- Company Reports 47 percent Year-Over-Year Increase in Service Revenues and an 87 percent Increase in Adjusted OIBDA -
Note: A webcast of Leap's third quarter earnings conference call
with accompanying presentation will be available at 5 p.m. EST on
Thursday, December 13, 2007 at the Investor Relations Section of
Leap's Web Site, www.leapwireless.com
SAN DIEGO--(BUSINESS WIRE)--Dec. 13, 2007--Leap Wireless
International, Inc. (NASDAQ:LEAP), a leading provider of innovative
and value-driven wireless communications services, today announced
financial and operational results for the third quarter of 2007. The
Company reported service revenues for the third quarter of $354.5
million, an increase of 47 percent from the prior year quarter, driven
by a 42 percent increase in weighted-average customers and an increase
of $1.64 in average monthly service revenue per user (ARPU). Operating
income for the third quarter of 2007 was $9.4 million compared to
operating income of $7.1 million for the third quarter of 2006.
Adjusted operating income before depreciation and amortization (OIBDA)
for the third quarter of 2007 was $95.7 million, up 87 percent from
$51.2 million for the third quarter of 2006. The Company ended the
period with 2.71 million customers, an increase of 37.8 percent from
the prior year quarter, and reported net customer additions for the
quarter of 36,500.
"The business delivered strong year-over-year growth in adjusted
OIBDA during the third quarter of 87 percent, even as the Company
successfully moved through a challenging period," said Doug Hutcheson,
Leap's CEO, president and acting CFO. "We also achieved an 11 percent
year-over-year increase in gross customer additions that, while
positive, was less than we anticipated. Looking forward to our current
quarter, the Company has seen attractive post-Thanksgiving results
that indicate we are on the right track for our expected fourth
quarter customer additions, reinforcing our belief that our efforts to
drive further return for the business are progressing as expected.
"While we experienced changes in customer buying patterns during
the third quarter which affected our near-term customer growth rate,
we believe that the long-term prospects for our business remain
bright. We recently concluded a significant investment cycle which
nearly doubled our footprint, customer base and adjusted OIBDA over
the prior year. We passed a major milestone for this investment during
the second quarter of this year in reaching adjusted OIBDA break-even
for our new markets. During the third quarter, operating income
increased as compared to the prior year period, demonstrating the
strong financial progress the Company has made as we expanded the
business. We are now in the early stages of realizing the benefits
from these investments as we continue to penetrate these markets, and
seek to leverage costs through scale and to grow adjusted OIBDA."
Net loss for the third quarter was $43.3 million, or $0.64 per
diluted share, compared to a net loss of $0.8 million, or $0.01 per
diluted share, for the corresponding quarter of the prior year. The
increase in net loss over the prior year period is primarily
attributable to a $12.9 million increase in net interest expense
resulting from an increase in the Company's long-term debt and a
change in the Company's tax accounting method for amortizing certain
wireless licenses that resulted in accelerated deductions and other
tax benefits and a $24.1 million increase in income tax expense for
accounting purposes. The change in taxes includes $19.3 million in one
time expenses and is expected to improve the potential utilization of
these tax benefits in future periods. Together, the increases in net
interest and tax expense as a result of the change in tax accounting
method during the third quarter of 2007 contributed $0.55 to the net
loss of $0.64 per diluted share reported for the quarter.
"In September, the Company initiated a comprehensive review of our
service revenue activity and forecasting process, which ultimately
resulted in our announcement that we would restate financial
statements for fiscal years 2004, 2005, 2006 and the first two
quarters of 2007," continued Hutcheson. "Over these periods, the
restatement had a net cumulative impact of approximately $8 million on
service revenues and approximately $23 million on operating income
over these periods. We have been working with our independent auditors
to finalize our financial statements and expect to file the third
quarter Form 10-Q by December 14, 2007 and complete the necessary
amendments and restatements of the required prior annual and quarterly
reports on or before December 31, 2007."
Key Reported Results:
(Unaudited and in millions, except percentages and per share amounts)
Three Months Ended Nine Months Ended September
September 30, 30,
--------------------------- ------------------------------
2007 2006 Change 2007 2006 Change
-------------------- ------ --------- ------------- ------
(As (As
Restated(3)) Restated(3))
Service
revenues $354.5 $ 240.6 47.3% $1,023.4 $ 685.8 49.2%
Total
revenues $409.7 $ 293.3 39.7% $1,201.0 $ 852.6 40.9%
Operating
income $ 9.4 $ 7.1 33.4% $ 38.6 $ 40.2 (4.0)%
Net income
(loss) $(43.3) $ (0.8) $ (57.9) $ 21.3
Diluted
earnings
(loss)
per share $(0.64) $ (0.01) $ (0.86) $ 0.34
Key Operating and Financial Metrics
(Unaudited and in millions, except percentages, customer data and
operating metrics)
Three Months Ended September 30,
-------------------------------------
2007 2006 Change
--------------- ------------- -------
(As
Restated(3))
Adjusted OIBDA $ 95.7 $ 51.2 86.9%
Adjusted OIBDA as a percentage
of service revenues 27% 21%
Gross customer additions 450,954 405,178 11.3%
Net customer additions 36,484 161,688 (77.4)%
End of period customers 2,711,447 1,967,369 37.8%
Weighted-average customers 2,654,555 1,870,204 41.9%
Churn 5.2% 4.3%
Average revenue per user (ARPU) $ 44.51 $ 42.87 3.8%
Cash costs per user (CCU) $ 21.23 $ 21.04 0.9%
Cost per gross addition (CPGA) $ 199 $ 176 13.1%
Cash purchases of property and
equipment $ 107.3 $ 161.9 (34.7)%
Nine Months Ended September 30,
---------------------------------
2007 2006 Change
----------- ------------- -------
(As
Restated(3))
Adjusted OIBDA $ 279.7 $ 204.2 37.0%
Adjusted OIBDA as a percentage of
service revenues 27% 30%
Gross customer additions 1,478,443 936,581 57.9%
Net customer additions 481,621 329,780 46.0%
End of period customers 2,711,447 1,967,369 37.8%
Weighted-average customers 2,544,872 1,792,928 (41.9)%
Churn 4.4% 3.8%
Average revenue per user (ARPU) $ 44.68 $ 42.50 5.1%
Cash costs per user (CCU) $ 20.79 $ 20.16 3.1%
Cost per gross addition (CPGA) $ 181 $ 167 8.4%
Cash purchases of property and
equipment $ 345.2 $ 348.9 (1.1)%
The financial and operating data presented in this press release,
including customer information, reflect the consolidated results of
Leap, its subsidiaries and its non-controlled joint ventures, LCW
Wireless, LLC (LCW Wireless) and Denali Spectrum, LLC (Denali).
The Company has announced it is restating its consolidated
financial statements as of and for the years ended December 31, 2006
and 2005 (including interim periods therein), for the period from
August 1, 2004 to December 31, 2004 and for the period from January 1,
2004 to July 31, 2004. In addition, the Company has announced it is
restating the condensed consolidated financial statements as of and
for the quarterly periods ended June 30, 2007 and March 31, 2007. The
financial data presented in this press release includes the effects of
the unaudited restated financial information for all such periods.
For a reconciliation of non-GAAP financial measures, please refer
to the section entitled "Definition of Terms and Reconciliation of
Non-GAAP Financial Measures" included at the end of this release.
Capital expenditures during the third quarter of 2007 were
approximately $107.3 million, including $11.5 million in related
capitalized interest, bringing total capital expenditures for the nine
months ended September 30, 2007 to $345.2 million. As of September 30,
2007, total unrestricted cash, cash equivalents and short-term
investments were $655.7 million.
"During the quarter, the Company delivered a 47 percent
year-over-year increase in service revenues, reflecting continued
customer growth and increasing ARPU," said Stefan Karnavas, VP finance
and treasurer for Leap. "This increase in service revenues translated
into increased adjusted OIBDA for the quarter and demonstrates the
further benefits of scale we expect to achieve in the future.
Excluding the $13.1 million of costs associated with the Company's
major new initiatives and other external activities, our adjusted
OIBDA margin was 31 percent. We have demonstrated our ability to
produce margins in excess of 40 percent, and expect our adjusted OIBDA
margins to continue to grow as our newer markets mature.
"The Company continues to see strong uptake of our higher-value
service plans, resulting in a $1.64 year-over-year increase in ARPU,
and expects continued ARPU growth during the fourth quarter,"
continued Karnavas. "The costs associated with customer acquisitions
(CPGA) reflect lower-than-expected gross customer additions during the
quarter and the planned costs of our major new initiatives, which
contributed to the increase in this amount year-over-year. Our monthly
costs per user (CCU) were generally flat year-over-year even with the
higher product costs associated with the strong uptake of our new
features and services."
Current Business Outlook
The Company's Outlook for Fourth Quarter and Full Year 2007:
-- Net customer additions for the fourth quarter are expected to
be between 70,000 and 130,000.
-- Customer churn for the fourth quarter is expected to be in the
range of 4.5 percent to 4.7 percent, reflecting typical
seasonal rhythms, the effects of customer handset upgrades and
expected decreases in the percentage of less-tenured customers
within the Company's overall customer base.
-- Adjusted OIBDA is expected to be between $105 million and $115
million, bringing anticipated full-year adjusted OIBDA to
between $385 million and $395 million. The Company's
expectation for fourth quarter adjusted OIBDA includes
approximately $12 million to $17 million of negative adjusted
OIBDA that the Company expects to incur to support its major
new initiatives, bringing the year-to-date negative adjusted
OIBDA for these initiatives for full-year 2007 to
approximately $25 million to $30 million. These new
initiatives include the Company's planned coverage expansion
for existing markets, market trials of higher-speed data
services, Auction #66 build activity and other strategic
activities.
-- Capital expenditures for 2007 are expected to be $300 million
to $320 million in the aggregate for the existing business,
the costs associated with the Company's launched markets to
date, and the Company's EVDO network upgrade. In addition, the
Company expects to invest approximately $205 million to $225
million in capital expenditures to support its major new
initiatives. These capital expenditures include a total of $50
million of capitalized interest.
-- As a result of the ongoing expansion of existing market
footprints, the Company expects to cover up to an additional
three million POPS by the end of 2007, bringing total covered
POPs to approximately 54 million at year end.
Long-term Business Outlook
The Company also updated its outlook for 2008 and beyond to
provide key criteria to assist investors and interested parties in
developing a better understanding of how the business is expected to
expand and the resulting long-term growth in adjusted OIBDA.
-- With the planned coverage expansion and launches of Auction
#66 markets, the company expects to cover up to an additional
12 to 28 million POPS by the end of 2008, bringing total
covered POPs to approximately 66 to 82 million by 2008 year
end. The Company also expects to launch 28 to 50 million new
covered POPs by the end of 2010. Aggregate capital
expenditures for new market builds through their first full
year of operation are anticipated to be approximately $26.00
per covered POP, excluding capitalized interest. Aggregate
investment in cumulative adjusted OIBDA loss in these markets
through adjusted OIBDA break-even is expected to be
approximately $5 per covered POP. The Company's new Auction
#66 markets are generally expected to reach adjusted OIBDA
break-even within four full quarters of operation.
-- Ongoing capital expenditures to support the growth and
development of the Company's one year or older markets are
expected to be in the mid-teens as a percentage of service
revenue.
-- Total adjusted OIBDA is expected to grow at a compound annual
growth rate of 30 to 40 percent from 2007 through 2010.
"We believe that the Company has strong independent growth
prospects, but we have also taken significant steps to explore
appropriate collaborative alternatives to further building the
business," said Hutcheson. "The Company has filed to participate in
Auction 73, which is expected to commence in January 2008. The Company
has been a disciplined bidder in past auctions resulting in one of the
lowest average price per megahertz POP paid, and the Company expects
to be thoughtful in managing its spectrum opportunities and
liquidity."
Conference Call Note
As previously announced, Leap will hold a conference call to
discuss its third quarter results and its outlook for fourth quarter
2007 and full year 2007 at 5:00 p.m., Eastern Standard Time, on
Thursday, December 13, 2007. Other forward-looking and material
information may also be discussed during this call. Interested parties
may listen to the call live by dialing 1-866-277-1184 or
internationally at 1-617-587-5360 and entering reservation number
86371859. A webcast of the earnings conference call with accompanying
presentation will be available at 5 p.m. EST on Thursday, December 13,
2007 at the Investor Relations Section of Leap's Web Site,
www.leapwireless.com.
To listen to the call, please go to the website at least 15
minutes prior to the start time to register, and download and install
any necessary audio software. An online replay will follow shortly
after the live conference call and will be available until January 13,
2008. The telephonic rebroadcast will be available shortly after the
completion of the call and will be available until close of business
December 27, 2007. Interested parties can access the rebroadcast by
dialing 1-888-286-8010 or 1-617-801-6888 internationally and entering
the reservation number 26421703. A downloadable MP3 recording of the
call will also be available 24 hours after broadcast. Interested
listeners can download the file from the "Events" page of the Investor
Relations section of Leap's website and on Street Events at
www.streetevents.com.
About Leap
Leap provides innovative, high-value wireless services to a
fast-growing, young and ethnically diverse customer base. With the
value of unlimited wireless services as the foundation of its
business, Leap pioneered both the Cricket(R) and Jump(TM) Mobile
services. The Company and its joint ventures now operate in 23 states
and hold licenses in 35 of the top 50 U.S. markets. Through its
affordable, flat-rate service plans, Cricket offers customers a choice
of unlimited voice, text, data and mobile Web services. Jump Mobile is
a unique prepaid wireless service designed for the mobile-dependent,
urban youth market. Headquartered in San Diego, Calif., Leap is traded
on the NASDAQ Global Select Market under the ticker symbol "LEAP." For
more information, please visit www.leapwireless.com.
Notes Regarding Non-GAAP Financial Measures
Information presented in this press release and in the attached
financial tables includes financial information prepared in accordance
with generally accepted accounting principles in the U.S., or GAAP, as
well as non-GAAP financial measures. Generally, a non-GAAP financial
measure, within the meaning of Securities and Exchange Commission
(SEC) Item 10 to Regulation S-K, is a numerical measure of a company's
financial performance or cash flows that (a) excludes amounts, or is
subject to adjustments that have the effect of excluding amounts,
which are included in the most directly comparable measure calculated
and presented in accordance with GAAP in the consolidated balance
sheets, consolidated statements of operations or consolidated
statements of cash flows; or (b) includes amounts, or is subject to
adjustments that have the effect of including amounts, which are
excluded from the most directly comparable measure so calculated and
presented. As described more fully in the notes to the attached
financial tables, management supplements the information provided by
financial statement measures with several customer-focused performance
metrics that are widely used in the telecommunications industry.
Adjusted OIBDA, CPGA, and CCU are non-GAAP financial measures.
Non-GAAP financial measures should be considered in addition to, but
not as a substitute for, the information prepared in accordance with
GAAP. Reconciliations of non-GAAP financial measures used in this
release to the most directly comparable GAAP financial measures can be
found in the section entitled "Definition of Terms and Reconciliation
of Non-GAAP Financial Measures" included toward the end of this
release.
Forward-Looking Statements
This press release contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements reflect management's current expectations based on
currently available operating, financial and competitive information,
but are subject to risks, uncertainties and assumptions that could
cause actual results to differ materially from those anticipated in or
implied by the forward-looking statements. Our forward-looking
statements include our discussions of management's outlook for the
fourth quarter of 2007, fiscal year 2007, fiscal year 2008 and future
years, our plans to offer our services to additional covered POPs and
our expectations regarding growth and future products, and are
generally identified with words such as "believe," "intend," "plan,"
"could," "may" and similar expressions. Risks, uncertainties and
assumptions that could affect our forward-looking statements include,
among other things:
-- our ability to attract and retain customers in an extremely
competitive marketplace;
-- changes in economic conditions including interest rates,
consumer credit conditions, unemployment and other
macro-economic factors that could adversely affect the market
for wireless services;
-- the impact of competitors' initiatives;
-- our ability to successfully implement product offerings and
execute effectively on our planned coverage expansion,
launches of Auction #66 markets, market trials introduction of
higher-speed data services and other strategic activities;
-- our ability to obtain roaming services from other carriers at
cost-effective rates;
-- delays in our market expansion plans, including delays
resulting from any difficulties in funding such expansion
through cash from operations, our revolving credit facility or
additional capital, delays in the availability of network
equipment and handsets for the AWS spectrum we acquired in the
Federal Communications Commission's, or FCC's, auction for
Advanced Wireless Services, or Auction #66, or delays by
existing U.S. government and other private sector wireless
operations in clearing the AWS spectrum, some of which users
are permitted to continue using the spectrum for several
years;
-- our ability to attract, motivate and retain an experienced
workforce;
-- our ability to comply with the covenants in our senior secured
credit facilities, indenture and any future credit agreement,
indenture or similar instrument;
-- failure of our network or information technology systems to
perform according to expectations; and
-- other factors detailed in the section entitled "Risk Factors"
included in our periodic reports filed with the SEC, including
our Annual Report on Form 10-K for the year ended December 31,
2006 and our Quarterly Reports on Form 10-Q.
All forward-looking statements included in this news release
should be considered in the context of these risks. We undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise. Investors and prospective investors are cautioned not to
place undue reliance on our forward-looking statements.
Leap is a U.S. registered trademark and the Leap logo is a
trademark of Leap. Cricket is a U.S. registered trademark of Cricket.
In addition, the following are trademarks of Cricket: Unlimited Access
Plus, Unlimited Access, Unlimited Plus, Unlimited Classic, By Week,
Jump, Travel Time, Cricket Clicks and the Cricket "K." All other
trademarks are the property of their respective owners.
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (1)
(Unaudited; In Thousands, Except Share Data)
September
30, December 31,
2007 2006
----------- -------------
(As
Restated)(3)
Assets
Cash and cash equivalents $ 356,724 $ 372,812
Short-term investments 298,991 66,400
Restricted cash, cash equivalents and short-
term investments 15,529 13,581
Inventories 79,983 90,185
Other current assets 56,966 52,981
----------- -------------
Total current assets 808,193 595,959
Property and equipment, net 1,197,524 1,078,521
Wireless licenses 1,861,399 1,563,958
Assets held for sale -- 8,070
Goodwill 425,782 425,782
Other intangible assets, net 54,534 79,828
Deposits for wireless licenses -- 274,084
Other assets 48,913 58,745
----------- -------------
Total assets $4,396,345 $4,084,947
=========== =============
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 207,858 $ 317,093
Current maturities of long-term debt 10,000 9,000
Other current liabilities 128,264 84,675
----------- -------------
Total current liabilities 346,122 410,768
Long-term debt 2,039,084 1,676,500
Deferred tax liabilities 176,981 148,335
Other long-term liabilities 55,451 47,608
----------- -------------
Total liabilities 2,617,638 2,283,211
----------- -------------
Minority interests 41,163 29,943
----------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock -- authorized 10,000,000
shares; $.0001 par value, no shares issued
and outstanding -- --
Common stock -- authorized 160,000,000
shares; $.0001 par value, 68,204,679 and
67,892,512 shares issued and outstanding at
September 30, 2007 and December 31, 2006,
respectively 7 7
Additional paid-in capital 1,799,256 1,769,772
Retained earnings (accumulated deficit) (57,647) 228
Accumulated other comprehensive income (loss) (4,072) 1,786
----------- -------------
Total stockholders' equity 1,737,544 1,771,793
----------- -------------
Total liabilities and stockholders' equity $4,396,345 $4,084,947
=========== =============
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (1)
(Unaudited; In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
2007 2006 2007 2006
------------------------------------------------
(As (As
Restated)(3) Restated)(3)
Revenues:
Service revenues $ 354,495 $ 240,554 $ 1,023,439 $ 685,799
Equipment revenues 55,161 52,712 177,556 166,776
------------------------------------------------
Total revenues 409,656 293,266 1,200,995 852,575
------------------------------------------------
Operating expenses:
Cost of service
(exclusive of items
shown separately
below) (100,907) (71,575) (281,906) (189,040)
Cost of equipment (97,218) (83,457) (310,701) (220,830)
Selling and marketing (54,265) (42,948) (150,045) (107,992)
General and
administrative (68,686) (49,116) (200,327) (144,782)
Depreciation and
amortization (77,781) (56,409) (218,996) (163,782)
Impairment of assets (1,368) (4,701) (1,368) (7,912)
------------------------------------------------
Total operating
expenses (400,225) (308,206) (1,163,343) (834,338)
Gain (loss) on sale
or disposal of
assets (38) 21,990 902 21,990
------------------------------------------------
Operating income 9,393 7,050 38,554 40,227
Minority interests in
consolidated
subsidiaries 182 418 2,434 209
Equity in net loss of
investee (807) -- (807) --
Interest income 10,148 5,491 22,567 15,218
Interest expense (33,336) (15,753) (86,922) (31,607)
Other income
(expense), net (4,207) 272 (4,844) (5,111)
------------------------------------------------
Income (loss) before
income taxes and
cumulative effect
of change in
accounting
principle (18,627) (2,522) (29,018) 18,936
Income tax benefit
(expense) (24,662) 1,721 (28,857) 1,721
------------------------------------------------
Income (loss) before
cumulative effect
of change in
accounting
principle (43,289) (801) (57,875) 20,657
Cumulative effect of
change in accounting
principle -- -- -- 623
------------------------------------------------
Net income (loss) $ (43,289) $ (801)$ (57,875) $ 21,280
================================================
Basic earnings (loss)
per share:
Income (loss) before
cumulative effect
of change in
accounting
principle $ (0.64) $ (0.01)$ (0.86) $ 0.34
Cumulative effect of
change in
accounting
principle -- -- -- 0.01
------------------------------------------------
Basic earnings (loss)
per share $ (0.64) $ (0.01)$ (0.86) $ 0.35
================================================
Diluted earnings
(loss) per share:
Income (loss) before
cumulative effect
of change in
accounting
principle $ (0.64) $ (0.01)$ (0.86) $ 0.33
Cumulative effect of
change in
accounting
principle -- -- -- 0.01
------------------------------------------------
Diluted earnings
(loss) per share $ (0.64) $ (0.01)$ (0.86) $ 0.34
================================================
Shares used in per
share calculations:
Basic 67,194 60,295 67,064 60,286
================================================
Diluted 67,194 60,295 67,064 61,866
================================================
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (1)
(Unaudited; In thousands)
Nine Months Ended
September 30,
------------------------
2007 2006
---------- -------------
(As
Restated)(3)
Operating activities:
Net cash provided by operating activities $ 195,841 $ 221,697
---------- -------------
Investing activities:
Purchases of property and equipment (345,195) (348,911)
Change in prepayments for purchases of
property and equipment 12,010 2,770
Purchases of and deposits for wireless
licenses and spectrum clearing costs (4,418) (307,128)
Proceeds from sale of wireless licenses and
operating assets 9,500 27,968
Purchases of investments (518,916) (120,398)
Sales and maturities of investments 287,066 165,982
Purchase of minority interest (4,706) --
Purchase of membership units (17,921) --
Changes in restricted cash, cash equivalents
and short-term investments, net 317 (3,443)
---------- -------------
Net cash used in investing activities (582,263) (583,160)
---------- -------------
Financing activities:
Proceeds from long-term debt 370,480 900,000
Repayment of long-term debt (6,750) (596,694)
Payment of debt issuance costs (5,257) (8,058)
Payment of fees related to forward equity sale -- (1,066)
Minority interest contributions 4,014 5,767
Proceeds from issuance of common stock, net 7,847 725
---------- -------------
Net cash provided by financing activities 370,334 300,674
---------- -------------
Net decrease in cash and cash equivalents (16,088) (60,789)
Cash and cash equivalents at beginning of
period 372,812 293,073
---------- -------------
Cash and cash equivalents at end of period $ 356,724 $ 232,284
========== =============
Explanatory Notes to Financial Statements
(1) The condensed consolidated financial statements and the
schedules of reported results and operating and financial
metrics included at the beginning of this release include the
accounts of Leap and its wholly owned subsidiaries as well as
the accounts of LCW Wireless and Denali and their wholly owned
subsidiaries. The Company consolidates its interests in LCW
Wireless and Denali in accordance with Financial Accounting
Standards Board ("FASB") Interpretation No. ("FIN") 46-R,
"Consolidation of Variable Interest Entities," because these
entities are variable interest entities and the Company will
absorb a majority of their expected losses. All significant
intercompany accounts and transactions have been eliminated in
the condensed consolidated financial statements.
(2) The following tables summarize operating data for the Company's
consolidated operations for the three months ended September
30, 2007 and 2006 (unaudited; in thousands, except
percentages):
Three Months Ended September 30,
---------------------------------------------------------
% of % of
2007 2006 Change from
Service Service Prior Year
------------------
2007 Revenues 2006 Revenues Dollars Percent
--------- -------- ---------- -------- --------- --------
(As
Restated)
(3)
Revenues:
Service
revenues $354,495 $ 240,554 $113,941 47.4%
Equipment
revenues 55,161 52,712 2,449 4.6%
--------- ---------- --------- --------
Total
revenues 409,656 293,266 116,390 39.7%
--------- ---------- --------- --------
Operating
expenses:
Cost of
service 100,907 28.5% 71,575 29.8% 29,332 41.0%
Cost of
equipment 97,218 27.4% 83,457 34.7% 13,761 16.5%
Selling and
marketing 54,265 15.3% 42,948 17.9% 11,317 26.4%
General and
administra-
tive 68,686 19.4% 49,116 20.4% 19,570 39.8%
Depreciation
and
amortization 77,781 21.9% 56,409 23.4% 21,372 37.9%
Impairment of
assets 1,368 0.4% 4,701 2.0% (3,333) (70.9)%
--------- -------- ---------- -------- --------- --------
Total
operating
expenses 400,225 112.9% 308,206 128.1% 92,019 29.9%
Gain (loss)
on sale of
wireless
licenses
and
disposal of
operating
assets (38) 0.0% 21,990 9.1% (22,028) (100.2)%
--------- -------- ---------- -------- --------- --------
Operating
income $ 9,393 2.6% $ 7,050 2.9% $ 2,343 33.2%
========= ======== ========== ======== ========= ========
(3) The Company has announced it is restating its historical
consolidated financial statements as of and for the years
ended December 31, 2006 and 2005 (including interim periods
therein), for the period from August 1, 2004 to December 31,
2004 and for the period from January 1, 2004 to July 31, 2004.
In addition, the Company has announced it is restating its
condensed consolidated financial statements as of and for the
quarterly periods ended June 30, 2007 and March 31, 2007. The
determination to restate these consolidated financial
statements and quarterly condensed consolidated financial
statements was made by the Company's Audit Committee upon
management's recommendation following the identification of
errors related to the Company's accounting for revenues and
operating expenses. The general nature and scope of the
related errors and adjustments will be summarized in the
Company's condensed financial statements included in its
Quarterly Report on Form 10-Q for the quarter ended September
30, 2007.
The following tables present the adjustments due to the
restatements of the Company's previously issued consolidated
financial statements and quarterly condensed consolidated
financial statements as of the year ended December 31, 2006
and for the three and nine months ended September 30, 2006
(unaudited; in thousands, except share and per share data).
December 31, 2006
---------------------------------
(Unaudited)
Previously As
Reported Adjustments Restated
---------- ----------- ----------
Assets
Cash and cash equivalents $ 374,939 $ (2,127) $ 372,812
Short-term investments 66,400 -- 66,400
Restricted cash, cash equivalents and
short-term investments 13,581 -- 13,581
Inventories 90,185 -- 90,185
Other current assets 53,527 (546) 52,981
---------- ----------- ----------
Total current assets 598,632 (2,673) 595,959
Property and equipment, net 1,077,755 766 1,078,521
Wireless licenses 1,563,958 -- 1,563,958
Assets held for sale 8,070 -- 8,070
Goodwill 431,896 (6,114) 425,782
Other intangible assets, net 79,828 -- 79,828
Deposits for wireless licenses 274,084 -- 274,084
Other assets 58,745 -- 58,745
---------- ----------- ----------
Total assets $4,092,968 $ (8,021) $4,084,947
========== =========== ==========
Liabilities and Stockholders' Equity
Accounts payable and accrued
liabilities $ 316,494 $ 599 $ 317,093
Current maturities of long-term debt 9,000 -- 9,000
Other current liabilities 74,637 10,038 84,675
---------- ----------- ----------
Total current liabilities 400,131 10,637 410,768
Long-term debt 1,676,500 -- 1,676,500
Deferred tax liabilities 149,728 (1,393) 148,335
Other long-term liabilities 47,608 -- 47,608
---------- ----------- ----------
Total liabilities 2,273,967 9,244 2,283,211
---------- ----------- ----------
Minority interests 30,000 (57) 29,943
---------- ----------- ----------
Stockholders' equity:
Preferred stock -- -- --
Common stock 7 -- 7
Additional paid-in capital 1,769,772 -- 1,769,772
Retained earnings 17,436 (17,208) 228
Accumulated other comprehensive
income 1,786 -- 1,786
---------- ----------- ----------
Total stockholders' equity 1,789,001 (17,208) 1,771,793
---------- ----------- ----------
Total liabilities and stockholders'
equity $4,092,968 $ (8,021) $4,084,947
========== ----------- ==========
Three Months Ended September 30, 2006
----------------------------------------------------
(Unaudited)
Revenue Other
Previously Timing Revenue Reclassification
Reported Adjustments Adjustments Adjustments
---------- ----------- ----------- ----------------
Revenues:
Service revenues $ 249,081 $(6,952) $(2,788) $ 1,213
Equipment revenues 38,532 (129) (--) 14,309
---------- ----------- ----------- ----------------
Total revenues 287,613 (7,081) (2,788) 15,522
---------- ----------- ----------- ----------------
Operating expenses:
Cost of service
(exclusive of
items shown
separately below) (70,722) -- -- (776)
Cost of equipment (68,711) -- -- (14,746)
Selling and
marketing (42,948) -- -- --
General and
administrative (49,110) -- (--) --
-----------
Depreciation and
amortization (56,409) -- -- --
Impairment of
assets (4,701) -- -- --
---------- ----------- ----------- ----------------
Total operating
expenses (292,601) -- (--) (15,522)
Gain on sale or
disposal of assets 21,990 -- -- --
---------- ----------- ----------- ----------------
Operating income 17,002 (7,081) (2,788) --
Minority interests
in consolidated
subsidiaries (138) -- -- --
Interest income 5,491 -- -- --
Interest expense (15,753) -- -- --
Other income, net 272 -- -- --
---------- ----------- ----------- ----------------
Income (loss)
before income
taxes 6,874 (7,081) (2,788) --
Income tax benefit 3,105 -- -- --
---------- ----------- ----------- ----------------
Net income (loss) $ 9,979 $(7,081) $(2,788) $ --
========== =========== =========== ================
Basic and diluted
earnings (loss)
per share:
Basic earnings
(loss) per share $ 0.17 $ (0.12) $ (0.05) $ --
========== =========== =========== ================
Diluted earnings
(loss) per share $ 0.16 $ (0.12) $ (0.04) $ --
========== =========== =========== ================
Shares used in per
share
calculations:
Basic 60,295 -- -- --
========== =========== =========== ================
Diluted 62,290 (--) (1,995) --
========== =========== =========== ================
Other Income Tax As
Adjustments Adjustments Restated
------------ ----------- ----------
Revenues:
Service revenues $ -- $ -- $ 240,554
Equipment revenues -- -- 52,712
------------ ----------- ----------
Total revenues -- -- 293,266
------------ ----------- ----------
Operating expenses:
Cost of service (exclusive of
items shown separately below) (77) -- (71,575)
Cost of equipment -- -- (83,457)
Selling and marketing -- -- ( 42,948)
General and administrative (6) -- (49,116)
Depreciation and amortization -- -- (56,409)
Impairment of assets -- -- (4,701)
------------ ----------- ----------
Total operating expenses (83) -- (308,206)
Gain on sale or disposal of assets -- -- 21,990
------------ ----------- ----------
Operating income (83) -- 7,050
Minority interests in consolidated
subsidiaries 556 -- 418
Interest income -- -- 5,491
Interest expense -- -- (15,753)
Other income, net -- -- 272
------------ ----------- ----------
Income (loss) before income taxes 473 -- (2,522)
Income tax benefit -- (1,384) 1,721
------------ ----------- ----------
Net income (loss) $ 473 $(1,384) $ (801)
============ =========== ==========
Basic and diluted earnings (loss)
per share:
Basic earnings (loss) per share $ 0.01 $ (0.02) $ (0.01)
============ =========== ==========
Diluted earnings (loss) per share $ 0.01 $ (0.02) $ (0.01)
============ =========== ==========
Shares used in per share
calculations:
Basic -- -- 60,295
============ =========== ==========
Diluted -- -- 60,295
============ =========== ==========
Nine Months Ended September 30, 2006
-----------------------------------------------------
(Unaudited)
Revenue Other
Previously Timing Revenue Reclassification
Reported Adjustments Adjustments Adjustments
---------- ----------- ----------- ----------------
Revenues:
Service revenues $ 695,707 $(11,002) $(2,457) $ 3,551
Equipment
revenues 126,448 8 -- 40,320
---------- ----------- ----------- ----------------
Total revenues 822,155 (10,994) (2,457) 43,871
---------- ----------- ----------- ----------------
Operating
expenses:
Cost of service
(exclusive of
items shown
separately
below) (186,181) -- -- (2,719)
Cost of equipment (179,678) -- -- (41,152)
Selling and
marketing (107,992) -- -- --
General and
administrative (145,268) -- (--) --
Depreciation and
amortization (163,782) -- -- --
Impairment of
assets (7,912) -- -- --
---------- ----------- ----------- ----------------
Total operating
expenses (790,813) -- (--) (43,871)
Gain on sale or
disposal of
assets 21,990 -- -- --
---------- ----------- ----------- ----------------
Operating income 53,332 (10,994) (2,457) --
Minority
interests in
consolidated
subsidiaries (347) -- -- --
Interest income 15,218 -- -- --
Interest expense (31,607) -- -- --
Other expense,
net (5,111) -- -- --
---------- ----------- ----------- ----------------
Income before
income taxes and
cumulative
effect of change
in accounting
principle 31,485 (10,994) (2,457) --
Income tax
benefit 3,105 -- -- --
---------- ----------- ----------- ----------------
Income before
cumulative
effect of change
in accounting
principle 34,590 (10,994) (2,457) --
Cumulative effect
of change in
accounting
principle 623 -- -- --
---------- ----------- ----------- ----------------
Net income $ 35,213 $(10,994) $(2,457) $ --
========== =========== =========== ================
Basic earnings
per share:
Income before
cumulative
effect of change
in accounting
principle $ 0.57 $ (0.18) $ (0.04) $ --
Cumulative effect
of change in
accounting
principle 0.01 -- -- --
---------- ----------- ----------- ----------------
Basic earnings
per share $ 0.58 $ (0.18) $ (0.04) $ --
========== =========== =========== ================
Diluted earnings
per share:
Income before
cumulative
effect of change
in accounting
principle $ 0.56 $ (0.18) $ (0.04) $ --
Cumulative effect
of change in
accounting
principle 0.01 -- -- --
---------- ----------- ----------- ----------------
Diluted earnings
per share $ 0.57 $ (0.18) $ (0.04) $ --
========== =========== =========== ================
Shares used in
per share
calculations:
Basic 60,286 -- -- --
========== =========== =========== ================
Diluted 61,866 -- -- --
========== =========== =========== ================
Other Income Tax As
Adjustments Adjustments Restated
------------ ----------- ----------
Revenues:
Service revenues $ -- $ -- $ 685,799
Equipment revenues -- -- 166,776
------------ ----------- ----------
Total revenues -- -- 852,575
------------ ----------- ----------
Operating expenses: --
Cost of service (exclusive of
items shown separately below) (140) -- (189,040)
Cost of equipment -- -- (220,830)
Selling and marketing -- -- (107,992)
General and administrative 486 -- (144,782)
Depreciation and amortization -- -- (163,782)
Impairment of assets -- -- (7,912)
------------ ----------- ----------
Total operating expenses 346 -- (834,338)
Gain on sale or disposal of assets -- -- 21,990
------------ ----------- ----------
Operating income 346 -- 40,227
Minority interests in consolidated
subsidiaries 556 -- 209
Interest income -- -- 15,218
Interest expense -- -- (31,607)
Other expense, net -- -- (5,111)
------------ ----------- ----------
Income before income taxes and
cumulative effect of change in
accounting principle 902 -- 18,936
Income tax benefit -- (1,384) 1,721
------------ ----------- ----------
Income before cumulative effect of
change in accounting principle 902 (1,384) 20,657
Cumulative effect of change in
accounting principle -- -- 623
------------ ----------- ----------
Net income $ 902 $(1,384) $ 21,280
============ =========== ==========
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $0.01 $ (0.02) $ 0.34
Cumulative effect of change in
accounting principle -- -- 0.01
------------ ----------- ----------
Basic earnings per share $0.01 $ (0.02) $ 0.35
============ =========== ==========
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle $0.01 $ (0.02) $ 0.33
Cumulative effect of change in
accounting principle -- -- 0.01
------------ ----------- ----------
Diluted earnings per share $0.01 $ (0.02) $ 0.34
============ =========== ==========
Shares used in per share
calculations:
Basic -- -- 60,286
============ =========== ==========
Diluted -- -- 61,866
============ =========== ==========
(4) Total share-based compensation expense related to all of the
Company's share-based awards for the three and nine months ended
September 30, 2007 and 2006 was comprised as follows (unaudited
in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2007 2006 2007 2006
------ ------------- ------- -------------
(As (As
Restated)(3) Restated)(3)
Cost of service $ 535 $ 311 $ 1,679 $ 830
Selling and marketing
expenses 843 637 2,403 1,437
General and administrative
expenses 5,696 4,115 17,630 11,976
------ ------------- ------- -------------
Share-based compensation
expense 7,074 5,063 21,712 14,243
====== ============= ======= =============
Share-based compensation
expense per share:
Basic $ 0.11 $ 0.08 $ 0.32 $ 0.24
====== ============= ======= =============
Diluted $ 0.11 $ 0.08 $ 0.32 $ 0.23
====== ============= ======= =============
Definition of Terms and Reconciliation of Non-GAAP Financial
Measures
The company utilizes certain financial measures that are widely
used in the telecommunications industry and are not calculated based
on GAAP. Certain of these financial measures are considered non-GAAP
financial measures within the meaning of Item 10 of Regulation S-K
promulgated by the SEC.
(5) Churn, which measures customer turnover, is calculated as the
net number of customers who disconnect from our service divided
by the weighted-average number of customers divided by the
number of months during the period being measured. Customers
who do not pay their first monthly bill are deducted from our
gross customer additions in the month that they are
disconnected; as a result, these customers are not included in
churn. In addition, customers are generally disconnected from
service approximately 30 days after failing to pay a monthly
bill. Beginning during the quarter ended June 30, 2007, pay-in-
advance customers who ask to terminate their service are
disconnected when their paid service period ends, whereas
previously these customers were generally disconnected on the
date of their request to terminate service. Management uses
churn to measure our retention of customers, to measure changes
in customer retention over time, and to help evaluate how
changes in our business affect customer retention. In addition,
churn provides management with a useful measure to compare our
customer turnover activity to that of other wireless
communications providers. We believe investors use churn
primarily as a tool to track changes in our customer retention
over time and to compare our customer retention to that of
other wireless communications providers. Other companies may
calculate this measure differently.
(6) ARPU is service revenue divided by the weighted-average number
of customers, divided by the number of months during the period
being measured. Management uses ARPU to identify average
revenue per customer, to track changes in average customer
revenues over time, to help evaluate how changes in our
business, including changes in our service offerings and fees,
affect average revenue per customer, and to forecast future
service revenue. In addition, ARPU provides management with a
useful measure to compare our subscriber revenue to that of
other wireless communications providers. Because our
calculation of weighted-average number of customers includes
customers who have not paid their last bill and have yet to
disconnect service, ARPU may appear lower during periods in
which we have significant disconnect activity. We believe
investors use ARPU primarily as a tool to track changes in our
average revenue per customer and to compare our per customer
service revenues to those of other wireless communications
providers. Other companies may calculate this measure
differently.
(7) CPGA is selling and marketing costs (excluding applicable share-
based compensation expense included in selling and marketing
expense), and equipment subsidy (generally defined as cost of
equipment less equipment revenue), less the net loss on
equipment transactions unrelated to initial customer
acquisition, divided by the total number of gross new customer
additions during the period being measured. The net loss on
equipment transactions unrelated to initial customer
acquisition includes the revenues and costs associated with the
sale of handsets to existing customers as well as costs
associated with handset replacements and repairs (other than
warranty costs which are the responsibility of the handset
manufacturers). We deduct customers who do not pay their first
monthly bill from our gross customer additions, which tends to
increase CPGA because we incur the costs associated with this
customer without receiving the benefit of a gross customer
addition. Management uses CPGA to measure the efficiency of our
customer acquisition efforts, to track changes in our average
cost of acquiring new subscribers over time, and to help
evaluate how changes in our sales and distribution strategies
affect the cost-efficiency of our customer acquisition efforts.
In addition, CPGA provides management with a useful measure to
compare our per customer acquisition costs with those of other
wireless communications providers. We believe investors use
CPGA primarily as a tool to track changes in our average cost
of acquiring new customers and to compare our per customer
acquisition costs to those of other wireless communications
providers. Other companies may calculate this measure
differently.
The following table reconciles total costs used in the calculation of
CPGA to selling and marketing expense, which we consider to be the
most directly comparable GAAP financial measure to CPGA (unaudited;
in thousands, except gross customer additions and CPGA):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
2007 2006 2007 2006
----------------------------------------------
(As (As
Restated(3)) Restated(3))
Selling and marketing
expense $ 54,265 $ 42,948 $ 150,045 $ 107,992
Less share-based
compensation expense
included in selling
and marketing expense (843) (637) (2,403) (1,437)
Plus cost of equipment 97,218 83,457 310,701 220,830
Less equipment revenue (55,161) (52,712) (177,556) (166,776)
Less net loss on
equipment transactions
unrelated to initial
customer acquisition (5,715) (1,804) (13,187) (4,214)
----------------------------------------------
Total costs used in
the calculation of
CPGA $ 89,764 $ 71,252 $ 267,600 $ 156,395
Gross customer
additions 450,954 405,178 1,478,443 936,581
----------------------------------------------
CPGA $ 199 $ 176 $ 181 $ 167
==============================================
(8) CCU is cost of service and general and administrative costs
(excluding applicable share-based compensation expense
included in cost of service and general and administrative
expense) plus net loss on equipment transactions unrelated to
initial customer acquisition (which includes the gain or loss
on sale of handsets to existing customers and costs associated
with handset replacements and repairs (other than warranty
costs which are the responsibility of the handset
manufacturers)), divided by the weighted-average number of
customers, divided by the number of months during the period
being measured. CCU does not include any depreciation and
amortization expense. Management uses CCU as a tool to
evaluate the non-selling cash expenses associated with ongoing
business operations on a per customer basis, to track changes
in these non-selling cash costs over time, and to help
evaluate how changes in our business operations affect non-
selling cash costs per customer. In addition, CCU provides
management with a useful measure to compare our non-selling
cash costs per customer with those of other wireless
communications providers. We believe investors use CCU
primarily as a tool to track changes in our non-selling cash
costs over time and to compare our non-selling cash costs to
those of other wireless communications providers. Other
companies may calculate this measure differently.
The following table reconciles total costs used in the calculation of
CCU to cost of service, which we consider to be the most directly
comparable GAAP financial measure to CCU (in thousands, except
weighted-average number of customers and CCU):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2007 2006 2007 2006
----------- ------------- ----------- -------------
(As (As
Restated(3)) Restated(3))
Cost of service $ 100,907 $ 71,575 $ 281,906 $ 189,040
Plus general and
administrative
expense 68,686 49,116 200,327 144,782
Less share-based
compensation
expense included
in cost of
service and
general and
administrative
expense (6,231) (4,426) (19,309) (12,806)
Plus net loss on
equipment
transactions
unrelated to
initial customer
acquisition 5,715 1,804 13,187 4,214
----------- ------------- ----------- -------------
Total costs
used in the
calculation
of CCU $ 169,077 $ 118,069 $ 476,111 $ 325,230
Weighted-average
number of
customers 2,654,555 1,870,204 2,554,872 1,792,928
----------- ------------- ----------- -------------
CCU $ 21.23 $ 21.04 $ 20.79 $ 20.16
=========== ============= =========== =============
(9) Adjusted OIBDA is a non-GAAP financial measure defined as
operating income less depreciation and amortization, adjusted to
exclude the effects of: gain/loss on sale/disposal of wireless
licenses and operating assets; impairment of indefinite-lived
intangible assets; impairment of long-lived assets and related
charges; and share-based compensation expense.
In a capital-intensive industry such as wireless
telecommunications, management believes that Adjusted OIBDA, as
well as the associated percentage margin calculation, is a
meaningful measure of the Company's operating performance. We use
Adjusted OIBDA as a supplemental performance measure because
management believes it facilitates comparisons of the Company's
operating performance from period to period and comparisons of
the Company's operating performance to that of other companies by
backing out potential differences caused by the age and book
depreciation of fixed assets (affecting relative depreciation
expenses) as well as the items described above for which
additional adjustments were made. While depreciation and
amortization are considered operating costs under generally
accepted accounting principles, these expenses primarily
represent the non-cash current period allocation of costs
associated with long-lived assets acquired or constructed in
prior periods. Because Adjusted OIBDA facilitates internal
comparisons of our historical operating performance, management
also uses this metric for business planning purposes and to
measure our performance relative to that of our competitors. In
addition, we believe that Adjusted OIBDA and similar measures are
widely used by investors, financial analysts and credit rating
agencies as measures of our financial performance over time and
to compare our financial performance with that of other companies
in our industry.
Adjusted OIBDA has limitations as an analytical tool, and should
not be considered in isolation or as a substitute for analysis of our
results as reported under GAAP. Some of these limitations include:
-- it does not reflect capital expenditures;
-- although it does not include depreciation and amortization,
the assets being depreciated and amortized will often have to
be replaced in the future, and Adjusted OIBDA does not reflect
cash requirements for such replacements;
-- it does not reflect costs associated with share-based awards
exchanged for employee services;
-- it does not reflect the interest expense necessary to service
interest or principal payments on current or future
indebtedness;
-- it does not reflect expenses incurred for the payment of
income taxes and other taxes; and
-- other companies, including companies in our industry, may
calculate this measure differently than we do, limiting its
usefulness as a comparative measure.
Management understands these limitations and considers Adjusted
OIBDA as a financial performance measure that supplements but does not
replace the information provided to management by our GAAP results.
The following table reconciles Adjusted OIBDA to operating income,
which we consider to be the most directly comparable GAAP financial
measure to Adjusted OIBDA (unaudited, in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2007 2006 2007 2006
------- ------------- --------- -------------
(As (As
Restated(3)) Restated(3))
Consolidated operating
income (loss) $ 9,393 $ 7,050 $ 38,554 $ 40,227
Plus depreciation and
amortization 77,781 56,409 218,996 163,782
------- ------------- --------- -------------
OIBDA $87,174 $ 63,459 $257,550 $204,009
======= ============= ========= =============
Less (gains) loss on
sale of wireless
licenses 38 (21,990) (902) (21,990)
Plus impairment of
indefinite-lived
intangible assets 1,368 4,701 1,368 7,912
Plus share-based
compensation expense 7,074 5,063 21,712 14,243
------- ------------- --------- -------------
Adjusted OIBDA $95,654 $ 51,233 $279,728 $204,174
======= ============= ========= =============
CONTACT: Leap
Greg Lund, Media Relations
858-882-9105
glund@leapwireless.com
or
Jim Seines, Investor Relations
858-882-6084
jseines@leapwireless.com
SOURCE: Leap Wireless International, Inc.
