UPDATE: Leap Wireless 1st-Quarter Loss Widens as Customer Losses Continue

--Leap Wireless first-quarter loss widens; customer losses continue

--Total subscribers drop 16% from year ago

--Expects iPhone shortfall to resolve over time

(Updates throughout with details and company comment beginning in the second paragraph.)

 
   By Thomas Gryta and Drew FitzGerald 
 

Leap Wireless International Inc.'s (LEAP) first-quarter loss widened as the discount mobile-phone service's customer base continued to erode.

The pay-as-you-go wireless carrier, which offers cellphone service under its Cricket brand, added about 474,000 customers in the period--down from about 860,000 a year ago--but wasn't able to offset cancellations, resulting in a net customer loss of 93,000. It ended the year with 5.2 million subscribers, a 16% decline from the year prior.

Shares fell 3.9% to $5.50 after-hours Tuesday as the company's bottom-line result missed analysts' expectations, extending the stock's 14% decline year-to-date.

Leap has embarked on a major business overhaul to attract higher-income customers with pricier smartphones, including Apple Inc.'s (AAPL) iPhone.

But the turnaround hasn't been easy. JPMorgan analyst Philip Cusick downgraded his rating on Leap to neutral from overweight Monday, citing weakening subscriber trends, increased competition and "challenging cash flow."

With T-Mobile USA's acquisition of MetroPCS Communications Inc. (PCS) expected to close this week, Leap will have more competition coming as the MetroPCS service will expand to new markets that will overlap with Leap. T-Mobile is a unit of Deutsche Telekom AG (DTE.XE, DTEGY).

After seeing its traditionally lower-income customer base hit hard by high unemployment, the new higher-end strategy has helped boost the average amount of revenue it generates from customers but so far has failed to halt the stream of subscribers leaving the service.

The company earlier this year also acknowledged it might sell half as many iPhones as it committed to sell by June, when the first year of its contract with Apple ends. The shortfall could burden the company with $100 million worth of unsold iPhones by the middle of this year. Leap doesn't break out its iPhone sales.

Leap began selling the iPhone last year, striking a three-year deal with Apple to spend $900 million in volume purchases.

On a conference call Tuesday, Chief Executive S. Douglas Hutcheson said the iPhone sales volumes "will resolve over time, and we're comfortable that the relationship we have with Apple will allow for an appropriate resolution."

The company doesn't expect to buy "any additional iPhones in excess of the sales demand in the first year of the contract," Mr. Hutcheson said.

The company also expects to introduce increased device-financing plans later this year.

Average revenue per user improved 2.7% to $43.72, while churn, a gauge of customer turnover, rose to 3.6% from 3.3% a year earlier.

The average device selling price rose to $129 from $68 a year ago, the company said, something that helped to boost equipment revenue and partially offset some of the service-revenue loss.

Leap hasn't turned a quarterly profit since 2007, aside from the third quarter of 2012, which benefited from a large gain on the exchange of spectrum licenses.

In the latest quarter, Leap reported a loss of $111.3 million, or $1.43 a share, compared with a year-earlier loss of $98.4 million, or $1.28 a share. Revenue dropped 4.3% to $789.9 million.

Analysts polled by Thomson Reuters recently had forecast a $1.53 per-share loss with $736 million of revenue.

While it has been left out of the latest round of industry consolidation, Leap has made it clear that it is open to alternative strategies including selling some or all assets.

"We have long said that industry consolidation and strategic partnership may make sense," Mr. Hutcheson said.

Write to Thomas Gryta at [e-mail] and Drew FitzGerald at [e-mail]

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