Leap Wireless International plans to skip some of a $75 million payment it owes Sprint for the use of its 3G network amid marked declines in its prepaid business.
CEO Doug Hutcheson said during the company's earnings call yesterday that Leap does not believe it is obligated to meet its contractual commitment to Sprint this year, though it will still pay a "significant majority" of the bill.
"Sprint has not agreed with our position, and we are in discussions with them," he said in a transcript provided by Seeking Alpha.
Leap owes Sprint $75 million this year under the terms of a five-year roaming contract the companies agreed to in 2010. The arrangement with Sprint is critical to Leap's ability to provide customers of its Cricket Communications prepaid brand with nationwide wireless service, as its own footprint is limited.
Under the agreement, Leap will pay Sprint a certain amount every month for customers using its network, plus $300 million in additional payments spread out over the term of the deal.
Leap agreed to pay out $25 million last year, followed by annual payments of $75 million through 2014, plus a payment of $50 million in 2015.
Leap executives declined to provide additional details about its discussions with Sprint or the amount it currently owes under the contract.
The announcement that Leap would delay payment to Sprint came as the company reported worst-than-expected results for the second quarter.
It lost 289,000 net customers last quarter, a reversal of the 258,000 customers it added during the first quarter.
"Net customer additions did not meet our expectations," Hutcheson said, placing blame for the numbers on the economy, handset quality and promotions that "did not perform as we expected."
Churn spiked as customers defected to other providers, rising more than a full percentage point from the first quarter to 4.4 percent. The churn number only increased two-tenths of a percentage point year-over-year, from 4.2 percent during the second quarter last year.
The addition of the iPhone in June boosted the company's ARPU nearly 4 percent to $41.64, from $40.15 last year. The company has not disclosed sales numbers for the smartphone, which is also being offered on a prepaid basis by Sprint prepaid brand Virgin Mobile USA.
Leap managed to improve its earnings over last year, but the numbers missed analysts' expectations, sending its shares plunging 18 percent by this morning. Sales ticked up to $787 million, from $760.5 million last year, helping the company narrow its losses to $41.6 million.
CFO Jerry Elliott, who took his post in early May, told investors during Leap's earnings call that the company's financial results "are not acceptable."
“Going forward, we cannot keep doing the same things and simply try harder," he said. “Instead, we have to take specific and significant actions to increase our margins and be on a clearly demonstrable path to free cash flow, realize the value of our assets and return to growth over time.”
Elliot said Leap aimed to reduce its spending on Sprint's network and lower its capital expenditures this year.
In addition, the operator is readying an overhaul of its smartphone lineup that will introduce 10 new devices during the second half of 2012. It also plans to expand its Muve Music service and update its service plans later this quarter, the first time it has made a major change to its rates in two years.
Leap is also pulling back on distribution to big box stores. Going forward, "we'll focus on a limited set of higher-volume retailers that have wireless as an important part of their business," Hutcheson said. By the end of the year, Leap's products will be in 8,000 national retail stores, "a much tighter focus than we've previously forecast," he said. The move will cut Leap's spending on retail distribution.