Not exactly Sprinting into the future
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the third largest cell phone carrier in the United States Sprint (NYSE: S) has been struggling to keep up with AT&T (NYSE: T) and Verizon (NYSE: VZ) for years. However Sprint has several assets not often talked about, and recent earnings indicate that Sprint is doing better than expected and is on a long road to recovery and profitability.
In the latest earnings Sprint's revenue growth was over 16%, which was far larger than Verizon’s or AT&T’s. Additionally a large part of the losses that Sprint reported -- and Sprint did report a net loss of $863 million in the quarter -- was due to onetime events. The largest of these was the onetime $543 million hit to record the depreciation costs associated with the shutdown of their aging iDen network, which Sprint acquired in 2005 when they merged with Nextel. This net loss was less than expected, according to a poll by FactSet. Sprint's customer base also had strong growth, fitting with the increase in revenue.
Sprint added just over one million customers in the first quarter of 2012, more than Verizon’s 734,000 and AT&T’s 726,000, and dwarfing the less than 200,000 customers T-Mobile, the nation’s fourth largest carrier, added. 785,000 of Sprint's customer gains came from indirect sources such as wholesale or affiliate networks, not customers signing up directly for cell phone service through Sprint. Sprint is not alone, however, in their reliance on indirect customer additions -- roughly 60% of AT&T’s net customer gains also came from wholesale operations. Although adding over one million customers is strong in a single quarter, Sprint added 1.5 million in the previous quarter.
One of the strong selling points on the Sprint network continues to be the iPhone, which Sprint sold 1.5 million of in the first quarter. Though this is lower than the number of iPhones Verizon and AT&T sold during the same time (AT&T sold 4.3 million iPhones and Verizon sold 3.2 million, down 43% and 24%, respectively, from the previous quarter), 44% of these iPhones sold on Sprint were sold to new customers. Sprint CEO Dan Hesse pointed to this as evidence that Sprint is luring customers from other networks to Sprint where they can get the iPhone and unlimited data, texting and talk at lower prices than the competition. Average revenue per user also grew nearly seven percent -- this comes because almost 70 percent of customers on the Sprint network now own smartphones, which are sold with texting, data and talk plans.
With 56 million users Sprint is too large to be a takeover candidate by either Verizon or AT&T; we saw the T-Mobile takeover fall apart and T-Mobile only has 33 million customers. It’s a good thing then that Sprint doesn’t need a takeover to survive.
Sprint is finally moving in the right direction with regard to their technology -- they are shutting down their aging iDen Nextel network and also stopping future investment in their WiMax technology to instead rollout LTE as their 4G network. The majority of new smartphones run LTE as does the iPad, so the next version of the iPhone probably will, so it's important that Sprint get on board with LTE quickly. Verizon has a strong and growing LTE network, which they launched in 2010 and which now covers over 200 million people; Verizon is not accepting any new smartphones that are not LTE equipped. AT&T is behind Verizon in LTE rollout -- they launched their LTE network in 2011 and currently cover 75 million people, but they are rolling out LTE quickly; even T-Mobile has plans to roll out LTE.
Sprint dominates the pre-paid market with more pre-paid customers than Metro PCS (NYSE: TMUS) and Leap Wireless combined and Metro PCS has made a name for themselves as a pre-paid wireless carrier with over nine million customers (even Metro PCS is rolling out LTE coverage; they already have 500,000 LTE customers).
This continued domination in the pre-paid market by Sprint, combined with continuing strong sales of traditional customers led by the iPhone and a technological unification on their network in the coming years sets Sprint up to be a strong long-term player. Additionally Sprint can continue to boost their niche offerings with such virtual operators as Boost Mobile and Virgin Mobile, which are both subsidiaries of Sprint and run on the Sprint network.
There will be risks going forward for Sprint -- they promised to purchase 30 plus million iPhones over four years starting in 2011, which locks Sprint into a roughly $20 billion commitment. The recent drop in iPhone sales in the latest quarter is not a good sign with regard to this commitment and $20 billion is a potentially make-or-break sized deal for Sprint. AT&T and Verizon do not have make-or-break deals hinging on the iPhone; in fact Verizon has a very popular Droid line of Android smartphones. Additionally although Sprint is unifying their technology and moving in the right direction with their LTE rollout, they are behind AT&T and Verizon. Sprint also owns 54% of Clearwire, which is a wireless internet service provider based on the WiMax technology that Sprint is leaving behind.
The road ahead for Sprint is not easy, especially because Sprint has made some strategic errors -- most recently with WiMax -- and it faces tough competition. Not only from AT&T and Verizon as the market leaders, but also from T-Mobile USA, which is boosting its pre-paid and wholesale offerings, as well as potentially merging with Metro PCS. The board of Sprint in early 2012 vetoed CEO Hesse’s $8 billion proposed takeover of Metro PCS, which fueled speculation about tension between Hesse and the Sprint board. The bet on Sprint is definitely a long-term play as the plans Sprint is launching will take years to implement fully. But there is a place in the market for a third successful national mobile carrier.
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