We initiate our coverage on Leap Wireless (LEAP) with a Neutral recommendation. The company is one of the prominent players in the low-cost unlimited prepaid wireless market serving roughly 4.7 million customers based on the latest quarterly statistics. However, the company reported disappointing results in the last quarter with net loss exceeding the Zacks Consensus Estimate.
Leap Wireless, together with its subsidiaries, provides digital wireless communication services in 34 states in the US under the “Cricket” brand. The company offers its services primarily through its wholly-owned subsidiary Cricket Communications Inc.
Leap Wireless offers unlimited local and long-distance wireless services as well as various calling features and messaging services. The company’s primary service is “Cricket Wireless” that offers unlimited wireless voice and data services for a flat monthly rate. Leap Wireless also offers roaming services, mobile web access (“Cricket Broadband”) and multiple value-added services including ringtones, SMS and directory assistance services.
The company offers its services under attractive fixed-rate unlimited usage based price plans primarily to the fast-growing youth and ethnically diverse demographics and does not require its customers to enter into long-term contracts and to keep minimum balance or deposits. This favorably differentiates Leap Wireless’s services from the Tier-1 national carriers such as AT&T (T) and Verizon (VZ) that typically require subscribers to sign up for long-term agreements.
Leap Wireless remains one of the lowest cost wireless service providers in the US, which enables it to roll out a range of cheap service plans that start as low as $30 per month. The company has strategized to expand coverage in urban and suburban markets and avoid less populated areas which help it to keep infrastructural cost low.
Leap Wireless is benefiting from a rapidly growing prepaid wireless market in the US. The company continues to upgrade its rate plans to meet customer need and attract new subscribers. Leap has upgraded its CDMA 1xRTT network to EV-DO technology based 3G network to support high-bandwidth data services. Moreover, the company is expanding its affordable device line-up, entering new markets and reinforcing distribution capability as part of its subscriber retention efforts.
However, Leap Wireless remains a loss making entity and contends with high churn level and declining ARPU (average revenue per user) due to increased customer defection as its larger peers continue to attract subscribers with competitive service plans, greater network coverage and better product offerings.
Leap Wireless is operating in an intensely competitive low-cost prepaid wireless market. Besides competing directly with MetroPCS (PCS), the company remains challenged by the competitive service plans of its larger rivals, especially Sprint Nextel’s (S) $50 monthly unlimited plan and $45 plan by America Movil’s (AMX) Tracfone.
We are also concerned about the decelerating subscriber growth levels as well as the company’s high debt exposure, which is expected to be exacerbated by the ongoing business expansion initiatives.
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