Leap Jumps>
Pitfalls test Leap in quest for markets at home and abroad
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February 14, 1999
Harvey White stood before a roomful of shareholders at the LaJolla Marriott recently, tap, tap tapping his wireless microphone, to no avail.
"Can you hear me now?" It was, perhaps, a defining moment.
White, chief executive of Leap Wireless International, was trying to explain why his new company bled more than $11 million in its first quarter of existence.
Microphone snafus are common, as are financial losses for start-up telecommunications companies which require bushels of up-front cash to build and install the transmitters, receivers and other equipment needed for communications networks.
But on this occasion of Leap's first annual meeting -- a January day when the company was supposed to inspire shareholder confidence -- the dual dose of poor earnings news and malfunctioning wireless equipment symbolized an infant company struggling to gain footing.
"You know wireless technology," White shrugged, moving to a conventional mike.
Leap was conceived out of a conflict of interest. Qualcomm was competing against fellow service carriers, while trying to sell them wireless phones and other hardware. It was an uncomfortable arrangement at best.
Deciding to focus on handsets, semiconductors and other related businesses, Qualcomm spun off Leap in September and set it loose in a world abundant with business potential and, as it turns out, rife with pitfalls.
Leap's mission is simple: partner with companies or consortiums and deploy Qualcomm-based wireless service in places and countries where phone service is wanting.
In so doing, Leap has inherited a collection of Qualcomm's former interests in Latin America, Russia and Australia, only to have those be overshadowed by a partner's ongoing bankruptcy woes and economic chaos in Eastern Europe.
Deploying wireless service in emerging markets generally is faster and cheaper than installing land-line telecommunications systems: There's no need to unspool miles of telephone line and wires don't have to penetrate every dwelling.
Thus, developing nations get the added benefit of leap-frogging their telecom systems into the 21st century.
White notes that there's a strong correlation between a country's gross domestic product and its "teledensity," or the ratio of phones to population. "If you're an emerging country," White says, "it's important, I believe, to move your teledensity up."
Indeed, governments such as Brazil, where as many as 4 million people are on waiting lists for phone service, have dismantled and sold off pieces of their former state monopolies to raise money for expansion and improvement of their telecommunications networks.
Leap, then, would seem in prime position to take advantage of pent-up demand in Latin America and in other developing regions worldwide.
But, unlike other spin-offs, such as Lucent Technologies, which successfully was spun from AT&T's orbit earlier this decade, Leap seemingly has taken two steps back for each stride forward.
By the end of this month, Leap and Pegaso Telecommunicationes are scheduled to launch service in Mexico, a nation of 99 million potential customers. Tijuana will be first to go online, followed by Mexico City, Monterrey and Guadalajara.
Leap owns a third of Pegaso, the consortium that includes Grupo Televisa, the largest Spanish media outlet on the planet.
Pegaso has invested about $700 million and plans to spend a total of $1.2 billion over five years to set up a fixed and mobile wireless nationwide network.
The consortium, which has a head start over two potential wireless competitors, paid about $220 million just for licenses to become the first carrier in Mexico to build a 100 percent digital wireless network.
"Mexico will be (Leap's) make or break opportunity," says Michael Krier, director of Latin American telecommunications research for the Strategis Group in Washington, D.C. "If they make that go, they gain more credibility and open doors for other markets."
That's the good news.
Then there's Chile, where Leap owns 50 percent of Chilesat PCS, the country's third largest carrier.
In Chilesat, Leap boasts that it helped install Latin America's first nationwide wireless phone network based on Qualcomm's digital code division multiple access, or CDMA, technology.
Leap calls it a "showcase" system.
However, Leap's primary partner in Chilesat, Telex Chile, is facing bankruptcy. Moreover, Leap reported in a recent Securities and Exchange Commission filing that Chilesat was experiencing technical difficulties with the system.
White and other officials at Leap downplay Telex Chile's woes and maintain that software and hardware glitches will be fixed soon. "I believe Telex Chile and its partners will come to a solution," White says. "I'm pretty optimistic about Telex Chile."
Telex Chile owes $200 million to three creditors: Banco BHIF, Banco Sud Americano and Dresdner Banque Nationale de Paris. In December, a Chilean judge declined to declare Telex Chile bankrupt and gave the company until April 8 to submit a refinancing plan.
There's more. Chilesat failed to repay a $35 million loan to Leap and a $10 million loan to Qualcomm due at the end of January. Leap declines to discuss how it intends to get its money back.
Telex Chile also failed to contribute $17.5 million in capital to Chilesat by a Jan. 31 deadline.
Leap and its affiliates have an option to convert outstanding loans to Chilesat into equity. In such a scenario, Leap and its affiliates would gain more control of Chilesat.
Again, Leap refuses to disclose its intentions. White says Leap "has a number of irons in the fire" should Telex Chile go belly up, but he declined to elaborate.
Krier, of the Strategis Group, predicts Leap "will withdraw from the Chilean market" should Telex Chile go bankrupt.
No way, says Daniel Pegg, Leap's senior vice president for public affairs. He contends that the asset is too valuable and that there would be eager buyers for Telex's share. "Who wouldn't want to pick it up?" Pegg says.
Leap's situation isn't any better in Russia, where the economy is more ill than perennially infirm President Boris Yeltsin.
Russia's central government has been accused of rendering the ruble worthless, of extorting unfair taxes, of confiscating export revenues and of strangling imports.
In what passes for good news, officials at Leap say they haven't had any problems with the notorious Russian mafia.
Leap owns majority equity in Metrosvyaz, a wireless carrier, as well as a major share of Orrengrove, a satellite long-distance company.
Leap and Qualcomm agreed to provide or procure up to $500 million of financing for Metrosvyaz. Qualcomm also agreed to provide a loan of $175 million to Metrosvyaz for working capital and the purchase of Qualcomm equipment. Leap assumed $72.4 million of the loan.
Metrosvyaz can't repay loans needed to deploy the wireless networks, however, and as a result, Leap has agreed to slow installation.
Moreover, Metrosvyaz has been forced to restructure the terms of its vendor financing agreement with Qualcomm, established before Leap was created.
"The one thing you can count on in the Russian economy is that it won't stay the same," says Tom Bernard, Leap's executive vice president. "But will it get better or worse?"
Bernard is optimistic the socioeconomic climate will improve, because "I've been there."
For shareholders, no news is good news from Down Under. Leap, through its wholly owned subsidiary, Ozphone Pty Limited, owns several communication licenses in Australia for a total cost of $6.3 million.
Leap's last financial filing with the SEC makes no mention of problems there, and the company is taking it slow in ramping up operations with an expected launch date by the end of the year. "We don't have to rush this," White says.
Back on the home front, Leap has hit stumbling blocks.
Leap owns 7.2 percent of Chase Telecommunications Holdings in Tennessee and announced last month that it wants to buy out the company, pending approval by the Federal Communications Commission. Leap also is trying to buy licenses in North Carolina and South Carolina from AirGate Wireless for $19.5 million.
The two properties are intended to serve as initial test markets for Leap's domestic strategy of providing a flat-rate wireless local area telephone service for the mass consumer market.
The problem is that both ChaseTel and AirGate operate under what's called C-Block licenses, which are reserved for small companies. Leap, a public company closely tied to Qualcomm -- a $3 billion corporate benefactor -- does not qualify, says the U.S. Small Business Administration. The SBA and four companies have filed objections with the FCC.
Leap, with about 65 employees, maintains that it qualifies as a small business and is confident it will win regulatory approval for the licenses.
Finally, Leap's fortunes are tied directly to those of Qualcomm, which is battling to deploy its CDMA system in more markets and in future generations of wireless phones and other devices.
While CDMA is widely deployed domestically, Global Systems Monitoring, or GSM, is king in Europe and elsewhere globally. Time division multiple access, or TDMA, is a technology favored by giant AT&T.
Leap chants the Qualcomm mantra that CDMA is the standard of the new millennium and is committed to deploying it in a world of competing technologies.
"We're going to deploy CDMA because everyone is going to supply CDMA in the next generation," White says. "There no reason for us to believe otherwise."
There's something to be said for loyalty, but Krier, the Latin American director at Strategis Group, says the strategy could be hazardous.
"The only thing that would worry me is if they're entirely wedded to Qualcomm's CDMA," Krier says. "That means you don't have a variety of offerings."
Yet, even with the specter of bankruptcy in Chile, the economic turmoil in Russia and the regulatory hurdles in the United States, Leap still has world hunger for telecommunications on its side.
There is pent-up demand for service in many parts of the world where Leap wants to do business. In that regard, Leap, with its deep-pocket connections to Qualcomm, is in position to take advantage, Krier says.
Now, if only the company can get those wireless microphones to work. |
