Leap strikes LTE roaming deal with unnamed carrier

Cricket provider Leap Wireless (NASDAQ:LEAP) said it resolved its disagreements with Sprint Nextel (NYSE:S) regarding their wholesale MVNO agreement and also entered into an LTE roaming deal with an unnamed company. In the past Leap executives have expressed support for network sharing and LTE roaming arrangements. Leap currently has a nationwide 3G roaming agreement with Sprint.

The company's announcements coincided with the release of its fourth-quarter earnings, in which the company revealed it lost subscribers for the third straight quarter. The company reported a large increase in churn from the year-ago period but said that it would continue to improve on that in 2013 as it focuses on providing higher-end handsets and a better customer experience.

Leap also pointed to its recently launched handset financing program as a bright spot and said it might expand the program. On the company's earnings conference call, Leap COO Jerry Elliott said the program will evolve over time but that it is "not nearly as broad-based as we want it to be or need it to be" and that it is "not driving any meaningful number" of gross subscriber additions. Leap CEO Doug Hutcheson said that "tens of thousands" of customers have signed up for the program since it was introduced in late November but that he company wants to do more on handset financing to get high-end smartphones into the hands of its customers.

Despite the LTE roaming deal, some analysts said they do not see much of a future for Leap unless it enters into some kind strategic deal. "We continue to believe Leap's equity represents an option on upside from a strategic transaction; the company does not have sufficient scale to support the capex required to compete as a facilities based provider," wrote New Street analyst Jonathan Chaplin. "While managing the company for cash flow can help the company in the short term, cutting growth capex is not a sustainable strategy. We see the opportunity for significant value creation from M&A." 

BTIG analyst Walter Piecyk said Leap is facing trouble. "Telecom is a fixed cost business that requires revenue growth and capital investment," he wrote. "Leap's capex cuts will lead to higher roaming expenses and a decreasingly competitive product offering going forward."

Leap provided few details on the resolution of its wholesale MVNO disagreement with Sprint. Leap disclosed in August 2012 that it had begun negotiations with Sprint on its wholesale deal, which included a minimum $75 million payment from Leap to Sprint in 2012. Leap said in 2012 that "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." The companies did not disclose the terms of the resolution.

Here is a breakdown of Leap's key quarterly metrics:

LTE: Leap said it now covers 21 million POPs with LTE, which was its target goal for the end of 2012. The company said it "may" launch LTE service to as many as an additional 10 million POPs in 2013. Leap disclosed that the average speeds on its LTE network are around 4 Mbps, slower than most national carriers, likely because of Leap's relatively weaker spectrum position. 

U.S. Cellular's (NYSE:USM) LTE network produces average downlink speeds of 3-6 Mbps, the company confirmed last week. A recent report from industry vendor OpenSignal showed MetroPCS (NYSE:PCS) operated the slowest LTE network in the United States, on average, with speeds clocking in at 1.2 Mbps.

Hutcheson and other Leap executives did not disclose which company Leap has partnered with for its LTE roaming deal but said more details would be provided in the coming quarters. He said that during the second half of the year Leap "will have appropriate devices ready to take advantage of the expanded coverage footprint," suggesting that new devices to run on the roaming partner's spectrum are in the works.

Subscribers: Leap said it lost 337,000 net subscribers in the fourth quarter, an increase from net losses of 269,000 customers in the third quarter and a sharp reversal from the gain of 179,000 in the year-ago period. Leap said the fourth-quarter losses reflected discontinued sales of its daily PAYGo product to new customers in October 2012, its shift in national retail to fewer, more productive retailers and locations and continued de-emphasis of its broadband service. 

Other flat-rate carriers also had weak fourth quarters; MetroPCS (NYSE:PCS) reported that it lost around 93,000 subscribers during the period.

Leap ended the fourth quarter with 5.29 million customers, down from 5.93 million at the end of 2011.

ARPU: Leap's average revenue per user in the quarter was $42.73, up from $42.09 in the year-ago period and $41.94 in the third quarter of 2012. 

Churn: Churn in the fourth quarter was 4.6 percent, up from 3.9 percent in the year-ago quarter and down from 4.8 percent in the third quarter. Leap said the increase in churn reflected discontinued sales of its daily PAYGo product to new customers in October and continued de-emphasis of its broadband business.

Leap noted that churn for its Cricket Wireless service in the quarter was 3.7 percent. Elliott emphasized that the company is focused intently on the Cricket Wireless portion of its business.

Financials: Leap reported a net loss of $73.8 million, compared with a loss of $78.7 million in the year-ago quarter. Meanwhile, the company's revenue dropped to $756 million from $767.4 million in the year-ago period, and the carrier's revenue was below Wall Street expectations for revenue of $778.8 million, according to Thomson Reuters I/B/E/S.

For more:
- see this release
- see this MarketWatch article
- see this Reuters article
- see this BTIG blog post (reg. req.)

Special Report: Wireless in the fourth quarter of 2012

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