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Risky business: Sprint juggles losses now, gains later

Dan Hesse, CEO of Sprint Nextel Corp., said Wednesday that the Overland Park-based wireless phone company has hit a “high-risk” stretch between its troubled past and promising future.

It has gotten beyond its troubles by improving customer service and polishing Sprint’s once-tarnished brand.

But now, Hesse said, the company has embarked on a two-year plan to spend heavily to upgrade its network and put iPhones in the hands of customers largely at Sprint’s expense.

Will its cash hold out long enough to reach a promising future?

“Everything’s improving, but we have two years where, let’s say, you have to balance the checkbook and we’re getting down near the bottom,” Hesse told The Kansas City Star in an interview. “That’s where the risk is, so it’s a high-risk strategy from that perspective.”

Sprint’s checkbook is stretched in two directions.

It’s being stressed by the 3.3 million iPhones that Sprint customers have snapped up in the six months the company has been able to offer them. Sprint pays most of the price tag on those high-dollar phones, expecting to make it up from revenues customers pay over time.

Sprint’s checkbook also has to cover the company’s $10 billion network upgrade, an expensive move toward better and faster service. It also allows Sprint finally to shut down its costly second network, the one gained in the regrettable 2005 merger with Nextel Partners.

Hesse’s comments about the future of the company came after Sprint reported its first-quarter results Wednesday morning. Sprint posted a 1.1 million increase in subscribers, selling 1.5 million more iPhones along the way, and saw revenues climb 5 percent. But the increase in expenses led to a near doubling of its losses from a year ago.

It was a better report than analysts were expecting. Still, Sprint shares ended the trading day 4 cents lower at $2.43 despite enjoying an early 18-cent boost on the earnings news.

Sprint’s revenues reached $8.7 billion during the quarter partly because it has more subscribers than ever, 56.1 million at the end of March.

It also helps that the average bill for customers who are under a service contract at Sprint were higher than a year ago. Credit the $10-a-month data surcharge Sprint began adding early last year to the contracts of new smartphone customers.

Hesse said that despite the cash drain, the iPhone helps greatly.

The company said 44 percent of the customers who bought iPhones from Sprint so far this year were new customers. That was better than the 40 percent of iPhone buyers during the last three months of 2011 who were new customers.

Many of the recently added iPhone customers broke a contract with another carrier to move, according to Sprint, and most of those told Sprint it had to be an iPhone or forget it.

“How could you not carry the iPhone, even though the short-term hit” pulls cash out of the company’s checkbook, Hesse said.

Hesse said Sprint’s iPhone sales are ahead of the pace needed to meet the company’s plans, which he has said forecasts the iPhone as one of Sprint’s most profitable product offerings.

Analyst Craig Moffett at Sanford C. Bernstein Co., LLC was less sure.

The 1.5 million iPhones sold in the first quarter was 300,000 fewer than the number sold late last year, and that suggests Sprint will fall short of what Sprint reportedly promised to sell under its agreement with Apple Inc., Moffett wrote in a note to clients.

“To be sure, it is much too early to raise alarms about this kind of shortfall, in our view,” Moffett wrote. “But it is not too early to begin watching the trend line.”

Sprint attributed the decline to a seasonal drop following the holiday sales boost late last year. Hesse pointed out that larger rivals Verizon and AT saw much larger declines in iPhone sales in the first quarter.

Moffett’s note said first-quarter results for all three carriers were helped by how few new customer signings there were all around. That held down the companies’ costs associated with getting new customers, including the loss each takes by selling iPhones at cut-rate prices under their two-year service contracts.

Sprint’s strategy is that the iPhone will bring more customers who will stay longer and pay longer, and that will more than make up for the current strain on the company’s checkbook.

“The evidence so far supports our decision to carry the iPhone,” Hesse said in a conference call with analysts.

But Hesse made the point that it was riskier for Sprint to add the iPhone and its strain on cash at the same time it embarks on its sweeping network upgrade, which it calls Network Vision.

Network Vision hit Sprint’s bottom line doubly in the first quarter.

It directly added $315 million to the company’s costs, with Sprint telling analysts the cost would increase throughout the year.

Sprint’s bottom line also was deeper in the red because of its plans for the Nextel network. The Nextel network uses a different technology, considered second-generation or 2G, than the Sprint network, which is a 3G technology.

The Nextel side of Sprint has been shedding customers for years. The pace of their departures is beginning to accelerate now that customers know Sprint will turn the network off next year.

A quicker exodus of customers means the Nextel network’s value to Sprint is depreciating faster. The company recorded a $543 million depreciation cost against its first-quarter results to account for the coming shutdown of Nextel.

Depreciation doesn’t drain Sprint’s checkbook, but losing Nextel subscribers hurts revenues.

Sprint’s 1.1 million new customer count would have been higher, but gains on its Sprint network were offset partly by the 836,000 Nextel network customers it lost in the first quarter. Sprint said 46 percent of the Nextel departures signed up for the Sprint network rather than going to a competitor or dropping service all together.

Counting only customers under contracts rather than month-to-month customers, the Nextel side lost more than the Sprint side gained. It left Sprint with 192,000 fewer customers under contract.

The contract count is an important total because contract customers pay higher bills than monthly customers.

In laying out Sprint’s finances to analysts, the company said it had boosted its cash with a recent $2 billion bond sale and is still working on $1 billion to $3 billion in financing from vendors it does business with. It has $7 billion available in cash, short-term investments it could sell easily and borrowing capacity on its lines of credit.

Sprint’s loss in the quarter totaled $863 million, or 29 cents a share, up from $439 million, or 15 cents a share, in the same three months of last year.

The loss increased partly because of the big depreciation charge for the coming Nextel network shutdown. It was helped by a $170 million net benefit from ending Sprint’s contract with LightSquared Inc. The deal broke off last month as LightSquared continued to struggle with interference problems with its planned network.

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