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Leap Wireless International (LEAP)Stock (Telecommunications Industry, Wireless Communications Industry)
 Leap has a niche in underserved minority and low-income markets, and increased total customers from 1.7 million at the end of 2005 to 2.9 million at the close of 2007.[3] Of these customers, Hispanics and African Americans form 53%, while the industry average is a much lower 17%. Similar, 57% of Leap's customers make less than $35,000, while its competitors average 20%.[4] While Leap is more exposed to low-income demographics than its industry peers, 65% of the wireless provider's customers rely on Leap for their only phone service.[5] This dependence helps cushion the company from U.S. economic conditions, because Leap's customers view their phone bill as non-discretionary spending. However, customers do not have contracts with Leap, which creates pricing pressure that intensifies in a recession. The lack of contracts means Leap's customers will switch to alternatives such as landlines, VoIP, or plans offered by Leap's direct competitors, MetroPCS and Sprint Boost Mobile, if they view these plans as a better value. [edit] Business Overview Since 2005, there has been widespread consolidation in the telecommunications industry. AT&T (T) purchased Cingular Wireless at the end of 2006 and Verizon Communications (VZ) acquired MCI in 2005. Furthermore, Sprint bought Nextel in 2005 to form Sprint Nextel (S). These three companies, Verizon, AT&T, and Sprint-Nextel, now account for 72% of the entire U.S. wireless market share.[6] With only 1.2% of the market share, Leap Wireless faces challenges competing with such large players - it costs more to offer expansive networks to customers, network improvement is more expensive, and competitors can offer bundled packages.[7] In response to competitive pressures arising from consolidation, MetroPCS Communications (PCS) offered to buy Leap Wireless in September 2007 for $5.5 billion or $75 per share. Leap rejected the terms, and MetroPCS subsequently withdrew its offer. Renegotiating is permitted as of April 2008, now that the 2008 Spectrum Auction, which restricts merger talks, has passed.[8] Prior to the consolidation in the telecommunication industry, Leap had filed for Chapter 11 Bankruptcy protection in April of 2003. The company had amassed $2.5 billion mostly to equipment makers like Nortel Networks (NT), Lucent Technologies, and Ericsson, but also defended itself against NextWave Communications, which challenged the company's winning FCC license bids.[9] After emerging from this bankruptcy in 2004, Leap focused on buying coverage area in urban markets in order to keep expenses low; it kept infrastructure costs minimal by avoiding less populated areas. In order to operate within a specific area, a wireless provider needs to either purchase coverage area from the Federal Communications Commission or enter a contract to use another service's bandwidth. Leap Wireless purchased 10-year PCS licenses that expire through 2006-2015 (each has renewal clauses). These PCS systems allow for two-way voice applications and limit the number of carriers to six per coverage area. The PCS licenses give Leap Wireless access to 54 million customers located in 23 states. In 2006, Leap Wireless spent $984.3 million to purchase AWS spectrum, which allows two-way mobile wireless and broadband service. This new AWS spectrum added 85 million potential customers to Leap's wireless coverage area.[10] Upon establishing a network in a city, Leap advertises primarily through radio, and as a result, its cost per gross customer addition is much lower than most competitors.[11] 22% of these new customers buy directly from one of Leap's 152 retail locations and kiosks, and the rest buy indirectly from roughly 2,690 authorized dealers and distributors.[12] Cricket customers can choose from an array of unlimited wireless calls, text messaging, and broadband services that range from $35-$60 per month.[13] Jump Mobile uses a pay per minute plan that requires customers to deposit money before using the service. A customer pays 10 cents per minute on incoming and outgoing calls, 69 cents for roaming calls, and has free text messaging as long as the customer as a positive balance in his or her account.[14] These service revenues accounted for 86% of Leap's 1.63 billion in 2007 sales. Equipment sales were the other 14%. [edit] Financial Performance and Business MetricsLeap's expansion into new markets increases sales and marketing expenses, along with raising service costs. In order to recoup these expenses, Leap has to retain its customers and seek new ones. The wireless provider can also increase revenue by selling more wireless services to each customer on average. As such, five performance measures are good indicators of Leap's business health. These metrics include:
The following table[15] shows the figures for these five business metrics over the past three years. Also, one can see how Leap compares to its competitor in the Competition Segment of this article.
While operating income for Leap has been positive over the past three years, Leap had a net loss for earnings. This because the company expanded into new markets, including Rochester, New York and areas in South and North Carolina, and this raised infrastructure expenses. Cost of service, which includes infrastructure expenses, increased 45.4% to $384 million in 2007 compared to 2006.[16] While this hurts profits in the short-term, if Leap is successful in these markets it improves future revenue streams in the long-run. The following graph[17] shows how Leap has spent more on selling and marketing expenses, but also increased service and equipment revenue over the last three years.
[edit] Leap's Growth StrategyLeap Wireless spent almost $1 billion dollars (which also raised outstanding debt) to acquire additional coverage area from the FCC in 2006. With this additional area, Leap plans to reach 12 to 28 million more potential customers by the end of 2008 and a total between 28 to 50 million by the end of 2010.[19] In the beginning of April 2008, Leap launched services in Oklahoma City.[20] Leap purchased licenses for Washington D.C., Chicago, New Orleans, St. Louis, and other major cities, but has yet to build networks[21]. The company plans to use low advertising expense compared to peers and niche among youth and minority markets to expand successfully into these markets.[22] [edit] Key Trends and Forces [edit] The wireless market has maturedThe International Data Corporation places the United States wireless penetration at 80%.[24] With over 250 million active wireless subscriptions in the United States[25], companies have to fight for market share or add services to existing customers, such as data, in order to drive revenue growth. Benefiting Leap's recent past has been the lack of attention telecom giants Verizon Wireless, T-Mobile, and AT&T Wireless gave to the minority and youth markets. However, within the past year, these wireless providers began flat rate unlimited service offerings much like what Leap offers.[26] Despite the maturing market, Leap believes a large portion of the remaining growth will come from people with low-credit scores and who do not like contracts. Its relatively low cost model for attracting business and servicing clients will keep its plans competitive as it enters new markets.[27] [edit] In response to saturation in the wireless market, wireless providers are pushing data services and consumers are buyingThe data market grew 55% in 2007 to close the year at $24.5 billion in service revenue.[28] Overall Average Revenue Per User (ARPU) declined $0.81 in 2007 for wireless providers as Voice ARPU dropped $1.50, but Data ARPU increased 7% or $0.68 for the year. This divergent trend between Voice and Data ARPU has been intact since the beginning of 2004.[29] The purchase of AWS spectrum coverage areas allows Leap to participate in this growing trend. In April 2007, Leap began offering service packages which included mobile web access, content, and downloadable music.[30] These new plans helped boost the Average Revenue per User (ARPR) to the company's highest, $45.57, in the 4th quarter of 2007. At the same time, Leap maintained a relatively flat Cash Cost per User (CCU) of $21.[31] [edit] Mergers and acquisitions have resulted in a few giants dominating the telecom industryThe M&A Activity has helped Verizon Wireless, Sprint Nextel (S), and AT&T Wireless claim almost three-quarters of the wireless communications industry.[32] This consolidation puts pressure on smaller wireless providers. For instance, these large companies control wider coverage areas and have pricing power over Leap when it comes to using their networks.[33] These giant wireless providers can also use large advertising budgets to target particular areas. Leap tries to avoid paying competitors for use of their networks by soliciting in mainly urban centers, where calls tend to be local and within its coverage area.[34] Further, Leap focuses marketing expenses on radio advertising, which runs cheaper than alternatives such as television ads.[35] The attention to urban markets will allow Leap to remain competitive by not requiring it to build and maintain national coverage or spend as much as competitors to attract business. [edit] MetroPCS Communications (PCS) bid for LeapAs consolidation of wireless providers left a few big players, MetroPCS Communications (PCS) made a bid for Leap Wireless in September of 2007. The deal, priced at $75.05 per Leap share, would have made the company the sixth largest wireless communications provider and given the two companies access to almost all the top 200 markets. The deal, which would have been paid in MetroPCS shares, also called for MetroPCS to refinance almost $2 billion of debt which Leap Wireless holds.[36] While Leap rejected the deal as it was, the FCC allowed talks (if desired) to resume in April 2008.[37] The two companies mostly operate in different markets, so a synergy would expand presence and not simply remove competitive pressure. Furthermore, a combination of the two wireless providers will lower overhead expenses and market-level operating expenses.[38] [edit] Leap's immunity to U.S. Economic CyclesWith 57% of Leap's customers earning less than $35,000 a year, rising prices at the pump and higher food costs, along with layoffs, will lower disposable income. However, 90% of Leap's customers use Leap service as their primary phone service, so they may find themselves decreasing spending outside of their phone bill.[39] The economic slowdown at the beginning of 2008 did not hurt Leap's competitor, MetroPCS Communications (PCS). The company added 450,000 net subscribers in the first quarter.[40] [edit] CompetitionCompetitive pressure for the roughly $168 billion wireless communication industry is quite fierce. These companies use quality, reliability, brand awareness, and value pricing to try to capture new and retain existing customers in the saturated wireless market. Wireless providers use 3 common business metrics to show success - Monthly Average Revenue Per Customer (ARPU), Net Additional Customers, and Churn rate (or turnover rate). The following table[41] compares these metrics, in addition to showing the total number of customers, 2007 revenue numbers, and each company's market share in the wireless communication industry.
^Pre-Paid, Post-Paid Customer Data ^^Market Share Data as of Q1 of 2007
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