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Leap: We won't make $75M payment to Sprint for 2012 network access

Cricket provider reports 289,000 net customer loss
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After a disastrous second quarter, Cricket provider Leap Wireless (NASDAQ:LEAP) said it will not make its $75 million minimum wholesale purchase commitment of network access from Sprint Nextel (NYSE:S). "Due to certain provisions in the wholesale agreement, we do not believe the company is obligated to meet this commitment in 2012, although we expect to satisfy a significant majority of it in any event," said Leap CEO Doug Hutcheson. "Sprint has not agreed to our decision and we are in discussions with them."

Click here for key slides from Leap's second quarter earnings presentation.

A Sprint representative declined to comment on the topic.

The announcement served to cap a number of serious issues that stung Leap during the company's second quarter. Leap reported a net loss of 289,000 customers and a net loss of $41.6 million that was more than analysts expected. The company also plans to narrow its national retail expansion to just 8,000 stores--fewer than its previous expectations.

"Our results for the second quarter are not acceptable," summed Leap CFO Jerry Elliott.

Leap signed its wholesale agreement with Sprint in 2010. The agreement allowed Leap--a regional wireless carrier headquartered in San Diego--to take its offerings nationwide, beyond the markets where it operated its own network. By reselling Sprint's services under Leap's Cricket brand, the move essentially turned Leap into a Sprint MVNO. Leap in the first quarter said that it did expect to meet its minimum $75 million purchase agreement with Sprint, but its calamitous showing in the second quarter appears to have tripped up the Cricket provider.

Leap's falling out with Sprint was one of a number of missteps that tugged at Leap during the quarter. Hutcheson said Leap didn't bring in as many customers as it had expected through its promotional efforts. He also said that "certain popular handsets" were not available during the quarter due to quality issues, though he didn't name the handset suppliers or provide details of the problems.

"We are discussions with these suppliers and expect steps to be taken on their part, or they may be, among other things, eliminated from our device portfolio," Hutcheson warned.

Leap began selling the Apple iPhone at the very end of the second quarter, but carrier executives did not provide any insight into sales of the device. "We will update [on the iPhone] in the coming quarters," Hutcheson said.

Hutcheson also said Leap plans to reduce spending on its 3G CDMA network by $80 million during 2012. Elliott explained that Leap's network will be able to handle the reduction in spending partially because of Leap's shrinking customer base and because of the company's intention to handle network spending with "rigor and discipline."

However, Leap executives said the cutback in Leap's CDMA network spending will not affect its LTE buildout plans; the carrier still expects to cover around two-thirds of its network footprint with LTE within the next two to three years. But that buildout will be tweaked slightly: Leap said it now expects to cover around 21 million POPs with LTE by the end of this year, down from a previous expectation of 24 million. Elliott explained that Leap now plans to turn on one LTE market in early 2013 instead of late 2012.

Interestingly, Leap said it plans to roll out LTE "by deploying facilities-based coverage and/or by entering into possible partnerships or joint ventures with others." Such language could indicate Leap plans to team up with another carrier to deploy LTE instead of handling the buildout by itself.

Indeed, the overall situation at Leap appears to be dire enough that the company is considering a range of corporate strategies. Hutcheson said: "We are also continuing to review alternatives to drive additional cash flow and value from our assets." Leap CFO Elliott said this "review" will put all options on the table, up to and including selling the company. "I wouldn't eliminate anything right now," he said.

Credit Suisse analyst Jonathan Chaplin said Leap has four major options:

1. A sale of the company;

2. Sell its spectrum and become a full MVNO;

3. Ink a network-sharing agreement where it would keep its network and supplement that with the network of another carrier.

4. Maintain its 3G CDMA network and share or wholesale its LTE network.

Chaplin indicated a network-sharing arrangement encompassing Leap's CDMA and LTE networks might be the most likely outcome.

Here is a breakdown of Leap's key metrics for the second quarter:

Subscribers: 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. Leap's net customer losses in the second quarter of this year included 205,000 voice customers and 84,000 broadband customers. Leap ended the second quarter with 5.9 million customers, up 2.7 percent from the year-ago quarter.

ARPU: Leap's ARPU for the second quarter of 2012 was $41.64, an increase of $1.49 over the comparable period of the prior year.

Churn: The carrier's customer churn for the second quarter of 2012 was 4.4 percent, up from the 4.2 percent it reported in the second quarter of 2011.

Handsets: Leap said 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.

Financials: Leap's service revenues for the second quarter of 2012 increased 6.7 percent over the prior year quarter to $751.3 million. The company's second quarter operating income was $31.6 million, up from the $12.3 million it reported in the second quarter of 2011. 

For more:
- see this release

Special Report: Wireless in the second quarter of 2012

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