Over the last three weeks I've set out on a personal mission to better understand the potential impact of the iPhone on Sprint Nextel's (S) earnings. I have been calling and speaking with various representatives, store and district managers, at Sprint, along with employees at Best Buy (BBY) who work in mobile sales. My goal was to learn more about the trends of this last quarter and get an idea of how well the company is performing after introducing the iPhone. My questions were not to determine total revenue, net loss, or any other fundamental data, but rather information on whether or not the iPhone experiment has been a success at individual stores. I spoke to people in 22 states, by simply using the store locator tool on both Best Buy and Sprint's website, which include 32 at Sprint and 11 at Best Buy.
I believe this study is appropriate, especially considering the latest news regarding RadioShack (RSH) blaming Sprint for its quarterly miss in earnings. Sprint has been hit hard, as of late, after both Verizon (VZ) and AT&T (T) missed bottom line expectations and after RadioShack's disappointing results. Yet my belief, prior to this study, was that Sprint would be different, and that investors would be more concerned with top line growth and new phone activations. Therefore, I was hoping that by contacting various stores, in different regions throughout the U.S., I could get an idea of how well the company is performing as a whole by only asking a few simple questions.
I first decided to call random stores after being frustrated by the company's unwillingness to release updates and or information. However, the information I received was both informative and encouraging. I didn't have a lot of time, and since I was making cold calls I didn't want to keep the employee on the phone for a long period of time. Therefore, I only asked a few questions: Have you noticed an increase in new customers? Are you seeing more upgrades or new subscribers for customers seeking the iPhone? Have iPhone sales affected the sales of other phones? Do you know how many iPhones you sell in a day, week, or month? Sometimes I wouldn't get the opportunity to ask these questions as the employees were busy. But on some occasions I was able to speak with sales managers, service managers, general managers, and even two district managers.
I think that after speaking with so many people at various stores that I now have a better understanding of the operations at Sprint. Each and every person that I spoke with acknowledged the iPhone being a hot product in the store. However, I expected that the iPhone would be a best seller, but what I really wanted to obtain through these conversations is the method that customers were using to purchase the iPhone, upgrades or new subscriptions.
It's somewhat sad for me to admit, but I was not previously aware that Sprint had discontinued its early upgrade service. Each person that I spoke with gave me the same information, which is that once a customer is locked into a two year contract that person can't upgrade to another phone until the contract is honored. Other companies such as AT&T (T) have various ways that a customer can purchase a new phone by upgrading and signing an additional contract. However, there is one way that current customers can purchase the iPhone and from what I can tell it's been very successful for Sprint.
I was told, by nearly half, that Sprint does offer its customers the option to cancel a contract for a set price. Any Sprint customer who has service with the company for 5 months, or longer, can pay $350 to cancel a current contract that will allow customers to purchase a new phone and sign a new deal. The $350 cancellation fee is based on a customer who has honored 5 months of a two year contract; the cancellation fee then declines by $10 each month after the fifth month. However, on some occasions customer service may offer special deals to long-term customers to pay a cheaper price to cancel a contract, or the company may offer a deal to all customers for a cheaper cancellation price.
One store manager in Ohio explained that cancellations have been from a large number of customers who are purchasing the iPhone. However, the number of customers who purchase an iPhone by early cancellation varies from store-to-store, with some being less than 10% and others being close to 50%. As an investor, this data is extremely encouraging because with a $350 cancellation charge along with a $200 iPhone, the company is returning an initial profit from the sale rather than losing upfront money.
It's been estimated that the new iPhone 4S cost retailers near $500. The company then sells the phone to its customers for $200 in hopes of locking the customer into a long-term contract. However, the company returns an initial loss, which has been seen in both AT&T and Verizon's quarterly results, where bottom line expectations were not met.
We may never know for sure, how many of Sprint's customers who purchased the iPhone are new subscribers or from cancellations of previous contracts. I was never given exact numbers, most of the time the person I was speaking with would guess or exaggerate which makes it even more difficult to predict.
I will say that the majority of all the people that I spoke with had similar responses to my questions. I had thought that by speaking with people in various states that I would receive much different answers, but for the most part I was wrong. The bottom line is that the majority of people believe that the iPhone is their best-selling smartphone, sales are increasing, and there has been an increase in new subscribers. Although the opinions vary from store-to-store regarding the level of growing subscribers. The only data that surprised me was regarding the cancellations and the high number of customers who are buying the iPhone from the cancellation of previous contracts; and very surprising data surrounding the iPhone 4.
I had known that Sprint was offering both the iPhone 4 and 4S but what I didn't expect was success from the iPhone 4. Of the 32 people that I spoke with, approximately 19 said that the iPhone 4 was selling at a rate similar to the 4S, possibly because of its $100 price. I imagine the facts surrounding cancellations apply to the iPhone 4 as well as the 4S, however I am not sure of how much the iPhone 4 costs the company, which I assume is cheaper than the 4S. The high sales of the iPhone 4 were surprising, and even stores with slower iPhone 4 sales admit that it's still a phone of choice. Overall, I heard what I expected but it was nice to get the perspective of different employees from various states, and as an investor I was impressed, or encouraged, by the potential revenue from both cancellations and the iPhone 4.
I wanted to contact Best Buy for two reasons: to find out how Sprint has performed when compared to its competitors and how many customers are choosing Sprint as their iPhone carrier. I only used 11 stores in 5 states, therefore the information is a bit flawed, especially since 8 of the stores were east of Saint Louis.
My first question was which carrier is used most often with service for the iPhone? The results were typical, or what I expected, with 8 saying AT&T, 1 saying Verizon, but 2 said Sprint, which was very surprising. However, I was encouraged that 5 of the employees said that Sprint has seen the biggest jump, and all acknowledged that there are more consumers switching to Sprint versus leaving Sprint for another carrier. One worker at a Tennessee Best Buy said it best, "when new customers are deciding on a carrier the unlimited data is very attractive compared to AT&T and Verizon." Another Best Buy in New York said, "parents are using Sprint, and switching to Sprint, with concerns over data usage for their kids who want an iPhone." These two points are very important because although Sprint's unlimited data may be an area of concern it's also the company's primary selling point and an advantage over the competition.
As I've stated, this little project of mine has several flaws and is based on the opinions of employees at various locations. However, I wanted to capture the opinions of different employees which overall, considering it was based on brief questions, I think the answers were surprisingly optimistic. I chose Sprint and Best Buy because I believe that the majority of customers shop and purchase new phones at either Best Buy or the actual retailer of the service provider. There have been several questions surrounding the immediate future of Sprint, especially with AT&T, Verizon, and RadioShack all missing bottom line expectations. However, I think this proves that Sprint may be in the best position to succeed and that RadioShack's low sales may be irrelevant as a reflection of Sprint's growth.
Let's be honest, when was the last time you bought a phone at RadioShack? The answer could very well be never. Investors overreacted to the news from RadioShack but the truth is that RadioShack is not one of the top providers of communication devices. Therefore, I will take the results and or opinions from Best Buy and Sprint itself as a better reflection of future earnings.
Verizon and AT&T both missed earnings expectations, yet Sprint has traded the lowest following the miss and I believe it may be the best positioned for success. I was unaware of the company's cancellation policy and just how many of its customers have canceled contracts to purchase the iPhone. In addition, I, along with many other investors, may not have accounted for the iPhone 4 and the sales it could potentially produce. In my opinion, the upside for this company is great and after hearing the voices of those who are associated with the company my optimism has never been higher.
The company has very low expectations, and is expected to post a loss of $0.37 on Feb. 8 for its Q4. Most believe the iPhone will hurt its bottom line much like it's hurt the company's competitors. And although this is very possible, I expect much better results because of the company's money saving initiatives in 2011 that resulted in much better margins during its recent quarter and significantly higher revenue. Overall, I believe there is significant value in Sprint, and I think that over the next few years its stock will appreciate quite nicely.