Sprint feels some iPhone pain, but improves overall

Sprint Nextel continued to lose valuable contract wireless subscribers in the first quarter of 2011 as it faced stiff competition from Verizon Wireless, which began selling the Apple iPhone in February.

But overall it managed to add customers, mostly from its prepaid and wholesale businesses, while also improving its churn rate and narrowing losses.

Sprint lost 114,000 postpaid, or contract, subscribers during the quarter. It was expected to lose about 40,000 such customers, according to Reuters. Still this was an improvement of about 464,000, or 80 percent, compared to the first quarter of 2010.

Analysts predicted that Sprint would continue to lose postpaid customers during the quarter as Verizon introduced the new iPhone on its network in February.

But the customer losses were not as extreme as some experts had predicted, with Sprint weathering the storm well. But CEO Dan Hesse said during a conference call with analysts and investors this morning that the company did take a hit due to the iPhone.

"Historically, with the iPhone we see a significant impact with the launch of new devices," he said. "And the iPhone continues to be a significant threat to us."

Hesse noted that the introduction of the iPhone on Verizon's network in February did have an effect on sales as did AT&T's offer to sell the previous-generation iPhone 3GS for $49.

"Quarter after quarter the iPhone is a successful device," he said. "And it provides strong competition for Sprint. Needless to say Verizon's introduction of their new iPhone did have a notable impact on our performance for the quarter."

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Overall Sprint said it added more than 1.1 million net wireless customers. This growth was driven mostly by Sprint's prepaid and wholesale businesses. And the company ended the quarter with more than 51 million wireless customers at the end of the first quarter of 2011. This includes 33.0 million postpaid subscribers, 13.1 million prepaid subscribers, and approximately 4.9 million wholesale and affiliate subscribers.

Even though the company continued to lose important contract customers, it improved its churn rate, or the rate at which customers leave its service compared to the same quarter a year ago. Sprint recorded its best-ever postpaid churn rate of 1.81 percent, compared to 2.15 percent during the same quarter a year ago. The churn rate was also better than in the fourth quarter of 2010 when it was 1.86 percent.

In fact, this was the best quarterly year-over-year improvement in postpaid churn in five years, according to Sprint, which has been struggling to retain customers ever since it merged with Nextel in 2005.

Sprint also improved its prepaid churn rate. Prepaid churn for the first quarter of 2011 was 4.36 percent, compared to 5.74 percent for the same quarter a year ago. And churn in the fourth quarter of 2010 was 4.93 percent.

From an operational standpoint, Sprint performed well during the quarter. The company narrowed its losses. In the fourth quarter, it reported a net loss of $439 million, or 15 cents per share, compared to a loss of $865 million, or 29 cents per share, a year earlier. Revenue was up to $8.3 billion from $8.09 billion.

But analysts remain skeptical about Sprint's long-term prospects. Not only does Sprint face stiff competition from rivals Verizon Wireless and AT&T, which is poised to acquire T-Mobile USA next year, but it also may need to spend more money going forward to keep its partnership with Clearwire going. Sprint owns a majority stake in Clearwire, which is building the nationwide WiMax network that Sprint is using to sell 4G service. And Clearwire needs more cash to finish building its network.

Still, the company appears on the right track toward recovery.

"The jury is still out on the financial engineering," Craig Moffett, an analyst with Sanford Bernstein, said in a research note today. "But Sprint operations, at least, seem genuinely on the mend. On virtually all key metrics, Sprint's results were better than we expected. Most importantly, Sprint is growing again, with subscribers and ARPU both rising, and this time without sacrificing margins."

UPDATED 7:20 a.m. PT: This story was updated with information from the quarterly conference call and analysis from an analyst.