Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Breakfast

Leap Wireless International Inc. (LEAP)

Q2 2007 Earnings Call

August 7, 2007, 5:00 PM ET

Executives

Jeanie Herbert - Director of IR

S. Douglas (Doug) Hutcheson - President, CEO and Director

Amin Khalifa - EVP and CFO

Albin "Al" Moschner - EVP and Chief Marketing Officer

Analysts

Romeo Reyes - Jefferies and Company

Phil Cusick - Bear Stearns

Brett Feldman - Lehman Brothers

Simon Flannery - Morgan Stanley

David Barden - Bank of America

Ric Prentiss - Raymond James

Chris Larsen - Credit Suisse

Tom Lee - JP Morgan

Michael Rollins - Citigroup

Anna Goshko - Banc of America

Jason Armstrong - Goldman Sachs

William V. Power - Robert W. Baird & Co.

Presentation

Operator

Great day ladies and gentlemen and welcome to the Second Quarter 2007 Leap Wireless International Earnings Conference Call. My name is Katina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms Jeanie Herbert, Director of Investor Relations. Please proceed.

Jeanie Herbert - Director of Investor Relations

Thank you, Katina. Good afternoon and welcome to Leap's second quarter 2007 conference call. This call is being recorded and will be available for playback in the U.S. through the close of business August 14th by calling 1-888-286-8010. Callers from outside the U.S. will need to dial 1-617-801-6888. The passcode for both calls is 20884537. This conference call is also being webcast live and will be available for replay on the Investor Relations section of our website at www.leapwireless.com through September 7th.

Joining me on the call today to discuss our second quarter results are Doug Hutcheson, our President and Chief Executive Officer and Amin Khalifa, our Executive Vice President and Chief Financial Officer. Following our prepared remarks, Katina will come back online with instructions for the question and answer portion of the call. Al Moschner, our Executive Vice President and Chief Marketing Officer and Glenn Umetsu, our Executive Vice President and Chief Technology Officer will join Doug and Amin for the question and answer session.

As used in today's conference call, existing markets refers to the company's markets in operation as of 12/31/05. New markets refers to those markets launched or acquired after 12/31/05, but des not include any Auction 66 market. During our call today, we will discuss some non-GAAP financial measures. For a GAAP reconciliation of non-GAAP financial measures, please see the Financial Reports page of the Investor Relations section of Leap's website at www.leapwireless.com. Statements made today that are not historical in nature includes statements about future events and performance and statements including words like expect, plan, intend and similar terms 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, 2006 and in our other publicly filed reports including our Form 10-Q for the quarter ended June 30, 2007 which we plan to file shortly.

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

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Thank you for joining us this afternoon. As we complete the first half of 2007, we have crossed two major milestones in the plans we outlined back in 2005 to double the size of our business. First. this quarter we completed the launch of our remaining new markets, bringing the business to nearly 51 million covered POPs. While that itself is a significant accomplishment, more importantly, this quarter our new markets in aggregate began to contribute positive adjusted OIBDA even though the average weighted life of these markets is less than 10 months at quarter end.

Also in the second quarter, we had several additional major accomplishments. The company launched new service plans across most of our markets which were well received by both new and existing customers. To enhance customer value and give us a continuing attractive competitive position, we added three unlimited text, picture and instant messaging to all of our service plans. We completed a senior notes offering that raised approximately $71 million in proceeds. And in June, the company held its first Analyst Day in many years, outlining our plans for the future. Throughout today's call, we will be highlighting and reinforcing some of the key topics that we discussed at that meeting.

Second quarter results demonstrate our continued ability to move our business ahead in a focused manner. In terms of our performance, we added 127,000 net customers during the quarter, more than double the amount we added in the second quarter of 2006. Of significance is the fact that we grew net customer additions in the existing markets by 30% in the first half of the year when compared to the same period last year. Service revenue reached approximately $350 million, driven by an increase in weighted average customers and continuing growth in ARPU. And our adjusted OIBDA for the quarter was approximately $115 million, driven not only by our performance in the existing markets, but by the contribution from our new markets.

The progress we have made in our business is further demonstrated in our results for calculated contribution per user. CCPU is a measure of customer economics that demonstrates the approximate net margin we realize per customer each month. For the second quarter, CCPU was $17.84, an improvement of approximately $1.18 from the second quarter of last year even as we supported the costs associated with expanding and optimizing the company's footprint. Our existing market CCPU was $20.37, an improvement of $2.05 from the prior year of quarter.

As we discuss today's results, this quarter represents an important transition point for the business. Now that we have completed our new market launches and these markets have begun to contribute positive adjusted OIBDA in the aggregate, this will be the last quarter in which we will separately characterize the results of our existing markets and our new markets.

As we said at our Analyst Day, 2007 is a year of optimization for our company. Our focus is to increase the opportunity for growth by continued efforts to provide high value service plans, expanding coverage in our operating markets, moving ahead on the Auction 66 build outs and evolving our higher speed data offerings, all along maintaining relentless attention to our cost leadership position. In our outlook today and going forward, we will provide insights into the impact and contributions that these activities will have on our business.

After Amin reviews our financial results, I will return for a further discussion of our customer activity, provide an overview of our major new initiatives and an update on our outlook. Amin?

Amin Khalifa - Executive Vice President and Chief Financial Officer

Thank you, Doug. We are pleased with our second quarter results. We have completed the new market launches and believe that we have put a growth engine in place for our business. As we look at the optimization opportunities and potential growth ahead, we believe that we are in a good position for continued success. Through mid year, the company continues to deliver improving adjusted OIBDA, robust customer growth and improved margins.

Second quarter's service revenues were $350 million, up 52% compared to the same quarter last year. The increase was driven by two key factors: First, a 45% increase in weighted average customers from new market launches and existing market growth; second, a $2.16 increase in ARPU over the prior year quarter due to strong uptake of our higher end service plans and our return to pay-in-advance billing for new customers.

Equipment revenues for the quarter were $43 million, an increase of 16% or $6 million compared to the same quarter last year. Increased revenues from a 68% increase in handsets sold were largely offset by increases in promotional incentives for customers and an increased shift in handset sales to our exclusive indirect distribution channel. Cost of equipment was $81 million, an increase of $29 million over the second quarter of 2006 due to the increased number of handsets sold. Cost of service for the quarter was $90 million and decreased by 0.5% as a percentage of service revenues over the second quarter of 2006. Variable product cost increased by 2.3% of service revenues due to increased customer usage of our value-added services. We expect that this trend will continue as more of our customers choose our higher end service plans and we also expect that the increased revenues from these plans will more than offset the increase in variable product cost.

Network infrastructure cost declined by 2.1% of service revenues compared to the prior year quarter, primarily because of a reduction in liabilities for cell site remediation costs and the benefits of scale. During the quarter, we negotiated amendments to agreements which reduced our liability for the removal of equipment on certain of our cell sites at the end of the lease term. This change resulted in a net reduction of cost of service of $6 million or 1.7% of service revenues and will also slightly reduce go forward network expenses.

Sales, marketing and general, administrative expenses were $113 million in the aggregate and decreased by 3.4% as a percentage of service revenues over the second quarter of 2006, due primarily to the reduced market launch expenses, benefits of scale from our new markets and increasing revenues.

Stock-based compensation expense before tax was $6 million for the second quarter of 2007 compared to $5 million for the second quarter of 2006.

We delivered $115 million of adjusted OBITDA, up from $78 million in the prior year quarter and up from $81 million in the first quarter of 2007, reflecting expected improvements as we grew our business and generated positive contributions in the aggregate from the newly launched markets. In the second quarter, our new markets delivered $3 million of adjusted OBITDA contribution and we expect that to continue to grow in future quarters.

Operating income for the quarter was $37 million compared to operating income of $16 million for the second quarter of 2006. The increase in operating income from the prior year quarter primarily reflects the increase in our revenues and the leveraging of our operating expenses through the benefits of scale.

The company achieved net income of $3.2 million compared to net income of $7.5 million for the corresponding quarter of the prior year, reflecting the impact of higher interest expense associated with financing activities and higher income tax expense. Compared to the net loss of $8 million in the first quarter of 2007, net income in the second quarter improved by $11 million. Diluted earnings per share for the quarter was $0.05.

In terms of capitalized interest and tax for 2007, our capitalized interest for the year should be between $45 million and $55 million, which has been included in our capital outlook. Our projected tax expense for the year is estimated to be between $40 million and $48 million assuming we adopt a potential change in tax accounting method that I will describe in a minute. This amount consists primarily of the deferred tax effect of the amortization of wireless license and tax goodwill. Similar to prior periods, we projected our cash taxes will be minimal.

We have continued to record a full valuation allowance on our deferred tax assets. At June 30, 2007, the company has cumulative pre-tax income of approximately $50 million since our emergence from bankruptcy in August of 2004. Accordingly, we will continue to closely monitor the positive and negative factors concerning the likelihood that our deferred tax assets will be recovered to determine whether the valuation allowance should be released. We expect to remain at near break even from a pre-tax income perspective for the remainder of 2007. We are currently evaluating a change in tax accounting method which would accelerate certain tax deductions related to the amortization of wireless licenses and increase our net operating loss carry forwards. We expect to complete our analysis of the potential tax accounting method change during the third quarter. Due to this potential change, deferred tax expense and net loss may increase in the second half of the year.

Capital expenditures were $106 million for the second quarter, primarily due to ongoing investments associated with operating our business, continued build out of our new markets, implementation of data network upgrades to EVDO and capitalized interest of $11 million.

Now let's review our key operating metrics. In the second quarter, ARPU was up 5% over the prior year quarter to $45.13. We saw customer migration to our $50, $55 and $60 service plans with approximately 90% of all new customers this quarter adopting the $45 and above service plans. As a result, build ARPU for new customers increased 8% from the prior year quarter. However, this growth in new customer build ARPU was somewhat masked by the seasonal rhythms in our business and the impact of customer deactivations associated with the less-tenured customers added in our recent market launches. The company disconnects customers 30 days after a bill is due but not paid for service, one of the shorter periods for wireless carriers. The company does not recognize revenue associated with the bill until payment has been received and services provided to the customer. Because customers who have not paid their last bill and have yet to disconnect service are included in our calculation of weighted average customers, ARPU tends to appear lower during those quarters in which we have significant disconnect activity. The effect is likely to continue through the rest of 2007, masking the underlying improvement we expect to see in ARPU overtime.

With the launch of the Charleston, Rochester and Raleigh markets in the second quarter, our customer acquisition expenses were as expected at $180. As we move to the third quarter of 2007, we expect CPGA to about $180 again, reflecting the normal seasonality of our business. We achieved a cash cost per user or CCU of $19.55 for the second quarter which included $1.39 in operating cost associated with new market development. Compared to the prior year quarter, CCU in our existing markets was relatively flat. During the quarter, we experienced increasing leverage in our operating expenses from customer growth and a benefit from the reduced remediation liability discussed earlier offset by the increase in the variable product cost from our value-added services. Going forward, we continue to expect our CCU in coming quarters to benefit from the advantages of scale from newly launched markets offset by the costs associated with increased customer use of these value-added services. We expect CCU to be about $21 for the third quarter of 2007.

On the network and systems front, our business planning for Auction 66 is nearly complete. In fact, we recently signed agreements with infrastructure providers for both our Auction 66 markets and existing footprint expansions. We expect to launch between 20 and 28 million new covered POPs in 2008 including both the planned coverage expansion and Auction 66 market development. We continue to expect capital expenditures associated with the Auction 66 build out to average $28 or less per covered POP. We build our networks for efficiency and capacity and they are now prepared for the increased opportunities in data services, EVDO capabilities embedded in our networks and can launched once applications and devices are available.

We completed a major upgrade to our enterprise resource planning system during the second quarter which included improvements in our procure-to-pay and asset management functionality. This significant project was completed on time and budget. Other systems are also undergoing enhancements for the growth ahead including our reporting and activation systems. We also continue to review long-term solutions for our building system.

On the liquidity front, as of June 30, 2007, total unrestricted cash, cash equivalents and shot-term investments were $685 million, an increase of $356 million during the quarter. After adjusting for the $371 million in proceeds from our offering of senior unsecured notes in early June, we generally broke even on cash generated during the period. All in all, the company is performing well while we are preparing to double our covered POPs beginning in 2008.

I would now like to turn the call back over to Doug.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Thank you, Amin. We continue to operate in a very competitive industry, something we reflect upon daily. Last April, we again led the industry by offering free text, picture and instant messaging in all of our service plans to fill our customers voice, messaging and data needs. Even as we have seen other unlimited concepts for voice and messaging spread with the industry, we continue to make progress in driving further value and bringing new customers to our business.

Also, we believe the business has to date absorbed the effects associated with financial pressure on sub prime borrowers and rising gas prices. However, we do not discount the potential future impact of these factors and continue to monitor macroeconomic trends as we have an economically sensitive customer base. We continue to operate on the basis that we'll be opportunistic during those time periods where net customer additions are more readily available and we'll be patient in other periods when conditions indicate customer activity may be reduced.

In the second quarter, over 127,000 net new customers selected our services, a 112% increase over the 60,000 customers added in the second quarter of 2006 after adjusting for the sale of Toledo and Sandusky, Ohio. Net customer additions in the second quarter for new markets totaled approximately 115,000, a 121% increase over the same period last year. The existing markets added nearly 12,000 net new customers in the second quarter, an approximately 60% increase over the previous year quarter and an approximate 30% increase year-over-year for the first half of the year. As we look to third quarter of 2007, we again expect the business to experience its normal seasonality with respect to gross additions and to be further influenced by increased customer deactivation. These expectations are in contrast to the third quarter of 2006 when we enjoyed the benefits of a large number of new market launches such as Houston, San Antonio, Austin, Louisville, Lexington and Cincinnati. As a result, we expect net customer additions in the third quarter of 2007 to be in the range of 40,000 to 120,000.

Churn for the second quarter was 4.3%, up by 0.7% from the prior year quarter and in line with our expectations based on seasonality, upgrade activity and our increasing number of less-tenured customers. Over the past year, we have noted that we expected churn to increase and the business would over time return to more traditional levels. Most recently at our Analyst Day, we provided additional information regarding the two principal reasons for this trend. First, we continue to see customers upgrade their handset by buying a new phone, activating a new line of service and letting their existing line of service lapse, which accounted for 0.4% of the 0.7% increase. We expect this trend will continue for several additional quarters and believe that this upgrade activity is a positive for the business since these customers choose to stay with Cricket. As previously disclosed, we are implementing a new customer lifetime value management system later this year. This system will provide the business with additional information and customer management tools that we can use to both manage and direct this customer upgrade activity.

Second, the large number of new customers from our recent market launches has resulted in a significantly less-tenured customer base. In fact, average customer tenure has dropped by approximately 20% since the second quarter of 2006. We recently provided information about the deactivation characteristics of our customers by tenure and highlighted that lower tenured customers have up to double the activation rates of some of our more tenured established customers. The increase in churn that we reported today is a direct byproduct of the success we have enjoyed in our newly launched markets and the addition of correspondingly less-tenured customers. To the degree that new customers follow the patterns of customers who have been with the business over the past several years, we anticipate that churn from these customers will decline as the newly launched markets mature. Viewed with that backdrop, the business continues to see core churn improve which we believe that indicates that our efforts are addressing many of the conditions that we have discussed that may cause churn.

As we look to the third quarter, we expect churn will be between 4.9% and 5.4% and we would summarize our expectations for churn with these three observations in mind. First, consistent with normal seasonal rhythms, Q3 is typically our highest churn quarter. Second, we anticipate an increasing number of customers will upgrade their handset by buying a new phone, activating a new line of service and letting their existing line of service lapse. And third, the business will continue to absorb the increased churn from the large number of less-tenured customers added from our new market launches. We expect churn to trend downward again as the new markets mature over the next several quarters. However, once our new Auction 66 markets reach critical mass, we may see the effect of less-tenured customers deactivating at a higher rate for some time period with their launches.

The company recently outlined several significant initiatives including our coverage expansion, Auction 66 new market development and efforts around our higher speed data service offerings. The company expects to add nearly 600 new cell sites over the next year to expand coverage to better meet the needs of our customers. We expect that this will not only lead to additional new customers but will also help reduce churn and lower the cost of off-network calling. For certain markets, these expansion plans represent the first major coverage enhancement since the market's initial launch over five years ago. The expansion process we have deployed will be disciplined and thoughtful as we have demonstrated on previous significant investments. After the 110 million of new licensed POPs that we and Denali purchased in Auction 66 and the overlay of an additional 10 megahertz of spectrum in many of our markets for data offerings, we have set the stage for another significant round of expansion. We now have spectrum in 35 of the top 50 markets, the highest number of any carrier in the unlimited space. We estimate that our Auction 66 spectrum portfolio includes up to approximately 85 million incremental covered POPs in markets suitable for our service, approximately 50 million that we are currently developing plans to build out and another 35 million which may be developed in conjunction with others are used to optimize the business.

As I said before, our Auction 66 markets reflect the characteristics of our better performing existing markets including: first, an appropriate footprint either on a standalone basis or in close proximity to other markets; second, an ethnically diverse potential customer base and third, attractive employment prospects. As a result, we expect to achieve attractive terminal penetration rates in our new markets, rates that we expect to be similar to the rates that may be achieved by others who operate our business model. However, we believe that predictions of long-term penetration rates should not be the focus of investors as there are significant opportunities and challenges that will need to be resolved before we reach terminal penetration. We expect to continue our focus on the business we had built and on the development of new markets over the next several quarters. We will concentrate on our execution to ensure that the new markets are launched on time and budget and that they contribute to building the company's financial performance.

With respect to Auction 66 spectrum clearing, we continue to await information from the government regarding how their current usage of the spectrum will be transitioned or eliminated. While we do not have comprehensive details at this point and continue to work at all levels to obtain the information, we are making progress. We believe that we have improved visibility regarding the availability of the cleared spectrum, allowing us to move ahead with our planned market launches in the first half of 2008. Additionally, we have seen further progress on the development of AWS capable handsets and are working together with our suppliers to develop an attractive portfolio of handsets also set for the first half of 2008. As a result of these developments and reflected in our outlook, we have begun to increase our activities to move ahead on our planned Auction 66 build out.

The final initiatives we recently discussed is our initial efforts to develop higher speed data products. Over the past two years, the company has seen substantial benefit from our continued effort to provide data services. Another recent data related success involves our introduction of ring back tones in early July. While it is still early, it appears we will have achieved industry typical penetration levels for this product within the first month of launch. We expect to launch additional data services in the second half of the year for our customers. Another development in the higher speed data here revolves around our introduction of a broadband product. This summer we began trials and this fall we expect to begin a more extensive market test to increase our understanding about customer needs. As always, we intend to follow a disciplined approach as we determine the viability of this product offering and decide if and when we will offer these services in additional markets. At this time, we have not yet determined the extent of our participation in the 700 megahertz auction, which is now expected to occur in January of 2008. We are studying last week's FCC order regarding the auction and are evaluating its effect on our decision to participate. We expect to update you on our plans for the auction at our next conference call.

Let me turn to our outlook for the third quarter full year 2007 and for the first time our initial outlook at 2008. We will now report on a combined basis our results for all the markets in operation at the end of the second quarter of 2007. As we discuss our outlook, we will report the performance of the major initiatives we are developing similar to what we have done over the past several quarters with Auction 58 and related new markets. The major new initiatives included our plan coverage expansion, Auction 66 market development and the new higher speed data products as discussed.

In our earnings release today, we provided an adjusted OIBDA outlook for the third quarter and outlined our initial perspective on the financial effects of our major new initiatives. We expect third quarter adjusted OIBDA will be between $110 million and $120 million for our operating markets, reflecting the continued improvements year-over-year in our average weighted customers and improvements in ARPU from our service offerings. This outlook does not include $10 million to $15 million in negative adjusted OIBDA that we expect to occur in conjunction with these major new initiatives. Taking into account the effect of these initiatives, we expect total company adjusted OIBDA to be between $100 million and $110 million for the quarter. Looking ahead for the full year 2007, adjusted OIBDA is expected to be between $430 million and $460 million for our operating markets. Again, this outlook does not include $25 million to $35 million in negative adjusted OIBDA we expect to incur in connection with these major new initiatives. Taking into account the effect of these plans, we expect total company adjusted OIBDA to be between $400 million and $430 million for the full year. Next quarter and thereafter, our outlook will include costs associated with these major initiatives.

Capital expenditures for 2007 are expected to be $280 million to $320 million for the existing business, the cost associated with our launch markets to date and the EVDO network upgrade. In addition, the company expects to invest $200 million to $250 million to support the major new initiatives we have outlined. Therefore, including total... therefore total 2007 capital expenditures are expected to be between $480 million and $570 million including capitalized interest.

Today, we provided our first outlook for 2008. We anticipate further adjusted OIBDA growth from our existing bills business with some of our growth offset by the effect of the major new initiatives. We expect adjusted OIBDA will be between $550 million and $650 million, which includes the impact of the planned coverage expansion and Auction 66 market launches. This outlook does not include any impact of the higher speed data service offerings beyond the initial trial markets launched in 2007. We expect capital expenditures to be between $650 million and $850 million in 2008, including the investments associated with our existing business, the coverage expansion, the Auction 66 market launches and the initial higher speed data service trial. This excludes capitalized interest.

In closing, we expect to continue to enhance our value proposition by introducing expanded functionality and capabilities into our service offerings that meet our customers need. As we have said time and again, unlimited is our mantra and it drives our brand promise. We expect to achieve continuing customer growth and strengthening financial performance in the coming quarters as a result of a persistent and disciplined approach to meeting our customer needs. We have completed a major set of milestones around the business expansion that we just started over two years ago. With the new initiatives outlined today, we are poised for continued growth. I want to thank our employees, partners and suppliers who have helped us achieve this success and are supporting our future efforts.

I would now like to turn the call over to our conference call host Katina. Would you please come back on the line to review instructions and open the call for Q&A?

Question And Answer

Operator

Yes, sir and thank you. [Operator Instructions]. Your first question will come from the line of Romeo Reyes representing Jefferies. Please proceed.

Romeo Reyes - Jefferies and Company

Hi, good afternoon. A couple of quick questions here. First, with respect to Q3 churn guidance, if you can give us a sense of that jump between I guess Q3... Q2 and Q3 seems fairly dramatic here. Give us a sense of how much of that is handset upgrades and also just the fact that you have less-tenured customers. And I guess the third element would be the seasonality. I don't if you can break out the delta in those three buckets, but that will be very helpful. And then secondly, with respect to the 2008 guidance on EBITDA or OBITDA rather, how much of that... how much in new initiative EBITDA burn are you anticipating from those $20 million to $28 million covered POPs, AWS covered POPs that you expect to launch? Should we assume that most of those are launched just towards the latter half so that there isn't a lot of burn associated with that, or can you give us a little bit more color; that would be helpful?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Sure. Well, let's start if you want to look at churn year-over-year, second quarter was up about 0.7 year-over-year. If you look at where we are at for the third quarter and you look at where we are at last year versus this year, it's fairly close in the same range. We think we'll see a little bit more upgrade activity and we'll see that continue for a little bit longer, and then we'll continue to work through the subscribers associated with less-tenured customers. We think that will probably take another 3 or 4 sometime middle of next when you'll really see that mature its way through. So I think you see a jump that's similar to what we saw in second quarter and we expect to see that in third quarter. And it's consistent with what we have expected to see. We have flagged that we would see higher churn as these younger customers come on as we move ahead.

As far as OIBDA, we expect that the new initiatives, and we'll update this, so this is an approximation, represent about $100 million related to the launch of new Auction 66 markets. That probably has a fair amount of range. We actually think we'll see some launches in the first half of the year. And remember, we tend towards seeing a fair amount of the burn associated with new market launches fairly quickly after launch, and so we are expecting that we'll move through a fair number of POPs as we move through the year.

Romeo Reyes - Jefferies and Company

Okay. And then just a quick follow up on Q3 ARPU, maybe for either Amin or Doug, are you guiding to a lower churn -- sorry, the lower ARPU for Q3 here based on your comments Amin? You said that you expect as the denominator becomes smaller because of the some of customers who are hotlined, your ARPU hasn't... I guess downward pressure when you have high churn period. As you see that in Q3, would you expect a decline in ARPU as well?

Amin Khalifa - Executive Vice President and Chief Financial Officer

No, we do expect that the underlying ARPU is on an upward trend right now as I spoke about before. So ARPU should increase throughout the rest of the year, but the effect will be muted. It won't be as strong as one would expect because of the calculation with the disconnects that we talked about earlier.

Romeo Reyes - Jefferies and Company

Is it going to be flattish or up on a reported basis Amin?

Amin Khalifa - Executive Vice President and Chief Financial Officer

It should be up.

Romeo Reyes - Jefferies and Company

Okay, thank you.

Operator

Your next question will come from the line of Phil Cusick representing Bear Stearns. Please proceed.

Phil Cusick - Bear Stearns

Hi guys, thanks for taking my question.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Hey Bill.

Phil Cusick - Bear Stearns

I wonder if first, we could talk about the macro environment overall. You made a comment on your release about the economic environment and if you could talk about what you are seeing in terms of sub prime if anything and how you see things going forward just to start.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Yes, certainly, a lot people asked about it and one of the comments that I made in the prepared part is we seem to be comfortably absorbing that. So I don't think we, at this point, have seen any meaningful impact in that area. We have seen the normal... we see some market fluctuation as we watch gas prices move around, but we haven't seen anything that's been materially different than what we have seen before. So at this point we are feeling like that part is moving through fairly well for us and don't see large macro environment affecting us. With that said, we are always... we always watch that and we keep watching, which is why I flagged that we are part of that environment. To the degree there is material changes, it may affect our business.

Phil Cusick - Bear Stearns

Okay. Second, on the churn side, you break out net adds between the two different types of markets, but you don't break out churn. I wonder if in this case we can at least talk about a relative increase quarter-to-quarter in the core markets, because the big delta from 1Q to 2Q in the overall, I would think, given your commentary was driven by the really big ramp in the new markets where you have got a younger customer base. So can you give us a relative increase quarter-to-quarter from those core markets?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Yes, the core markets continue to perform as we have seen them perform typically. In fact they have absorbed and we went through that... had gone through, have absorbed even the upgrade activity and performed at about the same level, which is why I pointed out that we have actually seen improvements in our core churn levels.

Phil Cusick - Bear Stearns

On a year-to-year business?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Yes. In fact, all of the impact that we are seeing, which is why at our Analyst Day we actually put the charts up and asked what to do people we most of the increase that you have seen is in the new or in fact all of the increase you have seen is in the new markets that is related to customer tenure and it's why we think it passes and works its way through.

Phil Cusick - Bear Stearns

Okay. And I apologize if you said... there was a lot of information on the call. And then from there, I wonder if we can talk about the overall... you talked again about the relative increase year-to-year in churn from upgrades. Can you give us some idea as to what you think that is in the overall churn level, and then I will stop?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Well, in the first quarter it was a 0.3% increase, this quarter it was 0.4 year-over-year increase. It's been about a 0.3%, 0.4% year-over-year increase and I think we believe the upgrades are value enhancing for us so we decided hence we have been talking again for the last several quarters that we wanted to absorb that impact. What we intend to do is roll out some systems at the point of sales that will give us some new tools and it will allow us to apply some things at the point of sale that might allow us to adjust customer behavior on that, but I think we feel pretty good right now, that customers that are choosing to upgrade their handset and staying with us. We want to continue to encourage that behavior. So we will be fine tuning the behavior not trying to eliminate it.

Phil Cusick - Bear Stearns

I am sorry. Let me just make sure I ask the question. Can you give us within the 4.3% what you think that upgrade activity actually is, that given as [inaudible].

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Total for the period was 0.7% for period.

Phil Cusick - Bear Stearns

So a year ago there was nothing in there?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

No the change from a year ago was 0.4.

Phil Cusick - Bear Stearns

Okay. I am sorry.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

So the year-over-year change was 0.4, the total activity was 0.7.

Phil Cusick - Bear Stearns

Got it. Okay I guess I will stop thank you.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Is that... thank you.

Operator

Your next question will come from the line of Brett Feldman representing Lehman Brothers. Please proceed.

Brett Feldman - Lehman Brothers

Thank you for taking the question. I though if you can just clarify some of the comments you made about the cost of service impact you had due to revision of your tower leases. Could you maybe just review what that represented, is that onetime or is it recurring and then I am curious why you are planning to take some sites down over since housekeeping around the contract?

Amin Khalifa - Executive Vice President and Chief Financial Officer

Well what we are talking about was in our contract negotiations, we are able to remove a liability that we have been responsible for and as you know we have to reflect the cost of bringing down our equipment from towers at the end of life whenever that may be in the future and we are able to negotiate some of our leases to remove that liability, in other words we will no longer have to incur cost some time in the future to do that. So that method of liability was removed from the books and future periods and that was that $6 million as I spoke about and in future periods we will benefit by several hundred thousand dollars additionally under using that cost.

Brett Feldman - Lehman Brothers

So is that a couple of hundred thousand dollars per quarter will be lower than what it previously would have been?

Amin Khalifa - Executive Vice President and Chief Financial Officer

Correct.

Brett Feldman - Lehman Brothers

Okay thanks for clarifying that. Separate question I know you have talked about seasonal patterns I was hoping may be you could just talk about patterns that you exhibit in markets during the period shortly after you launch them. For example we have come to learn that shortly after launching the market you are going to experience a period of very strong growth activation. How long do this period last in other words is it the first quarter is very strong, the second quarter is a little less and then may be five, six quarters out you tend to hit a period of seasonal activity or will it extend longer than that?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Yeah I think Al, do you want to answer that?

Albin “Al” Moschner - Executive Vice President and Chief Marketing Officer

Sure, absolutely, you are absolutely correct. What we see is a strong performance as we initially launch the market and it takes several quarters to settle out. It varies by market but I think as a general rule you know we see the seasonality impacts come into the patterns about 9 to 12 months or 3 to 4 quarters out.

Brett Feldman - Lehman Brothers

Great, thank you.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Thank you.

Operator

Your question will come from the line Simon Flannery representing Morgan Stanley. Please proceed.

Simon Flannery - Morgan Stanley

Okay. Thank you very much. Good afternoon. Can you first talk about the broadband offerings and just elaborate a little bit more is this intended to be a laptop card type solution and what your expectations are for timing of that roll out? And secondly coming back to the upgrade issue. What if you learn from your market research about exactly why people are doing this is it that you book some very attractive new handsets in and what's the typical time from when somebody has first portray service to when they come and upgrade to a new phone is that 6 months is it 15 months what is your research telling you there?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Okay. Let me take a short first on the what we are looking at on a higher speed data, we believe our customers are likely going to be interested in products including laptops, broadband service would be available soon. So our expectation is we will be into market trials late in the third quarter and through the fourth quarter we'll just watch that evolve. I think we have done a fair amount of friendly user trials at this point to get an idea and we planned on unrolling that out and seeing where that goes. So we are optimistic research says that its promising and its something that really gives us a shot to deliver our cost structure to the industry and in another way that's attracted to us and it's embedded in the networks that we have built. On the upgrade front Al do you want to take that?

Albin “Al” Moschner - Executive Vice President and Chief Marketing Officer

Sure, again there is a several reasons why customers upgrade their handsets. We call them upgrades but they come from various sources. One of the primary reasons that customers deactivate is that either they have issues with their handset either a loss or damage. Others find that their initial purchase didn't quite fit their need from a technology or data perspective as we are increasing our functionality. They are finding that the functionality that we provide is something that they would like to pursue. And again, there seem... there's quite a bit of variability around that but we see that customers upgrading is early as six months after their initial purchase and the range could be as 18 months but the newer markets are auction 58 markets are demonstrating a little bit of a higher upgrade rate than our core markets and I am not sure that that is something that is fully understand the difference is not significant but again the range is anywhere from as early as six months to up to 18 months.

Simon Flannery - Morgan Stanley

Okay. Do you think this is... will ease after you've obviously brought a lot of data products on line in the last sort of year or two that you will be able to see the settle down as old virtually all of the handsets you sell in over the next year or so will be very capable?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

We will see that's one of the reasons that we have been interested in watching this introducing the customer life time management. What Al said and I want to make it clear we have been pleasantly surprised not only by the uptake on our new service plans by new people joining the company but the migration and so we have seen a lot of when people come in and they have upgraded they have also gone on to a new higher ARPU rate plan which is one of the reasons that we see it as a attractive step for the business to take. So what we will do with the customer life time value management system is we will fine tune if people want to do a go to a new rate plan we may try to work with them to avoid doing it through a churn related upgrade. There may be other ways that we can work to provide and meet that customers need. We think is a net positive so that's why we have been signaling for over the last several quarters that we'll probably going to let this continue and we will manage as we put these new systems in place.

Simon Flannery - Morgan Stanley

Alright. Thank you.

Operator

Your next question comes from the line of David Barden representing Bank of America. Please proceed.

David Barden - Bank of America

Hey guys thanks a lot. Can you hear me okay.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Yes.

David Barden - Bank of America

Okay thanks. Couple of questions I guess you know stock trading off $11 in the aftermarket and clearly you know as typical and as expected as the churn in the subscriber performance in the quarter may have been I think people are looking back in going you know on May 8th we had a call there was guidance given the lowest end of that for the subscriber perspective was 125,000 presumably it wasn't the target for management to kind of hit this sum the lower-end. And I guess we look at the sub-prime market and we see softness there. We look forward to your third quarter guidance and we see some softening up of the subscriber number sequentially. And then we have got the upgrade issue where we are having to spend more to keep the same customers and we are having the cost to keep them. So is there a reason for deeper concern that's something about the business model is changing in this environment and that rather than higher highs in the first quarter and lower lows in the second quarter, we are going to see lower lows kind of in perpetuity in the model or what is giving you guys the comfort level to give kind of various at the higher end, pretty good guidance for 2008 on a financial basis. Where does s that come from? What are you seeing in the business today that will left people left on to that?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

I think it ranks to the entire thing. We are pretty positive with what we have seen go on. We have seen the new markets come up to speed, we are seeing attractive customer uptake of the products, we are seeing those customers behave no differently than other new customers, behave or see core churn so for the other reasons other than tenure and upgrade, we are seeing that coming down, we are seeing strong interest in our new rate plans. We are seeing the new programs that we're rolling out likely to continue to provide increased improvement and the expected company performance and will also reflecting that the seasonality we have seen in our business has been here sentient inspection and we go through not only reminding people in Q1every year about its seasonal and good things are happening. We remind people that it's the seasonal business and we find every year we work through Q2 and Q3 and see that business move through.

We feel we are doing pretty good. I have to tell you, we are pleased with where we see things going. We expected some of the things that we are seeing to work our way through. All of the information that we've given out today on our outlook was is contained within the guidance that we have expected to see it's a work even like we're delivering what we had expected to come through. We see time periods, I did flag we see time periods where customer activity is reduced and our experience has been repeatedly but we work away through those and things come back. So I don't know David that helps answer your question.

David Barden - Bank of America

Yeah thanks Doug. I guess I want to ask two if I could follow ups and related to that. One would be it seems to that as you give a free moths of people who upgrade and buy new fall in that that maybe... that process might be to be managed a little better six months seems like pretty short time to kind of give a guy three months and buy new phone it's another three months and it's new like the CPGA for those customers are becoming out those. I was wondering if you kind of outline kind of how you plan to manage this upgrade process and then...?

Unidentified Company Representative

First let me Al said in his it could be as early. But he also pointed it could go out for quite a bit longer than that as well. So lets not pick the worst data and point out that upgrades occur over a period of time and think about it that when a customer is deciding to upgrade that customer is also in play. And so, we certainly would like to see customers continue to stay with us so we can advance that. So what we are introducing the next step that we are introducing on that is what we this customer life time value which is introduced at the point of sale and will be available in all of our branded presences which is we are nearly 70% that we see nearly 70% of our new customers come through those. And I think, we are optimistic over a time period that that will allow us to better manage things. Also, I do want to point that the company does tend towards using it's guidance ranges, we have exceeded our guidance ranges in such so the fact we have used our guidance range this quarter is not untypical its what we have generally done as we move through building our business in a thoughtful way.

David Barden - Bank of America

And I apologize if I could ask one last one which is just I mean given that there is an awful lot of volatility and maybe misunderstanding about the rhythms of the business from quarter-to-quarter this will be a great form to kind of give us a picture of as we look into the fourth quarter. Which of these general trends are going to be moving in which direction to kind of get to the subscriber numbers which are really the gross driver of the business?

Unidentified Company Representative

What we typically see net customer additions increased during the fourth quarter and that's generally because there is both higher gross activity. So front door activity and lower turn activity. So third quarter is typically where we see the reduction in churn or the peak in churn and a little lower gross ad activity and then it starts to build back. So we think that all conditions are lined up that we will move through the same cycle.

David Barden - Bank of America

Alright guys. Good luck. Thanks so much.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Thank you.

Operator

Your next question will come from the line of Ric Prentiss representing Raymond James. Please proceed.

Ric Prentiss - Raymond James

Yes good afternoon guys.

Unidentified Company Representative

Hey Rick.

Ric Prentiss - Raymond James

Couple of questions I am following out a fairly similar theme I guess. If you look at second quarter you launched the 3 million POP you had not just Roley a couple of others out there. How did you feel about the ads within those newly launched markets within the quarter? Did you see the typical spike up in those?

Unidentified Company Representative

Yes we did. We saw the same typical patterns that we have seen when we have launched other markets. So the business performed similar to what we have seen it performed previously.

Ric Prentiss - Raymond James

And then on the major new initiatives; the increased footprint, the Auction 66 and the higher data offerings. Can you help us parcel a little bit. I am just trying to figure out, what about the higher speed data offering implies CapEx and OpEx burns; and then looking at more footprint versus Auction 66, should we just use that rule of thumb about 28 bucks per covered POP and refresh our memory on what's the OpEx burn rate we should expect. Is it kind of in the 5 to 10 range?

Unidentified Company Representative

What we have typically seen and what we guided to today is that CapEx is $28 or last for a new covered POP and that the associated impact to the OIBDA is $5 or less but generally been in the $5 range. So those numbers are in place and we are now as a result of information, we have gotten from the FCC are in fact moving ahead. We think we have enough information at this point to see the channels in our initial market launches that we needed to. So we think we are pleased; we are seeing good progress, we are ready to move ahead on that and have the information that we need. So the guidance that we have used, that we've provided previously continues to be appropriate for people to think about that. The data... higher speed data initiatives are really involved in two markets at this point where that we expect a launch and what does entail is not only; it's a little bit of increased capacity that may come in the way of stop [ph] identity but there are operating costs associated with adding some of the backbone around that and then you have to acquire customers. So there would be CPGA and marketing expense.

Unidentified Company Representative

And as far as the OpEx and CapEx impacts the higher speed data would probably be the rather de minimis compared to the other two.

Unidentified Company Representative

That's why we pointed out in our guidance that OIBDA the impact of that is only the initial and the implication when you are talking about launching you know 20 upwards 28 million new cover POPs, the implication there with that being closer to a 100 million is that you wouldn't expect a lot of impact as much impact from that.

Ric Prentiss - Raymond James

And then also the guidance for '08 on capital I think you mentioned does not include capitalized interest but the '07 guidance does any thoughts about why you included one in not the others I assume you can still capitalize some interest even into '08?

Unidentified Company Representative

We are but here is the... from a utilization of cash, we have provided a lot of information historically about our interest expense in total. And so for 2007, we provided additional details today that capitalized interest. So all that total interest expense between 45 and 55 million of that would move to the capital line. What happens in 2008 its still contingent to launch schedules and so the 2008 number may still move depending on how we launch. So the burn... the utilization of cash its still all on the interest expense line all we are doing now is giving details for '07 about how that closes out. So if you looked at the '07 guidance there is $50 million of roughly mid-point of guidance with capitalized interest in it.

Ric Prentiss - Raymond James

And then the final question speaking of cash and funding, given the plans you have laid out for the second half '07 and '08 and the cash balance you have on the balance sheet right now, how do you feel about fully funded process, are you still fully funded for the bill program?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Well where we are at is we certainly have felt comfortable that on the guidance range that we've put out right now for the 20 to 28 that we have adequate resources on that. And we also feel comfortable that have adequate resources to complete launching the remaining POPs by sometime in late 2010, utilizing our own resources. So we'll continue to make progress, we'll let the business build and then we can take adjustments to either self fund our way through that or look at other alternatives if there is a desire to move... a desire and a reason to move along more quickly.

Ric Prentiss - Raymond James

Great. Thanks guys. Have a good day.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Yes. Thank you.

Operator

Your next question will come from the line of Chris Larsen representing Credit Suisse. Please proceed.

Chris Larsen - Credit Suisse

Hi, thanks. A couple of questions. Good afternoon. The Auction 66 development, I know you mentioned that it was going to be part of the incremental cost, but I thought that would be capitalized. Secondly, as you're looking at the new data products, do you feel a need to have incremental distribution and/or does the ITC band have any impact on that? And I then I have third question on churn.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

The guidance on launching a new market remains the same, which was about up to $28 for capital.

Chris Larsen - Credit Suisse

I'm sorry, I was talking about the 10 to 15 of incremental expenses expected to be incurred in the third quarter.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Yes, well that's all related to we are accelerating coverage, so we're going... we are launching up to 600 cell sites over the next year in those markets in operation before the middle of 2007. That's what we outlined on our Analyst Day and we think that's an attractive value creating potential. And when you launch new cell sites, there is costs that are associated with that. And look at 600 cell sides on the basis of our total footprint, and that's a substantial number of new sites that we will... I think you will see a return come to the business fairly quickly. So we are moving ahead with 66. We pointed that out. And as a result of that, we started... as we have previously we started to incur costs ahead of the launches that will happen in the first half of 2008 and we will give more detail on those launch dates as we get a little closer.

Chris Larsen - Credit Suisse

I understood that the coverage expansion will have the 10 to 15 of incremental expenses that you are going to incur in 3Q that that would go in there. I am just surprised that 66 development would wind up going... would wind up hitting the income statement as opposed to being a capitalized expense?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Well remember that there is lease cost already included as we are starting to develop some markets and those flow through the P&L. They are part of $5 of operating expense that we run through the P&L. So there is no... it's the same process that we went through on the 58 expansion.

Chris Larsen - Credit Suisse

Got you.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

We started to incur costs on that a couple of quarters ahead when we started to see activity launches. And so I think you are seeing the same the process begin and we have throughout the year pointed out that Auction 66 expenses we would update when we started to get comfortable we had launch dates. And what you are seeing is that we are starting to get comfortable that we have markets that are going to be ready to launch. You are seeing progress and optimism based on fact on where we see spectrum clearing progressing. The effect of ITC does cause us to be thoughtful relative to the devices and we are doing the same thing that other carriers have done, trying... working to address the different intellectual property issues to the degree we want to go ahead with devices that are impacted.

Chris Larsen - Credit Suisse

Okay. And then in the past you talk about churn going down as your footprint expands. I wonder if you could talk a little bit about, maybe put some numbers around that as you are seeing the 600 cell sides. What we might see out of that as you go from 50 million POPs to 100 million POPs. What kind of churn reduction you might see there? And then if you were to go from 100 to say pairing up with somebody who had a similar footprint, what kind of churn reduction you might get out of that.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

The first piece --

Chris Larsen - Credit Suisse

Yes, I am smiling too --

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

The first piece I want to flag is that we are already seeing poor churn reduce. I mean when I talked about how year-over-year we see similar churn performance in our... in the existing markets, even though we are absorbing the upgrade activity, that gives a message that a lot of what's being going on is laying very strong good fundamentals for us. Well, we are pretty comfortable that as these customers that we have added, the 700,000 customers that we have added in the last year, mature, they follow the same profile as the rest of our business. So we have been consistent in pointing out that we expected this year would be higher churn, and then it would come back down as those customers mature. Well, we have an underlying business that's doing robust, doing well on churn. We see that underlying fundamental advancing and we see every reason as time passes that you will see churn go down. Now we also pointed out relative to the new sites, we haven't given, Chris, specific guidance. But as you would think about that investment, we think you should think about it not just focused on adding net new gross add customers, but also we put a lot of effort into looking for those customers that buy our service but may not have coverage where they are, where they live and going ahead and adding cell sites there. And we think that's the driver that gives us confidence that we'll see improved deactivation characteristics, and it will actually affect our tenure curves over time positively. And then the last piece is always managing our costs, and in case it will be a way to manage our off-network calling. So we haven't given specific numbers. We think it will lead into the continuing decline we have seen in core churn year-over-year and it will continue to keep that moving ahead. So we think we all are in the right track with that and we'll see good benefits.

Chris Larsen - Credit Suisse

Thanks a lot.

Operator

Your next question comes from the line of Thomas Lee representing J.P. Morgan. Please proceed.

Tom Lee - JP Morgan

Hey guys.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Hey Tom.

Tom Lee - JP Morgan

How are you?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

We are fine.

Tom Lee - JP Morgan

I think after kind of like seeing some of the investor reaction from the MetroPCS quarter and kind of like the reaction to some of your headline numbers and then hearing all these investors ask questions about seasonality and churn, I mean I guess the one thing that's really just jumping out at me is that at your Analyst Day, to me it struck me that as you guys think about your business, I kind of got the sense that subscriber was less important a metric in terms of how you view your business and more about, as you said, upselling your customer base or driving additional revenues. And I am just wondering could you just give us an idea like here we have almost 9 out of 10 questions focused on churn and unit, what's the better way for us to think about your customer? Because I know that in the past you have talked about the CPGA adjusted cash flow per customer, kind of other metrics that really look less at the subscriber to unit but more just as a revenue producer. So a, I guess I am just really curious could you just kind of tell us what you think about... how you create value in your business? And secondly, do you think that there might be some logic in the way... I know you guys count customers as customers and I know Metro tends to use the ESN phone count as their method for counting customers... but do you think there is a better way to measure your unit and your penetration, because I just think that the net adds are going to be volatile because you've got gross adds and you've got churn. So I mean your net's always your residual calculation. There is no reason like... I think it's very hard for you guys to have any position [ph] about thinking what 3Q net adds could be anyway. So I'd just to love hear your thoughts. Thanks.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Well, I start out every call talking about what we call the calculated contribution per user and talk about year-over-year that has come up. An example is in our existing business with all of the stuff that we've worked our way through, it's up year-over-year about $2 or 10%. Now that's applied across all customers, not only to new customers, but our existing customers. And so we focus on providing products and services that allow us to meet their needs, and in the process we have typically seen that they have actually improved our competitive position. So those pieces are in place, they are working well for us and expect them to continue and it also shows the results of how we have optimized our cost structure. Talked about year-over-year existing business growth went up 30% on new customer additions, so we see momentum in not only the margins that we are making per customer, but we see momentum in improvement in the rate that we are adding customers. So we think there is good progress being made by the teams there as well. So those two tell us that the growth engine that we have over time for OIBDA seems to be intact and moving ahead.

On the new markets, in 10 months, 10 months weighted average time periods, they broke even. That's well inside a typical time period that you would see with others. And we see them moving through the normal rhythms both of how customers mature and how our business has the seasonal rhythm where we tend towards adding more customers in the fourth and the first quarter. And so again, we... and we are watching those go from in less than 10 months going from consuming cash to contributing profit or OIBDA margin. So I think that's... we have two levers that we are always focusing on and how do we drive the increased margin and how do we drive increased customers. I would point out also that the billed ARPU, the people walking in the door over... went up in the second quarter year-over-year 8%. So we are pretty comfortable that the new rate plans that we have are robust, they are working well for us and that 90% of our customers chose the $45 and higher rate plan. So that's why we feel comfortable as we look ahead that we think we've got a business that's going to continue to grow and move ahead.

Tom Lee - JP Morgan

Got it. Thanks.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

You bet Tom. Thank you.

Operator

Your next question will come from the line of Michael Rollins representing Citigroup. Please proceed.

Michael Rollins - Citigroup

Hi, good afternoon.

Unidentified Company Representative

Hey Mike.

Michael Rollins - Citigroup

Just a couple of questions. I guess the first is what are you seeing from the weekly plan that you have launched, any material impacts to whether it's customer retention or sales from that plan? And then the second question I had was just looking out more broadly, I think Doug you had mentioned that you though there were significant upside opportunities for penetration, particularly in the core markets. You are comparing yourself to some of your peers with similar models. So I was curious if you could talk about what would be the catalyst to accelerate the incremental gain in penetration in those core markets. And then as you look at the new markets, how should we expect the pacing to go? What do you think the timeframe is for the newer markets to hit, for example, a 5% covered penetration of POPs and then maybe even say what would be the longer opportunity in terms of years to get to that 10% milestone? Thanks.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Cricket by Week is primarily in place right now as a retention tool and we are going to... we have it operating as an acquisition tool in a couple of markets and we'll be rolling that out based on what we see. So I think the results on Cricket by Week are early, promising and we'll let that continue to evolve. So in fact, if you think about it, it's likely that that 5% number that you are talking about may frequently be achieved within a year on a new market. We don't give specific guidance, but if you look at the total number of subs and think about the information that we have disclosed, you will see that you have robust customer growth and we see average penetration in those new markets that approaches those levels within a year. What I have said is you said it slightly different than what we have said publicly. So let me make sure that it's... I say where we see us. We see continued growth in our existing markets, which we are not going to break out separately what those initial 25 million POPs. And I pointed out we actually have seen an acceleration of customer activity, a 30% year-over-year increase in customer activity. So not only have we said that it's there, we are now seeing the acceleration of customer activity. And in addition to that, we are now telling you for the first time in over five years we are going to go back and make some investments in those markets that we think will help further move them ahead. So feel pretty good that we are already seeing progress on those and that as we add the additional cell sites that we'll see more.

The other part of your question, I actually pointed out that news market. So new markets not only include 66, but includes the Auction 58 markets really don't have any different long term... likely long-term penetration characteristics as compared to others that might operate the model. We don't believe people should be focused right now on long-term penetration. We don't think we should do anything that deoptimizes that, but we are more focused on how we grow it quarter-over-quarter. But we've shared a lot of data actually in June that showed why the markets look the same compared to others. And we think that data is... we are very confident that data is valid and we expect to continue to grow those not in a quarter or two, but over the next several years, we expect to see attractive increasing long-term penetration rates for the business. We don't see elements in place that cause us to believe additional growth isn't available.

Michael Rollins - Citigroup

And if I can just follow up with one other question on that. So if you think about this digestion period where you have a rapid period of gross add growth, is that digestion period that may hold back this incremental penetration rate, like if you look at the 2Q number in the new markets specifically. Is this an indigestion period that could last call it 6 or 12 months. So in some respects, you are taking a little bit of a step back from the churning effect of some of those gross adds, and then when you get through that, then you are in a much more normalized period of growth. Would you consider the second quarter a more normalized period of incremental penetration for the June quarter?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

The former, not the latter. So we would expect we would work through this tenure issue and business would go ahead. And into the latter part of 2008, you would see it like start to look more similar, all the different pieces of the business look more similar and exhibit normal seasonal rhythms.

Michael Rollins - Citigroup

So what you are suggesting is it might take 6 or 12 months of... and once you have this rapid pace of expansion to then digest a little bit. You are still growing, but you are also digesting a little bit and then after that six to twelve months, you get back to a more normalized pattern?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Absolutely. That's why we provided the tenure chart for people so that they can get an idea to think about how that works. And that's why we gave you data that said our average tenure customer is 20% lower than a year ago. And you will see that number actually be fairly high for the next few quarters and then it just flexes its way back through as we digest that growth. That is why we pointed out when we started the expansion process, that is why we made it clear that we thought we would see this effect. So this is now... we have been outlining that we would see the effect we are experiencing for five, six quarters that we would see an increase in the number of lower tenured customers and we see that work its way through the business.

Michael Rollins - Citigroup

Thank you for taking my questions.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

You bet. Thank you.

Operator

Your next question will come from the line of Anna Goshko representing Banc of America. Please proceed.

Anna Goshko - Banc of America

Hi guys, thanks for taking the question. I know this is getting to be a long call and you are probably running out of steam, so I will try to be brief. On your new roaming buckets which were implemented recently, you said that 90% of your customers now of the gross adds are talking a 45 or higher plan. I am wondering what the take rate is on a plan with a roaming bucket. And then secondly, I think a part of your intention in implementing the plan was as a potential churn reduction tool. So I know it's early, but wondering if you have been able to mine the data yet. And of the similarly tenured younger customers in terms of their tenure, I mean, is there any evidence that there is lesser churn with someone with a roaming bucket than one with not?

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

We don't give specifics on rate plan uptake, but we've seen not only at, or higher than expectations on new customers on the higher rate plans, but we've actually been pretty pleasantly surprised at the rate of migration. And that may have entailed an existing customer migrating, going to a higher ARPU plan and getting a new handset in the process. That was what I was trying to point out with some of the earlier questions, and that's a pretty attractive proposition for the company to work its way through. As far as differences between churn rates on customers different rate plans, I think it's premature for us to say that... to give any detailed information on how tenure or how the rate plans affect churn characteristics. What we have found is as we have driven better products and services to our customers, churn goes down, which is why we have pointed out that the core churn less these two issues continues to come down. And that's why we feel good that the business is well in hand to move through this transition.

Anna Goshko - Banc of America

Okay, thanks. The second thing is I saw today the FCC come out with an order on automatic roaming which appears to be a nice gesture, but there wasn't any relief in there on roaming rates. So my initial read is it's something that you will take, but it's probably not going have concrete [ph] impact on you. I just wanted to run that by you and see what your take is on the order.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

I think it's premature for us to interpret the order. I think that... and so we are in the process of looking at it. I don't... our initial read is that it tends towards looking promising at this point. And I think we feel best if we just continue to take a look at it and figure out what... where we go with it next.

Anna Goshko - Banc of America

Okay, great. Thanks very much Doug.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

You bet. Thank you.

Operator

Your next question comes from the line of Jason Armstrong representing Goldman Sachs. Please proceed.

Jason Armstrong - Goldman Sachs

Great, thanks. Hi, thanks guys. I'll just ask one given the time. Can you help us think through if sub prime or economic factors do get worse and start to impact the business a bit more, how you think about disaggregating the risk? Would your expectations be that it shows up more in sort of absolute disconnects or maybe more in sort of rate compression with subscribers migrating down to lower rate plans? Just helping us think through that would be beneficial.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Well, we have talked over the last couple of years about what we would expect to see not just with sub prime. I think people... what we expected to see on the sub prime issue has been very low impact and we think that's what we have seen. The business has absorbed that. If there were broader economic conditions, we think we'd see two effects, and if not right now, we don't have data that would indicate there is an ARPU effect or a downward migration. What we actually would see is those customers that run out of economic means, you would see an increase in their deactivation rates. If you think that through, however, we are probably the least expensive alternative for them to come back to in having a phone where 60% of your... or having a service where 60% of your customers don't have a landline phone, I think you would see increased volatility in that area, but you would see a lot of those customers come back with reactivations over a period of time. So we think that part works its way through. The part we find that's a little bit more interesting is actually more that other customers with other carriers start to look at what they are going to do to manage their costs. And as contracts lapse off for those customers, our ability to be in front of those customers with our services we actually think opens up the and expands our opportunity that customers will take a look at us. So I think right now it was our conversations and I outlined today that we think sub prime isn't a major factor on our business. But if there was a major factor like that, I think that's how it would affect us.

Jason Armstrong - Goldman Sachs

Okay, that's helpful. Thanks.

Operator

Your final question will come from the line of Will Power representing Robert W. Baird. Please proceed.

William V. Power - Robert W. Baird & Co.

Great. Thanks. Good afternoon.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Hey Will.

William V. Power - Robert W. Baird & Co.

I know you all covered a lot of ground here already. If I look at Q2, I mean it looks to me like the churn number basically came in line with guidance. And so I guess I was wondering if you can give us a sense for what the trajectory of gross adds looked like over the course of the quarter. Did gross adds improve, worsen etcetera? That might just help provide some flavor around your thoughts going into Q3. And then secondly, any update just on the Boost Unlimited product and what kind of impact that might or might not be having in those markets where they are. Thanks.

S. Douglas (Doug) Hutcheson - President, Chief Executive Officer and Director

Sure. Well we actually tend towards seeing second quarter being a little bit of a back-end loaded quarter. And so what you would have seen what goes along with the back-end quarters, you see an acceleration that happens later in the quarter versus earlier in the quarter. We have several quarters that are like that. I would point out as an example fourth quarter is absolutely another example of the back-end loaded quarter. So we tend towards having those effects so I would tell you there was plenty of strength at the end of the second quarter. And again, I think hitting our guidance where we are add on our gross additions in the second quarter seems like to us that we are moving and working through things. I won't comment to any one competitor specifically, I will comment in general. We seem to be doing fine dealing with competitive issues at this point, I certainly don't want to introduce that we think any variability that we are seeing in how customer activity is competitive related at this point. Now we are in the middle of the drop dead competitive industry, we are investing left and right on different things that we think that improve the strength of our proposition and we change our rate plans, recognizing that we are in a competitive industry but I don't think we see things at this point that are relative to actions of any one individual competitor.

William V. Power - Robert W. Baird & Co.

Okay great. Thank you.

Unidentified Company Representative

Thank you.

Operator

There are no further questions at this time. I will now like to turn the presentation back to Ms. Jeanie Herbert for closing remarks.

Jeanie Herbert - Director of Investor Relations

Thank you for joining us on the call. We look forward to updating you on our business on the next quarterly conference call. If you have further questions about our second quarter results or need additional clarifications, please feel free to call me at 858-882-6084. Thank you and good night.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Leap Wireless Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts