Sprint’s Loss Widens, Yet The Carrier Looks Steady

Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sprint Nextel (NYSE: S), the third largest US wireless carrier, reported its fourth quarter results by posting higher than expected revenue. The Kansas-based company experienced wider losses owing to its ongoing Nextel shutdown program, as it seeks to become more competitive to contend the telecom biggies. The telecom provider is in the middle of its Network Vision. It targets to upgrade its network service to increase its coverage to 200 million Americans by year end to catch up with larger rivals Verizon (NYSE: VZ) and AT&T (NYSE: T) who have taken a lead in deploying the 4G LTE technology. Let’s take a closer look at the results.

The quarter at a glance
The wireless operator, seeking to sell 70% stake to the Japanese carrier Softbank, posted a quarterly loss of $1.32 billion, or 44 cents a share. The revenue increased 3.3% to $9.01 billion compared to a year ago period and beat analyst estimates of $8.92 billion. The carrier witnessed record wireless service revenue of nearly $7 billion primarily driven by the subscriber growth and increased postpaid ARPU. Though the revenue increased, the loss widened compared to the prior year due to the huge depreciation cost of $400 million related to the Nextel shutdown and Network Vision. In addition, the company also had to bear an unexpected $45 million loss for the Hurricane Sandy.

Sprint sold a total of 6.1 million smartphones, out of which 2.2 million units were Apple’s (NASDAQ: AAPL) iPhone, up from 1.5 million units in the previous quarter. Fellow player Verizon sold 6.2 million iPhones, while AT&T continued to be Apple’s favorite carrier, selling 8.6 million units for the quarter. The iPhone 5, which was released in late September, experienced supply shortages during the month, so the pent-up demand was pushed forward in the fourth quarter in which Sprint enjoyed massive sales jump with adequate supply in the holiday season. About 40% of the iPhones sold were to new postpaid customers compared to Verizon’s 30% and AT&T’s 16%. However, like Verizon and AT&T, Sprint was also weighed down by the subsidy that it has to give to the Apple iPhones buyers. However, there is no other option other than selling the iPhone under cost to lure customers to take up the two-year contract. Though it eats up profits initially, but in the long run, the data hogging device contributes towards the revenue.

A concern
The company added 401,000 postpaid customers that included 333,000 recaptured subscribers of the Nextel platform. This suggests that the postpaid customer addition was heavily dependent on the retention of Nextel subscribers. However, it lost 644,000 Nextel platform customers and therefore recorded a net loss of 243,000 subscribers on contract based plans during the quarter. As a whole, the company lost 337,000 subscribers in the quarter. The postpaid churn rate increased to 1.98% and is expected to remain high in the coming quarters unless the company’s Network Vision starts paying off. This is one issue that the carrier needs to take care of, particularly if it wishes to fight the industry giants Verizon and AT&T that enjoyed a net addition of 2.1 million and 780,000 subscribers, respectively.

In fighting the foes
Sprint faces tough competition from Verizon and AT&T. It is way behind the top two as far as the LTE network deployment is concerned. The carrier is currently in the process of building an upgraded network to catch up with its bigger competitors. As part of its aggressive strategy to grow stronger, the carrier has agreed to sell 70% stake to Softbank in consideration of $20 billion. The cash infusion would assist the company to undertake the huge capital expenditure related to the Network Vision. In addition, with Softbank’s financial backing the company plans to buy the rest of Clearwire (NASDAQ: CLWR), as it already has over  a 50% stake. This would give Sprint access to Clearwire’s most valued spectrum asset and augment the company’s spectrum holdings, which is one of the key factors to stay competitive in the wireless industry. The proposed deal is facing opposition from Clearwire investors who consider that the offer awfully undermines the Bellevue carrier’s most prized possession. However, both Sprint and Clearwire are jointly collaborating to conclude the transaction.

Meanwhile the company is also in the process of shutting the Nextel network completely. It also aims to retain its Nextel customers rather than losing them to other carriers as the cost of retention is lower than the cost of attracting new subscribers from the mainstream market. The company managed to recapture 51% of Nextel customers in the fourth quarter. The Nextel network is scheduled to shut down in the middle of this year. This would relieve Sprint of the overhead costs and other operating expenses that it had to incur to make two different networks function.

The bottom-line
Sprint is in the middle of several strategic moves that it has undertaken to effectively compete with the bigger fishes of the sea. The churn rate and net customer additions  are expected to remain at high levels, at least in the first half of 2013. However, the company would actually start reaping the benefits once its network upgrading process is complete. In addition, with the support of the deep-pocketed Softbank, and the spectrum king Clearwire, Sprint should see happier days ahead.

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