iPhone drives Sprint growth, but drags loss to $1.3B

Sprint Nextel saw its biggest surge in new customers in six years thanks to the iPhone, but that growth came at a hefty price.

Still, Sprint reported a loss of $1.3 billion, or 43 cents a share, on revenue of $8.72 billion in the fourth quarter. That compares with a loss of $929 million, or 31 cents a share, on revenue of $8.3 billion in the year-ago quarter.

The Q4 results included a loss of $241 million, or 8 cents a share, due to one-time costs related to asset charges on property, plant, equipment, as well as severance costs and Sprint's investment in Clearwire, which provides it with 4G WiMax service.

Wall Street analysts had an average forecast of a loss of 37 cents a share on revenue of $8.69 billion.

"Although we're far from finished, our progress has been very significant. 2011 caps off the first phase of our recovery," Sprint CEO Dan Hesse said during a conference call with analysts today.

Like Verizon and AT&T, Sprint showed impressive customer growth in the period as customers lined up to buy the iPhone 4S. But also like its larger rivals, the company paid out a massive amount in subsidies to Apple. The result: a setback on the company's hoped-for road to profitability.

The dilemma is that the more iPhones sold, the bigger the near-term hit. Sprint activated 1.8 million iPhones in the period and said 40 percent of those activations came from customers new to Sprint. Unlike Verizon and AT&T, Sprint offers an unlimited data plan alongside the iPhone.

Largely due to the iPhone's success, Hesse said that 86 percent of phone sales to contract customers were smartphones and that 66 percent of its contract customer base owns smartphones.

That Sprint posted a loss isn't a shocker. The company had warned that costs related to the iPhone, as well as its 4G LTE network deployment, would pressure margins in the coming year. Chief Financial Officer Joe Euteneuer warned the iPhone was going to be 40 percent more expensive to Sprint than other smartphones. The company is asking Wall Street for a bit of patience as it works to deploy its own next-generation network and to get its customer growth back on track.

Hesse has said he is willing to pay the high costs of the iPhone because missing out on the product has been the company's biggest source of customer defection. With the iPhone, he hopes to garner more loyal customers willing to pay more each month.

But Sprint held off on aggressive promotions on smartphones in the fourth quarter even as rivals stepped up their efforts by discounting Apple iPhones and 4G LTE devices. As a result, Sprint missed out on its customer growth target for the year. But Hesse said he believes the move was prudent.

"It was a tough decision for us to make, but we believe we made the right decision," Hesse said.

Sprint has shown a lot of financial discipline as of late, although that may not be what consumers want to hear. In the last year, the company raised its smartphone data prices by $10 a month, raised its early-termination fees, eliminated its customer loyalty program, and lengthened its phone upgrade cycle, all in a bid to ensure the iPhone becomes profitable down the line.

Sprint added a total of 1.6 million new net customers, driven in part by 161,000 customers who signed a long-term contract with Sprint. Getting to growth in so-called postpaid customers has been a challenge for Sprint because results have repeatedly been weighed down by losses on the Nextel side.

The flagship Sprint brand added 539,000 new postpaid customers, while Nextel lost 378,000 such customers. The defections continue as the company prepares to shut down Nextel's iDEN network next year.

It also added a net 507,000 prepaid customers who signed up through its Virgin Mobile and Boost Mobile services and through its government-subsidized low-income Assurance Wireless offering. The results include losses from the Nextel prepaid services.

The wholesale business, which Sprint leans on heavily for growth, added 954,000 net new customers through resellers and affiliates.

Sprint reported a customer turnover rate of 1.98 percent, a tick up from 1.86 percent a year ago. The company blamed the higher defection on involuntary disconnections from customers who couldn't pay their bills or violated their terms and conditions. Sprint said it tightened its credit standards in the third and fourth quarter to avoid seeing similar issues.

Also weighing on results is Sprint's plan to launch 4G LTE service later this year as part of its broader Network Vision project. The company is spending billions of dollars on the deployment, which is expected to save money down the line because the infrastructure is more efficient to run. It said it would deploy its next-generation network in Kansas City and Baltimore by June, marking six cities covered by the first half.

Updated at 6:35 a.m. PT with additional background and executive comments from the conference call.