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Executives

Jim Seines - Director of Investor Relations

Douglas Hutcheson - President, Director, Chief Executive Officer and Acting Chief Financial Officer

Stefan Karnavas - Vice President of Finance and Treasurer

Albin Moschner - Executive Vice President Sales and Marketing Operations

Glenn Umetsu - Executive Vice President Engineering and Technical Operation

Analysts

Phil Cusick - Bear Stearns

Chris Larsen - Credit Suisse

Simon Flannery - Morgan Stanley

Brett Feldman - Lehman Brothers

Ric Prentiss - Raymond James

Scott Malat - Goldman Sachs

Romeo Reyes - Jefferies

Leap Wireless International Inc. (LEAP) Q4 2007 Earnings Call February 28, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Leap Wireless Q4 2007 Earnings Conference Call. My name is Lisa, and I’ll be your coordinator for today. At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call, Mr. Jim Seines, Director of Investor Relations.

Jim Seines

Thank you, Lisa. Good morning and welcome to Leap’s fourth quarter 2007 conference call. This call is being recorded and will be available for playback in the U.S. for the next 30 days by calling 1-888-286-8010. Callers from outside the U.S. will need to dial 1-617-801-6888. The pass code for both calls is 21553799.

This conference call with the accompanying presentation is also being webcast live and will be available for replay on the Investor Relations section of our website at www.leapwireless.com shortly after the completion of our live call today.

Joining me on the call today to discuss our fourth quarter results are Doug Hutcheson, our President, Chief Executive Officer and Acting Chief Financial Officer; and Stefan Karnavas, our Vice President Finance and Treasurer.

Following our prepared remarks Lisa will come back on line with instructions for the question and answer portion of the call. Al Moschner, our Executive Vice President Sales and Marketing Operations; and Glenn Umetsu, our Executive Vice President Engineering and Technical Operations will join Doug and Stefan for the question and answer session.

Turning to slide 3, during our call today we will discuss some non-GAAP financial measures. For a GAAP reconciliation of non-GAAP financial measures I would like to refer you to the notes to financial statements contained in our earnings release today and also the Financial Reports page of the Investor Relations section of Leap’s website.

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

Also as used in today’s conference call and the accompanying presentation, new initiatives refers to the company’s costs associated with its coverage expansion initiative; build out of Auction 66 markets; high-speed data offerings and strategic M&A activities.

Turning to slide 4, on our forward-looking statement slide I would like to remind you that statements made today that are not historical in nature, including 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, 2007, which we expect to file tomorrow.

For anyone listening to a tape, a webcast replay or a reviewing written transcript of our fourth quarter call, note that all information presented is current only as of today’s date February 28, 2008. The company disclaims any duty or obligation to update any forward-looking information whether as a result of new information, future events or otherwise unless as required by law.

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

Doug Hutcheson

Thanks Jim, and thanks to all of you for joining our discussion today of our fourth quarter 2007 performance. We ended the year with a strong performance as we added increased customers by 152,000 net additions.

Churn was nearly flat year-over-year and a 100 basis point improvement quarter-over-quarter better than expectation. This resulted in a 28% year-over-year increase in end of period customers.The strong momentum that we have built has also resulted in today us adding our 3 millionth customer.

Turing to ARPU, it grew year-over-year by nearly $2, as expected, and increased to $1.06 from the prior quarter. Both service revenue and total revenues increased with service revenues being higher due to increased customers and ARPU driving improved service revenues with an increase of 38%.

Operating income improved by $37 million as we enjoyed the increasing contributions from the markets we launched in 2006, and the first half of 2007, as well as the increasing contributions from our more mature markets.

Lastly, OIBDA increased year-over-year by 115%, as we achieved 30% adjusted margins, even including $15.2 million of spending related to the new initiatives.

As we turn to our customer profitability, we make our money customer-by-customer, month-by-month. We believe the calculated contribution per user is an important metric that sums up the results of our key operating metrics.

As we look to the far right of the chart you see the fourth quarter 2007 results, where ARPU up $45.57 when you take off our $21 CCU and our churn adjusted CPGA results in a $17.09 calculated contribution per user per month.Including the $1.70 of new initiative costs included in this number, the contribution was $18.79 for our operating business.

As you look towards the full year 2007, you see we reported an ARPU of just below $45, and cash costs just below $21, with the calculated contribution per user resulting in about $16.34 of monthly contribution per user. Including the new initiatives spend this number was $17.20. This yearly growth rate on that was 2.5% and our quarterly growth rate was 7%.

Our business is built around providing a high strong value proposition supported by an attractive cost structure. If you look at the industry average ARPU of a little over $51 and divide that by the industry average delivered minutes you see the current yield is a little less than $0.06. That cost of delivery is about $2.06 and has delivered at a 56% gross margin.

Our ARPU of $45.57 when divided by the 1450 minutes we deliver, resulted a yield of a little bit more than $0.03 and we deliver that at about $0.015. This results in a 52% margin.

We sell our services at 53% of the average selling price, and we achieve comparable operating margins. We believe we have the ability to provide nearly twice the value at comparable margins.

Turning to customer growth, we continue to reflect our seasonal patterns. However, it’s important to note that the covered POPs in our business over the past three years has increased nearly 28 million.

A portion of this comes from POP growth within our markets; a large percentage from the Auction 58 markets that we have launched in 2006 and the related launches in the first half of 2007, and we now see the results of the expanded footprint, with our first meaningful launches in the fourth quarter of 2007, related to the Rocky Mountain Not High initiatives we’ve discussed.

This resulted in 1.3 million new customers over the past three years. In fourth quarter, we added 152,000 net customer additions, and as we discussed, we expect to achieve 3 million customers today.

Churn improved this quarter due to the normal seasonal rhythms of our business and the expected improvements we had been looking for in customer tenures. The performance we experienced at 4.2% was better than expected and resulted from strong reactivation trends late in the fourth quarter.

As we look ahead, we expect the tenure effect and upgrade activity will perform as we’ve expected and as we’ve seen in the fourth quarter, and churn will continue to follow the typical seasonal rhythms that we see through 2008. The remaining effects of the tenure should be through the business by mid 2008.

As we turn towards ARPU, I think the business has clearly achieved some attractive results and demonstrated the ability to manage ARPU. We’ve achieved this by building an attractive array of service plan and set a goal to achieve an ARPU objective in the mid $40 range, something that we’ve now achieved over the past few quarters. This has resulted in an increased ARPU of $6.54 over the last three years.

Now there has been a variety of competitive moves that the industry has seen, not only the introduction of new unlimited offerings, but some targeted offers in the by-the-minute category, something that we discussed in our last earnings call.

We believe the company has built an attractive value proposition over a range of price points that will allow us to compete and continue to strive to balance the relationship between ARPU, customer growth, and costs.

When we look at the ability to continue to drive margin growth, and balance our pricing, the chart here shows that, in fact, our lower priced rate plans are fairly narrow, and our higher priced rate plans really add a lot of value that we bring to our customer.

We have conducted service plan trials that are designed to appeal to a broad range of customers by balancing price and value. And as we’ve demonstrated we’ve seen attractive uptake over the last several years of our higher value rate plans, a trend we expect will continue.

Our objective is and remains to maximize total returns by increasing customer growth, while maintaining ARPU in the mid $40 range.

Turning to CPGA, it’s performing as expected. Our CPGA for the quarter was reported at $178 including $8 of spending related to our new initiatives. Our spending levels were as expected, and we expect the 2008 CPGA trends to be consistent with our prior results.

One piece in particular on CPGA that we’re excited about is the introduction of our first low-cost handset, the Cricket EZ, a handset that we work to source and write label from overseas during the first quarter of 2008.

This handset along with a variety of other initiatives allows us to support competitive promotional pricing without affecting our subsidy materially. This will be our first handset retailing for less than $100 and will allow us to provide promotional pricing between $49 and $69.

CCU is expected to continue to improve as we continue to gain scale. It performed during the fourth quarter as expected at about $21; this includes $1.34 of expenses that are related to our new initiatives.

We expect CCU to remain in the $20 range through the 2008, which will reflect the costs associated with our new market launch activities. And in addition, as we look out over the longer-term horizon we expect further declines to occur as the business gains scale as a result of customer growth and ongoing cost control initiatives.

Stefan Karnavas

Thanks. Thanks, Doug. Turning to slide 16, you can see that while we significantly grew adjusted OIBDA during the fourth quarter of 2007, we also expanded our margin substantially.

Adjusted OIBDA margin improved by 11.1 percentage points to 30.2% on an as reported basis. Included in reported adjusted OIBDA was $15.2 million in new initiative spend, which represents costs associated with new market launches, core footprint expansion, broadband trials and other costs.

Excluding these costs, adjusted OIBDA margin grew by over 15 percentage points to 34.3% for the quarter. In addition, adjusted OIBDA margin excluding new initiatives was approximately 30% for the full year 2007.

The margin improvement was broad based. Our cost of service for non-product costs benefited from the scale on fixed costs including leases, utilities, backhaul and employee related costs.

These improvements were enough to absorb increases in the cost of service related to product costs, which are associated with third-party services that enable our delivery of directory assistance, text messaging, MMS, WAP, long-distance roaming, ring tones, et cetera.

Net equipment subsidy improved as we reintroduced activation fees for new customers, which were not charged during the prior year period.

Sales and marketing benefited from lower advertising spend from the year-ago period and customer care and billing margins improved due to efficiencies from further off-shoring at our outsourced call centers and some billing efficiencies.

The G&A margin on an adjusted basis for new initiatives was about flat and was negatively impacted by increased D&O insurance costs, professional services and employee-related expenses.

In summary, we are achieving margin improvement through scale as we expected, and believe we will continue to expand margins as we further penetrate our markets. The delivery of adjusted OIBDA margins that are at or exceed 40% in our more mature markets bodes well for margin expansion opportunities driven by growth in our recently launched markets.

Turning to slide 17, operating income in the fourth quarter of 2007 improved by about $38 million from the year-ago period. As revenue improved by about $115 million and total operating expenses including depreciation and amortization increased by around $77 million. While operating income grew by $38 million, net loss improved by $27.6 million.

Over half of the $10.6 million difference is explained by higher interest expense, primarily due to an increase of $350 million in face amount of senior unsecured debt for the period offset somewhat by lower interest income.

Please note that 72% of our debt is currently fixed, and we have executed $355 million of floating to fixed rate swaps under our term loan. At December 31, 2007, the effective interest rate on our term loan was 7.9% including the effect of these swaps.

Minority interest in consolidated subsidiaries increased by $1.9 million and reflects our partners’ interest in the net income or loss of joint ventures that are consolidated for financial reporting purposes, primarily LCW and Denali. The equity in net loss of investee of $1.5 million reflects our share of losses in a joint venture, which provides wireless service in Puerto Rico.

And finally while Leap does not pay taxes for federal income tax purposes, we do report tax expense on our income statement. During the fourth quarter, income tax expense was $8.5 million, in line with our expectations outlined in last quarter’s conference call, and a reduction of $2.5 million from the previous year.

Turning to slide 18, we’ve provided a summarized cash flow statement, which reconciles the cash, cash equivalents, and short-term investments. As you can see in the column that reconciles the three-months ended 12/31/2007, we used over $40 million in cash during the fourth quarter leaving the ending balance of $613 million at year-end.

Cash from operating activities was around $120 million while capital expenditures for the quarter were around $160 million.

For the full year, cash increased by $173 million with the primary sources being $318 million in cash from operating activities, and $367 million in cash generated from financing activities. These amounts were reduced by capital expenditures of $505 million for the full year, which included approximately $46 million in capitalized interest.

Our guidance range for capital expenditures for 2007 was $505 million to $545 million including around $50 million in capitalized interest. Of the total capital expenditures, around $100 million was spent on Auction 66.

A couple of items to note. First, cash from operating activities of $318 million for the full year was less than our reported adjusted OIBDA of $392 million, primarily due to a swing in our accounts payable and accrued liability balances associated with accrued invoices for heavy launch activity in late 2006, which were paid in early 2007.

Second, I want to briefly review our current cash investments. We are currently invested in three areas. Around 40% is invested directly in the U.S. government treasuries and short-term Federal agency notes. Around 40% is invested in money market reserves that invest primarily in U.S. treasuries and federal agency notes, and the remainder is invested in straight commercial paper from industrial companies and includes no banks or investment banks. We currently hold no auction-rate securities.

Our joint venture partner Denali holds two issues of asset-backed commercial paper with an aggregate face amount of $21.6 million. During the fourth quarter, we adjusted the fair market value of these securities by approximately $1 million, bringing the full year adjustment of fair market value to $5.4 million.

We may see further deterioration in the fair market value of these two securities. However, our maximum exposure is $16.2 million should these securities be written down to zero.

In closing the financial overview section of today’s call, I would like to reiterate that between our cash position of over $600 million at year end, our ability to generate cash from operating activities in 2008, and the flexibility inherent in the business to modulate the launch of new markets, affords Leap with adequate liquidity and the ability to flex its capital outlays if need be.

Our liquidity resources also include our $200 million undrawn revolver, which we typically do not rely upon when planning future funding needs. In addition to a healthy liquidity position, our total leverage has come down to 5.2 times at year-end, a reduction of over 25% since the senior unsecured add-on closed in June of this year.

As we look to fund future growth, we remain focused on a disciplined approach that balances investment in our existing markets with expansion opportunities in new markets in order to maximize value for all stakeholders.

Now I’ll turn it back over to Doug.

Doug Hutcheson

Thanks, Stefan. As we look to the future, I think we wanted to take a minute and discuss what we’ve achieved over the last three years. In early 2005, we laid out a plan to double the size of our business.

Relative to footprint, we increased our footprint by 108%, $3 million of this increase through POP growth within the existing footprint we then operated; about $23 million through new market launches, and $2 million through the expanded footprint that I’ll discuss later as we’ve added new cell sites into our more mature markets.

Our customers grew by nearly 1.3 million, an 82% growth. We had an initial modest increase between 2004 and 2005, as we completed our preparations for growth and enhanced our product portfolio. However, since then, we’ve seen a substantial acceleration with 2006 being a little less than 600,000 incremental customers, and 2007 being 633,000 net new customers.

As we look at service revenues, our CAGR has been 28% on service revenues as they’ve grown over or at 100% in the last three years. The service revenues have doubled as a result of the 82% increase in customers and the $6 increase that we’ve experienced in ARPU.

But it all culminated in the improvement that we’ve seen in our adjusted OIBDA. We’ve improved our adjusted OIBDA by over 141% when you adjust for the new initiatives that will allow us to consider the next doubling of our business.

This results in a 34% CAGR over the last few years and our business operated at a 34% adjusted OIBDA margin when we look at the business without the new initiatives. Our guidance as we look ahead expects that we’ll have an adjusted CAGR outlook of 30% to 40%.

Now we believe we’re in an attractive market segment. We believe that no contract area allows us to not only be in the largest growth area, which is the additional customers that will join the industry without contracts. But also as we’ve seen, over half of our customers come from other carriers, many of them that had been on postpaid plans.

So we see an expansion of the segment from 16% in 2007 to over 24% in 2012. We think as we see this continued improvement in penetration that Cricket has a substantial opportunity with our low-cost, high-value services.

In times of economic stress we believe we also provide an attractive alternative as we provide the best value for the rate plans that we provide. These numbers exclude the effects of mobile broadband penetration.

As we set up our next phase of expansion, I want to point out the company has acquired a significant portfolio spectrum. We have available to us up to 50 million additional covered POPs. And we’ve overlaid most of our footprint with additional spectrum to allow us to grow not only our voice business but introduce a mobile broadband opportunity.

The result is we have 186 million licensed POPs and spectrum in 35 of the top 50 U.S. markets. This portfolio has been built as we focused on value and executed a disciplined approach to acquisitions in the past.

Leap and our DE partners have achieved average acquisition prices in Auction 58 of $1.11 a megahertz/POP and for the most recent completed Auction 66, $0.41, the lowest price bidder of all of the major bidders in the Auction.

We have three new initiatives that we believe provide the opportunity to build our business further: continued coverage expansion, higher speed data offerings and the new market expansion.

In May, we discussed our plan to improve our network by enhancing the footprint that we believe complements many of the other growth initiatives we’re executing. The effect of increasing footprint not only improves the market quality score, but it continues to execute the clustering strategy that we’ve used over the last three years as we’ve combined markets together.

In 2007, we completed over 300 of the planned new 600 total sites. And we expect the remaining sites to be completed in the first half of 2005 (sic). What’s most significant is the early results on this are yielding the expected outcome.

We increased year-over-year sales in those markets that have been launched with the majority of their sites by over 20%. And we’ve seen the improved customer retention. We believe the expected benefits of this program over time will yield higher long-term penetration and lower off-network costs.

As we turn towards our product portfolio, we are seeing continued success with our major new product initiatives, particularly as the businesses continue to focus on data.

As a proxy for the behavior that you see with our younger, more ethnically diverse customer base, the results we’ve seen on ring-back tones are very compelling. In six months after launched, we’ve seen a 67% higher than the industry average usage of ring-back tones.

Our current offer includes a $5 monthly recurring charge that allows two ring-back tones a month. But there is more ahead, we see the opportunity to expand our data applications to mobile video, music, social network and e-mail. Our customers continue to show the propensity to be early adopters and large users of appropriate data services.

In the second half of last year, we announced the broadband trial, and we want to provide an update on some of the progress that we’ve made.

We finalized our pricing with a $40 per month charge for a new customer and $35 when bundled with our Cricket voice service. The trial now operates in five market clusters, and we can report that 60% of the subscribers are new to Cricket.

We launched initially with the product primarily in our branded distribution, but recently have now expanded to include regional consumer electronic stores.

We’ve reached an important milestone in the second quarter with the expected launch of our USB device that we think will broaden the appeal of our product. And we continue to expect to follow a disciplined approach as we see further success come with this new offering.

We’ve talked for sometime about how we’ve improved the market quality that the business operates through a variety of initiatives. As we look at what’s ahead, we have increased those market quality scores by 14%, as a result of the actions that we’ve taken in Auction 58 and Auction 66.

The effect of these improvements increases by nearly 25% the increased long-term penetration potential of our total business, as we continue to launch and move these markets ahead.

The Auction 66 markets continue to progress with an expectation of up to 12 million POPs launched by the end of this summer, and 12 to 28 million POPs launched by year-end 2008. We’re pleased to report, we have the initial handsets and believe that they are no longer in our path to hold us up, and continuing to launch as well.

Spectrum clearing is progressing. We have some markets cleared today, and we expect that we will have additional markets available in 2008, as we make further progress with the government.

The company reiterated its guidance for the new market build-outs with a CapEx per covered POP of $26 through the first full year of operation and an operating impact of approximately $5. Again, as we experienced it with our previous Auction 58 launches, we expect that those will be OIBDA breakeven within the first full four quarters of operation.

I think Leap has done well and continues to be a strong growth story. With our results that we’ve delivered today we see attractive year-over-year growth in our financial performance, and we see improving margins.

Further, our business is resilient. We’ve shown the ability to grow with a proven scalable business model that delivers nearly unparalleled value in the marketplace. And we have an attractive array of future growth opportunities; growth not only from our existing business, but from the expansion of our footprint as we continue to execute a disciplined approach.

With that, I’ll turn it over for questions and answers.

Question-and-Answer Session

Operator

Our first question comes from Romeo Reyes - Jefferies.

Romeo Reyes - Jefferies

Couple of questions. First before everybody asks about competitive landscape. Can you give us a quick update, Doug, on Boost and other alternatives out there that are in the marketplace?

Then secondly, with respect to broadband, can you give us a little bit more information, if you can, on the subsidies, CPGA? I think you’ve said churn is lower than your core business. It seems to us that it’s a lower CCPU, potentially lower CPGA and lower churn CPGA and overall costs of running that business should be lower and the margin should be higher. But can you give us a little bit more color on that if you can? Thanks.

Douglas Hutcheson

We have clearly watched and I’m sure I think a number of people have watched a very active period in the marketplace from a competitive landscape. But I think some of the early things that we’ve seen, particularly some of the announcements today, really give us I think a lot of headroom.

We think we have a really attractive competitive position. And so I have not seen any changes that really cause us to change how we believe the business is competitively positioned. We think we have real attractive growth prospects in front of us, and I think we have quite a bit of value differentiation that’s available to us.

I think we have discussed that we have operated our business with other unlimited competitors in a whole host of our different markets. And what we have seen in many of those markets is that effectively expands the pie. And we’ve done quite well at taking our fair share of that. So at this point, we’re dealing like the business is positioned for growth.

The broadband initiative is in a trial phase, and so I think it’s a little premature to give you some specific operating metrics on that. Clearly, we think that there’s an attractive margin growth opportunity for us. We think the costs associated with delivering our product should be very attractive for us.

I think we’ll get a better idea on the acquisition once we roll out the USB device. We think that’s an important milestone on us validating whether or not we want to proceed and expand this business.

But what we’ve been interested in on that or what we’ve been pleased with is we thought we would see adoption by our existing customers. And we’ve seen of the limited customers that we have about 40% of those are existing customers. But it also allows other customers to look at the business.

And we’ve seen some interesting data that it actually improves how all customers, or those customers that are aware certainly, take a look at our brand. And so it also helps improve our brand and how people see it in the marketplace as we bring value not only in our voice and mobile data services, but we add in the mobile broadband services.

Operator

Our next question comes from Scott Malat - Goldman Sachs.

Scott Malat - Goldman Sachs

I know a lot of people have talked about that $25 plan. So I wanted to hear your thoughts on the promotional $25 plan you ran in December and why it was taken away and what the effects we can expect going forward.

And then I noticed the $30 plans have been taken off the website. I was surprised by that piece. I just wanted to get an understanding of what maybe the sweet spot as for an opening price point in terms of voice plan.

Douglas Hutcheson

Let’s do a little historical. First off, the company has consistently had service plans or regularly had service plan promotions, particularly in the fourth quarter. And we’ve typically had those promotions to be real narrow subsets of what we offered; not a lot of additions or flexibility on those.

We do that first because it generates customer interest. And second, we believe based on the results that we’ve demonstrated that over time customers really want the value that we provide in our higher-value rate plans. And so we really set up an interesting opportunity for the customer to see additional growth.

And I do want to point out that, that was a promotional plan, which means it’s not a plan that’s available if you either disconnect or routinely offer; no different than we’ve done previously, particularly during the fourth quarter.

In addition, the business has regularly trial rate plans. I think last year we discussed a whole series of trials that we did. As an example, in advance of introducing our roaming products, would be one area. You’ve also seen us trial what we call bolt-ons as we’ve looked at adding in and creating value with some of the additional data services.

During the first quarter, we were trialing new rate plans. We expect that you’ll see new rate plan rollout comes sometime either in late in the first quarter or in the second quarter.

We feel pretty pleased with the results that we’re seeing clearly as we pass through our 3 millionth customer. And we think we’ll continue to see attractive prospects for the business. So I think we’re feeling that we’re in pretty good shape at this point.

Scott Malat - Goldman Sachs

Okay and just one other question. It seems that a lot of the national carriers might be tightening the credit standards. I’m just wondering if you’ve seen the effect of this, and does that add to your gross add channel? Thanks.

Douglas Hutcheson

To the degree there’s tightening of credit standards, and we have created and operate a business model that does not require contracts or long-term credit checks, and by managing our cost structure, both on the acquisition, churn and CCU side, clearly we provide a really attractive alternative for many customers.

We don’t require a contract and we provide industry-leading value with a lot of services that we provide. We’ll see how the year progresses. I think we feel like the setup for where we’re at looks promising. We feel like we’ve got a good fourth quarter behind us, and we’ll see how the first quarter continues to evolve.

Certainly through the end of February, as we’ve announced, we see good results. And we look forward to continuing to progress through the year, rolling out our next round of rate plans and service plans and seeing how we move ahead.

Operator

Our next question comes from Ric Prentiss - Raymond James.

Ric Prentiss - Raymond James

First, I appreciate the 3-million subscriber number. That’s a nice milestone to hit. Gives us also an indication of how the economy’s going, how your first quarter’s going. If there’s any more color you can give us along that front with the requisite economy question and should we expect the seasonality that that first quarter adds might be higher than fourth quarter adds, is the first question.

Douglas Hutcheson

Overall our first quarter, our net adds are seasonal. We tend towards seeing higher net adds in the fourth quarter and the highest net adds in the first quarter. And I think what we said today is we would expect that seasonal trend to continue. And I think what you see is that we’re certainly a long ways down the path at this point of having the first quarter be a higher number.

We’ve had an attractive run rate through the first couple of months. So I think from an economic standpoint, at this point I think we’ve seen the normal cycle that we see in the first quarter with attractive customer additions and look forward for looking ahead.

This year’s a little interesting. I’m sure many people are looking at the economic stimulus package, and we are too. Clearly one of the reasons we see attractive first quarter is some of the income tax returns that go on. And so to the degree there is an economic stimulus package that provides a potential opportunity that we’ll certainly look at as the year progresses a little bit later as well.

I don’t want to suggest that that changes the overall seasonal rhythms of the business. I think that would be inappropriate, but it certainly provides an interesting opportunity that we’re going to take look at pretty hard.

Ric Prentiss - Raymond James

I appreciate the update on the cash balance and your operating cash flow and the flexibility to modulate existing launches; also the history of you as far as being pretty diligent and disciplined bidders in Auction, both 58 and 66.

A side question might be though, would you consider yourself fully funded for your build-out? And knowing what you know, but we don’t know about Auction 73 participation, is that something you would feel comfortable saying that you’re fully funded, do you think?

Douglas Hutcheson

Got to be pretty careful here. I think we believe that the business has adequate cash reserves for our 12-million POP build-out plan. And we’ll look at what other alternatives are available as things develop here.

Ric Prentiss - Raymond James

Okay. I know that was a bit awkward. Sorry about that, but I always have to ask. Final question is obviously, Vegas is one of the markets you’ve got on your map with the flags on it. Philly is one of the map flags on your future markets. Both those are MetroPCS-intended markets as well.

As you look at your prioritization of the POPs to build out the 12 to 28, the 28 to 50 million POPs, how do you think about the competitive landscape? Does it affect you at all as far as prioritizing your POPs? And I know you’ve competed against them in a couple of markets, but just as your priority POPs, does Metro going after it factor into your scale?

Douglas Hutcheson

We have operated with other unlimited carriers in a variety of our markets. And we have found that the fact there’s another carrier there is not the key driver on whether or not that market is going to be successful. I want to reiterate that some of our deepest penetrated markets, which are clearly in the double digits, have had unlimited competitors in them for their entire time.

The priority that we have based on what we’ve learned most recently on market launches is to really roll out a solid footprint that meets the needs of our customers. And to the degree we can deliver that on a timely basis with the adequate spectrum is really where we’ve been focused.

The flags that we have, we’ve clearly said previously that Las Vegas and Philly were on our launch schedule. We would expect them to roll out in due course, but we’ll also have a number of other markets that we’ve discussed as well, such as Chicago and St. Louis and Oklahoma City and South Texas, Washington and Baltimore. So I think we have a variety of opportunities to go out and launch additional markets and see some continued growth.

Operator

Our next question comes from Brett Feldman - Lehman Brothers.

Brett Feldman - Lehman Brothers

Thanks for taking the question. I just have two of them. The first is, I think you mentioned that one of the reasons why you did particularly well in the fourth quarter on your net adds is that you had very strong reactivations towards the end of the quarter. So I thought maybe we could start off talking about what was behind that trend?

Douglas Hutcheson

We put out guidance for churn for the fourth quarter in early December, and we beat that guidance. And I think what we are trying to point out is that we certainly saw a change in trends. And remember that the way we calculate churn is a customer that reactivates is not a gross addition. The customer that reactivates with the same handset is a deduct to churn.

And what we saw around the holidays was a pretty significant increase in reactivations, particularly post the holidays. And I think we don’t have concrete data that gives all the ins and outs to why that occurred. But what is frequent, particularly now as the holiday giving of gift cards has expanded, that we see an influx of dollars that come in. And because of the value that we provide, we see an acceleration in reactivations.

So it was a little bit more than what we had anticipated. And clearly recognizing that we had, as a result of the tenure effect that we had seen through the business, ceded handsets into the marketplace, to see those handsets come back to us now, which is really what you see when you see these reactivation time periods, to see those come back and give us an opportunity to make additional margin off that is something that it’s hard to be disappointed about at this point. I think the business has done well there.

Brett Feldman - Lehman Brothers

I’m actually going to turn that first question into two-part question now because you mentioned the tenure effect. Could you maybe give us a little more color on how you think the tenure effect is going to play out over the course of this year?

It would seem early in 2008, it would become beneficial because you’ll be getting further away from some of your 2007 market launches. But once you begin the progress on your AWS launches does that turnaround again? I just want to make sure we properly anticipate how the tenure issue could impact this normal seasonal rhythms of churn this year.

Douglas Hutcheson

I think over the last three quarters, we’ve provided the tenure chart a bunch of times so that it’s in investors’ hands so that you can see as you accelerate new customer additions, you can see that you have higher tenure earlier in their life. And then as they mature out, you actually get down to pretty low, pretty attractive levels.

In today’s call, we mentioned that we expect the tenure effect that we’ve discussed that by midyear – and I don’t know if that’s exactly at the end of the second quarter or just midyear that we would see that those curves, if you looked at those curves, would have worked their way through the business, and you’d see a more normal tenure profile for the business that reflect our normal seasonality.

Clearly, we do. And we would expect that, as you look at our business, it would be appropriate for you to think about that as well, that as you launch in new market and you see the early strong uptick that normally comes along with a market launch for us, that for those markets you’d see that tenure effect reflected and it would work through on the same curves, albeit with small differences based on changes that you would see that it would work its way through.

Brett Feldman - Lehman Brothers

Okay. Thanks. And then, just the second question, a real quick one. Could you maybe give us an update on where you are or where you were at the end of the year with your AWS market builds?

I know it’s not in your reported POPs because you haven’t any commercially launched any. What I’m really driving towards is estimating capital expenditures for 2008. And one of the ways we do is we think about how many POPs you’re going to build, multiply it by 26. I’m just wondering if some of that cost has actually already been captured in your fourth quarter CapEx dollars?

Douglas Hutcheson

Yes, in our fourth quarter number, I think we said about $100 million of it was related to not only Auction 66, but some of the other strategic initiatives that we’ve been discussing with you. So we gave you a little bit background, and the answer to your question is yes.

We also today said we expect up to 12 million of those to launch by the end of the summer. So that should give you a little bit of perspective on how to look at timing, when we might see some launches.

And the third piece, at our last call we outlined that we expect, to the degree we have launches later in the year, that they’re big chunky launches. And we’ve suggested that if those were to move a quarter or two, you could see the difference between 12 and 28 million, just looking at the timing of those launches. So that was trying to give a launch timing view. So people could think about when we would see POPs rollout.

Operator

Our next question comes from Simon Flannery - Morgan Stanley.

Simon Flannery - Morgan Stanley

Interesting to hear about the EZ handset. Can you give us a little bit more details if this a decent functionality and will it work on the AWS bands as well as your legacy bands? And also if you could update us on distribution, your distribution strategy, how you are thinking about the spreading up between the exclusive stores versus some of the national retailers and so forth? Thanks.

Douglas Hutcheson

Why don’t I let Al answer both those since he did such a good job of putting together the EZ handset for us.

Albin Moschner

Sure Doug, thank you. Quick update on the EZ, yes we are quite excited about this. It is a de-featurized handset. It, however, supports voice and text and it’s really meant as an entry handset with entry pricing. At this point, it does not support a multi-band, so therefore it’s not intended at this point for AWS. We are looking at that as a potential for the future, but as it stands today, it does not support that.

The second question was the distribution; distribution for us Simon continues to evolve. We are, as you know, and have stated in the past about two-thirds to about 70% of our gross adds now come through our exclusive channels. This includes both our company-owned stores as well as our premier dealers.

We are very committed to that strategy. As we continue to look at Auction 66 launches this year, the premier channel is very much a part of our mix; however we still complement with what we call our standard dealers that help complement a full distribution range.

We have also at the end of last year introduced our direct channel which is our web and outbound telesales capability. We were very pleased with the initial rollout last year. We are expanding that this year. And we will expect to see a greater percentage of our adds coming through that as well as the year and future progresses. So that’s a quick update on distribution.

Simon Flannery - Morgan Stanley

Thank you. Is EZ handset just a start of a group of new lower priced handsets, will we see other products, with similar price points as the year progresses or is it really a one-off?

Albin Moschner

No, I think this is our first attempt; obviously this is a new for us and based on how well it performs clearly our demographic appreciates entry level pricing that is more competitive. And if this is successful, I would think that we would see this kind of a concept evolve.

Operator

Our next question comes from Chris Larsen - Credit Suisse.

Chris Larsen - Credit Suisse

Couple questions, first on the 3 million subs that you announced today, I just wanted to clarify. Maybe, if you just run rate that; we are probably talking knowing that the January is little stronger than March, probably 175,000 to 200,000 subs for 1Q ‘08. I just want to make sure I did that right.

Secondly, on ARPU, I think that’s probably one of the biggest questions we seem to get, particularly the $25 promotion plans, there is sort of three things going on. If you just simplify that you have the $25 promotion plans, a lot of your net adds were added at the end of 4Q, so you could actually get a benefit of a full quarter from some of those net adds on a straight-line basis to ARPU.

And then lastly, what are you seeing in terms of trends, ignoring the $25 promotion plans, are people taking or continue to take more of those higher revenue generating plans? And then lastly, you spent $50 million on strategic initiatives in ‘07, any thoughts for that type of spending for ‘08? Thanks.

Douglas Hutcheson

The first, I don’t know that one month is that much different than the other. So I don’t know that I can give you a lot of verification. We are two-thirds through the quarter, and have another month to go through. I think, what we are seeing is we are seeing it’s progressing, we are doing fine. I think we would expect that we would see continued growth in March as we would move things ahead.

The $25 promotion, I think people need to move passed that. We’ve done promotions before, we will do promotions again. It brings our customer base in, it buys at the holidays, that is unique when those customers come in and they get a very, very narrow range of services.

And they look at the rest of the value propositions that we have. They tend towards moving up over time. I mean it’s all the way you build and bring customers in and build a franchise.

And would we expect a $25 customer to be in the near-term, have an impact on ARPU? Yes, we all can do the math on that, but we said we expect our ARPU to be in the mid $40 range, and we’ve managed it over the last three years up over $6.50.

I think we feel comfortable. We know how to manage ARPU and add customers and create OIBDA growth over period of time.

So it is what it is but we are going to keep progressing and expect we’ll rollout a service plan mix that that continues to put us in an industry leading value position, and is reflective of the fact that we figured out how to grow ARPUs over the last three years and manage that.

What I have said for quite a while is that ARPU growth doesn’t occur forever. And I said in the second half of 2007 that is that the business would make a decision about what we would do and flex that line.

And clearly what we said and continue to say is that, we’re getting comfortable in the range that we’re at now, and probably we’ll look to operate, with our seasonality and all the things that go on and the effects that that we have in the range that we’re at. We found the spot that’s appropriate for us to be and we’ll work on it.

Does that mean every quarter lines up exactly? No, remember our business will progress our way through, but we feel like we’re okay.

The $15 million spend that we announced for the fourth quarter had not only spending related to Auction 66, it also had the initial costs with rolling out a couple of million additional covered POPs and the broadband trials, the new initiatives.

Our focus for 2008 will be 66 in broadband. We have given you guidance on the broadband or on Auction 66, the $5 per covered POP is how that would work its way through the OIBDA line.

We think it’s a little premature on the broadband right now. I think we’ve given you some flavor on that and we have committed to a disciplined approach and how we move through that. And so I think we’d rather let that build right now before we start giving a lot of specific guidance around that.

Chris Larsen - Credit Suisse

It sounds like you are still able to up-sell those customers as they’re coming in; that was the crux of the question.

Douglas Hutcheson

Clearly even a customer that comes in on a promotional rate plan buys other services. But and they may buy those at the point of sale, they may also buy those over the next year or two. So remember you can’t reconnect to a promotional plan, you can only reconnect to a service plan. And so we’ve had a lot of success doing this previously, and continue to believe that our business is in good stead and we’ll continue to progress.

Lisa, we have time for one more question.

Operator

And our last question comes from Phil Cusick - Bear Stearns.

Phil Cusick - Bear Stearns

As we hear chatter, and I’m sure everybody’s heard about this, whether Boost is going to coming out at unlimited, on iDEN or CDMA. I think that the question is becoming much more about the whole package than it is about just what’s the voice price?

And as I think about that in terms of you, ARPU has been going up by a great amount. And data seems to be becoming more important both on the handset and also on the laptop card trial. But can you update us on where you see your spectrum position?

In a lot of these markets where you have only 10 megahertz, are you still sitting with an open carrier, or are we pretty much built out in a lot of those markets? What are you thinking about that space?

Douglas Hutcheson

Let me go out at from two directions on spectrum availability there. First is we have cleared a carrier across all of our markets and that’s inside what that initial launch spectrum would be and other than a market or two during Auction 66, we overlaid our entire footprint with another 10 megahertz.

So I think the business certainly has adequate spectrum to continue to roll out the services that we’ve discussed relative to the social networking, e-mail, mobile video. I think, we look forward to those rolling out and moving ahead. And we remain with the second 10-megahertz untouched, which provides us another three carriers.

It’s all AWS spectrum. So it needs to work through that process of getting launched and added on, but we feel pretty positive that as we do that; we’re going to have pretty attractive business case that that we’re rolling out on that. So we feel like we are on pretty good shape on the spectrum, Phil.

Phil Cusick - Bear Stearns

Okay. And since you bring up AWS, how many handsets do you think are available now and at what point is that going to be a decent selection across the entire footprint?

Douglas Hutcheson

We’re going to end up with a portfolio of handsets from not one or two manufacturers, but a variety of manufacturers. I think they need to make their announcements about who is going to be where, but we’re pretty pleased with the broad array of manufacturers that we see.

Before we went into the AWS spectrum, one of the things that we looked at was the chipset that was going to be developed on that, and there was a new chipset coming out that was going to manage up to four frequencies simultaneously, four different bands that is really going to make that process of having a pretty broad array of handset choices to the business be pretty attractive and not be as complicated for the manufacturers to achieve that.

With that said, when you start AWS you start with one handset and you build that portfolio, but we see the portfolio of handsets available on that building fairly quickly and looks to us like it’s going to move through in an appropriate time period for us.

Doug Hutcheson

But I want to end before I pass it back to Jim to say also thank you to all employees and our customers and the team that is here today to push through things on the business. We really appreciate the efforts.

Jim Seines

Thank you. And thank you all for participating in our call today. We appreciate your interest and support and we look forward to updating you on the business progress during our next quarterly conference call. If you have any questions about the fourth quarter results or any further clarification on the information we presented and discussed today, please feel free to contact us at 858-882-6084. Thank you.

Operator

Thank you for participating in today’s conference. This concludes the presentation. You may now disconnect. Have a great day. Thank you.

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