Sprint Nextel Corp. is riding high on its pending buyout by a Japanese company. But its latest customer count and financial results, due Thursday, will offer a bit of a reality check.
They’re sure to show just how big a job lies ahead for Sprint and its expected new owner, SoftBank Corp. Both are bent on turning the nation’s lagging No. 3 carrier into a strong challenger to Verizon Wireless and AT Inc.
A key number in Sprint’s third-quarter earnings report Thursday will show whether the company is doing a better job adding customers.
Analysts, however, expect that Sprint will post little growth from the 56.4 million subscribers the Overland Park-based wireless phone company had at the end of June.
One sign of that was last week’s report from No. 1 Verizon, which has more than 100 million subscribers. It added 1.76 million new retail customers in the third quarter, even though there are few new customers to fight over.
“Unless one believes that industry growth rates accelerated — and we certainly don’t — Verizon’s gain is AT’s, Sprint’s and T-Mobile’s loss,” analyst Craig Moffett at Sanford C. Bernstein Co. wrote in a note to clients about the four main competitors.
Investors will see how AT fared when it issues its third-quarter report on Wednesday. T-Mobile USA will report in early November.
With Sprint’s report, analysts also will focus on how well the company’s wireless business helps its bottom line.
Costs have eaten up far more of the revenues that Sprint collects from its wireless customers when compared with its larger rivals. And that has left Sprint with less money to fund its competitive strategies.
A stronger Sprint will need to add customers and make more money in the process.
But in the cell phone industry, success on one front generally means trouble on the other. Solving that riddle will be the task ahead.
To help make that happen SoftBank is pumping $8 billion into Sprint as it buys control.Counting customers
In its June earnings report, Sprint added on 283,000 subscribers during the spring months, breaking a string of quarters in which it had gained a million customers or more each quarter.
The company had spent much of its time battling to keep customers it already had — those on its Nextel network.
Sprint gained the network, which runs alongside Sprint’s own network, in its 2005 merger with Nextel Partners. The Nextel network uses badly outdated second-generation technology in an increasingly fourth-generation, or 4G, world. Sprint will shut it down by the middle of next year.
As Nextel’s several million remaining customers pick out new cell phones, they’re not necessarily getting them from Sprint.
Sprint stunned the industry in June with the news that it had “recaptured” 60 percent of the relocating Nextel customers during the second quarter. Executives quickly cautioned that recapture rates closer to 40 percent or 30 percent were more likely once the shifting was over.
As June came to an end, Sprint said it had added 442,000 new customers under contract to its Sprint network. But, because 431,000 of those were merely recaptured Nextel customers, it amounted to just 11,000 “true net adds” for the Sprint network, said Christopher King, an analyst at Stifel Nicolaus Co. Inc.
Even this small gain may turn into a small decline with this week’s report, according to Nomura Securities analyst Mike McCormack. He has estimated that Sprint would show a net loss of 10,000 contract customers on its Sprint network, down from his earlier estimate of 40,000 added customers.
McCormack cited Sprint’s “strategic decision to focus on recapturing” Nextel customers while limiting other efforts.
Battling Verizon and No. 2 AT, however, will mean turning Sprint’s attention to winning over their customers.
“That will be the real test for Sprint, whether they can begin to take market share from others because that’s what they’re going to have to do to grow the business,” King said.
SoftBank was able to do just that as it turned from a weak No. 3 carrier into a vibrant No. 3 rival. SoftBank chief executive Masayoshi Son has vowed to do the same at Sprint but hasn’t said how.
Sprint may be hard pressed to mimic the tools that SoftBank used.
SoftBank boosted its customer counts partly by winning exclusive rights to Apple Inc.’s iPhone back in 2008, much in the same way AT’s exclusive rights in the U.S. market gave it an upper hand.
Technology may work against Sprint, though it offers the latest iPhones.
Verizon and AT have a big head start on Sprint in deploying the latest networks, which use Long Term Evolution, or LTE, technology. Sprint has launched in 32 markets, AT in 77 and Verizon in more than 400.
Sprint might consider the tactic SoftBank used before it got the iPhone franchise in Japan. SoftBank was a price slasher. Moffett, in a note to clients Monday, wrote that its price cutting lowered its own average revenues from each customer by 30 percent in three years.
Lowering revenues would seem to weaken Sprint’s already struggling finances.Financial progress
Sprint has done a good job of showing more revenues in recent financial reports.
One way has been to increase the average revenue from each customer by charging a $10 monthly data fee for customers with smart phones. The fee accounts for the greater network space that smart phones take up when customers access the Internet, download photos, watch video and enjoy many other data-intensive treats.
Sprint’s steps to close down the old Nextel network have begun to lower Sprint’s costs, too. It has been spending more, however, to upgrade its existing network and build the new LTE service.
By the time analysts add up the plusses and minuses, Sprint has had far less of its revenues left over than its competitors do. They call this key measurement the company’s wireless margin.
It’s not exactly a profit margin because the carriers have other costs to pay, such as interest on their debts.
For Sprint, about 16 percent of its wireless revenues were left over after covering its wireless business costs, according to its June report. Its 16 percent margin pales next to Verizon’s wireless margin that typically is north of 40 percent.
Analsyts will calculate an update to Sprint’s number from Thursday’s report.
“I doubt very seriously whether Sprint Nextel will ever reach Verizon Wireless (wireless) margins. The gap’s too wide,” King said.
Son has acknowledged that it’s an uphill battle.
Wireless companies typically see their wireless margins shrink, at least temporarily, when Apple launches a new iPhone, which it did this fall.
These popular devices cost a lot more than the carriers charge customers. The difference, called a subsidy, comes out of the wireless companies’ pockets and cuts into their wireless margins.
For Sprint, wireless margins would suffer from most of the traditional things wireless companies do to steal customers from each other. For example, spending more money to advertise would drive up costs.
Wireless margins across the industry would suffer if Sprint or another carrier started a price war by lowering monthly phone service rates as SoftBank did in Japan.
Sprint is sure to get a boost from the $8 billion its receiving from SoftBank. Thursday’s report will show just where it begins that uphill climb.