initiatives;
  • our ability to successfully implement product and service plan offerings, expand our retail distribution and execute effectively on our other strategic activities;
  • our ability to obtain and maintain roaming and wholesale services from other carriers at cost-effective rates;
  • our ability to maintain effective internal control over financial reporting;
  • our ability to attract, integrate, motivate and retain an experienced workforce, including members of senior management;
  • 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 acquire or obtain access to additional spectrum in the future at a reasonable cost or on a timely basis;
  • our ability to refinance our indebtedness under, or comply with the covenants in, any credit agreement, indenture or similar instrument governing any of our existing or future indebtedness;
  • failure of our network or information technology systems to perform according to expectations and risks associated with the upgrade or transition of certain of those systems, including our customer billing system; 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 March 31, 2012 filed with the SEC on April 27, 2012 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, 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 August 6, 2012, 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, 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, Muve First, Muve Headliners, Cricket Crosswave, Seek Music, Cricket MyPerks and Cricket Wireless Internet Service. All other trademarks are the property of their respective owners.

 

         

LEAP WIRELESS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (1)

(In thousands, except share amounts)

         
   

June 30,

2012

 

December 31,

2011

Assets

 

(Unaudited)

   

Cash and cash equivalents

 

$

386,376

   

$

345,243

 

Short-term investments

 

138,002

   

405,801

 

Inventories

 

117,137

   

116,957

 

Deferred charges

 

56,516

   

57,979

 

Other current assets

 

147,173

   

134,457

 

Total current assets

 

845,204

   

1,060,437

 

Property and equipment, net

 

1,946,547

   

1,957,374

 

Wireless licenses

 

1,605,256

   

1,788,970

 

Assets held for sale

 

390,682

   

204,256

 

Goodwill

 

31,886

   

31,886

 

Intangible assets, net

 

32,288

   

41,477

 

Other assets

 

66,796

   

68,290

 

Total assets

 

$

4,918,659

   

$

5,152,690

 

Liabilities and Stockholders' Equity

       

Accounts payable and accrued liabilities

 

$

362,637

   

$

460,278

 

Current maturities of long-term debt

 

21,911

   

21,911

 

Other current liabilities

 

231,711

   

256,357

 

Total current liabilities

 

616,259

   

738,546

 

Long-term debt, net

 

3,202,472

   

3,198,749

 

Deferred tax liabilities

 

354,459

   

333,804

 

Other long-term liabilities

 

178,058

   

172,366

 

Total liabilities

 

4,351,248

   

4,443,465

 

Redeemable non-controlling interests

 

89,894

   

95,910

 

Stockholders' equity:

       

Preferred stock - authorized 10,000,000 shares, $.0001 par value; no shares issued and outstanding

 

   

 

Common stock - authorized 160,000,000 shares, $.0001 par value; 79,419,622 and 78,924,049 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

8

   

8

 

Additional paid-in capital

 

2,179,948

   

2,175,436

 

Accumulated deficit

 

(1,701,738)

   

(1,561,417)

 

Accumulated other comprehensive loss

 

(701)

   

(712)

 

Total stockholders' equity

 

477,517

   

613,315

 

Total liabilities and stockholders' equity

 

$

4,918,659

   

$

5,152,690

 
 

 

         

LEAP WIRELESS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (1)

(Unaudited and in thousands, except per share data)

         
   

Three Months Ended

June 30,

 

Six Months Ended

June 30,

   

2012

 

2011

 

2012

 

2011

Revenues:

               

Service revenues

 

$

751,285

   

$

704,087

   

$

1,525,283

   

$

1,382,498

 

Equipment revenues

 

35,487

   

56,451

   

87,108

   

157,954

 

Total revenues

 

786,772

   

760,538

   

1,612,391

   

1,540,452

 

Operating expenses:

               

Cost of service (exclusive of items shown separately below)

 

256,555

   

244,870

   

517,866

   

480,815

 

Cost of equipment

 

171,673

   

182,677

   

419,520

   

412,472

 

Selling and marketing

 

77,247

   

87,161

   

172,801

   

197,013

 

General and administrative

 

94,892

   

92,079

   

184,591

   

187,488

 

Depreciation and amortization

 

154,483

   

136,137

   

301,026

   

262,811

 

Impairments and other charges

 

   

631

   

   

631

 

Total operating expenses

 

754,850

   

743,555

   

1,595,804

   

1,541,230

 

Loss on sale or disposal of assets, net

 

(333)

   

(4,646)

   

(801)

   

(4,995)

 

Operating income (loss)

 

31,589

   

12,337

   

15,786

   

(5,773)

 

Equity in net income (loss) of investees, net

 

(59)

   

1,010

   

134

   

2,189

 

Interest income

 

28

   

59

   

57

   

123

 

Interest expense

 

(66,983)

   

(61,923)

   

(134,025)

   

(120,742)

 

Other expense, net

 

   

(32)

   

   

(32)

 

Loss before income taxes

 

(35,425)

   

(48,549)

   

(118,048)

   

(124,235)

 

Income tax expense

 

(10,562)

   

(9,893)

   

(22,273)

   

(20,647)

 

Net loss

 

(45,987)

   

(58,442)

   

(140,321)

   

(144,882)

 

Accretion of redeemable non-controlling interests and distributions, net of tax

 

4,397

   

(6,769)

   

292

   

(16,540)

 

Net loss attributable to

common stockholders

 

$

(41,590)

   

$

(65,211)

   

$

(140,029)

   

$

(161,422)

 

Loss per share attributable to common stockholders:

               

Basic

 

$

(0.54)

   

$

(0.85)

   

$

(1.82)

   

$

(2.11)

 

Diluted

 

$

(0.54)

   

$

(0.85)

   

$

(1.82)

   

$

(2.11)

 

Shares used in per share calculations:

               

Basic

 

77,206

   

76,497

   

77,116

   

76,436

 

Diluted

 

77,206

   

76,497

   

77,116

   

76,436

 

Other comprehensive loss:

               

Net loss

 

$

(45,987)

   

$

(58,442)

   

$

(140,321)

   

$

(144,882)

 

Net unrealized holding gains on investments, net of tax

 

10

   

   

12

   

9

 

Comprehensive loss

 

$

(45,977)

   

$

(58,442)

   

$

(140,309)

   

$

(144,873)

 
 

 

     

LEAP WIRELESS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (1)

(Unaudited and in thousands)

     
   

Six Months Ended June 30,

   

2012

 

2011

Operating activities:

       

Net cash provided by operating activities

 

$

50,619

   

$

101,639

 

Investing activities:

       

Acquisition of a business

 

   

(850)

 

Purchases of property and equipment

 

(265,412)

   

(186,186)

 

Change in prepayments for purchases of

property and equipment

 

(1,940)

   

(2,953)

 

Purchases of wireless licenses and spectrum

clearing costs

 

(2,712)

   

(2,845)

 

Proceeds from sale of wireless licenses

and operating assets

 

1,420

   

468

 

Purchases of investments

 

(173,141)

   

(297,430)

 

Sales and maturities of investments

 

440,734

   

149,767

 

Change in restricted cash

 

(1,501)

   

(420)

 

Net cash used in investing activities

 

(2,552)

   

(340,449)

 

Financing activities:

       

Proceeds from issuance of long-term debt

 

   

396,772

 

Repayment of long-term debt

 

   

(15,089)

 

Payment of debt issuance costs

 

   

(6,680)

 

Proceeds from issuance of common stock, net

 

483

   

712

 

Proceeds from sale lease-back financing

 

   

23,891

 

Distributions made to joint venture partners

 

(5,230)

   

(2,268)

 

Other

 

(2,187)

   

(1,199)

 

Net cash provided by (used in) financing activities

 

(6,934)

   

396,139

 

Net increase in cash and cash equivalents

 

41,133

   

157,329

 

Cash and cash equivalents at beginning of period

 

345,243

   

350,790

 

Cash and cash equivalents at end of period

 

$

386,376

   

$

508,119

 
         

Supplementary disclosure of cash flow information:

       

Cash paid for interest

 

$

(126,747)

   

$

(102,328)

 

Cash paid for income taxes

 

$

(3,943)

   

$

(2,974)

 
 
 

Explanatory Notes to Financial Statements

 

(1)

The condensed consolidated financial statements and the tables of results and operating and financial metrics included at the beginning of this release include the operating results and financial position of Leap and its wholly-owned subsidiaries and consolidated joint ventures. The Company consolidates its non-controlling interest in Savary Island Wireless, LLC (Savary Island) in accordance with the authoritative guidance for the consolidation of variable interest entities because Savary Island is a variable interest entity and, among other things, the Company has entered into an agreement with Savary Island's other member which established a specified purchase price when it exercised its right to sell its membership interest to the Company. The Company consolidates STX Wireless, LLC in accordance with the authoritative guidance for consolidations based on the voting interest model. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

   
 

The following tables summarize operating data for the Company's consolidated operations for the three and six months ended June 30, 2012 and 2011 (unaudited; in thousands, except percentages):

 
     
     
   

Three Months Ended June 30,

                   

Change from Prior Year

   

2012

 

% of 2012 Service Revenues

 

2011

 

% of 2011 Service Revenues

 

Dollars

 

Percent

Revenues:

                       

Service revenues

 

$

751,285

       

$

704,087

       

$

47,198

   

6.7%

 

Equipment revenues

 

35,487

       

56,451

       

(20,964)

   

(37.1)%

 

Total revenues

 

786,772

       

760,538

       

26,234

   

3.4%

 

Operating expenses:

                       

Cost of service

 

256,555

   

34.1%

   

244,870

   

34.8%

   

11,685

   

4.8%

 

Cost of equipment

 

171,673

   

22.9%

   

182,677

   

25.9%

   

(11,004)

   

(6.0)%

 

Selling and marketing

 

77,247

   

10.3%

   

87,161

   

12.4%

   

(9,914)

   

(11.4)%

 

General and administrative

 

94,892

   

12.6%

   

92,079

   

13.1%

   

2,813

   

3.1%

 

Depreciation and amortization

 

154,483

   

20.6%

   

136,137

   

19.3%

   

18,346

   

13.5%

 

Impairments and other charges

 

   

—%

   

631

   

0.1%

   

(631)

   

(100.0)%

 

Total operating expenses

 

754,850

   

100.5%

   

743,555

   

105.6%

   

11,295

   

1.5%

 

Loss on sale or disposal of assets, net

 

(333)

   

—%

   

(4,646)

   

(0.7)%

   

4,313

   

(92.8)%

 

Operating income

 

$

31,589

   

4.2%

   

$

12,337

   

1.8%

   

$

19,252

   

156.1%

 
 


 

   

Six Months Ended June 30,

                   

Change from Prior Year

   

2012

 

% of 2012 Service Revenues

 

2011

 

% of 2011 Service Revenues

 

Dollars

 

Percent

Revenues:

                       

Service revenues

 

$

1,525,283

       

$

1,382,498

       

$

142,785

   

10.3%

 

Equipment revenues

 

87,108

       

157,954

       

(70,846)

   

(44.9)%

 

Total revenues

 

1,612,391

       

1,540,452

       

71,939

   

4.7%

 

Operating expenses:

                       

Cost of service

 

517,866

   

34.0%

   

480,815

   

34.8%

   

37,051

   

7.7%

 

Cost of equipment

 

419,520

   

27.5%

   

412,472

   

29.8%

   

7,048

   

1.7%

 

Selling and marketing

 

172,801

   

11.3%

   

197,013

   

14.3%

   

(24,212)

   

(12.3)%

 

General and administrative

 

184,591

   

12.1%

   

187,488

   

13.6%

   

(2,897)

   

(1.5)%

 

Depreciation and amortization

 

301,026

   

19.7%

   

262,811

   

19.0%

   

38,215

   

14.5%

 

Impairments and other charges

 

   

—%

   

631

   

—%

   

(631)

   

(100.0)%

 

Total operating expenses

 

1,595,804

   

104.6%

   

1,541,230

   

111.5%

   

54,574

   

3.5%

 

Loss on sale or disposal of assets, net

 

(801)

   

(0.1)%

   

(4,995)

   

(0.4)%

   

4,194

   

(84.0)%

 

Operating income (loss)

 

$

15,786

   

1.0%

   

$

(5,773)

   

(0.4)%

   

$

21,559

   

373.4%

 
 
 

Definition of Terms and Reconciliation of Non-GAAP Financial Measures

 

The Company utilizes certain financial measures that are widely used in the telecommunications industry and are not calculated based on GAAP. Certain of these financial measures are considered non-GAAP financial measures within the meaning of Item 10 of Regulation S-K promulgated by the SEC.

 

(1)

Churn, which measures customer turnover, is calculated as the net number of customers that disconnect from our service divided by the weighted-average number of customers divided by the number of months during the period being measured. Customers who do not pay the first bill they receive following initial activation are deducted from our gross customer additions in the month in which they are disconnected; as a result, these customers are not included in churn. Customers of our Cricket Wireless and Cricket Broadband service are generally disconnected from service approximately 30 days after failing to pay a monthly bill, and pay-in-advance customers who ask to terminate their service are disconnected when their paid service period ends. Cricket PAYGo customers generally have 60 days from the date they activated their account, were charged a daily or monthly access fee for service or last "topped-up" their account (whichever is later) to do so again, or they will have their account suspended for a subsequent 60-day period before being disconnected. Management uses churn to measure our retention of customers, to measure changes in customer retention over time, and to help evaluate how changes in our business affect customer retention. In addition, churn provides management with a useful measure to compare our customer turnover activity to that of other wireless communications providers. We believe investors use churn primarily as a tool to track changes in our customer retention over time and to compare our customer retention to that of other wireless communications providers. Other companies may calculate this measure differently.

   

(2)

ARPU is service revenues, less pass-through regulatory fees and telecommunications taxes, divided by the weighted-average number of customers, divided by the number of months during the period being measured. Management uses ARPU to identify average revenue per customer, to track changes in average customer revenues over time, to help evaluate how changes in our business, including changes in our service offerings, affect average revenue per customer, and to forecast future service revenue. In addition, ARPU provides management with a useful measure to compare our subscriber revenue to that of other wireless communications providers. Our customers are generally disconnected from service after a specified period following their failure to either pay a monthly bill or replenish, or "top-up," their account. Because our calculation of weighted-average number of customers includes customers who are not currently paying for service but who have not yet been disconnected from service because they have not paid their last bill or have not replenished their account, ARPU may appear lower during periods in which we have significant disconnect activity. We believe investors use ARPU primarily as a tool to track changes in our average revenue per customer and to compare our per customer service revenues to those of other wireless communications providers. Other companies may calculate this measure differently.

   

The following table reconciles total service revenues used in the calculation of ARPU to service revenues, which we consider to be the most directly comparable GAAP financial measure to ARPU (unaudited; in thousands, except weighted-average number of customers and ARPU):

 
 
   

Three Months Ended

June 30,

 

Six Months Ended

June 30,

   

2012

 

2011

 

2012

 

2011

Service revenues

 

$

751,285

   

$

704,087

   

$

1,525,283

   

$

1,382,498

 

Less pass-through

regulatory fees and

telecommunications

taxes

 

(2,678)

   

(9,455)

   

(6,815)

   

(20,914)

 

Total service revenues

used in the calculation

of ARPU

 

$

748,607

   

$

694,632

   

$

1,518,468

   

$

1,361,584

 

Weighted-average number

of customers

 

5,992,047

   

5,766,438

   

6,008,737

   

5,708,394

 

ARPU

 

$

41.64

   

$

40.15

   

$

42.12

   

$

39.75

 
 
 

(3)

CPGA is selling and marketing costs (excluding applicable share-based compensation expense included in selling and marketing expense), and equipment subsidy (generally defined as cost of equipment less equipment revenue), less the net loss on equipment transactions and third-party commissions unrelated to customer acquisition, divided by the total number of gross new customer additions during the period being measured. The net loss on equipment transactions unrelated to customer acquisition includes the revenues and costs associated with the sale of wireless devices to existing customers as well as costs associated with device replacements and repairs (other than warranty costs which are the responsibility of the device manufacturers). Commissions unrelated to customer acquisition are commissions paid to third parties for certain activities related to the continuing service of customers. We deduct customers who do not pay the first bill they receive following initial activation from our gross customer additions in the month in which they are disconnected, which tends to increase CPGA because we incur the costs associated with a new customer without receiving the benefit of a gross customer addition. Management uses CPGA to measure the efficiency of our customer acquisition efforts, to track changes in our average cost of acquiring new subscribers over time, and to help evaluate how changes in our sales and distribution strategies affect the cost-efficiency of our customer acquisition efforts. In addition, CPGA provides management with a useful measure to compare our per customer acquisition costs with those of other wireless communications providers. We believe investors use CPGA primarily as a tool to track changes in our average cost of acquiring new customers and to compare our per customer acquisition costs to those of other wireless communications providers. Other companies may calculate this measure differently.

   

The following table reconciles total costs used in the calculation of CPGA to selling and marketing expense, which we consider to be the most directly comparable GAAP financial measure to CPGA (unaudited; in thousands, except gross customer additions and CPGA):

 
 
   

Three Months Ended

June 30,

 

Six Months Ended

June 30,

   

2012

 

2011

 

2012

 

2011

Selling and

marketing expense

 

$

77,247

   

$

87,161

   

$

172,801

   

$

197,013

 

Less share-based

compensation expense

included in selling and

marketing expense

 

(616)

   

(261)

   

(639)

   

(308)

 

Plus cost of equipment

 

171,673

   

182,677

   

419,520

   

412,472

 

Less equipment revenue

 

(35,487)

   

(56,451)

   

(87,108)

   

(157,954)

 

Less net loss on equipment

transactions and third-party

commissions unrelated to

customer acquisition

 

(66,932)

   

(56,920)

   

(163,029)

   

(131,044)

 

Total costs used in the

calculation of CPGA

 

$

145,885

   

$

156,206

   

$

341,545

   

$

320,179

 

Gross customer additions

 

492,720

   

622,863

   

1,352,267

   

1,475,027

 

CPGA

 

$

296

   

$

251

   

$

253

   

$

217

 
 
 

(4)

CCU is cost of service and general and administrative costs (excluding applicable share-based compensation expense included in cost of service and general and administrative expense) plus net loss on equipment transactions and third-party commissions unrelated to customer acquisition (which includes the gain or loss on the sale of devices to existing customers, costs associated with device replacements and repairs (other than warranty costs which are the responsibility of the device manufacturers) and commissions paid to third parties for certain activities related to the continuing service of customers), less pass-through regulatory fees and telecommunications taxes, divided by the weighted-average number of customers, divided by the number of months during the period being measured. CCU does not include any depreciation and amortization expense. Management uses CCU as a tool to evaluate the non-selling cash expenses associated with ongoing business operations on a per customer basis, to track changes in these non-selling cash costs over time, and to help evaluate how changes in our business operations affect non-selling cash costs per customer. In addition, CCU provides management with a useful measure to compare our non-selling cash costs per customer with those of other wireless communications providers. We believe investors use CCU primarily as a tool to track changes in our non-selling cash costs over time and to compare our non-selling cash costs to those of other wireless communications providers. Other companies may calculate this measure differently.

 

The following table reconciles total costs used in the calculation of CCU to cost of service, which we consider to be the most directly comparable GAAP financial measure to CCU (unaudited; in thousands, except weighted-average number of customers and CCU):

 
 
   

Three Months Ended

June 30,

 

Six Months Ended

June 30,

   

2012

 

2011

 

2012

 

2011

Cost of service

 

$

256,555

   

$

244,870

   

$

517,866

   

$

480,815

 

Plus general and

administrative expense

 

94,892

   

92,079

   

184,591

   

187,488

 

Less share-based

compensation expense

included in cost of service

and general and administrative

expense

 

(3,813)

   

(6,685)

   

(3,096)

   

(10,217)

 

Plus net loss on equipment

transactions and third-party

commissions unrelated to

customer acquisition

 

66,932

   

56,920

   

163,029

   

131,044

 

Less pass-through regulatory

fees and telecommunications

taxes

 

(2,678)

   

(9,455)

   

(6,815)

   

(20,914)

 

Total costs used in the

calculation of CCU

 

$

411,888

   

$

377,729

   

$

855,575

   

$

768,216

 

Weighted-average number of customers

 

5,992,047

   

5,766,438

   

6,008,737

   

5,708,394

 

CCU

 

$

22.91

   

$

21.83

   

$

23.73

   

$

22.43

 
 
 

(5)

Adjusted OIBDA is a non-GAAP financial measure defined as operating income (loss) before depreciation and amortization, adjusted to exclude the effects of: (gain)/loss on sale, exchange or disposal of assets, net; impairments and other charges; and share-based compensation expense. Adjusted OIBDA should not be construed as an alternative to operating income (loss) or net income (loss) as determined in accordance with GAAP, or as an alternative to cash flows from operating activities as determined in accordance with GAAP or as a measure of liquidity.

 
 

In a capital-intensive industry such as wireless telecommunications, management believes that adjusted OIBDA, and the associated percentage margin calculations, are meaningful measures of our operating performance. We use adjusted OIBDA as a supplemental performance measure because management believes it facilitates comparisons of our operating performance from period to period and comparisons of our operating performance to that of other companies by backing out potential differences caused by the age and book depreciation of fixed assets (affecting relative depreciation expenses) as well as the items described above for which additional adjustments were made. While depreciation and amortization are considered operating costs under GAAP, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Because adjusted OIBDA facilitates internal comparisons of our historical operating performance, management also uses this metric for business planning purposes and to measure our performance relative to that of our competitors. In addition, we believe that adjusted OIBDA and similar measures are widely used by investors, financial analysts and credit rating agencies as measures of our financial performance over time and to compare our financial performance with that of other companies in our industry.

 
 

Adjusted OIBDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 
  • it does not reflect capital expenditures;
 
  • although it does not include depreciation and amortization, the assets being depreciated and amortized will often have  to be replaced in the future and adjusted OIBDA does not reflect cash requirements for such replacements;
 
  • it does not reflect costs associated with share-based awards exchanged for employee services;
 
  • it does not reflect the interest expense necessary to service interest or principal payments on indebtedness;
 
  • it does not reflect expenses incurred for the payment of income taxes and other taxes; and
 
  • other companies, including companies in our industry, may calculate this measure differently than we do, limiting its usefulness as a comparative measure.
 

Management understands these limitations and considers adjusted OIBDA as a financial performance measure that supplements but does not replace the information provided to management by our GAAP results.

 

The following table reconciles adjusted OIBDA to operating income (loss), which we consider to be the most directly comparable GAAP financial measure to adjusted OIBDA (unaudited; in thousands):

 
 
   

Three Months Ended

June 30,

 

Six Months Ended

June 30,

   

2012

 

2011

 

2012

 

2011

Operating income

 (loss)

 

$

31,589

   

$

12,337

   

$

15,786

   

$

(5,773)

 

Plus

depreciation and

amortization

 

154,483

   

136,137

   

301,026

   

262,811

 

OIBDA

 

$

186,072

   

$

148,474

   

$

316,812

   

$

257,038

 

Plus loss on

sale or disposal

of assets, net

 

333

   

4,646

   

801

   

4,995

 

Plus

impairments

and other

charges

 

   

631

   

   

631

 

Plus share-

based

compensation

expense

 

4,429

   

6,946

   

3,735

   

10,525

 

Adjusted OIBDA

 

$

190,834

   

$

160,697

   

$

321,348

   

$

273,189