Leap says it doesn't have to purchase additional iPhones from Apple

Leap Wireless (NASDAQ:LEAP) CFO Perley McBride said Leap is not required to purchase additional iPhones from Apple (NASDAQ:AAPL) to meet its first year commitment to the company. On Leap's second-quarter earnings conference call, McBride said that because of Leap's efforts to increase its sales of the iPhone, the company does not have to purchase more iPhones. Leap has a three-year, $900 million deal with Apple for iPhones. 

McBride noted that Leap has purchased approximately one-half of its first-year minimum purchase commitment to Apple through June. "Due to our efforts to expand sales volume for the iPhone, we have not been required to purchase additional handsets to meet the first year commitment," McBride said. 

Operator commitments with Apple for iPhone purchases have become a sticking point of late.  Earlier this month, Moffett Research, which analyzed SEC filings, said that it believed Verizon Wireless (NYSE:VZ) owed Apple $14 billion in purchase commitments if it doesn't sell the agreed number of iPhones this year. 

Leap said in March that its customer base was not purchasing unsubsidized Apple iPhone devices and it estimated it may only sell half as many iPhones as it planned during the first year of its three-year contract with Apple. At the time, Leap said that if iPhone sales did not increase, it might be forced to buy $100 million of unsold iPhones this summer.  

However, McBride noted that iPhone and other smartphone sales are improving at the company, thanks to Leap's new Phone Payment Plan, which offers Cricket customers three payment options when purchasing a smartphone. Leap executives said that they believe these options will give customers a lot of flexibility and improve gross activations.

Leap lost 289,000 subscribers in the second quarter and blamed its losses on increased competition, more expensive handsets and fewer reactivations. In addition, the company reported its total revenue in the second quarter dropped 7 percent to $731.5 million and service revenues decreased 10 percent to $678.5 million.

The company, which earlier this month announced it was being acquired by AT&T Mobility (NYSE:T) for $1.2 billion, also said that it was not going to expand its LTE coverage to the additional 10 million POPs as originally planned. Instead, Leap will improve its data coverage in existing markets. Leap currently has LTE covering 21 million POPs. The company also revised its capital expenditure forecast to between $150 million to $200 million for the year.

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

Subscribers: Leap reported a net loss of 364,268 customers for the second quarter of 2013, compared to a net loss of 289,270 customers for the second quarter of 2012. The company blamed the losses on increased competition in its markets and increased demand for 4G services. Leap also said that it saw fewer reactivating customers and an increase in handset pricing.

Churn: Leap's total churn for the second quarter was 4.3 percent, compared with 4.4 percent for the same quarter in 2012. Leap said there were approximately 400,000 fewer gross deactivations for the second quarter, compared to the year-ago quarter, but that was offset by fewer reactivations. Core churn was 3.6 percent, compared to 3.3 percent in the same quarter in 2012.

Smartphone sales: Leap said 72 percent of its new handset sales were smartphones and 10 percent of the company's voice customers upgraded to smartphones in the second quarter.

ARPU: Average revenue per user for the second quarter was $44.89, an increase of $3.25 over the same time in 2012. Leap attributed the increase to an improved mix of higher-value rate plans and additional fees as well as a reduction of the company's PayGO product.

Muve Music: Leap continues to see momentum with its Muve music service. The company reported that 37 percent of customers are currently using the Muve service.  

For more:
- see this release

Special Report: Wireless in the second quarter of 2013

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