Leap iPhone Sales More of a Worrisome Hop
“Sales of Apple devices were pretty good in the fourth quarter, actually. … We are not concerned about … meeting the Apple commitment. We think that’s going to be fine.”
– Leap Wireless COO Jerry Elliott, last week
In a filing this week with the U.S. Securities and Exchange Commission spotted by BTIG analyst Walter Piecyk, Leap said it expects to sell significantly fewer iPhones than the number it’s obligated to move over the first year of its agreement with Apple. “At our current purchase rate, we project that we will purchase approximately one-half of our first-year minimum purchase commitment through June 2013,” the company said.
Leap began offering the iPhone through its Cricket Wireless subsidiary last June, so this is a troubling disclosure, to say the least. If sales volumes are half of what was expected in the first year of the deal, what will they be in the second or third, which each include moderate increases? Leap says they’ll be just fine. The company is ramping up advertising and pursuing a number of other device-leasing and financing programs that it hopes will expand sales volume.
But if that doesn’t do the trick, Leap may find itself in a tough spot, as it bleakly explains in its 10-K:
If Apple were to require us to meet the annual minimum commitment in each of the three years of the contract term, we estimate that we would be required to purchase approximately $100 million of additional iPhones in mid-2013 above our current purchase rate, approximately $150 million of additional iPhones in mid-2014 above our current purchase rate and approximately $200 million of additional iPhones in mid-2015 above our current purchase rate.
That’s a lot of iPhone inventory for a carrier that’s clearly having challenges selling the device. And if Leap can’t move it all, and Apple declines to revise or extend the company’s purchase commitment, there could be serious financial repercussions. Said Leap, “If we were unable to sell such additional devices at the rates and prices we project, such differences could have a material adverse impact on our business, results of operations and financial condition.”
For Leap’s sake, let’s hope those iPhone leasing and financing programs prove as effective as it claims.