August 4, 2010 / 12:17 AM / in 7 years

UPDATE 5-Leap results disappoint, plans improvement

* Loses customers, analysts expected gain

* Q2 loss/shr $0.24 vs est. $0.23

* Q2 rev $633.5 mln vs est. $671.8 mln

* Shares fall nearly 5 pct after-hours, extending decline (Adds CEO’s comments)

By Sinead Carew and Manasi Phadke

NEW YORK/BANGALORE, Aug 3 (Reuters) - Low-cost wireless carrier Leap Wireless LEAP.O posted a wider-than-expected quarterly loss as customers quit its service, prompting a sell-off in the shares despite new plans to try and improve sales.

Leap -- which plans to rename itself “Cricket” after its brand this year -- lost a net 112,000 customers in the second quarter, surprising analysts who expected a gain.

The company, hoping to stem losses, unveiled a plan to launch more smartphones and rent network space from bigger rival Sprint Nextel (S.N) so it could offer nationwide wireless services. It also tweaked its service pricing.

Executives blamed the disappointing second-quarter on a dearth of new phones as well as weaker-than-expected demand from new markets.

“The new handsets didn’t come as soon as we had planned, so we had an inventory issue,” Chief Executive Doug Hutcheson told Reuters in an interview.

“This year, we believe the second quarter will be our softest,” he added, promising a “significant” improvement in churn -- or rate of customer defections -- in the normally weak third quarter.

Leap shares fell 4.8 percent to $11 after-hours. That was in addition to the 6 percent decline during normal trading on Nasdaq after the company flagged the weak results at an analyst day event.

Roe Equity Research analyst Kevin Roe expected Leap to add 193,000 customers in the quarter.

“It was materially worse than expectations,” said Roe, referring to the subscriber numbers. “The changes they made were necessary but as long as they’re a follower and not an innovator they’ll continue to lag peers ... Things aren’t going to get easier.”

Roe said the best thing Leap could do to recover is merge with rival MetroPCS PCS.N. Analysts have long expected the companies to merge, but said they have not been able to agree on the terms of a deal.

Leap also competes with Sprint-Nextel unit Boost Mobile and America Movil’s (AMXL.MX) (AMX.N) Tracfone.

“This (report) makes a combination with MetroPCS even more necessary,” Roe argued.

SHAKE-UP LOOMS

Hutcheson saw industry consolidation on the horizon with competition -- and competitors -- increasing.

“There will be a few large consolidated players. We’ve taken steps to ensure that we are one of them,” he said.

Later this year, the company plans to change its corporate name from Leap Wireless to Cricket, given its planned investments under the brand.

The company posted a net loss of $19.3 million, or 24 cents a share, compared with $61.2 million, or 89 cents a share, a year ago. Analysts expected a second-quarter loss of 23 cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose 6 percent to $633.5 million but lagged analyst expectations for $671.8 million.

Leap’s churn rate was 5 percent for the quarter, up from 4.4 percent a year ago. The churn rate was higher due to the impact of less-tenured customers, including those of the Company’s newer Cricket Broadband and Cricket PAYGo services businesses, the company said.

Nearly 75 percent of the broadband customer base is less than six months old, and shorter-tenured customers have a greater tendency to churn, the company said, adding that it expects the second quarter to be the softest quarter for net additions in 2010.

The company said it expects customer dropouts to begin to decline as it adds new devices and launches fresh service plans.

Leap said it has entered into a five-year deal with Sprint, which will allow its prepaid mobile services brand named Cricket to offer products and services over Sprint’s 3G network throughout the United States.

It also said it intends to launch a total of 15 new devices, including Research in Motion’s RIM.TO RIMM.O BlackBerry Curve and Kyocera’s (6971.T) Sanyo ZIO, by the end of the year.

Leap said it expects increasing penetration of smartphones and new broadband pricing to continue to lift its average revenue per user (ARPU) into 2011. [ID:nWNAB2975] (Reporting by Manasi Phadke in Bangalore and Sinead Carew in New York; Editing by Bernard Orr)

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