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Executives

Amy Wakeham

Stewart Douglas Hutcheson - Chief Executive Officer, President and Director

Jerry Elliott

R. Perley McBride - Executive Vice President and Chief Financial Officer

Analysts

Simon Flannery - Morgan Stanley, Research Division

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

David W. Barden - BofA Merrill Lynch, Research Division

Shing Yin - Guggenheim Securities, LLC, Research Division

Gerard Hallaren - Janco Partners, Inc., Research Division

James G. Moorman - S&P Equity Research

Philip Cusick - JP Morgan Chase & Co, Research Division

Leap Wireless International (LEAP) Q4 2012 Earnings Call February 20, 2013 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter and Full-year 2012 Leap Wireless International Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 20, 2013. I'd now like to turn the presentation over to the host for today's call, Ms. Amy Wakeham, Vice President of Investor Relations and Corporate Communications. Please proceed, ma'am.

Amy Wakeham

Great. Thanks. Good morning, everyone. Thanks for joining us and welcome to Leap's Fourth 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, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please see the notes to the financial statements of today's earnings release, or visit the Financial Reports page of our website.

I'd like to remind you that we're no longer breaking out the customer results and related customer metrics of our Voice and Broadband Services separately. However, as we continue to narrow our focus to our Cricket monthly pay in advance services, we will discuss the customer results of Cricket Wireless in addition to our consolidated results.

Cricket Wireless refers to our traditional monthly voice service and excludes Cricket Broadband and Cricket PAYGo. As a reminder, statements about expected future events and future results are forward-looking and subject to risks and uncertainties. Our actual results may vary. Please refer to the risk factors detailed in our SEC filings for further discussions. For anyone listening to a taped or webcast replay or viewing a written transcript of our fourth quarter call, please note that all information presented is current only as of today's date, February 20, 2013. 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 fourth quarter results are Doug Hutcheson, Leap's Chief Executive Officer; Jerry Elliott, Leap's President and Chief Operating Officer; and Perley McBride, Leap's Chief Financial Officer. Following our prepared remarks, the call operator will come back on the line for Q&A portion. I'd now like to turn the call over to Doug.

Stewart Douglas Hutcheson

Welcome and thank you for joining us this morning. As we take you to our fourth quarter results, I think it's important to put them in the context of the significant transition we see for consumer purchases of wireless services. Consumer desire for higher quality smartphones is unprecedented and this has reflected in the expanding industry sales volume of devices that cost $400 or more. This change drives us as a business to address how we can profitably capitalize on substantially better customer lifetime value of our offering, compared to that of postpaid carrier for these devices. Value-seeking customers can save over $1,000 on their iPhone or Galaxy 3 smartphone over 2 years with Cricket, which gives us a real opportunity if we can get the total offering right. Over recent quarters, we have made and continue to make significant improvements to our customer experience in the attractiveness of our offering, so that we can retain customers longer on higher ARPU plans, which will in turn, benefit us financially.

Our fourth quarter results reflect this ongoing transition and show the progress we're making towards goals in areas like churn. The results also show areas that require real improvements like gross additions. Year-over-year, gross additions decreased, mostly as a result of general softness in the prepaid sector and our focus on selling more full-featured, higher-priced smart devices that lead to longer customer lifetimes. We also reduced promotions on lower-priced devices as we've seen this activity drive lower customer lives and higher upgrade expenses. This strategy has narrowed our focus to Cricket pay in advance monthly plans, which we will discuss as Cricket Wireless and reduced emphasis on our broadband and daily PAYGo services. We expect this focus will likely impact our gross additions as the out the door costs are higher. However, we're encouraged that our actions have also resulted in improving Cricket Wireless churn performance.

The priority now is to introduce expanded initiatives to drive front door activity for Cricket Wireless, which we plan to accomplish through expanded device financing and other programs to help customers affordably purchase high-quality, smart devices with a customer experience that meets their needs.

Turning to financial performance, our focus remains on driving our revenue while improving operating efficiencies and cost reductions throughout the business, all with the goal of achieving free cash flow. ARPU improved, reflecting an increase of higher value customers. Total new customer acquisition costs were also lower on an annual basis, with the increase of fourth quarter CPGA, driven primarily by lower gross addition volume in the quarter. These factors and other cost management initiatives enable us to keep expenses under control and are driving the cost structure down except in those areas where we see a customer benefit that will result in a longer life customer. As a result, we saw improvements in both OIBDA and OIBDA margins. For the year, we achieved $600 million of OIBDA as well as our continued improvements in cash flow, driving free cash flow remains a top priority and while we didn't make as much progress as we would've liked primarily as a result of slower customer activity and the resulting higher inventories, we expect further cash flow improvement as we move through 2013. During the quarter, we also continued to thoughtfully manage our balance sheet and valuable spectrum assets, including completing our fourth spectrum exchange transaction in the last 2 years. These transactions have increased our average spectrum depth by 6 megahertz to 23 megahertz and raised nearly $120 million. This has been done against the backdrop of increasing spectrum prices. We're in the enviable position of having an attractive, valuable and more focused spectrum portfolio.

Let me now turn to Slide 7 to explain how we're executing our transition strategy and outline the progress we're making. First, it is clear in this competitive market that a key requirement for success is our ability to differentiate ourselves through the experience we provide our customers at every touch point. In the past quarter, we've seen significant improvements to our activation processes and device portfolio quality, which are delivering a better customer experience. We see this progress in the churn results of Cricket Wireless, which are similar year-over-year even though we substantially reduced our typical retention activities. Within our existing customer base, we're continuing to focus on the most profitable customers and working how to best retain this important component of our base.

As we service our core customer base, we will focus on providing affordable options through the expansion of our Lifeline programs and services such as Muve Music. We have seen success in acceptance of Cricket Lifeline, and we believe there are more opportunities here, which Jerry will discuss with you shortly. We're also seeing the benefits of using Muve Music as a tool to retain our current customer base. Earlier this quarter, we announced that we had achieved over 1.1 million customers and believe that we are one of the largest digital music subscription services in the United States. Of course, as I said, we also need to attract more customers profitably. As we look towards postpaid and acquiring more share, we want to remind you that 2/3 of our new customers have typically come from postpaid carriers and plans. We've made great strides in having the right devices for consumers but we need to continue to evolve our model to reduce the out-the-door price of higher quality devices. It's clear we can't do this with additional subsidy dollars and so our real opportunity is through expansion and growth of device financing programs. In the fourth quarter, we completed our anticipated rollout of 4G LTE services and added the best-selling Samsung Galaxy 3 to our growing lineup of iconic and high-end devices. How we use our spectrum will be the focus -- will be a focus as we find the right balance between our own network usage plans and arrangements with others. I'd now like to turn the call over to Jerry to discuss our customer and operational results.

Jerry Elliott

Thank you, Doug. In addition to the weak fourth quarter experienced by the prepaid industry as a whole that Doug talked about, our device pricing has definitely affected our number of gross additions and our average device selling price has increased $32 from a year ago from $47 in the fourth quarter of 2011, to $79 in the fourth quarter of 2012.

As we have talked about, we're trying to balance the slower customer activity that is now the reality of the industry environment with investing in customers who stay with us longer. Our fourth quarter net additions were also meaningfully impacted by a more disciplined and profitable approach to customer retention and win back activity this year. As we told you last quarter, we stopped marketing and sales of our broadband product at the end of the year. Some broadband inventory is still in our sales channels and we'll sell through that inventory over the next couple of quarters. We'll also continue to support our current broadband customer base.

As one of the parts of transitioning our business, during the fourth quarter, we also stopped selling our PAYGo daily product because it is a very high churn customer base. So you're going to see the number of broadband and PAYGo daily customers continue to decline. And then finally, in the fourth quarter of 2011, the national retail channel had 121,000 net adds and then in the fourth quarter of 2012, the channel lost 31,000 customers as we focused only on the best national retail partners.

So just to be sure you have a sense of the size of these products, at the end of the year, we had 210,000 broadband customers, 136,000 PAYGo daily customers, 336,000 PAYGo monthly customers and then 4.6 million Cricket Wireless customers. We expect first quarter 2013 Cricket Wireless gross additions to be lower year-over-year and the tax season this year was delayed by 2 or 3 weeks. But it's well underway now, but that may affect some of our first quarter customer activity.

On Slide 10, you can see Cricket Wireless churn of 3.7% was near the churn levels in the fourth quarter of 2011, even with significantly less retention activity. Our estimate is that churn would've been actually 50 to 60 basis points lower in the fourth quarter if in fact, we had run similar levels of retention activities that we did a year ago. However, if we had run those same kinds of program again, we also believe that we would see the negative effects in the first half of 2013 similar to what we saw in 2012. We're also beginning to see improvements to customer survival rates for our Muve customers. We expect first quarter churn to be near the first quarter 2012 levels for our Cricket Wireless business.

On Slide 11, we're focused on offering products and services that appeal to a very broad range of customers, all of whom are seeking value. Cricket Lifeline now has over 440,000 customers and we offer the program to over 95% of our covered POPs. Just as a reminder, Cricket Lifeline is a subsidized discount off our monthly rate plans, offering flexibility and choice. It is not the free phones and free service programs that other carriers are offering. Our Lifeline customers stay with us significantly longer and bring nearly twice as much as lifetime value as non-Lifeline customers. You may have heard concerns from some other carriers about Lifeline recertification. Our customer results reflect the completion of the SEC's recertification requirement in 2012 and we do not believe there's significant risk for us. About 40% of our Lifeline customers are in states where there is some level of requalification on at least a quarterly basis. Our customers are actively using our service and paying their bill every month. If they do not recertify, they no longer receive the Lifeline discount. However, they are not automatically disconnected from the other service, which is quite different from other carriers who offer free service as part of their Lifeline offering.

With respect to postpaid, we see a great opportunity to acquire share. In fact, about 2/3 of our gross adds come from a postpaid carrier. And then more broadly speaking, the majority of all wireless consumers of every income demographic are postpaid customers today. In order to successfully compete, we have to solve the high out-the-door price hurdle for our customer. Consumer desire for high-end devices has allowed postpaid carriers to turn device sales from being a subsidy event into actually, a very lucrative profit center. And we expect to evolve and enhance our device financing programs later this year. We'll also continue to innovate and offer new products to target and attract postpaid customers over the next several months.

Now I'll turn the call over to Perley to talk about the financial results.

R. Perley McBride

Thanks, Jerry, and good morning, everyone. As you heard from Doug and Jerry, against the backdrop of a highly competitive environment, we are continuing to transition and we remain focused on actions both near and longer term, to generate profitable growth and positive free cash flow. As a result of this, I'm excited to be here in part of the Leap Team as there are many opportunities for us to continue to move the business forward.

Turning to Slide 13, we experienced a nice uptick in Q4 ARPU. This increase was primarily driven by a reduction in retention programs. We also saw a lift in ARPU as a result of the decline in the number of PAYGo daily customers and we continue to see a greater percentage of our customers in higher value rate plans. Going forward, we expect ARPU will remain around levels we experienced in second half of 2012, with some quarterly fluctuations driven by the seasonal nature of the prepaid business as well as future changes to our product mix.

On Slide 14, year-over-year, CCU increased primarily due to 3 factors: first, network costs were higher as a result of an increase in backhaul and expense associated with decommissioning some cell sites; second, logistics cost increased year-over-year as a result of the change in our reverse logistics processes as well as higher repair cost associated with smartphones; and finally, product costs were higher, driven by the increase in customers on a Muve Music rate plan. At the end of the fourth quarter, 22% of our customers were on a Muve Music rate plan compared to 9% in Q4 2011. CCU in the fourth quarter increased slightly quarter-over-quarter as the mix of upgrades favored higher-end devices offset by a reduction in G&A expenses.

We expect CCU to increase at the same year-over-year pace in the first quarter as a result of the increased backhaul.

Slide 15. As discussed on recent quarterly calls, we are focused on managing our subsidy cost at the unit level. You can see on Slide 15 that total subsidy dollars for new customers in the fourth quarter were down $49 million year-over-year and $24 million sequentially. We continue to be prudent with our subsidy spend and will not overspend just to acquire customers. We are focused on acquiring the right customers, those who will stay with us longer. While total acquisition spending was down year-over-year and quarter-over-quarter, CPGA increased due to the lower customer activity in the fourth quarter. In fact, 90% of the year-over-year increase in CPGA was driven by volume. The remaining 10% of the increase was the result of increased dealer compensation as we supported our dealer network through this lower volume period.

Our strategic focus on acquiring the right customers may result in lower gross add volumes. Nevertheless, it is our conviction that focusing on the core issue, addressing the customer's desire for a high-end device rather than chasing customer additions through spending, will result in the acquisition of longer-tenured, higher-value customers.

Looking forward, we expect first quarter's CPGA to decline sequentially although it will remain higher on a year-over-year basis if gross add volumes remain low.

On Slide 16, looking at our fourth quarter financial results, we are beginning to see the financial impacts of steps we have taken to improve our operational execution over the past few quarters. We are pleased to see growth in adjusted OIBDA and adjusted OIBDA margin, even though our smaller customer base has pressured service revenue. We remain focused on making intelligent investments on the right things that will drive smart customer growth with increased survival. I'll talk more about free cash flow in a moment. However, I'd like to point out that our negative free cash flow in the fourth quarter was driven by higher-than-expected inventory levels as a result of the slow customer activity we saw during the quarter. We expect to address these inventory levels in the coming quarters.

Slide 17 further highlights the results of our financial discipline. As a percentage of service revenue, nearly every spending category was flat or down both sequentially and year-over-year. On a year-over-year basis, non-product cost was the only line item that increased as a percentage of service revenue, primarily due to higher network cost associated with the increased backhaul and cell site decommissioning cost mentioned earlier. Sales and marketing as a percentage of service revenue increased sequentially, primarily due to increased spend for the holiday selling season and slow front-door customer activity, which resulted in lower service revenue.

Moving to Slide 18. CapEx spending in the fourth quarter was $63 million, bringing full-year 2012 CapEx to $434 million, below our full-year CapEx guidance.

Looking to 2013, we remain focused on investing CapEx dollars where we expect to see the most impact and the highest return. We anticipate 2013 CapEx to be in the range of $275 million to $325 million for the year, including up to $100 million related to LTE. As further evidence of our commitment to focus on the most impactful areas to move our business forward, our 2012 results reflect nearly $40 million in one-time restructuring costs that we expect to drive annualized future cost savings of $15 million plus an additional $40 million of benefit in 2013.

Lastly as expected, we recently resolved the dispute with Sprint with no material impact to our financial statements. As we continue down the path of becoming free cash flow positive, we are maintaining and in some cases, heightening internal discipline around everything we do. Our strategy is unchanged. We are carefully evaluating every capital project and will continue to spend only on those projects that provide the most benefit to our customers. We understand that was a lower customer base we cannot simply sustain our current spending levels, so we must remain sharply focused on continued reductions in our cost structure, even as we work harder to deliver a great customer experience. I'd now like to turn the call back over to Doug to discuss our strategic initiatives.

Stewart Douglas Hutcheson

Thank you, Perley. And I also want to welcome you to the team. Turning to Slide 20, I'd like to briefly discuss our networks and how they're operating. We now offer 4G LTE services to approximately 21 million covered POPs that operate robust 3G networks across our footprint and in conjunction with others nationally. We continue to make smart investments in our network to ensure that our customers have a strong voice and data experience, whether they're on 3G or 4G. Our initial 4G markets are up and running and we look forward to watching these markets develop and progress as more and more customers select our 4G service offerings. With average speeds of over 4 megabits per second, we are offering a high-speed data experience with high-quality devices at an affordable price for our customer. Additionally, we're pleased to have recently entered into a nationwide 4G roaming agreement that will provide us the opportunity to supplement our facilities-based coverage as we continue to evaluate our options for continuing to rollout LTE. We expect that we will have the appropriate devices ready to take this expanded service footprint to market in the second half of 2013. We may elect to deploy up to 10 million additional LTE covered POPs in 2013. But again, our focus will be on making smart investments between building ourselves and partnering with others.

Turning to Slide 21, we want to highlight our spectrum situation. As we mentioned, we have completed 4 significant spectrum transactions over the past 2 years and that has reduced our footprint from over 180 million licensed POPs to now less than 140 million. These swaps increased our averaged operating market depth by 6 megahertz. Our active management of this asset, which is currently about 40% utilized in our operating markets gives us comfort that we have adequate spectrum to complete our initial 4G rollout. Our spectrum also has substantial value as we consider our alternatives. It is clear, as the recent transactions demonstrate, that this is an asset that's likely increasing in value.

In closing, we're making progress with our transition, which can be seen in our results in areas such as churn and ARPU, with more progress required in areas like gross customer additions. We're laser-focused on improving customer experience while generating free cash flow and improve margins with the ultimate goal to deliver the best possible value to shareholders. I'd now like to turn the call over to the operator for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is coming from the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

I wondered if you could just talk a little bit more about the gross add situation, in particular, we've seen weakness across the prepaid industry this quarter and for a couple of quarters here. You touched on a couple of things, some of the tax impacts in Q1, some of the handset pricing but perhaps, you can just talk a little bit more deeply, are we seeing something more challenging for prepaid? Are there issues around saturation in some segments here? Are the prepaid family plans -- or the postpaid family plans having a bigger impact? So more color around sort of the overall market conditions there and what you can do to address that.

Jerry Elliott

Simon, it's Jerry. Yes, I mean, there's no question, there are some macro things going on. We think that by far and away, the biggest issue is the device pricing and the ability of customers to pay the big upfront price.

Simon Flannery - Morgan Stanley, Research Division

And what's the magic price you think?

Jerry Elliott

I'm sorry?

Simon Flannery - Morgan Stanley, Research Division

What's the magic price? Is it 1 99 or 1 49 or...

Jerry Elliott

Certainly, in that range but I don't think there's any particular magic price. What we find is that consumers, regardless of the income demographics, they all want these same kinds of higher-end devices. They all want good feature functionality. And so if you look at kind of the types of handsets that people purchase and you look at the type of rate plans people go on, for example, our Lifeline customers purchase the same kinds of rate plans and the same kind of devices that non-Lifeline customers purchase. So it's very hard to distinguish the kinds of things that people want based on income demographics, if you will. So that again brings us back to the out-the-door device pricing. So the postpaid carriers are financing devices quite profitably these days. They might talk about subsidies and I know the investment community likes to talk about big subsidies. Those are one-time events because if you look at the cost of -- the monthly cost of a consumer and you look to compare that to the costs to the carrier providing that service, they're making a very large margin on that monthly payment. And so they're financing the device. You can call it whatever you want but they're definitely financing the device over the 2-year contract. And so you're going to see us continue to evolve the kinds of financing programs we've got in place today offer consumers different options in terms of the ways they might want to pay to lower that upfront pricing because its -- there's no question, it's a barrier. The family plans you mentioned, yes, I mean, the data sharing plans, I think that is a challenge. You will also see us do some things I mentioned in my scripts and things we're going to be doing that target postpaid customers. You'll see us do some things in that area. We're not going to go buy people out of contracts like some other people have done because I can't remotely make the math work on that. But you will see us do -- offer some products that we think are more competitive with the kinds of things that attract people to postpaid consumers. And again, regardless of the income demographic, that majority of wireless consumers out there are postpaid carriers -- or excuse me, postpaid customers. And so we believe the 2 barriers or the things that are shifting the mix to postpaid right now are -- is primarily the out-the-door price. And so that's where we're really focusing a lot of our time, effort, and you'll see a lot of, I think, innovation out of us the next few months on that.

Operator

Our next question comes from the line of Ric Prentiss with Raymond James.

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

A couple of questions. First, if you think about your cash position and then the CapEx guidance that was given, how do you look at the cash burn throughout the year and when do you need to make that decision on are you going to build the extra 10 million POPs and $100 million with LTE?

Stewart Douglas Hutcheson

Well, I think as we look towards 2013, our goal is to have an improving cash flow position, including the money associated with the incremental LTE POPs. So I think our decision on whether or not we build the LTE POPs, the next round is as much focused on alternatives between doing ourselves -- doing it ourselves and with others is really the primary focus on that, Ric. So I think we'll let things evolve. We'll be back to update you at the next call on what we think our timing is on that. But I wouldn't see that as being -- it's focused on what's the best way and most profitable way to get the next round of services out there. It isn't focused right now on where we're at because I think we feel that we have programs in place that cause us to believe we're going to see improvements in our cash flow.

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

And then a couple of quarters back, you had put in a slide that kind of showed your spectrum utilization and I compared the mobile broadband product when it was around and the 3G customer base, the ability to move on to 4G. When you think about that spectrum utilization chart and then you look at Slide 27 in the deck, talking about how there's a lot of excess spectrum or underutilized spectrum, how do you mesh those 2 charts? The one from a couple of quarters ago to kind of where you see yourself today? And we constantly are hearing that people are surprised, carriers are surprised by how much consumption is going across these 4G devices.

Stewart Douglas Hutcheson

Sure. The first piece is I think the data from the slides that we presented a couple of quarters ago is really consistent with what we've also included in there. So we've done 4 different swaps over the last 2 years, all of those swaps have been focused on taking what was already a spectrum position for 4G that was adequate to get us started, and making it better. And so what we've seen is that the spectrum position that we have in particularly, our most attractive markets has actually gotten deeper. And so as we look at 4G, we're feeling, as we rollout that service, that the existing spectrum, the 40% not utilized, really gives us a pretty good initial runway at how to work that. The other -- the next piece is that the 4G services that we've got that are up and running, we're pleased with the way they're running, the 4 megabits. The other piece that we should have given a comparative on is that we've also, through the course of the year, effectively doubled, nearly doubled I think, the 3G network speeds as well. So our whole network platform in the last year has really, I think, gotten a whole lot better, both the way our networks are operating, the quality of the speeds that we're providing on the networks, the introduction of 4G services on those. So when we look at spectrum from here, we really are deciding, do we put the next incremental dollar against that existing spectrum and do it ourselves or do we, as we've said, look at other alternatives to do it? And we're head down. We have shown a lot of progress in working with others on spectrum and resolving some of the other outstanding things that -- agreements that have -- that affect us with the introduction of nationwide 4G roaming as well during the quarter. So we feel like we're making good progress there.

Operator

Our next question comes from the line of David Barden with Bank of America.

David W. Barden - BofA Merrill Lynch, Research Division

Jerry, just first, I was wondering if you could give us an update on kind of your level of happiness/satisfaction with the conversations you've been having with the rest of the marketplace regarding trying to extract the maximum value from assets of Leap, be it spectrum sales or full strategic sales. If you could kind of just give a sense as to whether any traction has been gotten and what your satisfaction level is there? And I guess second, if you could just kind of update us on where you are with the Apple relationship and kind of what -- how far you went towards satisfying your requirements under that agreement in the second part of the year and kind of what your, again, approach is towards making sure you fulfill those contract minimums? If I could, just a last one, I'm not quite sure I understand that -- so we've got a national LTE roaming agreement presumably with known math and we've got this potential contingent $100 million we're going to spend on LTE. I'm not quite sure I understand why we're not sure whether we're doing it or not if we've got all the moving pieces that we need to make the conclusion in front of us. It would be helpful if you could clear that up.

Jerry Elliott

Yes, David, let me see if I can take them -- do them in the same order but in terms of the 4G or LTE build decision, I mean, it's really just an economic build versus buy decision. I mean, that's really all it is. We've got the option to buy from another carrier. We've got the option to build. And so, it's really just, from our perspective, what's the highest and best use of the next dollar of spend. Whether it's capital or operating spend, we don't really make that distinction. It's where do we get the biggest return on the dollar, whether that's building LTE or whether that's buying LTE. We definitely know that we want to -- need to provide 4G services to the customers. So we're going to do that one-way or another but that's -- it's an economic decision on which way do we go. And that's really at the market level. So do we build versus buy and every single one of the markets that make up that 10 million POPs. It's not a 10 million POP decision, it's a market by market by market decision. In terms of Apple, we -- sales of Apple devices were pretty good in the fourth quarter, actually, even with the challenges that I mentioned, this assignment on the out-the-door price. There was a good mix of sales in the iPhone, I would say. There was a stronger device in our lineup which was the Galaxy Samsung 3, also an extremely high-end device. And so we were pretty encouraged and continue to be real encouraged by the number of sales of high-end devices. We are not concerned about in terms of meeting the Apple commitment. We think that's going to be fine. So we're not going to give a blow-by-blow update on exactly where we stand on the total commitment but we're not concerned about meeting those obligations over the lifetime of that contract. And then your first question about my level of happiness, well -- so I'm not happy with our results in the slightest. I do think people need to focus on our core Cricket Wireless business, which is our traditional pay in advance business. That's where we're putting the emphasis. So when I see people talk about our total subscriber numbers, they tend to throw in the broadband product and the PAYGo daily product that we've been really clear about, that are exiting. So I'd ask people to focus on the business that we're focused on, which is the 4.6 million pay in advance customers. But in terms of the kind of strategic activity level, the asset value, I think obviously, we've all seen a fair amount of strategic activity in the third quarter and now, even just recently, if you look at the asset values, I think it's fair to say that the prices -- the observed prices in the marketplace in the last few weeks continue to increase pretty significantly and so, that's encouraging. I obviously, can't really comment on specific conversations but in terms of an appreciating asset, I think there were some pretty recent reconfirmations that the asset does continue to increase in value and until we get to a place where we want to do something on the strategic side, as we've been trying to talk about for a while, driving free cash flow out of the business is first and foremost on our list of priorities. And again, that's running the business at a market level very differently than perhaps, it's been run in the past. And as I said, I've said a number of times over the last several months, I mean, that does have volume implications. I've tried to be really clear about that. So we've got to size the business and the cost structure for not only what's going on from a macro standpoint that Simon talked about but also things that we're doing ourselves like raising the out-the-door device price, as I mentioned in the script.

Operator

Our next question comes from the line of Shing Yin from Guggenheim.

Shing Yin - Guggenheim Securities, LLC, Research Division

I wanted to see if you could give us a little more color on gross adds. Going into fourth quarter, I appreciate your comment earlier that we should expect gross adds to be lower year-over-year. But just on a sequential basis, are we seeing gross adds pick up a bit in the first quarter so far, maybe because you have started to offer some of your device financing programs, maybe because some of the big postpaid smartphone launches are now behind us and then also, are you getting any benefit from the tax refund cycle this time around?

Jerry Elliott

Sean, we don't give quarterly guidance. Very specifically, it's kind of directional. We've said it's going to be down year-over-year. I would say in terms of what have we seen so far, I mentioned the tax season did start 2 or 3 weeks later this year than it has historically. The IRS, I don't think would even process applications until the end of January. So tax money has definitely started coming into the market. We do see that in the last week or 10 days but it's also is a later start. So I don't want to get ahead of ourselves in terms of predicting how the full tax season is going to play out but it has arrived. It's just arrived later than normal and it's kind of early days. And I would say on the device financing side, we do have a product today. It's not nearly as broad-based as we want it to be or need it to be. And so, we're spending a lot of time trying to come up with additional ways to finance handsets for consumers in ways that the postpaid guys have been doing for years, they're financing handsets. Whatever people want to call it, they're financing handsets. And so we've got to broaden the offering that we've currently got in that market much more widely in order to have it really drive any meaningful number of gross adds. We've got something into the marketplace for Black Friday. We've learned a lot from it. We've got some things that we want to do differently with it going forward but it's not, right now, driving any meaningful number of gross adds and it needs to for sure. So it needs to change and evolve going forward, and it will.

Operator

Our next question comes from the line of Gerard Hallaren with Janco Partners.

Gerard Hallaren - Janco Partners, Inc., Research Division

It is tough out there. Given that, I thought the numbers were actually not bad at all. Could you take a moment and talk about the Cricket Wireless business that is shaping up to be more like a postpaid business? Give us a feel of what the incremental activity is in terms of what churn rates look like or gross adds look like there? And then I have questions about your spectrum trade.

Stewart Douglas Hutcheson

Sure. Well, I'll start and maybe Jerry, you can add where you feel appropriate. I think people need to recognize that in the last 2 years, it was what the opening slide was trying to flag, is that as an industry, after many years of declining device prices, we've seen consumer appetite go up substantially for much higher-priced devices. You saw that reflected -- Jerry outlined nearly a 70% year-over-year increase in out-the-door price of the device. We think that, that is going to continue to go up as consumer appetite for those better devices continues. And it really flags the transition that we, as a company, need to make and at the industry, which is how do we get those better devices into people's hands, still have the advantages of the lower, no contract basis that we have for our services that we provide and yet, provide a structure to people so that they can get the devices at a lower price out-the-door. And so we introduced, Jerry mentioned it, we introduced one program that did that at right before Black Friday. We've seen tens of thousands of people get into that program, but we think the opportunity is much, much larger than that. So I think there will become a business that some meaningful portion of our future customers that desire better devices will in fact, be on some type of a financing contract for that device is what our goal is. And then we'll be back to update you as we get through the year. But we'll still be a -- our primary go-to-market strategy will remain the no contract opportunity and then we'll provide additional opportunities for customers to finance that device. We actually gave you the details in our earnings presentation, Jerry covered those. You may want to add on where we're at inside the Cricket Wireless both on gross adds and churn. So maybe, Jerry, do you want to add any color on those?

Jerry Elliott

Yes. So in terms of our core Cricket Wireless business, if you look at the slides in the presentation, you can see that the trends and changes in the Cricket Wireless gross adds. I mean, again, we're -- both from a macro standpoint as well as some of the things we're doing about the out-the-door price of the device, we're affecting volume, there's no question. And we've said that will continue into the first quarter. In terms of churn, again, we -- I think it's an important point. We saw churn in the most recent quarter about the same as it was a year ago. However, there's a major difference in what happened, which is, a year ago, that a lot of that activity was driven by some very aggressive retention and win back programs that we did that we discontinued and have not done this year. And so we're achieving the same level of churn even without frankly, buying a lot of customers just to put it in stark terms. And so, we think that means the underlying churn rate is improving. In a world of much slower growth, keeping your customers, retaining your customers is obviously, far more important than it was 3 years ago when all boats were rising as the pie grew. So in a lower gross add environment, we're focused a lot more heavily on retention.

Gerard Hallaren - Janco Partners, Inc., Research Division

And if you look at that customer, you've talked about -- a lot about average lifetime value. Maybe could you give us a ratio of how a Cricket Wireless customer compares to a Lifeline value? You said something there, which I'm not sure I understood completely.

Jerry Elliott

So the churn rates, the deactivation rates for a Lifeline customer are considerably lower than they are for the rest of the Cricket wireless customer base. And that trends -- I mean, obviously, if the churn rates, the deactivation rates are significantly lower, that's going to result in a much greater value of the customer over that lifetime, because they're staying with us almost twice as long as a non-Lifeline customer stays, so that's how you get there. But it's a very, very sticky customer, very loyal customer and it's a product that we continue to believe is one of the 2 or 3 keys to our success.

Operator

Our next question comes from the line of James Moorman with S&P Capital IQ.

James G. Moorman - S&P Equity Research

The question I had was, could you just talk a little bit about your out of market strategy and how kind of the RadioShacks did in the most recent quarter?

Jerry Elliott

Yes. So just to be sure we got the context, we really significantly narrowed our focus on national retail over the course of 2012. I think as I mentioned in the fourth quarter of 2011, we had 121,000 net adds from national retail and in the fourth quarter of 2012, we lost 31,000 customers in national retail. That loss didn't occur because of RadioShack or Walmart who were 2 partners we're focused on, that -- that loss occurred because we got out of a number of other retailers where it wasn't -- they weren't profitable places for us to do business and so that was the -- that customer base from those particular big box retailers rolling off. So RadioShack, Walmart, we had focused on those 2 retailers because wireless is a very important part of their product set in their stores. RadioShack offers a very much more personal, one-on-one customer service connection than a general big box retailer does. Those 2 relationships are going well. And again, I think the results reflect really getting out of a bunch of national retailers as opposed to what happened in the 2 that we're committed to today.

Operator

Our next question comes from the line of Phil Cusick with JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

First, a clarification. I think Shing asked this, but could you give us a Cricket-branded gross add number from 1Q '12? You said that it was going to be down year-over-year, but I don't know if we have a baseline.

Jerry Elliott

You know what, I don't even remember the number off the top of my head. We can -- maybe can follow up with you on that so...

Amy Wakeham

[indiscernible] with you on that.

Philip Cusick - JP Morgan Chase & Co, Research Division

Okay. And you talked about improving cash flow through '13. Are you guiding for positive cash flow in '13? Do you think it's just going to improved in terms of negative levels?

R. Perley McBride

So our focus is being cash flow positive. We -- I'll say, as we ended this year, we're still negative about $200 million or so. But that is our drive as a company, is to become free cash flow positive. What I will say and we -- and a couple of questions on the CapEx and is CapEx a toggle of free cash flow, and I see those as 2 different things. One is driving a discipline within the company around how we need to make our investment and our capital decisions are the same way. I don't want people thinking that our LTE builds are contingent upon our free cash flow position. We look at every dollar, as Jerry said, to give us a return. So it's -- LTE falls in the same path and when you think of LTE, it's a build versus buy as Jerry said. The variables are adoption of 4G phones and then consumption. So in having a national roaming agreement in place allows us flexibility because the toggle is when you have more consumption, you want to move to a build model. And so I just -- some couple of questions around that on the phone, I just want to make sure we're kind of clear on their -- we see them as 2 separate things driving towards positive free cash flow and how we need to invest in our network.

Philip Cusick - JP Morgan Chase & Co, Research Division

Okay. Can I follow-up there? Can you give us a little more detail on this -- the LTE roaming deal? Is this an in-region, is it an out-of-region? When does it start to ramp up? When can customers start to use it? And could you use it exclusively if you decided to sell parts of your network or your spectrum?

Stewart Douglas Hutcheson

We'll give more details over time on it. But the roaming agreement, Phil, in particular, is a nationwide roaming agreement. So we could use it both in an existing market or outside of an existing market. As we said in the script, we think the focus will be on supplementing existing coverage, much the same as we've done with some of our national 3G agreement. There may be other alternatives that we have that would allow us to look at using other features that we have in markets that we haven't built LTE. But I think we, again, will come back to you in a quarter or so, and we'll update you on how we're thinking about those alternatives as we go forward.

Philip Cusick - JP Morgan Chase & Co, Research Division

And did that add to or come with another minimum obligation over a few [ph] year period?

Stewart Douglas Hutcheson

We'll update you. I believe that you'll see that our minimum revenue commitment actually has gone down as we disclosed. So I don't think that there's anything that's a factor relative to that in these agreements.

Philip Cusick - JP Morgan Chase & Co, Research Division

Okay. If I can just get one more clarification in. How much of the 4Q cost were things like onetime site decommissioning and how many sites was that?

Stewart Douglas Hutcheson

We don't have -- the total restructuring costs were in the $20-some million range. We haven't released specifically how many sites that was. But as a percentage of our total sites, Phil, it was a real small number. I mean, we're decommissioning some -- a few low-volume sites, a few zone and hold sites, and we still built, during the year, sites and we will build during this coming year, sites. And so I would tell you that, that was just a footprint optimization that we were doing in trying to make sure that we were utilizing things most efficiently.

Operator

Ladies and gentlemen, that does conclude our allotted time for questions. I'll now pass the call back to Ms. Wakeham for closing remarks.

Amy Wakeham

Great. Thanks. Thanks for joining us for our call this morning. We appreciate your time and we look forward to updating you on our progress on the next quarterly call. If you've got any further questions, please direct them to the Investor Relations team here at Leap. Have a great day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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