Sprint Nextel added more wireless customers in the third quarter than it has since 2006, which boosted revenue. But it still saw losses widen as customer spending declined and the carrier spent more to subsidize smartphones.
During the third quarter, Sprint added 644,000 net customers of which 354,000 were new subscribers with contracts. The company also reported a churn rate--or the rate at which people leave its service--of 1.93 percent for its contract customers. This compares with a churn rate of 2.17 percent during the same quarter a year ago and 1.85 percent in the second quarter of this year.
The additional customers boosted revenue to $8.15 billion, compared with $8.04 billion during the same quarter last year. Despite the revenue growth, losses widened to $911 million, or 30 cents a share, compared with a loss of $478 million, or 17 cents a share, a year ago.
The biggest hit to the company's bottom line likely comes from subsidies for smartphones and other wireless equipment. Sprint spent nearly $1.1 billion on subsidizing wireless equipment for customers in the quarter. Compare this with the $950 million it spent on subsidies during the same quarter last year and the $1 billion it spent in the second quarter of this year.
Even though the subsidies cost Sprint a hefty chunk, the company paints a positive picture indicating that the subsidies are good in the long term because they translate into more customers.
"The year-over-year increase in subsidy is a combination of improvement in postpaid gross additions, an increase in postpaid handsets sold with a greater mix of smartphones, which on average carry a higher subsidy rate per handset, and an increase in the number of prepaid handsets sold primarily as a result of the acquisition of Virgin Mobile and subsequent brand launches associated with the company's prepaid multi-brand strategy," the company today said in a statement. "Sequentially, subsidy increased as retail subscriber gross additions continue to improve." (Postpaid refers to subscribers with contracts.)
Indeed, it is good news for Sprint that the company is adding new subscribers, especially valuable smartphone users who sign two-year contract and pay monthly service fees. The company noted that nearly 10 percent of its subscribers with contracts upgraded their handsets during the third quarter. The company believes this signifies strong demand for Sprint's 4G handsets and continued strength in contract renewals.
Handsets overtake rate plans
During a conference call after today's earnings release, CEO Dan Hesse noted the importance of handset selection in competing for consumers. He said that over the past couple of years the handset has become a driving force in attracting new subscribers and retaining existing ones.
"Each year devices become a more important part of the overall marketing plan," he said. "It's what customers base their decision on. This wasn't the case just a couple of years ago."
Rate plans are still important in attracting new subscribers and keeping customers satisfied, he said, but increasingly even the cost of the plans is taking a backseat to handset choice for consumers. Hesse pointed to the success of the company's 4G handsets--the HTC Evo and Samsung Epic 4G. And he noted that Sprint is heading into the holiday-shopping season with a full portfolio of devices including these two existing 4G handsets.
The company is also introducing the Samsung Galaxy Tab tablet PC in mid-November for $399 with a two-year contract. Sprint has undercut competitor Verizon Wireless in the pricing of the Galaxy Tab, which it hopes will lure customers.
Is Clearwire enough?
Through its partnership with Clearwire, Sprint's 4G WiMax service is now in more than 55 markets--with 19 new cities acquiring the service during the third quarter. These cities included Boston, Orlando and Nashville. The company will officially add New York City to its roster November 1. And in December, it will start offering the service in Los Angeles, Miami, and San Francisco.
Hesse would not comment on whether Sprint is looking at other wholesale opportunities to supplement Clearwire's 4G network. But he did say the company has not ruled out other network providers or strategies for expanding its 4G base in the future. Sprint is a majority owner in Clearwire, but Clearwire is still an independent company. Over the past few months, Clearwire has indicated that it needs to raise additional capital to finance the continued deployment of its network.
In terms of competition, Hesse said that Sprint and Clearwire are in good shape right now to continue benefiting from their early lead in the 4G market. Verizon plans to launch its 4G wireless network by year's end in 38 markets with the ability to serve 110 million with its service. Verizon is expected to launch the network with laptop data sticks and will add mobile handsets in the first quarter of 2011.
"We will try to maximize our time to market advantage as much as we can," Hesse said. "Our strength is that we have a more mature ecosystem in terms of handsets. The Evo and Epic are getting tremendous reviews."
Hesse said that he couldn't predict how long the lead will last but that he is confident Sprint will continue to compete strongly with Verizon.
"When they introduce handsets in 2011, we will be in our second generation of handsets," he said. "So I think we will have an advantage in terms of selection of 4G handsets for a while. I can't say for how long. Verizon is a very capable competitor. They are investing heavily. And we know they will be on our heels quickly."
Update at 11:10 a.m. PDT: Information from the earnings call has been added.