Even the launch of the highly anticipated Palm Inc. (PALM) Pre
couldn't prevent Sprint Nextel Corp.'s (S) most lucrative customers
from packing their bags and leaving for its rivals in the second
quarter.
The besieged wireless carrier continues to struggle with keeping
subscribers who are willing to sign long-term contracts. It lost
nearly 1 million in the period, and more than 7 million in the past
two years.
Slightly offsetting the heavy losses were gains at the low end.
On Tuesday, Sprint expanded its presence in the pay-as-you-go
market with the acquisition of Virgin Mobile USA Inc. (VM). It's
easy to see why: Sprint's own prepaid service, Boost, added 938,000
new customers in the quarter.
Defections continued to weigh on the bottom line, as the
Overland Park, Kan., company reported a wider loss of $384 million,
or 13 cents a share, versus a year-earlier loss of $344 million, or
12 cents a share.
Sprint disclosed at 5 p.m. that its adjusted per-share loss -
which excludes one-time expenses related to its layoffs and the
write-off of its devalued stake in Clearwire Corp. (CLWR) and other
licenses and trademarks - was 1 cent.
Revenue retreated 10% to $8.14 billion as the carrier relies
more on prepaid customers accustomed to paying less each month for
wireless service.
Wall Street had forecast a loss of 2 cents, which includes
one-time items (Sprint no longer provides an adjusted figure), and
revenue of $8.12 billion.
Sprint shares recently fell 7% to $4.27.
"Expectations weren't good, but they delivered," said
Christopher King, an analyst at Stifel Nicolaus & Co. "The
guidance was unchanged. But they didn't seem to have a whole lot of
confidence behind that number."
Sprint ended the period with 48.8 million customers. The company
posted narrowed customer losses thanks to the debut of the Pre,
which hit stores in early June. Chief Executive Dan Hesse called it
"the smoothest and best executed new device launch in our
history."
Still, the Pre has been nagged by supply issues early on, as
well as concerns that sales had slowed in the recent weeks amid
criticism that Sprint hadn't provided enough marketing support. Pre
customers have largely been existing Sprint subscribers, and the
much-touted smartphone has yet to draw in new customers, Hesse
said.
Sprint is working to boost the Pre inventory at third-party
retailers such as Best Buy Co. (BBY), which should attract new
users, Hesse said.
Also dulling the shine from Sprint's exclusive phone is Verizon
Wireless' confirmation that it would offer the Pre early next year.
Hesse said in an interview that he hadn't seen evidence of
customers waiting until the Pre is available elsewhere before
buying the device.
Verizon Wireless - which is jointly owned by Verizon
Communications Inc. (VZ) and Vodafone Group PLC (VOD) - as well as
AT&T Inc. (T) and its new Apple Inc. (AAPL) iPhone 3GS were the
primary beneficiaries of Sprint's losses. Each added more than 1
million post-paid subscribers.
In total, Sprint posted a loss of 257,000 subscribers, weighed
down by heavy losses in the post-paid and wholesale segments. The
post-paid turnover rate fell to 2.05% from 2.25% in the first
quarter but is still much higher than its rivals.
Prepaid was strong, indicating that its Boost brand has competed
well against low-end regional players Leap Wireless International
Inc. (LEAP) and MetroPCS Communications Inc. (PCS).
Sprint agreed to pay $483 million to buy youth-centric Virgin
Mobile, which would bring in-house one of its wireless resellers
and provide it with a second outlet to take advantage of the
growing pre-paid business. The company, however, has to be careful
to avoid confusion over multiple brands.
"We're going into this acquisition with eyes open," Hesse said.
"The brand has relevance with a segment of the market that we're
not as strong as we like to be."
Wireless revenue fell 9.5%, and average monthly revenue per
user, a key metric for wireless companies, was flat in the
post-paid segment. Wireline revenue dropped 11% on continued voice
and data declines.
Margins, meanwhile, were a source of disappointment. With
significant cost cuts including cutting 8,000 jobs and closing call
centers, profitability should have been better than the 21.7%
posted in the second quarter, according to Goldman Sachs analyst
Jason Armstrong.
The company said it continues to see full-year subscriber trends
improve over a year ago, but Wall Street remains concerned as it
falls further behind the market leaders.
"You'll see gradual improvement," Hesse said. "There's no silver
bullet."
There remains a lag between the reality of a company with
improved customer service and network performance and the poor
reputation of gained from past years of neglect. Hesse has long
talked about narrowing that gap but has yet to provide clarity on
when it would happen.
"Patience is not one of my virtues," he said. "I'm doing what I
can to accelerate it. (The slow progress) is not unexpected, but
that doesn't mean it's not disappointing."
-By Roger Cheng, Dow Jones Newswires; 212-416-2153;
roger.cheng@dowjones.com