July 30, 2013

Sprint shares climb despite a loss of 2 million subscribers in quarter

The customer losses included more than 1 million who were under service contracts. They came at a time when other carriers were adding contract customers. Sprint’s losses largely reflected the shutdown of its old Nextel network at the end of June.

Having just lost 2 million subscribers this spring, Sprint CEO Dan Hesse is surprisingly poker-faced about his plans to find new ones.

In an interview following Sprint’s quarterly earnings report Tuesday, Hesse refused repeatedly to show his hand. Will Sprint try to attract customers by cutting prices, promoting its emerging new network or even spending more to advertise?

How about responding to the new phone upgrade and payment plans that T-Mobile, AT&T and Verizon announced recently?

“We may or may not feel we need some changes,” Hesse said.

In short, Sprint’s quarterly update for investors — its first since SoftBank Corp. in Tokyo earlier this month bought 78 percent of Sprint for $21.6 billion — included no hint of the Overland Park-based company’s strategy in an increasingly high-stakes battle for customers.

Sprint played a losing hand in the second quarter when it shed more than 1 million customers under contract and almost as many who buy service month to month. Verizon and AT&T added contract customers, and T-Mobile is expected to say next week that it did as well.

The second quarter was “ugly, but no worse than we expected,” said Kevin Smithen, in a note to clients at Macquarie Equities Research.

Investors found reason to cheer the mixed financial news Sprint posted Tuesday.

Sprint shares rose 42 cents, or 7.3 percent, to $6.16, their highest value in more than a week.

Revenues grew to $8.88 billion in the quarter from $8.84 billion a year earlier. That’s not bad considering 2 million customers walked away.

“It’s amazing they were able to do that,” said Berge Ayvazian, an industry consultant at HeavyReading.com.

Hesse said the key was that the average revenue Sprint earns from each customer had increased. It was true for each of its major brands: Sprint, Virgin and Boost.

The company’s network upgrade has expanded to cover 20,000 cell towers, up from 13,500 at the end of March. Its faster LTE service, which uses Long Term Evolution technology, is available in 151 markets and is on pace to reach 200 million potential customers by the end of the year.

Heavy spending on its network upgrade, plus the cost of shutting down and writing off its old Nextel network, helped to balloon Sprint’s losses to $1.6 billion. The company lost $1.4 billion in the same quarter a year ago.

Much of the day-to-day work at Sprint has been focused on operating more profitably, and that means keeping down costs so more of that revenue stays at Sprint.

For example, Hesse said, shutting down the Nextel network at the end of June did cost Sprint some subscribers. But it also will cut costs meaningfully and immediately.

But the unanswered question Tuesday: Where is Sprint going next?

Will it cut prices to win new subscribers?

“I’m not signaling anything from a price perspective, up or down,” Hesse said.

Will it promote the network upgrade to potential customers?

“In 2014, we could message our network’s strength. … You don’t tell your competitors what you’re going to do.”

Hesse told analysts early Tuesday that Sprint had spent the least of the four major carriers this year when it comes to marketing to customers. Will that change?

“It may,” he said. “It may not.”

Some analysts looked to Japan for answers.

SoftBank, led by founder Masayoshi Son, bought 78 percent of Sprint’s stock in early July. Son was busy releasing his own company’s second-quarter results and didn’t address Sprint’s investors Tuesday.

But SoftBank did identify five points for its U.S. strategy: network, devices such as phones and tablets, sales and branding, service and content, and cost savings.

Like Sprint, SoftBank is the No. 3 carrier in its country but has gained ground on its rivals. For example, it added more new customers than its rivals in the second quarter, and its profits rose to $2.4 billion, according to Bloomberg News.

A “very telling” part of SoftBank’s strategy has been to push customers’ ability to connect to the Internet through their mobile devices, analyst Jennifer Fritzsche at Wells Fargo Securities said in a note to clients.

“It is worth noting that SoftBank refers to itself as an “Internet company” in its presentations, Fritzsche wrote.

At least some of that was reflected in Sprint’s news. It intends to invest $8 billion this year on its network upgrade and other capital needs.

Such spending wouldn’t be possible without SoftBank’s financial backing, said Roger Entner, an analyst at Recon Analytics.

It also won’t be enough in the battle for customers. Entner and Ayvazian said Sprint needs to launch a push for subscribers soon.

“The market has evolved away from Sprint,” Entner said.

The bigger carriers — Verizon and AT&T — have a stronger network message because they’re further along in adding LTE technology to their networks for faster Internet connections.

Hesse said a network message would be stronger early next year after Sprint’s LTE coverage reaches a “critical mass” of potential customers at the end of this year.

T-Mobile has targeted a payment plan to help customers buy new phones and upgrade more often, and Verizon and AT&T have followed with their own.

Hesse dismissed the idea Tuesday as “a bit of a shell game.” Sprint, he said, just folds the payment into the monthly phone bill.

Entner agreed it’s a shell game but added that “people go for it.” Time is slipping away for Sprint if it wants to avoid big customer losses during the summer months, he said.

The consequences are bigger in the final three months of the year, which always see more cellphone shoppers because of the holidays.

It may be that Sprint’s plans simply aren’t ready or that Hesse still is seeking Son’s input or approval.

“It’s the middle of summer, so they don’t think it’s as urgent as it might be,” Ayvazian said. “In the fall, and certainly before the end of the year, they’re going to have to present a response.”

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