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Technology Stocks : Leap Wireless International (LWIN)
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To: pcstel who wrote (2417)7/27/2002 3:36:52 AM
From: wonk  Read Replies (2) of 2737
 
The fact that their Equipment costs associated directly with CPGA continues to increase at dramatic rates leads me to believe the problem is much larger than anyone thought! I am not sure they can fix it given their current marketing model.

The quick way to look at the relationship between churn and the cost per gross new add is to perform a decay analysis.

In a spreadsheet:

Column A: Months ascending from 1
Column B: Subscribers (start with a round number like 100 and reduce it each month by the churn rate)
Column C: Contribution Margin (for simplicity just use the ARPU - non equipment SGA) in this case $16.37
Column D Multiply the contribution margin by the decayed subscriber count in column a
Column E: discount the monthly contribution margin - multiplied by the decayed sub count - by the estimated weighted average cost of capital
Column F: Create a running total of the discounted monthly contribution margins - using an estimate of the company's weighted average cost of capital. This running total INCLUDES the starting sub number multiplied by the equipment cost per gross add. This is a negative number - and by the earnings announcement is $316 not $233.

I used a 14% discount rate. Basically, the company does not generate a positive Net Present Value on 100 gross new subscribers until the 46th month. By the 99th month the orginal 100 subs have decayed to less than 1. The total Net Present Value of those 100 gross adds is $3,600.

(NOTE that the contribution margins is an EBITDA number and hence doesn't take into account capx and debt service. Hence, they might actually be losing money on a NPV basis)

Now change the churn rate to - oh say 3% - and positive NPV comes in the 29th month and total NPV for 100 gross adds jumps to $22,400. (Decay below 1 sub goes out to the 152nd month)

Churn KILLS.

FWIW

ww

p.s High churn is why the early cellcos went with one-year contracts. This is a simplistic analysis of course. Contribution margins change, cost of capital generally goes down, etc. But if you don't lock the customer in for some period of time, you must recover a much larger percentage of the equipment and upfront sales commission per gross add. It can and does work that way. Pretty standard stuff.
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