Leap Wireless International, Inc. Q3 2008 Earnings Call Transcript

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Leap Wireless International, Inc. (LEAP) Q3 2008 Earnings Call November 5, 2008 5:00 PM ET


Amy Wakeham – Director, IR

S. Doug Hutcheson - President and CEO

Albin Moschner - EVP and COO

Walter Berger - EVP and CFO


Philip Cusick - Macquarie

Romeo Reyes - Jefferies & Co.

Chris Larsen - Credit Suisse

Scott Malat - Goldman Sachs

Rick Prentiss - Raymond James


Good day ladies and gentlemen and welcome to the quarter three, 2008 Leap Wireless International Earnings Call. My name is Michelle and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms. Amy Wakeham, Director of Investor Relations. Please proceed ma'am.

Amy Wakeham

Thank you. Michelle. Good afternoon and welcome to Leap's third quarter 2008 conference call. This call is being recorded and will be available for play back in the United States through the close of business on November 19th by calling 888-286-8010. Callers from outside the US will need to dial 617-801-6888. The pass code for both calls is 78428117.

Today's conference call with the accompanying presentation is also being webcast live and will be available for replay on the Investor Relations section of our website at investor.leapwireless.com, shortly after the completion of our live call.

Joining me on the call today to discuss our third quarter results are Doug Hutcheson, President and Chief Executive Officer; Al Moschner, Chief Operating Officer; and Walter Berger, Executive Vice President and Chief Financial Officer.

Following our prepared remarks, Michelle will come back on the line with instructions for the question-and-answer portion of the call. Glenn Umetsu, Executive Vice President and Chief Technical Officer will join Doug, Al and Walter for the question-and-answer session.

The results and data we will discuss today, including customer information reflect the consolidated results of Leap, its subsidiaries and is non-controlled joint ventures, LCW Wireless LLC and Denali Spectrum LLC for the period indicated.

Also as used in today's conference call and accompanying presentation, the term 'New Initiatives' refers to the company's newly market launch activities and its Mobile Broadband offerings. The term 'existing business' refers to the company's market in operation and associated services in those markets as of December 31st, 2007.

During our call today, we will discuss some non-GAAP financial measures. For a GAAP reconciliation of non-GAAP financial measures, please refer to the notes of the financial statements contained in today's earnings release and also to the financial reports page of the Investor Relations section of our website at investor.leapwireless.com.

Statements made today that are not historical in nature, including statements about future events and performance, such as our plans to offer our services to additional covered POPs and expectations regarding future growth, spending, results of operations and customer penetration, are forward-looking statements. Our actual results could differ materially from those stated or implied by such forward-looking statements.

Factors that could cause actual results to differ from our forward-looking statements are detailed in the section entitled 'Risk Factors', included in our Annual Report on Form 10-K for the year ended December 31, 2007 and in our other publicly filed reports, including our Form 10-Q for the quarter ended September 30, 2008, which we plan to file shortly.

For anyone listening to a taped or a 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 5, 2008. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events or otherwise.

With that, I would now like to turn the call over to Doug.

Doug Hutcheson

Thank you, Amy. Welcome and thank you for joining us today, for this appeared to be challenging times, both economically and weather related. However, we believe we are doing well even with the challenges we face and absorbing their effects.

While we find ourselves concerned like I expect all of you are who have joined us today, we also find ourselves optimistic in looking forward to the coming quarters. We believe we are in the right place, at the right time, with the right products. While we expect there will be challenges, we believe we are prepared to meet these.

As we look at our journey that we have outlined in late 2007 to double the size of our business by 2010, we continue to see progress. The footprint expansions are going as planned. The new markets that we have launched in Auction 66 are now $8.5 million and we expect to be approaching $10 million by year end.

We are looking forward to an acceleration of launches in the first half of 2009. Our broadband initiative continues to progress well with nearly 32 million POPs launched as we look towards 60 million or more by the end of the fourth quarter.

Customer growth also continues with overall Q3 growth returning to the levels we experienced in 2006. The peak, growth level that we saw in the third quarter, during our last expansion, which was based on a much greater number of launch POPs than what we currently have.

We are now entering our typical higher growth quarters, the fourth and the first quarters. We see as we will discuss with you today, strengthen the existing business and acceleration in our broadband business and as I discuss increasing launches. While we expect challenges we look forward to 2009.

Service revenues are responding to our growth, up 123% over the last three years and we now see nearly 27 million from our new market launches in the broadband initiatives.

Total OIBDA performs as expected. The existing business is performing well at nearly $147 million, while the new initiative spending is on track. Our progress suggests a potentially promising future and we look forward to the challenges that are ahead. Al?

Al Moschner

Thanks, Doug. We continue to show customer growth in all areas; reflecting seasonal patterns in our existing business, continued strong customer acceptance in our expansion markets and the building momentum in broadband.

Our net customer additions for the quarter were 156,000. Voice services, net additions were 116,000, which include nearly 24,000 net ads in our existing markets and approximately 92,000 additions in our newly launched markets.

All of this all came about in a period which saw national retail sales drop 1.2% in September, the third consecutive monthly drop and the largest since August of 2005. The full impact of our growth was mashed by the effects of Hurricane Ike and related weather systems that blunted the promising results we saw early in the quarter.

The storms caused power outages that close stores and shutdown cell sites and affected approximately 11.5 million covered POPs for about an 11 day period. We estimate the storms cost the company from 11,000 to 23,000 net additions in our existing voice business.

Our teams in the affected areas did a great job of minimizing the effects of closed stores and out of service cell sites due to power outages. The company offered our customers extended payment periods and free roaming.

In total, we believe the outages cost the company approximately $2.4 million, $1.2 million reflected in Q3 expense and the remainder we expect to book in Q4 and impacted revenue by $500 million for the quarter.

Our broadband expansion continues to show good progress with approximately 40,000 additions during the quarter and the continued expansion in our market suites which we increased by approximately 8.8 million covered POPs to 31.7 during the quarter.

Several of our planned broadband market launches were delayed until the fourth quarter as a result of previous discussed storms and we estimate that delay caused us to lose between 2,000 to 4,000 net additions in the quarter.

As we look to the fourth quarter, we see continued strong customer acceptance in our expansion markets in addition to the upcoming launch of Milwaukee and Southern Wisconsin later this month. The expansion of the broadband initiative of up to 63 million covered POPs by the end of the year, and anticipate the strong holiday buying season in our existing markets.

We however continue to be mindful of macroeconomic conditions like unemployment and fuel prices that may affect customer activity. Customer churn for the third quarter was 4.2%, a full point improvement from 5.2% in the comparable period of the prior year.

The third quarter is typically our highest deactivation quarter of the year. This decrease in churn is a result of the increase in customer tenure in markets launched in the first half of 2007, now returning the overall base to normal pre-launch levels.

Looking ahead, we expect that customers added in our newly launched Auction 66 markets will follow the same customer maturation process that the Auction 58 markets exhibited. Initially reducing overall churn and then spiking in the second and third quarter after launch, before returning to mature levels in subsequent quarters.

The company's third quarter churn performance also reflects the volatility of both an increase in customer deactivations and reactivations during the quarter. Similar to what we experienced in the second quarter of 2008. We expect churn for the existing business in the fourth quarter and 2009 to reflect seasonal trends similar to 2005 and '06.

The company continues to attract new customers and deliver greater profitability in our existing business. Our business cash cost per user grew by 20% year-over-year to $16.17 as we achieved $1.69 reduction in CCU from a combination of the benefit of scale and cost management and a $2.04 reduction in churn adjusted CPGA that offset a $1.05 year-over-year decrease in ARPU.

We effectively managed all of our metrics to deliver improved profitability. We are seeing approximately a $20 CCPU, from our markets that are two years old or older and we are also seeing an increasing contribution from our less mature markets. This growth in existing market profitability is funding all of our initiatives, so that we are able to maintain our year-over-year consolidate profitability as well as $13.01.

Third quarter consolidated ARPU declined 3.5% over the prior year quarter, to $42.95. Several factors were at play here. The decline reflected the effects of higher seasonal deactivations that were further impacted by the continued volatility of increased customer deactivations and higher reactivations and the impact of slightly lower than expected customer up tick of the company's higher value rate plans and optional add on products in the quarter.

We have seen a recovery in the uptick as gas prices have abated in the last 45days to 60 days. Third quarter ARPU results; also reflect the effects from our new initiatives. The rapid addition of customers in Auction 66 markets, whose ARPU although improving experienced lower than expected initial ARPU driven by the Texas border markets and Hargray, and the expected lower ARPU from the expansion of the company's mobile broadband initiatives.

Going forward, we expect fourth quarter ARPU to reflect some seasonal improvement in our existing markets. Changes being made to our higher end rate plan structure to reflect the expansion of our roaming plans to be introduced shortly, improvement in our expansion markets as they mature, and the addition of new markets. We expect broadband to continue in the current ARPU range of about $36 and to have a dampening effect on consolidated ARPU as the customer base grows.

Third quarter CPGA came in at $201 reflecting $186 CPGA in the existing business and new initiative incremental spend of $15. As always, we are working to keep costs as low as we can and as evidenced by the $7 year-over-year decrease of existing business CPGA. The savings came from handset subsidy reduction, primarily but not exclusively related to the Cricket EZ, a low cost, low subsidy handset; we introduced in early 2008.

We are also successful in absorbing the new distribution costs we discussed in previous calls. As a point of note, our non-Cricket handset activity continued to perform as expected in low double-digit percent range of overall gross ads. Our new initiative spend of $15 reflects peak 2008 launch costs related to two new market expansion and the launch of nearly nine million new broadband covered POPs.

Looking forward, we expect the fourth quarter '08 CPGA to improve on a sequential basis due to an expected seasonal year-over-year improvement in our existing markets while we expect new initiative incremental CPGA cost to be below $20.

Total company Q3 CCU was $21.50 and reflects the increasing benefit of scale and cost management and investment in new initiatives. Our existing market CCU declined to $19.22 showing nearly a $1.69 improvement year-over-year as we absorbed the foot print expansion in our existing markets. The new initiative spend of $2.20 per user reflects costs associated with new market development and mobile broadband expansion.

We expect the fourth of '08 consolidate CCU to remain in the $21 range, reflecting the continued hard work on the part of our employees to take advantage of the continued benefits to scale in our existing business to offset the costs of our company's new initiatives. So we continued to maintain an improved profitability.

I would like now to hand the call over to Walter.

Walter Berger

Thanks Al and good afternoon everybody. I am pleased to have this opportunity to walk through our financial results for the quarter, which we think we will show the strength and growth of our business to each of you.

To begin with service revenues in the third quarter increased $80 million year-over-year or approximately 23%. This increase reflects a combination of continued growth in service revenues for our existing business, which increased $53 million and $27 million of incremental service revenue contribution from our new initiatives that Al talked about.

Consolidated OIBDA increased year-over-year from approximately $96 million in Q3 of '07 to $98 million in 2008. This result reflects $49 million of net spending this quarter for new launches, these activities and the continued rollout of broadband.

Excluding the effect of these initiatives, Q3 OIBDA for the existing business increased $51 million year-over-year to $147 million bringing the year-to-date OIBDA contribution for the company to $436 million. As a result of our revenue growth and our continued focus on our costs, which I will discuss the drivers in a second, we continue to see improvement in our OIBDA margin for our existing business which increased nine points year-over-year to 36%.

Our cost of service margin within our existing business has continued to improve, as a result of our relentless focus on operating efficiencies and additional leverage as the business gains scale. Margin on the product portion cost to service improved year-over-year from 6.9% to 6.5% due to improvements in the rate of long distance calling costs, roaming and other rate reductions.

Margin on the non-product costs, of service for existing business, which includes backhaul, site leases et cetera, decreased year-over-year from 16% to 19% as a result of absorbing the costs associated with the footprint expansion program, within our existing business.

Margin improvements in sales and marketing for existing business again represents the benefit, of leverage on the expense line that is approximately two-thirds fixed and includes direct store leases and sales and marketing staffing.

During the quarter, we saw improvements in the customer care and billing margin portion of G&A expense reflecting the impact of nearly 500,000 increase in average customers, in our existing markets on an expense that was essentially flat year-over-year.

In addition, we experienced a decrease in the remaining portion of G&A margin, primarily due to certain non-recurring expenses for litigation settlement and business development activities. Without these costs OIBDA for our existing businesses would have increased another $3.6 million to $151 million.

Consistent with our operating strategy the company continues to generate margin improvements that we anticipated. We believe we will continue to see improvements as a result of further penetration of our existing markets and our ongoing cost management initiatives.

In the past, we have demonstrated an ability to deliver OIBDA margins that exceed 40% over time. Q3 results from our existing business indicate that we are well on our way to delivering similar margins in our existing business as we continue to grow and gain additional scale.

The increasing scale is evidenced by the incremental 97% contribution margin that business delivered during the third quarter. Our existing business has contributed $436 million of OIBDA through Q3 of '08 and we expect Q4 OIBDA for our existing business will be equal to or better than what we delivered in Q3.

With respect to new initiatives spending, as we have shared with you in the past, as part of our ongoing growth strategy, we continue to invest in these initiatives. In the third quarter of 2008, we absorbed approximately $49 million of negative OIBDA for our new initiatives, which we expect to contribute to the future growth and profitability of the business.

Included in the new initiative spending for the quarter is approximately $17 million of negative OIBDA associated with our broadband initiatives. This negative burn includes approximately $6 million of fixed costs per quarter, which we expect to continue through Q4 of '08 and an additional $11 million of negative variable contribution associated with the $32 million covered POPs we have launched in the third quarter of 2008.

This burn also reflects pre-launch spending for the additional broadband POPs we expect to launch in the fourth quarter of 2008. Our negative OIBDA also reflects approximately $31 million we invested in our expansion markets. This includes both the ongoing investment in negative OIBDA for the eight million POPs we launched in the second quarter of '08 and approximately $15 million of pre-launch costs for the POPs we expect to launch in the first half of 2009.

As you think about our fourth quarter, we expect our spending for the new initiatives that I have just addressed and that Al and Doug have also talked about would generally follow our level of investments and it did in the third quarter.

Now with respect to below the line results; net loss for the third quarter of 2008 was $49 million compared to a net loss of $43 million in the third quarter of 2007. The primary factors contributing to the increase were an $18 million increase in net interest expense relating to the $550 million of notes we issued in quarter two of '08 and the lower interest income as a result of changes to our investment portfolio to invest primarily in cash and treasuries.

Offsetting the impact to the increase was $15 million increase in income tax expense primarily reflecting a Q3 '07 change in accounting method of the tax amortization of wireless licenses. We expect to continue to report income tax expense of approximately $10 million in the fourth quarter despite the fact that we report a full valuation allowance on nearly all of our deferred tax assets.

Last item on this page, I would like to cover with you is that, if you look at our Q3 '08 loss per share of $0.72. It is important to look what is included in this number, which is $0.73 per share of loss on our investment with respect to our new initiatives. Without the $0.73 of loss, we would have delivered an EPS for the quarter of a $0.01 per share or a $0.65 positive improvement from our Q3 '07 loss of $0.64 per share.

Total cash and short-term investments at the end of the third quarter were $826 million, a decrease of $108 million from our cash position at the end of the quarter two. This change in cash primarily reflects $16 million of positive cash flow from operations offset by $190 million of cash outflow for CapEx.

Just taking a second to talk about our CapEx; for the quarter, they were approximately $190 million, which reflects spending for our expansion markets and $13 million of capitalized interest. CapEx for the quarter also include maintenance CapEx for existing business and is consistent with our expectation in the mid-teens as a percentage of service revenues.

Company currently has about $2.5 million of debt on our balance sheet. Approximately 80% of it is fixed and the first significant principal payment of $212 million occurs in September of '012.

Lastly, before I turn it back over to Doug. I just want to talk about our strong cash position. As a result of our current cash position and our ability to generate cash flow, we continue to believe that we are sufficiently funded for our current business operations and the expansion of our business through the launch of new markets, the expansion of our broadband service and footprint enhancement.

As discussed on the previous slide, the company does not face any near term maturities of debt. We maintain a thoughtful and disciplined approach in managing our capital resources and believe we can adjust our investment in growth initiatives to navigate through these challenging economic conditions.

With that Doug I would like to turn it back to you.

Doug Hutcheson

Thanks Walter. Now taking a look at our growth initiatives, we believe we have a clear strategy for delivering continuing growth. Whether we look in the product area that has voice and mobile data services for continued expansion of broadband or a careful review of our trials in the prepaid space, we look forward to continued success in the product area.

In addition, we have both footprint and operational improvements to expand our growth opportunity in our existing markets, with both footprint and distribution improvements and our new markets as we launch those with the consolidated product portfolio and the improvements that we are implementing in our existing business as well.

Our value leadership in voice and mobile data offering continues. Our most popular rate plan, our $45 rate plan competes well and reviewed compared to the other national carriers. For consumers in challenging times they can save over $600 a year using our services.

In addition, we continue to look at additional services and functionality to expand and improve our offerings. We look forward to next week launching a new nationwide footprint and associated new service plans ahead of our normal holiday volume.

Our voice service revenue includes the opportunity for returned uptake as we have already experienced in this quarter for ring tones, direct to you system, and international services and during the third quarter we did trial and get initial experience with the family plan. Our focus on mobile data services continues with the launch recently of mobile video and we look forward to expanding both our web activities and streaming upgrades in 2009.

We understand the trade off between growth and ARPU and we will manage that. We believe the new products will drive enhanced ARPU opportunities and the bundling of products over time provides our ability to drive increased value at customers.

Al discussed our results on our Cricket Wireless Internet Service and that expansion continues. As a reminder this service provides unlimited mobile broadband access that is comparable or better than many other mobile broadband products.

Our pricing is $40 per month for new customers and $35 for existing customers that already have a voice plan. It relies on the universal USP device that works both in desktop and laptop computers and we expect to that we will achieve full volume pricing levels by the end of the first quarter 2009 for this device.

The business opportunity is advancing attractively with nearly 55,000 customers at the end of Q3. The mix continues to be moderately weighted towards new customers that are joining us in Cricket and the usage levels are slightly higher than expected, but we see trends that we expect they will decline overtime.

Business performance expectation has been advanced this quarter. Customer growth has been extended from a 100,000 by year end to a 130,000 to 150,000 customers. The expected negative OIBDA earnings are on track to peak in the second half of the 2008. As we see strong customer uptick continue into the first quarter we expect a positive OIBDA contribution will begin in the second half of 2009.

We recently announced the trial in the prepaid space, Cricket PAYGo. We think this trial is important, because it provides the company with a potential benefit of an appropriate prepaid product. It drives value to the prepaid segment, which is simple and straightforward with pricing at $1, $2 and $3 a day. It opens big box distribution with the right products that have been proven to sell well and generate long-term value there.

It links, the revenue we receive, the usage of the customer and the costs that we incur to an attractive economic formula, and lastly provides significant differentiation with our current monthly products, to minimize the effects of any cannibalization that we might see. This trial launched in the third quarter of 2008, with nearly 600 Wal-Mart locations and three Cricket markets, Houston, Savannah and Cincinnati with approximately 1,500 locations.

This trial will follow, the same principles we have followed with other trials and we will be disciplined in advance our progress based on the success and the results that we see. We do not expect this to impact 2008 financial results significantly, and we will outline the expected impact of 2009 based on trial results.

Looking at our existing business; again as a reminder, we have traditionally and expect to continue to see historical growth as our markets mature, roughly 0.5% percent per year. Also as a reminder, we see our leading markets in double-digit penetration and continuing to exhibit annual growth. We have two major initiatives that we believe; overtime will generate additional growth potential.

During 2009, as they come online on 31 million covered POPs, we expect further improvements in our distribution, including enhanced direct store operations and relocations where appropriate, increased indirect channel performance management and with the combination of the network activities increased market level awareness.

In addition, by year end 2010, we also expect to add up to 600 additional sites within our existing footprint. We believe that this will affect markets covering approximately 45 of the existing 53 million covered POPs. Therefore, we believe that our long-term penetration potential for existing markets will be between 8% and 9%.

Also the businesses has and we expect will continue to be in a period of significant growth, and we are looking at further system enhancements. We expect to finalize the next step soon on a billing system upgrade, and we will announce those when those are completed.

The new market launches will continue through the first half, the end of the first half of 2009. Our market launches to-date show costs under control and customer uptick that is attractive as we share. The further launches will include a broader product family including voice and mobile data services, our broadband product, and pending trial results potentially the introduce of the PAYGo product.

We currently expect several additional launches in 2009. Those would include Chicago, Philadelphia, Baltimore and Washington D.C. We expect based on the result that we see that we will modulate those and ensure that we continue to drive for the best potential return for our investors. In addition, we have 14 million covered POPs for buildup potential by year end 2010. The final pace and timing on these will be dependent on the business performance.

In conclusion we believe that Leap is in the right place, at the right time, with the right products. The business is well positioned expanding its role as a value leader in the wireless space and we have seen that provides good customer growth and we had seen resilience even in uncertain times.

We have assembled the right assets at the right time. Our existing business operating performance continues to do well. We have adequate financial resources and attractive spectrum portfolio. Our products and our network are well positioned. We have industry leading value voice and mobile date services products

We have an upcoming good success with our mobile broadband products and initial try on take on PAYGo and we look forward to the results from our upgraded networks for both data and our foot print, with finally new market launches.

We have assembled a strong team of dedicated employees on behalf of all of us. I want to thank all the employees that did the strong work during the Hurricane and the related weather events to recover our networks. We have a management team that can deliver that has the experience to navigate through these uncertain times. We look forward to continuing to deliver on our plan to double the size of our business by the end of 2010.

With that I would like to open it up for questions and answers.

Question-and-Answer Session


(Operator instructions) Your first question comes from the line of Philip Cusick with Macquarie. Please proceed.

Philip Cusick - Macquarie

Hi. Thanks for taking the question.

Doug Hutcheson

Hey Phil, how are you?

Philip Cusick - Macquarie

Good, thank you. I got to commend you on some record timing in getting through the presentation. Maybe we can start with. You talked about the deactivation, reactivation activity in the quarter. Can you quantify this for us? Is there an average number of days that customers are disconnected that you can talk about and that is got to be higher this quarter than it was in previous times?

Al Moschner

Actually Phil, this is Al Moschner. We look at that data pretty carefully and I would say that we have not seen really any change in behavior in that volatility that I talked about since the second quarter of '08. I mean, when we started to see that occur. Our suspicion composes is that as the economic conditions actually got a little worse and gas prices; some of the discretionary income has been affected. That we have seen customers come on and off the service, and they have used their existing handsets as a means to really reactivate and so we have seen a balancing effect of that over the last couple of quarters. I would say we have not seen any increase or decrease as a flat quarter-over-quarter activity as we looked at the data.

Philip Cusick - Macquarie

I thought that part of the explanation for up or coming down quarter-over-quarter was an increase in that activity. I was wrong there.

Al Moschner

There was actually an increase in the third quarter overall deactivations which is seasonal. Phil.

Philip Cusick - Macquarie

I see. Then there was another point in the presentation when someone talked about improvements in the business trends over the last six to eight weeks. Can you talk about that as well?

Al Moschner

Yes. That is really it is actually last 45 days to 60 days. We have seen an increase or improvement in our higher level rate plans as well as our tax rates on our bill times. That is an area which we have seen some erosion in again during this period of time and recently we saw improvement in that, and that has held.

Philip Cusick - Macquarie

Okay. Then one more esoteric question from me. You have been running the $50 Cricket EZ phone for a few months now, I think three to six months now. I wonder if you see any difference in the conversion of that customer from walking in the door and buying the phone to becoming a paying customer over the next few months versus people have a little more skin in the game whether they come in at $100 or $150. Is that conversion rate consistent at the $50 level as it is with other price points?

Al Moschner

Phil, let me ask you a question. Is this your question about longevity or is it your question about what rate plans they actually take?

Philip Cusick - Macquarie

No, I am actually asking a question about longevity. So did those customers convert from being a free month up front to paying their bill on the first bill, bill timing?

Al Moschner

Yes, we typically see a relationship without the door pricing. So as we reduce out the door pricing, we will see some increase in first bill, not pay activity, but aside from that, once they get through the initial payment cycle, the longevity of those customers really do not deviate too significantly from the rest.

Philip Cusick - Macquarie

Okay. That is great. Thanks a lot.

Doug Hutcheson

Thanks Phil.


Your next question comes from the line of Romeo Reyes with Jefferies. Please proceed.

Romeo Reyes - Jefferies & Co.

Do I get ten questions also? First, can you give us a sense of what your broadband costs are on your data product? For that that is the first question and second is with respect to your footprint augmentation/expansion, you talked about enhancing your penetration and also over laying some additional distribution. Can you give us a little update on the early results on that? Thanks.

Doug Hutcheson

Sure, Romeo. On the broadband, we provided a fair amount of update in our guidance, so let me walk you through what is in there. The first thing is we expect cumulative variable negative OIBDA burn to peak at about $0.50 per covered pop. That will not be the peak at the market level. We will see contributions when the more mature markets come as they breakeven typically after three quarters.

We extended the number of covered POPs that we expect to see from about little previously were little bit more than 60 million and now we have included what we expect to launch by the end of the first half. So gone up to about 87 million covered POPs, and we have provided also that due to the success and some of the progress that we have seen, that you will see in 2009 that the fix cost associated with the product will increase, which are included in our total results that we expect it to be OIBDA positive in the second half of 2009.

By the end of 2009, with approximately $36 ARPU that we discussed, we expect that that will contribute on what we call the calculated contribution per user. CCPU, will contribute between $10 and $15 on that product, and so that will give you an idea of the split. There will obviously be some recurring adjusted CPGA costs and CCU. We have not given the detailed breakdown on those, but I think you will see, that gives you an idea how much contribution we will be seeing there.

The second question was on footprint, and Romeo can you clarify exactly what you are looking for there?

Romeo Reyes - Jefferies & Co.

I am just trying to figure out, you said in the past that you expect anywhere between I do not know but 70 -- 75 to 1.15 (inaudible) of incremental penetration from expanding the footprint, improving the in-built penetration and such. I am just wondering if you have any data points as to how much that helped in the quarter.

Doug Hutcheson

Well, certainly year-to-date we saw quite a bit of data, that we saw the markets and we had done the footprint expansion and we have seen a double-digit, about 10% increase in sales on those markets, and we have seen a reduction in churn, and so we have disclosed that previously, and that was on the markets that we touched the footprint on, and I do not think we have any reason to believe that, that data is not going to continue.

We have also and I have talk about adding a little bit more penetration and coverage that you will start to see some of that in 2009, but as we guided that will also happen through 2010, and we believe that will drive a little deeper in building penetration coverage and we mentioned on our last call, that we thought overtime that would drive roughly 2% in additional penetration.

We are little bit further along on the distribution. We have a few markets, some early markets that have shown some good results on the distribution. When Al talked in the fourth quarter we have seen that quarter start out, with some pretty good volume. Certainly when compared to last year, a lot of that has been concentrated in the markets that have been further along both with the old footprint and the distribution improvements that we see.

So what we find is when people have money, they are responding well, and we are feeling that we are headed in the right direction on that and we believe that we should move two things with it.

Romeo Reyes - Jefferies & Co.

Thanks a lot.


Your next question comes from the line of Chris Larsen with Credit Suisse. Please proceed.

Chris Larsen - Credit Suisse

Hi. Can you hear me?

Doug Hutcheson

Yes, I can, Chris. How are you?

Chris Larsen - Credit Suisse

I am doing very well. It looks like a good solid quarter in terms of net number of ads based on all the numbers I have seen, it looks like only up a dozen or so if you buy pod, looks like you will beat all that net add expectations. ARPU is a little bit softer and I was trying to back into the amount of sequential dilution from data, and I was wondering if you can give us a sense for just about how much the data had as a diluted impact on ARPU this quarter?

Then second I am guessing you are not going to answer this, but I am just going to ask it anyhow. Can you tell us if the national roaming plan that we are going to get will that include more than just the metro footprint, and then you alluded to some of the metrics in October. Can you talk about churn as well in October and net adds as we see? It is obvious the economy seems to have taken a turn for the worst. Have you seen any other metrics that would suggest that it's getting better or worse for your business? Thanks.

Doug Hutcheson

Sure. So Al, you want to take, why do not you start with what we are seeing in October and roaming and I will finish with the ARPU.

Al Moschner

Yes, hi Chris, good, very well. Thank you. I think as I mentioned in the call, what we really are expecting in the fourth quarter is for us to continue and to stay on that 2005, 2006 trend in our existing business. We have gone through the tenure effect in our launch of auctions, in Auction 58, we are back down to what I would consider normal churn profiles for ourselves that are seasonally adjusted and I expect in the fourth quarter at least with the October data would suggest that we are well on that path to stay on those lower churn curves.

Doug Hutcheson

It is interesting because along the way we have talked to you, to investors about how we thought core churn was getting better over time, and we think that shows pretty clearly in the third quarter and when we talk about going all the way back to 2005, and 2006, that is even now with the businesses absorbing upgrades as well in that number. So our core churn right now seems to be doing fine other than the volatility that we discussed, we have seen last couple of quarters a lot more both the acts and reacts in that area. Core churn appears to be holding pretty well and that seems to be transferring to nets at this point.

Al Moschner

Right. We are at this point seeing some good customer additions through the first month of the quarter.

Chris Larsen - Credit Suisse

Then do you want to talk about the footprint?

Al Moschner

The roaming, the changes that we are talking about, Chris you remember that we have had roaming plans introduced almost two years now and we have continued to improve them by growing our coverage and growing our capability in this latest change, just continues to make enhancements and we obviously will also take advantage of the new roaming agreement that we have with the Metro PCS. That roaming agreement not only gives us a better cost profile that will help us in the upcoming quarter as well as giving us better geographic presence.

Doug Hutcheson

Then the last thing, Chris, you asked about the broadband dilution in ARPU. It will dilute. So the company's overall ARPU, you are going to see that dilute. It is a product that we expect to perform approximately around $36. How that is going to affect ARPU in the long-term really is a volume issue. We are waiting to let that evolve, so we do not have long-term good assessment until we see how the volume comes along with how much dilution that, that will come on the ARPU side.

As we look at it, we expect we are going to see, we thought we would see it in the third quarter. We still expect that, we will see some recovery in ARPU in the existing business. We see that as we watch people coming back to the built-on product and we see the normal, seasonal reduction in the deactivations. Now that is based on what we have seen thus far and that could change, as we get further into the quarter. As we watch gas prices subside, we are seeing a broader uptick of things and we will also see, what happens on the rate plan uptick with some of the changes that we are going to make ahead of the holidays.

Then the last piece that Al also talked about is we expect we will see as we extend and expand the Auction 66 footprint launches, that you will see a larger contribution coming from those. We think ARPU is in good shape, especially when we look at the trade offs that we are trying to do between growth and volume and generating cash flow and margin. We know we would like to keep our eyes on it and see if we can get a little bit more out of it. I think the team is focused on that. I think some of the parts of the business have a little bit more potential than broadband. I think broadband is going to run in the $36 range for now but we will be on it.

Al Moschner

Thanks, Chris.

Chris Larsen - Credit Suisse

Thank you.


Your next question comes from the line of Scott Malat with Goldman Sachs. Please proceed.

Scott Malat - Goldman Sachs

Hi, good evening. I thought I saw $25 plans promotional plans during the quarter. Was I right in seeing some of those out in 3Q?

Doug Hutcheson

Yes, hi, Scott. Yes, you have and in fact what we do is we use a promotional plan that we used to actually and sent customer activity and it is a very good base that we actually sell up from. We see frankly very little penetration in that particular rate plan and we really use it as a stimulus for the market.

Scott Malat - Goldman Sachs

How do you decide when to institute these promotions? I understood ahead of holiday. Are there certain times in a year where you are more promotional than others? How are you thinking about the cycle?

Al Moschner

About a year ago, we shared some data about different quarters had different buying seasons on them, and we tend towards wanting to generate the volume and the traffic during those buying seasons. So, during the third quarter…

Doug Hutcheson

Yes, clearly, what I mean when there is activity that is expected, whether it is back to school or holiday season, there are different times in a year where this makes a lot of sense. Where you have customers that are very oriented to buy and you really want to orient them to your store. You obviously provide incentives and promotions that drive traffic into your particular area.

Scott Malat - Goldman Sachs

Okay, thanks. Then just one other, just I wanted to get your thoughts on some of the roaming provisions from the FCC on the Verizon Alltel deal, your thoughts on those?

Al Moschner

I think it is a work in progress. I would say there is still an open docket with the FCC that we expect will get heard now, most likely in the next coming months. Most likely first quarter is our assessment that we will advance that. As far as what they did yesterday relative to the Alltel Verizon merger, I think that that is progress for us. It allows us to continue to use the agreements that we have in place, and we believe that we will make progress. I think the docket on the roaming is pretty active at this point, and we are optimistic that there will be more progress as that docket has a chance to continue. I think we have time for one more question.


Your final question comes from the line of Rick Prentiss with Raymond James. Please proceed.

Rick Prentiss - Raymond James

Yes thanks for getting me on the wire there. Good evening.

Al Moschner

Hi Rick how are you?

Rick Prentiss - Raymond James

Very well thanks. A couple of questions for you may be one question with ten parts. No. The nationwide roaming plan, as you look at that plan and you had plans out there for a couple of years as Al you mentioned. How do you think that helps you, if you would look at it and say from a gross add side does it bring customers into the store and your ability to get them? What about on the ARPU side, what potential impact could there be on the churn side? May be what potential impact could there be as far as keeping customers on your revenue roll as opposed to losing it. If you look at nationwide roaming? How would you compare and contrast your ability to get adds with it versus ARPU versus churn improvement?

Doug Hutcheson

Sure Rick. Hi how are you. I would say that roaming plans have not necessarily been a big driver or front door activity. It really helps in the other two categories that you mentioned. That is retention. As a carrier that has some footprint limitations as you can extend those limitations with better roaming product to better prices. That is clearly a positive.

Then secondly, as you get customers that do consider Cricket, it is a very good tool to actually sell a higher end rate plan, with this latest enhancement that we are making. Again incorporating some of the new capability that we have established, it can drive behavior to a higher end rate plans, typically where we package it or if customers want it at a lower end rate plan, they can buy an additional optional built-on which we price at about $5. So, we get both ARPU enhancement as well as churn improvement and it is hard to measure what the front door does but I would suggest that would be the least of the three.

Rick Prentiss - Raymond James

Then the second question just hopefully we have heard Sprint talking about they want to get in the marketplace with unlimited. Can you just address and remind us the historical, what you saw when Sprint used to offer the unlimited and what you think they might be coming up with and how it might affect your business?

Al Moschner

Well, I sure can not comment on what they might be coming up with, but I can talk a little bit about what we have had now. I think we are up to the 13 or 14 different unlimited competitors at similar price points over the eight, nine, ten years that we have been at the same. So I would start out that we have continued to advance our business in the face of that, and we expect that we will continue to advance that.

Relative to what I think as we understand that the idea that it will go back to the iDEN network, that network was generally designed for pretty high ARPU, lower usage services other than the push to talk piece. So I am not sure what the cost structure will be on that or what the pricing will be, but we feel like the business is positioned to as it has been absorb competition.

We feel like, we get better with competition, and so we will try and work our way through it and if that is what challenge comes at us, we will take that on and see what we can do with it. So Rick, thank you very much and with that Amy?

Amy Wakeham

Great, thank you for joining us today. We look forward to updating you on our business on our next quarterly conference call. If you have any further questions about our third quarter results or need additional clarification, please feel free to contact us 858-882-6084. Thank you.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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