Interview With CFO of Sprint Pre-Paid Suggests Optimism

Includes: S
by: TMT Analyst

We recently sat down with John Feehan, the CFO of Sprint's (NYSE:S) growing pre-paid business to discuss current business trends and the future of Sprint's pre-paid business. The Q&A was enlightening and provided us with an upbeat assessment of Sprint's multi-brand strategy to address the burgeoning pre-paid market. A few key points: 1) Sprint expects to draw customers from other postpaid carriers; 2) retention programs are likely to have a positive impact on churn; 3) cost synergies in following a multi-brand strategy should help reduce CPGA; 4) there are no longer inventory issues at Boost; 5) their multi-brand strategy allows the flexibility to focus on added features rather than price: and 6) Sprint anticipates having a 4G prepaid offering as a result of thier relationship with Clearwire. He would not comment on whether it makes sense to spin-off the pre-paid business as a way to provide additional value to shareholders. If you are a Sprint investor or an investor in the Telecom space, then we believe you will find this interview to be informative.

TMT Analyst: Sprint’s prepaid business currently has a multi-brand strategy in place to attract all consumer segments. With that, what percent of the industry market share for pre-paid subscribers do you expect Sprint to achieve over the next year? Can you briefly explain each brand and the target segments?

John Feehan. Sprint’s prepaid multi-brand strategy focuses on some core value propositions specifically designed to appeal to the different ways in which consumers use their phones: from those who primarily talk to heavy texters to those who communicate mainly through the web and social networking. Sprint’s market research suggests that 60% of subscribers have a clear predilection for prepaid. Prepaid also accounts for about 55% of gross adds across the industry, while accounting for only 20% of the current wireless sub base.

Sprint’s prepaid brands are:

* Assurance Wireless is a special government-subsidized program giving eligible customers a free cell phone and 200 free minutes per month

* Boost Mobile is focused on those who talk and text a lot, where unlimited service for $50 a month makes the most sense. It also offers our prepaid push-to-talk service on the Nextel iDEN network.

* Common Cents Mobile is perfect for people who use their phones a bit less, and mainly to make calls. These are customers who don’t need bells and whistles and for whom a “smartphone” is one that provides the most basic communication needs – a way to call someone when needed.

* Virgin Mobile offers the richest and most comprehensive lineup of handsets and features, with plans that provide unlimited messaging, email, data and web access – in some cases, with less focus on minutes and more on social connecting…for people who tweet and post more than talk.

* Virgin Mobile also offers a prepaid broadband portfolio including its Broadband2Go USB device and [launching next week] the only prepaid MiFi device, from Novatel, allowing customers to connect up to 5 wireless devices at once.

You can find more detail on the plans here.

TMT Analyst: Can you discuss uptake of the new Beyond Talk plan? Any cannibalization to Boost?

John Feehan. The Beyond Talk plans just rolled out in late May so it’s too early to draw any concrete conclusions.

The Virgin Mobile plans, including Beyond Talk, are designed for people who email, IM, post and tweet more than they talk and text. We don’t expect to see migrations from Boost to VMU of any significance; they attract different demos. We do expect to draw customers from the postpaid companies – that’s the direct competition for Virgin Mobile which also has its first Blackberry and touch screen handsets as well as a prepaid broadband portfolio.

TMT Analyst: How are you marketing the brand differences between Virgin and Boost and have you seen cannibalization between the two brands? How is the Virgin business performing in terms of subscriber growth?

John Feehan. The brands’ personalities are different – Virgin Mobile is morphing into a tech-savvy product line and will continue to feature the best handsets available for prepaid. Advertising for the new plans starts next month and is aimed at consumers who live a “crazy life, beyond talk.”

Boost continues its award-winning Unwronged campaign, focusing on the “wrongness” of paying for more than you need or use. Boost has an urban/ethnic audience and our media buys reflect that.

Virgin Mobile has a strong music DNA with its annual rock festival and sponsorship of Lady Gaga’s tour, integrating our youth homelessness initiative and providing people with tickets in exchange for volunteer work. Boost works with racecar driver Danica Patrick and sponsors community soccer events with a strong Hispanic focus.

Again, we’re pleased with the progress that Beyond Talk plans and our new more sophisticated handsets like the Blackberry and Rumor Touch are making. It’s too early to see any trends.

TMT Analyst: What are your expectations for churn levels over the next year? Do you expect it trend down and what customer retention programs do you have in place that will ensure that?

John Feehan. We have designed several initiatives with the goal of retaining customers of both Boost and Virgin Mobile with these relaunches. We recognize that offering the best value in plans and handsets can make the difference, along with exemplary customer service especially without a contract when customers can leave anytime. We prefer not to share our retention program ideas – we do have incentives in place for customers.

Sprint’s Q1 results included prepaid churn of 5.74%, compared to 6.86% in the year-ago period and 5.56% in the fourth quarter of 2009. The year-over-year improvement in churn was due to the inclusion of Virgin Mobile customers and improving retention efforts across the Boost and Virgin Mobile base that reduced deactivations. Sequentially, prepaid churn increased as a result of deactivations of Boost customers at the expiration of holiday retention offers.

TMT Analyst: What are your expectations for cost per gross adds over the next year and what strategies do you have in place to bring CPGA down?

John Feehan. We won’t speculate on key metrics. Cost synergies are a key element of the multi-brand strategy and Sprint’s overall focus on the prepaid market allows us to adjust spending for one brand or another as needed. We now have the financial resources and freedom to tailor brands for different kinds of customers and how they use their mobile devices.

As an MVNO, low capex was our guiding principle. That continues but now we also have a better economic structure by having owner economics. It allows us to look at pricing levers but also to go beyond price in differentiating the products with compelling offers.

Prior to the Sprint acquisition, Virgin Mobile had reduced its CPGA from $111 to $107 [Q1-Q3 09 vs. 08] reflecting cost efficiencies in sales and marketing, as well as improvement in handset subsidies partially offset by increased sales of higher end devices and lower gross additions consistent with the strategy to focus on adding higher lifetime value subscribers.

CPGA for two of the brands, Assurance Wireless and Common Cents, are lower in general which we expect will contribute to savings as well.

TMT Analyst: The market for prepaid is intensely competitive with T-Mobile expected to get more competitive in the market. How do you plan to stay relevant in the face of rising competition and is there a threat of pricing pressure due to that level of competition? How do you view MetroPCS and Leap as competitors?

John Feehan. We created the different brands to razor-focus offers against specific competitors. Creating a variety of brands under one roof has been a successful strategy for many consumer products. If you’re able to build strong stand-alone brands that each resonate to clearly identified segments of your target audience, you’ll be able to win in the marketplace.

Both Boost and Virgin Mobile have a history of moving the market with innovative pricing and features. Boost was the first to introduce a $50 unlimited package; Virgin Mobile now has the lowest price for unlimited data and text. Common Cents has the industry’s lowest per-minute rate at 7 cents per minute and per text, and with the unique Round Down feature. This was more innovation than mere price-changing.

VM looks to draw customers from postpaid, Boost looks to combat the regional unlimited players like Cricket and Metro, Common Cents will fight against Net10.

Virgin Mobile is focusing on customers who use text and data services to power constant connection with social networks. We are capitalizing on the mass evolution in wireless behavior and increased usage of mobile email, social networking and web services particularly by the 18-34 year olds. These are the people who tweet and text, post and update on Facebook, share photos with friends on Flickr and catch streaming video on YouTube. As talk drops, we’re providing customers with enough minutes to satisfy their needs without overserving them.

Boost is serving a somewhat older audience with its highly popular $50 unlimited offer who tend to talk and text more. Consumers 25-49, with an ethnic concentration, are attracted to these simple unlimited talk, text and wireless web plans. And Boost’s addition of CDMA handsets this past January has expanded its audience while still offering the popular push to talk technology. Consumers can choose the ideal handset by determining which features they prefer.

TMT Analyst: When do you expect the Boost inventory issues to be resolved?

John Feehan. We did have inventory issues on Boost at the beginning of the year, driven by two things: much higher demand for our CDMA devices than originally forecasted, and a much larger base of customers upgrading their devices following Boost’s explosive growth. It took several weeks for device production to catch up with the new demand levels; they have, and we no longer have inventory constraints.

TMT Analyst: Can you discuss traction for plans Assurance and Common Cents Mobile? How are these plans growing? Are you seeing movements from Sprint plans or are sub growth coming for competitors. Are you concerned that such low pricing for these plans will erode the economics of the entire prepaid industry?

John Feehan. The introduction of Assurance Wireless and Common Cents Mobile extends the multi-brand strategy to provide offers tailored for specific customers, exactly the opposite effect of eroding the market.

Assurance is available now in 7 states [NY, NC,VA, MI, MD, TX, NC], specifically for a cash-constrained, eligible audience. We are very excited about its progress and expect to expand into additional states throughout the summer and the year.

We may likely draw from Tracfone’s SafeLink, given that we provide customers with almost three times the number of free minutes. If you understand this audience, you’ll understand why almost 50% of these customers are new to wireless. For most of us, cell phones are a luxury, one that most of these low-income customers would not be able to afford with these programs.

TMT Analyst: Price reductions from Sprint have induced competitive responses that are likely to further deteriorate the economics of the prepaid business. How would you characterize the pricing pressures in the prepaid business and when do you see stabilization on pricing?

John Feehand. The multi-brand strategy gives us a number of benefits, and one is not necessarily having to react to competitor pricing. Price is important but we now have the ability to leverage a wider bag of tools to address unique needs of different segments of customers throughout the marketplace

The Beyond Talk plans are also beyond just pricing. We have introduced innovative and attractive offers for specific groups of customers based on usage and habits – from those who are on limited budgets and use their phones infrequently to those who want high-end devices to use for all their communications, entertainment and social networking.

TMT Analyst: Do you expect the competitive pressures to result in the forced exit of industry participants?

The telecom business has evolved and grown so much over the past 7 years, it’s impossible to predict where it will all shake out. In the MVNO business, we watched companies come and go. Virgin Mobile acquired Helio in another consolidation and clearly recognized that navigating the competitive landscape would be much more effective as part of an industry leader like Sprint.

TMT Analyst:
How would a full acquisition of Clearwire (CLWR) impact the prepaid business?

John Feehan. We do not comment on speculation or rumor. With that said, we have indicated that we do anticipate having a 4G prepaid offering as a result of our relationship with Clearwire.

TMT Analyst: Do you believe it makes sense for Sprint to spin-off the prepaid business as a means to provide additional value to shareholders and have a currency that competes more directly with LEAP Wireless and MetroPCS.

John Feehan. Again here, I
won’t comment on that type of speculation. We have the strongest portfolio of prepaid brands in the marketplace and believe we are positioned well to be successful.

Disclosure: None