Sprint Connection

Sprint reports net loss and first quarterly subscriber decline since early 2010

Updated: 2012-10-26T01:53:29Z

BY MARK DAVIS

The Kansas City Star

Sprint Nextel Corp. on Thursday reported losing subscribers for the first time in more than two years, but said that was because it is picking its fights carefully in the battle for cellphone customers

Sprint, in its third quarter financial report, said its subscriber count fell by 423,000 during July, August and September, leaving it with 55.9 million wireless customers.

Verizon Wireless and AT&T Inc. reported customer increases in the third quarter and topped 100 million subscribers each, putting Sprint in a more distant third place.

Sprint also reported a $737 million loss in the third quarter, marking five years since the Overland Park-based company last posted a profit.

Chief executive Dan Hesse, in an interview after the report, talked about Sprint’s options for attracting customers but did not tip his hand on what the company will do.

Sprint could ratchet up its efforts to grab customers away from its rivals as the busy holiday sales season approaches. It has more money to spend after receiving $3.1 billion this week as part of its $20.1 billion deal to be acquired by Tokyo-based SoftBank Corp.

Hesse said it would make sense to fight harder for customers in the next couple of months, but also noted that an expensive marketing campaign likely would be a poor use of cash.

“You still want only to spend smart regardless of how much you have in the bank,” Hesse said.

Breaking a string

The customer decline was Sprint’s first since March 2010. Just six months ago, Sprint was on a stretch in which it had gained more than 1 million customers in six consecutive quarters.

Sprint’s financial losses were large but not damaging to its plans, Hesse said.

He said most of those losses represent declining values of equipment, buildings and other assets it owns but which depreciate in value over time. Their declining value digs into the company’s profitability under accounting rules.

The third quarter loss, for example, included a $397 million “accelerated” decline in the recorded value of the company’s old Nextel network that it gained from the 2005 merger with Nextel Partners. Sprint will shut the Nextel network down mid next year.

Cash has kept Sprint’s bills paid on time and its doors open, and Hesse has made careful use of company cash a priority since he joined Sprint in late 2007.

There were lots of reasons Sprint did not use cash in the third quarter to chase hard after new customers at Verizon, AT&T or other carriers. Many of those reasons still apply now.

Few consumers shopped for a cell phone in the third quarter because they were waiting for Apple Inc.’s newest iPhone. The iPhone5 was released in late September.

Even without marketing heavily, Sprint still managed to sell 1.5 million iPhones in the third quarter and 40 percent of those went to new Sprint customers.

Jennifer Fritzsche, an analyst at Wells Fargo Securities, told clients in a note that she was “especially impressed” that Sprint attracted so many new customers with iPhones, doing better than Verizon and AT&T.

Next month, Sprint will start selling Apple’s iPad, which its larger rivals already offer.

Sprint certainly will trumpet both the iPad and the iPhone5, as well as other new devices, as the holiday shopping season heats up in the year’s fourth quarter.

“It’s the cut-throat quarter,” said Bill Ho, a telecom industry analyst. “That’s where the promotions are going to happen.”

Dry powder

There are other reasons Sprint won’t open the checkbook wide.

One is called Long Term Evolution, or LTE, technology. It’s the fastest way yet for mobile consumers to stream videos, download photographs and browse the Internet.

In most cities, Verizon’s got it and Sprint doesn’t.

Verizon has LTE service in more than 400 markets and added 1.5 million new customers under service contracts during the third quarter. AT&T Inc. said it added 151,000. No. 4 carrier T-Mobile USA will report next month.

Sprint said it shed 456,000 subscribers who had signed a two-year service contract, which generate the most revenues for wireless carriers. Sprint said it added 33,000 customers who buy service from month to month, either directly at Sprint or through one of the companies that resells wireless service using Sprint’s network.

Hesse said the big difference in customer gains was Verizon’s LTE advantage.

“They could spend big money to roll it out quickly and roll out first. They had financial resources Sprint just didn’t have,” Hesse said.

Hesse called Verizon’s LTE advantage “temporary” and said Sprint is working hard to catch up. Sprint is adding LTE as part of its expensive network upgrade project called Network Vision.

Hesse said Sprint is battling the technology gap by promoting its unlimited data service plans. Verizon and AT&T have both introduced service plans that charge customers more for using more data.

Sprint has announced plans to offer LTE in more than 100 markets as a way to tempt wireless shoppers to wait, not for LTE but for unlimited LTE.

Even with that approach, Sprint would waste a lot of advertising dollars on a national LTE campaign. A market-by-market approach also could be difficult.

An August comparison of LTE in four markets — including Kansas City — found that Sprint’s coverage lagged far behind Verizon’s and AT&T’s coverage though all three had launched the service.

“If I were in marketing at Sprint I’d be kind of pulling my hair out,” Ho said.

Nextel exodus

At Sprint, the management’s eyes are on a different prize. They’re intent on shutting down the old Nextel network.

Doing so will save money. Sprint has had the added cost of running two networks — the Nextel one and Sprint’s own network — since the Nextel merger seven years ago.

Shuttering the Nextel network also will allow Sprint to reuse the wireless spectrum it operates on. Spectrum is essentially the licensed airwaves that wireless companies use to deliver service to customers. Sprint wants to use the Nextel spectrum to beef up its Network Vision project.

Sprint can’t do that until all of the Nextel customers have moved off the old network. And Sprint has to get them off the network by June to stay on schedule with Network Vision.

About 30 percent of the remaining Nextel customers did jump during the third quarter, with Sprint’s help.

Sprint has spent its effort, and its cash, on promotions such as phone discounts and service credits to get them to move to its Sprint network instead of Verizon, AT&T, T-Mobile or any other carrier. It calls this “recapturing” the Nextel customers.

“Our focus still will be primarily on recapturing those iDEN (Nextel network) customers,” Hesse said Thursday.

For starters, Hesse said, the company saves more than $200 by recapturing a Nextel customer compared with the cost of luring away subscribers from another carrier. And that’s a better use of Sprint’s cash.

More money in the bank

Hesse acknowledged that the $3.1 billion it gained this week from the SoftBank deal changes the choices Sprint faces.

Money could help Sprint catch up on LTE technology, he said, but not for another six months. It takes that long to get the zoning permits and leases for new tower sites in place to start construction.

Money, he said, could help lure customers in markets where Sprint has LTE coverage to show off.

He just won’t say which choices Sprint will make. Except for one.

Sprint’s going hard after the Nextel customers.

“Were focusing our guns,” he said, “on recapturing as many of them as possible. That’s our focus as the most profitable use of our dollars.”

Financially, Sprint increased its revenues in the third quarter to $8.76 billion, up 5 percent from a year ago. The company’s loss of $767 million equaled 26 cents a share, compared with a loss of $301 million, or 10 cents a share, a year ago.

Sprint shares fell 10 cents Thursday, closing at $5.52.

To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com.

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