Sprint Q1: Still Drops Customers, But Offsets with Kindle

Sprint (S) is still losing too many post paid retail customers to AT&T (T) and Verizon (VZ) but offsetting losses with wholesale additions due to the popularity of devices like the Kindle and its prepaid Boost plans.

The company on Monday reported a first quarter net loss of $594 million, or 21 cents a share, on revenue of $8.2 billion, down 12 percent from a year ago (statement). Adjusted earnings per share was 3 cents a share. Wall Street analysts expected a loss of 5 cents a share on revenue of $8.28 billion.

The really interesting part of Sprint’s release was the moving parts behind its subscriber totals. Sprint has been looking to reduce churn and improve customer service ahead of its exclusive Palm Pre launch. On a conference call, CEO Dan Hesse touted Sprint’s ability to pay down debt and improve customer service, but noted the company needs to keep its retail customers.

Among the moving customer parts:

• Sprint had 49.1 million customers at the end of the first quarter, compared to 49.3 million.
• That aforementioned stat sounds solid until you consider Sprint lost 1.25 million post paid retail customers. AT&T and Verizon both added roughly that same amount.
• Sprint gained wholesale and prepaid customers to come out with a total subscriber loss of 182,000 for the first quarter.
• Sprint gained 394,000 wholesale and affiliate subscribers and then said “growth in wholesale “was primarily driven by the increasing market opportunity for open network devices, such as the Amazon Kindle 2.” That figure is the closest you’ll get to a Kindle sales figure.
• Sprint’s churn rate was 2.25 percent in the quarter, up from 2.16 percent in the fourth quarter, but down from 2.45 percent a year ago.

Add it up and Sprint is getting better at holding the fort, but is still losing too many customers. And it’s unclear whether the popularity of Sprint’s Boost prepaid service is ultimately good for profits.

JP Morgan analyst Mike McCormack notes:

We remain skeptical about Sprint’s ability to turn around its core wireless business, as churn and gross add pressures continue to inhibit subscriber growth, while economic weakness is providing additional headwinds. While we applaud the performance of Boost Unlimited, we are unconvinced that these higher-churn, lower ARPU subscribers will deliver meaningful value for Sprint shareholders, and may cause Sprint to make strategic decisions regarding its target market.

Other odds and ends:

• Sprint’s customer credit quality is improving to 84 percent of prime, up from 81 percent.
• The Boost service is gaining some traction as churn fell to 6.86 percent from 9.93 percent from a year ago. Boost customers fall into the subprime credit category.
• The company said it expects prepaid services to increase compared to traditional plans given the economic climate. Sprint added that it expects subscriber losses to improve in 2009.
• WiMax service will roll out in Portland this summer.

Comments

[Geddy:]

They can tout pre-paid customers all they want. They don't "pay the bills" compared to post paid.

May 04 02:27 PM

[PastTense:]

Saying "Boost customers fall into the subprime credit category." is just not true; they mostly fall in the group of people who are not wasting money. Many post paid customers do waste too much money on cell phone service and could save a significant amount of money by switching to pre-paid--it depends on one's usage patterns.

May 04 03:09 PM

[kclawnboy:]

I agree with your comments that prepaid customers and wholesale and affiliate customers are not nearly as profitable as a postpaid customer. VZ and ATT would just be ok with S taking all of these subprime customers. I am amazed that the stock is going up as it is, but perhaps it is part of the overall S&P rally. It's even hard to imagine that the S&P is in positive territory for 2009 after today's gains. Also, I will be interested to see how S can handle not owning its network operations anymore by selling it to Ericcson.

May 04 03:20 PM

[Aryamehr:]

The facts don't belie themselves. Earnings were 3 cents, 8 cents better than expected. They had $800 million in free cash flow for the quarter and paid off more than $600 in debt, leaving Sprint with a very respectable $4.5 Billion cash balance. All this was done without an iPhone or Pre for that matter.

Couple the aforementioned with a nationwide 4G network and a leading Smart phone and what you will have is a money making formula. This is exactly what Dan Hesse has in mind.

May 04 09:47 PM

[Gerard Hall...:]

Lets be clear.

Boost prepaids are not on the wholsale line. They are reported as prepaid subscribers. Virgin Mobile, Kindle and other wholesalers are on the wholesale line.

Boost has a text system problem that Sprint says should be fixed by May 7 (coincidentially the original plan for shipping the Pre).

The kindle accounted for about 200,000 wholesale subs at the end of last year.

May 05 10:49 AM