Tidbits from Leap's March 31 10Q:.
"During the three months ended March 31, 2002, we incurred $41.9 million in cost of service and $84.0 million in cost of equipment...During the three months ended March 31, 2002 ...$66.2 million of our losses on handset sales were to acquire new customers"...Page 26.
Does this mean we subtract revenues from equipment ($12.2 million) from ($84.0 million) cost of equipment, then subtract $66.2 million, to calculate $5.6 million recurring handset subsidies on the existing customer base? Is any of this reducible fraud?
"During the three months ended March 31, 2002, we experienced a significant increase in the occurrence of fraud, which has been an issue in the wireless industry, over that experienced in the preceding year. The three types of fraud that have affected our business result from: (a) a person paying for service or equipment with the credit card of another; (b) a person who already owns a Cricket phone activating service with false information and thereby obtaining an additional month of service free; and (c) a third-party dealer or distributor reporting a handset as sold and activating the service in a fictitious person’s name and/or selling the phone to someone out of the market in violation of its contract with us. We believe that the financial costs of these activities are, subject to some normal delays in the reporting of credit card misuse, reflected in our current financial statements. Based on preliminary raw data from the new tools we are developing and implementing and anecdotal information, we estimate that up to five percent of our reported customers at March 31, 2002 may have been involved in fraud. The first two of these types of activities decrease our revenue and calculated average revenue per user per month (ARPU), either because the customer receives a month of service free or because of credit card charge-backs. The third type increases our equipment losses and cost per gross customer addition (CPGA) because we sell our handsets at a loss and give market development funds and volume incentive payments to the dealer. A customer entered onto our system through improper dealer activity, like any other customer who fails to pay his or her first bill for more than 30 days, is ultimately reversed out as a customer. New customers resulting from these three types of activities are not cumulatively increasing because each such customer is removed from our system through our normal procedures, typically within 60 days.
We have been developing and implementing aggressive programs, systems and processes to minimize the occurrence and cost of these issues. Early reports from these new programs, systems and processes show that we already have made progress in reducing improper use of credit cards and improper free months of service to customers. We also expect new systems to reduce the occurrence and cost of dealer misconduct during the second quarter of 2002. We expect to continue to see a negative impact on our calculated ARPU, CPGA and customer churn in the second quarter of 2002 and improvement in these metrics later in the year as the new programs, systems and processes we are implementing mitigate the effects of fraud." Pages 26 and 27.
Does anyone have any updated financial modeling after thinking through the meaning of these disclosures? |
