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Leap Wireless International (LEAP)

Q3 2012 Earnings Call

November 07, 2012 11:00 am ET

Executives

Amy Wakeham

Stewart Douglas Hutcheson - Chief Executive Officer, President and Director

Jerry V. Elliott - Chief Financial Officer and Executive Vice President

Analysts

Matthew Niknam - Goldman Sachs Group Inc., Research Division

Romeo A. Reyes - Jefferies & Company, Inc., Research Division

James G. Moorman - S&P Equity Research

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

James M. Ratcliffe - Barclays Capital, Research Division

Michael G. Bowen - Pacific Crest Securities, Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2012 Leap Wireless International Earnings Conference Call. [Operator Instructions] I would now turn the conference over to the host for today's call, Ms. Amy Wakeham, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Amy Wakeham

Thank you. Good morning, everyone, and thanks for joining us. Welcome to Leap's third quarter 2012 conference call. This call is being webcast live, and together with our earnings release and presentation are available on the Investor Relations section of our corporate website. The results and data we discuss today reflect the consolidated results of Leap, its subsidiaries and joint venture partners for the period indicated. During our call today, we will discuss certain non-GAAP measures. For a reconciliation to the most directly comparable GAAP measure, please see the notes to the financial statements in today's earnings release or review the financial reports page of our website.

I'd like to let you know that this quarter will be the last quarter in which we break out the customer results and related customer metrics of our voice and broadband services separately. As you know, broadband customers have declined over the past several quarters as we've deemphasized the product and shifted network usage to higher ARPU smartphones. We expect to discontinue broadband sales in the future as inventories decline. However, we will continue to support the ongoing customer base.

Additionally, we also do not plan to prerelease our fourth quarter customer results in early January as we've done in prior years, and instead expect to report all of our financial and operational results on our next quarterly reporting date.

As a reminder, statements about expected future events and financial results are forward-looking and subject to risks and uncertainties. Our actual results may differ. Please refer to the risk factors detailed in our SEC filings for further discussions. For anyone listening to a taped or webcast replay or reviewing a written transcript of our third quarter call, please note that all information presented is current only as of today's date, November 7, 2012. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events or otherwise.

On the call today to discuss our third quarter results are Doug Hutcheson, President and CEO; and Jerry Elliott, CFO. Following our prepared remarks, the call operator will come back on the line for Q&A.

I'd now like to turn the call over to Doug.

Stewart Douglas Hutcheson

Welcome, and thank you for joining us this morning. On our last earnings call, we spoke to you about a transition we're making in our business that we believe is essential and expect will significantly advance our strategy, strengthen our competitiveness, and improve our financial and operational performance. This transition is based on 2 elements: first, a concentrated focus on our customer experience to build on our position as a prepaid market leader; second, improving our free cash flow by making more efficient investments and taking steps to improve our cash generation.

In what has been a challenging environment, I can say that over the past quarter, we have made significant progress on both these fronts. As we stated last quarter, it is not business as usual, and that outlook continues to shape our actions. We are transforming our business to grow even with potentially fewer gross additions by building a customer experience that dramatically extends the survival of the customer.

In September, we announced sweeping enhancements to our monthly rate plans, which now include Muve Music in all Android rate plans at no additional cost. We also introduced a number of new devices such as the iPhone 5. In addition, we recently announced 4G LTE services into our second Cricket market, and we look forward to rolling out a number of additional markets in the fourth quarter. We also made progress in moving our business towards free cash flow positive, which we'll cover in greater detail later in the car -- call.

As we discussed on our last call, we expected the third quarter to be a tough quarter, and it was for both customer activity and financial results. We saw some churn pressure from our second quarter retention programs and device quality issues. However, underlying churn was similar to last year. We also saw impacts to our front door activity as a result of entry-level device pricing changes we made in the quarter.

Operationally, we saw the trend in ARPU that we expected, with increases both year-over-year and quarter-over-quarter. CCU reflects expected higher product costs, primarily as a result of increased uptake of our Muve Music service. Following the launch of our new rate plans in September, we increased our advertising primarily to position us for the holiday selling season, and you see this higher cost reflected in our CPGA results. Importantly, our subsidy on new devices sold remains similar year-over-year, with the increase in CPGA subsidy driven by a reduction in flash phones to our network and lower overall gross additions.

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