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Executives

Amy Wakeham

Stewart Douglas Hutcheson - Chief Executive Officer and Director

Jerry Elliott

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

Analysts

Simon Flannery - Morgan Stanley, Research Division

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

James G. Moorman - S&P Equity Research

Shing Yin - Guggenheim Securities, LLC, Research Division

Brett Feldman - Deutsche Bank AG, Research Division

Noel Culhane

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

Leap Wireless International (LEAP) Q1 2013 Earnings Call April 30, 2013 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2013 Leap Wireless International's Earnings Call. [Operator Instructions] I would 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. Thank you. Good afternoon, everyone. Thanks for joining us, and welcome to Leap's First Quarter 2013 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 the non-GAAP measure to the most directly comparable GAAP measures, please see the notes to the financial statements in today's earnings release, or visit the Financial Reports page of our website.

Statements about expected future events and financial results are forward-looking and subject to risks and uncertainties. Our actual results may differ. Please refer to the risk factors detailed in our SEC filings for further discussion. For anyone listening to a taped or webcast replay or viewing a written transcript of our first quarter call, please note that all information presented is current only as of today's date, April 30, 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 first quarter results are Doug Hutcheson, Leap's Chief Executive Officer; Jerry Elliott, Leap's Chief Operating Officer; and Perley McBride, Leap's Chief Financial Officer. Following our prepared remarks, the operator will come back on the line for the Q&A portion of the call. I'd now like to turn the call over to Doug.

Stewart Douglas Hutcheson

Welcome, and thank you for joining us this afternoon. On our last earnings call, we've talked to you about the significant transition we see in this industry, particularly consumers' expectation and desire for high-quality wireless devices and services. Not only does the industry transition continue at the consumer level, we've also seen several strategic changes that will further evolve our industry. While we have more to do, we believe we'd made progress in a number of areas to help us address our performance through this period.

Operationally, it was a quarter of forward progress for us. Throughout the quarter, we built on our strategy, delivering a better customer experience, retaining, and over time, expanding our current customer base, attracting postpaid customers and making smart investments. And we believe our results show progress with continued opportunity for more in the future.

As we review today's materials, let me acknowledge, we have more work to do to reestablish customer growth to where we'd like it to be and to build margins in our business to levels that we expect. That said, let me highlight the areas that indicate progress towards our goals. First, gross additions are stabilizing. While still at levels below where we'd like to see them, we're seeing increased -- increasing predictability. Second, churn for our core wireless service improved substantially, as we posted one of our lowest levels of churn ever for service. And third, the quality of our activations has improved substantially.

Throughout the presentation, we'll share the results of the actions we pursued that are driving these improvements. On the financial front, we see progress in spite of some significant headwinds. In particular, we've been able to avoid pricing pressures, and in conjunction with the financially more attractive customers who are purchasing our services today, have been able to absorb much of the pressure we have seen from the reduced number of customers. This is reflected in our modest margin improvement.

Lastly, we remain in a competitive, fast-paced industry with several competitors introducing new initiatives. The trend continues towards postpaid taking a greater share of higher-value customers seeking better, higher-priced devices, which we believe is the largest and most significant change in the competitive dynamic over the past year. Our initial focus has been on improving the focus and execution of what we do to -- and today's results reflect our progress.

We also recently introduced several new growth initiatives and remain on track towards expanding our device-financing capabilities in the second half of the year. Along with the competitive activities that are occurring, we continue to monitor the strategic landscape and the various moves others are making. We have long said that industry consolidation and strategic partnerships may make sense. We cannot control the overall industry landscape and what others do. However, we will continue to move our business forward by focusing on improving our operations.

I would now like to turn the call over to Jerry to discuss our customer and operational results. Jerry?

Jerry Elliott

Thank you, Doug, and good afternoon, everybody. We've been talking with you on our last couple of calls about some of the fundamental changes we're trying to drive. And while we still have a long way to go to turn around our business, our first quarter results are the first hard evidence that some of those changes are in fact beginning to take hold. We see some encouraging signs in the business and believe that we have more opportunity in front of us if we continue to simplify, focus and execute, even as competition in the industry intensifies.

You can see one of those encouraging signs at the bottom of Slide 8, as our net customer additions are dramatically better than they were in the fourth quarter.

Similar to our last few calls, our customer additions are down year-over-year because of the maturation of the wireless industry as a whole, our intentional and ongoing balancing of volume and profitability, our more disciplined approach to win back activity and an increase in our device average selling price from $68 a year ago to $129 this year.

Slide 9 shows how our customer mix and quality continues to improve, in part because of the discontinuation or deemphasis of the PAYGo daily and broadband products we've previously talked about with you, as well as a tighter focus on our national retail channel with our partners RadioShack and Walmart.

On Page 10, you can see that our churn has improved significantly because we continue to invest in things that we believe will produce more customer loyalty. Some of those things are better-quality handsets, significant improvements in our Muve Music product, changes to sales and dealer incentive plans, and most importantly, an obsession with improving the customer experience. The year-over-year churn improvement is particularly noteworthy because we had far less aggressive retention and win back activity this year than we did a year ago, as we more carefully target those activities to more profitable customers.

You can see on Page 11 some of the things that we're trying to do to return to growth and to grow more profitably, such as introducing a true family plan and an upgrade program. I won't go through each one of these, but I do want to note again that we believe solving the out-the-door price on high-end handsets through more device-financing options for our customers is critical to our success.

My overall message today is that while we still have a long way to go to turn around our performance, and it certainly will not be a straight line every quarter, there is now evidence of better performance and indications of more opportunity to win in the marketplace. It's now largely up to us to continue to simplify, focus and execute against those opportunities to win. Perley?

R. Perley McBride

Thank you, Jerry, and good afternoon, everyone. As you heard from Doug and Jerry, even in the current fluid competitive environment, we are beginning to see improvements in the customer metrics, where we have put considerable attention. We remain focused on these and other initiatives which provide the path to profitable growth and positive free cash flow.

Now let's turn to Slide 13. We experienced a nice increase in Q1 ARPU, primarily driven by the reduction in PAYGo daily customers, as well as a decrease in the number of hotlined and deactivated customers, resulting in an improvement to churn. Almost 70% of our customers are now on $45 or higher rate plans, and our rate plan mix continues to be strong. Looking ahead, we expect ARPU to remain around Q1 levels, with quarterly fluctuations driven by the seasonal nature of the business, as well as changes to our product mix.

Moving to Slide 14. On a year-over-year basis, the increase in CCU is primarily driven by the decrease in our customer base. Product costs are also higher due to an increase in customers on Muve Music rate plans. At the end of Q1 2013, approximately 30% of our customers were on a Muve Music rate plan compared to 10% in Q1 2012. We continue to manage our cost structure and seek out ways to take cost out of the business. However, we are a network-based company, and as such, there are many fixed costs that when spread over a smaller number of customers, cause the cost per user amount to increase. For the second quarter, we expect CCU to remain near the current Q1 '13 level.

Turning to CPGA on Slide 15. We continue to focus on managing our acquisition costs and on a year-over-year basis, reduce total acquisition spending by $45 million. However, CPGA on a year-over-year basis increased by 39%, reflecting a change in dealer compensation to incentivize the sale of higher-end devices and higher-value rate plans. In addition, in Q1 2012, we sold through excess lower cost inventory. On a sequential basis, we reduced CPGA through lower total cost acquisition spend and improved customer activity. As we have said over the past several quarters, we are focused on acquiring the right customer and the result may be lower gross add volumes. We continue to believe that addressing consumer desire for higher-end devices rather than chasing customer additions through spending will result in higher-value customers that stay with us longer.

Looking forward, we expect second quarter's CPGA to increase sequentially and year-over-year due to seasonality of gross additions.

Turning to our first quarter financial results on Page 16. On a year-over-year basis, service revenues declined 12%. However, our focus on higher-end devices drove an improvement in equipment revenues of over 100%. As a result, total revenues declined by just 4% year-over-year and increased 4.5% quarter-over-quarter. Additionally, the steps we have taken to improve our operational execution and reduce cost resulted in a reduction in overall spending and a smaller year-over-year decline in OIBDA, along with improved margins.

The improvement in free cash flow was primarily driven by lower capital spending in Q1, as we continue to explore cost-effective ways to deliver LTE services to additional customers.

Digging into OIBDA margins a bit further on Slide 17. Most expense categories were flat or down on a year-over-year and sequential basis. Non-product costs increased year-over-year, primarily due to higher costs associated with LTE and data delivery costs. On a sequential basis, net equipment subsidy increased as a result of higher device sales in Q1 2013. Improving margins continues to be a focus and must be accomplished through a combination of continued discipline on spending and investments to grow the top line.

Moving to Slide 18. We continue to remain focused on initiatives that will improve the customer experience, increase employee productivity and eliminate costs from the business. Additionally, our cost-savings initiatives remain on track to deliver expected savings. CapEx spending in the first quarter was $26 million, which was fairly evenly split between maintenance and growth initiatives. We expect capital spending to increase in the coming quarters, and our full year guidance is now in the range of $250 million to $300 million, which includes up to $100 million of spending for LTE.

Becoming cash flow positive remains a top priority, and we continue to maintain internal discipline over everything we do.

Lastly, I'd like to review our balance sheet position with you. On Slide 19, not only are we continuing to be prudent with our spending, but we are also focused on de-risking our balance sheet. We recently completed a $1.4 billion refinancing that effectively pushed out our first significant debt repayment until 2019. Pro forma for the proceeds from this recent refinancing, we have $878 million of cash on hand. The refinancing will also lower our cash interest by almost $30 million annually, once we repay the 2014 converts. This financing provides the business significant runway to focus on improving our operations. And as we have shared, we see progress in our efforts to drive a better customer experience. To reiterate, we will continue our focus on making the most appropriate smart investments in our business and driving free cash flow.

With that, let me turn it back over to Doug.

Stewart Douglas Hutcheson

Thanks, Perley. As we turn to Slide 21, last quarter, we outlined the key pillars of our operational strategy and shared the initiatives we're driving to move our business forward. As we work to differentiate ourselves through the experience we provide our customers at every touch point, we've improved our activation processes and device portfolio quality. The results of our efforts are showing, as we see reductions in core wireless churn, as well as improvements in 3-month customer survival rates. The expansion of our Lifeline programs and the continued enhancement of Muve Music have solidified these churn improvements on a differentiated basis. We're seeing solid churn improvements for Lifeline customers who take the discount on their regular service -- on a regular service plan, as well as on approximately the 1/2 of eligible Muve Music customers who use that service. We continue to make great strides in having the right devices for consumers, and are seeing a shift towards devices that we expect will meet the needs of our customers over a longer period of time.

Our network experience is solid. We have deployed 4G in our most appropriate footprint, and we continue to explore alternatives to expand our 4G service in coming quarters. We will continue to carefully manage our spectrum assets as we seek the right balance between our own network usage plans and a -- potential arrangements with others.

On Slide 22, consumer desire for higher-quality smartphones continues to expand. Industry sales volumes for devices that cost $200 or more continue to grow, and our numbers increased nearly 20% year-over-year to 27% of total handset volume in Q1 2013. This is the primary driver of the significant increase in average handset pricing that Jerry shared earlier. We're now focused on how we can profitably capitalize on a substantially better consumer lifetime value of our offering, compared to that of postpaid carrier -- carriers for these devices. Through 2013, we expect to introduce up to 5 new 4G LTE-capable smartphones, including the upcoming Galaxy S 4 later this quarter. We're pleased with the penetration growth of smart devices within our customer base. Approximately 54% of the customer base now has a smart device. Sales of our higher-end Apple and Samsung Galaxy devices are growing, and we expect to see this volume increase if we can introduce the iPhone in all markets and we see the benefits of device financing.

As an update on our commitment with Apple, we continue to work closely with Apple and have made progress on several fronts that may allow volumes to grow. We currently do not expect to purchase any additional iPhones in excess of the sales demand in the first year of the contract. We believe that our iPhone sales volumes will resolve over time, and we're comfortable that the relationship we have with Apple will allow for an appropriate resolution over the lifetime of the agreement.

Later this year, we expect to introduce the next phase of device financing to better assist creditworthy customers who purchase a high-end device. We are learning from our initial device-leasing program, recognizing that this solution deals with a narrow group of customers with some banking history and limited creditworthiness. In order for us to seize the opportunity in the marketplace, we need an affordable device solution that allows a broader range of customers to take advantage of our industry-leading service plans, while still enjoying the same high-quality smart devices they can get with a contract carrier. This solution will focus primarily on expanding device financing to approximately 2/3 of our new customers that come from postpaid plans and have some form of credit.

Our innovative Muve Music product continues to grow, and we ended the first quarter with over 1.5 million customers, a 41% increase from the 1.1 million we announced at the end of the year. With the expansion of Muve into all of our Android smartphone rate plans, approximately 30% of the Cricket customers are now on a Muve Music rate plan. And the benefits of this differentiated and enhanced customer experience are being seen through an improved 3-month survival for Muve customers approaching 800 basis points compared to a non-Muve customer.

We've made a lot of progress over the last year to improve the platform and user experience. The music industry generally regards our service as the best carrier-focused platform to deliver music seamlessly to the customer. We will see the opportunity to -- we still see the opportunity to continue to enhance the platform, and we're working closely with the industry as we do so. We recently announced our first international carrier partnership with TIM Brasil and are interested to see how the service performs there. We are committed to Muve and we see further opportunity to enhance the value of the platform to our business, as well as maximize the value for our shareholders.

Turning to Slide 24. I'd like to briefly discuss our networks and how they are operating. We now offer 4G LTE services to over 21 million covered POPs and operate robust 3G networks across our footprint, in conjunction with others nationally. Our device lineup includes 3 LTE devices, and we expect to launch up to 5 additional LTE devices in 2013. Our networks are performing well, and we see robust download speeds across our 3G and 4G networks, as we deliver -- as we work to deliver a network experience that meets the needs of our customers.

As we move into the middle of the year, we plan to evolve our network strategy to expand the use -- our use of WiFi. This will automatically provide our customers the best available network to offer the best quality and speed for their user experience. Our initial 4G markets are up and running, and we see promising early customer adoption of our 4G products and service. Additionally, as we shared last quarter, we entered into a nationwide 4G roaming agreement that will provide us the opportunity to supplement our facilities-based coverage in the second half of 2013, when appropriate devices are ready, as we continue to evaluate our options for continuing to roll out LTE. We may elect to deploy up to 10 million additional LTE-covered POPs in 2013, but also continue to explore several other attractive alternatives. We are focused on this important next step and expect to update you on our progress in the coming quarters.

We believe we have the right management team in place to drive our business forward, and our first quarter results demonstrate the progress we are making. We are seeing improvements in areas such as churn and ARPU, with more progress required in areas like gross customer additions.

I'd like to thank our employees, dealers and supplier partners for their efforts to move our business ahead. We are committed to improving the customer experience while generating free cash flow and improved margins. We have the financial flexibility needed to focus on the business and to make continued operational improvements we need to achieve our goals, with the ultimate goal to deliver the best possible value to our shareholders.

I'd now like to turn the call over to the operator for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley, Research Division

Doug, can you talk a little bit about the macro environment? We've had some commentary from some of your peers about the late tax refund season. Was there any sort of delay in sort of January, February and picking up later in the quarter that might flow through to April, May? And then Jerry, you talked about free cash flow generation. Obviously, your CapEx is back-end loaded. So it's going to be a little bit of a struggle in the next couple of quarters. But how should we think about the timing? Can you get to sort of breakeven for this year, and then positive for next year? What was the right way to think about that?

Stewart Douglas Hutcheson

Well, Simon, let me start and actually have Jerry comment a little bit about tax season. I think we all saw January be a little bit slower than it traditionally was. And I think that was fairly well communicated by the government, as it was looking at checks. We saw February and March come in line with what our expectations were. That's why we've seen some improvement in the predictability of the business, and as I highlighted. So Jerry, do you have others -- other you want to add?

Jerry Elliott

Yes, Simon, so on -- just in terms of customer activity and tax season, I think I mentioned on our prior quarterly call, that tax season was delayed by a few weeks this year. As Doug said, it did come in as expected in February, March. There was, I would say, some benefits continuing on into April, not, obviously, very long into April. But I think there were still some positive things spilled over into April. And so again, I mentioned in my comments that while the first quarter results are a heck of a lot better than we've posted in the past, we're continuing to see some good things going on in the business. And Perley, you want to talk about the free cash flow?

R. Perley McBride

Simon, on the free cash flow -- I mean, our goal as a company is to be free cash flow positive. We are driving in that direction. Yes, we do have some capital plans that we need to put in, in Q2, Q3 and Q4. By the end of the year, the plan we've put in place is to drive us to be free cash flow positive by year end. And so we just need to make that happen.

Stewart Douglas Hutcheson

We have a lot of work to do that, but we're very head-down focused on that and improving our customer experience, which we think we'll see results out of both.

Operator

And the next question comes from the line of Rick Prentiss with Raymond James.

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

Debt levels have been a big topic in telecom land lately with T-Mobile buying PCS, closing today, and SoftBank with Sprint, and then Dish with Sprint. How do you guys feel about your debt level, particularly leverage? What does it do or not allow you to do in the competitive arena?

Stewart Douglas Hutcheson

Well, the big thing that we want to start out with on that is that right now, we have no maturities. We have the cash on hand that will clear out the converts in 2014 when they come due. And then we have the next maturities in 2019. And as a management team, what we're all focused on is improving the operations, really trying to generate increased cash flow and margin performance as a result of the financing that we did, both won in fourth quarter and again, in the first quarter, that we think have really opened up our balance sheet and allowed us to focus on operating the business. Perley, do you want to add?

R. Perley McBride

Yes, I would just say I don't -- our debt levels don't really constrict us from doing anything on the -- I think where you're headed with your question. I mean, it's -- to us, it was about clearing an entire runway so we could focus on the operations of the business, with plenty of cash on hand to run the business, and we don't really have any restrictions, I guess, if you will, from our debt -- our debt covenants or levels, what-have-you.

Jerry Elliott

And I can just tell you, Rick -- it's Jerry. From the operating side, I mean, we don't ever have any discussions about, gee, we can't spend this money or that money, or make this investment or that investment, particularly around the network because of the balance sheet. So from my perspective, we certainly do want to delever over time. But -- and that will come through generating free cash flow, which I hope that message is coming through loud and clear. But it doesn't affect us from the -- on the operating side of the business, I can tell you.

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

I think one of the other things you alluded to on the call, as far as the fluid competitive environment with T-Mobile-Metro, there's been a lot of discussion of them coming out of their footprint into yours. Can you share with us what you think that will do? Obviously, you guys have competed against each other, probably in Philly and Vegas, as far as the most obvious spots, but what do you think the impact will be, and the time frame of when we might see it?

Jerry Elliott

Rick, I think it's -- instead of us guessing what they're going to do, it's probably more appropriate for them to talk about what their plans are. We have assumed that they're going to get pretty aggressive in our footprint. So we've been trying to do things, in particular around the customer experience, to try and get ahead of that and anticipate that. We've done some things on the pricing plans for the first family plans that I think the prepaid industry has ever really had, we introduced a couple of weeks ago. So we're trying to get out ahead of it. I don't -- I mean, you and I have been around the wireless industry a long time. I've always thought it was pretty intensely competitive, so I'm not sure that's ever going to change. And we just -- we assume that the competition will get more intense as time goes by. That being said, I think in a pretty intensely competitive environment, our first quarter results do provide some evidence that we can compete effectively and that the business is performing better.

Operator

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

James G. Moorman - S&P Equity Research

First question, in terms of the Muve Music plan. With the talk of potentially spinning it out, can you just give us a little bit more detail on how you guys see this helping with revenue in terms of the near-term, with what you've done with the carrier in Brazil and what you expect to do also, and how that might work in terms of the spin-off? And then also, if you could talk -- you talked about improving the financing plans later this year. Is there anything you plan to do near-term with the launch of the Galaxy S 4?

Stewart Douglas Hutcheson

Let's see. We'll take a few pieces. Right now, let's start with the Galaxy S 4. I think the piece that we all feel is that -- that we're pleased with, is we've now moved ourselves, that we're part of the initial launch partners on a device that we think is likely to do fairly well. And so our access to getting the types of devices that we continue to see consumers want to take, continues to improve and we feel good about it. In the last 6, 8 months, there's been some real fundamental improvements in the Muve Music business. And let me just recap a couple of those. The first is the size, the ability to grow the customer base as we went all in on that has been outstanding. As we've watched customers use it, I mentioned today, over 1/2 of them use the music service. If they use the music service 3 months after they start with us, there's a substantially better, by the 800 basis points, 8 percentage points better lifetime with them after 3 months. So it materially addresses the -- the stickiness of it has come out. And we see that -- have seen a real improvement in that. We continue to, on our own, be looking for how do we also get more revenue benefit on that and believe we have work to do on that. Over time, we believe that this is a business that probably deserves to be out on its own and have made a commitment to continue to pursue that. But we have so much positive traction in us getting the business improved right now that, that really has been job 1, because what we're seeing is, I think some fundamental good things out of it. When we have an update on that, both as we think about other carrier partners to work with the business and how we give that business a little bit more room to grow on its own, we'll be back to you. I don't have any updates as of today, but it's an area that we've committed to be looking at and will continue to keep looking at.

Operator

The next line comes from the line of Shing Yin with Guggenheim.

Shing Yin - Guggenheim Securities, LLC, Research Division

I wanted to ask you about your views on the spectrum value within Leap. In previous calls, you highlighted that you actually have a fair amount of spectrum that's not in use today. You gave some estimates of what you believe the spectrum is worth. I just wonder if there's an update on that, given some of the recent spectrum activity that we've seen in the market. I think most notably in the last month, we learned that Verizon have put out a bid for a fair amount of spectrum. It's thus indicating that even some of the large carriers out there may be in need of additional spectrum. So in light of some of the recent developments, could you just kind of give us an update on how you view the value of your spectrum and whether -- what the prospects are for potentially selling some of your spectrum?

Stewart Douglas Hutcheson

So in the last 2 or 3 calls, we gave you an overview of our spectrum position. And we didn't do that this call because there's not been any material changes in that. And perhaps after the call, Amy can talk a little bit about any questions around that. But I don't think there's a lot of material advancement different than what we had discussed. The industry right now has really been focused on letting a few transactions work their way through. And I think those are large and notable. And I don't know that I need to talk about them in particular. And so thinking about what you do with your spectrum when a lot of the marketplace is busy doing other things causes you to want to be patient. And I think that would be the way that I would tell you where we are. Yes, we do have spectrum available. That spectrum plays, and not only is it available as an asset to consider to monetize, but it's also available as an asset to provide access to 4G services and a whole variety of other things. And we believe, as the year progresses, that those opportunities may present themselves and we'll intend to be fluid, and try and make sure that we take appropriate moves to develop the enterprise and provide shareholder value.

Shing Yin - Guggenheim Securities, LLC, Research Division

Are you able to tell us whether you have received any indications of interest in your spectrum?

Stewart Douglas Hutcheson

We don't have anything to discuss today on anything in particular. So I don't have any updates today.

Operator

The next question comes from the line of Brett Feldman with Deutsche Bank.

Brett Feldman - Deutsche Bank AG, Research Division

You've got a little bit of experience now under your belt as an LTE network operator. Of course, you're still continuing to evaluate how you're going to expand the network or your capacity going forward. I'm just curious, what have you learned now that you actually observed traffic on your network? For example, are you -- do you think it's increasingly important that you have as much LTE traffic on net on your own spectrum? Or are you getting an increasing degree of comfort that it is actually possible to solve this problem through partnerships?

Stewart Douglas Hutcheson

Well, I think -- we think all the alternatives are still open to us. That's what I alluded to. One thing that we have underutilized, and I want to be careful, this isn't the solution, so I don't want to inadvertently present this as anything more than an element, is we have realized that there's more that we can do with WiFi. You'll see us expand and move more traffic through that channel, as others have done. We do quite a bit already. But we think that there's a chance to expand that. I know that some of the national carriers may be over 50% on that channel. And I know we have a lot of growth that we can look to do. We're much lower than that. The other area is that we are -- we've really been focused on putting in LTE where we see the most traffic likely. So not -- and believe that that is likely going to be pretty effective for us. We're early. We're a couple of quarters into our launches, and we'll keep our eye on that. And we're trying to gain that experience before we decide how we go forward with the next markets and what makes sense. And then again, it was alluded to with a little bit of the questions with the spectrum, we'll look at what we do ourselves and what we partner and look for other solutions to get to the best 4G footprint available. I want to remind people that we have signed a national 4G roaming agreement, and that we will be rolling that out in the second half of the year as well. I know that there's been some consternation or comments made that we don't have access to 4G. And I just want to remind people that, in fact, we do. And we are rolling it out. We gave you the timeline in the second half of the year. That will be supplementing our facilities footprint, with that in the second half of the year. So there is a lot of 4G activity for us. And we'll continue to update you as we make progress.

Brett Feldman - Deutsche Bank AG, Research Division

And that deal does let you roam within your own markets. That's what you mean by national, correct?

Stewart Douglas Hutcheson

Yes, when we say national, it's a national footprint. How we would use it inside our own markets versus out and such we'll deploy on a case-by-case basis. But yes, it's a roaming agreement. So it has -- it would include the entire available footprint, yes.

Operator

The next question comes from the line of Michael Rollins.

Noel Culhane

It's Noel Culhane here for Mike. A couple of questions. Firstly, can you discuss how the slowdown in the growth-side environment, how much of it is attributable to a shift to higher handset ASPs versus a maturation of the prepaid category? And secondly, if you could expand upon the types of solutions to improve the out-the-door selling price that you expanded upon in the second half of the year?

Jerry Elliott

It's Jerry. I'll be happy to take those. So I -- I'm not smart enough to figure out exactly which piece contributed how much to the gross additions. I mean, we've been seeing that for the last few quarters. And as I talked about in my script, I mean, it's a number of different factors we think are contributing to it. Certainly, the maturation of the -- not just the prepaid industry but the whole wireless industry. But if you look at postpaid adds, they're all coming from tablets, basically these days, or really low ARPU devices. And certainly, that's one factor. We are in an ongoing balancing exercise between profitability and volumes. And so that will just -- every day, we are trying to continuously find that balance. And then we've been far less aggressive on customer win back activity than we have in the past. And then you have a device, the average device -- the device average selling price has increased pretty significantly. So all of that is trying to, again, achieve growth, but profitable growth. And driving free cash flows. So what we are, I guess, more focused on is net additions. And so in an industry that's matured, in an industry where it's really about taking market share at this point, keeping your customers is far more important than it used to be in this industry. And by the way, just -- this is a financial call, keeping a customer is far more profitable than spending the money to go out and get a new customer. So that's what we've been trying to spend all of our time and energy around, in particular, through improving the customer experience. So as always, it's a bunch of different things. In terms of the financing alternatives for consumers, right now, we've got -- we've had a product in the marketplace since Black Friday. That's a pretty narrow, limited product, I would say. It really is suitable or appropriate for a fairly thin slice of our customer base. In the second half of this year, you'll see us introduce some new financing programs that will make financing options to -- available to a far larger number of both existing and potential customers. We're hoping, back to your gross add question, that some of those financing options are going to be available. It will help us increase gross additions as one of the several things we're trying to do to increase gross additions. But again, profitably. So if you would, just stay tuned on the kind of specific details of the new financing options. I know there's going to be, I think an increasing amount of activity in the device financing area for the industry as a whole, as some others have introduced a few things. And we've got quite a number of things that we'll be introducing and talking about more in the second half of this year.

Operator

And the final question comes from the line of Michael Bowen with Pacific Crest.

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

A couple of questions. Your upgrade rate, I think it was 12%. And as the new devices come on board, I think you mentioned you got 5 new LTE devices, including the S 4 coming. How should we think about that? And then I guess coupled with that, can you give us any thoughts on when we might be looking to cross back over into positive net add territory?

Jerry Elliott

Yes, I can take those. In terms of upgrades, I mean, yes, as we've significantly improved the quality and attractiveness of our handsets, we do see more upgrades. There's no question. And you can look at upgrades from a couple of different perspectives. One of the things that people don't necessarily think about when they think about upgrades, in the economics of upgrades, is that at least for us, a customer who upgrades stays 20 percentage points longer than a customer who does not upgrade. So while there is the subsidy issue on the initial upgrade itself, there's a significant longevity and survival piece associated with upgrades, which, again, in the context of a much more mature industry, keeping customers longer in the flow-through of the financial results from that is critically important. We don't give guidance on net adds. We obviously are extremely close in the first quarter to a breakeven on net adds. There's obviously some seasonality in our business that can move the net addition numbers around pretty dramatically. But as we continue to try and drive churn even lower than where it was in the first quarter through our customer experience, work and then try and again, find some ways to improve the activation side, all on a profitable basis. We're certainly driving toward getting back to growth on the customer side.

Stewart Douglas Hutcheson

And one additional piece. On the upgrades, on absolute units for both the fourth quarter and the first quarter, as you look at those on prior year as a percent of the base, there wasn't much change on those. So to a degree, the upgrades have impacted our financials, which isn't significant, really. That has been around, the move to the higher-quality devices. And not only to Jerry's point do they have at 3 months a 20% dramatic survival rate improvement, but we now are far enough into these better devices that we see they have a much longer lifetime to the device. And so we see a lot more units of profitability, and those customers, even if they upgrade, the probability that that handset gets passed on and used is higher. So likely, you're thinking that there's more revenue units available. With that, Amy?

Amy Wakeham

Great. Thanks for joining us for our call this afternoon. We look forward to updating you on our progress at our next quarterly conference call. Any further questions can be directed to the Investor Relations department. Operator, I'll go ahead and turn it back over to you to close the call.

Operator

Thank you. 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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