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Leap Wireless International (LEAP) |
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WIKI ANALYSIS
Leap Wireless International (NASDAQ: LEAP) provides wireless communication services through its Cricket and Jump Mobile brands. Leap differs from traditional carriers such as Verizon Wireless and AT&T Wireless in offering pre-paid, unlimited wireless plans. The company targets youth and minority markets, and its payment structure means customers avoid credit checks and contracts.[1]
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.[2] 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.
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.[3] 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.[4]
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.[5] 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.[6]
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.[7] 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.[8] Cricket customers can choose from an array of unlimited wireless calls, text messaging, and broadband services that range from $35-$60 per month.[9] 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 has a positive balance in his or her account.[10]
Financial Performance and Business Metrics[11]
In 2009, Leap incurred a net loss of $239.5 million on total revenues of $2.14 billion. This represents a 59.4% increase in net loss on a 25.4% increase in total revenues from 2008, when the company lost $150.2 million on $1.96 billion in revenues.
Leap'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:
- Average Revenue Per User (ARPU) is the monthly sales to each of Leap's customers on average. Higher ARPU translates to higher revenues.
- Cost Per Gross Customer Addition (CPGA) is how much Leap spends to acquire each additional customer. A lower CPGA decreases expenses, and increases operating profitability.
- Cash Cost Per User (CCU) is service and selling and general administrative costs, along with any equipment losses untied to acquiring customers, divided by the average number of customers. As the difference between ARPU and CCU increases, operating margins improve.
- Churn is the turnover rate among customers that have used Leap's service for more than a month. Leap would like to retain customers (low churn), because the price to attract new customers (CPGA) is quite high.
- Total Customers indicates how many people subscribe to Leap's service. More customers mean more service revenue for Leap.
The following table[12] 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.
Business Segments[13]
Leap operates through a single reportable segment - it is a wireless communications carrier offering digital wireless services in the United States.
Key Trends and Forces
The wireless market has matured
The International Data Corporation places the United States wireless penetration at 80%.[14] With over 250 million active wireless subscriptions in the United States[15], 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 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.[16] 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.[17]
Mergers and acquisitions have resulted in a few giants dominating the telecom industry
The M&A Activity has helped Verizon Wireless, Sprint Nextel (S), and AT&T claim almost three-quarters of the wireless communications industry.[18] 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.[19] 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.[20] Further, Leap focuses marketing expenses on radio advertising, which runs cheaper than alternatives such as television ads.[21] 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.
Leap's immunity to U.S. Economic Cycles
With 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.[22]
Competition
Competitive 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. Leap's larger competitors are Verizon Communications (VZ), AT&T (T), Sprint Nextel (S), and Deutsche Telekom AG (DT). Smaller competitors include Alltel (AT) and MetroPCS (PCS).
References
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Cricket Business Strategy" Page 3
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Cricket Overview" Page 2-3
- ↑ Chetan Sharma Consulting Group
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Competition" Page 10-12
- ↑ Answers.com
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Licensing of our Wireless Service Systems" Page 13-14
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Cricket Business Operations" Page 5-7
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Cricket Business Operations" Page 5-7
- ↑ Business Wire Article
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Cricket Business Operations" Page 5-7
- ↑ LEAP 2009 10-K pg. 87
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Performance Measures" Page 62-64
- ↑ LEAP 2009 10-K pg. 91
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Cricket Overview" Page 2-3
- ↑ Chetan Sharma Consulting
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Competition" Page 10-12
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Cricket Overview" Page 2-3
- ↑ Chetan Sharma Consulting Group
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Competition" Page 10-12
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Competition" Page 10-12
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Cricket Business Operations" Page 5-7
- ↑ Leap Wireless (LEAP) Form 10-K FY 2007, "Cricket Overview" Page 2-3
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