10/5/01 Ziff Davis interview with Harvey White.
theneteconomy.com
October 5, 2001
Leap's Hurdles
By Tim Kridel
The past few months haven't been kind to Leap Wireless. On July 25, the service
provider's stock began a 40% slide after it announced that it needed to reach $120 million
in 4Q 2001 revenue to meet performance goals in its vendor financing agreements.
Considering Leap reached only $47.8 million in 2Q revenue, the Qualcomm spin-off
needs a blowout performance.
Leap caught a break on Sept. 19, when vendor creditors Ericsson, Lucent Technologies
and Nortel Networks agreed to lower Leap's 4Q revenue target to $100 million and gave it
an extra $150 million to spend through 2002. That soothed skittish investors, who
immediately pumped the stock price by 12%.
The man responsible for getting Leap to hit its lowered mark is Harvey White, the service
provider's chairman and CEO. White recently spoke about Leap's prospects, about the
pros and cons of Leap's flat-rate Cricket service and about the health of the wireless
industry in general.
Q: You recently renegotiated your vendor covenants. How have they changed?
A: There were two covenants involved. One was a revenue covenant, which had to be
changed because the accounting rules changed. Our agreements with the lenders were
that if the rules changed, the covenants would be restated to take those changes into
account. We always felt that we'd meet that set of revenue covenants without any change.
The other covenant was when we set up the agreements with a fixed amount of capex
each year. If you didn't get to spend the money one year, you didn't get to carry it forward.
Our suppliers changed that to allow it to be cumulative. That allowed us to have $150
million that we didn't spend in 1999 and 2000 to be available to us in 2001. That made our
life easier.
Q: You're getting ready to deploy 1XRTT [the next-generation version of CDMA]. How is
that going?
A: The problem right now is getting handsets in any kind of quantity. Our networks are
capable of 1X. We're in the process of trying to determine when we can get handsets in
enough volume. There clearly aren't commercial quantities of 1X handsets. You're just
starting to see them.
It's really a supply and demand issue: When there are enough people who want to go to
1X, it will encourage the handset manufacturers to make the phones.
Q: As your customers switch from CDMA to 1X phones, your voice capacity increases.
How does that affect your cost structure?
A: The capacity gain is important to us. We built our networks later, so our infrastructure is
1X-compatibile. Other people built chunks of their networks with first-generation CDMA
equipment, so it's a forklift upgrade for them. We don't have as many customers as other
companies, which have millions of customers and face a bigger transition cost. Ours is an
easier task.
Q: One drawback to a flat-rate service like Cricket is that average revenue per user tends
to remain flat from quarter to quarter. What optional services will you add to increase
ARPU?
A: We do offer long distance, so we get some ARPU out of that, although the majority of
our customers make the vast majority of their calls locally. Long distance isn't a big driver
in our business. We get additional revenue out of features like call forwarding and call
waiting. And we do have sister cities in a couple of places -- Albuquerque and Santa Fe,
Charlotte and Hickory, Fayetteville and Fort Smith -- where you can use your phone in both
cities for an extra $10 a month. We're also seeing some impact from the fact that our
basic rate some cities is now $32.95 instead of $29.95. We see information services
[such as the Telephone Entertainment Network] adding to that.
Q: One advantage of flat-rate billing is that customers know pretty much what their bills will
be from month to month. How does that affect the way they use the service?
A: People start using the wireless phone more like wireline and rely on it as their major
source of communication. That moves us up in the bill-paying cycle to be one of the bills
that they pay.
Q: What's Leap's situation with customer churn?
A: A very, very small percentage of people leave to go to another service. We're seeing a
pattern that's pretty consistent with a lot of carriers when they start markets. If you look at
Sprint PCS and others, at the end of the first year, their churn was probably 5% to 6% [per
month], as opposed to the 4% we have the end of the first year. We still expect that over
time, our churn is going to be more in line with the industry norm [which is around 3%].
Early on, we saw that because people use the handset a lot, there was some churn by
broken handsets after the warranty period where people were unwilling to buy another
phone. We've taken steps to correct that by having an extended warranty that people can
buy. That's been fairly popular.
Q: Most wireless providers are urging the Federal Communications Commission to
eliminate the cap on the amount of spectrum that a provider can own in a single market,
but Leap consistently argues for keeping the cap. Why?
A: I'm a firm believer that there's more than enough spectrum under the control of most of
the people who want to add to it to do voice and data, including 3G. The problem is that
people are running their networks very inefficiently, either with technology that wasn't
developed for capacity - TDMA and GSM - or by not moving people off analog service.
I liken the spectrum cap issue to United Airlines going to the Federal Aviation
Administration and saying, "I want 30 more landing slots at LAX because I want to fly
DC-3s instead of DC-10s. You should give me more slots because I've got old
equipment." The FAA would laugh them out of the office, and that's what the FCC should
do.
Letting people who do a poor job of managing their spectrum get more just because
they're doing a poor job isn't what's needed. It's clearly not an issue of need for 3G. The
cap has been effective in creating competition and therefore in bringing new products to
the marketplace. If we got rid of the cap, there would be more consolidation and less
competition. There would be bigger players wanting to run roughshod over smaller
players.
Q: Leap has ample spectrum, which could make it an acquisition candidate. Would you
listen to offers, or would you circle your wagons?
A: Our responsibility is to our shareholders. We'd always take into mind the benefit to
shareholders of any offer that might come to us. Most acquisitions to date have been ones
that fill in networks, and our spectrum is pretty well scattered geographically. I don't see us
as somebody who fills in a network like Powertel, which had the Southeast, or Aerial,
which had Texas. We don't do that for anybody.
But if they did away with the spectrum cap, that would make it easier for somebody to
acquire us for whatever reason. In today's capital markets, everybody seems relatively
stressed to have money to spend on acquisitions right now. Because we don't fill holes, I
don't know that it makes us particularly attractive
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