CORPORATE OVERVIEW.
Leap Wireless International Inc. (LEAP) offers digital wireless services in the U.S. under the Cricket and Jump Mobile brand names. The services are based on the Code Division Multiple Access (CDMA 1xRTT) technology. LEAP's Cricket offers unlimited service on a flat rate to customer segments, which we believe are underserved by traditional wireless carriers. Jump Mobile is a per-minute prepaid service targeted at the urban youth market. The company's handset models provide color screens, camera phones, and other features to facilitate digital data transmission. In the first quarter of 2010, equipment sales accounted for 11% of total revenues, while service revenues contributed 89%. LEAP served 5.4 million customers as of the end of March 2010, up from 4.3 million a year earlier.
In the second half of 2006, the company successfully won licenses in Auction 66, the Advanced Wireless Services auction, and gained additional spectrum that allowed the company to launch in several new markets in 2008 and cover roughly 67 million POPs (population and potential customers) by the end of the year.
At the end of first quarter 2010, LEAP covered roughly 94.2 million POPs, and we do not expected any major market launches in the near future. However, we expect the company to expand coverage or edge out some of its newer markets.
In September 2007, MetroPCS (PCS 9, Strong Buy), a regional prepaid wireless carrier with 3.5 million subscribers, announced a stock-based offer to merge with LEAP. The terms of the deal, equal to 2.75 shares of PCS for every LEAP share, originally valued LEAP at $5.5 billion, or $75 a share. In November 2007, PCS withdrew its offer. Also, that November, LEAP announced it would restate its results from 2004 until the 2007 second quarter to adjust for errors in service revenues, equipment revenues, and operating expenses.
In September 2008, PCS and LEAP announced a national roaming agreement and spectrum swap. As part of the agreement, both companies also settled all outstanding litigation. In February 2010, LEAP announced plans to enter a merger agreement with Pocket Communications, which has roughly 320,000 subscribers in South Texas.
PRIMARY BUSINESS DYNAMICS.
In the first quarter of 2010, LEAP added 445,768 net subscribers, had a monthly churn rate of 4.5%, and had an average revenue per user (ARPU) of $37.96, down 10.1% from a year earlier. In the second and third quarters of any given year, LEAP's churn rate tends to increase and customer growth slows, but we believe this could be more pronounced in 2010 due to economic issues, including less disposable income. The company's customer profile is skewed toward young subscribers, with about half of LEAP's customers below the age of 35, greater than the average of below-35 customers for other wireless brands.
A majority of LEAP's customers have income of less than $35,000, which we think makes it difficult for the company to expand its revenue per user metrics. LEAP's customers have an average of 1,450 minutes of use per month, substantially higher than the national average of 803 minutes.
MARKET PROFILE.
Roughly 91% of the total U.S. population has subscribed to mobile wireless services, extending from the workplace to family members. Affordable service plans may enable wireless to reach higher market penetration rates. Network reliability has driven higher penetration of wireline substitution,but national carriers have begun to show differentiation due to handset availability, network coverage, and data service offerings.
CORPORATE STRATEGY.
LEAP targets the youth and lower income markets, which, in general, are not viewed favorably by large wireless players. Given the high penetration of wireless in the U.S., we believe these segments, including ethnic minorities, are the fastest-growing relatively untapped segment. The services do not require any contractual commitment and credit check, unlike those of other major wireless players. The company, which offers flat-rate unlimited voice and text messaging service plans, expanded offerings to include roaming andWeb access in 2007.
FINANCIAL TRENDS.
Total cash, cash equivalents and short-term investments decreased to $526 million as of March 31, 2010, from $564 million at the end of 2009. The company had total debt of $2.7 billion as of March 31, 2010, representing 63% of total capitalization. LEAP took on $550 million of debt in the second quarter of 2008, including $300 million of 10% senior notes and $250 million of 4.5% convertible senior notes, which we believe will be used to launch new markets and expand coverage in existing markets.We believe LEAP's balance sheet is strong and has been aided by improving operating cash flow, which has helped the company build out and launch networks in new markets.