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Executives

Amy Wakeham – Director, Investor Relations

S. Doug Hutcheson – President and Chief Executive Officer

Albin F. Moschner – Executive Vice President and Chief Operating Officer

Walter Berger – Executive Vice President and Chief Financial Officer

Analysts

Romeo Reyes - Jefferies & Co.

Simon Flannery - Morgan Stanley

Scott Malat - Goldman Sachs

David Barden - Banc of America Securities

Rick Prentiss - Raymond James and Associates

Leap Wireless International, Inc. (LEAP) Q2 2008 Earnings Call August 5, 2008 8:30 AM ET

Operator

Welcome to the second quarter 2008 Leap Wireless International earnings conference call. (Operator Instructions) I would now like to turn the presentation over to our host for today’s call, Amy Wakeham, Director of Investor Relations.

Amy Wakeham

This call is being recorded and will be available for playback in the United States through the close of business on August 19 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 56923116.

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

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

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

Turning to Slide 3, the results and data we discuss today, including customer information, reflects the consolidated results of Leap, its subsidiaries and its non-controlled joint ventures, LCW Wireless and Denali Spectrum, LLC, for the periods indicated, as well as the results and data of Hargray Wireless, which we acquired in the second quarter of 2008.

Also, as used in today’s conference call and accompanying presentation, the term new initiatives refers to the company’s new market launch activity and its mobile broadband offering. The term existing business refers to the company’s markets and operation and associated services in those markets as of December 31, 2007.

During our call today we will discuss some non-GAAP financial measures. For a GAAP reconciliation of nonGAAP financial measures I would like to refer you to the notes to the financial statements contained in today’s earnings release and also to the financial reports page of the Investor Relations section of Leap’s website at Investor.LeapWireless.com.

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

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

For anyone listening to a taped or webcast replay or viewing a written transcript of our second quarter call, please note that all information presented is current only as of today’s date, August 5, 2008. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events or otherwise.

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

S. Doug Hutcheson

Three years ago we established a goal to double the size of our business. We’re pleased to share with you our continuing success in achieving this goal. In addition during this time period we’ve also assembled the capability to double the size of our business yet again. Today we’ll outline our progress and plans to double this business once again.

As we look at covered POPs over the past three years, we’ve added nearly 35 million new covered POPs since the second quarter of 2005, an increase of 130% and well on our way to potentially 100 million total covered POPs. Also we’ve introduced our mobile broadband product as of the end of the quarter to 23 million potential subscribers on the back of our success and the upgraded networks that we’ve developed over this time period.

Lastly, we added nearly 1.7 net new customers, an increase of 104% from our voice, mobile, broadband and recent acquisitions. This results in a three-year customer CAGR of 27%. So even as we've grown we’ve been improving our margins and our existing business and are well on the way to demonstrating success with our new initiatives.

The quarterly service revenue growth over three years has been $225 million, an increase of 117%. In addition, we’re now pleased to begin reporting on the service revenues of both our expansion markets and our broadband initiatives, which during the quarter added an additional $10 million.

Our operating income in our existing business was strong, offset by the $48 million negative OIBDA investment associated with our new initiatives. OIBDA growth in our existing business increased by nearly $80 million, an increase of over 100%. Existing business margins increased to 38%, showing the continuing success we are achieving in increasing our operating leverage.

The new initiative spend lays the foundation for our next doubling over the coming years, and today we’ll share our plans and our progress. Al, our recently named COO, will discuss our operating performance for the second quarter. With this call, we’d like to welcome Walter Berger, who joined the company during second quarter as our CFO and will discuss our financial results. After I return to discuss our future growth plans, we’ll have a Q&A session, where Glenn Umetsu, our CTO, will also join us.

Albin F. Moschner

Overall, we are pleased with net subscriber performance for the quarter, achieving 171,000 or a 29% year-over-year increase. Performance in our existing business was consistent with seasonality and the maturing of markets launched in 2007, resulting in 44,000 new net subscribers.

We also saw strong customer acceptance in our expansion markets, resulting in 116,000 new net subscribers. In fact, initial AWS market performance exceeded that of Auction 58’s initial performance, demonstrating the effectiveness of launching markets with high market level scores and with larger footprints.

Also, we achieved a stronger than anticipated broadband success, adding 11,000 new broadband customers, ending the period with 14,000 subscribers or a 40% increase above our guidance of last quarter. We expect the second half of '08 to continue this customer growth.

Our existing business will reflect seasonal trends, with early results of new growth programs primarily in distribution, and we’re seeing a stronger than anticipated July performance activity. We expect our expansion markets to continue to strengthen and further expansion of our broadband initiative as we plan to expand to more markets over time. However, as always, customer activity may be affected by gas prices, tax rebates and other macroeconomic conditions.

Overall churn performance was as expected, with total company churn at 3.8%. In our existing business, churn performed at 3.9% compared to 4.3% in the second quarter of '07. There are three factors that contributed to this result - the tenure effects of pre-2008 launch activity was abated, as anticipated, year-over-year upgrade activity, that pressure is normalized, in fact, decreased in the quarter, and we are experiencing the expected benefits from our footprint expansion, which we’ve completed over the past 12 months.

However, we did experience greater volatility in the quarter in both our deactivations and reactivations, which generally offset each other in the period. We’ll talk more about that as it did affect some of our ARPU performance.

As expected, early churn performance in new markets reduced total company churn by 0.1%. These new markets, as expected, will follow the previous new market tenure experience in upcoming quarters, whereas we experience positives effect from the early quarters and additional churn over normal periods as the tenure of these markets mature.

We expect the second half churn to reflect our seasonal trends, similar to our 2005-2006 curves, but early second half '08 strength could be impacted by macroeconomic factors, as seen in the second quarter.

Second quarter consolidated ARPU was $43.97. In our existing business, we delivered ARPU of $44.18. We launched some very attractive new rate plans this last quarter, providing a value proposition over a range of price points. The mix of these plans performed as expected, but as I mentioned, we did experience higher deactivation activity offset by an increase in reactivations. This temporary effect did put pressure on ARPU, both in deactivations causing reduced revenue and reactivations - reduced revenue caused by timing of payment of service.

We’re looking at our new initiatives. We expect our ARPU - for those to be affected in the following ways: Our expansion markets are tracking as expected. Hargray ARPU we expect to increase in Q4 as integration proceeds. Broadband build ARPU is performing as expected, but we will be lower than voice and we expect in the mid to high 30s. Overall, we expect 3Q '08 ARPU for Cricket voice services to be flat or slightly higher [to 2008] and fully expect that to continue to be within our voice ARPU objectives, while we expect some dilution from mobile broadband service.

With the launch of our new rate plans in the second quarter, we continue to be the value leader in the industry, as shown, versus our competitors, offering the only real unlimited that saves customers up to $600 a year by offering more value at a lower price.

CPGA performance for the second quarter was $205, reflecting investments for growth in future periods. This comes in two forms. First, in the second quarter of '08 new initiatives spend of $12 reflects costs associated with peak 2008 launch costs related to new market expansion and the launch of nearly 15 million broadband covered POPs. Secondly, we saw a year-over-year increase in existing business CPGA of $11. That was a result of $19 of lower subsidy costs offset by an increase in sales and marketing of $26 in higher store costs as we added 12 new company stores, as disclosed in Q1, to support our footprint expansion.

Adjusted for these two investment efforts, CPGA would have been comparable to '07 levels. As we look at the second half of '08, CPGA will reflect our normal seasonal rhythms in our existing business, higher pre-launch and initial costs related to new market expansion and increasing launch costs related to further expansion of our broadband initiative.

CCU performance continues as expected, with the second quarter achieving a result of $21.01. Our existing business CCU of $18.92 also performed as expected, and from a year-over-year perspective it declined. Adjusted for a material one-time affect, it was $1.74, and this indicated the benefits of scale, which outweighed the costs of associated increased footprint.

New initiatives spend of $2.09 per user reflects costs associated with new markets and mobile broadband. In the second half of '08 we expect consolidated CCU to remain in the low $20 range, reflected continuing expansion of our business, provides scaling to offset a cost of new initiatives.

Finally, the net result of the metrics just reviewed resulted in our existing [capita] per user contribution, or existing markets I should say, a year-over-year increase of 9% or $17.72, demonstrating the company’s ability to grow while maintaining attractive customer performance metrics. Markets that are two years and older typically have contributed greater than $20 of CCPU while less mature markets continue to increase their contribution. On a consolidated basis, including $2.55 of new initiative costs, our calculated contribution per user was $15.52.

Now, I’d like to turn the call over to Walter.

Walter Berger

If you’d turn to Slide 17, one can see that with the exception of the third quarter of 2007, which is essentially a lower OIBDA-generating quarter, we’ve continued to grow total service revenues in existing business adjusted OIBDA for essentially every quarter since the second quarter of 2007.

Service revenues in the second quarter 2008 have increased by about $70 million over the second quarter 2007 or approximately 20%, which includes a $60 million increase in existing business service revenues and approximately $10 million of service revenues contribution from our new initiatives.

Impacting our consolidated adjusted OIBDA results for the quarter is $48 million in net spending for new initiatives. This principally reflects our investment associated with the expansion of our business to new market launches and our continued rollout of Cricket wireless Internet service. Excluding costs associated with new initiatives and excluding the one time $6 million gain recorded in the second quarter of 2007, our existing business adjusted OIBDA increased over $51 million year-over-year, and our existing business adjusted OIBDA margins continue to improve, increasing year-over-year by 8 percentage points or approximately 38% for the second quarter.

As discussed previously by Doug, while adjusted OIBDA margins have declined on a consolidated basis as a result of our investment in new initiatives, the margins of our existing business has continued to improve. Moving to Slide 18, we will provide further details behind the improvements in our existing business operating margins.

Cost of service margins within our existing business have improved year-over-year. The margin associated with the product portion of cost of service has improved year-over-year due to improvements in rate of long distance calling costs and other rate reductions. The margin for non-product portion of cost of service for our existing business has remained essentially flat with the prior year period, even while absorbing the cost associated with expansion of our footprint within our existing business.

The second quarter of 2007 also included a one-time gain related to the renegotiation of lease contracts that reduced our cost of service by approximately $6.1 million. The year-over-year improvement in our net equipment subsidy reflects a couple of things, including the reintroduction of activation fees for new customers which were not charged during the prior year period and the launch of Cricket EZ handset in the first quarter of this year, a low-cost handset which provides competitive pricing opportunities without negatively impacting subsidy.

The year-over-year improvement in sales and marketing margin for existing markets represents the benefit of scale on an expense line that is approximately two-thirds fixed. During the quarter we saw improvements in customer care and billing margins, reflecting expenses essentially flat year-over-year even with a nearly 500,000 increase in average customers in existing markets.

Overall, the company is achieving the margin improvements expected within existing business and believe we will continue to see improvements in our operating margins as a result of both further penetration of our existing markets and our ongoing cost initiatives.

Historically, we’ve demonstrated an ability to deliver adjusted OIBDA margins that exceed 40% over time, and the second quarter results of our existing business indicate that we are well on our way to delivering similar margins within our existing business as we continue to grow and gain additional scale. This increasing scale is also [inaudible] by the incremental 75% contribution margin the business delivered as measured by year-over-year and change in service revenues and existing business adjusted OIBDA.

Turning to Slide 19, as part of our ongoing strategy we continue to invest in new initiatives, and in the second quarter of 2008 we absorbed approximately $48 million of negative adjusted OIBDA associated with our new initiatives which we expect to contribute to the future growth and profitability of the business. Included in net initiative spending for the quarter was approximately $10 million of negative OIBDA associated with our broadband initiative.

This negative burn included approximately $6 million of fixed costs per quarter, which we shared with you last quarter, and an additional $3.5 million of variable costs associated with approximately 23 million covered POPs we’ve launched through the second quarter of 2008, as well as pre-launch spending for additional POPs we expect to launch this year.

For the quarter, we also invested approximately $38 million in expansion markets, including costs associated with our acquisition of Hargray. This includes both the costs associated with the approximately 8.5 million covered POPs launched in the second quarter of 2008 and approximately 8 million of pre-launch costs for POPs we expect to launch in the future.

Now turning to Slide 20, please, net loss in the second quarter of 2008 was $26 million compared to net income of $10 million or $0.14 per diluted share in the second quarter of 2007. However, the second quarter of 2008 net loss per share includes approximately $0.70 per share of negative adjusted OIBDA associated with the company’s new initiatives that we previously discussed.

In addition to the impact of costs associated with the company’s new initiatives, the primary factors contributing to year-over-year change from net income to net loss were an $8 million increase in net interest expense due to a decrease in interest income due to the company’s change in its investment portfolio to primarily cash and treasuries and an increase in the company’s interest expense in the current period primarily related to $350 million of high-yield bonds that were issued midway through the second quarter.

Another factor contributing to the increase of net loss was an $8.5 million increase in income tax expense primarily reflecting the deferred tax of higher amortization of wireless licenses resulting from the change in tax rate for those licenses in the third quarter of 2007, as we’ve discussed in previous quarters. We expect to continue to report income tax expense of approximately $10 million for each quarter through 2008 despite the fact that we’ve reported a full valuation allowance and nearly all of deferred taxes.

Expenses associated with our minority interest in consolidated subsidiaries increased by $2.5 million year-over-year, primarily reflecting increased accretion associated with the redeemable equity held by certain investors in our joint ventures.

Turning to Slide 21, as you know, the company completed several significant capital market transactions in the second quarter which positioned the company for continued growth and investment in new initiatives. These financings were achieved on favorable terms even as the overall credit markets have remained challenged.

First, the company successfully amended its senior secured credit agreements to align the existing agreement with our current operations and future growth plans. We also completed two financings which we believe provide the company additional flexibility and funding for our current new initiatives, including the build-out of our new Auction 66 markets, with continued expansion of our mobile broadband initiative and further enhancement of the footprint within our existing business. Further details regarding these financings, as well as the amendment to our credit facility, can be found within our filings made with the SEC on the closing of these transactions in late June.

Moving to Slide 22, total cash on hand, including short term investments, at the end of the second quarter was approximately $934 million. That’s an increase of $426 from our cash position at the end of the first quarter. The increase is primarily due to net proceeds from approximately $536 million received as a result of the financing activities completed during the second quarter, offset by the company’s usage of approximately $229 million in cash during the quarter.

Our current cash investments remain invested as disclosed in our first quarter conference call. In general, the company invests its cash with financial institutions and money market funds, short-term U.S. Treasury securities, obligations of U.S. government agencies and other securities, such as prime rate short-term commercial paper and investment grade corporate fixed income securities.

Capex for the quarter was $181 million, which includes capital expenditures in our existing business and ongoing expenditures for the completion of the first phase of our footprint enhancement program. Capital expenditures for the quarter also include Capex related to development of our expansion markets. For the second quarter, capitalized interest associated with the new market expansion was approximately $13 million. Looking ahead, we expect aggregate capital expenditures in our new market build activity to be approximately $25 per covered POP, excluding capitalized interest, reflecting a $1 reduction of our previously provided outlook.

This amount represents required capital expenditures to support our new markets through their first year of operation, and the reduction is the result of lower than anticipated site development expenses. After the first year of operation, annual Capex are expected to be in the mid teens as a percentage of service revenue. Note that any capital investments associated with significant enhancement of the footprint within our existing business is not included in this ongoing capital expenditure number.

Finally, in closing the financial section of today’s call, I’d like to share and reiterate the company’s belief that we’re sufficiently funded between our current cash position and our ability to generate cash from operating activities to meet the operating cash requirements from our current business operations and the expansion of our business through the launch of new markets, the continued expansion of our mobile broadband service, and the further enhancement of the footprint within our existing business.

With that, I’d like to turn the call back over to Doug.

S. Doug Hutcheson

As we look at our opportunity to double the size of the business again, we’ve implemented three primary drivers to achieve that. We believe there’s a series of programs in our existing business that we’ll cover in a little bit more detail that allow our 53 million covered POPs to see deeper penetration as a result of that increased financial performance.

Today I’ll share results with you on our new markets, the initial results - and we believe those markets represent a higher relative growth potential, and we’re well on our way to seeing that - and then the expanding role of mobile broadband.

Turning to our networks, we’ve completed 90% of the first phase of the network expansion that we communicated with you about a year ago, and that network expansion covers about 29 million total POPs. The remaining sites we'll roll out over the second half of this year and perhaps some into next year, but the bulk of the work on this is done.

We also discussed last call the potential of additional activity in this area and we do believe that further work will be done beginning in the second half of 2008. The background on this work, there's a high correlation we see between customer penetration and in building coverage, and we’ve identified priority areas based on specific micro market quality factors and look forward to seeing the results of this in 2009 and beyond.

These additional sites could represent up to an additional 600 sites. We anticipate the costs associated with those sites will be in the $225,000 to $250,000 range and will affect 45 million of the existing 53 million covered POPs. These sites are expected to be completed by year end 2010. The net effect of this work we believe will increase penetration in the affected markets by 0.5% to 1.0% by the end of 2010.

Turning to improvements in the market level, we think we have significant ability to drive further growth. We’re implementing marketing and distribution programs across 31 of our 53 million covered POPs. Those initiatives begin launching in the first half of 2009 and will roll out over the coming quarters.

The drive behind those is further improvements in direct store operations, in strengthening our indirect channel performance, when we have the factors lined up, an increase in market level awareness, and then always dealing in trying to optimize our store location. The expected effect of these initiatives is to increase penetration in the affected markets by 0.7% to 1.25% in the markets over the long term.

We’ve mentioned that the company has invested significant money in our networks to have them be the latest technology, and we see the benefits of that occurring not only in our ability to provide services to our existing voice customers but also with our mobile broadband initiative. We have one full-time EVDO carrier across all of our markets, and we built and all of our networks are connected to a data superhighway.

We’ve invested $165 million over the last three years to support this initiative, and now we’re beginning to see additional benefits as a result. Our new markets are all launched on a rev A basis, both the networks and the handsets, and we expect to upgrade our existing business networks to rev A during 2009.

This network enables us to deliver a series of advanced options, not only the recent announcement we made with a relationship with Fox Interactive but, in addition, other ARPU-enhancing features in 2008 such as the download of video clips, download of music tracks, and other initiatives that will be available, either bundled or on an a la carte basis. We do expect to look at a streaming upgrade in 2009.

So how does all this come together? What does it mean? Well, our markets two years and older have continued to historically penetrate at about 0.5% per year. We have leading markets that are well into the double digit penetration, and those also continue to grow. The previous round of markets that we launched in 2006 and 2007 are tracking to penetration at the end of two years between 0.5% and 0.6%.

When we look at organic growth and the new programs and our penetration impact on it, we believe that our existing business will achieve between 8% and 9% in aggregate by year end 2010. This does not include any effects from our mobile broadband initiative.

Turning to the initial Auction 66 market launches, we’ve completed 8 million covered POPs in the second quarter. We’re pleased to say these initial launches are at or ahead of our penetration expectations and currently performing ahead of our last auction, our Auction 58 market launches. We believe the markets that we see validate that, when we launch in a competitive situation, that it actually expands the pie. And you can see that when you look at the bottom of the chart, where we see in markets where we’ve had multiple low cost competitors substantial penetration as a result of the market level awareness that’s generated. We believe both our new Cricket only and the markets with multiple low-cost competitors will have attractive financial performance over time.

In addition, these recent market launches validate our revised spending profiles that we outlined today. Walter mentioned the lower Capex costs, and today we also increase by $1 our outlook for the cap of the OPEX burn associated with these markets when you look at that on an aggregate cumulative investment. Now, as previously, the peak burn on a market-by-market basis will be slightly higher, and we updated that number to $7.

We have substantial further opportunity in front of us. We expect to be able to launch up to 36 million POPs by the end of the first half of 2009 and up to 50 million POPs by year end 2010. These new markets provide us a substantial opportunity as we purchased those with low relative license costs and focused on markets that had attractive penetration potential and, as a result, we believe we have a good IRR potential in front of us.

The team has made good progress on spectrum clearing, although some risks remain in some of the markets to continue to clear those. But we believe as we look ahead that we'll see continued success.

We're going to launch up to seven new tri-band handsets by the end of 2008. We're continuing to work with our vendors on that and in addition provided the revised Capex buildout expectations we discussed with you.

Turning to the wireless Internet service, I think we're off to a strong start. Our product provides monthly access with speeds comparable to DSL. For those customers that are new to Cricket, which represents about 60% of the customers, that has a $40 cost, and for those customers that have other Cricket services, the product's available at $35.

As we mentioned, we launched a universal devise, a USB device. It works in desktop and laptop computers, and we've seen attractive uptick in our penetration, as we had expected. In addition, as a result of our initial volumes and the volumes that we expect to generate in the second half of 2008, we believe we'll see substantial volume pricing levels achieved with this device in the first quarter of 2009 that will allow this business to continue to move ahead nicely.

During the quarter, as Al mentioned, we added 11,000 customers, bringing our total customers to 14,000 against a 10,000 forecast. We achieved greater than anticipated volume not only in the original 13 million POPs that we outlined that we were going to launch, but got off to a strong support with the additional POPs that we were able to launch as well.

Current usage levels are expected to decline over time. We have programs that tell us that we expect that they'll come in line with what we anticipate. Just as when we've launched other unlimited products, we've been able to manage those products over time to what we would like them to be.

Our [inaudible] performance expectations have been advanced. Certainly a strong customer acceptance is driving us to move ahead more quickly, and we expect a negative OIBDA burn with this program as a result of launching 60 million covered POPs by year end 2008 to peak in the second half of this year. In addition, we expect this program will generate positive OIBDA contributions for the full year.

So as we look at our market level outlook, you see the $0.50 aggregate cost remains unchanged, although we'll remind you of the peak burn on a market by market basis, just as you see on the build-out of the new market, will be higher. And the 6 million fixed costs through the second half of 2009 will continue to run, although the $6 million is included in our positive contribution for the full year 2009.

Market level breakeven is projected within three full quarters after launch, and we expect 100,000 customers by year end 2008. Within one year after market level launch, about a half a point of penetration and customer profitability, as measured by how we calculate the cash calculated contribution per user per month, to be between $10 and $15 per month by year end 2009.

We believe we're delivering a strong continuing growth story. We've delivered business results. Our business has been resilient, making progress even in uncertain times. We've seen attractive customer growth, and we continue to see improvements in our year-over-year financial performance. We've established a significant set of assets - our existing business strength, the brand awareness and customer experience that we deliver through our field personnel and our distribution partners.

We have upgraded networks that are ready to bring new services to our customers and an attractive spectrum portfolio. Our growth opportunities are strong and they're attractive - the growth from our existing business, the doubling of the footprint and the expansion of our mobile broadband.

And, in ending, a team has been assembled that can do this, not only a strong team of dedicated employees, which I thank for their efforts, but a management team that can deliver.

As a result, today the company did update its three-year adjusted CAGR outlook excluding broadband, and we anticipate that our CAGR will be between 35% and 45%.

With that, I'd like to return to the operator for the Q&A period.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Romeo Reyes - Jefferies & Co.

Romeo Reyes - Jefferies & Co.

In terms of basically the churn was affected, I think you mentioned, by reacts and deacts. Can you please review that a little bit? I think, Al, you talked about ARPU also being affected a little bit by reacts and deacts, so can you please maybe just give us a sense of [inaudible] and on churn.

And then secondly just, Doug, I think in the slide you mentioned that broadband drivers are going to be about 100,000 by year end '08. Is that the right number?

Albin F. Moschner

Let me just again talk about the churn perspective. As I mentioned, we did see a very good result in churn, actually seeing a 40 basis point improvement in our existing business. But we did have higher volatility, and it came in two forms. We saw higher gross deactivations, and the way churn is calculated is we start out with the gross deactivations in the quarter and the net benefit against those gross deactivations are reactivations. People come back that had been on our service before, and they come back in several different ways. And fortunately we saw the reactivation side of this greater than expected, generally offsetting the greater gross deactivations.

Unfortunately, both of those have a dampening effect on ARPU. Clearly, as we have great deactivations, we don't collect revenue from those customers that leave the service, and in a reactivation sense, that service revenue is further delayed in later periods and not in the months that - we don't get full credit for that revenue in the months that the reactivation occurs. And so, with the volatility that we saw primarily at the end of the quarter, it tended to reduce ARPU to some degree.

Romeo Reyes - Jefferies & Co.

Would you mind going through the difference between deact and disconnect?

S. Doug Hutcheson

There's no difference. A deact and a gross disconnect are the same thing. So churn is reported, as we've always said, there's no difference in how we report churn. Churn is reported net of deacts and reactivations of the same customer.

Romeo, as far as the broadband, out guidance is we expect approximately 100,000 broadband customers by the end of this year based on our current trends, so I think what you heard was correct. And we'll have launched that up to about 60 million covered POPs.

Romeo Reyes - Jefferies & Co.

Is there a reason to expect that you wouldn't roll out the entire AWS or the 66 market in 2009 and 2010?

S. Doug Hutcheson

Well, we certainly have launched - all of the current market launches have been launched with the broadband product included. That's why you saw the breakout in the customer net additions that Al provided, that we had good volume. About 5,000 of the 11,000 net customer additions came in the Auction 66 markets.

I don't know that we'll launch it on all of the markets, but certainly almost all of them. I think we'll generally want to make sure that we have adequate spectrum in all the markets before we put the product in place, and there's a few markets where we have a little less spectrum and we may focus more on our voice product there.

Romeo Reyes - Jefferies & Co.

I realize this might be a little early but do you have any data on sort of the stickiness of the two-product customers relative to one-product customers.

S. Doug Hutcheson

What was your customer breakout on that, Romeo?

Romeo Reyes - Jefferies & Co.

Just the relative stickiness or churn for the customers that take both broadband and voice versus the customers who just take voice. I realize it's kind of early days.

S. Doug Hutcheson

Well, I'll say - and it's early, so I do want to flag that - for those people that are on the USB modems - so the ones that were on the older modem, as we had expected, the profile's a little bit different - but for those people on the USB modem, the churn profile has been a little bit better than what we see on a voice customer basis. And we don't have enough time, where they have both products with the USB modem, to really start to get into the details of the stickiness of the two-product customer. So what we'll do is watch that, and hopefully by either the next call or the call after that we'll be able to provide you a little more color there.

Operator

Your next question comes from Simon Flannery - Morgan Stanley.

Simon Flannery - Morgan Stanley

If I can follow up on mobile broadband, you did talk about some heavy usage that you were experiencing. Have you got sort of gigabyte caps and things like that that might help you manage some of that, and what is it that makes you feel like that's going to come down? Could you also address the capacity utilization experience? How do you manage the heavy network traffic from this? Is the peak period different from the voice peak, for example? And then I think maybe it was Al who mentioned that July was tracking quite well. If you could just give us a little bit more color on what's been happening here the last few weeks.

S. Doug Hutcheson

Sure. So the - let me break out what the - every time, if it's not every time it's pretty darn close, when we've launched unlimited products, we see them follow a curve that tends towards having higher usage when you first get ahold of the product and then things come down over time. And we're into our 10th, 11th, 12th product bundle like this, and we certainly see and expect that that'll follow the same trend. In addition to that, we'll continue to look. We have some other programs that we have that we think we can manage that volume.

So we see a normal curve that we're expecting to see and feel comfortable that we have the ability right now to manage that curve. I would tell you that we will keep our eye on it. I think we probably, even if the usage would stay a little higher, like we're seeing it, you know, still see this as a pretty profitable product, so I think we would tend towards looking at this issue not as a go-no go but as a margin enhancement opportunity over time.

As far as the volume that we have, remember - and that's why I flagged that we've identified a separate carrier for this, and that carrier's inside our existing first 10 megahertz of spectrum and we think for the guidance package that we've outlined at this point that we have more than adequate volume to absorb that - if we have the pleasures of significant success on that, you know, we'll look at what else we do and have associated revenues and cash flow should we expand and add carriers on it. So I think we'll stay in a success-based mode.

Because it's on a separate carrier the way that it is, it can have its own usage pattern, and so right now it's close to a similar usage pattern as what we see on the rest of the business. And I think given the way that we've structured the network on it, I think we feel pretty comfortable on that.

So the other piece is we have seen - July has been, I think, a nice July. I think some of that is the effect of the programs that we've been run and all of us are waiting to see how much of that is the affect of the tax rebate. So we have seen more strength than we typically see in July. That has equated into the front door volumes. It's also been a little bit of dampening of the volatility that we discussed on the ARPU.

With that said, we'll flag that, you know, that does not make a quarter. We're just saying the reason that we believe the ARPU effect is likely mitigated is we've seen, you know, had already seen some evidence of that, which is why we flagged that data. And then we'll look forward to watching the rest of the quarter come together, but think that we're going to be all right on it.

Simon Flannery - Morgan Stanley

Do you think, gas prices and so forth, the consumer is just much more price sensitive and you're really seeing that benefit, you and the marketplace, as you can - more opportunity to take share from people leaving the Big Four?

S. Doug Hutcheson

Well, we'll see. Gas prices certainly, as we've said for several years, certainly affect us. And Al, you know, in his section outlined that you come to our unlimited plans and it's $600 a year in savings, so it has given us a chance to really highlight pretty clearly a flight to value opportunity for us.

It is, I think - I can't say enough that I think our business is doing - I'm pleased how our business is doing right now, certainly compared to the volatility that we discussed with you last year. At this point I think the business has done a nice job of absorbing that and advancing through that. You know, we've got to get through the rest of the year and move our way through it, but I think right now we seem positioned that we'll be able to continue to execute on our growth plans and comfortably see the rest of the business move ahead.

Operator

Your next question comes from Scott Malat - Goldman Sachs.

Scott Malat - Goldman Sachs

A quick modeling question. I just want to make sure I understand this. The existing business that you give in terms of statistics, that includes all the markets up until the end of 2007. And when you compare it to a year ago, those are total, all markets, not the ones that were existing to the end of the third. That's right?

S. Doug Hutcheson

Yes. I think there was a few markets that were launched in 2007 that would be slightly increased to that.

Scott Malat - Goldman Sachs

So the ones that were launched in the beginning of 2007 in terms of the year ago comparisons, those are dilutive to those numbers, right?

S. Doug Hutcheson

Dilutive or additive, we launched three markets in the second quarter of 2007 that increased our total covered POPs I believe 3, 4 million covered POPs. And we have effects of the footprint expansion initiatives that we completed last year that have had the effect of increasing the covered POP number slightly. But more or less we believe they're generally comparable to where we're at in 2006 if you understand or look at those two things.

Scott Malat - Goldman Sachs

And then just on the rate plans, you did mention that they performed as expected. Can you help us understand what that means just in terms of you added some features to the $40 plan. I think you added some features to the $45 plan. And just understanding what are typical customers doing, are the sign ups at lower levels, are the sign ups at higher levels, and then are existing customers changing their plan, and just how'd that work through the quarter?

Albin F. Moschner

Yes, in fact what we did is maintain the price points that we had in the marketplace, but we wanted to increase the value delivered at those price points. And we were reacting to several factors. We look at competitive situations by market, and in fact we introduced two different structures. We have a lead plan structure and a standard plan structure. Depending on the competitive nature of the marketplace, we will either launch one or the other rate plan structure.

Within those structures, when we talk about performing as expected, the mix that we see, we typically go into these projecting what we believe the mix will be. That's pretty much what these markets performed on average, and that's how we look at it. And I think that was the commentary we made. We typically don't share specific mix numbers, but generally the markets performed as we would have expected and as we had planned for them based on the value equation that we created.

S. Doug Hutcheson

Yes, and we continue to see, as we've disclosed previously, that the - you know, our volume continues to be much stronger at our higher price points. So when we said they performed as expected, we're not capturing the volume but a strong downward migration on our rate plans.

We do have our entry level rate plans, as we discussed with the people a year ago, because it's important for us to have that entry level price point. It really sets up a framework for us to defend, you know, the bottom end of our rate plan. But if you were going to look at our rate plan uptake first quarter versus second quarter, you'd actually see that our average rate plan uptake, our average billed ARPU went up as a result of our new rate plan uptake, not down. So as we said on the slide, our rate plan uptake has been as expected, and so we're feeling like we're moving ahead fine on that.

Scott Malat - Goldman Sachs

In terms of how important the EZ handset was or just the lower end handsets, it seems like in this macro environment it's a lot to ask someone to spend over $100 for a new phone. How much has that been a part of helping your gross additions in this quarter?

Albin F. Moschner

I think, Scotty, I think it's been very important, and in fact it does two things. It provides a lower price point with good functionality. And secondly, as we reported, it also helped reduce our subsidy costs. I mean, it helped both the business and the consumer with how that performed. And as we had mentioned on previous calls, we continue to be very aggressive in our lineup, both now in AWS and in our nonAWS markets, to continue to drive not only the cost of our handsets down, but passing that onto the consumer because your perspective is correct. As we continue to improve that parameter, we see improvement in performance.

S. Doug Hutcheson

If you look at the rate plan uptake and then if you review the details that we shared on CPGA, you take out the new initiatives, as we talked in the first quarter, that we had some stores we were going to roll out during the second quarter, the $7 or so that was associated with that, what you see is the metrics are basically - we're seeing the growth that we're seeing pretty much on top of our typical acquisition profile. Meaning we're seeing not a material difference in CPGA nor a material difference in ARPU as people come in the front door.

So I think we should continue to progress on that set of conditions. The business seems like it's doing fine.

Operator

Your next question comes from David Barden - Banc of America Securities.

David Barden - Banc of America Securities

Doug, maybe just a couple questions on the subscribers. First, as we look at the guidance midpoint for existing business - 8.5% times the 53.5 million covered POPs - it implies about 1.4 million subscriber growth over the next two and a half years in those markets. When we look at the year-over-year comps in the second quarter, recognizing the seasonalities, this year we had the tax stimulus checks, we had maybe Sprint backing away a little bit from the prepaid market, and then obviously we had the economy, had some new markets launched in the latter part of '07. And yet the existing business subscribers were about 44,000 versus 127,000 last year, so a relatively sharp deceleration.

How do we think about kind of reaccelerating penetration in the existing business footprint to get to that kind of guidance target and interpret these kind of year-over-year comparisons where things seem to be decelerating in terms of penetration?

S. Doug Hutcheson

Well, the first thing is we launched a series of new markets in the second quarter of 2007, so you would expect on that comp that you would see a decline in the volume, same as we've seen and we've guided people always that you would expect on that. So I think that's the first thing.

The next thing is I do remember our first quarter growth was pretty strong as well, so you saw I think people were, when they had a chance to look at our first quarter growth and you look at our second quarter growth holding, we feel pretty good about that.

I do think when you look at the tax rebate part of your question, I think you need to be careful that whether the quarter ends on June 30th or July 30th that you're just, you know, not getting a chance to see what that will or won't bring from a volume standpoint. So I think the reason that we highlighted that we're moving through things and feel pretty good is based on the fact that we see that.

And then the last piece is I outlined some pretty discrete definitive programs with some pretty explicit impact that we expect those to have as well as us making the investments around those, and I think we feel pretty good about those programs. We see the results to date of how it's changing our business. I encourage you to look at - we included in the churn chart, as an example, that you actually see, you know, core churn has gone down, as an example, on the bar chart at the bottom of the churn slide. And you see us feeling comfortable that when we've targeted in and done the things that we have on the network and the distribution that we're going to see benefits there.

So I think you're right on your math. We do think that there's substantial upside on it. We've said for awhile we thought there was substantial upside available in our existing business, and we've outlined that now in a little bit more detail as well as the programs that we think will allow us to go get that.

David Barden - Banc of America Securities

And Doug, if I just followed, just quick, looking again, then, into the third quarter, obviously you kind of mentioned a strong July to this point in time, relatively speaking, I suppose, with respect to obviously the very strong new market net adds, what's the more powerful force heading into the third quarter? Is it seasonality is going to likely maybe drain some of that strength away or is it, given these markets are so new, one can expect some continued level of run rate success in those markets?

S. Doug Hutcheson

Well, remember - break that into different pieces. Our business - let me talk about the 53 million, the existing business, first. Our business is seasonal. We tend towards seeing higher customer additions in the fourth and the first quarter and lower customer additions in the second and the third quarter, and I have no evidence that this year will be any different than that.

So we have an okay July start, as we highlighted, but August and September will - and back to school - will need to work its way through. We've got good programs lined out for those but, you know, the business won't be materially changed by the outcome of, one way or the other, on third quarter. We'll move into the holiday season and the first quarter and see how we move and progress through that.

The new market launches, as Al said, you know, they're actually off. They started faster than what we saw in 58 launches. Now there are four markets. They're early. Seeing that would be important for us to have confidence to continue to both validate how we want to launch these markets. They are getting launched with a little bit more robust footprints and doing some things around those that we think will enhance how they generate long-term profitability. These markets are also markets that, as we've been saying, that we expected to have higher penetration potential and, you know, certainly we're seeing that.

The first quarter, full quarter, operation of a market tends to be the most robust time period for net additions, and then you see that start to mitigate back a little bit. And so you'll have some of those markets that'll be entering their second quarter operations, some that'll finish in their first quarter. So you'll see a mix of results on those, but I think you'll continue to see attractive performance.

The last piece is we will launch additional broadband POPs during the third quarter. They may come a little later in the quarter, but we expect continued performance out of our markets, the 23 million that we have launched, and we'll get some uptake from the new markets that we'll launch a little later in the quarter on our track towards hitting 100,000 broadband nets by the end of the year.

So I think the business is going to do fine on nets. We'll probably see some areas that are a little stronger and some areas that are a little softer, like you always do. But I think the business is pretty well positioned, Dave.

Operator

Your final question comes from Rick Prentiss - Raymond James and Associates.

Rick Prentiss - Raymond James and Associates

I want to probe a little further on the penetration in the Auction 66 markets. A nice pleasant surprise seeing those spike up so much. Do you look at your funding that you got recently - and I know you've got some chunky launches that are coming up - how do you look at what we might expect for the rest of this year, '08, to be seeing some POPs actually turn on?

S. Doug Hutcheson

There may be a little bit of activity through the rest of this year, but again, I think you pointed out that there are chunky markets that are there, and I don't know that you'll see big, chunky markets happening, you know, this year. You may see a little bit of activity on that. Our guidance is to have 36 million launched by the end of the first half of '09 and would anticipate that we would see that.

I do think one way or the other given, you know, the success that we're seeing on how we're launching these POPs that you'll see - whether they launch in fourth quarter or first quarter, as an example - you'll see the burn, you know, associated with those. You'll see that come in advance of launching as we move through those markets, to launch them on a robust way, because of these early penetration results we've seen.

Rick Prentiss - Raymond James and Associates

In fact, that hits right to my second question. With the $38 million burn this quarter for the Auction 66 market split 28 for the 8 million POPs that you launched in the quarter and 8 million for future pops, how should we think about that $6 aggregate, $7 kind of individual market spread as far as how far in advance should we start feeling a burn? Is $3 to $4 a POP, the quarter of the burn, something to think about? Just trying to think of spreading that $6 to $7 over a course of, you know, how many quarters before launch versus quarters after launch.

S. Doug Hutcheson

You know what? I think that's a great question and rather than - why don't we take on - we'll see if we can provide some information to help with that.

Rick Prentiss - Raymond James and Associates

Okay.

S. Doug Hutcheson

I don't have a quick answer on that, but I think to help people we can probably provide a little bit of additional information.

All right, everybody, thank you. Thank you for joining us today.

Amy Wakeham

Thanks for joining us today. We look forward to updating you on our business on the next quarterly conference call. If you have any questions about our second quarter results or need additional clarification, please feel free to contact us at 8588826084. Thank you very much.

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