Sprint Loses Another 1.3 mil. Subscribers in Q4 But Claims Improvement

For the sixth straight quarter in a row, Sprint has announced subscriber losses that have topped 1 million per quarter on average over a disastrous 2008 as the iDEN platform acquired from Nextel continues to haemorrhage users and the fight to retain subscribers drags on financial performance. Fourth-quarter revenues of US$8.43 billion were down by 14.4% year-on-year (y/y), with full-year revenues down by 11.2% y/y to US$35.64 billion. Operating losses for the fourth quarter ran to US$235 million, a swing from an operating profit of US$325 million a year earlier. For the full year, operating losses were US$732 million, swinging from an operating profit of US$1.87 billion in 2007. With Sprint recognising a massive US$30 billion write-down in the value of the iDEN network in the year-ago quarter, net losses were down from US$29.3 billion to US$1.6 billion for the quarter, which included an additional US$1-billion impairment charge relating to the iDEN business, slightly offset by US$213 million from the Clearwire transaction. Annual net losses moved from US$29.4 billion in 2007 to US$2.8 billion for 2008 (see United States: 29 February 2008: Sprint Goes All In for US$99 per Month as Revenues Continue to Decline and US$30 bil. is Written Off). As has become increasingly important for troubled companies in the era of the credit crunch, Sprint noted that it has paid back US$1 billion in principal debts and has US$3.7 billion in cash and equivalents, with access to an additional US$1.4 billion revolving credit facility for a total of US$5.1 billion in liquidity. Clearwire, which is now off Sprint's books, had capital expenditures (capex) of US$90 million and US$560 million for the quarter and full year respectively. Capex has been slashed from US$2.0 billion in the fourth quarter of 2007 to just US$548 million in the same quarter of 2008 and is down by more than half (52.9%) from US$6.5 billion to US$3.0 billion for the full year as Sprint works to mitigate the financial impact of the poor operational performance.

Wireless Operational Performance

The wireless segment of the business contributes 85% of the revenues, which was US$7.2 billion in the fourth quarter of 2008 or US$30.4 billion over the year. The segment ended the quarter with a total of 49.3 million subscribers, down from 53.8 million a year earlier, with 1.3 million subscribers leaving the carrier in the fourth quarter (marginally lower than the 1.3 million that left in the third quarter). Losses came from the direct customer segments, with 10.0% of post-paid customers leaving over the year to hit 36.7 million, and 21.4% of direct pre-paid customers, reaching 3.6 million. Wholesale subscribers grew by 5.1% to 8.1 million while affiliate customers rose by 9.8% y/y to 927,000. As Sprint battles to retain customers, equipment subsidy costs have risen from US$500 million a year ago to US$700 million in the third quarter and US$800 million in the fourth quarter. Post-paid churn of 2.16% was up 0.01% on the third quarter, but down from 2.29% on the previous year. The higher subsidies have probably helped to retain some customers, but business line de-activations were noted to be impacting on churn as the economic slowdown hit. Data revenues per user have continued to climb, reaching US$14.50 of post-paid ARPU and US$17.75 of CDMA ARPU through strength in data-card sales and the Simply Everything bundles released last year.

Platform Failure

The point of failure for Sprint is easy to see when performance is looked at by technology platform. Since the end of 2007, the iDEN platform has haemorrhaged customers while the key differentiator 'Push to Talk' (PTT), with direct-connect services, failed to retain users. The Boost Mobile pre-paid brand uses the iDEN network, but with losses of just under 1 million over the year, some 4 million post-paid contract subscribers to the iDEN network are also dropping the service. The Boost service is probably suffering largely due to the paucity of advanced or attractive handsets, largely from Motorola, which has had its own noted problems in producing well-regarded and high-selling handsets. The dualmode Powersource handsets were intended to remedy the network capacity and data-speed deficiencies inherent in the ageing iDEN system, but again the range of handsets available is likely to have limited appeal, with subscribers again tailing off. Where Boost has made gains is through the unlimited plans, which have raised pre-paid ARPU by US$2 on the previous year to US$30, but if this is being maintained it is not as clear as it fell from US$31 in the previous quarter.

The post-paid Nextel iDEN service has historically been popular with industries such as construction—hammered by the recession over 2008—government agencies and logistics/transportation despatch. The unique selling point of iDEN has been largely eroded as alternative solutions have come on-stream (although without the direct-connect off-network feature) including location-integrated, datacentric despatch services, which will have taken their toll on uptake. Nextel had looked at selling off the iDEN network last year, but failure to find an acceptable buyer for the high-risk asset in depressed market conditions was a likely outcome (see United States: 14 May 2008: Sprint to Stick with Nextel and iDEN, Asks for Time to Turn Around). Sprint notes that, following on from the BlackBerry Curve, a new range of Nextel direct-connect handsets is planned for 2009, but questions will persist over the viability of the network.

Wireline

While a small part of the business, Wireline has been the growth source as Sprint sold IP network capacity, particularly targeting the cable companies' VoIP services, for which it now supports some 4.4 million end-users and covers 31 million homes. This is still noted to be a strong element of the product portfolio, but declines in legacy voice (down 14% y/y) and data services (down 28% y/y) have overtaken the 25% y/y growth in IP revenues, with quarterly revenues down by 6.1% y/y to US$1.52 billion and down by 2.0% y/y to US$6.33 billion for the full year.

Outlook and Implications

Sprint notes that it expects subscriber losses to improve in 2009 with one major source of hope coming from exclusive access to the Palm Pre smartphone. This has gained good initial early stage reviews and benefits from some historical (but not recent) regard for Palm products and the benefits of being a domestically designed product in the U.S. market. It should take some of the heat from AT&T's handset lead gained through exclusive access to Apple's iPhone and should put Sprint back as a contender based on technology—Sprint historically had a good reputation for its data products. However, while the signs have been good, it remains to be seen whether the Palm can deliver on this early promise.

The flaw in Sprint's strategy remains the Nextel network, which is likely on a long-term spiral to nowhere, and it is unfortunate that Sprint has been unable to offload the business, though it would likely have received little in return. Sprint will also have to sell off at least some iDEN markets by the end of the year or find the cash to acquire iPCS (see United States: 6 February 2009: Sprint Ordered to Sell Nextel Operations in iPCS Markets). The major problem is that Sprint is failing to retain those Nextel/iDEN customers and move them onto the CDMA platform. Although problems with customer services and network issues have apparently been resolved, with independent tests quoted to back this up, the repercussions of long-term customer abuse will echo for years. Sprint has been aggressive in pricing strategies, such as the "Simply Everything" plan, and has introduced more competitive packages for the Boost and Nextel businesses (see United States: 20 January 2009: Sprint Launches New Flat Nextel Rate Plans).